Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following management’s discussion and analysis of our financial condition and results of operations should be read in conjunction with the audited consolidated financial statements and related notes of GEN Restaurant Group, Inc., included in Part II, Item 8 of this Annual Report on Form 10-K, and with the audited consolidated financial statements and related notes of GEN Restaurant Companies, LLC (the “Operating Company”) for the years ended December 31, 2023 and 2022.. The terms “we”, “our”, and “us” as used herein refer to the Operating Company and its consolidated subsidiaries prior to the Transactions (as defined in Note 1 to such consolidated financial statements) 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 Annual 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 Annual 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 forward-looking statements made in this Annual 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 37 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 opened prior to 2022 have generated average Payback Periods of approximately 1.7. Restaurants range in size from 4.7 thousand to 12 thousand square feet, and are typically located in high-activity commercial areas.
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 during 2023 we opened six new restaurants. As of December 31, 2023 we have entered into leases for additional eleven new restaurant locations for openings during 2024 and thereafter. These locations are in Maui, Hawaii, Orlando, Florida, Austin, Texas, Dallas Texas, Seattle, Washington, Portland, Oregon, Jacksonville, Florida, New York (Sixth Street), NY, San Antonio, Texas, Bayside (Queens), New York, and Austin, Texas. The six restaurants opened during 2023 were Kapolei, Hawaii, Westheimer Road in Houston, Texas Arlington, Texas, Cerritos, California, Chandler, Arizona and Fort Lauderdale, Florida. We currently expect to open seven to eight other locations during 2024. 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.
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Recent Events Concerning Our Financial Position
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 December 31, 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 year ended December 31, 2022 we received $2.6 million 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 December 31, 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 December 31, 2023. No amounts have been borrowed under the line of credit as of December 31, 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, income taxes, depreciation and amortization, stock-based compensation, and 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.”
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Average Unit Volume
“Average Unit Volume” or “AUV” means the average annual restaurant sales for all restaurants open for a full 12 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 year ended December 31, 2023 and December 31, 2022 :
Year Ended December 31,
(in thousands)
Comparable Restaurant Sales Change
Comparable restaurant sales change 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 12 full months prior to the accounting period presented. Once a restaurant has been open 12 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.
Year Ended December 31,
Comparable restaurant sales change (%) 0.6 % N/A
Comparable restaurant base 29 N/A
Since opening new restaurants is expected to be a significant component of our sales growth, comparable restaurant sales change is only one measure of how we evaluate our performance.
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 2020 and 2021 due to the COVID-19 pandemic, but began openings again in 2022. The following table shows the change in our restaurant base for the year ended December 31, 2023 and 2022:
Year Ended December 31,
Restaurant activity
Beginning of period 31 28
Openings 6 3
Closings — —
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Revenue Per Square Foot
“Revenue per square foot” means the restaurant sales for all restaurants opened a full 12 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 year ended December 31, 2023 and 2022:
Year Ended December 31,
Revenue per square foot $ 862 $ 890
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 change.
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.
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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 our IPO, these consulting fees were eliminated as services transitioned to us, although corporate general and administrative expenses have increased 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 of grants 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 December 31, 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 December 31, 2023 and December 31, 2022, $0 and $949 thousand, respectively, of these credits were received and recorded, and during the year ended December 31, 2023, and December 31, 2022, $2.5 million and $3.5 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 our initial public 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.
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.
Provision for income taxes. Represents federal, state, and local current and deferred income tax expense (benefit).
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Results of Operations for the years ended December 31, 2023 and December 31, 2022
The following table presents selected comparative results of operations from our audited financial statements for the year ended December 31, 2023 and December 31, 2022. Our financial results for these periods are not necessarily indicative of the financial results that we will achieve in future periods.
Year ended December 31, Increase/(decrease)
(amounts in thousands) 2023 2022 Amount %
Restaurant operating expenses:
Depreciation and amortization - corporate 84 39 45 115.4 %
Gain on extinguishment of debt — 387 (387 ) (100.0 )%
Aborted deferred IPO costs written off — (4,036 ) 4,036 (100.0 )%
Equity in income of equity method investee 535 966 (431 ) (44.6 )%
Provision for income taxes (21 ) — (21 ) 100.0 %
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% of Revenue
Year ended December 31,
Restaurant operating expenses:
Payroll and benefits 31.4 % 29.8 %
Occupancy expenses 8.1 % 7.4 %
Operating expenses 10.0 % 9.2 %
Depreciation and amortization 2.7 % 2.6 %
Pre-opening Costs 2.0 % 0.9 %
Total restaurant operating expenses 86.4 % 83.1 %
General and administrative 7.1 % 4.9 %
Consulting fees - related party 1.3 % 3.0 %
Management fees 0.6 % 1.4 %
Depreciation and amortization - corporate 0.0 % 0.0 %
Total costs and expenses 95.5 % 92.5 %
Income from operations 4.5 % 7.5 %
Gain on extinguishment of debt - 0.2 %
Employee retention credits 1.4 % 2.2 %
Aborted deferred IPO costs written off 0.0 % (2.5 )%
Other income (loss) 0.0 % (0.5 )%
Interest income (expense), net 0.2 % (0.4 )%
Equity in income of equity method investee 0.3 % 0.6 %
Income before income taxes 6.3 % 7.2 %
Provision for income taxes (0.0 )% 0.0 %
Net income 6.3 % 7.2 %
Net Income attributable to noncontrolling interest 1.7 % 0.9 %
Net income attributable to GEN Restaurant Group, Inc. 4.6 % 6.3 %
Revenues. Revenues were $181.0 million for the year ended December 31, 2023, compared to $163.7 million for the year ended December 31, 2022, an increase of $17.3 million, or 10.6%. This reflects revenue increases due largely to price increases in lunch and dinner menus in late 2022, as well as having 37 restaurants open in the year ended December 31, 2023 compared to 31 restaurants open in the year ended December 31, 2022.
Food costs. Food costs were $58.3 million for the year ended December 31, 2023, compared to $54.4 million for the year ended December 31, 2022, an increase of $3.9 million, or 7.3%. The increase in food costs reflects more restaurants in operation and inflationary cost increases. As a percentage of revenue, food costs decreased from 33.2% to 32.2%.
Payroll and benefits. Payroll and benefits costs were $56.9 million for the year ended December 31, 2023, compared to $48.9 million for the year ended December 31, 2022, an increase of $8.0 million, or 16.4%. 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 29.8% to 31.4%, reflecting inflationary payroll rate increases.
Occupancy expenses. Occupancy expenses were $14.7 million for the year ended December 31, 2023 compared to $12.1 million for the year ended December 31, 2022, an increase of $2.5 million, or 21.0%. The increase in occupancy expenses reflects the addition of six new locations in 2023. As a percentage of revenue, occupancy expenses were 8.1% in 2023 compared to 7.4% in 2022.
Operating expenses. Operating expenses were $18.0 million for the year ended December 31, 2023 compared to $15.0 million for the year ended December 31, 2022, an increase of $3.0 million, or 20.1%, as expenses increased to support the revenue growth and reflected inflationary cost increases. As a percentage of revenue, operating expenses were 10.0% in 2023 and 9.2% in 2022.
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Depreciation and amortization expenses. Depreciation and amortization expenses were $4.8 million for the year ended December 31, 2023 and $4.3 million for the year ended December 31, 2022. As a percentage of revenue, depreciation and amortization expenses at the restaurant-level were 2.7% in 2023 and 2.6% in 2022.
Pre-opening costs. Pre-opening costs were $3.6 million for the year ended December 31, 2023 compared to $1.5 million for the year ended December 31, 2022. This increase was due to more restaurants under development in 2023 than in 2022.
General and administrative expenses. General and administrative expenses were $12.9 million for the year ended December 31, 2023 compared to $8.0 million for the year ended December 31, 2022, an increase of $4.9 million, or 62.0%. As a percentage of revenue, general and administrative expenses increased from 4.9% in 2022 to 7.1% in 2023 as costs shifted post-IPO from consulting and management fees previously paid to related parties.
Consulting fees - related party. Consulting fees were $2.3 million for the year ended December 31, 2023 compared to $4.9 million for the year ended December 31, 2022, a decrease of $2.6 million or 52.5%. These fees were eliminated following the IPO in June 2023.
Management Fees. Management fees were $1.2 million for the year ended December 31, 2023 and $2.3 million for the year ended December 31, 2022. These were paid to a third-party entity and 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 in June 2023.
Gain on extinguishment of debt. During 2022 we received loan forgiveness from the SBA for 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 twelve month periods ended December 31, 2023 and December 31, 2022 we received employee retention credits from the IRS in the amount of $2.5 million and $3.5 million, respectively.
Aborted deferred IPO costs written off. During 2022 the Company wrote off $4.0 million of deferred IPO costs as market conditions prevented the execution of the IPO in 2022.
Other income (loss). During the year ended December 31, 2023 these expenses were $0. In the year ended December 31, 2022 the loss was $0.8 million consisting of legal accruals.
Interest expense, net. During 2023, interest expense, net, was $0.3 million in income compared to $0.6 million in expense in 2022. The increase in net interest income was primarily due to the interest income earned on the proceeds from the IPO.
Equity in income of equity method investee. Equity in income of equity method investee was a gain of $0.5 million in 2023 compared to $1.0 million in 2022.
Non-GAAP Financial Measures
Adjusted EBITDA and Adjusted EBITDA Margin
Adjusted EBITDA represents net income excluding interest expense, income taxes, depreciation and amortization, stock-based compensation and 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. 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.
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The following table reconciles net income to Adjusted EBITDA for the year ended December 31, 2023 and December 31, 2022.
(amounts in thousands) Year ended December 31,
EBITDA:
Net Income Margin 6.3 % 7.2 %
Interest income (expense), net (347 ) 634
Provision for income taxes 21 —
Depreciation and amortization 4,892 4,353
EBITDA Margin 8.8 % 10.2 %
Adjustments to EBITDA:
Stock-based compensation expense (1) 1,517 —
Gain on extinguishment of debt (2) — (387 )
Consulting fees - related party (3) 2,325 4,897
Employee retention credits (4) (2,483 ) (3,532 )
Litigation accrual (5) — 869
Aborted deferred IPO costs written off — 4,036
Non-cash lease expense related to pre-opening costs (7) 1,110 1,095
Adjusted EBITDA Margin 10.4 % 14.6 %
(1)
Stock-based compensation expense: During the year ended December 31, 2023, we incurred expenses related to the granting of Restricted Stock Units (“RSUs”) to employees. This was recorded in General and administrative expense.
(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 in June 2023.
(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 paid.
(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 paid.
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 expenses, 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 measures depict normal, recurring cash operating expenses essential to supporting the operations of our restaurants.
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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 year ended December 31, 2023 and December 31, 2022:
(amounts in thousands) Year ended December 31,
Income Margin from Operations 4.5 % 7.5 %
Depreciation and amortization 4,892 4,353
Consulting fees - related party 2,325 4,897
Restaurant-Level Adjusted EBITDA Margin 18.5 % 20.5 %
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-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 December 31, 2023 we had $32.6 million of cash and $5.5 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 price 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, mandated 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 year ended December 31, 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
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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:
Year ended December 31,
(amounts in thousands)
Summary of Cash Flows
Net cash provided by operating activities $ 22,164 $ 23,399
Net cash (used in) provided by investing activities (6,307 ) 2,571
Net cash provided by (used in) financing activities 5,579 (24,665 )
Cash Provided by Operating Activities
Net cash provided by operating activities during the year ended December 31, 2023 was $22.2 million, the result of net income of $11.4 million, adjusted by non-cash charges of depreciation and amortization of $4.9 million, amortization of operating lease assets of $4.6 million and stock-based compensation of $1.5 million, offset by net
53
cash outflows of approximately $0.3 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 prepaid expenses of $2.6 million and a decrease in operating lease liabilities of $3.1 million, partially offset by an increase in accounts payable of $3.0 million and a decrease in inventory of $2.1 million.
Net cash provided by operating activities during the year ended December 31, 2022 was $23.4 million, the result of net income of $11.7 million, adjusted by non-cash adjustments of $4.0 million due to aborted deferred IPO costs written off, $4.4 million for depreciation and amortization, $2.6 million in amortization of operating lease assets, and net cash inflows of approximately $1.7 million from changes in operating assets and liabilities. The net cash inflows from changes in operating assets and liabilities were primarily the result of an increase of $2.0 million in accounts payable, and an increase of $1.7 million in other current liabilities, offset partially by a $1.4 million decrease in inventories and $1.4 million decrease in operating lease liabilities.
Cash Flows (Used in) Provided by Investing Activities
Net cash used in investing activities during the year ended December 31, 2023 was $6.3 million, reflecting $10.9 million in the net recovery of proceeds from advances made to a related party, offset by $17.2 million for the purchase of property and equipment.
Net cash provided by investing activities during the year ended December 31, 2022 was $2.6 million, reflecting $10.7 million in the net recovery of proceeds from advances made to a related party, partially offset by $8.1 million for the purchase of property.
Cash Flows Provided by (Used in) Financing Activities
Net cash provided by financing activities during the year ended December 31, 2023 was $5.6 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, and payments on loans of $14.1 million.
Net cash used in financing activities during the year ended December 31, 2022 was $24.7 million, largely due to $29.2 million in member distributions, $7.7 million in payments on related party loans and $2.4 million in payments for deferred offering costs. These cash outflows were partially offset by $7.9 million in proceeds from third party loans, $3.5 million of proceeds from related party loans, $2.7 million received for PPP and EIDL loans and $2.4 million in advance from members.
Contractual Obligations
The following table presents our commitments and contractual obligations as of December 31, 2023:
Payments Due by Period as of December 31, 2023
Total Less than 1 year 1-3 years 3-5 years More than 5 years
(amounts in thousands)
Notes payable - related party (5) 1,197 1,197 — — —
Notes payable - related party interest (6) 176 176 — — —
(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 11—Leases” to the financial statements in this annual report for further details.
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(2)
Reflects the principal and interest payments during the lease terms. Refer to “Note 11—Leases” to the financial statements included in this annual report.
(3)
Reflects the principal payment on third party notes. Refer to “Note 9—Notes Payable” to the financial statements included elsewhere in this annual report.
(4)
Interest relates to the notes payable through maturity dates. Refer to “Note 9—Notes Payable” to the financial statements included in this annual report.
(5)
Reflects the principal payment on related party notes. Refer to “Note 10—Related Party Notes Payable” to the financial statements included in this annual report.
(6)
Interest related to the notes payable to related party through maturity dates. Refer to “Note 10—Related Party Notes Payable” to the financial statements included in this annual report.
Off-Balance Sheet Arrangements
As of December 31, 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 ( ASC Topic 842), using a modified retrospective approach. See "Note 11—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.
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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 $1.235 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 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.
The Company accounts for stock-based compensation awards under ASC 718, “Compensation -Stock Compensation”. The Company granted restricted stock units (“RSUs”) to certain employees and records the stock based compensation, net of forfeitures, on a straight-line basis over the vesting period based on the grant-date fair value, the quoted price of the Company’s common stock on the date of the grant.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
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 2023, 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
We are exposed to market interest rates if we were to access the line of credit, which bears an interest rate at the Wall Street Journal Prime Rate plus 0.25%.
Item 8. Financial Statements and Supplementary Data.
See index to financial statements on page F-1.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of 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 the period covered by this Annual Report on Form 10-K.
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Based on this evaluation, our Chief Executive Officers and Chief Financial Officer have concluded that as of December 31, 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.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the quarter ended December 31, 2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
This annual report does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of the company’s registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for newly public companies. Additionally, our auditors will not be required to formally opine on the effectiveness of our internal control over financial reporting pursuant to Section 404 until we are no longer an “emerging growth company” as defined in the JOBS Act.
Item 9B. Other Information.
None
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information with respect to directors’ names, ages, positions, term of office, period of service and business experience, which is contained under the caption “Election of directors” in our proxy statement for the 2024 annual meeting of stockholders is incorporated by reference to such proxy statement.
A list of our executive officers and their biographical information appears in Part 1, Item 1 of this report under the caption “Information About our Executive Officers.”
Code of ethics
We have adopted the Code of Business Conduct and Ethics for our Chief Executive Officers and Senior Finance Officers. A copy of the Code can be found on our website at www.genkoreanbbq.com in the “Investor” section. We intend to satisfy the disclosure requirements of the SEC regarding amendments to, or waivers from the Code by posting such information on the same website.
Audit Committee
The information contained under the caption “Committees of the board” with respect to the audit committee and the audit committee financial expert in our proxy statement for the 2024 annual meeting of the stockholders is incorporated herein by reference to such proxy statement.
Item 11. Executive Compensation.
The information contained under the captions “Director compensation” and “Executive compensation” in our proxy statement for the 2024 annual meeting of stockholders is incorporated herein by reference to such proxy statement, provided that the Compensation Committee report shall not be deemed filed with this Form 10-K.
The information contained under the caption “Compensation committee interlocks and insider participation” in our proxy statement for the 2024 annual meeting of stockholders is incorporated herein by reference to such proxy statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information that is contained under the captions “Security ownership of certain beneficial owners” and “Security ownership of directors and management” in our proxy statement for the 2024 annual meeting of stockholders is incorporated herein by reference to such proxy statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information contained under the captions “Related person transactions” and “Director independence” in our proxy statement for the 2024 annual meeting of stockholders is incorporated herein by reference to such proxy statement.
Item 14. Principal Accountant Fees and Services.
The information with respect to principal accountant fees and services contained under the caption “Proposal to ratify appointment of independent registered public accounting firm” in our proxy statement for the 2024 annual meeting of stockholders is incorporated herein by reference to such proxy statement.
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PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a)
The following documents filed as a part of the report:
(1)
Financial Statements:. See “Index to Consolidated Financial Statements” on page F-1.
(2)
Financial Statements Schedule: Not Applicable.
(3)
Exhibits:
ExhibitNumber Description
21.1* Subsidiaries of the Registrant
24.1* Power of Attorney (included on the signature page hereto)
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97.1* GEN Restaurant Group Clawback Policy.
101.SCH+ Inline XBRL Taxonomy Extension Schema With Embedded Linkbase Documents
104+ Cover Page Interactive Data File (embedded within the Inline XBRL document)
* Filed herewith.
# Denotes management compensatory plan or arrangement.
** These certifications accompany this Annual Report on Form 10-K; they are not deemed “filed” with the SEC and are not to be incorporated by reference in any filing of the Company under the Securities Act of the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in any filings, except to the extent that the Company specifically incorporates it by reference.
+ XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act is deemed not filed for purposes of Section 18 of the Exchange Act and otherwise is not subject to liability under these sections.
Item 16. Form 10-K Summary
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
GEN RESTAURANT GROUP, INC.
Date: March 6, 2024 By: /s/ Thomas V. Croal
Thomas V. Croal
Chief Financial Officer
(Principal Financial and Accounting Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each individual whose signature appears below constitutes and appoints David Kim and Thomas V. Croal and each them, his true and lawful attorneys-in-fact and agents, with full power of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Name Title Date
David Kim
Jae Chang
/s/ Michael B. Cowan Michael B. Cowan March 6, 2024
Michael B. Cowan (Director)
/s/ Jonathan Gregory Jonathan Gregory March 6, 2024
Jonathan Gregory (Director)
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets as of December 31, 2023 and 2022 F-3
Notes to Consolidated Financial Statements F-8
F-1
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
of Gen Restaurant Group, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Gen Restaurant Group, Inc. (the “Company”) as of December 31, 2023 and 2022, the related consolidated income statements and changes in permanent equity (deficit) and of cash flows for each of the two years in the period ended December 31, 2023, and the related notes (“collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of their operations and its cash flows for each of the two years in the period ended December 31, 2023 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Marcum, LLP
Marcum LLP
We have served as the Company’s auditor since 2021.
March 6, 2024
Costa Mesa, CA
PCAOB ID No. 688
F-2
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
GEN RESTAURANT GROUP, INC.
Consolidated Balance Sheets
Current assets:
Prepaid expenses and other current assets 3,726 994
Equity method investment 523 618
Notes receivable from related party — 10,850
Deferred tax asset 12,618 —
Liabilities and equity (deficit)
Current liabilities
Accrued salaries and benefits 2,660 1,976
Line of credit — 6,894
Notes payable to related parties, current 1,197 3,021
Obligations under finance leases, current 124 134
Operating lease liabilities, current 4,535 4,096
Deferred Restaurant Revitalization Fund grant 3,806 3,806
Notes payable, net of current portion 4,547 5,316
Notes payable to related parties, net of current portion — 500
Obligations under finance leases, net of current portion 1 185
Operating lease liabilities, net of current portion 110,501 100,872
Commitments and contingencies (Note 12)
Mezzanine equity
Permanent equity (deficit)
Members’ equity (deficit) — (10,011 )
Noncontrolling interest — 3,250
Additional paid-in capital 7,112 —
Retained Earnings 322 —
Non-controlling interest 28,552 —
Total permanent equity (deficit) 36,018 (6,761 )
Total liabilities and stockholders’ equity (deficit) $ 183,870 $ 138,878
See accompanying notes to consolidated financial statements.
F-3
GEN RESTAURANT GROUP, INC
Consolidated Income Statements
For the year ended December 31,
(in thousands, except per share amounts) 2023 2022
Restaurant operating expenses:
Depreciation and amortization 4,808 4,314
Consulting fees - related party 2,325 4,897
Depreciation and amortization - corporate 84 39
Gain on extinguishment of PPP debt — 387
Aborted deferred IPO costs written off — (4,036 )
Other loss — (835 )
Interest income (expense), net 347 (634 )
Equity in income of equity method investee 535 966
Provision for income taxes (21 ) —
Less: Net income attributable to noncontrolling interest 3,028 1,451
Net income attributable to GEN Restaurant Group, Inc. 8,406 10,281
Weighted-average shares of Class A common stock outstanding - basic (1) 4,140 —
Net income per share of Class A common stock - basic $ 0.08 —
Net income per share of Class A common stock - diluted $ 0.08 —
See accompanying notes to consolidated financial statements.
F-4
GEN RESTAURANT GROUP, INC.
Consolidated Statements of Changes in Permanent Equity (Deficit)
Year ended December 31, 2023 and December 31, 2022
(in thousands) Members' Equity(Deficit) Non-ControllingInterest Total
See accompanying notes to consolidated financial statements.
F-5
Net income prior to the organizational transactions 8,084 827 8,911
Conversion of related party loans to equity 871 871
Effects of initial public offering and related organization transactions: -
Capitalization of initial public offering costs (3,265 ) (3,265 )
F-6
GEN RESTAURANT GROUP, INC.
Consolidated Statements of Cash Flows
For the year ended December 31,
Cash flows from operating activities
Adjustments to reconcile net income to cash provided by operating activities
Depreciation and amortization 4,892 4,353
Equity in income of equity method investee, net of distributions 95 (429 )
Gain on extinguishment of debt, PPP — (387 )
Stock-based compensation 1,517 —
Amortization of operating lease assets 4,642 2,568
Aborted deferred IPO costs written off — 4,036
Interest income earned on Notes receivable from related party (150 ) (164 )
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (2,584 ) 454
Other assets (67 ) (19 )
Accrued salaries and benefits 684 509
Accrued interest (133 ) (86 )
Other current liabilities (45 ) 1,700
Operating lease liabilities (3,115 ) (1,424 )
Deferred tax asset (97 )
Income tax payable — —
Net cash provided by operating activities 22,164 23,399
Cash flows from investing activities
Proceeds from recovery of Notes receivable from related party 12,950 13,325
Advances made to related party (2,100 ) (2,650 )
Purchase of property and equipment (17,157 ) (8,104 )
Net cash (used in) provided by investing activities (6,307 ) 2,571
Cash flows from financing activities
Payments to members for advances (2,000 ) —
Payments for deferred offering costs (2,479 ) (2,420 )
Proceeds from PPP and EIDL loans — 2,700
Payments on PPP and EIDL loans (87 ) (213 )
Payments on finance leases (194 ) (207 )
Payments on third party loans (2,440 ) (509 )
Payments on related party loans (2,088 ) (7,684 )
Payment on line of credit (7,993 ) (1,000 )
Proceeds from third party loans 1,300 —
Proceeds from related party loans 500 3,518
Net cash provided by (used in) financing activities 5,579 (24,665 )
Net increase in cash and cash equivalents 21,436 1,305
Cash and cash equivalents at beginning of year 11,195 9,890
Cash and cash equivalents at end of the year $ 32,631 $ 11,195
Supplemental disclosures of other cash flow information:
Cash paid for interest $ 195 $ 736
Cash paid for taxes 175 —
Non-cash investing and financing activities:
Unpaid purchases of property and equipment 927 568
Receivable for member contributions — 60
Unpaid deferred offering cost 125 -
Purchase of PPE through finance lease - 15
Conversion of related party loans to member's equity 871 -
See accompanying notes to consolidated financial statements.
F-7
GEN RESTAURANT GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
(1) Organization and Description of Business
The accompanying consolidated financial statements represent the consolidated balance sheets, income statements, changes in permanent equity (deficit), and cash flows of GEN Restaurant Group, Inc. (“GEN Inc.”) and its consolidated subsidiaries, including GEN Restaurant Companies, LLC (“GEN LLC”, or the “Operating Company”). Unless the context otherwise requires, references to the “Company” refer to GEN Restaurant Group, Inc., and its consolidated subsidiaries, including the Operating Company. The Company operates restaurants which are located in California, Arizona, Hawaii, Nevada, New York, Texas, and Florida specializing in a variety of special flavored meats for Korean barbeque.
The following tables lists the Company’s entities in operation as of December 31, 2023:
Name Operating Name State Purpose
GEN Restaurant Group, LLC GEN Tustin CA Restaurant
GEN Huntington Beach CA Restaurant
GEN Oxnard CA Restaurant
JC Group International Inc. (S Corp) GEN Henderson NV Restaurant
GEN West Covina CA Restaurant
GEN Corona CA Restaurant
GEN Restaurant Investment, LLC GEN Glendale CA Restaurant
GEN California, LLC GEN Fullerton CA Restaurant
GEN Mira Mesa CA Restaurant
GEN Arizona, LLC GEN Tempe AZ Restaurant
GEN Chandler, LLC GEN Chandler AZ Restaurant
GEN Nevada, LLC GEN Sahara NV Restaurant
GEN Miracle Mile NV Restaurant
GEN Alhambra, LLC GEN Alhambra CA Restaurant
GEN Arlington, LP GEN Arlington TX Restaurant
GEN Cerritos, LLC GEN Cerritos CA Restaurant
GEN Cerritos II, LP Gen Cerritos II CA Restaurant
GEN Torrance, LLC GEN Torrance CA Restaurant
GEN Rancho Cucamonga, LP GEN Rancho Cucamonga CA Restaurant
GEN San Jose, LP GEN San Jose CA Restaurant
GEN Northridge, LP GEN Northridge CA Restaurant
GEN Chino Hills, LP GEN Chino Hills CA Restaurant
GEN Carrollton, LP GEN Carrollton TX Restaurant
GEN Fort Lauderdale, LP GEN Fort Lauderdale FL Restaurant
GEN Fremont, LP GEN Fremont CA Restaurant
GEN Concord, LP GEN Concord CA Restaurant
GEN Webster, LP GEN Webster TX Restaurant
GEN Westgate, LP GEN Westgate CA Restaurant
GEN Westheimer, LLC GEN Westheimer TX Restaurant
GEN Manhattan NYU, LP GEN Manhattan NY Restaurant
GEN Mountain View, LP GEN Mountain View CA Restaurant
GKBH Restaurant, LLC GEN Korean BBQ HI Restaurant
GEN Hawaii, LLC Investment Company HI Management of GKBH
GEN Online, LLC GEN Online CA Website sales
GEN Sacramento, LP GEN Sacramento CA Restaurant
GEN Pearlridge, LLC GEN Pearlridge HI Restaurant
GEN Kapolei, LP GEN Kapolei HI Restaurant
GEN Frisco, LP GEN Frisco TX Restaurant
GEN Houston, LLC GEN Houston TX Restaurant
GEN Texas, LLC Investment Company TX Management of GEN Houston and GEN Webster
GEN Master, LLC Holding Company NV Management
GEN Restaurant Management, LLC GRM DE Management
F-8
GEN RESTAURANT GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
As of December 31, 2023, the above entities are collectively owned 100% by the controlling group, except for GEN Hawaii. The Company has an equity method investment in GEN Hawaii, with a 50% ownership share. Prior to the IPO (as defined below), an outside investor owned 49% of GEN Houston and GEN Webster, but as of June 30, 2023, they are 100% owned by the Company. On December 31, 2023 and December 31, 2022, there were 37 and 31 restaurants in operation, respectively. During the fourth quarter of 2023, the Company signed two leases for a restaurant in Austin, Texas for a period of 10 years and a lease for another restaurant in Portland, Oregon for a period of 10 years.
Organization
GEN Inc. was formed as a Delaware corporation on October 28, 2021. GEN Inc. is a holding company that was formed for the purpose of completing an underwritten initial public offering (“IPO”) of shares of its Class A common stock (as defined below) and other related Transactions (as defined below) in order to carry on the business of the Operating Company, the predecessor of GEN Inc. for financial reporting purposes. The Operating Company was organized under the laws of the state of Delaware on October 28, 2021, and is based in Cerritos, California. As the managing member of the Operating Company, GEN Inc. operates and controls all the business and affairs of the Operating Company, and through the Operating Company and its consolidated subsidiaries, conducts its business. The authorized shares of GEN Inc. consist of (i) shares of Class A common stock, par value $0.001 per share (the “Class A common stock”) and (ii) shares of Class B common stock, par value $0.001 per share (the “Class B common stock”). See “Initial Public Offering and Organizational Transactions” below for the description of the IPO and the Transactions completed in June 2023.
The Operating Company has been determined to be the predecessor for accounting purposes and, accordingly, the consolidated financial statements for periods prior to the IPO and the related Transactions have been adjusted to combine the previously separate entities for presentation purposes. Amounts for the period from January 1, 2023 through June 27, 2023 presented in the consolidated financial statements and notes to the financial statements herein represent the historical operations of the Operating Company. The amounts for the period from June 28, 2023 through December 31, 2023 reflect the consolidated operations of the Company.
Initial Public Offering and Organizational Transactions
On June 30, 2023, GEN Inc. completed its IPO of 3,600,000 shares of Class A common stock at a public offering price of $12.00 per share. In addition, the underwriters purchased an additional 540,000 shares of Class A common stock from GEN, Inc. pursuant to the exercise of their option to purchase additional shares in the IPO. The sale of shares of Class A common stock by GEN Inc. generated aggregate net proceeds of $46.2 million, after deducting the underwriting discounts and commissions and offering expenses payable by GEN Inc. GEN Inc. contributed all of the net proceeds to the Operating Company in exchange for a number of Class A common units of the Operating Company (“Class A Common Units”) equal to the number of shares of Class A common stock sold by GEN Inc. in the IPO at a price per Class A Common Unit equal to the IPO price per share of Class A common stock. After giving effect to the IPO and the related Transactions and the use of the net proceeds from the IPO, GEN Inc. owns approximately 12.8% of the Operating Company’s outstanding common units. As a result of the IPO, Mr. David Kim and Mr. Jae Chang, Co-CEOs, collectively control approximately 58.6% of GEN Inc.’s common stock as a result of their ownership of GEN LLC’s Class B common units (“Class B Common Units”), which were issued on a one-to-one basis. Each share of Class B common stock is entitled to ten votes on all matters submitted to a vote of GEN Inc.’s stockholders.
As a result of the IPO and the Transactions, GEN Inc. became the managing member of the Operating Company and its principal asset is Class A Common Units of the Operating Company. As the managing member of the Operating Company, GEN Inc. operates and controls all of the business and affairs of the Operating Company, and through the Operating Company and its subsidiaries, conducts its business. Although GEN Inc. has a minority economic interest in the Operating Company, GEN LLC has the sole voting interest in, and controls the management of, the Operating Company, and has the obligation to absorb losses of, and receive benefits from, the Operating Company, which could be significant. GEN Inc. consolidated the Operating Company in its consolidated financial statements and reports a non-controlling interest related to the Class B Common Units held by the members of the Operating Company (other than the Class A Common Units held by GEN Inc.) on its consolidated financial statements. GEN Inc. has a board of directors and executive officers but has no employees. All of the Company’s assets are held by, and all of its operations are conducted through, the Operating Company. All of the Company’s employees are employed by the Operating Company.
F-9
GEN RESTAURANT GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
In connection with the closing of the IPO, GEN Inc. and the Operating Company consummated the following organizational transactions (collectively, the “Transactions”):
•
The Operating Company adopted the Operating Agreement (the “Operating Agreement”), which converted each member’s existing membership interests in the Operating Company into Class B Common Units, and appointed GEN Inc. as the managing member of the Operating Company;
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GEN Inc. restated its certificate of incorporation to, among other things, provide for Class A common stock and Class B common stock;
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GEN Inc. issued and sold 4,140,000 shares of its Class A common stock to the purchasers in the IPO (including the underwriters' option to exercise), and used all of the net proceeds received from the IPO to acquire Class A Common Units from the Operating Company at a purchase price per Class A Common Unit equal to the IPO price per share of Class A common stock, less underwriting discounts and commissions, which Class A Common Units represented approximately 12.8% of the Operating Company’s outstanding common units after the IPO; and
•
GEN Inc. entered into (i) a Tax Receivable Agreement (the “TRA”) with the Operating Company and the Operating Company’s members and (ii) a Registration Rights Agreement (the “Registration Rights Agreement”) with the Operating Company’s members who, assuming that all of the Class B Common Units of such members are redeemed or exchanged for newly-issued shares of Class A common stock on a one-to-one basis, will own an aggregate of 28,141,566 shares of Class A common stock, representing approximately 98.6% of the combined voting power of all of GEN Inc’s common stock. Although the actual timing and amount of any payments that GEN Inc will make to the Operating Company’s members under the TRA will vary, GEN Inc. expects those payments to be significant.
GEN Inc.’s corporate structure following the IPO, as described above, is commonly referred to as an “Up-C” structure, which is often used by partnerships and limited liability companies when they undertake an initial public offering of their business. The Up-C structure allows the members of the Operating Company to continue to realize tax benefits associated with owning interests in an entity that is treated as a partnership, or “pass-through” entity, for income tax purposes following the IPO. One of these benefits is that future taxable income of the Operating Company that is allocated to its members will be taxed on a flow-through basis and therefore will not be subject to corporate taxes at the Operating Company entity level. Additionally, because the members may redeem their Class B Common Units for shares of GEN Inc.'s Class A common stock on a one-for-one basis, the Up-C structure also provides the members with potential liquidity that holders of non-publicly traded limited liability companies are not typically afforded.
GEN Inc. will receive the same benefits as its members because of its ownership of Class A Common Units in an entity treated as a partnership, or “pass-through” entity, for income tax purposes. As GEN Inc. redeems additional Class B Common Units from the Operating Company’s members under the mechanism described above, GEN Inc will obtain a step-up in tax basis in GEN Inc’s share of the Operating Company’s assets. This step-up in tax basis will provide GEN Inc with certain tax benefits, such as future depreciation and amortization deductions that can reduce the taxable income allocable to GEN Inc. GEN Inc. entered into the TRA with the Operating Company and each of the Operating Company’s members, which provides for the payment by GEN Inc to the Operating Company’s members of 85% of the amount of tax benefits, if any, that GEN Inc. actually realizes (or in some cases, is deemed to realize) as a result of (i) increases in tax basis resulting from the redemption of Class B Common Units and (ii) certain other tax benefits attributable to payments made under the TRA.
As a result of the completion of the Transactions, including the IPO:
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GEN Inc. is a holding company and its principal asset is the Class A Common Units it holds in the Operating Company;
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GEN Inc. is the managing member of the Operating Company and controls the business and affairs of the Operating Company and its subsidiaries;
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The purchasers in the IPO (i) purchased 4,140,000 shares of Class A common stock, representing approximately 1.4% of the combined voting power of all of GEN Inc.’s common stock, and own 100% of the economic interest in GEN Inc.
F-10
GEN RESTAURANT GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
•
GEN Inc. owns all of the Class A Common Units of GEN LLC, representing approximately 12.8% of the distributions made by GEN LLC. While this interest represents a minority of economic interests in GEN LLC, it represents 100% of the voting interests, and GEN Inc. acts as the managing member of GEN LLC. As a result, GEN Inc. operates and controls all of GEN LLC’s business and affairs and is able to consolidate its financial results into GEN Inc.’s financial statements.
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The members of GEN LLC other than GEN Inc. are certain historic owners of GEN Restaurant Group, all of whom, in the aggregate, own 28,141,566 Class B Common Units of GEN LLC and 28,141,566 shares of Class B common stock of GEN Inc.
(2)
Basis of Presentation and Summary of Significant Accounting Policies
(a)
Basis of Presentation
The accompanying consolidated financial statements of the Company, collectively, have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”).
(b)
Recently Issued Accounting Pronouncements
In March 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-01, Leases (Topic 842): Common Control Arrangements. The new guidance requires all lessees in a lease with a lessor under common control to amortize leasehold improvement over the useful life of the common control group and provides new guidance for recognizing a transfer of assets between entities under common control as an adjustment to equity when the lessee no longer controls the use of the underlying asset. This guidance is effective for fiscal years beginning after December 15, 2023. The Company is in the process of evaluating the impact that the adoption of the ASU will have on the consolidated financial statements and related disclosures.
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 Accounting Standard Codification (“ASC”) 326 did not have a material impact on the Company’s recognition of financial instruments within the scope of the standard.
ASC Topic 320, “Investments-Debt Securities” requires that an enterprise classify all debt securities as either held-to-maturity, trading, or available-for-sale. During the quarter ended December 31, 2023, the Company adopted ASC 320 and classified its U.S. Treasury and equivalent securities as held-to-maturity. Held to maturity securities are those securities which the Company has the ability and intent to hold until maturity.
In December 2019, the FASB issued ASU No. 2019-12, “Simplifying the Accounting for Incomes Taxes (Topic 740)” (“ASU 2019-12”). During 2023, the Company adopted ASC 740 after the IPO transaction. ASU 2019-12 requires a company to use the asset and liability method of accounting for income taxes, whereby deferred tax assets are recognized for deductible temporary differences, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance, when, in the opinion of management, it is more likely than not that some portion, or all of, the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effect of changes in tax laws and rate on the date of enactment. The adoption of this standard in the second quarter of 2023 had no material impact on our consolidated financial statements.
In November 2023, the FASB issued ASU 2023-07, “Segment Reporting (Topic 820): Improvements to Reportable Segment Disclosures” which provides guidance to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The guidance is effective for fiscal years beginning after December 15, 2023. The Company is currently evaluating the impact of this standard on our consolidated financial statements.
F-11
GEN RESTAURANT GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740),” “Improvement for Income Tax Disclosure,” which is effective for fiscal years beginning after December 31, 2024. The Company is evaluating the presentational effect that ASU 2023-09 will have on the consolidation financial statements.
The Company adopted FASB ASC 260, “Earnings per Share” after the IPO. The consolidated income statements of the Company include a presentation of income (loss) per share. The Company calculates this on the income (loss) attributable to the activity after the IPO. As of December 31, 2023, the Company did not have any dilutive securities that could, potentially, be exercised or converted into Class A common stock and then share in the earnings of the Company. As a result, diluted income (loss) per share is the same as basic income (loss) per share for the period presented.
(c)
Use of Estimates
The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities in the accompanying consolidated financial statements of the Company. The accompanying consolidated financial statements have been prepared in conformity with GAAP and applicable rules, and regulations of the SEC.
(d)
Equity-Based Compensation
The Company accounts for equity-based compensation grants of equity awards to employees in accordance with ASC Topic 718, “Stock Based Compensation”. The Company issued restricted stock units to its employees in 2023.
The Company estimates the fair value of the restricted stock units on the grant-date and recognizes the resulting fair value over the requisite service period. The fair value of each restricted stock unit or award is determined based upon the value of the common stock granted or sold. The Company has elected to treat stock-based awards with graded vesting schedules and time-based service conditions as a single award and recognizes stock-based compensation on a straight-line basis over the requisite service period. Forfeitures are accounted for as they occur.
(e)
Cash and Cash Equivalents
The Company and its related entities consider all highly liquid instruments with a maturity of three months or less when purchased to be cash equivalents. As of December 31, 2023, cash and cash equivalents consist principally of cash, money market accounts and short-term investments. Short-term investments are classified available for sale securities, which are carried at fair value, with changes in fair value reported in earnings. Cash equivalents also include credit card transactions in transit. As of December 31, 2023 and December 31, 2022, there were deposits in excess of federally insured amounts of $8.8 million and $3.5 million, respectively.
(in thousands)
F-12
GEN RESTAURANT GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
(f)
Concentration Risk
The Company relies on third parties for specified food products and supplies. In instances where these parties fail to perform their obligation, the Company may be unable to find alternative suppliers.
For the year ended December 31, 2023, Sysco accounted for approximately 15.1% of total food costs.
The Company relies on U.S. Foods, an unrelated third-party for a significant portion of its food products. For the year ended December 31, 2023 and 2022, U.S. Foods accounted for approximately 36.0% and 57.6% of total food costs, respectively.
The Company relies on Pacific Global Distribution, Inc. (“PGD”), which provides restaurant supplies such as tableware, napkins, soda, and sauces. PGD is owned by a related party. For the year ended December 31, 2023 and December 31, 2022, PGD accounted for approximately 16.4% and 21.2% of total operating expenses, respectively.
The Company also relies on Wise Universal, Inc. (“Wise”), an entity 60% owned by a related party, which provides food products for 13 restaurants. For the year ended December 31, 2023 and December 31, 2022, Wise accounted for approximately 21.3% and 32.5% of total food costs, respectively.
(g)
Inventories
Inventories consist principally of food and beverages and are valued at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method (FIFO) for all inventories.
(h)
Revenue Recognition