U.S. SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
FORM 10-Q
  
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  
EXCHANGE ACT OF 1934
 
For the quarterly period ended September 28, 2014   
 
[_] 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:  26,185,375 shares of $.0001 par value common stock outstanding as of November 5, 2014.
 
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	[ X ]	
 	 	 	 	 	
Non-accelerated filer	[   ]	 	Smaller reporting company	[   ]	
 
(Do not check if a smaller reporting company)        
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

 
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
 
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  Yes [  ]       No [  ]

 

 
 
INDEX
 
PART I. FINANCIAL INFORMATION	1	
Item 1. Financial Statements	1	
Consolidated Balance Sheets	1	
Consolidated Statements of Operations	2	
Consolidated Statements of Comprehensive Income (loss)	3	
Consolidated Statements of Stockholders' Equity 	4	
Consolidated Statements of Cash Flows	5	
Notes to Interim Consolidated Financial Statements	6	
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	19	
Item 3. Quantitative and Qualitative Disclosure About Market Risks	25	
Item 4. Controls and Procedures	26	
PART II. OTHER INFORMATION	27	
Item 1. Legal Proceedings	27	
Item 1A. Risk Factors	27	
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	27	
Item 3. Defaults Upon Senior Securities	27	
Item 5. Other Information	27	
Item 6. Exhibits	27	

 

 
PART I.  FINANCIAL INFORMATION
 
Item 1.  Financial Statements
 
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
     
 	 	September 28	 	 	 	 	 	
 	 	2014	 	 	December 29	 	
ASSETS	 	(UNAUDITED)	 	 	2013	 	
Current assets	 	 	 	 	 	 	 	 	
Cash and cash equivalents	 	$	6,514,056	 	 	$	9,562,473	 	
Investments	 	 	4,911,848	 	 	 	8,561,598	 	
Accounts receivable	 	 	231,334	 	 	 	1,248,940	 	
Inventory	 	 	1,182,420	 	 	 	1,017,626	 	
Prepaid assets	 	 	429,581	 	 	 	555,144	 	
Total current assets	 	 	13,269,239	 	 	 	20,945,781	 	

Deferred income taxes	 	 	1,353,681	 	 	 	1,162,761	 	
Property and equipment, net	 	 	74,500,195	 	 	 	58,576,734	 	
Intangible assets, net	 	 	3,229,487	 	 	 	2,948,013	 	
Goodwill	 	 	10,998,630	 	 	 	8,578,776	 	
Other long-term assets	 	 	199,500	 	 	 	121,668	 	
Total assets	 	$	103,550,732	 	 	$	92,333,733	 	
 	 	 	 	 	 	 	 	 	
LIABILITIES AND STOCKHOLDERS' EQUITY	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	
Current liabilities	 	 	 	 	 	 	 	 	
Accounts payable	 	$	5,210,270	 	 	$	4,416,092	 	
Accrued compensation	 	 	1,565,911	 	 	 	2,060,082	 	
Other accrued liabilities	 	 	1,035,623	 	 	 	809,104	 	
Current portion of long-term debt	 	 	12,327,788	 	 	 	8,225,732	 	
Current portion of deferred rent	 	 	377,812	 	 	 	306,371	 	
Total current liabilities	 	 	20,517,404	 	 	 	15,817,381	 	
 	 	 	 	 	 	 	 	 	
Deferred rent, less current portion	 	 	2,992,190	 	 	 	3,420,574	 	
Unfavorable operating leases	 	 	712,223	 	 	 	759,065	 	
Other long-term liabilities	 	 	410,600	 	 	 	327,561	 	
Long-term debt, less current portion	 	 	44,528,221	 	 	 	38,047,589	 	
Total liabilities	 	 	69,160,638	 	 	 	58,372,170	 	
 	 	 	 	 	 	 	 	 	
Commitments and contingencies (Notes 10 and 11)	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	
Stockholders' equity	 	 	 	 	 	 	 	 	
Common stock - $0.0001 par value; 100,000,000 shares authorized; 26,147,999 and 26,049,578, respectively, issued and outstanding	 	 	2,582	 	 	 	2,580	 	
Additional paid-in capital	 	 	35,554,165	 	 	 	35,275,255	 	
Accumulated other comprehensive loss	 	 	(180,997	)	 	 	(245,364	)	
Accumulated deficit	 	 	(985,656	)	 	 	(1,070,908	)	
Total stockholders' equity	 	 	34,390,094	 	 	 	33,961,563	 	
 	 	 	 	 	 	 	 	 	
Total liabilities and stockholders' equity	 	$	103,550,732	 	 	$	92,333,733	 	

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

1

 
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 
 	 	Three Months Ended	 	 	Nine Months Ended	 	
 	 	September 28	 	 	September 29	 	 	September 28	 	 	September 29	 	
 	 	2014	 	 	2013	 	 	2014	 	 	2013	 	

Revenue	 	$	32,782,092	 	 	$	26,368,090	 	 	$	93,264,727	 	 	$	80,410,174	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating expenses	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Restaurant operating costs (exclusive of depreciation and amortization shown separately below):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Food, beverage, and packaging costs	 	 	9,456,106	 	 	 	7,759,146	 	 	 	26,784,277	 	 	 	24,336,433	 	
Compensation costs	 	 	8,405,116	 	 	 	6,972,432	 	 	 	24,170,212	 	 	 	20,903,931	 	
Occupancy costs	 	 	1,873,693	 	 	 	1,600,278	 	 	 	5,052,643	 	 	 	4,704,380	 	
Other operating costs	 	 	7,220,083	 	 	 	5,436,252	 	 	 	19,627,639	 	 	 	16,100,223	 	
General and administrative expenses	 	 	2,133,564	 	 	 	1,558,924	 	 	 	6,345,810	 	 	 	5,058,879	 	
Pre-opening costs	 	 	609,664	 	 	 	639,498	 	 	 	2,063,800	 	 	 	2,036,022	 	
Depreciation and amortization	 	 	2,865,794	 	 	 	2,070,841	 	 	 	7,612,125	 	 	 	5,539,874	 	
Loss on disposal of property and equipment	 	 	33,013	 	 	 	22,970	 	 	 	353,333	 	 	 	83,711	 	
Total operating expenses	 	 	32,597,033	 	 	 	26,060,341	 	 	 	92,009,839	 	 	 	78,763,453	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating profit	 	 	185,059	 	 	 	307,749	 	 	 	1,254,888	 	 	 	1,646,721	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest expense	 	 	(483,057	)	 	 	(320,798	)	 	 	(1,436,092	)	 	 	(1,375,646	)	
Other income, net	 	 	67,789	 	 	 	68,415	 	 	 	86,426	 	 	 	92,958	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) before income taxes	 	 	(230,209	)	 	 	55,366	 	 	 	(94,778	)	 	 	364,033	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income tax provision (benefit)	 	 	(48,100	)	 	 	(14,444	)	 	 	(180,030	)	 	 	52,186	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss)	 	$	(182,109	)	 	$	69,810	 	 	$	85,252	 	 	$	311,847	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Basic earnings (loss) per share	 	$	(0.01	) 	 	$	0.00	 	 	$	0.00	 	 	$	0.01	 	
Fully diluted earnings (loss) per share	 	$	(0.01	) 	 	$	0.00	 	 	$	0.00	 	 	$	0.01	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Weighted average number of common shares outstanding	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Basic	 	 	26,107,627	 	 	 	26,054,118	 	 	 	26,074,797	 	 	 	23,231,403	 	
Diluted	 	 	26,107,627	 	 	 	26,186,263	 	 	 	26,174,593	 	 	 	23,351,128	 	

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

2

 
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 
 	 	Three Months Ended	 	 	Nine Months Ended	 	
 	 	September 28	 	 	September 29	 	 	September 28	 	 	September 29	 	
 	 	2014	 	 	2013	 	 	2014	 	 	2013	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss)	 	$	(182,109	)	 	$	69,810	 	 	$	85,252	 	 	$	311,847	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other comprehensive income (loss)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Unrealized changes in fair value of interest rate swaps, net of tax of $43,284, $77,315, $26,039 and $18,011, respectively	 	 	84,022	 	 	 	(150,082	)	 	 	50,841	 	 	 	34,962	 	
Unrealized changes in fair value of invesments, net of tax of $2,232, $16,876, $6,969 and $8,423, respectively	 	 	(4,333	)	 	 	32,750	 	 	 	13,526	 	 	 	(16,253	)	
Total other comprehensive income (loss)	 	 	79,689	 	 	 	(117,332	)	 	 	64,367	 	 	 	18,709	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Comprehensive income (loss)	 	$	(102,420	)	 	$	(47,522	)	 	$	149,619	 	 	$	330,556	 	

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

3

 
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
 	 	 	 	 	 	 	 	 	 	 	 	 	 	Accumulated	 	 	Retained	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	Additional	 	 	Other	 	 	Earnings	 	 	Total	 	
 	 	Common Stock	 	 	Paid-in	 	 	Comprehensive	 	 	(Accumulated	 	 	Stockholders'	 	
 	 	Shares	 	 	Amount	 	 	Capital	 	 	Income (Loss)	 	 	Deficit)	 	 	Equity	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balances - December 30, 2012	 	 	18,951,700	 	 	$	1,888	 	 	$	2,991,526	 	 	$	(284,294	)	 	$	(1,205,216	)	 	$	1,503,904	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Issuance of restricted shares	 	 	145,575	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Forfeitures of restricted shares	 	 	(48,399	)	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Sale of common stock from follow-on offering, net of fees and expenses	 	 	6,900,000	 	 	 	690	 	 	 	31,906,989	 	 	 	-	 	 	 	-	 	 	 	31,907,679	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Stock options exercised	 	 	104,638	 	 	 	2	 	 	 	74,997	 	 	 	-	 	 	 	-	 	 	 	74,999	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Employee stock purhcase plan	 	 	2,061	 	 	 	-	 	 	 	12,145	 	 	 	 	 	 	 	 	 	 	 	12,145	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Share-based compensation	 	 	-	 	 	 	-	 	 	 	205,668	 	 	 	-	 	 	 	-	 	 	 	205,668	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other comprehensive income	 	 	-	 	 	 	-	 	 	 	-	 	 	 	18,709	 	 	 	-	 	 	 	18,709	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	311,847	 	 	 	311,847	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balances - September 29, 2013 (unaudited)	 	 	26,055,575	 	 	$	2,580	 	 	$	35,191,325	 	 	$	(265,585	)	 	$	(893,369	)	 	$	34,034,951	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balances - December 29, 2013	 	 	26,049,578	 	 	$	2,580	 	 	$	35,275,255	 	 	$	(245,364	)	 	$	(1,070,908	)	 	$	33,961,563	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Issuance of restricted shares	 	 	91,966	 	 	 	-	 	 	 	 	 	 	 	-	 	 	 	-	 	 	 	-	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Forfeitures of restricted shares	 	 	(2,068	)	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Share-based compensation	 	 	-	 	 	 	-	 	 	 	237,079	 	 	 	-	 	 	 	-	 	 	 	237,079	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Employee stock purchase plan	 	 	8,523	 	 	 	2	 	 	 	41,831	 	 	 	-	 	 	 	-	 	 	 	41,833	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other comprehensive income	 	 	-	 	 	 	-	 	 	 	-	 	 	 	64,367	 	 	 	-	 	 	 	64,367	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	85,252	 	 	 	85,252	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balances - September 28, 2014 (unaudited)	 	 	26,147,999	 	 	$	2,582	 	 	$	35,554,165	 	 	$	(180,997	)	 	$	(985,656	)	 	$	34,390,094	 	

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

4

 

 
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
 	 	Nine Months Ended	 	
 	 	September 28	 	 	September 29	 	
 	 	2014	 	 	2013	 	
 	 	 	 	 	 	 	 	 	
Cash flows from operating activities	 	 	 	 	 	 	 	 	
Net income	 	$	85,252	 	 	$	311,847	 	
Adjustments to reconcile net income to net cash provided by operating activities	 	 	 	 	 	 	 	 	
Depreciation and amortization	 	 	7,641,090	 	 	 	5,539,874	 	
Write off of loan fees	 	 	-	 	 	 	76,408	 	
Realized loss on sales of investments	 	 	33,406	 	 	 	-	 	
Loss on disposal of property and equipment	 	 	353,333	 	 	 	83,711	 	
Share-based compensation	 	 	237,079	 	 	 	205,668	 	
Deferred income taxes	 	 	(223,928	)	 	 	(13,248	)	
Changes in operating assets and liabilities that provided (used) cash	 	 	 	 	 	 	 	 	
Accounts receivable	 	 	1,017,606	 	 	 	(136,544	)	
Inventory	 	 	(110,794	)	 	 	(300,064	)	
Prepaid assets	 	 	125,563	 	 	 	(67,541	)	
Intangible assets	 	 	(210,937	)	 	 	(546,831	)	
Other long-term assets	 	 	(77,832	)	 	 	(299,267	)	
Accounts payable	 	 	1,292,321	 	 	 	759,930	 	
Accrued liabilities	 	 	(107,580	)	 	 	(458,825	)	
Deferred rent	 	 	(356,943	)	 	 	614,182	 	
Net cash provided by operating activities	 	 	9,697,636	 	 	 	5,769,300	 	
 	 	 	 	 	 	 	 	 	
Cash flows from investing activities	 	 	 	 	 	 	 	 	
Purchases of investments	 	 	(7,469,555	)	 	 	(12,690,397	)	
Proceeds from sale of investments	 	 	11,106,241	 	 	 	5,278,048	 	
Purchases of property and equipment	 	 	(23,685,771	)	 	 	(17,297,791	)	
Acquisition of business, net of cash acquired	 	 	(3,202,750	)	 	 	-	 	
Net cash used in investing activities	 	 	(23,251,835	)	 	 	(24,710,140	)	
 	 	 	 	 	 	 	 	 	
Cash flows from financing activities	 	 	 	 	 	 	 	 	
Proceeds from issuance of long-term debt	 	 	16,448,332	 	 	 	55,862,559	 	
Repayments of long-term debt	 	 	(5,865,644	)	 	 	(58,460,520	)	
Payment of loan fees	 	 	(118,739	)	 	 	-	 	
Proceeds from employee stock purchase plan	 	 	41,833	 	 	 	-	 	
Proceeds from sale of common stock, net of underwriter fees	 	 	-	 	 	 	31,994,823	 	
Net cash provided by financing activities	 	 	10,505,782	 	 	 	29,396,862	 	
 	 	 	 	 	 	 	 	 	
Net increase (decrease) in cash and cash equivalents	 	 	(3,048,417	)	 	 	10,456,022	 	
 	 	 	 	 	 	 	 	 	
Cash and cash equivalents, beginning of period	 	 	9,562,473	 	 	 	2,700,328	 	
 	 	 	 	 	 	 	 	 	
Cash and cash equivalents, end of period	 	$	6,514,056	 	 	$	13,156,350	 	

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

 
 
5

DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 
1.           BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Nature of Business
 
Diversified Restaurant Holdings, Inc. (“DRH”) is a fast-growing restaurant company operating two complementary concepts:  Bagger Dave’s Burger Tavern ® (“Bagger Dave’s”) and Buffalo Wild Wings ® Grill & Bar (“BWW”).  As the creator, developer, and operator of Bagger Dave’s and as one of the largest franchisees of BWW, 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 September 28, 2014, we had 61 locations in Florida, Illinois, Indiana, and Michigan.
  
DRH and its wholly-owned subsidiaries (collectively, the “Company”), AMC Group, Inc. (“AMC”), AMC Wings, Inc. (“WINGS”), AMC Burgers, Inc. (“BURGERS”), and AMC Real Estate, Inc. (“REAL ESTATE”) own, operate, and manage Bagger Dave's and DRH-owned BWW restaurants located throughout Florida, Illinois, Indiana, and Michigan.
 
DRH originated the Bagger Dave’s concept with our first restaurant opening in January 2008 in Berkley, Michigan.  Currently, there are 22 Bagger Dave’s, 14 in Michigan and eight in Indiana. The Company expects to operate between 47 and 51 Bagger Dave’s locations by the end of 2017.
 
DRH is also one of the largest BWW franchisees and currently operates 40 DRH-owned BWW restaurants (18 in Michigan, 14 in Florida, four in Illinois, and four in Indiana), 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 52 DRH-owned BWW restaurants by the end of 2017, exclusive of potential additional BWW restaurant acquisitions. 
 
The following organizational chart outlines the current corporate structure of DRH.  A brief textual description of the entities follows the organizational chart. DRH is incorporated in Nevada.    

 
AMC was formed on March 28, 2007 and serves as our operational and administrative center. AMC renders management, operational support, and advertising services to WINGS, BURGERS, REAL ESTATE and their subsidiaries. Services rendered by AMC include marketing, restaurant operations, restaurant management consultation, hiring and training of management and staff, and other management services reasonably required in the ordinary course of restaurant operations.
 
BURGERS was formed on March 12, 2007 and serves as a holding company for our Bagger Dave’s restaurants.  Bagger Dave’s Franchising Corporation, a subsidiary of BURGERS, was formed to act as the franchisor for the Bagger Dave’s concept and has rights to franchise in Illinois, Indiana, Kentucky, Michigan, Missouri, Ohio, and Wisconsin.  We do not intend to pursue franchise development at this time.  
 
WINGS was formed on March 12, 2007 and serves as a holding company for our DRH-owned BWW restaurants.  We are economically dependent on retaining our franchise rights with BWLD.  The franchise agreements have specific initial term expiration dates ranging from March 2020 through June 2034, depending on the date each was executed and the duration of its initial term.  The franchise agreements are renewable at the option of the franchisor and are generally renewable if the franchisee has complied with the franchise agreement.  When factoring in any applicable renewals, the franchise agreements have specific expiration dates ranging from March 2035 through June 2049.  We believe we are in compliance with the terms of these agreements.   
 
6

 
REAL ESTATE was formed on March 18, 2013 and serves as the holding company for the real estate properties owned by DRH. REAL ESTATE’s portfolio currently includes eight properties, four of which are Bagger Dave’s restaurants and four of which are DRH-owned BWW restaurants. The restaurants at these locations are all owned and operated by DRH.
 
Basis of Presentation
 
The consolidated financial statements as of September 28, 2014 and December 29, 2013, and for the three-month and nine-month periods ended September 28, 2014 and September 29, 2013, have been prepared by the Company pursuant to accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the Securities and Exchange Commission. The financial information as of September 28, 2014 and for the three-month and nine-month periods ended September 28, 2014 and September 29, 2013 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 29, 2013 is derived from our audited consolidated financial statements and notes thereto for the fiscal year ended December 29, 2013, which is included in Item 8 in the Fiscal 2013 Annual Report on Form 10-K, and should be read in conjunction with such consolidated financial statements.
 
The results of operations for the three-month and nine-month periods ended September 28, 2014 are not necessarily indicative of the results of operations that may be achieved for the entire year ending December 28, 2014.
 
Reclassifications
 
Certain reclassifications have been made to the consolidated financial statements to conform to the prior year's presentation.
 
Segment Reporting
 
The Company has two operating segments, Bagger Dave’s and BWW. The brands operate within the ultra-casual, full-service dining industry, providing similar products to similar customers. The brands also possess similar economic characteristics, resulting in similar long-term expected financial performance. Sales from external customers are derived principally from food and beverage sales. We do not rely on any major customers as a source of sales. We believe we meet the criteria for aggregating our operating segments into a single reporting segment.
 
Concentration Risks
 
Approximately 79.8% and 80.6% of the Company's revenues are generated from food and beverage sales of restaurants located in the Midwest region during the nine-month periods ended September 28, 2014 and September 29, 2013, respectively.
 
Investments
 
The Company’s investment securities are classified as available-for-sale. Investments classified as available-for-sale are available to be sold in the future in response to the Company’s liquidity needs, changes in market interest rates, tax strategies, and asset-liability management strategies, among other reasons. Available-for-sale securities are reported at fair value, with unrealized gains and losses, net of taxes, reported in the accumulated other comprehensive income (loss) component of stockholders’ equity, and accordingly, have no effect on net income. Realized gains or losses on sale of investments are determined on the basis of specific costs of the investments. Dividend income is recognized when declared and interest income is recognized when earned. Discount or premium on debt securities purchased at other than par value are amortized using the effective yield method. See Note 3 for details. 
 
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 September 28, 2014 and December 29, 2013, we had goodwill of $ 11.0 million and $8.6 million, respectively that was assigned to our BWW operating segment. See Note 2 for additional information.
 
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. 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 29, 2013, based on our quantitative analysis, goodwill was considered recoverable. At September 28, 2014, there were no impairment indicators warranting an analysis.
   
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.

7

 
Interest Rate Swap Agreements
 
The Company utilizes interest rate swap agreements with RBS Citizens, N.A. (“RBS”) 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 7 and Note 14 for additional information on the interest rate swap agreements.
 
Recent Accounting Pronouncements
 
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 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, 2016, 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.  
 
2.           SIGNIFICANT BUSINESS TRANSACTIONS
 
On April 23, 2013, the Company completed an underwritten, follow-on equity offering of 6.9 million shares of common stock at a price of $5.00 per share to the public. After deducting underwriting discounts, commissions, and other offering expenses the net proceeds to DRH were $31.9 million. The Company invested a portion of the proceeds from the follow-on offering in highly liquid short-term investments with maturities of less than one year. At September 28, 2014, the Company held available-for-sale securities with an estimated fair value of $4.9 million. See Note 3 for additional information.
 
On June 30, 2014, the Company completed the acquisition of substantially all of the assets of Screamin’ Hot Florida, LLC and Screamin’ Hot Trinity, LLC, each a Florida limited liability company. The assets consist of three BWW restaurants in Clearwater, Port Richey and Oldsmar, Florida (the “Restaurants”). The purchase price was $3.2 million in cash, subject to working capital adjustment, and one-half of the transfer fees imposed by BWLD under its franchise agreements for these Restaurants. After the acquisition, the Company will own the entire Tampa, FL BWW market, giving DRH control of the local Advertising Co-Op. This ownership provides DRH a unique opportunity to gain local market scale, in addition to providing greater geographic diversity to the Company’s restaurant portfolio.
 
The following table summarizes the estimated fair values of net assets acquired and liabilities assumed:

Working capital	 	$	57,600	 	
Property and equipment	 	 	656,146	 	
Franchise fees	 	 	72,750	 	
Goodwill	 	 	2,419,854	 	
Net Cash paid for acquisition	 	$	3,206,350	 	
 
The excess of the purchase price over the aggregate fair value of assets acquired is allocated to goodwill . Goodwill will be deductible for tax purposes. The results of operations of these locations are included in our Consolidated Statements of Operations from the date of acquisition.

8

 
  3.           INVESTMENTS
 
Investments consist of available-for-sale securities that are carried at fair value. Available-for-sale securities are classified as current assets based upon our intent and ability to use any and all of the securities as necessary to satisfy the operational requirements of our business. Based on the call date of the investments, all securities have maturities of one year or less. Unrealized losses are charged against net earnings when a decline in fair value is determined to be other than temporary.
  
The amortized cost, gross unrealized holding gains, gross unrealized holding loss, and fair value of available-for-sale securities by type are as follows: 
 
 	 	September 28, 2014	 	
 	 	
  Amortized
Cost	 	 	Unrealized
Gains	 	 	Unrealized
Loss	 	 	Estimated
Fair Value	 	
Debt securities:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Obligations of states/municipals	 	 	2,613,309	 	 	 	-	 	 	 	(5,468	)	 	 	2,607,841	 	
Corporate securities	 	 	2,322,250	 	 	 	-	 	 	 	(18,243	)	 	 	2,304,007	 	
Total debt securities	 	$	4,935,559	 	 	$	-	 	 	$	(23,711	)	 	$	4,911,848	 	

 	 	December 29, 2013	 	
 	 	
  Amortized
Cost	 	 	Unrealized
Gains	 	 	Unrealized
Loss	 	 	Estimated
Fair Value	 	
Debt securities:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
U.S. government and agencies	 	$	3,497,951	 	 	$	236	 	 	$	(52	)	 	$	3,498,135	 	
Corporate securities	 	 	5,107,853	 	 	 	-	 	 	 	(44,390	)	 	 	5,063,463	 	
Total debt securities	 	$	8,605,804	 	 	$	236	 	 	$	(44,442	)	 	$	8,561,598	 	
 
As of September 28, 2014 and December 29, 2013, $4.9 million and $7.0 million of investments were in a loss position with a cumulative unrealized loss of $23,711 and $44,442, respectively. The Company may incur future impairment charges if decline in market values continue and/or worsen and the impairments are no longer considered temporary. All investments with unrealized losses have been in such position for less than 12 months.
 
Gross unrealized gains and losses on available-for-sale securities, recorded in accumulated other comprehensive income (loss), as of September 28, 2014 and December 29, 2013, were as follows:
 
 	 	September 28
2014	 	 	December 29
2013	 	
Unrealized gains	 	$	-	 	 	$	236	 	
Unrealized loss	 	 	(23,711	)	 	 	(44,442	)	
Net unrealized loss	 	 	(23,711	)	 	 	(44,206	)	
Deferred federal income tax benefit	 	 	8,061	 	 	 	15,030	 	
Net unrealized loss on investments, net of deferred income tax	 	$	(15,650	)	 	$	(29,176	)	

4.          PROPERTY AND EQUIPMENT
 
Property and equipment are comprised of the following assets:
 
 	 	September 28
2014	 	 	December 29
2013	 	
Land	 	$	5,823,050	 	 	$	3,610,453	 	
Building	 	 	4,316,263	 	 	 	4,316,263	 	
Equipment	 	 	26,459,185	 	 	 	22,212,594	 	
Furniture and fixtures	 	 	6,950,744	 	 	 	5,822,813	 	
Leasehold improvements	 	 	57,304,857	 	 	 	46,469,088	 	
Restaurant construction in progress	 	 	4,551,171	 	 	 	2,434,332	 	
Total	 	 	105,405,270	 	 	 	84,865,543	 	
Less accumulated depreciation	 	 	(30,905,075	)	 	 	(26,288,809	)	
Property and equipment, net	 	$	74,500,195	 	 	$	58,576,734	 	

9

 
5.        INTANGIBLE ASSETS
 
Intangible assets are comprised of the following:
 
 	 	September 28
2014	 	 	December 29
2013	 	
Amortized intangibles:	 	 	 	 	 	 	 	 	
Franchise fees	 	$	659,863	 	 	$	568,363	 	
Trademark	 	 	64,059	 	 	 	59,199	 	
Non-compete agreement	 	 	76,560	 	 	 	76,560	 	
Favorable lease	 	 	239,000	 	 	 	239,000	 	
Loan fees	 	 	465,497	 	 	 	346,758	 	
Total	 	 	1,504,979	 	 	 	1,289,880	 	
Less accumulated amortization	 	 	(481,961	)	 	 	(361,009	)	
Amortized intangibles, net	 	 	1,023,018	 	 	 	928,871	 	
 	 	 	 	 	 	 	 	 	
Unamortized intangibles:	 	 	 	 	 	 	 	 	
Liquor licenses	 	 	2,206,469	 	 	 	2,019,142	 	
Total intangibles, net	 	$	3,229,487	 	 	$	2,948,013	 	
 
Amortization expense for the three-month periods ended September 28, 2014 and September 29, 2013, was $15,935 and $13,989, respectively. Amortization expense for the nine-month periods ended September 28, 2014 and September 29, 2013, was $45,144 and $41,437, respectively. Amortization of favorable leases and loan fees are reflected as part of occupancy and interest expense, respectively.
 
Based on the current intangible assets and their estimated useful lives, future intangible-related expense for the next five years is projected as follows:
 
Year	 	Amount	 	
Remainder of 2014	 	$	42,847	 	
2015	 	 	165,794	 	
2016	 	 	147,614	 	
2017	 	 	146,078	 	
2018	 	 	71,516	 	
2019 and thereafter	 	 	449,169	 	
Total	 	$	1,023,018	 	
 
The aggregate weighted-average amortization period for intangible assets is 8.2 years .  
 
6.           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 September 28, 2014 and September 29, 2013, were $131,050, and $101,440, respectively . Fees paid during the nine-month periods ended September 28, 2014 and September 29, 2013, were $378,988 and $295,642, respectively.
 
See Note 10 for related party operating lease transactions.

10

 
  7.           LONG-TERM DEBT
 
Long-term debt consists of the following obligations:
 	 	September 28
2014	 	 	December 29
2013	 	
Note payable - $46.0 million term loan; payable to RBS with a senior lien on all the Company’s personal property and fixtures. Scheduled monthly principal payments are approximately $547,619 plus accrued interest through maturity in April 2018. Interest is charged based on one-month LIBOR plus an applicable margin, which ranges from 2.25% to 3.15%, depending on the lease adjusted leverage ratio defined in the terms of the agreement. The rate at September 28, 2014 was approximately 2.7%.	 	$	26,690,476	 	 	 	31,619,048	 	
 	 	 	 	 	 	 	 	 	
Note payable - $15.0 million development line of credit; payable to RBS with a senior lien on all the Company’s personal property and fixtures. Scheduled monthly principal payments are $178,571 plus accrued interest through maturity in April 2018. Interest is charged based on one-month LIBOR plus an applicable margin, which ranges from 2.25% to 3.15%, depending on the lease adjusted leverage ratio defined in the terms of the agreement. The rate at September 28, 2014 was approximately 2.7%.	 	 	14,107,143	 	 	 	12,759,420	 	
 	 	 	 	 	 	 	 	 	
Note payable - $20.0 million development line of credit II; payable to RBS with a senior lien on all the Company’s personal property and fixtures. Interest is charged based on one-month LIBOR plus an applicable margin, which ranges from 2.25% to 3.15%, depending on the lease adjusted leverage ratio defined in the terms of the agreement. The rate at September 28, 2014 was approximately 2.7%. Once fully drawn, payments will be due monthly; the note matures in April 2018.	 	 	14,207,752	 	 	 	-	 	
 	 	 	 	 	 	 	 	 	
Note payable to a bank secured by a senior mortgage on the Brandon Property. Scheduled monthly principal and interest payments are approximately $8,000 through maturity in June 2030, at which point a balloon payment of $413,550 is due. Interest is charged based on a fixed rate of 6.7%, per annum, through June 2017, at which point the rate will adjust to the U.S. Treasury Securities Rate plus 4.0% (and every seven years thereafter).	 	 	1,063,990	 	 	 	1,081,047	 	
 	 	 	 	 	 	 	 	 	
Note payable to a bank secured by a junior mortgage on the Brandon Property. The note matures in 2030 and requires monthly principal and interest installments of approximately $6,300 until maturity. Interest is charged at a rate of 3.6% per annum.	 	 	786,648	 	 	 	813,806	 	
 	 	 	 	 	 	 	 	 	
Total long-term debt	 	 	56,856,009	 	 	 	46,273,321	 	
 	 	 	 	 	 	 	 	 	
Less current portion	 	 	(12,327,788	)	 	 	(8,225,732	)	
 	 	 	 	 	 	 	 	 	
Long-term debt, net of current portion	 	$	44,528,221	 	 	$	38,047,589	 	
 
On April 15, 2013, the Company entered into a $63.0 million senior secured credit facility with RBS (the “April 2013 Senior Secured Credit Facility”). The April 2013 Senior Secured Credit Facility consists of a $46.0 million term loan (the “April 2013 Term Loan”), a $15.0 million development line of credit (the “April 2013 DLOC”), and a $2.0 million revolving line of credit (the “April 2013 RLOC”). The April 2013 Term Loan is for a period of five years. Payments of principal are based upon an 84-month straight-line amortization schedule, with monthly principal payments of $547,619 plus accrued interest through maturity on April 15, 2018, at which time the entire unpaid principal and interest is due. The April 2013 DLOC converted to a term loan on March 11, 2014, with monthly principal payments of $178,571 plus accrued interest beginning May 2014 through maturity on April 15, 2018, at which time the entire unpaid principal and interest is due. The April 2013 RLOC is for a term of two years. As of September 28, 2014 no amounts were outstanding under the April 2013 RLOC. Amounts borrowed under the April 2013 Senior Secured Credit Facility bear interest at a rate of one-month LIBOR plus an applicable margin.
 
On March 20, 2014, the Company amended the April 2013 Senior Secured Credit Facility to include a $20.0 million development line of credit II (the “March 2014 DLOC II”). The March 2014 DLOC II is for a term of two years and is convertible upon maturity into a term note. The amendment also provided a 25 basis point reduction to the April 2013 Senior Secured Credit Facility’s applicable margin rate, which reduced the range from 2.5%/3.4% to 2.25%/3.15%, which commenced April 2014. 

11

 
Based on the long-term debt terms that existed at September 28, 2014, the scheduled principal maturities for the next five years and thereafter are summarized as follows:
 
Year	 	Amount	 	
Remainder of 2014	 	$	2,558,034	 	
2015	 	 	13,148,218	 	
2016	 	 	13,151,117	 	
2017	 	 	13,154,578	 	
2018	 	 	13,276,923	 	
2019 and thereafter	 	 	1,567,139	 	
Total	 	$	56,856,009	 	
 
For the three-month periods ended September 28, 2014 and September 29, 2013, interest expense was $483,057 and $320,798, respectively. For both the nine-month periods ended September 28, 2014 and September 29, 2013, interest expense was $1.4 million.
 
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 September 28, 2014.
  
At September 28, 2014, the Company has four 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. The swap agreements have a combined notional amount of $40.2 million at September 28, 2014. Under the swap agreements, the Company receives interest at the one-month LIBOR and pays a fixed rate. The April 2012 swap has a rate of 1.4% (notional amount of $10.5 million) and expires April 2019, the October 2012 swap has a rate of 0.9% (notional amount of $4.3 million) and expires October 2017, the December 2013 swap has a rate of 1.4% (notional amount of $12.5 million) and expires April 2018, and the April 2015 forward swap has a rate of 1.54% (notional amount of $12.9 million) and expires April 2018. The fair value of these swap agreements was a liability of $250,528 and $327,561 at September 28, 2014 and December 29, 2013, respectively. 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 14 for additional information pertaining to interest rate swaps.
  
8.            STOCK-BASED COMPENSATION
 
The Company established a Stock Incentive Plan in 2011 (“Stock Incentive Plan”) to attract and retain directors, consultants, and team members and to align their interests with the interests of the Company’s shareholders through the opportunity for increased stock ownership.  The plan permits the grant and award of 750,000 shares of common stock by way of stock options and/or restricted stock.  Stock options must be awarded at exercise prices at least equal to or greater than 100.0% of the fair market value of the shares on the date of grant. The options will expire no later than 10 years from the date of grant, with vesting terms to be defined at grant date, ranging from a vesting schedule based on performance to a vesting schedule that extends over a period of time as selected by the Compensation Committee of the Board of Directors (the “Committee”) or another committee as determined by the Board of Directors. The Committee also determines the grant, issuance, retention, and vesting timing and conditions of awards of restricted stock. The Committee may place limitations, such as continued employment, passage of time, and/or performance measures, on restricted stock. Awards of restricted stock may not provide for vesting or settlement in full of restricted stock over a period of less than one year from the date the award is made.
 
During the nine months ended September 28, 2014 and September 29, 2013, restricted shares were granted to certain team members at a weight-average fair value of $4.82 and $5.85 .  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 or upon the three year anniversary of the granted shares, the vesting terms are determined by the Committee.  Unrecognized stock-based compensation expense of $700,648 at September 28, 2014 will be recognized over the remaining weighted-average vesting period of 2.1 years. The total fair value of shares vested during the nine months ended September 28, 2014 and September 29, 2013 was $193,996 and $169,593, respectively.  Under the Stock Incentive Plan, there are 543,434 shares available for future awards at September 28, 2014.
 
The Company 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 plan 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 nine months ended September 28, 2014 and September 29 2013, we issued 8,523 and 2,061 shares, respectively. Under the ESPP, there are 236,704 shares available for future awards at September 28, 2014.

12

 
The following table presents the restricted shares transactions during the nine months ended September 28, 2014:
 
 	 	Number of
Restricted
Stock Shares	 	
Unvested, December 29, 2013	 	 	116,667	 	
Granted	 	 	91,966	 	
Vested	 	 	(41,031	)	
Expired/Forfeited	 	 	(2,068	)	
Unvested, September 28, 2014	 	 	165,534	 	
 
The following table presents the restricted shares transactions during the nine months ended September 29, 2013:
 
 	 	Number of
Restricted
Stock Shares	 	
Unvested, December 30, 2012	 	 	54,900	 	
Granted	 	 	145,375	 	
Vested	 	 	(26,500	)	
Expired/Forfeited	 	 	(48,400	)	
Unvested, September 29, 2013	 	 	125,375	 	

On July 30, 2007, DRH granted options for the purchase of 150,000 shares of common stock to the directors of the Company at an exercise price of $2.50 per share. These options vested ratably over a three-year period and were set to expire six years from issuance, July 30, 2013. All 150,000 options were fully vested as of July 30, 2013 and were exercised either through cash or cashless exercise at a price of $2.50 per share. The intrinsic value of options exercised in 2013 was $679,680.
 
On July 30, 2010, DRH granted options for the purchase of 210,000 shares of common stock to the directors of the Company.  These options are fully vested and expire six years from issuance, July 30, 2016.  Once vested, the options can be exercised at a price of $2.50 per share. At September 28, 2014, 210,000 shares of authorized common stock are reserved for issuance to provide for the exercise of these options. The intrinsic value of outstanding options is $476,700 and $852,600 as of September 28, 2014 and September 29, 2013, respectively.
 
Stock-based compensation of $84,072 and $70,563 was recognized, during the three-month periods ended September 28, 2014 and September 29, 2013, respectively, and $237,079 , and $205,668 for the nine-month periods ended September 28, 2014 and September 29, 2013, 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 September 28, 2014.  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.

13

 
  9.           INCOME TAXES
 
The (benefit) provision for income taxes consists of the following components for the three-month and nine-month periods ended September 28, 2014 and September 29, 2013, respectively:

 	 	Three Months Ended	 	 	Nine Months Ended	 	

September 28
2014	 	 	September 29
2013	 	 	September 28
2014	 	 	September 29
2013	 	
Federal:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Current	 	$	-	 	 	$	-	 	 	$	-	 	 	$	-	 	
Deferred	 	 	(20,315	)	 	 	(14,246	)	 	 	(189,473	)	 	 	23,908	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
State:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Current	 	 	(24,389	)	 	 	33,568	 	 	 	43,898	 	 	 	65,434	 	
Deferred	 	 	(3,396	)	 	 	(33,766	)	 	 	(34,455	)	 	 	(37,156	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income tax provision (benefit)	 	$	(48,100	)	 	$	(14,444	)	 	$	(180,030	)	 	$	52,186	 	
 
The (benefit) provision for income taxes is different from that which would be obtained by applying the statutory federal income tax rate to income before income taxes before income taxes.  The items causing this difference are as follows:
 
 	 	September 28
2014	 	 	September 29
2013	 	
Income tax provision at federal statutory rate	 	$	(32,235	)	 	$	116,298	 	
State income tax provision	 	 	6,331	 	 	 	18,663	 	
Permanent differences	 	 	53,499	 	 	 	123,778	 	
Tax credits	 	 	(207,625	)	 	 	(206,553	)	
Income tax provision (benefit)	 	$	(180,030	)	 	$	52,186	 	
 
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.  The Company expects the deferred tax assets to be fully realizable within the next several years. Significant components of the Company's deferred income tax assets and liabilities are summarized as follows:
 
 	 	September 28
2014	 	 	December 29
2013	 	
Deferred tax assets:	 	 	 	 	 	 	 	 	
Net operating loss carry forwards	 	$	494,900	 	 	$	983,682	 	
Deferred rent expense	 	 	593,237	 	 	 	131,249	 	
Start-up costs	 	 	133,744	 	 	 	130,136	 	
Tax credit carry forwards	 	 	2,591,009	 	 	 	2,427,861	 	
Interest rate swaps	 	 	85,179	 	 	 	111,218	 	
Investments	 	 	8,061	 	 	 	15,030	 	
Stock-based compensation	 	 	275,606	 	 	 	129,514	 	
Other	 	 	259,280	 	 	 	186,814	 	
Total deferred tax assets	 	 	4,441,016	 	 	 	4,115,504	 	
 	 	 	 	 	 	 	 	 	
Deferred tax liabilities:	 	 	 	 	 	 	 	 	
Tax depreciation in excess of book	 	 	2,804,681	 	 	 	2,708,544	 	
Other	 	 	282,654	 	 	 	244,199	 	
Total deferred tax liabilities	 	 	3,087,335	 	 	 	2,952,743	 	
 	 	 	 	 	 	 	 	 	
Net deferred income tax asset	 	$	1,353,681	 	 	$	1,162,761	 	
 
If deemed necessary by management, the Company establishes valuation allowances in accordance with the provisions of Accounting Standards Codification (“ASC”) 740, Income Taxes ("ASC 740") issued by FASB . Management continually reviews the likelihood that deferred tax assets will be realized and the Company recognizes these benefits only as reassessment indicates that it is more likely than not that such tax benefits will be realized. 
 
The Company expects to use net operating loss and general business tax credit carryforwards before their 20-year expiration. As of September 28, 2014, the Company has available federal net operating loss carryforwards of approximately $2.1 million. Of that amount, approximately $600,000 relates to stock-based compensation tax deductions in excess of book compensation expense that will be credited to additional paid in capital in future periods when such deductions reduce taxes payable as determined based on a "with-and-without" approach.  Net operating losses relating to such benefits are not included in the table above. General business tax credits of $2.6 million will expire between 2028 and 2035. 
 
The Company applies the provisions of ASC 740 regarding the accounting for uncertainty in income taxes.  There are no amounts recorded on the Company's consolidated financial statements for uncertain positions.  The Company classifies all interest and penalties as income tax expense.  There are no accrued interest amounts or penalties related to uncertain tax positions as of September 28, 2014.

14

   
The Company files income tax returns in the United States federal jurisdiction and various state jurisdictions.
 
10.           OPERATING LEASES (INCLUDING RELATED PARTY)
 
Lease terms range from five to 20 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 $1.4 million and $1.2 million for the three-month periods ended September 28, 2014 and September 29, 2013, respectively (of which $34,299 and $18,820, respectively, were paid to a related party).  Total rent expense was $3.8 million and $3.7 million for the nine-month periods ended September 28, 2014 and September 29, 2013, respectively (of which $103,961 and $56,394, respectively, were paid to a related party). On October 30, 2014, Detroit Burgers, Inc., one of our wholly-owned subsidiaries, acquired 100% of the membership interests of DMM Group, LLC from a trust controlled by the spouse of our President, CEO and Chairman, T. Michael Ansley for $250,000. DMM Group’s sole asset is the land and improvements used for our Detroit Bagger Dave’s restaurant.
 
Scheduled future minimum lease payments for each of the five years and thereafter for non-cancelable operating leases with initial or remaining lease terms in excess of one year at September 28, 2014 are summarized as follows:
 
Year	 	Amount	 	
Remainder of 2014	 	$	1,528,696	 	
2015	 	 	6,065,811	 	
2016	 	 	5,841,663	 	
2017	 	 	5,568,461	 	
2018	 	 	5,282,794	 	
2019 and thereafter	 	 	24,090,959	 	
Total	 	$	48,378,384	 	

Scheduled future minimum lease payments for each of the five years and thereafter for non-cancelable operating leases for restaurants under development with initial or remaining lease terms in excess of one year at September 28, 2014 are summarized as follows:
 
Year	 	Amount	 	
Remainder of 2014	 	$	37,008	 	
2015	 	 	496,736	 	
2016	 	 	520,872	 	
2017	 	 	522,552	 	
2018	 	 	524,236	 	
2019 and thereafter	 	 	4,107,260	 	
Total	 	$	6,208,664	 	

11.           COMMITMENTS AND CONTINGENCIES
 
The Company’s ADA requires DRH to open 32 restaurants by March 1, 2017.  Failure to develop restaurants in accordance with the schedule detailed in the agreement could lead to potential penalties of up to $50,000 for each undeveloped restaurant, payment of the initial franchise fees for each undeveloped restaurant, and loss of rights to development territory.  As of September 28, 2014, we have opened 22 of the 32 restaurants required by the ADA.  With the remaining 10 restaurants, along with two additional franchise agreements, we expect the Company will operate 52 BWW restaurants by 2017, exclusive of potential additional BWW restaurant acquisitions.  
  
The Company is required to pay BWLD royalties (5.0% of net sales) and advertising fund contributions (3.0% of net sales globally and 0.5% of net sales for certain cities) for the term of the individual franchise agreements.  The Company incurred royalty fees of $1.4 million and $1.2 million for the three-month periods ended September 28, 2014 and September 29, 2013 and $3.9 million and $3.5 million for nine-month periods ended September 28, 2014 and September 29, 2013, respectively .  Advertising fund contribution expenses were $813,579 and $690,096 for the three-month periods ended September 28, 2014 and September 29, 2013 and $2.3 million and $2.1 million for nine-month periods ended September 28, 2014 and September 29, 2013, respectively.

15

 
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 $700,000 depending on an individual restaurant's needs.
 
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. 
 
12.          EARNINGS PER COMMON SHARE
 
The following is a reconciliation of basic and fully diluted earnings per common share for the three-month and nine-month periods ended September 28, 2014 and September 29, 2013:
 
 	 	Three months ended	 	

September 28
2014	 	 	September 29
2013	 	
Income (loss) available to common stockholders	 	$	(182,109	)	 	$	69,810	 	
 	 	 	 	 	 	 	 	 	
Weighted-average shares outstanding	 	 	26,107,627	 	 	 	26,054,118	 	
Effect of dilutive securities	 	 	-	 	 	 	132,145	 	
Weighted-average shares outstanding - assuming dilution	 	 	26,107,627	 	 	 	26,186,263	 	
 	 	 	 	 	 	 	 	 	
Earnings (loss) per common share	 	$	(0.01	) 	 	$	0.00	 	
Earnings (loss) per common share - assuming dilution	 	$	(0.01	) 	 	$	0.00	 	
 
 	 	Nine months ended	 	

September 28
2014	 	 	September 29
2013	 	
 	 	 	 	 	 	 	 	 	
Income available to common stockholders	 	$	85,252	 	 	$	311,847	 	
 	 	 	 	 	 	 	 	 	
Weighted-average shares outstanding	 	 	26,074,797	 	 	 	23,231,403	 	
Effect of dilutive securities	 	 	99,796	 	 	 	119,725	 	
Weighted-average shares outstanding - assuming dilution	 	 	26,174,593	 	 	 	23,351,128	 	
 	 	 	 	 	 	 	 	 	
Earnings per common share	 	$	0.00	 	 	$	0.01	 	
Earnings per common share - assuming dilution	 	$	0.00	 	 	$	0.01	 	

13.            SUPPLEMENTAL CASH FLOWS INFORMATION
 
Other Cash Flows Information
 
Cash paid for interest was $438,679 and $319,689 during the three-month periods ended September 28, 2014 and September 29, 2013, and was $1.3 million and $1.4 million for the nine-month periods ended September 28, 2014 and September 29, 2013, respectively.
 
Cash paid for income taxes was $22,000 during the three-month periods ended September 28, 2014 and September 29, 2013, respectively, and $22,000 and $65,500 for the nine-month periods ended September 28, 2014 and September 29, 2013, respectively.

16

 
Supplemental Schedule of Non-Cash Operating, Investing, and Financing Activities
 
Noncash investing activities for property and equipment not yet paid during both the nine months ended September 28, 2014 and September 29, 2013, was $1.4 million.
 
14.           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 principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. We use a three-tier fair value hierarchy based upon observable and non-observable inputs as follows:
 
●  	Level 1	Quoted market prices in active markets for identical assets and liabilities;	
 	 	 	
●  	Level 2	Inputs, other than level 1 inputs, either directly or indirectly observable; and	
 	 	 	
●  	Level 3	Unobservable inputs developed using internal estimates and assumptions (there is little or no market data) which reflect those that market participants would use.	
 
As of September 28, 2014 and December 29, 2013, respectively, our financial instruments consisted of cash and cash equivalents, accounts receivable, available-for-sale investments, 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 7 for additional information pertaining to interest rates swaps.
 
The estimated fair values of the Company’s investment portfolio are based on prices provided by a third party pricing service and a third party investment manager. The prices provided by these services are based on quoted market prices, when available, non-binding broker quotes, or matrix pricing. The third party pricing service and the third party investment manager provide a single price or quote per security and the Company has not historically adjusted security prices. The Company obtains an understanding of the methods, models and inputs used by the third party pricing service and the third party investment manager, and has controls in place to validate that amounts provided represent fair values. Our investments are classified as a Level 2 measurement as these securities are not actively traded in the market, but are observable based on the quoted prices provided by our Portfolio managers.
 
As of September 28, 2014 and December 29, 2013, our total debt was approximately $56.9 million and $46.3 million, respectively, which approximated fair value. The Company estimates the fair value of its fixed-rate debt using discounted cash flow analysis based on the Company’s incremental borrowing rate (Level 2).
 
There were no transfers between levels of the fair value hierarchy during the three and nine months ended September 28, 2014 and the fiscal year ended December 29, 2013.

17

 
The following table presents the fair values for those assets and liabilities measured on a recurring basis as of September 28, 2014:
 
FAIR VALUE MEASUREMENTS	 	
Description	 	Level 1	 	 	Level 2	 	 	Level 3	 	 	
Asset/(Liability)
Total	 	
Interest rate swaps	 	$	-	 	 	$	(250,528	)	 	$	-	 	 	$	(250,528	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Debt securities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Obligations of states/municipals	 	 	-	 	 	 	2,607,841	 	 	 	-	 	 	 	2,607,841	 	
Corporate securities	 	 	-	 	 	 	2,304,007	 	 	 	-	 	 	 	2,304,007	 	
Total debt securities	 	 	-	 	 	 	4,911,848	 	 	 	-	 	 	 	4,911,848	 	
Total debt securities and derivatives	 	$	-	 	 	$	4,661,320	 	 	$	-	 	 	$	4,661,320	 	

The following table presents the fair values for those assets and liabilities measured on a recurring basis as of December 29, 2013:
 
FAIR VALUE MEASUREMENTS	 	
Description	 	Level 1	 	 	Level 2	 	 	Level 3	 	 	
Asset/(Liability)
Total	 	
Interest rate swaps	 	$	-	 	 	$	(327,561	)	 	$	-	 	 	$	(327,561	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Debt securities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
U.S. government and agencies	 	 	-	 	 	 	3,498,135	 	 	 	-	 	 	 	3,498,135	 	
Corporate securities	 	 	-	 	 	 	5,063,463	 	 	 	-	 	 	 	5,063,463	 	
Total debt securities	 	 	-	 	 	 	8,561,598	 	 	 	-	 	 	 	8,561,598	 	
Total debt securities and swaps	 	$	-	 	 	$	8,234,037	 	 	$	-	 	 	$	8,234,037	 	

15. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
 
The following table summarizes each component of Accumulated Other Comprehensive Income ( loss):
 
 	 	September 28
2014	 	 	December 29
2013	 	
Fair value of interest rate swaps (net of tax of $85,179 and $111,218)	 	$	(165,347	)	 	$	(216,188	)	
Fair value of investments (net of tax of $8,061 and $15,030)	 	 	(15,650	)	 	 	(29,176	)	
Total Accumulated other comprehensive loss ending balance	 	$	(180,997	)	 	$	(245,364	)	

16.           SUBSEQUENT EVENTS
 
On October 31, 2014 and November 5, 2014, the Company closed on its previously announced sale and leaseback transaction with Spirit Master Funding IX (“Purchaser”), with regard to seven of the 12 properties that are subject to the agreement. The aggregate sales price for the properties closed to date was $13.1 million. The Company plans to use $5.0 million of the proceeds to pay down debt, including $1.9 million to retire mortgages on its Brandon Buffalo Wild Wings property and $3.1 million to pay down its DLOC. The Company intends to use the remaining proceeds from the transaction to fund growth capital. Closing on the remaining properties, all of which remain under construction, is anticipated to occur upon completion of the construction, subject to customary diligence by Purchaser and satisfaction of other conditions precedent to closing. For additional information, refer the 8-K filed on November 5, 2014.

18

 
  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 29, 2013. 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 consumer acceptance of the Bagger Dave’s Tavern® (“Bagger Dave’s”) and Buffalo Wild Wings® Grill & Bar (“BWW”) concept 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 fast-growing restaurant company operating two complementary concepts:  Bagger Dave’s Burger Tavern ® (“Bagger Dave’s”) and Buffalo Wild Wings ® Grill & Bar (“BWW”).  As the creator, developer, and operator of Bagger Dave’s and as one of the largest franchisees of BWW, 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 September 28, 2014, we had 61 locations in Florida, Illinois, Indiana, and Michigan.
  
DRH and its wholly-owned subsidiaries (collectively, the “Company”), AMC Group, Inc. (“AMC”), AMC Wings, Inc. (“WINGS”), AMC Burgers, Inc. (“BURGERS”), and AMC Real Estate, Inc. (“REAL ESTATE”) own, operate, and manage Bagger Dave's and DRH-owned BWW restaurants located throughout Florida, Illinois, Indiana, and Michigan.
 
DRH originated the Bagger Dave’s concept with our first restaurant opening in January 2008 in Berkley, Michigan.  Currently, there are 22 Bagger Dave’s, 14 in Michigan and eight in Indiana. The Company expects to operate between 47 and 51 Bagger Dave’s locations by the end of 2017.
 
DRH is also one of the largest BWW franchisees and currently operates 40 DRH-owned BWW restaurants (18 in Michigan, 14 in Florida, four in Illinois, and four in Indiana), 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 52 DRH-owned BWW restaurants by the end of 2017, exclusive of potential additional BWW restaurant acquisitions. 

19

 
RESTAURANT OPENINGS
 
The following table outlines the restaurant unit information for each fiscal year from 2010 through 2014. From our inception in 2006, we managed, but did not own, nine BWW restaurants, which we acquired in February 2010.
 
 	 	2014
(estimate)	 	 	2013	 	 	2012	 	 	2011	 	 	2010	 	
Summary of restaurants open at the beginning of year	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
DRH-owned BWW	 	 	36	 	 	 	33	 	 	 	22	 	 	 	19	 	 	 	7	 	
Bagger Dave’s	 	 	18	 	 	 	11	 	 	 	6	 	 	 	3	 	 	 	2	 	
BWW Acquisitions / affiliate restaurants under common control	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	9	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	 	54	 	 	 	44	 	 	 	28	 	 	 	22	 	 	 	18	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Openings:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
DRH-owned BWW	 	 	3	 	 	 	3	 	 	 	3	 	 	 	3	 	 	 	3	 	
Bagger Dave’s	 	 	6	 	 	 	7	 	 	 	5	 	 	 	3	 	 	 	1	 	
BWW Acquisitions	 	 	3	 	 	 	-	 	 	 	8	 	 	 	-	 	 	 	-	 	
Closures	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	
Total restaurants	 	 	66	 	 	 	54	 	 	 	44	 	 	 	28	 	 	 	22	 	

RESULTS OF OPERATIONS
 
For the three-month period ended September 28, 2014 ("Third Quarter 2014") and nine-month period ended September 28, 2014 (“Year to Date 2014”), revenue was generated from the operations of 40 BWW restaurants and 21 Bagger Dave’s restaurants. Of these restaurants, the Company opened one BWW restaurant in July 2014 and acquired three BWW restaurants on June 30, 2014. Additionally, the Company has opened three Bagger Dave’s during Year to Date 2014; one in May 2014, June 2014, and September 2014. For the three-month period ended September 29, 2013 ("Third Quarter 2013") and the nine-month period ended September 29, 2013 (“Year to Date 2013”), revenue was generated from the operations of 35 BWW restaurants and 14 Bagger Dave’s restaurants (three Bagger Dave’s restaurants opened during Year to Date 2013; one in May 2013, July 2013, and September 2013). 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 restaurant to be comparable in the first full quarter following 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 46 and 35 restaurants at September 28, 2014 and September 29, 2013 , respectively
 
Results of Operations for the Three Months Ended September 28, 2014 and September 29, 2013
 
 	 	Three Months Ended	 	
 	 	
September 28
2014	 	 	September 29
2013	 	
Total revenue	 	 	100.0	%	 	 	100.0	%	
 	 	 	 	 	 	 	 	 	
Operating expenses	 	 	 	 	 	 	 	 	
Restaurant operating costs:	 	 	 	 	 	 	 	 	
Food, beverage, and packaging costs	 	 	28.8	%	 	 	29.4	%	
Compensation costs	 	 	25.6	%	 	 	26.4	%	
Occupancy costs	 	 	5.7	%	 	 	6.1	%	
Other operating costs	 	 	22.0	%	 	 	20.6	%	
General and administrative expenses	 	 	6.5	%	 	 	5.9	%	
Pre-opening costs	 	 	1.9	%	 	 	2.4	%	
Depreciation and amortization	 	 	8.7	%	 	 	7.9	%	
Loss on disposal of property and equipment	 	 	0.1	%	 	 	0.1	%	
Total operating expenses	 	 	99.3	%	 	 	98.8	%	
 	 	 	 	 	 	 	 	 	
Operating profit	 	 	0.7	%	 	 	1.2	%	

20

 
Revenue for Third Quarter 2014 was $32.8 million, an increase of $6.4 million, or 24.3%, over the $26.4 million of revenue generated during Third Quarter 2013. The increase was attributable to increased same store sales, acquisition of three BWW locations, and the opening of 10 DRH-owned restaurants (eight Bagger Dave’s and two BWW restaurants). $1.3 million was attributable to the 5.0% same store sales increase for 35 BWW and 11 Bagger Dave’s restaurants. $1.6 million was attributable to the acquisition of three BWW restaurants on June 30, 2014. The remaining $3.5 million is a result of restaurants opening within the last 18-months, including 10 Bagger Dave’s and five BWW restaurants. Breaking down our same store sales increase of 5.0% into components, 3.5% was attributable to price increase from winter and fall menu rollouts and 1.5% was attributable to increase traffic in our comparable locations.

Food, beverage, and packaging costs increased by $1.7 million, or 21.9%, to $9.5 million in Third Quarter 2014 from $7.8 million in Third Quarter 2013.  The increase was primarily due to an increased number of restaurants operating in 2014, including an acquisition of three BWW restaurants. Food, beverage, and packaging costs as a percentage of revenue decreased to 28.8% in Third Quarter 2014 from 29.4% in Third Quarter 2013 primarily due to lower chicken wing prices. Average cost per pound for bone-in chicken wings was $1.50 in Third Quarter 2014 compared to $1.71 in Third Quarter 2013.
 
Compensation costs increased by $1.4 million, or 20.5%, to $8.4 million in Third Quarter 2014 from $7.0 million in Third Quarter 2013.  The increase was primarily due to an increased number of restaurants operating in 2014, including an acquisition of three BWW restaurants.  Compensation costs as a percentage of sales decreased to 25 .6% in Third Quarter 2014 from 26.4% in Third Quarter 2013.  
 
Occupancy costs increased by $0.3 million, or 17.1%, to $1.9 million in Third Quarter 2014 from $1.6 million in Third Quarter 2013.  This increase is primarily due to the increased number of restaurants operating in 2014, including an acquisition of three BWW restaurants. Occupancy as a percentage of sales decreased to 5.7% in Third Quarter 2014 from 6.1% in Third Quarter 2013 due to the increased real estate purchases occurring in late fiscal 2013 and throughout fiscal 2014 .
 
Other operating costs increased by $1.8 million, or 32.8%, to $7.2 million in Third Quarter 2014 from $5.4 million in Third Quarter 2013.  The increase was primarily due to an increased number of restaurants operating in 2014. Other operating costs as a percentage of sales increased to 22.0% in Third Quarter 2014 from 20.6% in Third Quarter 2013 primarily due to additional repair and maintenance costs .
 
General and administrative expenses increased by $0.5 million, or 36.9%, to $2.1 million in Third Quarter 2014 from $1.6 million in Third Quarter 2013.  This increase was primarily due to the timing of our marketing expenses versus the prior year. General and administrative expenses as a percentage of sales increased to 6.5% in Third Quarter 2014 from 5.9% in Third Quarter 2013.
 
Pre-opening costs were relatively flat at $0.6 million in Third Quarter 2014 and Third Quarter 2013.   Pre-opening costs depend on the timing of restaurants under construction.  The Company opened two new restaurants in Third Quarter 2014 compared to two openings and one relocation in Third Quarter 2013. Pre-opening costs as a percentage of sales was 1.9% in Third Quarter 2014 and 2.4% in Third Quarter 2013.
 
Depreciation and amortization increased by $0.8 million, or 38.4%, to $2.9 million in Third Quarter 2014 from $2.1 in Third Quarter 2013.  This increase was primarily due to an increased number of restaurants operating in 2014.  Depreciation and amortization as a percentage of sales increased to 8.7% in Third Quarter 2014 from 7.9% in Third Quarter 2013 primarily due to the increased investment in ground-up development of our restaurant buildings . 
 
Loss on disposal of property and equipment increased by $10,043, or 43.7%, to $33,013 in Third Quarter 2014 from $22,970 in Third Quarter 2013. Loss on disposal of property and equipment as a percentage of sales remained at 0.1% in Third Quarter 2014.
 
Results of Operations for the Nine Months Ended September 28, 2014 and September 29, 2013
 
 	 	Nine Months Ended	 	

September 28
2014	 	 	September 29
2013	 	
Total revenue	 	 	100.0	%	 	 	100.0	%	
 	 	 	 	 	 	 	 	 	
Operating expenses	 	
Restaurant operating costs:	 	
Food, beverage, and packaging costs	 	 	28.7	%	 	 	30.3	%	
Compensation costs	 	 	25.9	%	 	 	26.0	%	
Occupancy costs	 	 	5.4	%	 	 	5.9	%	
Other operating costs	 	 	21.0	%	 	 	20.0	%	
General and administrative expenses	 	 	6.8	%	 	 	6.3	%	
Pre-opening costs	 	 	2.2	%	 	 	2.5	%	
Depreciation and amortization	 	 	8.2	%	 	 	6.9	%	
Loss on disposal of property and equipment	 	 	0.4	%	 	 	0.1	%	
Total operating expenses	 	 	98.6	%	 	 	98.0	%	
 	 	 	 	 	 	 	 	 	
Operating profit	 	 	1.4	%	 	 	2.0	%	

21

 
Revenue for Year to Date 2014 was $93.3 million, an increase of $12.9 million or 16.0% over the $80.4 million of revenue generated during Year to Date 2013. The increase was primarily attributable to three factors: (i) approximately $9.5 million was attributable to revenues generated from the opening of 10 DRH-owned restaurants (eight Bagger Dave’s restaurants and two BWW restaurant); (ii) $1.8 million increase was related to a 2.6% increase in same store sales for 35 BWW and 11 Bagger Dave’s restaurants; and (iii) the remaining $1.6 million was attributable to the acquisition of three BWW restaurants on June 30, 2014.
 
Food, beverage, and packaging costs increased by $2.5 million or 10.1% to $26.8 million in Year to Date 2014 from $24.3 million in Year to Date 2013.  The increase was primarily due to the increased number of restaurants operating in 2014.  Food, beverage, and packaging costs as a percentage of sales decreased to 28.7% in Year to Date 2014 from 30.3% in Year to Date 2013 due to lower chicken wing prices. Average cost per pound for bone-in chicken wings was $1.41 in Year to Date 2014 compared to $1.80 in Year to Date 2013.
 
Compensation costs increased by $3.3 million or 15.6% to $24.2 million in Year to Date 2014 from $20.9 million in Year to Date 2013. This increase was primarily due to the increased number of restaurants operating in 2014. Compensation as a percentage of sales decreased to 25.9% in Year to Date 2014 from 26.0% in Year to Date 2014 and in Year to Date 2013.
 
Occupancy costs increased by $0.4 million or 7.4% to $5.1 million in Year to Date 2014 from $4.7 million in Year to Date 2013.  This increase was primarily due to the increased number of restaurants operating in 2014. Occupancy cost as a percentage of sales decreased to 5.4% in Year to Date 2014 from 5.9% in Year to Date 2014 and in Year to Date 2013.
 
Other operating costs increased by $3.5 million or 21.9% to $19.6 million in Year to Date 2014 from $16.1 million in Year to Date 2013.  This increase was primarily the increased number of restaurants operating in 2014.  Other operating costs as a percentage of sales increased to 21.0% in Year to Date 2014 from 20.0% in Year to Date 2013.
 
General and administrative cost increased by $1.2 million or 25.4% to $6.3 million in Year to Date 2014 from $5.1 million in Year to Date 2013.  This increase was primarily due to the increased marketing campaign and other corporate costs associated with the substantial growth in operations. General and administrative cost as a percentage of sales increased to 6.8% in Year to Date 2014 from 6.3% in Year to Date 2013.
 
Pre-opening cost increased by $0.1 million or 1.4% to $2.1 million in Year to Date 2014 from $2.0 million in Year to Date 2013.  The decrease in pre-opening costs was due to the timing of restaurant openings in Year to Date 2014 versus Year to Date 2013.  The Company opened three new restaurants and relocated two restaurants in Year to Date 2014 compared to five openings and one relocation in Year to Date 2013. Pre-opening cost as a percentage of sales decreased to 2.2% in Year to Date 2014 from 2.5% in Year to Date 2013.
 
Depreciation and amortization cost increased by $2.1 million or 37.4% to $7.6 million in Year to Date 2014 from $5.5 million in Year to Date 2013.  This increase was primarily due to the increased number of restaurants operating in 2014.  Depreciation and amortization cost as a percentage of sales increased to 8.2% in Year to Date 2014 from 6.9% in Year to Date 2013 primarily due to the increased investment in real estate purchases. 
 
Loss on disposal of property and equipment increased by $0.3 million or 322.1% to $0.4 million in Year to Date 2014 from $0.1 million in Year to Date 2013.  This increase was primarily due to non-recurring property and equipment disposals in the current year driven by the relocation of two restaurants. Loss on disposal of property and equipment as a percentage of sales increased to 0.4% in Year to Date 2014 from 0.1% in Year to Date 2013
 
INTEREST AND TAXES
 
Interest expense was $483,057 and $320,798 during Third Quarter 2014 and Third Quarter 2013, respectively. The increase was due to the increased debt for 2014.  Interest expense was $1.4 million during both Year to Date 2014 and Year to Date 2013 . 
 
For Third Quarter 2014, DRH had an income tax benefit of $48,100 compared to Third Quarter 2013 income tax benefit of $14,444.  The Third Quarter 2014 income tax benefit primarily relates to the increase in tip credits for the period. For Year to Date 2014, we booked an income tax benefit of $180,030 compared to Year to Date 2013 of an income tax provision of $52,186.  

22

 
 
LIQUIDITY AND CAPITAL RESOURCES; EXPANSION PLANS
 
On April 15, 2013, the Company entered into a $63.0 million senior secured credit facility with RBS Citizens, N.A. (the “April 2013 Senior Secured Credit Facility”). The April 2013 Senior Secured Credit Facility consists of a $46.0 million term loan (the “April 2013 Term Loan”), a $15.0 million development line of credit (the “April 2013 DLOC”), and a $2.0 million revolving line of credit (the “April 2013 RLOC”). The April 2013 Term Loan is for a period of five years. Payments of principal are based upon an 84-month straight-line amortization schedule, with monthly principal payments of $547,619 plus accrued interest through maturity on April 15, 2018, at which time the entire unpaid principal and interest is due. The April 2013 DLOC converted to a term loan on March 11, 2014, with monthly principal payments of $178,571 plus accrued interest beginning May 2014 through maturity on April 15, 2018, at which time the entire unpaid principal and interest is due. The April 2013 RLOC is for a term of two years. As of September 28, 2014, no amounts were outstanding under the April 2013 RLOC. Amounts borrowed under the April 2013 Senior Secured Credit Facility bear interest at a rate of one-month LIBOR plus an applicable margin. On March 20, 2014, the Company amended the April 2013 Senior Secured Credit Facility to include a $20.0 million development line of credit II (the “March 2014 DLOC II”). The March 2014 DLOC II is for a term of two years and is convertible upon maturity into a term note. The amendment also provided a 25 basis point reduction to the April 2013 Senior Secured Credit Facility’s applicable margin rate, which reduced the range from 2.5%/3.4% to 2.25%/3.15%, which commences April 2014. 
  
On April 23, 2013, the Company completed an underwritten, follow-on equity offering of 6.9 million shares of common stock at a price of $5.00 per share to the public. After deducting underwriting discounts, commissions, and other offering expenses the net proceeds to DRH were $31.9 million. At September 28, 2014, the Company held available-for-sale securities with an estimated fair value of $4.9 million. The investments were funded by a portion of the proceeds from the follow-on offering. See Note 3 for additional information.
 
We believe the cash flow from operations, the remaining proceeds from the registered offering, proceeds from the sale-lease-back agreement and availability of credit will be sufficient to meet our operational funding, development, and 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 costs for 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.  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). Similarly, we expect the build-out of a new DRH-owned BWW restaurant will require an estimated cash investment of $1.9 million to $2.1 million (excluding potential tenant incentives).  We expect to spend approximately $200,000 to $250,000 per restaurant for pre-opening expenses.  Depending on individual lease negotiations, we may receive cash tenant incentives of up to $400,000.  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 return on our initial total capital investment, excluding real estate investment (which includes land and building), of less than four years.    The expected payback is subject to how quickly we reach our target sales volume and the cost of construction.  Real estate purchases and building costs are excluded from our expected return since the majority of our restaurants are leased and purchased real estate is not a part of our core operations.  We separate the analysis and decisions on real estate projects from new restaurant development, although we have no plans for independent real estate projects without an associated new restaurant opening.
 
Cash flow from operations for Year to Date 2014 was $9.7 million compared with $5.8 million for Year to Date 2013. Net cash provided by operating activities consisted primarily of net earnings adjusted for non-cash expenses.
 
Opening new restaurants, including real estate investments, is our primary use of capital and is estimated to be over 80.0% of our capital expenditures in 2014. For 2014, we estimate capital expenditures to be between $33.0 million and $36.0 million. Of this amount, $3.2 million was used for the acquisition of three new BWW restaurants in the north Tampa area. The acquisition was funded with a combination of bank funded DLOC and cash on hand. We plan to use the remaining capital as follows: one half for new restaurant openings, currently three Bagger Dave's and two DRH-owned BWW are under construction; one third for real estate (including the purchase of land and construction of buildings) associated with new restaurant openings; and the remaining for restaurant remodels, upgrades, relocations and other general corporate purposes.
 
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 $800,000 (for a full remodel of the restaurant). Restaurants are typically upgraded after approximately five to seven years of operation and fully remodeled after approximately 10 years of operation.

23

 
 
Contractual Obligations
 
The following table presents a summary of our contractual obligations as of September 28, 2014:
 
 	 	 	 	 	 	Less than	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Total	 	 	one year	 	 	1 - 3 years	 	 	3 - 5 years	 	 	After 5 years	 	
Long-term debt 1	 	$	56,856,009	 	 	$	12,327,788	 	 	$	26,085,494	 	 	$	16,932,023	 	 	$	1,510,704	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating lease obligations	 	 	48,378,384	 	 	 	6,074,376	 	 	 	11,561,553	 	 	 	10,335,688	 	 	 	20,406,767	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Commitments for restaurants under development 2	 	 	17,865,941	 	 	 	12,061,110	 	 	 	1,042,592	 	 	 	1,049,344	 	 	 	3,712,895	 	
 	 	$	123,100,334	 	 	$	30,463,274	 	 	$	38,689,639	 	 	$	28,317,055	 	 	$	25,630,366	 	
 
1	Amount represents the expected principal cash payments relating to our long-term debt and do not include any fair value adjustments or discounts/premiums or interest rate payments due to the variable of the rates. See Note 7 for additional details.	

2	Amount represents capital expenditures DRH is obligated to pay for restaurants under development in addition to noncancelable operating leases for these restaurants.	

Mandatory Upgrades
 
In fiscal year 2014, we plan to complete two mandatory remodels of existing DRH-owned BWW restaurant, which will be funded with cash from operations.
 
Discretionary Upgrades and Relocations
 
In fiscal year 2014, the Company will invest additional capital to provide minor upgrades to a number of its existing locations, all of which will be funded by cash from operations. These improvements will primarily consist of new carpentry, audio/visual equipment upgrades, patio upgrades, and point-of-sale system upgrades. In fiscal year 2014, we relocated two DRH-owned BWW locations in lieu of remodels, the relocations occurred in second quarter 2014. 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 results of operations 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.
 
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. 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.  A majority of the leases for our restaurants provide for contingent rent obligations based on a percentage of revenue.  As a result, rent expense will absorb a proportionate share of any menu price increases in our restaurants.  However, 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 assumed, from a related entity, an ADA in which the Company was to open 23 BWW restaurants within its designated "development territory”. On December 12, 2008, this agreement was amended, adding nine additional restaurants and extending the date of fulfillment to March 1, 2017. Failure to develop restaurants in accordance with the schedule detailed in the agreement could lead to potential penalties of up to $50,000 for each undeveloped restaurant, payment of the initial franchise fees for each undeveloped restaurant, and loss of rights to development territory. Failure to develop restaurants in accordance with the schedule detailed in the agreement could lead to potential penalties of $50,000 for each undeveloped restaurant and loss of rights to the development territory. As of September 28, 2014, 22 of the required 32 ADA restaurants had been opened for business. We remain on track to fulfill our obligation under the amended ADA, and we expect to operate a total of 52 BWW by the end of 2017, exclusive of potential acquisitions of additional BWW restaurants.
 
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 29, 2013.

24

 
Item 3. Quantitative and Qualitative Disclosure About Market Risks
 
Debt Securities
 
We are exposed to market risk related to our debt securities. To manage our exposure, we have invested our excess cash in highly liquid short-term investments with maturities of less than one year. The investments are not held for trading or other speculative purposes. See Notes 1, 3, and 14 of our unaudited consolidated financial statements in Part I Item 1 of this report for additional information.
 
Interest Rate Risk
 
As a result of our normal borrowing activities, our operating results are exposed to fluctuations in interest rates. DRH has short-term and long-term debt with both fixed and variable interest rates. The short-term debt comprises the current portion of long-term debt maturing within twelve months from the balance sheet date. Long-term debt includes secured notes payable, two lines of credit and a revolving line of credit which is used to finance working capital requirements. To manage our exposure, we have entered into interest rate swap agreements. The derivative instruments are not held for trading or other speculative purposes.
 
As of September 28, 2014, DRH had $56.9 million of variable-rate debt with a weighted average interest rate of 2.7%, which approximates fair value. Interest based on the debt agreement is based on one-month LIBOR plus an applicable margin, which ranges from 2.25% to 3.15%, depending on the lease adjusted leverage ratio defined in the terms of the agreement. DRH currently estimates that a 100 basis point fluctuation in LIBOR would result in an approximate $0.6 million fluctuation in pretax income. See Notes 1, 7 and 14 of our unaudited consolidated financial statements in Part I Item 1 of this report for additional information.
 
Inflation
 
The primary inflationary factors affecting our operations are food, labor, and restaurant operating costs. Substantial increases in these costs could impact operating results to the extent that such increases cannot be passed along through higher menu prices. A large number of our restaurant personnel are paid at rates based on the applicable federal and state minimum wages, and increases in the minimum wage rates and tip-credit wage rates could directly affect our labor costs. Many of our leases require us to pay taxes, maintenance, repairs, insurance, and utilities, all of which are generally subject to inflationary increases.
 
Commodity Price Risk
 
Many of the food products purchased by us are affected by weather, production, availability, and other factors outside our control. We believe almost all of our food and supplies are available from several sources, which helps to control food product risks. Our purchasing department for Bagger Dave’s negotiates directly with our independent suppliers for our supply of food and paper products. As negotiated by BWLD, our DRH-owned BWW restaurants have a distribution contract with a BWLD selected vendor for our supply of food, paper, and non-food products. We have minimum purchase requirements with some of our vendors, but the terms of the contracts and our historical use of the products are such that we believe these minimum purchase requirements do not create a material market risk. One of the primary food products used by our BWW restaurants is chicken wings. We work to counteract the effect of the volatility of chicken wing prices, which can significantly change our cost of sales and cash flow, with the introduction of new menu items, effective marketing promotions, focused efforts on food costs and waste, and menu price increases. We also explore purchasing strategies to reduce the severity of cost increases and fluctuations. For the three-month periods ended September 28, 2014 and September 29, 2013 chicken wings accounted for approximately 15.9% and 15.8%, with an average price per pound of $1.50 and $1.71, respectively. For the nine-month periods ended September 28, 2014 and September 29, 2013 chicken wings accounted for approximately 29.1% and 34.5%, with an average price per pound of $1.41 and $1.80, respectively.

 
25

 
Item 4. Controls and Procedures
 
(a) Evaluation of disclosure controls and procedures.
 
We are required to maintain disclosure controls and procedures designed to ensure that material information related to us, including our consolidated subsidiaries, is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms. Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
 
Conclusion regarding the effectiveness of disclosure controls and procedures
 
As of September 28, 2014, an evaluation was performed under the supervision of and with the participation of our management, including our principal executive and principal financial officers, of the effectiveness of the design and operation of our disclosure controls and procedures.  Based on that evaluation, our management, including our principal executive and principal financial officers, concluded that our disclosure controls and procedures were effective as of September 28, 2014.
 
(b) Changes in internal controls over financial reporting.
 
There were no changes in the Company’s internal control over financial reporting during the quarter ended September 28, 2014 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.

26

 
PART II. OTHER INFORMATION
 
Item 1. Legal Proceedings  
 
Occasionally, we are a defendant in litigation arising in the ordinary course of our business, including claims arising from personal injuries, contract claims, dram shop claims, employment-related claims, and claims from guests or 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
 
There have been no material changes in our risk factors from those previously disclosed in our annual report on Form 10-K for the year ended December 29, 2013.
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
Not Applicable.
 
Item 3. Defaults Upon Senior Securities
 
None.
 
Item 5. Other Information
 
None.
 
Item 6. Exhibits
 
(a) Exhibits:
 
3.1	Certificate of Incorporation (filed as an exhibit to the Company's Registration Statement on Form S-1, as filed with the Securities and Exchange Commission on August 10, 2007, and incorporated herein by this reference).	
 	 	
3.2	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).	
 	 	
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	

27

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

Dated: November 7, 2014	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)	 	

28

 
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).	
 	 	
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	

 

29

Exhibit 31.1
 
RULE 13a-14(a) CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, T. Michael Ansley, certify that:
 
1.          I have reviewed this Quarterly Report on Form 10-Q for the fiscal quarter ended September 28, 2014 of Diversified Restaurant Holdings, Inc. (the "Company");
 
2.         Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.         Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.         The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13-a-15(f) and 15d-15(f)) for the registrant and have:

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

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

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

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

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

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

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

 
Dated:  November 7, 2014	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 September 28, 2014 of Diversified Restaurant Holdings, Inc. (the "Company");
 
2.         Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.         Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.         The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13-a-15(f) and 15d-15(f)) for the registrant and have:
 
 	(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;	
 
 	(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;	
 
 	(c)	Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and	
 
 	(d)	Disclosed in this report any change in the registrant's internal control over financing reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and	
 
5.         The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
 
 	(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonable likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and	
 
 	(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.	

Dated:  November 7, 2014	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 September 28, 2014, I, T. Michael Ansley, Chairman of the Board of Directors and Chief Executive Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that:
 
1. The Quarterly Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
2. The information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:  November 7, 2014	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 September 28, 2014, I, David G. Burke, Treasurer and Chief Financial Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that:
 
1. The Quarterly Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
2. The information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:  November 7, 2014	DIVERSIFIED RESTAURANT HOLDINGS, INC.	 	

 	 	 	 	
 	By:	/s/ David G. Burke	 	

 	 	 	 	
 	 	David G. Burke
Treasurer and Chief Financial Officer
(Principal Financial Officer)