Diversified Restaurant Holdings Reports 2.2% Increase in Same-store Sales for 2018 Fourth Quarter

SOUTHFIELD, Mich.–(BUSINESS WIRE)–Diversified
Restaurant Holdings, Inc.
(Nasdaq: SAUC) (“DRH” or the “Company”),
one of the largest franchisees for Buffalo Wild Wings®
(“BWW”) with 64 stores across five states, today announced results for
its fourth quarter and fiscal year ended December 30, 2018.

Fourth Quarter and Full Year Key Information (from continuing
operations)

  • Revenue for the quarter totaled $39.1 million and was $153.1 million
    for the year
  • Achieved same-store sales growth of 2.2% in the fourth quarter; first
    positive quarter since 2015
  • Operating loss of $1.5 million in the quarter, which included a $2.8
    million asset impairment charge; operating loss was $0.4 million for
    the year
  • Net loss was $2.3 million in the quarter and $5.0 million for the year
  • Restaurant-level EBITDA(1) margin was 14.3% for the
    quarter and 15.2% for the year
  • Adjusted EBITDA(1) was $3.8 million for the quarter
    and $15.8 million for the year
  • Total debt was down $11.6 million to $102.4 million at year-end

(1)See attached table for a reconciliation of
GAAP net loss to Restaurant-level EBITDA and Adjusted EBITDA

We continue to be energized and excited by the changes that are being
implemented by our franchisor and are starting to reap the early
benefits of the new marketing, media and promotional initiatives,”
commented David G. Burke, President and CEO. “We achieved our first
positive quarterly same-store sales result in three years and we believe
there is a lot of room to continue to build on this momentum as these
changes gain traction and future initiatives continue to roll out. We
are especially encouraged with the early read into 2019. Same-store
sales through early March continue to trend positive, despite severe
weather across most of our regions, with the excitement of March madness
in front of us.

To capitalize on the NCAA tournament and to complement our focus to be
The Great American Sports Bar, there will be a strong traffic-driving
media strategy alongside a new menu design, new and improved food
offerings and enhanced food presentation. Equally important are the
number of initiatives taking place behind the scenes, as we implement
new training and engagement tools to drive better team member retention
and improve the overall customer experience. We are on the path to
achieve the eagerly awaited relaunch of the brand this fall.”

Mr. Burke concluded, “We are uniquely positioned to benefit from Inspire
Brands plans to rebuild the Buffalo Wild Wings brand. With the
resurgence of the brand combined with our operating expertise, we
believe we can achieve strong long-term growth and margin performance.”

DRH announced on February 28, 2019 that it executed an agreement to
acquire nine BWW restaurants located in the Chicago market for $22.5
million. The Company expects to complete the purchase in the second
quarter, subject to franchisor consent and waiving of its right of first
refusal, as well as customary closing conditions.

Fourth Quarter 2018 Results (from continuing operations)      
(Unaudited, $ in thousands)   Q4 2018 Q4 2017 Change % Change
Revenue $ 39,074.4 $ 41,927.1 $ (2,852.7 ) (6.8 )%
Operating (loss) profit $ (1,498.6 ) $ 1,832.4 $ (3,331.0 ) (181.8 )%
Operating margin (3.8 )% 4.4 %
Pre-tax (loss) income $ (3,015.6 ) $ 268.1 $ (3,283.7 ) (1,224.8 )%
Net loss $ (2,294.2 ) $ (20,245.1 ) $ 17,950.9 (88.7 )%
Diluted net loss per share $ (0.07 ) $ (0.76 ) $ 0.69 (90.8 )%
 
Same-store sales(1) 2.2 % (6.8 )%
 
Restaurant-level EBITDA(2) $ 5,585.1 $ 7,163.7 $ (1,578.6 ) (22.0 )%
Restaurant-level EBITDA margin 14.3 % 17.1 %
Adjusted EBITDA(2) $ 3,770.8 $ 4,933.5 $ (1,162.7 ) (23.6 )%
Adjusted EBITDA margin 9.7 % 11.8 %
 
 
Full Year 2018 Results (from continuing operations)
(Unaudited, $ in thousands) 2018 2017 Change % Change
Revenue $ 153,138.2 $ 165,462.6 $ (12,324.4 ) (7.4 )%
Operating (loss) profit $ (382.5 ) $ 5,240.7 $ (5,623.2 ) (107.3 )%
Operating margin (0.2 )% 3.2 %
Pre-tax loss $ (6,686.9 ) $ (1,286.4 ) $ (5,400.5 ) 419.8 %
Net loss $ (5,003.9 ) $ (20,284.2 ) $ 15,280.3 (75.3 )%
Diluted net loss per share $ (0.17 ) $ (0.76 ) $ 0.59 (77.6 )%
 
Same-store sales(1) (4.6 )% (3.7 )%
 
Restaurant-level EBITDA(2) $ 23,335.3 $ 28,284.7 $ (4,949.4 ) (17.5 )%
Restaurant-level EBITDA margin 15.2 % 17.1 %
Adjusted EBITDA(2) $ 15,810.3 $ 19,868.1 $ (4,057.8 ) (20.4 )%
Adjusted EBITDA margin 10.3 % 12.0 %
(1)  

Same store sales calculations exclude closures in September from
Hurricane Irma and the 53rd week in fiscal 2017, and one unit
permanently closed as well as one unit with special circumstances
in 2018

(2) Please see attached table for a reconciliation of GAAP Net loss to
Restaurant-level EBITDA and Adjusted EBITDA

The decrease in sales in the fourth quarter was due to one less
restaurant combined with the prior-year period benefiting from an extra
week as fiscal 2017 was a 53-week year. The full year decline reflects
similar impacts as well as reduced traffic for much of the year.

General and administrative (“G&A”) expenses as a percentage of sales
decreased 80 basis points to 4.8% in the fourth quarter due to lower
corporate overhead, including lower incentive accruals. For the full
year, G&A was down 10 basis points to 5.4% of sales, despite incurring
$0.9 million, or 60 basis points, of non-recurring items during 2018.

Fourth quarter and full year 2018 food, beverage, and packaging costs as
a percentage of sales decreased 10 basis points and 90 basis,
respectively, as lower traditional chicken wing costs helped to offset
the impact of recent promotional activity. Average cost per pound for
traditional bone-in chicken wings, DRH’s most significant input cost,
decreased to $1.76 in 2018 compared with $2.07 in the prior-year period.

Higher average wages due to a tight labor market, coupled with sales
de-leveraging, resulted in compensation costs as a percent of sales
increasing 160 basis points for both the fourth quarter and full year
2018.

The Company recognized an impairment and loss on asset disposal of $2.8
million in the quarter, which reflects the impairment of certain fixed
assets at four locations. For the full year of 2018, impairment charges
at five locations amounted to $3.7 million.

In last year’s fourth quarter, the Company revalued its deferred tax
assets due to the 2017 Tax Cuts and Jobs Act and re-evaluated its
ability to realize these assets. As a result, the Company recognized a
one-time tax expense of $19.0 million.

Balance Sheet and Cash Flow Highlights – Continuing Operations

Cash and cash equivalents were $5.4 million at December 30, 2018,
compared with $4.4 million at 2017 year-end. Capital expenditures were
$1.6 million during 2018 and were primarily for minor facility upgrades
and general maintenance-type investments. Capital expenditures were $4.7
million for 2017.

DRH does not expect to build any new restaurants or complete any major
remodels in 2019. However, the Company is planning to complete some
corporate initiatives, point-of-sale upgrades and build outs around open
space. As a result, DRH anticipates its capital expenses will be
approximately $2.0 million in 2019.

Total debt was $102.4 million at December 30, 2018, down $11.6 million
for the year.

Webcast, Conference Call and Presentation

DRH will host a conference call and live webcast on Friday, March 8,
2019 at 10:00 A.M. Eastern Time, during which management will review the
financial and operating results for the fourth quarter and full year
period, and discuss its corporate strategies and outlook. A
question-and-answer session will follow.

The teleconference can be accessed by calling (201) 389-0879. The
webcast can be monitored at www.diversifiedrestaurantholdings.com.
A presentation that will be referenced during the conference call is
also available on the website.

A telephonic replay will be available from 1:00 P.M. ET on the day of
the call through Friday, March 15, 2019. To listen to the archived call,
dial (412) 317-6671 and enter replay pin number 13686205, or access the
webcast replay at http://www.diversifiedrestaurantholdings.com,
where a transcript will also be posted once available.

About Diversified Restaurant Holdings, Inc.

Diversified Restaurant Holdings, Inc. is one of the largest franchisees
for Buffalo Wild Wings with 64 franchised restaurants in key markets in
Florida, Illinois, Indiana, Michigan and Missouri. DRH’s strategy is to
generate cash, reduce debt and leverage its strong franchise operating
capabilities for future growth. The Company routinely posts news and
other important information on its website at http://www.diversifiedrestaurantholdings.com.

Safe Harbor Statement

The information made available in this news release and the Company’s
March 8, 2019 earnings conference call contain forward-looking
statements which reflect DRH’s current view of future events, results of
operations, cash flows, performance, business prospects and
opportunities. Wherever used, the words “anticipate,” “believe,”
“expect,” “intend,” “plan,” “project,” “will continue,” “will likely
result,” “may,” and similar expressions identify forward-looking
statements as such term is defined in the Securities Exchange Act of
1934. Any such forward-looking statements are subject to risks and
uncertainties, actual growth, results of operations, financial
condition, cash flows, performance, business prospects and opportunities
could differ materially from historical results or current expectations.
Some of these risks include, without limitation, the franchisor waiving
its right of first refusal, our ability to obtain financing for the
acquisition, the success of initiatives aimed at improving the Buffalo
Wild Wings brand, the impact of economic and industry conditions,
competition, food safety issues, store expansion and remodeling, labor
relations issues, costs of providing employee benefits, regulatory
matters, legal and administrative proceedings, information technology,
security, severe weather, natural disasters, accounting matters, other
risk factors relating to business or industry and other risks detailed
from time to time in the Securities and Exchange Commission filings of
DRH. Forward-looking statements contained herein speak only as of the
date made and, thus, DRH undertakes no obligation to update or publicly
announce the revision of any of the forward-looking statements contained
herein to reflect new information, future events, developments or
changed circumstances or for any other reason.

FINANCIAL TABLES FOLLOW

DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

   

Three Months Ended

Twelve Months Ended

December 30,
2018

 

December 31,
2017

December 30,
2018

 

December 31,
2017

Revenue $ 39,074,438 $ 41,927,106 $ 153,138,219 $ 165,462,612
 
Operating expenses

Restaurant operating costs (exclusive of
depreciation and
amortization shown separately
below):

Food, beverage, and packaging 11,406,832 12,269,817 43,795,044 48,799,718
Compensation costs 10,500,070 10,600,978 41,111,404 41,726,264
Occupancy 2,944,660 3,018,219 11,607,378 11,720,147
Other operating costs 8,637,775 8,874,402 33,455,134 35,062,833
General and administrative expenses 1,885,626 2,357,429 8,246,709 9,081,866
Pre-opening costs 405,448
Depreciation and amortization 2,356,809 2,966,022 11,532,662 13,115,072
Impairment and loss on asset disposals 2,841,235   7,884   3,772,431   310,536  
Total operating expenses 40,573,007 40,094,751 153,520,762 160,221,884
       
Operating (loss) profit (1,498,569 ) 1,832,355 (382,543 ) 5,240,728
 
Interest expense (1,551,223 ) (1,592,573 ) (6,416,531 ) (6,633,709 )
Other income, net 34,161   28,279   112,155   106,586  
 

Income (loss) from continuing operations before
income taxes

(3,015,631 ) 268,061 (6,686,919 ) (1,286,395 )

Income tax benefit (expense) of continuing
operations

721,460   (20,513,209 ) 1,682,995   (18,997,756 )
Loss from continuing operations (2,294,171 ) (20,245,148 ) (5,003,924 ) (20,284,151 )
 
Discontinued operations

Loss from discontinued operations before
income taxes

(82,701 ) (238,253 )
Income tax benefit of discontinued operations   6,137     64,328  
Loss from discontinued operations (76,564 ) (173,925 )
       
Net loss $ (2,294,171 ) $ (20,321,712 ) $ (5,003,924 ) $ (20,458,076 )
 
Basic and diluted loss per share from:
Continuing operations $ (0.07 ) $ (0.76 ) $ (0.17 ) $ (0.76 )
Discontinued operations       (0.01 )
Basic and diluted loss per share: $ (0.07 ) $ (0.76 ) $ (0.17 ) $ (0.77 )

DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Unaudited)

   
December 30, 2018 December 31, 2017
ASSETS
Current assets
Cash and cash equivalents $ 5,364,014 $ 4,371,156
Accounts receivable 654,322 653,102
Inventory 1,526,779 1,591,363
Prepaid and other current assets 511,835   408,982  
Total current assets 8,056,950 7,024,603
 
Property and equipment, net 34,423,345 48,014,043
Intangible assets, net 2,198,685 2,438,187
Goodwill 50,097,081 50,097,081
Other long-term assets 408,761   185,322  
Total assets $ 95,184,822   $ 107,759,236  
 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities
Accounts payable $ 4,273,133 $ 4,561,939
Accrued compensation 1,830,415 1,854,127
Other accrued liabilities 2,946,738 2,404,942
Current portion of long-term debt 11,515,093 11,440,433
Current portion of deferred rent 427,479   411,660  
Total current liabilities 20,992,858 20,673,101
 
Deferred rent, less current portion 2,385,961 2,208,238
Deferred income taxes 1,220,087 2,759,870
Unfavorable operating leases 438,944 510,941
Other liabilities 1,587,821 2,346,991
Long-term debt, less current portion 90,907,537   102,488,730  
Total liabilities 117,533,208 130,987,871
 
Stockholders’ deficit:

Common stock – $0.0001 par value; 100,000,000 shares authorized;
33,200,708
and 26,859,125, respectively, issued and outstanding

3,182 2,625
Additional paid-in capital 27,021,517 21,776,402
Accumulated other comprehensive income (loss) 355,293 (283,208 )
Accumulated deficit (49,728,378 ) (44,724,454 )
Total stockholders’ deficit (22,348,386 ) (23,228,635 )
   
Total liabilities and stockholders’ deficit $ 95,184,822   $ 107,759,236  

DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 
Fiscal Year Ended
December 30, 2018   December 31, 2017
Cash flows from operating activities
Net loss $ (5,003,924 ) $ (20,458,076 )
Loss from discontinued operations   173,925  
Net loss from continuing operations (5,003,924 ) (20,284,151 )

Adjustments to reconcile net loss from continuing operations to
net cash
provided by operating activities:

Depreciation and amortization 11,532,662 13,115,072
Amortization of debt discount and loan fees 296,385 294,103
Amortization of gain on sale-leaseback (199,834 ) (131,617 )
Impairment and loss on asset disposals 3,772,431 310,536
Share-based compensation 653,119 418,096
Deferred income taxes (1,706,853 ) 18,943,427
Changes in operating assets and liabilities that provided (used) cash
Accounts receivable (1,220 ) (376,864 )
Inventory 64,584 109,241
Prepaid and other assets 50,847 896,954
Intangible assets (20,000 ) (48,806 )
Other long-term assets 1,987 48,217
Accounts payable (300,702 ) 555,089
Accrued liabilities 313,195 (1,357,970 )
Deferred rent 193,542   182,477  
Net cash provided by operating activities of continuing operations 9,646,219   12,673,804  
Net cash used in operating activities of discontinued operations   (173,925 )
Net cash provided by operating activities 9,646,219   12,499,879  
 
Cash flows from investing activities
Purchases of property and equipment (1,623,355 ) (4,687,242 )
Net cash used in investing activities (1,623,355 ) (4,687,242 )
 
Cash flows from financing activities
Proceeds from issuance of long-term debt 4,650,965
Repayments of long-term debt (11,622,559 ) (12,116,623 )
Proceeds from employee stock purchase plan 83,122 65,200
Proceeds from issuance of common stock 4,579,781
Tax withholding for restricted stock (70,350 ) (62,149 )
Net cash used in financing activities (7,030,006 ) (7,462,607 )
Net increase in cash and cash equivalents 992,858 350,030
Cash and cash equivalents, beginning of period 4,371,156   4,021,126  
Cash and cash equivalents, end of period $ 5,364,014   $ 4,371,156  
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES

Reconciliation between Net Loss and Adjusted EBITDA and
Adjusted Restaurant-Level EBITDA

       
Three Months Ended (Unaudited) Fiscal Year Ended (Unaudited)
   

December 30,
2018

 

December 31,
2017

 

December 30,
2018

 

December 31,
2017

Net loss   $ (2,294,171 )   $ (20,321,712 )   $ (5,003,924 )   $ (20,458,076 )
+ Loss from discontinued operations 76,564 173,925
+ Income tax (benefit) expense (721,460 ) 20,513,209 (1,682,995 ) 18,997,756
+ Interest expense 1,551,223 1,592,573 6,416,531 6,633,709
+ Other income, net (34,161 ) (28,279 ) (112,155 ) (106,586 )
+ Impairment and loss on asset disposal 2,841,235 7,884 3,772,431 310,536
+ Depreciation and amortization   2,356,809     2,966,022     11,532,662     13,115,072  
EBITDA   $ 3,699,475     $ 4,806,261     $ 14,922,550     $ 18,666,336  
+ Pre-opening costs 405,448
+ Non-recurring expenses (Restaurant-level) 166,023 131,000
+ Non-recurring expenses (Corporate-level)   71,355     127,250     721,694     665,333  
Adjusted EBITDA   $ 3,770,830     $ 4,933,511     $ 15,810,267     $ 19,868,117  
Adjusted EBITDA margin (%) 9.7 % 11.8 % 10.3 % 12.0 %
+ General and administrative 1,885,626 2,357,429 8,246,709 9,081,866
+ Non-recurring expenses (Corporate-level)   (71,355 )   (127,250 )   (721,694 )   (665,333 )
Restaurant–Level EBITDA   $ 5,585,101     $ 7,163,690     $ 23,335,282     $ 28,284,650  
Restaurant–Level EBITDA margin (%) 14.3 % 17.1 % 15.2 % 17.1 %

Restaurant-Level EBITDA represents Net loss plus the sum of
non-restaurant specific general and administrative expenses, restaurant
pre-opening costs, impairment and loss on property and equipment
disposals, depreciation and amortization, other income and expenses,
interest, taxes, and non-recurring expenses. Adjusted EBITDA represents
net income (loss) plus the sum of restaurant pre-opening costs,
impairment and loss on property and equipment disposals, depreciation
and amortization, other income and expenses, interest, taxes, and
non-recurring expenses. We are presenting Restaurant-Level EBITDA and
Adjusted EBITDA, which are not presented in accordance with GAAP,
because we believe they provide additional metrics by which to evaluate
our operations. When considered together with our GAAP results and the
reconciliation to our net income (loss), we believe they provide a more
complete understanding of our business than could be obtained absent
this disclosure. We use Restaurant-Level EBITDA and Adjusted EBITDA
together with financial measures prepared in accordance with GAAP, such
as revenue, income from operations, net income, and cash flows from
operations, to assess our historical and prospective operating
performance and to enhance the understanding of our core operating
performance. Restaurant-Level EBITDA and Adjusted EBITDA are presented
because: (i) we believe they are useful measures for investors to assess
the operating performance of our business without the effect of non-cash
depreciation and amortization expenses; (ii) we believe investors will
find these measures useful in assessing our ability to service or incur
indebtedness; and (iii) they are used internally as benchmarks to
evaluate our operating performance or compare our performance to that of
our competitors.

Additionally, we present Restaurant-Level EBITDA because it excludes
the impact of general and administrative expenses and restaurant
pre-opening costs, which is non-recurring. The use of Restaurant-Level
EBITDA thereby enables us and our investors to compare our operating
performance between periods and to compare our operating performance to
the performance of our competitors. The measure is also widely used
within the restaurant industry to evaluate restaurant level
productivity, efficiency, and performance. The use of Restaurant-Level
EBITDA and Adjusted EBITDA as performance measures permits a comparative
assessment of our operating performance relative to our performance
based on GAAP results, while isolating the effects of some items that
vary from period to period without any correlation to core operating
performance or that vary widely among similar companies. Companies
within our industry exhibit significant variations with respect to
capital structure and cost of capital (which affect interest expense and
tax rates) and differences in book depreciation of property and
equipment (which affect relative depreciation expense), including
significant differences in the depreciable lives of similar assets among
various companies. Our management team believes that Restaurant-Level
EBITDA and Adjusted EBITDA facilitate company-to-company comparisons
within our industry by eliminating some of the foregoing variations.

Restaurant-Level EBITDA and Adjusted EBITDA are not determined in
accordance with GAAP and should not be considered in isolation or as an
alternative to net income, income from operations, net cash provided by
operating, investing, or financing activities, or other financial
statement data presented as indicators of financial performance or
liquidity, each as presented in accordance with GAAP. Neither
Restaurant-Level EBITDA nor Adjusted EBITDA should be considered as a
measure of discretionary cash available to us to invest in the growth of
our business. Restaurant-Level EBITDA and Adjusted EBITDA as presented
may not be comparable to other similarly titled measures of other
companies and our presentation of Restaurant-Level EBITDA and Adjusted
EBITDA should not be construed as an inference that our future results
will be unaffected by unusual items. Our management recognizes that
Restaurant-Level EBITDA and Adjusted EBITDA have limitations as
analytical financial measures.

Contacts

Investor and Media Contact:
Deborah K. Pawlowski
Kei
Advisors LLC
716.843.3908
dpawlowski@keiadvisors.com

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