1. Summary of significant accounting policies

Background

Granite City Food & Brewery Ltd. (the “Company”) develops and operates two casual dining concepts: Granite City Food & Brewery® and Cadillac Ranch All American Bar & Grill®.

The Company operates 29 restaurants of its original concept, which is a polished casual American 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 plans to open one additional Granite City restaurant later this year.

The Company also operates six Cadillac Ranch restaurants featuring freshly prepared, authentic, All-American cuisine in a fun, dynamic environment. Its patrons enjoy a diverse menu and a warm, Rock N’ Roll inspired atmosphere, with plenty of room for friends, music and dancing.

The Company operates a centralized beer production facility which facilitates the initial stages of its brewing process. The product created at its beer production facility is then transported to the fermentation vessels at each of the Company’s Granite City restaurants where the brewing process is completed. The Company believes that this proprietary brewing process enables the Company to control the quality and consistency of its beers and improves the economics of microbrewing by eliminating the initial stages of brewing and storage at each restaurant, as well as third-party distribution costs. The Company was granted patents by the United States Patent Office for its brewing process and for an apparatus for distributed production of beer.

Basis of presentation

In the opinion of management, the financial statements presented herein include all adjustments, consisting of normal recurring adjustments, which are necessary for a fair statement of the Company’s financial position as of July 2, 2013, and its results of operations for the interim periods ended July 2, 2013 and June 26, 2012. The results of operations for the thirteen and twenty-seven weeks ended July 2, 2013 are not necessarily indicative of the results to be expected for the entire year.

Certain information and footnote disclosures normally included in consolidated financial statements in accordance with U.S. GAAP have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission (“SEC”). A description of the Company’s accounting policies and other financial information is included in its audited consolidated financial statements for the year ended December 25, 2012 as filed with the SEC on Form 10-K. Management believes that the disclosures included in the Company’s accompanying interim financial statements and footnotes are adequate to make the information not misleading, but should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K. The accompanying balance sheet at December 25, 2012 has been derived from the Company’s audited financial statements at that date.

Derivatives

The Company utilizes an interest rate swap agreement with a financial institution to fix interest rates on a portion of its variable rate debt, which reduces exposure to interest rate fluctuations (Note 2). The Company accounts for this derivative using fair value accounting and measurements described in Note 7. The fair value of the interest rate swap is recorded on the condensed consolidated balance sheet in other assets or other liabilities, depending on the fair value of the swap. The change in the fair value of the swap is recorded on the condensed consolidated statements of operations in other interest expense.

The Company does not use derivatives for trading or speculative purposes and has procedures in place to monitor and control the use of such instruments.

Related parties

Concept Development Partners LLC (“CDP”) is the Company’s controlling shareholder. As of August 13, 2013, CDP beneficially owned approximately 78.6% of the Company’s common stock.

Fiscal year

The Company utilizes a 52/53-week fiscal year ending on 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.

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 second quarter and first half of fiscal years 2013 and 2012 are set forth in the following table:

	Thirteen Weeks Ended						Twenty-seven Weeks Ended			Twenty-six Weeks Ended
	July 2, 2013			June 26, 2012			July 2, 2013			June 26, 2012

Net loss	$	(496,570	)	$	(1,028,084	)	$	(975,355	)	$	(2,239,395	)
Less dividends declared on preferred stock	(202,500		)	(202,500		)	(405,000		)	(405,000		)
Net loss available to common shareholders	$	(699,070	)	$	(1,230,584	)	$	(1,380,355	)	$	(2,644,395	)

Loss per common share, basic	$	(0.09	)	$	(0.25	)	$	(0.17	)	$	(0.55	)

Weighted average shares outstanding, basic	8,150,419			4,864,987			8,123,609			4,808,648

Of the net loss per common share, $(0.02) and $(0.05) was attributable to dividends declared for the second quarter and first half of fiscal year 2013, respectively, while $(0.04) and $(0.08) was attributable to dividends declared in the second quarter and first half of fiscal year 2012, respectively.