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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 30, 2009
 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 of 
incorporation or formation)
    
    (I.R.S. employer identification
number)
 
 
 No change
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INTERIM FINANCIAL STATEMENTS INDEX
 
 PagePART I  FINANCIAL INFORMATION:Item 1. Financial Statements
    
    
    1Consolidated Balance Sheets  September 30, 2009 (unaudited) and December 31, 2008 (audited)
    
    
    1Consolidated Statements of Operations for the three months and nine months ended September 30, 2009 and
2008 (unaudited)
    
    
    2Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and 2008 (unaudited)
    
    
    3Notes to Interim Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    21Item 3. Quantitative and Qualitative Disclosure About Market Risks
    
    
    27Item 4T. Controls and Procedures
    
    
    27PART II  OTHER INFORMATION:Item 1. Legal Proceedings
    
    
    28Item 1A. Risk Factors
    
    
    28Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    28Item 3. Defaults Upon Senior Securities
    
    
    28Item 4. Submission of Matters to a Vote of Security Holders
    
    
    28Item 5. Other Information
    
    
    28Item 6. Exhibits
    
    
    28Signatures
    
    
    29Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
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DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 September 30
    
    
    December 312009
    
    
    2008Unaudited
    
    
    AuditedASSETSCurrent assetsCash and cash equivalents
    
    $
    334,286
    
    
    $
    133,865Accounts receivable  related party
    
    
    236,979
    
    
    
    192,889Inventory
    
    
    148,090
    
    
    
    157,882Prepaid insurance
    
    
    81,403
    
    
    
    52,440Accounts receivable  other
    
    
    (1,630
    )
    
    
    192,000Other assets
    
    
    31,780
    
    
    
    20,000Total current assets
    
    
    830,908
    
    
    
    749,076Property and equipment
    
    
    8,102,685
    
    
    
    7,817,254Intangible assets, net (Note 3)
    
    
    403,571
    
    
    
    406,982Deferred income taxes
    
    
    277,937
    
    
    
    599,957Total assets
    
    $
    9,615,101
    
    
    $
    9,573,269LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesCurrent portion of long-term debt
    
    $
    1,633,575
    
    
    $
    1,454,867Accounts payable
    
    
    324,218
    
    
    
    660,353Accrued liabilities
    
    
    374,365
    
    
    
    305,302Accrued rent
    
    
    224,244
    
    
    
    113,909Deferred rent
    
    
    489,909
    
    
    
    530,944Total current liabilities
    
    
    3,046,311
    
    
    
    3,065,375Other liabilities  interest rate swap
    
    
    186,735
    
    
    
    253,792Long-term debt, less current portion (Notes 3 and 4)
    
    
    4,805,455
    
    
    
    5,025,227Total liabilities
    
    
    8,038,501
    
    
    
    8,344,394Commitments and contingencies (Notes 3, 4, 7, and 8)Stockholders equity (Note 5)Common stock  $0.0001 par value; 100,000,000 shares
authorized, 18,070,000 shares issued and outstanding
    
    
    1,807
    
    
    
    1,807Additional paid-in capital
    
    
    1,783,134
    
    
    
    1,758,899Accumulated deficit
    
    
    (208,341
    )
    
    
    (531,831
    )Total stockholders equity
    
    
    1,576,600
    
    
    
    1,228,875Total liabilities and stockholders equity
    
    $
    9,615,101
    
    
    $
    9,573,269
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DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS UNAUDITED
 Three Months Ended September 30
    
    
    Nine Months Ended September 302009
    
    
    2008
    
    
    2009
    
    
    2008RevenueFood and beverage sales
    
    $
    4,560,261
    
    
    $
    2,937,982
    
    
    $
    13,001,047
    
    
    $
    6,288,808Management and advertising fees
    
    
    426,332
    
    
    
    428,173
    
    
    
    1,324,137
    
    
    
    1,377,944Total revenue
    
    
    4,986,593
    
    
    
    3,366,155
    
    
    
    14,325,184
    
    
    
    7,666,752Operating expensesCompensation costs
    
    
    1,476,823
    
    
    
    1,185,333
    
    
    
    4,327,716
    
    
    
    2,723,774Food and beverage costs
    
    
    1,397,913
    
    
    
    850,110
    
    
    
    4,028,315
    
    
    
    1,876,929General and administrative
    
    
    1,221,449
    
    
    
    1,176,548
    
    
    
    3,480,356
    
    
    
    2,303,170Occupancy
    
    
    289,244
    
    
    
    220,611
    
    
    
    839,446
    
    
    
    483,256Depreciation and amortization
    
    
    157,293
    
    
    
    225,246
    
    
    
    862,137
    
    
    
    515,734Total operating expenses
    
    
    4,542,722
    
    
    
    3,657,848
    
    
    
    13,537,970
    
    
    
    7,902,863Income from operations
    
    
    443,871
    
    
    
    (291,693
    )
    
    
    787,214
    
    
    
    (236,111
    )Interest expense
    
    
    118,740
    
    
    
    97,408
    
    
    
    334,632
    
    
    
    181,866Other expense (income), net
    
    
    16,148
    
    
    
    3,691
    
    
    
    (74,366
    )
    
    
    20,656Income (loss) before income taxes
    
    
    308,983
    
    
    
    (392,792
    )
    
    
    526,948
    
    
    
    (438,633
    )Income tax (provision) benefit
    
    
    (135,024
    )
    
    
    53,852
    
    
    
    (203,453
    )
    
    
    68,564Net income (loss)
    
    $
    173,959
    
    
    $
    (338,940
    )
    
    $
    323,495
    
    
    $
    (370,069
    )Basic earnings (loss) per share  as reported
    
    $
    0.010
    
    
    $
    (0.019
    )
    
    $
    0.018
    
    
    $
    (0.020
    )Fully diluted earnings (loss) per share  as reported
    
    $
    0.006
    
    
    $
    (0.019
    )
    
    $
    0.011
    
    
    $
    (0.020
    )Weighted average number of shares
outstanding (Note 1)Basic
    
    
    18,070,000
    
    
    
    18,022,826
    
    
    
    18,070,000
    
    
    
    17,895,219Diluted
    
    
    29,020,000
    
    
    
    28,972,826
    
    
    
    29,020,000
    
    
    
    28,805,255
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DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED
 Nine Months Ended September 302009
    
    
    2008Cash flows from operating activitiesNet income (loss)
    
    $
    323,495
    
    
    $
    (370,069
    )Adjustments to reconcile net income (loss) to
net cash provided by operating activitiesDepreciation and amortization
    
    
    862,137
    
    
    
    515,734Loss on disposal of property and equipment
    
    
    2,903
    
    
    
    Share-based compensation
    
    
    24,234
    
    
    
    24,234Deferred income tax benefit
    
    
    322,020
    
    
    
    (69,551
    )Changes in operating assets and liabilities that
provided (used) cashAccounts receivable  related party
    
    
    (44,090
    )
    
    
    16,289Accounts payable
    
    
    (336,135
    )
    
    
    225,211Inventory
    
    
    9,792
    
    
    
    (75,332
    )Prepaid insurance
    
    
    (28,963
    )
    
    
    2,886Accounts receivable  other
    
    
    193,630
    
    
    
    (141,994
    )Intangible assets
    
    
    (1,210
    )
    
    
    (124,020
    )Other assets
    
    
    (11,780
    )
    
    
    (12,000
    )Accrued liabilities
    
    
    2,006
    
    
    
    199,348Accrued rent
    
    
    110,334
    
    
    
    58,965Deferred rent
    
    
    (41,035
    )
    
    
    75,977Net cash provided by operating activities
    
    
    1,387,338
    
    
    
    325,678Cash flows used in investing activitiesPurchases of property and equipment
    
    
    (287,073
    )
    
    
    (4,222,970
    )Cash from financing activitiesProceeds from issuance of notes payable  related party
    
    
    13,125
    
    
    
    204,800Proceeds from issuance of long term debt
    
    
    
    
    
    
    3,680,296Repayment of notes payable  related party
    
    
    (75,858
    )
    
    
    (338,989
    )Repayments of long-term debt
    
    
    (837,111
    )
    
    
    734,998Net cash (used in) provided by financing activities
    
    
    (899,844
    )
    
    
    4,281,105Net increase in cash and cash equivalents
    
    
    200,421
    
    
    
    383,813Cash and cash equivalents, beginning of period
    
    
    133,865
    
    
    
    275,728Cash and cash equivalents, end of period
    
    $
    334,286
    
    
    $
    659,541Supplemental schedule of non-cash investing and financing
activities:Capital expenditures funded by capital lease borrowings
    
    $
    858,779
    
    
    $
    
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DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
 
 NOTES
TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 1.
    

    BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESNature of BusinessDiversified Restaurant Holdings, Inc. (DRH) was formed September 25, 2006. DRH and its three wholly-owned subsidiaries AMC Group, Inc, (AMC), AMC Wings, Inc. (WINGS),
and AMC Burgers, Inc. (BURGERS) (collectively, the Company), develop, own, and operate, as well as render management and marketing services for, Buffalo Wild Wings
restaurants located throughout Michigan and Florida and the Companys own restaurant concept, Bagger Daves Legendary Burgers and Fries (Bagger Daves), as detailed below.The following organizational chart outlines the corporate structure of the Company and
its subsidiaries, all of which are wholly-owned by the Company. A brief textual description
of the entities follows the organizational chart. DRH is incorporated in the State of
Nevada. All other entities are incorporated in the State of Michigan.
 
 
 1
    
    Wings is under contract with Buffalo Wild Wings, Inc to open
20 additional stores by 20172
    
    Wings has the option to purchase nine existing affiliate BBW restaurants currently managed by
AMC3
    
    Burgers plans to franchise the Bagger Daves concept through Bagger Daves Franchising Corp. 4




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DIVERSIFIED
RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 AMC, formed on March 28, 2007, serves as the operational and administrative center for the
Company. AMC renders management and marketing services to WINGS and BURGERS and their
subsidiaries and nine Buffalo Wild Wings restaurants affiliated with the Company through
common ownership and management control but not required to be consolidated for financial
reporting purposes. Services rendered by AMC include marketing, restaurant operations,
restaurant management consultation, the hiring and training of management and staff, and
other management services reasonably required in the ordinary course of restaurant
operations.
 WINGS was formed on March 12, 2007 to hold Buffalo Wild Wings restaurants developed by the
Company. WINGS, through its subsidiaries, holds seven Buffalo Wild Wings restaurants
currently in operation. Each of WINGS subsidiaries is named for the location of the
restaurant it holds. The subsidiaries that hold restaurants currently in operation are:
 Date ofSubsidiary
    
    Restaurant OpeningAMC North Port, Inc.
    
    August 2007AMC Riverview, Inc.
    
    August 2007AMC Grand Blanc, Inc.
    
    March 2008AMC Troy, Inc.
    
    July 2008AMC Petoskey, Inc.
    
    August, 2008AMC Flint, Inc.
    
    December 2008AMC Port Huron, Inc.
    
    June 2009
 The Company has also executed franchise agreements with Buffalo Wild Wings International,
Inc. to open two more restaurants in 2010, one in Chesterfield Township, Michigan and the
other in Marquette, Michigan. These restaurants will be held by AMC Chesterfield, Inc. and
AMC Marquette, Inc., respectively. The Company is economically dependent on retaining its
franchise rights with Buffalo Wild Wings, Inc. Each of the franchise agreements has a
specific expiration date ranging from September 28, 2026 through October 20, 2029, depending
on the date that each was executed and its initial term. The franchise agreements are
renewable at the option of the franchisor and are generally renewable if the franchisee has
complied with the franchise agreement. The Company is in compliance with the terms of these
agreements at September 30, 2009. The Company is under contract with Buffalo Wild Wings,
International, Inc. to open 20 additional stores by 2017. The Company also holds an option
to purchase the nine (9) affiliated restaurants that are currently managed by AMC. The
Company plans to exercise this option in 2010.
 BURGERS was formed on March 12, 2007 to own the Companys Bagger Daves restaurants, a new
fast casual dining concept developed by the Company. BURGERS subsidiaries Ann Arbor
Burgers, Inc. and Berkley Burgers, Inc. own restaurants currently in operation in Ann Arbor,
Michigan and Berkley, Michigan, respectively. BURGERS also has a
wholly-owned subsidiary named Bagger Daves Franchising
Corporation that was formed to act as the franchisor for the Bagger
Daves Legendary Burgers and Fries concept. Our Board has
authorized, and the Company has taken, action to secure our rights to
franchise Bagger Daves restaurants in Indiana, Michigan, Ohio
and Illinois. We are currently authorized to sell Bagger Daves
franchises in Indiana, Michigan and Ohio, and our application in
Illinois is under review. We have not yet franchised any Bagger
Daves restaurants.
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DIVERSIFIED
RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 We follow accounting standards set by the Financial Accounting Standards Board, commonly
referred to as the FASB. The FASB sets generally accepted accounting principles (GAAP)
that we follow to ensure we consistently report our financial condition, results of
operations and cash flows. References to GAAP issued by the FASB in these footnotes are to
the FASB Accounting Standards Codification,sometimes referred to as the Codification or
ASC. The FASB finalized the Codification effective for periods ending on or after September
15, 2009. Prior FASB standards like FASB Statement No. 13, Accounting for Leases,are no
longer being issued by the FASB. For further discussion of the Codification, see FASB
Codification Discussion in Managements Discussion and Analysis of Financial Condition and
Results of Operations (commonly referred to as MD&A) elsewhere in this report.Principles of Consolidation
 The consolidated financial statements include the accounts of DRH and its wholly owned
subsidiaries AMC, WINGS and its subsidiaries, and BURGERS and its subsidiaries.
 All significant intercompany accounts and transactions have been eliminated upon
consolidation.Segment Reporting
 The Company has determined that it does not have any separately reportable business segments
at September 30, 2009 and December 31, 2008.Cash and Cash Equivalents
 Cash and cash equivalents consist of cash on hand and demand deposits in banks. The
Company considers all highly liquid investments purchased with original maturities of three
months or less to be cash equivalents. The Company, at times throughout the year, may in
the ordinary course of business maintain cash balances in excess of federally insured
limits. Management does not believe the Company is exposed to any unusual risks on such
deposits.Revenue Recognition
 Management and advertising fees are calculated by applying a percentage as stipulated in a
management services agreement to managed restaurant revenues. Revenues derived from
management and advertising fees are recognized in the period in which they are earned, which
is the period in which the management services are rendered. Revenues from food and
beverages sales are recognized and generally collected at the point-of-sale.Accounts Receivable  Related Party
 Accounts receivable are stated at the amount management expects to collect from outstanding
balances. Balances that are outstanding after management has used reasonable collection
efforts are written off with a corresponding charge to bad debt expense. The balances at
September 30, 2009 and December 31, 2008 relate principally to management and advertising
fees charged to and intercompany transactions with the related Buffalo Wild Wings
restaurants that are managed by AMC and arise in the ordinary course of business (see Note
4). Management does not believe any allowances for doubtful accounts are necessary at
September 30, 2009 or December 31, 2008.Accounting for Gift Cards
 The Company records the actual dollar amount of gift card liabilities at period end. The
liability is included in accrued liabilities in the consolidated balance sheets. As of
September 30, 2009, the Companys gift card liability was approximately $30,275, compared to
approximately $68,456 at December 31, 2008. Florida law prohibits gift card expiration
dates, expiration periods and any post-sale charges or fees. Michigan law states that gift
cards cannot expire and any post-sale fees cannot be assessed until
five (5) years after the date of gift card purchase by consumer. At this time, there is no
breakage for the Company to record.
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DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 Lease Accounting
 Certain operating leases provide for minimum annual payments that increase over the life of
the lease. The aggregate minimum annual payments are expensed on a straight-line basis
beginning when we take possession of the property and extending over the term of the related
lease. The amount by which straight-line rent exceeds actual lease payment requirements in
the early years of the lease is accrued as deferred rent and reduced in later years when the
actual cash payment requirements exceed the straight-line expense. The Company also
accounts, in its straight-line computation, for the effect of any rental holidays or
tenant incentives.Inventory
 Inventory, which consists mainly of food and beverage products, is valued at the lower of
cost determined on the first-in, first-out basis, or market.Prepaid Expenses and Other Assets
 Prepaid expenses consist principally of prepaid insurance and are recognized ratably as
operating expense over the period covered by the unexpired premium. Other assets consist
principally of franchise fees, trademarks and loan fees, which are deferred and amortized to
operating expense on a straight line basis over the term of the related underlying
agreements, which are as follows:
 Franchise fees
    
    15 yearsTrademarks
    
    15 yearsLoan fees
    
    2 to 7 years (loan term)
 Liquor licenses are deemed to have an indefinite life. Management annually reviews these
assets to determine whether carrying values have been impaired. During the period ended
September 30, 2009, no impairments relating to intangible assets with finite or infinite
lives were recognized.Property and Equipment
 Property and equipment are stated at cost. Major improvements and renewals are capitalized,
while ordinary maintenance and repairs are expensed. Management annually reviews these
assets to determine whether carrying values have been impaired.
 The Company capitalizes as restaurant construction-in-progress costs incurred in connection
with the design, build out and furnishing of its owned restaurants. Such costs consist
principally of leasehold improvements, directly related costs such as architectural and
design fees, construction period interest (when applicable) and equipment, furniture and
fixtures not yet placed in service.Depreciation and Amortization
 Depreciation on non-restaurant equipment, furniture and fixtures is computed using the
straight-line method over the estimated useful lives of the related assets which range from
five to seven years. Depreciation on restaurant equipment, furniture and fixtures is
computed on the straight-line method over the estimated useful lives of the related assets,
which range from five to seven years. Restaurant leasehold improvements are amortized over
the shorter of the lease term or the useful life of the related improvement. Restaurant
construction-in-progress is not amortized or depreciated until the related assets are placed
into service. In the current quarter, the Company determined that certain assets that were
being depreciated as equipment were actually part of leasehold improvements. Depreciation
has been updated to reflect this re-classification.
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DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 Advertising
 Advertising expenses are recognized in the period in which they are incurred. Advertising
expense was $146,511 for the three months ended September 30, 2009 and was $303,912 for the
three months ended September 30, 2008. Advertising expense was $406,912 for the nine months
ended September 30, 2009 and was $465,549 for the nine months ended September 30, 2008.Income Taxes
 Deferred income tax assets and liabilities are computed for differences between the
financial statement and tax bases of assets and liabilities that will result in taxable or
deductible amounts in the future, based on enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets to the amount
expected to be realized. Income tax expense is the tax payable or refundable for the period
plus or minus the change during the period in deferred tax assets and liabilities.Earnings (Loss) Per Share
 Earnings (loss) per share are calculated under the provisions of FASB ASC 260, Earnings per
Share. ASC 260 requires a dual presentation of basic and diluted earnings per share on
the face of the income statement. Diluted reflects the potential dilution of all common
stock equivalents except in cases where the effect would be anti-dilutive.Concentration Risks
 Approximately 9% and 18% of the Companys revenues during the nine month period ended
September 30, 2009 and 2008, respectively, are generated from the management of Buffalo Wild
Wings restaurants located in Michigan and Florida, which are related under common ownership
and management control (see Note 4). Approximately 83% and 63% of food and beverage sales
came from restaurants located in Michigan during the nine month period ended September 30,
2009 and 2008, respectively.Use of Estimates
 The preparation of consolidated financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the reported amounts of
income and expenses during the reporting period. Actual results could differ from those
estimates.Financial Instrument
 The Company utilizes interest rate swap agreements with a bank to fix interest rates on a
portion of the Companys portfolio of variable rate debt which reduces exposure to interest
rate fluctuations. The Company does not use any other types of derivative financial
instruments to hedge such exposures, nor does it use derivatives for speculative purposes.
 The Company records the fair value of their interest rate swaps on the balance sheet in
other assets or other liabilities depending on the fair value of the swaps. The terms of
the agreements match those of the underlying debt and therefore are classified as
non-current. Fair value adjustments are recorded each period in other income or other
expense on the statement of operations. The notional value of interest rate swap agreements
in place at September 30, 2009 was approximately $2,588,000. The expiration dates of these
agreements are consistent with debt instruments as described in Note 5.
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DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 Recent Accounting Pronouncements
 In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair
Value Measurements. This Statement replaces multiple existing definitions of fair value
with a single definition, establishes a consistent framework for measuring fair value, and
expands financial statement disclosures regarding fair value measurements. This Statement
applies only to fair value measurements that are already required or permitted by other
accounting standards and does not require any new fair value measurements. SFAS 157 is
effective for fiscal years beginning subsequent to November 15, 2007. The Company adopted
SFAS No. 157 on January 1, 2008, which did not have a material effect on the consolidated
financial statements.
 In December 2007, the FASB issued SFAS No. 141(R), Business Combinations(SFAS 141(R)),
which retains the fundamental requirements in Statement 141 that the acquisition method of
accounting (which Statement 141 called the purchase method) be used for all business
combinations and for an acquirer to be identified for each business combination. SFAS No.
141(R) requires an acquirer to recognize the assets acquired, the liabilities assumed, and
any non-controlling interest in the acquiree at the acquisition date, measured at their fair
values as of that date, with limited exceptions. SFAS No. 141(R) retains the guidance in
Statement 141 for identifying and recognizing intangible assets separately from goodwill and
applies prospectively to business combinations for which the acquisition date is on or after
the beginning of the first annual reporting period beginning on or after December 15, 2008.
An entity may not apply it before that date. The Company is currently evaluating the
requirements of SFAS No. 141(R) and cannot determine the impact future acquisitions may have
on its consolidated financial statements.
 In March 2008, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 161,
Disclosures about Derivative Investments and Hedging Activities, an amendment of FASB
Statement No. 133, which requires additional disclosures about the objectives of the
derivative instruments and hedging activities, the method of accounting for such instruments
under SFAS No. 133 and its related interpretations, and a tabular disclosure of the effects
of such instruments and related hedged items on the Companys financial position, financial
performance, and cash flows. SFAS No. 161 is effective for the Company beginning January 1,
2009. The Company is currently assessing the potential impact, if any, that adoption of SFAS
No. 161 may have on the Companys consolidated financial statements.
 In May 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS 165). SFAS 165
provides general standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available to be issued.
In addition, SFAS 165 requires the disclosure of the date through which an entity has
evaluated subsequent events and the basis for that date.
 2.

    
    PROPERTY AND EQUIPMENT, NET
 Property and equipment are comprised of the following assets:
 September 30
    
    
    December 312009
    
    
    2008Equipment
    
    $
    3,017,403
    
    
    $
    2,613,488Furniture and fixtures
    
    
    831,313
    
    
    
    767,979Leasehold improvements
    
    
    6,088,762
    
    
    
    5,401,301Restaurant construction-in-progress
    
    
    13,467
    
    
    
    27,410Total
    
    
    9,950,945
    
    
    
    8,810,178Less accumulated depreciation
    
    
    1,848,260
    
    
    
    992,924Property and equipment, net
    
    $
    8,102,685
    
    
    $
    7,817,254
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DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 3.
    
    INTANGIBLES
 Intangible assets are comprised of the following:
 September 30
    
    
    December 312009
    
    
    2008Amortized IntangiblesFranchise Fees
    
    $
    131,250
    
    
    $
    131,250Trademark
    
    
    2,500
    
    
    
    2,500Loan Fees
    
    
    15,691
    
    
    
    15,691Total
    
    
    149,441
    
    
    
    149,441Less accumulated amortization
    
    
    10,230
    
    
    
    5,609Amortized Intangibles, net
    
    
    139,211
    
    
    
    143,832Unamortized IntangiblesLiquor Licenses
    
    
    264,360
    
    
    
    263,150Total Intangibles, net
    
    $
    403,571
    
    
    $
    406,982
 Amortization expense for the nine months ended September 30, 2009 and 2008 was $4,621 and
$3,301, respectively. Based on the current intangible assets and their estimated useful
lives, amortization expense for fiscal 2009, 2010, 2011, 2012 and 2013 is projected to total
approximately $6,000 per year.
 4.
    
    RELATED PARTY TRANSACTIONS
 Fees for monthly accounting and financial statement compilation services are paid to an
entity owned by a Director and stockholder of the Company. Fees paid during the three
months ended September 30, 2009 and 2008 were $23,760 and $17,244, respectively. Fees paid
during the nine months ended September 30, 2009 and 2008 were $63,636 and $43,675,
respectively.
 Management and advertising fees are earned from restaurants affiliated with the Company
through common ownership and management control. Fees earned during the three months ended
September 30, 2009 and 2008 totaled $426,332 and $428,173, respectively. Fees earned during
the nine months ended September 30, 2009 and 2008 were $1,324,137 and $1,377,944,
respectively. Accounts receivable arising from such billed fees were $112,387 and $140,034
at September 30, 2009 and December 31, 2008, respectively. Accounts receivable from related
parties also includes amounts due from properties under common ownership and control that
are included in the Companys Michigan Business Tax filing, representing tax benefits
realized by these related parties from offsetting state income tax that would be due on an
individual basis with tax losses from the Company (see Note 7). This amounts to $118,567 as
of September 30, 2009. The remainder of accounts receivable  related party, at September
30, 2009 consists of amounts due to DRH from managed restaurants for other fees paid on
their behalf.
 The Company is a guarantor of debt of nine entities that are affiliated through common
ownership and management control. Under the terms of the guarantees, the Companys maximum
liability is equal to the unpaid principal and any unpaid interest. There are currently no
separate agreements that provide recourse for the Company to recover any amounts from third
parties should the Company be required to pay any amounts or otherwise perform under the
guarantees, and there are no assets held either as collateral or by third parties, that,
under the guarantees, the Company could liquidate to recover all or a portion of any amounts
required to be paid under the guarantees. The event or circumstance that would require the
Company to perform under the guarantee is an event of default. An event of default is
defined in the related note agreements principally as a) default of any liability,
obligation, or covenant with a bank, including failure to pay, b) failure to maintain
adequate collateral security value, or c) default of any material liability or obligation to
another party. As of September 30, 2009, the carrying amount of the underlying debt
obligations of the related entities was, in aggregate, approximately
$3,119,000 and the Companys guarantee extends for the full term of the debt agreements, the last of which
expires in 2019.
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DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 This amount is also the maximum potential amount of future payments the
Company could be required to make under the guarantees. As noted above, the Company and the
related entities for which it has provided the guarantees operate under common ownership and
management control and, in accordance with FASB ASC 460, Guarantees,the initial recognition
and measurement provisions of ASC 460 do not apply. At September 30, 2009, payments on the
debt obligations were current.
 Long term debt (Note 5) contains two promissory notes in the amount of $100,000 each, along
with accrued interest, due to two of DRHs stockholders. The notes bear interest at a rate
of 3.2% per annum and are being repaid over a two-year period that commenced January 2009 in
monthly installments of approximately $4,444 each.
 Long term debt (Note 5) also includes two notes in the amount of $95,000 each and one note
in the amount of $142,500 to three of DRHs stockholders. The notes bear interest at 5.26%
and are due, along with accumulated interest, on November 1, 2009. At maturity, the note
holders, at their option, may elect to use all or part of the principal and interest due, at
that time, to exercise the private placement warrants previously issued to them in November
2006 (Note 6).
 See financial statement Note 8 for related party lease transactions.
 5.
    
    LONG TERM DEBTLong-term debt consists of the following obligations:
 September 30
    
    December 312009
    
    2008Note payable to a bank secured by the
property and equipment of AMC Grand Blanc,
Inc. as well as corporate and personal
guarantees of DRH, certain stockholders, and
various related parties. The agreement
calls for interest only payments through
February 2009 with monthly principal and
interest payments of approximately $15,000
for the period beginning March 2009 through
maturity in February 2011. Interest is
charged based on the one month London
InterBank Offered Rate (LIBOR) plus 2.5%
(effective annual rate of approximately
2.75% at September 30, 2009).
    
    $
    249,877
    
    
    $
    349,915Note payable to a bank secured by the
property and equipment of AMC Grand Blanc,
Inc. as well as corporate and personal
guarantees of DRH, certain stockholders, and
various related parties. Scheduled monthly
principal and interest payments are
approximately $11,800 through maturity in
February 2015. Interest is charged based on
a swap arrangement designed to yield a fixed
annual rate of approximately 6.05%.
    
    
    659,767
    
    
    
    735,829Note payable to a bank secured by the
property and equipment of AMC Petoskey, Inc.
as well as corporate and personal guarantees
of DRH, certain stockholders, and various
related parties. The agreement calls for
interest only payments through February 2009
with monthly principal and interest payments
of approximately $14,800 for the period
beginning March 2009 through maturity in
February 2011. Interest is charged based on
the one month LIBOR rate plus 2.5%
(effective annual rate of approximately
2.75% at September 30, 2009).
    
    
    244,690
    
    
    
    345,445
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DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 September 30
    
    December 312009
    
    2008Note payable to a bank secured by the
property and equipment of AMC Petoskey, Inc.
as well as corporate and personal guarantees
of DRH, certain stockholders, and various
related parties. The agreement calls for
payments of principal and interest of
approximately $12,200 for the period
beginning July 2008 through maturity in
September 2015. Interest is charged based
on a swap arrangement designed to yield a
fixed annual rate of approximately 6.98%.
    
    
    686,359
    
    
    
    757,153Note payable to a bank secured by the
property and equipment of Berkley Burgers,
Inc. as well as corporate and personal
guarantees of DRH, certain stockholders, and
various related parties. Scheduled monthly
principal and interest payments are
approximately $6,900 including annual
interest charged based on a swap arrangement
designed to yield a fixed annual rate of
approximately 6.95%. The note matures in
November 2014.
    
    
    375,271
    
    
    
    417,051Note payable to a bank secured by the
property and equipment of AMC Troy, Inc. as
well as corporate and personal guarantees of
DRH, certain stockholders, and various
related parties. The agreement calls for
monthly payments of principal and interest
of approximately $15,600 for the period
beginning July 2008 through maturity in
September 2015. Interest is charged based
on a swap arrangement designed to yield a
fixed annual rate of approximately 7.28%.
    
    
    866,504
    
    
    
    955,417Note payable to a bank secured by the
property and equipment of AMC Troy, Inc. as
well as corporate and personal guarantees of
DRH, certain stockholders, and various
related parties. The agreement calls for a
line of credit up to $476,348, and interest
only payments through February 2009 with
monthly principal and interest payments of
approximately $8,600 for the period
beginning March 2009 through maturity in
February 2014. Interest is charged based on
the one month LIBOR plus 2.75% (effective
annual rate of approximately 3.00% at
September 30, 2009).
    
    
    420,774
    
    
    
    476,348Note payable to a bank secured by the
property and equipment of AMC North Port,
Inc. as well as corporate and personal
guarantees of DRH, certain stockholders, and
various related parties. Scheduled monthly
principal and interest payments are
approximately $12,400 with annual interest
charged at 9.15%. The note matures in
November 2014.
    
    
    625,782
    
    
    
    696,707Note payable to a bank secured by the
property and equipment of AMC Riverview,
Inc. as well as corporate and personal
guarantees of DRH, certain stockholders, and
various related parties. Scheduled monthly
principal and interest payments are
approximately $12,200 with annual interest
charged at 8.67%. The note matures in
November 2014.
    
    
    633,022
    
    
    
    704,449
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DIVERSIFIED
RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 September 30
    
    December 312009
    
    2008Note payable to a bank secured by generally all
assets of Ann Arbor Burgers, Inc. as well as
personal guarantees of certain stockholders,
and various related parties. Scheduled monthly
principal and interest payments are
approximately $7,669. Interest is charged at a
fixed annual rate of approximately 7.50%. The
note matures in December 2015.
    
    
    458,051
    
    
    
    500,000Obligation under capital lease (see note 9)
    
    
    739,849
    
    
    
    Notes payable  related parties (see note 4)
    
    
    479,084
    
    
    
    541,780Total long-term debt
    
    $
    6,439,030
    
    
    $
    6,480,094Less current portion
    
    
    1,633,575
    
    
    
    1,454,867Long-term debt, net of current portion
    
    $
    4,805,455
    
    
    $
    5,025,227
 Scheduled principal maturities of long-term debt for each of the five years succeeding
December 31, 2008 and thereafter are summarized as follows:
 Year
    
    Amount2009
    
    $
    1,633,5752010
    
    
    1,168,0912011
    
    
    1,031,8302012
    
    
    1,024,8352013
    
    
    882,534Thereafter
    
    
    698,165Total
    
    $
    6,439,030
 Interest expense was $118,740 and $97,408 (including related party interest expense of
$5,555 in 2009 and $3,000 in 2008  see Note 4) in the three months ended September 30,
2009 and 2008, respectively. Interest expense was $334,632 and $181,866 for the nine months
ended September 30, 2009 and 2008, respectively (including related party interest expense of
$17,272 in 2009 and $7,600 in 2008).The above agreements contain various customary financial covenants generally based on the
performance of the specific borrowing entity and other related entities. The more
significant covenants consist of a minimum global debt service ratio, maximum global funded
indebtedness to EBITDA ratio and a Corporate Fixed Charge Coverage Ratio.
 6.
    
    CAPITAL STOCK (INCLUDING PURCHASE WARRANTS AND OPTIONS)On July 30, 2007, DRH granted options for the purchase of 150,000 shares of common stock to
the directors of the Company. These options vest ratably over a three year period and
expire nine years from issuance. Once vested, the options can be exercised at a price of
$2.50 per share. Stock option expense of $8,077 and $8,078, as determined using the
Black-Scholes model, was recognized during the three months ended September 30, 2009 and
2008, respectively, and stock option expense of $24,234 and $24,234 was recognized during
the nine months ended September 30, 2009 and 2008, respectively, as compensation cost in the
consolidated statements of operations and as additional paid-in capital on the consolidated
statement of stockholders equity to reflect the fair value of shares vested as of September
30, 2009. The fair value of
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DIVERSIFIED
RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 unvested shares, as determined using the Black-Scholes model,
is $26,985 as of September 30, 2009. The fair value of the unvested shares will be
amortized ratably over the remaining vesting term. The valuation methodology used an
assumed term based upon the stated term of three years, a risk-free rate of return
represented by the U.S. Treasury Bond rate and volatility factor of 0 based on the concept
of minimum value as defined in FASB ASC 718, CompensationStock Compensation. A dividend
yield of 0% was used because the Company has never paid a dividend and does not anticipate
paying dividends in the reasonably foreseeable future.On November 30, 2006, pursuant to a private placement, DRH issued warrants to purchase
800,000 common shares at a purchase price of $1 per share. These warrants vest over a three
year period from the issuance date and expire three years after issuance. The fair value of
these warrants, which totaled approximately $145,000 as determined using the Black-Scholes
model, was recognized as an offering cost in 2006. The valuation methodology used an
assumed term based upon the stated term of three years, a risk-free rate of return
represented by the U.S. Treasury Bond rate and volatility factor of 0 based on the concept
of minimum value as defined in FASB ASC 718, CompensationStock Compensation.A dividend
yield of 0% was used because the Company has never paid a dividend and does not anticipate
paying dividends in the reasonably foreseeable future.In the third quarter of 2008, the Company issued 140,000 common shares in exchange for
approximately $735,000 raised in connection with its initial public offering.At September 30, 2009, 950,000 shares of authorized common stock are reserved for issuance
to provide for the exercise of the Companys stock purchase warrants and stock options. No
such warrants or options have been exercised as of September 30, 2009.The Company has authorized 10,000,000 shares of preferred stock at a par value of $0.0001.
No preferred shares are issued or outstanding as of September 30, 2009. Any preferences,
rights, voting powers, restrictions, dividend limitations, qualifications, and terms and
conditions of redemption shall be set forth and adopted by a board of directors resolution
prior to issuance of any series of preferred stock.
 7.
    
    INCOME TAXESThe (provision) benefit for income taxes consists of the following components for the three
and nine months ended September 30, 2009 and 2008:
 Three Months Ended
    
    
    Nine Months EndedSeptember 30
    
    
    September 30
    
    
    September 30
    
    
    September 302009
    
    
    2008
    
    
    2009
    
    
    2008FederalCurrent
    
    $
    
    
    
    $
    507
    
    
    $
    
    
    
    $
    (987
    )Deferred
    
    
    (73,816
    )
    
    
    53,345
    
    
    
    (178,943
    )
    
    
    69,551StateCurrent
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deferred
    
    
    (61,208
    )
    
    
    
    
    
    
    (24,510
    )
    
    
    Income Tax
(Provision) Benefit
    
    $
    (135,024
    )
    
    $
    53,852
    
    
    $
    (203,453
    )
    
    $
    68,564
 The (provision) benefit for income taxes is different from that which would be obtained by
applying the statutory federal income tax rate to loss before income taxes. The items
causing this difference are as follows:
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DIVERSIFIED
RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 September 30
    
    
    December 312009
    
    
    2008Income tax (provision) benefit at federal statutory rate
    
    $
    (159,397
    )
    
    $
    291,114State income tax (provision) benefit
    
    
    (24,511
    )
    
    
    158,938Permanent differences
    
    
    (23,450
    )
    
    
    (20,967
    )Tax credits
    
    
    68,750
    
    
    
    59,920Other
    
    
    (64,845
    )
    
    
    31,772Income tax (provision) benefit
    
    $
    (203,453
    )
    
    $
    520,777
 Deferred income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and the amounts
used for income tax purposes. The Company expects the deferred tax assets to be fully
realizable within the next several years. Significant components of the Companys deferred
income tax liabilities and assets are summarized as follows:
 September 30
    
    
    December 312009
    
    
    2008Deferred tax assets:Net operating loss carry forwards
    
    $
    958,931
    
    
    $
    1,028,689Deferred rent expense
    
    
    73,621
    
    
    
    38,699Start-up costs
    
    
    91,884
    
    
    
    77,292Tax credit carry-forwards
    
    
    139,616
    
    
    
    69,260Swap loss recognized for book
    
    
    63,490
    
    
    
    86,289Other  including state deferred tax assets
    
    
    189,380
    
    
    
    270,244Total deferred assets
    
    
    1,516,922
    
    
    
    1,570,473Deferred tax liabilities:Other  including state deferred tax assets
    
    
    132,006
    
    
    
    87,188Tax depreciation in excess of book
    
    
    1,106,979
    
    
    
    883,328Total deferred tax liabilities:
    
    
    1,238,985
    
    
    
    970,516Net deferred income tax assets
    
    $
    277,937
    
    
    $
    599,957
 If deemed necessary by management, the Company establishes valuation allowances in
accordance with the provisions of FASB ASC 740, Income Taxes. Management continually
reviews realizability of deferred tax assets and the Company recognizes these benefits only
as reassessment indicates that it is more likely than not that such tax benefits will be
realized.The Company expects to use net operating loss and general business tax credit carry-forwards
before their 20 year expiration. This belief is based upon the Companys option to purchase
the nine affiliated restaurants currently managed by DRH. Net operating loss carry-forwards
of $286,555 and $2,533,830 will expire in 2029 and 2028, respectively. General business tax
credits of $68,750, $58,116 and $11,144 will expire in 2029, 2028 and 2027, respectively.
 15




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DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 On January 1, 2007, the Company adopted the provisions of FASB ASC 740 regarding the
accounting for uncertainty in income taxes. There was no impact on the Companys
consolidated financial statements upon adoption.
 The Company classifies all interest and penalties as income tax expense. There are no
accrued interest amounts or penalties related to uncertain tax positions as of September 30,
2009.
 In July 2007, the State of Michigan signed into law the Michigan Business Tax Act (MBTA),
replacing the Michigan Single Business Tax with a business income tax and a modified gross
receipts tax. This new tax took effect January 1, 2008, and, because the MBTA is based or
derived from income-based measures, the provisions of FASB ASC 740, Income Taxes,apply as
of the enactment date. The law, as amended, established a deduction to the business income
tax base if temporary differences associated with certain assets results in a net deferred
tax liability as of December 31, 2007 (the year of enactment of this new tax). This
deduction has a carry-forward period to at least tax year 2029. This benefit amounts to
$33,762.
 The Company is a member of a unitary group with other parties related by common ownership
according to the provisions of the Michigan Business Tax Act. This group will file a single
tax return for all members. An allocation of the current and deferred MBT incurred by the
unitary group has been made based on an estimate of MBT attributable to the Company and has
been reflected as state income tax expense in the accompanying consolidated financial
statements consistent with the provisions of ASC 740.
 The Company files income tax returns in the United States federal jurisdiction and various
state jurisdictions.
 8.
    
    OPERATING LEASES (INCLUDING RELATED PARTY)
 The Company leases its current office facilities under a lease which expires April 30, 2010.
The agreement requires rent to be paid in monthly installments of $3,835.
 The Company renegotiated its lease for AMC Northport, Inc. Effective March 1, 2009, the base
rent is approximately $6,129, reduced from approximately $12,267, through February, 2011. For
consideration of the above rent modification, Diversified Restaurant Holdings, Inc. agrees to
guarantee the rent for a period of five years beginning March 1, 2009. The lease contains two
(2) five-year options to extend.
 The Company renegotiated its lease for AMC Riverview, Inc. Effective April 1, 2009; the base
rent has been reduced to approximately $9,600 from approximately $12,800 through March, 2010.
The lease contains two (2) five-year options to extend.
 Berkley Burgers, Inc. has signed a lease for restaurant space from an entity related through
common ownership. The 15-year lease commenced in February 2008 and requires monthly payments
of approximately $6,300. This lease contains three (3) five-year options to extend.
 AMC Grand Blanc, Inc. lease payments commenced March 2008 and require monthly payments of
approximately $10,300. The 10-year lease expires in 2018. This lease contains two (2)
five-year options to extend.
 AMC Troy, Inc. and Ann Arbor Burgers, Inc. lease payments commenced in August 2008. Both
leases have ten year terms expiring in 2018 and monthly payments of approximately $13,750 and
$6,890, respectively. Each lease contains two (2) five-year options to extend.
 AMC Petoskey, Inc.s lease commenced in August 2008 under a 10 year term expiring in 2018.
Monthly lease payments of approximately $9,000 began in February 2009. This lease contains
two (2) five-year options to extend.
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DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 AMC Flint, Inc.s lease commenced in December 2008 under a 10 year term expiring in 2018. The
lease requires monthly payments of approximately $4,800. This lease contains three (3)
five-year options to extend.
 AMC Port Huron, Inc.s lease commenced in June 2009 under a 10 year term expiring in 2019.
The lease requires monthly payments of approximately $6,500. This lease contains three (3)
five-year options to extend.
 Troy Burgers, Inc. signed a lease for restaurant space in Novi, MI; the site of the third
Bagger Daves restaurant. The lease is not expected to commence until the first quarter of
2010. The lease term is 10 years with two (2) five-year options to extend. Monthly lease
payments will be approximately $7,000 per month.
 Total rent expense was $289,244 and $220,611 for the three months ended September 30, 2009 and
2008, respectively. Rent expense was $839,446 and $483,256 for the nine months ended
September 30, 2009 and 2008, respectively. Of these amounts, $20,872 and $20,872 for the
three months ended September 30, 2009 and 2008, respectively, were paid to a related party.
For the nine months ended September 30, 2009 and 2008, $62,616 and $55,659, respectively, were
paid to a related party.
 Scheduled future minimum lease payments for each of the five years and thereafter for
non-cancelable operating leases with initial or remaining lease terms in excess of one year at
September 30, 2009 are summarized as follows:
 Year
    
    Amount2009
    
    $
    839,1742010
    
    
    925,1132011
    
    
    953,1152012
    
    
    997,3492013
    
    
    1,046,209Thereafter
    
    
    5,352,119Total
    
    $
    10,113,079
 9.
    
    CAPITAL LEASES
 In January 2009, the Company entered into an agreement to sell and immediately
lease back various equipment and furniture at its Flint location. The lease requires
48 monthly payments of approximately $10,854, including applicable taxes, with an
option to purchase the assets under lease for $100 at the conclusion of the lease.
This transaction is reflected in the consolidated financial statements as a capital
lease with the assets recorded at their purchase price of $427,953 and depreciated as
purchased furniture and equipment, and the lease obligation is included in long term
debt at its present value.
 In May 2009, the Company entered into an agreement to sell and immediately lease
back various equipment and furniture at its Port Huron location. The lease requires 48
monthly payments of approximately $10,778, excluding applicable taxes, with an option
to purchase the assets under lease for $100 at the conclusion of the lease. This
transaction is reflected in the consolidated financial statements as a capital lease
with the assets recorded at their purchase price of $430,877 plus $31,041 of sales tax
paid upfront and depreciated as purchased furniture and equipment, and the lease
obligation is included in long term debt at its present value.
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DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 The following is a schedule by years of future minimum lease payments under the
capital lease together with the present value of the net minimum lease payments as of
the date of the lease:
 Year
    
    Amount2009
    
    $
    236,7352010
    
    
    259,5852011
    
    
    259,5852012
    
    
    259,5852013
    
    
    53,890Total minimum lease payments
    
    
    1,069,380Less amount representing interest
    
    
    179,512Present value of minimum lease payments
    
    $
    889,868
 10.
    
    COMMITMENTS AND CONTINGENCIES
 The Company has management service agreements in place with nine Buffalo Wild Wings
restaurants located in Michigan and Florida. These management service agreements contain an
option that allows WINGS to purchase each restaurant for a price equal to a factor of twice
the average earnings before interest, taxes, depreciation, and amortization of the
restaurant for the previous three fiscal years. This option may be exercised by the
subsidiary up to and including thirty days following the two-year anniversary date of the
Companys initial public offering completed by the Company. The two year anniversary will
occur on August 1, 2010. The Company plans to exercise the option early and purchase the
nine restaurants on February 1, 2010. Such exercise has always been part of the Companys
strategic plan.
 The Company assumed from a related entity an Area Development Agreement with Buffalo Wild
Wings, Inc. in which the Company undertakes to open 23 Buffalo Wild Wings restaurants within
their designated development territory, as defined by the agreement, by October 1, 2016.
On December 12, 2008, this agreement was amended adding 9 additional restaurants and
extending the date of fulfillment to March 1, 2017. Failure to develop restaurants in
accordance with the schedule detailed in the agreement could lead to potential penalties of
$50,000 for each undeveloped restaurant, payment of the initial franchise fees for each
undeveloped restaurant and loss of rights to development territory. As of September 30,
2009, of the 32 restaurants required to be opened, ten of these restaurants had been opened
for business, seven of which are Company owned.
 The Company is required to pay Buffalo Wild Wings, Inc. royalties (5% of net sales) and
advertising fund contributions (3% of net sales) for the term of the individual franchise
agreements. The Company incurred $207,072 and $132,514 in royalty expense in the three
months ended September 30, 2009 and 2008 respectively. Royalty expense was $582,453 and
$272,863 for the nine months ended September 30, 2009 and 2008, respectively. Advertising fund contribution expenses were
$125,221 and $76,945 in the three months ended September 30, 2009 and 2008, respectively.
For the nine months ended September 30, 2009 and 2008, the advertising fund contribution
expenses were $347,550 and $159,222, respectively.
 The Company is required by its various Buffalo Wild Wings, Inc. franchise agreements to
modernize the restaurants during the term of the agreement. The individual agreements
generally require improvements between the fifth year and the tenth year to meet the most
current design model that Buffalo Wild Wings, Inc. has approved. The modernization costs
can range from approximately $50,000 to approximately $500,000 depending on the individual
restaurants needs.
 The Company is subject to ordinary, routine, legal proceedings, as well as demands, claims
and threatened litigation, which arise in the ordinary course of its business. The ultimate
outcome of any litigation is uncertain. While unfavorable outcomes could have adverse
effects on the Companys business, results of operations and financial condition, management
believes that the Company is adequately insured and does not believe that any pending or
threatened proceedings would adversely impact the Companys results of operations, cash
flows or financial condition.
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DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 AMC Group, Inc., a wholly owned subsidiary of DRH, became a guarantor to an operating lease
at one of our Affiliated restaurants. The guarantee began April 1, 2009 and continues for
four years. The amount guaranteed is $115,733 in year 1, $136,533 in year 2 and $147,200 in
years 3 and 4.
 11.
    
    SUPPLEMENTAL CASH FLOWS INFORMATION
 Other Cash Flows Information
 Cash paid for interest was $118,740 and $97,408 during the three months ended September 30,
2009 and 2008, respectively. For the nine months ended September 30, 2009 and 2008, cash
paid for interest was $334,632 and $181,866, respectively.
 Supplemental Schedule of Non-Cash Investing and Financing Activities
 Capital expenditures of $858,779 were funded by capital lease
borrowings during the nine
months ended September 30, 2009.
 12.
    
    FAIR VALUE OF FINANCIAL INSTRUMENTS
 As of September 30, 2009 and December 31, 2008, our financial instruments consisted of cash
equivalents, accounts receivable, accounts payable and debt. The fair value of cash
equivalents, accounts receivable, accounts payable and short term debt approximate their
carrying value, due to their short-term nature. Also, the fair value of Notes Payable 
Related Parties approximates the carrying value due to their short term maturities. As of
September 30, 2009, our total debt, less related party debt, was approximately $6.0 million
and had a fair value of approximately $6.2 million. As of December 31, 2008, our total debt
was approximately $5.9 million and had a fair value of approximately $5.2 million. The
Company estimates the fair value of its fixed-rate debt using discounted cash flow analysis
based on the Companys incremental borrowing rate.
 There was no impact for adoption of FASB ASC 820, Fair Value Measurements and Disclosures,
to the consolidated financial statements as of September 30, 2009. ASC 820 requires fair
value measurement to be classified and disclosed in one of the following three categories:
 
    
    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).
 Interest rate swaps held by the Company for risk management purposes are not actively
traded. The Company measures the fair value using broker quotes which are generally based
on market observable inputs including yield curves and the value associated with
counterparty credit risk. The interest rate swaps discussed in Notes 1 and 5 fall into the
Level 2 category under the guidance of ASC 820. The fair market value of the interest rate
swaps as of September 30, 2009 was a liability of $186,735, which is recorded in other
liabilities on the consolidated balance sheet. The fair value of the interest rate swaps at
December 31, 2008 was a liability of $253,792. Unrealized loss associated with interest
rate swap positions in existence at September 30, 2009, which are reflected in the statement
of operations, totaled $11,286 for the three months ended September 30, 2009 and are
included in other income/loss. For the nine months ended September 30, 2009, the unrealized
gain associated with interest rate swap positions was $67,057.
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DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 13.
    
    SUBSEQUENT EVENTS
 Subsequent to September 30, 2009, the Buffalo Wild Wings Franchise Agreements were executed
for AMC Marquette, Inc. and AMC Chesterfield, Inc. for the right to open Buffalo Wild Wings
restaurants in Marquette, Michigan and Chesterfield Township, Michigan. Both companies are
wholly-owned subsidiaries of AMC Wings, Inc. The Company plans to open these stores
mid-year during 2010.
 Subsequent to September 30, 2009, Jay Alan Dusenberry, Company Treasurer and member of the
Board of Directors, exercised options on 6,000 shares of common stock in the Company. The
option price paid was $2.50 per share.
 The Company evaluated subsequent events for potential recognition and/or disclosure through
November 16, 2009, the date the consolidated financial statements were issued.
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##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
  CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
   FASB Codification Discussion
 Accounting for
Leases.
 FASB Accounting Standards
Codification, Leases.
 Property and Equipment
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##### Table of Contents



Deferred Tax Assets
  LIQUIDITY AND CAPITAL RESOURCES
  
    
    Novi, Michigan  Bagger Daves  construction to begin in the fourth quarter
2009 and restaurant opening to occur in the first quarter 2010. The estimated cost
of construction and equipment is approximately $650,000. We anticipate borrowing
50% of the necessary funds and paying the remaining balance through cash from
operations.
 
    
    Marquette, Michigan  Buffalo Wild Wings  construction expected to begin in
the second quarter 2010 with an estimated opening in the third quarter 2010. The
estimated cost of construction is approximately $1,037,000. We anticipate
borrowing 50-70% of the necessary funds and paying the remaining balance through
cash from operations.
 
    
    Chesterfield, Michigan  Buffalo Wild Wings  construction expected to begin
in the second quarter 2010 with an estimated opening in the third quarter 2010.
The estimated cost of construction is approximately $950,000. We anticipate
borrowing 50-70% of the necessary funds and paying the remaining balance through
cash from operations.
  OFF BALANCE SHEET ARRANGEMENTS
  22




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##### Table of Contents



Area Development Agreement
     23




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##### Table of Contents



EXERCISE OF OPTION TO PURCHASE
   Balance Sheet
  a.
    
    Cash and cash equivalents (expected increases from operations).
 b.
    
    Inventories (food and supplies expected to increase).
 c.
    
    Prepaid expenses (potential increase for normal operating costs such as rent,
insurance, etc., depending on timing of payments).
 d.
    
    Property and equipment (value assigned to restaurant equipment, furnishings and
improvements upon acquisition).
 e.
    
    Intangible assets (value assigned upon acquisition).
 f.
    
    Trade accounts payable and accrued expenses (such as compensation costs and amounts due
to vendors expected to increase).
 g.
    
    Debt (existing debt carried by the acquired restaurants and debt to be incurred to
finance the purchases).
 h.
    
    Common or Preferred stock (if issued to fund the purchases).
 Income Statement
  a.
    
    Management and advertising fee revenue (will be eliminated).
 b.
    
    Food and beverage sales (expected increases as purchase options are exercised).
 c.
    
    Cost of food and beverage sales (expected to increase in proportion to increased food
and beverage sales from acquired restaurants).
 d.
    
    Depreciation and amortization (expected to increase due to allowances for depreciation
and amortization of assets acquired from exercise of purchase options).
 e.
    
    Interest expense (will increase as debt financing is required to finance the
acquisition costs).
 f.
    
    Other operating costs (expected increases in numerous operating costs such as rent,
utilities, compensation costs, etc.).
 Cash Flows Statement
  OPERATING AND FINANCIAL REVIEW
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##### Table of Contents



Nine Months ended September 30, 2009 and 2008
  Berkley Burgers, Inc.
    
    Berkley, Michigan
    
    BD
    
    Opened January 13, 2008AMC Grand Blanc, Inc.
    
    Grand Blanc, Michigan
    
    BWW
    
    Opened March 16, 2008AMC Troy, Inc.
    
    Troy, Michigan
    
    BWW
    
    Opened July 20, 2008AMC Petoskey, Inc.
    
    Petoskey, Michigan
    
    BWW
    
    Opened August 17, 2008Ann Arbor Burgers, Inc.
    
    Ann Arbor, Michigan
    
    BD
    
    Opened August 30, 2008AMC Flint, Inc.
    
    Flint, Michigan
    
    BWW
    
    Opened December 21, 2008AMC Port Huron, Inc.
    
    Port Huron, Michigan
    
    BWW
    
    Opened June 7, 2009
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##### Table of Contents



Three months ended September 30, 2009 and 2008
  AMC Troy, Inc.
    
    Troy, Michigan
    
    BWW
    
    Opened July 20, 2008AMC Petoskey, Inc.
    
    Petoskey, Michigan
    
    BWW
    
    Opened August 17, 2008Ann Arbor Burgers, Inc.
    
    Ann Arbor, Michigan
    
    BD
    
    Opened August 30, 2008AMC Flint, Inc.
    
    Flint, Michigan
    
    BWW
    
    Opened December 21, 2008AMC Port Huron, Inc.
    
    Port Huron, Michigan
    
    BWW
    
    Opened June 7, 2009
  COST OF SALES  Cost of goods sold (food and beverage) increased $547,803 or 64% for the
three months ended September 30, 2009 over the same period in 2008. This relates primarily to the
opening of the additional restaurants. The cost percentage of food and beverage sales, as a
whole, was 31% in 2009 compared to 29% in 2008. The reason for this increase is that costs
associated with fresh traditional chicken wings are up 43% year to date which encompasses 28.5% of
total food and beverage sales.
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##### Table of Contents



CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS
  
    
    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.
  
 Item 3.
    
    Quantitative and Qualitative Disclosure About Market Risks.
  
 Item 4T.
    
    Controls and Procedures
 (a)
    
    Evaluation of disclosure controls and procedures.
  (b)
    
    Changes in internal controls.
  27




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1.
    
    Legal Proceedings.
  
 Item 1A.
    
    Risk Factors.
  
 Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 3.
    
    Defaults Upon Senior Securities.
  
 Item 4.
    
    Submission of Matters to a Vote of Security Holders.
  
 Item 5.
    
    Other Information.
  
 Item 6.
    
    Exhibits.
 (a)
    
    Exhibits:
 *3.1
    
    Certificate of Incorporation.*3.2
    
    By-Laws.31.1
    
    Certification pursuant to Section 302 of Sarbanes Oxley Act of 2002.31.2
    
    Certification pursuant to Section 302 of Sarbanes Oxley Act of 2002.32.1
    
    Certification pursuant to Section 906 of Sarbanes Oxley Act of 2002.32.2
    
    Certification 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. 28




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##### Table of Contents



SIGNATURES
  Dated: November 16, 2009
    DIVERSIFIED RESTAURANT HOLDINGS, INC.By:
    /s/ T. Michael AnselyT. Michael AnsleyPresident, Principal Executive Officer and DirectorBy:
    /s/ Jason T. CurtisJason T. CurtisChief Operating Officer, Principal Financial Officer 29