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Business Description

Kahala Franchising is an Arizona limited liability company which was formed on December 29, 2008. Kahala Franchising is in the business of franchising to others the right to own and operate quick service restaurants. On July 26, 2016, Kahala Brands merged with a wholly-owned subsidiary of MTY Food Group, Inc. (“MTY Food Group”) having an address at 8150 Transcanada Highway, Suite 200, Saint Laurent, Québec H4S 1MF. Kahala Brands’ parent company became MTY Franchising USA, Inc. (“MTY USA”), a Delaware corporation incorporated originally as The Extreme Pita Franchising USA, Inc. on March 14, 2001, and having an address of 9311 E Via De Ventura, Scottsdale, AZ 85258. MTY USA’s parent corporation is MTY Tiki Ming Enterprises Inc. (“MTY Canada”), a Canada corporation incorporated on February 13, 1979, and a wholly owned subsidiary of MTY Food Group, Inc., and having an address at 8150 Route Transcanadienne, Suite 200, Ville SaintLaurent, Quebec, H4S 1M5, Canada.

Prior Experience

Our parent company is Kahala Brands, Ltd., which is a Delaware corporation (“Kahala Brands”). Kahala Brands was formerly known as Kahala Corp. but changed its name to Kahala Brands in December 2014. Prior to that, Kahala Corp. was a Florida corporation and was redomiciled in Delaware on December 31, 2012. In January 2006, an affiliate of Kahala Franchising purchased Blimpie International, Inc.’s 60% interest in the Blimpie restaurant brand and associated franchising system, including all trademarks and tradenames. Blimpie Associates, Ltd. retained their 40% interest in the Blimpie brand and franchise system and continued franchising the Blimpie brand in their territory consisting of Delaware, Maryland, Virginia, Washington, D.C., portions of New Jersey, portions of New York and portions of Pennsylvania (“BA Territory”). In May 2007, an affiliate of Kahala Franchising purchased Blimpie Associates, Ltd.’s 40% interest in the Blimpie restaurant brand and associated franchising system, including all trademarks and tradenames. We have been offering Blimpie franchises throughout the United States except in Southern California since August 2010 under the name of Kahala Franchising, L.L.C. From January 2006 through March 2010, our predecessor, Kahala Franchise Corp. offered Blimpie franchises throughout the United States except in the BA Territory and Southern California. Kahala Franchise Corp. offered Blimpie franchises in the BA Territory from May 2007 through March 2010.

Business Offered

If you qualify, you may (i) construct a new Blimpie restaurant; (ii) purchase one of our Blimpie franchises by acquiring an existing business from another franchisee or from us; or (iii) convert all of your existing retail operations from another brand to our Blimpie brand. The business you will operate is a single traditional or non-traditional Blimpie restaurant specializing in fresh deli sandwiches, salads, and other food and beverage items, at a specific location approved by us, and using the trademarks Blimpie® , Blimpie Subs & Salads® , and other trademarks, trade names, service marks, logotypes, and other commercial symbols we adopt and authorize. A “traditional” Blimpie restaurant is a restaurant that is easily accessible by the general public, such as a free-standing building, inline retail shop, lifestyle shopping center and street front location. A traditional Blimpie restaurant normally offers a full Blimpie menu. A “non-traditional” Blimpie restaurant is a restaurant that may be located within another business or operated in conjunction with another business, like a convenience store, office building, department store, general merchandise retailer, hospital, stadium, university food service facility, airport, amusement park, sports or entertainment venue, train station, travel plaza, toll roads, cafeteria, military base, movie theater, hotel, casino or high school or college campus or any other location where it may succeed as a complement to the primary business of the host facility, or may be located in a nontraditional marketplace (in franchisor’s sole discretion), or a unique or special venue that we obtain through our relationship with a national or regional host facility. A host facility is referred to as a “Host/Authority” in this Disclosure Document. A non-traditional restaurant may require and/or authorize adjustments to the approved product line that may expand upon or diminish the then current standard full menu offering. A restaurant in a host facility may be required to offer and sell the approved product line under different specifications from other Blimpie restaurants if required by a Host/Authority. All restaurants, whether traditional or non-traditional, must be developed and operated to our specifications and standards, and sell only those products that we authorize. A Blimpie restaurant, whether traditional or non-traditional, is also referred to as the “Franchised Business.” Blimpie restaurants serve the general public, and people of all ages consume the products offered by Blimpie restaurants. Most Blimpie restaurants may be operated throughout the year; however, sales may fluctuate during the year. You will have to compete with other restaurants, fast food outlets, supermarkets and other food retailers located in your venue or market area. Some of your competitors may include Blimpie restaurants operated by other franchisees or by our affiliates. The extent to which you may succeed at any particular location cannot be predicted. Because of the highly competitive nature of the business involved, successful operation of the Blimpie restaurant will depend in part upon the best efforts, capabilities, management, and efficient operation by the franchisee; as well as the general economic trend and other local marketing conditions. You must comply with all federal, state, and local laws that regulate commerce in general and the food service industry in particular. In addition to laws and regulations that apply to businesses and restaurant operations generally, Blimpie Franchised Businesses are subject to: (i) federal, state, and local health codes regarding health, sanitation, and food safety and (ii) menu labeling and nutrition laws.

Initial Fees

Initial Franchise Fee for traditional Blimpie restaurants purchased at different times: You will pay a $19,900 lump sum Initial Franchise Fee for your first traditional restaurant. The Initial Franchise Fee is reduced to $11,900 per restaurant for your second and each subsequent traditional restaurant. Initial Franchise Fee for non-traditional Blimpie restaurants purchased at different times: You will pay an $11,900 lump sum Initial Franchise Fee for your first non-traditional restaurant. The Initial Franchise Fee is reduced to $6,900 per restaurant for your second and each subsequent nontraditional restaurant. Initial Franchise Fee for traditional or non-traditional Blimpie restaurants purchased at the same time: If we agree, you may purchase additional franchises for traditional or non-traditional restaurants for the following reduced initial franchise fees, if you purchase them at the same time as you purchase your initial franchise: (i) the reduced fees for traditional restaurants purchased at the same time are $19,900 for your initial traditional restaurant; $11,900 for your first additional traditional restaurant purchased at the same time as the initial unit; and $6,900 for your second and additional traditional restaurants if purchased at the same time as the initial unit; and (ii) the reduced fees for non-traditional restaurants purchased at the same time are $11,900 for your initial non-traditional restaurant, $6,900 for your first additional non-traditional restaurant if purchased at the same time as the initial unit, and $4,400 for your second and additional non-traditional restaurants if purchased at the same time as the initial unit. If you are currently an active or active reserve member of the U.S. Armed Forces, have been honorably discharged from the U.S. Armed Forces, are a “wounded warrior” or the spouse of a currently active duty military member (“Eligible Military”), or are a 501(c)(3) organization (“501(c)(3)”), you will receive a 20% discount on the Initial Franchise Fee. The initial fees to be paid to us and/or our affiliate(s) before the franchisee’s business opens are indicated in the chart below and in the notes to the chart. The initial fees to be paid to us and/or our affiliate(s) before the franchisee’s business opens are the total of the Initial Franchise Fee, grand opening fee, lease review fee (if any) and the required equipment, furniture, menu boards, and smallwares purchased from Neptune Equipment, and ranges from $19,620 to $76,150 for a non-traditional location, and from $28,620 to $86,050 for a traditional location. These amounts do not include the optional lease guarantee fee that is variable based upon the amount of the underlying guarantee, or the Document Administration Fee which is only required if there is less than a 50% change in the ownership of Franchisee. For the 2017 fiscal year, the formula used to calculate the range of initial fees paid to us and/or our affiliate(s) before the franchisee’s business opened was: the total of the initial franchise fee, lease review fee (if any), and the cost of equipment, furniture, menu boards, and/or smallwares purchased from Neptune Equipment. The factors that determined these amounts were: (i) if the Initial Franchise Fee was discounted or waived; (ii) if the restaurant was traditional or nontraditional; (iii) if the restaurant was the franchisee’s first, second or subsequent franchise (the initial franchise fee was reduced for the third and subsequent restaurant during the 2017fiscal year); (iv) if the franchises were purchased at the same time or different times; (vi) the lease review fee if the franchisee requested a full lease review ; (vii) the lease guarantee fee if the franchisee requested we guarantee their lease and Kahala Franchising or its affiliate agreed to be a guarantor on the franchisee’s lease; and (viii) the cost of equipment, interior and exterior signage, menu boards, and smallwares purchased from our affiliate, Neptune Equipment, which depended on the equipment purchased. The cost of advertising for a grand opening and during the first six months from the opening of the restaurant was paid by franchisee during the 2017 fiscal year. There are no refunds of Initial Franchise Fees under any circumstances. We may periodically reduce the Initial Franchise Fee in connection with limited time promotions, new concepts and/or operational programs. We may vary the terms of our franchises in connection with testing new marketing, branding and/or operational programs. These tests are generally conducted with experienced, existing franchisees and may include incentives and other rights which are not available to all franchisees. If you sign the Franchise Agreement in connection with a transfer or renewal, you will not pay the Initial Franchise Fee. We may offer you the option to purchase a license to sell additional signature products in your Blimpie restaurant and to use the signature products trademark(s) as signature products are developed. The signature products that would be available for Blimpie franchisees to sell in their restaurants are currently under development. We estimate that the fees associated with acquiring license(s) to sell additional products will be between $2,500 and $5,000 although these license fees may be modified from time to time.

Financing

We do not offer any direct or indirect financing or financing arrangement, nor will we guaranty your obligations under any note or other obligation, except potentially for the lease for your site or if you purchase a restaurant corporate-owned “as-is” by one of our affiliates, and only in our sole and absolute discretion. If you are an individual, you (and your spouse, if married), must sign the Guaranty of Franchise Agreement. (See Exhibit F). If you are a corporation, limited liability company, partnership or other business entity, each of your shareholders, members, partners or other owners (and their respective spouses, if married) must sign the Guaranty of Franchise Agreement. If, in order to obtain the lease agreement for the site of your Blimpie restaurant, the landlord requires you to obtain a third party lease guarantee, and we or one of our affiliates agrees to serve as such guarantor (with such determination to be made in our sole and absolute discretion), you will pay to us a lease guarantee fee in the amount of 10% of the total amount of the rental obligations being guaranteed under the lease during its term up to a maximum payment of $10,000. If the franchisee is an individual, the individual franchisee (and his/her souse, if married) must personally guarantee the debt. If the franchisee is a corporation, limited liability company, partnership, or other entity, each of the principals of the entity (and each of their respective spouses, if married) must personally guarantee the debt. Once paid, the lease guarantee fee is non-refundable under all circumstances. We do not offer financing for the lease guarantee fee as it is payable in full upon the execution of the guarantee. Neither we, nor any of our affiliates, are required to serve as a guarantor of your lease for the site of your restaurant. The decision of whether to serve as a guarantor of your lease shall be made at our sole and absolute discretion. If you purchase a corporate restaurant “as-is” that is owned and operated by one of our affiliates, we may finance up to 100% of the purchase price, at our sole discretion. When you purchase a corporate-owned restaurant from one of our affiliates, you will enter into an “Asset Purchase Agreement” (See Exhibit D). If you finance any portion of the purchase price of the corporate-owned restaurant through Kahala Holdings or Kahala Restaurants, you will also enter into a “Promissory Note and Security Agreement” and a “Guaranty,” which is an exhibit to the Asset Purchase Agreement. The purchase price includes the initial franchise fee and all leasehold improvements including furniture, fixtures, and equipment that are contained in the restaurant at the time of purchase, along with any inventory that is in the restaurant at the time of purchase. The lender providing the financing is one of our affiliates, Kahala Holdings or Kahala Restaurants, whichever entity owns the restaurant. The annual rate of interest charged will be between 0% and 12% and will depend on the creditworthiness of the franchisee, the amount being financed, and the dollar amount being paid up-front by the franchisee. There are no finance charges associated with the Promissory Note and Security Agreement. The amount being financed will be required to be repaid in equal monthly installments and the period of repayment will be between 12 months and 60 months, depending on the amount being financed. The security interest required by us is a first position lien on all equipment. If the franchisee is an individual, the individual franchisee (and his/her spouse, if married) must personally guarantee the debt. If the franchisee is a corporation, limited liability company, partnership, or other entity, each of the principals of the entity (and their respective spouses, if married) must personally guarantee the debt. The Promissory Note and Security Agreement may be pre-paid in full or in part at any time and from time to time without penalty. The franchisee’s potential liabilities upon default include: (i) an accelerated obligation to pay the entire amount due, including all accrued and unpaid interest, if the default is not cured within ten calendar days; and the interest rate will be increased to an annual rate of 18%; (ii) obligation to pay costs and attorneys’ fees incurred in collecting the debt; (iii) termination of the franchise; and (iv) liabilities from cross defaults resulting from non-payment or from the loss of business property; on franchisee’s other restaurants name in the Promissory Note and Security Agreement and granting either Kahala Holdings or Kahala Restaurants the right to take back the restaurant(s). The Promissory Note and Security Agreement requires franchisees to waive the following legal rights: demand, notice, diligence protest, presentment for payment, and notice of extension, dishonor, protest, demand and nonpayment of the promissory note; any release or discharge as a result in any change in security given or change in person or entity who may become liable for the note or any modification of the note; rights to contest or appeal our exercise of the take back rights; and not receiving compensation for the restaurant after the take back rights have been exercised. The Promissory Note and Security Agreement also bars the franchisee’s right to contest the take back rights. We require a first lien position in all equipment as a security interest to be given by the franchisee. We do not intend to sell, assign or discount to a third party any financing arrangement. We do not arrange financing from other sources; therefore, we do not receive direct or indirect payments from placing financing. The lease for a corporate restaurant is entered into by one of our affiliates. When you purchase the corporate restaurant, you will enter into a Sublease with our affiliate using our standard form of Sublease where you pay all monies owing under the Master Lease directly to the property owner, or our standard form of Sublease in which you pay all monies owing under the Master Lease to our affiliate and the affiliate will pay the property owner, which are exhibits to the Asset Purchase Agreement. The Sublease will contain substantially the same terms as the Master Lease. The term of the Sublease will be for the entire term of the Master Lease, less one day. If you are an individual, you (and your spouse, if married) must sign the Guaranty of Sublease. If you are a corporation, limited liability company, partnership or other business entity, each of your shareholders, members, partners or other owners (and their respective spouses, if married) must sign the Guaranty of Sublease. Please note, if you intend to lease the site of your restaurant, the lease must include certain required provisions (See Exhibit L: Required Lease Terms; Exhibit E-1: Franchise Agreement (New) – Section 2.2; Exhibit E-2: Franchise Agreement (Renewal) – Section 2.2; Exhibit E-3: Franchise Agreement (Transfer) – Section 2.2 (all the proceeding three franchise agreements collectively known as “Exhibit E: Franchise Agreement”)).

Franchisee Revenue and Profit

We do not make any representations about a franchisee’s future financial performance or the past financial performance of company-owned or franchised outlets. We also do not authorize our employees or representatives to make any such representations either orally or in writing. If you are purchasing an existing outlet, however, we may provide you with the actual records of that outlet. If you receive any other financial performance information or projections of your future income, you should report it to the franchisor’s management by contacting John Wuycheck, Kahala Franchising, L.L.C., 9311 E. Via De Ventura, Scottsdale, Arizona 85258; (480) 362-4800, the Federal Trade Commission, and the appropriate state regulatory agencies.