How will Fat Shack verify Royalty payments from franchisees?

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ledgers and bank statements for checking and savings accounts; (iv) copies of any checks or other evidence of payments; (v) all contracts or agreements entered into by Franchisee and any third parties related to the FAT SHACK Restaurant; and (vi) any other documents requested by FSI. FSI may audit and inspect documents covering a period beginning with the date on which Franchisee first acquired its FAT SHACK Restaurant and ending on the date such audit is concluded. All documents provided for FSI's inspection or audit must be certified by Franchisee and the appropriate affiliated party, if applicable, as true, complete and correct. Inspections and audits may be conducted following the termination or expiration of this Agreement for any reason. If any inspection or audit discloses a deficiency in amounts of payments owed to FSI pursuant to this Agreement then such amounts will become immediately payable to FSI by Franchisee, with interest and late fees due in accordance with Section 5.4 hereof, except for Acts of Deception which shall be governed by the provisions of Section 16.5 hereof. In addition, if it is found by any inspection or audit that the Gross Sales of its FAT SHACK Restaurant have been understated by 2 percent or more during the period audited, Franchisee must pay all reasonable costs and expenses FSI incurred in connection with the inspection or audit, including the costs and fees of any independent accountant and the travel and living expenses and compensation of any of FSI's employees or agents conducting such inspection or audit.

16.5. Act of Deception

Notwithstanding anything to the contrary contained in this article, if a breach occurs under Sections 5.1, 5.3, 13.3, or 16.1, due to Franchisee failing to pay or report to FSI any sales pursuant to the terms established hereunder; or if Franchisee underpays any amounts owed to FSI, including amounts discovered in an audit of Franchisee's books and records; or provides reports to FSI that are incomplete, inaccurate or misleading in any respect, and said breach remains uncured for 25 days or more after notice of default has been given, said act shall be deemed a deceptive act by Franchisee to prevent FSI from receiving its fees based on the Gross Sales of Franchisee's FAT SHACK Restaurant (an "Act of Deception"). The occurrence of an Act of Deception will result in serious damage to FSI and the FSI franchise system in that it would (i) result in FSI receiving less compensation than it is entitled; (ii) result in substantial costs to FSI in responding to the Act of Deception, based on the need to research Franchisee's activities, contact third parties, coordinate an audit, and/or take other actions; (iii) demand substantial effort and attention of FSI's representatives, in turn diverting their attention from their ordinary duties devoted to FSI and its services for the FSI franchise system; and (iv) encourage other franchisees, distributors, or Area Representatives of FSI to engage in similar acts, thereby contributing to a general atmosphere of noncompliance within the FSI franchise system. At the same time, FSI and Franchisee acknowledge and agree that these damages, due to their nature, would be difficult to quantify. Therefore, upon discovery of an Act of Deception by FSI, Franchisee shall pay FSI as liquidated damages and not as a penalty, 100 percent of Franchisee's Gross Sales involved in the Act of Deception, together with any administrative fees and late fees in accordance with Section 5.4 of this Agreement, plus interest at 2.5 percent per month or the highest rate allowable by applicable law, whichever is less, on such amount from the first date any fees arising from such Gross Sales were due to FSI.

Source: Item 23 — Receipts (FDD pages 53–223)