Explanation

Qargo Coffee, Inc.'s (Qargo Coffee) audited financial statements reveal critical instability. The company is insolvent, with a negative net worth that worsened from $(189,480) in 2023 to $(619,845) in 2024. It has also incurred significant net losses for consecutive years. This condition, flagged as a "Special Risk" in the FDD, severely questions the company's ability to provide support, fulfill its obligations, or even continue operating, posing a direct threat to your investment.

Potential Mitigations

• Your accountant must perform a deep analysis of the financial statements, including the significant negative net worth and ongoing losses.
• A business advisor should help you evaluate the extreme risk of partnering with an insolvent franchisor that may be unable to provide promised support.
• Discuss with your franchise attorney the implications of the "going concern" issues and the franchisor's potential inability to meet its contractual obligations.

Explanation

The franchisee turnover data in Item 20 is a significant concern. In 2024, one of the two franchises operating at the start of the year ceased operations, representing a 50% loss of the initial base. While the absolute number is small, such a high percentage of failure in a very small system is a strong indicator of potential systemic problems or lack of franchisee success. This risk is amplified by the large number of unopened franchises.

Potential Mitigations

• It is critical to contact the franchisee who ceased operations and other current franchisees from the list in Exhibit E to discuss their experiences.
• Your accountant should analyze the turnover rate in the context of the system's small size and brief history.
• A franchise attorney can help you frame questions for former franchisees to understand the reasons for their departure.

Explanation

The FDD reveals extremely rapid franchise sales that far outpace actual store openings. Item 20 shows 72 signed agreements for franchises not yet open, while only 6 outlets are operational. This aggressive sales strategy, coupled with the franchisor's insolvency shown in Item 21, indicates a very high risk that the company's support infrastructure cannot handle this growth. This is highlighted as a "Special Risk," suggesting an inability to provide adequate site selection, training, and opening support.

Potential Mitigations

• A business advisor should help you assess the severe risk that the franchisor's support systems are insufficient for the number of franchises sold.
• Your accountant must evaluate if the franchisor's poor financial state can sustain any support infrastructure for this rapid expansion.
• Discuss the high ratio of sold-to-opened franchises with current franchisees to gauge the quality of opening support.

Explanation

Qargo Coffee is a new franchisor, having started in May 2020 with only a few years of operational history and just six open outlets. This lack of a proven track record is a significant risk. The risk is magnified by the franchisor's severe financial instability (Item 21), history of FTC litigation for disclosure violations (Item 3), and management's prior business failures (Item 2), making this a highly speculative and unproven franchise system.

Potential Mitigations

• Your business advisor should help you perform extensive due diligence on the viability of this new and financially troubled system.
• It is essential to contact the few existing franchisees listed in Item 20 to understand the realities of operating within this unproven system.
• An accountant should review the financials to assess if the company has sufficient capital to survive its startup phase.

Explanation

The management team's history presents significant risks. The Development Manager, Mark Bastorous, previously operated a master franchise for another brand that ceased operations. Both he and the President, Bernadette Bastorous, have prior personal bankruptcy filings disclosed in Item 4. This history, combined with a recent FTC enforcement action against the company and its key principals (Item 3), indicates a concerning lack of experience in successfully and compliantly managing a franchise system.

Potential Mitigations

• A franchise attorney must review the litigation and bankruptcy disclosures in Items 3 and 4 to explain the potential implications.
• Your business advisor should help you weigh the risks of investing in a system run by management with a history of business failure and regulatory issues.
• It is crucial to speak with current franchisees about their direct experiences with the management team's support and leadership.

Explanation

Item 3 discloses a major enforcement action by the Federal Trade Commission (FTC) against Qargo Coffee and its principals for violating the FTC Act. Allegations included making misstatements, unfair omissions, and failing to provide proper disclosures. The settlement involved a monetary judgment and a rescission offer to all franchisees. This government action indicates serious, systemic issues with the franchisor's sales practices and compliance, representing a critical risk to any prospective franchisee.

Potential Mitigations

• A franchise attorney must be consulted to analyze the full implications of the FTC litigation and settlement detailed in Item 3.
• Your business advisor should help you evaluate the extreme counterparty risk of dealing with a franchisor found to have engaged in such practices.
• Thoroughly question the franchisor about the changes they have implemented to prevent recurrence of these issues.