Toronto, February 16, 2021 – Pizza Pizza Royalty Corp. (the “Company”) and Pizza Pizza Limited (“PPL”) today announced that effective January 1, 2021, the number of restaurants on which royalties are paid to the Company by PPL (the “Royalty Pool”) has been adjusted to include ten new restaurants opened during the prior year vend-in period, offset by 34 restaurants which were closed during the period.
By brand, nine new Pizza Pizza restaurants and one new Pizza 73 restaurant were added to the Royalty Pool; there were 32 Pizza Pizza restaurants and two Pizza 73 restaurants closed and removed from the Royalty Pool. Of the 34 closures, 18 were traditional restaurants and 16 were non-traditional locations.
For 2021, there will be 725 restaurants (2020 – 749) in the Royalty Pool made up of 622 Pizza Pizza locations and 103 Pizza 73 locations.
Historically, PPL has maintained a low restaurant closure rate. However, the effects of the COVID-19 pandemic resulted in more restaurant closures in 2020 compared to historical levels. In 2021, PPL management projects growing the traditional restaurant count by over 5%.
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.
January 1, Royalty Pool Adjustment Date (the “Adjustment Date”)
Annually, on January 1, 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 (“Equivalent 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 through an increase to the Class B and/or Class D Exchange Multipliers. In the case where system sales of the closed restaurants exceeded the additional system sales of the additional restaurants added to the Royalty Pool, the deficit (the “Make-Whole Payment”), will be paid by PPL to the Partnership in that year, and will be carried over and continue to be paid for subsequent years, until on an Adjustment Date, additional system sales of additional restaurants are sufficient to offset the system sales attributable to all closed restaurants. As per the Pizza Pizza Royalty Limited Partnership agreement, whenever the Estimated Determined Amount is negative it shall be deemed to be zero. Additional details about this formula can be found in Table 1 below and in the Company’s most recent Annual Information Form.
January 1, 2021 Royalty Pool Adjustment
On January 1, 2021 Adjustment Date, $14,516,000 of System Sales from Pizza Pizza restaurants were removed from the Royalty Pool ($4,056,000 from the nine new Pizza Pizza restaurants less $18,572,000 from the 32 permanently closed Pizza Pizza restaurants). Since the system sales of the closed Pizza Pizza restaurants exceeded the system sales of the restaurants added to the Royalty Pool, a Make-Whole Payment will be paid by PPL to the Partnership in 2021 and will be carried over, and may continue to be paid for subsequent years, as discussed above. Additionally, since the Estimated Determined Amount is negative it shall be deemed to be zero. Accordingly, the Class B Exchange Multiplier remained unchanged at 2.118582. The second adjustment to the Class B Exchange Multiplier will be adjusted to be effective January 1, 2021, once the actual performance of the new restaurants is determined in early 2022.
Additionally, $534,000 of System Sales from Pizza 73 restaurants were removed from the Royalty Pool ($520,000 from one new Pizza 73 restaurant less sales of $1,054,000 from the two permanently closed Pizza 73 restaurants). Since the system sales of the closed Pizza 73 restaurants exceeded the system sales of the restaurant added to the Pizza 73 Royalty Pool, a Make-Whole Payment will be paid by PPL to the Partnership in 2021 and will be carried over, and may continue to be paid for subsequent years, as discussed above. Additionally, since the Estimated Determined Amount is negative it shall be deemed to be zero. Accordingly, the Class D Exchange Multiplier remained unchanged at 22.44976. The second adjustment to the Class D Exchange Multiplier will be adjusted to be effective January 1, 2021, once the actual performance of the new restaurants is determined in early 2022.
Table 1 – Summary of the Company’s Outstanding and Fully-Diluted Shares, including an analysis before and after the 20% entitlement holdback:
| Shares outstanding & issuable after January 1, 2021 Annual Adjustment | Issued & Outstanding Shares, and Equivalent Shares | Issued & Outstanding Shares, Equivalent Shares and Holdback of Equivalent Shares | |
| Public float | 24,618,392 | 24,618,392 |
|
| Class B equivalent Shares held by PPL | 5,313,909 | 5,313,909 | (1) |
| Class D equivalent Shares held by PPL | 2,244,975 | 2,244,975 | (2) |
| Additional PPL Class B equivalent Shares as of January 1, 2021 (80%) | – | – |
(3) |
| Additional PPL Class B equivalent Shares – 20% Holdback as of January 1, 2021 | – | – |
(4) |
| Additional PPL Class D equivalent Shares as of January 1, 2021 (80%) | – | – | (3) |
| Additional PPL Class D equivalent Shares – 20% Holdback as of January 1, 2021 | – | – | (4) |
| Number of fully-diluted Shares | 32,177,276 | 32,177,276 |
|
| Percentage of fully-diluted Shares available for exchange by PPL at January 1, 2021 | 23.5% | 23.5% |
|
(1) In early January 2021, adjustments to royalty payments and PPL’s Class B Exchange Multiplier were made based on the actual performance of the 19 new restaurants added to the Royalty Pool on January 1, 2020. As a result of the adjustments, the Class B Exchange Multiplier remains unchanged at 2.118582 and Class B Units can be exchanged for 5,313,909 shares, effective January 1, 2020.
(2) In early January 2021, adjustments to royalty payments and PPL’s Class D Exchange Multiplier were made based on the actual performance of the one Pizza 73 restaurant added to the Royalty Pool on January 1, 2020. As a result of the adjustments, the Class D Exchange Multiplier remains unchanged at 22.44976 and Class D Units can be exchanged for 2,244,975 shares effective January 1, 2020.
(3) Additional Class B and Class D equivalent Shares available January 1, 2021 are shown in the table and determined by the following three steps:
(a) Determined Amount = 92.5% x (1-Tax%) x [(Additional System Sales of Additional Restaurants – System Sales of Closed Restaurants) x Royalty rate] ÷ Share Yield
(b) Exchange Multiplier increase = (80% of Determined Amount / Market Price of Shares determined on the Adjustment Date) ÷ Class B or D Partnership Units Outstanding
(c) Issuable Equivalent Shares = Exchange Multiplier increase amount x Class B or D Partnership Units Outstanding
New Class B Exchange Multiplier = 2.118582
Tax % = 22.3%
Net Additional System Sales = $(14,516,000)
Royalty rate = 6%
Share yield = 7.34%
Class B Partnership Units Outstanding = 2,508,239
New Class D Exchange Multiplier = 22.44976
Tax % = 22.3%
Net Additional System Sales = $(534,000)
Royalty rate = 9%
Share yield = 7.34%
Class D Partnership Units Outstanding = 100,000
(4) A preliminary calculation of the 20% holdback of equivalent Shares was done as of January 1, 2021 using the net, 2021 Forecasted Sales. The final Class B and D equivalent Shares entitlement will be determined in early 2022, effective January 1, 2021 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, Chief Financial Officer, Pizza Pizza Limited
Telephone: (416) 967-1010 extension 393
cdsylva@pizzapizza.ca
