BBQ HOLDINGS, INC. Overview
OnAugust 8, 2022 , a subsidiary of MTY Food Group Inc. (TSX:MTY) ("MTY") and the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") providing for the acquisition of the Company by MTY in a transaction consisting of a tender offer (the "Offer"), followed by a subsequent merger, for all of the Company's issued and outstanding common shares for cash consideration ofUS$17.25 per Company share representing total transaction value of approximatelyUS$200 million (C$256 million ) (the "Transaction"), including the Company's net debt. The terms and conditions of the Merger Agreement were unanimously approved by the Boards of Directors of both companies. The Transaction is subject to customary closing conditions including receipt of applicable regulatory approvals. InSeptember 2019 a holding company reorganization was completed in whichFamous Dave's of America, Inc. ("FDA") became a wholly owned subsidiary of the new parent holding company namedBBQ Holdings, Inc. ("BBQ Holdings "). As used in this Form 10-Q, "Company", "we" and "our" refer toBBQ Holdings and its wholly owned subsidiaries.BBQ Holdings was incorporated onMarch 29, 2019 under the laws of theState of Minnesota , while FDA was incorporated inMinnesota onMarch 14, 1994 . The Company develops, owns and operates restaurants under the name "Famous Dave's", "Village Inn ", "Barrio Queen", "Granite City",Real Urban Barbecue ", "Tahoe Joe's Steakhouse ", "Bakers Square ", "Craft Republic ", "Fox & Hound", and "Champps". Additionally, the Company franchises restaurants under the name "Famous Dave's" and "Village Inn ". As ofJuly 3, 2022 , there were 143 Famous Dave's restaurants operating in three countries, including 43 Company-owned restaurants and 100 franchise-operated restaurants. This includes the nine Famous Dave's ghost kitchens the Company operates out of itsGranite City restaurants. A Clark Crew BBQ restaurant opened inDecember 2019 inOklahoma City, Oklahoma .BBQ Holdings had a 20% ownership in this venture, and sold that entire ownership in June of 2022. The Company owns and operates 18 Granite City Food & Brewery restaurants located throughout the Midwest and twoReal Urban Barbecue restaurants located inIllinois . OnJuly 30, 2021 , the Company completed the purchase of theVillage Inn family restaurant concept currently with 24 Company-owned restaurants and 102 franchised restaurants, and theBakers Square pie and comfort food concept currently with 14 Company-owned restaurants and six locations whereBakers Square pies are licensed. OnOctober 8, 2021 the Company acquired the Tahoe Joe's Steakhouse brand, currently with four Company-owned restaurants. OnMarch 11, 2022 the Company acquired three bar-centric locations, and onMay 24, 2022 , the Company acquired another bar-centric location, collectively referred to as "Famous Craft Concepts". OnApril 11, 2022 , the Company closed the purchase of Barrio Queen, a chain of seven authentic Mexican fine dining restaurants inPhoenix, Arizona . InMarch 2020 , theWorld Health Organization declared the outbreak of a novel coronavirus ("COVID-19") as a pandemic andthe United States declared a National Public Health Emergency. As a result, public health measures were taken to minimize exposure to the virus. These measures, some of which are government-mandated, have been implemented globally resulting in a dramatic decrease in economic activity. During the second quarter of 2021, mandated restrictions began to ease in a number of the markets in which the Company operates. Although the Company has experienced some recovery from the initial impact of COVID-19, the long-term impact of COVID-19 on the economy and on its business remains uncertain, the duration and scope of which cannot currently be predicted. As new variants of COVID-19 are being discovered and cases continue to occur at material rates throughout the markets in which the Company does business, the Company cannot predict the severity of another surge, what additional restrictions may be enacted, to what extent it can maintain off-premise sales volumes, whether it can maintain sufficient staffing levels, or if individuals will be comfortable returning to its dining rooms during or following social distancing protocols, and what long-lasting effects the COVID-19 pandemic may have on the restaurants industry as a whole. The potential impact of the COVID-19 pandemic on consumer spending behavior, which may be a function of continued concerns over safety and/or depressed consumer sentiment due to adverse economic conditions, including job losses, will determine the significance of the impact to the Company's operating results and financial position. - 19 -
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BBQ HOLDINGS, INC. AND SUBSIDIARIES
The following table includes the number of Company-owned and franchise-operated restaurants as of the dates presented:
Six Months Ended Six Months Ended
July 3, 2022 July 4, 2021
Company-owned restaurants:
Famous Dave's 43 27
Granite City Food & Brewery 18 18
Real Urban Barbecue 2 1
Clark Crew BBQ - 1
Village Inn 24 -
Bakers Square 14 -
Tahoe Joe's 4 -
Famous Craft Concepts 4 -
Barrio Queen 7 -
End of period 116 47
% of system 36 % 32 %
Franchise-operated and licensed restaurants:
Famous Dave's 100 100
Village Inn 102 -
Bakers Square 6 -
End of period 208 100
% of system 64 % 68 %
System end of period total 324 147
Of the 100 franchise-operated restaurants, 19 are Famous Dave's ghost kitchens
operating out of the kitchen of another restaurant location or a shared kitchen
space. Additionally, nine of our Granite City locations are operating Famous
Dave's ghost kitchens under licensing agreements.
Fiscal Year
Our fiscal year ends on the Sunday closest toDecember 31 . Our fiscal year is generally 52 weeks; however, it periodically consists of 53 weeks. Both fiscal year 2022, endingJanuary 1, 2023 , and fiscal year 2021, endedJanuary 2, 2022 , consist of 52 weeks. Revenue Our revenue consists of restaurant sales, franchise-related revenue and licensing, national advertising fund contributions and other revenue. Our franchise-related revenue is comprised of three separate and distinct earnings processes: area development fees, initial franchise fees, and continuing royalty and national advertising fund payments. Currently, our domestic area development fee consists of a one-time, non-refundable payment of approximately$15,000 per restaurant in consideration for the services we perform in preparation of executing each area development agreement. For our international area development agreements, the one-time, non-refundable payment is negotiated on a per development basis and is determined based on the costs incurred to arrange for the sale of that development area. Currently, our initial, non-refundable, franchise fee for domestic growth depends on the restaurant model and varies from$15,000 to$45,000 per location. Finally, franchisees are also required to pay us a monthly royalty equal to a percentage of their net sales. Licensing revenue includes royalties from a retail line of business, including Famous Dave's branded sauces, rubs, marinades and seasonings. Other revenue includes the recognition of gift card breakage, opening assistance and training we provide to our franchise partners, the sale ofReal Urban Barbecue consumer packaged goods, and the sale of raw brewing products produced at theGranite City brewing facility. - 20 -
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BBQ HOLDINGS, INC. AND SUBSIDIARIES
Costs and Expenses
Restaurant costs and expenses include food, beverage and merchandise costs; labor and benefits costs; and operating expenses, which include occupancy costs, repair and maintenance costs, supplies, advertising and promotion. Certain of these costs and expenses are variable and will increase or decrease with sales volume. The primary fixed costs are restaurant management, operations, and catering support salaries, occupancy, utilities, and insurance costs.
General and Administrative Expenses
General and administrative expenses include all corporate and administrative functions to support future growth. Salaries and benefits, legal and accounting fees, professional fees, travel, rent and general insurance are major items in this category. We also provide franchise services for which the revenue is included in other revenue and the expenses are included in general and administrative expenses.
Results of Operations - the three and six months ended
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the accompanying unaudited
condensed consolidated financial statements and notes, and the audited
consolidated financial statements and notes included in our Annual Report on
Form 10-K for the fiscal year ended
The table below presents items in our unaudited condensed consolidated statements of operations as a percentage of net restaurant sales or total revenue, as indicated, for the periods presented.
Three Months Ended Six Months Ended
July 3, 2022 July 4, 2021 July 3, 2022 July 4, 2021
Food and beverage costs(1) 30.6 % 29.0 % 30.9 % 29.4 %
Labor and benefits costs(1) 32.6 % 30.2 % 32.8 % 30.3 %
Operating expenses(1) 26.4 % 28.1 % 27.7 % 29.2 %
Restaurant-level operating margin(1)(2) 10.4 % 12.7 % 8.6 % 11.1 %
Depreciation and amortization expenses(3) 2.8 % 3.1 % 3.2 % 3.6 %
General and administrative expenses(3) 7.2 % 10.0 % 7.7 % 10.4 %
Income from operations(3) 5.6 % 6.4 % 3.5 % 4.5 %
_______________________
(1)As a percentage of restaurant sales, net
(2)Restaurant-level margins are equal to restaurant sales, net, less restaurant
level food and beverage costs, labor and benefit costs, and operating expenses.
(3)As a percentage of total revenue
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BBQ HOLDINGS, INC. AND SUBSIDIARIES
Total Revenue
Our components of and changes in revenue consisted of the following for the
three and six months ended
Three Months Ended
(dollars in thousands) July 3, 2022 July 4, 2021 $ Change % Change
Revenue:
Restaurant sales, net $ 74,625 $ 41,205 $ 33,420 81.1 %
Franchise royalty and fee revenue 3,900 2,946 954 32.4
Franchisee national advertising fund
contributions 547 421 126 29.9
Licensing and other revenue 866 948 (82) (8.6)
Total revenue $ 79,938 $ 45,520 $ 34,418 75.6 %
Six Months Ended
(dollars in thousands) July 3, 2022 July 4, 2021 $ Change % Change
Revenue:
Restaurant sales, net $ 133,356 $ 74,808 $ 58,548 78.3 %
Franchise royalty and fee revenue 7,507 5,320 2,187 41.1
Franchisee national advertising fund
contributions 1,037 749 288 38.5
Licensing and other revenue 2,222 1,962 260 13.3
Total revenue $ 144,122 $ 82,839 $ 61,283 74.0 %
Restaurant Sales, net
The increase in year-over-year net restaurant sales for the three and six months
ended July 3, 2022 was primarily due to the acquisition of 32 Village Inn and
Bakers Square restaurants in July 2021 , the acquisition of Tahoe Joe's in
October 2021 , the Famous Craft Concepts acquisitions in the first half of 2022,
and the Barrio Queen acquisition in April 2022 . Additionally, dining
restrictions related to the COVID-19 pandemic eased further throughout 2022,
resulting in an increase in dine-in sales in the three and six months ended
July 3, 2022 compared to the three and six months ended July 4, 2021 .
It is our policy to include in same store net sales base, restaurants that have
been open for 12 months under BBQ Holdings' ownership. In the second quarter and
first two quarters of 2022, same store net sales for Company-owned restaurants
increased 4.5% and 9.2% compared to the second quarter and first two quarters of
2021, respectively.
Franchise-Related Revenue, including national advertising fund contributions
The increase in franchise royalty revenue and national advertising fund
contributions year over year was due primarily to the acquisition of the Village
Inn brand in
Licensing and Other Revenue
For the three and six months endedJuly 3, 2022 , licensing and other revenue decreased 9% and increased 13% compared to the three and six months endedJuly 4, 2021 . This fluctuation seen when comparing the three and six month year-over-year time periods is due primarily to the recognition of gift card breakage. Average WeeklyNet Sales
The following table shows Company-owned and franchise-operated average weekly same store sales for the periods presented:
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BBQ HOLDINGS, INC. AND SUBSIDIARIES
Three Months Ended Six Months Ended
July 3, 2022 July 4, 2021 July 3, 2022 July 4, 2021
Average Weekly Net Sales (AWS):
Franchise-Operated Famous Dave's(1) $ 54,712 $
57,499
61,713 60,947 57,868 55,284
Company-Owned Granite City 79,304 71,282 75,408 64,332
Company-Owned Clark Crew BBQ 159,569 161,046 153,210 149,914
Company-Owned Real Urban BBQ 55,034 55,139 49,560 47,216
Company-Owned Village Inn(2) 33,376 32,767 33,084 30,057
Franchise-Operated Village Inn(1)(2) 34,570 33,773 34,138 30,857
Company-Owned Bakers Square(2) 30,925 28,952 29,249 26,076
Company-Owned Tahoe Joe's(2) 84,414 91,136 84,539 85,199
Company-Owned Famous Craft Concepts(2) 64,153 N/A 64,884 N/A
Company-Owned Barrio Queen(2) 98,265 116,865 105,095 113,669
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(1)AWS for franchise-operated restaurants are not our revenues and are not
included in our condensed consolidated financial statements. We believe that
disclosure of comparable restaurant net sales for franchise-operated restaurants
provides useful information to investors because historical performance and
trends of Famous Dave's and Village Inn franchisees relate directly to trends in
franchise royalty revenues that we receive from such franchisees and have an
impact on the perceived success and value of the Famous Dave's and Village Inn
brands. It also provides a comparison against which management and investors can
analyze the extent to which Company-owned restaurants are realizing their
revenue potential.
(2)Management notes that Village Inn , Bakers Square , Tahoe Joe's , Famous Craft
Concept Restaurants , and Barrio Queen were not owned by the Company in Q2 of
2021, and as such the respective amounts presented above are pro forma in
nature.
Food and Beverage Costs
Our food and beverage costs consisted of the following for the three and six
months ended
Three Months Ended
(dollars in thousands) July 3, 2022 July 4, 2021 $ Change % Change
Food and beverage costs $ 22,820 $ 11,932 $ 10,888 91.3 %
Six Months Ended
(dollars in thousands) July 3, 2022 July 4, 2021 $ Change % Change
Food and beverage costs $ 41,177 $ 21,989 $ 19,188 87.3 %
Food and beverage costs for the three months ended July 3, 2022 , and July 4,
2021 , represented approximately 30.6% and 29.0% of net restaurant sales,
respectively. Food and beverage costs for the six months ended July 3, 2022 and
July 4, 2021 , represented approximately 30.9% and 29.4% of net restaurant sales,
respectively. These year-over-year increases, as a percentage of net restaurant
sales, were a result of increases in commodity costs, which were partially
offset by a more favorable commodity mix due to 2021 and 2022 acquisitions.
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BBQ HOLDINGS, INC. AND SUBSIDIARIES
Labor and Benefits Costs
Our labor and benefits costs consisted of the following for the three and six
months ended
Three Months Ended
(dollars in thousands)
% Change
Labor and benefits costs $ 24,348 $ 12,429 $ 11,919 95.9 %
Six Months Ended
(dollars in thousands) July 3, 2022 July 4, 2021 $ Change % Change
Labor and benefits costs $ 43,734 22,683 $ 21,051 92.8 %
Labor and benefits costs for the three months ended July 3, 2022 , and July 4,
2021 , represented approximately 32.6% and 30.2% of net restaurant sales,
respectively, and for the six months ended July 3, 2022 , and July 4, 2021 ,
represented approximately 32.8% and 30.3% of net restaurant sales, respectively.
These year-over-year increases, as a percentage of net restaurant sales, were
driven in part by increased hourly and salary wage rates, as well as an increase
in dine-in sales requiring a higher level of staffing.
Operating Expenses
Our operating expenses consisted of the following for the three and six months
ended
Three Months Ended
(dollars in thousands) July 3, 2022 July 4, 2021 $ Change % Change
Operating expenses $ 19,675 $ 11,594 $ 8,081 69.7%
Six Months Ended
(dollars in thousands) July 3, 2022 July 4, 2021 $ Change % Change
Operating expenses $ 36,914 $ 21,843 $ 15,071 69.0%
Operating expenses for the three months ended July 3, 2022 and July 4, 2021
represented approximately 26.4% and 28.1% of net restaurant sales, respectively.
Operating expenses for the six months ended July 3, 2022 , and July 4, 2021
represented approximately 27.7% and 29.2% of net restaurant sales, respectively.
These year-over-year decreases in expense as a percentage of net restaurant
sales were due primarily to leverage on our fixed operating costs.
Depreciation and Amortization
Depreciation and amortization expense for the three and six months endedJuly 3, 2022 was$2.2 million and$4.7 million , respectively, compared to$1.4 million and$3.0 million for the three and six months endedJuly 4, 2021 . The increase in depreciation and amortization expense was primarily due to the increase in corporate-owned stores from acquisitions that occurred in the 12 months following the end of the second quarter of 2021.
General and Administrative Expenses
Our general and administrative expenses consisted of the following for the three
and six months ended
Three Months Ended
(dollars in thousands) July 3, 2022 July 4, 2021 $ Change % Change General and administrative expenses$ 5,745 $ 4,544
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BBQ HOLDINGS, INC. AND SUBSIDIARIES
Six Months Ended
(dollars in thousands) July 3, 2022 July 4, 2021 $ Change % Change
General and administrative expenses $ 11,036 $ 8,582 General and administrative expenses for the three months endedJuly 3, 2022 , andJuly 4, 2021 represented approximately 7.2% and 10.0% of total revenues, respectively. General and administrative expenses for the six months endedJuly 3, 2022 , andJuly 4, 2021 represented approximately 7.7% and 10.4% of total revenues, respectively. This year-over-year decrease in expense as a percentage of total revenues was due primarily to leverage from the increased revenue resulting from 2021 and 2022 acquisitions and an increase in dine-in sales.
Income Tax (Expense) Benefit
Income tax expense for the three months endedJuly 3, 2022 was approximately$985,000 , or 19.1% of our pretax income and the income tax expense for the three months endedJuly 4, 2021 was$399,000 , or 2.4% of our pretax income. Income tax expense for the six months endedJuly 3, 2022 was approximately$744,000 , or 13.4% of our pretax income and the income tax expense for the six months endedJuly 4, 2021 was$481,000 or 2.7% of our pretax income. The increase in the amount of income tax expense for the three and six month periods is primarily due to the growth in taxable income of the Company. The increase in the income tax expense for the three and six month periods as a percentage of our pretax income is primarily due to the presence of a gain on debt extinguishment in the three month period endedJuly 4, 2021 .
Financial Condition, Liquidity and Capital Resources
Our balance of unrestricted cash and cash equivalents was approximately
Net cash provided by operating activities was approximately$6.2 million for the six months endedJuly 3, 2022 , and was approximately$8.9 million for the six months endedJuly 4, 2021 . The$2.7 million year-over-year decrease in net cash provided by operating activities was driven primarily by an increase in gift card redemptions in the first six months of 2022 as compared to the first six months of 2021, as well as a$2.0 million reduction in accounts payable in the first half of 2022 compared to an increase of$700,000 in accounts payable in the first six months of 2021. Net cash used for investing activities was approximately$35.8 million for the six months endedJuly 3, 2022 relating primarily to the purchase of the Barrio Queen restaurants and the Famous Craft Concepts restaurants, the acquisitions of which we closed in March, April and May of 2022.
Net cash used for investing activities was approximately
Net cash provided by financing activities for the six months endedJuly 3, 2022 , was approximately$9.4 million which was primarily the result of the increase in our term loan balance to fund the Barrio Queen purchase.
Net cash provided by financing activities for the six months ended
We are subject to various financial and non-financial covenants on our long-term debt, including a debt-service coverage ratio. As ofJuly 3, 2022 , we were in compliance with all of our covenants. The Merger Agreement contains certain termination rights for the Company and MTY. Upon termination of the Merger Agreement under specified circumstances, the Company will be required to pay MTY a termination fee of$7.8 million . - 25 -
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BBQ HOLDINGS, INC. AND SUBSIDIARIES
Critical Accounting Policies
Our significant accounting policies are described in Note 1 - Nature of Business and Significant Accounting Policies to the consolidated financial statements included in our Annual Report on Form 10-K for the year endedJanuary 2, 2022 . Except as disclosed in Note 1 "Basis of Presentation" to the accompanying notes to the consolidated financial statements, there have been no updates to our critical accounting policies.
Important Information
The tender offer for the outstanding common stock of the Company referred to in this document has not yet commenced. This document is not a recommendation, an offer to purchase or a solicitation of an offer to sell shares of the Company's common stock. The solicitation and the offer to purchase shares of the Company's common stock will only be made pursuant to an offer to purchase and related materials that MTY intend to file with theSEC . At the time the Offer is commenced, MTY will file a Tender Offer Statement on Schedule TO with theSEC , and soon thereafter the Company will file a Solicitation/Recommendation Statement on Schedule 14D-9 with respect to the Offer. Shareholders of the Company are advised to read the Schedule TO (including an offer to purchase, a related letter of transmittal and other offer documents) and the solicitation/recommendation statement on Schedule 14D-9, as each may be amended or supplemented from time to time, and any other relevant documents filed with theSEC when they become available, before making any decision with respect to the Offer because these documents will contain important information about the proposed transactions and the parties thereto. Shareholders may obtain free copies of the Schedule TO and Schedule 14D-9, as each may be amended or supplemented from time to time, and other documents filed by the parties (when available), at theSEC's web site at www.sec.gov or by visiting the Company's Investor Relations website at https://ir.bbqholdco.com/or by contacting the Company's Investor Relations Department by phone at 952-294-1300 or by e-mail at InvestorRelations@BBQ-Holdings.com.
Forward-Looking Information
BBQ Holdings makes written and oral statements from time to time, including statements contained in this Quarterly Report on Form 10-Q regarding its business and prospects, such as projections of future performance, statements of management's plans and objectives, forecasts of market trends and other matters that are forward-looking statements within the meaning of Sections 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934. Statements containing the words or phrases "will likely result", "anticipates", "are expected to", "will continue", "is anticipated", "estimates", "projects", "believes", "expects", "intends", "target", "goal", "plans", "objective", "should" or similar expressions identify forward-looking statements which may appear in documents, reports, filings with theSEC , news releases, written or oral presentations made by our officers or other representatives to analysts, shareholders, investors, news organizations, and others, and discussions with our management and other Company representatives. For such statements, including those contained in this report, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Our future results, including results related to forward-looking statements, involve a number of risks and uncertainties that are difficult to predict, including but not limited to those identified herein under Part II, Item 1A. "Risk Factors" and under Part I, Item 1A. "Risk Factors" of our Annual Report on Form 10-K for the fiscal year endedJanuary 2, 2022 . No assurance can be given that the results reflected in any forward-looking statements will be achieved. Any forward-looking statements made by us or on our behalf speak only as of the date on which such statement is made. Our forward-looking statements are based upon assumptions that are sometimes based upon estimates, data, communications and other information from suppliers, government agencies and other sources that may be subject to revision. We do not undertake any obligation to update or keep current either (i) any forward-looking statements to reflect events or circumstances arising after the date of such statement, or (ii) the important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or which are reflected from time to time in any forward-looking statement which may be made by us or on our behalf.
Additional Information on
We are currently subject to the informational requirements of the Securities Exchange Act of 1934, as amended. As a result, we are required to file periodic reports and other information with theSEC , such as annual, quarterly, and - 26 -
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BBQ HOLDINGS, INC. AND SUBSIDIARIES current reports, proxy and information statements. You are advised to read this Quarterly Report on Form 10-Q in conjunction with the other reports, proxy statements and other documents we file from time to time with theSEC . If you would like more information regardingBBQ Holdings , ourSEC filings are also available to the public free of charge at theSEC's website. The address of this website is http://www.sec.gov. Our most currentSEC filings, such as our annual, quarterly and current reports, proxy statements and press releases are available to the public free of charge on our website. The address of our website is http://www.bbq-holdings.com. Our website is not intended to be, and is not, a part of this Quarterly Report on Form 10-Q. We will provide electronic or paper copies of ourSEC filings (excluding exhibits) to anyBBQ Holdings shareholder free of charge upon receipt of a written request for any such filing. All requests for ourSEC filings should be sent to the attention of Investor Relations atBBQ Holdings, Inc. ,12701 Whitewater Drive , Suite 100,Minnetonka, MN 55343. - 27 -
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