##### 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 June 27, 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.
 Yes þ No o
 Yes
o No o
 Yes o No þ
 APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS
 Yes o No 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
    
    
    1Consolidated
Statements of Operations (Unaudited)
    
    
    2Consolidated Statements of Comprehensive (Loss) Income (Unaudited)
    
    
    3Consolidated Statements of Stockholders (Deficit) Equity
    
    
    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
    
    
    25Item 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
    
    
    33Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    33Item 3. Defaults Upon Senior Securities
    
    
    33Item 5. Other Information
    
    
    33Item 6. Exhibits
    
    
    33Exhibit 10.1Exhibit 10.2Exhibit 10.3Exhibit 10.4Exhibit 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
 June 27
    
    
    December 272010
    
    
    2009(unaudited)
    
    
    (audited)ASSETSCurrent assetsCash and cash equivalents
    
    $
    668,962
    
    
    $
    649,518Accounts receivable  related party
    
    
    
    
    
    
    254,540Inventory
    
    
    305,517
    
    
    
    125,332Prepaid assets
    
    
    161,475
    
    
    
    103,452Other current assets
    
    
    59,227
    
    
    
    11,219Total current assets
    
    
    1,195,181
    
    
    
    1,144,061Property and equipment, net (Note 3)
    
    
    15,258,823
    
    
    
    7,866,149Intangible assets, net (Note 4)
    
    
    956,570
    
    
    
    411,983Other long-term assets
    
    
    56,144
    
    
    
    49,280Deferred income taxes (Note 8)
    
    
    786,942
    
    
    
    246,754Total assets
    
    $
    18,253,660
    
    
    $
    9,718,227LIABILITIES AND STOCKHOLDERS (DEFICIT) EQUITYCurrent liabilitiesCurrent portion of long-term debt (Notes 5 and 6)
    
    $
    2,233,716
    
    
    $
    1,402,742Accounts payable
    
    
    759,410
    
    
    
    293,984Accrued liabilities
    
    
    885,769
    
    
    
    329,355Deferred rent
    
    
    119,486
    
    
    
    54,273Total current liabilities
    
    
    3,998,381
    
    
    
    2,080,354Accrued rent
    
    
    741,369
    
    
    
    253,625Deferred rent
    
    
    834,272
    
    
    
    422,068Other liabilities  interest rate swap
    
    
    404,921
    
    
    
    167,559Long-term debt, less current portion (Notes 5 and 6)
    
    
    13,054,104
    
    
    
    4,601,909Total liabilities
    
    
    19,033,047
    
    
    
    7,525,515Commitments 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, respectfully, issued and outstanding
    
    
    1,888
    
    
    
    1,863Additional paid-in capital
    
    
    2,622,286
    
    
    
    2,356,155Accumulated deficit
    
    
    (2,998,640
    )
    
    
    (165,306
    )Comprehensive (loss) income
    
    
    (404,921
    )
    
    
    Total stockholders (deficit) equity
    
    
    (779,387
    )
    
    
    2,192,712Total liabilities and stockholders (deficit) equity
    
    $
    18,253,660
    
    
    $
    9,718,227
   1




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DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF OPERATIONS (UNAUDITED)
 Three Months Ended
    
    
    Six Months EndedJune 27
    
    
    June 30
    
    
    June 27
    
    
    June 302010
    
    
    2009
    
    
    2010
    
    
    2009RevenueFood and beverage sales
    
    $
    10,683,821
    
    
    $
    4,305,776
    
    
    $
    19,325,822
    
    
    $
    8,440,786Management and advertising fees
    
    
    
    
    
    
    441,276
    
    
    
    165,886
    
    
    
    897,805Total revenue
    
    
    10,683,821
    
    
    
    4,747,052
    
    
    
    19,491,708
    
    
    
    9,338,591Operating expensesCompensation costs
    
    
    3,397,029
    
    
    
    1,491,686
    
    
    
    5,983,841
    
    
    
    2,850,893Food and beverage costs
    
    
    3,137,948
    
    
    
    1,348,406
    
    
    
    5,810,496
    
    
    
    2,630,402General and administrative
    
    
    2,642,782
    
    
    
    1,019,158
    
    
    
    4,675,377
    
    
    
    2,125,829Pre-opening
    
    
    111,921
    
    
    
    131,277
    
    
    
    217,179
    
    
    
    133,078Occupancy
    
    
    573,619
    
    
    
    275,805
    
    
    
    1,183,785
    
    
    
    550,202Depreciation and amortization
    
    
    640,715
    
    
    
    358,439
    
    
    
    1,163,275
    
    
    
    704,844Total operating expenses
    
    
    10,504,014
    
    
    
    4,624,771
    
    
    
    19,033,953
    
    
    
    8,995,248Operating profit
    
    
    179,807
    
    
    
    122,281
    
    
    
    457,755
    
    
    
    343,343Interest expense
    
    
    (518,143
    )
    
    
    (104,585
    )
    
    
    (668,426
    )
    
    
    (215,892
    )Other income (expense), net
    
    
    (15,658
    )
    
    
    79,295
    
    
    
    (2,567
    )
    
    
    90,514(Loss) income before income taxes
    
    
    (353,994
    )
    
    
    96,991
    
    
    
    (213,238
    )
    
    
    217,965Income tax benefit (provision)
    
    
    244,463
    
    
    
    (26,668
    )
    
    
    354,979
    
    
    
    (68,429
    )Net (loss) income
    
    $
    (109,531
    )
    
    $
    70,323
    
    
    $
    141,741
    
    
    $
    149,536Basic (loss) earnings per share  as reported
    
    $
    (0.006
    )
    
    $
    0.004
    
    
    $
    0.008
    
    
    $
    0.008Fully diluted (loss) earnings per share  as reported
    
    $
    (0.004
    )
    
    $
    0.002
    
    
    $
    0.005
    
    
    $
    0.005Weighted 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
    
    
    
    29,090,000
    
    
    
    29,020,000
   2




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DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED)
 Three Months Ended
    
    
    Six Months EndedJune 27
    
    
    June 30
    
    
    June 27
    
    
    June 302010
    
    
    2009
    
    
    2010
    
    
    2009Net (loss) income
    
    $
    (109,531
    )
    
    $
    70,323
    
    
    $
    141,741
    
    
    $
    149,536Comprehensive (loss) incomeUnrealized changes in fair value of cash flow hedges
    
    
    (404,921
    )
    
    
    
    
    
    
    (404,921
    )
    
    
    Comprehensive (loss) income
    
    $
    (514,452
    )
    
    $
    70,323
    
    
    $
    (263,180
    )
    
    $
    149,536
   3




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##### Table of Contents



DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS (DEFICIT) EQUITY
 (AccumulatedAdditional
    
    
    Deficit)
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Paid-in
    
    
    Retained
    
    
    Comprehensive
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    (Loss) Income
    
    
    Equity (Deficit)Balances  December 27, 2009 (audited)
    
    
    18,626,000
    
    
    $
    1,863
    
    
    $
    2,356,155
    
    
    $
    (165,306
    )
    
    $
    
    
    
    $
    2,192,712Shares issued for warrants exercised at $1.00
per share (Note 7)
    
    
    250,000
    
    
    
    25
    
    
    
    249,975
    
    
    
    
    
    
    
    
    
    
    
    250,000Share-based compensation (Note 7)
    
    
    
    
    
    
    
    
    
    
    16,156
    
    
    
    
    
    
    
    
    
    
    
    16,156Acquisition of BWW restaurants (Note 2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,975,075
    )
    
    
    
    
    
    
    (2,975,075
    )Unrealized changes in fair value of cash flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (404,921
    )
    
    
    (404,921
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    141,741
    
    
    
    
    
    
    
    141,741Balances  June 27, 2010 (unaudited)
    
    
    18,876,000
    
    
    $
    1,888
    
    
    $
    2,622,286
    
    
    $
    (2,998,640
    )
    
    $
    (404,921
    )
    
    $
    (779,387
    )
   4




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##### Table of Contents



DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF CASH FLOWS (UNAUDITED)
 Six Months EndedJune 27
    
    
    June 302010
    
    
    2009Cash flows from operating activitiesNet income
    
    $
    141,741
    
    
    $
    149,536Adjustments to reconcile net income to
net cash provided by (used in) operating activitiesDepreciation and amortization
    
    
    1,163,275
    
    
    
    704,844Loss on disposal of property and equipment
    
    
    217,868
    
    
    
    Share-based compensation
    
    
    16,156
    
    
    
    16,156Deferred income tax (provision) benefit
    
    
    (540,188
    )
    
    
    186,996Changes in operating assets and liabilities that
provided (used) cashAccounts receivable  related party
    
    
    254,540
    
    
    
    (91,028
    )Inventory
    
    
    (23,642
    )
    
    
    (454
    )Prepaid assets
    
    
    6,191
    
    
    
    (2,687
    )Other current assets
    
    
    (48,008
    )
    
    
    172,728Intangible assets
    
    
    (81,068
    )
    
    
    (1,210
    )Other assets
    
    
    (6,864
    )
    
    
    (78,341
    )Accounts payable
    
    
    219,994
    
    
    
    (49,388
    )Accrued liabilities
    
    
    257,044
    
    
    
    77,240Accrued rent
    
    
    (117,201
    )
    
    
    59,299Deferred rent
    
    
    215,018
    
    
    
    (27,467
    )Net cash provided by operating activities
    
    
    1,674,856
    
    
    
    1,116,224Cash flows from investing activitiesPurchases of property and equipment
    
    
    (2,501,501
    )
    
    
    (1,127,110
    )Net cash used in investing activities
    
    
    (2,501,501
    )
    
    
    (1,127,110
    )Cash flows from financing activitiesProceeds from issuance of notes payable  related party
    
    
    236,198
    
    
    
    8,750Proceeds from issuance of long-term debt
    
    
    963,065
    
    
    
    858,779Repayment of notes payable  related party
    
    
    (25,084
    )
    
    
    (50,370
    )Repayments of long-term debt
    
    
    (578,090
    )
    
    
    (516,026
    )Proceeds from issuance of common stock
    
    
    250,000
    
    
    
    Net cash provided by financing activities
    
    
    846,089
    
    
    
    301,133Net increase in cash and cash equivalents
    
    
    19,444
    
    
    
    290,247Cash and cash equivalents, beginning of period
    
    
    649,518
    
    
    
    133,865Cash and cash equivalents, end of period
    
    $
    668,962
    
    
    $
    424,112
   5




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##### Table of Contents



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
  (Loss) Earnings per Share
 Earnings per Share
 Concentration Risks
  Use of Estimates
   10




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##### Table of Contents



Financial Instrument
     Recent Accounting Pronouncements
 Subsequent Events
 The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting Principles  a
Replacement of FASB Statement No. 162.
  11




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##### Table of Contents



Fair Value
Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements Fair Value Measurements and Disclosures,
  Reclassifications
  2. SIGNIFICANT BUSINESS TRANSACTIONS
 Acquisition of Nine Affiliated BWW Restaurants
   Execution of $15 Million Comprehensive Credit 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
  June 27
    
    
    December 272010
    
    
    2009Land
    
    $
    385,959
    
    
    $
    Building
    
    
    2,243,861
    
    
    
    Equipment
    
    
    7,312,657
    
    
    
    3,008,670Furniture and fixtures
    
    
    1,974,209
    
    
    
    831,313Leasehold improvements
    
    
    12,590,925
    
    
    
    6,087,233Restaurant construction in progress
    
    
    365,392
    
    
    
    126,804Total
    
    
    24,873,003
    
    
    
    10,054,020Less accumulated depreciation
    
    
    (9,614,180
    )
    
    
    (2,187,871
    )Property and equipment, net
    
    $
    15,258,823
    
    
    $
    7,866,149
   4. INTANGIBLES
  June 27
    
    
    December 272010
    
    
    2009Amortized Intangibles:Franchise fees
    
    $
    358,750
    
    
    $
    141,250Trademark
    
    
    2,500
    
    
    
    2,500Loan fees
    
    
    149,825
    
    
    
    15,691Total
    
    
    511,075
    
    
    
    159,441Less accumulated amortization
    
    
    (96,723
    )
    
    
    (11,818
    )Amortized Intangibles, net
    
    
    414,352
    
    
    
    147,623Unamortized Intangibles:Liquor licenses
    
    
    542,218
    
    
    
    264,360Total Intangibles, net
    
    $
    956,570
    
    
    $
    411,983
    14




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##### Table of Contents



5. RELATED PARTY TRANSACTIONS
    Guarantees,
     15




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##### Table of Contents



6. LONG-TERM DEBT
  June 27
    
    
    December 272010
    
    
    2009Senior Secured Term Loan 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%.
    
    $
    8,914,220
    
    
    
    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).
    
    
    1,150,000
    
    
    
    Note payable to a bank secured by a junior
mortgage on the Brandon Property,
corporate guaranties, and a personal
guaranty. The agreement provides for a
short-term bridge loan (which will be
transferred to a long-term SBA loan within
90  120 days), matures in April 2011, and
requires interest-only payments until
maturity. Interest is charged at a
floating rate, adjusted daily, equal to
the Banks Prime Rate plus 3%. The rate at
June 27, 2010 was approximately 6.25%.
    
    
    920,000
    
    
    
    DLOC 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 June 27,
2010 was approximately 4.35%). In
November 2011, if the Company has not
already elected to do so (which is its
intent), 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.
    
    
    657,136
    
    
    
    Unsecured 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.
    
    
    245,754
    
    
    
    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 June 27, 2010 was approximately
4.05%. The note matures in September
2014.
    
    
    48,059
    
    
    
    
  16




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##### Table of Contents



June 27
    
    
    December 272010
    
    
    2009Note 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.
    
    
    14,592
    
    
    
    Various 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 Credit
Facility.
    
    
    
    
    
    
    4,956,607Obligations under capital leases (Note 10)
    
    
    
    
    
    
    693,196Notes payable  related parties (Note 5)
    
    
    3,338,059
    
    
    
    354,848Total long-term debt
    
    $
    15,287,820
    
    
    $
    6,004,651Less current portion
    
    
    (2,233,716
    )
    
    
    (1,402,742
    )Long-term debt, net of current portion
    
    $
    13,054,104
    
    
    $
    4,601,909
  Year
    
    Amount2010
    
    $
    2,233,7162011
    
    
    1,575,5842012
    
    
    1,777,9002013
    
    
    2,099,9892014
    
    
    2,004,175Thereafter
    
    
    5,596,456Total
    
    $
    15,287,820
    17




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##### Table of Contents



7. CAPITAL STOCK (INCLUDING PURCHASE WARRANTS AND OPTIONS)
 CompensationStock Compensation
  Equity
Based Payments to Non-Employees.
  8. INCOME TAXES
  Three Months Ended
    
    
    Six Months EndedJune 27
    
    
    June 30
    
    
    June 27
    
    
    June 302010
    
    
    2009
    
    
    2010
    
    
    2009FederalCurrent
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Deferred
    
    
    295,744
    
    
    
    (71,476
    )
    
    
    410,100
    
    
    
    (105,127
    )StateCurrent
    
    
    (36,502
    )
    
    
    
    
    
    
    (73,004
    )
    
    
    Deferred
    
    
    (14,779
    )
    
    
    44,808
    
    
    
    17,883
    
    
    
    36,698Income Tax
Benefit (Provision)
    
    $
    244,463
    
    
    $
    (26,668
    )
    
    $
    354,979
    
    
    $
    (68,429
    )
  18




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##### Table of Contents



June 27
    
    
    December 272010
    
    
    2009Income tax benefit (provision) at federal statutory rate
    
    $
    58,760
    
    
    $
    (207,455
    )State income tax benefit (provision)
    
    
    (55,121
    )
    
    
    (57,585
    )Permanent differences
    
    
    (24,056
    )
    
    
    (32,111
    )Tax credits
    
    
    70,000
    
    
    
    93,500Other
    
    
    305,396
    
    
    
    (48,413
    )Income tax benefit (provision)
    
    $
    354,979
    
    
    $
    (252,064
    )
  June 27
    
    
    December 272010
    
    
    2009Deferred tax assets:Net operating loss carry forwards
    
    $
    757,922
    
    
    $
    954,370Deferred rent expense
    
    
    566,993
    
    
    
    78,998Start-up costs
    
    
    236,851
    
    
    
    104,327Tax credit carry forwards
    
    
    262,544
    
    
    
    164,366Swap loss recognized for book
    
    
    
    
    
    
    56,970Other  including state deferred tax assets
    
    
    425,757
    
    
    
    193,781Total deferred assets
    
    
    2,250,067
    
    
    
    1,552,812Deferred tax liabilities:Other  including state deferred tax liabilities
    
    
    240,113
    
    
    
    146,325Tax depreciation in excess of book
    
    
    1,223,012
    
    
    
    1,159,733Total deferred tax liabilities:
    
    
    1,463,125
    
    
    
    1,306,058Net deferred income tax assets
    
    $
    786,942
    
    
    $
    246,754
 Income Taxes
   19




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9. OPERATING LEASES (INCLUDING RELATED PARTY)
         20




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21




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Year
    
    Amount2010
    
    $
    2,633,0672011
    
    
    2,476,7802012
    
    
    2,558,8602013
    
    
    2,624,8042014
    
    
    2,496,364Thereafter
    
    
    6,155,604Total
    
    $
    18,945,479
 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
     13. FAIR VALUE OF FINANCIAL INSTRUMENTS
   23




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##### Table of Contents



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
  Director
    
    Option Vesting DatesT. Michael Ansley
    
    10,000 shares on July 31, 201110,000 shares on July 31, 201210,000 shares on July 31, 2013David G. Burke
    
    10,000 shares on July 31, 201110,000 shares on July 31, 201210,000 shares on July 31, 2013Jay A. Dusenberry
    
    10,000 shares on July 31, 201110,000 shares on July 31, 201210,000 shares on July 31, 2013David Ligotti
    
    10,000 shares on July 31, 201110,000 shares on July 31, 201210,000 shares on July 31, 2013Gregory J. Stevens
    
    10,000 shares on July 31, 201110,000 shares on July 31, 201210,000 shares on July 31, 2013Bill McClintock
    
    10,000 shares on June 3, 201110,000 shares on June 3, 201210,000 shares on June 3, 2013Joseph M. Nowicki
    
    10,000 shares on June 3, 201110,000 shares on June 3, 201210,000 shares on June 3, 2013
     24




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##### Table of Contents



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.
 OVERVIEW
 ® ® ®
 ACQUISITION OF NINE AFFILIATED BWW RESTAURANTS
   25




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EXECUTION OF $15 MILLION COMPREHENSIVE CREDIT FACILITY
  PURCHASE OF BUILDING IN BRANDON, FLORIDA
  RESULTS OF OPERATIONS
  REVENUE
 Three Months EndedJune 27
    
    
    June 30
    
    
    $
    
    
    %2010
    
    
    2009
    
    
    Change
    
    
    ChangeRevenueFood and beverage sales
    
    $
    10,683,821
    
    
    $
    4,305,776
    
    
    $
    6,378,045
    
    
    
    148.1
    %Management and advertising fees
    
    
    
    
    
    
    441,276
    
    
    
    (441,276
    )
    
    
    (100.0
    )%Total revenue
    
    $
    10,683,821
    
    
    $
    4,747,052
    
    
    $
    5,936,769
  26




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##### Table of Contents



Six
Months EndedJune 27
    
    
    June 30
    
    
    $
    
    
    %2010
    
    
    2009
    
    
    Change
    
    
    ChangeRevenueFood and beverage sales
    
    $
    19,325,822
    
    
    $
    8,440,786
    
    
    $
    10,885,036
    
    
    
    129.0
    %Management and advertising fees
    
    
    165,886
    
    
    
    897,805
    
    
    
    (731,919
    )
    
    
    (81.5
    )%Total revenue
    
    $
    19,491,708
    
    
    $
    9,338,591
    
    
    $
    10,153,117
  OPERATING EXPENSES
 Three
Months Ended
    
    
    
    
    
    
    
    
    
    
    % Total
    
    
    % TotalJune 27
    
    
    June 30
    
    
    $
    
    
    %
    
    
    Revenue
    
    
    Revenue2010
    
    
    2009
    
    
    Change
    
    
    Change
    
    
    2010
    
    
    2009Operating expensesCompensation costs
    
    $
    3,397,029
    
    
    $
    1,491,686
    
    
    $
    1,905,343
    
    
    
    127.7
    %
    
    
    31.8
    %
    
    
    31.4
    %Food and beverage costs*
    
    
    3,137,948
    
    
    
    1,348,406
    
    
    
    1,789,542
    
    
    
    132.7
    %
    
    
    29.4
    %*
    
    
    31.3
    %*General and administrative
    
    
    2,642,782
    
    
    
    1,019,158
    
    
    
    1,623,624
    
    
    
    159.3
    %
    
    
    24.7
    %
    
    
    21.5
    %Pre-opening
    
    
    111,921
    
    
    
    131,277
    
    
    
    (19,356
    )
    
    
    (14.7
    )%
    
    
    1.0
    %
    
    
    2.8
    %Occupancy
    
    
    573,619
    
    
    
    275,805
    
    
    
    297,814
    
    
    
    108.0
    %
    
    
    5.4
    %
    
    
    5.8
    %Depreciation and amortization
    
    
    640,715
    
    
    
    358,439
    
    
    
    282,276
    
    
    
    78.8
    %
    
    
    6.0
    %
    
    
    7.6
    %Total operating expenses
    
    $
    10,504,014
    
    
    $
    4,624,771
    
    
    $
    5,879,243
 *
    
    Note that the food and beverage costs category of operating expenses uses percentages of revenue
figures based on food and beverage revenue amounts as opposed to total revenue amounts, as is the
case for all other operating expense categories.     27




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##### Table of Contents



Six Months Ended
    
    
    
    
    
    
    
    
    
    
    % Total
    
    
    % TotalJune 27
    
    
    June 30
    
    
    $
    
    
    %
    
    
    Revenue
    
    
    Revenue2010
    
    
    2009
    
    
    Change
    
    
    Change
    
    
    2010
    
    
    2009Operating expensesCompensation costs
    
    $
    5,983,841
    
    
    $
    2,850,893
    
    
    $
    3,132,948
    
    
    
    109.9
    %
    
    
    30.7
    %
    
    
    30.5
    %Food and beverage costs*
    
    
    5,810,496
    
    
    
    2,630,402
    
    
    
    3,180,094
    
    
    
    120.9
    %
    
    
    30.1
    %*
    
    
    31.2
    %*General and administrative
    
    
    4,675,377
    
    
    
    2,125,829
    
    
    
    2,549,548
    
    
    
    119.9
    %
    
    
    24.0
    %
    
    
    22.8
    %Pre-opening
    
    
    217,179
    
    
    
    133,078
    
    
    
    84,101
    
    
    
    63.2
    %
    
    
    1.1
    %
    
    
    1.4
    %Occupancy
    
    
    1,183,785
    
    
    
    550,202
    
    
    
    633,583
    
    
    
    115.2
    %
    
    
    6.1
    %
    
    
    5.9
    %Depreciation and amortization
    
    
    1,163,275
    
    
    
    704,844
    
    
    
    458,431
    
    
    
    65.0
    %
    
    
    6.0
    %
    
    
    7.5
    %Total operating expenses
    
    $
    19,033,953
    
    
    $
    8,995,248
    
    
    $
    10,038,705
 *
    
    Note that the food and beverage costs category of operating expenses uses percentages of revenue
figures based on food and beverage revenue amounts as opposed to total revenue amounts, as is the
case for all other operating expense categories.  28




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INTEREST AND TAXES
   29




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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  construction began in the second quarter of 2010 with
an anticipated opening date of Sunday, August 22, 2010
 
    
    Ft. Myers, Florida  BWW  construction is scheduled to begin in August 2010 with an
anticipated opening date in the fourth quarter of 2010
 
    
    Brighton, Michigan  Bagger Daves  construction is scheduled to begin in September
 2010 with an anticipated opening date in the fourth quarter of 2010
   OFF BALANCE SHEET ARRANGEMENTS
   30




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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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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
   32




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Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 5. Other Information
  
 Item 6. Exhibits
  **2.1
    
    
    Brandon Property Purchase and Sale Agreement dated March 25, 2010 between our subsidiary, MCA
Enterprises, Brandon, Inc. and Florida Wings Group, LLC.*3.1
    
    
    Certificate of Incorporation.*3.2
    
    
    By-Laws.10.1
    
    
    Real Estate Loan Agreement dated June 23, 2010 between our subsidiary, MCA Enterprises
Brandon, Inc., and Bank of America N.A.10.2
    
    
    Bridge Loan Agreement dated June 23, 2010 between our subsidiary, MCA Enterprises Brandon,
Inc., and Bank of America N.A.10.3
    
    
    Promissory Note dated June 23, 2010 between our subsidiary, MCA Enterprises Brandon, Inc.,
and Florida Wings Group, LLC.10.4
    
    
    Buffalo Wild Wings Franchise Agreement dated June 3, 2010 between our subsidiary, AMC Ft.
Myers, Inc., and Buffalo Wild Wings International, Inc.***10.5
    
    
    RBS Development Line of Credit Agreement dated May 5, 2010 between DRH and RBS.***10.6
    
    
    RBS Credit Agreement dated May 5, 2010 between DRH and RBS.31.1
    
    
    Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes Oxley Act of 2002.31.2
    
    
    Certification Chief Financial Officer pursuant to Section 302 of Sarbanes Oxley Act of 2002.32.1
    
    
    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.
 *
    
    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.**
    
    Filed with the Securities and Exchange Commission as an exhibit to the Companys Form 8-K on June
30, 2010.***
    
    Filed with the Securities and Exchange Commission as an exhibit to the Companys Form 8-K on May
10, 2010.  33




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SIGNATURES
  Dated: August 10, 2010
    DIVERSIFIED RESTAURANT HOLDINGS, INC.By:
    /s/ T. Michael AnsleyT. Michael AnsleyPresident, Principal Executive Officer and Director  34




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SIGNATURES
  Dated: August 10, 2010
    DIVERSIFIED RESTAURANT HOLDINGS, INC.By:

/s/
David G. BurkeDavid G. BurkePrincipal Financial Officer
and Treasurer  34