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GCFB > SEC Filings for GCFB > Form 10-Q on 17-May-2013All 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.


17-May-2013

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 Cautionary Statement filed as Exhibit 99 to this report for additional factors known to us that may cause actual results to vary.

Overview

We operate Modern American casual dining restaurants under the names Granite City Food & Brewery® and Cadillac Ranch All American Bar & Grill®. As of May 13, 2013, we operated 28 Granite City restaurants and and six Cadillac Ranch restaurants. 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 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. We were granted patents by the United States Patent Office for our brewing process and 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 continue to seek to renegotiate the pricing of various aspects of our business. We also implemented marketing initiatives designed to increase brand awareness and help drive guest traffic, including focusing on various social media initiatives and growing our "Mug Club" loyalty program database.

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. Fiscal year 2013 will consist of 53 weeks while fiscal year 2012 consisted of 52 weeks. The first quarters of 2013 and 2012 included 470 and 403 operating weeks, respectively, which is the sum of the actual number of weeks each restaurant operated. Because we have opened new restaurants at various times throughout the years, we


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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 approximately one 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, cash and 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 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.

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 fourteen and thirteen weeks ended April 2, 2013 and March 27, 2012, respectively:

                                Fourteen Weeks Ended    Thirteen Weeks Ended
                                   April 2, 2013           March 27, 2012

Restaurant revenue                             100.0 %                 100.0 %

Cost of sales:
Food, beverage and retail                       27.3                    26.7
Labor                                           32.3                    32.8
Direct restaurant operating                     15.7                    14.8
Occupancy                                        7.7                     8.3
Total cost of sales                             83.0                    82.6

General and administrative                       7.9                     8.9
Depreciation and amortization                    5.6                     6.2
Pre-opening                                      1.3                     0.8
Acquisition costs                                0.1                     1.3
Loss on disposal of assets                       0.2                     0.1
Exit or disposal activities                      0.0                     0.1
Operating income                                 2.0                     0.1

Interest:
Income                                           0.0                     0.0
Expense                                         (3.4 )                  (4.3 )
Net interest expense                            (3.4 )                  (4.3 )

Net loss                                        (1.4 )%                 (4.2 )%


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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 25, 2012, filed with the Securities and Exchange Commission on March 20, 2013.

Results of operations for the fourteen weeks ended April 2, 2013 and the thirteen weeks ended March 27, 2012

Revenue

We generated $34,961,454 and $28,570,000 of revenue during the first quarters of 2013 and 2012, respectively, an increase of 22.4%. Such increase was the result of the additional week in the first quarter of 2013 as well as having three additional locations in operation in the first quarter of 2013 compared to that of 2012. Comparable restaurant revenue, which includes restaurants which we have operated for over 18 months, increased 2.7%.

We expect that restaurant revenue will vary from quarter to quarter. Continued seasonal fluctuations in restaurant revenue are due in part to increased 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, increased 0.6% to 27.3% in the first quarter of 2013 from 26.7% in the first quarter of 2012. While we experienced some cost decreases in bottled beer, liquor, wine and some proteins, such decreases were offset by increases in tap beer, soft drinks, fish and retail products. 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 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. Based on industry information, we anticipate commodity prices to increase two to three percent through 2013. However, we will seek to offset such increases with pricing, new menu offerings and specials.

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


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Our labor costs, as a percentage of revenue, decreased 0.5% to 32.3% in the first quarter of 2013 from 32.8% in the first quarter of 2012. Although we experienced a slight increase in insurance, performance compensation and labor relating to the security and janitorial services we brought in-house at a number of our locations, virtually all other labor costs decreased from the first quarter of 2012 to the first quarter of 2013. Non-cash stock-based compensation decreased $9,584 to $29,018 in the first quarter of 2013 from $38,602 in the first quarter of 2012.

We expect that benefit costs will increase as new health insurance regulations are implemented. Additionally, we expect 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, increased 0.9% to 15.7% in the first quarter of 2013 from 14.8% in the first quarter of 2012. While we experienced decreases in utilities, paper products and administrative costs, those cost decreases were offset by cost increases in marketing, training and maintenance and repair.

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

Our occupancy costs, which include both fixed and variable portions of rent, common area maintenance charges, property insurance and property taxes, decreased 0.6% as a percentage of revenue to 7.7% in the first quarter of 2013 from 8.3% in the first quarter of 2012. While fixed rent has decreased as a percentage of revenue due to the higher revenue base and the additional fiscal week in the first quarter of 2013 compared to the first quarter of 2012, we have seen an increase of $304,075 in occupancy expense. The majority of our leases include a provision for additional rent based upon restaurant sales. As such, with our increased revenue base, our percentage rent has increased as well.

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 a new restaurant opening team during periods of expansion, non-cash rental costs incurred during the construction period and certain other direct costs associated with opening new 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 quarter of 2013 were related primarily to the Granite City restaurant we opened in Franklin, Tennessee in February 2013 while such expenses in the first quarter of 2012 were related primarily to the Granite City restaurant we opened in Troy, Michigan in May 2012. Non-cash construction-period rent of $53,876 related to the restaurant we plan to open in Indianapolis, Indiana later this year was included in pre-opening expense.

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,


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investor relations, office administration, centralized accounting system costs and travel by our corporate management.

General and administrative expense increased $222,427 to $2,751,121 in the first quarter of 2013 from $2,528,694 in the first quarter of 2012. As a percentage of revenue, general and administrative expense decreased 1.0% to 7.9% in the first quarter of 2013 from 8.9% in the first quarter of 2012 due to the higher revenue provided by new locations and the additional fiscal week in 2013. Compensation expense was higher in the first quarter of 2013 due to the additional fiscal week and legal and investor relations fees were higher due to our appeal of NASDAQ's determination to delist our common stock. Additionally, we incurred approximately $158,000 of consulting expense related to a restaurant site we discontinued pursuing. These costs were offset in part by a reduction of travel and management training expenses. 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.

As we seek new ways to build revenue, we will continue to closely monitor our general and administrative costs and attempt to reduce these expenses as a percentage of revenue while preserving an infrastructure that remains suitable for our current operations. With our growth plans, we will need to recruit additional personnel to provide continued oversight of operations. To the extent our turnover increases above our expectations, additional costs could be incurred in recruiting and training expenses.

Depreciation and amortization

Depreciation and amortization expense increased $182,512 to $1,951,643 in the first quarter of 2013 from $1,769,131 in the first quarter of 2012. As a percentage of revenue, depreciation expense decreased 0.6% to 5.6% in the first quarter of 2013 from 6.2% in the first quarter of 2012, 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 complete enhancements at selected 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.

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 decreased $48,585 to $1,192,763 in the first quarter of 2013 from $1,241,348 in the first quarter of 2012. In the first quarter of 2013, $49,696 of interest expense was capitalized as part of the construction of our Franklin, Tennessee; Indianapolis, Indiana and Lyndhurst, Ohio restaurants.

Liquidity and capital resources

As of April 2, 2013, we had $2,010,229 of cash and a working capital deficit of $9,047,566 compared to $2,566,034 of cash and a working capital deficit of 8,905,723 at December 25, 2012.

During the fourteen weeks ended April 2, 2013, we obtained $1,551,655 of net cash from operating activities. Our net cash used for investing activities of $1,140,544 was made up purchases of property and equipment totaling $2,890,544, offset in part by $1,750,000 cash proceeds from the sale leaseback of our Franklin, Tennessee restaurant in the form of a tenant improvement allowance. We used $966,916 in financing activities which included payments on our debt and capital leases of $762,862, cash payment of dividends on our preferred stock of $202,504 and $1,550 of net costs to issue stock.

During the thirteen weeks ended March 27, 2012, we obtained $7,111,418 of net cash through financing activities. Such funds were made up of $7,807,171 in proceeds from a credit facility with Fifth Third Bank (the "Bank") and $100,756 of cash from the exercise of options, offset in part by payments we made on our debt and capital lease obligations aggregating $525,211, $170,046 of cash used for debt issuance costs and $101,252 of cash in payment of dividends on our preferred stock. We obtained $62,129 of net cash in operating activities and used $7,954,655 of cash to purchase property and equipment, including $4.9 million to purchase the assets of


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three Cadillac Ranch restaurants and approximately $2.0 million for construction and equipment for our Troy, Michigan restaurant.

Credit Facility

We have a $22.0 million credit facility with the Bank, collateralized by liens on our subsidiaries, personal property, fixtures and real estate owned or to be acquired. At April 2, 2013, we had a balance outstanding on term loans of $7.6 million. On that date, we had $8.0 million outstanding and $4.0 million available on our line of credit with the Bank.

Lease Agreements

In February 2012, we entered into a 15-year lease agreement for a site in Franklin, Tennessee where we constructed a Granite City restaurant which we opened in February 2013. Per the terms of the lease, the landlord paid us a $1.75 million tenant improvement allowance. Because our company incurred all the construction costs and risk of loss, we accounted for the transaction as a sales leaseback, pursuant to guidance in ASC 840 Leases. Management evaluated the fair value of the property and determined it to be equal to undepreciated costs, and therefore recorded a deferred loss of $1.7 million which will be amortized to rent expense over the life of the lease. The lease, which may be extended at our option for up to two additional five-year periods, calls for annual base rent starting at $158,000.

In June 2012, we entered into a 10-year lease agreement for a site in Indianapolis, Indiana where we are constructing a Granite City restaurant. Per the terms of the lease, the landlord will pay us a tenant improvement allowance of approximately $1.1 million. Through the build out or "rent holiday" period, we have recorded an aggregate of approximately $100,000 of non-cash rent expense in pre-opening costs. Of such amount, approximately $54,000 was included in the first quarter of 2013. The lease, which may be extended at our option for up to two additional five-year periods, calls for annual base rent starting at $210,000. Under the terms of the lease, we may be required to pay additional contingent rent based upon restaurant sales. We anticipate opening this restaurant in the third quarter of 2013.

In October 2012, we entered into a 10-year lease agreement for a site in Lyndhurst, Ohio where we plan to construct a Granite City restaurant. Per the terms of the lease, the landlord will pay us a tenant improvement allowance of approximately $1.2 million. The lease, which may be extended at our option for up to two additional five-year periods, calls for annual base rent starting at $456,850. We anticipate opening this restaurant in the summer of 2013. Under the terms of the lease, we may be required to pay additional contingent rent based upon restaurant sales.

Funding Operations and Expansion:

During fiscal year 2012 and the first quarter of 2013, we operated at a level that allowed us to fund our existing operations. We believe this same level of sales and margins will allow us to fund our obligations for the foreseeable future. We continue to pursue growth under the assumption that we will continue to generate positive cash flow from existing operations. Under such assumption, with continued access to the credit facility and anticipated continued access to funds through future sale-leaseback transactions, we are implementing a variety of initiatives both to generate new revenue and to invest in technologies to improve our existing business and financial condition.

We expect to generate additional revenue and cash flow through new restaurant growth of our Granite City concept, primarily within our existing geographic footprint. We have opened a new Granite City restaurant in Franklin, Tennessee, and expect to open new Granite City restaurants in Indianapolis, Indiana and Lyndhurst, Ohio in 2013. We are analyzing other potential new Granite City restaurant sites and expect to increase revenue through expansion. We further believe that expansion will lessen turnover and related costs as we expect to be better able to retain managers and other key personnel who may otherwise seek new opportunities with other restaurant chains.


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We also seek to generate additional revenue through physical changes in some of our high volume 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, corporate events, and reduce wait times in peak periods. At some locations we are updating and refreshing the look of our restaurant in order to provide a better experience for the guest. We evaluate the costs of these potential capital enhancements relative to the projected revenue gains, thereby determining the expected return on investment of these potential restaurant modifications. We enhanced five Granite City restaurants through 2012 and we plan to complete five additional such modifications in 2013. As part of these enhancements, we have recorded non-cash losses related to the assets replaced that were not fully depreciated.

We also believe we can improve the efficiency of our restaurants with table management systems and kitchen management systems designed to increase table turnover, provide a higher level of service to our customers, improve the overall dining experience, increase our sales, and improve our financial condition. We have these systems fully implemented at eight of our restaurants and plan to expand the program to up to six additional restaurants in 2013.

The above objectives assume that, in addition to continued access to the credit facility and continued access to funds through anticipated future sale-leaseback transactions, we continue to generate positive cash flow. If we cease generating positive cash flow, our business could be adversely affected and we may be required to alter or cease our growth, restaurant modifications and technological improvements. Our ability to continue funding our operations and meet our debt service obligations continues to depend upon our operating performance, and more broadly, achieving budgeted revenue and operating margins, both of which will be affected by prevailing economic conditions in the retail and casual dining industries and other factors, which may be beyond our control. If revenue or margins, or a combination of both, decrease to levels unsustainable for continuing operations, we may require additional equity or debt financing to meet ongoing obligations. The amount of any such required funding would depend upon our ability to generate working capital.

Off- balance sheet arrangements:

We have not entered into any off-balance sheet arrangements as it is not our business practice to do so.

Summary of contractual obligations:

The following table summarizes our obligations under contractual agreements as of April 2, 2013 and the timeframe within which payments on such obligations are due. This table does not include amounts related to contingent rent as such future amounts are not determinable. In addition, whether we would incur any additional expense on our employment agreements depends upon the existence of a change in control of the company coupled with a termination of employment or other unforeseeable events. Therefore, neither contingent rent nor severance expense has been included in the following table.

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