Diversified Restaurant Holdings, Inc. - FORM 10-Q/A

Attached files

file	filename
EX-32.1 - EXHIBIT 32.1 - Diversified Restaurant Holdings, Inc.	c09560exv32w1.htm
EX-31.2 - EXHIBIT 31.2 - Diversified Restaurant Holdings, Inc.	c09560exv31w2.htm
EX-31.1 - EXHIBIT 31.1 - Diversified Restaurant Holdings, Inc.	c09560exv31w1.htm
EX-32.2 - EXHIBIT 32.2 - Diversified Restaurant Holdings, Inc.	c09560exv32w2.htm

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 March 28, 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		(I.R.S. employer
incorporation or formation)		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

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 8, 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 (Do not check if a smaller reporting company)		Smaller reporting company þ

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 March 28, 2010 (“Original Quarterly Financial Statements”), which were filed with the Securities and Exchange Commission (“SEC”) on May 12, 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 Stockholders’ Equity (Deficit) (Unaudited)			3

Consolidated Statements of Cash Flows (Unaudited)			4

Notes to Interim Consolidated Financial Statements			5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			28

Item 3. Quantitative and Qualitative Disclosure About Market Risks			32

Item 4. Controls and Procedures			32

PART II — OTHER INFORMATION			33

Item 1. Legal Proceedings			33

Item 1A. Risk Factors			33

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			33

Item 3. Defaults Upon Senior Securities			33

Item 5. Other Information			33

Item 6. Exhibits			34

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)


	March 28			December 27
	2010			2009 ^(a)
	(Restated)			(Restated)
ASSETS

Current assets
Cash and cash equivalents	$	1,294,021		$	1,594,362
Accounts receivable — related party		—			376,675
Inventory		302,170			307,301
Prepaid assets		101,959			152,702
Accounts receivable — other		32,456			42,382


Total current assets		1,730,606			2,473,422

Property and equipment, net (Note 3)		11,915,555			11,655,513
Intangible assets, net (Note 4)		817,843			751,779
Other assets		15,592			49,280
Deferred income taxes (Note 8)		286,383			246,754


Total assets	$	14,765,979		$	15,176,748


LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY

Current liabilities
Current portion of long-term debt (Note 6)	$	2,786,486		$	2,193,057
Accounts payable		841,419			527,151
Accrued liabilities		791,869			674,768
Deferred rent		104,940			104,940


Total current liabilities		4,524,714			3,499,916

Accrued rent		904,639			846,014
Deferred rent		611,789			638,024
Related party payable		—			430,351
Other liabilities — interest rate swap		214,074			213,604
Long-term debt, less current portion (Note 6)		9,023,271			6,767,041


Total liabilities		15,278,487			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, respectfully, issued and outstanding		1,888			1,863
Additional paid-in capital		2,614,208			2,356,155
Retained earnings (accumulated deficit)		(3,128,604	)		423,780


Total stockholders’ equity (deficit)		(512,508	)		2,781,798


Total liabilities and stockholders’ equity (deficit)	$	14,765,979		$	15,176,748


^(a)		Amounts are derived from audited financial statements as of December 27, 2009.

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

DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)


	Three Months Ended
	March 28			March 31
	2010			2009
	(Restated)			(Restated)
Revenue
Food and beverage sales	$	10,715,878		$	10,429,955


Total revenue		10,715,878			10,429,955

Operating expenses
Compensation costs		3,036,997			2,798,559
Food and beverage costs		3,337,262			3,265,105
General and administrative		2,560,725			2,553,281
Occupancy		765,650			723,542
Depreciation and amortization		604,889			488,498


Total operating expenses		10,305,523			9,828,985


Operating profit		410,355			600,970

Interest expense		(169,733	)		(180,048	)
Other income, net		17,221			26,942


Income before income taxes		257,843			447,864

Income tax benefit (provision)		(122,576	)		(101,884	)


Net income	$	135,267		$	345,980


Basic earnings per share — as reported	$	0.007		$	0.019

Fully diluted earnings per share — as reported	$	0.005		$	0.012


Weighted average number of common shares outstanding (Note 1 and 7)
Basic		18,870,505			18,070,000
Diluted		29,020,000			29,020,000

The accompanying notes are an integral part of these 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			Stockholders’
	Shares		Amount		Capital		Deficit)			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)						8,078					8,078

Aquisition of BWW restaurants (Note 2)								(3,134,790	)		(3,134,790	)

Distributions								(552,861	)		(552,861	)

Net income								135,267			135,267


Balances — March 28, 2010		18,876,000	$	1,888	$	2,614,208	$	(3,128,604	)	$	(512,508	)


(a)		Amounts are derived from audited financial statements as of December 27, 2009.

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

DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	Three Months Ended
	March 28			March 31
	2010			2009
	(Restated)			(Restated)
Cash flows from operating activities
Net income	$	135,267		$	345,980
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		570,013			488,498
Loss on disposal of property and equipment		34,875			—
Share-based compensation		8,078			8,078
Deferred income tax benefit		(39,629	)		154,761
Changes in operating assets and liabilities that provided (used) cash
Accounts receivable — related party		376,675			46,520
Accounts payable		(116,083	)		(194,106	)
Inventory		5,131			17,023
Prepaid assets		50,743			20,812
Accounts receivable — other		9,926			181,994
Intangible assets		(73,117	)		—
Other assets		33,688			(11,780	)
Accrued liabilities		117,101			205,126
Accrued rent		58,625			55,719
Deferred rent		(26,235	)		(28,366	)


Net cash provided by operating activities		1,145,058			1,290,259


Cash flows from investing activities
Purchases of property and equipment		(607,877	)		(182,548	)


Net cash used for investing activities		(607,877	)		(182,548	)


Cash flows from financing activities
Proceeds from issuance of long-term debt		236,198			426,597
Repayments of long-term debt		(770,859	)		(363,382	)
Proceeds from issuance of common stock		250,000			—
Distributions		(552,861	)		(616,581	)


Net cash used for financing activities		(837,522	)		(553,366	)


Net increase (decrease) in cash and cash equivalents		(300,341	)		554,345

Cash and cash equivalents, beginning of period		1,594,362			900,986


Cash and cash equivalents, end of period	$	1,294,021		$	1,455,331

The accompanying notes are an integral part of these 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”) 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”) (collectively referred to as the “Company”), 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 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 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 the following 16 BWW restaurants that are currently in operation:


		Date of
Subsidiary		Restaurant Opening
Flyer Enterprises, Inc. (Sterling Heights, MI)		December 1999*
Anker, Inc. (Fenton, MI)		April 2001*
TMA Enterprises of Novi, Inc. (Novi, MI)		June 2002*
Bearcat Enterprises, Inc. (Clinton Township, MI)		December 2003*
MCA Enterprises Brandon, Inc. (Brandon, FL)		June 2004*
TMA Enterprises of Ferndale, Inc. (Ferndale, MI)		March 2005*
Buckeye Group, LLC (Riverview/Fish Hawk Ranch, FL)		September 2005*
Buckeye Group II, LLC (Sarasota, FL)		March 2006*
AMC Warren, LLC (Warren, MI)		July 2006*
AMC North Port, Inc. (North Port, FL)		August 2007
AMC Riverview, Inc. (Riverview, FL)		August 2007
AMC Grand Blanc, Inc. (Grand Blanc, MI)		March 2008
AMC Troy, Inc. (Troy, MI)		July 2008
AMC Petoskey, Inc. (Petoskey, MI)		August 2008
AMC Flint, Inc. (Flint, MI)		December 2008
AMC Port Huron, Inc. (Port Huron, MI)		June 2009


*		Acquired as part of the Affiliates Acquisition completed on February 1, 2010 (see Note 2 for details).

The Company also executed franchise agreements with Buffalo Wild Wings, Inc. (“BWWI”) 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 BWWI. 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 March 28, 2010. The Company is under contract with BWWI to open 20 additional stores by 2017. The Company held an option to purchase the nine (9) 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 new full service, ultra 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’ subsidiary, Troy Burgers, Inc., opened on February 21, 2010 in Novi, Michigan. 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, and have been approved, to franchise in Michigan, Ohio, and Indiana, but have not yet franchised any Bagger Dave’s restaurants. Our filing in the state of Illinois remains pending review by the pertinent authorities.

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 Codification, refer to the “Recent Accounting Pronouncements” section of this note.

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 a 52- or 53-week 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 three-month period ended March 28, 2010, comprising 13 weeks.

Segment Reporting

The Company has determined that it does not have any separately reportable business segments at March 28, 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 March 28, 2010 and December 27, 2009 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 prior to the February 1, 2010 acquisition (see Note 5). 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 March 28, 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 (5) 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 three months ended March 28, 2010 and for the three months ended March 31, 2009, respectively.

The liability is included in accrued liabilities in the interim consolidated balance sheets. As of March 28, 2010, the Company’s gift card liability was approximately $4,169, 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 expenses 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 March 28, 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. 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 approximately $485,738 and $590,663 for the three months ended March 28, 2010 and the three months ended March 31, 2009, respectively.

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 78% and 79% of food and beverage sales came from restaurants located in Michigan during the three months ended March 28, 2010 and the three months ended March 31, 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 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 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.

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 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 March 28, 2010 and December 27, 2009 was $2,893,249 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” No. 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. ASC 855-10 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 No. 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. ASC 105-10 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.

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. 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 (“Purchase 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 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.

3. PROPERTY AND EQUIPMENT

Property and equipment are comprised of the following assets:


	March 28			December 27
	2010			2009
Equipment	$	7,038,423		$	6,710,092
Furniture and fixtures		1,895,850			1,833,347
Leasehold improvements		12,074,667			11,585,978
Restaurant construction in progress		70,283			126,804

Total		21,079,223			20,256,221
Less accumulated depreciation		(9,163,668	)		(8,600,708	)


Property and equipment, net	$	11,915,555		$	11,655,513

4. INTANGIBLE ASSETS

Intangible assets are comprised of the following:


	March 28			December 27
	2010			2009
Amortized intangible assets
Franchise fees	$	376,250		$	358,750
Trademark		2,500			2,500
Loan fees		81,393			66,565

Total		460,143			427,815
Less accumulated amortization		(129,117	)		(122,064	)


Amortized intangible assets, net		331,026			305,751


Unamortized intangible assets
Liquor licenses		486,817			446,028

Total intangible assets, net	$	817,843		$	751,779

Amortization expense for the three months ended March 28, 2010 and March 31, 2009 was $7,053 and $9,006, 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 $36,900 per year.

5. RELATED PARTY TRANSACTIONS

The Affiliates Acquisition (see 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 March 28, 2010 and the three months ended March 31, 2009 were $60,434 and $50,103, 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”. An “event of default” is defined in the related note agreement 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 March 28, 2010 and December 27, 2009, the carrying amount of the underlying debt obligation of the related entity was approximately $1,961,600 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 entities for which it has provided the guarantees operate under common ownership and management control and, in accordance with FASB ASC 460, Guarantees (“ASC 460”), the initial recognition and measurement provisions of ASC 460 do not apply. At March 28, 2010, payments on the debt obligation were current.

Long-term debt (Note 6) contains two promissory notes in the amount of $100,000 each, along with accrued interest, due to two of the Company’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.

Current debt (Note 6) 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 8.00% per annum and is compounded quarterly. The Company has 180 days from the date of demand to pay the principal and accrued interest.

See Note 9 for related party lease transactions.

6. LONG-TERM DEBT

Long-term debt consists of the following obligations:


	March 28		December 27
	2010		2009

Note 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 March 28, 2010).	$	162,596	$	206,396

Note 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%.		607,867		634,081

Note 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 plus 2.5% (effective annual rate of approximately 2.75% at March 28, 2010).		158,329		201,510

Note 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 June 2015. Interest is charged based on a swap arrangement designed to yield a fixed annual rate of approximately 6.98%.		636,943		661,651

Note 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.		346,641		361,129

Note 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 June 2015. Interest is charged based on a swap arrangement designed to yield a fixed annual rate of approximately 7.28%.		804,380		835,442


	March 28		December 27
	2010		2009

Note 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 March 28, 2010).		373,139		396,957

Note 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.		580,818		604,373

Note 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 December 2014.		587,903		611,531

Note 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.		428,757		443,537

Note payable to a bank secured by the property and equipment of Flyer Enterprises, Inc. as well as corporate and personal guarantees of certain stockholders and various related parties. The agreement calls for monthly principal and interest payments of approximately $10,400 for the period beginning March 2008 through maturity in July 2013. Interest is charged based a fixed rate of 6.30% per annum.		146,552		156,375

Note payable to a bank secured by the property and equipment of TMA Enterprises of Ferndale, LLC as well as personal guarantees of certain stockholders and various related parties. Scheduled monthly principal and interest payments are approximately $11,200 through maturity in August 2014. Interest is charged based on a swap arrangement designed to yield a fixed annual rate of approximately 7.60%.		497,418		520,968

Note payable to a bank secured by the property and equipment of Anker, Inc. as well as personal guarantees of certain stockholders and various related parties. The agreement calls for monthly principal and interest payments of approximately $6,200 for the period beginning June 2003 through maturity in May 2021. Interest is charged based on a fixed rate of 7.61% per annum.		210,585		224,454


	March 28			December 27
	2010			2009

Note payable to a bank secured by the property and equipment of TMA Enterprises of Novi, Inc. and personal guarantees of certain stockholders and various related parties. The agreement calls for payments of principal and interest of approximately $11,300 for the period beginning June 2007 through maturity in May 2014. Interest is charged based on a fixed rate of 8.20% per annum.		480,934			503,407

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 December 31, 2009 was approximately 3.95%. The note matures in September 2014.		60,633			72,975

Note payable to a bank secured by the property and equipment of AMC Warren, LLC as well as personal guarantees of certain members and various related parties. The agreement calls for monthly payments of principal and interest of approximately $12,600 through maturity in September 2013. Interest is charged based on a fixed annual rate of approximately 8.63%.		458,793			485,088

Note payable to a bank secured by the property and equipment of MCA Enterprises Brandon, Inc. as well as personal guarantees of certain stockholders and various related parties. The agreement calls for monthly payments of principal and interest of approximately $11,700 for the period beginning August 2004 through maturity in July 2011. Interest is charged based on a fixed annual rate of approximately 8.10%.		179,062			209,704

Note payable to a bank secured by the property and equipment of Buckeye Group, LLC as well as personal guarantees of certain members and various related parties. Scheduled monthly principal and interest payments are approximately $10,900 with annual interest charged at approximately 8.27%. The note matures in December 2012.		323,801			348,637

Note payable to a bank secured by the property and equipment of Buckeye Group II, LLC as well as personal guarantees of certain members and various related parties. Scheduled monthly principal and interest payments are approximately $11,900 with annual interest charged at approximately 8.46%. The note matures in April 2013.		390,544			416,672

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 0.00% rate. Scheduled monthly principal payments are approximately $430. The note matures in April 2013.		15,879			17,167

Obligation under capital leases (Note 10)		889,442			693,196

Notes payable — related parties (Note 5)		3,468,740			354,848


Total long-term debt	$	11,809,757		$	8,960,098

Less current portion		(2,786,486	)		(2,193,057	)


Long-term debt, net of current portion	$	9,023,271		$	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	$	2,786,486
2011		2,301,297
2012		2,379,493
2013		1,870,162
2014		1,547,243
Thereafter		925,076

Total	$	11,809,757

Interest expense was $169,733 and $180,048 (including related party interest expense of $7,534 for the three months ended March 28, 2010 and $11,251 for the three months ended March 31, 2009; refer to Note 5) for the three months ended March 28, 2010 and the three months ended March 31, 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 global debt service ratio, maximum global funded indebtedness to EBITDA ratio, and a Corporate Fixed Charge Coverage Ratio.

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 nine 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 $8,078, as determined using the Black-Scholes model, was recognized during the three months ended March 28, 2010 and the three months ended March 31, 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 March 28, 2010. The fair value of unvested shares, as determined using the Black-Scholes model, is $10,821 as of March 28, 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 March 28, 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 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 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 March 28, 2010, all 800,000 warrants were exercised at the option price of $1.

The Company authorized 10,000,000 shares of preferred stock at a par value of $0.0001. No preferred shares are issued or outstanding as of March 28, 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 months ended March 28, 2010 and the three months ended March 31, 2009:


	March 28			March 31
	2010			2009
Federal
Current	$	—		$	—
Deferred		(105,137	)		(33,650	)

State
Current		(50,101	)		—
Deferred		32,662			(8,111	)


Income tax benefit (provision)	$	(122,576	)	$	(41,761	)

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:


	March 28			December 27
	2010			2009

Income tax provision at federal statutory rate	$	(87,667	)	$	(207,455	)
State income tax benefit (provision)		(17,439	)		(57,585	)
Permanent differences		34,581			(32,111	)
Tax credits		35,000			93,500
Other		(87,051	)		(48,413	)


Income tax benefit (provision)	$	(122,576	)	$	(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:


	March 28		December 27
	2010		2009
Deferred tax assets:
Net operating loss carry forwards	$	457,131	$	954,370
Deferred rent expense		331,772		78,998
Start-up costs		216,180		104,327
Tax credit carry forwards		184,222		164,366
Swap loss recognized for book		72,785		56,970
Other — including state deferred tax assets		401,254		193,781


Total deferred assets		1,663,344		1,552,812

Deferred tax liabilities:
Other — including state deferred tax liabilities		191,036		146,325
Tax depreciation in excess of book		1,185,925		1,159,733


Total deferred tax liabilities		1,376,961		1,306,058


Net deferred income tax assets	$	286,383	$	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 $1,071,363 will expire in 2029 and 2028, respectively. General business tax credits of $35,000, $78,356, $59,722 and $11,144 will expire in 2030, 2029, 2028 and 2027, respectively.

On January 1, 2007, the Company adopted the provisions of FASB ASC 740 (“ASC 740”), Income Taxes, 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 March 28, 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)

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, and now occupies 5,340 square feet of office space for a period of fifty-one (51) months with two (2) two-year options to extend. Rent payments begin May 1, 2010 at $4,450 per month.

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 (2) five-year options to extend.

The Company renegotiated its lease for AMC Riverview, Inc. Effective April 1, 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. The lease contains two (2) five-year options to extend.

Berkley Burgers, Inc. 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.’s 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.’s and Ann Arbor Burgers, Inc.’s lease payments commenced in August 2008. Both leases have 10-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 September 2009. This lease contains two (2) five-year options to extend.

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 commenced on February 21, 2010. The lease term is 10 years with two (2) five-year options to extend. Monthly lease payments are approximately $7,000 per month.

Flyer Enterprises, Inc.’s lease payments commenced in December 1999 and require monthly payments, effective January 2010, of $11,116 per month. The lease continues through December 31, 2014 with 3% annual increases.

Anker, Inc.’s lease payments commenced May 2001 and require monthly payments of approximately $9,354. The lease ran through May 2011, with annual rent adjustments based on the Consumer Price Index, but was recently amended to extend through April 2021. The lease contains two (2) five-year options to extend.

TMA Enterprises of Novi, Inc.’s lease payments commenced June 2002 and require monthly payments of approximately $14,493. Payments will increase approximately 9% in June 2012. The lease runs through June 2014 and contains one (1) five-year renewal option.

Bearcat Enterprises, Inc.’s lease payments commenced February 2004 and require monthly payments of approximately $20,197. The 15-year lease expires in 2019. This lease contains three (3) five-year options to extend. This lease is with a party related through common ownership.

MCA Enterprises Brandon, Inc.’s lease payments commenced June 2004 and monthly payments are approximately $20,829. This 20-year lease expires June 2024 and contains four (4) five-year options to extend.

TMA Enterprises of Ferndale, LLC’s lease payments commenced March 2005 and monthly payments are approximately $8,864. This 10-year lease expires March 2015 and contains two (2) five-year options to extend.

Buckeye Group, LLC’s lease commenced March 2006 under a 10-year term expiring in 2016. The lease requires monthly payments of approximately $9,333. This lease contains two (2) five-year options to extend.

Buckeye Group II, LLC’s lease commenced April 2006 under a 10-year term expiring in 2016. The lease requires monthly payments of approximately $15,102. The lease contains two (2) five-year options to extend.

AMC Warren, LLC’s lease commenced July 2006 under a 10-year term expiring in 2016. The lease calls for monthly payments of approximately $15,755. The lease contains two (2) five-year options to extend.

Total rent expense was $657,908 and $680,342 for the three months ended March 28, 2010 and the three months ended March 31, 2009, respectively. Of these amounts, $82,802 and $81,463 for the three months ended March 28, 2010 and the three months ended March 31, 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 March 28, 2010 are summarized as follows:


Year	Amount

2010	$	2,520,060
2011		2,638,297
2012		2,724,716
2013		2,790,660
2014		2,672,635
Thereafter		10,082,067


Total	$	23,428,435

10. 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 interim consolidated financial statements as a capital lease with the assets recorded at their purchase price of $427,902 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 interim 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.

In February 2010, the Company entered into an agreement to sell and immediately lease back various equipment and furniture at its Novi Bagger Dave’s location. The lease requires thirty six (36) monthly payments of approximately $8,155, excluding applicable taxes, with an option to purchase the assets under lease for $1 at the conclusion of the lease. This transaction is reflected in the interim consolidated financial statements as a capital lease with the assets recorded at their purchase price of $250,000 plus $6,241 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.

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	Amount

2010	$	268,085
2011		357,446
2012		357,446
2013		48,644
2014		—

Total minimum lease payments		1,031,621
Less amount representing interest		(142,179	)

Present value of minimum lease payments	$	889,442

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.

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 March 28, 2010, of the 32 restaurants required to be opened, 10 of these restaurants 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 $502,830 and $498,607 in royalty expense for the three months ended March 28, 2010 and the three months ended March 31, 2009, respectively. Advertising fund contribution expenses were $316,064 and $325,718 for the three months ended March 28, 2010 and the three months ended March 31, 2009, respectively.

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 $169,733 and $180,048 during the three months ended March 28, 2010 and the three months ended March 31, 2009, respectively.

Cash paid for income taxes was $94,979 and $0 during the three months ended March 28, 2010 and the three months ended March 31, 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 three months ended March 28, 2010.

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

13. FAIR VALUE OF FINANCIAL INSTRUMENTS

As of March 28, 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 approximate its carrying value, due to its short-term nature. Also, the fair value of notes payable — related party approximates the carrying value due to its short-term maturities. As of March 28, 2010, our total debt, less related party debt, was approximately $8.3 million and had a fair value of approximately $8.7 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 March 28, 2010 was a liability of $214,074, 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 March 28, 2010, which are reflected in the statement of operations, totaled $470 for the three months ended March 28, 2010 and are included in other income/loss.

14. SUBSEQUENT EVENTS

The Company, together with its wholly-owned subsidiaries, entered into a credit facility (the “Credit Facility”) with RBS Citizens, N.A., a national banking association (“RBS”) on May 5, 2010. 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. The Company plans to use 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 as working capital. The Company expects to realize approximately $1 million in debt service savings over the next 12 months through this refinancing. 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 $136,275.

The Company evaluated subsequent events for potential recognition and/or disclosure through May 12, 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 March 28, 2010 (“Original Quarterly Financial Statements”), which were filed with the SEC on May 12, 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)


	March 28, 2010									December 27, 2009
	As Previously						As			As Previously					As
	Reported			Adjustments			Restated			Reported			Adjustments		Restated
ASSETS

Total current assets		1,730,606			—			1,730,606			1,144,061			1,329,361		2,473,422
Deferred income taxes		505,876			(219,493	)		286,383			246,754					246,754
Total other long-term assets		12,748,990			—			12,748,990			8,327,412			4,129,160		12,456,572

Total assets	$	14,985,472		$	(219,493	)	$	14,765,979		$	9,718,227		$	5,458,521	$	15,176,748


LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

Total current liabilities		4,524,714			—			4,524,714			2,080,354			1,419,562		3,499,916
Total long-term liabilities		10,753,773			—			10,753,773			5,445,161			3,449,873		8,895,034

Total liabilities		15,278,487			—			15,278,487			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		2,614,208			—			2,614,208			2,356,155			—		2,356,155
Retained earnings (accumulated deficit)		(2,909,111	)		(219,493	)		(3,128,604	)		(165,306	)		589,086		423,780

Total stockholders’ equity (deficit)		(293,015	)		(219,493	)		(512,508	)		2,192,712			589,086		2,781,798


Total liabilities and stockholders’ equity (deficit)	$	14,985,472		$	(219,493	)	$	14,765,979		$	9,718,227		$	5,458,521	$	15,176,748

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


	Three Months Ended March 28, 2010									Three Months Ended March 31, 2009
	As Previously						As			As Previously						As
	Reported			Adjustments			Restated			Reported			Adjustments			Restated

Revenue
Food and beverage sales	$	8,642,001		$	2,073,877		$	10,715,878		$	4,135,010		$	6,294,945		$	10,429,955
Management and advertising fees		165,886			(165,886	)		—			456,529			(456,529	)		—


Total revenue		8,807,887			1,907,991			10,715,878			4,591,539			5,838,416			10,429,955

Operating expenses
Compensation costs		2,586,812			450,185			3,036,997			1,359,207			1,439,352			2,798,559
Food and beverage costs		2,672,548			664,714			3,337,262			1,281,996			1,983,109			3,265,105
General and administrative		2,157,855			402,870			2,560,725			1,108,472			1,444,809			2,553,281
Occupancy		610,166			155,484			765,650			274,397			449,145			723,542
Depreciation and amortization		522,560			82,329			604,889			346,405			142,093			488,498


Total operating expenses		8,549,941			1,755,582			10,305,523			4,370,477			5,458,508			9,828,985


Operating profit		257,946			152,409			410,355			221,062			379,908			600,970

Interest expense		(150,283	)		(19,450	)		(169,733	)		(111,307	)		(68,741	)		(180,048	)
Other income, net		13,091			4,130			17,221			11,219			15,723			26,942


Income before income taxes		120,754			137,089			257,843			120,974			326,890			447,864

Income tax benefit (provision)		110,516			(233,092	)		(122,576	)		(41,761	)		(60,123	)		(101,884	)


Net income	$	231,270		$	(96,003	)	$	135,267		$	79,213		$	266,767		$	345,980


Basic earnings per share — as reported	$	0.012		$	(0.005	)	$	0.007		$	0.004		$	0.015		$	0.019
Fully diluted earnings per share — as reported	$	0.008		$	(0.003	)	$	0.005		$	0.003		$	0.009		$	0.012

Weighted average number of common shares outstanding
Basic		18,870,505			—			18,870,505			18,070,000			—			18,070,000
Diluted		29,020,000			—			29,020,000			29,020,000			—			29,020,000

DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)


	Common Stock				Additional		Retained Earnings			Total Stockholders’
BALANCES AS PREVIOUSLY REPORTED:	Shares		Amount		Paid-In Capital		(Accumulated Deficit)			Equity (Deficit)

Balances — December 27, 2009		18,626,000	$	1,863	$	2,356,155	$	(165,306	)	$	2,192,712

Shares issued for warrants		250,000		25		249,975		—			250,000

Share-based compensation		—		—		8,078		—			8,078

Aquisition of BWW restaurants		—		—		—		(2,975,075	)		(2,975,075	)

Distributions		—		—		—		—			—

Net income		—		—		—		231,270			231,270


Balances — March 28, 2010		18,876,000	$	1,888	$	2,614,208	$	(2,909,111	)	$	(293,015	)


	Common Stock				Additional		Retained Earnings			Total Stockholders’
ADJUSTMENTS:	Shares		Amount		Paid-In Capital		(Accumulated Deficit)			Equity (Deficit)

Balances — December 27, 2009		—		—		—		589,086			589,086

Shares issued for warrants		—		—		—		—			—

Share-based compensation		—		—		—		—			—

Aquisition of BWW restaurants		—		—		—		(159,715	)		(159,715	)

Distributions		—		—		—		(552,861	)		(552,861	)

Net income		—		—		—		(96,003	)		(96,003	)


Balances — March 28, 2010		—	$	—	$	—	$	(219,493	)	$	(219,493	)


	Common Stock				Additional		Retained Earnings			Total Stockholders’
BALANCES AS RESTATED:	Shares		Amount		Paid-In Capital		(Accumulated Deficit)			Equity (Deficit)

Balances — December 27, 2009		18,626,000	$	1,863	$	2,356,155	$	423,780		$	2,781,798

Shares issued for warrants		250,000		25		249,975		—			250,000

Share-based compensation		—		—		8,078		—			8,078

Aquisition of BWW restaurants		—		—		—		(3,134,790	)		(3,134,790	)

Distributions		—		—		—		(552,861	)		(552,861	)

Net income		—		—		—		135,267			135,267


Balances — March 28, 2010		18,876,000	$	1,888	$	2,614,208	$	(3,128,604	)	$	(512,508	)

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


	Three Months Ended March 28, 2010									Three Months Ended March 31, 2009
	As Previously						As			As Previously						As
	Reported			Adjustments			Restated			Reported			Adjustments			Restated

Net cash provided by operating activities	$	1,266,154		$	(121,096	)	$	1,145,058		$	502,561		$	787,698		$	1,290,259

Net cash used in investing activities		(636,505	)		28,628			(607,877	)		(26,496	)		(156,052	)		(182,548	)

Net cash provided by financing activities		14,854			(852,376	)		(837,522	)		198,275			(751,641	)		(553,366	)


Net increase in cash and cash equivalents		644,503			(944,844	)		(300,341	)		674,340			(119,995	)		554,345

Cash and cash equivalents, beginning of period		649,518			944,844			1,594,362			133,865			767,121			900,986


Cash and cash equivalents, end of period	$	1,294,021		$	—		$	1,294,021		$	808,205		$	647,126		$	1,455,331


Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

(The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated interim financial statements and related notes included in Item 1 of Part 1 of this Quarterly Report and the audited consolidated financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results from Operations contained in our Form 10-K for the fiscal year ended December 27, 2009.)

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

Statements contained in this “Quarterly Report on Form 10-Q” may contain information that includes or is based upon certain “forward-looking statements” relating to our business. These forward-looking statements represent management’s current judgment and assumptions, and can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements are frequently accompanied by the use of such words as “anticipates,” “plans,” “believes,” “expects,” “projects,” “intends,” and similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors, including, but not limited to, those relating to our ability to secure the additional financing adequate to execute our business plan, our ability to locate and start up new restaurants, acceptance of our restaurant concepts in new market places, and the cost of food and other raw materials. Any one of these or other risks, uncertainties, other factors, or inaccurate assumptions may cause actual results to be materially different from those described herein or elsewhere by us. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date they were made. Certain of these risks, uncertainties, and other factors may be described in greater detail in our filings from time to time with the Securities and Exchange Commission, which we strongly urge you to read and consider. Subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth above and elsewhere in our reports filed with the Securities and Exchange Commission. We expressly disclaim any intent or obligation to update any forward-looking statements.

OVERVIEW

Diversified Restaurant Holdings, Inc. (“DRH” or “the Company”) is a leading Buffalo Wild Wings^{^®} (“BWW”) franchisee that is rapidly expanding through organic growth and acquisitions. It operates 16 BWW restaurants; 11 in Michigan and five in Florida. DRH also created its own unique, full-service restaurant concept: Bagger Dave’s Legendary Burgers and Fries^{^®}, which falls within the full service, ultra casual dining segment and was launched in January 2008. As of March 28, 2010, we owned and operated three Bagger Dave’s^® restaurants in Southeast Michigan with the most recent store opening on February 21, 2010. We also plan to franchise our Bagger Dave’s concept. To that end, we have cleared Franchise Disclosure Documents in Michigan, Indiana and Ohio, while our filing in Illinois remains pending review by the pertinent authorities.

ACQUISITION

Amounts for the first quarter include financial results associated with the acquisition, on February 1, 2010, of nine affiliated BWW locations (“the Affiliates Acquisition”) in Michigan and Florida. The Affiliates Acquisition was valued at $3.1 million. The Company financed the Affiliates Acquisition through the issuance of subordinated promissory notes to the sellers totaling $3,134,790. The notes are amortized over six years and bear interest at 6% per year (refer to Note 2 in the notes to interim consolidated financial statements for further details).

The Affiliates Acquisition consisted of BWW Michigan stores in Sterling Heights, Fenton, Novi, Clinton Township, Ferndale and Warren and Florida stores in Brandon, Fish Hawk Ranch, and Sarasota. The stores range in age from four to 10 years. The Affiliates Acquisition allows us to fully capture the potential economic benefits associated with these nine BWW stores in 2010 and beyond.

RESULTS OF OPERATIONS

For the three months ended March 28, 2010, revenue was generated from the operations of 16 BWW restaurants and three Bagger Dave’s Legendary Burgers and Fries (“Bagger Dave’s”) restaurants (with the newest location in Novi, MI recently opened on February 21, 2010). For the three months ended March 31, 2009, revenue was generated from the operations of 15 BWW restaurants and two Bagger Dave’s restaurants.


	March 28		March 31
	2010		2009		$		%
	(Restated)		(Restated)		Change		Change
Revenue
Food and beverage sales	$	10,715.878	$	10,429,955	$	285,923		2.7	%

Revenue increased 2.7% to $10.7 million as a result of the new store openings.


	March 28		March 31							%			%
	2010		2009		$		%			revenue			revenue
	(Restated)		(Restated)		Change		Change			2010			2009
Operating expenses
Compensation costs	$	3,036,997	$	2,798,559	$	238,438		8.5	%		28.3	%		26.8	%
Food and beverage costs		3,337,262		3,265,105		72,157		2.2	%		31.1	%		31.3	%
General and administrative		2,560,725		2,553,281		7,444		0.3	%		23.9	%		24.5	%
Occupancy		765,650		723,542		42,108		5.8	%		7.1	%		6.9	%
Depreciation and amortization		604,889		488,498		116,391		23.8	%		5.6	%		4.7	%


Total operating expenses	$	10,305,523	$	9,828,985	$	476,538		4.9	%		96.2	%		94.2	%

Compensation costs increased 8.5% for the three months ended March 28, 2010 when compared with the three months ended March 31, 2009. As a percentage of revenue, compensation costs increased from 26.8% to 28.3% for the three months ended March 28, 2010 and March 31, 2009, respectively. This increase as a percentage of revenue is attributed to labor inefficiencies and training associated with new store openings.

Food and beverage costs remained fairly constant, only increasing by 2.2% for the three months ended March 28, 2010 when compared with the three months ended March 31, 2009. As a percentage of revenue, food and beverage costs remained fairly consistent at 31.3% to 31.1% for the three months ended March 31, 2009 and March 28, 2010, respectively. The stabilizing of chicken wing costs was the largest contributing factor to the relative static balance in this account.

General and administrative costs remained fairly constant, only increasing by 0.3% for the three months ended March 28, 2010 when compared with the three months ended March 31, 2009. As a percentage of revenue, the general and administrative costs remained fairly consistent at 24.5% and 23.9%, for the three months ended March 31, 2009 and March 28, 2010, respectively.

Occupancy costs increased by 5.8% for the three months ended March 28, 2010 when compared with the three months ended March 31, 2009. As a percentage of revenue, occupancy costs for the three months ended March 28, 2010 were 7.1% compared with occupancy costs of 6.9% for the three months ended March 31, 2009.

Depreciation and amortization costs increased by 23.8% for the three months ended March 28, 2010 when compared with the three months ended March 31, 2009. As a percentage of revenue, depreciation and amortization costs increased to 5.6% for the three months ended March 28, 2010 from 4.7% for the three months ended March 31, 2009, respectively. This is primarily due to the depreciation and amortization that is recorded for the new restaurant locations.

LIQUIDITY AND CAPITAL RESOURCES; EXPANSION PLANS

Our current consolidated interim cash flow from operations for the three months ended March 28, 2010 was $1,145,058 compared with $1,290,259 for the three months ended March 31, 2009. On April 16, 2010, DRH committed to a credit facility with Charter One, a division of RBS Citizens, N.A. The new $15 million credit facility became effective on May 5, 2010. This facility will refinance all existing senior debt used to finance the building of our existing stores over the years as well as make available a $6 million development line of credit for future borrowings. In 2010, we anticipate drawing on the new development line of credit for the following new restaurants:

	•		Marquette, Michigan — BWW — currently under construction with a target opening date in early June 2010. The estimated cost of construction is approximately $1,037,000. We anticipate borrowing up to 70% of the necessary funds and paying the remaining balance through cash from operations.

	•		Chesterfield, Michigan — BWW — construction expected to begin in the second quarter of 2010 with an estimated opening in the third quarter of 2010. The estimated cost of construction is approximately $950,000. We anticipate borrowing up to 70% of the necessary funds and paying the remaining balance through cash from operations.

In addition, we are evaluating the potential opening of our fourth Bagger Dave’s store as well as our 19th BWW location. Should we decide to move forward with either of these new stores, we anticipate drawing on the new development line of credit to fund the cost of construction, which may begin this year.

Refer to our 8-K filing of May 10, 2010 for further details surrounding our new credit facility.

Despite the new development line of credit, there are no assurances that we will be successful in our efforts to draw on this facility for new store openings due to covenant restrictions. Management believes that emphasis on prime locations is now more critical than ever to create stronger store openings and earlier positive cash flows to decrease our dependency on third-party financing.

OFF BALANCE SHEET ARRANGEMENTS

The Company assumed, from a related entity, an “Area Development Agreement” with BWW to open 23 BWW restaurants by October 1, 2016 within the designated “development territory”, as defined by the agreement. 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 and loss of rights to the development territory.

On December 10, 2008, DRH, through its wholly-owned subsidiary, AMC Wings, Inc., entered into an amendment to the Area Development Agreement (the “Amended Agreement”) with BWW. The Amended Agreement expanded our exclusive franchise territory in Michigan and extended, by one year, the time frame for completion of our obligations under the initial terms of the Area Development Agreement.

The Amended Agreement includes the right to develop an additional nine (9) BWW Restaurants, which increases the total number of BWW Restaurants we have a right to develop to thirty two (32). Under the Amended Agreement, we paid Buffalo Wild Wings, Inc., as Franchisor, a development fee of $31,250. Franchise fees for the nine (9) additional restaurants will be $12,500 each. We have until November 1, 2017 to complete our development obligations under the Amended Agreement. As of March 28, 2010, ten (10) of these restaurants had been opened for business under the Amended Agreement and twenty-two remain. Another six (6) restaurants were opened prior to the Area Development Agreement which, assuming that we are successful at fulfilling our Area Development Agreement, will bring DRH’s total BWW restaurant count to 38 by November 1, 2017.

The Company is required by its various BWWI 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 BWWI has approved. The modernization costs can range from approximately $50,000 to approximately $500,000 depending on the individual restaurant’s needs.

EXERCISE OF OPTION TO PURCHASE

We exercised an option to purchase, for $3,134,790, nine affiliated BWW restaurants we previously managed, which are listed below. We closed on the acquisition on February 1, 2010, six months prior to the option’s expiration date of August 1, 2010 (the two-year anniversary date of the completion of the Initial Public Offering). The acquisition was financed by the sellers. A promissory note was issued to each selling shareholder, bearing interest at 6% per year, maturing on February 1, 2016, and payable in quarterly installments with principal and interest fully amortized over six years.


Subsidiary Name		Restaurant Opening Date
Flyer Enterprises, Inc. (Sterling Heights, MI)		December 1999
Anker, Inc. (Fenton, MI)		April 2001
TMA Enterprises of Novi, Inc. (Novi, MI)		June 2002
Bearcat Enterprises, Inc. (Clinton Township, MI)		December 2003
MCA Enterprises Brandon, Inc. (Brandon, FL)		June 2004
TMA Enterprises of Ferndale, Inc. (Ferndale, MI)		March 2005
Buckeye Group, LLC (Riverview, FL)		September 2005
Buckeye Group II, LLC (Sarasota, FL)		March 2006
AMC Warren, LLC (Warren, MI)		July 2006

The impact of the acquisition to our interim financial statements is reflected in the consolidated interim balance sheets, statements of operations, statement of stockholders’ equity, cash flows, and notes to the consolidated interim financial statements; refer to Note 2 in the notes to interim consolidated financial statements for further details.

CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES

In the ordinary course of business, we have made a number of estimates and assumptions in the preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. We frequently reevaluate these significant factors and make adjustments where facts and circumstances dictate.

We discuss our significant accounting policies in Note 1 to the Company’s consolidated interim financial statements, including those policies that do not require management to make difficult, subjective or complex judgments or estimates. These policies are also described in Item 7 (Managements’ Discussion and Analysis of Financial Condition and Results of Operation) of our Annual Report on Form 10-K for the year ended December 27, 2009. We have not materially changed these policies from those reported in our Annual Report on Form 10-K for the year ended December 27, 2009.

Item 3. Quantitative and Qualitative Disclosure About Market Risks

Not Applicable.

Item 4. Controls and Procedures

Disclosure Controls and Procedures. Management of the Company carried out an evaluation, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, due to the existence of a material weakness in internal control over financial reporting in the area of accounting for the acquisition of affiliated restaurants under common control and income taxes associated therewith, the Company’s disclosure controls and procedures were not effective as of March 28, 2010.

For certain additional information regarding the restatements of certain of the Company’s historical financial results and the material weakness identified by management, see Note 15 of the accompanying Notes to the interim consolidated financial statements included herewith.

Changes in Internal Control. On March 22, 2010, the Company retained David G. Burke as its Chief Financial Officer. In this capacity, Mr. Burke is the Company’s principal financial officer. Previously, the role of principal financial officer had been filled by the Company’s Chief Operations Officer. As part of his duties, Mr. Burke will directly oversee the Company’s internal control over financial reporting. The Company believes that adding Mr. Burke’s dedicated oversight will improve the Company’s internal control over financial reporting.

Additionally, as a result of the identification of the issues that led to the restatements, and the related reassessment of our disclosure controls and procedures, including our internal control over financial reporting, as of June 28, 2010 and September 26, 2010, there have been subsequent changes in our controls that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Specifically, the following have been implemented:

•

The Company retained a controller with public accounting expertise, on April 22, 2010, to strengthen our internal accounting team.

•

During the 3rd Quarter of 2010, the Company adopted an internal policy requiring written documentation of the accounting methods applied to significant accounting transactions and the rationale for selecting such methods.

•

During the 3rd Quarter of 2010, the Company adopted an internal policy requiring the review, by an outside subject matter expert, of material and complex transactions, such as the Affiliates Acquisition that we completed on February 1, 2010.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

Occasionally, we are a defendant in litigation arising in the ordinary course of our business, including claims arising from personal injuries, contract claims, dram shop claims, employment related claims and claims from guests or employees alleging injury, illness or other food quality, health or operational concerns. To date, none of these types of litigation, most of which are typically covered by insurance, has had a material effect on us. We have insured and continue to insure against most of these types of claims. A judgment on any claim not covered by or in excess of our insurance coverage could adversely affect our financial condition or results of operations.

Item 1A. Risk Factors

There have been no material changes in our risk factors from those previously disclosed in our annual report on Form 10-K for the year ended December 27, 2009.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The six warrant holders listed below exercised warrants to purchase the Company’s common stock during the reporting period. The warrants were originally granted in connection with a private placement made by the Company in November 2006 prior to the Initial Public Offering. The exercise of these warrant was similarly conducted pursuant to a private placement exemption from registration. Each of the warrants was exercised at the exercise price of $1.00 per share of our common stock for the consideration and on the date listed below:

Shares of Common

Investor

Date of Purchase

Stock Acquired

Consideration Paid

John Bowling

December 30, 2009

100,000

100,000 cash

John R. Burke

December 30, 2009

50,000

50,000 cash

Kenneth Bush

December 30, 2009

25,000

25,000 cash

John Eric Bush

December 30, 2009

25,000

25,000 cash

Steve Waddle

December 30, 2009

25,000

25,000 cash

Larry Timmons

December 30, 2009

25,000

25,000 cash

Item 3. Defaults Upon Senior Securities

None.

Item 5. Other Information

None.

Item 6. Exhibits

(a) Exhibits:


	*3.1			Certificate of Incorporation.

	*3.2			By-Laws.

	31.1			Certification of Chief Executive Officer pursuant to Rule 13a-14(a).

	31.2			Certification of Chief Financial Officer pursuant to Rule 13a-14(a).

	32.1			Certification of Chief Executive Officer pursuant to Section 906 of Sarbanes Oxley Act of 2002.

	32.2			Certification of Chief Financial Officer pursuant to Section 906 of Sarbanes Oxley Act of 2002.


*		Filed as an exhibit to the Company’s Registration Statement on Form S-1, as filed with the Securities and Exchange Commission on August 10, 2007, and incorporated herein by this reference.

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, there unto duly authorized.


Dated: December 10, 2010	DIVERSIFIED RESTAURANT HOLDINGS, INC.
	By:	/s/ T. Michael Ansley
		T. Michael Ansley
		President and Chief Executive Officer (Principal Executive Officer)

	By:	/s/ David G. Burke
		David G. Burke
		Chief Financial Officer (Principal Financial and Accounting Officer)

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Diversified Restaurant Holdings, Inc. Reports

Diversified Restaurant Holdings, Inc. - FORM 10-Q/A - December 10, 2010

Attached files

Diversified Restaurant Holdings, Inc. Reports