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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 27, 2012

Commission File Number 000-29643

GRANITE CITY FOOD & BREWERY LTD.

(Exact Name of Registrant as Specified in Its Charter)

701 Xenia Avenue South

Minneapolis, Minnesota 55416

(952) 215-0660

(Address of Principal Executive Offices and Issuer’s

Telephone Number, including Area Code)

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 o

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 (§ 229.405 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 o

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

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

As of May 7, 2012, the issuer had outstanding 4,831,662 shares of common stock.

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PART I              FINANCIAL INFORMATION

ITEM 1  Financial Statements

GRANITE CITY FOOD & BREWERY LTD.

CONDENSED CONSOLIDATED BALANCE SHEETS

See notes to condensed consolidated financial statements.

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GRANITE CITY FOOD & BREWERY LTD.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

See notes to condensed consolidated financial statements.

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GRANITE CITY FOOD & BREWERY LTD.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See notes to condensed consolidated financial statements.

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GRANITE CITY FOOD & BREWERY LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Thirteen weeks ended March 27, 2012 and March 29, 2011

1.     Summary of significant accounting policies

Background

Granite City Food & Brewery Ltd. (the “Company”) develops and operates two casual dining concepts.  Its original restaurant concept is a Modern American casual dining restaurant known as Granite City Food & Brewery®.  The Granite City restaurant theme is upscale casual dining with a wide variety of menu items that are prepared fresh daily, combined with freshly brewed hand-crafted beers finished on-site.  The Company opened its first Granite City restaurant in St. Cloud, Minnesota in July 1999 and has since expanded to other Midwest markets.  As of March 27, 2012, the Company operated 26 Granite City restaurants in 11 states.  Additionally, the Company operates a centralized beer production facility which is used to provide raw material brewing support to its Granite City restaurants to create consistent quality and operational efficiencies in the production of its custom proprietary beers.  The Company believes that this brewing process improves the economics of microbrewing as it eliminates the initial stages of brewing and storage at multiple locations.  In 2007, the Company was granted a patent by the United States Patent Office for its brewing process and in June 2010, was granted an additional patent for an apparatus for distributed production of beer.

In the fourth quarter of fiscal year 2011, the Company purchased the assets of two Cadillac Ranch All American Bar & Grill restaurants, one at the Mall of America in Bloomington, Minnesota and one in Miami, Florida. Cadillac Ranch restaurants feature freshly prepared, authentic, All-American cuisine in a fun, dynamic environment.  Its 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.  In the first quarter of 2012, the Company purchased the assets of three additional Cadillac Ranch restaurants in Oxon Hill and Annapolis, Maryland and Indianapolis, Indiana, along with the intellectual property of Cadillac Ranch.

Principles of consolidation and basis of presentation

The Company’s condensed consolidated financial statements include the accounts and operations of the Company and its subsidiary corporation under which its four Kansas locations are operated.  By Kansas state law, 50% of the stock of the subsidiary corporation must be owned by a resident of Kansas.  Granite City Restaurant Operations, Inc., a wholly-owned subsidiary of the Company, owns the remaining 50% of the stock of the subsidiary corporation.  The resident-owner of the stock of that entity has entered into a buy-sell agreement with the subsidiary corporation providing, among other things, that transfer of the shares is restricted and that the shareholder must sell his shares to the subsidiary corporation upon certain events, or any event that disqualifies the resident-owner from owning the shares under applicable laws and regulations of the state.  The Company has entered into a master agreement with the subsidiary corporation that permits the operation of the restaurants and leases to the subsidiary corporation the Company’s property and facilities.  The subsidiary corporation pays all of its operating expenses and obligations, and the Company retains, as consideration for the operating arrangements and the lease of property and facilities, all the net profits, as defined, if any, from such operations.  The foregoing ownership structure was set up to comply with the licensing and ownership regulations related to microbreweries within the state of Kansas.  The Company has determined that such ownership structure will cause the subsidiary corporation to be treated as a variable interest entity in which the Company has a controlling financial interest for the purpose of Financial Accounting Standards Board’s (“FASB”) accounting guidance on accounting for variable interest entities.  As such, the subsidiary corporation is consolidated with the Company’s financial statements and the Company’s financial statements do not reflect a minority ownership in the subsidiary corporation.  Also included in the

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Company’s condensed consolidated financial statements are other wholly-owned subsidiaries.  All references to the Company in these notes to the condensed consolidated financial statements relate to the consolidated entity, and all intercompany balances have been eliminated.

In the opinion of management, all adjustments, consisting of normal recurring adjustments, which are necessary for a fair statement of the Company’s financial position as of March 27, 2012, and its results of operations for the interim periods ended March 27, 2012 and March 29, 2011, have been included.

The balance sheet at December 27, 2011 has been derived from the audited financial statements at that date, but does not include all of the information and notes required by generally accepted accounting principles for complete financial statements.  Certain information and note disclosures normally included in the Company’s annual financial statements have been condensed or omitted.  These condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 27, 2011, filed with the Securities and Exchange Commission (“SEC”) on March 23, 2012.

The results of operations for the thirteen weeks ended March 27, 2012 are not necessarily indicative of the results to be expected for the entire year.

Related parties

In May 2011, Concept Development Partners LLC (“CDP”) became the Company’s controlling shareholder through its purchase of Series A Convertible Preferred Stock (“Series A Preferred”) and a related shareholder and voting agreement with DHW Leasing, L.L.C. (“DHW”).  As of May 7, 2012, CDP beneficially owned approximately 72.1% of the Company’s common stock, representing 6,000,000 shares issuable upon conversion of 3,000,000 shares of Series A Preferred owned by CDP, 1,666,666 shares over which CDP has voting power pursuant to a shareholder and voting agreement and irrevocable proxy between CDP and DHW, and 139,298 shares of common stock issued to CDP as dividend shares.

Use of estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America and regulations of the SEC requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period.  Significant estimates include estimates related to asset lives and gift card liability.  Actual results could differ from these estimates.

Cash and cash equivalents

The Company considers all highly liquid instruments with original maturities of three months or less to be cash equivalents.  Amounts receivable from credit card processors are considered cash equivalents because they are both short-term and highly liquid in nature and are typically converted to cash within three days of the sales transaction.

Inventory

Inventory, consisting of food, beverages, retail items and beer production supplies, is stated at the lower of cost or market and determined using the first-in, first-out (FIFO) method.

Prepaid expenses and other current assets

The Company has cash outlays in advance of expense recognition for items such as rent, insurance, fees and service contracts.  All amounts identified as prepaid expenses and other current assets are expected to be utilized during the twelve-month period after the balance sheet dates presented.  Other current assets consist primarily of receivables of amounts due from third-party gift card sales, third-party delivery services and rebate amounts due from certain vendors.

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Revenue recognition

Revenue is derived from the sale of prepared food and beverage and select retail items.  Revenue is recognized at the time of sale and is reported on the Company’s condensed consolidated statements of operations net of sales taxes collected.  The amount of sales tax collected is included in other accrued expenses until the taxes are remitted to the appropriate taxing authorities.  Revenue derived from gift card sales is recognized at the time the gift card is redeemed.  Until the redemption of gift cards occurs, the outstanding balances on such cards are included in accrued expenses in the accompanying condensed consolidated balance sheets.  When the Company determines there is no legal obligation to remit the value of unredeemed gift cards to the relevant jurisdictions, the Company periodically recognizes gift card breakage which represents the portion of its gift card obligation for which management believes the likelihood of redemption by the customer is remote, based upon historical redemption patterns.  Such amounts are included as a reduction to general and administrative expense.

Pre-opening costs

Pre-opening costs are expensed as incurred and include direct and incremental costs incurred in connection with the opening of each restaurant’s operations.  Pre-opening costs consist primarily of travel, food and beverage, employee payroll and related training costs.  Pre-opening costs also include non-cash rental costs under operating leases incurred during a construction period pursuant to the FASB guidance on accounting for rental costs incurred during a construction period.

Stock-based compensation

The Company measures and recognizes all stock-based compensation under the fair value method using the Black-Scholes option-pricing model.  Share-based compensation expense recognized is based on awards ultimately expected to vest, and as such, it is reduced for estimated or actual forfeitures.  Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.  The Company used the following assumptions within the Black-Scholes option-pricing model for the first quarters of fiscal years 2012 and 2011:

Income tax

For income tax return purposes, the Company has federal net operating loss carryforwards and federal general business credit carryforwards.  These carryforwards are limited due to changes in control of the Company during 2009 and 2011 and, if not used, portions of these carryforwards will begin to expire in 2020.  The Company has determined, based upon its history, that it is probable that future taxable income may be insufficient to fully realize the benefits of the net operating loss carryforwards and other deferred tax assets. As such, the Company has determined that a full valuation allowance is needed at this time.

Net loss per share

Basic net loss per share is calculated by dividing net loss less the sum of preferred stock dividends declared by the weighted average number of common shares outstanding during the period.  Diluted net loss per share is not presented since the effect would be anti-dilutive due to the losses in the respective reporting periods.  Calculations of the Company’s net loss per common share for the first quarters of fiscal years 2012 and 2011 are set forth in the following table:

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Of the net loss per common share for the first quarter of fiscal year 2012, $(0.04) was attributable to dividends declared.

2.     Fair value of financial instruments

At March 27, 2012 and December 27, 2011, the fair value of cash and cash equivalents, receivables, accounts payable and accrued expenses approximates their carrying value due to the short-term nature of these financial instruments. The fair value of the capital lease obligations and long-term debt is estimated at its carrying value based upon current rates available to the Company.

3.              Significant transaction

Cadillac Ranch asset acquisition

In November 2011, the Company 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, the Company acquired the following Cadillac Ranch restaurant assets:

The acquisition of the Cadillac Ranch assets was accounted for as a business combination under ASC 805, Business Combinations.  The purchase price was allocated to equipment, leasehold improvements and intangible assets comprised of, in part, licenses, trade names, trademarks, trade secrets and proprietary information.  The Company assessed the fair value of the assets acquired under the assumption that a typical Cadillac Ranch restaurant would be reasonably similar to a Granite City build-out, including kitchen equipment.  Based on the costs of assets of its Granite City restaurants, management estimated depreciation from the time the assets were placed in service until the assets were purchased by the Company.  Management believes that in the early years, the net book value of the assets at its restaurants approximates fair value.  As the assets acquired were less than three years old, management valued the assets based on estimated cost less related depreciation.  The fair values for acquired intangible assets were determined by management, in part, based on valuation discussions with an independent valuation specialist.  The Company is amortizing the intellectual property over 20 years.

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In conjunction with acquiring these assets, the Company assumed the leases for the property at the five Cadillac Ranch restaurant locations.  The terms range from two to twelve years, each with options for additional terms, and the leases have been classified as operating leases.

While the assets of two of the properties were acquired prior to the beginning of fiscal year 2012 and the remaining assets were acquired shortly after the start of fiscal 2012, the acquisitions were pursuant to one master asset purchase agreement. In order to best evaluate the nature and financial effect of this transaction, the Company’s management believes a pro forma presentation of the combined acquisition is necessary. As such, the presentation below reflects the amounts of Cadillac Ranch’s revenue and earnings included in the Company’s condensed consolidated income statement for the quarter ended March 27, 2012, and the revenue and earnings of the combined entity had the acquisition date of all assets referenced above been December 29, 2010 (the first day of the Company’s fiscal year 2011). The following unaudited pro forma disclosure does not purport to report current or future operations.

The 2012 supplemental pro forma earnings were adjusted to exclude $364,680 of acquisition-related costs incurred in fiscal year 2011.

In January 2012, the Company entered into an asset purchase agreement with the sellers of the Cadillac Ranch assets, pursuant to which it has agreed to purchase the Cadillac Ranch assets located in Pittsburgh, Pennsylvania for $900,000 (Note 9).  This asset purchase is expected to close in the second quarter of 2012.

4.              Non-current assets

Property and equipment

Property and equipment is recorded at cost and depreciated over the estimated useful lives of the assets.  Leasehold improvements are depreciated over the term of the related lease or the estimated useful life, whichever is shorter.  Depreciation and amortization of assets held under capital leases and leasehold improvements are computed on the straight-line method for financial reporting purposes.  The following is a summary of the Company’s property and equipment at March 27, 2012 and December 27, 2011:

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*Construction-in-progress includes the following approximate amounts for items yet to be placed in service:

Intangible and other assets

Intangible and other assets consisted of the following: 

5.     Accrued expenses

Accrued expenses consisted of the following:

6.     Deferred rent

Under the terms of the lease agreement the Company entered into regarding its Lincoln, Nebraska property, the Company received a lease incentive of $450,000, net.  This lease incentive was recorded as deferred rent and is being amortized to reduce rent expense over the initial term of the lease using the straight-line method.

Also included in deferred rent is the difference between minimum rent payments and straight-line rent over the initial lease term including the “build out” or “rent-holiday” period.  Deferred rent also includes amounts certain of the Company’s landlords agreed to defer for specified periods of time.  The deferrals are offset in part by the fair value of the warrants issued to certain landlords in consideration of rent reductions.  Contingent rent expense,

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which is based on a percentage of revenue, is also recorded to the extent it exceeds minimum base rent per the lease agreement.  As of March 27, 2012 and December 27, 2011, deferred rent payable consisted of the following:

7.     Long-term debt and line of credit

In August 2008, the Company issued a promissory note to an Indiana general partnership in the amount of $250,000.  The note was issued to obtain the liquor license for the Company’s restaurant located in South Bend, Indiana.

In the first quarter of fiscal year 2011, the Company entered into lease termination agreements regarding the restaurant in Rogers, Arkansas at which it ceased operations in August 2008.  Pursuant to these lease termination agreements, the Company issued a $400,000 promissory note to the mall owner and a $1.0 million promissory note to the developer, Dunham Capital Management, L.L.C. (“DCM”).  In the first quarters of fiscal years 2012 and 2011, $16,885 and $7,817 of interest expense related to these promissory notes, respectively, was recorded on the Company’s condensed consolidated statements of operations as exit or disposal activities.

In March 2011, the Company entered into a $1.3 million loan agreement with First Midwest Bank (“FMB”), an independent financial institution in Sioux Falls, South Dakota, for the purchase of the buildings and all related improvements associated with its Indianapolis and South Bend, Indiana restaurants.

In May 2011, the Company entered into a $10.0 million credit agreement with Fifth Third Bank (“the Bank”), collateralized by liens on the Company’s subsidiaries, personal property, fixtures and real estate owned or to be acquired.  The credit agreement, as amended (Note 14), provides 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 in on December 30, 2012, and a line of credit currently in the amount of $11.5 million.  Such amount on the line of credit will be available to the Company until the earlier to occur of (a) consummation of Granite City’s planned sale-leaseback of its real property in Troy, Michigan, or (b) June 30, 2012.  As of such date, the line of credit commitment will decrease from $11.5 million to $10 million, bringing the total credit facility amount to $20 million.  As of May 7, 2012, the Company had drawn down $9.8 million on the line of credit.

As of March 27, 2012 and December 27, 2011, the balances, interest rates and maturity dates of the Company’s long-term debt were as follows:

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As of March 27, 2012, future maturities of long-term debt, exclusive of interest, were as follows:

The foregoing table does not include the line of credit advances from the Bank subsequent to March 27, 2012.

8.     Capital leases

As of March 27, 2012, the Company operated 22 restaurants under capital lease agreements, of which one expires in 2020, one in 2022, three in 2023, two in 2024, five in 2026, three in 2027 and seven in 2030, all with renewable options for additional periods.  Under certain of the leases, the Company may be required to pay additional contingent rent based upon restaurant sales.  At the inception and the amendment date of each of these leases, the Company evaluated the fair value of the land and building separately pursuant to the FASB guidance on accounting for leases.  The land portion of these leases is classified as an operating lease while the building portion of these leases is classified as a capital lease because its present value was greater than 90% of the estimated fair value at the beginning or amendment date of the lease and/or the lease term represents 75% or more of the expected life of the property.

The Company also has a land and building lease agreement for its beer production facility.  This ten-year lease allows the Company to purchase the facility at any time for $1.00 plus the unamortized construction costs.  Because the construction costs will be fully amortized through payment of rent during the base term, if the option

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is exercised at or after the end of the initial ten-year period, the option price will be $1.00.  As such, the lease, including land, is classified as a capital lease.

Included in property and equipment as of March 27, 2012 and December 27, 2011 are the following assets held under capital leases:

Minimum future lease payments under all capital leases are as follows:

Amortization expense related to the assets held under capital leases is included with depreciation expense on the Company’s statements of operations.

9.         Commitments and contingencies

Pending acquisition

The Company and the sellers of the Cadillac Ranch restaurant assets have entered into an asset purchase agreement pursuant to which it has agreed to purchase the Cadillac Ranch restaurant operated by Pittsburgh CR, LLC in Pittsburgh, Pennsylvania for $900,000.  The Pittsburgh asset purchase will close at such time as a liquor license can be issued by the Pennsylvania Liquor Control Board, which the parties expect to occur in the second quarter of 2012.  In January 2012, the Company entered into a third amendment to the credit agreement with the Bank to allow it to issue a promissory note in the amount of $900,000 to the sellers, and to maintain a separate bank account to be used in connection with the consulting agreement between the Company and such sellers under which the Pittsburgh location will be operated through closing.

Franklin, Tennessee lease

In February 2012, the Company entered into a 15-year lease agreement for a site in Franklin, Tennessee where it plans to construct a Granite City restaurant.  The lease, which may be extended at the Company’s option for up to two additional five-year periods, calls for annual base rent starting at $158,000.  The Company anticipates opening this restaurant in late summer 2012.  In March 2012, the Company entered into

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a fourth amendment to the credit agreement with the Bank, which (1) amends certain borrower covenants to permit a landlord lien in connection with the Company’s entry into such lease and waives the requirement to obtain a collateral access agreement from such landlord, and (2) amends the effective date of the second amendment from December 30, 2011 to December 26, 2011.

Purchase and sale agreement

In October 2011, the Company entered into a purchase and sale agreement with Store Capital Acquisitions, LLC (“Store Capital”) regarding the Granite City restaurant in Troy, Michigan.  Pursuant to the agreement, Store Capital will purchase the property and improvements for the lesser of $3.6 million or the actual costs the Company incurs for the property and construction of the restaurant thereon.  Upon the closing of the sale, the Company will enter into an agreement with Store Capital whereby the Company will lease the restaurant from Store Capital for an initial term of 15 years at an annual rental rate equal to the purchase price multiplied by a capitalization rate equal to the greater of 9.25% or 5.85% plus the 15-year swap rate.  Such agreement will include options for additional terms and provisions for rental adjustments.

Litigation

From time to time, lawsuits are threatened or filed against the Company in the ordinary course of business.  Such lawsuits typically involve claims from customers, former or current employees, and others related to issues common to the restaurant industry.  A number of such claims may exist at any given time.  Although there can be no assurance as to the ultimate disposition of these matters, it is management’s opinion, based upon the information available as of May 7, 2012, that the expected outcome of these matters, individually or in the aggregate, will not have a material adverse effect on the results of operation, liquidity or financial condition of the Company.

Employment agreements

The Company has employment agreements with its chief executive officer, chief concept officer, president and chief financial officer.  The agreements provide for an annual base salary, incentive compensation as determined by the Company’s compensation committee, and participation in the Company’s other employee benefit plans.  The agreements entitle the executives to receive severance benefits under certain conditions including a change of control of the Company.  Each executive has also agreed to certain nondisclosure, non-competition, non-recruitment and/or non-interference provisions during the term of his employment and for a certain period thereafter.  Each agreement either automatically extends, or may be extended, for additional one-year terms upon the mutual agreement of the Company and the executive.

Purchase commitments

The Company has entered into contracts through 2016 with certain suppliers of raw materials (primarily hops) for minimum purchases both in terms of quantity and in pricing.  As of March 27, 2012, the Company’s future obligations under such contracts aggregated approximately $1.0 million.

10.      Stock option plans

In August 2002, the Company adopted the 2002 Equity Incentive Plan, now known as the Amended and Restated Equity Incentive Plan.  As of March 27, 2012, there were options outstanding under the plan for the purchase of 1,029,592 shares.  Although vesting schedules vary, option grants under this plan generally vest over a three or four-year period and options are exercisable for no more than ten years from the date of grant.  The Amended and Restated Equity Incentive Plan expired in February 2012.

In October 2011, the Company’s shareholders approved its Long-Term Incentive Plan.  The plan provides for flexible, broad-based incentive compensation in the form of stock-based awards of options, stock appreciation rights, warrants, restricted stock awards and restricted stock units, stock bonuses, cash bonuses, performance awards, dividend equivalents, and other equity-based awards.  The issuance of up to 400,000 shares of common stock is authorized under the plan.  All stock options issued under the plan must have an exercise price equal to or greater than the fair market value of the Company’s common stock on the date of grant.  As of March 27, 2012, options for the purchase of 17,500 shares were issued and outstanding under the plan.

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A summary of the status of the Company’s stock options as of March 27, 2012 is presented below:

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the closing price of the Company’s stock on March 27, 2012 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on March 27, 2012.  As of March 27, 2012, there was approximately $438,527 of total unrecognized compensation cost related to unvested share-based compensation arrangements, of which $241,825 is expected to be recognized during the remainder of fiscal year 2012, $133,100 in fiscal year 2013, $46,701 in fiscal year 2014, $15,840 in fiscal year 2015 and $1,061 in fiscal year 2016.

The following table summarizes information about stock options outstanding at March 27, 2012:

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11.          Common stock warrants

During the first eight months of 2009, in consideration of rent reduction agreements entered into with certain of its landlords, the Company issued five-year warrants to purchase the Company’s common stock to such landlords.  Pursuant to the anti-dilution provisions of such agreements, the number of shares purchasable under these warrants came to be 201,125 and the weighted average exercise price came to be $1.60 per share.  As of March 27, 2012, warrants for the purchase of 37,309 shares with exercise prices ranging from $1.58 to $3.00 per share had been exercised and warrants for the purchase of 163,816 shares remained unexercised.

Pursuant to the bridge loan agreement entered into in March 2009 with Harmony Equity Income Fund, L.L.C., Harmony Equity Income Fund II, L.L.C. and certain other accredited investors, the Company issued to the investors five-year warrants for the purchase of an aggregate of 53,332 shares of common stock at a price of $1.52 per share.  Such warrants became exercisable September 30, 2009, and remained unexercised at March 27, 2012.

In the second quarter of 2011, the Company entered into lease amendments with certain of its landlords.  In consideration of more favorable lease terms and conditions, the Company issued five-year warrants to purchase the Company’s common stock to such landlords.  The number of shares purchasable under these warrants is 40,000 and the exercise price is $3.32 per share.  As of March 27, 2012, all such warrants remained unexercised.

As of March 27, 2012, warrants for the purchase of an aggregate of 257,148 shares of common stock were outstanding and exercisable.  The weighted average exercise price of such warrants was $1.85 per share.

12.      Preferred stock

In May 2011, the Company issued 3,000,000 shares of Series A Preferred to CDP for $9.0 million pursuant to a stock purchase agreement.  Each share of Series A Preferred is convertible into two shares of the Company’s common stock and the Series A Preferred has preference over the common stock in the event of a liquidation or dissolution of the Company.  The Company is obligated to pay 9% dividends on the Series A Preferred through 2013, one-half of which is in the form of common stock.  Pursuant to the terms of the Series A Preferred, on March 30, 2012, the Company paid $101,252 in cash dividends and issued 46,190 shares of its common stock to the preferred shareholder of record on that date.  Such amount was reflected in the liabilities and equity section of the Company’s balance sheet at March 27, 2012.

13.      Retirement plan

The Company sponsors a defined contribution plan under the provisions of section 401(k) of the Internal Revenue Code.  The plan is voluntary and is provided to all employees who meet the eligibility requirements.  A participant can elect to contribute up to 100% of his/her compensation subject to IRS limits.  The Company has elected to match 10% of such contributions up to 6% of the participant’s compensation.  In the first quarter of fiscal years 2012 and 2011, the Company contributed $5,098 and $2,580 in the aggregate, respectively, under the plan.

14.       Subsequent event(s)

Amendment to credit agreement

In April 2012, the Company and the Bank entered into a fifth amendment to the credit agreement originally dated as of May 10, 2011 to adjust the temporary increase in the line of credit due to the delay of the sale-leaseback of the Company’s property in Troy, Michigan.  Pursuant to this amendment, the line of credit was decreased from $12 million to $11.5 million, effective April 17, 2012.  Such amount will be available to the Company until the earlier to occur of (a) consummation of the planned sale-leaseback of the Troy property, or (b) June 30, 2012.  As of such date, the line of credit commitment will decrease from $11.5 million to $10 million, bringing the total credit facility amount to $20 million.

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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 on March 23, 2012 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 7, 2012, we operated 26 Granite City restaurants in and five Cadillac Ranch restaurants in 13 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 focuses on bringing authentic, All-American cuisine to customers in a fun, dynamic environment.  The Cadillac Ranch menu is diverse with offerings ranging from homemade meatloaf to pasta dishes, all freshly prepared using quality ingredients.

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 and guest traffic in fiscal year 2011 over 2010.

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 first quarters of 2012 and 2011 included 403 and 338 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 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

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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 store 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.

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 weeks ended March 27, 2012 and March 29, 2011: