Explanation

The franchisor, OnAxis Franchising Group, LLC (OnAxis), exhibits significant financial weakness. Audited financial statements show substantial net losses for 2023 and 2024, a large accumulated deficit, and negative cash flow from operations. Furthermore, the 2025 unaudited interim balance sheet shows negative members' equity, indicating insolvency. This financial condition may severely impair OnAxis's ability to support you and maintain the franchise system, posing a direct risk to your investment.

Potential Mitigations

• A franchise accountant must conduct a thorough review of the financial statements, including all footnotes and cash flow analysis, to assess the franchisor's viability.
• Discuss the franchisor's plan to address its financial instability and achieve profitability with your business advisor before investing.
• Your attorney should verify if any financial assurances, like a bond or escrow, are required by state regulators due to this financial condition.

Explanation

The data in Item 20 reveals a concerningly high franchisee turnover rate. In 2023, the system experienced a turnover rate of approximately 14.7%, based on the number of terminations, non-renewals, and other cessations relative to the number of outlets at the start of the year. This level of turnover can be a significant indicator of potential systemic problems, such as issues with profitability, franchisee dissatisfaction, or inadequate support, which could directly impact your potential for success.

Potential Mitigations

• Your accountant should help you calculate the precise turnover rates for the last three years to understand the trend.
• It is critical to contact a significant number of former franchisees listed in Item 20 to understand their reasons for leaving the system.
• A business advisor can help you compare these turnover figures against any available industry benchmarks for similar franchise systems.

Explanation

OnAxis is a relatively new business entity, formed in late 2021 and acquiring the assets of its predecessor in mid-2022. While the underlying business concept has a longer history through the predecessor, OnAxis itself has a limited operating track record as the franchisor. This newness, combined with the significant financial instability disclosed in Item 21, presents a heightened risk concerning the franchisor's ability to effectively manage and grow the franchise system long-term.

Potential Mitigations

• A business advisor should help you conduct extensive due diligence on the management team's direct experience in both the industry and in successfully managing a franchise system.
• It is important to speak with franchisees who have been with the system both before and after the 2022 ownership change to understand any differences in support and direction.
• Your accountant should analyze the franchisor's capitalization and business plan to assess its long-term viability.

Explanation

While some members of the management team disclosed in Item 2 have experience from the predecessor franchisor, the current franchisor entity, OnAxis, is relatively new and financially unstable. The significant operating losses and negative cash flow shown in Item 21 raise questions about the current management's ability to lead the system to profitability and provide robust, sustainable support, despite their individual backgrounds. The effectiveness of their collective experience under the new ownership structure is not yet proven.

Potential Mitigations

• Your business advisor can help you assess whether the management team's experience is directly relevant to overcoming the company's current financial challenges.
• In your discussions with current franchisees, specifically inquire about their confidence in the current leadership team and the quality of support they provide.
• Your attorney should help you understand what contractual commitments for support exist if management or ownership were to change.

Explanation

Item 3 discloses a history of litigation that includes franchisee-initiated lawsuits against the predecessor alleging fraud and breach of contract. More recently, OnAxis has been in litigation with a former franchisee regarding the enforcement of post-term non-competition covenants. While some litigation is common, a pattern of disputes, especially those involving claims of misrepresentation or contentious enforcement actions, may suggest underlying problems in the franchisor-franchisee relationship or its business practices.

Potential Mitigations

• A thorough review of the details of each case in Item 3 with your attorney is essential to understand the nature and outcomes of the disputes.
• Consider the number of lawsuits in the context of the system's size with your business advisor to gauge if it is unusually high.
• Speaking with current and former franchisees may provide valuable context regarding the franchisor's litigation history and relationship with its network.