As of February 15, 2017,2018, the Company's Common Stock was held by 146139 holders of record. Registered ownership includes nominees who may hold securities on behalf of multiple beneficial owners. The Company estimates that the number of beneficial owners of its common stock at February 15, 2017,2018, is approximately 1,100 based upon information provided by a proxy services firm.

STOCK OPTIONS

In May 2001, the Company's Board of Directors approved a Long-Term Incentive and Stock Option Plan (Plan), with an amendment in May 2003 to increase the Plan from the reserve of 1,100,000 shares to 1,400,000 shares of Common Stock for grant.  A total of 1,400,000 stock options have been granted to directors, officers and employees.  In 20162017 and 2015,2016, no options were granted. As of November 30, 2016, all stock options had been exercised or forfeited under the Plan.  (See Note 6 of the audited consolidated financial statements included herein.)

CASH DISTRIBUTION AND DIVIDEND POLICY

On December 5, 2016,2017, a $0.01 quarterly and a $0.01 special cash distribution/dividend per share was declared and paid on January 12, 2018.

The Board of Directors declared a $0.01 quarterly cash distribution/dividend per share on March 15, June 7 and September 7, 2017, paid April 20, July 13, and October 13, 2017, respectively On December 5, 2016, a $0.01 quarterly and $.01 special cash distribution/dividend per share was declared and paid January 9, 2017.

The Board of Directors declared a cash distribution/dividend on March 3, June 6 and September 6, 2016 of $0.01 per share, paid April 13, July 11, and October 12, 2016, respectively. On December 3, 2015, a $0.01 quarterly and $.02 special cash distribution/dividend per share was declared and paid January 6, 2016.

The Board of Directors declared a $0.01 quarterly cash distribution/dividend per share on March 2, June 4 and September 2, 2015, paid April 10, July 8, and October 9, 2015, respectively. On December 3, 2014, a $0.01 quarterly and a $0.01 special cash distribution/dividend per share was declared and paid January 6, 2015.

On May 6, 2013, the Board of Directors (“Board”) of BAB, Inc. authorized and declared a dividend distribution of one right for each outstanding share of the common stock of BAB, Inc. to stockholders of record at the close of business on May 13, 2013. Each right entitles the registeredregistered holder to purchase from the Company one one-thousandth of a share of the Series A Participating Preferred Stock of the Company at an exercise price of $0.90 per one-thousandth of a Preferred Share, subject to adjustment. The complete terms of the Rights are set forth in a Preferred Shares Rights Agreement, dated May 6, 2013, between the Company and IST Shareholder Services, as rights agent.

The Board adopted the Rights Agreement to protect stockholders from coercive or otherwise unfair takeover tactics. In general terms, it works by imposing a significant penalty upon any person or group that acquires 15% (or 20% in the case of certain institutional investors who report their holdings on Schedule 13G) or more of the Common Shares without the approval of the Board. As a result, the overall effect of the Rights Agreement and the issuance of the Rights may be to render more difficult a merger, tender or exchange offer or other business combination involving the Company that is not approved by the Board. However, neither the Rights Agreement nor the Rights should interfere with any merger, tender or exchange offer or other business combination approved by the Board.

Full details about the Rights Plan are contained in a Form 8-K filed by the Company with the U.S. Securities and Exchange Commission on May 7, 2013.

On June 18, 2014 an amendment to the Preferred Shares Rights Agreement was filed appointing American Stock Transfer & Trust Company, LLC as successor to Illinois Stock Transfer Company. All original rights and provisions remain unchanged. On August 18, 2015 an amendment was filed to the Preferred Shares Rights Agreement changing the final expiration date to mean the fifth anniversary of the original date of the original agreement. All other original rights and provisions remain the same. On May 22, 2017 an amendment was filed extending the final expiration date to mean the seventh anniversary date of the original agreement. All other original rights and provisions remain the same.

ITEM 6.  SELECTED FINANCIAL DATA

Not required for smaller reporting companies.

ITEM 7.7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The selected financial data contained herein has been derived from the consolidated financial statements of the Company included elsewhere in this Report on Form 10-K. The data should be read in conjunction with the consolidated financial statements and notes thereto.  Certain statements contained in Management's Discussion and Analysis of Financial Condition and Results of Operations, including statements regarding the development of the Company's business, the markets for the Company's products, anticipated capital expenditures, and the effects of completed and proposed acquisitions, and other statements and disclosures contained herein and throughout this Annual Report regarding matters that are not historical facts, are forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995). In such cases, we may use words such as "believe," "intend," "expect," "anticipate" and the like.  Because such statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Certain risks and uncertainties are wholly or partially outside the control of the Company and its management, including its ability to attract new franchisees; the continued success of current franchisees; the effects of competition on franchisee store results; consumer acceptance of the Company's products in new and existing markets; fluctuation in development and operating costs; brand awareness; availability and terms of capital; adverse publicity; acceptance of new product offerings; availability of locations and terms of sites for store development; food, labor and employee benefit costs; changes in government regulation (including increases in the minimum wage); regional economic and weather conditions; the hiring, training, and retention of skilled corporate and restaurant management; and the integration and assimilation of acquired concepts. Accordingly, readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof.  The Company undertakes no obligation to publicly release the results of any revision to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

GENERAL

The Company has 8582 franchised and 3 licensed units with 2 units under development at the end of 2016.2017. Units in operation and under development at the end of 20152016 included 8485 franchised and 3 licensed units and 72 units under development.  System-wide revenues were $35.0 million in 2017 and $35.5 million in 2016 and $34.8 million in 2015.2016.

The Company's revenues are derived primarily from the ongoing royalties paid to the CompanyCompany by its franchisees and from receipt of initial franchise fees. Additionally, the Company derives revenue from the sale of licensed products (My Favorite Muffin mix, Big Apple Bagels cream cheese and Brewster's coffee), and through a licensing agreements (Kohr Bros. andagreement with Green Beans Coffee).Coffee. Also included in licensing fees and other income is Operation’s Sign Shop results. For franchise consistency and convenience, the Sign Shop providesprovided the majority of signage to franchisees, including but not limited to, posters, menu panels, build charts, outside window stickers and counter signs. Beginning in December 2017, a majority of franchise signage and point of sale materials will be outsourced to a printer that will be able to provide consistency and convenience to the franchisees. Outsourcing signage will not have a material effect on revenues or net income.

YEAR 2016 2017 COMPARED TO YEAR 20152016

Total revenues from all sources increased $170,000,decreased $165,000, or 7.7%6.9%, to $2,386,000$2,221,000 in 20162017 from $2,216,000$2,386,000 in the prior year due to an increasea decrease in royalty revenue of $30,000, an increase$18,000, a decrease in franchisee fee revenue of $28,000$63,000 and an increasea decrease in licensing fees and other income of $112,000.

$84,000.

Royalty revenue from franchise stores increased $30,000,decreased $18,000, or 1.7%1.0%, to $1,727,000 in 2017 as compared to $1,745,000 in 2016 as compared to $1,715,000 in 2015.2016. Franchise fee revenue increased $28,000,decreased $63,000, or 32.9%55.8%, to $50,000 in 2017 versus $113,000 in 2016 versus $85,000 in 2015.2016.  During fiscal 20162017 there were 2 store openings and 2 transfers, compared to 3 store openings, that had franchise fees, 6 transfers and one defaulted preliminary fee, compared to 3 store openings, 4 transfersagreement in 2015.2016. Licensing fees and other income increased $112,000,decreased $84,000, or 26.9%15.9%, to $444,000 in 2017 compared to $528,000 in 2016 compared to $416,000 in 2015.2016.  The increasedecrease in licensing and other income was primarily due to an increasea decrease of $51,000$61,000 in settlement and other income, $54,000 in nontraditional revenues and $7,000$14,000 for Sign Shop revenues and $9,000 in 2016nontraditional revenues in 2017 as compared to 2015.2016.

Total operating expenses in 20162017 were $1,761,000, or 79.3% of revenues, compared to $1,926,000, or 80.7% of revenues compared to $2,113,000, or 95.4% of revenues in 2015.2016. Total operating expenses decreased $187,000,$165,000, or 8.8%8.6%, in 20162017 compared to 2015. There was a judgment of $243,000 in 2015.2016.

The decreasesdecrease in operating expenses of $187,000$165,000 in 2016 were2017 was primarily due to the $243,000 judgmenta decrease in payroll of $101,000 because there was no bonuses in 2017 versus bonuses paid in 2015,2016. In 2017 there was a decrease in advertising and promotionpromotions of $16,000 and$17,000, a decrease in travellegal expenses of $7,000, offset by an increase in payroll of $27,000, an increase in legal and other professional fees of $17,000, an increase$13,000, a decrease in franchise development of $7,000,$12,000, a decrease in Sign Shop expenses for cost of goods and obsolete inventory of $19,000,$25,000 and a decrease in depreciation and amortization of $9,000. These expenses were offset by an increase in rent of $3,000, occupancyemployee benefits of $3,000, an increase in bad debt expense of $2,000 and other miscellaneousan increase in general expenses increased $4,000 in 2016 compared to 2015.of $4,000.

InterestOn December 22, 2017 the Tax Cuts and Jobs Act (the “Act”) was signed into law. Among other provisions, the Act reduces the Federal statutory corporate income decreased $1,000tax rate from 35% to 21%. We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences. This rate reduction is not expected to have a significant impact on the net deferred tax asset which will be reviewed during the first quarter of fiscal 2018.

Interest income was less than $1,000 in 2016 versus $2,000 in 2015.2017 and 2016.

Interest expense decreased $2,000$1,000 to zero in 2017 versus $1,000 in 2016, versus $3,000 in 2015, as a result of a decreaseno outstanding debt in outstanding debt.2017.

There was an incomeincome tax expense of $6,000 in 2017 compared to an expense of $10,000 in 2016 compared to a benefit of $9,000 in 2015.2016.

Net income totaled $454,000 or 20.4% of revenue in 2017 as compared to $449,000 or 18.8% of revenue in 2016 as compared to $110,000 or 5.0%, of revenue in the prior year. Earnings per share for basic and diluted outstanding shares isare $.06 for 20162017 and $.02 for 2015.2016.

LIQUIDITY AND CAPITAL RESOURCES

At November 30, 2017, the Company had working capital of $648,000 and unrestricted cash of $793,000. At November 30, 2016, the Company had working capital of $557,000 and unrestricted cash of $907,000. At November 30, 2015,

During fiscal 2017, the Company had working capitalnet income of $527,000$454,000 and unrestrictedoperating activities which provided cash of $837,000.

$260,000. The principal adjustments to reconcile net income to cash provided by operating activities were depreciation and amortization of $12,000, less the provision for uncollectible accounts of $6,000. In addition, changes in other operating assets and liabilities decreased a total of $200,000. During fiscal 2016, the Company had net income of $449,000 and operating activities which provided cash of $543,000. The principal adjustments to reconcile net income to cash provided by operating activities were depreciation and amortization of $20,000, less the provision for uncollectible accounts of $8,000. In addition, changes in other operating assets and liabilities increased a total of $82,000.

During fiscal 2015,2017, the Company had net income of $110,000used $11,000 for investing activities for equipment purchases and operating activities which provided cash of $526,000. The principal adjustments to reconcile net income to cash provided by operating activities were depreciation and amortization of $17,000, less the provision for uncollectible accounts of $8,000. In addition, changes in other operating assets and liabilities increased a total of $407,000.

trademark renewal. During fiscal 2016, the Company used $4,000 for investing activities for trademark renewal. During fiscal 2015, the Company used $3,000 for investing activities for trademark renewals.

For financing activities in fiscal 2017, $363,000 was used for cash distributions/dividend payments to common stockholders. For financing activities in fiscal 2016, $33,000 was used for repayment of debt and $436,000 for cash distributions/dividend payments to common stockholders. For financing activities in fiscal 2015, $32,000 was used for repayment of debt and $363,000 for cash distributions/dividend payments to common stockholders.

Although there can be no assurances that the Company will be able to pay cash distributions/dividends in the future, it is the Company’s intent that future cash distributions/dividends will be considered based on profitability expectations and financing needs and will be declared at the discretion of the Board of Directors. It is the Company’s intent going forward to declare and pay cash distributions/dividends on a quarterly basis if warranted.Onwarranted.

On December 5, 2016,2017, a $0.01 quarterly and a $0.01 special cash distribution/dividend per share was declared and paid on January 9, 2017.12, 2018.

The Company believes execution of its cash distribution/dividend policy will not have any material adverse effects on its ability to fund current operationsoperations or future capital investments.

The Company has no financial covenants on its outstanding debt. The Company has no outstanding debt at November 30, 2016. On September 6, 2002, the Company signed a note payable requiring annual installments of $35,000, including interest at a rate of 4.75% per annum, for a term of 15 years, in the original amount, including principal and interest of $525,000. The Company purchased and retired an adjusted 1,380,040 shares of BAB, Inc. common stock from a former stockholder. A final payment of $35,000 was paid on October 1, 2016.2017.

OFF BALANCE SHEET ARRANGEMENTS

The Company has no off balance sheet arrangements, other than the lease commitments disclosed in Note 7 of the audited consolidated financial statements included herein.

CRITICAL ACCOUNTING POLICIES

The Company's significant accounting policies are presented in the Notes to the Consolidated Financial Statements (see Note 2 of the audited consolidated financial statements included herein).  While all of the significant accounting policies impact the Company's Consolidated Financial Statements, some of the policies may be viewed to be more critical.  The more critical policies are those that are most important to the portrayal of the Company's financial condition and results of operations and that require management's most difficult, subjective and/or complex judgments and estimates.   Management bases its judgments and estimates on historical experience and various other factors that are believed to be reasonable under the circumstances.  The results of judgments and estimates form the basis for making judgments about the Company's value of assets and liabilities that are not readily apparent from other sources.  Actual results could differ from those estimates under different assumptions or conditions.   Management believes the following are its most critical accounting policies because they require more significant judgments and estimates in preparation of its consolidated financial statements.

Revenue Recognition

Royalty fees from franchised stores represent a 5% fee on net retail and wholesale sales of franchised units. Royalty revenues are recognized on an accrual basis using actual franchise receipts. Generally, franchisees report and remit royalties on a weekly basis. The majority of month-end receipts are recorded on an accrual basis based on actual numbers from reports received from franchisees shortly after the month-end. Estimates are utilized in certain instances where actual numbers have not been received and such estimates are based on the average of the last 10 weeks’ actual reported sales.

The Company recognizesrecognizes franchise fee revenue on the store’s opening. Direct costs associated with the sale of franchises are deferred until the franchise fee revenue is recognized.  These costs include site approval, construction approval, commissions, blueprints and training costs.

The Company recognizesrecognizes revenue upon a signed and completed franchise agreement for a Master Franchise Agreement (“MFA”). The revenue for a MFA is a nonrefundable fee and the amount of the fee is dependent on the area covered by the MFA. In addition there will be an ongoing royalty fees as determined by the contract.

The Company earns a licensing fee from the sale of BAB branded and nonbranded products, which includes coffee, cream cheese, muffin mix and par baked bagels from a third-party commercial bakery to the franchised and licensed units.

Long-Lived Assets

Property and equipment are recorded at cost.  Improvements and replacements are capitalized, while expenditures for maintenance and routine repairs that do not extend the life of the asset are charged to expense as incurred.  Depreciation is calculated on the straight-line basis over the estimated useful lives of the assets.  Property, equipment and leasehold improvements are stated at cost, less accumulated depreciation.  Estimated useful lives for the purpose of depreciation and amortization are 3 to 7 years for property and equipment and 10 years, or the term of the lease if less, for leasehold improvements.

Following the guidelines contained in ASC 350, the corporation tests goodwill and intangible assets that are not subject to amortization for impairment annually or more frequently if events or circumstances indicate that impairment is possible. Goodwill and intangible assets were tested at the end of fiscal 2016 andThe Company has elected to conduct its annual test during the first fiscalquarter. During the quarter ended February 28, 2017, management qualitatively assessed goodwill to determine whether testing was necessary. Factors that management considers in 2016this assessment include macroeconomic conditions, industry and 2015,market considerations, overall financial performance (both current and projected), changes in management and strategy, and changes in the composition and carrying amounts of net assets. If this qualitative assessment indicates that it was foundis more likely than not that the fair value of a reporting unit is less than its carrying value, a quantitative assessment is then performed. Based on a qualitative evaluation, management determined that the carrying value of goodwill and intangible assets werewas not impaired.

The impairment test performed for fiscal 2016 was based on a discounted cash flow model using management’s business plan projected for expected cash flows. Based on the computation it was determined that no impairment was needed. An impairment test was performedimpaired at February 28, 20162017, and at the end of fiscal 2016 and ita quantitative assessment was found that based on the computations using discounted cash flows, it was also determined that no impairment occurred.not considered necessary.

Management reviewed the qualitative assessment conducted during the first quarter 2017 at year end and does not believe that any impairment exists at November 30, 2016.2017.

Concentrations of Credit Risk

Certain financial instruments potentially subject the Company to concentrations of credit risk.  These financial instruments consist primarily of royalty and wholesale accounts receivables.   The Company believes it has maintained adequate reserves for doubtful accounts.  The Company reviews the collectibility of receivables periodically taking into account payment history and industry conditions.

Valuation Allowance and Deferred Taxes

A valuation allowance is the portion of a deferred tax asset for which it is more likely than not that a tax benefit will not be realized.

As of November 30, 20162017 the Company has net operating loss carryforwards of approximately $3,046,000$2,592,000 expiring between 20172018 and 2029 for U.S. federal income tax purposes. The Company routinely reviews the future realization of tax assets based on projected future reversals of taxable temporary differences, available tax planning strategies and projected future taxable income. A valuation allowance has been established for $641,000$457,000 and $827,000$641,000 as of November 30, 20162017 and 2015,2016, respectively, for the deferred tax benefit related to those loss carryforwards and other deferred tax assets, that are more likely than not that the deferred tax asset will not be realized.

Recent Accounting Pronouncements

Revenue from Contracts with Customers, ASU 2014-09 establishes a comprehensive revenue recognition standard for virtually all industries in U.S. GAAP, including those that previously followed industry-specific guidance such as the real estate, construction and software industries. The revenue standard’sstandard’s core principle is built on the contract between a vendor and a customer for the provision of goods and services. It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled. The standard requires five basic steps: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, (v) recognize revenue when (or as) the entity satisfies a performance obligation. Entities will generally be required to make more estimates and use more judgment than under current guidance, which will be highlighted for users through increased disclosure requirements.

The ASUstandard requires that the transaction price received from customers be allocated to each separate and distinct performance obligation. The transaction price attributable to each separate and distinct performance obligation is then recognized as the performance obligations are satisfied. We are currently evaluating the standards to determine whether the services we provide related to upfront fees we receive from franchisees such as initial or renewal fees contain separate and distinct performance obligations from the franchise right. If we determine these services are not separate and distinct from the overall franchise right, the fees received will be recognized as revenue over the term of each respective franchise agreement. We currently recognize upfront franchise fees such as initial and renewal fees when the related services have been provided, which is when a store opens for initial fees and when renewal options become effective for renewal fees. The standards require the Company,unamortized portion of fees received to be presented in our Consolidated Balance Sheets as a contract liability. Any contract liabilities required to be recorded as a result of adopting these standards may be material to our Consolidated Balance Sheets given the volume of our franchise agreements and their duration, which is typically equal to ten years.

We are currently evaluating whether the standards will have an impact on transactions currently not included in our revenues such as franchisee contributions to and subsequent expenditures from our marketing fund. We act as an agent in regard to these franchisee contributions and expenditures and as such we do not currently include them in our Consolidated Statements of Income or Cash Flows. See Note 2 for fiscal years beginning after December 15, 2017.details. We are evaluating whether the new standards will impact the principal/agent determinations in these arrangements. If we determine we are the principal in these arrangements we would include contributions to and expenditures from these advertising cooperatives within our Consolidated Statements of Income and Cash Flows. While any such change has the potential to materially impact our gross amount of reported revenues and expenses, we are still evaluating how this standard specifically affects this arrangement. The Company will adopt ASU 2014-09 for fiscal year ending November 30, 2019 and the Company is evaluating the impact that adoption of this guidance might have on the Company’s financial position, cash flows or results of operations.2019.

On February 25, 2016, the FASB issued ASU No. 2016-02, Leases, requiring lessees to recognize a right-of-use asset and a lease liability on the balance sheet for all leases with the exception of short-term leases. For lessees, leases will continue to be classified as either operating or finance leases in the income statement. Lessor accounting is similar to the current model but updated to align with certain changes to the lessee model. Lessors will continue to classify leases as operating, direct financing or sales-type leases. The effective date of the new standard for public companies is for fiscal years beginning after December 15, 2018. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition and requires application of the new guidance at the beginning of the earliest comparative period presented. The Company will adopt ASU 2016-02 for fiscal year ending November 30, 20192020 and the Company is evaluating the impact that adoption of this guidance might have on the Company’s financial position, cash flows or results of operations.

In March 2016, the Financial Accounting Standards Board issued ASU 2016-04, Liabilities – Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products. The amendments in the ASU are designed to provide guidance and eliminate diversity in the accounting for derecognition of prepaid stored-value product liabilities. Typically, a prepaid stored-value product liability is to be derecognized when it is probable that a significant reversal of the recognized breakage amount will not subsequently occur. This is when the likelihood of the product holder exercising its remaining rights becomes remote. This estimate shall be updated at the end of each period. The amendments in this ASU are effective for the annual reporting periods beginning after December 15, 2017, including the interim periods within that reporting period. Early adoption is permitted. The Company is still evaluating the impact thethat adoption of this guidance will have on the Company’s financial position, cash flows or results of operations.

In January 2017, the FASB issued ASU 2017-04, Intangibles- Goodwill and Other (Topic 350), which is intended to simplify the test for goodwill impairment. To simplify the subsequent measurement of goodwill, the standard eliminates Step 2 from the goodwill impairment test. Instead, an entity will perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The amendments in this ASU are effective for the annual reporting periods beginning after December 15, 2019, including the interim periods within that reporting period. Early adoption is permitted. The Company is evaluating the impact of adopting this guidance.

Management does not believe that there are any other recently issued and effective or not yet effective pronouncements as of November 30, 20162017 that would have or are expected to have any significant effect on the Company’sCompany’s financial position, cash flows or results of operations.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In regard to interest, foreign currency and commodity price risk the Company does not believe that these are significant risk factors.

ITEM 8. FINANCIAL STATEMENTS

The Consolidated Financial Statements and Report of Independent Registered Public Accounting Firm is included immediately following.

BAB, Inc.

Years Ended November 30, 20162017 and 20152016

C o n t e n t s

Report of Independent Registered Public Accounting Firm

Stockholders and Board of Directors of BAB, Inc.

We have audited the accompanying consolidated balance sheetssheets of BAB, Inc. and Subsidiaries as of November 30, 20162017 and 20152016 and the related consolidated statements of income, stockholders’ equity and cash flows for the years then ended. BAB, Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our auditsaudits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of BAB, Inc. and Subsidiaries as of November 30, 20162017 and 2015,2016, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

By: /s/ Sassetti LLC

Oak Park, Illinois
February 23, 2017

26, 2018

BAB, Inc

Consolidated Balance Sheets

November 30 2016,2017 and 2015 2016

See accompanying notes

BAB, Inc

Consolidated Statements of Income

Years Ended November 30, 20162017 and 20152016

See accompanying notes

BBAB,AB, Inc

Consolidated Statements of Stockholders’Stockholders’ Equity

Years Ended November 30, 20162017 and 20152016

See accompanying notes

BAB, Inc

Consolidated Statements of Cash FlowsFlows

Years Ended November 30, 2016 2017and 20152016

See accompanying notes

BAB, Inc

Notes to the Consolidated Financial Statements

November 30, 20162017 and 20152016

BAB, Inc

Notes to the Consolidated Financial Statements

November 30, 20162017 and 20152016

Note 2 - Summary of Significant Accounting Policies (Continued)

Earnings Per Share (Continued)

At November 30, 2017 and 2016, there are no unexercised options includable in the computation because all outstanding expired as of November 28, 2016. In 2015, there were 237,500 unexercised options that are not included in the computation of dilutive EPS because their impact would be antidilutive due to the market price of the common stock being lower than the option prices.equivalents. In addition, the weighted average shares do not include any effects for potential shares related to the Preferred Shares Rights Agreement.

Stock-Based Compensation

TheStock-Based Compensation

The Company recognizes compensation cost using a fair-value based method for all share-based payments granted after November 30, 2006, plus any awards granted to employees up through November 30, 2006 that remain unvested at that time. The Company had no recorded compensation expense arising from share-based payment arrangements for the Company’s stock option plan in 20162017 or 2015.2016.

Fair Value of Financial Instruments

The carrying amounts of financial instruments including cash, accounts receivable, notes receivable, accounts payable and short-term debt approximate their fair values because of the relatively short maturity of these instruments. The carrying value of long-term debt, including the current portion, approximate fair value based upon market prices for the same or similar instruments.

Recent Accounting Pronouncements

Revenue from Contracts with Customers, ASU 2014-092014-09 establishes a comprehensive revenue recognition standard for virtually all industries in U.S. GAAP, including those that previously followed industry-specific guidance such as the real estate, construction and software industries. The revenue standard’sstandard’s core principle is built on the contract between a vendor and a customer for the provision of goods and services. It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled. The standard requires five basic steps: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, (v) recognize revenue when (or as) the entity satisfies a performance obligation. Entities will generally be required to make more estimates and use more judgment than under current guidance, which will be highlighted for users through increased disclosure requirements.

The ASUstandard requires that the transaction price received from customers be allocated to each separate and distinct performance obligation. The transaction price attributable to each separate and distinct performance obligation is then recognized as the performance obligations are satisfied. We are currently evaluating the standards to determine whether the services we provide related to upfront fees we receive from franchisees such as initial or renewal fees contain separate and distinct performance obligations from the franchise right. If we determine these services are not separate and distinct from the overall franchise right, the fees received will be recognized as revenue over the term of each respective franchise agreement. We currently recognize upfront franchise fees such as initial and renewal fees when the related services have been provided, which is when a store opens for initial fees and when renewal options become effective for renewal fees. The standards require the Company, for fiscal years beginning after December 15, 2017. The Company will adopt ASU 2014-09 for fiscal year ending November 30, 2019unamortized portion of fees received to be presented in our Consolidated Balance Sheets as a contract liability. Any contract liabilities required to be recorded as a result of adopting these standards may be material to our Consolidated Balance Sheets given the volume of our franchise agreements and the Companytheir duration, which is evaluating the impact that adoption of this guidance might have on the Company’s financial position, cash flows or results of operations.

typically equal to ten years.

BAB, Inc

Notes to the Consolidated Financial Statements

November 30, 2016 2017 and 20152016

Recent Accounting Pronouncements (continued)