# GEN Restaurant Group, Inc.: Form 10-Q for the period ended Sep 30, 2023

- Company: [GEN Restaurant Group, Inc.](/companies/genk.md) (CIK 1891856)
- Form: 10-Q
- Filed: 2023-11-14
- Accepted by EDGAR: Nov 14, 2023, 22:10 ET
- Period: 2023-09-30
- Accession: 0000950170-23-063843
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1891856/000095017023063843/genk-20230930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1891856/000095017023063843/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-30 | $45.6m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2023-01-01 to 2023-09-30 | $135.9m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Operating income | 3 months, 2023-07-01 to 2023-09-30 | $2.5m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-01-01 to 2023-09-30 | $9.0m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-07-01 to 2023-09-30 | $216.0k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2023-01-01 to 2023-09-30 | $733.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | $74.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | $171.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | $337.0k | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | $8.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.08 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | $0.08 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.08 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | $0.08 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 4,140,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 4,140,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | $13.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $9.5m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2023-09-30 | $32.1m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-09-30 | $35.8m | us-gaap:AssetsCurrent |
| Total assets | at 2023-09-30 | $175.6m | us-gaap:Assets |
| Current liabilities | at 2023-09-30 | $24.9m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-09-30 | $139.1m | us-gaap:Liabilities |
| Long-term debt | at 2023-09-30 | $4.7m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2023-09-30 | $42.0k | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2023-09-30 | $35.0m | us-gaap:StockholdersEquityIncludingPortionAttributableToNoncontrollingInterest |

## Management's discussion and analysis

As filed, 64,891 characters.

*The following management’s discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and related notes of GEN Restaurant Group, Inc., included in Part I, Item 1 of this Quarterly Report on Form 10-Q, and with the audited consolidated financial statements and related notes of GEN Restaurant Companies, LLC (the “Operating Company”) for the year ended December 31, 2022 which are included in our Registration Statement on Form S-1 (File No. 333-272253) as amended, filed with the Securities and Exchange Commission (the “SEC”). The terms “we”, “our”, and “us” as used herein refer to the Operating Company and its consolidated subsidiaries prior to the Transactions described in this Form 10-Q and to GEN Restaurant Group, Inc. and its consolidated subsidiaries, including the Operating Company, following the Transactions.*

*This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. All statements other than statements of historical fact contained in this Quarterly Report, including, without limitation, statements regarding our future results of operations or financial condition, business strategy, and plans and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “believe,” “consider,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” or “would” or the negative of these words or other similar terms or expressions. You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, and operating results. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in our Registration Statement on Form S-1 (File No. 333-272253), as amended, and in our subsequent filings with the SEC, which are available on the SEC's website at www.sec.gov. The forward-looking statements made in this Quarterly Report relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements to reflect future events or circumstances, new information, or the occurrence of unanticipated events, except as required by law.*

### Overview

GEN Restaurant Group is an Asian casual dining restaurant concept that offers an extensive menu of traditional Korean and Korean-American food, including high-quality meats, poultry, and seafood, all at a superior value. Founded in 2011 by two Korean immigrants, since the opening of our first restaurant in September 2011 we have grown to 34 company-owned restaurants located in California, Arizona, Hawaii, Nevada, Texas, New York and Florida. Our restaurants have modern décor, lively Korean pop music playing in the background and embedded grills in the center of each table. We believe we offer our customers a unique dining experience in which guests cook the majority of the food themselves, reducing the need for chefs and servers and providing a similar customer experience across the restaurants.

We expect to continue growing our number of restaurants in the future. Our new restaurants have historically generated average payback periods of approximately 1.4 years. Restaurants range in size from 4,700 to 12,000 thousand square feet, and are typically located in high-activity commercial areas.

During the third quarter of 2023, we signed one new lease for a restaurant in Orlando, FL.

### Business Trends

Although we temporarily paused our new restaurant opening plans during the pandemic, our long-term growth strategy is to continue to open new restaurants in locations that we believe will achieve profitability levels consistent with our pre-pandemic experience. During 2022, we opened three new restaurants and as of September 30, 2023 we have ten new restaurant locations with leases that have been signed, four of which we already opened in 2023. These locations are in Kapolei, Hawaii, Westheimer Road in Houston, Texas (opened on October 26, 2023), Seattle, Washington, Jacksonville, Florida, Dallas, Texas, Arlington, Texas, Maui, Hawaii, Cerritos, California (opened on April 4, 2023), Chandler, Arizona (opened on June 1, 2023) and Fort Lauderdale, Florida (opened on June 10, 2023). We currently expect to open three to four other locations during the rest of 2023. Future sales and profitability levels of our restaurants and our ability to successfully implement our growth strategy in the near term, however, remain uncertain, as the full impact and duration of the pandemic continues to evolve.

### Recent Events Concerning Our Financial Position

During 2021, we entered into several loans under the Paycheck Protection Program, or “PPP Loans”, which provided for an aggregate loan in the amount of $13.5 million as of October 6, 2021. During the month of December 2021, we received notices of loan forgiveness related to the PPP Loans that totaled $13.1 million. In addition, we have received approximately $16.8 million in Restaurant Revitalization Fund, or RRF, grants. These grants were recognized as income as the money was spent, with $13.0 million recorded as income as of December 31, 2021, and $3.8 million was deferred as of December 31, 2022 and September 30, 2023. During 2022, we received notices of forgiveness of $0.4 million related to the PPP Loans and recorded it as a “Gain on extinguishment of debt” in 2022. During the twelve months ended December 31, 2021 and 2022, we received $1.4 million and $2.6 million, respectively, in additional EIDL loans. There are no additional EIDL loans expected. The EIDL loans mature in 2050 and 2051, and carry an interest rate of 3.75%. The range of monthly payments under the EIDL loans are from $700 to $9,770.

During 2022, we entered into a new line of credit for $8.0 million with Pacific City Bank with the funds used to pay off related party loans payable. On August 16, 2023, the Company paid the outstanding balance on the line of credit and the related interest payable in full reflecting a balance at September 30, 2023 of $0. The line of credit matured in September 2023, and had a variable interest rate defined as the Wall Street Journal Prime Rate plus 1.75%, which resulted in an interest rate of 9.25% as of December 31, 2022 and 10.25% as of August 16, 2023.

On September 29, 2023, the Company entered into a $20 million line of credit with a bank. The line of credit matures on September 25, 2024 and bears interest at a variable rate per annum equal to 8.750% as of September 30, 2023. No amounts have been borrowed under the line of credit as of September 30, 2023.

We assessed our long-lived assets for potential impairment each quarter with the result that no impairment charges were recorded in any of the periods presented.

### Key Performance Indicators

In assessing the performance of our business, we consider a variety of financial and performance measures. The key measures for determining how our business is performing include Net Income Margin, Adjusted EBITDA, Adjusted EBITDA Margin, Restaurant-Level Adjusted EBITDA, Restaurant-Level Adjusted EBITDA Margin, Average Unit Volumes, comparable restaurant sales growth, the number of restaurant openings and revenue per square foot.

### Net Income Margin

Net Income Margin is net income measured under GAAP divided by revenue.

### Adjusted EBITDA and Adjusted EBITDA Margin

Adjusted EBITDA represents net income excluding interest expense, net, income taxes, depreciation and amortization, stock-based compensation, consulting fees paid to a related party, and we also exclude non-recurring items such as gain on extinguishment of debt, RRF grants, Employee retention credits, litigation accruals, aborted deferred IPO costs written off, non-cash lease expense and non-cash lease expense included in pre-opening costs. Adjusted EBITDA Margin is defined as Adjusted EBITDA divided by revenue. Adjusted EBITDA and Adjusted EBITDA Margin are non-GAAP measures intended as supplemental measures of our performance and are neither required by, nor presented in accordance with, GAAP. For a discussion of why we consider these measures to be useful and their material risks and limitations, see “*Non-GAAP Financial Measures.”*

### Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin

Restaurant-Level Adjusted EBITDA is Income from operations plus adjustments to add-back the following expenses: depreciation and amortization, pre-opening costs, general and administrative expenses, related party consulting fees, management fees and non-cash lease expense. Non-cash items such as charges for asset impairments and asset disposals are not included in Restaurant-Level Adjusted EBITDA. Restaurant-Level Adjusted EBITDA Margin is the calculation of Restaurant-Level Adjusted EBITDA divided by revenue. For a discussion of why we consider these measures to be useful and their material risks and limitations, see “*Non-GAAP Financial Measures.”*

### Average Unit Volume

“Average Unit Volume” or “AUV” means the average annual restaurant sales for all restaurants open for a full 18 months before the end of the period measured. AUV is calculated by dividing annual revenue for the year presented for all such restaurants by the total number of restaurants in that base. This measurement allows management to assess changes in consumer spending patterns at our restaurants and the overall performance of our restaurant base.

The following table shows the AUV for the twelve months ended September 30, 2023 and September 30, 2022 :

*(in thousands)*

*(unaudited)*

|  | Twelve months ended September 30, 2023 | 2022 |
| --- | ---: | ---: |
| Average Unit Volume | $5,963 | $5,886 |

### Comparable Restaurant Sales Growth

Comparable restaurant sales growth refers to the change in year-over-year sales for the comparable restaurant base. We include restaurants in the comparable restaurant base that have been in operation for at least 18 full months prior to the accounting period presented. Once a restaurant has been open 18 full months, it must have had continuous operations during both the current period and the prior year period being measured to remain a comparable restaurant. If operations were to be substantially impacted by unusual events that closed the location or significantly changed its capacity, that location is excluded from the comparable sales calculation until it has been operating continuously under normal conditions for both the current period and the prior year comparison period.

|  | Three months ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | --- | --- | --- |
| Comparable restaurant sales growth (%) | -1.2% | N/A | N/A | N/A |
| Comparable restaurant base | 28 | N/A | N/A | N/A |

Since opening new restaurants is expected to be a significant component of our sales growth, comparable restaurant sales growth is only one measure of how we evaluate our performance. COVID-19 capacity restrictions continued into the first quarter of 2022. Therefore the calculations of comparable restaurant sales growth could only begin with the periods starting with the second quarter of 2023, as its comparable period in the prior year, the second quarter of 2022, was the first quarter of normal operations.

### Number of Restaurant Openings

The number of restaurant openings reflects the number of restaurants opened during a particular reporting period. Before we open new restaurants, we incur pre-opening costs. New restaurants may not be profitable, and their sales performance may not follow historical patterns. The number and timing of restaurant openings has had, and is expected to continue to have, an impact on our results of operations. We temporarily stopped opening new restaurants in 2021 and 2020 due to the COVID-19 pandemic, but began openings again in 2022. The following table shows the change in our restaurant base for the three and nine months ended September 30, 2023 and September 30, 2022:

| Restaurant activity | Three months ended September 30, 2023 | 2022 | Nine months ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Beginning of period | 34 | 30 | 31 | 28 |
| Openings | — | — | 3 | 2 |
| Closings | — | — | — | — |
| End of period | 34 | 30 | 34 | 30 |

### Revenue Per Square Foot

“Revenue per square foot” means the restaurant sales for all restaurants opened a full 18 months before the end of the twelve month period measured divided by the average square footage of such restaurants. This measurement allows management to assess the effectiveness of our approach to real estate selection and the overall performance of our restaurant base. The following table shows the revenue per square foot for the twelve month periods ended September 30, 2023 and September 30, 2022 :

|  | Twelve months ended September 30, 2023 | 2022 |
| --- | ---: | ---: |
| Revenue per square foot | $888 | $876 |

26

### Components of Results of Operations

***Revenues.*** Revenues represent sales of food and beverages in restaurants and, to a minor extent, through our online portal. Restaurant revenues in a given period are directly impacted by the number of restaurants we operate, menu pricing, the number of customers visiting and comparable restaurant sales growth.

***Food costs.*** Food costs are variable in nature, change with sales volume and are influenced by menu mix and subject to increases or decreases based upon fluctuations in commodity costs. Another important factor causing fluctuations in food costs includes restaurant management of food waste. Food costs are a substantial expense and are expected to grow proportionally as our sales grow.

***Payroll and benefits.*** Payroll and benefits include all restaurant-level management and hourly labor costs, including wages, employee benefits and payroll taxes. Similar to the food costs that we incur, labor and related expenses at our restaurants are expected to grow proportionally as our sales grow. Factors that influence fluctuations in our labor and related expenses include the volume of sales at our restaurants, minimum wage and payroll tax legislation, payroll rate increases due to labor shortages or inflationary pressures, the frequency and severity of workers’ compensation claims, and healthcare costs.

***Occupancy expenses.*** Occupancy expenses include rent, common area maintenance and taxes for all restaurant locations, but exclude any related pre-opening costs.

***Operating expenses***. Operating expenses include supplies, utilities, repairs and maintenance, and other costs incurred directly at the restaurant level.

***Depreciation and amortization expenses***. Depreciation and amortization expenses are periodic non-cash charges at our restaurants that consist of depreciation of fixed assets, including equipment, software and capitalized leasehold improvements. Depreciation is determined using the straight-line method over the assets’ estimated useful lives, ranging from five to ten years.

***Pre-opening costs.*** Pre-opening costs include pre-opening period rent, maintenance, taxes, payroll and benefits costs, advertising and other expenses directly incurred by the new restaurant until the date of the restaurant opening. Pre-opening costs can fluctuate significantly from period to period, based on the number and timing of restaurant openings.

***General and administrative expenses.*** General and administrative expenses include expenses associated with corporate management supervisory functions that support the operations of existing restaurants and development of new restaurants, including compensation and benefits, stock-based compensation, travel expenses, legal and professional fees, marketing costs, information systems, corporate office rent and other related corporate costs. General and administrative expenses are expected to grow as our sales grow, including incremental legal, accounting, insurance and other expenses incurred as a public company including becoming compliant with the requirements of Sarbanes-Oxley and addressing our internal control weaknesses through implementing new accounting systems and hiring additional staff.

***Consulting fees — related party.*** Consulting fees include expenses paid to a related party entity, which provides for annual fees of up to 25% of gross revenue in exchange for various consulting services. The related party is 100% owned by an executive officer, the services were for 21 of the restaurants, and such consulting fees were only paid to the extent we had adequate resources. Following the effective date of our IPO, these consulting fees have been eliminated as services transitioned to us, although corporate general and administrative expenses are expected to increase correspondingly.

***Management fees***. Management fees include expenses paid to a third-party entity, which provides fixed fees for 12 restaurants and a percentage of gross revenue for one restaurant in exchange for management services. Following the IPO, management fees were phased out, although corporate general and administrative expenses are expected to increase correspondingly.

***Depreciation and amortization - corporate.*** These are periodic non-cash charges at the corporate level that consist of depreciation of fixed assets, including equipment, information systems software and capitalized leasehold improvements, if any. Depreciation is determined using the straight-line method over the assets’ estimated useful lives, ranging from five to seven years.

***Gain on extinguishment of debt.*** During 2021 we entered into PPP Loans that provided for an aggregate loan amount of $13.5 million. We received notices of loan forgiveness in the amount of $13.1 million in December 2021 and $0.4 million in January 2022 related to the PPP Loans. We recorded both sets of loan forgiveness as “Gain on extinguishment of debt” in 2021 and 2022 and do not anticipate receiving additional funds as the program has not been extended under the CARES Act.

***Restaurant revitalization fund grant.*** During 2021, we received $16.8 million under the Restaurant Revitalization Fund, of which $13.0 million was recognized in income and $3.8 million was deferred as of December 31, 2022 and September 30, 2023. We do not anticipate receiving additional funds under this program.

***Employee retention credits***. Employee retention credits include refundable credits recognized under the provisions of the CARES Act and extension thereof. During the three months ended September 30, 2023 and September 30, 2022, $0 and $65 thousand, respectively, of these credits were received and recorded, and during the nine months ended September 30, 2023, and September 30, 2022, $2.5 million and $2.6 million, respectively, of these credits were received and recorded.

***Aborted deferred IPO costs written off.*** Costs related to an aborted IPO consist of direct and incremental costs such as accounting, consulting, legal and printing fees that were incurred in connection with an IPO process in which we had planned to register and quote our Common Stock, which we did not complete in 2022 due to market conditions and therefore wrote off the costs incurred through the end of 2022. Market conditions changed in 2023 allowing the process to begin again, with the 2023 IPO costs deferred on the balance sheet in 2023 and charged against stockholder's equity as a reduction of additional paid-in capital at the consummation of the offering just prior to the end of June 2023.

***Other income (loss).*** Other income (loss) consists of one-time legal accruals and other miscellaneous items.

***Interest expense, net.*** Interest expense includes cash and non-cash charges related to our debt outstanding and finance lease obligations. Interest income reflects income earned on notes receivable.

***Provision for income taxes.*** Represents federal, state, and local current and deferred income tax expense (benefit).

***Equity in income of equity method investee.*** Equity in income of equity method investee reflects our 50% ownership in a restaurant located in Hawaii that is accounted for using the equity method.

### Results of Operations for the three months ended September 30, 2023 and September 30, 2022

The following table presents selected comparative results of operations for the three months ended September 30, 2023 and September 30, 2022. Our financial results for these periods are not necessarily indicative of the financial results that we will achieve in future periods.

*(amounts in thousands)*

*(unaudited)*

|  | Three months ended September 30, 2023 | 2022 | Increase/(decrease) Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Revenue | $45,564 | $42,419 | $3,145 | 7.4% |
| Restaurant operating expenses: |  |  |  |  |
| Food cost | 14,523 | 13,954 | 569 | 4.1% |
| Payroll and benefits | 14,444 | 12,649 | 1,795 | 14.2% |
| Occupancy expenses | 3,772 | 3,168 | 604 | 19.1% |
| Operating expenses | 4,582 | 4,159 | 423 | 10.2% |
| Depreciation and amortization | 1,232 | 1,095 | 137 | 12.5% |
| Pre-opening Costs | 723 | 437 | 286 | 65.4% |
| Total restaurant operating expenses | 39,276 | 35,462 | 3,814 | 10.8% |
| General and administrative | 3,802 | 2,191 | 1,611 | 73.5% |
| Consulting fees - related party | - | 1,320 | (1,320) | (100.0)% |
| Management fees | - | 588 | (588) | (100.0)% |
| Depreciation and amortization - corporate | 21 | 9 | 12 | 133.3% |
| Total costs and expenses | 43,099 | 39,570 | 3,529 | 8.9% |
| Income from operations | 2,465 | 2,849 | (384) | (13.5)% |
| Employee retention credits | — | 64 | (64) | (100.0)% |
| Other income (loss) | — | (6) | 6 | (100.0)% |
| Interest expense, net | 190 | (203) | 393 | (193.6)% |
| Equity in income of equity method investee | 53 | 70 | (17) | (24.3)% |
| Income before income taxes | 2,708 | 2,774 | (66) | (2.4)% |
| Provision for income taxes | (74) | — | (96) | — |
| Net income | 2,634 | 2,774 | (140) | (5.0)% |
| Net Income attributable to noncontrolling interest | 2,297 | 387 | 1,910 | 493.5% |
| Net income attributable to GEN Restaurant Group, Inc. | $337 | $2,387 | $(2,050) | (85.9)% |

28

*(unaudited)*

|  | % of Revenue Three months ended September 30, 2023 | 2022 |
| --- | ---: | ---: |
| Revenue | 100.0% | 100.0% |
| Restaurant operating expenses: |  |  |
| Food cost | 31.9% | 32.9% |
| Payroll and benefits | 31.7% | 29.8% |
| Occupancy expenses | 8.3% | 7.5% |
| Operating expenses | 10.1% | 9.8% |
| Depreciation and amortization | 2.7% | 2.6% |
| Pre-opening Costs | 1.6% | 1.0% |
| Total restaurant operating expenses | 86.2% | 83.6% |
| General and administrative | 8.3% | 5.2% |
| Consulting fees - related party | 0.0% | 3.1% |
| Management fees | 0.0% | 1.4% |
| Depreciation and amortization - corporate | 0.0% | 0.0% |
| Total costs and expenses | 94.6% | 93.3% |
| Income from operations | 5.4% | 6.7% |
| Employee retention credits | 0.0% | 0.2% |
| Other income (loss) | 0.0% | 0.0% |
| Interest expense, net | 0.4% | (0.5)% |
| Equity in income of equity method investee | 0.1% | 0.2% |
| Income before income taxes | 5.9% | 6.5% |
| Provision for income taxes | (0.2)% | 0.0% |
| Net income | 5.8% | 6.5% |
| Net Income attributable to noncontrolling interest | 5.0% | 0.9% |
| Net income attributable to GEN Restaurant Group, Inc. | 0.7% | 5.6% |

*Revenues*. Revenues were $45.6 million for the three months ended September 30, 2023, compared to $42.4 million for the three months ended September 30, 2022, an increase of $3.1 million, or 7.4%. This reflects revenue increases due largely to price increases in lunch and dinner menus in late 2022, as well as having 30 restaurants open in the three months ended September 30, 2022 compared to 34 restaurants open in the three months ended September 30, 2023.

*Food costs*. Food costs were $14.5 million for the three months ended September 30, 2023, compared to $14.0 million for the three months ended September 30, 2022, an increase of $0.5 million, or 4.1%. The increase in food costs reflects more restaurants in operation and inflationary cost increases. As a percentage of revenue, food costs decreased from 32.9% to 31.9%.

*Payroll and benefits*. Payroll and benefits costs were $14.4 million for the three months ended September 30, 2023, compared to $12.7 million for the three months ended September 30, 2022, an increase of $1.8 million, or 14.2%. The increase in payroll and benefits costs reflects the staffing needed to support the higher customer volumes from new and existing restaurants as well as inflationary payroll increases. As a percentage of revenue, payroll and benefits costs increased from 29.8% to 31.7%.

*Occupancy expenses*. Occupancy expenses were $3.8 million for the three months ended September 30, 2023 compared to $3.2 million for the three months ended September 30, 2022, an increase of $0.6 million, or 19.1%. The increase in occupancy expenses reflects the addition of four new locations, two of which were in higher rent geographies. As a percentage of revenue, occupancy expenses were 8.3% in the three months ended September 30, 2023 compared to 7.5% in the three months ended September 30, 2022.

*Operating expenses*. Operating expenses were $4.6 million for the three months ended September 30, 2023 compared to $4.2 million for the three months ended September 30, 2022, an increase of $0.4 million, or 10.2%, as expenses increased to support the revenue growth and reflected inflationary cost increases. As a percentage of revenue, operating expenses were 10.1% in the three months ended September 30, 2023 and 9.8% in the three months ended September 30, 2022.

*Depreciation and amortization expenses*. Depreciation and amortization expenses were $1.2 million for the three months ended September 30, 2023 and $1.1 million for the three months ended September 30, 2022. As a percentage of revenue, depreciation and amortization expenses at the restaurant-level were 2.7% during the three months ended September 30, 2023 and 2.6% during the three months ended September 30, 2022, with the decrease due to increased revenue.

*Pre-opening costs*. Pre-opening costs were $0.7 million for the three months ended September 30, 2023 compared to $0.4 million for the three months ended September 30, 2022. This increase was due to more restaurants under development in 2023 than in 2022.

*General and administrative expenses*. General and administrative expenses were $3.8 million for the three months ended September 30, 2023 compared to $2.1 million for the three months ended September 30, 2022, an increase of $1.6 million, or 73.5%. As a percentage of revenue, general and administrative expenses increased from 5.2% for the three months ended September 30, 2022, to 8.3% for the three months ended September 30, 2023 as costs shifted post-IPO from consulting and management fees previously paid to related parties.

*Consulting fees - related party*. Consulting fees were $0 for the three months ended September 30, 2023 compared to $1.3 million for the three months ended September 30, 2022, a decrease of $1.3 million or 100%. These fees were eliminated following the IPO.

*Management Fees*. Management fees were $0 million for the three months ended September 30, 2023 and $0.6 million for the three months ending September 30, 2022. This includes expenses paid to a third-party entity, which consist of fixed fees for twelve restaurants and a percentage of gross revenue for one restaurant in exchange for management services. These fees were eliminated following the IPO.

*Employee retention credits*. During the three months ended September 30, 2023, we did not receive employee retention credits from the IRS, compared to $64 thousand in the three months ended September 30, 2022.

*Other income (loss).* During the three months ended September 30, 2023 miscellaneous expenses were zero. In the three months ended September 30, 2022 other loss was $6 thousand.

*Interest expense, net*. During the three months ended September 30, 2023, interest expense, net was $190 thousand income compared to $203 thousand in expense during the three months ended September 30, 2022. The increase in net interest income was primarily due to the interest income earned on the proceeds from the IPO transaction.

*Equity in income of equity method investee*. Equity in income of equity method investee was a gain of $53 thousand during the three months ended September 30, 2023 compared to $70 thousand during the three months ended September 30, 2022.

### Results of Operations for the nine months ended September 30, 2023 and September 30, 2022

The following table presents selected comparative results of operations for the nine months ended September 30, 2023 and September 30, 2022. Our financial results for these periods are not necessarily indicative of the financial results that we will achieve in future periods.

*(amounts in thousands)*

*(unaudited)*

|  | Nine Months Ended September 30, 2023 | 2022 | Increase/(decrease) Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Revenue | $135,899 | $122,880 | $13,019 | 10.6% |
| Restaurant operating expenses: |  |  |  |  |
| Food cost | 43,614 | 40,968 | 2,646 | 6.5% |
| Payroll and benefits | 42,419 | 36,128 | 6,291 | 17.4% |
| Occupancy expenses | 10,876 | 9,051 | 1,825 | 20.2% |
| Operating expenses | 13,007 | 11,178 | 1,829 | 16.4% |
| Depreciation and amortization | 3,476 | 3,234 | 242 | 7.5% |
| Pre-opening Costs | 2,123 | 975 | 1,148 | 117.7% |
| Total restaurant operating expenses | 115,515 | 101,534 | 13,981 | 13.8% |
| General and administrative | 7,815 | 5,720 | 2,095 | 36.6% |
| Consulting fees - related party | 2,325 | 4,897 | (2,572) | (52.5)% |
| Management fees | 1,176 | 1,745 | (569) | (32.6)% |
| Depreciation and amortization - corporate | 58 | 24 | 34 | 141.7% |
| Total costs and expenses | 126,889 | 113,920 | 12,969 | 11.4% |
| Income from operations | 9,010 | 8,960 | 50 | 0.6% |
| Gain on extinguishment of PPP debt | — | 387 | (387) | (100.0)% |
| Employee retention credits | 2,483 | 2,583 | (100) | (3.9)% |
| Other income (loss) | (7) | (854) | 847 | (99.2)% |
| Interest expense, net | (206) | (440) | 234 | (53.2)% |
| Equity in income of equity method investee | 520 | 921 | (401) | (43.5)% |
| Income before income taxes | 11,800 | 11,557 | 243 | 2.1% |
| Provision for income taxes | (171) | 0 | (171) | — |
| Net income | 11,629 | 11,557 | 72 | 0.6% |
| Net Income attributable to noncontrolling interest | 3,198 | 1,067 | 2,131 | 199.7% |
| Net income attributable to GEN Restaurant Group, Inc. | $8,431 | $10,490 | $(2,059) | (19.6)% |

31

*(unaudited)*

|  | % of Revenue Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: |
| Revenue | 100.0% | 100.0% |
| Restaurant operating expenses: |  |  |
| Food cost | 32.1% | 33.3% |
| Payroll and benefits | 31.2% | 29.4% |
| Occupancy expenses | 8.0% | 7.4% |
| Operating expenses | 9.6% | 9.1% |
| Depreciation and amortization | 2.6% | 2.6% |
| Pre-opening Costs | 1.6% | 0.8% |
| Total restaurant operating expenses | 85.0% | 82.6% |
| General and administrative | 5.7% | 4.7% |
| Consulting fees - related party | 1.7% | 4.0% |
| Management fees | 0.9% | 1.4% |
| Depreciation and amortization - corporate | 0.0% | 0.0% |
| Total costs and expenses | 93.4% | 92.7% |
| Income from operations | 6.6% | 7.3% |
| Gain on extinguishment of PPP debt | 0.0% | 0.3% |
| Employee retention credits | 1.8% | 2.1% |
| Other income (loss) | 0.0% | (0.7)% |
| Interest expense, net | (0.2)% | (0.4)% |
| Equity in income of equity method investee | 0.4% | 0.7% |
| Income before income taxes | 8.7% | 9.4% |
| Provision for income taxes | (0.1)% | 0.0% |
| Net income | 8.6% | 9.4% |
| Net Income attributable to noncontrolling interest | 2.4% | 0.9% |
| Net income attributable to GEN Restaurant Group, Inc. | 6.2% | 8.5% |

*Revenues*. Revenues were $135.9 million for the nine months ended September 30, 2023, compared to $122.9 million for the nine months ended September 30, 2022, an increase of $13.0 million, or 10.6%. This reflects revenue increases at comparable stores due largely to price increases in lunch and dinner menus in late 2022, as well as having four more restaurants open for at least a portion of the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.

*Food costs*. Food costs were $43.6 million for the nine months ended September 30, 2023, compared to $41.0 million for the nine months ended September 30, 2022, an increase of $2.6 million, or 6.5%. The increase in food costs reflects more restaurants in operation and inflationary cost increases. As a percentage of revenue, food costs declined from 33.3% to 32.1%.

*Payroll and benefits*. Payroll and benefits costs were $42.4 million for the nine months ended September 30, 2023, compared to $36.1 million for the nine months ended September 30, 2022, an increase of $6.3 million, or 17.4%. The increase in payroll and benefits costs reflects the staffing needed to support the higher customer volumes from new and existing restaurants as well as inflationary payroll increases. As a percentage of revenue, payroll and benefits costs increased from 29.4% to 31.2%.

*Occupancy expenses*. Occupancy expenses were $10.9 million for the nine months ended September 30, 2023 compared to $9.1 million for the nine months ended September 30, 2022, an increase of $1.8 million, or 20.2%. The increase in occupancy expenses reflects the addition of four new locations, two of which were in higher rent geographies. As a percentage of revenue, occupancy expenses were 8.0% in the nine months ended September 30, 2023 compared to 7.4% in the nine months ended September 30, 2022.

*Operating expenses*. Operating expenses were $13.0 million for the nine months ended September 30, 2023 compared to $11.2 million for the nine months ended September 30, 2022, an increase of $1.8 million, or 16.4%, as expenses increased to support the revenue growth and reflected inflationary cost increases. As a percentage of revenue, operating expenses were 9.6% in the nine months ended September 30, 2023 and 9.1% in the nine months ended September 30, 2022.

*Depreciation and amortization expenses*. Depreciation and amortization expenses were $3.5 million for the nine months ended September 30, 2023, compared to $3.2 million for the nine months ended September 30, 2022, an increase of $0.3 million, or 7.5%. As a percentage of revenue, depreciation and amortization expenses at the restaurant-level were 2.6% for both the nine months ended September 30, 2023 and September 30, 2022.

*Pre-opening costs*. Pre-opening costs were $2.1 million for the nine months ended September 30, 2023 compared to $1.0 million for the nine months ended September 30, 2022. This increase was due to more restaurants under development in 2023 than in 2022.

*General and administrative expenses*. General and administrative expenses were $7.8 million for the nine months ended September 30, 2023 compared to $5.7 million for the nine months ended September 30, 2022, an increase of $2.1 million, or 36.6%. The increase is largely due to hiring employees to support higher restaurant volume and new restaurant development and the shifting of costs, post IPO, from consulting and management fees previously paid to related parties. As a percentage of revenue, general and administrative expenses increased from 4.7% for the nine months ended September 30, 2022 to 5.7% for the nine months ended September 30, 2023.

*Consulting fees - related party*. Consulting fees were $2.3 million for the nine months ended September 30, 2023 compared to $4.9 million for the nine months ended September 30, 2022, a decrease of $2.6 million or 52.5%. These fees were eliminated in the third quarter of 2023, following the IPO.

*Management Fees*. Management fees were $1.2 million for the nine months ended September 30, 2023 and $1.8 million for the nine months ended September 30, 2022. This includes expenses paid to a third-party entity, which consist of fixed fees for twelve restaurants and a percentage of gross revenue for one restaurant in exchange for management services. These fees were eliminated in the third quarter of 2023, following the IPO.

*Gain on extinguishment of debt*. During the nine months ended September 30, 2022 we received loan forgiveness from the SBA related to the PPP Loans in the amount of $0.4 million. We do not anticipate receiving additional funds under this program.

*Employee retention credits*. During both the nine month periods ended September 30, 2023 and September 30, 2022 we received employee retention credits from the IRS in the amount of $2.5 million.

*Other income (loss).* During the nine months ended September 30, 2023 miscellaneous expenses were negligible. In the nine months ended September 30, 2022 other income (loss) was $848 thousand, largely reflecting a one-time charge for settlement of a long-standing legal dispute.

*Interest expense, net*. During the nine months ended September 30, 2023, interest expense, net was $206 thousand compared to $440 thousand during the nine months ended September 30, 2022. The decrease in net interest expense was due to the increase in interest income on higher cash balances since the IPO.

*Equity in income of equity method investee*. Equity in income of equity method investee was a gain of $0.5 million during the nine months ended September 30, 2023 compared to $0.9 million during the nine months ended September 30, 2022.

### Non-GAAP Financial Measures

### Adjusted EBITDA and Adjusted EBITDA Margin

Adjusted EBITDA represents net income excluding interest expense, income taxes, depreciation and amortization, and we also exclude non-recurring items, such as gain on extinguishment of debt, RRF grants, consulting fees paid to a related party, employee retention credits, litigation accruals, aborted deferred IPO costs written off, non-cash lease expense and non-cash lease expense related to pre-opening costs. Adjusted EBITDA Margin is defined as Adjusted EBITDA divided by revenue. We believe that Adjusted EBITDA and Adjusted EBITDA Margin provide useful information to management and investors regarding certain financial and business trends relating to our financial condition and operating results, as these measure depict normal recurring cash operating expenses essential to supporting the operations of our company. We expect Adjusted EBITDA to increase with the number of new restaurants we open and with comparable restaurant sales growth.

The following table reconciles net income to Adjusted EBITDA for the three and nine months ended September 30, 2023 and September 30, 2022.

*(amounts in thousands)*

*(unaudited)*

*(unaudited)*

| EBITDA: | Three months ended September 30, 2023 | 2022 | Nine months ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| **Net income** | $2,634 | $2,774 | $11,629 | $11,557 |
| Net Income Margin | 5.8% | 6.5% | 8.6% | 9.4% |
| Interest expense, net | (190) | 203 | 206 | 440 |
| Provision for income taxes | 74 | — | 171 | — |
| Depreciation and amortization | 1,253 | 1,104 | 3,534 | 3,258 |
| **EBITDA** | **$3,771** | **$4,081** | **$15,540** | **$15,255** |
| **EBITDA Margin** | **8.3%** | **9.6%** | **11.4%** | **12.4%** |
| **Adjustments to EBITDA:** |  |  |  |  |
| EBITDA | $3,771 | $4,081 | $15,540 | $15,255 |
| Stock-based compensation expense (1) | 759 | — | 759 | — |
| Gain on extinguishment of debt (2) | — | — | — | (387) |
| Consulting fees - related party (3) | — | 1,320 | 2,325 | 4,897 |
| Employee retention credits (4) | — | (64) | (2,483) | (2,583) |
| Litigation accrual (5) | — | — | — | 850 |
| Non-cash lease expense (6) | 144 | 77 | 303 | 207 |
| Non-cash lease expense related to pre-opening costs (7) | 338 | 437 | 763 | 916 |
| **Adjusted EBITDA** | **$5,012** | **$5,851** | **$17,207** | **$19,155** |
| **Adjusted EBITDA Margin** | **11.0%** | **13.8%** | **12.7%** | **15.6%** |

(1) Stock-based compensation expense: During the third quarter of 2023, we incurred expenses related to the granting of Restricted Stock Units (“RSUs”) to employees.

(2) Gain on extinguishment of debt: In the first quarter of 2022, we received loan forgiveness from the SBA related to the PPP Loans in the amount of $0.4 million. We do not anticipate receiving additional funds as the program has not been extended under the CARES Act.

(3) Consulting fees—related party: These costs ended following the completion of the IPO.

(4) Employee retention credits: These are refundable credits recognized under the provisions of the CARES Act.

(5) Litigation accruals: This is an accrual in 2022 related to a specific, one-time, litigation claim.

(6) Non-cash lease expense: This reflects the extent to which lease expense is greater than or less than contractual rent.

(7) Non-cash lease expense related to pre-opening costs: Cost for stores in development in which the lease expense is greater than the contractual rent.

### Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin

We define Restaurant-Level Adjusted EBITDA as Income from operations plus adjustments to add-back the following expenses: depreciation and amortization, pre-opening costs, general and administrative expense, related party consulting fees, management fees and non-cash lease expense. We define Restaurant-Level Adjusted EBITDA Margin as Restaurant-Level Adjusted EBITDA divided by revenue.

As with Adjusted EBITDA and Adjusted EBITDA Margin, we believe that Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin provide useful information to management and investors regarding certain financial and business trends relating to our financial condition and operating results, as these measure depicts normal, recurring cash operating expenses essential to supporting the operations of our restaurants. We expect Restaurant-Level Adjusted EBITDA to increase in proportion to the number of new restaurants we open and with our comparable restaurant sales growth.

However, you should be aware that Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin are financial measures that are not indicative of overall results for our company, and Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin do not accrue directly to the benefit of stockholders because of corporate-level and non-cash expenses excluded from such measures.

The following table reconciles Income from Operations to Restaurant-Level Adjusted EBITDA for the three and nine months ended September 30, 2023 and September 30, 2022:

*(amounts in thousands)*

*(unaudited)*

*(unaudited)*

|  | Three months ended September 30, 2023 | 2022 | Nine months ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| **Income from Operations** | **$2,465** | **$2,849** | **$9,010** | **$8,960** |
| Income Margin from Operations | 5.4% | 6.7% | 6.6% | 7.3% |
| Depreciation and amortization | 1,253 | 1,104 | 3,534 | 3,258 |
| Pre-opening costs | 723 | 437 | 2,123 | 975 |
| General and administrative | 3,802 | 2,191 | 7,815 | 5,720 |
| Consulting fees - related party | - | 1,320 | 2,325 | 4,897 |
| Management Fees | - | 588 | 1,176 | 1,745 |
| Non-cash lease expense | 144 | 77 | 303 | 207 |
| **Restaurant-Level Adjusted EBITDA** | **$8,387** | **$8,566** | **$26,286** | **$25,762** |
| **Restaurant-Level Adjusted EBITDA Margin** | **18.4%** | **20.3%** | **19.3%** | **21.0%** |

Adjusted EBITDA, Adjusted EBITDA Margin, Restaurant-Level Adjusted EBITDA, and Restaurant-Level Adjusted EBITDA Margin are non-GAAP measures intended as supplemental measures of our performance and are neither required by, nor presented in accordance with GAAP. Our presentation of these measures should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Our computation of Adjusted EBITDA, Adjusted EBITDA Margin, Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin may not be comparable to other similarly titled measures presented by other companies, because all companies may not calculate Adjusted EBITDA, Adjusted EBITDA Margin, Restaurant-Level Adjusted EBITDA, and Restaurant-Level Adjusted EBITDA Margin in the same fashion. These non-U.S.GAAP financial measures have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP.

### Liquidity and Capital Resources

As of September 30, 2023 we had $32.1 million of cash and $10.9 million of working capital, which is calculated as current assets minus current liabilities, compared with $11.2 million of cash and ($22.5) million of working capital as of December 31, 2022. On June 30, 2023, we completed the IPO of 4,140,000 shares of Class A common stock. The public offering prices of the shares sold in the IPO was $12.00 per share, resulting in aggregate net proceeds to us of approximately $46.2 million after deducting the underwriting discounts and commission and offering expenses payable by us.

Our primary uses of cash are for operational expenditures and capital investments, including new restaurants, costs incurred for restaurant remodels and restaurant equipment and fixtures. There is no guarantee that if we need to raise any additional capital that we will be able to do so.

Prior to the IPO certain companies within GEN Restaurant Group made distributions to their members, which impacted our cash position upon completion of the IPO. The operating agreements of most of the companies within GEN Restaurant Group, as separate private entities prior to the Reorganization, mandate annual or quarterly distributions of available cash and/or tax distributions in an amount sufficient to allow members to pay taxes on income allocated to them. We determined the amount of these distributions based on the operating cash flow of each such entity. During the year ended December 31, 2022, an aggregate of $29.5 million of distributions were made, and during the nine months ended September 30, 2023, an aggregate of $26.5 million of distributions were made.

We believe that cash provided by operating activities and cash on hand will be sufficient to fund our lease obligations, capital expenditures and working capital needs for at least the next 12 months.

Upon the IPO transaction, GEN Inc. became a holding company with no operations of its own. Accordingly, GEN Inc. will be dependent on distributions from GEN LLC to pay its taxes, its obligations under the Tax Receivable Agreement and other expenses.

In connection with the Reorganization, certain members of GEN LLC received the right to receive future payments pursuant to the Tax Receivable Agreement. The amount payable under the Tax Receivable Agreement will be based on an annual calculation of the reduction in our U.S. federal, state and local taxes resulting from the utilization of certain tax benefits resulting from sales and exchanges by certain members of GEN LLC. We expect that payments that we may be required to make under the Tax Receivable Agreement may be substantial. Assuming no material changes in the relevant tax law and that we earn sufficient taxable income to realize all tax benefits that are subject to the Tax Receivable Agreement, we expect that the reduction in tax payments for us associated with the federal, state and local tax benefits described above would aggregate to approximately $117.2 million through 2037. Under such scenario we would be required to pay certain members of GEN LLC 85% of such amount, or $99.6 million through 2037.

The actual amounts may materially differ from these hypothetical amounts as potential future reductions in tax payments for us and Tax Receivable Agreement payments by us will be calculated using prevailing tax rates applicable to us over the life of the Tax Receivable Agreement and will be dependent on us generating sufficient future taxable income to realize the benefit.

We cannot reasonably estimate future annual payments under the Tax Receivable Agreement given the difficulty in determining those estimates as they are dependent on a number of factors, including the extent of exchanges by continuing GEN LLC unitholders, the associated fair value of the underlying GEN LLC units at the time of those exchanges, the tax rates applicable, our future income, and the associated tax benefits that might be realized that would trigger a Tax Receivable Agreement payment requirement.

However, a significant portion of any potential future payments under the Tax Receivable Agreement is anticipated to be payable over 15 years, consistent with the period over which the associated tax deductions would be realized by GEN Inc., assuming GEN LLC generates sufficient income to utilize the deductions. If sufficient income is not generated by GEN LLC, the associated taxable income of GEN Inc. will be impacted and the associated tax benefits to be realized will be limited, thereby similarly reducing the associated Tax Receivable Agreement payments to be made. Given the length of time over which payments would be payable, the impact to liquidity in any single year may be greatly reduced.

### Summary of Cash Flows

Our primary sources of liquidity are operating cash flows, cash on hand and debt borrowings. We use these sources to fund expenditures for new restaurant openings, reinvest in our existing restaurants, and increase our working capital. Our working capital position benefits from the fact that we generally collect cash from sales to guests the same day, or in the case of credit or debit card transactions, within several days of the related sale, and we typically have at least 30 days to pay our vendors.

The following table summarizes our cash flows for the periods presented:

*(amounts in thousands)*

*(unaudited)*

| Summary of Cash Flows | Nine months ended September 30, 2023 | 2022 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $13,486 | $13,779 |
| Net cash provided by investing activities | 1,388 | 7,690 |
| Net cash provided by (used in) financing activities | 6,080 | (22,355) |

### Cash Provided by Operating Activities

Net cash provided by operating activities during the nine months ended September 30, 2023 was $13.5 million, the result of net income of $11.6 million, adjusted by non-cash charges of depreciation and amortization of $3.5 million, amortization of operating lease assets of $3.5 million and stock-based compensation of $0.8 million, offset by net cash outflows of approximately $5.9 million from changes in operating assets and liabilities. The net cash outflows from changes in operating assets and liabilities were primarily the result of an increase in accounts payable of $2.8 million, an increase in prepaid expenses of $2.0 million and an increase in operating lease liabilities of $2.5 million.

Net cash provided by operating activities during the nine months ended September 30, 2022 was $13.8 million, the result of net income of $11.6 million, adjusted by non-cash charges of depreciation and amortization of $3.3 million, and amortization of operating lease assets of $2.6 million, partially offset by net cash outflows from changes in operating assets and liabilities. The net cash outflows from changes in operating assets and liabilities were primarily due to a $3.0 million increase in inventories and adjustments to operating lease assets and liabilities resulting from the adoption of ASC 842, offset by a $1.7 million increase in accounts payable.

### Cash Flows Provided by Investing Activities

Net cash provided by investing activities during the nine months ended September 30, 2023 was $1.4 million, reflecting $10.9 million in the recovery of net proceeds from advances made to a related party, partially offset by $9.5 million for the purchase of property and equipment.

Net cash provided by investing activities during the nine months ended September 30, 2022 was $7.7 million, reflecting $13.5 million in the recovery of advances made to a related party, partially offset by $5.8 million for the purchase of property and equipment.

### Cash Flows Provided by (Used in) Financing Activities

Net cash provided by financing activities during the nine months ended September 30, 2023 was $6.1 million, primarily due to $46.2 million in proceeds from the issuance of Class A common stock in the IPO, offset partially by $26.5 million in member distributions.

Net cash used in financing activities during the nine months ended September 30, 2022 was $22.4 million, reflecting $27.6 million in net distributions to members and $8.0 million in payments made on related party loans. These were partially offset by proceeds from third party loans of $7.9 million, $2.7 million from PPP and EIDL loans, and $2.9 million in advances from members.

### Contractual Obligations

The following table presents our commitments and contractual obligations as of September 30, 2023:

*(amounts in thousands)*

|  | Payments Due by Period as of September 30, 2023 Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years |
| --- | ---: | ---: | ---: | ---: | ---: |
| Operating lease payments (1) | $190,331 | $2,408 | $21,855 | $22,736 | $143,332 |
| Finance lease payments (2) | 178 | 40 | 138 | — |  |
| Notes payable (3) | 4,751 | 42 | 349 | 358 | 4,002 |
| Line of credit (4) | - | — | — | — | — |
| Notes payable interest (5) | 2,967 | 47 | 364 | 325 | 2,231 |
| Notes payable - related party (6) | 1,062 | 1,062 | — | — | — |
| Total Contractual obligations | $199,289 | $3,599 | $22,706 | $23,419 | $149,565 |

(1) Represents future minimum lease payments for our restaurant operations and corporate office. Operating lease payments exclude contingent rent payments that may be due under certain of our leases based on a percentage of sales in excess of specified thresholds. See “Note 10—Leases” to the financial statements in this quarterly report for further details.

(2) Reflects the principal and interest payments during the lease terms. Refer to “Note 10—Leases” to the financial statements included in this quarterly report.

(3) Reflects the principal payment on third party notes. Refer to “Note 8—Notes Payable” to the financial statements included elsewhere in this quarterly report.

(4) Reflects the principal payment on the line of credit. Refer to “Note 7—Line of Credit” to the financial statements included in this quarterly report.

(5) Interest relates to the notes payable through maturity dates. Refer to “Note 8—Notes Payable” to the financial statements included in this quarterly report.

(6) Reflects the principal payment on related party notes. Refer to “Note 9—Related Party Notes Payable” to the financial statements included in this quarterly report.

### Off-Balance Sheet Arrangements

As of September 30, 2023 and December 31, 2022 we did not have any material off-balance sheet arrangements.

### Critical Accounting Policies and Estimates

Our discussion and analysis of operating results and financial condition are based upon our financial statements. The preparation of our financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales, expenses and related disclosures of contingent assets and liabilities. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis.

Our critical accounting policies are those that materially affect our financial statements and involve subjective or complex judgments by management. Although these estimates are based on management’s best knowledge of current events and actions that may impact us in the future, actual results may be materially different from the estimates. We believe the following critical accounting policies are affected by significant judgments and estimates used in the preparation of our financial statements and that the judgments and estimates are reasonable.

### Operating and Finance Leases

Our office leases provide for fixed minimum rent payments. Our restaurant leases provide for fixed minimum rent payments and some require additional contingent rent payments based upon sales in excess of specified thresholds. When achievement of such sales thresholds is deemed probable, contingent rent is accrued in proportion to the sales recognized in the period. For operating leases that include free-rent periods and rent escalation clauses, we recognize rent expense based on the straight-line method. For the purpose of calculating rent expenses under the straight-line method, the lease term commences on the date we obtain control of the property. Lease incentives used to fund leasehold improvements are recognized when earned and reduce the operating right-of-use asset related to the lease. These are amortized through the operating right-of-use asset as reductions of expense over the lease term. Restaurant lease expense is included in occupancy expenses, while office lease expense is included in general and administrative expenses on the accompanying financial statements.

We currently lease all of our restaurant locations, corporate office, and some of the equipment used in our restaurants. On January 1, 2022, we adopted ASU 2016-02, Leases (Topic 842), using a modified retrospective approach. See "Note 10—Leases" to the financial statements. At commencement of the lease, we determine the appropriate classification as an operating lease or a finance lease. All of our restaurant and office leases are classified as operating leases and some of our equipment leases are classified as finance leases.

Assets we acquired under finance lease arrangements are recorded at the lower of the present value of future minimum lease payments or fair value of the assets at the inception of the lease. Finance lease assets are amortized over the shorter of the useful life of the assets or the lease term, and the amortization expense is included in depreciation and amortization on the accompanying financial statements.

### Impairment of Long-Lived Assets

We assess potential impairments of our long-lived assets, which includes property and equipment and operating lease right-of-use assets, in accordance with the provisions of Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, 360—Property, Plant and Equipment. An impairment test is performed on a quarterly basis or whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. In determining the recoverability of the asset value, an analysis is performed at the individual restaurant level. Assets are grouped at the individual restaurant-level for purposes of the impairment assessment because a restaurant represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Recoverability of an asset group is measured by a comparison of the carrying amount of an asset group to its estimated forecasted restaurant cash flows expected to be generated by the asset group. Factors considered by us in estimating future cash flows include, but are not limited to: significant underperformance relative to expected historical or projected future operating results; significant changes in the manner of use of the acquired assets; and significant negative industry or economic trends. If the carrying amount of the asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized as the amount by which the carrying amount of the asset exceeds the fair value of the asset.

No impairment loss was recognized during any of the periods presented.

### Emerging Growth Company Status

We are an “emerging growth company,” as defined in the JOBS Act, and we have taken advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies.” We may take advantage of these exemptions until we are no longer an “emerging growth company.” Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards. We have elected to use the extended transition period for complying with new or revised accounting standards and as a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates. We may take advantage of these exemptions up until the last day of the fiscal year following the fifth anniversary of our IPO or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than $1.07 billion in annual revenue, we have more than $700.0 million in market value of our stock held by non-affiliates (and we have been a public company for at least 12 months and have filed one annual report on Form 10-K) or we issue more than $1.0 billion of non-convertible debt securities over a three-year period.

### Recently Adopted Accounting Pronouncements

In April 2020, the staff of the Financial Accounting Standards Board (“FASB”) issued a question-and-answer document that stated that entities may elect to account for lease concessions related to the effects of the COVID-19 pandemic as though the rights and obligations for those concessions existed as of the commencement of the contract rather than as a lease modification. Lessees may make the election for any lessor- provided lease concession related to the impact of the COVID-19 pandemic as long as the concession does not result in a substantial increase in the rights of the lessor or in the obligations of the lessee. We have made such election. We have received immaterial rent concessions that did not result in an extension of lease term. As such, this election did not have a material impact on the balance sheets, the statements of operations, statements of stockholders’ equity or statements of cash flows.

On September 1, 2019, the FASB issued ASU 2016-02, “Leases (Topic 842)”, or Topic 842 or ASC 842, along with related clarifications and improvements. This pronouncement requires lessees to recognize a liability for lease obligations, which represents the discounted obligation to make future lease payments, and a corresponding right-of-use asset on the balance sheet. The guidance requires disclosure of key information about leasing arrangements that is intended to give financial statement users the ability to assess the amount, timing, and potential uncertainty of cash flows related to leases. We adopted this pronouncement for the year beginning after December 31, 2021 using the modified retrospective method to apply the standard as of the effective date of January 1, 2022 and therefore prior period amounts were not adjusted.

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” which is intended to simplify various aspects related to accounting for income taxes. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. ASU 2019-12 was effective for us beginning in fiscal year 2022, although applicability only began after we became a publicly traded C corporation in June 2023.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” ("ASU 2016-13"). ASU 2016-13 amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including receivables. In January 2023, the Company adopted ASU No. 2016-13, and concluded that the adoption of ASC 326 did not have a material impact on the Company’s recognition of financial instruments within the scope of the standard.

## Market risk

As filed, 2,941 characters.

### Commodity and Food Price Risks

Our profitability is dependent on, among other things, our ability to anticipate and react to changes in the costs of key operating resources, including food and beverage and other commodities. We have been able to partially offset cost increases that have resulted from a number of factors, including market conditions, shortages or interruptions in supply due to weather or other conditions beyond our control and governmental regulations and inflation, by increasing our menu prices as well as making other operational adjustments that increase productivity. However, substantial increases in costs and expenses could impact our operating results to the extent that such increases cannot be offset by menu price increases or operational adjustments.

### Inflation Risk

The primary areas where inflation impacts our operations are food, beverage, labor and energy costs. Our restaurant operations are subject to federal and state minimum wage and other laws governing such matters as working conditions, overtime and tip credits. Significant numbers of our restaurant personnel are paid at rates related to the federal and/or state minimum wage and, accordingly, increases in the minimum wage increase our labor costs. To the extent permitted by competition and the economy, we have mitigated increased costs by increasing menu prices and may continue to do so if deemed necessary in future years. Substantial increases in costs and expenses could impact our operating results to the extent such increases cannot be passed through to our guests. Historically, until 2022, inflation has not had a material effect on our results of operations. Severe increases in inflation, however, could affect the global and U.S. economies and could have an adverse impact on our business, financial condition or results of operations.

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

### Interest Rate Risk

The Company is exposed to market interest rates reflected in the line of credit which bears an interest rate at the Wall Street Journal Prime Rate plus 0.25%.

## Controls and procedures

As filed, 1,672 characters.

### Disclosure Controls and Procedures

Our management carried out an evaluation, under the supervision and with the participation of our Chief Executive Officers and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined by Rule 13a-15(e) of the Exchange Act) as of the end of period covered by this Quarterly Report on Form 10-Q.

Based on this evaluation, our Chief Executive Officers and Chief Financial Officer have concluded that as of September 30, 2023 due to material weaknesses in internal control over financial reporting, our disclosure controls and procedures were not effective in ensuring that the information required to be disclosed in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities Exchange Commission and is accumulated and communicated to our management, including our Chief Executive Officers and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. The material weaknesses related to (a) a lack of adequate and timely review of accounts and reconciliations by management, primarily due to a large number of accounting journal entries across GEN Restaurant Group's operating entities resulting in material audit adjustments and significant post-closing adjustments and (b) an inadequate design of our information technology controls and inadequate access by members of our finance team, primarily due to our accounting system's open architecture and a lack of segregation of duties within our finance team.

Filed Nov 14, 2023.
Source: SEC EDGAR, the filing index for accession 0000950170-23-063843. Last ingested by Listed: Oct 24, 2026, 15:16 ET. No prices; not investment advice.