Item 21, financials

Item 21 is the franchisor’s own books. 16 CFR 436.5(u) requires audited statements, US GAAP, a prescribed set of years. Of the twenty-three Items this is the only one somebody outside the company signed. That does not make it gospel. It does make it the only page where a licensed professional put a name under a judgement.

It is also the Item people skip, because it arrives as an exhibit at the back, forty pages after the last sentence that looked like the deal. Skip it and you have bought training, a defended mark and a supply chain from a company you have not checked can pay for any of them.

Two things it is not. It is not a store P&L — nothing in Item 21 says what a franchised restaurant takes or keeps; that is Item 19, when the filing has one. And it is not a score for the brand. A franchisor can lose money building a support office before the royalties exist. A franchisor can be profitable while franchisees are not. The statements answer one question: can this company do what it is contracting to do.

Whose statements are these

Read the name at the top of the balance sheet before reading a number on it, and match it to the party named in the proposed agreement and to the entity map in Item 1. Three patterns recur.

The franchisor’s own statements. The entity on the cover publishes its own audited accounts. That is the cleanest read: the company that signs the franchise agreement is the company whose cash, debt and equity you can see.

Parent statements with a guarantee. Permitted where the rule’s conditions are met, typically a parent that absolutely and unconditionally guarantees the franchisor’s obligations, with the guarantee included in the document. The parent’s scale is reassuring to look at; the guarantee’s scope is the actual comfort. Counsel reads the guarantee. An accountant reads whether the parent’s business is this restaurant system or a group that could sell the subsidiary tomorrow.

A short history, because the company is new. A young franchisor cannot produce a long audited file, and the rule contemplates that. Doner Shack Franchising, LLC’s FDD issued 29 April 2025 contains a single audited year. Döner Haus Franchising, LLC’s FDD issued 7 April 2026 contains two periods, the first of them a stub running from the franchisor’s formation on 26 June 2024. Both match the companies they describe.

Names that differ by one word are different companies. Shah’s Halal Food’s audited statements are those of Shah’s Halal Food Partners, Inc., a New York corporation, and the franchisor you would sign with is a separate company. 375° Chicken ‘n Fries’s audited franchisor is 375 Global Franchise LLC, while the income statement in its Item 19 belongs to 375 Ventures LLC, renamed 375 Enterprises LLC between the 2023 and 2024 filings. Neither arrangement is improper. Both mean that a reader who skims the letterhead ends up attributing one company’s results to another.

The auditor’s report is a document with headings

Bound in front of the statements is a report of between one and three pages, and it has a fixed structure. Read the headings first, in order, and note which ones are present:

• Opinion — what the auditor concluded about whether the statements present fairly, in all material respects, the financial position and results.
• Basis for Opinion — the standards the audit was conducted to, and the auditor’s statement of independence.
• Emphasis of Matter or a going-concern paragraph — present in some reports and absent in most. If it exists, it sits here, between the basis and the responsibilities sections, under its own heading.
• Responsibilities of Management for the Financial Statements — including management’s own obligation to evaluate whether there is substantial doubt about the entity’s ability to continue as a going concern.
• Auditor’s Responsibilities for the Audit of the Financial Statements — including the auditor’s obligation to conclude on the same question.

Those last two headings are the reason a reader cannot search their way to an answer. The phrase “substantial doubt about the entity’s ability to continue as a going concern” appears in both of them, in every audited statement, with the company’s name inserted, whether or not anything is wrong. A text search returns two hits in a perfectly healthy filing and both read like findings. The only way to know what the auditor said is to open the report and look at what has a heading of its own. The auditor’s report takes the document apart section by section, covers the signature, the city, the report date and what an auditor change between filings might mean.

Three findings, in ascending order of seriousness

An unmodified opinion. The statements present fairly in all material respects. Nothing else. This is what most reports here say, including reports on companies with substantial accumulated deficits and large current-year losses.

An unmodified opinion with an emphasis-of-matter paragraph. The opinion is unchanged. The auditor has added a paragraph directing the reader to something that is already disclosed in the notes and that they consider fundamental to understanding the statements — commonly a liquidity or related-party-funding footnote. It asserts no doubt and it modifies nothing. Calling it a qualification is simply a false description of what the report says.

A report stating substantial doubt about the ability to continue as a going concern. A separate headed paragraph in which the auditor says, in terms, that conditions raise substantial doubt about whether the company can continue. In a registration state this normally also produces a special risk on the cover page of the document, in prescribed words, before Item 1 — which means the state has already flagged for the reader what the exhibit at the back contains.

The distinction between the second and the third is the single most misreported thing in franchise reading, and the evidence for how different they are sits in two filings here.

The teaching pair: GDK and Atomic Wings

German Doner Kebab is the second case. The audited statements of GDK USA, Inc. show six loss-making fiscal years out of the six with figures on file, totalling roughly $7.47 million: ($196,539) in FY2019 and ($705,313) in FY2020 from the FDD issued 19 August 2021; ($1,422,432) in FY2021 and ($1,900,514) in FY2022 from the FDD issued 20 July 2023; ($1,729,515) in FY2023 from the FDD issued 3 September 2024; and ($1,513,634) in FY2024 from the FDD registered in Wisconsin on 24 September 2025. The accumulated deficit at 31 December 2024 is $7,609,195. Almost nothing has been earned back. FY2018 appears in no filing on hand, so this is six years on file rather than every year since inception. The unaudited interim statements in the 2025 filing, covering 1 January to 31 July 2025, show total revenue of $826,507 and the deficit at $7,923,332.

What the auditor wrote about all that is an emphasis-of-matter paragraph. The opinion is unmodified. In the 2025 filing the paragraph records that the company “has not yet generated substantial revenue-producing activities and is subject to all of the risks and uncertainties that startup franchisor companies typically face”, that it “expects to continue incurring operating losses until a certain volume of franchise stores are in operation to cover operating expenses”, and that “the ability of GDK USA, Inc., to meet its future obligations is dependent upon continued working capital advances from its ownership group.” The same paragraph appears in the 2023, 2024 and 2025 filings.

The footnote names who writes the cheques: “continued working capital advances from its stockholder, GDKI and financial support from Hero Brands, Ltd.” Those advances stand at $3,424,521 at the end of FY2022, $4,799,661 at the end of FY2023 and $5,936,215 at the end of FY2024, with a further $1,521,725 provided after 31 December 2024 and recorded as a related-party payable. Management’s plan for 2025 is stated to allow the company to continue for a period of not less than one year past the issuance date of the audited statements. The US company has never covered its own costs. Operations continue because the owners keep advancing cash. The franchisee has no claim if they stop.

Atomic Wings’ 2024 filing is the going-concern case. The cover page of the FDD issued 30 April 2024 carries, as special risk 5, the prescribed wording: “Going Concern. The auditor’s report on the franchisor’s financial statements expresses substantial doubt about the franchisor’s ability to remain in business. This means that the franchisor may not have the financial resources to provide services or support to you.” The auditor, Silva’s Financial Services, wrote the matching paragraph: the statements “have been prepared assuming that the Company will continue as a going concern”, the company “had negative working capital and an accumulated deficit as of December 31, 2022”, and “This condition raises substantial doubt about its ability to continue as a going concern.” The supporting figures are a loss from operations of $205,812.35 for 2022, with total liabilities exceeding total assets by $56,846.02 at the end of 2021 and $33,813.39 at the end of 2022. Note 13 sets out management’s plans: area development agreements signed, large 2022 costs characterised as non-recurring, officer compensation capped at $150,000 and shareholder distributions closely managed.

The next year’s filing dropped that paragraph. The FDD issued 29 April 2025 reports net income of $22,170.92 for 2023 and $110,756 for 2024 against the 2022 loss, and the auditor’s report no longer carries the substantial-doubt paragraph. The cover page still carries a financial-condition risk, but softened and renumbered, now item 3: “Financial Condition. The franchisor’s financial condition, as reflected in its financial statements (see Item 21), calls into question the franchisor’s financial ability to provide services and support to you.” Retained earnings remain negative throughout — $(291,082.02) at the end of 2022, $(742,176.00) at the end of 2023 and $(720,005.08) at the end of 2024 — and those balances do not roll forward by net income alone, so there are equity movements the statements itemise that the net-income line does not explain.

GDK’s numbers are worse: six years of losses, $7.47 million, a company that has never covered its own costs. Atomic Wings lost $205,812.35 in one year and got a cover-page going-concern risk. Auditor language follows who is funding the hole, not how deep it is. GDK’s owners kept advancing cash, so the heading stayed “Emphasis of Matter”. Call that paragraph what it is. Do not write “qualified”, “adverse” or “going-concern qualification” about an emphasis-of-matter paragraph, and do not treat the disappearance of a going-concern paragraph as though the earlier one had not happened.

What the auditor is not reacting to is size

Capriotti’s Sandwich Shop, Inc.’s FDD issued 21 July 2023 discloses a loss of $4,368,938 for the fiscal year ended 25 December 2022, of which $4,022,495 is attributable to Capriotti’s itself and the remainder to a non-controlling interest, against an accumulated deficit of $23,777,352 and total equity of $(2,797,283). The auditor’s report is unmodified with no additional paragraph. Atomic Wings lost $205,812.35 in 2022 — a twentieth of the size — and got a substantial-doubt paragraph and a cover-page special risk.

Auditors are not ranking the size of a loss. They are asking whether the company can meet its obligations for a period after the statements are issued, which depends on liquidity, the terms of its debt, and whether somebody with money is committed to funding it. A four-million-dollar loss inside a group that can absorb it can produce an unmodified report. A two-hundred-thousand-dollar loss in a company whose liabilities exceed its assets can produce a going-concern paragraph. Read the loss, then read who is funding it.

A deficit and a current-year loss are different facts

An accumulated deficit or a members’ deficit is a cumulative balance-sheet line: the sum of everything the company has ever earned or lost, plus distributions taken out. A net loss is one year’s trading. Confusing them produces bad conclusions in both directions.

The Halal Guys Franchise, Inc., in the FDD issued 29 April 2024, was profitable in all three disclosed years — $3,488,644 in FY2021, $2,574,574 in FY2022 and $517,749 in FY2023 — while carrying an accumulated deficit throughout. The deficit shrank from $(3,693,003) at the start of 2021 to $(371,445) at the end of 2023, which is what retained profits working off an older hole look like. Total stockholders’ equity at 31 December 2023 is $948,582. Meanwhile the trend inside those profits is the more interesting fact: net income fell by about 85% over two years while the balance sheet stayed positive.

Dog Haus Worldwide, LLC, in the FDD issued 9 April 2024, reported $4,398,975 in FY2021, $2,250,546 in FY2022 and $2,344,415 in FY2023, and its statements are titled “Statements of Operations and Members’ Deficit”. The heading is a cumulative equity caption. It is not a ranking of that year’s profit.

The corollary holds too. Great Greek Franchising, LLC’s members’ deficit of $(3,031,593) at 30 April 2023 and Capriotti’s accumulated deficit of $23,777,352 are large numbers that describe history, not this year. A deficit line on its own supports no conclusion at all; it tells you to go and read the income statement and the funding note.

A loss is not always an operating loss

Great Greek Franchising, LLC’s FDD issued 17 August 2023 shows three consecutive losses totalling $3,915,565 — $(1,423,122) for the year to 30 April 2021, $(1,600,555) to 30 April 2022 and $(891,888) to 30 April 2023 — on income that nearly trebled over the same period to $5,007,609. Read as a series of bottom lines that is a franchisor going backwards while growing, which is a worrying shape.

Read one line higher up and it is a different story. The consolidated statements show a loss before other income and expense of $438,589 for the year to April 2023 against lawsuit expenses of $585,739, and $557,461 against lawsuit expenses of $1,249,528 the year before. Litigation, not trading, is what put those years underwater. The auditor’s report is unmodified and the note records management evaluating the going-concern question and concluding that the company can continue.

The practical instruction is to read Item 3 and Item 21 together, in both directions. A litigation entry with no visible cost is not necessarily cheap, and a loss with no visible operating cause may be sitting in Item 3. Ask which of the disclosed matters are still running, because a non-recurring expense is only non-recurring if the case is over.

The years do not line up

Every ranking of these figures compares a comparable measure over non-comparable periods, and a reader has to hold that in mind rather than resolve it. Great Greek closes its fiscal year on 30 April. Capriotti’s and Melt Shop close on a 52- or 53-week date in late December — Capriotti’s most recent audited year ended 25 December 2022 — so their “years” are not calendar years and are not always the same length as each other. Everyone else here closes on 31 December. A pandemic quarter, a summer, a Christmas trading period and a fee increase all fall in different places in two such years.

Overlapping years across two filings are worth lining up for the same reason. GDK’s FY2023 accumulated deficit is stated as $6,095,843 in the FDD issued 3 September 2024 and $6,095,561 in the FDD registered 24 September 2025 — a $282 difference in the same fiscal year across two documents. It is trivial in itself and a clean demonstration of why the exercise is worth doing: figures that ought to be identical sometimes are not, and the reason is information you can only get by asking.

The franchisors with almost no history

A single-period statement cannot show a trend in either direction. That sentence is the whole of what should be said about the youngest franchisors, and it needs saying because the absence of a downward line is easily read as reassurance.

Doner Shack Franchising, LLC’s FDD issued 29 April 2025 contains one audited year, FY2024, with a loss of $90,719 and members’ equity of $163,939 at 31 December 2024, on an unmodified opinion. That loss belongs to an entity with no US outlets at all: overhead against a US offering that had not yet sold anything, while the operating business is three company-owned restaurants in the United Kingdom held by a different affiliate whose statements are not in the document.

Döner Haus Franchising, LLC’s FDD issued 7 April 2026 contains two periods: a stub from the franchisor’s formation on 26 June 2024 to 31 December 2024, and FY2025. The opinion is unmodified, from Metwally CPA PLLC of Flower Mound, Texas — the same auditor as the 2024 filing. A young franchisor’s statements cover the years the company has existed. That is the file the rule asks for.

Two further filings in the wider material — Chopt Creative Salad Co and Dos Toros — yield no extractable financial statements at all, and both franchising entities were formed months before their documents were issued, on 7 June 2022 and 22 September 2022 respectively, so both statements cover a partial period from inception and both are captioned member’s deficit. Neither has been read here, which is a different statement from “nothing was found in them”.

What the table at the foot of this page does not contain

Two brands here have no Item 21 record at all: Pepper Lunch and Wienerschnitzel are carried from a May 2024 comparative study of published filings rather than from a document, so there are no statements on hand. Their financial condition is unknown. The ranking leaves them out rather than sorting them to either end of it.

Reading it against the rest of the document

Item 20’s openings and Item 21’s revenue mix belong on the same page of notes. A young system selling development schedules — GDK’s definition of “you” in the FDD issued 3 September 2024 is a person who buys the right to operate five or more outlets — can book initial-fee income in a year that has not yet produced five paying royalties. The two figures will not match one-for-one, and they should not tell opposite stories without an explanation.

Royalty income ties to Item 6 and to the franchised count in Item 20: if Shah’s Item 20 reports 0 franchised outlets and 44 licensed of 58 as of 2023, do not expect a thick franchised-royalty line in the same year. Supplier-rebate income, if material, ties to Item 8, and a franchisor earning materially from a franchisee’s purchasing has an interest in what the franchisee buys. Related-party receivables and payables tie back to the affiliates named in Item 1, and in GDK’s case they are the largest thing in the statements.

And Item 21 is not Item 19, in either direction. GDK’s Item 19 in the 2024 filing disclosed one full-year franchised mall unit at $1,383,053 of gross revenues for FY2023; that figure is not “the company’s sales” and does not appear in the franchisor’s income statement. 375°’s Item 19 income statement shows net income of $804,218 on sales of $3,782,437 for FY2023 for the corporate restaurants, while the audited franchisor entity in the same document made $36,229 in FY2023 after a $69,900 loss in FY2022. The outlets made money and the franchisor roughly broke even: two companies, one document. Trace which is which before either number goes into a model.

The table that follows ranks these filings by the most recent audited result on file, with the fiscal year end in its own column because those years do not line up, and the auditor’s opinion in the last one. It is a ranking of what each franchisor reported, not of how safe each one is, and the two brands with no statements on hand are absent from it rather than scored.

Related reading

• The auditor’s report — the document in front of the statements, taken apart section by section
• Item 1, the franchisor — which entity’s books these should be
• Item 19 — outlet performance is a different Item, and a different company in some filings
• Item 20, outlet tables — openings that should eventually appear as royalties
• Item 3, litigation — where an unexplained loss sometimes turns out to live
• Reading successive filings — overlapping fiscal years, and whether the two documents agree
• Attorney and accountant — who actually reviews the statements
• Financing overview — the franchisor’s solvency is not your loan