Mr. Michael Harbinson reports

BOSTON PIZZA INTERNATIONAL ADDS ONE NEW RESTAURANT TO, AND REMOVES SIX PERMANENTLY CLOSED RESTAURANTS FROM, THE ROYALTY POOL OF BOSTON PIZZA ROYALTIES INCOME FUND

Effective Jan. 1, 2024, Boston Pizza Royalties Income Fund and Boston Pizza International Inc. (BPI) adjusted the fund's royalty pool to include the one new full-service Boston Pizza restaurant opened across Canada between Jan. 1, 2023, and Dec. 31, 2023, and to remove six full-service Boston Pizza restaurants that were permanently closed during the period. With the adjustment for these restaurants, the royalty pool now includes 372 Boston Pizza restaurants.

The fund effectively receives 5.5 per cent of franchise revenues of Boston Pizza restaurants in the royalty pool less the pro rata portion payable to BPI in respect of its retained interest in the fund. On Jan. 1 of each year, an adjustment is made to add to the royalty pool new Boston Pizza restaurants that opened and to remove any Boston Pizza restaurants that permanently closed since the last adjustment date. In return for adding new royalty and distribution income from the new restaurants after subtracting the royalty and distribution income that is lost from the closed restaurants (such difference, net royalty and distribution income), BPI receives the right to indirectly acquire additional units of the fund (the additional entitlements). The calculation of additional entitlements is designed to be accretive to unitholders of the fund as the expected increase in franchise sales from the new restaurants added to the royalty pool less the decrease in franchise sales from the closed restaurants is valued at a 7.5-per-cent discount. The additional entitlements are calculated at 92.5 per cent of the estimated royalty and distribution income expected to be generated by the new restaurants less the actual royalty and distribution income lost from the closed restaurants, multiplied by one minus the effective tax rate estimated to be paid by the fund, divided by the yield of the fund, divided by the weighted average unit price over a specified period. BPI indirectly receives 80 per cent of the additional entitlements initially, with the balance received when the actual full-year performance of the New Restaurants and the actual effective tax rate paid by the fund are known with certainty. BPI receives 100 per cent of the distributions on the additional entitlements throughout the year. After the new restaurants have been part of the royalty pool for a full year, an audit of the franchise sales of these restaurants is performed and the actual effective tax rate paid by the fund is determined. At such time, an adjustment is made to reconcile distributions paid to BPI and the additional entitlements received by BPI.

The estimated annual franchise sales in 2024 for the one new restaurant that opened in 2023 is $1.8-million. As described above, BPI is required to deduct from this amount the actual franchise sales received from the six closed restaurants in 2023 during the first 12-month period immediately following their addition to the royalty pool, which is $9.2-million. Accordingly, the resulting estimated annual net franchise sales for 2023 is negative $7.5-million. The net royalty and distribution income in respect of the adjustment date of Jan. 1, 2024, is negative $400,000 (the deficiency, being 5.5 per cent of negative $7.5-million net franchise sales). Since there was a deficiency in respect of each of the Jan. 1, 2021, adjustment date, the Jan. 1, 2022, adjustment date and the Jan. 1, 2023, adjustment date, there is currently a cumulative deficiency of $2-million. A summary of the cumulative deficiency is as shown in the associated table.

Since there is a deficiency, BPI did not receive any additional entitlements on Jan. 1, 2024. However, BPI did not lose any of the additional entitlements it received in respect of previous years. Instead, BPI will be required to make up the cumulative deficiency of $2-million in future years by first adding net royalty and distribution income in an amount equal to the cumulative deficiency before receiving any further additional entitlements. BPI continues to hold a 13.3-per-cent interest in the fund.

See the fund's annual information form dated Feb. 8, 2023, for a detailed description of the annual adjustment that is made to the royalty pool.

We seek Safe Harbor.