Explanation

The audited financial statements for Rosati's Pizza Enterprises, Inc. (RPE) reveal significant risks. For both 2023 and 2024, the company reported substantial net losses, and by year-end 2024, it had a negative stockholder's equity (insolvency). This financial instability raises serious questions about RPE's ability to support you, invest in the brand, or even remain in business. The auditor's report in Item 21 also flags significant litigation as a major uncertainty, compounding the financial risk.

Potential Mitigations

• A thorough review of the franchisor's financial statements, including all footnotes and the auditor's opinion, with your accountant is essential.
• Understanding the implications of the ongoing litigation mentioned in Item 3 on the franchisor's financial stability requires discussion with your attorney.
• A business advisor can help you assess if the franchisor has sufficient resources to provide the support promised in Item 11 despite its financial condition.

Explanation

Item 20 data from 2024 indicates an extremely high rate of franchisee turnover. The tables show 10 terminations and 33 units that "Ceased Operations - Other Reasons" out of a base of 126 outlets. A footnote explains these 33 ceased operations were transfers, which is a confusing classification. Regardless, a combined turnover and transfer rate of 34% in a single year is a significant red flag that may suggest systemic issues, franchisee dissatisfaction, or lack of profitability.

Potential Mitigations

• Your accountant should help you calculate and analyze the effective turnover rates from the Item 20 tables over the past three years.
• It is critical to contact a significant number of former franchisees listed in Exhibit B to understand their reasons for leaving the system.
• Your attorney can help you formulate questions for the franchisor about the high number of terminations and transfers.

Explanation

In 2024, the system added 48 new outlets, representing 38% growth from its starting base of 126. This rapid expansion, especially when combined with the franchisor's concurrent financial losses and negative equity shown in Item 21, creates a risk that support resources could be stretched too thin. Fast growth without a stable financial and operational foundation may compromise the quality of training, site selection assistance, and ongoing support available to you and other franchisees.

Potential Mitigations

• A discussion with your business advisor is needed to assess whether the franchisor's support infrastructure can sustain such rapid growth.
• Inquiring with recent franchisees about the quality and timeliness of the support they received can provide valuable insight.
• Your accountant should review the franchisor's financial statements to determine if they have allocated sufficient capital to support expansion.

Explanation

The current franchisor, RPE, has only been in operation since February 2022. Although the Rosati's brand is long-established, this specific entity is new and was formed out of a contentious split with the predecessor franchisor, Rosati's Franchising, Inc. (RFI). As detailed in Item 3, the new franchisor is embroiled in fundamental litigation with RFI, creating significant uncertainty about its stability and operational history as a standalone entity.

Potential Mitigations

• Your attorney must carefully evaluate the risks associated with the franchisor's recent formation and the ongoing litigation with its predecessor.
• It is important to contact franchisees who have been with the system through the transition to understand the impact of the new ownership.
• A business advisor can help you weigh the risks of investing in a technically new franchisor entity, despite the established brand name.

Explanation

Item 1 details the franchisor's history, which involves acquiring franchise agreements from a predecessor, Rosati's Franchising, Inc. (RFI). Item 3 reveals this transition was not amicable and is the subject of ongoing, significant litigation. This unresolved conflict with the predecessor creates substantial uncertainty and risk regarding the stability of the system and the franchisor's undisputed right to grant this franchise, representing a significant inherited issue.

Potential Mitigations

• Your attorney must carefully analyze the disclosed history with the predecessor and the ongoing litigation described in Item 3.
• It is crucial to understand the potential outcomes of the litigation and how they could impact your franchise agreement.
• Discussing the transition from the predecessor with long-term franchisees can provide critical context for your business advisor.

Explanation

Item 3 discloses significant and material litigation between the franchisor (RPE) and its predecessor (RFI). The lawsuit directly challenges the formation of RPE and the assignment of franchise agreements, with claims including breach of fiduciary duty. This is not routine litigation; it is a foundational dispute that threatens the franchisor’s very right to exist and operate the system. The uncertain outcome represents a severe risk to any prospective franchisee.

Potential Mitigations

• A thorough review of the details and potential outcomes of the litigation described in Item 3 with your attorney is absolutely essential.
• Your attorney should advise you on the existential risk this lawsuit poses to the franchisor and, consequently, to your investment.
• Seeking independent legal research on the case dockets may provide your attorney with additional context.