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 June 26, 2016  
 
[_] 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:   26,657,436 shares of $.0001 par value common stock outstanding as of August 3, 2016 .
 
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	 	
Item 1. Financial Statements	2	
Consolidated Balance Sheets	2	
Consolidated Statements of Operations	3	
Consolidated Statements of Comprehensive Loss	4	
Consolidated Statements of Stockholders' Equity 	5	
Consolidated Statements of Cash Flows	6	
Notes to Interim Consolidated Financial Statements	7	
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	20	
Item 3. Quantitative and Qualitative Disclosure About Market Risks	28	
Item 4. Controls and Procedures	28	
PART II. OTHER INFORMATION	29	
Item 1. Legal Proceedings	29	
Item 1A. Risk Factors	29	
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	29	
Item 3. Defaults Upon Senior Securities	29	
Item 4. Mine Safety Disclosures	29	
Item 5. Other Information	29	
Item 6. Exhibits	29	

Table of Contents

PART I.  FINANCIAL INFORMATION
 
Item 1.  Financial Statements
 
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS

									
ASSETS	 	June 26, 2016	 	December 27, 2015	
 	 	(unaudited)	 		
Current assets	 	 	 	 	
Cash and cash equivalents	 	$	5,537,822		 	$	14,200,528		
Accounts receivable	 	508,245		 	620,942		
Inventory	 	1,872,057		 	1,934,584		
Prepaid assets	 	1,307,165		 	1,618,429		
Total current assets	 	9,225,289		 	18,374,483		
 	 	 	 	 	
Deferred income taxes	 	14,630,653		 	13,320,177		
Property and equipment, net	 	81,162,442		 	79,189,661		
Intangible assets, net	 	3,388,585		 	3,638,716		
Goodwill	 	50,097,081		 	50,097,081		
Other long-term assets	 	1,141,900		 	1,152,377		
Total assets	 	$	159,645,950		 	$	165,772,495		
 	 	 	 	 	
LIABILITIES AND STOCKHOLDERS' EQUITY	 	 	 	 	
Current liabilities	 	 	 	 	
Accounts payable	 	$	5,601,690		 	$	7,807,552		
Accrued compensation	 	2,763,165		 	3,087,883		
Other accrued liabilities	 	3,153,133		 	3,663,211		
Current portion of long-term debt	 	9,843,746		 	9,891,825		
Current portion of deferred rent	 	334,637		 	396,113		
Total current liabilities	 	21,696,371		 	24,846,584		
 	 	 	 	 	
Deferred rent, less current portion	 	3,036,979		 	2,826,210		
Unfavorable operating leases	 	631,400		 	671,553		
Other long-term liabilities	 	6,186,273		 	4,463,631		
Long-term debt, less current portion	 	112,461,267		 	116,364,165		
Total liabilities	 	144,012,290		 	149,172,143		
 	 	 	 	 	
Commitments and contingencies (Notes 9 and 10)	 		 		
 	 	 	 	 	
Stockholders' equity	 	 	 	 	
Common stock - $0.0001 par value; 100,000,000 shares authorized; 26,619,811 and 26,298,725, respectively, issued and outstanding	 	2,586		 	2,584		
Additional paid-in capital	 	36,335,496		 	36,136,332		
Accumulated other comprehensive loss	 	(2,420,504	)	 	(1,006,667	)	
Accumulated deficit	 	(18,283,918	)	 	(18,531,897	)	
Total stockholders' equity	 	15,633,660		 	16,600,352		
 	 	 	 	 	
Total liabilities and stockholders' equity	 	$	159,645,950		 	$	165,772,495		
The accompanying notes are an integral part of these interim consolidated financial statements.

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DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

	
																	
 	 	Three Months Ended	 	Six Months Ended	
 	 	June 26, 2016	 	June 28, 2015	 	June 26, 2016	 	June 28, 2015	
Revenue	 	$	46,391,046		 	$	36,871,838		 	$	94,803,845		 	$	76,312,170		
 	 	 	 	 	 	 	 	 	
Operating expenses	 	 	 	 	 	 	 	 	
Restaurant operating costs (exclusive of depreciation and amortization shown separately below):	 	 	 	 	 	 	 	 	
Food, beverage, and packaging costs	 	13,058,782		 	10,561,270		 	26,754,325		 	22,009,173		
Compensation costs	 	12,378,780		 	9,754,171		 	24,890,721		 	19,908,963		
Occupancy costs	 	3,051,165		 	2,432,350		 	6,221,920		 	4,804,817		
Other operating costs	 	9,684,253		 	7,811,480		 	19,723,097		 	15,772,029		
General and administrative expenses	 	2,814,979		 	5,674,963		 	5,477,737		 	8,171,850		
Pre-opening costs	 	649,119		 	576,390		 	921,483		 	1,669,890		
Depreciation and amortization	 	4,402,183		 	3,250,701		 	8,709,900		 	6,408,023		
Impairment and loss (gain) on asset disposal	 	(609,751	)	 	2,320,059		 	(543,623	)	 	2,468,467		
Total operating expenses	 	45,429,510		 	42,381,384		 	92,155,560		 	81,213,212		
 	 	 	 	 	 	 	 	 	
Operating profit (loss)	 	961,536		 	(5,509,546	)	 	2,648,285		 	(4,901,042	)	
 	 	 	 	 	 	 	 	 	
Interest expense	 	(1,440,562	)	 	(559,035	)	 	(2,885,502	)	 	(991,258	)	
Other income, net	 	39,633		 	727,258		 	84,905		 	744,261		
 	 	 	 	 	 	 	 	 	
Loss before income taxes	 	(439,393	)	 	(5,341,323	)	 	(152,312	)	 	(5,148,039	)	
 	 	 	 	 	 	 	 	 	
Income tax benefit	 	(256,967	)	 	(2,022,980	)	 	(400,291	)	 	(2,092,338	)	
 	 	 	 	 	 	 	 	 	
Net income (loss)	 	$	(182,426	)	 	$	(3,318,343	)	 	$	247,979		 	$	(3,055,701	)	
 	 	 	 	 	 	 	 	 	
Basic earnings per share	 	$	(0.01	)	 	$	(0.13	)	 	$	0.01		 	$	(0.12	)	
Fully diluted earnings per share	 	$	(0.01	)	 	$	(0.13	)	 	$	0.01		 	$	(0.12	)	
 	 	 	 	 	 	 	 	 	
Weighted average number of common shares outstanding	 	 	 	 	 	 	 	 	
Basic	 	26,379,065		 	26,151,853		 	26,338,549		 	26,150,518		
Diluted	 	26,379,065		 	26,151,853		 	26,338,549		 	26,150,518		

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

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DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (unaudited)

	
																	
 	 	Three Months Ended	 	Six Months Ended	
 	 	June 26, 2016	 	June 28, 2015	 	June 26, 2016	 	June 28, 2015	
 	 	 	 	 	 	 	 	 	
Net income (loss)	 	$	(182,426	)	 	$	(3,318,343	)	 	$	247,979		 	$	(3,055,701	)	
 	 	 	 	 	 	 	 	 	
Other comprehensive income (loss)	 	 	 	 	 	 	 	 	
Unrealized changes in fair value of interest rate swaps, net of tax of $188,044, $51,980, $728,340 and $109,713, respectively	 	(365,027	)	 	100,900		 	(1,413,837	)	 	(212,973	)	
Unrealized changes in fair value of investments, net of tax of $0, $0 $0 and $1,959, respectively	 	—		 	—		 	—		 	3,804		
Total other comprehensive income (loss)	 	(365,027	)	 	100,900		 	(1,413,837	)	 	(209,169	)	
 	 	 	 	 	 	 	 	 	
Comprehensive loss	 	$	(547,453	)	 	$	(3,217,443	)	 	$	(1,165,858	)	 	$	(3,264,870	)	

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

4

DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (unaudited)

	
																							
 	 	 	 	 	Additional	 	Accumulated
Other	 	Retained
Earnings	 	Total	
 	Common Stock	 	Paid-in	 	Comprehensive	 	(Accumulated	 	Stockholders'	
 	Shares	 	Amount	 	Capital	 	Income (Loss)	 	Deficit)	 	Equity	
 Balances - December 28, 2014	26,149,824		 	$	2,582		 	$	35,668,001		 	$	(175,156	)	 	$	(2,339,405	)	 	$	33,156,022		
 	 	 	 	 	 	 	 	 	 	 	 	
Issuance of restricted shares	47,502		 	—		 	—		 	—		 	—		 	—		
 	 	 	 	 	 	 	 	 	 	 	 	
Forfeitures of restricted shares	(3,586	)	 	—		 	—		 	—		 	—		 	—		
 	 	 	 	 	 	 	 	 	 	 	 	
Employee stock purchase plan	10,205		 	—		 	40,360		 	—		 	—		 	40,360		
 	 	 	 	 	 	 	 	 	 	 	 	
Share-based compensation	—		 	—		 	162,563		 	—		 	—		 	162,563		
 	 	 	 	 	 	 	 	 	 	 	 	
Stock repurchase	(24,500	)	 	(2	)	 	(98,250	)	 	—		 	—		 	(98,252	)	
 	 	 	 	 	 	 	 	 	 	 	 	
Other comprehensive loss	—		 	—		 	—		 	(209,169	)	 	—		 	(209,169	)	
 	 	 	 	 	 	 	 	 	 	 	 	
Net loss	—		 	—		 	—		 	—		 	(3,055,701	)	 	(3,055,701	)	
 	 	 	 	 	 	 	 	 	 	 	 	
Balances - June 28, 2015	26,179,445		 	$	2,580		 	$	35,772,674		 	$	(384,325	)	 	$	(5,395,106	)	 	$	29,995,823		
 	 	 	 	 	 	 	 	 	 	 	 	
Balances - December 27, 2015	26,298,725		 	$	2,584		 	$	36,136,332		 	$	(1,006,667	)	 	$	(18,531,897	)	 	$	16,600,352		
 	 	 	 	 	 	 	 	 	 	 	 	
Issuance of restricted shares	335,831		 	—		 	—		 	—		 	—		 	—		
 	 	 	 	 	 	 	 	 	 	 	 	
Forfeitures of restricted shares	(22,351	)	 	—		 	—		 	—		 	—		 	—		
 	 	 	 	 	 	 	 	 	 	 	 	
Shares effectively repurchased for required employee withholding taxes	(5,940	)	 	—		 	(9,326	)	 	—		 	—		 	(9,326	)	
 	 	 	 	 	 	 	 	 	 	 	 	
Employee stock purchase plan	13,546		 	2		 	20,780		 	—		 	—		 	20,782		
 	 	 	 	 	 	 	 	 	 	 	 	
Share-based compensation	—		 	—		 	187,710		 	—		 	—		 	187,710		
 	 	 	 	 	 	 	 	 	 	 	 	
Other comprehensive loss	—		 	—		 	—		 	(1,413,837	)	 	—		 	(1,413,837	)	
 	 	 	 	 	 	 	 	 	 	 	 	
Net income	—		 	—		 	—		 	—		 	247,979		 	247,979		
 	 	 	 	 	 	 	 	 	 	 	 	
Balances - June 26, 2016	26,619,811		 	$	2,586		 	$	36,335,496		 	$	(2,420,504	)	 	$	(18,283,918	)	 	$	15,633,660		

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

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DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

	
									
 	 	Six Months Ended	
 	 	June 26, 2016	 	June 28, 2015	
Cash flows from operating activities	 	 	 	 	
Net income (loss)	 	$	247,979		 	$	(3,055,701	)	
Adjustments to reconcile net income (loss) to net cash provided by operating activities	 	 	 	 	
Depreciation and amortization	 	8,709,900		 	6,408,023		
Amortization of debt discount and loan fees	 	117,238		 	14,214		
Amortization of gain on sale-leaseback	 	(78,604	)	 	(78,604	)	
Impairment and loss (gain) on asset disposals	 	(543,623	)	 	2,468,467		
Share-based compensation, net	 	187,710		 	162,563		
Deferred income taxes	 	(582,136	)	 	(1,929,924	)	
Changes in operating assets and liabilities that provided (used) cash	 	 	 	 	
Accounts receivable	 	112,697		 	1,187,273		
Inventory	 	62,527		 	(135,234	)	
Prepaid assets	 	311,264		 	(369,353	)	
Intangible assets	 	(394,483	)	 	(129,426	)	
Other long-term assets	 	10,477		 	(778,071	)	
Accounts payable	 	(1,201,271	)	 	(955,715	)	
Accrued liabilities	 	(1,175,727	)	 	1,780,743		
Deferred rent	 	149,293		 	17,169		
Net cash provided by operating activities	 	5,933,241		 	4,606,424		
 	 	 	 	 	
Cash flows from investing activities	 	 	 	 	
Proceeds from sale of investments	 	—		 	2,952,302		
Proceeds from sale of property and equipment, net of fees	 	1,134,717		 	—		
Purchases of property and equipment	 	(11,716,557	)	 	(12,646,471	)	
Net cash used in investing activities	 	(10,581,840	)	 	(9,694,169	)	
 	 	 	 	 	
Cash flows from financing activities	 	 	 	 	
Proceeds from issuance of long-term debt	 	7,109,154		 	7,551,319		
Repayments of long-term debt	 	(11,134,717	)	 	(4,000,000	)	
Repurchase of stock	 	—		 	(98,252	)	
Proceeds from employee stock purchase plan	 	20,782		 	40,360		
Tax withholdings for restricted stock units	 	(9,326	)	 	—		
Net cash (used in) provided by financing activities	 	(4,014,107	)	 	3,493,427		
 	 	 	 	 	
Net decrease in cash and cash equivalents	 	(8,662,706	)	 	(1,594,318	)	
 	 	 	 	 	
Cash and cash equivalents, beginning of period	 	14,200,528		 	18,688,281		
 	 	 	 	 	
Cash and cash equivalents, end of period	 	$	5,537,822		 	$	17,093,963		
 
The accompanying notes are an integral part of these interim consolidated financial statements.

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DIVERSIFIED RESTAURANT HOLDINGS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

1.           BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Nature of Business
 
Diversified Restaurant Holdings, Inc. (“DRH”) is a restaurant company operating two complementary concepts:   Buffalo Wild Wings ® Grill & Bar (“BWW”) and Bagger Dave’s Burger Tavern ® (“Bagger Dave’s”).  As the largest franchisee of BWW and the creator, developer, and operator of Bagger Dave’s, we provide a unique guest experience in a casual and inviting environment.  We were incorporated in 2006 and are headquartered in the Detroit metropolitan area.  As of June 26, 2016 , we had 83 locations in Florida, Illinois, Indiana, Michigan, Missouri and Ohio.
  
DRH is the largest BWW franchisee and currently operates 64 DRH-owned BWW restaurants ( 20 in Michigan, 17 in Florida, seven in Illinois, five in Indiana and 15 in Missouri), including the nation’s largest BWW, based on square footage, in downtown Detroit, Michigan. We remain on track to fulfill our area development agreement (“ADA”) with Buffalo Wild Wings International, Inc. (“BWLD”) and expect to operate 77 DRH-owned BWW restaurants by the end of 2020, exclusive of potential additional BWW restaurant acquisitions. 

DRH originated the Bagger Dave’s concept with our first restaurant opening in January 2008 in Berkley, Michigan.  Currently, there are 19 Bagger Dave’s, 16 in Michigan and one in Indiana and two in Ohio.
 
Basis of Presentation
 
The consolidated financial statements as of June 26, 2016 and December 27, 2015 , and for the three and six-month periods ended June 26, 2016 and June 28, 2015 , have been prepared by DRH and its wholly-owned subsidiaries (collectively, 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. The financial information as of June 26, 2016 and for the three and six-month periods ended June 26, 2016 and June 28, 2015 is unaudited, but, in the opinion of management, reflects all adjustments and accruals necessary for a fair presentation of the financial position, results of operations, and cash flows for the interim periods.
 
The consolidated financial information as of December 27, 2015 is derived from our audited consolidated financial statements and notes thereto for the fiscal year ended December 27, 2015 , which is included in Item 8 in the Fiscal 2015 Annual Report on Form 10-K, and should be read in conjunction with such consolidated financial statements.
 
The results of operations for the three and six-month periods ended June 26, 2016 are not necessarily indicative of the results of operations that may be achieved for the entire fiscal year ending December 25, 2016 .
 
Segment Reporting
 
During the First Quarter 2016, the Company reorganized segment reporting from one reportable segment to two reportable segments, BWW and Bagger Dave's, due to differences that have developed in the economic characteristics between the two concepts. All prior period information was recast to reflect this change. The Company’s reportable segments are organized based on restaurant concept. Resources are allocated and performance is assessed for the concepts by the Company’s Chief Executive Officer, Chief Financial Officer and Chief Operating Officer whom the Company has determined to be its Chief Operating Decision Makers. See Note 15 for additional information.

Goodwill
 
Goodwill is not amortized and represents the excess of cost over the fair value of identified net assets of businesses acquired. Goodwill is subject to an annual impairment analysis or more frequently if indicators of impairment exist. At June 26, 2016 and December 27, 2015 , we had goodwill of $50.1 million , that was assigned to our BWW operating segment.
 
The impairment analysis, if necessary, consists of a two-step process. The first step is to compare the fair value of the reporting unit to its carrying value, including goodwill. We estimate fair value using market information (market approach) and discounted cash flow projections (income approach). The income approach uses the reporting unit’s projection of estimated operating results and cash flows that is discounted using a weighted-average cost of capital that reflects market conditions. The projection uses management’s best estimates of projected revenue, costs and cash expenditures, including an estimate of new restaurant openings and related capital expenditures. Other significant estimates also include terminal growth rates and working capital requirements.

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DIVERSIFIED RESTAURANT HOLDINGS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

We supplement our estimate of fair value under the income approach by using a market approach which estimates fair value by applying multiples to the reporting unit’s projected operating performance. The multiples are derived from comparable publicly traded companies with similar characteristics to the reporting unit. If the fair value of the reporting unit is less than its carrying value, the second step of the impairment analysis must be performed in order to determine the amount of impairment loss, if any. The second step compares the implied fair value of goodwill with the carrying amount of that goodwill. If the carrying amount of the goodwill exceeds its implied fair value, an impairment charge is recognized in an amount equal to that excess. As of December December 27, 2015 , based on our quantitative analysis, goodwill was considered recoverable. At June 26, 2016 , there were no impairment indicators warranting an analysis.
   
Impairment or Disposal of Long-Lived Assets

We review long-lived assets quarterly to determine if triggering events have occurred which would require a test to determine if the carrying amount of these assets may not be recoverable based on estimated future cash flows. Assets are reviewed at the lowest level for which cash flows can be identified, which is at the individual restaurant level. In the absence of extraordinary circumstances, restaurants are included in the impairment analysis after they have been open for two years. We evaluate the recoverability of a restaurant’s long-lived assets, including buildings, intangibles, leasehold improvements, furniture, fixtures, and equipment over the remaining life of the primary asset in the asset group, after considering the potential impact of planned operational improvements, marketing programs, and anticipated changes in the trade area. In determining future cash flows, significant estimates are made by management with respect to future operating results for each restaurant over the remaining life of the primary asset in the asset group. If assets are determined to be impaired, the impairment charge is measured by calculating the amount by which the asset carrying amount exceeds its fair value based on our estimate of discounted future cash flows. The determination of asset fair value is also subject to significant judgment. No impairment was recognized for quarter-ended June 26, 2016 . During the quarter-ended June 28, 2015, the Company recorded an impairment loss of $1.2 million related to three Bagger Dave's locations. We continue to monitor several other restaurants for potential impairment of long-lived assets while we continue to develop plans to improve operating results. As such, based on our current estimates of the future operating results of these restaurants, we believe that the assets at these restaurants are not impaired. As we periodically refine our estimated future operating results, changes in our estimates and assumptions may cause us to realize impairment charges in the future that could be material. For additional details refer to the 2015 10-K filed on March 11, 2015.

We account for exit or disposal activities, including restaurant closures, in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 420, Exit or Disposal Cost Obligations . Such costs include the cost of disposing of the assets as well as other facility-related expenses from previously closed restaurants. These costs are generally expensed as incurred. Additionally, at the date we cease using a property under an operating lease, we record a liability for the net present value of any remaining lease obligations, net of estimated sublease income. Any subsequent adjustments to that liability as a result of lease termination or changes in estimates of sublease income are recorded in the period incurred. During fiscal 2015, the Company decided to close 12 underperforming locations, eight in Indiana, three in Michigan and one in Florida. The Company closed the restaurants during the third and fourth quarters of 2015. In connection with the 2015 closures, the Company recorded a liability of $1.3 million , for the net present value of any remaining lease obligations, net of estimated sublease income. As of June 26, 2016 , a liability of $417,599 remains on our Consolidated Balance Sheet and is classified as Other accrued liabilities. For additional details refer to the 2015 10-K filed on March 11, 2015.

Indefinite-Lived Intangible Assets

Liquor licenses, also a component of intangible assets, are deemed to have an indefinite life and, accordingly, are not amortized. Management reviews liquor license assets on an annual basis (at year-end) to determine whether carrying values have been impaired. We identify potential impairments for liquor licenses by comparing the fair value with its carrying amount. If the fair value exceeds the carrying amount, the liquor licenses are not impaired. If the carrying amount exceeds the fair value, an impairment loss is recorded for the difference.  If the fair value of the asset is less than the carrying amount, an impairment is recorded. No impairments were recognized for quarter-ended June 26, 2016 or fiscal year ended December 27, 2015 .

Use of Estimates
 
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

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DIVERSIFIED RESTAURANT HOLDINGS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

Interest Rate Swap Agreements
 
The Company utilizes interest rate swap agreements with Citizens Bank, N.A. (“Citizens”) to fix interest rates on a portion of the Company’s portfolio of variable rate debt, which reduces exposure to interest rate fluctuations.  The Company does not use any other types of derivative financial instruments to hedge such exposures, nor does it use derivatives for speculative purposes. The Company’s interest rate swap agreements qualify for hedge accounting. As such, the Company records the change in the fair value of its swap agreements as a component of accumulated other comprehensive income (loss), net of tax. The Company records the fair value of its interest swaps on the Consolidated Balance Sheet in other long-term assets or other long-term liabilities depending on the fair value of the swaps. See Note 6 and Note 13 for additional information on the interest rate swap agreements.
 
Recent Accounting Pronouncements

In March 2016, the FASB issued Accounting Standards Update ("ASU") 2016-09, Topic 718: Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"). ASU 2016-09 simplifies several aspects of accounting for share-based payment award transactions, including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, with early adoption permitted. The Company is in the process of assessing the impact of adoption of ASU 2016-09 on its consolidated financial statements.

In February 2016, FASB issued ASU 2016-02, Leases ("ASU 2016-02"). ASU 2016-02 requires that lease arrangements longer than 12 months result in a lessee recognizing a lease asset and liability. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The updated guidance is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. We are currently evaluating the impact of the updated guidance on our consolidated financial statements.
 
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"), which supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP.  The standard is effective for annual periods beginning after December 15, 2017, and interim periods therein.  We are currently evaluating the impact of our pending adoption of ASU 2014-09, although based on the nature of our business we do not expect the standard will have a significant impact on our consolidated financial statements.  
 
We reviewed all other significant newly-issued accounting pronouncements and concluded that they either are not applicable to our operations or that no material effect is expected on our consolidated financial statements as a result of future adoption.

Recently Adopted Accounting Standards

In November 2015, the FASB issued ASU 2015-17, Topic 740: Balance Sheet Classification of Deferred Taxes (“ASU No. 2015-17”), which simplifies the presentation of deferred income taxes. ASU No. 2015-17 provides presentation requirements to classify deferred tax assets and liabilities as noncurrent in a classified statement of financial position. The Company adopted this standard as of December 27, 2015, with prospective application. The adoption of ASU No. 2015-17 had no impact on the Company’s Consolidated Statements of Operations and Comprehensive Loss.

In August 2015, the FASB issued ASU 2015-15, Interest - Imputation of Interest ( Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. This ASU adds paragraphs pursuant to the Securities and Exchange Commission's ("SEC") Staff Announcement at the June 18, 2015 Emerging Issues Task Force meeting about the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements. ASU 2015-15 states that given the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit. The Company has historically recorded and will continue to record, debt issuance costs associated with the line-of-credit as an asset and subsequently amortize the deferred costs over the term of the line-of-credit, with there being no impact on previously issued financial statements.

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DIVERSIFIED RESTAURANT HOLDINGS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

In April 2015, the FASB issued ASU No. 2015-03, Interest-Imputation of Interest, which updates guidance on the presentation of debt issuance costs. The guidance requires debt issuance costs to be presented as a direct deduction of debt balances on the statement of financial position, similar to the presentation of debt discounts. The guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. We retrospectively adopted this guidance in First Quarter 2016. This resulted in a reclassification of the December 27, 2015 Consolidated Balance Sheet of $345,317 from Intangible assets, net to Current portion of long-term debt and Long-term debt, $27,002 and $318,315 , respectively.

2.          PROPERTY AND EQUIPMENT
 
Property and equipment are comprised of the following assets:

									
 	 	June 26, 2016	 	December 27, 2015	
Land	 	$	—		 	$	37,500		
Building	 	3,932,646		 	2,339,219		
Equipment	 	35,275,081		 	32,912,992		
Furniture and fixtures	 	8,989,084		 	8,194,060		
Leasehold improvements	 	77,382,253		 	72,148,545		
Restaurant construction in progress	 	700		 	1,768,027		
Total	 	125,579,764		 	117,400,343		
Less accumulated depreciation	 	(44,417,322	)	 	(38,210,682	)	
Property and equipment, net	 	$	81,162,442		 	$	79,189,661		
At June 26, 2016 and December 27, 2015, $66,925 and $0.9 million , respectively, of fixed and intangible assets for the closed locations are held for sale, which are recorded in Property and equipment and Intangible assets on the Consolidated Balance Sheets. On June 8, 2016 we sold the Detroit Bagger Dave's building and land net of fees for approximately $1.1 million in proceeds, of which were used to pay down our term loan. We recorded a gain of $ 884,717 , which is recorded in Impairment and loss (gain) on asset disposal on the Consolidated Statements of Operations. We anticipate selling the remaining assets held for sale in Third Quarter 2016.

3.        INTANGIBLE ASSETS
 
Intangible assets are comprised of the following:

									
 	 	June 26, 2016	 	December 27, 2015	
Amortized intangibles:	 	 	 	 	
Franchise fees	 	$	1,278,142		 	$	1,278,142		
Trademark	 	70,576		 	66,826		
Non-compete agreement	 	76,560		 	76,560		
Favorable lease	 	351,344		 	351,344		
Loan fees - Revolving line of credit and DLOC	 	368,084		 	368,084		
Total	 	2,144,706		 	2,140,956		
Less accumulated amortization	 	(640,537	)	 	(519,858	)	
Amortized intangibles, net	 	1,504,169		 	1,621,098		
 	 	 	 	 	
Unamortized intangibles:	 	 	 	 	
Liquor licenses	 	1,884,416		 	2,017,618		
Total intangibles, net	 	$	3,388,585		 	$	3,638,716		
 
Amortization expense for the three-month periods ended June 26, 2016 and June 28, 2015 and six-month periods ended June 26, 2016 and June 28, 2015 was $22,831 , $17,322 , $45,621 and $43,064 respectively. Amortization of favorable leases and loan fees are reflected as part of occupancy and interest expense, respectively.

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DIVERSIFIED RESTAURANT HOLDINGS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

The aggregate weighted-average amortization period for intangible assets is 10.6 years at June 26, 2016 .  

4.           RELATED PARTY TRANSACTIONS
 
Fees for monthly accounting and financial statement services are paid to an entity owned by a member of the DRH Board of Directors and a stockholder of the Company. Fees paid during the three-month periods ended June 26, 2016 and June 28, 2015 and six-month periods ended June 26, 2016 and June 28, 2015  were $18,481 , $139,270 , $60,163 and $277,890 , respectively.

5.     OTHER ACCRUED LIABILITES

								
 	June 26, 2016	 	December 27, 2015	
Sales tax payable	$	862,795		 	$	987,795		
Accrued interest	446,946		 	495,365		
Closure liability - current	417,599		 	1,008,707		
Accrued property taxes	389,331		 	349,131		
Other	1,036,462		 	822,213		
Total other accrued liabilities	$	3,153,133		 	$	3,663,211		

6.           LONG-TERM DEBT
 
Long-term debt consists of the following obligations:

									
 	 	June 26, 2016	 	December 27, 2015	
Note payable - $120.0 million term loan; payable to Citizens with a senior lien on all the Company’s personal property and fixtures. Scheduled monthly principal payments are approximately $833,333 plus accrued interest through maturity in June 2020. Interest is charged based on one-month LIBOR plus an applicable margin, which ranges from 2.25% to 3.5%, depending on the lease adjusted leverage ratio defined in the terms of the agreement. The rate at June 26, 2016 was approximately 3.95%.	 	$	104,698,616		 	$	115,833,333		
 	 	 	 	 	
Note payable - $30.0 million development line of credit; payable to Citizens with a senior lien on all the Company’s personal property and fixtures. Payments are due monthly once fully drawn and matures in June 2020. Interest is charged based on one-month LIBOR plus an applicable margin, which ranges from 2.25% to 3.5%, depending on the lease adjusted leverage ratio defined in the terms of the agreement. The rate at June 26, 2016 was approximately 3.95%.	 	18,199,476		 	11,090,323		
 	 	 	 	 	
Unamortized discount and debt issuance costs	 	(593,079	)	 	(667,666	)	
 	 	 	 	 	
Total debt	 	122,305,013		 	126,255,990		
 	 	 	 	 	
Less current portion	 	(9,843,746	)	 	(9,891,825	)	
 	 	 	 	 	
Long-term debt, net of current portion	 	$	112,461,267		 	$	116,364,165		
 
On June 29, 2015, the Company entered into a $155.0 million senior secured credit facility with Citizens (the “June 2015 Senior Secured Credit Facility”).  The June 2015 Senior Secured Credit Facility consists of a $120.0 million term loan (the “June 2015 Term Loan”), a $30.0 million development line of credit (the “June 2015 DLOC”) and a $5.0 million revolving line of credit (the “June 2015 RLOC”). The Company used approximately $65.5 million of the June 2015 Term Loan to refinance existing outstanding debt and used approximately $54.0 million of the June 2015 Term Loan to refinance an acquisition occurring in second quarter 2015.   The remaining balance of the June 2015 Term Loan, approximately $0.5 million , was used to pay the fees, costs, and expenses associated with the closing of the June 2015 Senior Secured Credit Facility.  The June 2015 Term Loan is for a period of five years .  Payments of principal are based upon an 12 -month straight-line amortization schedule, with monthly principal payments of $833,333 plus accrued interest.  The interest rate for the June 2015 Term Loan is LIBOR plus an applicable margin, which ranges from 2.25% to 3.5% , depending on the lease adjusted leverage ratio defined in the terms of the agreement.  The

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DIVERSIFIED RESTAURANT HOLDINGS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

entire remaining outstanding principal and accrued interest on the June 2015 Term Loan is due and payable on the maturity date of June 29, 2020.  The June 2015 DLOC is for a term of two years and is convertible upon maturity into a term note based on the terms of the agreement at which time monthly principal payments will be due based on a 12 -month straight-line amortization schedule, plus interest, through maturity on June 29, 2020. The June 2015 RLOC is for a term of two years and no amounts were outstanding as of June 26, 2016 .

Fees related to the term debt are recorded as debt discount and fees related to the DLOC and RLOC are capitalized as intangible assets. Debt issuance costs represents legal, consulting and financial costs associated with debt financing. Debt discount and debt issuance cost related to term debt totaled $593,079 , net of accumulated amortization at June 26, 2016 . Unamortized debt issuance costs related to the DLOC and RLOC totaled $286,987 at June 26, 2016 . Debt discount and debt issuance cost are amortized over the life of the debt and are recorded in interest expense using the effective interest method.
  
For the three-month periods ended June 26, 2016 and June 28, 2015 and six-month periods ended June 26, 2016 and June 28, 2015 , interest expense was $1.4 million , $0.6 million , $2.9 million and $1.0 million respectively.
 
The current debt agreement contains various customary financial covenants generally based on the performance of the specific borrowing entity and other related entities. The more significant covenants consist of a minimum debt service coverage ratio and a maximum lease adjusted leverage ratio, both of which we are in compliance with as of June 26, 2016 .
  
At June 26, 2016 , the Company has six interest rate swap agreements to fix a portion of the interest rates on its variable rate debt. The swap agreements all qualify for hedge accounting and are included in Other long-term liabilities on the Balance Sheet. Under the swap agreements, the Company receives interest at the one -month LIBOR and pays a fixed rate. Since these swap agreements qualify for hedge accounting, the changes in fair value are recorded in other comprehensive income (loss), net of tax. See Note 1 and Note 13 for additional information pertaining to interest rate swaps.

The following summarizes the fair values of derivative instruments designated as cash flow hedges which were outstanding:

	
																
 	 	 	June 26, 2016	
 	 	 	Notional amounts	 	Derivative assets	 	Derivative liabilities	
Interest rate swaps	Rate	Expires	 	 	 	 	 	
April 2012	1.4%	April 2019	$	6,476,191	 	 	$	—		 	$	82,105		
October 2012	0.9%	October 2017	2,785,714	 	 	—	 	 	11,958	 	
July 2013	1.4%	April 2018	9,904,762	 	 	—	 	 	64,273	 	
May 2014	1.5%	April 2018	10,357,143	 	 	—	 	 	158,834	 	
January 2015	1.8%	December 2019	20,833,333	 	 	—	 	 	942,461	 	
August 2015	2.3%	June 2020	49,696,875	 	 	—	 	 	2,407,801	 	
Total	 	 	$	100,054,018		 	 	$	—		 	$	3,667,432		

	
																
 	 	 	December 27, 2015	
 	 	 	Notional amounts	 	Derivative assets	 	Derivative liabilities	
Interest rate swaps	Rate	Expires	 	 	 	 	
April 2012	1.4%	April 2019	$	7,619,048	 	 	$	—		 	$	56,280		
October 2012	0.9%	October 2017	3,214,286	 	 	—	 	 	3,027	 	
July 2013	1.4%	April 2018	8,190,476	 	 	—	 	 	60,164	 	
May 2014	1.5%	April 2018	11,428,571	 	 	—	 	 	122,716	 	
January 2015	1.8%	December 2019	20,547,619	 	 	 	—		 	 	415,459		
August 2015	2.3%	June 2020	49,696,875	 	 	—	 	 	867,609	 	
Total	 	 	$	100,696,875		 	 	$	—		 	$	1,525,255		

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DIVERSIFIED RESTAURANT HOLDINGS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

7.            STOCK-BASED COMPENSATION

Restricted stock awards

In First and Second Quarter 2016 , restricted shares were granted to certain team members and Board members at a weighted-average fair value of $1.52 per share and in Second quarter 2015 restricted shares were granted to certain team members and board members at a weighted-average fair value of $4.21 .  Restricted shares are granted with a per share purchase price at 100.0% of the fair market value on the date of grant. Based on the Stock Award Agreement, shares vest ratably over a three year period, one year period or upon the three year anniversary of the granted shares. The vesting terms are determined by the Compensation Committee of the Board of Directors.  Unrecognized stock-based compensation expense of $790,242 at June 26, 2016 will be recognized over the remaining weighted-average vesting period of  2.2 years . The total fair value of shares vested during the six-month periods ended June 26, 2016 and June 28, 2015 was $108,671 and $104,947 , respectively.  Under the Stock Incentive Plan, there are 95,775 shares available for future awards at June 26, 2016 .

The following table presents the restricted shares transactions during the six-month periods ended June 26, 2016 :

			
 	Number of
Restricted
Stock Shares	
Unvested, December 27, 2015	241,124		
Granted	335,831		
Vested	(63,106	)	
Vested shares tax portion	(5,940	)	
Expired/Forfeited	(22,351	)	
Unvested, June 26, 2016	485,558		
 
The following table presents the restricted shares transactions during the six-month periods ended June 28, 2015 :

			
 	Number of
Restricted
Stock Shares	
Unvested, December 28, 2014	164,867		
Granted	47,502		
Vested	(22,751	)	
Expired/Forfeited	(3,586	)	
Unvested, June 28, 2015	186,032		
   
On July 30, 2010, DRH granted options for the purchase of 210,000 shares of common stock to the then-members of its Board of Directors .  These options are fully vested and expire six years from issuance, July 30, 2016.  On July 28, 2016, the Stock Option Agreement of 2010 was amended and extends the expiration date of the agreement to July 31, 2019. The options can be exercised at a price of $2.50 per share. On August 13, 2015, 30,000 shares were exercised at a price of $2.50 per share The intrinsic value of options exercised is $6,300 . At June 26, 2016 , 180,000 shares of authorized common stock are reserved for issuance to provide for the exercise of these options. The intrinsic value of outstanding options is $0 and $273,000 as of June 26, 2016 and June 28, 2015 , respectively.

Employee stock purchase plan

The Company has also reserved 250,000 shares of common stock for issuance under the Employee Stock Purchase Plan (“ESPP”). The ESPP is available to team members subject to employment eligibility requirements. Participants may purchase common stock at 85.0% of the lesser of the start or end price for the offering period. The ESPP has four offering periods, each start/end dates coincide with the fiscal quarter and are awarded on the last day of the offering period. During the six-month periods ended June 26, 2016 and June 28, 2015 , we issued  13,546 and  10,205 shares, respectively. Under the ESPP, there are 199,043 shares available for future awards at June 26, 2016 .

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DIVERSIFIED RESTAURANT HOLDINGS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

Share Repurchase Program

In March 2015, the Board of Directors authorized a program to repurchase up to $1.0 million of the Company's common stock in open market transactions at market prices or otherwise. In April 2015, we repurchased $98,252 in outstanding shares, representing 24,500 shares. The weighted average purchase price per share was $4.01 . Upon receipt, the repurchased shares were retired and restored to authorized but unissued shares of common stock.

Stock-Based Compensation
 
Stock-based compensation of $90,284 and $106,770 , $ 187,710 and $ 162,563 was recognized during the three-month periods ended June 26, 2016 and June 28, 2015 and six-month periods ended June 26, 2016 and June 28, 2015 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.
   
The Company has authorized 10,000,000 shares of preferred stock at a par value of $0.0001 .   No preferred shares are issued or outstanding as of June 26, 2016 .  Any preferences, rights, voting powers, restrictions, dividend limitations, qualifications, and terms and conditions of redemption shall be set forth and adopted by a Board of Directors' resolution prior to issuance of any series of preferred stock.

8.           INCOME TAXES
 
The effective income tax rate for the three-month periods ended June 26, 2016 and June 28, 2015 and six-month periods ended June 26, 2016 and June 28, 2015 was (58.5)% , (37.8)% , (262.8)% and (40.6)% , respectively. The change in the effective income tax rate for June 26, 2016 as compared to the six months ended June 28, 2015 is primarily attributable to the decrease in loss before income taxes.

9.           OPERATING LEASES
 
Base lease terms range from five to 24 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 $2.4 million , $1.9 million , $4.9 million and $3.8 million for the three-month periods ended June 26, 2016 and June 28, 2015 and six-month periods ended June 26, 2016 and June 28, 2015 , respectively.
 
Scheduled future minimum lease payments for each of the five years and thereafter for non-cancelable operating leases with initial or remaining lease terms in excess of one year at June 26, 2016 are summarized as follows: 

				
Year	Amount	
Remainder of 2016	$	5,509,766		
2017	11,007,937		
2018	10,535,524		
2019	9,688,037		
2020	9,423,851		
2021 and thereafter	49,035,777		
Total	$	95,200,892		

10.           COMMITMENTS AND CONTINGENCIES
 
The Company’s ADA requires DRH to open 42 BWW restaurants designated "development territory” by April 1, 2021.   As of June 26, 2016 we have opened 29 of the 42 restaurants required by the ADA.  With the remaining 13 restaurants, we expect the Company will operate 77 BWW restaurants by 2020 , exclusive of potential additional BWW restaurant acquisitions.  
  
The Company is required to pay BWLD royalties ( 5.0% of net sales) and advertising fund contributions (between 3.15% and 3.25% of net sales globally) for the term of the individual franchise agreements.  The Company incurred royalty fees of $2.0

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DIVERSIFIED RESTAURANT HOLDINGS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

million , $1.5 million , $4.2 million and $3.1 million for the three-month periods ended June 26, 2016 and June 28, 2015 and six-month periods ended June 26, 2016 and June 28, 2015 , respectively.  Advertising fund contribution expenses were $1.3 million , $1.0 million $2.8 million and $1.9 million for the three-month periods ended June 26, 2016 and June 28, 2015 and six-month periods ended June 26, 2016 and June 28, 2015 , respectively.

The Company is required by its various BWLD franchise agreements to modernize the restaurants during the term of the agreements.  The individual agreements generally require improvements between the fifth and tenth year to meet the most current design model that BWLD has approved.  The modernization costs for a restaurant can range from approximately $50,000 to approximately $1.3 million depending on an individual restaurant's needs.
On December 18, 2015, a collective action was filed against AMC Wings, Inc., and the Company in the U.S. District Court for the Southern District of Illinois (the "Court") by plaintiffs, David, et. al. A Sure Wing, LLC, the seller of the 18 St. Louis BWW restaurants acquired by the Company on June 29, 2015, was also named as a defendant. Plaintiffs primarily allege that former and current tipped workers at the above-mentioned companies were assigned to perform tasks outside the scope of their tipped positions, in violation of Illinois and federal law.  On July 6, 2016, the parties filed a joint Notice of Settlement, stating that the parties had reached an agreement in principle to resolve plaintiffs’ class and collective action claims through June 29, 2015, for $600,000 and intend to seek Court approval of their settlement.  On July 8, 2016, following a status conference with the parties, the Court gave leave to plaintiffs to file an amended complaint in light of the settlement discussions.  Plaintiffs did so on July 8, 2016.  At this stage in the proceedings, the parties are drafting a joint motion for preliminary Court approval of the terms of their settlement.
The Company has filed an indemnity claim against A Sure Wing, LLC and has received a reciprocal indemnity claim from A Sure Wing, LLC. A Sure Wing, LLC and the Company previously agreed to toll their respective indemnity claims pending resolution of the matter. A Sure Wing has agreed to fund the settlement in return for DRH releasing their indemnity claim.
 
Additionally, the Company is subject to ordinary and 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 an unfavorable outcome of any pending or threatened proceedings is probable or reasonably possible.  Therefore, no separate reserve or disclosure has been established for these types of legal proceedings. 

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11.          EARNINGS PER SHARE
 
The following is a reconciliation of basic and fully diluted earnings per common share for the three and six month periods ended June 26, 2016 and June 28, 2015 :

									
 	 	Three months ended	
 	 	June 26, 2016	 	June 28, 2015	
Loss available to common stockholders	 	$	(182,426	)	 	$	(3,318,343	)	
 	 	 	 	 	
Weighted-average shares outstanding	 	26,379,065		 	26,151,853		
Effect of dilutive securities	 	—		 	—		
Weighted-average shares outstanding - assuming dilution	 	26,379,065		 	26,151,853		
 	 	 	 	 	
Earnings per share	 	$	(0.01	)	 	$	(0.13	)	
Earnings per share - assuming dilution	 	$	(0.01	)	 	$	(0.13	)	

	
									
 	 	Six months ended	
 	 	June 26, 2016	 	June 28, 2015	
Income (loss) available to common stockholders	 	$	247,979		 	$	(3,055,701	)	
 	 	 	 	 	
Weighted-average shares outstanding	 	26,338,549		 	26,150,518		
Effect of dilutive securities	 	—		 	—		
Weighted-average shares outstanding - assuming dilution	 	26,338,549		 	26,150,518		
 	 	 	 	 	
Earnings per share	 	$	0.01		 	$	(0.12	)	
Earnings per share - assuming dilution	 	$	0.01		 	$	(0.12	)	

Potentially dilutive securities whose effect would have been antidilutive are excluded from the computation of diluted earnings per share.

12.            SUPPLEMENTAL CASH FLOWS INFORMATION
 
Other Cash Flows Information
 
Cash paid for interest was $1.4 million , $0.5 million , $2.8 million and $1.0 million during the three-month periods ended June 26, 2016 and June 28, 2015 and six-month periods ended June 26, 2016 and June 28, 2015 , respectively.
 
Cash paid for income taxes was $10,000 , $34,290 , $10,000 and $94,290 during the three-month periods ended June 26, 2016 and June 28, 2015 and six-month periods ended June 26, 2016 and June 28, 2015 , respectively.

Supplemental Schedule of Non-Cash Operating, Investing, and Financing Activities
 
Noncash investing activities for property and equipment not yet paid during the six months ended  June 26, 2016 and June 28, 2015 , was $0.9 million and $1.3 million , respectively.  

13.           FAIR VALUE OF FINANCIAL INSTRUMENTS
 
The guidance for fair value measurements, FASB 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

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DIVERSIFIED RESTAURANT HOLDINGS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

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 June 26, 2016 and December 27, 2015 , respectively, our financial instruments consisted of cash and cash equivalents, accounts receivable, accounts payable, and debt. The fair value of cash and cash equivalents, accounts receivable, and accounts payable approximate carrying value, due to their 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. See Note 1 and Note 6 for additional information pertaining to interest rates swaps.
 
As of June 26, 2016 and December 27, 2015 , our total debt was approximately $122.3 million and $126.3 million , respectively, which approximated fair value because the applicable interest rates are adjusted frequently based on short-term market rates (Level 2).
 
There were no transfers between levels of the fair value hierarchy during the three and six months ended June 26, 2016  and the fiscal year ended December 27, 2015 .

The following table presents the fair values for those assets and liabilities measured on a recurring basis as of June 26, 2016 :

	
																	
FAIR VALUE MEASUREMENTS	
Description	 	Level 1	 	Level 2	 	Level 3	 	Asset/(Liability)
Total	
Interest rate swaps	 	$	—		 	$	(3,667,432	)	 	$	—		 	$	(3,667,432	)	

The following table presents the fair values for those assets and liabilities measured on a recurring basis as of December 27, 2015 :

	
																	
FAIR VALUE MEASUREMENTS	
Description	 	Level 1	 	Level 2	 	Level 3	 	Asset/(Liability)
Total	
Cash equivalents	 	$	2,000,000		 	$	—		 	$	—		 	$	2,000,000		
Interest rate swaps	 	—		 	(1,525,255	)	 	—		 	(1,525,255	)	
Total	 	$	2,000,000		 	$	(1,525,255	)	 	$	—		 	$	474,745		

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14. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
 
The following table summarizes each component of Accumulated Other Comprehensive Income (loss):

																									
 	 	Three Months Ended June 26, 2016	 	Three Months Ended June 28, 2015	
 	 	Interest Rate Swaps	 	Investments	 	Total	 	Interest Rate Swaps	 	Investments	 	Total	
Beginning balance	 	$	(2,055,477	)	 	$	—		 	$	(2,055,477	)	 	$	(485,225	)	 	$	—		 	$	(485,225	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Gain (loss) recorded to other comprehensive income	 	(553,071	)	 	—		 	(553,071	)	 	152,880		 	—		 	152,880		
Tax benefit (expense)	 	188,044		 	—		 	188,044		 	(51,980	)	 	—		 	(51,980	)	
Other comprehensive income (loss)	 	(365,027	)	 	—		 	(365,027	)	 	100,900		 	—		 	100,900		
 	 	 	 	 	 	 	 	 	 	 	 	 	
Accumulated OCL	 	$	(2,420,504	)	 	$	—		 	$	(2,420,504	)	 	$	(384,325	)	 	$	—		 	$	(384,325	)	

	
																									
 	 	Six Months Ended June 26, 2016	 	Six Months Ended June 28, 2015	
 	 	Interest Rate Swaps	 	Investments	 	Total	 	Interest Rate Swaps	 	Investments	 	Total	
Beginning balance	 	$	(1,006,667	)	 	$	—		 	$	(1,006,667	)	 	$	(171,352	)	 	$	(3,804	)	 	$	(175,156	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Gain (loss) recorded to other comprehensive income	 	(2,142,177	)	 	—		 	(2,142,177	)	 	(322,686	)	 	5,763		 	(316,923	)	
Tax benefit (expense)	 	728,340		 	—		 	728,340		 	109,713		 	(1,959	)	 	107,754		
Other comprehensive income (loss)	 	(1,413,837	)	 	—		 	(1,413,837	)	 	(212,973	)	 	3,804		 	(209,169	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Accumulated OCL	 	$	(2,420,504	)	 	$	—		 	$	(2,420,504	)	 	$	(384,325	)	 	$	—		 	$	(384,325	)	

15. SEGMENT REPORTING

During the First Quarter 2016, the Company reorganized segment reporting from one reportable segment to two reportable segments, BWW and Bagger Dave's, due to differences that have developed in the economic characteristics between the two concepts. All prior period information was recast to reflect this change. The Company’s reportable segments are organized based on restaurant concept. Resources are allocated and performance is assessed for the concepts by the Company’s Chief Executive Officer, Chief Financial Officer and Chief Operating Officer whom the Company has determined to be its Chief Operating Decision Makers. See Note 1 for additional information.

Revenues for all segments include only transactions with customers and include no intersegment revenues. Excluded from net income from operations for BWW and Bagger Dave's are certain legal and corporate costs not directly related to the performance of the segments, interest and other expenses related to the Company’s credit agreements and derivative instruments, certain stock-based compensation expenses, certain bonus expense and certain insurance expenses managed centrally.

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Segment activity is as follows:

																
 	Three months ended	 	Six months ended	
 	June 26, 2016	 	June 28, 2015	 	June 26, 2016	 	June 28, 2015	
Revenue from external customers:	 	 	 	 	 	 	 	
BWW	$	40,951,181		 	$	29,610,702		 	$	84,094,433		 	$	61,462,790		
Bagger Dave's	5,439,865		 	7,261,136		 	10,709,412		 	14,849,380		
Total	$	46,391,046		 	$	36,871,838		 	$	94,803,845		 	$	76,312,170		
 	 	 	 	 	 	 	 	
Segment operating profit (loss):	 	 	 	 	 	 	 	
BWW	$	3,849,895		 	$	3,751,902		 	$	9,135,540		 	$	8,358,232		
Bagger Dave's	(889,880	)	 	(2,810,306	)	 	(1,502,142	)	 	(4,268,941	)	
Total segment operating profit	$	2,960,015		 	$	941,596		 	$	7,633,398		 	$	4,089,291		
Closure-related items	928,153		 	—		 	583,142		 	—		
Corporate expenses	(2,926,632	)	 	(6,451,142	)	 	(5,568,255	)	 	(8,990,333	)	
Total consolidated operating profit (loss)	$	961,536		 	$	(5,509,546	)	 	$	2,648,285		 	$	(4,901,042	)	
 	 	 	 	 	 	 	 	
Interest expense	$	(1,440,562	)	 	$	(559,035	)	 	$	(2,885,502	)	 	$	(991,258	)	
Other income	39,633		 	727,258		 	84,905		 	744,261		
Net loss before income taxes	$	(439,393	)	 	$	(5,341,323	)	 	$	(152,312	)	 	$	(5,148,039	)	
 	 	 	 	 	 	 	 	
 	 	 	 	 	June 26, 2016	 	December 27, 2015	
Total assets	 	 	 	 	 	 	 	
BWW		 		 	$	116,669,017		 	$	115,044,166		
Bagger Dave's		 		 	21,588,976		 	21,886,470		
Corporate		 		 	21,387,957		 	28,841,859		
Total assets		 		 	$	159,645,950		 	$	165,772,495		

16.           SUBSEQUENT EVENTS

On July 28, 2016, the Board of Directors approved the tax-free spinoff of AMC Burgers, which includes all 19 of the Bagger Dave's entities. The company will be formed as an independent, publicly-traded company on the over the counter market. DRH will continue to own and operate its 64 franchised BWW restaurants. DRH is currently developing a comprehensive separation plan for the spinoff. The separation plan, including transaction structure, timing, composition of senior management and the Boards of Directors, capital structure and other matters, will be subject to approval by the DRH Board of Directors, customary regulatory and other approvals. The Company expects to complete the spinoff in the fourth quarter of 2016.

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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, for the fiscal year ended December 27, 2015 . Information included in this discussion and analysis includes commentary on company-owned restaurant, restaurant sales, and same store sales. Management believes such sales information is an important measure of our performance, and is useful in assessing Buffalo Wild Wings® Grill & Bar (“BWW”) concept and consumer acceptance of the Bagger Dave’s Tavern® (“Bagger Dave’s”) and the overall health of the concepts. However, same store sales information does not represent sales in accordance with accounting principles generally accepted in the United States of America (“GAAP”), should not be considered in isolation or as a substitute for other measures of performance prepared in accordance with GAAP and may not be comparable to financial information as defined or used by other companies.
 
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; and 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 ("SEC"), 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 SEC. We expressly disclaim any intent or obligation to update any forward-looking statements.
 
OVERVIEW
 
Diversified Restaurant Holdings, Inc. (“DRH”) is a restaurant company operating two complementary concepts:   BWW and Bagger Dave’s.  As the largest franchisees of BWW and the creator, developer, and operator of Bagger Dave’s, we provide a unique guest experience in a casual and inviting environment.  We were incorporated in 2006 and are headquartered in the Detroit metropolitan area.  As of June 26, 2016 , we had 83 locations in Florida, Illinois, Indiana, Michigan, Missouri and Ohio.
  
DRH is the largest BWW franchisee and currently operates 64 DRH-owned BWW restaurants ( 20 in Michigan, 17 in Florida, seven in Illinois, five in Indiana and 15 in Missouri), including the nation’s largest BWW, based on square footage, in downtown Detroit, Michigan. We remain on track to fulfill our area development agreement (“ADA”) with Buffalo Wild Wings International, Inc. (“BWLD”) and expect to operate 77 DRH-owned BWW restaurants by the end of 2020, exclusive of potential additional BWW restaurant acquisitions. 

DRH originated the Bagger Dave’s concept with our first restaurant opening in January 2008 in Berkley, Michigan.  Currently, there are 19 Bagger Dave’s, 16 in Michigan and one in Indiana and two in Ohio.

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RESTAURANT OPENINGS
 
The following table outlines the restaurant unit information for each fiscal year from 2012 through 2016.

																
 	 	2016 (estimate)	 	2015	 	2014	 	2013	 	2012	
Summary of restaurants open at the beginning of year	 	 	 	 	 	 	 	 	 	 	
DRH-owned BWW	 	62		 	42		 	36		 	33		 	22		
Bagger Dave’s	 	18		 	24		 	18		 	11		 	6		
Total	 	80		 	66		 	54		 	44		 	28		
 	 	 	 	 	 	 	 	 	 	 	
Openings:	 	 	 	 	 	 	 	 	 	 	
DRH-owned BWW	 	2		 	3		 	3		 	3		 	3		
Bagger Dave’s	 	1		 	5		 	6		 	7		 	5		
BWW Acquisitions	 	—		 	18		 	3		 	—		 	8		
Closures - DRH-owned BWW	 	—		 	(1	)	 	—		 	—		 	—		
Closures - Bagger Dave's	 	—		 	(11	)	 	—		 	—		 	—		
Total restaurants	 	83		 	80		 	66		 	54		 	44		

RESULTS OF OPERATIONS
 
For the three-month period ended June 26, 2016 (" Second Quarter 2016 ") and six-month period ended June 26, 2016 ("Year to Date 2016") , revenue was generated from the operations of 64 BWW restaurants and 19 Bagger Dave’s restaurants. For the three-month period ended June 28, 2015 (" Second Quarter 2015 ") and six-month period ended June 28, 2015 ("Year to Date 2015), revenue was generated from the operations of 42 BWW restaurants and 26 Bagger Dave’s restaurants. Quarterly and annual operating results may fluctuate significantly as a result of a variety of factors, including the timing and number of new restaurant openings and related expenses, increases or decreases in same store sales, changes in commodity prices, general economic conditions, and seasonal fluctuations. As a result, our quarterly results of operations are not necessarily indicative of the results that may be achieved for any future period. Same store sales is defined as a restaurants comparable sales in the first full month after the 18th month of operations. Changes in comparable restaurant sales reflect changes in sales for the comparable group of restaurants over a specified period of time. Our comparable restaurant base consisted of 70 and 50 restaurants at June 26, 2016 and June 28, 2015 , respectively.

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Results of Operations for the Three Months Ended June 26, 2016 and June 28, 2015

															
 	 	Three Months Ended	
 	 	June 26, 2016	 	Percent of sales	 	June 28, 2015	 	Percent of sales	
BWW	 	$	40,951,181		 	88.3	 %	 	$	29,610,702		 	80.3	 %	
Bagger Dave's	 	5,439,865		 	11.7	 %	 	7,261,136		 	19.7	 %	
Total revenue	 	46,391,046		 	100.0	 %	 	36,871,838		 	100.0	 %	
 	 	 	 	 	 	 	 	 	
Operating expenses	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	
Food, beverage, and packaging costs	 	 	 	 	 	 	 	 	
BWW	 	11,419,464		 	27.9	 %	 	8,324,900		 	28.1	 %	
Bagger Dave's	 	1,639,318		 	30.1	 %	 	2,236,370		 	30.8	 %	
Food, beverage, and packaging costs	 	13,058,782		 	28.1	 %	 	10,561,270		 	28.6	 %	
 	 	 	 	 	 	 	 	 	
Compensation costs	 	 	 	 	 	 	 	 	
BWW	 	10,283,942		 	25.1	 %	 	7,064,960		 	23.9	 %	
Bagger Dave's	 	2,094,838		 	38.5	 %	 	2,689,211		 	37.0	 %	
Compensation costs	 	12,378,780		 	26.7	 %	 	9,754,171		 	26.5	 %	
 	 	 	 	 	 	 	 	 	
Occupancy costs	 	 	 	 	 	 	 	 	
BWW	 	2,774,108		 	6.8	 %	 	1,728,997		 	5.8	 %	
Bagger Dave's	 	277,057		 	5.1	 %	 	703,353		 	9.7	 %	
Occupancy costs	 	3,051,165		 	6.6	 %	 	2,432,350		 	6.6	 %	
 	 	 	 	 	 	 	 	 	
Other operating costs	 	 	 	 	 	 	 	 	
BWW	 	8,397,035		 	20.5	 %	 	6,241,037		 	21.1	 %	
Bagger Dave's	 	1,326,490		 	24.4	 %	 	1,570,443		 	21.6	 %	
Closure-related items	 	(39,272	)	 	(0.1	)%	 	—		 	—	 %	
Other operating costs	 	9,684,253		 	20.9	 %	 	7,811,480		 	21.2	 %	
 	 	 	 	 	 	 	 	 	
General and administrative expenses	 	2,814,979		 	6.1	 %	 	5,674,963		 	15.4	 %	
Pre-opening costs	 	649,119		 	1.4	 %	 	576,390		 	1.6	 %	
Depreciation and amortization	 	4,402,183		 	9.5	 %	 	3,250,701		 	8.8	 %	
Impairment and loss (gain) on asset disposal	 	(609,751	)	 	(1.3	)%	 	2,320,059		 	6.3	 %	
 	 	 	 	 	 	 	 	 	
Total operating expenses	 	45,429,510		 	97.9	 %	 	42,381,384		 	114.9	 %	
 	 	 	 	 	 	 	 	 	
Operating profit	 	$	961,536		 	2.1	 %	 	$	(5,509,546	)	 	(14.9	)%	

Revenue for Second Quarter 2016 was $46.4 million , an increase of $9.5 million , or 25.8% , over the $36.9 million of revenue generated during Second Quarter 2015 . The increase was attributable to the following: $10.2 million increase from the acquisition of 18 BWW locations; $3.6 million increase from nine new restaurant openings consisting of five BWW restaurants and four Bagger Dave's restaurants; $2.5 million decrease from the closure of 11 Bagger Dave's restaurants and one BWW restaurant; $1.1 million decrease in DRH-Owned BWW same store sales; $0.5 million decrease from impact of restaurants not falling in the sales comp-base because the restaurants have not been open for 18 months and lower Bagger Dave's average unit volumes.

With regard to the costs and expenses discussed below, results and trends that are unique and material within our individual reporting segments have been highlighted. Otherwise, the trends and results for the individual segments are consistent with our discussion of the composite trends and results.  

Food, beverage, and packaging costs increased by $2.5 million , or 23.6% , to $13.1 million in Second Quarter 2016 from $10.6 million in Second Quarter 2015 .  The increase was primarily due to an increased number of restaurants operating in 2016 . Food, beverage, and packaging costs as a percentage of revenue decreased to 28.1% in Second Quarter 2016 from 28.6% in Second Quarter 2015 primarily due to commodity price relief and menu price increases. Average cost per pound for bone-in chicken wings,

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our most significant input cost for our BWW concept, increased to $1.92 in Second Quarter 2016 compared to $1.77 in Second Quarter 2015 . For Bagger Dave's, we experienced commodity cost relief for beef which was offset by an increase in potato costs and a price decrease resulting from our plattering initiative in the latter half of 2015.
 
Compensation costs increased by $2.6 million , or 26.9% , to $12.4 million in Second Quarter 2016 from $9.8 million in Second Quarter 2015 .  The increase was primarily due to an increased number of restaurants operating in 2016 .  Compensation costs as a percentage of sales increased to 26.7% in Second Quarter 2016 from 26.5% in Second Quarter 2015 due to higher average hourly wages.  
 
Occupancy costs  increased by $0.6 million , or 25.4% , to $3.1 million in Second Quarter 2016 from $2.4 million in Second Quarter 2015 .  This increase is primarily due to the increased number of restaurants operating in 2016 . Occupancy as a percentage of sales remained flat at 6.6% in Second Quarter 2016 and Second Quarter 2015 .
 
Other operating costs increased by $1.9 million , or 24.0% , to $9.7 million in Second Quarter 2016 from $7.8 million in Second Quarter 2015 .  The increase was primarily due to an increased number of restaurants operating in 2016 . Other operating costs as a percentage of sales decreased to 20.9% in Second Quarter 2016 from 21.2% in Second Quarter 2015 .
 
General and administrative expenses decreased by $2.9 million , or 50.4% , to $2.8 million  in Second Quarter 2016 from $5.7 million in Second Quarter 2015 .  This decrease was primarily due to settlement and expenses related to a wage-claim litigation occurring in Second Quarter 2015 and additional salaries and marketing expense directly related to the acquisition of 18 locations, partially offset by the decrease in salaries and marketing expenses directly related to closures. General and administrative expenses as a percentage of sales decreased to 6.1% in Second Quarter 2016 from 15.4% in Second Quarter 2015 .
 
Pre-opening costs increased by $72,729 , or 12.6% , to $649,119 in Second Quarter 2016 from $576,390 in Second Quarter 2015 . DRH and its wholly-owned subsidiaries (collectively, the "Company") opened three new restaurants in the Second Quarter 2016 (one Bagger Dave's and two BWW) and opened one Bagger Dave's restaurant and one BWW relocation in Second Quarter 2015 . Pre-opening costs as a percentage of sales decreased to 1.4% in Second Quarter 2016 from 1.6% in Second Quarter 2015 .
 
Depreciation and amortization  increased by $1.2 million , or 35.4% , to $4.4 million in Second Quarter 2016 from $3.3 million in Second Quarter 2015 .  This increase was primarily due to an increased number of restaurants operating in 2016 driven by the acquisition of 18 BWW locations.  Depreciation and amortization as a percentage of sales increased to 9.5% in Second Quarter 2016 from 8.8% in Second Quarter 2015 primarily due to the impact of the 18 acquired locations which had higher average depreciation and amortization expense as a percentage of sales. 
 
Impairment and loss (gain) on asset disposal decreased by $2.9 million , or 126.3% , to a gain of $0.6 million in Second Quarter 2016 from a loss of $2.3 million  in Second Quarter 2015 due to the sale of the Detroit Bagger Dave's building in the Second Quarter 2016 and the asset impairment associated with the closure of three Bagger Dave's locations in Second Quarter 2015. Impairment and loss (gain) on asset disposal as a percentage of sales was 1.3% in Second Quarter 2016 versus 6.3% in Second Quarter 2015 .

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Results of Operations for the Six Months Ended June 26, 2016 and June 28, 2015

	
															
 	 	Six Months Ended	
 	 	June 26, 2016	 	Percent of sales	 	June 28, 2015	 	Percent of sales	
BWW	 	$	84,094,433		 	88.7	 %	 	$	61,462,790		 	80.5	 %	
Bagger Dave's	 	10,709,412		 	11.3	 %	 	14,849,380		 	19.5	 %	
Total revenue	 	94,803,845		 	100.0	 %	 	76,312,170		 	100.0	 %	
 	 	 	 	 	 	 	 	 	
Operating expenses	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	
Food, beverage, and packaging costs	 	 	 	 	 	 	 	 	
BWW	 	23,480,217		 	27.9	 %	 	17,508,564		 	28.5	 %	
Bagger Dave's	 	3,274,108		 	30.6	 %	 	4,500,609		 	30.3	 %	
Food, beverage, and packaging costs	 	26,754,325		 	28.2	 %	 	22,009,173		 	28.8	 %	
 	 	 	 	 	 	 	 	 	
Compensation costs	 	 	 	 	 	 	 	 	
BWW	 	20,796,263		 	24.7	 %	 	14,498,208		 	23.6	 %	
Bagger Dave's	 	4,094,458		 	38.2	 %	 	5,410,755		 	36.4	 %	
Compensation costs	 	24,890,721		 	26.3	 %	 	19,908,963		 	26.1	 %	
 	 	 	 	 	 	 	 	 	
Occupancy costs	 	 	 	 	 	 	 	 	
BWW	 	5,540,567		 	6.6	 %	 	3,460,345		 	5.6	 %	
Bagger Dave's	 	681,353		 	6.4	 %	 	1,344,572		 	9.1	 %	
Occupancy costs	 	6,221,920		 	6.6	 %	 	4,804,917		 	6.3	 %	
 	 	 	 	 	 	 	 	 	
Other operating costs	 	 	 	 	 	 	 	 	
BWW	 	16,788,991		 	20.0	 %	 	12,660,074		 	20.6	 %	
Bagger Dave's	 	2,178,454		 	20.3	 %	 	3,111,955		 	21.0	 %	
Closure-related items	 	755,652		 	0.8	 %	 	—		 	—	 %	
Other operating costs	 	19,723,097		 	20.8	 %	 	15,772,029		 	20.7	 %	
 	 	 	 	 	 	 	 	 	
General and administrative expenses	 	5,477,737		 	5.8	 %	 	8,171,850		 	10.7	 %	
Pre-opening costs	 	921,483		 	1.0	 %	 	1,669,890		 	2.2	 %	
Depreciation and amortization	 	8,709,900		 	9.2	 %	 	6,408,023		 	8.4	 %	
Impairment and loss (gain) on asset disposal	 	(543,623	)	 	(0.6	)%	 	2,468,467		 	3.2	 %	
 	 	 	 	 	 	 	 	 	
Total operating expenses	 	92,155,560		 	97.2	 %	 	81,213,312		 	106.4	 %	
 	 	 	 	 	 	 	 	 	
Operating profit	 	$	2,648,285		 	2.8	 %	 	$	(4,901,142	)	 	(6.4	)%	

Revenue for Year to Date 2016 was $94.8 million , an increase of $18.5 million , or 24.2% , over the $76.3 million of revenue generated during Year to Date 2015 . The increase was attributable to the following: $20.9 million increase from the acquisition of 18 BWW locations; $7.7 million increase from nine new restaurant openings consisting of five BWW restaurants and four Bagger Dave's restaurants; $5.0 million decrease from the closure of 11 Bagger Dave's restaurants and one BWW restaurant; $2.9 million decrease in DRH-Owned BWW same store sales; $2.2 million decrease from impact of restaurants not falling into the sales comp-base because the restaurants have not been open for 18 months.

With regard to the costs and expenses discussed below, results and trends that are unique and material within our individual reporting segments have been highlighted. Otherwise, the trends and results for the individual segments are consistent with our discussion of the composite trends and results.  

Food, beverage, and packaging costs increased by $4.7 million , or 21.6% , to $26.8 million in Year to Date 2016 from $22.0 million in Year to Date 2015 . The increase was primarily due to an increased number of restaurants operating in 2016 . Food, beverage, and packaging costs as a percentage of revenue decreased to 28.2% in Year to Date 2016 from 28.8% in Year to Date 2015 primarily

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due to commodity price relief and menu price increases. Average cost per pound for bone-in chicken wings, our most significant input cost for our BWW concept, increased to $1.92 in Year to Date 2016 compared to $1.84 in Year to Date 2015 . For Bagger Dave's, we experienced commodity cost relief for beef which was offset by an increase in potato costs and a price decrease resulting from our plattering initiative in the latter half of 2015.
 
Compensation costs increased by $5.0 million , or 25.0% , to $24.9 million in Year to Date 2016 from $19.9 million in Year to Date 2015 .  The increase was primarily due to an increased number of restaurants operating in 2016 .  Compensation costs as a percentage of sales increased to 26.3% in Year to Date 2016 from 26.1% in Year to Date 2015 due to higher average hourly wages.  
 
Occupancy costs  increased by $1.4 million , or 29.5% , to $6.2 million in Year to Date 2016 from $4.8 million in Year to Date 2015 .  This increase is primarily due to the increased number of restaurants operating in 2016 . Occupancy as a percentage of sales increased to 6.6% in Year to Date 2016 from 6.3% in Year to Date 2015 primarily due to the impact of the 18 acquired BWW locations, which had higher average occupancy costs as a percentage of sales and lower comparable sales over the same period last year. This was partially offset by lower occupancy costs as a percentage of sales for Bagger Dave's due to the recent closure of underperforming locations.
 
Other operating costs increased by $4.0 million , or 25.1% , to $19.7 million in Year to Date 2016 from $15.8 million in Year to Date 2015 .  The increase was primarily due to an increased number of restaurants operating in 2016 . Other operating costs as a percentage of sales remained relatively flat at 20.8% for Year to Date 2016 and 20.7% in Year to Date 2015 .
 
General and administrative expenses decreased by $2.7 million , or 33.0% , to $5.5 million  in Year to Date 2016 from $8.2 million in Year to Date 2015 .  This decrease was primarily due to settlement and expenses related to a wage-claim litigation occurring in 2015 and additional salaries and marketing expense directly related to the acquisition of 18 locations, partially offset by the decrease in salaries and marketing expenses directly related to closures. General and administrative expenses as a percentage of sales decreased to 5.8% in Year to Date 2016 from 10.7% in Year to Date 2015 .
 
Pre-opening costs decreased by $0.7 million , or 44.8% , to $0.9 million in Year to Date 2016 from $1.7 million in Year to Date 2015 . The Company opened three new restaurants in Second Quarter 2016 (one Bagger Dave's and two BWW) and opened one Bagger Dave's restaurant and one BWW relocation in Second Quarter 2015 . There were five openings in the previous year Fourth Quarter 2014, which contributed to carry-over costs in First Quarter 2015.  Pre-opening costs as a percentage of sales decreased to 1.0% in Year to Date 2016 from 2.2% in Year to Date 2015 .
 
Depreciation and amortization  increased by $2.3 million , or 35.9% , to $8.7 million in Year to Date 2016 from $6.4 million in Year to Date 2015 .  This increase was primarily due to an increased number of restaurants operating in 2016 driven by the acquisition of 18 BWW locations.  Depreciation and amortization as a percentage of sales increased to 9.2% in Year to Date 2016 from 8.4% in Year to Date 2015 primarily due to the impact of the 18 acquired locations which had higher average depreciation and amortization expense as a percentage of sales.
 
Impairment and loss (gain) on asset disposal decreased by $3.0 million , or 122.0% , to a gain of $0.5 million in Year to Date 2016 from a loss of $2.5 million  in Year to Date 2015 due to the sale of the Detroit Bagger Dave's building in Second Quarter 2016 and the asset impairment associated with the closure of three Bagger Dave's location in Second Quarter 2015. Impairment and loss (gain) on asset disposal as a percentage of sales was 0.6% in Year to Date 2016 versus 3.2% in Year to Date 2015 .

INTEREST AND TAXES
 
Interest expense was $1.4 million and $0.6 million during Second Quarter 2016 and Second Quarter 2015 , respectively. Interest expense was $2.9 million and $1.0 million during Year to Date 2016 and Year to Date 2015 , respectively. The increase was primarily due to the increased debt related to the acquisition of 18 BWW locations occurring in the Second Quarter 2015 along with the building of new restaurants. 
 
For Second Quarter 2016 , DRH had an income tax benefit of $0.3 million compared to Second Quarter 2015 income tax benefit of $2.0 million . For Year to Date 2016 and Year to Date 2015 , DRH had an income tax benefit of $0.4 million compared to Second Quarter 2015 income tax benefit of $2.1 million .  The decrease in the income tax benefit is primarily related to the decrease in loss before income taxes.

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LIQUIDITY AND CAPITAL RESOURCES; EXPANSION PLANS
 
On June 29, 2015, the Company, entered into a $155.0 million Senior Secured Credit Facility with Citizens Bank, N.A. (the “June 2015 Senior Secured Credit Facility”). The June 2015 Senior Secured Credit Facility consists of a $120.0 million Term Loan (the "June 2015 Term Loan"), a $30.0 million development line of credit (the "June 2015 DLOC") and a $5.0 million revolving line of credit (the "June 2015 RLOC"). The Company immediately used approximately $65.5 million of the June 2015 Term Loan to refinance existing outstanding debt and $54.0 million of the June 2015 Term Loan to finance an acquisition occurring in the second quarter 2015. The remaining balance of the June 2015 Term Loan, approximately $0.5 million, was used to pay the fees, costs and expenses arising in connection with the closing of the loans constituting the June 2015 Senior Secured Credit Facility. The June 2015 Term Loan is for a term of five years. Payments of principal shall be based upon a 12-year straight-line amortization schedule, with monthly principal payments of $833,333 plus accrued interest. The interest rate for the Term Loan is LIBOR plus an applicable margin which ranges from 2.25% to 3.5%. The entire remaining outstanding principal and accrued interest on the Term Loan is due and payable on the Term Loan maturity date of June 29, 2020. The June 2015 DLOC is for a term of two years and is convertible upon maturity into a term note based on the terms of the agreement at which time monthly principal payments will be due based on a 12-year straight-line amortization schedule, plus interest, through maturity on June 29, 2020. The June 2015 RLOC is for a term of five years and bears interest at LIBOR plus an applicable margin, no amount was outstanding as of June 26, 2016 .
 
We believe that along with our current cash balance, the cash flow from operations and availability of credit will be sufficient to meet our operational, development and debt obligations for at least the next 12 months.
  
Our capital requirements are primarily dependent upon the pace of our new restaurant growth plan. The new restaurant growth plan is primarily dependent upon economic conditions, the real estate market and resources to both develop and operate new restaurants.  In addition to new restaurants, our capital expenditure outlays are also dependent on the cost and potential obligation to invest in maintenance, facility upgrades, capacity enhancements, information technology and other general corporate capital expenditures.

The amount of capital required to open a new restaurant is largely dependent on whether we build-out an existing leased space or build from the ground up.  Our preference is to find leased space for new restaurant locations, but depending on the availability of real estate in specific markets, we will take advantage of alternative strategies, which may include land purchases, land leases, and ground-up construction of a building to house our restaurant operation.  We expect that a build-out of a new DRH-owned BWW restaurant will require an estimated cash investment of $1.7 million to $2.1 million (excluding potential tenant incentives). Excluding land and building, we expect the build-out of a new Bagger Dave’s restaurant will, on average, require a total cash investment of $1.1 million to $1.4 million (excluding potential tenant incentives).  We expect to spend up to $0.3 million per restaurant for pre-opening expenses.  Depending on individual lease negotiations, we may receive cash tenant incentives of up to $0.4 million.  The projected cash investment per restaurant is based on recent opening costs and future projections and may fluctuate based on construction costs specific to new restaurant locations.
 
We target a cash on cash payback on our initial total capital investment of less than four years. The expected payback is subject to how quickly we reach our target sales volume and the cost of construction.
 
Cash flow from operations for Year to Date 2016 was $5.9 million compared with $4.6 million for Year to Date 2015 . Net cash provided by operating activities consisted primarily of net earnings adjusted for non-cash expenses.

For 2016, capital expenditures are anticipated to be between $14.0 million and $16.0 million. We plan to use the capital as follows: 50.0% for new restaurant openings; and the remaining 50.0% for restaurant remodels, upgrades and other general corporate purposes. Any excess cash from operations will be used to accelerate pay down of our debt. With planned capital expenditures significantly lower than historical and additional operating cash flows, both of which are due to the fact that we have just recently integrated 18 additional BWW locations and closed underperforming restaurants, we are targeting a net debt-to-adjusted EBITDA ratio of 3.0x by mid-2018.
 
Although investments in new restaurants are an integral part of our strategic and capital expenditures plan, we also believe that reinvesting in existing restaurants is an important factor and necessary to maintain the overall positive dining experience for our guests. Depending on the age of the existing restaurants, upgrades range from $50,000 (for minor interior refreshes) to $1.3 million (for a full extensive remodel of the restaurant), we target remodels of $0.6 to $0.7 million to upgrade a typical BWW restaurant to the new Stadia design. The Company's strategy is to fully remodel existing BWW restaurants to the new Stadia design at time of scheduled refresh or remodel typically within seven years or less of opening.

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Mandatory Upgrades
 
In fiscal year 2016 , we will invest in seven mandatory remodels of existing DRH-owned BWW restaurants. Four of the seven remodels have been completed, one is near completion and we expect the remaining two will be completed by the end of fiscal 2016. These will primarily be funded through cash from operations, supplemented by drawing off our development line of credit.
 
Discretionary Upgrades and Relocations
 
In fiscal year 2016 , the Company plans to invest additional capital to provide minor upgrades to a number of its existing locations, all of which we expect to fund with cash from operations. These improvements will primarily consist of refreshing interior building finishes audio/visual equipment upgrades, and patio upgrades. In fiscal year 2016 , we do not have any planned relocations. The decision to relocate is typically driven by timing of our current lease agreements and the availability of real estate that we deem to be a better long-term investment. Relocations are funded by a combination of cash from operations and borrowing from our credit facility.

Inflation
 
Our profitability is dependent, among other things, on our ability to anticipate and react to changes in the costs of key operating resources, including food and other raw materials, labor, energy, and other supplies and services. Substantial increases in costs and expenses could impact our operating results to the extent that such increases cannot be passed along to our restaurant guests.  The impact of inflation on food, labor, energy, and occupancy costs can significantly affect the profitability of our restaurant operations.
 
All of our restaurant staff members are paid hourly rates based on the federal minimum wage.  Certain operating costs, such as taxes, insurance, and other outside services continue to increase with the general level of inflation or higher and may also be subject to other cost and supply fluctuations outside of our control.
 
While we have been able to partially offset inflation and other changes in the costs of key operating resources by gradually increasing prices for our menu items, more efficient purchasing practices, productivity improvements, and greater economies of scale, there can be no assurance that we will be able to continue to do so in the future. From time to time, competitive conditions could limit our menu pricing flexibility.  In addition, macroeconomic conditions could make additional menu price increases imprudent.  There can be no assurance that all future cost increases can be offset by increased menu prices or that increased menu prices will be fully absorbed by our restaurant guests without any resulting changes in their visit frequencies or purchasing patterns. There can be no assurance that we will continue to generate increases in comparable restaurant sales in amounts sufficient to offset inflationary or other cost pressures.

OFF-BALANCE SHEET ARRANGEMENTS

The Company’s ADA requires DRH to open 42 BWW restaurants within its designated "development territory” by April 1, 2021.   As of June 26, 2016 we have opened 29 of the 42 restaurants required by the ADA.  With the remaining 13 restaurants, we expect the Company will operate 77 BWW restaurants by 2020, exclusive of potential additional BWW restaurant acquisitions.  

Impact of New Accounting Standards

See Note 1, "Business and Summary of Significant Accounting Policies," included in Part 1, Item 1, "Notes to Interim Consolidated Financial Statements," of this Quarterly Report.
 
CRITICAL ACCOUNTING ESTIMATES
 
We prepare our consolidated financial statements in conformity with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Our critical accounting policies have not changed materially from those previously reported in our Annual Report on Form 10-K for the fiscal year ended December 27, 2015 .

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Item 3. Quantitative and Qualitative Disclosure About Market Risks  

Not applicable for smaller reporting companies.

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 Securities and Exchange Commission 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 June 26, 2016 , 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 June 26, 2016 .
 
(b) Changes in internal control over financial reporting.
 
There were no changes in the Company’s internal control over financial reporting during the quarter ended June 26, 2016 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.

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PART II. OTHER INFORMATION
 
Item 1. Legal Proceedings  
 
The following information is incorporated by reference: the information set forth under the heading "Legal Proceedings" in Note 10 "Commitments and Contingencies" of the "Notes to the Interim Consolidated Financial Statements" of Part I, Item 1 to this Report on Form 10-Q.

In addition, we are occasionally 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 team members 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. As of the date of this Quarterly Report, we are not a party to any material pending legal proceedings and are not aware of any claims that could have a materially adverse effect on our financial position, results of operations or cash flows. 

Item 1A. Risk Factors
 
Not applicable for smaller reporting companies.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
Not Applicable.

Item 3. Defaults Upon Senior Securities
 
None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information
 
None.

Item 6. Exhibits

The Exhibit Index following the signature page hereto is incorporated by reference under this item.

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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:	August 5, 2016	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)	

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EXHIBIT INDEX

	
		
Exhibit No.	Exhibit Description	
 	 	
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	Amended and Restated Bylaws (filed as an exhibit to the Company's Form 8-K, as filed with the Securities and Exchange Commission on August 29, 2012, and incorporated herein by this reference).	
 	 	
3.3	First Amendment to the Amended and Restated Bylaws (filed as an exhibit to the Company's Form 8-K, as filed with the Securities and Exchange Commission on October 31, 2012, and incorporated herein by this reference).	
 	 	
 3.4	Second Amendment to the Amended and Restated Bylaws (filed as an exhibit to the Company's Form 8-K, as filed with the Securities and Exchange Commission on July 29, 2016, and incorporated herein by this reference).	
 	 	
10.1	Employment Agreement between Diversified Restaurant Holdings, Inc. and David G. Burke, dated May 19, 2016 (filed as exhibit 10.1 to the Company's Form 8-K, as filed with the Securities and Exchange Commission on May 24, 2016, 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 18 U.S.C. Section 1350.	
 	 	
32.2	Certification Chief Financial Officer pursuant to 18 U.S.C. Section 1350.	
 	 	
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	

31

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 June 26, 2016 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: 	August 5, 2016	DIVERSIFIED RESTAURANT HOLDINGS, INC.   	

 	 	By:	/s/ T. Michael Ansley	 	
 	 	 	T. Michael Ansley
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)	 	

  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 June 26, 2016 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:	August 5, 2016	DIVERSIFIED RESTAURANT HOLDINGS, INC.	
 	 	 	 	 	
 	 	By:	/s/ David G. Burke	 	
 	 	 	David G. Burke
Treasurer and Chief Financial Officer
(Principal Financial Officer)	 	

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 10-Q (“Quarterly Report”) of Diversified Restaurant Holdings, Inc. (the "Company") for the fiscal quarter ended June 26, 2016 , 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:	August 5, 2016	DIVERSIFIED RESTAURANT HOLDINGS, INC.   	

 	 	 	 	 	
 	 	By:	/s/ T. Michael Ansley	 	
 	 	 	T. Michael Ansley
Chairman of the Board, President, and
Chief Executive Officer
(Principal Executive Officer)	 	

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 10-Q (“Quarterly Report”) of Diversified Restaurant Holdings, Inc. (the "Company") for the fiscal quarter ended June 26, 2016 , 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:	August 5, 2016	DIVERSIFIED RESTAURANT HOLDINGS, INC.	

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