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BAGR > SEC Filings for BAGR > Form 10-Q on 15-May-2013All Recent SEC Filings

Show all filings for DIVERSIFIED RESTAURANT HOLDINGS, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for DIVERSIFIED RESTAURANT HOLDINGS, INC.


15-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

(The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated interim financial statements and related notes included in Item 1 of Part 1 of this Quarterly Report and the audited consolidated financial statements and related notes and Management's Discussion and Analysis of Financial Condition and Results from Operations contained in our Form 10-K, for the fiscal year ended December 30, 2012.)

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

Statements contained in this "Quarterly Report on Form 10-Q" may contain information that includes or is based upon certain "forward-looking statements" relating to our business. These forward-looking statements represent management's current judgment and assumptions, and can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements are frequently accompanied by the use of such words as "anticipates," "plans," "believes," "expects," "projects," "intends," and similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors, including, while it is not possible to predict or identify all such risks, uncertainties, and other factors, those relating to our ability to secure the additional financing adequate to execute our business plan; our ability to locate and start up new restaurants; acceptance of our restaurant concepts in new market places; and the cost of food and other raw materials. Any one of these or other risks, uncertainties, other factors, or any inaccurate assumptions may cause actual results to be materially different from those described herein or elsewhere by us. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date they were made. Certain of these risks, uncertainties, and other factors may be described in greater detail in our filings from time to time with the Securities and Exchange Commission, which we strongly urge you to read and consider. Subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth above and elsewhere in our reports filed with the Securities and Exchange Commission. We expressly disclaim any intent or obligation to update any forward-looking statements.

OVERVIEW

Diversified Restaurant Holdings, Inc. ("DRH") is a fast-growing restaurant company operating two complementary concepts: Bagger Dave's Legendary Burger Tavern® ("Bagger Dave's") and Buffalo Wild Wings® ("BWW"). As the creator, developer, and operator of Bagger Dave's and one of the largest franchisees of BWW, we provide a unique guest experience in a casual and inviting environment. We are committed to providing value to our guests through offering generous portions of flavorful food in an upbeat and entertaining atmosphere. We believe Bagger Dave's and DRH-owned BWW are uniquely-positioned restaurant brands designed to maximize appeal to our guests. Both restaurant concepts offer competitive price points and a family-friendly atmosphere, which we believe enables consistent performance through economic cycles. We were incorporated in 2006 and are headquartered in the Detroit metropolitan area. As of March 31, 2013, we had 45 locations in Florida, Illinois, Indiana, Michigan, and Missouri. Of those restaurants, 44 are corporate owned and one is franchised by a third party.

Our roots can be traced to 1999, when our founder, President, CEO, and Chairman of the Board of Directors, T. Michael Ansley, opened his first BWW restaurant in Sterling Heights, Michigan. By late 2004, Mr. Ansley and his business partners owned and operated seven BWW franchised restaurants and formed AMC Group, LLC as an operating center for those locations. In 2006, DRH was formed and several entities, including AMC Group, LLC, were reorganized to provide the framework and financial flexibility to grow as a franchisee of BWW and to develop and grow our Bagger Dave's concept. In 2008, we became public by completing a self-underwritten initial public offering for approximately $735,000 and 140,000 shares.

Mr. Ansley has received various awards from Buffalo Wild Wings International, Inc. ("BWLD"), including awards for highest annual restaurant sales and operator of the year. In September 2007, Mr. Ansley was awarded Franchisee of the Year by the International Franchise Association ("IFA"). The IFA's membership consists of over 12,000 franchisee members and over 1,000 franchisor members.

Today, DRH and its wholly-owned subsidiaries (collectively, the "Company"), including AMC Group, Inc. ("AMC"), AMC Wings, Inc. ("WINGS"), and AMC Burgers, Inc. ("BURGERS"), own and operate Bagger Dave's and DRH-owned BWW restaurants located throughout Florida, Illinois, Indiana, and Michigan.

DRH originated the Bagger Dave's concept with our first restaurant opening in January 2008 in Berkley, Michigan. Currently, there are 10 corporate-owned Bagger Dave's in Michigan, one corporate-owned Bagger Dave's in Indiana, and one franchised location in Missouri. The Company plans to operate approximately 50 Bagger Dave's corporate-owned locations by the end of 2017.

DRH is also one of the largest BWW franchisees and currently operates 35 DRH-owned BWW restaurants (17 in Michigan, 10 in Florida, four in Illinois, and four in Indiana), including the nation's largest BWW, based on square footage, in downtown Detroit, Michigan. We remain on track to fulfill our area development agreement with BWLD. Per the area development agreement with BWLD, and the recently-purchased right to develop another location in Indiana, we expect to operate 47 DRH-owned BWW by the end of 2017.


RESTAURANT OPENINGS

The following table outlines the restaurant unit information for the years
indicated as of March 31, 2013. "Corporate-owned restaurants" reflects the
number of restaurants owned and operated by DRH for each year. From our
inception in 2006, we managed, but did not own, nine BWW restaurants that we
subsequently acquired in February 2010. Comparative results for 2009, 2008, and
2007 are a consolidation of owned and managed restaurants based on the
accounting of an acquisition of entities under common control.

                     2013 (estimate)        2012          2011          2010          2009          2008          2007
Beginning of year
Corporate owned                    44            28            22             9             8             2             -
Franchised
restaurants                         1             -             -             -             -             -             -
Acquisitions /
affiliated
restaurants under
common control                      -             -             -             9             9             9             9
Summary of
restaurants open
at the beginning
of year                            45            28            22            18            17            11             9

Scheduled
openings:
Corporate owned                    10             8             6             4             1             6             2
Franchised
restaurants                         -             1             -             -             -             -             -
Acquisitions                                      8             -             -             -             -             -
Closures                            -             -             -             -             -             -             -
Total restaurants
at year end                        55            45            28            22            18            17            11

RESULTS OF OPERATIONS

For the three months ended March 31, 2013 ("First Quarter 2013"), revenue was generated from the operations of 33 BWW restaurants and 11 Bagger Dave's restaurants. For the three months ended March 25, 2012 ("First Quarter 2012"), revenue was generated from the operations of 22 BWW restaurants and six Bagger Dave's restaurants.

Results of Operations for the Three Months Ended March 31, 2013 and March 25, 2012

Our operating results below are expressed as a percentage of revenue on the basis of comparison to prior periods.

                                                 Three Months Ended
                                              March 31        March 25
                                                2013            2012

Revenue                                           100.0 %         100.0 %

Operating expenses
Restaurant operating costs:
Food, beverage, and packaging                      31.7 %          31.1 %
Compensation costs                                 26.0 %          24.8 %
Occupancy                                           5.7 %           5.2 %
Other operating costs                              19.6 %          19.3 %

General and administrative expenses                 5.6 %           7.2 %
Pre-opening costs                                   2.2 %           0.3 %
Depreciation and amortization                       6.1 %           5.5 %
Loss on disposal of property and equipment          0.1 %           0.0 %
Total operating expenses                           97.0 %          93.4 %

Operating profit                                    3.0 %           6.6 %


Revenue for First Quarter 2013 was $27.1 million, an increase of $9.3 million or 52.6% over the $17.7 million of revenue generated during First Quarter 2012. The increase was primarily attributable to two factors. First, approximately $8.6 million of the increase was attributable to revenues generated from the opening of eight restaurants and the acquisition of eight restaurants in 2012 (five Bagger Dave's restaurants; 11 BWW restaurants of which eight were acquired). Second, the remaining $0.7 million increase was related to a 3.5% increase in same store sales for 29 BWW and four Bagger Dave's restaurants.

Our positive same store sales are a consequence of many factors. Pricing drove the majority of the positive same-store-sales performance in addition to a slight improvement in traffic. This is despite the fact we were closed for the Easter holiday, which fell in the first quarter for 2013 and in the second quarter for 2012.

Food, beverage, and packaging costs increased by $3.1 million or 55.4% to $8.6 million in First Quarter 2013 from $5.5 million in First Quarter 2012. The increase was primarily due to the addition of 16 new restaurants.
Food, beverage, and packaging costs as a percentage of sales increased to 31.7% in First Quarter 2013 from 31.1% in First Quarter 2012, primarily due to a slight increase in bone-in chicken wing prices. Average cost per pound for bone-in chicken wings was $2.10 in First Quarter 2013 compared to $1.92 in First Quarter 2012.

Compensation costs increased by $2.6 million or 60.0% to $7.0 million in First Quarter 2013 from $4.4 million in First Quarter 2012. The increase was primarily due to the addition of 16 new restaurants. Compensation costs as a percentage of sales increased to 26.0% in First Quarter 2013 from 24.8% in First Quarter 2012 partially due to labor inefficiencies experienced in the eight restaurants acquired in the fourth quarter of 2012.

Occupancy increased by $617,886 or 67.5% to $1.5 million in First Quarter 2013 from $915,119 in First Quarter 2012. This increase was primarily due to the addition of 16 new restaurants. Occupancy as a percentage of sales increased to 5.7% in the First Quarter 2013 from 5.2% in the First Quarter 2012 due to higher lease rates as a percentage of sales for the 16 newly-operated restaurants.

Other operating costs increased by $1.9 million or 55.1% to $5.3 million in First Quarter 2013 from $3.4 million in First Quarter 2012. This increase was primarily due to the addition of 16 new restaurants. Other operating costs as a percentage of sales remained relatively consistent at 19.6% in First Quarter 2013 versus 19.3% in First Quarter 2012.

General and administrative expenses increased by $249,612 or 19.6% to $1.5 million in First Quarter 2013 from $1.3 million in First Quarter 2012. This increase was primarily due to increased marketing and advertising expense consistent with our increase in sales. General and administrative expenses as a percentage of sales decreased to 5.6% in First Quarter 2013 from 7.2% in First Quarter 2012 primarily due to a significant increase in sales relative to the increase in general and administrative expense.

Pre-opening costs increased by $544,855 or 1,138.2% to $592,756 in First Quarter 2013 from $47,871 in First Quarter 2012. The difference in pre-opening costs was due to the timing and overall cost to build and open new restaurants. Pre-opening costs as a percentage of sales increased to 2.2% in First Quarter 2013 from 0.3% in First Quarter 2012.

Depreciation and amortization increased by $682,426 or 70.1% to $1.7 million in First Quarter 2013 from $973,058 in First Quarter 2012. This increase was primarily due to the opening and acquisition of a total of 16 new restaurants in 2012. Depreciation and amortization as a percentage of sales increased to 6.1% in First Quarter 2013 from 5.5% in First Quarter 2012.

INTEREST AND TAXES

Interest expense was $469,211 and $312,541 during First Quarter 2013 and First Quarter 2012, respectively. The increase is due to the additional borrowing for new restaurant development since the First Quarter 2012.

For First Quarter 2013, we booked an income tax provision of $101,820 compared to First Quarter 2012 when an income tax provision of $249,390 was recorded. The effective tax rate of income before taxes was 29.9% for First Quarter 2013 compared to 26.7% for First Quarter 2012.

LIQUIDITY AND CAPITAL RESOURCES; EXPANSION PLANS

At March 31, 2013, our principal sources of cash were net cash provided by operations and our $48.0 million credit facility with RBS, entered into on September 25, 2012. During the three months ended March 31, 2013, we funded up to 80.0% of the construction and start-up costs of new Bagger Dave's and DRH-owned BWW restaurants with our development line of credit and met all remaining capital requirements from operating cash flow.

On April 15, 2013, the Company entered into a $63.0 million senior secured term loan ("April 2013 Senior Secured Credit Facility"), which includes a $46.0 million term loan, $15.0 million development line of credit, and $2.0 million revolving line of credit. The April 2013 Senior Secured Credit Facility is secured by a senior lien on all the Company's assets. The Company used approximately $44.8 million of the April 2013 Senior Secured Credit Facility to repay substantially all of the Company's outstanding debt. The April 2013 Senior Secured Credit Facility is for a term of five years and bears interest at one-month LIBOR plus a LIBOR Margin (as defined in the agreement) which ranges between 2.5% and 3.4%, depending on the Company's lease adjusted leverage ratio. On May 15, 2013, the Company paid down $10.0 million on its April 2013 Term Loan in satisfaction of its post-offering requirement to RBS to utilize up to 40.0% of the offering proceeds for such purpose. We plan to continue to fund up to 80.0% of the construction and start-up costs of new Bagger Dave's and DRH-owned BWW restaurants with our development line of credit.

On April 23, 2013, the Company completed a follow-on equity offering of 6.0 million shares of common stock at a price of $5.00 per share to the public. In connection with the offering, the Company granted the underwriters 45-day options to purchase, at the offering price, up to an additional 900,000 shares of common stock to cover over-allotments, if any, which the underwriters exercised in full on May 3, 2013. Total net proceeds of the follow-on equity offering, a total of 6.9 million shares including the over-allotment, were $31.9 million, after deducting underwriting discounts and commissions and other offering expenses.

We believe that the cash flow from operations and the proceeds from the registered offering will be sufficient to meet our operational funding, development, and obligations for at least the next 12 months.


Cash flow from operations for First Quarter 2013 was $846,430 compared with $1.6 million for First Quarter 2012.

For 2013, we estimate capital expenditures to range between $22.5 million and $26.0 million, net of agreed-upon tenant incentives and including approximately $1.8 million to $2.1 million of restaurant pre-opening expenses. Estimated allocations of these capital expenditure projections are $8.0 million to $9.5 million for the opening of six to seven new Bagger Dave's, $5.5 million to $6.5 million for the opening of two to three new DRH-owned BWW, $3.0 million to $3.5 million for real estate (including the purchase of land and construction of buildings) associated with new restaurant openings, and $4.2 million to $4.4 million for restaurant remodels, upgrades, relocations, and general corporate purposes.

Opening new restaurants, including real estate investments, is our primary use of capital and is estimated to be over 80.0% of our capital expenditures in 2013. Our 2013 new restaurant development plan currently includes the following locations, where we have either entered into a lease agreement or purchased real estate. Some of these locations are currently under construction:

? Lapeer, Michigan (DRH-owned BWW) - opened in April 2013

? Sault Ste. Marie, Michigan (DRH-owned BWW) - opened in May 2013

? Grand Rapids, Michigan (Bagger Dave's) - scheduled to open in Q2 2013

? Avon, Indiana (Bagger Dave's) - scheduled to open in Q2 2013

? Detroit, Michigan (Bagger Dave's) - scheduled to open in Q3 2013

? Indianapolis, Indiana (Bagger Dave's) - scheduled to open in Q4 2013

In addition to the six locations listed above, we plan to open at least four new Bagger Dave's and DRH-owned BWW locations in Michigan, Indiana, and Illinois in 2013.

Although investments in new restaurants are an integral part of our strategic and capital expenditures plan, we also believe that reinvesting in existing restaurants is an important factor and necessary to maintain the overall positive dining experience for our guests. Depending on the age of the existing restaurants, upgrades range from $50,000 (for minor interior refreshes) to $500,000 (for a full remodel of the restaurant). Restaurants are typically upgraded after approximately five years of operation and fully remodeled after approximately 10 years of operation.

Mandatory Upgrades

We have one mandatory remodel of an existing DRH-owned BWW restaurant scheduled in 2013, which we intend to fund with cash from operations.

Discretionary Upgrades

In fiscal year 2013, the Company will invest additional capital to provide minor upgrades to a number of its existing locations, all of which will be funded by cash from operations. These improvements primarily consist of audio/visual equipment upgrades, patio upgrades, and point-of-sale system upgrades.

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