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BAGR > SEC Filings for BAGR > Form 10-Q on 14-Aug-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.


14-Aug-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 June 30, 2013, we have 48 locations in Florida, Illinois, Indiana, Michigan, and Missouri. Of these restaurants, 47 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, 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, DRH became public by completing a self-underwritten initial public offering for approximately $735,000 and 140,000 shares. We subsequently completed an underwritten, follow-on offering on April 23, 2013 of 6.9 million shares with net proceeds of $32.0 million.

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 12,600 franchisee members and over 1,100 franchisor members.

Today, DRH and its wholly-owned subsidiaries (collectively, the "Company"), which includes 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 11 corporate-owned Bagger Dave's in Michigan, two 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 ("ADA") with BWLD. Per the ADA with BWLD, we expect to operate 47 DRH-owned BWW by the end of 2017. DRH also has the rights to develop another location in Indiana, which was acquired in the September 2012 acquisition.


RESTAURANT OPENINGS

The following table outlines the restaurant unit information for the years indicated as of June 30, 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 June 30, 2013 ("Second Quarter 2013"), and six months ended June 30, 2013 ("Year to Date 2013"), revenue was generated from the operations of 35 BWW restaurants (one BWW restaurant opened in April 2013 and another one in May 2013) and 12 Bagger Dave's restaurants (one Bagger Dave's restaurant opened in May 2013). For the three months ended June 24, 2012 ("Second Quarter 2012") and the six months ended June 24, 2012 ("Year to Date 2012"), revenue was generated from the operations of 22 BWW restaurants and seven Bagger Dave's restaurants (one of which opened in May 2012). Quarterly and annual operating results may fluctuate significantly as a result of a variety of factors, including the timing and number of new restaurant openings and related expenses, increases or decreases in same store sales, changes in commodity prices, general economic conditions, and seasonal fluctuations. As a result, our quarterly results of operations are not necessarily indicative of the results that may be achieved for any future period.

Results of Operations for the Three Months Ended June 30, 2013 and June 24, 2012



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



                                                Three Months Ended
                                              June 30        June 24
                                               2013           2012
Total revenue                                    100.0 %        100.0 %

Operating expenses
Restaurant operating costs:
Food, beverage, and packaging costs               29.7 %         31.2 %
Compensation costs                                25.5 %         25.5 %
Occupancy                                          5.8 %          5.4 %
Other operating costs                             19.9 %         20.1 %

General and administrative expenses                7.3 %          8.7 %
Pre-opening costs                                  3.0 %          1.3 %
Depreciation and amortization                      6.7 %          5.7 %
Loss on disposal of property and equipment         0.1 %          0.0 %
Total operating expenses                          98.0 %         97.9 %

Operating profit                                   2.0 %          2.1 %


Revenue for Second Quarter 2013 was $27.0 million, an increase of $10.2 million, or 61.2%, over the $16.7 million of revenue generated during Second Quarter 2012. The increase was primarily attributable to two factors. First, approximately $8.8 million of the increase was attributable to revenues generated from the opening of 10 DRH-owned restaurants (five Bagger Dave's restaurants and five BWW restaurants) and the acquisition of eight BWW restaurants in September 2012. Second, the remaining $1.4 million increase was related to a 6.7% increase in same store sales for 30 BWW and six Bagger Dave's restaurants.

Our positive same-store-sales are a result of many factors. Factors contributing to both our BWW and BD concepts include the improving economy in Michigan, the favorable results of local sports teams, overall customer awareness, increased customer satisfaction due to increased market penetration, continued improvement of the overall guest experience, and price increases, which we frequently review to offset inflationary pressures. Our BWW restaurants also benefit from increased national advertising.

Food, beverage, and packaging costs increased by $2.8 million, or 53.0%, to $8.0 million in Second Quarter 2013 from $5.2 million in Second Quarter 2012. The increase was primarily due to more restaurants being operated in 2013. Food, beverage, and packaging costs as a percentage of sales decreased to 29.7% in Second Quarter 2013 from 31.2% in Second Quarter 2012 primarily due to lower chicken wing prices, partially offset by lower wing-per-pound yields. Average cost per pound for bone-in chicken wings was $1.61 in Second Quarter 2013 compared to $1.90 in Second Quarter 2012.

Compensation costs increased by $2.6 million, or 61.6%, to $6.9 million in Second Quarter 2013 from $4.3 million in Second Quarter 2012. The increase was primarily due more restaurants being operated in 2013. Compensation costs as a percentage of sales was 25.5% for both Second Quarter 2013 and Second Quarter 2012.

Occupancy increased by $660,499, or 72.5%, to $1.6 million in Second Quarter 2013 from $910,598 in Second Quarter 2012. This increase was primarily due to more restaurants being operated in 2013. Occupancy as a percentage of sales increased to 5.8% in Second Quarter 2013 from 5.4% in Second Quarter 2012 due to higher lease rates associated with the acquisition in September 2012 and the new restaurants opened after Second Quarter 2012. We believe the higher lease rates are reflective on an overall strengthening of commercial real estate in our markets.

Other operating costs increased by $2.0 million, or 59.6%, to $5.4 million in Second Quarter 2013 from $3.4 million in Second Quarter 2012. This increase was primarily due to more restaurants being operated in 2013. Other operating costs as a percentage of sales decreased to 19.9% in Second Quarter 2013 from 20.1% in Second Quarter 2012.

General and administrative expenses increased by $528,283, or 36.5%, to $2.0 million in Second Quarter 2013 from $1.4 million in Second Quarter 2012. This increase was primarily due to increased marketing and advertising expense consistent with our increase in sales, hiring of personnel critical to our growth, and expenses associated with uplisting to the NASDAQ stock exchange. General and administrative expenses as a percentage of sales decreased to 7.3% in Second Quarter 2013 from 8.7% in Second Quarter 2012.

Pre-opening costs increased by $585,183, or 267.7%, to $803,798 in Second Quarter 2013 from $218,615 in Second Quarter 2012. The difference in pre-opening costs was due to the timing and overall cost to build and open new restaurants. The Company opened three new restaurants and was in the construction phase of seven additional restaurants during the Second Quarter 2013 compared to one opening and five under construction in Second Quarter 2012. Pre-opening costs as a percentage of sales increased to 3.0% in Second Quarter 2013 from 1.3% in Second Quarter 2012.

Depreciation and amortization increased by $856,192, or 89.4%, to $1.8 million in Second Quarter 2013 from $957,357 in Second Quarter 2012. This increase was primarily due to more restaurants being operated in 2013. Depreciation and amortization as a percentage of sales increased to 6.7% in Second Quarter 2013 from 5.7% in Second Quarter 2012.

Loss on disposal of property and equipment increased by $19,064, or 288.7%, to $25,667 in Second Quarter 2012 from $6,603 in Second Quarter 2012. This increase was primarily due to non-recurring property and equipment disposals in the current year. Loss on disposal of property and equipment as a percentage of sales increased to 0.1% in Second Quarter 2013 from 0.0% in Second Quarter 2012.


Results of Operations for the Six Months Ended June 30, 2013 and June 24, 2012



                                                Six Months Ended
                                              June 30      June 24
                                               2013         2012
Total revenue                                    100.0 %      100.0 %

Operating expenses
Restaurant operating costs:
Food, beverage, and packaging costs               30.7 %       31.1 %
Compensation costs                                25.8 %       25.1 %
Occupancy                                          5.7 %        5.3 %
Other operating costs                             19.7 %       19.7 %

General and administrative expenses                6.5 %        7.9 %
Pre-opening costs                                  2.6 %        0.8 %
Depreciation and amortization                      6.4 %        5.6 %
Loss on disposal of property and equipment         0.1 %        0.0 %
Total operating expenses                          97.5 %       95.5 %

Operating profit                                   2.5 %        4.5 %

Revenue for Year to Date 2013 was $54.0 million, an increase of $19.6 million or 56.7% over the $34.5 million of revenue generated during Year to Date 2012. The increase was primarily attributable to two factors. First, approximately $17.5 million of the increase was attributable to revenues generated from the opening of 10 DRH-owned restaurants (five Bagger Dave's restaurants and five BWW restaurants) and the acquisition of eight BWW restaurants in September 2012. Second, the remaining $2.1 million increase was related to a 5.1% increase in same store sales for 30 BWW and six Bagger Dave's restaurants.

Food, beverage, and packaging costs increased by $5.8 million or 54.3% to $16.6 million in Year to Date 2013 from $10.7 million in Year to Date 2012. The increase was primarily due to more restaurants being operated in 2013. Food, beverage, and packaging costs as a percentage of sales decreased to 30.7% in Year to Date 2013 from 31.2% in Year to Date 2012 due to lower chicken wing prices, partially offset by lower wing-per-pound yields. Average cost per pound for bone-in chicken wings was $1.86 in Year to Date 2013 compared to $1.91 in Year to Date 2012.

Compensation cost increased by $5.3 million or 60.8% to $13.9 million in Year to Date 2013 from $8.7 million in Year to Date 2012. This increase was primarily due to more restaurants being operated in 2013. Compensation as a percentage of sales increased to 25.8% in Year to Date 2013 from 25.1% in Year to Date 2012, primarily due to inefficiencies from newer locations and integration of the September 2012 acquired locations in the first quarter of 2013.

Occupancy cost increased by $1.3 million or 70.0% to $3.1 million in Year to Date 2013 from $1.8 million in Year to Date 2012. This increase was primarily due to more restaurants being operated in 2013. Occupancy cost as a percentage of sales increased to 5.7% in Year to Date 2013 from 5.3% in Year to Date 2012 due to higher lease rates associated with the acquisition in September 2012 and the new restaurants opened after Second Quarter 2012. We believe the higher lease rates are reflective of an overall strengthening of commercial real estate in our markets.

Other operating costs increased by $3.9 million or 57.3% to $10.7 million in Year to Date 2013 from $6.8 million in Year to Date 2012. This increase was primarily due to more restaurants being operated in 2013. Other operating costs as a percentage of sales was 19.7% in both Year to Date 2013 and Year to Date 2012.

General and administrative cost increased by $777,895 or 28.6% to $3.5 million in Year to Date 2013 from $2.7 million in Year to Date 2012. This increase was primarily due to increased marketing and advertising expense consistent with our increase in sales, hiring of personnel critical to our growth, and expenses associated with uplisting to the NASDAQ stock exchange. General and administrative cost as a percentage of sales decreased to 6.5% in Year to Date 2013 from 7.9% in Year to Date 2012.

Pre-opening cost increased by $1.1 million or 424.1% to $1.4 million in Year to Date 2013 from $266,486 in Year to Date 2012. The increase in pre-opening costs was due to the timing and overall cost to build and open new restaurants during the period. The Company opened three new restaurants and is in the construction phase on six additional restaurants during Year to Date 2013 compared with opening only one restaurant in Year to Date 2012 and being in the construction phase on five restaurants during Year to Date 2012. Pre-opening cost as a percentage of sales increased to 2.6% in Year to Date 2013 from 0.8% in Year to Date 2012.

Depreciation and amortization cost increased by $1.5 million or 79.7% to $3.5 million in Year to Date 2013 from $1.9 million in Year to Date 2012. This increase was primarily due to more restaurants being operated in 2013. Depreciation and amortization cost as a percentage of sales increased to 6.4% in Year to Date 2013 from 5.6% in Year to Date 2012.


Loss on disposal of property and equipment increased by $54,138 or 819.9% to $60,741 in Year to Date 2013 from $6,603 in Year to Date 2012. This decrease was primarily due to non-recurring property and equipment disposals in the current year. Loss on disposal of property and equipment as a percentage of sales increased to 0.1% in Year to Date 2013 from 0.0% in Year to Date 2012.

INTEREST AND TAXES

Interest expense was $585,637 and $253,103 during Second Quarter 2013 and Second Quarter 2012, respectively. Interest expense was $1.1 million and $565,644 during Year to Date 2013 and Year to Date 2012, respectively. The increase is associated with the $63.0 million senior secured credit facility with RBS Citizens, N.A. (the "April 2013 Senior Secured Credit Facility"), which was effective on April 15, 2013 and includes a write-off of loan fees for $76,408.
Additionally, increased borrowings for new restaurant development in 2013 was a contributing factor.

For Second Quarter 2013, we booked an income tax benefit of $35,190 compared to Second Quarter 2012 when an income tax provision of $86,155 was recorded. The effective tax rate of income before taxes was 111.5% for Second Quarter 2013 versus 212.2% for Second Quarter 2012. The Second Quarter 2013 income tax benefit primarily relates to the pre-tax loss incurred in Second Quarter 2013 versus income in Second Quarter 2012 and return to provision adjustments made during Second Quarter 2013. For Year to Date 2013, we booked an income tax provision of $66,630 compared to Year to Date 2012 when an income tax provision of $335,545 was recorded. The effective tax rate of income before taxes was 21.6% for Year to Date 2013 vs. 34.4% for Year to Date 2012.

LIQUIDITY AND CAPITAL RESOURCES; EXPANSION PLANS

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 (the "April 2013 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 the $46.0 million April 2013 Term Loan in satisfaction of its post-offering requirement to RBS Citizens, N.A 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 an underwritten, follow-on equity offering of 6.9 million shares of common stock at a price of $5.00 per share to the public. The net proceeds to DRH from the offering were $32.0 million, after deducting underwriting discounts, commissions, and other offering expenses. A registration statement relating to these securities has been filed with the SEC. The SEC declared the registration statement effective on April 17, 2013. Refer to the follow-on offering (Form S-1/A) filed on April 15, 2013 for additional information.

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 Year to Date 2013 was $2.1 million compared with $2.7 million for Year to Date 2012. Net cash provided by operating activities consisted primarily of net earnings adjusted for non-cash expenses and a decrease in accounts payable.

For 2013, we estimate capital expenditures up to $29.0 million. Approximately 50.0% is for 2013 new store openings (seven Bagger Dave's and three DRH-owned BWW restaurants); 25.0% for real estate (including the purchase of land and construction of buildings) associated with new restaurant openings; 15.0% for restaurant remodels, upgrades, relocations and other general corporate purposes; and 10.0% for new store openings scheduled for early 2014.

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. Most of these locations are currently under construction.

Opening new restaurants is the Company's primary use of capital and is critical to its growth. Our completed and planned new construction for 2013 includes:

? 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) - opened in May 2013

? Avon, Indiana (Bagger Dave's) -opened in July 2013

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


? Detroit, Michigan (Bagger Dave's) - scheduled to open in Q4 2013

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

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

? Woodhaven, Michigan (Bagger Dave's) - scheduled to open in Q4 2013

? Gaylord, Michigan (DRH-owned BWW) - scheduled to open in Q4 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 had one mandatory remodel of an existing DRH-owned BWW restaurant, which was completed in 2013 and funded 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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