FORM 10-Q

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

(Mark One)

BAB, Inc.

(Name of small business issuer in its charter)

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

(Address of principal executive offices) (Zip Code)

Issuer's telephone number (847) 948-7520

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).   YesX☒Yes ☒  No ☐        

Indicate by checkmark whether the registrant is a large accelerated filer, accelerated filer, a non-accelerated filer, or a smaller reporting company.Largecompany. Large accelerated filer ☐      Accelerated filer ☐      Non-accelerated filer ☐ (Do not check if a smaller reporting company)      Smaller reporting company ☒

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

As of February 28,July 10, 2015 BAB, Inc. had: 7,263,508 shares of Common Stock outstanding.

TABLE OF CONTENTS

PART I

BAB, Inc.

Consolidated Balance SheetsSheets

SEE ACCOMPANYING NOTES

BAB, Inc.

Consolidated Statements of Income

For theThree Monthsand Six Month Periods EndedFebruary 28, May 31, 2015 and 2014

(Unaudited)

SEE ACCOMPANYING NOTES

BAB, Inc.

Consolidated Statements of Cash Flows

Forthe ThreeSix Months EndedFebruary 28, 2015 May 31, 2015 and 20142014

(Unaudited)

SEE ACCOMPANYING NOTES

BAB, Inc.

Notes to Unaudited Consolidated Financial Statements

Forthe Three Monthsand Six Month Periods EndedFebruary 28, 2015 May 31, 2015 and 20142014

(Unaudited)

On June 18, 2014 an amendment to the Preferred Shares Rights Agreement was filed appointing American Stock Transfer Company LLC as successor to Illinois Stock Transfer Company. All original rights and provisions remain unchanged.

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 8481 franchised and 5 licensed units at February 28,May 31, 2015 compared to 9593 franchised and 5 licensed units February 28,May 31, 2014.  System-wide revenues for the threesix months ended February 28,May 31, 2015 were $8.0$17.0 million as compared to February 28,May 31, 2014 which were $8.1$17.5 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, Big Apple Bagels frozen bagels and Brewster's coffee), and through licensing and nontraditional channels of distribution (Kohr Bros., Kaleidoscoops and Green Beans Coffee). Also included in licensing fees and other income is Operation’s Sign Shop revenue. The Sign Shop provides the majority of signage, which includes but is not limited to, posters, menu panels, outside window stickers and counter signs to franchisees to provide consistency and convenience.

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.

The Company recognizes franchise fee revenue upon the opening of a franchise store or upon the signing of a master franchise agreement.Master Franchise Agreement. Direct costs associated with the franchise sale are deferred until the franchise fee revenue is recognized.  These costs include site approval, construction approval, commissions, blueprints and training costs.

In 2014 a Master Franchise Agreement (“MFA”) was entered into with a Dubai based organization which includes ten Middle East Countries. The MFA is for $200,000, is nonrefundable and represents full payment for the MFA and the first fifteen stores owned by the Master Franchisee (“MF”), and/or franchised locations. There was an initial payment of $100,000 paid upon execution of the agreement, $50,000 is due upon the openingwas paid in April of the first BAB location or 12 months after execution of the agreementthis year and $50,000 is due upon opening of the second location or eighteen months after execution of the agreement.MFA. MF owned BAB locations will pay a 3% royalty and service fee on gross sales. All BAB locations under the MFA operated by a franchisee will pay BAB Systems 50% of the current royalty and service fee payable to the MF. The first Big Apple Bagels location, which is owned by the MF, is currently under development.

The Company earns a licensing fee 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,May 31, 2015, the Company employed 15 full-time and 23 part-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,May 31, 2015 versus Three Months Ended February 28,May 31, 2014

For the three months ended February 28,May 31, 2015 and 2014, the Company reported a net loss of $246,000 and net income of $31,000,$119,000 and $272,000, respectively. Total revenue of $492,000$568,000 decreased $45,000,$201,000, or 8.4%26.1%, for the three months ended February 28,May 31, 2015, as compared to total revenue of $537,000$769,000 for the three months ended February 28,May 31, 2014.

Royalty fee revenue of $394,000,$444,000, for the quarter ended February 28,May 31, 2015, decreased $3,000,$12,000, or 0.8%2.6%, from the $397,000$456,000 for quarter ended February 28,May 31, 2014. There were fewer locations in 2015 versus same period in 2014.

Franchise fee revenues of $5,000,$25,000, for the quarter ended February 28,May 31, 2015, decreased $30,000$175,000 as compared to the same quarter 2014. There was one transferexpress store opened and two transfers in the three months ending February 28,May 31, 2015 compared to one store opening and 2no openings or transfers in 2014 but a Master Franchise Agreement was signed in the same period 2014.

Licensing fee and other income of $93,000,$99,000, for the quarter ended February 28,May 31, 2015, decreased $12,000,$14,000, or 11.4%12.4% from $105,000$113,000 for the quarter ended February 28,May 31, 2014. The decrease in licensing fees and other income was primarily due to a reduction in Sign Shop revenue for the first quarter 2015 compared to same period 2014.

Total operating expenses of $738,000 includes $243,000 of expense for a legal settlement in the first quarter 2015 as compared to $505,000$448,000, for the quarter ended February 28, 2014. ExcludingMay 31, 2015 decreased $34,000, or 7.1% from $482,000 for the $243,000 the operating expenses for February 28, 2015 were $495,000, $10,000 less than the same period inquarter ended May 31, 2014. The $10,0002015 decrease in 2015 expenses compared to 2014 same period was primarily due to a decrease in professional feesbad debt reserve of $8,000,$28,000 and a decreasereduction in franchise development of $14,000, Sign Shop cost of goods decreasedof $11,000 compared to the same period in 2014. There was a $14,000 decrease in professional fees and $7,000 in occupancy expenses in the second quarter 2015 versus the same period 2014, offset by an $8,000 increase in payroll becausethe second quarter 2015 of higher employee Christmas bonuses in fiscal 2015, a $3,000 increase in advertising and promotion and a $9,000 increase$10,000 for employee benefits, which included an employee 401K contribution accrual.increase of $9,000 for franchise advertising and $7,000 for payroll and payroll tax expenses compared to the same period 2014.

Interest expense and interest income werenetted to less than a $1,000 each, nettingin the quarter ended May 31, 2015 as compared to zero$1,000 in net interest expense for the 3same period 2014.

Earnings per share, as reported for basic and diluted outstanding shares for the second quarter ended May 31, 2015 was $0.02 per share and $0.04 per share in 2014.

Six Months Ended May 31, 2015 versus Six Months Ended May 31, 2014

For the six months ended February 28,May 31, 2015 and 2014, the Company reported a net loss $126,000 and net income of $303,000, respectively. Total revenue of $1,060,000 decreased $246,000, or 18.8%, for the six months ended May 31, 2015, as compared to total revenue of $1,306,000 for the six months ended May 31, 2014.

Royalty fee revenue of $838,000, for the six months ended May 31, 2015, decreased $15,000, or 1.8%, from the $853,000 for the six months ended May 31, 2014. Royalty revenues were down because there are fewer operating units in 2015 versus 2014.

Franchise fee revenues of $30,000, for the six months ended May 31, 2015, decreased $205,000 as compared to the same quarter 2014. One BAB Express store opened and three stores transferred in 2015 compared to $1,000 netone store opened, two stores transferred and an International Master Franchise Agreement was signed with a UAE franchisee in 2014.

Licensing fee and other income of $192,000, for the six months ended May 31, 2015, decreased $26,000, or 11.9%, from $218,000 for the six months ended May 31, 2014. The $26,000 decrease in 2015 was primarily due to a $24,000 decrease in Sign Shop revenue and an $11,000 decrease in nontraditional revenue, offset by $9,000 of settlement income compared to the same period in 2014.

Total operating expenses of $1,186,000 increased $200,000, or 20.3%, for the six months ended May 31, 2015, from $986,000 for the same period 2014. The increase in total operating expenses in 2015 as compared to same period 2014 was primarily due to an increase of $244,000 for a legal settlement in 2015 where there were no such expenses in 2014. In addition, payroll related expenses increased $15,000 primarily due to employee Christmas bonuses of $24,000 in 2015 versus $10,000 for the same period 2014, an increase in franchise sales advertising of $11,000 in 2015 compared to 2014 and an increase of $21,000 in 2015 for employee benefit expense primarily due to Company 401(k) matching program started January 1, 2015. The increases were offset by decreases in occupancy expense of $7,000 primarily due to a credit in the 2015 escalator of $2,000 versus a $4,000 charge in 2014, a reduction in legal expenses of $24,000 and a reduction in SG&A of $56,000 which included a $27,000 difference in bad debt reserve which was a $5,000 credit in 2015 and a $22,000 charge in 2014 same period, a decrease in franchise development expense of $10,000 in 2015 compared to same period 2014 and the Sign Shop cost of goods sold decreased $18,000 in 2015 compared to 2014.

Interest income and interest expense for the six months ended May 31, 2015 and 2014 netted to $1,000 and $2,000, respectively.

There was no income tax expense recorded for the six months ended May 31, 2015 versus $15,000 for the six months ended May 31, 2014.

Loss/Earnings per share, as reported for basic and diluted outstanding shares for the first quartersix months ended February 28,May 31, 2015 was a loss of $0.034$0.02 per share compared to income of $0.004$0.04 in 2014.

Liquidity and Capital Resources

At February 28,May 31, 2015, the Company had working capital of $412,000$461,000 and unrestricted cash of $605,000.$690,000. At November 30, 2014 the Company had working capital of $800,000 and unrestricted cash of $710,000.

During the threesix months ended February 28,May 31, 2015, the Company had a net loss of $246,000$126,000 and operating activities provided cash of $42,000.$202,000. The principal adjustments to reconcile the net incomeloss to cash usedprovided in operating activities for the six months ending May 31, 2015 were depreciation and amortization of $4,000.$9,000 less a provision for uncollectible accounts of $5,000. In addition, changes in operating assets and liabilities increased cash by $284,000. For the period ended February 28,$325,000. During May 31, 2014, the Company had net income of $31,000$303,000 and operating activities provided cash of $2,000.$219,000. The principal adjustments to reconcile net income to cash provided by operating activities for the threesix months ending February 28,May 31, 2014 were depreciation and amortization of $5,000 less the$9,000 and a provision for uncollectible accounts of $1,000.$22,000. In addition changes in operating assets and liabilities decreased cash by $33,000.$115,000.

For the three months ended February 28, 2015 the Company used $1,000 for investing activities and none for the three months ended February 28, 2014.

The Company used $145,000$3,000 for investing activities for the six months ended May 31, 2015 and 2014.

The Company used $218,000 and $291,000 for cash distribution/dividend payments during the threesix month periodsperiod ended February 28,May 31, 2015 and 2014, respectively.

On March 2,June 4, 2015, the Board of Directors declaredauthorized a $0.01 per share cash distribution/dividend to shareholders of record as of March 20,June 18, 2015, payable April 10,July 8, 2015. 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.

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

The Company has no financial covenants on its outstanding debt.

Cash Distribution and Dividend Policy

It is the Company’s intent that future cash distributions/dividends will be considered after reviewing profitability expectations and financing needs and will be declared at the discretion of the Board of Directors. Due to the general economic downturn and its impact on the Company, there can be no assurance that the Company will generate sufficient earnings to pay out cash distributions/dividends. The Company will continue to analyze its ability to pay cash distributions/dividends on a quarterly basis.

The Company believes that for tax purposes the cash distributions declared in 2015 may be treated as a return of capital to stockholders depending on each stockholder’s basis or it may be treated as a dividend or a combination of the two. Determination of whether it is a cash distribution, cash dividend or combination of the two will not be made until after December 31, 2015, as the classification or combination is dependent upon the Company’s earnings and profits for tax purposes for its fiscal year ending November 30, 2015.

The Company believes execution of this policy will not have any material adverse effect on its ability to fund current operations or future capital investments.

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’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 ASU is effective for the Company, for annual periods beginning after December 15, 2017. 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 consolidated financial position, cash flows or results of operations.

Management does not believe that there are any other recently issued and effective or not yet effective pronouncements as of February 28,May 31, 2015 that would have or are expected to have any significant effect on the Company’s financial position, cash flows or results of operations.

Critical Accounting Policies

The Company has identified 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, 2014, filed with the Securities and Exchange Commission on February 23, 2015.  There have been no material changes to the Company's critical accounting policies that impact the Company's financial condition, results of operations or cash flows for the three or six months ended February 28,May 31, 2015.

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

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,May 31, 2015 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 threesix months of fiscal year 2015 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”).

PART II

We are 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. Except as stated below, we know of no pending or threatened proceeding or claim to which we are or will be a party.

The Company hashad previously reported that on July 8, 2013, a judgment was entered in the Circuit Court of Cook County in the amount of $84,000 against BAB Operations, Inc. (“Operations”), a wholly owned subsidiary of BAB, Inc., and in favor of a former landlord of Operations, Alecta Real Estate USA, LLC.  Operations, the subsidiary which owned Company stores, had been a tenant operating a Big Apple Bagels store in Glenview, Illinois from 1999 to 2001 when it sold the store and assigned the lease to a franchisee.  The store was sold and the lease was assigned three more times over the next 10 years. In 2011, the final owner of the store closed it and defaulted on the lease.  Operations, which no longer owns any Company stores, was sued for a continuing guaranty in connection with the original assignment of the lease in 2001. 

On August 15, 2013, an additional judgment of $70,030 was entered in the Circuit Court of Cook County for this same matter for plaintiff’s attorney’s fees which were contractually payable to the prevailing party, bringing the total judgment to $154,030.  In September 2013 the Company filed an appeal.

On March 23, 2015 the Appellate Court found in favor of the plaintiff and against Operations, affirming the trial court’s judgment in the amount of $154,030 plus post-judgment interest and attorneys fees incurred on the appeal.

BAB has reserved the amount of the judgment plus statutory interest and additionaljudgment. The legal fees as an expensesettlement was accrued in the first quarter financial statements of 2015.2015 and payment was made in the second quarter 2015 and it includes the judgment, attorney’s fees and interest. 

None.

None.

Not applicable

None.

See index to exhibits

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.

INDEX TO EXHIBITS

(a)  EXHIBITS

The following exhibits are filed herewith.

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