U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

Amendment No. 1

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.

(Exact name of small business issuer as specified in its charter)

Nevada		03-0606420
(State or other jurisdiction of incorporation or formation)		(I.R.S. employer identification number)

27680 Franklin Road
Southfield, Michigan 48034
(Address of principal executive offices)

Issuer’s telephone number: (248) 223-9160
Issuer’s facsimile number: (248) 223-9165

No change
(Former name, former address and former
fiscal year, if changed since last report)

Copies to:
Michael T. Raymond, Esq.
Dickinson Wright, PLLC
301 East Liberty, Suite 500
Ann Arbor, Michigan 48104-2266
(734) 623-1663
www.dickinson-wright.com

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes o No o

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 18,876,000 shares of $.0001 par value common stock outstanding as of December 10, 2010.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer o		Accelerated Filer o		Non-Accelerated Filer o		Smaller reporting company þ
				(Do not check if a smaller reporting company)

 

 

EXPLANATORY NOTE

Diversified Restaurant Holdings, Inc. (“DRH” or the “Company”) is filing this Amendment No. 1 on Form 10-Q/A (“Amendment No. 1”) to correct certain misstatements made in the Company’s financial statements included in Part I, Item 1 of the Company’s quarterly report on Form 10-Q for the quarter ended June 27, 2010 (“Original Quarterly Financial Statements”), which were filed with the Securities and Exchange Commission (“SEC”) on August 10, 2010 (the “Original Filing”). The misstatements and corrections thereto are described in Note 15 to the unaudited consolidated financial statements. The Company has also amended its Management’s Discussion and Analysis contained in Part I, Item 2 to reflect the changes to the Company’s Financial Statements that have been amended by this Amendment No 1. The Company has also amended its Part I, Item 4 disclosures regarding controls and procedures and included updated certifications of its Chief Executive Officer and Chief Financial Officer as Exhibits 31 and 32 to this Amendment No. 1, as required by Rule 12b-15 promulgated pursuant to the Securities and Exchange Act of 1934, as amended.

Other than as described above, none of the other disclosures in the Original Filing have been amended or updated. However, for the convenience of the reader, this Amendment No. 1 includes those unaltered items from the Original Filing in their entirety. This Amendment No. 1 speaks as of the filing date of the Original Filing, does not reflect events that may have occurred subsequent to the original filing date, and does not modify or update in any way disclosures made in the Original Filing other than as described above. Accordingly, this Amendment No. 1 should be read in conjunction with the Company’s filings with the SEC subsequent to the Original Filing.

INDEX

PART I. FINANCIAL INFORMATION			1
Item 1. Financial Statements			1
Consolidated Balance Sheets (Unaudited)			1
Consolidated Statements Of Operations (Unaudited)			2
Consolidated Statements Of Comprehensive Income (Loss) (Unaudited)			3
Consolidated Statements Of Stockholders’ Equity (Deficit) (Unaudited)			4
Consolidated Statements Of Cash Flows (Unaudited)			5
Notes to Interim Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			30
Item 3. Quantitative and Qualitative Disclosure About Market Risks			37
Item 4. Controls and Procedures			37
PART II. OTHER INFORMATION			38
Item 1. Legal Proceedings			38
Item 1A. Risk Factors			38
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			38
Item 3. Defaults Upon Senior Securities			38
Item 5. Other Information			38
Item 6. Exhibits			39
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

		June 27				December 27
		2010				2009 (a)
		(Restated)				(Restated)
ASSETS
Current assets
Cash and cash equivalents		$	668,962			$	1,594,362
Accounts receivable — related party			—				376,675
Inventory			305,517				307,301
Prepaid assets			161,475				152,702
Other current assets			59,227				42,382
Total current assets			1,195,181				2,473,422
Property and equipment, net (Note 3)			15,258,823				11,655,513
Intangible assets, net (Note 4)			956,570				751,779
Other long-term assets			56,144				49,280
Deferred income taxes (Note 8)			567,449				246,754
Total assets		$	18,034,167			$	15,176,748
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities
Current portion of long-term debt (Note 6)		$	2,233,716			$	2,193,057
Accounts payable			759,410				527,151
Accrued liabilities			885,769				674,768
Deferred rent			119,486				104,940
Total current liabilities			3,998,381				3,499,916
Accrued rent			741,369				846,014
Deferred rent			834,272				638,024
Related party payable			—				430,351
Other liabilities — interest rate swap			404,921				213,604
Long-term debt, less current portion (Note 6)			13,054,104				6,767,041
Total liabilities			19,033,047				12,394,950
Commitments and contingencies (Notes 5, 6, 9, 10, and 11)
Stockholders’ equity (deficit) (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				1,863
Additional paid-in capital			2,622,286				2,356,155
Retained Earnings (accumulated deficit)			(3,218,133	)			423,780
Comprehensive income (loss)			(404,921	)			—
Total stockholders’ equity (deficit)			(998,880	)			2,781,798
Total liabilities and stockholders’ equity (deficit)		$	18,034,167			$	15,176,748

The accompanying notes are an integral part of these interim consolidated financial statements.

DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

		Three Months Ended								Six Months Ended
		June 27				June 30				June 27				June 30
		2010				2009				2010				2009
		(Restated)				(Restated)				(Restated)				(Restated)
Revenue
Food and beverage sales		$	10,683,821			$	10,403,079			$	21,399,699			$	20,833,034
Total revenue			10,683,821				10,403,079				21,399,699				20,833,034
Operating expenses
Compensation costs			3,397,029				2,966,668				6,434,026				5,765,227
Food and beverage costs			3,137,948				3,295,191				6,475,210				6,560,295
General and administrative			2,642,782				2,276,075				5,083,677				4,827,556
Pre-opening			111,921				131,277				217,179				133,078
Occupancy			573,619				722,175				1,333,839				1,445,719
Depreciation and amortization			640,715				538,701				1,245,604				1,027,199
Total operating expenses			10,504,014				9,930,087				20,789,535				19,759,074
Operating profit			179,807				472,992				610,164				1,073,960
Interest expense			(518,143	)			(171,156	)			(687,876	)			(351,203	)
Other income (expense), net			(15,658	)			97,245				1,563				124,187
Income (loss) before income taxes			(353,994	)			399,081				(76,149	)			846,944
Income tax benefit (provision)			244,463				(113,122	)			121,887				(215,006	)
Net income (loss)		$	(109,531	)		$	285,959			$	45,738			$	631,938
Basic earnings (loss) per share — as reported		$	(0.006	)		$	0.016			$	0.002			$	0.035
Fully diluted earnings (loss) per share — as reported		$	(0.004	)		$	0.010			$	0.002			$	0.022
Weighted average number of common shares outstanding (Notes 1 and 7)
Basic			18,876,000				18,070,000				18,873,253				18,070,000
Diluted			29,020,000				29,020,000				29,020,000				29,020,000

The accompanying notes are an integral part of these interim consolidated financial statements.

DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

		Three Months Ended								Six Months Ended
		June 27				June 30				June 27				June 30
		2010 (Restated)				2009 (Restated)				2010 (Restated)				2009 (Restated)
Net income (loss)		$	(109,531	)		$	285,959			$	45,738			$	631,938
Comprehensive income (loss)
Unrealized changes in fair value of cash flow hedges			(404,921	)			—				(404,921	)			—
Comprehensive income (loss)		$	(514,452	)		$	285,959			$	(359,183	)		$	631,938

The accompanying notes are an integral part of these interim consolidated financial statements.

DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (UNAUDITED) (RESTATED)

														Retained
										Additional				Earnings								Total
		Common Stock								Paid-in				(Accumulated				Comprehensive				Stockholders’
		Shares				Amount				Capital				Deficit)				Income (Loss)				Equity (Deficit)
Balances — December 27, 2009 (a)			18,626,000			$	1,863			$	2,356,155			$	423,780			$	—			$	2,781,798
Shares issued for warrants exercised at $1.00 per share (Note 7)			250,000				25				249,975				—				—				250,000
Share-based compensation (Note 7)			—				—				16,156				—				—				16,156
Acquisition of BWW restaurants (Note 2)			—				—				—				(3,134,790	)			—				(3,134,790	)
Distributions			—				—				—				(552,861	)			—				(552,861	)
Unrealized changes in fair value of cash flow hedges			—				—				—				—				(404,921	)			(404,921	)
Net income			—				—				—				45,738				—				45,738
Balances — June 27, 2010			18,876,000			$	1,888			$	2,622,286			$	(3,218,133	)		$	(404,921	)		$	(998,880	)

The accompanying notes are an integral part of these interim consolidated financial statements.

DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

		Six Months Ended
		June 27				June 30
		2010				2009
		(Restated)				(Restated)
Cash flows from operating activities
Net income		$	45,738				631,938
Adjustments to reconcile net income to net cash provided by (used in) operating activities
Depreciation and amortization			1,245,604				1,027,199
Loss on disposal of property and equipment			217,868				—
Share-based compensation			16,156				16,156
Deferred income tax (provision) benefit			(320,695	)			186,996
Changes in operating assets and liabilities that provided (used) cash
Accounts receivable — related party			376,675				(93,090	)
Inventory			1,784				22,226
Prepaid assets			(8,773	)			(2,687	)
Other current assets			(16,845	)			168,370
Intangible assets			(88,329	)			(1,210	)
Other assets			(6,864	)			(89,802	)
Accounts payable			(198,092	)			(40,030	)
Accrued liabilities			211,001				226,461
Accrued rent			(104,645	)			89,620
Deferred rent			210,794				(56,400	)
Net cash provided by operating activities			1,581,377				2,085,747
Cash flows from investing activities
Purchases of property and equipment			(2,500,490	)			(1,459,141	)
Net cash used for investing activities			(2,500,490	)			(1,459,141	)
Cash flows from financing activities
Proceeds from issuance of long-term debt			963,065				867,529
Repayments of long-term debt			(666,491	)			(757,052	)
Proceeds from issuance of common stock			250,000				—
Distributions			(552,861	)			(797,750	)
Net cash used for financing activities			(6,287	)			(687,273	)
Net increase in cash and cash equivalents			(925,400	)			(60,667	)
Cash and cash equivalents, beginning of period			1,594,362				1,029,459
Cash and cash equivalents, end of period		$	668,962			$	968,792

The accompanying notes are an integral part of these interim consolidated financial statements.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

Diversified Restaurant Holdings, Inc. (“DRH” or the “Company”) was formed on September 25, 2006. DRH and its three wholly-owned subsidiaries, AMC Group, Inc, (“AMC”), AMC Wings, Inc. (“WINGS”), and AMC Burgers, Inc. (“BURGERS”), develop, own, and operate, as well as render management and advertising services for, Buffalo Wild Wings (“BWW”) 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 or organized in the State of Michigan.

AMC was formed on March 28, 2007 and serves as the operational and administrative center for the Company. AMC renders management and advertising services to WINGS and its subsidiaries and to BURGERS and its subsidiaries. Prior to the February 1, 2010 acquisition (see Note 2 for details), AMC also rendered management and advertising services to nine BWW restaurants affiliated with the Company through common ownership and management control. Services rendered by AMC include marketing, restaurant operations, restaurant management consultation, 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 and serves as a holding company for its BWW restaurants. WINGS, through its subsidiaries, holds 17 BWW restaurants that are currently in operation. The Company also executed franchise agreements with Buffalo Wild Wings International, Inc. (“BWWI”) to open two more restaurants, one in Chesterfield Township, Michigan and the other in Ft. Myers, Florida. The Company is currently negotiating another franchise agreement for a BWW restaurant in Traverse City, Michigan, as was recently announced in a July 27, 2010 press release. The Company anticipates having this franchise agreement executed by the end of August 2010. These restaurants will be held by AMC Chesterfield, Inc., AMC Ft. Myers, Inc., and AMC Traverse City, Inc., respectively.

The Company is economically dependent on retaining its franchise rights with BWWI. Each of the franchise agreements has a specific initial term expiration date ranging from October 10, 2010 through June 3, 2030, 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. Each of the franchise agreements has a specific expiration date, when factoring in any applicable renewals, ranging from January 29, 2019 through June 3, 2045. The Company is in compliance with the terms of these agreements at June 27, 2010. The Company is under contract with BWWI to facilitate another 19 franchise agreements by 2017. The Company held an option to purchase the nine affiliated restaurants that were managed by AMC, which it exercised on February 1, 2010 (see Note 2 for details).

BURGERS was formed on March 12, 2007 to own the Company’s Bagger Dave’s restaurants, a full-service, ultra-casual dining concept developed by the Company. BURGERS’ subsidiaries, Berkley Burgers, Inc, Ann Arbor Burgers, Inc., and Troy Burgers, Inc., own restaurants currently in operation in Berkley, Ann Arbor, and Novi, Michigan, respectively. The Company is expanding its Bagger Dave’s concept to Brighton, Michigan, as was recently announced in an August 10, 2010 press release. 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 concept. We have filed for rights to franchise in Michigan, Ohio, and Indiana, but have not yet franchised any Bagger Dave’s restaurants.

We follow accounting standards set by the Financial Accounting Standards Board (“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 (“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 ASC, refer to the “Recent Accounting Pronouncements” section of this note.

Basis of Presentation

The consolidated financial statements as of June 27, 2010 and December 27, 2009, and for the three-month and six-month periods ended June 27, 2010 and June 30, 2009, have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. The financial information as of June 27, 2010 and December 27, 2009 and for the three-month and six-month periods ended June 27, 2010 and June 30, 2009 is unaudited, but, in the opinion of management, reflects all adjustments and accruals necessary for a fair presentation of the financial position, results of operations, and cash flows for the interim periods.

The financial information as of December 27, 2009 is derived from our audited consolidated financial statements and notes thereto for the fiscal year ended December 27, 2009, which is included in Item 8 in the Fiscal 2009 Annual Report on Form 10-K and should be read in conjunction with such financial statements.

The results of operations for the three-month and six-month periods ended June 27, 2010 are not necessarily indicative of the results of operations that may be achieved for the entire year ending December 26, 2010.

Principles of Consolidation

The interim consolidated financial statements include the accounts of DRH and its subsidiaries, AMC, WINGS and its subsidiaries, and BURGERS and its subsidiaries. The interim consolidated financial statements also include the account balances of the nine recently acquired, affiliated restaurants resulting from the February 1, 2010 acquisition, as they are now subsidiaries of WINGS (refer to Note 2 for details).

All significant intercompany accounts and transactions have been eliminated upon consolidation.

Fiscal Year

During 2009, the Company changed its fiscal year to utilize an accounting period that ends on the last Sunday in December. Consequently, fiscal year 2009 ended on December 27, 2009, comprising 51 weeks and three days. Prior to 2009, the Company reported on a calendar-year basis and, accordingly, fiscal year 2008 ended on December 31, 2008, comprising 52 weeks and one day. This quarterly report on Form 10-Q is for the six-month period ended June 27, 2010, comprising 26 weeks.

Segment Reporting

Reportable segments are strategic business units that offer different products and services, are managed separately because each business requires different executional strategies, cater to different clients’ needs, and are subject to regular review by our chief operating decision-maker.

While DRH may be viewed as having two reporting segments, one as a restaurant operator and the other as a franchisor, the Company has determined it does not meet the quantitative or materiality thresholds to be considered separately reportable. As such, there are no separately reportable business segments at June 27, 2010 and December 27, 2009.

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

Revenues from food and beverage sales are recognized and generally collected at the point of sale. As a result of the February 1, 2010 acquisition, management and advertising fees are no longer recognized (refer to Note 2 for details).

Accounts Receivable

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 June 27, 2010 and December 27, 2009, respectively, relate principally to management and advertising fees charged to and intercompany transactions with the related BWW restaurants that were managed by AMC and arose in the ordinary course of business (refer to Note 5 for details) prior to the February 1, 2010 acquisition. Refer to Note 2 for details on the recent acquisition, which essentially eliminated management and advertising fees revenue. Management does not believe any allowances for doubtful accounts are necessary at June 27, 2010 or December 27, 2009.

Accounting for Gift Cards

The Company records the net increase or decrease in BWW gift card sales versus gift card redemptions to the gift card liability account on a monthly basis. The gift card processor deducts gift card sales dollars from each restaurant’s bank account weekly and deposits gift card redemption dollars weekly. Under this centralized system, any breakage would be recorded by Blazin Wings, Inc., a subsidiary of BWWI, and be subject to the breakage laws in the state of Minnesota, where Blazin Wings, Inc. is located.

The Company records the net increase or decrease in Bagger Dave’s gift card sales versus gift card redemptions to the gift card liability account on a monthly basis. Michigan law states that gift cards cannot expire and any post-sale fees cannot be assessed until five years after the date of gift card purchase by the consumer. There is no breakage attributable to Bagger Dave’s restaurants for the Company to record for the six months ended June 27, 2010 and for the six months ended June 30, 2009, respectively.

The liability is included in accrued liabilities in the interim consolidated balance sheets. As of June 27, 2010, the Company’s gift card liability was approximately $3,062, compared to approximately $30,067 at December 27, 2009.

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 liability 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 accounted for at the lower of cost or market using the first in, first out method of inventory valuation.

Prepaid, Intangible, and Other Assets

Prepaid assets consist principally of prepaid insurance and are recognized ratably, as operating expense, over the period covered by the unexpired premium. Amortizable intangible assets consist principally of franchise fees, trademarks, and loan fees and are deferred and amortized to operating expense on a straight-line basis over the term of the related underlying agreements based on the following:

Franchise fees		10 to 20 years
Trademarks		15 years
Loan fees		2 to 7 years (loan term)

Liquor licenses, also a component of intangible assets, are deemed to have an indefinite life and, accordingly, are not amortized. Management annually reviews these assets to determine whether carrying values have been impaired. During the period ended June 27, 2010, 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 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 equipment and 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. Restaurant leasehold improvements are amortized over the shorter of the lease term or the useful life of the related improvement, whichever is shorter. Restaurant construction in progress is not amortized or depreciated until the related assets are placed into service.

Advertising

Advertising expenses are recognized in the period in which they are incurred. Advertising expense was $560,737 for the three months ended June 27, 2010 and $389,193 for the three months ended June 30, 2009. Advertising expense was $1,046,475 for the six months ended June 27, 2010 and $847,566 for the six months ended June 30, 2009.

Pre-opening Costs

Pre-opening costs are those costs associated with opening new restaurants and will vary based on the number of new locations opening and under construction. These costs are expensed as incurred. Pre-opening costs for the three months ended June 27, 2010 were $111,921 and $131,277 for the three months ended June 30, 2009. For the six months ended June 27, 2010, pre-opening costs were $217,179 and $133,078 for the six months ended June 30, 2009.

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 per Share

Earnings 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 80% and 79% of food and beverage sales came from restaurants located in Michigan during the six months ended June 27, 2010 and the six months ended June 30, 2009, respectively.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures 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 Instruments

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.

On May 5, 2010, the Company, together with its wholly-owned subsidiaries, entered into a $15 million credit facility (the “Credit Facility”) with RBS Citizens, N.A., a national banking association (“RBS”), as further described in Notes 2 and 6. The Credit Facility consists of a $6 million loan in the form of a development line of credit and a $9 million senior secured term loan with a fixed-rate swap arrangement. In conjunction with the Credit Facility, the existing swap agreements were terminated, resulting in a notional principal amount reduction of $214,074 and a termination fee of $19,176. The termination fee was recorded as interest expense for the three- and six-month period ended June 27, 2010.

The Company’s interest rate swap liabilities at December 27, 2009 were treated as a fair value hedge. By contrast, the Company has elected to account for the new interest rate swap using cash flow hedge accounting. Under the cash flow hedge method, the effective portion of the derivative is marked to fair value, based on third-party valuation models, as a component of comprehensive income.

The Company records the fair value of its interest rate swaps on the balance sheet in other assets or other liabilities, depending on the fair value of the swaps. The notional value of interest rate swap agreements in place at June 27, 2010 and December 27, 2009 was $8,914,220 and $3,013,271, respectively. The expiration dates of these agreements are consistent with debt instruments as described in Note 6.

Recent Accounting Pronouncements

In May 2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) Number 165 (“SFAS No. 165” or “ASC 855-10”), Subsequent Events. Companies are now required to disclose the date through which subsequent events have been evaluated by management. Public entities (as defined) must conduct the evaluation as of the date the financial statements are issued and provide disclosure that such date was used for this evaluation. SFAS No. 165 provides that financial statements are considered “issued” when they are widely distributed for general use and reliance in a form and format that complies with GAAP. ASC 855-10 is effective for interim and annual periods ending after June 15, 2009 and must be applied prospectively. The adoption of ASC 855-10 during the quarter ended September 30, 2009 did not have a significant effect on the Company’s financial statements as of that date or for the quarter or year-to-date period then ended.

In June 2009, the FASB issued SFAS Number 168 (“SFAS No. 168” or “ASC 105-10”), The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a Replacement of FASB Statement No. 162. SFAS No. 168 establishes the Codification as the sole source of authoritative accounting principles recognized by the FASB to be applied by all nongovernmental entities in the preparation of financial statements in conformity with GAAP. ASC 105-10 was prospectively effective for financial statements issued for fiscal years ending on or after September 15, 2009 and interim periods within those fiscal years. The adoption of ASC 105-10 on July 1, 2009 did not impact the Company’s results of operations or financial condition. The Codification did not change GAAP, however, it did change the way GAAP is organized and presented. As a result, these changes impact how companies reference GAAP in its financial statements and in its significant accounting policies. The Company implemented the Codification in these interim consolidated financial statements by providing references to the Codification topics alongside references to the corresponding standards.

In January 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.” ASU 2010-06 amends ASC 820, Fair Value Measurements and Disclosures, to require new disclosures related to transfers into and out of Levels 1 and 2 of the fair value hierarchy and additional disclosure requirements related to Level 3 measurements. The guidance also clarifies existing fair value measurement disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The additional disclosure requirements are effective for the first reporting period beginning after December 15, 2009, except for the additional disclosure requirements related to Level 3 measurements which are effective for fiscal years beginning after December 15, 2010. The additional disclosure requirements did not have any financial impact on our consolidated financial statements.

With the exception of the pronouncements noted above, no other accounting standards or interpretations issued or recently adopted are expected to have a material impact on the Company’s financial position, operations, or cash flows.

Reclassifications

Certain reclassifications have been made to the prior year consolidated financial statements to conform to the current year’s presentation.

2. SIGNIFICANT BUSINESS TRANSACTIONS

Acquisition of Nine Affiliated BWW Restaurants

On February 1, 2010, the Company, through its WINGS subsidiary, acquired nine affiliated BWW restaurants it previously managed (“Affiliates Acquisition”). Under the terms of the agreements, the purchase price for each of the affiliated restaurants was determined by multiplying each restaurant’s average annual earnings before interest, taxes, depreciation, and amortization (“EBITDA”) for the previous three (3) fiscal years (2007, 2008, and 2009) by two, and subtracting the long-term debt of the respective restaurant. Two of the affiliated restaurants did not have a positive purchase price under the above formula. As a result, the purchase price for those restaurants was set at $1.00 per membership interest percentage. The total purchase price for these nine restaurants was $3,134,790. The Affiliates Acquisition was approved by resolution of the disinterested directors of the Company, who determined that the Affiliates Acquisition terms were at least as favorable as those that could be obtained through arms-length negotiations with an unrelated party. The Company paid the purchase price for each of the affiliated restaurants to each selling shareholder by issuing an unsecured promissory note for the pro-rata value of the equity interest in the affiliated restaurants. The promissory notes bear interest at 6% per year, mature on February 1, 2016, and are payable in quarterly installments, with principal and interest fully amortized over six years.

In accordance with FASB ASC 805-50, Business Combinations: Transactions Between Entities Under Common Control, the Company accounted for the Affiliates Acquisition, a transaction between entities under common control, as if the transaction had occurred at the beginning of the period (i.e., December 27, 2009). Further, prior years amounts also have been retrospectively adjusted to furnish comparative information while the entities were under common control.

Execution of $15 Million Comprehensive Credit Facility

As introduced above, on May 5, 2010, the Company, together with its wholly-owned subsidiaries, entered into a $15 million Credit Facility with RBS. The Credit Facility consists of a $6 million development line of credit (“DLOC”) and a $9 million senior secured term loan (“Senior Secured Term Loan”). The Credit Facility is secured by a senior lien on all Company assets.

The Company plans to use the DLOC to increase its number of BWW franchise restaurant locations in the states of Michigan and Florida and to develop additional Bagger Dave’s restaurant locations. The DLOC is for a term of 18 months (the “Draw Period”) and amounts borrowed bear interest at 4% over LIBOR as adjusted monthly. During the Draw Period, the Company may make interest-only payments on the amounts borrowed. The Company may convert amounts borrowed during the Draw Period into one or more term loans bearing interest at 4% over LIBOR as adjusted monthly, with principal and interest amortized over seven years and with a maturity date of May 5, 2017. Any amounts borrowed by the Company during the Draw Period that are not converted into a term loan by November 5, 2011, will automatically be converted to a term loan on the same terms as outlined above. The DLOC includes a carrying cost of .25% per year of any available but undrawn amounts, payable quarterly.

The Company used approximately $8.7 million of the Senior Secured Term Loan to repay substantially all of its outstanding senior debt and early repayment fees owed to unrelated parties and the remaining $0.3 million was used for working capital. The Senior Secured Term Loan is for a term of seven years and, through a fixed-rate swap arrangement, bears interest at a fixed rate of 7.10%. Principal and interest payments are amortized over seven years, with monthly payments of approximately $120,000.

Purchase of Building in Brandon, Florida

On June 24, 2010, MCA Enterprises Brandon, Inc., a wholly-owned subsidiary of DRH, completed the purchase of its previously-leased BWW location at 2055 Badlands Drive, Brandon, FL 33511 (the “Brandon Property”) pursuant to the terms of a Purchase and Sale Agreement (the “Purchase and Sale Agreement”) dated March 25, 2010, between MCA Brandon Enterprises, Inc. and Florida Wings Group, LLC. The Brandon Property includes 2.01 useable acres of land and is improved by a free-standing, 6,600 square foot BWW restaurant built in 2004. On April 28, 2010, the land and building appraised at $2.6 million. The Company has operated a BWW restaurant at the Brandon Property since June 2004. The total purchase price of the Brandon Property was $2,573,062, exclusive of additional fees, taxes, due diligence, and closing costs. The purchase price was paid through a combination of commercial financing, seller financing, and working capital. Specifically, the Company caused MCA Brandon Enterprises, Inc. to enter into a Real Estate Loan Agreement (the “Real Estate Loan Agreement”) and a Bridge Loan Agreement (the “Bridge Loan Agreement”) with Bank of America, N.A. and a Promissory Note (“Promissory Note”) with Florida Wings Group, LLC.

The Real Estate Loan Agreement provides for a loan in the total principal amount of $1,150,000, matures on June 23, 2030, and requires equal monthly payments of interest and principal amortized over 25 years. The outstanding amounts borrowed under the Real Estate Loan Agreement bear interest at an initial rate of 6.72% per year. The interest rate will adjust to the U.S. Treasury Securities Rate plus 4% on June 23, 2017, and on the same date every seven years thereafter. After each adjustment date, the interest rate remains fixed until the next adjustment date. The Real Estate Loan Agreement is secured by a senior mortgage on the Brandon Property; the corporate guaranties of the Company, WINGS, and AMC; and the personal guaranty of T. Michael Ansley, President, CEO, Chairman of the Board of Directors, and a principal shareholder of the Company.

The Bridge Loan Agreement provides for a short-term bridge loan in the total principal amount of $920,000, matures on April 23, 2011 and requires interest-only payments until maturity. The outstanding amounts borrowed under the Bridge Loan Agreement bear interest at a floating rate, adjusted daily, equal to the Bank’s Prime Rate plus 3%. The Bridge Loan Agreement is secured by a junior mortgage on the Brandon Property; the corporate guaranties of the Company, WINGS, and AMC Group; and the personal guaranty of T. Michael Ansley.

The Company obtained a Section 504 Authorization for Debenture Guaranty issued by the U.S. Small Business Administration (“SBA”) on April 1, 2010. The parties anticipate that the Bridge Loan Agreement will be replaced by a Section 504 loan from the SBA as soon as the necessary paperwork has been completed. This process is expected to take approximately 90 — 120 days. The Section 504 loan will bear a fixed interest rate of 4.93% for its 20-year duration.

The Promissory Note is in the principal amount of $245,754, matures on August 1, 2013, is amortized over 15 years, and requires monthly principal and interest installments of $2,209 with the balance due at maturity. The outstanding amounts borrowed under the Promissory Note bear interest at 7% per annum. The Promissory Note is unsecured.

The remainder of the purchase price for the Brandon Property was financed using the Company’s working capital.

3. PROPERTY AND EQUIPMENT

Property and equipment are comprised of the following assets:

		June 27				December 27
		2010				2009
Land		$	385,959			$	—
Building			2,243,861				—
Equipment			7,312,657				6,710,092
Furniture and fixtures			1,974,209				1,833,347
Leasehold improvements			12,590,925				11,585,978
Restaurant construction in progress			365,392				126,804
Total			24,873,003				20,256,221
Less accumulated depreciation			(9,614,180	)			(8,600,708	)
Property and equipment, net		$	15,258,823			$	11,655,513

On June 24, 2010, MCA Enterprises Brandon, Inc., a wholly-owned subsidiary of the Company, completed the purchase the Brandon Property; refer to Note 2 for details.

4. INTANGIBLE ASSETS

Intangible assets are comprised of the following:

		June 27				December 27
		2010				2009
Amortized intangible assets:
Franchise fees		$	358,750			$	358,750
Trademark			2,500				2,500
Loan fees			149,825				66,565
Total			511,075				427,815
Less accumulated amortization			(96,723	)			(122,064	)
Amortized intangible assets, net			414,352				305,751
Unamortized intangible assets:
Liquor licenses			542,218				446,028
Total intangible assets, net		$	956,570			$	751,779

Amortization expense for the six months ended June 27, 2010 and June 30, 2009 was $17,263 and $32,091, respectively. Based on the current intangible assets and their estimated useful lives, amortization expense for fiscal years 2010, 2011, 2012, 2013, and 2014 is projected to total approximately $45,500 per year.

5. RELATED PARTY TRANSACTIONS

The Affiliates Acquisition (refer to Note 2 for details) was accomplished through the issuance of unsecured promissory notes to each selling shareholder. The notes bear interest at 6% per year, mature on February 1, 2016, and are payable in quarterly installments, with principal and interest fully amortized over six years.

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 June 27, 2010 and the three months ended June 30, 2009 were $49,160 and $41,969, respectively. Fees paid during the six months ended June 27, 2010 and the six months ended June 30, 2009 were $109,594 and $91,796, respectively.

The Company is a guarantor of debt of two 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 guarantees is an “event of default”, which 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 June 27, 2010 and December 27, 2009, the carrying amount of the underlying debt obligation of the related entity was $1,932,993 and 2,938,000, respectively. The Company’s guarantees extend for the full term of the debt agreements, which expire in 2019. 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 entity for which it has provided the guarantees operate under common ownership and management control and, in accordance with FASB ASC 460 (“ASC 460”), Guarantees, the initial recognition and measurement provisions of ASC 460 do not apply. At June 27, 2010, payments on the debt obligations were current.

Long-term debt (refer to Note 6 for details) contains two promissory notes in the amount of $100,000 each, along with accrued interest, due to two of DRH’s stockholders. The notes commenced in January 2009, bear interest at a rate of 3.2% per annum, and are being repaid in monthly installments of approximately $4,444 each over a two-year period.

Current debt (refer to Note 6 for details) also includes a promissory note to a DRH stockholder in the amount of $250,000. The note is a demand note that does not require principal or interest payments. Interest is accrued at 8% per annum and is compounded quarterly. The Company has 180 days from the date of demand to pay the principal and accrued interest.

Refer to Note 9 for related party operating lease transactions.

6. LONG-TERM DEBT

Long-term debt consists of the following obligations:

		June 27				December 27
		2010				2009
Senior 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				—

		June 27				December 27
		2010				2009
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				72,975
Note 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				17,167
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.			—				7,821,912
Obligations under capital leases (Note 10)			—				693,196
Notes payable — related parties (Note 5)			3,338,059				354,848
Total long-term debt		$	15,287,820			$	8,960,098
Less current portion			(2,233,716	)			(2,193,057	)
Long-term debt, net of current portion		$	13,054,104			$	6,767,041

Scheduled principal maturities of long-term debt for each of the five years succeeding December 27, 2009, and thereafter, are summarized as follows:

Year		Amount
2010		$	2,233,716
2011			1,575,584
2012			1,777,900
2013			2,099,989
2014			2,004,175
Thereafter			5,596,456
Total		$	15,287,820

Interest expense was $518,143 and $171,155 (including related party interest expense of $52,581 for the three months ended June 27, 2010 and $13,971 for the three months ended June 30, 2009; refer to Note 5 for further details) for the three months ended June 27, 2010 and the three months ended June 30, 2009, respectively. Interest expense was $687,876 and $351,203 (including related party interest expense of $61,220 for the six months ended June 27, 2010 and $24,497 for the six months ended June 30, 2009; refer to Note 5 for further details) for the six months ended June 27, 2010 and the six months ended June 30, 2009, respectively.

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 debt service coverage ratio and a maximum lease adjusted leverage ratio, both of which we are in compliance with as of June 27, 2010.

7. 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 six years from issuance. Once vested, the options can be exercised at a price of $2.50 per share. Stock option expense of $8,078 and $8,077, as determined using the Black-Scholes model, was recognized during the three months ended June 27, 2010 and the three months ended June 30, 2009, 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 June 27, 2010. The fair value of unvested shares, as determined using the Black-Scholes model, is $2,743 as of June 27, 2010. 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.

In October 2009, one member of the Board of Directors exercised 6,000 vested options at a price of $2.50 per share. Consequently, at June 27, 2010, 144,000 shares of authorized common stock are reserved for issuance to provide for the exercise of the Company’s stock options.

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 vested over a three-year period from the issuance date and expired on November 30, 2009. 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 505-50, Equity Based Payments to Non-Employees. 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. An extension of time to exercise warrants until December 31, 2009 was approved by resolution of the disinterested directors of the Company. As of June 27, 2010, all 800,000 warrants were exercised at the option price of $1 per share.

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 June 27, 2010. 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.

8. INCOME TAXES

The benefit (provision) for income taxes consists of the following components for the three and six months ended June 27, 2010 and the three and six months ended June 30, 2009:

		Three Months Ended								Six Months Ended
		June 27				June 30				June 27				June 30
		2010				2009				2010				2009
Federal
Current		$	—			$	—			$	—			$	—
Deferred			295,744				(71,476	)			190,607				(105,127	)
State
Current			(36,502	)			—				(86,603	)			—
Deferred			(14,779	)			44,808				17,883				36,698
Income tax benefit (provision)		$	244,463			$	(26,668	)		$	121,887			$	(68,429	)

The benefit (provision) 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:

		June 27				December 27
		2010				2009
Income tax benefit (provision) at federal statutory rate		$	25,891			$	(207,455	)
State income tax benefit (provision)			(68,720	)			(57,585	)
Permanent differences			22,554				(32,111	)
Tax credits			70,000				93,500
Other			72,162				(48,413	)
Income tax benefit (provision)		$	121,887			$	(252,064	)

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 assets and liabilities are summarized as follows:

		June 27				December 27
		2010				2009
Deferred tax assets:
Net operating loss carry forwards		$	757,922			$	954,370
Deferred rent expense			347,500				78,998
Start-up costs			236,851				104,327
Tax credit carry forwards			262,544				164,366
Swap loss recognized for book			—				56,970
Other — including state deferred tax assets			425,757				193,781
Total deferred assets			2,030,574				1,552,812
Deferred tax liabilities:
Other — including state deferred tax liabilities			240,113				146,325
Tax depreciation in excess of book			1,223,012				1,159,733
Total deferred tax liabilities:			1,463,125				1,306,058
Net deferred income tax assets		$	567,449			$	246,754

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 its 20-year expiration. A significant amount of net operating loss carry forwards were used when the Company purchased nine affiliated restaurants, which were previously managed by DRH. Net operating loss carry forwards of $273,141 and $1,956,042 will expire in 2029 and 2028, respectively. General business tax credits of $70,000, $86,678, $59,722 and $46,144 will expire in 2030, 2029, 2028 and 2027, respectively.

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 June 27, 2010.

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 on or derived from income-based measures, the provisions of ASC 740 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 MBTA. This group will file a single tax return for all members. An allocation of the current and deferred Michigan business tax incurred by the unitary group has been made based on an estimate of Michigan business tax attributable to the Company and has been reflected as state income tax expense in the accompanying interim 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.

9. OPERATING LEASES (INCLUDING RELATED PARTY)

Lease terms are generally 10 to 15 years (with the exception of our office lease, which is a four-year term), with renewal options, and generally require us to pay a proportionate share of real estate taxes, insurance, common area maintenance, and other operating costs. Some restaurant leases provide for contingent rental payments based on sales thresholds.

The Company previously leased its office facilities under a lease that required monthly payments of $3,835; this lease expired on April 30, 2010. The Company relocated its general offices, effective March 1, 2010, signed a new four-year lease for 5,340 sq. ft. of office space that commenced in March 2010, requires monthly payments of $4,450, expires in May 2014, and contains two two-year options to extend.

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, DRH agreed to guarantee the rent for a period of five years beginning March 1, 2009. The lease contains two five-year options to extend.

The Company renegotiated its lease for AMC Riverview, Inc. Effective April 2009, the base rent was reduced from approximately $12,800 to approximately $9,600 through March 2010. An extension to this rent reduction was later granted through May 2010. Beginning in June 2010, the rent reverted back to its original $12,800 amount. The lease contains two five-year options to extend.

Flyer Enterprises, Inc. signed a 10-year lease that commenced in December 1999, requires monthly payments of $11,116 (with 3% annual increases), and expired in December 2009. An option was exercised on the lease, extending the expiration date to December 2014.

TMA Enterprises of Novi, Inc. signed a 12-year lease that commenced in June 2002, requires monthly payments of approximately $14,493 (with an approximate 9% rent increase in June 2012), expires in 2014, and contains one five-year renewal option.

Bearcat Enterprises, Inc. signed a 15-year lease, from an entity related through common ownership, which commenced in February 2004, requires monthly payments of approximately $20,197, expires in 2019, and contains three five-year options to extend.

TMA Enterprises of Ferndale, LLC signed a 10-year lease that commenced in March 2005, requires monthly payments of approximately $8,864, expires in 2015, and contains two five-year options to extend.

Buckeye Group II, LLC signed a 10-year lease that commenced in April 2006, requires monthly payments of approximately $15,102, expires in 2016, and contains two five-year options to extend.

AMC Warren, LLC signed a 10-year lease that commenced in July 2006, requires monthly payments of approximately $15,755, expires in 2016, and contains two five-year options to extend.

Berkley Burgers, Inc. signed a 15-year lease, from an entity related through common ownership, which commenced in February 2008, requires monthly payments of approximately $6,300, expires in February 2023, and contains three five-year options to extend.

AMC Grand Blanc, Inc. signed a 10-year lease that commenced in March 2008, requires monthly payments of approximately $10,300, expires in 2018, and contains two five-year options to extend.

AMC Troy, Inc. and Ann Arbor Burgers, Inc. both signed 10-year leases that commenced in August 2008, require monthly payments of approximately $13,750 and $6,890, respectfully, expire in 2018, and contain two five-year options to extend.

AMC Petoskey, Inc. signed a 10-year lease that commenced in August 2008, requires monthly payments of approximately $9,000, expires in 2018, and contains two five-year options to extend.

AMC Flint, Inc.’s signed a 10-year lease that commenced in December 2008, requires monthly payments of approximately $4,800, expires in 2018, and contains three five-year options to extend.

The Company renegotiated its lease for Buckeye Group, LLC. Effective April 2009, the base rent was reduced from approximately $13,333 to approximately $9,333. The term of the lease was also extended through 2017 and contains two five-year options to extend.

AMC Port Huron, Inc. signed a 10-year lease that commenced in June 2009, requires monthly payments of approximately $6,500, expires in 2019, and contains three five-year options to extend.

Troy Burgers, Inc. signed a 10-year lease that commenced in February 2010, requires monthly payments of approximately $7,000 (rent is based on a percentage of revenues, not to exceed approximately $7,000 per month), expires in 2020, and contains two five-year options to extend.

The Company renegotiated its lease for Anker, Inc. Effective March 2010, the base rent was reduced from approximately $9,354 to approximately $6,800 through April 2021. The term of the lease was also extended through April 2021 and contains two five-year options to extend.

AMC Marquette, Inc. signed a 15-year lease that commenced in June 2010, requires monthly payments of approximately $8,700, expires in 2025, and contains three five-year options to extend.

Total rent expense was $573,619 and $712,880 for the three months ended June 27, 2010 and June 30, 2009, respectively (of which $82,538 and $81,463 for the three months ended June 27, 2010 and June 30, 2009, respectively, were paid to a related party). Rent expense was $1,333,839 and $1,444,331 for the six months ended June 27, 2010 and June 30, 2009, respectively (of which $165,341 and $162,927 for the six months ended June 27, 2010 and June 30, 2009, 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 June 27, 2010 are summarized as follows:

Year		Amount
2010		$	2,633,067
2011			2,476,780
2012			2,558,860
2013			2,624,804
2014			2,496,364
Thereafter			6,155,604
Total		$	18,945,479

10. CAPITAL LEASES

Starting January 2009 through February 2010, the Company entered into agreements to sell and immediately lease back various equipment and furniture at its Flint BWW, Port Huron BWW, and Novi Bagger Dave’s locations, respectively. These leases required between 36 and 48 monthly payments of approximately $29,787 combined, including applicable taxes, with options to purchase the assets under lease for a range of $1 to $100 at the conclusion of the lease. These transactions, prior to the Credit Facility, were reflected in the interim consolidated financial statements as capital leases with a combined asset values recorded at their combined purchase price of $1,108,780 and depreciated as purchased furniture and equipment, and the lease obligations included in long-term debt at its present value. As a result of the Senior Secured Term Loan of the Credit Facility (refer to Note 2 for details), these lease obligations were paid in full, along with applicable prepayment penalties.

11. COMMITMENTS AND CONTINGENCIES

Prior to February 1, 2010, the Company had management service agreements in place with nine BWW restaurants located in Michigan and Florida. These management service agreements contained options that allowed WINGS to purchase each restaurant for a price equal to a factor of twice the average EBITDA of the restaurant for the previous three fiscal years (2007, 2008, and 2009) less long-term debt. These options were exercised by the subsidiary on February 1, 2010, six months prior to the expiration of the options and in line with the Company’s strategic plan (refer to Note 2 for details).

The Company assumed, from a related entity, an “Area Development Agreement” with BWWI in which the Company undertakes to open 23 BWW restaurants within their designated “development territory”, as defined by the agreement, by October 1, 2016. On December 12, 2008, this agreement was amended adding nine 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 June 27, 2010, of the 38 restaurants required to be opened, 17 of these restaurants, including six that were in operation prior to the initial Area Development Agreement, had been opened for business.

The Company is required to pay BWWI royalties (5% of net sales) and advertising fund contributions (3% of net sales) for the term of the individual franchise agreements. The Company incurred $491,898 and $496,369 in royalty expense for the three months ended June 27, 2010 and the three months ended June 30, 2009, respectively. The Company incurred $994,728 and $994,976 in royalty expense for the six months ended June 27, 2010 and the six months ended June 30, 2009, respectively. Advertising fund contribution expenses were $296,556 and $293,674 for the three months ended June 27, 2010 and the three months ended June 30, 2009, respectively. Advertising fund contribution expenses were $612,620 and $619,313 for the three months ended June 27, 2010 and the three months ended June 30, 2009, respectively.

The Company is required by its various BWWI franchise agreements to modernize the restaurants during the term of the agreements. The individual agreements generally require improvements between the fifth year and the tenth year to meet the most current design model that BWWI 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.

12. SUPPLEMENTAL CASH FLOWS INFORMATION

Other Cash Flows Information

Cash paid for interest was $518,143 and $171,155 during the three months ended June 27, 2010 and the three months ended June 30, 2009, respectively. Cash paid for interest was $687,876 and $351,203 during the six months ended June 27, 2010 and the six months ended June 30, 2009, respectively.

Cash paid for income taxes was $15,457 and $0 during the three months ended June 27, 2010 and the three months ended June 30, 2009, respectively. Cash paid for income taxes was $110,436 and $0 during the six months ended June 27, 2010 and the six months ended June 30, 2009, respectively.

Supplemental Schedule of Non-Cash Operating, Investing, and Financing Activities

Capital expenditures of $250,000 were funded by capital lease borrowing during the six months ended June 27, 2010.

The Company issued promissory notes totaling $3,134,790 to the sellers to fund the February 1, 2010 Affiliates Acquisition.

The $9 million Senior Secured Term Loan of the new Credit Facility paid off $8,577,071 of existing debt.

Approximately $2.3 million of long-term assets and debt were assumed in the Brandon Property purchase.

13. FAIR VALUE OF FINANCIAL INSTRUMENTS

As of June 27, 2010 and December 27, 2009, 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 approximates its carrying value, due to its short-term nature. Also, the fair value of notes payable — related party approximates carrying value due to its short-term maturities. As of June 27, 2010, our total debt, less related party debt, was approximately $11.9 million and had a fair value of approximately $8.9 million. As of December 27, 2009, our total debt was approximately $8.5 million and had a fair value of approximately $8.7 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 (“ASC 820”), 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 6 fall into the Level 2 category under the guidance of ASC 820. The fair market value of the interest rate swaps as of June 27, 2010 was a liability of $404,921, which is recorded in other liabilities on the consolidated balance sheet. The fair value of the interest rate swaps at December 27, 2009 was a liability of $213,604. Unrealized loss associated with interest rate swap positions in existence at June 27, 2010, which are reflected in the statement of stockholders’ (deficit) equity, totaled $404,921 for the six months ended June 27, 2010 and are included in comprehensive (loss) income.

14. SUBSEQUENT EVENTS

On July 31, 2010, the Company entered into a stock option agreement (“Stock Option Agreement”) with each of its directors as compensation for their services as directors, including T. Michael Ansley, who serves as the Company’s President and Chief Executive Officer, and David G. Burke, who serves as the Company’s Chief Financial Officer and Treasurer; refer to our 8-K filing of August 5, 2010 for further details. The Stock Option Agreements granted each of the directors, including Mr. Ansley and Mr. Burke, the option to purchase 30,000 shares of common stock exercisable at $2.50 per share. The options expire on July 31, 2016. The options and the underlying shares of common stock are restricted securities. The options vest for each of the directors according the schedule set forth below, subject to continued service as a director:

Director		Option Vesting Dates
T. Michael Ansley		10,000 shares on July 31, 2011 10,000 shares on July 31, 2012 10,000 shares on July 31, 2013
David G. Burke		10,000 shares on July 31, 2011 10,000 shares on July 31, 2012 10,000 shares on July 31, 2013
Jay A. Dusenberry		10,000 shares on July 31, 2011 10,000 shares on July 31, 2012 10,000 shares on July 31, 2013
David Ligotti		10,000 shares on July 31, 2011 10,000 shares on July 31, 2012 10,000 shares on July 31, 2013
Gregory J. Stevens		10,000 shares on July 31, 2011 10,000 shares on July 31, 2012 10,000 shares on July 31, 2013
Bill McClintock		10,000 shares on June 3, 2011 10,000 shares on June 3, 2012 10,000 shares on June 3, 2013
Joseph M. Nowicki		10,000 shares on June 3, 2011 10,000 shares on June 3, 2012 10,000 shares on June 3, 2013

Effective July 29, 2010, the Company exercised an option, with BWWI, to renew its Anker, Inc. franchise agreement.

On August 10, 2010, the Company announced the expansion of its Bagger Dave’s concept to the Brighton, Michigan area. The new Bagger Dave’s restaurant is anticipated to open by the end of the year.

The Company evaluated subsequent events for potential recognition and/or disclosure through August 10, 2010, the date the interim consolidated financial statements were issued.

15. RESTATEMENTS

The restated financial statements included in Part I, Item 1 of this Form 10-Q/A Amendment No. 1 (“Restated Financial Statements”) restate the financial statements included in Part I, Item 1 of the Company’s quarterly report on Form 10-Q for the quarter ended June 27, 2010 (“Original Quarterly Financial Statements”), which were filed with the SEC on August 10, 2010 (the “Original Filing”).

On February 1, 2010, the Company completed the Affiliates Acquisition. The Original Quarterly Financial Statements included the activity from the Affiliates Acquisition commencing as of February 1, 2010. However, upon re-evaluation of the Original Quarterly Financial Statements in light of FASB ASC 805-50, Business Combinations: Transactions Between Entities Under Common Control, the Company has determined that the Affiliates Acquisition, as a transaction between entities under common control, should have been accounted for as if the transaction had occurred at the beginning of the period (i.e., December 28, 2009). Further, financial statements and financial information presented in the Original Quarterly Financial Statements for prior years should also have been retrospectively adjusted to furnish comparative information while the entities were under common control. The Company’s Restated Financial Statements include the activity of the acquired affiliates for the full 2009 and 2010 years.

In addition, the Company incorrectly incorporated the acquired entities’ landlord allowance balance (recorded as deferred revenue per accounting standards) as a temporary difference for book versus tax rent in the Original Quarterly Financial Statements. In accordance with FASB 740-10-25, Income Taxes, only the amortization of the landlord allowance is a temporary difference. The Company’s Restated Financial Statements includes only the amortization of the landlord allowance as a temporary difference.

A summary comparison of the Original Quarterly Financial Statements to the Restated Financial Statements showing the material net effect of the Restatement follows:

DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)

		June 27, 2010												December 27, 2009
		As Previously								As				As Previously								As
		Reported				Adjustments				Restated				Reported				Adjustments				Restated
ASSETS
Total current assets			1,195,181				—				1,195,181				1,144,061				1,329,361				2,473,422
Deferred income taxes			786,942				(219,493	)			567,449				246,754				—				246,754
Total other long-term assets			16,271,537				—				16,271,537				8,327,412				4,129,160				12,456,572
Total assets		$	18,253,660			$	(219,493	)		$	18,034,167			$	9,718,227			$	5,458,521			$	15,176,748
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Total current liabilities			3,998,381				—				3,998,381				2,080,354				1,419,562				3,499,916
Total long-term liabilities			15,034,666				—				15,034,666				5,445,161				3,449,873				8,895,034
Total liabilities			19,033,047				—				19,033,047				7,525,515				4,869,435				12,394,950
Stockholders’ equity (deficit)
Common stock			1,888				—				1,888				1,863				—				1,863
Additional paid-in capital			2,622,286				—				2,622,286				2,356,155				—				2,356,155
Retained earnings (accumulated deficit)			(2,998,640	)			(219,493	)			(3,218,133	)			(165,306	)			589,086				423,780
Comprehensive (loss) income			(404,921	)			—				(404,921	)			—				—				—
Total stockholders’ equity (deficit)			(779,387	)			(219,493	)			(998,880	)			2,192,712				589,086				2,781,798
Total liabilities and stockholders’ equity (deficit)		$	18,253,660			$	(219,493	)		$	18,034,167			$	9,718,227			$	5,458,521			$	15,176,748

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

		Three Months Ended June 27, 2010												Three Months Ended June 30, 2009
		As Previously								As				As Previously								As
		Reported				Adjustments				Restated				Reported				Adjustments				Restated
Revenue
Food and beverage sales		$	10,683,821			$	—			$	10,683,821			$	4,305,776			$	6,097,303			$	10,403,079
Management and advertising fees			—				—				—				441,276				(441,276	)			—
Total revenue			10,683,821				—				10,683,821				4,747,052				5,656,027				10,403,079
Operating expenses
Compensation costs			3,397,029				—				3,397,029				1,491,686				1,474,982				2,966,668
Food and beverage costs			3,137,948				—				3,137,948				1,348,406				1,946,785				3,295,191
General and administrative			2,642,782				—				2,642,782				1,019,158				1,256,917				2,276,075
Pre-opening			111,921				—				111,921				131,277				—				131,277
Occupancy			573,619				—				573,619				275,805				446,370				722,175
Depreciation and amortization			640,715				—				640,715				358,439				180,262				538,701
Total operating expenses			10,504,014				—				10,504,014				4,624,771				5,305,316				9,930,087
Operating profit			179,807				—				179,807				122,281				350,711				472,992
Interest expense			(518,143	)			—				(518,143	)			(104,585	)			(66,571	)			(171,156	)
Other income (expense), net			(15,658	)			—				(15,658	)			79,295				17,950				97,245
Income (loss) before income taxes			(353,994	)			—				(353,994	)			96,991				302,090				399,081
Income tax benefit (provision)			244,463				—				244,463				(26,668	)			(86,454	)			(113,122	)
Net income (loss)		$	(109,531	)		$	—			$	(109,531	)		$	70,323			$	215,636			$	285,959
Basic earnings (loss) per share — as reported		$	(0.006	)			0.00			$	(0.006	)		$	0.004			$	0.012			$	0.016
Fully diluted earnings (loss) per share — as reported		$	(0.004	)			(0.00	)		$	(0.004	)		$	0.002			$	0.007			$	0.010
Weighted average number of common shares outstanding
Basic			18,870,505				5,495				18,876,000				18,070,000				—				18,070,000
Diluted			29,160,000				(140,000	)			29,020,000				29,020,000				—				29,020,000

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

		Six Months Ended June 27, 2010												Six Months Ended June 30, 2009
		As Previously								As				As Previously								As
		Reported				Adjustments				Restated				Reported				Adjustments				Restated
Revenue
Food and beverage sales		$	19,325,822			$	2,073,877			$	21,399,699			$	8,440,786			$	12,392,248			$	20,833,034
Management and advertising fees			165,886				(165,886	)			—				897,805				(897,805	)			—
Total revenue			19,491,708				1,907,991				21,399,699				9,338,591				11,494,443				20,833,034
Operating expenses
Compensation costs			5,983,841				450,185				6,434,026				2,850,893				2,914,334				5,765,227
Food and beverage costs			5,810,496				664,714				6,475,210				2,630,402				3,929,893				6,560,295
General and administrative			4,675,377				408,300				5,083,677				2,125,829				2,701,727				4,827,556
Pre-opening			217,179				—				217,179				133,078				—				133,078
Occupancy			1,183,785				150,054				1,333,839				550,202				895,517				1,445,719
Depreciation and amortization			1,163,275				82,329				1,245,604				704,844				322,355				1,027,199
Total operating expenses			19,033,953				1,755,582				20,789,535				8,995,248				10,763,826				19,759,074
Operating profit			457,755				152,409				610,164				343,343				730,617				1,073,960
Interest expense			(668,426	)			(19,450	)			(687,876	)			(215,892	)			(135,311	)			(351,203	)
Other income (expense), net			(2,567	)			4,130				1,563				90,514				33,673				124,187
Income (loss) before income taxes			(213,238	)			137,089				(76,149	)			217,965				628,979				846,944
Income tax benefit (provision)			354,979				(233,092	)			121,887				(68,429	)			(146,577	)			(215,006	)
Net income (loss)		$	141,741			$	(96,003	)		$	45,738			$	149,536			$	482,402			$	631,938
Basic earnings per share — as reported		$	0.008			$	(0.005	)		$	0.002			$	0.008			$	0.027			$	0.035
Fully diluted earnings per share — as reported		$	0.005			$	(0.003	)		$	0.002			$	0.005			$	0.017			$	0.022
Weighted average number of common shares outstanding
Basic			18,870,505				2,748				18,873,253				18,070,000				—				18,070,000
Diluted			29,090,000				(70,000	)			29,020,000				29,020,000				—				29,020,000