• Second quarter food and beverage sales increased more than 148% to a record $10.7 million
  • Food and beverage costs, as a percentage of related sales, declined as fresh, bone-in chicken wing costs decreased
  • Cash generated from 2010 operations exceeded $1.6 million to date
  • Three new restaurants expected to open in the second half of 2010 with a fourth scheduled to open in the first quarter of 2011

SOUTHFIELD, Mich.  (RestaurantNewsRelease.com)  Diversified Restaurant Holdings, Inc. (OTCBB: DFRH) (“DRH” or the “Company”), the owner/operator and franchisor of the unique, full-service, ultra-casual restaurant and bar, Bagger Dave’s Legendary Burgers & Fries® (“Bagger Dave’s”), and a leading franchisee for Buffalo Wild Wings® (“BWW”), today reported financial results for the 2010 second quarter ended June 27, 2010.

Second quarter 2010 revenue, derived solely from food and beverage sales, was $10.7 million, a 148% increase compared with total revenue of $4.7 million in the 2009 second quarter, due predominantly to the acquisition of nine affiliated BWW restaurants it had previously managed on February 1, 2010 (“Affiliates Acquisition”). Food and beverage sales in last year’s second quarter were $4.3 million; last year’s quarter also included $441 thousand in management fees that were generated under a service agreement covering the nine restaurants prior to the Affiliates Acquisition. Food and beverage sales in the second quarter of 2010 included sales from operations of the acquired restaurants, as well as the Company’s third Bagger Dave’s location in Novi, Michigan, which opened in February 2010, and a Buffalo Wild Wings location in Marquette, Michigan, which opened in early June 2010. With these additions, the second quarter of 2010 included food and beverage sales for 17 BWW and three Bagger Dave’s locations while the 2009 quarter included sales from seven BWW and two Bagger Dave’s locations.

Revenue for the first six months of 2010 was $19.5 million, a 108.7% increase compared with revenue of $9.3 million in the same 2009 period. Food and beverage sales were $19.3 million, 129.0% above sales of $8.4 million in the first half of 2009, primarily due to the greater number of restaurants now owned and operating in the 2010 period. Sales for the first six months of 2010 included the operations of 16 BWW restaurants that were opened prior to 2010 and the 17th BWW location that opened in June as well as sales of two Bagger Dave’s restaurants that were opened prior to 2010 and the third Bagger Dave’s location that opened in February. In addition, the 2010 first half had one more day of sales as the net result of the Company’s adoption, in 2009, of a fiscal year that ends on the last Sunday of each calendar quarter to align itself with restaurant industry standards.

Revenue from management and advertising fees decreased to $166 thousand in the first half of 2010, compared with $898 thousand in the 2009 first half, as a result of the Affiliates Acquisition and only one month of fees being recognized in the 2010 calendar year prior to the Affiliates Acquisition.

The net loss in the 2010 second quarter was $110 thousand, or $0.004 loss per fully diluted share, compared with net income of $70 thousand, or $0.002 earnings per fully diluted share, in the same period the prior year. For the first six months of 2010, net income was $142 thousand, or $0.005 earnings per diluted share, compared with net income of $150 thousand, or $0.005 earnings per fully diluted share, in the first half of 2009.

Michael Ansley, President and Chief Executive Officer of DRH, commented, “The acquisition of the nine Buffalo Wild Wings restaurants that we previously managed, along with the openings of our Marquette Buffalo Wild Wings and our Novi Bagger Dave’s restaurants, are driving significant revenue growth thus far in 2010. However, the restaurant expansion, made possible by the funding we secured earlier this year, resulted in an increase in interest expense which produced a small loss for the quarter. Notably, we generated positive operating cash flow and, with costs for fresh, bone-in chicken wings decreasing, we will remain focused on controlling our other costs as we pursue our goal of profitable future growth.”

Second Quarter Operating Results

(in thousands)         Three Months Ended     Increase     Percent
          June 27, 2010     June 30, 2009     (Decrease)     Change
Food and beverage costs         $ 3,138     $ 1,348     $ 1,790     132.7%
% to food and beverage sales           29.4%       31.3%            
                             
G&A expense         $ 2,755     $ 1,150     $ 1,605     139.6%
% to food and beverage sales           25.8%       26.7%            
                             
Compensation & Occupancy Costs         $ 3,971     $ 1,767     $ 2,204     124.7%
% to food and beverage sales           37.2%       41.0%            
                             
Operating income         $ 180     $ 122     $ 58     47.5%
Operating margin           1.7%       2.6%            

Food and beverage costs declined as a percentage of related sales in the second quarter of 2010 compared with the 2009 second quarter as fresh, bone-in chicken wing prices continued to trend downward during the quarter.

Both general and administrative (G&A) expense and compensation and occupancy costs declined as a percentage of food and beverage sales in the 2010 second quarter compared with the second quarter of last year due primarily to efficiencies associated with the Affiliates Acquisition. Higher advertising expenses and audio/visual costs related to an increased number of sports packages available at the Company’s restaurants, combined with higher maintenance costs on a larger mix of older restaurants, were offset by purchasing efficiencies experienced as a result of the increased number of restaurants now owned.

The improvement in operating income was primarily driven by the increased food and beverage revenue while the decline in operating margin was related to the absence of management and advertising fees from the acquired restaurants.

Interest expense for the 2010 second quarter was $518 thousand, significantly above interest expense of $105 thousand during the second quarter of 2009 due to higher borrowings associated with the Affiliates Acquisition as well as the one-time prepayment penalties associated with the new credit facility obtained during the second quarter of 2010.

DRH recorded an income tax benefit in the 2010 second quarter of $244 thousand compared with an income tax provision of $27 thousand in the same period last year, as the Company recognized significant deferred tax assets and used a significant amount of net operating loss carry forwards during the quarter, made possible by the Affiliates Acquisition.

Operating Results for the First Half of 2010

(in thousands)         Six Months Ended     Increase     Percent
          June 27, 2010     June 30, 2009     (Decrease)     Change
Food and beverage costs         $ 5,810     $ 2,630     $ 3,180     120.9%
% to food and beverage sales           30.1%       31.2%            
                             
G&A expense         $ 4,893     $ 2,259     $ 2,634     116.6%
% to food and beverage sales           25.3%       26.8%            
                             
Compensation & Occupancy Costs         $ 7,168     $ 3,401     $ 3,767     110.8%
% to food and beverage sales           37.1%       40.3%            
                             
Operating income         $ 458     $ 343     $ 115     33.5%
Operating margin           2.3%       3.7%            

Food and beverage costs as a percentage of related sales in the first six months of 2010 were below the level experienced in last year’s first half due to declining fresh, bone-in chicken wing costs. The decline in G&A expense as a percentage of food and beverage sales in the first six months of 2010 compared with the 2009 period is related to efficiencies gained from the more mature acquired restaurants. Compensation and occupancy costs also declined as a percentage of food and beverage sales due to higher revenue and improved efficiencies.

Operating income in the first six months of 2010 was $458 thousand, compared with operating income of $343 thousand in the 2009 period. However, operating margin was 140 basis points below margin in the first half of 2009 due primarily to the elimination of management and advertising fees as a result of the Affiliates Acquisition.

Interest expense for the first six months of 2010 was $668 thousand, compared to interest expense of $216 thousand during the same 2009 period due to higher borrowings associated with the Affiliates Acquisition and the one-time prepayment penalties incurred in conjunction with the execution of the new credit facility.

Balance Sheet

Cash and cash equivalents were $669 thousand at June 27, 2010, compared with $650 thousand at December 27, 2009. DRH generated in excess of $1.6 million in cash from operations during the first six months of 2010 compared with approximately $1.1 million during the first half of 2009. The increase in cash from operations in the 2010 period is primarily due to the Affiliates Acquisition.

Capital expenditures in the second quarter of 2010 were approximately $4.3 million and are related to ongoing restaurant openings and the purchase of a previously-leased building in Brandon, Florida, where the Company operates a BWW restaurant. For the first six months of 2010, capital expenditures were approximately $5.0 million, compared with $1.1 million in the first half of 2009. Capital expenditures related to 2010 restaurants openings, excluding the purchase of the Brandon building, are expected to be approximately $4.5 million for 2010.

Outlook

DRH plans to open two additional BWW restaurants in 2010. The first is currently under construction in Chesterfield, Michigan, with a planned opening date of Sunday, August 22, 2010, and the second location will be in Ft. Myers, Florida, with a planned opening during the fourth quarter of 2010. In addition, DRH expects to open its twentieth BWW restaurant in Traverse City, Michigan, in the first quarter of 2011. The Company’s agreement with BWW requires a total of 38 restaurants in Michigan and Florida in operation by 2017. In addition, the Company is opening its fourth company-owned Bagger Dave’s restaurant in Brighton, Michigan, with a planned opening during the fourth quarter of 2010. DRH also has a Franchise Disclosure Document in place for future Bagger Dave’s franchises in Michigan, Ohio, and Indiana. As of June 27, 2010, DRH operated three Bagger Dave’s restaurants in Michigan and 17 BWW restaurants (12 in Michigan and five in Florida).

Mr. Ansley concluded, “The Ft. Myers Buffalo Wild Wings restaurant will mark the halfway point in our commitment to open 38 Buffalo Wild Wings restaurants by 2017. We continue to evaluate additional new locations in both Michigan and Florida as we grow our BWW restaurant count. We also recently announced the site for our fourth Bagger Dave’s location in Brighton, Michigan. In addition, we are assessing possible franchising options in Michigan, Ohio, and Indiana. The successful execution of our growth strategies for our two concepts, along with a continued commitment to providing a superior guest experience, through well-trained and motivated employees, remains our top priority.”

About Diversified Restaurant Holdings

DRH is a leading BWW® franchisee, currently operates 17 BWW restaurants (five in Florida and 12 in Michigan), with the 18th scheduled to open in the third quarter of 2010, the 19th scheduled to open in the fourth quarter of 2010, and the 20th scheduled to open in the first quarter of 2011. DRH is also the recipient of many franchise awards, including an award for the Highest Annual Restaurant Sales.

The Company also owns and operates its own unique, full-service, ultra-casual restaurant and bar concept, Bagger Dave’s, which was launched in January 2008. The concept focuses on local flair with the interior showcasing historic photos of the city in which it resides. Bagger Dave’s offers a full-service, family-friendly restaurant and bar with a casual, comfortable atmosphere. The menu features freshly made burgers (never frozen), accompanied by more than 30 toppings from which to choose, fresh-cut fries, hand-dipped milkshakes, and a selection of craft beer and wine. Signature items include Sloppy Dave’s BBQ®, Train Wreck Burger®, and Bagger Dave’s Amazingly Delicious Turkey Black Bean Chili™. There’s also an electric train that runs above the dining room and bar areas. All current and future locations will be smoke-free. Currently, there are three locations in the State of Michigan, with the fourth scheduled to open in the fourth quarter of 2010. DRH has filed for rights, and has been approved, to franchise Bagger Dave’s in the States of Michigan, Indiana, and Ohio. For more information, please visit www.baggerdaves.com.

DRH routinely posts news and other important information on its Web site at www.diversifiedrestaurantholdings.com.

Safe Harbor Regarding Forward Looking Statements

This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

Forward-looking statements are subject to risks, uncertainties and assumptions and are identified by words such as “expects,” “estimates,” “projects,” “anticipates,” “believes,” “could,” and other similar words. Forward-looking statements are based upon the current beliefs and expectations of management. All statements addressing operating performance, events, or developments that DRH expects or anticipates will occur in the future, including but not limited to franchise sales, restaurant openings, financial performance, and adverse developments with respect to litigation or increased litigation costs, the operation or performance of the Company’s business units, or the market price of its common stock are forward-looking statements. Because they are forward-looking, they should be evaluated in light of important risk factors and uncertainties. Actual results may vary materially from those contained in forward-looking statements based on a number of risk factors and uncertainties including, without limitation, our ability to operate in new markets, the cost of commodities, the success of our marketing and other initiatives to attract customers, customer preferences, operating costs, economic conditions, competition, the availability of financing for franchisees and the Company, and the impact of applicable regulations. These and other risk factors and uncertainties are more fully described in the Company’s most recent Annual and Quarterly Reports filed with the Securities and Exchange Commission. Undue reliance should not be placed on the Company’s forward-looking statements. Except as required by law, DRH disclaims any obligation to update or publicly announce any revisions to any of the forward-looking statements contained in this press release.

 
DIVERSIFIED RESTAURANT HOLDINGS, INC.
CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS
(unaudited)
 
    Three Months Ended     Six Months Ended
    June 27     June 30     June 27   June 30
      2010         2009         2010         2009  
Revenue                      
Food and beverage sales   $ 10,683,821       $ 4,305,776       $ 19,325,82       $ 8,440,786  
Management and advertising fees             441,276         165,886         897,805  
Total revenue     10,683,821         4,747,052         19,491,708         9,338,591  
                       
Operating expenses                      
Compensation costs     3,397,029         1,491,686         5,983,841         2,850,893  
Food and beverage costs     3,137,948         1,348,406         5,810,496         2,630,402  
General and administrative     2,642,782         1,019,158         4,675,377         2,125,859  
Pre-opening     111,921         131,277         217,179         133,078  
Occupancy     573,619         275,805         1,183,785         550,202  
Depreciation and amortization     640,715         358,439         1,163,275         704,844  
Total operating expenses     10,504,014         4,624,771         19,033,953         8,995,248  
                       
Operating profit     179,807         122,281         457,755         343,343  
                       
Interest expense     (518,143 )       (104,585 )       (668,426 )       (215,892 )
Other income (expense), net     (15,658 )       79,295         (2,567 )       90,514  
                       
(Loss) income before income taxes     (353,994 )       96,991         (213,238 )       217,965  
                       
Income tax benefit (provision)     244,463         (26,668 )       354,979         (68,429 )
                       
Net (loss) income   $ (109,531 )     $ 70,323       $ 141,741       $ 149,536  
                       
Basic (loss) earnings per share – as reported   $ (0.006 )     $ 0.004       $ 0.008       $ 0.008  
Fully diluted (loss) earnings per share – as reported   $ (0.004 )     $ 0.002       $ 0.005       $ 0.005  
                       
Weighted average number of common shares                      
outstanding                      
Basic     18,870,505         18,070,000         18,870,505         18,070,000  
Diluted     29,160,000         29,020,000         29,090,000         29,020,000  
                                       
 
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED INTERIM BALANCE SHEETS
 
ASSETS       June 27     December 27
        2010     2009
        (unaudited)     (audited)
Current assets              
Cash and cash equivalents       $ 668,962       $ 649,518  
Accounts receivable – related party                 254,540  
Inventory         305,517         125,332  
Prepaid assets         161,475         103,452  
Other current assets         59,227         11,219  
Total current assets         1,195,181         1,144,061  
               
Property and equipment, net         15,258,823         7,866,149  
Intangible assets, net         956,570         411,983  
Other long-term assets         56,144         49,280  
Deferred income taxes         786,942         246,754  
Total assets       $ 18,253,660       $ 9,718,227  
               
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY              
               
Current liabilities              
Current portion of long-term debt       $ 2,233,716       $ 1,402,742  
Accounts payable         759,410         293,984  
Accrued liabilities         885,769         329,355  
Deferred rent         119,486         54,273  
Total current liabilities         3,998,381         2,080,354  
               
Accrued rent         741,369         253,625  
Deferred rent         834,272         422,068  
Other liabilities – interest rate swap         404,921         167,559  
Long-term debt, less current portion         13,054,104         4,601,909  
Total liabilities         19,033,047         7,525,515  
               
Stockholders’ (deficit) equity              
 Common stock – $0.0001 par value; 100,000,000 shares authorized,
18,876,000 and 18,626,000 shares, respectfully, issued and outstanding
        1,888         1,863  
Additional paid-in capital         2,622,286         2,356,155  
Accumulated deficit         (2,998,640 )       (165,306 )
Comprehensive (loss) income         (404,921 )        
Total stockholders’ (deficit) equity         (779,387 )       2,192,712  
               
Total liabilities and stockholders’ (deficit) equity       $ 18,253,660       $ 9,718,227  
 
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
(unaudited)
 
      Six Months Ended
      June 27     June 30
      2010     2009
Cash flows from operating activities            
Net income     $ 141,741       $ 149,536  
Adjustments to reconcile net income to            
net cash provided by (used in) operating activities            
Depreciation and amortization       1,163,275         704,844  
Loss on disposal of property and equipment       217,868          
Share-based compensation       16,156         16,156  
Deferred income tax (provision) benefit       (540,188 )       186,996  
Changes in operating assets and liabilities that            
provided (used) cash            
Accounts receivable – related party       254,540         (91,028 )
Inventory       (23,642 )       (454 )
Prepaid assets       6,191         (2,687 )
Other current assets       (48,008 )       172,728  
Intangible assets       (81,068 )       (1,210 )
Other assets       (6,864 )       (78,341 )
Accounts payable       219,995         (49,388 )
Accrued liabilities       257,044         77,240  
Accrued rent       (117,201 )       59,299  
Deferred rent       215,018         (27,467 )
Net cash provided by operating activities       1674,856         1,116,224  
             
Cash flows from investing activities            
Purchases of property and equipment       (2,501,501 )       (1,127,110 )
Net cash used in investing activities       (2,501,501 )       (1,127,110 )
             
Cash flows from financing activities            
Proceeds from issuance of notes payable – related party       236,198         8,750  
Proceeds from issuance of long-term debt       963,065         858,779  
Repayment of notes payable – related party       (25,084 )       (50,370 )
Repayments of long-term debt       (578,090 )       (516,026 )
Proceeds from issuance of common stock       250,000          
Net cash provided by financing activities       846,089         301,133  
             
Net increase in cash and cash equivalents       19,444         290,247  
             
Cash and cash equivalents, beginning of period       649,518         133,865  
             
Cash and cash equivalents, end of period     $ 668,962       $ 424,112  
                     
 
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
RESTAURANT COUNT
 
2010 Total at Q1 Q2 Q3 Q4 Projected
  Dec. 27, 2010 2010 2010 2010 Total at
  2009         Dec. 26,
            2010
BWW            
Michigan 5 6 1 1(1)   13(2)
Florida 2 3     1(1) 6
Bagger Dave’s            
Michigan 2 1     1(1) 4
Total Locations 9 10 1 1 2 23
(1)  –  New restaurant opening
(2)  –  DRH plans its 14th Michigan BWW restaurant in Traverse City in Q1 2011
 
2009 Total at Q1 Q2 Q3 Q4 Total at
  Dec. 31, 2009 2009 2009 2009 Dec. 27,
  2008         2009
BWW            
Michigan 4   1     5
Florida 2         2
Bagger Dave’s            
Michigan 2         2
Total Locations 8   1     9
 
2008 Total at Q1 Q2 Q3 Q4 Total at
  Dec. 31, 2008 2008 2008 2008 Dec. 31,
  2007         2008
BWW            
Michigan   1   2 1 4
Florida 2         2
Bagger Dave’s            
Michigan   1   1   2
Total Locations 2 2   3 1 8