UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT
 
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
Date of Report (Date of earliest event reported): May 7, 2019

DIVERSIFIED RESTAURANT HOLDINGS, INC.
 
(Name of registrant in its charter)

	
					
Nevada	 	000-53577	 	03-0606420	
(State or other jurisdiction of
 incorporation)	 	(Commission File Number)	 	(IRS Employer Identification No.)	
 	 	27680 Franklin Road
Southfield, MI  48034	 	 	
(Address of principal executive offices)	

Registrant's telephone number:   (833) 374-7282

No change
(Former name, former address and former fiscal year, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

[   ]    Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
[   ]    Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
[   ]    Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
[   ]    Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
 
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR §240.12b-2). Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

  Securities registered pursuant to Section 12(b) of the Act:

			
Title of each class	Trading Symbol(s)	Name of each exchange on which registered	
Common Stock, $.0001 par value	SAUC	The NASDAQ Capital Market	

 
Item 2.02 Results of Operations and Financial Condition

Earnings Release

On May 7, 2019 , Diversified Restaurant Holdings, Inc. (NASDAQ: SAUC) (the "Company") issued a press release announcing earnings and other financial results for the quarter ended March 31, 2019 . A copy of the press release is furnished as Exhibit 99.1 to this report and incorporated here by reference.
 
Item 7.01. Regulation FD Disclosure

The Company has prepared presentation materials (the “Investor Presentation”) that management intends to use during its previously announced First Quarter 2019 Conference call on Wednesday, May 8, 2019 at 10:00 am Eastern Time, and from time to time thereafter in presentations about the Company’s operations and performance. The Company may use the Investor Presentation, possibly with modifications, in presentations to current and potential investors, analysts, lenders, business partners, acquisition candidates, customers, employees and others with an interest in the Company and its business.

A copy of the Investor Presentation is furnished as Exhibit 99.2 to this Current Report on Form 8-K and is available on the Company's website at http://www.diversifiedrestaurantholdings.com/investors/events-and-presentations/default.aspx. Materials on the Company's website are not part of or incorporated by reference into this Form 8-K.

In accordance with General Instruction B.2 of Form 8-K, the information in this Current Report on Form 8-K, including Exhibits 99.1 and 99.2, shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liability of that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

Item 9.01 Financial Statement and Exhibits
(d) Exhibits

Exhibit No.      Description

99.1 Press Release of Diversified Restaurant Holdings, Inc. reporting financial results and earnings for the quarter ended March 31, 2019

99.2 Diversified Restaurant Holdings, Inc. Investor Presentation dated May 7, 2019

SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.

	
					
 	 	DIVERSIFIED RESTAURANT
HOLDINGS, INC.	 	
 	 	 	 	 	
Dated:	May 7, 2019	By:	 /s/ Phyllis A. Knight	 	
 	 	Name:	Phyllis A. Knight	 	
 	 	Title:	Chief Financial Officer (Principal   
Financial and Accounting Officer)	 	

FOR IMMEDIATE RELEASE     

Diversified Restaurant Holdings Reports 4.2% Increase in
Same-Store Sales for First Quarter 2019
Comparable sales continue to trend positive in second quarter, up 7.7% before Easter shift and 4.6% after, with both traffic and average ticket up
SOUTHFIELD, MI, May 7, 2019 -- 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 first quarter ended March 31, 2019 .
First Quarter Information (compared with prior-year period unless otherwise noted)

•	Revenue totaled $40.6 million , up 2.6% despite one fewer restaurant	
		
•	Same-store sales increased 4.2%	
		
•	Net income was $0.1 million	
		
•	Restaurant-level EBITDA (1) was $6.4 million or 15.7% of sales	
		
•	Adjusted EBITDA (1) was $4.5 million or 11.1% of sales	
		
•	Total debt of $99.5 million was down $3.0 million for the year-to-date period	
(1) See attached table for a reconciliation of GAAP net income to Restaurant-level EBITDA and Adjusted EBITDA
"The increase in our first quarter sales, particularly the strong trend in March that has continued into the second quarter, is an exciting indication of things to come for the BWW brand. Despite headwinds early in the quarter due to severe winter weather hindering sales for two entire football playoff weekends in each of our three core Midwest markets, the quarter was our second consecutive positive result for same-store sales. Our focus on perfecting the execution of the delivery channel continues to pay-off, as delivery led the way for us early in the quarter. However, as the new brand media and product launches began in mid-March, we finally saw our dine-in traffic turn positive. In fact, since those launches, our dine-in same-store sales through the end of last week are up 3.0%," commented David G. Burke, President and CEO.
"While we are disappointed that the revenue increase didn’t convert well to earnings this quarter, we are much more optimistic about the future. Cost of sales, labor and delivery expenses were all headwinds in the quarter as traditional wing prices were higher than expected and labor cost headwinds remain a concern. On the labor front, we made significant investments in training during the quarter around new brand initiatives, and while we don't expect these to be permanent costs, certain of these initiatives will also impact our labor line in the

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second quarter. Additionally, we implemented a menu price increase at the tail end of the quarter that will help to alleviate these pressures, and we are successfully and meaningfully driving down our delivery costs while continuing to ramp up sales. We have also taken another hard look at our G&A expenses, and will be executing reductions in the next several weeks approaching $1 million on an annualized basis. We expect these reductions to drive overhead expenses below 5% of sales for this year, and closer to 4.5% in future years when we get the full benefit of the reductions."

	
															
First Quarter Results	 	 	 	 	 	 	 	
(Unaudited, $ in thousands)	Q1 2019	 	Q1 2018	 	Change	 	% Change	
Revenue	$	40,568.1		 	$	39,533.0		 	$	1,035.1		 	2.6	 %	
Operating profit	$	1,537.5		 	$	1,471.9		 	$	65.6		 	4.6	 %	
  Operating margin	3.8	%	 	3.7	 %	 	 	 	 	
Net Inco me	$	55.4		 	$	159.9		 	$	(104.5	)	 	(65.4	)%	
Net income per share	$	—		 	$	0.01		 	$	(0.01	)	 	(100.0	)%	
 	 	 	 	 	 	 	 	
Same-store sales	4.2	%	 	(8.5	)%	 	 	 	 	
 	 	 	 	 	 	 	 	
Restaurant-level EBITDA (1)	$	6,378.9		 	$	6,898.1		 	$	(519.2	)	 	(7.5	)%	
  Restaurant-level EBITDA margin	15.7	%	 	17.4	 %	 	 	 	 	
Adjusted EBITDA (2)	$	4,502.2		 	$	5,071.7		 	$	(569.5	)	 	(11.2	)%	
  Adjusted EBITDA margin	11.1	%	 	12.8	 %	 	 	 	 	

(1) Please see attached table for a reconciliation of GAAP net income to Restaurant-level EBITDA and Adjusted EBITDA

There was a favorable calendar shift in the quarter, as Easter, a holiday on which the DRH restaurants are closed, fell within the 2018 first quarter versus the second quarter in 2019.
General and administrative ("G&A") expenses as a percentage of sales decreased 20 basis points to 5.5% due to lower corporate overhead and other efficiency initiatives, partially offset by higher incentive accruals. For the full year of fiscal 2019, the Company is targeting G&A expenses below 5% of sales, excluding non-recurring items.
Food, beverage, and packaging costs as a percentage of sales increased 60 basis points to 28.8% primarily due to higher traditional chicken wing costs. Average cost per pound for traditional bone-in chicken wings, DRH’s most significant input cost, increased to $1.94 in the 2019 first quarter compared with $1.89 in the prior-year period.
Higher average wages due to a tight labor market and investments in training around new brand initiatives resulted in compensation costs as a percent of sales increasing 120 basis points to 26.9% .

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Balance Sheet Highlights
Cash and cash equivalents were $6.5 million at March 31, 2019 , compared with $5.4 million at the end of 2018 . Capital expenditures were $0.6 million during the first three months of 2019 and were for minor facility upgrades and general maintenance-type investments, but also included approximately $0.2 million invested in the plate ware upgrades introduced in March. DRH does not expect to build any new restaurants or complete any major remodels in 2019. As a result, the Company anticipates its capital expenditures will approximate $2.0 million in fiscal 2019.
Total debt was $99.5 million at the end of the quarter, down $3.0 million since 2018 year-end.
Mr. Burke added, "We are focused on refinancing our debt between now and the end of the third quarter. While the fact that BWW exercised its right of first refusal on our planned acquisition caused us to change course on this refinancing, we are highly confident about a successful outcome in the next several months. We expect that, after refinance, the debt service demands on our free cash flow will be substantially lessened, supporting our ability to invest in the business to drive improved financial performance and shareholder value."

3

Webcast, Conference Call and Presentation
DRH will host a conference call and live webcast on Wednesday, May 8, 2019 at 10:00 A.M. Eastern Time, during which management will review the financial and operating results for the first 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, May 15, 2019. To listen to the archived call, dial (412) 317-6671 and enter replay pin number 13689832, 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 .

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Safe Harbor Statement
The information made available in this news release and the Company’s May 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.

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

FINANCIAL TABLES FOLLOW

5

DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

									
 	 	Three Months Ended	
 	 	March 31, 2019	 	April 1, 2018	
Revenue	 	$	40,568,084		 	$	39,532,957		
 	 	 	 	 	
Operating expenses	 	 	 	 	
Restaurant operating costs (exclusive of depreciation and amortization shown separately below):	 	 	 	 	
Food, beverage, and packaging costs	 	11,684,395		 	11,132,377		
Compensation costs	 	10,906,293		 	10,164,655		
Occupancy costs	 	2,938,054		 	2,943,840		
Other operating costs	 	8,688,161		 	8,393,955		
General and administrative expenses	 	2,239,947		 	2,253,928		
Depreciation and amortization	 	2,565,370		 	3,166,500		
Loss on asset disposal	 	8,385		 	5,851		
Total operating expenses	 	39,030,605		 	38,061,106		
 	 	 	 	 	
Operating profit	 	1,537,479		 	1,471,851		
 	 	 	 	 	
Interest expense	 	(1,505,335	)	 	(1,646,044	)	
Other income, net	 	40,054		 	32,640		
Income (loss) before income taxes	 	72,198		 	(141,553	)	
 	 	 	 	 	
Income tax benefit (expense)	 	(16,757	)	 	301,423		
Net Income	 	$	55,441		 	$	159,870		
 	 	 	 	 	
Basic and diluted earnings per share	 	$	—		 	$	0.01		
 	 	 	 	 	
Weighted average number of common shares outstanding:	 	 	 	 	
Basic and diluted	 	31,925,521		 	26,853,724		

As a result of the Company’s adoption of the new lease standard (ASU 2016-02), certain prior year amounts have been reclassified for consistency with the current year presentation.

6

DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Unaudited)

									
ASSETS	 	March 31, 2019	 	December 30, 2018	
Current assets:	 	 	 	 	
Cash and cash equivalents	 	$	6,506,938		 	$	5,364,014		
Accounts receivable	 	328,914		 	654,322		
Inventory	 	1,505,609		 	1,526,779		
Prepaid and other assets	 	391,621		 	556,480		
Total current assets	 	8,733,082		 	8,101,595		
 	 	 	 	 	
Property and equipment, net	 	32,458,202		 	34,423,345		
Operating lease right-of-use assets	 	51,096,209		 	52,650,512		
Intangible assets, net	 	2,173,074		 	2,198,685		
Goodwill	 	50,097,081		 	50,097,081		
Other long-term assets	 	289,046		 	408,761		
Total assets	 	$	144,846,694		 	$	147,879,979		
 	 	 	 	 	
LIABILITIES AND STOCKHOLDERS' DEFICIT	 	 	 	 	
Current liabilities:	 	 	 	 	
Accounts payable	 	$	4,338,999		 	$	4,273,133		
Accrued compensation	 	2,802,803		 	1,830,415		
Other accrued liabilities	 	3,235,999		 	2,821,235		
Current portion of long-term debt	 	11,494,830		 	11,515,093		
Current portion of operating lease liabilities	 	6,190,122		 	6,670,227		
Total current liabilities	 	28,062,753		 	27,110,103		
 	 	 	 	 	
Operating lease liabilities, less current portion	 	47,897,014		 	48,956,491		
Deferred income taxes	 	1,177,039		 	1,220,087		
Unfavorable operating leases	 	415,881		 	438,944		
Other long-term liabilities	 	321,454		 	343,075		
Long-term debt, less current portion	 	88,027,975		 	90,907,537		
Total liabilities	 	165,902,116		 	168,976,237		
 	 	 	 	 	
Stockholders’ deficit :	 	 	 	 	
Common stock - $0.0001 par value; 100,000,000 shares authorized; 33,215,584 and 33,200,708, respectively, issued and outstanding	 	3,188		 	3,182		
Preferred stock - $0.0001 par value; 10,000,000 shares authorized; zero shares issued and outstanding	 	—		 	—		
Additional paid-in capital	 	27,192,077		 	27,021,517		
Accumulated other comprehensive income	 	114,338		 	355,293		
Accumulated deficit	 	(48,365,025	)	 	(48,476,250	)	
Total stockholders’ deficit	 	(21,055,422	)	 	(21,096,258	)	
 	 	 	 	 	
Total liabilities and stockholders’ deficit	 	$	144,846,694		 	$	147,879,979		

As a result of the Company’s adoption of the new lease standard (ASU 2016-02), certain prior year amounts have been reclassified for consistency with the current year presentation.

7

DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

									
 	 	Three Months Ended	
 	 	March 31, 2019	 	April 1, 2018	
Cash flows from operating activities	 	 	 	 	
Net income	 	$	55,441		 	$	159,870		
Adjustments to reconcile net income to net cash provided by operating activities :	 	 	 	 	
Depreciation and amortization	 	2,542,307		 	3,166,500		
Amortization of operating lease assets	 	1,554,303		 	1,582,406		
Amortization of debt discount and loan fees	 	64,080		 	72,434		
Loss on asset disposals	 	8,385		 	5,851		
Share-based compensation	 	168,338		 	234,758		
Deferred income taxes	 	6,175		 	(301,423	)	
Changes in operating assets and liabilities that provided (used) cash:	 	 	 	 	
Accounts receivable	 	325,408		 	358,167		
Inventory	 	21,171		 	(2,937	)	
Prepaid and other assets	 	107,230		 	(38,763	)	
Intangible assets	 	—		 	(20,076	)	
Other long-term assets	 	(57,050	)	 	—		
Accounts payable	 	85,155		 	(1,325,034	)	
Operating lease liabilities	 	(1,539,582	)	 	(1,581,449	)	
Accrued liabilities	 	1,365,530		 	1,187,397		
Net cash provided by operating activities	 	4,706,891		 	3,497,701		
 	 	 	 	 	
Cash flows from investing activities	 	 	 	 	
Purchases of property and equipment	 	(602,290	)	 	(496,061	)	
Net cash used in investing activities	 	(602,290	)	 	(496,061	)	
 	 	 	 	 	
Cash flows from financing activities	 	 	 	 	
Proceeds from issuance of long-term debt	 			 			
Repayments of long-term debt	 	(2,963,905	)	 	(2,879,156	)	
Proceeds from employee stock purchase plan	 	28,137		 	18,974		
Tax withholdings for restricted stock	 	(25,909	)	 	(43,617	)	
Net cash used in financing activities	 	(2,961,677	)	 	(2,903,799	)	
 	 	 	 	 	
Net increase in cash and cash equivalents	 	1,142,924		 	97,841		
 	 	 	 	 	
Cash and cash equivalents, beginning of period	 	5,364,014		 	4,371,156		
 	 	 	 	 	
Cash and cash equivalents, end of period	 	$	6,506,938		 	$	4,468,997		

As a result of the Company’s adoption of the new lease standard (ASU 2016-02), certain prior year amounts have been reclassified for consistency with the current year presentation.

8

	
								
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES	
Reconciliation between Net Income and Adjusted EBITDA and Adjusted Restaurant-Level EBIT DA	
 	 	 	 	
 	Three Months Ended (Unaudited)	
 	March 31, 2019	 	April 1, 2018	
Net Income	$	55,441		 	$	159,870		
  + Income tax (benefi t) expense	16,757		 	(301,423	)	
  + Interest expense	1,505,335		 	1,646,044		
  + Other income, net	(40,054	)	 	(32,640	)	
  + Loss on asset disposal	8,385		 	5,851		
  + Depreciation and amortization	2,565,370		 	3,166,500		
EBITDA	$	4,111,234		 	$	4,644,202		
  + Non-recurring expenses (Restaurant-level)	27,671		 	—		
  + Non-recurring expenses (Corporate-level)	363,299		 	427,525		
Adjusted EBITDA	$	4,502,204		 	$	5,071,727		
  Adjusted EBITDA margin (%)	11.1	%	 	12.8	%	
  + General and administrative	2,239,947		 	2,253,928		
  + Non-recurring expenses (Corporate-level)	(363,299	)	 	(427,525	)	
Restaurant–Level EBITDA	$	6,378,852		 	$	6,898,130		
  Restaurant–Level EBITDA margin (%)	15.7	%	 	17.4	%	

As a result of the Company’s adoption of the new lease standard (ASU 2016-02), certain prior year amounts have been reclassified for consistency with the current year presentation.

Restaurant-Level EBITDA represents net income plus the sum of non-restaurant specific general and administrative expenses, loss on property and equipment disposals, depreciation and amortization, other income and expenses, interest, taxes, and non-recurring expenses. Adjusted EBITDA represents net income plus the sum of 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.

9

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.

###

10

Q1 2019 Financial Results May 7, 2019 1

 

Safe Harbor Some of the statements contained in this presentation and the Company’s May 8, 2019 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. 2

 

Q1 2019 Key Information Sales of $40.6M, up $1.1M Sales Negative weather impacts early offset by strong momentum through March Same Store Sales up 4.2% S-S-S Month of March up 8.0% (includes favorable Easter calendar shift) Adjusted EBITDA of $4.5M, 11.1% of sales EBITDA Month of March up 8.0% (includes favorable Easter calendar shift) Restaurant-level EBITDA of $6.4M, 15.7% of sales Margins Margin down 1.7 pts. as a result of cost of sales and labor headwinds, and higher third party delivery expenses Strong LTM unlevered free cash flow of $14.9M Cashflow 3

 

DRH Average Check and Traffic Trends Two consecutive positive quarters of SSS + start to third; average check turned positive in Q2 with reduced promotional activity coupled with menu price increases 7.7% 7.1% 6.6% 6.1% 5.7% 5.5% 4.4% 4.4% 3.3% 3.1% 3.2% 7.7% 2.8% 4.9% 4.6% 2.6% 1.9% 1.7% 1.7% 5.5% 5.9% 1.4% 4.0% 4.1% 4.2% 2.9% 4.3% 1.1% 4.3% 2.6% 2.9% 0.2% 3.0% 0.1% 2.2% 1.3% 0.8% -0.2% 2.0% -0.3% 2.2% 1.7% 1.1% -1.1% 1.1% 0.9% 0.6% -1.8% 0.2% -2.2% -2.7% -1.8% -2.3%0.3% 0.1% -3.7% -0.7% -3.1% -3.7% -4.4% -4.6% -5.4% -5.2%-1.8% -1.8% -2.0% -2.0% -1.9% -6.4% -2.5% -6.8% -3.0% -3.3% -8.5% -3.0% -3.2% -4.3% -4.9% -4.8% -6.3% -7.2% Check count and average check impacted by Tuesday wing promo shift from half price to -10.9% BOGO -12.3% SSS% Traffic % Avg Check % -16.2% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 1 Q2 Q3 Q4 Q1 Q2 FY FY FY FY FY YTD 2014 2014 2014 2014 2015 2015 2015 2015 2016 2016 2016 2016 2017 2017 2017 2017 2018 2018 2018 2018 2019 QTD 2014 2015 2016 2017 2018 2019 NOTE: Average check is predominantly driven by price, but is also influenced by product mix and, to a lesser extent, average guests per check. 1 – Ramping up of Tuesday Promotion and the Bogo Blitz offering in 2016 drove 170 bp of the 12.3% traffic decline in Q4 2017. 4

 

Q1 Sales Bridge ($M) First quarter revenue driven by strong increase in delivery sales and the Easter calendar shift; while January dine-in traffic was negatively impacted by weather, it turned positive in March $2.0 $0.5 $0.5 $0.4 $0.5 $40.6 $39.5 $39.0 Q1 2018 Sarasota Closure Q1 2018 Adj Weather Dine In/Carry-Out Easter Calendar Delivery Q1 2019 Revenue Revenue Shift Revenue 5

 

Q1 Adjusted EBITDA Bridge ($M) Labor, cost of sales and delivery fees were drags on EBITDA in the quarter – exacerbated by one-time costs related to the new menu, plate ware and product launches in March $0.2 $0.3 $0.2 $0.3 $0.4 $0.2 $0.1 $0.1 $5.1 $4.0 $4.5 $4.5 $4.1 $3.9 $3.9 Q1 2018 Labor Cost Delivery Fees Cost of Sales New Product1 2018 G&A 2 G&A Other Opex Sales Q1 2019 Adj. EBITDA Launch Accrual Carry- Adj. EBITDA Over 1 – Includes Training, food testing and obsolete inventory related to new burger and other new menu items 2 – Incentive accruals in 2017 carried into 2018 for payments ultimately not made ($200K) 6

 

Delivery Expense Headwinds are Abating Net delivery expense is on a downward trajectory, and we expect further meaningful improvements in the coming months as price and contract negotiations are working in our favor as volumes increase $3.00 25.0% 22.8% 22.7% 21.4% 20.3% $2.50 19.7% 19.0% 20.0% 18.2% 17.3% 16.9% $2.00 15.0% $1.50 11.6% $2.56 10.0% $2.14 $1.00 $1.33 5.0% $0.50 $0.85 $0.86 $0.60 $0.58 $0.43 $0.47 $0.47 $- 0.0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Apr-19 2017 2017 2017 2017 2018 2018 2018 2018 2019 Delivery Sales $M Delivery Expense % to Sales 7

 

Quarterly Restaurant EBITDA Trend AUV Trend Line AUV ($M) $2.7 $2.6 $2.6 $2.6 $2.8 $2.5 $2.4 $2.4 $2.4 $2.3 $2.3 $2.5 $2.5 $2.6 $2.5 $2.4 100.0% 3.00 90.0% 29.9% 29.4% 29.4% 29.2% 29.3% 28.2% 28.5% 28.5% 29.2% 28.8% 28.6% COS 28.0% 28.1% 2.50 27.9% 27.4% 29.2% 80.0% 70.0% 2.00 60.0% 24.4% 25.2% 24.7% 25.7% 24.8% 25.0% 24.7% 25.5% 25.4% 25.3% 27.5% 27.4% 26.9% 26.9% 25.2% 26.8% LABOR 50.0% 1.50 11.5% 40.0% 12.1% 13.3% 12.7% 14.0% 12.3% 13.8% 13.1% 13.0% 12.9% OPEX 12.9% 13.4% 14.0% 14.1% 13.3% 13.6% 1.00 8.2% 30.0% 1 8.1% 8.1% 8.1% FF 8.0% 8.1% 8.2% 8.1% 8.1% 8.1% 8.2% 8.1% 8.1% 8.1% 6.5% 8.1% 8.1% OCC 6.8% 7.0% 6.5% 6.8% 20.0% 7.2% 7.4% 7.1% 7.2% 7.1% 7.6% 7.6% 7.2% 7.6% 7.8% 7.6% 0.50 10.0% 21.5% 20.0% 19.6% 19.0% 17.1% 17.4% 19.4% 17.1% 16.5% 16.6% 15.9% 15.0% 14.2% 14.2% 15.7% 15.2% REST REST EBITDA 0.0% - KEY Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2 Q1 Q2 Q3 Q4 Q1 FY FY 2 FY 2016 2016 2016 2016 2017 2017 2017 2017 2018 2018 2018 2018 2019 2016 2017 2018 1 – FF = Franchise-related fees which includes 5.0% royalty and 3.0 – 3.15% NAF (national advertising fund) 2 – Q4 2017 included a 14th week; 2017 included a 53rd week 8

 

Q1 Cost of Sales Bridge (% of Net Sales) Higher traditional wing costs/mix and expenses associated with the new menu roll out were partially offset by lower costs for boneless wings and other products 0.2% 0.1% 0.5% 0.8% 28.2% 29.2% 28.8% 28.8% Q1 2018 Traditional Wings Alcohol New Menu Roll-Out Boneless/ Q1 2019 COS % (test/obsolscence) Food & Bev COS % 9

 

COS Trends and Wing Impact Traditional wing costs were high in Q1 2019 relative to all of 2018 – impact exacerbated by mix shift to more traditional wings, driving wing cost as percent of total cost of sales to nearly 24%, same as Q1 2017 $2.14 $2.13 29.9% 29.5% 29.2% 29.4%$2.03 29.3% 29.2% 29.4% 28.8% 28.8% $2.02 28.5% 28.5% 28.5% 28.6% 28.1% 28.1% 28.2% 28.1% 28.1% 28.0% 27.9% $2.07 27.6% 27.4% $1.95 $1.94 $1.92 $1.92 $1.89 $1.89 $1.82 $1.87 $1.79 25.3% $1.81 $1.77 $1.80 24.9% 23.9% 24.7% $1.76 $1.70 24.0% 24.7% 23.5% $1.66 $1.67 21.7% 21.5% 21.6% 21.1% 20.9% 20.7% 20.8% 20.4% 20.3% 20.1% $1.53 20.4% 19.5% 19.5% 19.5% 18.4% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q31 Q4 Q1 Q2 Q3 Q4 Q1 FY FY FY FY FY 2015 2015 2015 2015 2016 2016 2016 2016 2017 2017 2017 2017 2018 2018 2018 2018 2019 2014 2015 2016 2017 2018 Total COS % Wing Cost % of Total COS Wing Cost/Lb NOTE: Wing prices shown are the average price paid per pound of fresh, jumbo chicken wings – including distribution costs of approximately $0.34 per pound in Q3 2018 (2015 – Q2 2018 $0.29 per pound) 1 – Q3 actual reported COS was 29.2% which included $323K in cover charges for the Mayweather/McGregor fight that had no cost 10 associated with it

 

Historical Wing Prices Volatile fresh wing spot prices have remained relatively high coming into the spring season – forecasts suggest possible wing cost headwinds again in 2019 – though the market has softened some more recently $ / lb. Fresh Jumbo Northeast Chicken Wing Spot Prices Source: Urner Barry Comtell™ UB Chicken – Northeast Jumbo Wings as of May 7, 2019 NOTE: Logistics cost to restaurants is now $0.37 / lb. over the spot price 11

 

Q1 Labor Bridge (% of Net Sales) Labor cost headwinds and training had a 120 bp negative impact on margins in Q1 as hourly wages have increased 6%, partially offset by efficiency gains 0.5% 0.4% 0.3% 25.7% 26.9% Q1 2018 Labor % Hourly Labor Management Labor Training for Q1 2019 Labor % New Rollouts 12

 

Lower G&A Run Rate ($M) G&A expenses are projected below 5.0% of net sales after run rate cost savings initiatives nearing $1M are executed in Q2 2019 $9.0 5.6% 5.4% $8.5 5.4% 5.2% $8.0 5.2% $7.5 $8.9 5.0% 5.0% $8.4 $7.5 $7.0 $7.9 4.8% $6.5 4.6% $6.0 4.4% FY2016 FY 2017 FY 2018 2019 Fcst G&A $ Total G&A % of Sales Incentive accrual impact Note: G&A expenses are shown net of non-recurring expenses; 2017 % of sales excludes week 53 Note: 2017 higher and 2018 lower by approx. $0.2M incentive accrual carryover 13

 

Free Cash Flow and Net Debt ($M) Unlevered free cash flow improved to $14.9M LTM Q1 2019; net debt reduced to $93 million ($ millions) 2015 2016 2017 2018 Q1 2019 LTM Total net sales $ 144.8 $ 166.5 $ 1 65.5 $ 1 53.1 $ 154.2 Restaurant level EBITDA 29.7 32.3 2 8.3 2 3.3 22.8 Adjusted EBITDA 21.6 23.3 1 9.9 1 5.8 15.2 Capital expenditures (20.2) ( 12.5) (4.7) (1.6) ( 1.7) Changes in net working capital 3.9 - - - 1.4 Taxes - - - - - Unlevered free cash flow $ 5.3 $ 10.8 $ 1 5.2 $ 1 4.2 $ 14.9 Mandatory debt amortization $ (8.2) $ ( 10.0) $ (11.5) $ (11.6) $ ( 11.6) Interest (4.2) ( 5.8) (6.6) (6.4) $ ( 6.3) Levered free cash flow $ (7.1) $ ( 5.0) $ (2.9) $ (3.8) $ ( 3.0) Cash 14.2 4.0 4 .4 5 .4 6.5 Debt 126.3 121.2 1 13.9 102.4 99.5 Net debt $ 112.1 $ 117.2 $ 1 09.5 $ 9 7.0 $ 93.0 Net debt / LTM EBITDA 5.2X 5.0X 5.5X 6.1X 6.1X 14

 

Value Creation – Going Forward > Franchisor under new ownership – demonstrated track record Current > Renewed energy and excitement behind the brand Environment > Traffic turned positive in Q4 2018 behind new media bridge campaign > Significant brand activity rolled out in March 2019 > Traction from media and promotional changes > New menu roll-out and improved food presentation 2019 > Well positioned to leverage improved commodity cost environment and future sales growth > Full re-launch of brand in the fall Value > Best in class operations Proposition > Strong cash flow targeted at debt reduction converts to equity value > Tax benefits to offset over $75 million in pre-tax income 15

 

Loyalty Attachment Rates Blazin’ Rewards Loyalty Attachment Rates 27.6% 27.7% 26.6% 25.4% 24.6% 24.4% 23.9% 23.9% 24.1% 23.7% 22.8% 21.9% 22.1% 21.1% 19.8% 19.4% 18.9% Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 • Our goal is to reach 35% loyalty attachment in 2019 • Multiple data sources suggest that a 35% attachment rate is the point at which the restaurant obtains maximum benefits through higher frequency visits from less regular guests • We are leading the pack, as the BWLD franchise system is currently below 15% loyalty attachment * Source: internal company data 16

 

DRH Continues to Improve its Operations (Q1 2019 vs Q1 2018) Guest Loyalty Likely to Loyalty Index Recommend Attachment 2019-89.2% 2019-90.9% 2019-26.6% 2018-86.6% +2.6 pts 2018-88.7% +2.2 pts 2018-21.1% +5.5 pts Review COS Takeout Tracker¹ Waste Variance Execution 2019-4.2 stars 2019-0.4% 2019-92.4% 2018-3.7 stars +0.5 pts 2018-0.6% - 0.2 pts 2018-90.4% +2.0 pts Same-Store Check Sales Count 2019 +4.2% 2019 +3.2% 2018 -8.5% 2018 -15.1% ¹Consolidated customer ratings from the following sources: Google, Yelp, TripAdvisor, YP, Zomato, Facebook, Foursquare, Insider Pages, and Seamless 17

 

Exhibits 18

 

EBITDA Reconciliation 19

 

EBITDA Reconciliation cont. Restaurant-Level EBITDA represents net income plus the sum of non-restaurant specific general and administrative expenses, loss on property and equipment disposals, depreciation and amortization, other income and expenses, interest, taxes, and non-recurring expenses related to acquisitions, equity offerings or other non-recurring expenses. Adjusted EBITDA represents net income plus the sum of 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 an additional metric 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. 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. 20