Diversified Restaurant Holdings Reports Revenue More Than Doubled in Second Quarter 2010

Food and beverage sales in last year’s second quarter were $4.3 million; last year’s quarter also included $441 thousand in management fees that were generated under a service agreement covering the nine restaurants prior to the Affiliates Acquisition. Food and beverage sales in the second quarter of 2010 included sales from operations of the acquired restaurants, as well as the Company’s third Bagger Dave’s location in Novi, Michigan, which opened in February 2010, and a Buffalo Wild Wings location in Marquette, Michigan, which opened in early June 2010. With these additions, the second quarter of 2010 included food and beverage sales for 17 BWW and three Bagger Dave’s locations while the 2009 quarter included sales from seven BWW and two Bagger Dave’s locations.

Revenue for the first six months of 2010 was $19.5 million, a 108.7% increase compared with revenue of $9.3 million in the same 2009 period. Food and beverage sales were $19.3 million, 129.0% above sales of $8.4 million in the first half of 2009, primarily due to the greater number of restaurants now owned and operating in the 2010 period. Sales for the first six months of 2010 included the operations of 16 BWW restaurants that were opened prior to 2010 and the 17^th BWW location that opened in June as well as sales of two Bagger Dave’s restaurants that were opened prior to 2010 and the third Bagger Dave’s location that opened in February. In addition, the 2010 first half had one more day of sales as the net 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.

Revenue from management and advertising fees decreased to $166 thousand in the first half of 2010, compared with $898 thousand in the 2009 first half, as a result of the Affiliates Acquisition and only one month of fees being recognized in the 2010 calendar year prior to the Affiliates Acquisition.

The net loss in the 2010 second quarter was $110 thousand, or $0.004 loss per fully diluted share, compared with net income of $70 thousand, or $0.002 earnings per fully diluted share, in the same period the prior year. For the first six months of 2010, net income was $142 thousand, or $0.005 earnings per diluted share, compared with net income of $150 thousand, or $0.005 earnings per fully diluted share, in the first half of 2009.

Michael Ansley, President and Chief Executive Officer of DRH, commented, “The acquisition of the nine Buffalo Wild Wings restaurants that we previously managed, along with the openings of our Marquette Buffalo Wild Wings and our Novi Bagger Dave’s restaurants, are driving significant revenue growth thus far in 2010. However, the restaurant expansion, made possible by the funding we secured earlier this year, resulted in an increase in interest expense which produced a small loss for the quarter. Notably, we generated positive operating cash flow and, with costs for fresh, bone-in chicken wings decreasing, we will remain focused on controlling our other costs as we pursue our goal of profitable future growth.”

Food and beverage costs declined as a percentage of related sales in the second quarter of 2010 compared with the 2009 second quarter as fresh, bone-in chicken wing prices continued to trend downward during the quarter.

Both general and administrative (G&A) expense and compensation and occupancy costs declined as a percentage of food and beverage sales in the 2010 second quarter compared with the second quarter of last year due primarily to efficiencies associated with the Affiliates Acquisition. Higher advertising expenses and audio/visual costs related to an increased number of sports packages available at the Company’s restaurants, combined with higher maintenance costs on a larger mix of older restaurants, were offset by purchasing efficiencies experienced as a result of the increased number of restaurants now owned.

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 absence of management and advertising fees from the acquired restaurants.

Interest expense for the 2010 second quarter was $518 thousand, significantly above interest expense of $105 thousand during the second quarter of 2009 due to higher borrowings associated with the Affiliates Acquisition as well as the one-time prepayment penalties associated with the new credit facility obtained during the second quarter of 2010.

DRH recorded an income tax benefit in the 2010 second quarter of $244 thousand compared with an income tax provision of $27 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, made possible by the Affiliates Acquisition.

Food and beverage costs as a percentage of related sales in the first six months of 2010 were below the level experienced in last year’s first half due to declining fresh, bone-in chicken wing costs. The decline in G&A expense as a percentage of food and beverage sales in the first six months of 2010 compared with the 2009 period is related to efficiencies gained from the more mature acquired restaurants. Compensation and occupancy costs also declined as a percentage of food and beverage sales due to higher revenue and improved efficiencies.

Operating income in the first six months of 2010 was $458 thousand, compared with operating income of $343 thousand in the 2009 period. However, operating margin was 140 basis points below margin in the first half of 2009 due primarily to the elimination of management and advertising fees as a result of the Affiliates Acquisition.

Interest expense for the first six months of 2010 was $668 thousand, compared to interest expense of $216 thousand during the same 2009 period due to higher borrowings associated with the Affiliates Acquisition and the one-time prepayment penalties incurred in conjunction with the execution of the new credit facility.

Balance Sheet

Cash and cash equivalents were $669 thousand at June 27, 2010, compared with $650 thousand at December 27, 2009. DRH generated in excess of $1.6 million in cash from operations during the first six months of 2010 compared with approximately $1.1 million during the first half of 2009. The increase in cash from operations in the 2010 period is primarily due to the Affiliates Acquisition.

Capital expenditures in the second quarter of 2010 were approximately $4.3 million and are related to ongoing restaurant openings and the purchase of a previously-leased building in Brandon, Florida, where the Company operates a BWW restaurant. For the first six months of 2010, capital expenditures were approximately $5.0 million, compared with $1.1 million in the first half of 2009. Capital expenditures related to 2010 restaurants openings, excluding the purchase of the Brandon building, are expected to be approximately $4.5 million for 2010.

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