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FORM 10-Q

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

(Mark One)

[X]

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

For the quarterly period ended
February 28, 2014

[ ]

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

 

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).   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 ☐  (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 April 10, 2014 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 Operation

10
     

Item 3

Quantitative and Qualitative Disclosures About Market Risk

13
     

Item 4

Controls and Procedures

13
     

PART II

OTHER INFORMATION

14
     

Item 1.

Legal Proceedings

14
     

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

14
     

Item 3

Defaults Upon Senior Securities

14
     

Item 4

Mine Safety Disclosures

14
     

Item 5

Other Information

14
     

Item 6

Exhibits

14
     

SIGNATURE

  15

  

 
2

 

  

PART I

 

ITEM 1.     FINANCIAL STATEMENTS

 

BAB, Inc.

Consolidated Balance Sheets

   

February 28, 2014

   

November 30, 2013

 

ASSETS

               

Current Assets

               

Cash

  $ 467,893     $ 683,891  

Restricted cash

    552,979       581,469  

Receivables

               

Trade accounts and notes receivable (net of allowance for doubtful accounts of $9,904 in 2014 and $10,447 in 2013 )

    144,347       137,294  

Marketing fund contributions receivable from franchisees and stores

    20,072       10,017  

Inventories

    27,311       27,544  

Prepaid expenses and other current assets

    71,463       81,532  

Total Current Assets

    1,284,065       1,521,747  
                 

Property, plant and equipment (net of accumulated depreciation of $144,605 in 2014 and $143,459 in 2013)

    8,955       10,102  

Assets held for sale

    3,783       3,783  

Trademarks

    448,022       448,022  

Goodwill

    1,493,771       1,493,771  

Definite lived intangible assets (net of accumulated amortization of $71,302 in 2014 and $67,887 in 2013)

    44,388       47,803  

Deferred tax asset

    248,000       248,000  

Total Noncurrent Assets

    2,246,919       2,251,481  

Total Assets

  $ 3,530,984     $ 3,773,228  
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               

Current Liabilities

               

Current portion of long-term debt

  $ 30,451     $ 30,451  

Accounts payable

    13,654       22,543  

Accrued expenses and other current liabilities

    286,885       280,120  

Unexpended marketing fund contributions

    342,233       360,683  

Deferred franchise fee revenue

    25,000       50,000  

Deferred licensing revenue

    26,667       36,667  

Total Current Liabilities

    724,890       780,464  
                 

Long-term debt (net of current portion)

    65,311       65,311  

Total Liabilities

    790,201       845,775  
                 

Stockholders' Equity

               

Preferred shares -$.001 par value; 4,000,000 authorized; no shares outstanding as of February 28, 2014 and November 30, 2013.

    -       -  

Preferred shares -$.001 par value; 1,000,000 Series A authorized; no shares outstanding as of February 28, 2014 and November 30, 2013.

    -       -  

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, 2014 and November 30, 2013.

    13,508,257       13,508,257  

Additional paid-in capital

    987,034       987,034  

Treasury stock

    (222,781 )     (222,781 )

Accumulated deficit

    (11,531,727 )     (11,345,057 )

Total Stockholders' Equity

    2,740,783       2,927,453  

Total Liabilities and Stockholders' Equity

  $ 3,530,984     $ 3,773,228  

 

SEE ACCOMPANYING NOTES

 

 
3

 

 

BAB, Inc.  

Consolidated Statements of Income

For the Quarters Ended February 28, 2014 and 2013

(Unaudited) 

 

   

For the 3 months ended February 28,

 
   

2014

   

2013

 

REVENUES

               

Royalty fees from franchised stores

  $ 396,706     $ 419,919  

Franchise fees

    35,000       -  

Licensing fees and other income

    105,165       115,160  

Total Revenues

    536,871       535,079  
                 

OPERATING EXPENSES

               

Selling, general and administrative expenses:

               

Payroll and payroll-related expenses

    289,644       378,638  

Occupancy

    43,155       41,563  

Advertising and promotion

    8,330       17,477  

Professional service fees

    66,998       61,783  

Travel

    9,248       17,015  

Employee benefit expenses

    24,929       25,721  

Depreciation and amortization

    4,561       4,344  

Other

    57,781       52,719  

Total Operating Expenses

    504,646       599,260  

Income/(Loss) from operations

    32,225       (64,181 )

Interest income

    148       307  

Interest expense

    (1,137 )     (1,482 )

Income/(Loss) before provision for income taxes

    31,236       (65,356 )
                 

Provision for income taxes

    -       -  

Net Income/(Loss)

  $ 31,236     $ (65,356 )
                 

Net Income/(Loss) per share - Basic and Diluted

  $ 0.004     $ (0.009 )
                 

Weighted average shares outstanding - Basic

    7,263,508       7,263,508  
                 

Effect of dilutive common stock

    2,737       -  
                 

Weighted average shares outstanding - Diluted

    7,266,245       7,263,508  
                 

Cash distributions declared per share

  $ 0.03     $ 0.05  

 

 

 

 

 

SEE ACCOMPANYING NOTES

 

 
4

 
 

 

BAB, Inc.

Consolidated Statements of Cash Flows

For the Quarters Ended February 28, 2014 and 2013

(Unaudited) 

 

 

   

For the 3 months ended February 28,

 
   

2014

   

2013

 

Operating activities

               

Net income/(Loss)

  $ 31,236     $ (65,356 )

Adjustments ro reconcile net income to cash flows provided by/(used in) operating activities:

               

Depreciation and amortization

    4,561       4,344  

Provision for uncollectible accounts, net of recoveries

    (542 )     (5,807 )

Changes in:

               

Trade accounts receivable and notes receivable

    (6,510 )     10,876  

Restricted cash

    28,490       21,208  

Marketing fund contributions receivable

    (10,055 )     6,233  

Inventories

    233       1,275  

Prepaid expenses and other

    10,069       (22,386 )

Accounts payable

    (8,889 )     2,007  

Accrued liabilities

    6,765       (13,498 )

Unexpended marketing fund contributions

    (18,450 )     (27,441 )

Deferred revenue

    (35,000 )     22,500  

Net Cash Provided by/(Used in) Operating Activities

    1,908       (66,045 )
                 

Investing activities

               

Capitalization of trademark renewals

    -       (150 )

Net Cash Used In Investing Activities

    -       (150 )
                 

Financing activities

               

Cash distributions/dividends

    (217,906 )     (363,175 )

Net Cash Used In Financing Activities

    (217,906 )     (363,175 )
                 

Net Decrease in Cash

    (215,998 )     (429,370 )
                 

Cash, Beginning of Period

    683,891       1,256,257  

Cash, End of Period

  $ 467,893     $ 826,887  
                 
                 

Supplemental disclosure of cash flow information:

               

Interest paid

  $ -     $ -  

Income taxes paid

  $ -     $ 8,450  

 

 

 SEE ACCOMPANYING NOTES

 

 
5

 

 

BAB, Inc.

Notes to Unaudited Consolidated Financial Statements

For the Quarters Ended February 28, 2014 and 2013

(Unaudited)

 

 

 

Note 1 - Nature of Operations

 

BAB, Inc. (“the Company”) has two wholly owned subsidiaries: BAB Systems, Inc. (“Systems”) and BAB Operations, Inc. (“Operations”). Systems was incorporated on December 2, 1992, and was primarily established to franchise Big Apple Bagels® (“BAB”) specialty bagel retail stores. My Favorite Muffin Too, Inc., a New Jersey corporation, was acquired on May 13, 1997 and is included as a part of Systems. Brewster’s Franchise Corporations (“Brewster’s”) was established on February 15, 1996. Brewster’s® coffee is sold in BAB and My Favorite Muffin® (“MFM”) locations as well as through license agreements. SweetDuet Frozen Yogurt & Gourmet Muffins® (“SD”) was established to franchise frozen yogurt and gourmet muffin retail stores. Operations was formed on August 30, 1995, primarily to operate Company-owned stores of which there are currently none. The assets of Jacobs Bros. Bagels (“Jacobs Bros.”) were acquired on February 1, 1999, and any branded wholesale business uses this trademark.

 

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 and frozen yogurt retail units under the BAB, MFM and SD trade names. At February 28, 2014, the Company had 95 franchise units and 5 licensed units in operation in 26 states. The Company additionally derives income from the sale of its trademarked bagels, muffins and coffee through nontraditional channels of distribution including under licensing agreements with Kohr Bros. Frozen Custard, Kaleidoscoops, Green Beans Coffee, Sodexo and through direct home delivery of specialty muffin gift baskets and coffee. Also, included in licensing fees and other income is Operations Sign Shop results. For franchise consistency and convenience, the Sign Shop provides the majority of signage to franchisees, including but not limited to, posters, menu panels, outside window stickers and counter signs.

 

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. Licensed BAB units serve the Company's frozen bagel and related products baked daily.  BAB units are primarily concentrated in the Midwest and Western United States. The MFM brand consists of units operating as "My Favorite Muffin®," featuring a large variety of freshly baked muffins, coffees and related products, and units operating as "My Favorite Muffin and Bagel Cafe," featuring these products as well as a variety of specialty bagel sandwiches and related products.  The SweetDuet Frozen Yogurt & Gourmet Muffins® brand is a fusion concept, pairing self-serve frozen yogurt with MFM’s exclusive line of My Favorite Muffin gourmet muffins, broadening the shop’s offering and therefore differentiating itself from the numerous frozen yogurt outlets already populating the market. Although the Company doesn't actively market Brewster's stand-alone franchises, Brewster's coffee products are sold in most franchised units.    

 

The Company has grown significantly since its initial public offering through growth in franchise units and the development of alternative distribution channels for its branded products.  The Company is leveraging on the natural synergy of distributing muffin products in 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.

 

 
6

 

 

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, 2013 which was filed February 26, 2014.  In the opinion of the Company's management, the condensed consolidated financial statements for the unaudited interim periods presented include all adjustments, including normal recurring adjustments, necessary to fairly present the results of such interim periods 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.

 

 

2. Units Open and Under Development

 

Units which are open or under development at February 28, 2014 are as follows:  

 

Stores open:

       
         

Franchise owned stores

    95  

Licensed Units

    5  

Unopened stores with Franchise

       

Agreements

    3  

Total operating units and units with Franchise Agreements

    103  

 

3. Earnings per Share

 

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

 

 

   

For the 3 months ended February 28,

 
   

2014

   

2013

 

Numerator:

               
                 

Net Income/(Loss) available to common shareholders

  $ 31,236     $ (65,356 )
                 

Denominator:

               
                 

Weighted average outstanding shares

               

Basic

    7,263,508       7,263,508  

Earnings/(Loss) per Share - Basic

  $ 0.004     $ (0.009 )
                 

Effect of dilutive common stock

    2,737       -  

Weighted average outstanding shares

               

Diluted

    7,266,245       7,263,508  

Earnings/(Loss) per share - Diluted

  $ 0.004     $ (0.009 )

  

The Company excluded 350,400 and 368,373 potential shares attributable to outstanding stock options from the calculation of diluted earnings per share for the three months ended February 28, 2014 and 2013, respectively because their inclusion would have been anti-dilutive.

 

 
7

 

 

4.  Long-Term Debt

 

The total debt balance of $125,000 represents a note payable to a former shareholder that requires an annual payment of $35,000, including interest at 4.75%, due October 1 and running through 2016.

 

5.  Stock Options

 

In May 2001, the Company approved a Long-Term Incentive and Stock Option Plan (Plan). The Plan reserved and has issued 1,400,000 shares of common stock for grant. As of February 28, 2014, there were 1,039,600 stock options exercised or forfeited under the Plan.   

 

   

For the 3 months ended February 28,

 
   

2014

Options

   

2013

Options

 

Options outstanding at beginning of period

    368,373       368,373  

Granted

    -       -  

Forfeited or Expired

    (7,973 )     -  

Exercised

    -       -  

Outstanding at end of period

    360,400       368,373  

 

 

All compensation cost arising from share-based payment arrangements in payroll-related expenses was expensed as of November 30, 2011.

 

To value option grants and other awards for stock-based compensation, the Company uses the Black-Scholes option valuation model. When the measurement date is certain, the fair value of each option grant is estimated on the date of grant and is based on the assumptions used for the expected stock price volatility, expected term, risk-free interest rates and future dividend payments.

 

The Company’s stock option terms expire in 10 years and vary in vesting from immediate to a vesting period of five years.

 

The following table summarizes the stock options outstanding and exercisable at February 28, 2014:

 

 

Options Outstanding

   

Options Exercisable

 
 

Outstandingat

2/28/14

   

Wghtd. Avg.

Remaining Life

   

Wghtd. Avg.

Exercise Price

   

Aggregate

Intrinsic Value

   

Exercisable

2/28/2014

   

Wghtd. Avg.

Exercise Price

   

Aggregate

Intrinsic Value

 
    360,400       2.50     $ 1.17     $ -       360,400     $ 1.17     $ -  

 

There is no computation for the aggregate intrinsic value in the table above because the outstanding options weighted average exercise price was greater than the Company’s closing stock price of $0.84 as of the last business day of the period ended February 28, 2014. There were 7,973 unexercised options that expired and no options exercised during the three month period ended February 28, 2014. 

 

 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. The Company follows this guidance.

 

The Company tests goodwill that is not subject to amortization for impairment annually or more frequently if events or circumstances indicate that impairment is possible. Goodwill was tested at the end of the first quarter, February 28, 2014 and it was found that the carrying value of goodwill and intangible assets were not impaired.

 

 
8

 

 

The impairment test performed February 28, 2014 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 has occurred.

 

7. Recent Accounting Pronouncements

 

Management does not believe that there are any recently issued and effective, or not yet effective, pronouncements as of February 28, 2014 that would have, or are expected to have, any significant effect on the Company’s consolidated financial position, cash flows or results of operations.

 

8. Equity

 

On May 6, 2013 BAB, Inc. adopted a Preferred Shares Rights Agreement (“Rights Plan”) and declared a dividend distribution of one right (equivalent to one one-thousandth of a preferred share), for each outstanding share of common stock. The Rights Plan is intended to protect BAB and its stockholders from efforts to obtain control of BAB that the Board of Directors determines are not in the best interest of BAB and its stockholders. BAB issued one Right for each current share of stock outstanding at the close of business on May 13, 2013. In general, the rights will not be exercisable unless a person or group acquires 15% (20% institutional investors) or more of BAB’s common stock (“trigger event”). Should a trigger event occur, 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 Rights will expire in three years from the date of declaration.

 

9. Contingency

 

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.

 

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 the Company, 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. Operations contended that it bore no liability because of language in one of the subsequent assignments releasing it from any further liability.

 

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 bringing the total judgment to $154,030. In September 2013 the Company filed an appeal. A bond was required and posted by BAB, Inc. for an amount equal to 150% of the judgment.

 

The Company has filed its initial appellate brief. The Plaintiff’s brief is due on May 5, 2014 and the Company’s reply brief is due on May 19, 2014. It is anticipated that the oral argument would be sometime in July of 2014.

 

The Company and its trial and appellate counsel believe that we will prevail on appeal and that it is only reasonably possible that the Court’s ruling will be upheld as it is contrary to applicable Illinois precedent. The Company believes there will be zero damages assessed based on prior favorable rulings in similar cases; accordingly, no amounts have been accrued for any potential losses in this matter.

 

 
9

 

 

10. Subsequent Event

 

A Master Franchise agreement was signed on March 12, 2014 with a Dubai based Company allowing them exclusive territorial rights to specific countries in the Middle East, as defined by the agreement. The fee for the Master Franchise agreement is $200,000, and will be recognized as revenue in the second quarter of 2014.

 

 

 

 

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 Company-owned 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

 

There are 95 franchised and 5 licensed units at February 28, 2014.  Units in operation at February 28, 2013 included 98 franchised and 6 licensed units.  System-wide revenues for the three months ended February 28, 2014 were $8.1 million as compared to February 28, 2013 which were $8.5 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 and Brewster's coffee), and through licensing and nontraditional channels of distribution (Kohr Bros., Kaleidoscoops, Green Beans Coffee and Sodexo). 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.

 

 
10

 

 

The Company recognizes franchise fee revenue upon the opening of a franchise store. 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.

 

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, 2014, the Company employed 12 full-time and 4 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, 2014 versus Three Months Ended February 28, 2013

 

For the three months ended February 28, 2014 and 2013, the Company reported net income of $31,000 and a net loss of $65,000, respectively. Total revenue of $537,000 increased $2,000, or .4%, for the three months ended February 28, 2014, as compared to total revenue of $535,000 for the three months ended February 28, 2013.

 

Royalty fee revenue of $397,000, for the quarter ended February 28, 2014, decreased $23,000, or 5.5%, from the $420,000 for quarter ended February 28, 2013. The Company had fewer franchise locations February 28, 2014 compared to February 28, 2013. In addition, the extreme winter weather during December 2013 through February 2014 has taken a toll on the restaurant industry, including our franchises.

 

Franchise fee revenues of $35,000, for the quarter ended February 28, 2014, increased $35,000 as compared to the same quarter 2013. There were 1 store opening and 2 transfers for quarter ended February 28, 2014, compared to no store openings and no transfers in the same period 2013.

 

Licensing fee and other income of $105,000, for the quarter ended February 28, 2014, decreased $10,000, or 8.7% from $115,000 for the quarter ended February 28, 2013. Licensing fee and settlement revenues decreased $15,000 with $14,000 primarily being from reduced license fees and $1,000 of settlement income for the quarter ended February 28, 2014 compared to same period in 2013, offset by an increase of $5,000 in Sign Shop revenue for the quarter ended February 28, 2014 compared to the same period in 2013.

 

Total operating expenses of $505,000 decreased $94,000, or 15.7%, for the quarter ended February 28, 2014, from $599,000 for the same period 2013. The decrease in total operating expenses in 2014 as compared to same period 2013 was primarily due to a decrease in payroll expenses of $89,000, which included a reduction in December employee bonuses, a decrease in executive payroll and a decrease in employees which included one SweetDuet employee from this period to same period 2013, offset by a decreased Marketing Fund allocations primarily because employee reductions included Marketing personnel. Travel expenses decreased $8,000 in 2014 compared to 2013 primarily due to less BAB and MFM travel and no SD travel in 2014 compared to same period 2013, advertising expenses decreased $9,000 primarily due to reduced advertising expense for BAB and MFM franchise sales and no SD franchise sales advertising in 2014 compared to 2013, offset by an increase in other general operating expenses of $6,000 and professional fees of $5,000.

 

Interest income was less than $1,000 for the three months ended February 28, 2014 and 2013.

 

Interest expense was $1,000 for the quarters ended February 28, 2014 and 2013.

 

Earnings per share, as reported for basic and diluted outstanding shares for the second quarter ended February 28, 2014 was $.004 compared to a loss of $0.009 in 2013.

 

 
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Liquidity and Capital Resources

 

At February 28, 2014, the Company had working capital of $559,000 and unrestricted cash of $468,000. At November 30, 2013 the Company had working capital of $741,000 and unrestricted cash of $684,000.

    

During the three months ended February 28, 2014, the Company had net income of $31,000 and operating activities provided cash of $2,000. The principal adjustments to reconcile net income to cash used in operating activities were depreciation and amortization of $5,000, less provision for uncollectible accounts of $1,000. In addition, changes in operating assets and liabilities decreased cash by $33,000. During February 28, 2013, the Company had a net loss of $65,000 and operating activities used cash of $66,000. The principal adjustments to reconcile net income to cash provided by operating activities for the three months ending February 28, 2013 were depreciation and amortization of $4,000 less the provision for uncollectible accounts of $6,000. In addition changes in operating assets and liabilities increased cash by $1,000.

 

For the three months ended February 28, 2014 the Company used no cash for investing activities versus less than $1,000 for the three months ended February 28, 2013.

 

The Company used $218,000 and $363,000 for cash distribution/dividend payments during the three month period ended February 28, 2014 and 2013, respectively.

 

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. On March 12, 2014, the Board of Directors authorized a $0.01 per share cash distribution/dividend payable April 14, 2014 to shareholders of record as of March 28, 2014.

 

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 distribution declared in 2014 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, 2014, as the classification or combination is dependent upon the Company’s earnings and profits for tax purposes for its fiscal year ending November 30, 2014.

 

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.

 

 
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Recent Accounting Pronouncements

 

Management does not believe that there are any recently issued and effective, or not yet effective, pronouncements as of February 28, 2014 that would have, or are expected to have, any significant effect on the Company’s consolidated 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, 2013, filed with the Securities and Exchange Commission on February 26, 2014.  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 nine months ended February 28, 2014.

 

 

 

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURE 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, 2014 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 nine months of fiscal year 2013 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”).

 

 
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PART II

 

ITEM 1.    LEGAL PROCEEDINGS 

 

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.

 

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 the Company, 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. Operations contended that it bore no liability because of language in one of the subsequent assignments releasing it from any further liability.

 

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 bringing the total judgment to $154,030. In September 2013 the Company filed an appeal. A bond was required and posted by BAB, Inc. for an amount equal to 150% of the judgment.

 

The Company has filed its initial appellate brief. The Plaintiff’s brief is due on May 5, 2014 and the Company’s reply brief is due on May 19, 2014. It is anticipated that the oral argument would be sometime in July of 2014.

 

The Company and its trial and appellate counsel believe that we will prevail on appeal and that it is only reasonably possible that the Court’s ruling will be upheld as it is contrary to applicable Illinois precedent. The Company believes there will be zero damages assessed based on prior favorable rulings in similar cases; accordingly, no amounts have been accrued for any potential losses in this matter.

 

 

 

ITEM 2.    UNREGISTERED SALES OF EQUITY AND USE OF PROCEEDS

 

None.

 

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

 

None. 

 

ITEM 4.    MINE SAFETY DISCLOSURES

 

Not applicable

 

ITEM 5.    OTHER INFORMATION

 

None.

 

ITEM 6.    EXHIBITS

 

See index to exhibits

 

 
14

 

  

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 11, 2014

/s/ Geraldine Conn

 

Geraldine Conn

 

Chief Financial Officer

 

 

 

INDEX TO EXHIBITS

 

(a)  EXHIBITS

 

The following exhibits are filed herewith.

 

INDEX NUMBER

DESCRIPTION

 

21.1

List of Subsidiaries of the Company

 

31.1

Section 302 of the Sarbanes-Oxley Act of 2002   Certification of Chief Executive Officer

 

31.2

Section 302 of the Sarbanes-Oxley Act of 2002   Certification of Chief Financial Officer

 

32.1

Section 906 of the Sarbanes-Oxley Act of 2002   Certification of Chief Executive Officer

 

32.2

Section 906 of the Sarbanes-Oxley Act of 2002   Certification of Chief Financial Officer

 
     

101.INS*
101.SCH*
101.CAL*
101.DEF*
101.LAB*
101.PRE*

XBRL Instance
XBRL Taxonomy Extension Schema 
XBRL Taxonomy Extension Calculation 
XBRL Taxonomy Extension Definition
XBRL Taxonomy Extension Labels
XBRL Taxonomy Extension Presentation

 

 

* XBRL Information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

 

15