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BABB Bab

Filed: 14 Apr 21, 11:32am
 

 

FORM 10-Q

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended February 28, 2021

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to _________________

Commission file number: 0-31555

  

BAB, Inc.

(Name of small business issuer in its charter)

 

Delaware

36-4389547

(State or other jurisdiction of incorporation or

organization)

(I.R.S. Employer Identification No.)

 

500 Lake Cook Road, Suite 475, Deerfield, Illinois 60015

 

(Address of principal executive offices) (Zip Code)

 

Issuer's telephone number (847) 948-7520

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

BABB

OTCQB

 

Indicate by checkmark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐      

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes ☒   No ☐      

 

Indicate by checkmark whether the registrant is a large accelerated filer, accelerated filer, a non-accelerated filer, or a smaller reporting company.

Large accelerated filer ☐      Accelerated filer ☐     Non-accelerated filer ☐     Smaller reporting company ☒  Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.      ☐                               

 

Indicate by check mark whether the registrant is a shell company. Yes ☐         No ☒

 

As of April 14, 2021 BAB, Inc. had: 7,263,508 shares of Common Stock outstanding.

 

 

 

 

 

TABLE OF CONTENTS

 

PART I

FINANCIAL INFORMATION

3
   

Item 1.

Financial Statements

3
   

Item 2

Management's Discussion and Analysis of Financial Condition and Results of Operations

15
   

Item 3

Quantitative and Qualitative Disclosures About Market Risk

19
   

Item 4

Controls and Procedures

19
   

PART II

OTHER INFORMATION

20
   

Item 1.

Legal Proceedings

20
   

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

20
   

Item 3

Defaults Upon Senior Securities

20
   

Item 4

Mine Safety Disclosures

20
   

Item 5

Other Information

20
   

Item 6

Exhibits

21
   

SIGNATURE

 22

 

2

 

PART I

 

ITEM 1.

FINANCIAL STATEMENTS

 

 

BAB, Inc.

Consolidated Balance Sheets

 

  

February 28, 2021

  

November 30, 2020

 
  (unaudited)  (audited) 
ASSETS        

Current Assets

        

Cash

 $1,332,529  $1,236,081 

Restricted cash

  389,721   396,842 

Receivables

        

Trade accounts and notes receivable (net of allowance for doubtful accounts of $16,743 in 2021 and $18,152 in 2020 )

  62,773   62,969 

Marketing fund contributions receivable from franchisees and stores

  18,424   17,544 

Prepaid expenses and other current assets

  87,257   96,723 

Total Current Assets

  1,890,704   1,810,159 
         

Property, plant and equipment (net of accumulated depreciation of $157,504 in 2021 and $157,118 in 2020)

  1,910   2,296 

Trademarks

  461,445   461,445 

Goodwill

  1,493,771   1,493,771 

Definite lived intangible assets (net of accumulated amortization of $128,301 in 2021 and $127,474 in 2020)

  22,880   23,707 

Operating lease right of use

  282,143   303,084 

Total Noncurrent Assets

  2,262,149   2,284,303 

Total Assets

 $4,152,853  $4,094,462 
         

LIABILITIES AND STOCKHOLDERS' EQUITY

        

Current Liabilities

        

Accounts payable

 $4,293  $10,279 

Accrued expenses and other current liabilities

  322,510   288,888 

Unexpended marketing fund contributions

  406,659   387,117 

Deferred franchise fee revenue

  42,460   33,957 

Deferred licensing revenue

  23,572   31,071 

Current portion operating lease liability

  100,937   99,149 

Payroll Protection Program loan

  -   228,155 

Total Current Liabilities

  900,431   1,078,616 
         

Long-term Liabilities (net of current portion)

        

Operating lease liability

  234,047   260,094 

Deferred franchise revenue

  75,836   93,929 

Deferred tax liability

  105,940   84,940 

Deferred licensing revenue

  2,976   3,869 

Total Long-term Liabilities

  418,799   442,832 
         

Total Liabilities

 $1,319,230  $1,521,448 
         

Stockholders' Equity

        

Preferred shares -$.001 par value; 4,000,000 authorized; no shares outstanding as of February 28, 2021 and November 30, 2020

  -   - 

Preferred shares -$.001 par value; 1,000,000 Series A authorized; no shares outstanding as of February 28, 2021 and November 30, 2020

  -   - 

Common stock -$.001 par value; 15,000,000 shares authorized; 8,466,953 shares issued and 7,263,508 shares outstanding as of February 28, 2021 and November 30, 2020

  13,508,257   13,508,257 

Additional paid-in capital

  987,034   987,034 

Treasury stock

  (222,781)  (222,781)

Accumulated deficit

  (11,438,887)  (11,699,496)

Total Stockholders' Equity

  2,833,623   2,573,014 

Total Liabilities and Stockholders' Equity

 $4,152,853  $4,094,462 

 

SEE ACCOMPANYING NOTES

 

3

 

 

BAB, Inc.

Consolidated Statements of Income

For the Three Months Ended February 28, 2021 and February 29, 2020

(Unaudited)

 

  

February 28, 2021

  

February 29, 2020

 

REVENUES

        

Royalty fees from franchised stores

 $346,660  $387,339 

Franchise Fees

  16,839   3,650 

Licensing fees and other income

  157,930   77,174 

Marketing fund revenue

  201,476   227,521 
         

Total Revenues

  722,905   695,684 
         

OPERATING EXPENSES

        

Selling, general and administrative expenses:

        

Payroll and payroll-related expenses

  209,770   230,405 

Occupancy

  34,706   33,678 

Advertising and promotion

  1,568   13,910 

Professional service fees

  58,037   49,117 

Travel

  1,027   7,999 

Employee benefit expenses

  37,998   37,190 

Depreciation and amortization

  1,214   740 

Marketing fund expenses

  201,476   227,521 

Other

  40,142   37,034 

Total Operating Expenses

  585,938   637,594 

Income from operations

  136,967   58,090 

Interest income

  123   104 

Loan forgiveness

  228,155   - 

Income before provision for income taxes

  365,245   58,194 

Provision for income taxes

        

Current tax expense

  11,000   15,000 

Deferred tax expense

  21,000   - 

Total Tax Provision

  32,000   15,000 
         

Net Income

 $333,245  $43,194 
         

Net Income per share - Basic and Diluted

 $0.05  $0.01 
         

Weighted average shares outstanding - Basic and diluted

  7,263,508   7,263,508 

Cash distributions declared per share

 $0.01  $0.03 

 

SEE ACCOMPANYING NOTES

 

4

 

 

BAB, Inc.

Consolidated Statements of Cash Flows

For the Three Months Ended February 28, 2021 and February 29, 2020

 

(Unaudited)

 

  

February 28, 2021

  

February 29, 2020

 

Operating activities

        

Net Income

 $333,245  $43,194 

Adjustments to reconcile net income to cash flows provided by operating activities:

        

Depreciation and amortization

  1,213   740 

Deferred tax expense

  21,000   - 

Provision for uncollectible accounts, net of recoveries

  (609)  (2,646)

Noncash lease expense

  24,827   35,094 

Loan forgiveness

  (228,155)  - 

Changes in:

        

Trade accounts receivable and notes receivable

  26,588   (7,511)

Marketing fund contributions receivable

  (880)  (2,613)

Prepaid expenses and other

  9,466   10,740 

Accounts payable

  (5,986)  1,040 

Accrued liabilities

  33,621   (3,189)

Unexpended marketing fund contributions

  (6,241)  (11,458)

Deferred revenue

  (17,981)  14,465 

Operating lease liability

  (28,145)  (27,483)

Net Cash Provided by Operating Activities

  161,963   50,373 
         

Investing activities

        

Capitalization of trademark renewals

  -   (1,525)

Net Cash Used In Investing Activities

  -   (1,525)
         

Financing activities

        

Cash distributions/dividends

  (72,636)  (217,906)

Net Cash Used In Financing Activities

  (72,636)  (217,906)
         

Net Increase/(Decrease) in Cash and Restricted Cash

  89,327   (169,058)

Cash and Restricted Cash - Beginning of Period

  1,632,923   1,495,669 

Cash and Restricted Cash - End of Period

 $1,722,250  $1,326,611 
         
         

Supplemental disclosure of cash flow information:

        

Interest paid

 $-  $- 

Income taxes paid

 $1,700  $- 

 

SEE ACCOMPANYING NOTES

 

5

 

BAB, Inc.

Notes to Unaudited Consolidated Financial Statements

For the Three Months Ended February 28, 2021 and February 29, 2020

(Unaudited)

 

 

Note 1. Nature of Operations

 

BAB, Inc. (“the Company”) has three wholly owned subsidiaries: BAB Systems, Inc. (“Systems”), BAB Operations, Inc. (“Operations”) and BAB Investments, Inc. (“Investments”). Systems was incorporated on December 2, 1992, and was primarily established to franchise Big Apple Bagels® (“BAB”) specialty bagel retail stores. My Favorite Muffin (“MFM”) was acquired in 1997 and is included as a part of Systems. Brewster’s (“Brewster’s”) was established in 1996 and the coffee is sold in BAB and MFM locations. SweetDuet® (“SD”) frozen yogurt can be added as an additional brand in a BAB location. Operations was formed in 1995, primarily to operate Company-owned stores of which there are currently none. The assets of Jacobs Bros. Bagels (“Jacobs Bros.”) were acquired in 1999, and any branded wholesale business uses this trademark. Investments was incorporated in 2009 to be used for the purpose of acquisitions. To date there have been no acquisitions.

 

The Company was incorporated under the laws of the State of Delaware on July 12, 2000.  The Company currently franchises and licenses bagel and muffin retail units under the BAB, MFM and SD trade names. At February 28, 2021, the Company had 71 franchise units and 3 licensed units in operation in 21 states. There is 1 unit under development. The Company additionally derives income from the sale of its trademark bagels, muffins and coffee through nontraditional channels of distribution including under a licensing agreement with Green Beans Coffee.

 

The BAB franchised brand consists of units operating as “Big Apple Bagels®,” featuring daily baked bagels, flavored cream cheeses, premium coffees, gourmet bagel sandwiches and other related products. BAB units are primarily concentrated in the Midwest and Western United States.  The MFM brand consists of units operating as “My Favorite Muffin Gourmet Muffin Bakery™” (“MFM Bakery”), featuring a large variety of freshly baked muffins and coffees and units operating as “My Favorite Muffin Your All Day Bakery Café®” (“MFM Cafe”) featuring these products as well as a variety of specialty bagel sandwiches and related products.  The SweetDuet® is a branded self-serve frozen yogurt that can be added as an additional brand in a BAB location.  Although the Company doesn't actively market Brewster's stand-alone franchises, Brewster's coffee products are sold in most franchised units.     

 

The Company is leveraging on the natural synergy of distributing muffin products in existing BAB units and, alternatively, bagel products and Brewster's Coffee in existing MFM units. The Company expects to continue to realize efficiencies in servicing the combined base of BAB and MFM franchisees.

 

The accompanying condensed consolidated financial statements are unaudited. These financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been omitted pursuant to such SEC rules and regulations; nevertheless, the Company believes that the disclosures are adequate to make the information presented not misleading.  These financial statements and the notes hereto should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended November 30, 2020 which was filed February 26, 2021.  In the opinion of the Company's management, the condensed consolidated financial statements for the unaudited interim period presented include all adjustments, including normal recurring adjustments, necessary to fairly present the results of such interim period and the financial position as of the end of said period. The results of operations for the interim period are not necessarily indicative of the results for the full year.

 

6

 

 

2. Summary of Significant Accounting Policies

 

Unaudited Consolidated Financial Statements

 

The accompanying unaudited Condensed Consolidated Financial Statements of BAB, Inc. have been prepared pursuant to generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) for Form 10-Q. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of the financial statements and accompanying notes are in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported periods. Actual results could differ from those estimates.

 

Accounts and Notes Receivable

 

Receivables are carried at original invoice amount less estimates for doubtful accounts. Management determines the allowance for doubtful accounts by reviewing and identifying troubled accounts and by using historical collection experience. A receivable is considered to be past due if any portion of the receivable balance is outstanding 90 days past the due date. Receivables are written off when deemed uncollectible. Recoveries of receivables previously written off are recorded as income when received. Certain receivables have been converted to unsecured interest-bearing notes.

 

Property, Plant and Equipment

 

Property, equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Estimated useful lives are 3 to 7 years for property and equipment and 10 years, or term of lease if less, for leasehold improvements. Maintenance and repairs are charged to expense as incurred. Expenditures that materially extend the useful lives of assets are capitalized.

 

Advertising and Promotion Costs

 

The Company expenses advertising and promotion costs as incurred. All advertising and promotion costs were related to the Company’s franchise operations.

 

Leases

 

The company accounts for leases under ASC 842. Lease arrangements are determined at the inception of the contract. Operating leases are included in operating lease right-of-use (“ROU”) assets, other current and long-term operating lease liabilities on the consolidated balance sheets. Finance leases are included in property and equipment, other current liabilities, and other long-term liabilities on the consolidated balance sheets. 

 

Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most leases do not provide an implicit rate, we use an incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

 

7

 

2. Summary of Significant Accounting Policies (continued)

 

Recent Accounting Pronouncements

 

In June 2016, the FASB issued ASU 2016-13, Financial InstrumentsCredit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The standard’s main goal is to improve financial reporting by requiring earlier recognition of credit losses on financing receivables and other financial assets in scope, including trade receivables. The amendments in this update broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The guidance in ASU 2016-13 is effective for public companies for fiscal years and for interim periods with those fiscal years beginning after December 15, 2023. The Company will adopt ASU 2019-13 for fiscal year ending November 30, 2024 and the adoption of this guidance is not expected to have any material impact on the Company’s financial position, cash flows or results of operations.

 

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The amendments in ASU 2019-12 are effective for public business entities for fiscal years beginning after December 15, 2020, including interim periods therein. Early adoption of the standard is permitted, including adoption in interim or annual periods for which financial statements have yet been issued. The Company will adopt ASU 2019-12 for fiscal year ending November 30, 2022 and the adoption of this guidance is not expected to have any material impact on the Company’s financial position, cash flows or results of operations.

 

Management does not believe that there are any recently issued and effective or not yet effective accounting pronouncements as of February 28, 2021 that would have or are expected to have any significant effect on the Company’s financial position, cash flows or income statement.

 

Statement of Cash Flows

 

The chart below shows the cash and restricted cash within the consolidated statements of cash flows as of February 28, 2021 and February 29, 2020 were as follows:

 

  

February 28, 2021

  

February 29, 2020

 
         

Cash and cash equivalents

 $1,332,529  $939,402 

Restricted cash

  389,721   387,209 

Total cash and restricted cash

 $1,722,250  $1,326,611 

 

 

 

3. Revenue Recognition

 

Franchise and related revenue

 

The Company sells individual franchises. The franchise agreements typically require the franchisee to pay an initial, non-refundable fee prior to opening the respective location(s), and continuing royalty fees on a weekly basis based upon a percentage of franchisee net sales. The initial term of franchise agreements are typically 10 years.  Subject to the Company’s approval, a franchisee may generally renew the franchise agreement upon its expiration.  If approved, a franchisee may transfer a franchise agreement to a new or existing franchisee, at which point a transfer fee is typically paid by the current owner which then terminates that franchise agreement. A franchise agreement is signed with the new franchisee with no franchise fee required. If a contract is terminated prior to its term, it is a breach of contract and a penalty is assessed based on a formula reviewed and approved by management. Revenue generated from a contract breach is termed settlement income by the Company and included in licensing fees and other income.

 

8

 

3. Revenue Recognition (continued)

 

Franchise and related revenue (continued)

 

Under the terms of our franchise agreements, the Company typically promises to provide franchise rights, pre-opening services such as blueprints, operational materials, planning and functional training courses, and ongoing services, such as management of the marketing fund. The Company considers certain pre-opening activities and the franchise rights and related ongoing services to represent two separate performance obligations. The franchise fee revenue has been allocated to the two separate performance obligations using a residual approach. The Company has estimated the value of performance obligations related to certain pre-opening activities deemed to be distinct based on cost plus an applicable margin, and assigned the remaining amount of the initial franchise fee to the franchise rights and ongoing services. Revenue allocated to preopening activities is recognized when (or as) these services are performed. Revenue allocated to franchise rights and ongoing services is deferred until the store opens, and recognized on a straight-line basis over the duration of the agreement, as this ensures that revenue recognition aligns with the customer’s access to the franchise right.

 

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.

 

Royalty revenue is recognized during the respective franchise agreement based on the royalties earned each period as the underlying franchise store sales occur.

 

There are two items involving revenue recognition of contracts that require us to make subjective judgments: the determination of which performance obligations are distinct within the context of the overall contract and the estimated stand-alone selling price of each obligation. In instances where our contract includes significant customization or modification services, the customization and modification services are generally combined and recorded as one distinct performance obligation.

 

Gift Card Breakage Revenue

 

The Company sells gift cards to its customers in its retail stores and through its Corporate office. The Company’s gift cards do not have an expiration date and are not redeemable for cash except where required by law. Revenue from gift cards is recognized upon redemption in exchange for product and reported within franchisee store revenue and the royalty and marketing fees are paid and shown in the Condensed Consolidated Statements of Income. Until redemption, outstanding customer balances are recorded as a liability. An obligation is recorded at the time of sale of the gift card and it is included in accrued expenses on the Company’s Condensed Consolidated Balance Sheets.

 

The liability is reduced when the gift cards are redeemed by a franchise. Although there are no expiration dates for our gift cards, based on our analysis of historical gift card redemption patterns, we can reasonably estimate the amount of gift cards for which redemption is remote, which is referred to as “breakage.” The Company recognizes gift card breakage proportional to actual gift card redemptions on a quarterly basis and the corresponding revenue is included in licensing fees and other revenue. Significant judgments and estimates are required in determining the breakage rate and will be reassessed each quarter.

 

9

 

3. Revenue Recognition (continued)

 

Nontraditional and rebate revenue

 

As part of the Company’s franchise agreements, the franchisee purchases products and supplies from designated vendors.  The Company may receive various fees and rebates from the vendors and distributors on product purchases by franchisees.  In addition, the Company may collect various initial fees, and those fees are classified as deferred revenue in the balance sheet and straight lined over the life of the contract as deferred revenue in the balance sheet. The Company does not possess control of the products prior to their transfer to the franchisee and products are delivered to franchisees directly from the vendor or their distributors. The Company recognizes the rebates as franchisees purchase products and supplies from vendors or distributors and recognizes the initial fees over the contract life and the fees are reported as licensing fees and other income in the Condensed Consolidated Statements of Income.

 

Marketing Fund

 

Franchise agreements require the franchisee to pay continuing marketing fees on a weekly basis, based on a percentage of franchisee sales. Marketing fees are not paid on franchise wholesale sales. The balance sheet includes marketing fund cash, which is the restricted cash, accounts receivable and unexpended marketing fund contributions. Although the marketing fees are not separate performance obligations distinct from the underlying franchise right, the Company acts as the principal as it is primarily responsible for the fulfillment and control of the marketing services. As a result, the Company records marketing fees in revenues and related marketing fund expenditures in expenses in the Condensed Consolidated Statement of Income. The Company historically presented the net activities of the marketing fund within the balance sheet in the Condensed Consolidated Balance Sheet. While this reclassification impacts the gross amount of reported revenue and expenses the amounts will be offsetting, and there is no impact on net income.   

 

Disaggregation of Revenue

 

The following table presents disaggregation of revenue from contracts with customers for the three months ended February 28, 2021and February 29, 2020:

 

  

For three months

ended February 28,

2021

  

For three months

ended February 29,

2020

 
         

Revenue recognized at a point in time

     

Sign Shop revenue

 $3,002  $909 

Settlement revenue

  95,307   631 

Total revenue at a point in time

  98,309   1,540 

Revenue recognized over time

        

Royalty revenue

  346,660   387,339 

Franchise fees

  16,839   3,650 

License fees

  6,750   9,041 

Gift card revenue

  1,561   2,451 

Nontraditional revenue

  51,310   64,142 

Marketing fund revenue

  201,476   227,521 

Total revenue over time

  624,596   694,144 

Grand total

 $722,905  $695,684 

 

10

 

3. Revenue Recognition (continued)

 

Contract balances

 

The balance of contract liabilities includes franchise fees, license fees and vendor payments that have ongoing contract rights and the fees are being straight lined over the contract life. Contract liabilities also include marketing fund balances and gift card liability balances.

 

  

For the Three

Months Ended

February 28, 2021

  

Fiscal Year to Date

November 30, 2020

 

Liabilities

        

Contract liabilities - current

 $615,804  $599,965 

Contract liabilities - long-term

  95,334   97,798 

Total Contract Liabilities

 $711,138  $697,763 

 

 

  

For the Three

Months Ended

February 28, 2021

  

Fiscal Year to Date

November 30, 2020

 

Contract Liabilities at beginning of period

 $697,763  $702,834 
         

Revenue Recognized during period

  (235,660)  (780,940)

Additions during period

  249,035   775,869 

Contract Liabilities at end of period

 $711,138  $697,763 

 

Transaction price allocated to remaining performance obligations (franchise agreements and license fee agreement) for the year ended November 30:

 

(a)

2021

 $45,647 
 

2022

 $20,281 
 

2023

 $15,837 
 

2024

 $13,706 
 

2025

 $13,540 
 

Thereafter

 $35,833 
 

Total

 $144,844 

 

(a) represents the estimate for the remainder of 2021

 

The Company has elected to apply certain practical expedients as defined in ASC 606-10-50-14 through 606-10-50-14A, including (i) performance obligations that are a part of a contract that has an original expected duration of one year or less; (ii) the right to invoice practical expedient; and (iii) variable consideration related to unsatisfied performance obligations that is allocated entirely to a wholly unsatisfied promise to transfer a distinct service that forms part of a single performance obligation, and the terms of that variable consideration relate specifically to our efforts to transfer the distinct service, or to a specific outcome from transferring the distinct service. As such, sales-based royalty and marketing income, as well as gift card breakage revenue, is not included in the above transaction price chart.

 

11

 

 

4. Units Open and Under Development

 

Units which are open or under development at February 28, 2021 are as follows:

 

  

February 28, 2021

  

February 29, 2020

 

Stores open:

        

Franchisee-owned stores

  71   73 

Licensed Units

  3   7 
   74   80 
         

Unopened stores with Franchise Agreements

  1   2 
         

Total operating units and units with Franchise Agreements

  75   82 

 

 

 

5. Earnings per Share

 

The following table sets forth the computation of basic and diluted earnings per share: 

 

  

February 28, 2021

  

February 29, 2020

 

Numerator:

        

Net income available to common shareholders

 $333,245  $43,194 
         

Denominator:

        

Weighted average outstanding shares

        

Basic and diluted

  7,263,508   7,263,508 

Earnings per Share - Basic and diluted

 $0.05  $0.01 

 

 

 

6. Goodwill and Other Intangible Assets

 

Accounting Standard Codification (“ASC”) 350 “Goodwill and Other Intangible Assets” requires that assets with indefinite lives no longer be amortized, but instead be subject to annual impairment tests.

 

Following the guidelines contained in ASC 350, the Company 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. The Company has elected to conduct its annual test during the first quarter. During the quarters ended February 28, 2021 and February 29, 2020, management qualitatively assessed goodwill to determine whether testing was necessary. Factors that management considers in this assessment include macroeconomic conditions, industry and 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 is more likely than not that the fair value of a reporting unit is less than it’s carrying value, a quantitative assessment is then performed.

��

Although the COVID-19 pandemic has caused significant disruption to our industry, the Company has been able to recover much quicker than expected and 2020 royalty revenues were 83.7% of fiscal 2019 royalty revenues. We find the same trend in 2021 with royalty revenue down 10.5% (which included 2020 leap year day and 2021 harsher winter weather in the Midwest). Management reviewed and updated the qualitative assessment for the first quarter 2021 and does not believe that any impairment exists at February 28, 2021.

 

12

 

6. Goodwill and Other Intangible Assets (continued)

 

After reviewing the changes to the Company’s operations and overall business environment during the first quarter 2021, management believes that the decrease in sales is temporary and has determined that the carrying value of goodwill was not impaired at February 28, 2021, and was not considered necessary. In addition, the overall fair market value of the Company exceeds the book value of intangibles and goodwill as of February 28, 2021.

 

 

 

7. Lease Commitments

 

The Company rents its office under an operating lease which requires it to pay base rent, real estate taxes, insurance and general repairs and maintenance. A lease was signed in June of 2018, effective October 1, 2018, expiring on March 31, 2024 with an option to renew for a 5 year period. A six month rent abatement and tenant allowance was provided in the lease, with any unused portion to be applied to base rent. The unused portion was determined to be $21,300. The renewal option has not been included in the measurement of the lease liability.

 

Monthly rent expense is recognized on a straight-line basis over the term of the lease. At February 28, 2021 the remaining lease term was 37 months. The operating lease is included in the balance sheet at the present value of the lease payments at a 5.25% discount rate. The discount rate was considered to be an estimate of the Company’s incremental borrowing rate.

 

Gross future minimum annual rental commitments as of February 28, 2021 are as follows:

 

  

Undiscounted Rent

Payments

 

Year Ending November 30:

    

2021

 $84,878 

2022

  115,673 

2023

  118,322 

2024

  40,177 

Total Undiscounted Rent Payments

 $359,050 
     

Present Value Discount

  (24,066)

Present Value

 $334,984 
     

Short-term lease liability

 $100,937 

Long-term lease liability

  234,047 

Total Operating Lease Liability

 $334,984 

 

 

 

8. Payroll Protection Program Loan

 

On May 1, 2020, BAB Systems, Inc. received loan proceeds of $228,155 from Lake Forest Bank and Trust Company, N.A., pursuant to the Paycheck Protection Program (the “PPP”) under Division A, Title 1 of the CARES Act, which was enacted March 27, 2020.

 

On December 9, 2020 the PPP loan in the amount of $228,155 and related accrued interest was forgiven by the Small Business Administration (“SBA”). The amount forgiven is recognized as loan forgiveness income during this quarter, ended February 28, 2021.

 

13

 

 

9. Income Taxes

 

On December 9, 2020 the Payroll Protection Program loan was forgiven by the Small Business Administration (“SBA”). Among other provisions, the CARES Act eliminated federal tax on the forgiveness of the SBA loan. States were allowed to determine whether they would follow the federal government forgiveness. Illinois has adopted the federal government forgiveness program.

 

In fiscal 2021, the Company’s income included the $228,000 of forgiveness, but it is excluded from federal and state tax calculations as a permanent difference, thereby reducing the federal and state effective rate from the customary effective tax rate used to compute income tax expense at the federal rate of 21% and a state rate of 7.11%, which is net of the federal tax effect.

 

 

 

10. Stockholders Equity

 

On March 17, 2021 the Board of Directors declared a $0.01 cash distribution/dividend per share to stockholders of record as of April 1, 2021, to be paid April 22, 2021. On January 27, 2021 the Board of Directors declared a $0.01 quarterly cash distribution/dividend per share to stockholders of record as of February 10, 2021 and paid February 24, 2021.

 

On December 5, 2019, a $0.01 quarterly and a $0.02 special cash distribution/dividend per share was declared and paid on January 9, 2020. On March 4, 2020, a $0.01 quarterly cash distribution/dividend per share was declared to stockholders of record as of March 23, 2020 and paid April 08, 2020.

 

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 registered 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 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. On February 22, 2019 an amendment was filed extending the final expiration date to mean the ninth anniversary date of the original agreement. All other original rights and provisions remain the same. On March 4, 2021 an amendment was filed extending the final expiration date to mean the eleventh anniversary date of the original agreement. All other original rights and provisions remain the same.

 

14

 

 

11. Uncertainties and COVID-19

 

The COVID-19 outbreak in the United States during 2020 resulted in reduced customer traffic for our franchisees, resulting in reduced royalty revenue and ultimately reduced nontraditional revenues with a significant impact in April and May 2020. Through the year end 2020 and the end of our first quarter, February 28, 2021 franchise sales continued to increase as more on-line and delivery tools were utilized.

 

While the Coronavirus pandemic has created challenges for restaurants around the country, our franchisees have done what we believe is an excellent job adapting to the changing regulations and government mandates through the last 12 months. In 2021 states have begun to open up and ease restrictions with varying degrees by state. In the first quarter of 2021 royalty revenues were down 10.5% compared to 2020. In the first quarter 2021 our franchisees sales were also affected by a harsh cold and snowy February for the midwestern states. We are continuing to evaluate the effects of the Coronavirus pandemic outbreak on our operations.

 

 

 

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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 contained herein regarding matters that are not historical facts, are forward-looking statements as is within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Because such statements include risks and uncertainties, actual results could differ materially from those expressed or implied by such forward-looking statements as set forth in this report, the Company's Annual Report on Form 10-K and other reports that the Company files with the Securities and Exchange Commission. 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 franchisees and 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

 

There are 71 franchised and 3 licensed units at February 28, 2021 compared to 73 franchised and 7 licensed units at February 29, 2020.  System-wide revenues for the three months ended February 28, 2021 were $7.3 million and February 29, 2020 was $8.1 million.

 

The Company's revenues are derived primarily from the ongoing royalties paid to the Company by its franchisees and 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 nontraditional channels of distribution through a licensing agreement with Green Beans Coffee.

 

15

 

Royalty fees 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.

 

There are two items involving revenue recognition of contracts that require us to make subjective judgments: the determination of which performance obligations are distinct within the context of the overall contract and the estimated stand-alone selling price of each obligation. In instances where our contract includes significant customization or modification services, the customization and modification services are generally combined and recorded as one distinct performance obligation.

 

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

 

As of February 28, 2021, the Company employed 12 full-time employees at the Corporate office. The employees are responsible for corporate management and oversight, accounting, advertising and franchising.  None of the Company's employees are subject to any collective bargaining agreements and management considers its relations with its employees to be good.

 

Results of Operations

 

Three Months Ended February 28, 2021 versus Three Months Ended February 29, 2020

 

For the three months ended February 28, 2021 and February 29, 2020, the Company reported net income of $333,000 and net income of $43,000, respectively. Total revenue of $723,000 increased $27,000, or 3.9%, for the three months ended February 28, 2021, as compared to total revenue of $696,000 for the three months ended February 29, 2020.

 

Royalty fee revenue of $347,000, for the quarter ended February 28, 2021, decreased $40,000, or 10.3%, from the $387,000 for quarter ended February 29, 2020. The primary reasons royalty revenue decreased was 2020 included one extra day for leap year, a harsher Midwest winter in February of 2021 and continued effects of states limiting in store dining and operating restrictions due to the Coronavirus pandemic.

 

Franchise fee revenues of $17,000, for the quarter ended February 28, 2021, increased $13,000, or 325.0%, from the $4,000 for the quarter ended February 29, 2020. One store closed in 2021 that resulted in $12,000 of franchise fees recognized. The $5,000 for 2021 and $4,000 for 2020 was amortization of franchise fees.

 

Licensing fee and other income of $158,000, for the quarter ended February 28, 2021, increased $81,000 or 105.2% from $77,000 for same quarter 2020. There was a $95,000 increase in settlement income and an increase in Sign Shop revenue of $2,000, offset by a decrease in nontraditional revenues of $13,000, a decrease of $2,000 in license fee revenue and a $1,000 decrease in gift card revenue in 2021 versus 2020.

 

Marketing Fund revenues of $201,000, for the quarter ended February 28, 2021, decreased $27,000, or 11.8%. The primary reasons Marketing Fund revenue decreased was 2020 included one extra day for leap year, a harsher Midwest winter in February of 2021 and continued effects of states limiting in store dining and operating restrictions due to the Coronavirus pandemic.

 

16

 

Total operating expenses of $586,000, for the quarter ended February 2021, decreased $52,000, or 8.2% from $638,000 for the quarter ended February 29, 2020. The decrease was primarily a related to a reduction in Marketing Fund expenses of $27,000, payroll expense reduction of $20,000, a $12,000 reduction in advertising and promotion and a $7,000 decrease in travel, offset by an increase of $9,000 in legal and consulting, $3,000 increase in business insurance and a $2,000 increase in Sign Shop expenses in 2021 versus 2020. The Marketing Fund and travel expense decreases were primarily due to COVID-19 state restrictions.

 

On May 1, 2020 the Company received loan proceeds of $228,000 through the CARES act offered by the Treasury Department and Small Business Administration. On December 9, 2020 the Company was notified that the loan was forgiven in full, including any accrued interest. The cash received was used to pay employees, employee benefits, rent and utilities. On December 9, 2020, the SBA forgave the debt from the PPP loan and it is included in other income in the first quarter 2021.

 

For the three months ended February 28, 2021 the provision for income tax was $32,000, compared to a $15,000 income tax provision for the three months ending February 29, 2020.

 

Earnings per share, as reported for basic and diluted outstanding shares for the quarters ended February 28, 2021 and February 29, 2020 was $.05 and $0.01 respectively.

 

Liquidity and Capital Resources

 

At February 28, 2021, the Company had working capital of $976,000 and unrestricted cash of $1,333,000. At February 29, 2020 the Company had working capital of $651,000 and unrestricted cash of $939,000.

    

During the three months ended February 28, 2021, the Company had net income of $333,000 and operating activities provided cash of $162,000. The principal adjustments to reconcile the net income to cash provided by operating activities for the three months ending February 28, 2021 was depreciation and amortization of $1,000, deferred tax expense of $21,000 and noncash lease expense of $25,000, less PPP loan forgiveness of $228,000 and the provision for uncollectible accounts of $1,000. In addition, changes in operating assets and liabilities increased cash by $10,000. During the three months ended February 29, 2020, the Company had net income of $43,000 and operating activities provided cash of $50,000. The principal adjustments to reconcile net income to cash provided in operating activities for the three months ending February 29, 2020 was noncash lease expense of $35,000, depreciation and amortization of $1,000, less provision for uncollectible accounts of $3,000. In addition, changes in operating assets and liabilities decreased cash by $26,000.

 

The Company had no investing activities during the quarter ended February 28, 2021 and $2,000 of trademark capitalization for the same period 2020.

 

Cash distributions/dividends used $73,000 in financing activities in 2021 versus $218,000 of cash distributions/dividends for the same period 2020.

 

Cash Distribution and Dividend Policy

 

The Company will continue to monitor the impact of the Coronavirus Pandemic on its operations when determining the future cash distribution/dividend payments. Cash distributions/dividend payments will be considered after reviewing profitability expectations and financing needs and will be declared at the discretion of the Board of Directors. The Company will continue to analyze its ability to pay cash distributions/dividends on a quarterly basis. For fiscal 2021 a $0.01 cash distribution has been declared for the first and second quarters.

 

Determination of whether distributions are considered a cash distribution, cash dividend or combination of the two will not be made until after December 31, 2021, as the classification or combination is dependent upon the Company’s earnings and profits for tax purposes for its fiscal year ending November 30, 2021.

 

17

 

Recent Accounting Pronouncements

 

In June 2016, the FASB issued ASU 2016-13, Financial InstrumentsCredit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The standard’s main goal is to improve financial reporting by requiring earlier recognition of credit losses on financing receivables and other financial assets in scope, including trade receivables. The amendments in this update broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The guidance in ASU 2016-13 is effective for public companies for fiscal years and for interim periods with those fiscal years beginning after December 15, 2020. The Company will adopt ASU 2019-13 for fiscal year ending November 30, 2022 and the adoption of this guidance is not expected to have any material impact on the Company’s financial position, cash flows or results of operations.

 

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The amendments in ASU 2019-12 are effective for public business entities for fiscal years beginning after December 15, 2023, including interim periods therein. Early adoption of the standard is permitted, including adoption in interim or annual periods for which financial statements have yet been issued. The Company will adopt ASU 2019-12 for fiscal year ending November 30, 2024 and the adoption of this guidance is not expected to have any material impact on the Company’s financial position, cash flows or results of operations.

 

Management does not believe that there are any recently issued and effective or not yet effective accounting pronouncements as of February 28, 2021 that would have or are expected to have any significant effect on the Company’s financial position, cash flows or income statement.

 

Critical Accounting Policies

 

The Company has identified other significant accounting policies that, as a result of the judgments, uncertainties, uniqueness and complexities of the underlying accounting standards and operations involved could result in material changes to its financial condition or results of operations under different conditions or using different assumptions.  The Company's most critical accounting policies are related to revenue recognition, valuation of long-lived and intangible assets, deferred tax assets and the related valuation allowance.  Details regarding the Company's use of these policies and the related estimates are described in the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 2020, filed with the Securities and Exchange Commission on February 26, 2021. 

 

18

 

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

BAB, Inc. has no interest, currency or derivative market risk.

 

ITEM 4.CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of both our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. Based on such evaluation, both our Chief Executive Officer and Chief Financial Officer have concluded that, as of February 28, 2021 our disclosure controls and procedures are effective (i) to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) to ensure that information required to be disclosed by us in the reports that we submit under the Exchange Act is accumulated and communicated to our management, including our executive and financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

 

Changes in Internal Control Over Financial Reporting

 

There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) during the three months of fiscal year 2021 to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Compliance with Section 404 of Sarbanes-Oxley Act

The Company is in compliance with Section 404 of the Sarbanes-Oxley Act of 2002 (the “Act”).

 

19

 

PART II

 

ITEM 1.

LEGAL PROCEEDINGS

 

We may be subject to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of such proceedings or claims cannot be predicted with certainty, management does not believe that the outcome of any of such proceedings or claims will have a material effect on our financial position. We know of no pending or threatened proceeding or claim to which we are or will be a party.

 

ITEM 2.  

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4.

MINE SAFETY DISCLOSURES

 

Not applicable

 

ITEM 5.

OTHER INFORMATION

 

Amendment No. 5 to the Company’s Preferred Shares Rights Agreement dated May 6, 2013 was filed on March 8, 2021. The amendment revises the definition of “Final Expiration Date” to mean the eleventh anniversary of the date of the Preferred Shares Rights Agreement.

 

20

 

(a)  EXHIBITS

 

The following exhibits are filed herewith.

 

INDEX NUMBER

 

DESCRIPTION

   

3.1

 

Articles of Incorporation (See Form 10-KSB for year ended November 30, 2006 filed February 28, 2007)

   

3.2

 

Bylaws of the Company (See Form 10-KSB for year ended November 30, 2006 filed February 28, 2007)

   

4.1

 

Preferred Shares Rights Agreement (See Form 8-K filed May 7, 2013)

   

4.2

 

Preferred Shares Rights Agreement Amendment No. 1 (See Form 8-K filed June 18, 2014)

   

4.3

 

Preferred Shares Rights Agreement Amendment No. 2 (See Form 8-K filed August 18, 2015)

   

4.4

 

Preferred Shares Rights Agreement Amendment No. 3 (See Form 8-K filed May 22, 2017)

   

4.5

 

Preferred Shares Rights Agreement Amendment No. 4 (See Form 8-K filed February 22, 2019)

   

4.6

 

Preferred Shares Rights Agreement Amendment No. 5 (See Form 8-K filed March 8, 2021)

   

21.1

 

List of Subsidiaries of the Company

   

31.1, 31.2

 

Section 302 of the Sarbanes-Oxley Act of 2002

   

32.1, 32.2

 

Section 906 of the Sarbanes-Oxley Act of 2002

   
101.INS XBRL Instance
   
101.SCH XBRL Taxonomy Extension Schema
   
101.CAL XBRL Taxonomy Extension Calculation
   
101.DEF XBRL Taxonomy Extension Definition
   
101.LAB XBRL Taxonomy Extension Labels
   
101.PRE XBRL Taxonomy Extension Presentation

 

21

 

SIGNATURE

 

In accordance with the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

BAB, Inc.

 

Dated: April 14, 2021

/s/ Geraldine Conn

 

Geraldine Conn

 

Chief Financial Officer

 

22