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GCFB > SEC Filings for GCFB > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for GRANITE CITY FOOD & BREWERY LTD. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for GRANITE CITY FOOD & BREWERY LTD.


9-Nov-2012

Quarterly Report


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

This discussion and analysis contains various non-historical forward-looking statements within the meaning of Section 21E of the Exchange Act. Although we believe that, in making any such statement, our expectations are based on reasonable assumptions, any such statement may be influenced by factors that could cause actual outcomes and results to be materially different from those projected. When used in the following discussion, the words "anticipates," "believes," "expects," "intends," "plans," "estimates" and similar expressions, as they relate to us or our management, are intended to identify such forward-looking statements. You are cautioned not to attribute undue certainty to such forward-looking statements, which are qualified in their entirety by the cautions and risks described herein. Please refer to the "Risk Factors" section of our Annual Report on Form 10-K, filed with the Securities and Exchange Commission ("SEC") on March 23, 2012 for additional factors known to us that may cause actual results to vary.

Overview

We operate two casual dining concepts under the names Granite City Food & Brewery® and Cadillac Ranch All American Bar & Grill®. As of September 25, 2012, we operated 27 Granite City restaurants and six Cadillac Ranch restaurants in 15 states. The Granite City restaurant theme is upscale casual dining with a wide variety of menu items that are prepared fresh daily, including Granite City's award-winning signature line of hand-crafted beers finished on-site. The extensive menu features moderately priced favorites served in generous portions. Granite City's attractive price point, high service standards, and great food and beer combine for a memorable dining experience. Cadillac Ranch restaurants feature freshly prepared, authentic, All-American


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cuisine in a fun, dynamic environment. Patrons enjoy a warm, Rock N' Roll inspired atmosphere, with plenty of room for friends, music and dancing. The Cadillac Ranch menu is diverse with offerings ranging from homemade meatloaf to pasta dishes, all freshly prepared using quality ingredients.

Additionally, we operate a centralized beer production facility which facilitates the initial stages of our brewing process. The product produced at our beer production facility is then transported to the fermentation vessels at each of our Granite City restaurants where the brewing process is completed. We believe that this brewing process improves the economics of microbrewing as it eliminates the initial stages of brewing and storage at multiple locations. In 2007, we were granted a patent by the United States Patent Office for our brewing process and in June 2010, were granted an additional patent for an apparatus for distributed production of beer.

Our industry can be significantly affected by changes in economic conditions, discretionary spending patterns, consumer tastes, and cost fluctuations. In recent years, consumers have been under increased economic pressures and as a result, many have changed their discretionary spending patterns. Although negative trends in consumer spending within the casual dining sector appear to be easing, many consumers continue to dine out less frequently than in the past and/or have decreased the amount they spend on meals while dining out. To offset the negative impact of decreased sales, we undertook a series of initiatives to renegotiate the pricing of various aspects of our business, effectively reducing our cost of food, insurance, payroll processing, shipping, supplies and our property and equipment rent. We also implemented marketing initiatives designed to increase brand awareness and help drive guest traffic. We believe these initiatives contributed to the increase in sales in the first three quarters of fiscal year 2012 over the first three quarters of fiscal year 2011.

We believe that our operating results will fluctuate significantly because of several factors, including the operating results of our restaurants, changes in food and labor costs, increases or decreases in comparable restaurant sales, general economic conditions, consumer confidence in the economy, changes in consumer preferences, nutritional concerns and discretionary spending patterns, competitive factors, the skill and the experience of our restaurant-level management teams, the maturity of each restaurant, adverse weather conditions in our markets, and the timing of future restaurant openings and related expenses.

We utilize a 52/53-week fiscal year ending the last Tuesday in December for financial reporting purposes. The third quarters of 2012 and 2011 included 429 and 338 operating weeks, respectively, which is the sum of the actual number of weeks each restaurant operated. The first three quarters of 2012 and 2011 included 1,246 and 1,014 operating weeks, respectively. Because we have opened new restaurants at various times throughout the years, we provide this statistical measure to enhance the comparison of revenue from period to period as changes occur in the number of units we are operating.

Our restaurant revenue is comprised almost entirely of the sales of food and beverages. We also obtain a small percentage of revenue from cover charges, banquet or private dining room rentals and the sale of retail items. Such sales make up less than two percent of total revenue. Product costs include the costs of food, beverages and retail items. Labor costs include direct hourly and management wages, taxes and benefits for restaurant employees. Direct and occupancy costs include restaurant supplies, marketing costs, rent, utilities, real estate taxes, repairs and maintenance and other related costs. Pre-opening costs consist of direct costs related to hiring and training the initial restaurant workforce, the salaries and related costs of our new restaurant opening team, non-cash rent costs incurred during the construction period and certain other direct costs associated with opening new restaurants. General and administrative expenses are comprised of expenses associated with all corporate and administrative functions that support existing operations, which include management and staff salaries, employee benefits, travel, information systems, training, market research, professional fees, supplies and corporate rent. Acquisition costs are expenses related to due diligence performed as part of the potential acquisition of assets. Depreciation and amortization includes depreciation on capital expenditures at the restaurant and corporate levels and amortization of intangibles that do not have indefinite lives. Interest expense represents the cost of interest expense on debt and capital leases net of interest income on invested assets.


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Results of operations as a percentage of sales

The following table sets forth results of our operations expressed as a percentage of sales for the thirteen and thirty-nine weeks ended September 25, 2012 and September 27, 2011:

                                          Thirteen Weeks Ended            Thirty-nine Weeks Ended
                                     September 25,    September 27,    September 25,    September 27,
                                         2012             2011             2012             2011

Restaurant revenue                           100.0 %          100.0 %          100.0 %          100.0 %

Cost of sales:
Food, beverage and retail                     27.0             27.2             27.0             27.2
Labor                                         33.1             34.0             33.0             34.2
Direct restaurant operating                   15.3             15.6             14.8             14.9
Occupancy                                      8.3              8.1              8.2              7.5
Total cost of sales                           83.6             85.0             83.0             83.8

Pre-opening                                    0.5              0.0              1.0              0.0
General and administrative                     7.4              8.7              8.0              8.2
Acquisition costs                              0.6                -              0.8                -
Depreciation and amortization                  6.2              6.4              6.1              6.5
Exit or disposal activities                    0.1              0.1              0.1             (0.2 )
Loss (gain) on disposal of assets              0.5              0.2              0.4             (0.0 )
Operating loss                                 1.1             (0.3 )            0.7              1.9

Interest:
Income                                           -                -                -                -
Expense                                       (4.0 )           (4.1 )           (4.1 )           (4.0 )
Net interest expense                          (4.0 )           (4.1 )           (4.1 )           (4.0 )

Net loss                                      (2.9 )%          (4.4 )%          (3.5 )%          (2.2 )%

Certain percentage amounts do not sum due to rounding.

Critical accounting policies

Our critical accounting policies are those that require significant judgment. There have been no material changes to the critical accounting policies previously reported in our Annual Report on Form 10-K for the fiscal year ended December 27, 2011, filed with the SEC on March 23, 2012.


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Results of operations for the thirteen and thirty-nine weeks ended September 25, 2012 and September 27, 2011

Revenue

We generated $31,135,288 and $22,945,303 of revenue during the third quarters of 2012 and 2011, respectively. The 35.7% increase in the third quarter of 2012 revenue was primarily the result of the six Cadillac Ranch restaurants we acquired in late 2011 and early 2012, and our Granite City restaurant in Troy, Michigan which opened in May 2012. Comparable restaurant revenue, which includes restaurants we have operated over 18 months, increased 2.5% from the third quarter of 2011 to the third quarter of 2012 due primarily to reduction of discounts offered to our guests. The average weekly revenue per restaurant at our comparable restaurants increased $1,678 from $67,886 in the third quarter of 2011 to $69,564 in the third quarter of 2012.

We generated $90,072,910 and $70,072,350 of revenue during the first three quarters of 2012 and 2011, respectively. The 28.5% increase in the first three quarters of 2012 revenue was primarily the result of the Cadillac Ranch restaurants we acquired and the Granite City restaurant we opened in Troy, Michigan. Comparable restaurant revenue, which includes restaurants we have operated over 18 months, increased 1.9% from the first three quarters of 2011 to the first three quarters of 2012 due primarily to reduction of discounts offered to our guests. The average weekly revenue per restaurant at our comparable restaurants increased $1,339 from $69,105 in the first three quarters of 2011 to $70,444 in the first three quarters of 2012.

We expect that restaurant revenue will vary from quarter to quarter. Continued seasonal fluctuations in restaurant revenue are due in part to the availability of outdoor seating and weather conditions. Due to the honeymoon effect that periodically occurs with the opening of a restaurant, we expect the timing of any future restaurant openings to cause fluctuations in restaurant revenue. Additionally, other factors outside of our control, such as timing of holidays, consumer confidence in the economy and changes in consumer preferences may affect our future revenue.

Restaurant costs

Food and beverage

Our food and beverage costs, as a percentage of revenue, decreased 0.2% to 27.0% in both the third quarter and first three quarters of 2012 from 27.2% in both the third quarter and first three quarters of 2011. While we experienced some cost increases, primarily fish, chicken and beer, such increases were offset by decreases in other protein, wine, some produce and soft drinks. While pricing negotiations with our suppliers have reduced our exposure to commodity price increases, we do expect that our food and beverage costs will continue to vary going forward due to numerous variables, including seasonal changes in food and beverage costs for certain products for which we do not have contracted pricing, fluctuations within commodity-priced goods and guest preferences. We periodically create new menu offerings and introduce new craft brewed beers based upon guest preferences. Although such menu modifications may temporarily result in increased food and beverage cost, we believe we are able to offset such increases with our specials which provide variety and value to our guests. Our varieties of craft brewed beer, which we believe we can produce at a lower cost than beers we purchase for resale, also enable us to keep our food and beverage costs low while fulfilling guest requests and building customer loyalty. During the first three quarters of 2012, we discontinued several tiers of sales discounting at the Granite City restaurants. As such, we expect overall food costs as a percentage of revenue will continue at a similar level through the fourth quarter of 2012.

Labor

Labor expense consists of restaurant management salaries, hourly staff payroll costs, other payroll-related items including management bonuses, and non-cash stock-based compensation expense. Our experience to date has been that staff labor costs associated with a newly opened restaurant, for approximately its first four to six


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months of operation, are greater than what can be expected after that time, both in aggregate dollars and as a percentage of revenue.

Our labor costs, as a percentage of revenue, decreased 0.9% to 33.1% in the third quarter of 2012 from 34.0% in the third quarter of 2011. Such costs decreased 1.2% as a percentage of revenue to 33.0% in the first three quarters of 2012 from 34.2% in the first three quarters of 2011. The Cadillac Ranch restaurants use third parties to provide certain security services which are provided by the Company's employees at the Granite City restaurants. As a result, those expenses are recorded in direct operating cost instead of labor expense. Non-cash stock-based compensation was $107,476 in the first three quarters of 2012 compared to $200,726 in the first three quarters of 2011.

We expect that labor costs will vary as minimum wage laws, local labor laws and practices, and unemployment rates vary from state to state, as will hiring and training expenses. We believe that retaining good employees and more experienced staff ensures high quality guest service and may reduce hiring and training costs.

Direct restaurant operating

Operating supplies, repairs and maintenance, utilities, promotions and restaurant-level administrative expense represent the majority of our direct restaurant operating expense, a portion of which is fixed or indirectly variable. Our direct restaurant operating expense, as a percentage of revenue, decreased 0.3% to 15.3% in the third quarter of 2012 from 15.6% in the third quarter of 2011. Such costs decreased 0.1% to 14.8% in the first three quarters of 2012 from 14.9% in the first three quarters of 2011. While we experienced increases in maintenance and repair, security services and janitorial supplies, we saw decreases in utilities, credit card fees and marketing on a year-to-date basis.

We continue to seek ways to reduce our direct operating costs going forward including additional pricing negotiations with suppliers and the elimination of waste.

Occupancy

As a percentage of revenue, our occupancy costs, which include both fixed and variable portions of rent, common area maintenance charges, property insurance and property taxes, increased 0.2% in the third quarter of 2012 to 8.3% from 8.1% in the third quarter of 2011. Such costs increased 0.7% to 8.2% in the first three quarters of 2012 from 7.5% in the first three quarters of 2011. The primary source of the year-to-date increase was the non-cash difference between our current rent payments and straight-line rent expense over the initial lease term which is included in occupancy costs. This non-cash rent expense was $279,696 in the first three quarters of 2012 and $(195,228) in the first three quarters of 2011. The credit balance in the first three quarters of 2011 was due to the rental abatement agreements entered into for two of our restaurants. Pursuant to such agreements, we wrote off approximately $307,000 of rent expense we had recorded but withheld during negotiations.

While fixed rent has decreased as a percentage of revenue due to the higher revenue base, we have seen an increase of $838,026 in fixed rent expense when comparing the first three quarters year over year due in part to the nature of our Cadillac Ranch leases. Each Cadillac Ranch lease is considered an operating lease in which all lease expense is included in occupancy expense. In contrast, the majority of our Granite City leases are capital leases in which a portion of the lease expense is recorded as occupancy expense while the remainder is recorded as interest expense and reduction of liability.

Pre-opening

Pre-opening costs, which are expensed as incurred, consist of expenses related to hiring and training the initial restaurant workforce, wages and expenses of our new restaurant opening team, cash and non-cash rental costs incurred during the construction period and certain other direct costs associated with opening new


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restaurants. The majority of pre-opening costs, excluding construction-period rent, are incurred in the month of, and two months prior to, restaurant opening.

Our pre-opening costs in the first two quarters of 2012 were related primarily to the Granite City restaurant we opened in Troy, Michigan in May 2012 while such costs incurred in the third quarter of 2012 were primarily related to our Franklin, Tennessee restaurant, which we expect to open in the first quarter of 2013.

General and administrative

General and administrative expense includes all salaries and benefits, including non-cash stock-based compensation, associated with our corporate staff that is responsible for overall restaurant quality, financial controls and reporting, restaurant management recruiting, management training, and excess capacity costs related to our beer production facility. Other general and administrative expense includes advertising, professional fees, investor relations, office administration, centralized accounting system costs and travel by our corporate management.

General and administrative expense increased $329,995 to $2,315,538 in the third quarter of 2012 from $1,985,543 in the third quarter of 2011. As a percentage of revenue, general and administrative expenses decreased 1.3% in the third quarter of 2012 over 2011 due to the higher revenue provided primarily by the Cadillac Ranch and Troy, Michigan restaurants. Such costs increased $1,470,492 to $7,207,083 in the first three quarters of 2012 from $5,736,591 in the first three quarters of 2011. As a percentage of revenue, general and administrative expenses decreased 0.2% in the first three quarters of 2012 over 2011. Employee compensation, travel and occupancy expense increased general and administrative cost due primarily to the addition of several key members of management in connection with our May 2011 transaction with Concept Development Partners LLC ("CDP"), our majority shareholder, as well as additional personnel and travel expense related to the addition of our six Cadillac Ranch restaurants. Aggregate non-cash stock-based compensation for employees and non-employee board members was $116,271 and $475,349 in the first three quarters of 2012 and 2011, respectively. While we expect similar general and administrative expenses in future months, we believe that the benefit of restaurant, menu and food upgrades and future restaurant unit growth will help to reduce general and administrative expenses as a percentage of revenue.

Depreciation and amortization

Depreciation and amortization expense increased $461,939 to $1,920,425 in the third quarter of 2012 from $1,458,486 in the third quarter of 2011. Such costs increased $967,473 to $5,493,719 in the first three quarters of 2012 from $4,526,246 in the first three quarters of 2011. As a percentage of revenue, depreciation expense decreased 0.2% and 0.4% in the third quarter and first three quarters of 2012 compared to the comparable periods of 2011, respectively, indicating that revenue generated from our new locations more than offset the related increase in depreciation expense. We anticipate depreciation expense will increase as we open additional restaurants and complete enhancements at selected Granite City restaurants, including increased seating in the bars, enclosure of patios for year-round service, and the addition of private dining rooms to accommodate private parties and reduce wait times during peak periods.

Exit or disposal activities

In the first quarter of fiscal year 2011, we entered into lease termination agreements and promissory notes regarding our Rogers, Arkansas restaurant which we ceased operating in August 2008. Pursuant to these agreements, we wrote off the remaining assets and liabilities related to the leases and recorded approximately $168,000 of non-cash income in exit and disposal activities.


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Interest

Net interest expense consists of interest expense on capital leases and long-term debt, net of interest earned from cash on hand. Net interest expense increased $284,522 to $1,232,515 in the third quarter of 2012 from $947,993 in the third quarter of 2011. Such expense increased $901,561 to $3,721,423 in the first three quarters of 2012 from $2,819,862 in the first three quarters of 2011. These increases were due to the increase in the amount borrowed to acquire our six Cadillac Ranch restaurants. We expect our interest expense will increase as we utilize our credit facility to build new Granite City restaurants in select markets, add space through physical enhancements at key existing Granite City restaurant locations and improve operational efficiencies through upgraded technology.

Liquidity and capital resources

As of September 25, 2012, we had $2,413,261 of cash and a working capital deficit of $7,292,083 compared to $2,128,299 of cash and a working capital deficit of $9,277,408 at December 27, 2011.

During the thirty-nine weeks ended September 25, 2012, we obtained $1,771,370 of net cash in operating activities and $13,192,685 of net cash through financing activities. The funds from financing activities were made up of $9,807,171 in proceeds from a credit facility with Fifth Third Bank (the "Bank"), $6,549,358 of net cash from the issuance of common stock and $4,000,000 in proceeds from the sale leaseback of our Troy, Michigan property, offset in part by payments we made on our debt and capital lease obligations aggregating $6,660,394, cash used for debt issuance costs in the amount of $199,695, and $303,755 of cash in payment of dividends on our preferred stock. We used $14,679,093 of cash to purchase property and equipment, including $5,764,277 to purchase the assets of four Cadillac Ranch restaurants, including intellectual property, and approximately $3,700,000 for construction and equipment for our Troy, Michigan restaurant.

During the thirty-nine weeks ended September 27, 2011, we obtained $2,726,950 of net cash through financing activities. Such funds were made up of $9,000,000 in cash proceeds from the sale of our Series A Preferred, the receipt of $6,000,000 in proceeds from a credit facility with the Bank and $101,321 of cash from the exercise of options and warrants, offset in part by payments we made on our debt and capital lease obligations aggregating $2,385,129, $7,050,000 of cash used to repurchase 3,000,000 shares of our common stock from DHW Leasing, L.L.C. and $2,939,241 of cash for costs associated with the CDP transaction. We obtained $366,036 of net cash in operating activities and used $4,761,973 of cash for debt issuance costs and to purchase property and equipment.

Sale of common stock

In June 2012, we entered into a stock purchase agreement with CDP. Pursuant to such agreement, we issued 3,125,000 shares of our common stock to CDP at a price of $2.08 per share, resulting in gross proceeds of $6.5 million. We used $5.0 million of the net proceeds to pay down our credit facility with the Bank, $1.0 million of which was a required pay-down and the other $4.0 million was paid on the line of credit to reduce our interest expense. We plan to use the remaining net proceeds for general corporate purposes, including working capital and new restaurant construction. We will borrow from our line of credit as needed. Including this stock issuance, at September 25, 2012, CDP beneficially owned approximately 78.4% of our common stock.

Credit agreement

In May 2011, we entered into a $10.0 million credit agreement with the Bank, collateralized by liens on our subsidiaries, personal property, fixtures and real estate owned or to be acquired. The credit agreement, as amended through the first quarter of 2012, provided for a term loan in the amount of $5.0 million which was advanced on May 10, 2011, a term loan in the amount of $5.0 million which was advanced on December 30, 2011, and a line of credit in the amount of $10.0 million. On June 26, 2012, we entered into a sixth amendment to our credit agreement with the Bank. Pursuant to the sixth amendment, the line of credit was increased by $2.0 million to $12.0 million and the date on which the line of credit will convert to a term loan was extended one year to December 31, 2013. Prior to the sixth amendment, the credit agreement would have required us to pay down


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one of our term loans by 25% of the net proceeds received from the issuance of our common stock to CDP in June 2012. Under the sixth amendment, the required term loan repayment was decreased to $1.0 million. Such payment was made on June 28, 2012. As a result of the sixth amendment, the total credit facility increased to $21.0 million. On July 24, 2012, we paid down $4.0 million on the line of credit to lower our interest expense. In November, we took an advance of $1.0 million from the line of credit to fund construction of our Franklin, Tennessee restaurant. As of November 6, 2012, the Company had $7.0 million outstanding on the line of credit.

Cadillac Ranch asset acquisitions

In November 2011, we entered into a master asset purchase agreement with CR Minneapolis, LLC, Pittsburgh CR, LLC, Indy CR, LLC, Kendall CR LLC, 3720 Indy, LLC, CR NH, LLC, Parole CR, LLC, CR Florida, LLC, Restaurant Entertainment Group, LLC, Clint R. Field and Eric Schilder, relating to the purchase of the assets of up to eight restaurants operated by the selling parties under the name "Cadillac Ranch All American Bar & Grill." Pursuant to the master asset purchase agreement, as amended, we acquired the following Cadillac Ranch restaurant assets in November and December 2011:

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