10-Q

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended September 25, 2011

[_] 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 registrant as specified in its charter)

Nevada	03-0606420
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

27680 Franklin Road

Southfield, Michigan 48034

(Address of principal executive offices)

Registrant’s telephone number: (248) 223-9160

No change

(Former name, former address and former

fiscal year, if changed since last report)

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 [X] No [  ]

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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [X] No [  ]

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 November 9, 2011.

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. 

Large accelerated filer	[  ]	Accelerated filer	[  ]
Non-accelerated filer	[  ]	Smaller reporting company	[X]
(Do not check if a smaller reporting company)

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

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 [  ]       No [  ]

INDEX

PART I.  FINANCIAL INFORMATION	1
Item 1.  Financial Statements	1
Consolidated Balance Sheets	1
Consolidated Statements of Operations	2
Consolidated Statements of Stockholders' Equity (Deficit)	3
Consolidated Statements of Cash Flows	4
Notes to Interim Consolidated Financial Statements	5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3. Quantitative and Qualitative Disclosure About Market Risks	20
Item 4. Controls and Procedures	20
PART II. OTHER INFORMATION	20
Item 1. Legal Proceedings	20
Item 1A. Risk Factors	20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	21
Item 3. Defaults Upon Senior Securities	21
Item 5. Other Information	21
Item 6. Exhibits	21

i

PARTI.  FINANCIAL INFORMATION

Item 1.  Financial Statements

DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

	September 25			December 26
ASSETS	2011			2010
Current assets
Cash and cash equivalents	$	2,199,922		$	1,358,381
Accounts receivable		14,348			-
Inventory		479,604			339,059
Prepaid assets		153,268			209,708
Other current assets		-			43,348
Total current assets		2,847,142			1,950,496
Property and equipment, net - restricted assets of VIE		1,465,326			1,487,993
Property and equipment, net		20,772,884			17,252,599
Intangible assets, net		1,080,154			975,461
Other long-term assets		84,674			80,099
Deferred income taxes		-			607,744
Total assets	$	26,250,180		$	22,354,392
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Current portion of long-term debt (including VIE debt of $89,414)	$	2,884,518		$	1,947,676
Accounts payable		1,465,577			1,388,397
Accrued liabilities		1,541,967			1,089,112
Deferred rent		168,205			127,075
Total current liabilities		6,060,267			4,552,260
Deferred rent		1,734,870			1,622,943
Deferred income taxes		410			-
Other liabilities - interest rate swap		712,430			367,181
Long-term debt, less current portion (including VIE debt of $1,162,377 and $1,229,437)		16,478,319			15,936,193
Total liabilities		24,986,296			22,478,577
Commitments and contingencies (Notes 6, 10, and 11)
Stockholders' equity (deficit)
Common stock - $0.0001 par value; 100,000,000 shares authorized, 18,876,000 shares issued and outstanding		1,888			1,888
Additional paid-in capital		2,697,248			2,631,304
Retained earnings (accumulated deficit)		(1,782,124	)		(3,096,017	)
Total DRH stockholders' equity (deficit)		917,012			(462,825	)
Noncontrolling interest in VIE		346,872			338,640
Total stockholders' equity (deficit)		1,263,884			(124,185	)
Total liabilities and stockholders' equity	$	26,250,180		$	22,354,392

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

1

DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

	Three Months Ended						Nine Months Ended
	September 25			September 26			September 25			September 26
	2011			2010			2011			2010
Revenue
Food and beverage sales	$	14,588,078		$	11,423,726		$	44,617,381		$	32,823,425
Total revenue		14,588,078			11,423,726			44,617,381			32,823,425
Operating expenses
Compensation costs		4,254,003			3,346,237			12,757,321			9,780,263
Food and beverage costs		4,236,077			3,310,374			12,683,404			9,785,584
General and administrative		3,440,926			2,624,892			10,310,680			7,708,569
Pre-opening		135,009			66,129			403,714			283,308
Occupancy		854,624			810,969			2,444,948			2,144,808
Depreciation and amortization		881,432			698,770			2,491,649			1,944,374
Total operating expenses		13,802,071			10,857,371			41,091,716			31,646,906
Operating profit		786,007			566,355			3,525,665			1,176,519
Change in fair value of derivative instruments		(140,629	)		(177,707	)		(345,249	)		(582,628	)
Interest expense		(282,934	)		(349,548	)		(876,368	)		(1,037,424	)
Other income (expense), net		(17,749	)		3,508			(58,262	)		5,071
Income (loss) before income taxes		344,695			42,608			2,245,786			(438,462	)
Income tax provision		(155,176	)		(131,119	)		(816,661	)		(9,232	)
Net income (loss)	$	189,519		$	(88,511	)	$	1,429,125		$	(447,694	)
Net (income) loss attributable to noncontrolling interest		(38,747	)		88,446			(115,232	)		88,446
Net income (loss) attributable to DRH	$	150,772		$	(65	)	$	1,313,893		$	(359,248	)
Basic earnings (loss) per share - as reported	$	0.01		$	(0.00	)	$	0.07		$	(0.02	)
Fully diluted earnings (loss) per share - as reported	$	0.01		$	(0.00	)	$	0.07		$	(0.02	)
Weighted average number of common shares outstanding
Basic		18,876,000			18,870,505			18,876,000			18,870,505
Diluted		19,039,692			18,870,505			19,048,836			18,870,505

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

2

DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (UNAUDITED)

							Retained			Accumulated
					Additional		Earnings			Other						Total
	Common Stock				Paid-in		(Accumulated			Comprehensive			Noncontrolling			Stockholders'
	Shares		Amount		Capital		Deficit)			Income (Loss)			Interest			Equity (Deficit)
Balances - December 26, 2010,      as previously reported		18,876,000	$	1,888	$	2,631,304	$	(2,728,836	)	$	(367,181	)	$	-		$	(462,825	)
Reclassification of fair value of interest rate swap		-		-		-		(367,181	)		367,181			-			-
Initial consolidation of VIE		-		-		-		-			-			338,640			338,640
Balances - December 26, 2010, as adjusted		18,876,000		1,888		2,631,304		(3,096,017	)		-			338,640			(124,185	)
Share-based compensation		-		-		65,944		-			-			-			65,944
Net income		-		-		-		1,313,893			-			115,232			1,429,125
Dividends		-		-		-		-			-			(107,000	)		(107,000	)
Balances - September 25, 2011		18,876,000	$	1,888	$	2,697,248	$	(1,782,124	)	$	-		$	346,872		$	1,263,884

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

3

DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Nine Months Ended
	September 25			September 26
	2011			2010
Cash flows from operating activities
Net income (loss)	$	1,429,125		$	(447,694	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation and amortization		2,491,649			1,944,375
Loss on disposal of property and equipment		30,157			217,868
Share-based compensation		65,944			21,409
Change in fair value of derivative instruments		345,249			582,628
Deferred income tax benefit (provision)		608,154			(203,780	)
Changes in operating assets and liabilities that provided (used) cash
Accounts receivable		(14,348	)		376,675
Inventory		(140,545	)		(1,196	)
Prepaid assets		56,440			(87,328	)
Other current assets		43,348			(69,025	)
Intangible assets		(72,822	)		(111,198	)
Other long-term assets		(4,575	)		(6,864	)
Accounts payable		77,180			(68,884	)
Accrued liabilities		452,855			462,929
Deferred rent		153,057			209,990
Net cash provided by operating activities		5,520,868			2,819,905
Cash flows from investing activities
Purchases of property and equipment		(6,051,295	)		(4,176,237	)
Net cash used in investing activities		(6,051,295	)		(4,176,237	)
Cash flows from financing activities
Proceeds from issuance of long-term debt		3,138,321			3,086,496
Repayments of long-term debt		(1,659,353	)		(2,059,215	)
Proceeds from issuance of common stock		-			250,000
Dividends		(107,000	)		(552,861	)
Net cash provided by financing activities		1,371,968			724,420
Net increase (decrease) in cash and cash equivalents		841,541			(631,912	)
Cash and cash equivalents, beginning of period		1,358,381			1,660,099
Cash and cash equivalents, end of period	$	2,199,922		$	1,028,187

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

4

DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES

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 wholly-owned subsidiaries, including AMC Group, Inc, (“AMC”), AMC Wings, Inc. (“WINGS”), and AMC Burgers, Inc.  (“BURGERS”) develop, own, and operate Buffalo Wild Wings® (“BWW”) restaurants located throughout Michigan and Florida and its own restaurant concept, Bagger Dave's Legendary Burger Tavern® (“Bagger Dave's”), as detailed below.

The following organizational chart outlines the corporate structure of DRH and its wholly-owned subsidiaries.  A brief textual description of the entities follows the organizational chart.  DRH is incorporated in the State of Nevada.  All other entities are incorporated or organized in the State of Michigan.

AMC was formed on March 28, 2007 and serves as the operational and administrative center for DRH. AMC renders management and advertising services to WINGS and its subsidiaries and BURGERS and its subsidiaries.  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 22 BWW restaurants that are currently in operation (with its most recent opening in University Park, Florida on Sunday, October 30, 2011).

WINGS is economically dependent on retaining its franchise rights with Buffalo Wild Wings, Inc. (“BWWI”).  The franchise agreements have specific initial term expiration dates ranging from January 29, 2014 through March 25, 2031, depending on the date 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.  When factoring in any applicable renewals, the franchise agreements have specific expiration dates ranging from January 29, 2019 through March 25, 2046.  WINGS is in compliance with the terms of these agreements at September 25, 2011.  The Company is under contract with BWWI to enter into 16 additional franchise agreements by 2017 (see Note 11 for details).  

BURGERS was formed on March 12, 2007 to own the Bagger Dave's restaurants, a full-service, ultra-casual dining concept developed by the Company.  BURGERS, through its subsidiaries, owns five Bagger Dave’s restaurants that are currently in operation (with the sixth location scheduled to open on Sunday, November 13, 2011 in Cascade Township, 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 been approved, to franchise in Michigan, Ohio, Indiana, Illinois, Wisconsin, Kentucky, and Missouri.  No Bagger Dave's franchise agreements have been entered into to date.

5

Principles of Consolidation

The consolidated financial statements include the accounts of DRH, its wholly-owned subsidiaries, and Ansley Group, LLC (collectively, the "Company"), a real estate entity under common control which is consolidated in accordance with Financial Accounting Standards Board ("FASB") guidance related to variable interest entities.  All significant intercompany accounts and transactions have been eliminated upon consolidation.

We consolidate all variable interest entities (“VIE”) where we are the primary beneficiary.  For VIEs, we assess whether we are the primary beneficiary as prescribed by the accounting guidance on the consolidation of VIEs.  The primary beneficiary of a VIE is the party that has the power to direct the activities that most significantly impact the performance of the entity and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the entity.  We adopted the consolidation of variable interest entities guidance issued in June 2009 effective January 1, 2011.  We consolidated Ansley Group, LLC because we lease and maintain substantially all of its assets to operate our Clinton Township, Michigan BWW restaurant and we guarantee all of its debt.

Basis of Presentation

The consolidated financial statements as of September 25, 2011 and December 26, 2010, and for the three-month and nine-month periods ended September 25, 2011 and September 26, 2010, have been prepared by the Company pursuant to accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”). The financial information as of September 25, 2011 and for the three-month and nine-month periods ended September 25, 2011 and September 26, 2010 is unaudited, but, in the opinion of management, reflects all adjustments and accruals necessary for a fair presentation of the financial position, results of operations, and cash flows for the interim periods.

Except as described in Note 2 to the consolidated financial statements, the financial information as of December 26, 2010 is derived from our audited consolidated financial statements and notes thereto for the fiscal year ended December 26, 2010, which is included in Item 8 in the Fiscal 2010 Annual Report on Form 10-K/A, Amendment No. 1, and should be read in conjunction with such financial statements.

The results of operations for the three-month and nine-month periods ended September 25, 2011 are not necessarily indicative of the results of operations that may be achieved for the entire year ending December 25, 2011.

Fiscal Year

The Company utilizes a 52-week accounting period that ends on the last Sunday in December. Consequently, fiscal year 2010 ended on December 26, 2010, comprising 52 weeks. This quarterly report on Form 10-Q is for the three-month period ended September 25, 2011, comprising 13 weeks.

Concentration Risks

Approximately 76% and 82% of the Company's revenues during the nine months ended September 25, 2011 and September 26, 2010, respectively, are generated from food and beverage sales from restaurants located in Michigan.

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 disclose 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.

Swap Agreements

The Company utilizes interest rate swap agreements with a bank to fix interest rates on a portion of the Company's portfolio of variable rate debt, which reduces exposure to interest rate fluctuations.  The Company does not use any other types of derivative financial instruments to hedge such exposures, nor does it use derivatives for speculative purposes.

On May 5, 2010, the Company entered into a $15 million dollar debt facility with RBS Citizens Bank, N.A. (“RBS”), as further described in Note 7, in which $6 million is in the form of a development line of credit (of which $1.4 million and $2.9 million were subsequently termed out and affixed to a fixed-rate swap arrangement) and $9 million is a senior secured term loan with a fixed-rate swap arrangement.

6

These interest rate swap agreements do not qualify for hedge accounting.  As such, the Company records the change in the fair value of the swap agreements in change in fair value of derivative instruments on the consolidated statements of operations.

The Company records the fair value of its interest rate swaps on the balance sheet in other assets or other liabilities depending on the fair value of the swaps.  The notional value of interest rate swap agreements in place at September 25, 2011 and December 26, 2010 was approximately $11.5 million and $9.8 million, respectively.  

Recent Accounting Pronouncements

There were no accounting standards or interpretations issued or recently adopted that 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.           STAFF ACCOUNTING BULLETIN NO. 108

During the three months ended March 27, 2011, the Company identified an error related to its 2010 accounting for its interest rate swap agreements.  The Company determined that its interest rate swap agreements, effective May 2010 and September 2010, did not qualify for hedge accounting and, as a result, the change in the fair value of the swap agreements as of December 26, 2010 of $367,181 and as of September 26, 2010 of $582,628 should have been reflected in the consolidated statement of operations as change in fair value of derivative instruments instead of in the consolidated statement of stockholders’ equity.  

In addition, during the three months ended March 27, 2011, the Company determined that, as a result of its August 2010 guarantee of the mortgage obligations of Ansley Group, LLC, the Company should have consolidated Ansley Group, LLC into its financial statements as of and for the year ended December 26, 2010 and for the three- and nine-month periods ended September 26, 2010 in accordance with FASB guidance related to consolidating variable interest entities.

The Company assessed the materiality of these errors on its December 26, 2010 financial statements in accordance with the SEC’s Staff Accounting Bulletin (“SAB”) No. 99 and concluded that the errors were not material to that period.  The Company also concluded that, had the errors been adjusted within its financial statements for the three-month and nine-month periods ended September 25, 2011, the impact of such adjustments would have been material to its financial statements for the period then ended and it expects the errors may be material to its full year 2011 results.  In accordance with SAB No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements", the December 26, 2010 balance sheet and the statements of operations for the three-month and nine-month periods ended September 26, 2010 have been revised to correct these errors.

The Company will make additional adjustments as appropriate to the corresponding annual financial statements the next time it files these statements.  

The impact of the errors on the December 26, 2010 balance sheet is as follows:

	Balances at December 26, 2010
	Previously Reported			Adjustment			As Adjusted
Cash and cash equivalents	$	1,305,031		$	53,350		$	1,358,381
Property and equipment, net - restricted assets of VIE		-			1,487,993			1,487,993
Other long-term assets		63,539			16,560			80,099
Current portion of long-term debt		1,858,262			89,414			1,947,676
Deferred rent (long-term)		1,722,531			(99,588	)		1,622,943
Long-term debt, less current portion		14,706,756			1,229,437			15,936,193
Retained earnings (accumulated deficit)		(2,728,836	)		(367,181	)		(3,096,017	)
Accumulated other comprehensive income (loss)		(367,181	)		367,181			-
Noncontrolling interest in VIE		-			338,640			338,640

7

The impact of the errors on the consolidated statements of operations for the three-month and nine-month periods ended September 26, 2010 is as follows:

	Three Months Ended September 26, 2010									Nine Months Ended September 26, 2010
	Previously Reported			Adjustment			As Adjusted			Previously Reported			Adjustment			As Adjusted
General and administrative	$	2,670,428		$	(45,536	)	$	2,624,892		$	7,707,679		$	890		$	7,708,569
Occupancy		765,289			45,680			810,969			2,165,555			(20,747	)		2,144,808
Depreciation and amortization		696,161			2,609			698,770			1,941,765			2,609			1,944,374
Change in fair value of derivative instruments		-			(177,707	)		(177,707	)		-			(582,628	)		(582,628	)
Interest expense		(243,854	)		(105,694	)		(349,548	)		(931,730	)		(105,694	)		(1,037,424	)
Income (loss) before income taxes		331,587			(288,979	)		42,608			232,612			(671,074	)		(438,462	)
Net income (loss)		200,468			(288,979	)		(88,511	)		223,380			(671,074	)		(447,694	)
Net income (loss) attributable to noncontrolling interest		-			88,446			88,446			-			88,446			88,446
Net income (loss) attributable to DRH		-			(65	)		(65	)		-			(359,248	)		(359,248	)
Basic earnings (loss) per share		0.01			(0.01	)		0.00			0.01			(0.03	)		(0.02	)
Fully diluted earnings (loss) per share		0.01			(0.01	)		0.00			0.01			(0.03	)		(0.02	)
Weighted average number of common shares outstanding
Basic		18,870,505			-			18,870,505			18,870,505			-			18,870,505
Diluted		29,160,000			(10,289,495	)		18,870,505			29,113,333			(10,242,828	)		18,870,505

The Company's SAB 99 evaluation considered that the interest rate swap has no impact on the liability that was already recorded, is non-cash in nature, and is not material given the Company's overall volume of activity in 2010.  Regarding consolidation of the Ansley Group, LLC the impact on the 2010 statement of operations is not material and the 2010 balance sheet impact, disclosed in the table above, is not material given that the restaurant's operating results related to the assets that should have been consolidated were already included in operations and the potential debt obligation was previously disclosed.  In the aggregate, the Company does not believe it is probable that the view of a reasonable investor would be changed by the correction in 2010 of these items.

3.           SIGNIFICANT BUSINESS TRANSACTIONS

On June 7, 2011, the Company, together with its wholly-owned subsidiaries, entered into a First Amended and Restated Development Line of Credit Agreement (the "DLOC Agreement") with RBS, N.A. ("RBS").  The DLOC Agreement provides for an $8 million credit facility with RBS (the "Credit Facility").  The Credit Facility consists of a $7 million development line of credit (“DLOC”) and a $1 million revolving line of credit (“Revolving Line of Credit”). The Credit Facility is secured by a senior lien on all Company assets.

The Company plans to use the Credit Facility 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 in the Midwest. The DLOC is for a term of 18 months (the “Draw Period”) and amounts borrowed bear interest at between 3% - 4% over LIBOR as adjusted monthly, depending on the Lease Adjusted Leverage Ratio (as defined in the DLOC). 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 3% - 4% over LIBOR as adjusted monthly, with principal and interest amortized over seven years (20 years for real estate) and with a maturity date of June 7, 2018. Any amounts borrowed by the Company during the Draw Period that are not converted into a term loan by December 7, 2012, will automatically be converted to a term loan on the same terms as outlined above. The DLOC includes a carrying cost of .25% per year of any available but undrawn amounts, payable quarterly; however, RBS has granted a zero carrying cost on the unused DLOC through December 25, 2011.  The Company also secured a $1 million Revolving Line of Credit, which has a maturity date of June 7, 2012.  Advances on the Company’s Revolving Line of Credit must be repaid within ninety consecutive days.

On September 29, 2011, the Company entered into a commitment letter with RBS, as administrator and lead arranger, with respect to senior credit facilities of up to $50 million.   The commitment letter provides that the senior credit facilities would include a term loan facility of up to $42 million to refinance the existing outstanding debt of the Company and its affiliates and to finance a potential acquisition.  The senior credit facilities would also include a renewal of the Company's development line of credit facility of up to $7 million to fund the development of BWW and Bagger Dave's restaurants and a renewal of its revolving line of credit of up to $1 million.  The senior credit facilities would be secured by a first priority lien on the Company's assets.  The commitment letter provides, among other things, that the closing of the senior credit facilities is subject to conditions customary to similar transactions, including the closing of a potential acquisition.  In the event the potential acquisition, as contemplated by the commitment letter, is not consummated, the commitment letter will be terminated or amended.

On February 1, 2010, the Company, through its WINGS subsidiary, acquired nine affiliated BWW restaurants it previously managed (“Affiliates Acquisition”).  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 28, 2009) using the historical cost basis of the acquired affiliates. Further, prior year amounts also have been retrospectively adjusted to furnish comparative information while the entities were under common control. 

8

4.           PROPERTY AND EQUIPMENT

Property and equipment are comprised of the following assets:

	September 25 2011		December 26 2010
Land	$	469,680	$	385,959
Land (restricted assets of VIE)		520,000		520,000
Building		2,745,296		2,255,246
Building (restricted assets of VIE)		1,570,967		1,570,967
Equipment		9,682,030		8,140,417
Furniture and fixtures		2,810,371		2,216,347
Leasehold improvements		17,332,641		13,925,216
Restaurant construction in progress		772,390		1,247,265
Total		35,903,375		30,261,417
Less accumulated depreciation		(13,039,524)		(10,917,851	)
Less accumulated depreciation attributable to restricted assets of VIE		(625,641)		(602,974	)
Property and equipment, net	$	22,238,210	$	18,740,592

5.           INTANGIBLES

 Intangible assets are comprised of the following:

	September 25 2011		December 26 2010
Amortized intangibles:
Franchise fees	$	303,750	$	373,750
Trademark		22,283		7,475
Loan fees		164,429		155,100
Total		490,462		536,325
Less accumulated amortization		(83,375)		(115,246	)
Amortized intangibles, net		407,087		421,079
Unamortized intangibles:
Liquor licenses		673,067		554,382
Total intangibles, net	$	1,080,154	$	975,461

Amortization expense for the three months ended September 25, 2011 and September 26, 2010 was $28,698 and $9,815, respectively.  Amortization expense for the nine months ended September 25, 2011 and September 26, 2010 was $48,129 and $27,078, respectively.  Based on the current intangible assets and their estimated useful lives, amortization expense for fiscal years 2011, 2012, 2013, 2014, and 2015 is projected to total approximately $49,275 per year.

6.           RELATED PARTY TRANSACTIONS

The Affiliates Acquisition (see Note 3) was accomplished by issuing unsecured promissory notes to each selling shareholder that bear interest at 6% per year, mature on February 1, 2016, and are payable in quarterly installments of approximately $157,000, with principal and interest fully amortized over six years.  The outstanding balance on the notes is $2,388,769 and $2,801,221 at September 25, 2011 and December 26, 2010, respectively.

Fees for monthly accounting and financial statement compilation services are paid to an entity owned by a director and stockholder of the Company.  Fees paid during the three months ended September 25, 2011 and September 26, 2010 were $84,486 and $45,905, respectively.  Fees paid during the nine months ended September 25, 2011 and September 26, 2010 were $236,571 and $155,499, respectively.

Current debt (see Note 7) also includes a promissory note to a DRH stockholder in the amount of $250,000.  The note is a demand note that does not require principal or interest payments.  Interest is accrued at 8% per annum and is compounded quarterly.  The Company has 180 days from the date of demand to pay the principal and accrued interest.

See Note 10 for related party operating lease transactions.

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7.           LONG-TERM DEBT

Long-term debt consists of the following obligations:

	September 25 2011		December 26 2010
Note payable to a bank secured by a senior lien on all company assets. Scheduled monthly principal and interest payments are approximately $120,000 through maturity in May 2017. Interest is charged based on a swap arrangement designed to yield a fixed annual rate of 7.10%.	$	7,602,346	$	8,399,538
Note payable to a bank secured by a senior mortgage on the Brandon Property and a personal guaranty. Scheduled monthly principal and interest payments are approximately $8,000 for the period beginning July 2010 through maturity in June 2030, at which point a balloon payment of $413,550 is due. Interest is charged based on a fixed rate of 6.72%, per annum, through June 2017, at which point the rate will adjust to the U.S. Treasury Securities Rate plus 4% (and every seven years thereafter).		1,127,278		1,141,188
Note payable to a bank secured by a junior mortgage on the Brandon Property. Matures in 2030 and requires monthly principal and interest installments of approximately $6,300 until maturity. Interest is charged at a rate of 3.58% per annum.		891,048		915,446
DLOC to a bank, secured by a senior lien on all company assets. Scheduled interest payments are charged at a rate of 3.0% over the 30-day LIBOR (the rate at September 25, 2011 was approximately 3.23%). In November 2011, the DLOC will convert into a term loan bearing interest at 4% over the 30-day LIBOR and will mature in May 2017. The DLOC includes a carrying cost of .25% per year of any available but undrawn amounts.		1,662,999		1,424,679
Note payable to a bank secured by a senior lien on all company assets. Scheduled monthly principal and interest payments are approximately $15,000 through maturity in May 2017. Interest is charged based on a swap arrangement designed to yield a fixed annual rate of 5.91%.		1,244,391		1,379,098
Note payable to a bank secured by a senior lien on all company assets. Scheduled monthly principal and interest payments are approximately $33,000 through maturity in May 2017. Interest is charged based on a swap arrangement designed to yield a fixed annual rate of 6.35%.		2,701,583		-
Unsecured note payable that matures in August 2013 and requires monthly principal and interest installments of approximately $2,200, with the balance due at maturity. Interest is 7% per annum.		234,478		241,832
Note payable to Ford Credit secured by a vehicle purchased by Flyer Enterprises, Inc. to be used in the operation of the business. This is an interest-free loan under a promotional 0% rate. Scheduled monthly principal payments are approximately $430. The note matures in April 2013.		8,154		12,016
Notes payable - variable interest entity. Note payable to a bank secured by a senior mortgage on the property located at 15745 Fifteen Mile Road, Clinton Township, Michigan 48035, a DRH corporate guaranty, and a personal guaranty. Scheduled monthly principal and interest payments are approximately $12,500 through maturity in 2025. Interest is charged at a rate of 4% over the 30-day LIBOR (the rate at September 25, 2011 was approximately 4.23%).		1,251,791		1,318,851
Notes payable – related parties		2,638,769		3,051,221
Total long-term debt		19,362,837		17,883,869
Less current portion (includes VIE debt of $89,414)		(2,884,518)		(1,947,676	)
Long-term debt, net of current portion	$	16,478,319	$	15,936,193

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Scheduled principal maturities of long-term debt are summarized as follows:

Year	Amount
September 25, 2011	$	2,884,518
September 23, 2012		3,034,050
September 22, 2013		2,987,327
September 21, 2014		3,176,477
September 20, 2015		2,941,824
Thereafter		4,338,641
Total	$	19,362,837

Interest expense was $282,934 and $349,548 (including related party interest expense of $42,131 and $50,932) for the three months ended September 25, 2011 and September 26, 2010, respectively.  Interest expense was $876,368 and $1,037,424 (including related party interest expense of $144,502 and $111,047) for the nine months ended September 25, 2011 and September 26, 2010, respectively.

On August 30, 2010, Ansley Group, LLC entered into a $1.3 million mortgage refinance agreement with RBS. This agreement is secured by a senior mortgage on the property located at 15745 Fifteen Mile Road, Clinton Township, Michigan 48035, a DRH corporate guaranty, and a personal guaranty.  Ansley Group, LLC was formed for the sole purpose of acting as landlord for this property.  DRH leases this property through its wholly-owned subsidiary, Bearcat Enterprises, Inc. In accordance with ASC 810, Ansley Group, LLC is considered a variable interest entity and, accordingly, its activities are consolidated into DRH’s interim consolidated financial statements.

The above agreements contain various customary financial covenants generally based on the performance of the specific borrowing entity and other related entities.  The more significant covenants consist of a minimum debt service coverage ratio and a maximum lease adjusted leverage ratio, both of which we are in compliance with as of September 25, 2011.

8.           CAPITAL STOCK (INCLUDING PURCHASE WARRANTS AND OPTIONS)

In 2011, the Company established the Stock Incentive Plan of 2011 (“Stock Incentive Plan”) to attract and retain directors, consultants, and employees and to more fully align their interests with the interests of the Company’s shareholders through the opportunity for increased stock ownership.  The plan permits the grant and award of 750,000 shares of common stock by way of stock options and/or restricted stock.  Stock options must be awarded at exercise prices at least equal to or greater than 100% of the fair market value of the shares on the date of grant.  The options will expire no later than 10 years from the date of grant, with vesting terms to be defined at grant date, ranging from a vesting schedule based on performance to a vesting schedule that extends over a period of time as selected by the Compensation Committee of the Board of Directors or other committee as determined by the Board (the “Committee”).  The Committee also determines the grant, issuance, retention, and vesting timing and conditions of awards of restricted stock.  The Committee may place limitations, such as continued employment, passage of time, and/or performance measures, on restricted stock.  Awards of restricted stock may not provide for vesting or settlement in full of restricted stock over a period of less than one year from the date the award is made.  The Stock Incentive Plan was approved by our shareholders on May 26, 2011. 

During fiscal 2011, restricted shares were issued to certain employees at a weighted-average grant date fair value of $5.00.  Restricted shares are granted with a per share purchase price at 100% of the fair market value on the date of grant.  Stock-based compensation expense will be recognized over the expected vesting period in an amount equal to the fair market value of such awards on the date of grant.  The restricted shares transactions are summarized below:

	Number of Restricted Stock Shares
Unvested, June 26, 2011		0
Granted		60,800
Vested		0
Expired/Forfeited		(200	)
Unvested, September 25, 2011		60,600

Under the Stock Incentive Plan, there are 689,400 shares available for future awards.

On July 31, 2010, prior to the Stock Incentive Plan, DRH granted options for the purchase of 210,000 shares of common stock to the directors of the Company.  These options vest ratably over a three-year period and expire six years from issuance.  Once vested, the options can be exercised at a price of $2.50 per share.

Stock-based compensation of $21,981 and $5,253 was recognized, during the three-month period ended September 25, 2011 and September 26, 2010, respectively, as compensation cost in the consolidated statements of operations and as additional paid-in capital on the consolidated statement of stockholders' equity to reflect the fair value of shares vested as of September 25, 2011.  Stock-based compensation for the nine-months ended September 25, 2011 and September 26, 2010, respectively, was $65,944 and $21,409.  The fair value of stock options is estimated using the Black-Scholes model.  The fair value of unvested shares is $153,870 as of September 25, 2011.  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 and a risk-free rate of return represented by the U.S. 5-year Treasury Bond rate and volatility factor of 30% based on guidance 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 September 25, 2011, 354,000 shares of authorized common stock are reserved for issuance to provide for the exercise of the Company’s stock options.

The Company has authorized 10,000,000 shares of preferred stock at a par value of $0.0001.  No preferred shares are issued or outstanding as of September 25, 2011.  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.

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9.           INCOME TAXES

The benefit (provision) for income taxes consists of the following components for the three-month and nine-month periods ended September 25, 2011 and September 26, 2010, respectively:

		Three Months Ended					Nine Months Ended
		September 25 2011			September 26 2010		September 25 2011		September 26 2010
Federal
Current	$	0		$	0	$	0		$	0
Deferred		(36,390	)		(69,280)		(463,772	)		121,327
State
Current		(71,500	)		(36,502)		(208,507	)		(123,105)
Deferred		(47,286	)		(25,337)		(144,382	)		(7,454)
Income tax benefit (provision)	$	(155,176	)	$	(131,119)	$	(816,661	)	$	(9,232)

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:

	September 25 2011			September 26 2010
Income tax benefit (provision) at federal statutory rate	$	(766,063	)	$	(78,957)
State income tax benefit (provision)		(352,889	)		(130,559)
Permanent differences		(77,139	)		9,535
Tax credits		318,643			105,000
Other		60,787			85,749
Income tax benefit (provision)	$	(816,661	)	$	(9,232)

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:

	September 25 2011			December 26 2010
Deferred tax assets:
Net operating loss carry forwards	$	363,121		$	1,252,609
Deferred rent expense		62,762			68,509
Start-up costs		231,393			190,076
Tax credit carry forwards		846,808			540,533
Other		437,643			487,139
Total deferred tax assets		1,941,727			2,538,866
Deferred tax liabilities:
Other		176,552			425,322
Tax depreciation in excess of book		1,765,585			1,505,800
Total deferred tax liabilities		1,942,137			1,931,122
Net deferred income tax (liabilities) assets	$	(410	)	$	607,744

If deemed necessary by management, the Company establishes valuation allowances in accordance with the provisions of FASB ASC 740 ("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 carryforwards before its 20-year expiration.  A significant amount of net operating loss carry forwards were used when the Company purchased nine affiliated restaurants in 2010, which were previously managed by DRH.  Federal net operating loss carry forwards of $680,018 and $28,611 will expire in 2029 and 2030, respectively.  General business tax credits of $318,013, $341,156, $122,850, $59,722 and $5,067 will expire in 2031, 2030, 2029, 2028 and 2027, respectively.

The Company applies the provisions of ASC 740 regarding the accounting for uncertainty in income taxes.  There are no amounts recorded on the Company's consolidated financial statements for uncertain positions.  The Company classifies all interest and penalties as income tax expense.  There are no accrued interest amounts or penalties related to uncertain tax positions as of September 25, 2011.

The Company files income tax returns in the United States federal jurisdiction and various state jurisdictions.

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10.           OPERATING LEASES (INCLUDING RELATED PARTY)

Lease terms range from four to 15 years, generally include renewal options, and frequently require us to pay a proportionate share of real estate taxes, insurance, common area maintenance, and other operating costs. Some restaurant leases provide for contingent rental payments based on sales thresholds.

Total rent expense was $657,130 and $540,127 for the three-month period ended September 25, 2011 and September 26, 2010, respectively (of which $23,358 and $20,871, respectively, were paid to a related party).  Total rent expense was $1,921,178 and $1,468,995 for the nine-month period ended September 25, 2011 and September 26, 2010, respectively (of which $66,760 and $62,616, 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 December 26, 2010 are summarized as follows:

Year	Amount
2011	$	2,699,479
2012		2,883,835
2013		2,948,547
2014		2,815,633
2015		2,511,310
Thereafter		8,377,052
Total	$	22,235,856

11.           COMMITMENTS AND CONTINGENCIES

The Company assumed, from a related entity, an "Area Development Agreement" with BWWI in which the Company undertakes to open 23 BWW restaurants within its 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 September 25, 2011, of the 32 restaurants required to be opened under the Area Development Agreement, 15 of these restaurants had been opened for business (with the 16th restaurant opened on October 30, 2011).  An additional six restaurants not part of this Area Development Agreement were also opened for business as of September 25, 2011. 

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 $667,224 and $533,833 in royalty expense for the three-month period ended September 25, 2011 and September 26, 2010, respectively, and $2,045,488 and $1,528,560 for the nine-month period ended September 25, 2011 and September 26, 2010, respectively.  Advertising fund contribution expenses were $422,570 and $328,574 for the three-month period ended September 25, 2011 and September 26, 2010, respectively, and $1,271,538 and $941,194 for the nine-month period ended September 25, 2011 and September 26, 2010, respectively.

The Company is required, by its various BWWI franchise agreements, to modernize the restaurants during the term of the agreements.  The individual agreements generally require improvements between the fifth year and the tenth year to meet the most current design model that BWWI has approved.  The modernization costs can range from approximately $50,000 to approximately $500,000 depending on the individual restaurants’ needs.

The Company is subject to ordinary, routine, legal proceedings, as well as demands, claims and threatened litigation, which arise in the ordinary course of its business.  The ultimate outcome of any litigation is uncertain.  While unfavorable outcomes could have adverse effects on the Company's business, results of operations, and financial condition, management believes that the Company is adequately insured and does not believe that any pending or threatened proceedings would adversely impact the Company's results of operations, cash flows, or financial condition.  Therefore, no separate reserve has been established for these types of legal proceedings.

12.            SUPPLEMENTAL CASH FLOWS INFORMATION

Other Cash Flows Information

Cash paid for interest was $278,616 and $349,548 during the three-month period ended September 25, 2011 and September 26, 2010, respectively, and $827,253 and $1,037,424 for the nine-month period ended September 25, 2011 and September 26, 2010, respectively.

Cash paid for income taxes was $110,000 and $36,502 during the three-month period ended September 25, 2011 and September 26, 2010, respectively, and $147,943 and $146,937 for the nine-month period ended September 25, 2011 and September 26, 2010, respectively.

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13.           FAIR VALUE OF FINANCIAL INSTRUMENTS

The guidance for fair value measurements, ASC 820 Fair Value Measurements and Disclosures, establishes the authoritative definition of fair value, sets out a framework for measuring fair value, and outlines the required disclosures regarding fair value measurements. Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. We use a three-tier fair value hierarchy based upon observable and non-observable inputs as follows:

●	Level 1	Quoted market prices in active markets for identical assets and liabilities;
●	Level 2	Inputs, other than level 1 inputs, either directly or indirectly observable; and
●	Level 3	Unobservable inputs developed using internal estimates and assumptions (there is little or no market data) which reflect those that market participants would use.

As of September 25, 2011 and December 26, 2010, respectively, our financial instruments consisted of cash equivalents, accounts payable, and debt. The fair value of cash equivalents, accounts payable and short-term debt approximate its carrying value, due to its short-term nature.

The fair value of our interest rate swaps is determined based on valuation models, which utilize quoted interest rate curves to calculate the forward value and then discount the forward values to the present period. 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. Our interest rate swaps are classified as a Level 2 measurement as these securities are not actively traded in the market, but are observable based on transactions associated with bank loans with similar terms and maturities.

There were no transfers between levels of the fair value hierarchy during the three months ended September 25, 2011 and the fiscal year ended December 26, 2010, respectively.

The following table presents the fair values for those assets and liabilities measured on a recurring basis as of September 25, 2011:

FAIR VALUE MEASUREMENTS
											Asset/(Liability)
Description	Level 1		Level 2			Level 3		Total			Total
Interest Rate Swaps	$	—	$	(712,430	)	$	—	$	(712,430	)	$	(712,430	)

The following table presents the fair values for those assets and liabilities measured on a recurring basis as of December 26, 2010:

FAIR VALUE MEASUREMENTS
											Asset/(Liability)
Description	Level 1		Level 2			Level 3		Total			Total
Interest Rate Swaps	$	—	$	(367,181	)	$	—	$	(367,181	)	$	(367,181	)

As of September 25, 2011, our total debt, less related party debt, was approximately $16.7 million and had a fair value of approximately $14.0 million. As of December 26, 2010, our total debt, less related party debt, was approximately $14.8 million and had a fair value of approximately $12.7 million. Related party debt at September 25, 2011 was approximately $2.6 million and had a fair value of approximately $2.7 million.  Related party debt as of December 26, 2010 was approximately $3.1 million and had a fair value of approximately $2.8 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.

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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, as amended, for the fiscal year ended December 26, 2010.)

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

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

OVERVIEW

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.  WINGS, through its subsidiaries, holds 22 BWW restaurants that are currently in operation; 14 are located in Michigan and eight in Florida (with its most recent opening in University Park, Florida on Sunday, October 30, 2011).  DRH also created and launched its own unique, full-service, ultra-casual restaurant concept, Bagger Dave’s Legendary Burger Tavern® (“Bagger Dave’s”), in January 2008.  As of September 25, 2011, the Company owned and operated five Bagger Dave’s® restaurants in Southeast Michigan with the most recent store opening, in East Lansing, Michigan, on September 18, 2011. Our sixth Bagger Dave's location is scheduled to open on November 13, 2011.  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 been approved, to franchise in Michigan, Ohio, Indiana, Illinois, Wisconsin, Kentucky, and Missouri.

Our organic growth strategy is dependent on three key components.  First is the continued development of our BWW concept as a franchisee.  We expect to open two to three BWW stores each year through 2017 with a combined total of 38 by the end of 2017.  Second is our continued development of our own Bagger Dave’s concept throughout the Midwest consistent with the current capabilities of our supply base.  We intend to open, depending on our ability to find real estate and fund new development, a minimum of three to five corporate stores in 2012.  Third is our desire to franchise our Bagger Dave’s concept throughout the Midwest.  We have made significant investments, including the hiring of a veteran in the franchise community to seek qualified multi-unit operators, support the development of new franchisee-owned stores, and ultimately manage the franchisee system. 

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”).  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 28, 2009) using the historical cost basis of the acquired affiliates. Further, prior years amounts also have been retrospectively adjusted to furnish comparative information while the entities were under common control.

15

RESTAURANT OPENINGS

The following table outlines the restaurant unit information for the fiscal years indicated. “Total owned restaurants” reflects the number of restaurants owned and operated by DRH for each year. From the Company’s inception to February 1, 2010, it managed nine BWW restaurants that were owned by affiliated parties.  On February 1, 2010, these restaurants were acquired by the Company.  “Total managed restaurants” reflects the total number of restaurants managed and/or owned by the Company. Our 2009 comparative results are a consolidation of owned and managed restaurants based on the accounting of an acquisition of entities under common control (refer to Note 3 in the notes to consolidated financial statements for further details).

		2011	2010	2009	2008	2007
	Beginning of year	22	9	8	2	0
	Acquisitions	0	9	0	0	0
	Openings	5	4	1	6	2
	Planned openings	1	N/A	N/A	N/A	N/A
Total owned restaurants		28	22	9	8	2
	Affiliate restaurants under common control	0	0	9	9	9
Total managed restaurants		28	22	18	17	11

RESULTS OF OPERATIONS

For the three months ended September 25, 2011 ("Third Quarter 2011") and the nine months ended September 25, 2011 (“Year to Date 2011”), revenue was generated from the operations of 21 BWW restaurants (two of which opened in February 2011) and five Bagger Dave’s restaurants (of which one opened in late February 2011 and another opened in mid-September 2011 ). For the three months ended September 26, 2010 ("Third Quarter 2010") and nine months ended September 26, 2010 (“Year to Date 2010”), revenue was generated from the operations of 18 BWW restaurants (of which one opened in June 2010 and another opened in August 2010) and three Bagger Dave’s restaurants (one of which opened in February 2010).

Results of Operations for the Three Months Ended September 25, 2011 and September 26, 2010

Our operating results below are expressed as a percentage of total revenue on the basis of comparison to prior periods.

	Three Months Ended
	September 25			September 26
	2011			2010
Total revenue		100.0	%		100.0	%
Operating expenses
Compensation costs		29.2	%		29.3	%
Food and beverage costs		29.0	%		29.0	%
General and administrative		23.6	%		23.0	%
Pre-opening		0.9	%		0.6	%
Occupancy		5.9	%		7.1	%
Depreciation and amortization		6.0	%		6.1	%
Total operating expenses		94.6	%		95.1	%
Operating profit		5.4	%		4.9	%

Total revenue for Third Quarter 2011 was $14.6 million, an increase of $3.2 million or 27.7% over the $11.4 million of revenue generated during Third Quarter 2010. The increase was primarily attributable to two factors. First, approximately $2.6 million of the increase was attributable to revenues generated from the opening of four new restaurants in 2011 (two Bagger Dave's restaurant and two BWW restaurants) and revenues generated by four restaurants (one Bagger Dave's restaurant and three BWW restaurants) that opened prior to 2011 but did not meet the criteria for same-store-sales for all or part of the three-month period. Second, we believe the remaining $596 thousand increase was related to a 5.7% increase in same-store-sales for 16 BWW restaurants meeting our same-store-sales criteria and a 10.2% increase in same-store-sales for three Bagger Dave's restaurants meeting our same-store-sales criteria.

16

Compensation cost increased by $908 thousand or 27.1% to $4.3 million in Third Quarter 2011 from $3.3 million in Third Quarter 2010.  The increase was primarily due to the addition of six restaurants.  Compensation cost as a percentage of sales decreased to 29.2% in Third Quarter 2011 from 29.3% in Third Quarter 2010 primarily due to the fact that the proportional increase in revenue exceeded the increase of management compensation.

Food and beverage cost increased by $926 thousand or 28.0% to $4.2 million in Third Quarter 2011 from $3.3 million in Third Quarter 2010.  The increase was primarily due to the addition of six restaurants.  Food and beverage cost as a percentage of sales remained consistent at 29.0% in Third Quarter 2011 and Third Quarter 2010.

General and administrative cost increased by $816 thousand or 31.1% to $3.4 million in Third Quarter 2011 from $2.6 million in Third Quarter 2010.  This increase was primarily due to the addition of six restaurants.  General and administrative cost as a percentage of sales increased to 23.6% in Third Quarter 2011 from 23.0% in Third Quarter 2010 primarily due to a nonrecurring increase in professional fees.

Pre-opening cost increased by $69 thousand or 104.2% to $135 thousand in Third Quarter 2011 from $66 thousand in Third Quarter 2010.   The difference in pre-opening cost was due to the timing and overall cost to build and open new stores during the period.  The Company had one new store opening in the Third Quarter 2011 and two scheduled openings in early Fourth Quarter 2011, versus one store opening in Third Quarter 2010 and one store opening in Fourth Quarter 2010.  Pre-opening cost as a percentage of sales increased to 0.9% in Third Quarter 2011 from 0.6% in Third Quarter 2010.

Occupancy cost increased by $44 thousand or 5.4% to $855 thousand in Third Quarter 2011 from $811 thousand in Third Quarter 2010.  This increase was primarily due to the addition of six new stores. Occupancy cost as a percentage of sales decreased to 5.9% in Third Quarter 2011 from 7.1% in Third Quarter 2010, primarily due to the Brandon building acquisition in June 2010 as well as negotiated rate reductions.

Depreciation and amortization cost increased by $183 thousand or 26.1% to $881 thousand in Third Quarter 2011 from $699 thousand in Third Quarter 2010.  This increase was primarily due to the addition of six restaurants.  Depreciation and amortization cost as a percentage of sales decreased to 6.0% in Third Quarter 2011 from 6.1% in Third Quarter 2010 primarily due to the increase in same-store-sales.

Our operating results below, for the nine months ended September 25, 2011 and September 26, 2010, are expressed as a percentage of total revenue on the basis of comparison to prior periods.

 Results of Operations for the Nine Months Ended September 25, 2011 and September 26, 2010

	Nine Months Ended
	September 25			September 26
	2011			2010
Total revenue		100.0	%		100.0	%
Operating expenses
Compensation costs		28.6	%		29.8	%
Food and beverage costs		28.4	%		29.8	%
General and administrative		23.1	%		23.5	%
Pre-opening		0.9	%		0.9	%
Occupancy		5.5	%		6.5	%
Depreciation and amortization		5.6	%		5.9	%
Total operating expenses		92.1	%		96.4	%
Operating profit		7.9	%		3.6	%

Total revenue for Year to Date 2011 was $44.6 million, an increase of $11.8 million or 35.9% over the $32.8 million of revenue generated during Year to Date 2010. The increase was primarily attributable to two factors. First, approximately $10.2 million of the increase was attributable to revenues generated following the opening of four new restaurants in 2011 (two Bagger Dave's restaurants and two BWW restaurants) and revenues generated by four restaurants (one Bagger Dave's restaurant and three BWW restaurants) that opened prior to 2011 but did not meet the criteria for same-store-sales for all or part of the nine-month period.  Second, the remaining $1.6 million increase was related to a 3.9% increase in same-store-sales for 16 BWW restaurants meeting our same-store-sales criteria and a 7.8% increase in same-store-sales for three Bagger Dave's restaurants meeting our same-store-sales criteria.

17

Compensation cost increased by $3.0 million or 30.4% to $12.8 million in Year to Date 2011 from $9.8 million in Year to Date 2010.  The increase was primarily due to the addition of four restaurants in 2011 and four that opened in 2010.  Compensation cost as a percentage of sales decreased to 28.6% in Year to Date 2011 from 29.8% in Year to Date 2010 primarily due to a reduction in hourly labor costs and due to the fact that the proportional increase in revenue exceeded the increase of management compensation.  This improvement was partially offset by early-stage hourly labor inefficiencies attributed to the opening of four new stores in 2011.

Food and beverage cost increased by $2.9 million or 29.6% to $12.7 million in Year to Date 2011 from $9.8 million in Year to Date 2010.  The increase was primarily due to the addition of four restaurants in 2011 and four that opened in 2010.  Food and beverage cost as a percentage of sales decreased to 28.4% in Year to Date 2011 from 29.8% in Year to Date 2010 primarily due to lower bone-in chicken wing cost, menu price increases, and efficiencies in food preparation.  This decrease was partially offset by increases in other food and beverage costs.

General and administrative cost increased by $2.6 million or 33.8% to $10.3 million in Year to Date 2011 from $7.7million in Year to Date 2010.  This increase was primarily due to the addition of four restaurants in 2011 and four that opened in 2010.  General and administrative cost as a percentage of sales decreased to 23.1% in Year to Date 2011 from 23.5% in Year to Date 2010 due to cost reduction initiatives and because the proportional increase in revenue was greater than that of general and administrative overhead expenses.

Pre-opening cost increased by $120 thousand or 42.5% to $404 thousand in Year to Date 2011 from $283 thousand in Year to Date 2010.  The difference in pre-opening cost was due to the timing and overall cost to build and open new stores during the period.  The Company opened four new stores in 2011 and four new stores in 2010.  Pre-opening cost as a percentage of sales remained consistent at 0.9% in Year to Date 2011 and Year to Date 2010.

Occupancy cost increased by $300 thousand or 14.0% to $2.4 million in Year to Date 2011 from $2.1 million in Year to Date 2010.  This increase was primarily due to the addition of four restaurants in 2011 and four that opened in 2010.  Occupancy cost as a percentage of sales decreased to 5.5% in Year to Date 2011 from 6.5% in Year to Date 2010, primarily due to the Brandon building acquisition in June of 2010 as well as negotiated rate reductions.

Depreciation and amortization cost increased by $547 thousand or 28.1% to $2.5 million in Year to Date 2011 from $1.9 million in Year to Date 2010.  This increase was primarily due to addition of four restaurants in 2011 and four that opened in 2010.  Depreciation and amortization cost as a percentage of sales decreased to 5.6% in Year to Date 2011 from 5.9% in Year to Date 2010 primarily due to the increase in same-store-sales.

INTEREST AND TAXES

Interest expense was $282,934 and $349,548 during Third Quarter 2011 and Third Quarter 2010, respectively.  Interest expense was $876,368 and $1,037,424 during Year to Date 2011 and Year to Date 2010, respectively.  The decrease is due to nonrecurring prepayment expenses associated with the May 2010 debt facility.

For Third Quarter 2011, we booked an income tax provision of $155,176 compared to Third Quarter 2010 when an income tax provision of $131,119 was recorded.  The effective tax rate of income before taxes was 45% for Third Quarter 2011 vs. 307.7% for Third Quarter 2010.  For Year to Date 2011, we booked an income tax provision of $816,661 compared to Year to Date 2010 when an income tax provision of $9,232 was recorded.  The effective tax rate of income before taxes was 36.4% for Year to Date 2011 vs. (2.1)% for Year to Date 2010 when the Company recorded negative pre-tax earnings.  The retrospective adjustments for the Company's 2010 interest rate swap agreements that did not qualify for hedge accounting and the Company’s consolidation of the VIE significantly impacted the income (loss) before income taxes for both the three-month and nine-month periods ended September 25, 2011 and September 26, 2010; refer to Note 2 for further details.

LIQUIDITY AND CAPITAL RESOURCES; EXPANSION PLANS

Our primary liquidity and capital requirements are for new restaurant construction, remodeling of existing restaurants, and other general business needs. We intend to fund up to 70% of the construction and start-up costs of future BWW and Bagger Dave’s restaurants with a $7.0 million development line of credit with RBS Charter One.  We expect to meet all remaining capital requirements from operational cash flow.  We believe that the cash flow from operations and the development line of credit will be sufficient to meet our operational funding, development and obligations for the foreseeable future. However, to provide additional certainty that our liquidity requirements will be met, we have secured a $1.0 million line of credit for working capital with RBS CharterOne.

Cash flow from operations for Year to Date 2011 was $5.5 million compared with $2.8 million for Year to Date 2010.

18

Total capital expenditures for fiscal year 2011 are expected to be approximately $9.1 million, of which approximately $7.2 million is for new restaurant construction, $0.6 million is for real estate, and $1.3 million is for existing store renovations, which includes a remodel, an addition, upgrades to audio/visual equipment, and patio upgrades.  Some of the soft construction costs will be expensed depending on the nature of the charge.

Opening new restaurants is the Company’s primary use of capital and is critical to its growth.  Our completed and planned new construction for 2011 includes:

• Traverse City, Michigan – BWW – opened February 7, 2011

• Lakeland, Florida – BWW – opened February 13, 2011

• Brighton, Michigan – Bagger Dave’s – opened February 27, 2011

• East Lansing, Michigan – Bagger Dave’s – opened September 18, 2011

• University Park, Florida – BWW – opened October 30, 2011

• Cascade Township, Michigan – Bagger Dave’s – scheduled to open on November 13, 2011

Although investments in new stores are an integral part of our strategic and capital expenditures plan, we also believe that reinvesting in existing stores is an important factor and necessary to maintain the overall positive dining experience for our guests. Depending on the age of the existing stores, upgrades range from $50 thousand on the interior to $500 thousand for a full remodel of the restaurant. Stores are typically upgraded after approximately five years of operation and fully remodeled after approximately 10 years of operation.

Mandatory Upgrades

Per a franchise agreement dated July 29, 2010 by and between BWWI and Anker, Inc., a wholly-owned subsidiary of the Company, we were obligated to complete a full remodel of our Fenton, Michigan BWW location in 2011.  This remodel was completed in September 2011and totaled approximately $450 thousand dollars.

Discretionary Upgrades

In fiscal year 2011, the Company invested additional capital to upgrade seven existing locations, all of which were funded by cash from operations. These improvements consisted of audio/visual equipment upgrades or patio upgrades.

19

Our Credit Facility has debt covenants that have to be met on a quarterly basis. As of September 25, 2011, we are in compliance with all of the covenants.

Item 3. Quantitative and Qualitative Disclosure About Market Risks

Not Applicable.

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures.

We are required to maintain disclosure controls and procedures designed to ensure that material information related to us, including our consolidated subsidiaries, is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

As of September 25, 2011, an evaluation was performed under the supervision of and with the participation of our management, including our principal executive and principal financial officers, of the effectiveness of the design and operation of our disclosure controls and procedures.  Based on that evaluation, our management, including our principal executive and principal financial officers, concluded that our disclosure controls and procedures were effective as of September 25, 2011.

(b) Changes in internal controls over financial reporting.

There were no changes in the Company’s internal control over financial reporting during the quarter ended September 25, 2011 that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.

Our process for evaluating controls and procedures is continuous and encompasses constant improvement of the design and effectiveness of established controls and procedures and the remediation of any deficiencies that may be identified during this process.

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 entirely or predominantly covered by insurance, has had a material effect on our financial condition or results of operations. 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 materially 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, as amended, for the year ended December 26, 2010.

20

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

Not Applicable.

Item 3. Defaults Upon Senior Securities

None.

Item 5. Other Information

None.

Item 6. Exhibits

(a) Exhibits:

3.1 Certificate of Incorporation (filed as an exhibit to the Company's Registration Statement on Form S-1, as filed with the Securities and Exchange Commission on August 10, 2007, and incorporated herein by this reference).

3.2 By-Laws (filed as an exhibit to the Company's Registration Statement on Form S-1, as filed with the Securities and Exchange Commission on August 10, 2007, and incorporated herein by this reference).

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

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

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

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

101.INS*  XBRL Instance Document

101.SCH*  XBRL Taxonomy Extension Schema Document

101.CAL*  XBRL Taxonomy Extension Calculation Document

101.DEF*  XBRL Taxonomy Extension Definition Document

101.LAB*  XBRL Taxonomy Extension Label Document

101.PRE*  XBRL Taxonomy Extension Presentation Document

* In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed to be “furnished” and not “filed.”

21

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.

	DIVERSIFIED RESTAURANT HOLDINGS, INC.
Dated:  November 9, 2011	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 and Treasurer (Principal Financial and Accounting Officer)

EX-31.1

Exhibit 31.1

RULE 13a-14(a) CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, T. Michael Ansley, certify that:

1.           I have reviewed this Quarterly Report on Form 10-Q for the fiscal quarter ended September 25, 2011 of Diversified Restaurant Holdings, Inc. (the "Company");

2.           Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.           Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.           The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13-a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financing reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.           The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonable likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Dated:  November 9, 2011	DIVERSIFIED RESTAURANT HOLDINGS, INC.
	By:	/s/ T. Michael Ansley
		T. Michael Ansley Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)

EX-31.2

Exhibit 31.2

RULE 13a-14(a) CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, David G. Burke, certify that:

1.           I have reviewed this Quarterly Report on Form 10-Q for the fiscal quarter ended September 25, 2011 of Diversified Restaurant Holdings, Inc. (the "Company");

2.           Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.           Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.           The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13-a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financing reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.           The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonable likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Dated:  November 9, 2011	DIVERSIFIED RESTAURANT HOLDINGS, INC.
	By:	/s/ David G. Burke
		David G. Burke Treasurer and Chief Financial Officer (Principal Financial Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the accompanying Quarterly Report on Form Q (“Quarterly Report”) of Diversified Restaurant Holdings, Inc. (the "Company") for the fiscal quarter ended September 25, 2011, I, T. Michael Ansley, Chairman of the Board of Directors and Chief Executive Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that:

1.The Quarterly Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.The information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:  November 9, 2011	DIVERSIFIED RESTAURANT HOLDINGS, INC.
	By:	/s/ T. Michael Ansley
		T. Michael Ansley Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)

EX-32.2

Exhibit 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the accompanying Quarterly Report on Form Q (“Quarterly Report”) of Diversified Restaurant Holdings, Inc. (the "Company") for the fiscal quarter ended September 25, 2011, I, David G. Burke, Treasurer and Chief Financial Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that:

1.The Quarterly Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.The information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:  November 9, 2011	DIVERSIFIED RESTAURANT HOLDINGS, INC.
	By:	/s/ David G. Burke
		David G. Burke Treasurer and Chief Financial Officer (Principal Financial Officer)

XML

Consolidated Balance Sheets (Unaudited) (Parentheticals) (USD $)	Sep. 25, 2011	Dec. 26, 2010
Common stock, par value (in Dollars per share)	$ 0.0001	$ 0.0001
Common stock, shares authorized	100,000,000	100,000,000
Common stock, shares issued	18,876,000	18,876,000
Common stock, shares outstanding	18,876,000	18,876,000
Current Debt [Member]
VIE debt (in Dollars)	$ 89,414
Noncurrent Debt [Member]
VIE debt (in Dollars)	$ 1,162,377	$ 1,229,437

XML

Consolidated Statements of Operations (Unaudited) (USD $)	3 Months Ended		9 Months Ended
	Sep. 25, 2011	Sep. 26, 2010	Sep. 25, 2011	Sep. 26, 2010
Revenue
Food and beverage sales	$ 14,588,078	$ 11,423,726	$ 44,617,381	$ 32,823,425
Total revenue	14,588,078	11,423,726	44,617,381	32,823,425
Operating expenses
Compensation costs	4,254,003	3,346,237	12,757,321	9,780,263
Food and beverage costs	4,236,077	3,310,374	12,683,404	9,785,584
General and administrative	3,440,926	2,624,892	10,310,680	7,708,569
Pre-opening	135,009	66,129	403,714	283,308
Occupancy	854,624	810,969	2,444,948	2,144,808
Depreciation and amortization	881,432	698,770	2,491,649	1,944,374
Total operating expenses	13,802,071	10,857,371	41,091,716	31,646,906
Operating profit	786,007	566,355	3,525,665	1,176,519
Change in fair value of derivative instruments	(140,629)	(177,707)	(345,249)	(582,628)
Interest expense	(282,934)	(349,548)	(876,368)	(1,037,424)
Other income (expense), net	(17,749)	3,508	(58,262)	5,071
Income (loss) before income taxes	344,695	42,608	2,245,786	(438,462)
Income tax provision	(155,176)	(131,119)	(816,661)	(9,232)
Net income (loss)	189,519	(88,511)	1,429,125	(447,694)
Net (income) loss attributable to noncontrolling interest	(38,747)	88,446	(115,232)	88,446
Net income (loss) attributable to DRH	$ 150,772	$ (65)	$ 1,313,893	$ (359,248)
Basic earnings (loss) per share - as reported (in Dollars per share)	$ 0.01	$ 0.00	$ 0.07	$ (0.02)
Fully diluted earnings (loss) per share - as reported (in Dollars per share)	$ 0.01	$ 0.00	$ 0.07	$ (0.02)
Weighted average number of common shares outstanding
Basic (in Shares)	18,876,000	18,870,505	18,876,000	18,870,505
Diluted (in Shares)	19,039,692	18,870,505	19,048,836	18,870,505

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Document And Entity Information	9 Months Ended
	Sep. 25, 2011	Nov. 09, 2011
Document and Entity Information [Abstract]
Entity Registrant Name	Diversified Restaurant Holdings, Inc.
Document Type	10-Q
Current Fiscal Year End Date	--12-27
Entity Common Stock, Shares Outstanding		18,876,000
Amendment Flag	false
Entity Central Index Key	0001394156
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Filer Category	Smaller Reporting Company
Entity Well-known Seasoned Issuer	No
Document Period End Date	Sep. 25, 2011
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	Q3

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Note 6. Related Party Transactions

3 Months Ended

Sep. 25, 2011

Related Party Transactions Disclosure [Text Block]

6.           RELATED PARTY TRANSACTIONS

The Affiliates Acquisition (see Note 3) was accomplished by issuing unsecured promissory notes to each selling shareholder that bear interest at 6% per year, mature on February 1, 2016, and are payable in quarterly installments of approximately $157,000, with principal and interest fully amortized over six years.  The outstanding balance on the notes is $2,388,769 and $2,801,221 at September 25, 2011 and December 26, 2010, respectively.

Fees for monthly accounting and financial statement compilation services are paid to an entity owned by a director and stockholder of the Company.  Fees paid during the three months ended September 25, 2011 and September 26, 2010 were $84,486 and $45,905, respectively.  Fees paid during the nine months ended September 25, 2011 and September 26, 2010 were $236,571 and $155,499, respectively.

Current debt (see Note 7) also includes a promissory note to a DRH stockholder in the amount of $250,000.  The note is a demand note that does not require principal or interest payments.  Interest is accrued at 8% per annum and is compounded quarterly.  The Company has 180 days from the date of demand to pay the principal and accrued interest.

See Note 10 for related party operating lease transactions.

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Note 11. Commitments and Contingencies

3 Months Ended

Sep. 25, 2011

Commitments and Contingencies Disclosure [Text Block]

11.           COMMITMENTS AND CONTINGENCIES

The Company assumed, from a related entity, an "Area Development Agreement" with BWWI in which the Company undertakes to open 23 BWW restaurants within its 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 September 25, 2011, of the 32 restaurants required to be opened under the Area Development Agreement, 15 of these restaurants had been opened for business (with the 16th restaurant opened on October 30, 2011).  An additional six restaurants not part of this Area Development Agreement were also opened for business as of September 25, 2011. 

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 $667,224 and $533,833 in royalty expense for the three-month period ended September 25, 2011 and September 26, 2010, respectively, and $2,045,488 and $1,528,560 for the nine-month period ended September 25, 2011 and September 26, 2010, respectively.  Advertising fund contribution expenses were $422,570 and $328,574 for the three-month period ended September 25, 2011 and September 26, 2010, respectively, and $1,271,538 and $941,194 for the nine-month period ended September 25, 2011 and September 26, 2010, respectively.

The Company is required, by its various BWWI franchise agreements, to modernize the restaurants during the term of the agreements.  The individual agreements generally require improvements between the fifth year and the tenth year to meet the most current design model that BWWI has approved.  The modernization costs can range from approximately $50,000 to approximately $500,000 depending on the individual restaurants’ needs.

The Company is subject to ordinary, routine, legal proceedings, as well as demands, claims and threatened litigation, which arise in the ordinary course of its business.  The ultimate outcome of any litigation is uncertain.  While unfavorable outcomes could have adverse effects on the Company's business, results of operations, and financial condition, management believes that the Company is adequately insured and does not believe that any pending or threatened proceedings would adversely impact the Company's results of operations, cash flows, or financial condition.  Therefore, no separate reserve has been established for these types of legal proceedings.

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Note 2. Staff Accounting Bulletin No. 108

3 Months Ended

Sep. 25, 2011

Accounting Changes and Error Corrections [Text Block]

2.           STAFF ACCOUNTING BULLETIN NO. 108

During the three months ended March 27, 2011, the Company identified an error related to its 2010 accounting for its interest rate swap agreements.  The Company determined that its interest rate swap agreements, effective May 2010 and September 2010, did not qualify for hedge accounting and, as a result, the change in the fair value of the swap agreements as of December 26, 2010 of $367,181 and as of September 26, 2010 of $582,628 should have been reflected in the consolidated statement of operations as change in fair value of derivative instruments instead of in the consolidated statement of stockholders’ equity.  

In addition, during the three months ended March 27, 2011, the Company determined that, as a result of its August 2010 guarantee of the mortgage obligations of Ansley Group, LLC, the Company should have consolidated Ansley Group, LLC into its financial statements as of and for the year ended December 26, 2010 and for the three- and nine-month periods ended September 26, 2010 in accordance with FASB guidance related to consolidating variable interest entities.

The Company assessed the materiality of these errors on its December 26, 2010 financial statements in accordance with the SEC’s Staff Accounting Bulletin (“SAB”) No. 99 and concluded that the errors were not material to that period.  The Company also concluded that, had the errors been adjusted within its financial statements for the three-month and nine-month periods ended September 25, 2011, the impact of such adjustments would have been material to its financial statements for the period then ended and it expects the errors may be material to its full year 2011 results.  In accordance with SAB No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements", the December 26, 2010 balance sheet and the statements of operations for the three-month and nine-month periods ended September 26, 2010 have been revised to correct these errors.

The Company will make additional adjustments as appropriate to the corresponding annual financial statements the next time it files these statements.  

The impact of the errors on the December 26, 2010 balance sheet is as follows:

	Balances at December 26, 2010
	Previously Reported			Adjustment			As Adjusted
Cash and cash equivalents	$	1,305,031		$	53,350		$	1,358,381
Property and equipment, net - restricted assets of VIE		-			1,487,993			1,487,993
Other long-term assets		63,539			16,560			80,099
Current portion of long-term debt		1,858,262			89,414			1,947,676
Deferred rent (long-term)		1,722,531			(99,588	)		1,622,943
Long-term debt, less current portion		14,706,756			1,229,437			15,936,193
Retained earnings (accumulated deficit)		(2,728,836	)		(367,181	)		(3,096,017	)
Accumulated other comprehensive income (loss)		(367,181	)		367,181			-
Noncontrolling interest in VIE		-			338,640			338,640

The impact of the errors on the consolidated statements of operations for the three-month and nine-month periods ended September 26, 2010 is as follows:

	Three Months Ended September 26, 2010									Nine Months Ended September 26, 2010
	Previously Reported			Adjustment			As Adjusted			Previously Reported			Adjustment			As Adjusted
General and administrative	$	2,670,428		$	(45,536	)	$	2,624,892		$	7,707,679		$	890		$	7,708,569
Occupancy		765,289			45,680			810,969			2,165,555			(20,747	)		2,144,808
Depreciation and amortization		696,161			2,609			698,770			1,941,765			2,609			1,944,374
Change in fair value of derivative instruments		-			(177,707	)		(177,707	)		-			(582,628	)		(582,628	)
Interest expense		(243,854	)		(105,694	)		(349,548	)		(931,730	)		(105,694	)		(1,037,424	)
Income (loss) before income taxes		331,587			(288,979	)		42,608			232,612			(671,074	)		(438,462	)
Net income (loss)		200,468			(288,979	)		(88,511	)		223,380			(671,074	)		(447,694	)
Net income (loss) attributable to noncontrolling interest		-			88,446			88,446			-			88,446			88,446
Net income (loss) attributable to DRH		-			(65	)		(65	)		-			(359,248	)		(359,248	)
Basic earnings (loss) per share		0.01			(0.01	)		0.00			0.01			(0.03	)		(0.02	)
Fully diluted earnings (loss) per share		0.01			(0.01	)		0.00			0.01			(0.03	)		(0.02	)
Weighted average number of common shares outstanding
Basic		18,870,505			-			18,870,505			18,870,505			-			18,870,505
Diluted		29,160,000			(10,289,495	)		18,870,505			29,113,333			(10,242,828	)		18,870,505

The Company's SAB 99 evaluation considered that the interest rate swap has no impact on the liability that was already recorded, is non-cash in nature, and is not material given the Company's overall volume of activity in 2010.  Regarding consolidation of the Ansley Group, LLC the impact on the 2010 statement of operations is not material and the 2010 balance sheet impact, disclosed in the table above, is not material given that the restaurant's operating results related to the assets that should have been consolidated were already included in operations and the potential debt obligation was previously disclosed.  In the aggregate, the Company does not believe it is probable that the view of a reasonable investor would be changed by the correction in 2010 of these items.

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Note 8. Capital Stock (Including Purchase Warrants and Options)

3 Months Ended

Sep. 25, 2011

Stockholders' Equity Note Disclosure [Text Block]

8.           CAPITAL STOCK (INCLUDING PURCHASE WARRANTS AND OPTIONS)

In 2011, the Company established the Stock Incentive Plan of 2011 (“Stock Incentive Plan”) to attract and retain directors, consultants, and employees and to more fully align their interests with the interests of the Company’s shareholders through the opportunity for increased stock ownership.  The plan permits the grant and award of 750,000 shares of common stock by way of stock options and/or restricted stock.  Stock options must be awarded at exercise prices at least equal to or greater than 100% of the fair market value of the shares on the date of grant.  The options will expire no later than 10 years from the date of grant, with vesting terms to be defined at grant date, ranging from a vesting schedule based on performance to a vesting schedule that extends over a period of time as selected by the Compensation Committee of the Board of Directors or other committee as determined by the Board (the “Committee”).  The Committee also determines the grant, issuance, retention, and vesting timing and conditions of awards of restricted stock.  The Committee may place limitations, such as continued employment, passage of time, and/or performance measures, on restricted stock.  Awards of restricted stock may not provide for vesting or settlement in full of restricted stock over a period of less than one year from the date the award is made.  The Stock Incentive Plan was approved by our shareholders on May 26, 2011. 

During fiscal 2011, restricted shares were issued to certain employees at a weighted-average grant date fair value of $5.00.  Restricted shares are granted with a per share purchase price at 100% of the fair market value on the date of grant.  Stock-based compensation expense will be recognized over the expected vesting period in an amount equal to the fair market value of such awards on the date of grant.  The restricted shares transactions are summarized below:

	Number of Restricted Stock Shares
Unvested, June 26, 2011		0
Granted		60,800
Vested		0
Expired/Forfeited		(200	)
Unvested, September 25, 2011		60,600

Under the Stock Incentive Plan, there are 689,400 shares available for future awards.

On July 31, 2010, prior to the Stock Incentive Plan, DRH granted options for the purchase of 210,000 shares of common stock to the directors of the Company.  These options vest ratably over a three-year period and expire six years from issuance.  Once vested, the options can be exercised at a price of $2.50 per share.

Stock-based compensation of $21,981 and $5,253 was recognized, during the three-month period ended September 25, 2011 and September 26, 2010, respectively, as compensation cost in the consolidated statements of operations and as additional paid-in capital on the consolidated statement of stockholders' equity to reflect the fair value of shares vested as of September 25, 2011.  Stock-based compensation for the nine-months ended September 25, 2011 and September 26, 2010, respectively, was $65,944 and $21,409.  The fair value of stock options is estimated using the Black-Scholes model.  The fair value of unvested shares is $153,870 as of September 25, 2011.  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 and a risk-free rate of return represented by the U.S. 5-year Treasury Bond rate and volatility factor of 30% based on guidance 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 September 25, 2011, 354,000 shares of authorized common stock are reserved for issuance to provide for the exercise of the Company’s stock options.

The Company has authorized 10,000,000 shares of preferred stock at a par value of $0.0001.  No preferred shares are issued or outstanding as of September 25, 2011.  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.

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Note 13. Fair Value of Financial Instruments

3 Months Ended

Sep. 25, 2011

Fair Value Disclosures [Text Block]

13.           FAIR VALUE OF FINANCIAL INSTRUMENTS

The guidance for fair value measurements, ASC 820 Fair Value Measurements and Disclosures, establishes the authoritative definition of fair value, sets out a framework for measuring fair value, and outlines the required disclosures regarding fair value measurements. Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. We use a three-tier fair value hierarchy based upon observable and non-observable inputs as follows:

●	Level 1	Quoted market prices in active markets for identical assets and liabilities;
●	Level 2	Inputs, other than level 1 inputs, either directly or indirectly observable; and
●	Level 3	Unobservable inputs developed using internal estimates and assumptions (there is little or no market data) which reflect those that market participants would use.

As of September 25, 2011 and December 26, 2010, respectively, our financial instruments consisted of cash equivalents, accounts payable, and debt. The fair value of cash equivalents, accounts payable and short-term debt approximate its carrying value, due to its short-term nature.

The fair value of our interest rate swaps is determined based on valuation models, which utilize quoted interest rate curves to calculate the forward value and then discount the forward values to the present period. 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. Our interest rate swaps are classified as a Level 2 measurement as these securities are not actively traded in the market, but are observable based on transactions associated with bank loans with similar terms and maturities.

There were no transfers between levels of the fair value hierarchy during the three months ended September 25, 2011 and the fiscal year ended December 26, 2010, respectively.

The following table presents the fair values for those assets and liabilities measured on a recurring basis as of September 25, 2011:

FAIR VALUE MEASUREMENTS
											Asset/(Liability)
Description	Level 1		Level 2			Level 3		Total			Total
Interest Rate Swaps	$	—	$	(712,430	)	$	—	$	(712,430	)	$	(712,430	)

The following table presents the fair values for those assets and liabilities measured on a recurring basis as of December 26, 2010:

FAIR VALUE MEASUREMENTS
											Asset/(Liability)
Description	Level 1		Level 2			Level 3		Total			Total
Interest Rate Swaps	$	—	$	(367,181	)	$	—	$	(367,181	)	$	(367,181	)

As of September 25, 2011, our total debt, less related party debt, was approximately $16.7 million and had a fair value of approximately $14.0 million. As of December 26, 2010, our total debt, less related party debt, was approximately $14.8 million and had a fair value of approximately $12.7 million. Related party debt at September 25, 2011 was approximately $2.6 million and had a fair value of approximately $2.7 million.  Related party debt as of December 26, 2010 was approximately $3.1 million and had a fair value of approximately $2.8 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.

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Note 9. Income Taxes

3 Months Ended

Sep. 25, 2011

Income Tax Disclosure [Text Block]

9.           INCOME TAXES

The benefit (provision) for income taxes consists of the following components for the three-month and nine-month periods ended September 25, 2011 and September 26, 2010, respectively:

		Three Months Ended					Nine Months Ended
		September 25 2011			September 26 2010		September 25 2011		September 26 2010
Federal
Current	$	0		$	0	$	0		$	0
Deferred		(36,390	)		(69,280)		(463,772	)		121,327
State
Current		(71,500	)		(36,502)		(208,507	)		(123,105)
Deferred		(47,286	)		(25,337)		(144,382	)		(7,454)
Income tax benefit (provision)	$	(155,176	)	$	(131,119)	$	(816,661	)	$	(9,232)

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:

	September 25 2011			September 26 2010
Income tax benefit (provision) at federal statutory rate	$	(766,063	)	$	(78,957)
State income tax benefit (provision)		(352,889	)		(130,559)
Permanent differences		(77,139	)		9,535
Tax credits		318,643			105,000
Other		60,787			85,749
Income tax benefit (provision)	$	(816,661	)	$	(9,232)

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:

	September 25 2011			December 26 2010
Deferred tax assets:
Net operating loss carry forwards	$	363,121		$	1,252,609
Deferred rent expense		62,762			68,509
Start-up costs		231,393			190,076
Tax credit carry forwards		846,808			540,533
Other		437,643			487,139
Total deferred tax assets		1,941,727			2,538,866
Deferred tax liabilities:
Other		176,552			425,322
Tax depreciation in excess of book		1,765,585			1,505,800
Total deferred tax liabilities		1,942,137			1,931,122
Net deferred income tax (liabilities) assets	$	(410	)	$	607,744

If deemed necessary by management, the Company establishes valuation allowances in accordance with the provisions of FASB ASC 740 ("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 carryforwards before its 20-year expiration.  A significant amount of net operating loss carry forwards were used when the Company purchased nine affiliated restaurants in 2010, which were previously managed by DRH.  Federal net operating loss carry forwards of $680,018 and $28,611 will expire in 2029 and 2030, respectively.  General business tax credits of $318,013, $341,156, $122,850, $59,722 and $5,067 will expire in 2031, 2030, 2029, 2028 and 2027, respectively.

The Company applies the provisions of ASC 740 regarding the accounting for uncertainty in income taxes.  There are no amounts recorded on the Company's consolidated financial statements for uncertain positions.  The Company classifies all interest and penalties as income tax expense.  There are no accrued interest amounts or penalties related to uncertain tax positions as of September 25, 2011.

The Company files income tax returns in the United States federal jurisdiction and various state jurisdictions.

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Note 7. Long-Term Debt

3 Months Ended

Sep. 25, 2011

Long-term Debt [Text Block]

7.           LONG-TERM DEBT

Long-term debt consists of the following obligations:

	September 25 2011		December 26 2010
Note payable to a bank secured by a senior lien on all company assets. Scheduled monthly principal and interest payments are approximately $120,000 through maturity in May 2017. Interest is charged based on a swap arrangement designed to yield a fixed annual rate of 7.10%.	$	7,602,346	$	8,399,538
Note payable to a bank secured by a senior mortgage on the Brandon Property and a personal guaranty. Scheduled monthly principal and interest payments are approximately $8,000 for the period beginning July 2010 through maturity in June 2030, at which point a balloon payment of $413,550 is due. Interest is charged based on a fixed rate of 6.72%, per annum, through June 2017, at which point the rate will adjust to the U.S. Treasury Securities Rate plus 4% (and every seven years thereafter).		1,127,278		1,141,188
Note payable to a bank secured by a junior mortgage on the Brandon Property. Matures in 2030 and requires monthly principal and interest installments of approximately $6,300 until maturity. Interest is charged at a rate of 3.58% per annum.		891,048		915,446
DLOC to a bank, secured by a senior lien on all company assets. Scheduled interest payments are charged at a rate of 3.0% over the 30-day LIBOR (the rate at September 25, 2011 was approximately 3.23%). In November 2011, the DLOC will convert into a term loan bearing interest at 4% over the 30-day LIBOR and will mature in May 2017. The DLOC includes a carrying cost of .25% per year of any available but undrawn amounts.		1,662,999		1,424,679
Note payable to a bank secured by a senior lien on all company assets. Scheduled monthly principal and interest payments are approximately $15,000 through maturity in May 2017. Interest is charged based on a swap arrangement designed to yield a fixed annual rate of 5.91%.		1,244,391		1,379,098
Note payable to a bank secured by a senior lien on all company assets. Scheduled monthly principal and interest payments are approximately $33,000 through maturity in May 2017. Interest is charged based on a swap arrangement designed to yield a fixed annual rate of 6.35%.		2,701,583		-
Unsecured note payable that matures in August 2013 and requires monthly principal and interest installments of approximately $2,200, with the balance due at maturity. Interest is 7% per annum.		234,478		241,832
Note payable to Ford Credit secured by a vehicle purchased by Flyer Enterprises, Inc. to be used in the operation of the business. This is an interest-free loan under a promotional 0% rate. Scheduled monthly principal payments are approximately $430. The note matures in April 2013.		8,154		12,016
Notes payable - variable interest entity. Note payable to a bank secured by a senior mortgage on the property located at 15745 Fifteen Mile Road, Clinton Township, Michigan 48035, a DRH corporate guaranty, and a personal guaranty. Scheduled monthly principal and interest payments are approximately $12,500 through maturity in 2025. Interest is charged at a rate of 4% over the 30-day LIBOR (the rate at September 25, 2011 was approximately 4.23%).		1,251,791		1,318,851
Notes payable – related parties		2,638,769		3,051,221
Total long-term debt		19,362,837		17,883,869
Less current portion (includes VIE debt of $89,414)		(2,884,518)		(1,947,676	)
Long-term debt, net of current portion	$	16,478,319	$	15,936,193

Scheduled principal maturities of long-term debt are summarized as follows:

Year	Amount
September 25, 2011	$	2,884,518
September 23, 2012		3,034,050
September 22, 2013		2,987,327
September 21, 2014		3,176,477
September 20, 2015		2,941,824
Thereafter		4,338,641
Total	$	19,362,837

Interest expense was $282,934 and $349,548 (including related party interest expense of $42,131 and $50,932) for the three months ended September 25, 2011 and September 26, 2010, respectively.  Interest expense was $876,368 and $1,037,424 (including related party interest expense of $144,502 and $111,047) for the nine months ended September 25, 2011 and September 26, 2010, respectively.

On August 30, 2010, Ansley Group, LLC entered into a $1.3 million mortgage refinance agreement with RBS. This agreement is secured by a senior mortgage on the property located at 15745 Fifteen Mile Road, Clinton Township, Michigan 48035, a DRH corporate guaranty, and a personal guaranty.  Ansley Group, LLC was formed for the sole purpose of acting as landlord for this property.  DRH leases this property through its wholly-owned subsidiary, Bearcat Enterprises, Inc. In accordance with ASC 810, Ansley Group, LLC is considered a variable interest entity and, accordingly, its activities are consolidated into DRH’s interim consolidated financial statements.

The above agreements contain various customary financial covenants generally based on the performance of the specific borrowing entity and other related entities.  The more significant covenants consist of a minimum debt service coverage ratio and a maximum lease adjusted leverage ratio, both of which we are in compliance with as of September 25, 2011.

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Consolidated Statements of Cash Flows (Unaudited) (USD $)	9 Months Ended
	Sep. 25, 2011	Sep. 26, 2010
Cash flows from operating activities
Net income (loss)	$ 1,429,125	$ (447,694)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation and amortization	2,491,649	1,944,375
Loss on disposal of property and equipment	30,157	217,868
Share-based compensation	65,944	21,409
Change in fair value of derivative instruments	345,249	582,628
Deferred income tax benefit (provision)	608,154	(203,780)
Changes in operating assets and liabilities that provided (used) cash
Accounts receivable	(14,348)	376,675
Inventory	(140,545)	(1,196)
Prepaid assets	56,440	(87,328)
Other current assets	43,348	(69,025)
Intangible assets	(72,822)	(111,198)
Other long-term assets	(4,575)	(6,864)
Accounts payable	77,180	(68,884)
Accrued liabilities	452,855	462,929
Deferred rent	153,057	209,990
Net cash provided by operating activities	5,520,868	2,819,905
Cash flows from investing activities
Purchases of property and equipment	(6,051,295)	(4,176,237)
Net cash used in investing activities	(6,051,295)	(4,176,237)
Cash flows from financing activities
Proceeds from issuance of long-term debt	3,138,321	3,086,496
Repayments of long-term debt	(1,659,353)	(2,059,215)
Proceeds from issuance of common stock	0	250,000
Dividends	(107,000)	(552,861)
Net cash provided by financing activities	1,371,968	724,420
Net increase (decrease) in cash and cash equivalents	841,541	(631,912)
Cash and cash equivalents, beginning of period	1,358,381	1,660,099
Cash and cash equivalents, end of period	$ 2,199,922	$ 1,028,187

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Note 3. Significant Business Transactions

3 Months Ended

Sep. 25, 2011

Schedule OfSignificant Business Transactions [Text Block]

3.           SIGNIFICANT BUSINESS TRANSACTIONS

On June 7, 2011, the Company, together with its wholly-owned subsidiaries, entered into a First Amended and Restated Development Line of Credit Agreement (the "DLOC Agreement") with RBS, N.A. ("RBS").  The DLOC Agreement provides for an $8 million credit facility with RBS (the "Credit Facility").  The Credit Facility consists of a $7 million development line of credit (“DLOC”) and a $1 million revolving line of credit (“Revolving Line of Credit”). The Credit Facility is secured by a senior lien on all Company assets.

The Company plans to use the Credit Facility 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 in the Midwest. The DLOC is for a term of 18 months (the “Draw Period”) and amounts borrowed bear interest at between 3% - 4% over LIBOR as adjusted monthly, depending on the Lease Adjusted Leverage Ratio (as defined in the DLOC). 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 3% - 4% over LIBOR as adjusted monthly, with principal and interest amortized over seven years (20 years for real estate) and with a maturity date of June 7, 2018. Any amounts borrowed by the Company during the Draw Period that are not converted into a term loan by December 7, 2012, will automatically be converted to a term loan on the same terms as outlined above. The DLOC includes a carrying cost of .25% per year of any available but undrawn amounts, payable quarterly; however, RBS has granted a zero carrying cost on the unused DLOC through December 25, 2011.  The Company also secured a $1 million Revolving Line of Credit, which has a maturity date of June 7, 2012.  Advances on the Company’s Revolving Line of Credit must be repaid within ninety consecutive days.

On September 29, 2011, the Company entered into a commitment letter with RBS, as administrator and lead arranger, with respect to senior credit facilities of up to $50 million.   The commitment letter provides that the senior credit facilities would include a term loan facility of up to $42 million to refinance the existing outstanding debt of the Company and its affiliates and to finance a potential acquisition.  The senior credit facilities would also include a renewal of the Company's development line of credit facility of up to $7 million to fund the development of BWW and Bagger Dave's restaurants and a renewal of its revolving line of credit of up to $1 million.  The senior credit facilities would be secured by a first priority lien on the Company's assets.  The commitment letter provides, among other things, that the closing of the senior credit facilities is subject to conditions customary to similar transactions, including the closing of a potential acquisition.  In the event the potential acquisition, as contemplated by the commitment letter, is not consummated, the commitment letter will be terminated or amended.

On February 1, 2010, the Company, through its WINGS subsidiary, acquired nine affiliated BWW restaurants it previously managed (“Affiliates Acquisition”).  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 28, 2009) using the historical cost basis of the acquired affiliates. Further, prior year amounts also have been retrospectively adjusted to furnish comparative information while the entities were under common control. 

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Note 4. Property and Equipment

3 Months Ended

Sep. 25, 2011

Property, Plant and Equipment Disclosure [Text Block]

4.           PROPERTY AND EQUIPMENT

Property and equipment are comprised of the following assets:

	September 25 2011		December 26 2010
Land	$	469,680	$	385,959
Land (restricted assets of VIE)		520,000		520,000
Building		2,745,296		2,255,246
Building (restricted assets of VIE)		1,570,967		1,570,967
Equipment		9,682,030		8,140,417
Furniture and fixtures		2,810,371		2,216,347
Leasehold improvements		17,332,641		13,925,216
Restaurant construction in progress		772,390		1,247,265
Total		35,903,375		30,261,417
Less accumulated depreciation		(13,039,524)		(10,917,851	)
Less accumulated depreciation attributable to restricted assets of VIE		(625,641)		(602,974	)
Property and equipment, net	$	22,238,210	$	18,740,592

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Note 12. Supplemental Cash Flows Information

3 Months Ended

Sep. 25, 2011

Cash Flow, Supplemental Disclosures [Text Block]

12.            SUPPLEMENTAL CASH FLOWS INFORMATION

Other Cash Flows Information

Cash paid for interest was $278,616 and $349,548 during the three-month period ended September 25, 2011 and September 26, 2010, respectively, and $827,253 and $1,037,424 for the nine-month period ended September 25, 2011 and September 26, 2010, respectively.

Cash paid for income taxes was $110,000 and $36,502 during the three-month period ended September 25, 2011 and September 26, 2010, respectively, and $147,943 and $146,937 for the nine-month period ended September 25, 2011 and September 26, 2010, respectively.

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Note 5. Intangibles

3 Months Ended

Sep. 25, 2011

Intangible Assets Disclosure [Text Block]

5.           INTANGIBLES

 Intangible assets are comprised of the following:

	September 25 2011		December 26 2010
Amortized intangibles:
Franchise fees	$	303,750	$	373,750
Trademark		22,283		7,475
Loan fees		164,429		155,100
Total		490,462		536,325
Less accumulated amortization		(83,375)		(115,246	)
Amortized intangibles, net		407,087		421,079
Unamortized intangibles:
Liquor licenses		673,067		554,382
Total intangibles, net	$	1,080,154	$	975,461

Amortization expense for the three months ended September 25, 2011 and September 26, 2010 was $28,698 and $9,815, respectively.  Amortization expense for the nine months ended September 25, 2011 and September 26, 2010 was $48,129 and $27,078, respectively.  Based on the current intangible assets and their estimated useful lives, amortization expense for fiscal years 2011, 2012, 2013, 2014, and 2015 is projected to total approximately $49,275 per year.

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Consolidated Statements of Stockholders' Equity (Deficit) (Unaudited) (USD $)	Common Stock [Member]	Additional Paid-in Capital [Member]	Retained Earnings [Member]	Accumulated Other Comprehensive Income (Loss) [Member]	Noncontrolling Interest [Member]	Total
Balance at Dec. 26, 2010 (Scenario, Previously Reported [Member])	$ 1,888	$ 2,631,304	$ (2,728,836)	$ (367,181)		$ (462,825)
Balance at Dec. 26, 2010	1,888	2,631,304	(3,096,017)		338,640	(124,185)
Balance (in Shares) at Dec. 26, 2010 (Scenario, Previously Reported [Member])	18,876,000
Balance (in Shares) at Dec. 26, 2010	18,876,000					18,876,000
Share-based compensation		65,944				65,944
Net income			1,313,893		115,232	1,429,125
Dividends					(107,000)	(107,000)
Initial consolidation of VIE						346,872
Balance at Sep. 25, 2011	$ 1,888	$ 2,697,248	$ (1,782,124)		$ 346,872	$ 1,263,884
Balance (in Shares) at Sep. 25, 2011	18,876,000					18,876,000

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Note 1. Business and Summary of Significant Accounting Policies

3 Months Ended

Sep. 25, 2011

Significant Accounting Policies [Text Block]

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 wholly-owned subsidiaries, including AMC Group, Inc, (“AMC”), AMC Wings, Inc. (“WINGS”), and AMC Burgers, Inc.  (“BURGERS”) develop, own, and operate Buffalo Wild Wings® (“BWW”) restaurants located throughout Michigan and Florida and its own restaurant concept, Bagger Dave's Legendary Burger Tavern® (“Bagger Dave's”), as detailed below.

The following organizational chart outlines the corporate structure of DRH and its wholly-owned subsidiaries.  A brief textual description of the entities follows the organizational chart.  DRH is incorporated in the State of Nevada.  All other entities are incorporated or organized in the State of Michigan.

AMC was formed on March 28, 2007 and serves as the operational and administrative center for DRH. AMC renders management and advertising services to WINGS and its subsidiaries and BURGERS and its subsidiaries.  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 22 BWW restaurants that are currently in operation (with its most recent opening in University Park, Florida on Sunday, October 30, 2011).

WINGS is economically dependent on retaining its franchise rights with Buffalo Wild Wings, Inc. (“BWWI”).  The franchise agreements have specific initial term expiration dates ranging from January 29, 2014 through March 25, 2031, depending on the date 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.  When factoring in any applicable renewals, the franchise agreements have specific expiration dates ranging from January 29, 2019 through March 25, 2046.  WINGS is in compliance with the terms of these agreements at September 25, 2011.  The Company is under contract with BWWI to enter into 16 additional franchise agreements by 2017 (see Note 11 for details).  

BURGERS was formed on March 12, 2007 to own the Bagger Dave's restaurants, a full-service, ultra-casual dining concept developed by the Company.  BURGERS, through its subsidiaries, owns five Bagger Dave’s restaurants that are currently in operation (with the sixth location scheduled to open on Sunday, November 13, 2011 in Cascade Township, 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 been approved, to franchise in Michigan, Ohio, Indiana, Illinois, Wisconsin, Kentucky, and Missouri.  No Bagger Dave's franchise agreements have been entered into to date.

Principles of Consolidation

The consolidated financial statements include the accounts of DRH, its wholly-owned subsidiaries, and Ansley Group, LLC (collectively, the "Company"), a real estate entity under common control which is consolidated in accordance with Financial Accounting Standards Board ("FASB") guidance related to variable interest entities.  All significant intercompany accounts and transactions have been eliminated upon consolidation.

We consolidate all variable interest entities (“VIE”) where we are the primary beneficiary.  For VIEs, we assess whether we are the primary beneficiary as prescribed by the accounting guidance on the consolidation of VIEs.  The primary beneficiary of a VIE is the party that has the power to direct the activities that most significantly impact the performance of the entity and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the entity.  We adopted the consolidation of variable interest entities guidance issued in June 2009 effective January 1, 2011.  We consolidated Ansley Group, LLC because we lease and maintain substantially all of its assets to operate our Clinton Township, Michigan BWW restaurant and we guarantee all of its debt.

Basis of Presentation

The consolidated financial statements as of September 25, 2011 and December 26, 2010, and for the three-month and nine-month periods ended September 25, 2011 and September 26, 2010, have been prepared by the Company pursuant to accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”). The financial information as of September 25, 2011 and for the three-month and nine-month periods ended September 25, 2011 and September 26, 2010 is unaudited, but, in the opinion of management, reflects all adjustments and accruals necessary for a fair presentation of the financial position, results of operations, and cash flows for the interim periods.

Except as described in Note 2 to the consolidated financial statements, the financial information as of December 26, 2010 is derived from our audited consolidated financial statements and notes thereto for the fiscal year ended December 26, 2010, which is included in Item 8 in the Fiscal 2010 Annual Report on Form 10-K/A, Amendment No. 1, and should be read in conjunction with such financial statements.

The results of operations for the three-month and nine-month periods ended September 25, 2011 are not necessarily indicative of the results of operations that may be achieved for the entire year ending December 25, 2011.

Fiscal Year

The Company utilizes a 52-week accounting period that ends on the last Sunday in December. Consequently, fiscal year 2010 ended on December 26, 2010, comprising 52 weeks. This quarterly report on Form 10-Q is for the three-month period ended September 25, 2011, comprising 13 weeks.

Concentration Risks

Approximately 76% and 82% of the Company's revenues during the nine months ended September 25, 2011 and September 26, 2010, respectively, are generated from food and beverage sales from restaurants located in Michigan.

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 disclose 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.

Swap Agreements

The Company utilizes interest rate swap agreements with a bank to fix interest rates on a portion of the Company's portfolio of variable rate debt, which reduces exposure to interest rate fluctuations.  The Company does not use any other types of derivative financial instruments to hedge such exposures, nor does it use derivatives for speculative purposes.

On May 5, 2010, the Company entered into a $15 million dollar debt facility with RBS Citizens Bank, N.A. (“RBS”), as further described in Note 7, in which $6 million is in the form of a development line of credit (of which $1.4 million and $2.9 million were subsequently termed out and affixed to a fixed-rate swap arrangement) and $9 million is a senior secured term loan with a fixed-rate swap arrangement.

These interest rate swap agreements do not qualify for hedge accounting.  As such, the Company records the change in the fair value of the swap agreements in change in fair value of derivative instruments on the consolidated statements of operations.

The Company records the fair value of its interest rate swaps on the balance sheet in other assets or other liabilities depending on the fair value of the swaps.  The notional value of interest rate swap agreements in place at September 25, 2011 and December 26, 2010 was approximately $11.5 million and $9.8 million, respectively.  

Recent Accounting Pronouncements

There were no accounting standards or interpretations issued or recently adopted that 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.

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Note 10. Operating Leases (Including Related Party)

3 Months Ended

Sep. 25, 2011

Operating Leases of Lessee Disclosure [Table Text Block]

10.           OPERATING LEASES (INCLUDING RELATED PARTY)

Lease terms range from four to 15 years, generally include renewal options, and frequently require us to pay a proportionate share of real estate taxes, insurance, common area maintenance, and other operating costs. Some restaurant leases provide for contingent rental payments based on sales thresholds.

Total rent expense was $657,130 and $540,127 for the three-month period ended September 25, 2011 and September 26, 2010, respectively (of which $23,358 and $20,871, respectively, were paid to a related party).  Total rent expense was $1,921,178 and $1,468,995 for the nine-month period ended September 25, 2011 and September 26, 2010, respectively (of which $66,760 and $62,616, 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 December 26, 2010 are summarized as follows:

Year	Amount
2011	$	2,699,479
2012		2,883,835
2013		2,948,547
2014		2,815,633
2015		2,511,310
Thereafter		8,377,052
Total	$	22,235,856

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Consolidated Balance Sheets (Unaudited) (USD $)	Sep. 25, 2011	Dec. 26, 2010
Current assets
Cash and cash equivalents	$ 2,199,922	$ 1,358,381
Accounts receivable	14,348
Inventory	479,604	339,059
Prepaid assets	153,268	209,708
Other current assets		43,348
Total current assets	2,847,142	1,950,496
Property and equipment, net - restricted assets of VIE	1,465,326	1,487,993
Property and equipment, net	20,772,884	17,252,599
Intangible assets, net	1,080,154	975,461
Other long-term assets	84,674	80,099
Deferred income taxes		607,744
Total assets	26,250,180	22,354,392
Current liabilities
Current portion of long-term debt (including VIE debt of $89,414)	2,884,518	1,947,676
Accounts payable	1,465,577	1,388,397
Accrued liabilities	1,541,967	1,089,112
Deferred rent	168,205	127,075
Total current liabilities	6,060,267	4,552,260
Deferred rent	1,734,870	1,622,943
Deferred income taxes	410
Other liabilities - interest rate swap	712,430	367,181
Long-term debt, less current portion (including VIE debt of $1,162,377 and $1,229,437)	16,478,319	15,936,193
Total liabilities	24,986,296	22,478,577
Common stock - $0.0001 par value; 100,000,000 shares authorized, 18,876,000 shares issued and outstanding	1,888	1,888
Additional paid-in capital	2,697,248	2,631,304
Retained earnings (accumulated deficit)	(1,782,124)	(3,096,017)
Total DRH stockholders' equity (deficit)	917,012	(462,825)
Noncontrolling interest in VIE	346,872	338,640
Total stockholders' equity (deficit)	1,263,884	(124,185)
Total liabilities and stockholders' equity	$ 26,250,180	$ 22,354,392