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Pizza Pizza Royalty Corp. adds Restaurants to the Royalty Pool Wednesday, January 24th, 2018

Toronto, January 24, 2018 – Pizza Pizza Royalty Corp. (the “Company”) and Pizza Pizza Limited (“PPL”) today announced that effective January 1, 2018, the number of restaurants on which royalties are paid to the Company by PPL (the “Royalty Pool”) has been adjusted to include 25 new restaurants opened during the prior year vend-in period; 18 restaurants were closed and removed from the Royalty Pool.

By brand, 17 new Pizza Pizza restaurants and eight new Pizza 73 restaurants were added to the Royalty Pool; there were 16 Pizza Pizza restaurants and two Pizza 73 restaurants closed and removed from the Royalty Pool. Of the 18 closures, eight were traditional restaurants and ten were nontraditional locations.  For 2018, there will be 758 restaurants in the Royalty Pool made up of 652 Pizza Pizza locations and 106 Pizza 73 locations.

The Company, indirectly through the Pizza Pizza Royalty Limited Partnership (the “Partnership”), owns the trademarks and trade names used by PPL in its Pizza Pizza and Pizza 73 restaurants.  The Pizza Pizza trademarks and other intellectual property were licensed to PPL in 2005 for 99 years, for which PPL pays the Partnership a royalty equal to 6% of the System Sales of its Pizza Pizza restaurants in the Royalty Pool. In 2007, the Partnership acquired the trademarks and other intellectual property of Pizza 73 and licensed them to PPL for 99 years, for which PPL pays a royalty equal to 9% of the System Sales of the Pizza 73 restaurants in the Royalty Pool.

Annually, on January 1 (the “Adjustment Date”), the Royalty Pool is adjusted to include the Forecasted System Sales from new restaurants added to the Royalty Pool net of System Sales from restaurants which were closed and removed from the Royalty Pool. The Forecasted System Sales from new restaurants added to the Royalty Pool may also be reduced by any decrease in system sales of a previously existing restaurant whose territory has been adjusted by a new restaurant. (See “Adjusted Restaurant” as defined in the Licence and Royalty Agreements). 

In exchange for adding new restaurants to the Royalty Pool, PPL is compensated in equivalent Company shares using an agreed-upon formula which is designed to be accretive to current shareholders.  Generally, when additional restaurants are added to the Royalty Pool, the forecasted increase to PPL’s System Sales (and thus, the Company’s royalty income) will result in an increase in PPL’s interest in the Company, reflected in an increase to the Class B and/or Class D Exchange Multipliers. Additional details about this formula can be found in Table 1 below and in the Company’s most recent Annual Information Form.

After the January 1, 2018 Adjustment Date, PPL now owns equivalent Shares representing 22.3% of the Company’s fully diluted shares as shown in Table 1. Prior to this adjustment, PPL’s ownership was 21.1%. PPL’s ownership is through its holdings of Class B and Class D units of the Partnership, which are exchangeable for a number of Shares based on the Class B and Class D Exchange Multipliers (the “equivalent Shares”). The following provides the details supporting the change in PPL’s ownership.

On January 1, 2018, one net Pizza Pizza restaurant was added to the Royalty Pool as a result of 17 new restaurants opening and 16 closing from January 1, 2017 to December 31, 2017. Forecasted System Sales of $3,860,000 annually from the 17 new restaurants less sales of $3,861,000 from 16 permanently closed Pizza Pizza restaurants, resulted in the Estimated Determined Amount being ($1,000).  As per the Pizza Pizza Royalty Limited Partnership agreement, whenever the Estimated Determined Amount is negative, the amount is deemed to be zero. Accordingly, the Class B Exchange Multiplier remained unchanged at 2.000691. PPL will only have additional Class B equivalent Shares for 2018 if the actual sales performance of the new Pizza Pizza restaurants, less the sales of closed restaurants, is positive when the actual sales performance of the new restaurants is known with certainty in early 2019.

Additionally, in exchange for adding $4,576,000 of Forecasted System Sales from Pizza 73 restaurants to the Royalty Pool ($4,836,000 from the eight new Pizza 73 restaurants less sales of $260,000 from two permanently closed Pizza 73 restaurants), PPL has received 276,781 additional equivalent Shares (through the change to the Class D Exchange Multiplier). These represent 80% of the forecasted equivalent Shares entitlement to be received (345,977 equivalent Shares represent 100%), with the final equivalent Shares entitlement to be determined when the actual sales of the new restaurants are known with certainty in early 2019.

Table 1 – Summary of the Company’s Outstanding and Fully-Diluted Shares, including an analysis before and after the 20% entitlement holdback:

(1)       In early January 2018, adjustments to royalty payments and PPL’s Class B Exchange Multiplier were made based on the actual performance of the 23 new restaurants added to the Royalty Pool on January 1, 2017.  As a result of the adjustments, the new Class B Exchange Multiplier is 2.000691 and Class B Units can be exchanged for 5,018,210 shares, which is an increase of 175,727 shares, effective January 1, 2017.

(2)       In early January 2018, adjustments to royalty payments and PPL’s Class D Exchange Multiplier were made based on the actual performance of the four Pizza 73 restaurants added to the Royalty Pool on January 1, 2017. As a result of the adjustments, the new Class D Exchange Multiplier remains unchanged at 17.52620 and Class D Units can be exchanged for 1,752,620 shares effective January 1, 2017.

(3)       Additional Class B and Class D equivalent Shares available January 1, 2018 are shown in the table and determined by the following three steps:

New Class B Exchange Multiplier = 2.000691 (unchanged from 2017)

 Tax % = 22.3%
Net Additional System Sales = ($1,000)
Royalty rate = 6%
Share yield = 5.39%
Class B Partnership Units Outstanding = 2,508,239

New Class D Exchange Multiplier = 20.29401

 Tax % = 22.3%
Net Additional System Sales = $4,576,000
Royalty rate = 9%
Share yield = 5.39%
Class D Partnership Units Outstanding = 100,000

(4)       A preliminary calculation of the 20% holdback of equivalent Shares was done as of January 1, 2018 using the net, positive, 2018 Forecasted Sales. The final Class B and D equivalent Shares entitlement will be determined in early 2019, effective January 1, 2018 once actual sales of the restaurants are known.

Forward-Looking Statements

Certain statements in this press release, including those concerning Forecasted Sales performance of new restaurants and related adjustments to the Exchange Multipliers, may constitute “forward-looking” statements, which involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.

When used in this press release, such statements include such words as “may”, “will”, “expect”, “believe”, “plan”, and other similar terminology in conjunction with a discussion of future operating or financial performance.  These statements reflect management’s current expectations regarding future events and operating performance of the restaurants added to the Royalty Pool and speak only as of the date of this press release. Material factors or assumptions reflected in the presentation of Forecasted Additional System Sales include: demographic and competitive studies, historical sales performance of similar stores and economic forecasts for the retail industry.  These forward-looking statements involve a number of risks and uncertainties. The following are some factors that could affect the forecasted performance of these restaurants, causing actual results to differ materially from those expressed in or underlying such forward-looking statements: competition, the store owner’s performance, changes in demographic trends, changing consumer preferences and discretionary spending patterns, changes in national and local business and economic conditions, and legislation and governmental regulation. These factors could also affect PPL’s ability to develop new restaurants. The foregoing list of factors is not exhaustive and should be considered in conjunction with the other risks and uncertainties described in the Company’s most recent Annual Information Form. The Company assumes no obligation to update these forward-looking statements, except as required by applicable securities laws.

For further information:

Christine D’Sylva, Vice President Finance & Investor Relations, Pizza Pizza Limited
Telephone: (416) 967-1010 extension 393
cdsylva@pizzapizza.ca

www.pizzapizza.ca and www.pizza73.com or www.sedar.com.