Explanation

The financial statements in Exhibit E show that Oakberry USA LLC (OLLC) has a significant net worth deficit (-$1.86 million in 2024) and substantial operating losses. The FDD also includes "Financial Condition" as a special risk. While the parent company has indicated intent to provide financial support, the FDD notes there is no formal agreement in place, creating a major risk that OLLC may be unable to provide support or meet its obligations.

Potential Mitigations

• Your accountant must conduct a deep analysis of the financial statements and the parent company's ability and legal obligation to provide support.
• It is crucial to have your attorney evaluate the lack of a formal financial support agreement from the parent company.
• Engaging a business advisor to assess the risk of the franchisor's potential insolvency on your investment is highly recommended.

Explanation

Item 20 data indicates that two franchised outlets ceased operations in 2024 out of a starting base of 21 units. For a young and small system, this rate of closure could be a warning sign of potential issues with profitability, franchisee support, or the business model. This data suggests a potential instability within the franchisee network that warrants careful investigation before you invest.

Potential Mitigations

• Contacting former franchisees who ceased operations, listed in Exhibit F, is critical to understand why they left the system; your attorney can help prepare questions.
• Discussing the reasons for these closures directly with the franchisor should be a priority for you and your business advisor.
• An accountant's assistance can help analyze the turnover rate in the context of the system's overall growth and financial health.

Explanation

The franchisor is experiencing very rapid growth, expanding from zero to 24 franchised outlets in two years and projecting 40 more in the next fiscal year, as shown in Item 20. When combined with the company's significant financial losses disclosed in Item 21, this rapid expansion creates a high risk that the franchisor's support infrastructure (training, operations, marketing) may not be able to keep pace, potentially leading to inadequate assistance for you.

Potential Mitigations

• In discussions with the franchisor, your business advisor should probe deeply into their specific plans for scaling support staff and systems to match this growth.
• It is vital to ask a wide range of existing franchisees about the current quality and responsiveness of the support they receive.
• Your accountant should review the franchisor's financials to assess if they have the capital to fund the necessary support infrastructure.

Explanation

As disclosed in Item 1 and the "Special Risks" section, Oakberry USA LLC is a very new franchisor, having only started offering franchises in July 2022. Investing in such a new system carries higher-than-average risk. The business model, operational support, and brand recognition are not yet proven over time, which could impact your potential for success and the long-term viability of the brand.

Potential Mitigations

• Conducting extensive due diligence on the backgrounds of the management team in both franchising and the food service industry is essential, with help from your business advisor.
• A thorough review of the franchisor's capitalization and business plan with your accountant is critical to assess its long-term viability.
• Your attorney can help you understand the heightened risks associated with investing in a new and unproven franchise system.

Explanation

This risk appears to be present. The franchisor, OLLC, is a subsidiary of Oakberry Acai Inc. Given OLLC's significant net worth deficit, the financial health of the parent is material. However, the parent company's financial statements are not included in the FDD. The auditors' notes in Exhibit E state the parent has expressed intent to provide financial support, but no formal, binding agreement is in place, increasing risk.

Potential Mitigations

• Your attorney must highlight the risk that the parent company is not legally obligated to support the franchisor financially.
• An accountant should assess the franchisor's viability on a standalone basis, given the absence of parent financials.
• Inquiring with your attorney about the possibility of requesting the parent company's financials for review is a valid due diligence step.

Explanation

Item 3 discloses a lawsuit filed against the franchisor, its parent, and principals by a licensee alleging breach of contract and intentional misrepresentation, among other claims. Although the matter was ordered to arbitration, the existence of a lawsuit containing such serious allegations from a business partner is a significant warning sign about potential disputes and the franchisor's business practices. This indicates a potentially contentious relationship with its partners.

Potential Mitigations

• It is critical that your attorney reviews the specific allegations in this lawsuit to understand the nature of the dispute.
• You should ask the franchisor for their perspective on this litigation, with guidance from your business advisor.
• Discussing this matter with other franchisees may provide additional context and insight.