$112

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. 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.

Prior Experience

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 of9311 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 Saint-Laurent, Quebec, H4S 1M5, Canada. In addition to the concepts franchised by Kahala Franchising or its current or former affiliates, MTY Food Group, Inc. or one or more of its subsidiaries (“MTY”) franchises thirty-six (36) different restaurant concepts under the following trademarks in Canada and the United States: Au Vieux Duluth Express, Big Smoke Burger, Café Depot, Country Style, Croissant Plus, Cultures, Extreme Pita, Ginger Sushi Boutique, Jugo Juice, Kim Chi, Koryo, Koya, La Crémière, Madisons, Manchu Wok, Mr. Souvlaki, Mr. Sub, Mucho Burrito, Muffin Plus, O’Burger, Sukiyaki, Sushi Go, Sushiman, Sushi Shop, Tandori, Thai Express, Thaïzone, Tiki Ming, Tosto, Tutti Frutti, Valentine, Van Houtte, Vanellis, Vie & Nam, Villa Madina and Wasabi Grill & Noodle trademarks. MTY also sub-franchises two (2) other different restaurant concepts: TCBY and TacoTime. MTY is a publiclytraded company headquartered in Montreal, Québec, Canada. The name and principal business address of any predecessors for Cold Stone Creamery brand during the 10-year period immediately before the close of Kahala Franchising’s most recent fiscal year is: Kahala Franchise Corp., 9311 E. Via De Ventura, Scottsdale, Arizona 85258. Our predecessor, Kahala Franchise Corp., did not conduct the type of business the franchisee will operate, but its affiliate, CSC Restaurants has been conducting the type of business the franchisee will operate by operating corporate Cold Stone Creamery stores since April 1994; its affiliate, Kahala Holdings, has been conducting the type of business the franchisee will operate by operating corporate Cold Stone Creamery stores since January 2008; and another affiliate, Kahala Restaurants, L.L.C., an Arizona limited liability company (“Kahala Restaurants”), has been conducting the type of business the franchise will operate by operating corporate Cold Stone Creamery stores since January 2010. Kahala Franchise Corp. offered franchises providing the type of business the franchisee will operate from March 2008 until March 2010. The name and principal business address of another predecessor for Cold Stone Creamery during the 10-year period immediately before the close of Kahala Franchising’s most recent fiscal year is: Cold Stone Creamery, Inc., 9311 E. Via De Ventura, Scottsdale, Arizona 85258. Predecessor, Cold Stone Creamery, Inc., conducted the type of business the franchisee will operate from April 1994 until March 2008. Predecessor, Cold Stone Creamery, Inc., offered traditional franchises providing the type of business the franchisee will operate from April 1994 until March 2008, and offered non-traditional franchises providing the type of business the franchisee will operate from November 2002 until March 2008. Cold Stone Creamery, Inc. did not operate businesses of the type being franchised, but rather, CSC Restaurants, its affiliate, did conduct the type of business the franchisee will operate by operating corporate Cold Stone Creamery since April 1994. Neither Cold Stone Creamery, Inc., nor any of its affiliates had offered franchises in any other line of business. Kahala Franchise Corp. offered franchises under the following names, which are now being offered by Kahala Franchising as of August 2010: Surf City Squeeze, Rollerz Rolled Sandwiches, Frullati Cafe & Bakery, Ranch One, Samurai Sam’s Teriyaki Grill, TacoTime, Great Steak, Johnnie’s New York Pizzeria, NrGize Lifestyle Cafe, Blimpie, and Cereality cereal bar & cafe. As of November 30, 2017, there were - franchises (915 franchises in the United States plus 336 international franchises), 94 licensed outlets and 8 company-owned restaurants. There were also 88 Rocky Mountain Chocolate Factory stores and 1 Tim Hortons store that are co-branded in Cold Stone Creamery restaurants. The license agreement allowing selected Cold Stone Creamery franchisees to sell Tim Hortons products in their Cold Stone Creamery restaurants has been terminated, so no additional Cold Stone Creamery franchisees may amend their franchise agreement to allow them to sell Tim Hortons products in their restaurants. We have a Master License Agreement dated August 17, 2009 with Rocky Mountain Chocolate Factory, Inc. under which selected franchised and company-owned Cold Stone Creamery restaurants will be allowed to sell RMCF’s products in addition to the Cold Stone Creamery product offering (See Exhibit H-2). We have been offering Cold Stone Creamery franchises since August 2010 under the name of Kahala Franchising. Kahala Franchising does not operate businesses of the type being franchised, but rather, Kahala Holdings and Kahala Restaurants, affiliates of Kahala Franchising, operate many of our corporate-owned restaurants, including businesses of the type being franchised. Any corporate-owned Cold Stone Creamery restaurants may compete with franchised restaurants in its vicinity.

Business Offered

If you qualify, you may (i) construct a new Cold Stone Creamery restaurant; (ii) purchase one of our Cold Stone Creamery 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 Cold Stone Creamery brand. The business you will operate is a single traditional or non-traditional Cold Stone Creamery restaurant specializing in super-premium fresh made ice cream, frozen yogurt, cakes, pies, smoothies, shakes, specialty beverages, soft drinks and other frozen dessert products (prepared using proprietary recipes) and an assortment of complementary toppings and mix-ins on a take-out or eat-in basis, at a specific location approved by us, and using the trademarks Cold Stone Creamery® , and other trademarks, trade names, service marks, logotypes, and other commercial symbols we adopt and authorize. The ice cream and frozen yogurt is used to prepare cakes, pies, smoothies, shakes, specialty beverages, soft drinks and other frozen dessert products. A “traditional” Cold Stone Creamery restaurant is a Cold Stone Creamery restaurant that is easily accessible by the general public, such as a free-standing building, inline retail shop, shopping mall and street front location. A traditional Cold Stone Creamery restaurant normally offers a full Cold Stone Creamery menu. A “non-traditional” Cold Stone Creamery restaurant is a restaurant that is located in a non-traditional marketplace (in franchisor’s sole discretion) such as an airport, amusement park, sports or entertainment venue, train station, travel plaza, toll roads, cafeteria, retail store, convenience store, military base, hospital, office building, movie theater, hotel, casino, kiosk, cart or high school or college campus. A non-traditional Cold Stone Creamery restaurant generally offers a limited version of the full Cold Stone Creamery menu. A Cold Stone Express kiosk is non-traditional and sells soft serve and frozen yogurt with a variety of toppings, shakes, smoothies, Frappes and other frozen beverages, novelties and bottled beverages. The Cold Stone Express may also sell Cold Stone Creamery cakes and pies, and you have the option of owning a Cold Stone Express with or without the granite stone. A Cold Stone Creamery restaurant, whether traditional, non-traditional, or a Cold Stone Express kiosk, is also referred to as the “Franchised Business.” Cold Stone Creamery restaurants serve the general public, and people of all ages consume the products offered by Cold Stone Creamery restaurants. Most Cold Stone Creamery restaurants may be operated throughout the year; however, the restaurant market for the products offered by Cold Stone Creamery restaurants is seasonal, as consumption of ice cream, frozen yogurt, cakes, pies, smoothies, shakes, specialty beverages and other frozen dessert products is typically higher in the summer and lower in the winter. 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 Cold Stone Creamery 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 Cold Stone Creamery 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.

Initial Fees

The initial franchise fee (“Initial Franchise Fee”) for your first Cold Stone Creamery traditional restaurant is $27,000. The Initial Franchise Fee is reduced for your second and each subsequent traditional restaurant to $15,000. The Initial Franchise Fee for your non-traditional Cold Stone Creamery restaurant location ranges from $10,000 to $20,000 for each restaurant. The Initial Franchise Fee for your Cold Stone Express kiosk is $2,000 per each year of the term of your lease for the location. For example, if the term of the lease is three years, the Initial Franchise Fee for the Cold Stone Express kiosk would be $6,000. 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 (“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 Cold Stone Creamery business opens are indicated on 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, lease review fee (if any) and the cost of equipment, furniture, menu boards, wall decor and smallwares, and ranges from $28,270 to $140,050 for a non-traditional location, $5,000 to $121,250 for a Cold Stone Express kiosk, and from $45,270 to $147,050 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, wall décor 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 or subsequent traditional restaurant (iv) the lease review fee if the franchisee requested a full lease review, ; (v) the lease guarantee fee if the franchisee requested we guarantee their lease and Kahala Franchising or its affiliate agreed to be a guarantor on their lease; and (vi) the cost of equipment, furniture, menu boards, wall décor and smallwares purchased from our affiliate, Neptune Equipment. 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 Cold Stone Creamery restaurant and to use the signature products trademark(s) as signature products are developed. The signature products that would be available for Cold Stone Creamery 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. Notes: (1) There are no refunds under any circumstances. Kahala Franchising does not offer any financing of the Initial Franchise Fee. We may periodically reduce the Initial Franchise Fee in connection with limited time promotions, new concepts and/or operational programs. (3) If, after a request by you, Kahala Franchising or any of its affiliates agree, in their sole and absolute discretion, to guarantee your lease with the applicable third party landlord for the Cold Stone Creamery restaurant you are developing, you will pay Kahala Franchising or its affiliate a lease guarantee fee in the amount of 10% of the total amount of the rental obligations being guaranteed under the lease upon the execution of the lease and associated guarantee with the third party landlord, up to a maximum payment of $10,000. This fee is not refundable (See Exhibit M: Lease Guaranty Acknowledgement). (4) If, prior to executing the lease, you request Kahala Management’s real estate department review your lease and provide suggested changes to you, a $1,250 lease review fee shall be paid by you to Kahala Franchising (“Lease Review Fee”) upon your request to Kahala Management’s real estate department. The Lease Review Fee is non-refundable. This is an optional service, with the determination of whether to utilize Kahala Management’s real estate department to be made in your sole discretion. (5) The majority of your equipment, furniture, menu boards, wall graphics and smallwares will be purchased from Neptune Equipment, an affiliate of Kahala Franchising, and approved third party vendors.

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 Cold Stone Creamery 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 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 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. We will, within 60 days after we receive the proposed Master Lease (and additional materials required by us), review the Master Lease to make sure it meets our minimum site requirements. Upon submission of a proposed Master Lease, you must provide us with any additional documentation and information that we may require regarding the proposed site, the proposed lease, your financial condition and your Principals’ financial condition. If we determine that you do not have the financial capacity to perform your obligations with respect to the site or the Master Lease, we may deny approval of the site and/or Master Lease. That disapproval will be deemed to be reasonable. In that event, we or our affiliates or franchisees may operate a Cold Stone Creamery restaurant at that site. We or our affiliates may, in our sole discretion, lease the site approved by us for your Cold Stone Creamery restaurant and sublease the site to you. If we lease your site, you will be subject to a Location Review Fee payable when you sign your Franchise Agreement. In addition, if and when you sign the Sublease, you must pay to us an amount equal to two month’s base rent under the Master Lease, plus a security deposit in an amount equal to the security deposit required under the Master Lease. (We reserve the right, however, to require a greater security deposit, based upon your creditworthiness.) 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

The average gross sales contained in the Table below pertains to the historic performance of a Cold Stone Creamery stores that share the following characteristics: (i) all are in a location in the United States; (ii) all offer a full menu and use the same recipes; (iii) all were open for a minimum of 12 months; (iv) all operate under the same trademarks; and (v) all were franchised. The time period measured was December 1, 2016 through November 30, 2017. Notes: 1. As of November 30, 2017, there were 923 franchised, and corporate stores open in the United States. Of these 923 stores, 872of these stores were either franchised or corporate owned stores that were opened for 12 months or more. 2. The information is based upon gross sales of franchised, corporate and licensed stores. Some stores had gross sales that exceeded the average gross sales. We are not representing that your franchised store will meet or exceed the average gross sales. 3. The figures in the tables above should not be considered a representation of the probable gross sales you should expect or a forecast of future performance. Your sales may differ substantially from those in the tables above. There is no assurance that you will earn as much as the stores listed in the tables. 4. The above table and information were prepared from (i) weekly sales reports provided to us by franchisees. We have not audited the information provided by the franchisees. 5. We will provide to you the spreadsheets as written substantiation for the representations made in this Item 19 upon reasonable request. 6. Other than the preceding financial performance representation, we do not make any financial performance representations. 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.