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 24, 2017  
 
[_] 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 [  ]

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

	
				
Large accelerated filer	[   ]	Accelerated filer	[  ]	
 	 	 	 	
Non-accelerated filer	[   ]	(Do not check if a smaller reporting company)	 	
 	 	Smaller reporting company	[ X ]	
 	 	Emerging growth company	[  ]	
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.	[  ]	

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:  26,881,607 shares of $.0001 par value common stock outstanding as of November 2, 2017 .

INDEX

	
		
PART I. FINANCIAL INFORMATION	 	
Item 1. Financial Statements	2	
Consolidated Balance Sheets	2	
Consolidated Statements of Operations	3	
Consolidated Statements of Comprehensive Income (Loss)	4	
Consolidated Statements of Stockholders' Equity (Deficit)	5	
Consolidated Statements of Cash Flows	6	
Notes to Interim Consolidated Financial Statements	7	
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	23	
Item 3. Quantitative and Qualitative Disclosure About Market Risks	32	
Item 4. Controls and Procedures	32	
PART II. OTHER INFORMATION	33	
Item 1. Legal Proceedings	33	
Item 1A. Risk Factors	33	
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	33	
Item 3. Defaults Upon Senior Securities	33	
Item 4. Mine Safety Disclosures	33	
Item 5. Other Information	33	
Item 6. Exhibits	33	

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements

DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

									
 	 	September 24, 2017	 	December 25, 2016	
ASSETS	 	(unaudited)	 		
Current assets	 	 	 	 	
Cash and cash equivalents	 	$	4,665,491		 	$	4,021,126		
Accounts receivable	 	103,843		 	276,238		
Inventory	 	1,503,617		 	1,700,604		
Prepaid and other assets	 	1,171,343		 	1,305,936		
Total current assets	 	7,444,294		 	7,303,904		
 	 	 	 	 	
Deferred income taxes	 	18,020,997		 	16,250,928		
Property and equipment, net	 	50,684,927		 	56,630,031		
Intangible assets, net	 	2,493,602		 	2,666,364		
Goodwill	 	50,097,081		 	50,097,081		
Other long-term assets	 	187,084		 	233,539		
Total assets	 	$	128,927,985		 	$	133,181,847		
 	 	 	 	 	
LIABILITIES AND STOCKHOLDERS' DEFICIT	 	 	 	 	
Current liabilities	 	 	 	 	
Accounts payable	 	$	5,135,349		 	$	3,995,846		
Accrued compensation	 	1,640,664		 	2,803,549		
Other accrued liabilities	 	2,544,416		 	2,642,269		
Current portion of long-term debt	 	11,375,468		 	11,307,819		
Current portion of deferred rent	 	471,365		 	194,206		
Total current liabilities	 	21,167,262		 	20,943,689		
 	 	 	 	 	
Deferred rent, less current portion	 	2,103,398		 	2,020,199		
Unfavorable operating leases	 	531,018		 	591,247		
Other long-term liabilities	 	3,316,271		 	3,859,231		
Long-term debt, less current portion	 	105,381,002		 	109,878,201		
Total liabilities	 	132,498,951		 	137,292,567		
 	 	 	 	 	
Commitments and contingencies (Notes 3, 10 and 11)	 		 		
 	 	 	 	 	
Stockholders' deficit	 	 	 	 	
Common stock - $0.0001 par value; 100,000,000 shares authorized; 26,848,507 and 26,632,222, respectively, issued and outstanding	 	2,623		 	2,610		
Additional paid-in capital	 	21,624,434		 	21,355,270		
Accumulated other comprehensive loss	 	(795,281	)	 	(934,222	)	
Accumulated deficit	 	(24,402,742	)	 	(24,534,378	)	
Total stockholders' deficit	 	(3,570,966	)	 	(4,110,720	)	
 	 	 	 	 	
Total liabilities and stockholders' deficit	 	$	128,927,985		 	$	133,181,847		
The accompanying notes are an integral part of these interim consolidated financial statements.

2

Table of Contents

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

	
																	
 	 	Three Months Ended	 	Nine Months Ended	
 	 	September 24, 2017	 	September 25, 2016	 	September 24, 2017	 	September 25, 2016	
Revenue	 	$	39,262,940		 	$	41,625,312		 	$	123,535,506		 	$	125,719,745		
 	 	 	 	 	 	 	 	 	
Operating expenses	 	 	 	 	 	 	 	 	
Restaurant operating costs (exclusive of depreciation and amortization shown separately below):	 	 	 	 	 	 	 	 	
Food, beverage, and packaging costs	 	11,569,925		 	11,402,389		 	36,529,901		 	34,881,667		
Compensation costs	 	9,991,381		 	10,288,623		 	31,125,287		 	31,112,586		
Occupancy costs	 	2,969,250		 	2,899,508		 	8,701,927		 	8,440,075		
Other operating costs	 	8,770,406		 	8,922,440		 	26,188,432		 	25,808,943		
General and administrative expenses	 	2,301,061		 	2,375,476		 	6,724,436		 	6,896,819		
Pre-opening costs	 	79,605		 	84,650		 	405,448		 	654,034		
Depreciation and amortization	 	3,244,255		 	3,626,377		 	10,149,050		 	11,212,555		
Loss on asset disposal	 	16,578		 	79,220		 	302,652		 	263,371		
Total operating expenses	 	38,942,461		 	39,678,683		 	120,127,133		 	119,270,050		
 	 	 	 	 	 	 	 	 	
Operating profit	 	320,479		 	1,946,629		 	3,408,373		 	6,449,695		
 	 	 	 	 	 	 	 	 	
Interest expense	 	(1,822,876	)	 	(1,439,273	)	 	(5,041,136	)	 	(4,324,765	)	
Other income, net	 	26,000		 	11,849		 	78,307		 	87,856		
 	 	 	 	 	 	 	 	 	
Income (loss) from continuing operations before income taxes	 	(1,476,397	)	 	519,205		 	(1,554,456	)	 	2,212,786		
Income tax benefit (expense) of continuing operations	 	933,157		 	77,504		 	1,515,453		 	(89,304	)	
Income (loss) from continuing operations	 	(543,240	)	 	596,709		 	(39,003	)	 	2,123,482		
 	 	 	 	 	 	 	 	 	
Discontinued operations	 	 	 	 	 	 	 	 	
Loss from discontinued operations before income taxes	 	(22,960	)	 	(2,748,012	)	 	(155,552	)	 	(4,593,907	)	
Income tax benefit of discontinued operations	 	7,806		 	762,178		 	58,191		 	1,329,278		
Loss from discontinued operations	 	(15,154	)	 	(1,985,834	)	 	(97,361	)	 	(3,264,629	)	
 	 	 	 	 	 	 	 	 	
Net Loss	 	$	(558,394	)	 	$	(1,389,125	)	 	$	(136,364	)	 	$	(1,141,147	)	
 	 	 	 	 	 	 	 	 	
Basic earnings (loss) per share from:	 	 	 	 	 	 	 	 	
Continuing operations	 	$	(0.02	)	 	$	0.02		 	$	—		 	$	0.08		
Discontinued operations	 	—		 	(0.07	)	 	—		 	(0.12	)	
Basic net earnings (loss) per share	 	$	(0.02	)	 	$	(0.05	)	 	$	—		 	$	(0.04	)	
 	 	 	 	 	 	 	 	 	
Diluted earnings (loss) per share from:	 	 	 	 	 	 	 	 	
Continuing operations	 	$	(0.02	)	 	$	0.02		 	$	—		 	$	0.08		
Discontinued operations	 	—		 	(0.07	)	 	—		 	(0.12	)	
Diluted net earnings (loss) per share	 	$	(0.02	)	 	$	(0.05	)	 	$	—		 	$	(0.04	)	
 	 	 	 	 	 	 	 	 	
Weighted average number of common shares outstanding	 	 	 	 	 	 	 	 	
Basic	 	26,764,776		 	26,625,615		 	26,672,057		 	26,434,238		
Diluted	 	26,764,776		 	26,625,615		 	26,672,057		 	26,434,238		
 The accompanying notes are an integral part of these interim consolidated financial statements. 

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DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)

	
																	
 	 	Three Months Ended	 	Nine Months Ended	
 	 	September 24, 2017	 	September 25, 2016	 	September 24, 2017	 	September 25, 2016	
 	 	 	 	 	 	 	 	 	
Net Loss	 	$	(558,394	)	 	$	(1,389,125	)	 	$	(136,364	)	 	$	(1,141,147	)	
 	 	 	 	 	 	 	 	 	
Other comprehensive income (loss)	 	 	 	 	 	 	 	 	
Unrealized changes in fair value of interest rate swaps, net of tax of ($150,926), ($183,417), ($71,576) and $544,923, respectively.	 	292,974		 	356,047		 	138,941		 	(1,057,790	)	
Total other comprehensive income (loss)	 	292,974		 	356,047		 	138,941		 	(1,057,790	)	
 	 	 	 	 	 	 	 	 	
Comprehensive income (loss)	 	$	(265,420	)	 	$	(1,033,078	)	 	$	2,577		 	$	(2,198,937	)	

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

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DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (unaudited)

	
																							
 	 	 	 	 	Additional	 	Accumulated
Other	 	 	 	Total	
 	Common Stock	 	Paid-in	 	Comprehensive	 	Accumulated	 	Stockholders'	
 	Shares	 	Amount	 	Capital	 	Loss	 	Deficit	 	Equity (Deficit)	
 Balances - December 27, 2015	26,298,725		 	$	2,597		 	$	36,136,319		 	$	(1,006,667	)	 	$	(18,531,897	)	 	$	16,600,352		
 	 	 	 	 	 	 	 	 	 	 	 	
Issuance of restricted shares	342,331		 	—		 	—		 	—		 	—		 	—		
 	 	 	 	 	 	 	 	 	 	 	 	
Forfeitures of restricted shares	(23,851	)	 	—		 	—		 	—		 	—		 	—		
 	 	 	 	 	 	 	 	 	 	 	 	
 Shares effectively repurchased for required employee withholding taxes	(5,940	)	 	(1	)	 	(9,325	)	 	—		 	—		 	(9,326	)	
 	 	 	 	 	 	 	 	 	 	 	 	
Employee stock purchase plan	21,896		 	3		 	31,220		 	—		 	—		 	31,223		
 	 	 	 	 	 	 	 	 	 	 	 	
Share-based compensation	—		 	8		 	351,369		 	—		 	—		 	351,377		
 	 	 	 	 	 	 	 	 	 	 	 	
Other comprehensive loss	—		 	—		 	—		 	(1,057,790	)	 	—		 	(1,057,790	)	
 	 	 	 	 	 	 	 	 	 	 	 	
Net income from continuing operations	—		 	—		 	—		 	—		 	2,123,482		 	2,123,482		
 	 	 	 	 	 	 	 	 	 	 	 	
Net loss from discontinued operations	—		 	—		 	—		 	—		 	(3,264,629	)	 	(3,264,629	)	
 	 	 	 	 	 	 	 	 	 	 	 	
Balances - September 25, 2016	26,633,161		 	$	2,607		 	$	36,509,583		 	$	(2,064,457	)	 	$	(19,673,044	)	 	$	14,774,689		
 	 	 	 	 	 	 	 	 	 	 	 	
Balances - December 25, 2016	26,632,222		 	$	2,610		 	$	21,355,270		 	$	(934,222	)	 	$	(24,534,378	)	 	$	(4,110,720	)	
 	 	 	 	 	 	 	 	 	 	 	 	
Issuance of restricted shares	263,332		 	—		 	—		 	—		 	—		 	—		
 	 	 	 	 	 	 	 	 	 	 	 	
Forfeitures of restricted shares	(48,850	)	 	—		 	—		 	—		 	—		 	—		
 	 	 	 	 	 	 	 	 	 	 	 	
 Shares effectively repurchased for required employee withholding taxes	(22,716	)	 	(2	)	 	(59,926	)	 	—		 	—		 	(59,928	)	
 	 	 	 	 	 	 	 	 	 	 	 	
Employee stock purchase plan	24,519		 	2		 	45,003		 	—		 	—		 	45,005		
 	 	 	 	 	 	 	 	 	 	 	 	
Share-based compensation	—		 	13		 	284,087		 	—		 	—		 	284,100		
 	 	 	 	 	 	 	 	 	 	 	 	
Other comprehensive income	—		 	—		 	—		 	138,941		 	—		 	138,941		
 	 	 	 	 	 	 	 	 	 	 	 	
Adoption of ASU 2016-09 (Note 1)	—		 	—		 	—		 	—		 	268,000		 	268,000		
 	 	 	 	 	 	 	 	 	 	 	 	
Net loss from continuing operations	—		 	—		 	—		 	—		 	(39,003	)	 	(39,003	)	
 	 	 	 	 	 	 	 	 	 	 	 	
Net loss from discontinued operations	—		 	—		 	—		 	—		 	(97,361	)	 	(97,361	)	
 	 	 	 	 	 	 	 	 	 	 	 	
Balances - September 24, 2017	26,848,507		 	$	2,623		 	$	21,624,434		 	$	(795,281	)	 	$	(24,402,742	)		$	(3,570,966	)	

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

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

	
									
 	 	Nine Months Ended	
 	 	September 24, 2017	 	September 25, 2016	
Cash flows from operating activities	 	 	 	 	
Net loss	 	$	(136,364	)	 	$	(1,141,147	)	
Net loss from discontinued operations	 	(97,361	)	 	(3,264,629	)	
Net income (loss) from continuing operations	 	(39,003	)	 	2,123,482		
Adjustments to reconcile net income (loss) to net cash provided by operating activities	 	 	 	 	
Depreciation and amortization	 	10,149,050		 	11,212,555		
Amortization of debt discount and loan fees	 	156,951		 	178,287		
Amortization of gain on sale-leaseback	 	(99,657	)	 	(95,878	)	
Loss on asset disposals	 	302,652		 	263,371		
Share-based compensation	 	284,100		 	351,377		
Deferred income taxes	 	(1,573,644	)	 	(100,119	)	
Changes in operating assets and liabilities that provided (used) cash	 	 	 	 	
Accounts receivable	 	172,395		 	(56,139	)	
Inventory	 	196,987		 	135,837		
Prepaid and other assets	 	134,593		 	(704,206	)	
Intangible assets	 	(28,729	)	 	31,763		
Other long-term assets	 	46,455		 	746,772		
Accounts payable	 	1,228,025		 	(1,049,207	)	
Accrued liabilities	 	(1,270,506	)	 	(1,049,327	)	
Deferred rent	 	137,342		 	81,177		
Net cash provided by operating activities of continuing operations	 	9,797,011		 	12,069,745		
Net cash used in operating activities of discontinued operations	 	(97,361	)	 	(3,859,500	)	
Net cash provided by operating activities	 	9,699,650		 	8,210,245		
 	 		 	 	
Cash flows from investing activities	 	 	 	 	
Purchases of property and equipment	 	(4,453,861	)	 	(12,161,596	)	
Net cash used in investing activities of continuing operations	 	(4,453,861	)	 	(12,161,596	)	
Net cash used in investing activities of discontinued operations	 	—		 	(640,655	)	
Net cash used in investing activities	 	(4,453,861	)	 	(12,802,251	)	
 	 		 	 	
Cash flows from financing activities	 	 	 	 	
Proceeds from issuance of long-term debt	 	4,650,965		 	8,609,154		
Repayments of long-term debt	 	(9,237,466	)	 	(13,634,717	)	
Proceeds from employee stock purchase plan	 	45,005		 	31,223		
Tax withholdings for restricted stock units	 	(59,928	)	 	(9,326	)	
Net cash used in financing activities	 	(4,601,424	)	 	(5,003,666	)	
 	 	 	 	 	
Net increase (decrease) in cash and cash equivalents	 	644,365		 	(9,595,672	)	
 	 	 	 	 	
Cash and cash equivalents, beginning of period	 	4,021,126		 	13,499,890		
 	 	 	 	 	
Cash and cash equivalents, end of period	 	$	4,665,491		 	$	3,904,218		
 
The accompanying notes are an integral part of these interim consolidated financial statements.

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

1.         BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

Diversified Restaurant Holdings, Inc. and its wholly-owned subsidiaries (“DRH”) is a restaurant company operating a single concept, Buffalo Wild Wings ® Grill & Bar (“BWW”). As the largest franchisee of BWW, we provide a unique guest experience in a casual and inviting environment.

DRH currently operates 65 DRH-owned BWW restaurants ( 20 in Michigan, 18 in Florida, 15 in Missouri, 7 in Illinois and 5 in Indiana), including the nation’s largest BWW, based on square footage, in downtown Detroit, Michigan. We have an area development agreement (“ADA”) with Buffalo Wild Wings International, Inc. ("BWLD") under which we have opened 30 restaurants out of a total required of 42 by 2021. We are in discussions with BWLD regarding the remaining 12 restaurants. We may continue to open new restaurants but at a potentially lower number over a longer period of time under an amended ADA.

On December 25, 2016, the Company completed a spin-off (the "Spin-Off") of 19 Bagger Dave's entities and certain real estate entities which house the respective Bagger Dave's entities previously owned by DRH into a new independent publicly traded company, Bagger Dave's Burger Tavern, Inc. ("Bagger Dave's"). See Note 2 for additional details.

Principles of Consolidation

The consolidated financial statements as of September 24, 2017 and December 25, 2016 , and for the nine -month periods ended September 24, 2017 and September 25, 2016 , have been prepared by DRH pursuant to accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the Securities and Exchange Commission ("SEC"). The financial information as of September 24, 2017 and for the nine -month periods ended September 24, 2017 and September 25, 2016 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 statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated.

The consolidated financial information as of December 25, 2016 is derived from our audited consolidated financial statements and notes thereto for the fiscal year ended December 25, 2016 , which is included in Item 8 in the Fiscal 2016 Annual Report on Form 10-K, and should be read in conjunction with such consolidated financial statements.

The results of operations for the nine -month periods ended September 24, 2017 and September 25, 2016 are not necessarily indicative of the results of operations that may be achieved for the entire fiscal year ending December 31, 2017 .

For Variable Interest Entities ("VIE(s)"), we assess whether we are the primary beneficiary as prescribed by the accounting guidance on the consolidation of VIEs. The primary beneficiary of a VIE is the party that has the power to direct the activities that most significantly impact the performance of the entity and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the entity. See Note 3 to the accompanying notes to the consolidated financial statements for more details.

Segment Reporting

Since December 25, 2016, as a result of the Spin-Off of Bagger Dave’s as further described in Note 2 to the consolidated financial statements, the Company has one operating and reportable segment.

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 both September 24, 2017 and December 25, 2016 , we had goodwill of $50.1 million .

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

The Company assesses goodwill for impairment on an annual basis by reviewing relevant qualitative and quantitative factors. More frequent evaluations may be required if the Company experiences changes in its business climate or as a result of other triggering events that take place. If carrying value exceeds fair value, a possible impairment exists and further evaluation is performed.

ASC Topic 350-20, Intangibles - Goodwill and Other , gives companies the option to perform a one-step (step zero) qualitative assessment to determine whether it is more likely than not (a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount. In evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we assess relevant events and circumstances. If, after assessing the totality of events and circumstances, we determine that it is more likely than not that the fair value of the reporting unit is less than the carrying amount, the first and second steps of the goodwill impairment test would be necessary. Conversely, if we do not make this determination, no further action would be required.

As of December 25, 2016 , as a result of step zero of the qualitative assessment, the Company has concluded that its goodwill is recoverable. At September 24, 2017 , there were no impairment indicators warranting an analysis.

Impairment or Disposal of Long-Lived Assets

We review long-lived assets quarterly to determine if triggering events have occurred which would require a test to determine if the carrying amount of these assets may not be recoverable based on estimated future cash flows. Assets are reviewed at the lowest level for which cash flows can be identified, which is at the individual restaurant level. In the absence of extraordinary circumstances, restaurants are included in the impairment analysis after they have been open for two years. We evaluate the recoverability of a restaurant’s long-lived assets, including buildings, intangibles, leasehold improvements, furniture, fixtures, and equipment over the remaining life of the primary asset in the asset group, after considering the potential impact of planned operational improvements, marketing programs, and anticipated changes in the trade area. In determining future cash flows, significant estimates are made by management with respect to future operating results for each restaurant over the remaining life of the primary asset in the asset group. If assets are determined to be impaired, the impairment charge is measured by calculating the amount by which the asset carrying amount exceeds its fair value based on our estimate of discounted future cash flows. The determination of asset fair value is also subject to significant judgment. During the three-month and nine -month periods ended September 24, 2017 and September 25, 2016 , no impairment was recognized.

We account for exit or disposal activities, including restaurant closures, in accordance with ASC Topic 420, Exit or Disposal Cost Obligations . Such costs include the cost of disposing of the assets as well as other facility-related expenses from previously closed restaurants. These costs are generally expensed as incurred. Additionally, at the date we cease using a property under an operating lease, we record a liability for the net present value of any remaining lease obligations, net of estimated sublease income. Any subsequent adjustments to that liability as a result of lease termination or changes in estimates of sublease income are recorded in the period incurred.

Intangible Assets

Amortizable intangible assets consist of franchise fees, trademarks, non-compete agreements, favorable and unfavorable operating leases, and loan fees and are stated at cost, less accumulated amortization. Intangible assets are amortized on a straight-line basis over the estimated useful life, as follows: franchise fees- 10 – 20 years , trademarks- 15 years , non-compete agreements- 3 years , favorable and unfavorable leases - over the term of the respective leases and loan fees - over the term of the respective loan.

Liquor licenses, if transferable, are deemed to have an indefinite life and are carried at the lower of fair value or cost. We identify potential impairments for liquor licenses by comparing the fair value with its carrying amount. If the fair value exceeds the carrying amount, the liquor licenses are not impaired. If the fair value of the asset is less than the carrying amount, an impairment charge is recorded. During the three-month and nine -month periods ended September 24, 2017 and September 25, 2016 , no impairment was recognized.

Concentration Risks

Approximately 77% and 76% of the Company's continuing revenues for the three months ended September 24, 2017 and September 25, 2016 , respectively, were generated from food and beverage sales from restaurants located in the Midwest region.

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The remaining 23% and 24% of the Company's continuing revenues for the three months ended September 24, 2017 and September 25, 2016 , respectively, were generated from food and beverage sales from restaurants located in Florida.

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.

Interest Rate Swap Agreements

The Company utilizes interest rate swap agreements with Citizens Bank, N.A. (“Citizens”) and other banks to fix interest rates on a portion of its portfolio of variable rate debt, which reduces exposure to interest rate fluctuations. Our derivative financial instruments are recorded at fair value on the Consolidated Balance Sheets. The effective portion of changes in the fair value of derivatives which qualify for hedge accounting is recorded in other comprehensive income and is recognized in the Consolidated Statements of Operations when the hedged item affects earnings. The ineffective portion of the change in fair value of a hedge would be recognized in income immediately. 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 interest rate swap agreements associated with the Company’s current debt agreement 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 loss, net of tax. The Company records the fair value of its interest swaps on the Consolidated Balance Sheets in other long-term assets or other liabilities depending on the fair value of the swaps. See Note 7 and Note 14 for additional information on the interest rate swap agreements.

Blazin' Rewards® Loyalty Program

In 2017, the Company completed the implementation of a customer loyalty program, Blazin' Rewards®. The program allows members to earn points when they make purchases at our restaurants. The Company developed an estimate for the value of each point based on historical data. We record the fair value, net of estimated breakage, of the points as a reduction of restaurant sales and establish a liability within deferred revenue as the points are earned. Breakage is the percentage of points earned that are not expected to be redeemed. The revenue associated with the points is recognized upon the redemption of the points. Points generally expire after six months of inactivity.

Recent Accounting Pronouncements

In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation: Scope of Modification Accounting. ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The updated guidance is effective for interim and annual periods beginning after December 15, 2017, and early adoption is permitted. We do not believe the updated requirements will materially impact our consolidated financial statements.

In January 2017, the FASB issued Accounting Standards Update ("ASU") 2017-04, Topic 350: Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). ASU 2017-04 simplified wording and removes step 2 of the goodwill impairment test. A goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The FASB also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform step 2 of the goodwill test. We do not expect the standard will have a significant impact.  ASU 2017-04 is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2020, with early adoption permitted for interim or annual goodwill impairment tests on testing dates after January 1, 2017. We are currently evaluating the pending adoption of ASU 2017-04 and the impact it will have on our consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Topic 230: Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"). ASU 2016-15 clarifies current GAAP that is either unclear or does not include specific guidance on a number of specific issues. The amendments set forth are an improvement to GAAP because they provide guidance for each issue and reduce the current and potential future diversity in practice. ASU 2016-15 is effective for public business entities

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NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. We are currently evaluating the pending adoption of ASU 2016-15 and the impact it will have on our consolidated financial statements.

In February 2016, FASB issued ASU 2016-02, Leases . ASU 2016-02 requires that lease arrangements longer than 12 months result in a lessee recognizing a lease asset and liability. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The updated guidance is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. We have analyzed the impact of the new standard and concluded that the adoption of ASU 2016-02 will materially impact our consolidated financial statements by significantly increasing our non-current assets and non-current liabilities on our consolidated balance sheets in order to record the right of use assets and related lease liabilities for our existing operating leases. Operating leases comprise the majority of our current lease portfolio. With respect to implementation, we are currently reviewing the accounting standard and are not yet able to estimate the impact on our consolidated financial statements.

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09 Revenue with Contracts from Customers (Topic 606) . ASU 2014-09 supersedes the current revenue recognition guidance, including industry-specific guidance. The guidance introduces a five-step model to achieve its core principal of the entity recognizing revenue to depict the transfer of goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In March 2016, the FASB issued ASU 2016-04, Liabilities - Extinguishments of Liabilities: Recognition of Breakage for Certain Prepaid Stored-Value Products. ASU 2016-04 provides specific guidance for the de-recognition of prepaid stored-value product liabilities. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net). ASU 2016-08 provides specific guidance to determine whether an entity is providing a specified good or service itself or is arranging for the good or service to be provided by another party. In April 2016, the FASB issued ASU 2016-10, "Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing." ASU 2016-10 provides clarification on the subjects of identifying performance obligations and licensing implementation guidance.

The requirements for these standards relating to Topic 606 will be effective for interim and annual periods beginning after December 15, 2017. The Company expects to adopt these standards upon their effective date. While the Company's evaluation of the standard is ongoing, our preliminary assessment indicates that the new revenue recognition standard will not materially impact the recognition of restaurant sales, our primary source of revenue. As we continue the evaluation, documentation and implementation of ASU 2016-09, other areas which could be impacted may be identified. Additionally, this guidance will require us to enhance our disclosures, including disclosing performance obligations to customers arising from certain promotional activity, such as our customer loyalty program. With respect to the transition method for adoption, we expect to adopt this standard using the modified retrospective approach. We expect to complete the evaluation and documentation by year end December 31, 2017 .

We reviewed all other significant newly-issued accounting pronouncements and concluded that they either are not applicable to our operations or that no material effect is expected on our consolidated financial statements as a result of future adoption.

Recently Adopted Accounting Pronouncements

In March 2016, the FASB issued ASU 2016-09, Topic 718: Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"). ASU 2016-09 simplifies several aspects of accounting for share-based payment award transactions, including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, with early adoption permitted. Beginning in fiscal 2017, the tax effects of awards will be recognized in the statement of operations. In addition, the Company will account for forfeitures as they occur.

Effective December 26, 2016, the Company adopted the accounting guidance contained within ASU 2016-09. As a result, the Company recorded a deferred tax asset and retained earnings increase of $268,000 to recognize the Company's excess tax benefits that existed as of December 25, 2016, on the Consolidated Balance Sheet.

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NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

2.      DISCONTINUED OPERATIONS

Spin-Off of Bagger Dave's

On August 4, 2016, DRH announced that its Board of Directors unanimously approved a plan to pursue a tax-free spin-off of its Bagger Dave's business. Pursuant to this plan, DRH contributed its 100.0% owned entity, AMC Burgers, LLC and certain real estate entities, into Bagger Dave's Burger Tavern, Inc., a newly created Nevada company, which was then spun-off into a stand-alone company. AMC Burgers, Inc. owned and operated all of the Bagger Dave's Burger Tavern ® restaurants and the real estate entities held certain real estate related to the restaurants before the real estate was sold in 2014 and 2015. In connection with the Spin-Off, DRH contributed certain assets, liabilities and employees related to its Bagger Dave's businesses. Intercompany balances due to/from DRH, which included amounts from sales, were contributed to equity of Bagger Dave's. The Spin-Off was effected on December 25, 2016 via a one-for-one distribution of common shares in Bagger Dave's to DRH holders of record on December 19, 2016.

As part of the Spin-Off transaction, DRH agreed to fund a one-time $2.0 million cash distribution to Bagger Dave's and agreed that, if deemed necessary within twelve months after the date of the Spin-Off, up to $1 million of additional cash funding may be considered upon approval by DRH and its lenders. Through the period ended September 24, 2017 , no additional funding has been required.

Prior to the Spin-Off, Bagger Dave’s was a co-obligor on a joint and several basis with the Company on its $155.0 million senior secured credit facility. The Company’s debt under this facility remained with the Company and Bagger Dave’s was released as a borrower. As a result, this debt was not assigned to discontinued operations. Additionally, DRH retained substantially all of the tax benefits (net operating loss and tax credit carryforwards) generated by Bagger Dave's prior to the date of the transaction, representing an amount sufficient to offset pre-tax income totaling over $50 million at current estimated tax rates.

DRH decided to spin-off Bagger Dave's after considering all reasonable strategic and structural alternatives because of the disparity between the operating models of its two brands, BWW as franchisee, and Bagger Dave's as an owned concept. The management teams of Bagger Dave's and DRH agreed that the nature of the two concepts varied greatly, and that each would be more valuable and operate more effectively independently of one another. Bagger Dave's is a concept developed by the management team of DRH. In contrast to operating a franchised concept like BWW, it has no development restrictions and the flexibility to enhance brand attributes such as logos, trade dress and restaurant design, change its menu offering and improve its operational model in an effort to better align with guest expectations. To manage these functions effectively, specific resources are required that are not necessary for a franchisee. For example, menu development, purchasing and brand marketing are critical to the success of Bagger Dave's but not necessary for a BWW franchisee since these functions are managed by the franchisor. Additionally, as a start-up brand, Bagger Dave's has both higher risk and higher growth potential while BWW, being a mature brand and as a franchisee, has more limited organic growth potential due to the status of its existing market penetration and the need to obtain development rights from the franchisor.

In conjunction with the Spin-Off, DRH entered into a transition services agreement (the "TSA") with Bagger Dave's pursuant to which DRH provides certain information technology and human resources support, limited accounting support, and other minor administrative functions at no charge. The TSA is intended to assist the discontinued component in efficiently and seamlessly transitioning to stand on its own. The agreement expires in December 2017, at which time the parties may negotiate which services will be required on an ongoing basis and the fees that will be charged for such services.

Information related to Bagger Dave's has been reflected in the accompanying consolidated financial statements as follows:

•	Consolidated Statements of Operations - Bagger Dave's results of operations for the three and nine month periods ended September 25, 2016 have been presented as discontinued operations. Additionally, all activity related to the discontinued operation at the Company is presented as discontinued operations for the three and nine month periods ended September 24, 2017 .	

•	Consolidated Statements of Cash Flows - The Bagger Dave's cash flows from operating and investing activities for the nine-month periods ended September 24, 2017 and September 25, 2016 have been presented separately on the face of the cash flow statement. The Bagger Dave's cash flows from financing activities for these years have not been separately reported on the consolidated statements of cash flows since there was only one financing function for both entities.	

The following are major classes of line items constituting pre-tax loss from discontinued operations:

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	 	Three Months Ended	 	Nine Months Ended	
	 	September 24, 2017	 	September 25, 2016	 	September 24, 2017	 	September 25, 2016	
Revenue	 	$	—		 	$	5,063,316		 	$	—		 	$	15,772,729		
Restaurant operating and closure related costs (exclusive of depreciation and amortization)	 			 	(5,265,968	)	 	96,276		 	(16,125,720	)	
General and administrative expenses	 	(22,960	)	 	(909,153	)	 	(251,828	)	 	(1,865,550	)	
Depreciation and amortization	 			 	(1,547,698	)	 	—		 	(2,671,419	)	
Pre-opening costs	 	—		 	(11,664	)	 	—		 	(363,763	)	
Other income	 	—		 	1,018		 	—		 	9,905		
Gain (loss) on asset disposals	 	—		 	(77,863	)	 	—		 	649,911		
Loss from discontinued operations before income taxes	 	(22,960	)	 	(2,748,012	)	 	(155,552	)	 	(4,593,907	)	
Income tax benefit	 	7,806		 	762,178		 	58,191		 	1,329,278		
	 			 			 			 			
Loss from discontinued operations	 	$	(15,154	)	 	$	(1,985,834	)	 	$	(97,361	)	 	$	(3,264,629	)	

The operating results of the discontinued operations include only direct expenses incurred by Bagger Dave’s. Interest expense was not allocated to discontinued operations because the Company’s debt under the $155 million secured credit facility remained with the Company.

Prior to the Spin-Off, Bagger Dave's was a reportable segment of the Company. Following the Spin-Off, there were no assets or liabilities remaining from the Bagger Dave's operations as of December 25, 2016. See Note 3 for a discussion of involvement the Company continues to have with Bagger Dave's after the Spin-Off.

3.     UNCONSOLIDATED VARIABLE INTEREST ENTITIES

After the Spin-Off of Bagger Dave’s and the related discontinuation of its operations described in Note 2 , the Company remains involved with certain activities that result in Bagger Dave’s being considered a VIE. This conclusion results primarily from the existence of guarantees by the Company of certain Bagger Dave’s leases as described below under "Lease Guarantees". While the Company holds a variable interest in Bagger Dave’s, it is not considered to be its primary beneficiary because it does not have the power to direct the activities of Bagger Dave’s. Specifically, we considered the fact that, although three of the Company’s executive officers are currently also on Bagger Dave’s board, there are no agreements in place that require these executive officers to vote in the interests of the Company, as these executive officers do not represent the Company in their capacity as Bagger Dave’s directors. Furthermore, they remain on the board of Bagger Dave’s so long as the shareholders annually elect them. At any time, these board members can be replaced by a vote of the Bagger Dave’s shareholders. As a result, the Company does not consolidate the VIE.

Lease Guarantees

At September 24, 2017 , the Company is a guarantor for 17 leases, three of which have been re-leased to an unaffiliated party . In the event the respective lessees cannot make their lease payments, the Company may become responsible for the payments under its guarantee.

Upon Spin-Off of Bagger Dave's, in accordance with ASC 460, Guarantees , the Company evaluated its liability from the lease guarantees first by estimating the non-contingent component representing the estimated fair market value of the guarantees at inception, and recorded a liability in the amount of $0.3 million as of December 25, 2016 , which is included in other liabilities on the Consolidated Balance Sheet as of September 24, 2017 and December 25, 2016 . No liability had previously been recorded as a result of the affiliate relationship between the Company and Bagger Dave’s.

Secondly, the Company considered the contingent component of the guarantees and concluded that, as of September 24, 2017 and December 25, 2016 , no loss under the guarantees was probable because all but one of the Bagger Dave's restaurants subject to the leases is either currently operating or the site has been leased to another tenant who is responsible for, and making, the lease

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payments. With respect to the one recent closure, we expect to find a new tenant for the site and, in the meantime, Bagger Dave's is continuing to make the lease payments.

The Company has determined that its maximum exposure resulting from the lease guarantees includes approximately $8.8 million of future minimum lease payments plus potential additional payments to satisfy maintenance, property tax and insurance requirements under the leases as of September 24, 2017 . The terms and conditions of the guarantees vary, and each guarantee has an expiration date which may or may not correspond with the end of the underlying lease term.  The guarantee expiration dates range from less than 1 month to 12 years as of September 24, 2017 . In the event that the Company is required to perform under any of its lease guarantees, we do not believe the liability would be material because we would first seek to minimize the exposure by finding a suitable tenant to lease the space. In many cases, we expect that a replacement tenant would be found and the lessor would agree to release the Company from its future guarantee obligation. Since 2015, 10 Bagger Dave’s locations with DRH lease guarantees were closed. New tenants were found to step into the Company’s lease obligations for 7 of these locations in 3 to 14 months from the date of closure. Over this time, 6 guarantees expired or terminated, and 4 remain obligations of the Company. In reaching our conclusion, we also considered the following:

•	the financial condition of Bagger Dave’s, including its ability to service the lease payments on the locations it continues to operate;	
		
•	its history of incurring operating losses;	
		
•	its liquidity position and the actions available to it should its liquidity deteriorate to such a degree that its ability to service required lease payments is threatened; and	
		
•	the actions available to the Company to avoid or mitigate potential losses should Bagger Dave's become unable to service one or more of the leases that the Company guarantees.	

The following is a detailed listing of all Bagger Dave's leases that include a guarantee by the Company as of September 24, 2017 :

											
Location of lease	Status of location	Guarantee expiry date	 	Liability recognized on balance sheet	 	Future guaranteed lease payments	
Holland, MI	Closed / re-leased	10/09/17	 	$	2,101		 	$	2,177		
Bloomfield, MI	Open	01/14/18	 	2,787		 	25,833		
Shelby Township, MI	Open	01/31/18	 	2,622		 	25,929		
West Chester Township, OH	Open	02/01/18	 	2,866		 	28,333		
Woodhaven, MI	Closed	11/30/18	 	4,426		 	86,567		
Traverse City, MI	Open	01/31/19	 	5,887		 	121,667		
Fort Wayne, IN	Open	01/31/19	 	5,424		 	111,909		
Grand Blanc, MI	Open	01/31/20	 	6,759		 	164,667		
Centerville, OH	Open	11/30/20	 	13,293		 	345,343		
Chesterfield Township, MI	Open	12/31/20	 	8,092		 	211,250		
E. Lansing, MI	Open	09/10/21	 	2,334		 	75,000		
Birch Run, MI	Open	12/31/24	 	23,557		 	690,138		
Berkley, MI	Open	06/08/29	 	32,532		 	989,520		
Cascade Township, MI	Open	06/08/29	 	29,856		 	908,124		
Avon, IN	Closed / re-leased	06/30/29	 	48,658		 	1,480,024		
Greenwood, IN	Closed / re-leased	06/30/29	 	50,372		 	1,532,160		
Canton, MI	Open	06/30/30	 	63,541		 	1,971,938		
Totals	 	 	 	$	305,107		 	$	8,770,579		

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NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

4.          PROPERTY AND EQUIPMENT

Property and equipment are comprised of the following assets:

									
 	 	September 24, 2017	 	December 25, 2016	
Equipment	 	$	30,265,430		 	$	29,426,476		
Furniture and fixtures	 	7,466,401		 	7,275,923		
Leasehold improvements	 	64,837,092		 	63,449,082		
Restaurant construction in progress	 	27,720		 	94,595		
Total	 	102,596,643		 	100,246,076		
Less accumulated depreciation	 	(51,911,716	)	 	(43,616,045	)	
Property and equipment, net	 	$	50,684,927		 	$	56,630,031		

5.        INTANGIBLE ASSETS

Intangible assets are comprised of the following:

									
 	 	September 24, 2017	 	December 25, 2016	
Amortized intangible assets	 	 	 	 	
Franchise fees	 	$	1,290,642		 	$	1,290,642		
Trademark	 	2,500		 	2,500		
Non-compete	 	76,560		 	76,560		
Favorable operating leases	 	351,344		 	351,344		
Loan fees	 	368,083		 	368,083		
Total	 	2,089,129		 	2,089,129		
Less accumulated amortization	 	(859,779	)	 	(718,517	)	
Amortized intangible assets, net	 	1,229,350		 	1,370,612		
 	 	 	 	 	
Unamortized intangible assets	 	 	 	 	
Liquor licenses	 	1,264,252		 	1,295,752		
Total intangible assets, net	 	$	2,493,602		 	$	2,666,364		

Amortization expense was $21,067 and $21,571 , $63,443 and $64,912 for the three-month periods ended September 24, 2017 and September 25, 2016 and nine-month periods ended September 24, 2017 and September 25, 2016 , respectively. Amortization of favorable leases and loan fees are reflected as part of occupancy and interest expense, respectively.

The aggregate weighted-average amortization period for intangible assets is 8.5 years at September 24, 2017 .

6.    OTHER ACCRUED LIABILITES 

								
 	September 24, 2017	 	December 25, 2016	
Sales tax payable	$	671,642		 	$	816,215		
Accrued interest	590,450		 	442,976		
Accrued royalty fees	162,407		 	144,727		
Accrued property taxes	315,412		 	490,809		
Accrued loyalty rewards	279,923		 	—		
Other	524,582		 	747,542		
Total other accrued liabilities	$	2,544,416		 	$	2,642,269		

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NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

7.           LONG-TERM DEBT

Long-term debt consists of the following obligations:

									
 	 	September 24, 2017	 	December 25, 2016	
$120.0 million term loan - the rate at September 24, 2017 and December 25, 2016 was 4.73% and 4.12%, respectively.	 	$	92,198,617		 	$	99,698,616		
 	 	 	 	 	
$23.0 million development line of credit, converted to $18.2 million facility term loan in December 2016 - the rate at September 24, 2017 and December 25, 2016 was 4.73% and 4.21%, respectively.	 	17,062,009		 	18,199,476		
 	 	 	 	 	
$5.0 million revolving line of credit - the rate at September 24, 2017 and December 25, 2016 was 4.79% and 6.25%, respectively.	 	5,000,000		 	4,000,000		
 	 	 	 	 	
$5.0 million development line of credit - the rate at September 24, 2017 was 4.73%.	 	3,050,965		 	—		
 	 	 	 	 	
Unamortized discount and debt issuance costs	 	(555,121	)	 	(712,072	)	
 	 	 	 	 	
Total debt	 	116,756,470		 	121,186,020		
 	 	 	 	 	
Less current portion	 	(11,375,468	)	 	(11,307,819	)	
 	 	 	 	 	
Long-term debt, net of current portion	 	$	105,381,002		 	$	109,878,201		

On June 29, 2015, the Company entered into a $155.0 million senior secured credit facility with a syndicate of lenders led by Citizens (the “June 2015 Senior Secured Credit Facility”) with a senior lien on all the Company’s personal property and fixtures. The June 2015 Senior Secured Credit Facility consists of a $120.0 million term loan (the “June 2015 Term Loan”), a $30.0 million , subsequently amended to $23.0 million (see amendment details immediately following this paragraph) development line of credit (the “June 2015 DLOC”) and a $5.0 million (see amendment details immediately following this paragraph) revolving line of credit (the “June 2015 RLOC”). The Company used approximately $65.5 million of the June 2015 Term Loan to refinance existing outstanding debt and used approximately $54.0 million of the June 2015 Term Loan to refinance an acquisition occurring in second quarter 2015. The remaining balance of the June 2015 Term Loan, approximately $0.5 million , was used to pay the fees, costs, and expenses associated with the closing of the June 2015 Senior Secured Credit Facility. The June 2015 Term Loan is for a period of five years .

On December 23, 2016, the Company entered into an amendment agreement for purposes of, among other things, releasing the Bagger Dave’s entities as borrowers and releasing all related liens on the Bagger Dave’s assets. In addition, the amendment (a) converted the amounts then outstanding under the June 2015 DLOC to a development facility term loan (the “DF Term Loan”), (b) canceled $6.8 million previously available under the June 2015 DLOC, and (c) extended the maturity date on the remaining $5.0 million under the June 2015 DLOC to June 29, 2018.

Payments of principal are based upon a 12 -year straight-line amortization schedule, with monthly principal payments of $833,333 on the June 2015 Term Loan and $126,385 on the DF Term Loan, plus accrued interest. The entire remaining outstanding principal and accrued interest on the June 2015 Term Loan and the DF Term Loan is due and payable on the maturity date of June 29, 2020. The June 2015 DLOC is for a term of two years and is subject to certain limitations relative to actual development costs. Once the DLOC is fully drawn, outstanding balances convert into a term note based on the terms of the agreement, at which time monthly principal payments will be due based on a 12 -year straight-line amortization schedule, plus interest, through maturity on June 29, 2020. If the DLOC is not fully drawn by the end of the two years term, the outstanding principal balance becomes due based on the 12 -year amortization period with final payment due June 29, 2020. The June 2015 RLOC, which is subject to certain usage restrictions during each annual period, is for a term of five years .

The interest rate for each of the loans, as selected by the borrower, is based upon either a LIBOR or base rate (generally Prime or Fed Funds) plus an applicable margin, which ranges from 2.25% to 3.5% for LIBOR loans and from 1.25% to 2.5% for base rate loans, depending on the lease adjusted leverage ratio as defined in the agreement.

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

Fees related to the term debt are recorded as debt discount and fees related to the DLOC and RLOC are capitalized as intangible assets. Debt issuance costs represent legal, consulting and financial costs associated with debt financing. As a result of the December 2016 Amendment, the Company incurred $197,889 of debt issuance costs recorded as a part of debt discount. Debt discount related to term debt, net of accumulated amortization totaled $555,121 and $712,072 at September 24, 2017 and December 25, 2016 , respectively. The unamortized portion of capitalized debt issuance costs related to the DLOC and RLOC totaled $180,359 and $244,336 at September 24, 2017 and December 25, 2016 , respectively. Debt discount and debt issuance cost are amortized over the life of the debt and are recorded in interest expense using the effective interest method.

For the three-month periods ended September 24, 2017 and September 25, 2016 and nine-month periods ended September 24, 2017 and September 25, 2016 interest expense was $1.8 million and $1.4 million , $5.0 million and $4.3 million , respectively.

The current debt agreement contains various customary financial covenants generally based on the performance of the specific borrowing entity and other related entities. The more significant covenants consist of a minimum debt service coverage ratio and a maximum lease adjusted leverage ratio. On June 30, 2017, the Company entered into an amendment agreement for purposes of revising the maximum lease adjusted leverage ratio and revising certain definitions impacting the calculation of the ratio. As of September 24, 2017 , the Company is in compliance with the loan covenants.

At September 24, 2017 , the Company has six interest rate swap agreements to fix a portion of the interest rates on its variable rate debt. The swap agreements all qualify for hedge accounting. Under the swap agreements, the Company receives interest at the one-month LIBOR and pays a fixed rate. Since these swap agreements qualify for hedge accounting, the changes in fair value are recorded in other comprehensive loss, net of tax. See Note 1 and Note 14 for additional information pertaining to interest rate swaps.

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

	
																		
 	 	 	September 24, 2017	
 	 	 	Notional amounts	 	Derivative assets	 	Derivative liabilities	
Interest rate swaps	Rate	Expires	 	 	 	 	 	
April 2012	1.4%	April 2019	$	3,619,048	 	 	$	696	 	 	$	—	 	
October 2012	0.9%	October 2017	1,714,286	 	 	438	 	 	—	 	
July 2013	1.4%	April 2018	2,190,476	 	 	—	 	 	1,307	 	
May 2014	1.5%	April 2018	7,678,571	 	 	—	 	 	8,540	 	
January 2015	1.8%	December 2019	21,547,619	 	 	—	 	 	133,945	 	
August 2015	2.3%	June 2020	60,783,333	 	 	—	 	 	1,062,316	 	
Total	 	 	$	97,533,333	 	 	$	1,134	 		$	1,206,108	 	

	
																		
 	 	 	December 25, 2016	
 	 	 	Notional amounts	 	Derivative assets	 	Derivative liabilities	
Interest rate swaps	Rate	Expires	 	 	 	 	
April 2012	1.4%	April 2019	$	5,333,333	 	 	$	—	 	 	$	21,037	 	
October 2012	0.9%	October 2017	2,357,143	 	 	—	 	 	723	 	
July 2013	1.4%	April 2018	4,761,905	 	 	—	 	 	18,949	 	
May 2014	1.5%	April 2018	9,285,714	 	 	—	 	 	58,359	 	
January 2015	1.8%	December 2019	21,119,048	 	 	—	 	 	271,144	 	
August 2015	2.3%	June 2020	49,696,875	 	 	—	 	 	1,045,279	 	
Total	 	 	$	92,554,018	 	 	$	—	 	 	$	1,415,491	 	

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

8.            SHARE-BASED COMPENSATION

Restricted share awards

On July 13, 2017, the Company's shareholders approved a new stock incentive plan - the Stock Incentive Plan of 2017. No further grants will be made under the Stock Incentive Plan of 2011. The Stock Incentive Plan of 2017 authorized a total of 2,500,000 shares for issuance as incentive awards.

For the nine-months ended September 24, 2017 , and September 25, 2016 , restricted shares were issued to certain team members under the Stock Incentive Plan of 2011 and the Stock Incentive Plan of 2017 at a weighted-average grant date fair value of $2.31 and $1.52 , respectively. Based on the Stock Award Agreement, shares typically vest ratably over either a one or three year period, or on the third anniversary of the grant date, as determined by the Compensation Committee. Unrecognized share-based compensation expense of $778,737 at September 24, 2017 will be recognized over the remaining weighted-average vesting period of 1.8 years . The total fair value of shares vested during the nine-month periods ended September 24, 2017 and September 25, 2016 , was $386,675 and $108,671 , respectively. Under the Stock Incentive Plan of 2017, there were 2,270,001 shares available for future awards at September 24, 2017 .

The following table presents the restricted shares transactions during the nine -month period ended September 24, 2017 : 

			
 	Number of
Restricted
Stock Shares	
Unvested, December 25, 2016	473,391		
Granted	263,332		
Vested	(132,158	)	
Vested shares tax portion	(22,716	)	
Expired/Forfeited	(48,850	)	
Unvested, September 24, 2017	532,999		

The following table presents the restricted shares transactions during the nine -month period ended September 25, 2016 :

			
 	Number of
Restricted
Stock Shares	
Unvested, December 27, 2015	241,124		
Granted	342,331		
Vested	(63,106	)	
Vested shares tax portion	(5,940	)	
Expired/Forfeited	(23,851	)	
Unvested, September 25, 2016	490,558		

On July 30, 2010, prior to the adoption of the Stock Incentive Plan of 2011, 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 had an original expiration date six years from the date of issuance. On July 28, 2016, the Stock Option Agreement of 2010 was amended to extend the expiration date of these options to July 31, 2019. The options can be exercised at a price of $2.50 per share. At September 24, 2017 , 180,000 shares of authorized common stock are reserved for issuance to provide for the exercise of the remaining options. The intrinsic value of outstanding options was negligible as of both September 24, 2017 and September 25, 2016 .

Employee stock purchase plan

The Company 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 24, 2017 and September 25, 2016 , the Company issued 24,519 and 21,896 shares, respectively. Under the ESPP, there were 159,806 shares available for future purchase at September 24, 2017 .

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

Share-based Compensation

Share-based compensation of $0.1 million and $0.1 million , $0.3 million and $0.4 million , was recognized during the three-month periods ended September 24, 2017 and September 25, 2016 and nine-month periods ended September 24, 2017 and September 25, 2016 , respectively, as compensation cost in the Consolidated Statements of Operations and as additional paid-in capital on the Consolidated Statement of Stockholders' Equity (Deficit) 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 24, 2017 . 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.

9.           INCOME TAXES

The effective income tax expense (benefit) rate for continuing operations was (63.2)% and (14.9)% , (97.5)% and 4.0% for the three-month periods ended September 24, 2017 and September 25, 2016 and the nine-month periods ended September 24, 2017 and September 25, 2016 , respectively. The change in the effective income tax rate for the nine months ended September 24, 2017 compared with the nine months ended September 25, 2016 is primarily attributable to the decrease in income before income taxes and the fluctuations that the tip credits cause in the effective tax rate when income (loss) is relatively close to break even.

The deferred tax asset as of September 24, 2017 was $18.0 million . On a quarterly basis, the Company evaluates the recoverability of the asset by reviewing current and projected company and restaurant industry trends, and the macro economic environment. Currently, we have concluded no valuation reserve against the deferred tax asset is necessary, however unfavorable business conditions in the future could cause this assessment to change.

10.           OPERATING LEASES

The Company's lease terms generally include renewal options, and frequently require us to pay a proportionate share of real estate taxes, insurance, common area maintenance, and other operating costs. Some restaurant leases provide for contingent rental payments based on sales thresholds.

Total rent expense was $2.2 million and $2.2 million , $6.6 million and $6.5 million for the three-month periods ended September 24, 2017 and September 25, 2016 and nine-month periods ended September 24, 2017 and September 25, 2016 , respectively.

Scheduled future minimum lease payments for each of the five years and thereafter for non-cancelable operating leases with initial or remaining lease terms in excess of one year at September 24, 2017 are summarized as follows:

				
Year	Amount	
Remainder of 2017	$	2,282,774		
2018	8,947,232		
2019	8,249,477		
2020	8,170,861		
2021	7,342,901		
Thereafter	33,729,527		
Total	$	68,722,772		

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

11.           COMMITMENTS AND CONTINGENCIES

The Company’s ADA with BWLD calls for it to open 42 restaurants by April 1, 2021. As of September 24, 2017 we have opened 30 restaurants under the ADA. We are currently in discussions with BWLD with respect to both the timing and desirability of building the remaining 12 restaurants pursuant to the current ADA. If the ADA is not renegotiated, the Company may choose not to build some, or all of the remaining 12 locations in exchange for a fee of $50,000 for each unbuilt unit.

The Company is required to pay BWLD royalties ( 5.0% of net sales) and advertising fund contributions (between 3.00% and 3.15% of net sales). In addition, the Company is required to spend an additional 0.25% - 0.50%  of regional net sales related to advertising cooperatives for certain metropolitan markets for the term of the individual franchise agreements. The Company incurred $2.0 million and $2.3 million in royalty expense for the three-month periods ended September 24, 2017 and September 25, 2016 and $6.0 million and $6.3 million for the nine-month periods ended September 24, 2017 and September 25, 2016 , respectively. Advertising fund contribution and advertising cooperative expenses were $1.3 million and $1.4 million for the three-month periods ended September 24, 2017 and September 25, 2016 and $4.0 million and $4.1 million for the nine-month periods ended September 24, 2017 and September 25, 2016 . Amounts are recorded in Other Operating Costs on the Consolidated Statement of Operations.

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 $250,000 to $850,000 depending on an individual restaurant's needs and whether or not additions such as enclosed patios will be included.

In connection with the Spin-Off of Bagger Dave’s, the Company’s board of directors approved a cash distribution of $2.0 million to $3.0 million to Bagger Dave’s within twelve months of the transaction date. On December 25, 2016, the Company contributed $2.0 million in cash to Bagger Dave’s as part of the Spin-Off. The additional $1.0 million of funding by the Company would only be considered if deemed necessary, and would only be made if approved by the Company’s lenders. As of September 24, 2017 , no additional funding has been required.

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. 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.

Refer to Note 3 for a discussion of lease guarantees provided by the Company.

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

12.         EARNINGS PER SHARE

The following is a reconciliation of basic and fully diluted earnings per common share for the three-month periods ended September 24, 2017 and September 25, 2016 and nine-month periods ended September 24, 2017 and September 25, 2016 :

									
	 	Three months ended	
 	 	September 24, 2017	 	September 25, 2016	
Income (loss) from continuing operations	 	$	(543,240	)	 	$	596,709		
Loss from discontinued operations	 	(15,154	)	 	(1,985,834	)	
Net loss	 	$	(558,394	)	 	$	(1,389,125	)	
	 	 	 	 	
Weighted-average shares outstanding	 	26,764,776		 	26,625,615		
Effect of dilutive securities	 	—		 	—		
Weighted-average shares outstanding - assuming dilution	 	26,764,776		 	26,625,615		
	 	 	 	 	
Earnings per common share from continuing operations	 	$	(0.02	)	 	$	0.02		
Earnings per common share from discontinued operations	 	—		 	(0.07	)	
Earnings per common share	 	$	(0.02	)	 	$	(0.05	)	
	 	 	 	 	
Earnings per common share - assuming dilution - from continuing operations	 	(0.02	)	 	0.02		
Earnings per common share - assuming dilution - from discontinued operations	 	—		 	(0.07	)	
Earnings per common share - assuming dilution	 	$	(0.02	)	 	$	(0.05	)	
	 	 	 	 	
	 	Nine Months Ended	
 	 	September 24, 2017	 	September 25, 2016	
Income (loss) from continuing operations	 	$	(39,003	)	 	$	2,123,482		
Loss from discontinued operations	 	(97,361	)	 	(3,264,629	)	
Net loss	 	$	(136,364	)	 	$	(1,141,147	)	
	 			 			
Weighted-average shares outstanding	 	26,672,057		 	26,434,238		
Effect of dilutive securities	 	—		 	—		
Weighted-average shares outstanding - assuming dilution	 	26,672,057		 	26,434,238		
	 			 			
Earnings per common share from continuing operations	 	$	—		 	$	0.08		
Earnings per common share from discontinued operations	 	—		 	(0.12	)	
Earnings per common share	 	$	—		 	$	(0.04	)	
	 			 			
Earnings per common share - assuming dilution - from continuing operations	 	—		 	0.08		
Earnings per common share - assuming dilution - from discontinued operations	 	—		 	(0.12	)	
Earnings per common share - assuming dilution	 	$	—		 	$	(0.04	)	

During the three and nine month periods ended September 24, 2017 and the three and nine month periods ended September 25, 2016 , 533,000 and 490,559 shares, respectively, of unvested restricted stock were excluded from the calculation of diluted earnings per share because such shares were anti-dilutive.

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

13.            SUPPLEMENTAL CASH FLOWS INFORMATION

Other Cash Flows Information

Cash paid for interest was $1.7 million and $1.4 million , $4.7 million and $4.2 million during the three-month periods ended September 24, 2017 and September 25, 2016 and nine-month periods ended September 24, 2017 and September 25, 2016 , respectively.

Cash paid for income taxes was $0 and $0 , $2,819 and $10,000 during the three-month periods ended September 24, 2017 and September 25, 2016 and nine-month periods ended September 24, 2017 and September 25, 2016 , respectively.

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

Noncash investing activities for property and equipment not yet paid as of  September 24, 2017 and September 25, 2016 , was $0.0 million and $0.5 million , respectively.

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 24, 2017 and December 25, 2016 , our financial instruments consisted of cash and cash equivalents, accounts receivable, accounts payable, interest rate swaps, lease guarantee liability, 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 observable market 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 fair value of our lease guarantee liability is determined by calculating the present value of the difference between the estimated rate at which the Company and Bagger Dave’s could borrow money in a duration similar to the underlying lease guarantees. Our lease guarantees are classified as a Level 2 measurement as there is no actively traded market for such instruments.

As of September 24, 2017 and December 25, 2016 , our total debt was approximately $116.8 million and $121.2 million , respectively, which approximated fair value because the applicable interest rates are adjusted frequently based on short-term market rates (Level 2).

There were no transfers between levels of the fair value hierarchy during the three and nine month periods ended September 24, 2017 and the fiscal year ended December 25, 2016 .

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

The following table presents the fair values for those liabilities measured on a recurring basis as of September 24, 2017 :

	
																	
FAIR VALUE MEASUREMENTS	
Description	 	Level 1	 	Level 2	 	Level 3	 	Liability
Total	
Interest rate swaps	 	$	—		 	$	(1,204,974	)	 	$	—		 	$	(1,204,974	)	
Lease guarantee liability	 	—		 	(305,107	)	 	—		 	(305,107	)	
Total	 	$	—		 	$	(1,510,081	)	 	$	—		 	$	(1,510,081	)	

The following table presents the fair values for those assets and liabilities measured on a recurring basis as of December 25, 2016 :

	
																	
FAIR VALUE MEASUREMENTS	
Description	 	Level 1	 	Level 2	 	Level 3	 	Liability
Total	
Interest rate swaps	 	$	—		 	$	(1,415,491	)	 	$	—		 	$	(1,415,491	)	
Lease guarantee liability	 	—		 	(306,000	)	 	—		 	(306,000	)	
Total	 	$	—		 	$	(1,721,491	)	 	$	—		 	$	(1,721,491	)	

15.    ACCUMULATED OTHER COMPREHENSIVE LOSS

The following table summarizes each component of Accumulated Other Comprehensive Loss:

									
 	 	Three Months Ended September 24, 2017	 	Three Months Ended September 25, 2016	
 	 	Interest Rate Swaps	 	Interest Rate Swaps	
Beginning balance	 	$	(1,088,255	)	 	$	(2,420,504	)	
 	 	 	 	 	
Income recorded to other comprehensive loss	 	443,900		 	539,464		
Tax expense	 	(150,926	)	 	(183,417	)	
Other comprehensive income	 	292,974		 	356,047		
	 	 	 	 	
Accumulated OCL	 	$	(795,281	)	 	$	(2,064,457	)	
 	 	 	 	 	
 	 	Nine Months Ended September 24, 2017	 	Nine Months Ended September 25, 2016	
 	 	Interest Rate Swaps	 	Interest Rate Swaps	
Beginning balance	 	$	(934,222	)	 	$	(1,006,667	)	
 	 	 	 	 	
Income (loss) recorded to other comprehensive loss	 	210,517		 	(1,602,713	)	
Tax benefit (expense)	 	(71,576	)	 	544,923		
Other comprehensive income (loss)	 	138,941		 	(1,057,790	)	
 	 	 	 	 	
Accumulated OCL	 	$	(795,281	)	 	$	(2,064,457	)	

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated interim financial statements and related notes included in Item 1 of Part 1 of this Quarterly Report and the audited consolidated financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results from Operations contained in our Form 10-K for the fiscal year ended December 25, 2016 . Information included in this discussion and analysis includes commentary on company-owned restaurants, restaurant sales, and same store sales. Management believes such sales information is an important measure of our performance, and is useful in assessing the Buffalo Wild Wings® Grill & Bar (“BWW”) concept. 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, 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 marketplaces; and the cost of food and other operating costs. 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. and its wholly-owned subsidiaries (“DRH” or the "Company") is a single-concept restaurant company operating 65 BWW franchised restaurants. As the largest franchisee of BWLD, we provide a unique guest experience in a casual and inviting environment. We are committed to providing value to our guests by offering generous portions of flavorful food in an upbeat and entertaining atmosphere. We believe BWW is a uniquely positioned restaurant brand, designed to maximize guest appeal, offering competitive price points and a family-friendly atmosphere, which we believe enables strong performance through economic cycles. We were incorporated in 2006 and are headquartered in the Detroit metropolitan area. As of September 24, 2017 , we had 65 restaurants ( 20 in Michigan, 18 in Florida, 15 in Missouri, 7 in Illinois and 5 in Indiana), including the nation’s largest BWW, based on square footage, in downtown Detroit, Michigan. We believe our historical track record of acquiring and integrating restaurants provides us with additional future growth opportunities and we will seek to take advantage of strategic acquisitions that may be available in the marketplace.

RESTAURANT OPENINGS

The following table outlines the restaurant unit information for each fiscal year from 2013 through 2017 (estimate).

																
 	 	2017 (estimate)	 	2016	 	2015	 	2014	 	2013	
Restaurants open at the beginning of year	 	64		 	62		 	42		 	36		 	33		
 	 	 	 	 	 	 	 	 	 	 	
Openings/closures:	 	 	 	 	 	 	 	 	 	 	
New restaurant openings	 	1		 	2		 	3		 	3		 	3		
Restaurant acquisitions	 	—		 	—		 	18		 	3		 	—		
Restaurant closures	 	—		 	—		 	(1	)	 	—		 	—		
Total restaurants open at the end of the year	 	65		 	64		 	62		 	42		 	36		

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RESULTS OF OPERATIONS

For the three-month period ended September 24, 2017 (" Third Quarter 2017 "), revenue was generated from the operations of 65 restaurants. For the three-month period ended September 25, 2016 (" Third Quarter 2016 "), revenue was generated from the operations of 64 restaurants. Quarterly 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's comparable sales in the first full month after the 18th month of operation. 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 62 and 60 restaurants at September 24, 2017 and September 25, 2016 , respectively.
 
Results of Operations for the Three Months Ended September 24, 2017 and September 25, 2016

							
 	 	Three months ended	
 	 	September 24, 2017	 	September 25, 2016	
Total revenue	 	100.0	 %	 	100.0	 %	
 	 	 	 	 	
Operating expenses	 	 	 	 	
Food, beverage, and packaging costs	 	29.5	 %	 	27.4	 %	
Compensation costs	 	25.4	 %	 	24.7	 %	
Occupancy costs	 	7.6	 %	 	7.0	 %	
Other operating costs	 	22.3	 %	 	21.4	 %	
General and administrative expenses	 	5.9	 %	 	5.7	 %	
Pre-opening costs	 	0.2	 %	 	0.2	 %	
Depreciation and amortization	 	8.3	 %	 	8.7	 %	
Loss on asset disposal	 	—	 %	 	0.2	 %	
Total operating expenses	 	99.2	 %	 	95.3	 %	
 	 	 	 	 	
Operating profit	 	0.8	 %	 	4.7	 %	
 	 	 	 	 	
Interest expense	 	(4.6	)%	 	(3.5	)%	
Other income, net	 	0.1	 %	 	0.0	 %	
 	 	 	 	 	
Income (loss) from continuing operations before income taxes	 	(3.7	)%	 	1.2	 %	
 	 	 	 	 	
Income tax benefit of continuing operations	 	2.4	 %	 	0.3	 %	
 	 	 	 	 	
Income (loss) from continuing operations	 	(1.3	)%	 	1.5	 %	
 	 	 	 	 	
Loss from discontinued operations before income taxes	 	(0.1	)%	 	(6.6	)%	
Income tax benefit of discontinued operations	 	—	 %	 	1.8	 %	
Loss from discontinued operations	 	(0.1	)%	 	(4.8	)%	
 	 	 	 	 	
Net Loss	 	(1.4	)%	 	(3.3	)%	

Revenue for Third Quarter 2017 was $39.3 million , a decrease of $2.3 million , or 5.7% , compared to $41.6 million of revenue generated during Third Quarter 2016 . The decrease was driven by lost sales due to Hurricane Irma, major construction projects impacting two locations, the honeymoon phase of two new restaurants that opened in the Second Quarter 2016 and the impact of the revenue deferral related to the Blazin' Rewards loyalty program launched in late-2016. The decrease was partially offset by a new restaurant opening late in Second Quarter 2017. Third Quarter 2017 same-store sales decreased by 4.4%.

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Food, beverage, and packaging costs increased by $0.2 million , or 1.5% , to $11.6 million in Third Quarter 2017 from $11.4 million in Third Quarter 2016 due to the increase in the number of restaurants operating in 2017. Food, beverage, and packaging costs as a percentage of revenue increased to 29.5% in Third Quarter 2017 from 27.4% in Third Quarter 2016 primarily due to higher traditional chicken wing costs and an increase in promotional activity. Average cost per pound for traditional bone-in chicken wings, our most significant input cost, increased to $2.14 in Third Quarter 2017 compared with $1.70 in Third Quarter 2016 , while the mix of traditional wings to total product sales increased from 29.6% in the Third Quarter of 2016 to 38.3% in the Third Quarter of 2017 , driven by promotions.

Compensation costs decreased by $0.3 million , or 2.9% , to $10.0 million in Third Quarter 2017 from $10.3 million in Third Quarter 2016 . The decrease was primarily due to lower volumes, and lower bonuses and labor overhead expense. Compensation costs as a percentage of sales increased to 25.4% in Third Quarter 2017 from 24.7% in Third Quarter 2016 as a result of lower volumes compared to the same period last year.

Occupancy costs  increased $0.1 million , or 2.4% , to $3.0 million in Third Quarter 2017 from $2.9 million in Third Quarter 2016 due to having more restaurants in Third Quarter of 2017. Occupancy as a percentage of sales increased to 7.6% in Third Quarter 2017 compared with 7.0% Third Quarter 2016 due to lower sales compared to the same period last year.

Other operating costs decreased $0.1 million , or 1.7% , to $8.8 million in Third Quarter 2017 from $8.9 million in Third Quarter 2016 primarily due to cost saving initiatives. Other operating costs as a percentage of sales increased to 22.3% in Third Quarter 2017 from 21.4% in Third Quarter 2016 , due to lower sales compared to the same period last year.

General and administrative expenses decreased $0.1 million , or 3.1% , to $2.3 million  in Third Quarter 2017 from $2.4 million in Third Quarter 2016 .  This decrease was primarily due to a decrease in corporate wages and lower marketing expenses. General and administrative expenses as a percentage of sales increased to 5.9% in Third Quarter 2017 from 5.7% in Third Quarter 2016 .

Depreciation and amortization  decreased by $0.4 million , or 10.5% , to $3.2 million in Third Quarter 2017 from $3.6 million in Third Quarter 2016 . This decrease was primarily due to fixed asset disposals partially offset by the addition of a new restaurant opened in the Second Quarter of 2017. Depreciation and amortization as a percentage of sales decreased to 8.3% in Third Quarter 2017 from 8.7% in Third Quarter 2016 .

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Results of Operations for the Nine Months Ended September 24, 2017 and September 25, 2016

							
 	 	Nine months ended	
 	 	September 24, 2017	 	September 25, 2016	
Total revenue	 	100.0	 %	 	100.0	 %	
 	 	 	 	 	
Operating expenses	 	 	 	 	
Food, beverage, and packaging costs	 	29.6	 %	 	27.7	 %	
Compensation costs	 	25.2	 %	 	24.8	 %	
Occupancy costs	 	7.0	 %	 	6.7	 %	
Other operating costs	 	21.2	 %	 	20.6	 %	
General and administrative expenses	 	5.4	 %	 	5.5	 %	
Pre-opening costs	 	0.3	 %	 	0.5	 %	
Depreciation and amortization	 	8.2	 %	 	8.9	 %	
Loss on asset disposal	 	0.2	 %	 	0.2	 %	
Total operating expenses	 	97.1	 %	 	94.9	 %	
 	 	 	 	 	
Operating profit	 	2.9	 %	 	5.1	 %	
 	 	 	 	 	
Interest expense	 	(4.1	)%	 	(3.4	)%	
Other income, net	 	0.1	 %	 	0.1	 %	
 	 	 	 	 	
Income (loss) from continuing operations before income taxes	 	(1.1	)%	 	1.8	 %	
 	 	 	 	 	
Income tax benefit (expense) of continuing operations	 	1.2	 %	 	(0.1	)%	
 	 	 	 	 	
Income from continuing operations	 	0.1	 %	 	1.7	 %	
 	 	 	 	 	
Loss from discontinued operations before income taxes	 	(0.1	)%	 	(3.7	)%	
Income tax benefit of discontinued operations	 	—	 %	 	1.1	 %	
Loss from discontinued operations	 	(0.1	)%	 	(2.6	)%	
 	 	 	 	 	
Net Loss	 	—	 %	 	(0.9	)%	

Revenue for Year to Date 2017 was $123.5 million , a decrease of $2.2 million , or 1.7% , over $125.7 million of revenue generated during Year to Date 2016 . The decrease was driven by lost sales from Hurricane Irma, unfavorable number of major sporting events in our core markets in the Second Quarter, a decline in traffic and the impact of the revenue deferral related to the Blazin' Rewards loyalty program launched in late-2016, partially offset by sales from a new restaurant opened in Second Quarter 2017. Year to Date 2017 same-store sales decreased by 2.7%.

Food, beverage, and packaging costs increased by $1.6 million , or 4.7% , to $36.5 million in Year to Date 2017 from $34.9 million in Year to Date 2016 due to the increase in the number of restaurants operating in 2017 . Food, beverage, and packaging costs as a percentage of revenue increased to 29.6% in Year to Date 2017 from 27.7% in Year to Date 2016 primarily due to commodity cost inflation and an increase in promotional activity. Average cost per pound for traditional bone-in chicken wings, our most significant input cost, increased to $2.06 in Year to Date 2017 compared with $1.85 in Year to Date 2016 , while the yield from bone-in chicken wings was reduced in Year to Date 2017 compared to Year to Date 2016 as a result of larger average pieces, as we purchase by the pound and sell by the piece.

Compensation costs were flat at $31.1 million in Year to Date 2017 and Year to Date 2016 . Compensation costs as a percentage of sales increased to 25.2% in Year to Date 2017 from 24.8% in Year to Date 2016 due to lower average unit volumes.

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Occupancy costs  increased $0.3 million , or 3.1% , to $8.7 million in Year to Date 2017 from $8.4 million in Year to Date 2016 due to the increased number of restaurants operating in 2017 . Occupancy as a percentage of sales increased to 7.0% in Year to Date 2017 compared with 6.7% in Year to Date 2016 primarily due to lower volumes.

Other operating costs increased $0.4 million , or 1.5% , to $26.2 million in Year to Date 2017 from $25.8 million in Year to Date 2016 due to the increased number of restaurants operating in 2017. Other operating costs as a percentage of sales increased to 21.2% in Year to Date 2017 from 20.6% in Year to Date 2016 , primarily due to lower average unit volumes.

General and administrative expenses decreased $0.2 million , or 2.5% , to $6.7 million  in Year to Date 2017 from $6.9 million in Year to Date 2016 . This decrease was primarily due to a decrease in corporate wages and marketing expenses. General and administrative expenses as a percentage of sales remained relatively flat at 5.4% in Year to Date 2017 and 5.5% in Year to Date 2016 .

Pre-opening costs decreased $0.3 million , or 38.0% , to $0.4 million in Year to Date 2017 from $0.7 million in Year to Date 2016 . We opened one new restaurant in Second Quarter 2017 and opened two new restaurants in the Second Quarter 2016 . Pre-opening costs as a percentage of sales decreased to 0.3% in Year to Date 2017 from 0.5% in Year to Date 2016 .

Depreciation and amortization  decreased by $1.1 million , or 9.5% , to $10.1 million in Year to Date 2017 from $11.2 million in Year to Date 2016 . This decrease was primarily due to fixed asset disposals partially offset by the addition of two new restaurants opened in the Second Quarter of 2016 and one new restaurant opened in Second Quarter 2017. Depreciation and amortization as a percentage of sales decreased to 8.2% in Year to Date 2017 from 8.9% in Year to Date 2016 .

INTEREST AND TAXES

Interest expense was $1.8 million and $1.4 million during Third Quarter 2017 and in Third Quarter 2016 , respectively. Interest expense was $5.0 million and $4.3 million in Year to Date 2017 and in Year to Date 2016 , respectively. The increase was primarily due to increased debt resulting from building new restaurants in fiscal 2016 and Second Quarter 2017 .

For Third Quarter 2017 , DRH had an income tax benefit of $0.9 million compared to Third Quarter 2016 income tax benefit of $0.1 million . For Year to Date 2017 , DRH had an income tax benefit of $1.5 million compared to Year to Date 2016 income tax provision of $0.1 million . The increase in the income tax benefit was primarily attributable to the increase in estimated tip tax credits for 2017 creating a tax recovery. As the decrease in income before income taxes for the nine months ended September 24, 2017 resulted in an operating loss, the effective income tax rate appears as an expense but is effectively a recovery generated by the operating loss and the increase in estimated tip tax credits.

LIQUIDITY AND CAPITAL RESOURCES; EXPANSION PLANS

On June 29, 2015, the Company entered into a $155.0 million senior secured credit facility with a syndicate of lenders led by Citizens (the “June 2015 Senior Secured Credit Facility”) with a senior lien on all the Company’s personal property and fixtures. The June 2015 Senior Secured Credit Facility consists of a $120.0 million term loan (the “June 2015 Term Loan”), a $30.0 million development line of credit that was subsequently amended to $23.0 million (see amendment details below) (the “June 2015 DLOC”) and a $5.0 million revolving line of credit (the “June 2015 RLOC”). The Company used approximately $65.5 million of the June 2015 Term Loan to refinance existing outstanding debt and used approximately $54.0 million of the June 2015 Term Loan to finance an acquisition. The remaining balance of the June 2015 Term Loan, approximately $0.5 million , was used to pay the fees, costs, and expenses associated with the closing of the June 2015 Senior Secured Credit Facility. The June 2015 Term Loan is for a period of five years .

On December 23, 2016, the Company entered into an amendment agreement for purposes of, among other things, releasing the Bagger Dave’s entities as borrowers and releasing all related liens on the Bagger Dave’s assets. In addition, the amendment (a) converted the amounts then outstanding under the June 2015 DLOC to a development facility term loan (the “DF Term Loan”), (b) canceled $6.8 million previously available under the June 2015 DLOC, and (c) extended the maturity date on the remaining $5.0 million under the June 2015 DLOC to June 29, 2018 (the "DLOC Maturity Date").

Payments of principal are based upon a 12 -year straight-line amortization schedule, with monthly principal payments totaling $833,333 on the June 2015 Term Loan and $126,385 on the DF Term Loan, plus accrued interest. The entire remaining outstanding principal and accrued interest on the June 2015 Term Loan and the DF Term Loan is due and payable on the maturity date of June 29, 2020. Availability under the June 2015 DLOC is subject to certain limitations relative to actual development costs, and outstanding balances convert into an additional DF Term Loan based on the terms of the agreement, at which time monthly principal

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payments will be due based on a 12 -year, straight-line amortization schedule, plus interest, through maturity on June 29, 2020. There were no balances outstanding under the June 2015 DLOC at December 25, 2016. If the DLOC is fully drawn prior to the DLOC Maturity Date, the outstanding principal balance automatically converts to a term loan and becomes due based on the 12 -year amortization period with final payment due June 29, 2020. If the DLOC is not fully drawn prior to the DLOC Maturity Date, then any outstanding balances automatically convert to a term loan on on such date. The June 2015 RLOC is for a term of five years.

The interest rate for each of the loans, as selected by the borrower, is based upon either a LIBOR or base rate (generally Prime or Fed Funds) plus an applicable margin, which ranges from 2.25% to 3.5% for LIBOR loans and from 1.25% to 2.5% for base rate loans, depending on the lease adjusted leverage ratio as defined in the agreement.

The current debt agreement contains various customary financial covenants generally based on the performance of the Company. The financial covenants consist of a minimum required debt service coverage ratio and a maximum permitted lease adjusted leverage ratio. On June 30, 2017, the Company entered into an amendment agreement for purposes of revising the maximum lease adjusted leverage ratio and revising certain definitions impacting the calculation of the ratio. As of September 24, 2017 , the Company was in compliance with the loan covenants.

We believe that our current cash balance, in addition to our cash flow from operations and availability of credit, will be sufficient to fund our present operations and meet our commitments on our existing debt. However, if current negative sales trends persist, key commodity costs remain elevated, or suitable acquisition opportunities or other working capital needs arise that require additional financing, we believe that our financial position and earnings history provide a sufficient base for obtaining additional financing resources or restructuring our existing debt at reasonable rates and terms. We may also issue additional shares of common or preferred stock to raise funds.

Our capital requirements are primarily dependent upon the pace of our new restaurant growth plan and our restaurant remodeling schedule. The new restaurant growth plan is primarily dependent upon economic conditions, the real estate market and resources to both develop and operate new restaurants. Our capital expenditure outlays are also dependent on the cost and potential obligation to invest in maintenance, facility upgrades, capacity enhancements, information technology and other general corporate capital expenditures.

The amount of capital required to open a new restaurant is largely dependent on whether we build-out an existing leased space or build from the ground up. Our preference is to find leased space for new restaurant locations, but depending on the availability of real estate in specific markets, we will take advantage of alternative strategies, which may include land purchases, land leases, and ground-up construction of a building to house our restaurant operation. We expect that a build-out of a new DRH-owned BWW restaurant will require an estimated cash investment of $1.7 million to $2.1 million (excluding potential tenant incentives). We expect to spend up to $0.3 million per restaurant for pre-opening expenses. Depending on individual lease negotiations, we may receive cash tenant incentives, which have historically been up to $0.4 million. The projected cash investment per restaurant is based on recent opening costs and future projections and may fluctuate based on construction costs specific to new restaurant locations.

We target a cash on cash payback on our initial total capital investment of less than four years. The expected payback is subject to how quickly we reach our target sales volume and the cost of construction.

Cash flow from continuing operations for the nine months ended September 24, 2017  was $9.8 million compared with $12.1 million for the nine months ended September 25, 2016 . Net cash provided by operating activities consisted primarily of net earnings adjusted for non-cash expenses.

For 2017 , capital expenditures are anticipated to total approximately $6.0 million. We plan to use the capital as follows: approximately 45.0% for new restaurant openings and the remaining 55.0% for restaurant remodels, upgrades, maintenance and other general corporate purposes.

Although investments in new restaurants have been 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 have ranged from approximately $50,000 (for minor interior refreshes) to approximately $1.3 million (for a full remodel of the restaurant). We target remodels of $0.3 million to $0.7 million to upgrade a typical BWW restaurant to the new Stadia design, where the higher end of the range would also typically include an expansion such as the addition of an enclosed patio. The Company's strategy is to fully remodel existing BWW restaurants to the Stadia design at time of scheduled refresh or remodel, typically within seven years of opening.

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Mandatory Upgrades
 
In fiscal year 2017 , we have invested in two mandatory remodels of existing BWW restaurants. These have been primarily funded through cash from operations, supplemented by borrowing on our development line of credit.
 
Discretionary Upgrades and Relocations
 
In fiscal year 2017 , the Company plans to invest additional capital to provide minor upgrades to a number of its existing locations, all of which we expect to fund with cash from operations. These improvements will primarily consist of refreshing interior building finishes, audio/visual equipment upgrades, and patio upgrades. In fiscal year 2017 , we do not have any planned relocations. The decision to relocate is typically driven by timing of our current lease agreements and the availability of real estate that we deem to be a better long-term investment. Relocations are funded by a combination of cash from operations and borrowing from our credit facility.

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Inflation

Our profitability is dependent, among other things, on our ability to anticipate and react to changes in the costs of key operating resources, including food and other raw materials, labor, energy, and other supplies and services. Substantial increases in costs and expenses could impact our operating results to the extent that such increases cannot be passed along to our restaurant guests. The impact of inflation on food, labor, energy, and occupancy costs can significantly affect the profitability of our restaurant operations.

All of our restaurant staff members are paid hourly rates based on, or in excess of, the federal minimum wage. Certain operating costs, such as taxes, insurance, and other outside services continue to increase with the general level of inflation or at higher rates and may also be subject to other cost and supply fluctuations outside of our control.

While we have been able to partially offset inflation and other changes in the costs of key operating resources by gradually increasing prices for our menu items, more efficient purchasing practices, productivity improvements, and greater economies of scale, there can be no assurance that we will be able to continue to do so in the future. From time to time, competitive conditions could limit our menu pricing flexibility. In addition, macroeconomic conditions could make additional menu price increases imprudent. There can be no assurance that all future cost increases can be offset by increased menu prices or that increased menu prices will be fully absorbed by our restaurant guests without any resulting changes in their visit frequencies or purchasing patterns. There can be no assurance that we will be able to generate increases in comparable restaurant sales in amounts sufficient to offset inflationary or other cost pressures.

OFF-BALANCE SHEET ARRANGEMENTS

The Company's ADA requires DRH to open 42 BWW restaurants within its designated development territory by April 1, 2021. As of September 24, 2017 , 30 of the required 42 restaurants under the ADA had been opened for business. We are in discussions with BWLD regarding the remaining 12 restaurants required by 2021. The Company may continue to open new locations, but at a lower number over a longer period of time under an amended ADA.

After the Spin-Off, the Company remains liable for guarantees of certain Bagger Dave’s leases. These guarantees cover 17 separate leases, several of which relate to restaurants previously closed and being operated by a new tenant under either a sub-lease or a new lease.

The Company has determined that its maximum exposure resulting from the lease guarantees includes approximately $8.8 million of future minimum lease payments plus potential additional payments to satisfy maintenance, property tax and insurance requirements under the leases. The terms and conditions of the guarantees vary, and each guarantee has an expiration date which may or may not correspond with the end of the underlying lease term. These expiration dates range from less than 1 month to 12 years as of September 24, 2017 . In the event that the Company is required to perform under any of its lease guarantees, we do not believe the liability would be material because we would first seek to minimize the exposure by finding a suitable tenant to lease the space. In many cases, we expect that a replacement tenant would be found and the lessor would agree to release the Company from its future guarantee obligation. Since 2015, 10 Bagger Dave’s locations with DRH lease guarantees were closed. New tenants were found to step into the Company’s lease obligations for 7 of these locations in 3 to 14 months from the date of closure. Over this time, 6 guarantees expired or terminated, and 4 remain obligations of the Company.

Further, in conjunction with the Spin-Off, DRH entered into a transition services agreement (the "TSA") with Bagger Dave's pursuant to which DRH will provide certain information technology and human resources support, limited accounting support, and other minor administrative functions at no charge. The TSA is intended to assist the discontinued component in efficiently and seamlessly transitioning to stand on its own. The current terms of the TSA expire in December 2017 at which time the parties may negotiate which services will be required on an ongoing basis and the fees that will be charged for such services, and at any time thereafter the TSA can be terminated by the Company with 10 days written notice.

Impact of New Accounting Standards

See Note 1 , "Nature of Business and Summary of Significant Accounting Policies" included in Part 1, Item 1, "Notes to Interim Consolidated Financial Statements," of this Quarterly Report.

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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 25, 2016 .

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Item 3. Quantitative and Qualitative Disclosure About Market Risks  

Not applicable for smaller reporting companies.

Item 4. Controls and Procedures
 
(a) Evaluation of disclosure controls and procedures.
 
We are required to maintain disclosure controls and procedures designed to ensure that material information related to us, including our consolidated subsidiaries, is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission rules and forms. Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
 
Conclusion regarding the effectiveness of disclosure controls and procedures
 
As of September 24, 2017 , 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 24, 2017 .
 
(b) Changes in internal control over financial reporting.
 
There were no changes in the Company’s internal control over financial reporting during the quarter ended September 24, 2017 that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.
 
Our process for evaluating controls and procedures is continuous and encompasses constant improvement of the design and effectiveness of established controls and procedures and the remediation of any deficiencies that may be identified during this process.

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PART II. OTHER INFORMATION
 
Item 1. Legal Proceedings  
We are occasionally a defendant in litigation arising in the ordinary course of our business, including claims arising from personal injuries, contract claims, dram shop claims, employment-related claims, and claims from guests or team members alleging injury, illness, or other food quality, health, or operational concerns. To date, none of these types of litigation, most of which are entirely or predominantly covered by insurance, has had a material effect on our financial condition or results of operations. We have insured and continue to insure against most of these types of claims. A judgment on any claim not covered by or in excess of our insurance coverage could materially adversely affect our financial condition or results of operations. As of the date of this Quarterly Report, we are not a party to any material pending legal proceedings and are not aware of any claims that could have a materially adverse effect on our financial position, results of operations or cash flows. 

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

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
None.

Item 3. Defaults Upon Senior Securities
 
None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information
 
None.

Item 6. Exhibits

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

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

	
				
 	 	DIVERSIFIED RESTAURANT HOLDINGS, INC.	

Dated:	November 3, 2017	By:	/s/ David G. Burke	
 	 	David G. Burke	
 	 	President and Chief Executive	
 	 	Officer (Principal Executive Officer)	

 	 	By:	/s/ Phyllis A. Knight	
 	 	Phyllis A. Knight	
 	 	Chief Financial Officer and Treasurer	
 	 	(Principal Financial and Accounting Officer)	

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EXHIBIT INDEX

	
		
Exhibit No.	Exhibit Description	
 	 	
3.1	Certificate of Incorporation (filed as an exhibit to the Company's Registration Statement on Form S-1, as filed with the Securities and Exchange Commission on August 10, 2007, and incorporated herein by this reference).	
 	 	
3.2	Amended and Restated Bylaws (filed as an exhibit to the Company's Form 8-K, as filed with the Securities and Exchange Commission on August 29, 2012, and incorporated herein by this reference).	
 	 	
3.3	First Amendment to the Amended and Restated Bylaws (filed as an exhibit to the Company's Form 8-K, as filed with the Securities and Exchange Commission on October 31, 2012, and incorporated herein by this reference).	
 	 	
 3.4	Second Amendment to the Amended and Restated Bylaws (filed as an exhibit to the Company's Form 8-K, as filed with the Securities and Exchange Commission on July 29, 2016, and incorporated herein by this reference).	
 	 	
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	

35

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

I, David G. Burke, certify that:
 
1.          I have reviewed this Quarterly Report on Form 10-Q for the fiscal quarter ended September 24, 2017 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 3, 2017	DIVERSIFIED RESTAURANT HOLDINGS, INC.   	

 	 	By:	/s/ David G. Burke	 	
 	 	 	David G. Burke
President and
Chief Executive Officer
(Principal Executive Officer)	 	

  Exhibit 31.2 
 
RULE 13a-14(a) CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Phyllis A. Knight, certify that:
 
1.          I have reviewed this Quarterly Report on Form 10-Q for the fiscal quarter ended September 24, 2017 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 3, 2017	DIVERSIFIED RESTAURANT HOLDINGS, INC.	
 	 	 	 	 	
 	 	By:	/s/ Phyllis A. Knight	 	
 	 	 	Phyllis A. Knight
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 24, 2017 , I, David G. Burke, President 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 3, 2017	DIVERSIFIED RESTAURANT HOLDINGS, INC.   	

 	 	 	 	 	
 	 	By:	/s/ David G. Burke	 	
 	 	 	David G. Burke
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 24, 2017 , I, Phyllis A. Knight, 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 3, 2017	DIVERSIFIED RESTAURANT HOLDINGS, INC.	

 	 	 	 	 	
 	 	By:	/s/ Phyllis A. Knight	 	
 	 	 	Phyllis A. Knight
Treasurer and Chief Financial Officer
(Principal Financial Officer)