Diversified Restaurant Holdings Reports 91.8% Increase in First Quarter 2010 Revenue

Diversified Restaurant Holdings, Inc. (OTCBB: DFRH), the owner/operator and soon to be franchisor of the unique, full service ultra-casual restaurant and bar, Bagger Dave’s Legendary Burgers & Fries® (“Bagger Dave’s”), and a leading franchisee for Buffalo Wild Wings® (“BWW”), today reported financial results for the 2010 first quarter which ended on March 28, 2010.

First quarter 2010 revenue was $8.8 million, a 91.8% increase compared with revenue of $4.6 million in the 2009 first quarter. Net income in the 2010 first quarter was $231 thousand, or $0.008 per fully diluted share, compared with net income of $79 thousand, or $0.003 per fully diluted share, in the same period the prior year.

Food and beverage sales for the first quarter more than doubled to $8.6 million compared with $4.1 million in the 2009 first quarter; while revenue from management and advertising fees was down to $166 thousand compared with $457 thousand in last year’s quarter. The year-over-year increase in food and beverage sales included $3.8 million in sales from operations at nine previously-managed stores which were acquired on February 1, 2010, as well as a third Bagger Dave’s location which DRH opened in February 2010. With these additions, the first quarter of 2010 included sales of 16 BWW locations and three Bagger Dave’s locations while the 2009 quarter included sales from six BWW and two Bagger Dave’s locations. Management and advertising fees income during the 2010 first quarter and the 2009 first quarter was generated under a service agreement covering the recently acquired restaurants and resulted in the decline in fee income. In addition, the 2010 first quarter included two additional days of sales as a result of the Company’s adoption, in 2009, of a fiscal year that ends on the last Sunday of each calendar quarter to align itself with restaurant industry standards.

Michael Ansley, President and Chief Executive Officer of DRH, commented, “The strategic significance of the acquisition of the nine BWW stores from our affiliates is apparent in the results for the quarter. The substantial increase in revenue, bolstered by the operations of our third, well-received Bagger Dave’s location, was a major step in our growth plans and we expect, as the economy recovers, to benefit from the addition of these stores to our growing Company.”

Food and beverage costs declined slightly as a percentage of related sales in the first quarter of 2010 compared with the 2009 first quarter. Although average chicken wing prices for the quarter were up from the prior year period and reached a high of $2.01 per pound in February 2010, prices began to moderate toward the end of the first quarter of 2010. Both general and administrative (G&A) expense and compensation and occupancy costs declined as a percentage of food and beverage sales in the 2010 first quarter compared with the first quarter of last year due primarily to the addition of the nine previously managed locations, which resulted in a larger mix of stores that had been in operation for over a year and the fact that DRH’s first two Bagger Dave’s stores also have been open for over a year. Restaurants typically become more efficient after their first year of operations. The improvement in operating income was primarily driven by the increased food and beverage revenue while the decline in operating margin was related to the lower management and advertising fees resulting from the acquisition of the nine BWW stores.

Interest expense for the 2010 first quarter was $150 thousand, 35.0% above interest expense of $111 thousand during the first quarter of 2009, due to higher borrowings associated with the February 2010 store acquisition as well as the opening of new restaurants in 2008, 2009, and 2010.

DRH recorded an income tax benefit in the 2010 first quarter of $111 thousand compared with an income tax provision of $42 thousand in the same period last year, as the Company recognized significant deferred tax assets and used a significant amount of net operating loss carry forwards, during the quarter, as a result of the recent acquisition.

Balance Sheet

Cash and cash equivalents were $1.3 million at March 28, 2010, compared with $650 thousand at December 27, 2009. DRH generated $1.3 million in cash from operations during the first quarter of 2010 compared with $503 thousand in the 2009 first quarter, primarily due to the acquisition of nine BWW restaurants during the period.

Capital expenditures in the first quarter of 2010 were $637 thousand. This compares with capital expenditures in the 2009 first quarter of $26 thousand, a period in which DRH did not open any new restaurants. Capital expenditures related to 2010 store openings, as outlined in the restaurant count schedule below, are expected to be approximately $3.0 million for 2010.

On May 7, 2010, DRH announced that it had obtained up to a $6 million development line of credit which it intends to use to expand the number of BWW locations in the states of Michigan and Florida and to develop additional Bagger Dave’s stores. In addition to the development line of credit, the Company received $9 million to repay its outstanding senior debt and related early repayment fees. The refinancing is expected to free up over $1.0 million in cash flow within the next 12 months.

Outlook

DRH plans to open two additional BWW restaurants in Michigan in 2010., The first is currently under construction in Marquette, with a planned opening date of Sunday, June 6, 2010, and the second location will be in Chesterfield, with a planned opening during the third quarter of 2010. A third new BWW Michigan location is currently being considered for later in the year and, in addition, the Company is evaluating potential sites in the state for its fourth Bagger Dave’s restaurant. The Company’s agreement with BWW allows for a total of 38 stores in Michigan and Florida in operation by 2017. DRH also has a Franchise Disclosure Document in place for future Bagger Dave’s franchises in Michigan, Ohio, and Indiana. As of March 28, 2010, DRH operated three Bagger Dave’s restaurants in Michigan and 16 BWW locations, 11 in Michigan and five in Florida.

Mr. Ansley concluded, “I expect 2010 to be a critical year in the pursuit of our growth goals, which include the expansion of our highly-successful BWW operations as well as the accelerated development of our established Bagger Dave’s concept. To address our growth plans, we were able to restructure our balance and obtain the funds needed for expansion opportunities over the next several years. At the same time, we will remain focused on providing our customers with a unique and pleasant dining experience through unmatched customer service and innovative menu offerings.”

About Diversified Restaurant Holdings, Inc.

DRH owns and operates its own unique, full-service restaurant concept, Bagger Dave’s Legendary Burgers and Fries^®(“Bagger Dave’s”), which falls within the full service, ultra casual dining segment and was launched in January 2008. Bagger Dave’s^® offers a full-service restaurant and bar at an ultra casual price point for friends and families in a casual, comfortable atmosphere. The innovative menu features freshly made burgers (never frozen) accompanied by more than 30 toppings from which to choose, fresh-cut fries, and hand-dipped milkshakes. Signature items include Sloppy Dave’s BBQ^®, Train Wreck Burger^®, and Bagger Dave’s Amazingly Delicious Turkey Black Bean Chili™. Currently, there are three locations in the state of Michigan. We have filed for rights, and have been approved, to franchise in the states of Michigan, Indiana, and Ohio. Our filing in the state of Illinois remains pending review by the pertinent authorities. The concept focuses on local flair with the interior showcasing historic photos of the neighborhood in which it resides. There’s also an electric train that runs above the dining room and bar areas. All current and future locations will be smoke-free. 

DRH also is a leading BWW^® franchisee, handling the operations of 16 BWW restaurants: five in Florida and 11 in Michigan, and has received franchise awards for the Highest Annual Restaurant Sales.

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