##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 26, 2010
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from
 Commission File No. 000-53577
 DIVERSIFIED RESTAURANT HOLDINGS, INC.
  Nevada
    
    03-0606420(State or other jurisdiction
    
    (I.R.S. employerof incorporation or
    
    identification number)formation)
 
 
 (Former name, former address and former
 Copies to:  Michael T. Raymond, Esq.
 þ o
 o o
 o þ
 APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING 
THE PRECEDING FIVE YEARS
 o o
 APPLICABLE ONLY TO CORPORATE ISSUERS
   Large Accelerated Filer o
    
    Accelerated Filer o
    
    Non-Accelerated Filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)




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##### 



INDEX
 PART I. FINANCIAL INFORMATION
    
    
    1Item 1. Financial Statements
    
    
    1Consolidated Balance Sheets (Unaudited)
    
    
    1Consolidated Statements of Operations (Unaudited)
    
    
    2Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
    
    
    3Consolidated Statements of Stockholders Equity (Deficit) (Unaudited)
    
    
    4Consolidated Statements of Cash Flows (Unaudited)
    
    
    5Notes to Interim Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    24Item 3. Quantitative and Qualitative Disclosure About Market Risks
    
    
    32Item 4. Controls and Procedures
    
    
    32PART II. OTHER INFORMATION
    
    
    32Item 1. Legal Proceedings
    
    
    32Item 1A. Risk Factors
    
    
    32Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    33Item 3. Defaults Upon Senior Securities
    
    
    33Item 5. Other Information
    
    
    33Item 6. Exhibits
    
    
    34Exhibit 10.1Exhibit 10.2Exhibit 10.3Exhibit 10.4Exhibit 10.5Exhibit 10.6Exhibit 10.7Exhibit 10.8Exhibit 10.12Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   i




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS

(UNAUDITED)
 September 26
    
    
    December 272010
    
    
    2009 (a)ASSETSCurrent assetsCash and cash equivalents
    
    $
    959,028
    
    
    $
    1,594,362Accounts receivable  related party
    
    
    
    
    
    
    376,675Inventory
    
    
    308,497
    
    
    
    307,301Prepaid assets
    
    
    240,030
    
    
    
    152,702Other current assets
    
    
    111,407
    
    
    
    42,382Total current assets
    
    
    1,618,962
    
    
    
    2,473,422Property and equipment, net (Note 3)
    
    
    16,229,563
    
    
    
    11,655,513Intangible assets, net (Note 4)
    
    
    978,349
    
    
    
    751,779Other long-term assets
    
    
    56,144
    
    
    
    49,280Deferred income taxes (Note 8)
    
    
    450,534
    
    
    
    246,754Total assets
    
    
    19,333,552
    
    
    
    15,176,748LIABILITIES AND STOCKHOLDERS (DEFICIT) EQUITYCurrent liabilitiesCurrent portion of long-term debt (Note 6)
    
    
    1,256,097
    
    
    
    2,193,057Accounts payable
    
    
    888,618
    
    
    
    527,151Accrued liabilities
    
    
    1,137,697
    
    
    
    674,768Deferred rent
    
    
    125,788
    
    
    
    104,940Total current liabilities
    
    
    3,408,200
    
    
    
    3,499,916Accrued rent
    
    
    783,679
    
    
    
    846,014Deferred rent
    
    
    889,501
    
    
    
    638,024Related party payable
    
    
    
    
    
    
    430,351Other liabilities  interest rate swap
    
    
    582,628
    
    
    
    213,604Long-term debt, less current portion (Note 6)
    
    
    14,663,236
    
    
    
    6,767,041Total liabilities
    
    
    20,327,244
    
    
    
    12,394,950Commitments and contingencies (Notes 5, 6, 9, 10, and 11)Stockholders (deficit) equity (Note 7)Common stock  $0.0001 par value; 100,000,000 shares
authorized, 18,876,000
and 18,626,000 shares, respectively, issued and outstanding
    
    
    1,888
    
    
    
    1,863Additional paid-in capital
    
    
    2,627,539
    
    
    
    2,356,155Retained earnings (accumulated deficit)
    
    
    (3,040,491
    )
    
    
    423,780Comprehensive (loss) income
    
    
    (582,628
    )
    
    
    Total stockholders (deficit) equity
    
    
    (993,692
    )
    
    
    2,781,798Total liabilities and stockholders equity
    
    $
    19,333,552
    
    
    $
    15,176,748
  (a)
  1




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##### Table of Contents



DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)
 Three Months Ended
    
    
    Nine Months EndedSeptember 26
    
    
    September 30
    
    
    September 26
    
    
    September 302010
    
    
    2009
    
    
    2010
    
    
    2009RevenueFood and beverage sales
    
    $
    11,423,726
    
    
    $
    10,477,157
    
    
    $
    32,823,425
    
    
    $
    31,310,192Total revenue
    
    
    11,423,726
    
    
    
    10,477,157
    
    
    
    32,823,425
    
    
    
    31,310,192Operating expensesCompensation costs
    
    
    3,346,237
    
    
    
    2,890,306
    
    
    
    9,780,263
    
    
    
    8,655,533Food and beverage costs
    
    
    3,310,374
    
    
    
    3,253,647
    
    
    
    9,785,584
    
    
    
    9,813,943General and administrative
    
    
    2,670,428
    
    
    
    2,322,537
    
    
    
    7,707,679
    
    
    
    7,281,370Pre-opening
    
    
    66,129
    
    
    
    131,277
    
    
    
    283,308
    
    
    
    133,078Occupancy
    
    
    765,289
    
    
    
    741,744
    
    
    
    2,165,555
    
    
    
    2,187,465Depreciation and amortization
    
    
    696,161
    
    
    
    567,099
    
    
    
    1,941,765
    
    
    
    1,594,297Total operating expenses
    
    
    10,854,618
    
    
    
    9,906,610
    
    
    
    31,664,154
    
    
    
    29,665,686Operating profit
    
    
    569,108
    
    
    
    570,547
    
    
    
    1,159,271
    
    
    
    1,644,506Interest expense
    
    
    (243,854
    )
    
    
    (198,699
    )
    
    
    (931,730
    )
    
    
    (578,654
    )Other income, net
    
    
    6,333
    
    
    
    16,120
    
    
    
    5,071
    
    
    
    169,059Income before income taxes
    
    
    331,587
    
    
    
    387,968
    
    
    
    232,612
    
    
    
    1,234,911Income tax provision
    
    
    (131,119
    )
    
    
    (204,796
    )
    
    
    (9,232
    )
    
    
    (419,803
    )Net income
    
    $
    200,468
    
    
    $
    183,172
    
    
    $
    223,380
    
    
    $
    815,108Basic earnings per share  as reported
    
    $
    0.011
    
    
    $
    0.010
    
    
    $
    0.012
    
    
    $
    0.045Fully diluted earnings per share  as reported
    
    $
    0.007
    
    
    $
    0.006
    
    
    $
    0.008
    
    
    $
    0.028Weighted average number of common shares
outstanding (Notes 1 and 7)Basic
    
    
    18,870,505
    
    
    
    18,070,000
    
    
    
    18,870,505
    
    
    
    18,070,000Diluted
    
    
    29,160,000
    
    
    
    29,020,000
    
    
    
    29,113,333
    
    
    
    29,020,000
   2




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##### Table of Contents



DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)
 Three Months Ended
    
    
    Nine Months EndedSeptember 26
    
    
    September 30
    
    
    September 26
    
    
    September 302010
    
    
    2009
    
    
    2010
    
    
    2009Net income
    
    $
    200,468
    
    
    $
    183,172
    
    
    $
    223,380
    
    
    $
    815,108Comprehensive income (loss)Unrealized changes in fair
value of cash flow hedges
    
    
    (177,707
    )
    
    
    
    
    
    
    (582,628
    )
    
    
    Comprehensive income (loss)
    
    $
    22,761
    
    
    $
    183,172
    
    
    $
    (359,248
    )
    
    $
    815,108
   3




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##### Table of Contents



DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)

(UNAUDITED)
 RetainedAdditional
    
    
    Earnings
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Paid-in
    
    
    (Accumulated
    
    
    Comprehensive
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit)
    
    
    (Loss) Income
    
    
    Equity (Deficit)Balances  December 27, 2009
    
    
    18,626,000
    
    
    $
    1,863
    
    
    $
    2,356,155
    
    
    $
    423,780
    
    
    $
    
    
    
    $
    2,781,798Shares issued for warrants exercised at $1.00
per share (Note 7)
    
    
    250,000
    
    
    
    25
    
    
    
    249,975
    
    
    
    
    
    
    
    
    
    
    
    250,000Share-based compensation (Note 7)
    
    
    
    
    
    
    
    
    
    
    21,409
    
    
    
    
    
    
    
    
    
    
    
    21,409Acquisition of BWW restaurants (Note 2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,134,790
    )
    
    
    
    
    
    
    (3,134,790
    )Distributions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (552,861
    )
    
    
    
    
    
    
    (552,861
    )Unrealized changes in fair value of cash
flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (582,628
    )
    
    
    (582,628
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    223,380
    
    
    
    
    
    
    
    223,380Balances  September 26, 2010
    
    
    18,876,000
    
    
    $
    1,888
    
    
    $
    2,627,539
    
    
    $
    (3,040,491
    )
    
    $
    (582,628
    )
    
    $
    (993,692
    )
   4




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##### Table of Contents



DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)
 Nine Months EndedSeptember 26
    
    
    September 302010
    
    
    2009Cash flows from operating activitiesNet income
    
    $
    223,380
    
    
    $
    815,108Adjustments to reconcile net income to
net cash provided by (used in) operating
activitiesDepreciation and amortization
    
    
    1,941,765
    
    
    
    1,590,246Loss on disposal of property and equipment
    
    
    217,868
    
    
    
    6,954Share-based compensation
    
    
    21,409
    
    
    
    24,234Deferred income tax (provision) benefit
    
    
    (203,780
    )
    
    
    322,020Changes in operating assets and
liabilities that
provided (used) cashAccounts receivable  related party
    
    
    376,675
    
    
    
    (48,469
    )Inventory
    
    
    (1,196
    )
    
    
    25,076Prepaid assets
    
    
    (87,328
    )
    
    
    (28,963
    )Other current assets
    
    
    (69,025
    )
    
    
    (11,780
    )Intangible assets
    
    
    (111,198
    )
    
    
    (1,210
    )Other long-term assets
    
    
    (6,864
    )
    
    
    196,104Accounts payable
    
    
    (68,884
    )
    
    
    (380,219
    )Accrued liabilities
    
    
    462,929
    
    
    
    294,643Accrued rent
    
    
    (62,335
    )
    
    
    155,815Deferred rent
    
    
    272,325
    
    
    
    (84,435
    )Net cash provided by operating activities
    
    
    2,905,741
    
    
    
    2,875,124Cash flows from investing activitiesPurchases of property and equipment
    
    
    (4,159,301
    )
    
    
    (593,301
    )Net cash used in investing activities
    
    
    (4,159,301
    )
    
    
    (593,301
    )Cash flows from financing activitiesProceeds from issuance of long-term debt
    
    
    2,035,876
    
    
    
    1,992,203Repayments of long-term debt
    
    
    (1,114,789
    )
    
    
    (3,263,664
    )Proceeds from issuance of common stock
    
    
    250,000
    
    
    
    Distributions
    
    
    (552,861
    )
    
    
    (936,000
    )Net cash provided by financing activities
    
    
    618,226
    
    
    
    (2,207,461
    )Net increase in cash and cash equivalents
    
    
    (635,334
    )
    
    
    74,362Cash and cash equivalents, beginning of period
    
    
    1,594,362
    
    
    
    1,029,459Cash and cash equivalents, end of period
    
    $
    959,028
    
    
    $
    1,103,821
   5




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##### Table of Contents



DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Nature of Business
   
    6




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##### Table of Contents



Accounting for Leases,
 Basis of Presentation
     7




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##### Table of Contents



Principles of Consolidation
   Fiscal Year
  Segment Reporting
   Cash and Cash Equivalents
  Revenue Recognition
  Accounts Receivable  Related Party
   8




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##### Table of Contents



Accounting for Gift Cards
    Lease Accounting
  Inventory
  Prepaid, Intangible, and Other Assets
  Franchise fees
    
    10 to 20 yearsTrademarks
    
    15 yearsLoan fees
    
    2 to 7 years (loan term)
  Property and Equipment
   9




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##### Table of Contents



Depreciation and Amortization
  Advertising
  Pre-opening Costs
  Income Taxes
  Earnings Per Share
 Earnings Per Share
 Concentration Risks
  Use of Estimates
   10




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##### Table of Contents



Financial Instrument
     Recent Accounting Pronouncements
 Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value
Measurements. Fair Value
Measurements and Disclosures
 Amendments to Certain Recognition and Disclosure
Requirements
  11




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##### Table of Contents



Reclassifications
  2. SIGNIFICANT BUSINESS TRANSACTIONS
 Acquisition of Nine Affiliated BWW Restaurants
  Business Combinations: Transactions Between Entities Under
Common Control i.e.
 Execution of $15 Million Comprehensive Debt Facility
   12




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##### Table of Contents



Purchase of Building in Brandon, Florida
      13




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##### Table of Contents



3. PROPERTY AND EQUIPMENT
  September 26
    
    
    December 272010
    
    
    2009Land
    
    $
    385,959
    
    
    $
    Building
    
    
    2,255,246
    
    
    
    Equipment
    
    
    7,752,192
    
    
    
    6,710,092Furniture and fixtures
    
    
    2,051,927
    
    
    
    1,833,347Leasehold improvements
    
    
    13,334,481
    
    
    
    11,585,978Restaurant construction in progress
    
    
    652,909
    
    
    
    126,804Total
    
    
    26,432,714
    
    
    
    20,256,221Less accumulated depreciation
    
    
    (10,203,151
    )
    
    
    (8,600,708
    )Property and equipment, net
    
    $
    16,229,563
    
    
    $
    11,655,513
 4. INTANGIBLES
  September 26
    
    
    December 272010
    
    
    2009Amortized Intangibles:Franchise fees
    
    $
    373,750
    
    
    $
    358,750Trademark
    
    
    7,475
    
    
    
    2,500Loan fees
    
    
    155,100
    
    
    
    66,565Total
    
    
    536,325
    
    
    
    427,815Less accumulated amortization
    
    
    (104,813
    )
    
    
    (122,064
    )Amortized Intangibles, net
    
    
    431,512
    
    
    
    305,751Unamortized Intangibles:Liquor licenses
    
    
    546,837
    
    
    
    446,028Total Intangibles, net
    
    $
    978,349
    
    
    $
    751,779
  5. RELATED PARTY TRANSACTIONS
    14




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##### Table of Contents



Guarantees,
    6. LONG-TERM DEBT
  September 26
    
    
    December 272010
    
    
    2009Note payable to a bank secured by a senior
lien on all company assets. Scheduled
monthly principal and interest payments are
approximately $120,000 through maturity in
May 2017. Interest is charged based on a
swap arrangement designed to yield a fixed
annual rate of 7.10%.
    
    $
    8,656,879
    
    
    
    Note payable to a bank secured by a senior
mortgage on the Brandon Property, corporate
guaranties, and a personal guaranty.
Scheduled monthly principal and interest
payments are approximately $8,000 for the
period beginning July 2010 through maturity
in June 2030, at which point a balloon
payment of $413,550 is due. Interest is
charged based on a fixed rate of 6.72%, per
annum, through June 2017, at which point
the rate will adjust to the U.S. Treasury
Securities Rate plus 4% (and every seven
years thereafter).
    
    
    1,145,737
    
    
    
    Note payable
to a bank secured by a junior mortgage on the Brandon Property. Matures in 2030
and requires monthly principal and interest
installments of approximately $6,100 until
maturity. Interest is charged at a rate of
3.58% per annum.
    
    
    923,435
    
    
    
    
  15




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##### Table of Contents



September 26
    
    
    December 272010
    
    
    2009DLOC to a bank, secured by a senior lien on
all company assets. Scheduled interest
payments are charged at a rate of 4% over
the 30-day LIBOR (the rate at September 26,
2010 was approximately 4.26%). In November
2011, the DLOC will convert into a term
loan bearing interest at 4% over the 30-day
LIBOR and will mature in May 2017. The DLOC
includes a carrying cost of .25% per year
of any available but undrawn amounts.
    
    
    305,947
    
    
    
    Note payable to a bank secured by a senior
lien on all company assets. Scheduled
monthly principal and interest payments are
approximately $22,000 through maturity in
May 2017. Interest is charged based on a
swap arrangement designed to yield a fixed
annual rate of 5.91%.
    
    
    1,424,000Unsecured note payable that matures in
August 2013 and requires monthly principal
and interest installments of approximately
$2,200, with the balance due at maturity.
Interest is 7% per annum.
    
    
    244,199
    
    
    
    Note payable to a bank secured by the
property and equipment of Bearcat
Enterprises, Inc. as well as personal
guarantees of certain stockholders and
various related parties. Scheduled monthly
principal and interest payments are
approximately $4,600 including annual
interest charged at a variable rate of
3.70% above the 30-day LIBOR rate. The
rate at September 26, 2010 was
approximately 3.96%. The note matures in
September 2014.
    
    
    0
    
    
    
    72,975Note payable to Ford Credit secured by a
vehicle purchased by Flyer Enterprises,
Inc. to be used in the operation of the
business. This is an interest-free loan
under a promotional 0% rate. Scheduled
monthly principal payments are
approximately $430. The note matures in
April 2013.
    
    
    13,304
    
    
    
    17,167Various notes payable to a bank or leasing
company secured by property and equipment
as well as corporate and personal
guarantees of DRH; the Companys
subsidiaries; certain stockholders; and/or
various related parties. The various
agreements called for either monthly
interest only, principal, and/or interest
payments in the aggregate amount of
$117,169. Interest charges ranged from
LIBOR plus 2% to a fixed rate of 9.15% per
annum. The various notes were scheduled to
mature between February 2011 and December
2015. These various notes were paid off
upon the execution of the May 5, 2010
Credit Facility.
    
    
    
    
    
    
    7,821,912Obligations under capital leases (Note 10)
    
    
    
    
    
    
    693,196Notes payable  related parties (Note 5)
    
    
    3,205,832
    
    
    
    354,848Total long-term debt
    
    
    15,919,333
    
    
    
    8,960,098Less current portion
    
    
    (1,256,097
    )
    
    
    (2,193,057
    )Long-term debt, net of current portion
    
    $
    14,663,236
    
    
    $
    6,767,041
  16




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Year
    
    Amount2010
    
    $
    1,256,0972011
    
    
    1,608,2622012
    
    
    1,810,4782013
    
    
    2,130,6542014
    
    
    2,040,548Thereafter
    
    
    7,073,294Total
    
    $
    15,919,333
   7. CAPITAL STOCK (INCLUDING PURCHASE WARRANTS AND OPTIONS)
   Compensation-Stock
Compensation
  17




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Equity
Based Payments to Non-Employees
  8. INCOME TAXES
  Three Months Ended
    
    
    Nine Months EndedSeptember 26
    
    
    September 30
    
    
    September 26
    
    
    September 302010
    
    
    2009
    
    
    2010
    
    
    2009FederalCurrent
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Deferred
    
    
    (69,280
    )
    
    
    (73,816
    )
    
    
    121,327
    
    
    
    (178,943
    )StateCurrent
    
    
    (36,502
    )
    
    
    (69,772
    )
    
    
    (123,105
    )
    
    
    (216,350
    )Deferred
    
    
    (25,337
    )
    
    
    (61,208
    )
    
    
    (7,454
    )
    
    
    (24,510
    )(61,839
    )
    
    
    
    
    
    
    (130,559
    )Income Tax
Provision
    
    $
    (131,119
    )
    
    $
    (204,796
    )
    
    $
    (9,232
    )
    
    $
    (419,803
    )
  18




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##### Table of Contents



September 26
    
    
    December 272010
    
    
    2009Income tax provision at federal statutory rate
    
    $
    (78,957
    )
    
    $
    (207,455
    )State income tax provision
    
    
    (130,559
    )
    
    
    (57,585
    )Permanent differences
    
    
    9,535
    
    
    
    (32,111
    )Tax credits
    
    
    105,000
    
    
    
    93,500Other
    
    
    85,749
    
    
    
    (48,413
    )Income tax provision
    
    $
    (9,232
    )
    
    $
    (252,064
    )
  September 26
    
    
    December 272010
    
    
    2009Deferred tax assets:Net operating loss carry forwards
    
    $
    830,660
    
    
    $
    954,370Deferred rent expense
    
    
    94,862
    
    
    
    78,998Start-up costs
    
    
    244,294
    
    
    
    104,327Tax credit carry forwards
    
    
    297,544
    
    
    
    164,366Swap loss recognized for book
    
    
    
    
    
    
    56,970Other  including state deferred tax assets
    
    
    154,776
    
    
    
    193,781Total deferred assets
    
    
    1,622,136
    
    
    
    1,552,812Deferred tax liabilities:Other  including state deferred tax
liabilities
    
    
    7,910
    
    
    
    146,325Tax depreciation in excess of book
    
    
    1,163,692
    
    
    
    1,159,733Total deferred tax liabilities:
    
    
    1,171,602
    
    
    
    1,306,058Net deferred income tax assets
    
    $
    450,534
    
    
    $
    246,754
  19




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##### Table of Contents



Income Taxes
  Income Taxes
     9. OPERATING LEASES (INCLUDING RELATED PARTY)
     20




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21




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##### Table of Contents



Year
    
    Amount2010
    
    $
    2,664,4732011
    
    
    2,563,9682012
    
    
    2,646,0472013
    
    
    2,711,9912014
    
    
    2,583,552Thereafter
    
    
    8,791,561Total
    
    $
    21,961,592
 10. CAPITAL LEASES
  11. COMMITMENTS AND CONTINGENCIES
    22




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##### Table of Contents



12. SUPPLEMENTAL CASH FLOWS INFORMATION
 Other Cash Flows Information
   Supplemental Schedule of Non-Cash Operating, Investing, and Financing Activities
     23




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##### Table of Contents



13. FAIR VALUE OF FINANCIAL INSTRUMENTS
  Fair Value Measurements and
Disclosures,
 
    
    Level 1: Unadjusted quoted prices in active markets that are accessible at the
measurement date for identical, unrestricted assets or liabilities.
 
    
    Level 2: Quoted prices in markets that are not active or inputs which are observable,
either directly or indirectly, for substantially the full term of the asset or liability.
 
    
    Level 3: Prices or valuation techniques that require inputs that are both significant to
the fair value measurement and unobservable (i.e., supported by little or no market
activity).
  14. SUBSEQUENT EVENTS
   
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 (The following 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 27, 2009.)
 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; 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.
  24




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##### Table of Contents



OVERVIEW
 ® ® ®
 ACQUISITION OF NINE AFFILIATED BWW RESTAURANTS
  i.e.
 EXECUTION OF $15 MILLION COMPREHENSIVE CREDIT FACILITY
  PURCHASE OF BUILDING IN BRANDON, FLORIDA
   25




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##### Table of Contents



RESULTS OF OPERATIONS
  REVENUE
 Three Months Ended
    
    
    ChangeSeptember 26, 2010
    
    
    September 30, 2009
    
    
    $
    
    
    %RevenueFood and beverage sales
    
    $
    11,423,726
    
    
    $
    10,477,157
    
    
    $
    946,569
    
    
    
    9.0
    %Total revenue
    
    $
    11,423,726
    
    
    $
    10,477,157
    
    
    $
    946,569
    
    
    
    9.0
    %
  Nine Months Ended
    
    
    ChangeSeptember 26, 2010
    
    
    September 30, 2009
    
    
    $
    
    
    %RevenueFood and beverage sales
    
    $
    32,823,425
    
    
    $
    31,310,192
    
    
    $
    1,513,233
    
    
    
    4.8
    %Total revenue
    
    $
    32,823,425
    
    
    $
    31,310,192
    
    
    $
    1,513,233
    
    
    
    4.8
    %
  OPERATING EXPENSES
 Three Months Ended
    
    
    Change
    
    
    % Total RevenueSeptember 26, 2010
    
    
    September 30, 2009
    
    
    $
    
    
    %
    
    
    2010
    
    
    2009Operating expensesCompensation costs
    
    $
    3,346,237
    
    
    $
    2,890,306
    
    
    $
    455,931
    
    
    
    15.8
    %
    
    
    29.3
    %
    
    
    27.6
    %Food and beverage costs
    
    
    3,310,374
    
    
    
    3,253,647
    
    
    
    56,727
    
    
    
    1.7
    
    
    
    29.0
    
    
    
    31.1General and administrative
    
    
    2,670,428
    
    
    
    2,322,537
    
    
    
    347,891
    
    
    
    15.0
    
    
    
    23.4
    
    
    
    22.2Pre-opening
    
    
    66,129
    
    
    
    131,277
    
    
    
    (65,148
    )
    
    
    (49.6
    )
    
    
    0.6
    
    
    
    1.3Occupancy
    
    
    765,289
    
    
    
    741,744
    
    
    
    23,545
    
    
    
    3.2
    
    
    
    6.7
    
    
    
    7.1Depreciation and
amortization
    
    
    696,161
    
    
    
    567,099
    
    
    
    129,062
    
    
    
    22.8
    
    
    
    6.1
    
    
    
    5.4Total operating expenses
    
    $
    10,854,618
    
    
    $
    9,90,6610
    
    
    $
    948,008
    
    
    
    9.6
    %
    
    
    95.0
    %
    
    
    94.6
    %
  26




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27




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Nine Months Ended
    
    
    Change
    
    
    % Total RevenueSeptember 26, 2010
    
    
    September 30, 2009
    
    
    $
    
    
    %
    
    
    2010
    
    
    2009Operating expensesCompensation costs
    
    $
    9,780,263
    
    
    $
    8,655,533
    
    
    $
    1,124,730
    
    
    
    13.0
    %
    
    
    29.8
    %
    
    
    27.6
    %Food and beverage costs
    
    
    9,785,584
    
    
    
    9,813,943
    
    
    
    (28,359
    )
    
    
    (0.3
    )
    
    
    29.8
    
    
    
    31.3General and administrative
    
    
    7,707,679
    
    
    
    7,281,370
    
    
    
    426,309
    
    
    
    5.9
    
    
    
    23.5
    
    
    
    23.3Pre-opening
    
    
    283,308
    
    
    
    133,078
    
    
    
    150,230
    
    
    
    112.9
    
    
    
    0.9
    
    
    
    0.4Occupancy
    
    
    2,165,555
    
    
    
    2,187,465
    
    
    
    (21,910
    )
    
    
    (1.0
    )
    
    
    6.6
    
    
    
    7.0Depreciation and amortization
    
    
    1,941,765
    
    
    
    1,594,297
    
    
    
    347,468
    
    
    
    21.8
    
    
    
    5.9
    
    
    
    5.1Total operating expenses
    
    $
    31,664,154
    
    
    $
    29,665,686
    
    
    $
    1,998,468
    
    
    
    6.7
    %
    
    
    96.5
    %
    
    
    94.7
    %
         28




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##### Table of Contents



INTEREST AND TAXES
   LIQUIDITY AND CAPITAL RESOURCES; EXPANSION PLANS
     
    
    Novi, Michigan  Bagger Daves  opened February 22, 2010
 
    
    Marquette, Michigan  BWW  opened June 6, 2010
 
    
    Chesterfield, Michigan  BWW  opened August 22, 2010
 
    
    Ft. Myers, Florida  BWW  opened November 7, 2010
 
    
    Brighton, Michigan  Bagger Daves  construction began in early November 2010 with an
anticipated opening date in February 2011
 
    
    Lakeland, Florida  BWW  construction began in early November 2010 with an
anticipated opening date in February 2011
 
    
    Traverse City, Michigan  BWW  construction is scheduled to begin in November 2010
with an anticipated opening date in February 2011
  29




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##### Table of Contents



Mandatory Upgrades:
 
    
    Per a Franchise Agreement dated July 29, 2010 by and between BWWI and Anker, Inc., a
wholly-owned subsidiary of the Company, were obligated to complete a full remodel of our
Fenton, Michigan location by August 31, 2011. Estimated cost of this remodel will be
between $350 thousand and $450 thousand dollars, which we plan to commence in July 2011. This
remodel will be funded by cash from operations.
 Discretionary Upgrades:
  
    
    Sterling Heights, Michigan  BWW  in June 2010, we completed a remodel of this
location funded by cash from operations in the amount of $97 thousand dollars. This
remodel was discretionary and consisted primarily of audio/video equipment upgrades and a
freshening up of the interior to enhance the guest experience.
 
    
    Ferndale, Michigan  BWW  in September 2010, we completed a remodel of this location
funded by cash from operations in the amount of $250 thousand dollars. This remodel was
discretionary but strategic due to increased market competition and higher expectations of
our guests. It included audio/video equipment upgrades and significant interior
architectural changes.
   OFF BALANCE SHEET ARRANGEMENTS
    30




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##### Table of Contents



CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
   FASB Codification Discussion
 Accounting for
Leases.
 FASB Accounting Standards
Codification, Leases.
 Property and Equipment
    31




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##### Table of Contents



Deferred Tax Assets
  
 Item 3. Quantitative and Qualitative Disclosure About Market Risks
  
 Item 4. Controls and Procedures
   
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
   32




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##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  Director
    
    Option Vesting DatesT. Michael Ansley
    
    10,000 shares on July 31, 2011
10,000 shares on July 31, 2012
10,000 shares on July 31, 2013David G. Burke
    
    10,000 shares on July 31, 2011
10,000 shares on July 31, 2012
10,000 shares on July 31, 2013Jay A. Dusenberry
    
    10,000 shares on July 31, 2011
10,000 shares on July 31, 2012
10,000 shares on July 31, 2013David Ligotti
    
    10,000 shares on July 31, 2011
10,000 shares on July 31, 2012
10,000 shares on July 31, 2013Gregory J. Stevens
    
    10,000 shares on July 31, 2011
10,000 shares on July 31, 2012
10,000 shares on July 31, 2013Bill McClintock
    
    10,000 shares on June 3, 2011
10,000 shares on June 3, 2012
10,000 shares on June 3, 2013Joseph M. Nowicki
    
    10,000 shares on June 3, 2011
10,000 shares on June 3, 2012
10,000 shares on June 3, 2013
 
 Item 3. Defaults Upon Senior Securities
  
 Item 5. Other Information
   33




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##### Table of Contents



Item 6. Exhibits
  3.1
    
    
    Certificate of Incorporation (filed as an exhibit to the Companys Registration Statement on
Form S-1, as filed with the Securities and Exchange Commission on August 10, 2007, and
incorporated herein by this reference).3.2
    
    
    By-Laws (filed as an exhibit to the Companys Registration Statement on Form S-1, as filed
with the Securities and Exchange Commission on August 10, 2007, and incorporated herein by
this reference).10.1
    
    
    Buffalo Wild Wings Franchise Agreement dated July 29, 2010 by and between Buffalo Wild Wings
International, Inc. and Anker, Inc., a wholly-owned subsidiary of the Company.10.2
    
    
    Renewal Addendum to Buffalo Wild Wings Franchise Agreement dated July 29, 2010, by and
between Buffalo Wild Wings International, Inc. and Anker, Inc., a wholly-owned subsidiary of
the Company.10.3
    
    
    Buffalo Wild Wings Area Development Agreement dated July 18, 2003, by and between Buffalo
Wild Wings International, Inc. and MCA Enterprises, Inc. (subsequently assigned to AMC Wings,
Inc., a wholly-owned subsidiary of the Company).10.4
    
    
    Transfer
Agreement dated March 20, 2007, by MCA Enterprises Brandon, Inc.
(formerly  MCA
Enterprises, Inc.), T. Michael Ansley, Mark C. Ansley, Thomas D. Ansley, Steven Menker, Jason
Curtis and AMC Wings, Inc. and Buffalo Wild Wings International, Inc.10.5
    
    
    Amendment to Buffalo Wild Wings Area Development Agreement dated March 20, 2007.10.6
    
    
    Amendment to Buffalo Wild Wings Area Development Agreement dated November 5, 2007.10.7
    
    
    Commercial Security Agreement dated June 30, 2008, between Ann Arbor Burgers, Inc., a
wholly-owned subsidiary of the Company, and Home City Federal Savings Bank of Springfield.
(Note: This exhibit is filed to replace Exhibit 10.1 to our Form 8-K filed July 7, 2008, which
contained technical errors that rendered certain portions of the exhibit illegible.)10.8
    
    
    Promissory Note dated June 30, 2008 between Ann Arbor Burgers, Inc., a wholly-owned
subsidiary of the Company, and Home City Federal Savings Bank of Springfield. (Note: This
exhibit is filed to replace Exhibit 10.2 to our Form 8-K filed July 7, 2008, which contained
technical errors that rendered certain portions of the exhibit illegible.)10.9
    
    
    Buffalo Wild Wings Franchise Agreement dated September 7, 2010, by and between Buffalo Wild
Wings International, Inc. and AMC Traverse City, Inc., a wholly-owned subsidiary of the
Company (filed as an exhibit to the Companys Current Report on Form 8-K filed with the
Securities and Exchange Commission on September 10, 2010, and incorporated herein by this
reference).10.10
    
    
    Buffalo Wild Wings Franchise Agreement dated September 7, 2010, by and between Buffalo
Wild Wings International, Inc. and AMC Lakeland, Inc., a wholly-owned subsidiary of the
Company (filed as an exhibit to the Companys Current Report on Form 8-K filed with the
Securities and Exchange Commission on September 10, 2010, and incorporated herein by this
reference).10.11
    
    
    Form of Stock Option Agreement (filed as a exhibit to the Companys Current Report on Form
8-K filed with the Securities and Exchange Commission on August 5, 2010, and incorporated
herein by this reference).10.12
    
    
    Amendment to Buffalo Wild Wings Area Development Agreement dated
December 27, 2003.31.1
    
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a).31.2
    
    
    Certification Chief Financial Officer pursuant to Rule 13a-14(a).32.1
    
    
    Certification Chief Executive Officer pursuant to Section 906 of Sarbanes Oxley Act of 2002.32.2
    
    
    Certification Chief Financial Officer pursuant to Section 906 of Sarbanes Oxley Act of 2002.
  34




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SIGNATURES
  Dated:  November 10, 2010
    DIVERSIFIED RESTAURANT HOLDINGS, INC.By:
    /s/ David G. BurkeDavid G. BurkeChief Financial Officer and Treasurer
(Principal Financial Officer)  35