Diversified Restaurant Holdings Reports Second Quarter 2018 Results

Diversified Restaurant Holdings, Inc. (Nasdaq: SAUC) ("DRH" or the "Company"), one of the largest franchisees for Buffalo Wild Wings^® ("BWW") with 65 stores across five states, today announced results for its second quarter ended July 1, 2018.

Second Quarter Information (from continuing operations)

• Revenue totaled $37.0 million
• Same-store sales declined 6.4%
• Net loss was $1.1 million or $0.04 per diluted share
• Restaurant-level EBITDA⁽¹⁾ was $5.5 million, or 15.0% of sales
• Adjusted EBITDA⁽¹⁾ was $3.7 million
• Total debt of $108.2 million was down $5.8 million for the year-to-date period

"Our second quarter results reflect the ongoing headwinds that the Buffalo Wild Wings system is facing in the short-term while our franchisor, under new ownership, works to realign media and promotional strategies and reinvigorate the brand,” commented David G. Burke, President and CEO. "Despite the current challenges, we remain optimistic about a turnaround in sales trends as a result of the improved corporate marketing strategy planned for the upcoming football season along with the many other positive developments that are being tested and implemented, from advertising to information technology to menu innovation. We also expect to realize cost benefits as we participate in the leverage from our franchisor’s larger scale and buying power. We expect that the impact from these efforts will begin to be realized in our results later in the year as changes are implemented and gain traction.”

Mr. Burke added, "Given the current operating environment and our anticipated cash outlays for debt repayment and capital improvements, we felt it was prudent to complete an equity offering. The approximately $4.7 million in net proceeds that was recently raised provides confidence that our current cash balance, in addition to our cash flow from operations, will be sufficient to fund our operations, meet our commitments on our existing debt and ensure ongoing debt covenant compliance.”

The decrease in sales in the second quarter was the result of reduced traffic and the impact of the revenue deferral related to the Blazin' Rewards loyalty program, partially offset by a new restaurant opening late in second quarter of 2017 and a favorable calendar shift with Easter falling in the 2018 first quarter versus the second quarter in 2017.

General and administrative expenses as a percentage of sales increased to 5.8% in the second quarter from 5.2% due to lower sales volumes. Food, beverage and packaging costs as a percentage of revenue decreased 140 basis points to 28.5%, primarily due to lower traditional chicken wing costs. Average cost per pound for traditional bone-in chicken wings, DRH’s most significant input cost, decreased to $1.66 in the 2018 second quarter compared with $2.03 in the prior-year period.

Balance Sheet Highlights - Continuing Operations

Cash and cash equivalents were $2.5 million at July 1, 2018 compared with $4.4 million at 2017 year-end. Capital expenditures were $0.9 million during the first six months of 2018 and were for minor facility upgrades and general maintenance-type investments, as well as improvements to prepare an open space for sub-lease adjacent to one of our restaurants in the first quarter. DRH does not expect to build any new restaurants nor is it expected to complete any major remodels in 2018. As a result, the Company anticipates its capital expenditures will approximate $1.5 million in fiscal 2018.

Total debt was $108.2 million at the end of the quarter, down $5.8 million since 2017 year-end.

On July 24, 2018, the Company completed an underwritten registered public offering of 6 million shares of common stock at a public offering price of $1.00 per share, including 700,000 shares offered by a certain selling stockholder, for total Company gross proceeds of $5.3 million. DRH also granted the underwriter an option for a period of 30 days to purchase up to an additional 450,000 shares of its common stock to cover over-allotments, if any. DRH intends to use the net proceeds from the offering for working capital and general corporate purposes, which may include repayment of debt.

Webcast, Conference Call and Presentation

DRH will host a conference call and live webcast on Wednesday, August 8, 2018 at 10:00 A.M. Eastern Time, during which management will review the financial and operating results for the second quarter, 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 Wednesday, August 15, 2018. To listen to the archived call, dial (412) 317-6671 and enter replay pin number 13681116, 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 65 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

Some of the statements contained in this news release and the Company’s August 8, 2018 earnings conference call may constitute "forward-looking statements” within the meaning of the Federal Private Securities Litigation Reform Act of 1995. These statements reflect the current views of our senior management team with respect to future events, including our financial performance, business and industry in general. Statements that include the words "expect,” "intend,” "plan,” "believe,” "project,” "forecast,” "estimate,” "may,” "should,” "anticipate,” and variations of such words and similar statements of a future or forward-looking nature are intended to identify such forward-looking statements. We intend for our forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we set forth this statement in order to comply with such safe harbor provisions.

Forward-looking statements involve known and unknown risks and uncertainties and are not assurances of future performance. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in these statements, including, among others, the risks and uncertainties disclosed in our annual reports on Form 10-K, quarterly reports on Form 10-Q and other filings made with the Securities and Exchange Commission. Any forward-looking statements you read in this news release reflect our views as of the date of this news release with respect to future events and are subject to these and other risks, uncertainties, and assumptions relating to our operations, results of operations, growth strategy, and liquidity. You should carefully consider all of the factors identified in this news release that could cause actual results to differ.

FINANCIAL TABLES FOLLOW

Restaurant-Level EBITDA represents net income (loss) plus the sum of non-restaurant specific general and administrative expenses, restaurant pre-opening costs, 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, 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, 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.

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