Quarterly Report for Quarter Ending August 31, 2025 (Form 10-Q)

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 60 franchised and 4 licensed units at August 31, 2025 compared to 64 franchised and 4 licensed units at August 31, 2024. System-wide revenues for the nine months ended August 31, 2025 were $30.5 million and August 31, 2024 was $30.9 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, and Brewster's coffee), and through nontraditional channels of distribution.

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 August 31, 2025, the Company employed 11 full-time employees and one part-time employee 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 August 31, 2025 versus Three Months Ended August 31, 2024

For the three months ended August 31, 2025 and August 31, 2024, the Company reported net income of $168,000 and $160,000, respectively. Total revenue of $769,000 decreased $103,000, or 11.8%, for the three months ended August 31, 2025, as compared to total revenue of $872,000 for the three months ended August 31, 2024. Our total revenue for the three months ended August 31, 2025 decreased compared to the prior period due to a decrease in marketing fund expenses, which drive the recognition of marketing fund revenue. Under U.S. GAAP, we recognize marketing fund revenue at the time the related marketing fund expenses are incurred. As marketing fund revenue and expense directly offset each other in any given period, the decline has no impact on net income.

Royalty fee revenue of $512,000, for the quarter ended August 31, 2025, decreased $7,000, or 1.3%, from the $519,000 for quarter ended August 31, 2024.

Franchise fee revenue was $3,000, for the quarter ended August 31, 2025, decreasing $6,000, or 66.7%, from $9,000 for August 31, 2024. In the third quarter of 2025 there were no transfers and in the same period 2024 there was one store transferred and both years had normal annual amortization. Licensing fee and other income of $67,000, for the quarter ended August 31, 2025, increased $17,000 or 34.0% from $50,000 for same quarter 2024. Settlement revenue increased $5,000, and gift card revenue increased by $18,000 for the same period 2025 compared to 2024, offset by a $2,000 decrease in license fees and $4,000 decrease in nontraditional revenue in 3 months of 2025 compared to same period 2024. Marketing Fund revenues of $187,000, for the quarter ended August 31, 2025, decreased $106,000, or 36.2% from $293,000 for the quarter ended August 31, 2024. This is offset by a reduction of $106,000 in marketing fund expenses.

Total operating expenses of $550,000, for the quarter ended August 31, 2025, decreased $117,000, or 17.5% from $667,000 for the quarter ended August 31, 2024. The decrease was primarily related to a decrease in, marketing fund expenses of $106,000, a decrease in professional services of $6,000, and a decrease in employee benefits of $17,000, offset by an increase in payroll of $4,000, an increase in travel of $3,000 and an increase in other selling and general expenses of $5,000.

Interest income was $15,000 for the quarter ended August 31, 2025, decreasing $3,000, or 16.7% from $18,000 for the three months ended August 31, 2024 primarily because of reduced short-term interest rates in 2025 compared to 2024.

For the three months ended August 31, 2025 the provision for income tax was $66,000, compared to $63,000 for the three months ending August 31, 2024.

Earnings per share, as reported for basic and diluted outstanding shares, was $0.02 for quarters ended August 31, 2025 and 2024.

Nine Months Ended August 31, 2025 versus Nine Months Ended August 31, 2024

For the nine months ended August 31, 2025 and August 31, 2024, the Company reported net income of $438,000 and $405,000, respectively. Total revenue of $2,334,000 decreased $257,000, or 9.9%, for the nine months ended August 31, 2025, as compared to total revenue of $2,591,000 for the nine months ended August 31, 2024. Our total revenue for the nine months ended August 31, 2025 decreased compared to the prior period primarily due to a decrease in marketing fund expenses of $229,000, which drive the recognition of marketing fund revenue. Under U.S. GAAP, we recognize marketing fund revenue at the time the related marketing fund expenses are incurred. As marketing fund revenue and expense directly offset each other in any given period, the decline has no impact on net income.

Royalty fee revenue of $1,481,000, for the nine months ended August 31, 2025, decreased $11,000, or 0.7%, from the $1,492,000 for the nine months ended August 31, 2024.

Franchise fee revenue was $15,000, for the nine months ended August 31, 2025, decreasing $14,000, or 48.3%, from $29,000 for August 31, 2024. In the nine months of 2025 there was one transfer compared to two transfers and one store opened in the same period 2024 with both years having normal monthly amortization. Licensing fee and other income of $207,000, for the nine months ended August 31, 2025, decreased $3,000 or 1.4% from $210,000 for same period 2024. Nontraditional revenue decreased $27,000, settlement revenue decreased $9,000, and license fee revenue decreased $3,000, offset by a $29,000 increase in gift card revenue and an increase in Sign Shop revenue of $7,000 in the nine months ended August 31, 2025 compared to August 31, 2024. Marketing Fund revenues of $631,000, for the nine months ended August 31, 2025, decreased $229,000, or 26.6% from $860,000 for the nine months ended August 31, 2024.

Management continues to review expenses and control costs in a time of rising costs. Total operating expenses of $1,767,000, for the nine months ended August 31, 2025, decreased $310,000, or 14.9% from $2,077,000 for the nine months ended August 31, 2024. Marketing expenses accounted for $229,000 of the decrease for the nine months of 2025 compared to same period 2024. The Marketing Department is planning on increased spending in the fourth quarter of fiscal 2025 as they complete scheduled marketing projects. There were decreases in expenses for August 31, 2025 compared to August 31, 2024 in professional services of $22,000, in employee benefits of $52,000 as some employees transitioned from the employer health plan to Medicare, there was a decrease in occupancy expense of $8,000, and a decrease in other expenses of $9,000. These decreases were offset by an increase in payroll of $8,000, an increase in franchise advertising of $2,000 and travel of $1,000 for the nine months ended August 31, 2025 compared to August 31, 2024.

Interest income was $43,000 for the nine months ended August 31, 2025, decreasing $7,000, or 14.0% from $50,000 for the nine months ended August 31, 2024 primarily because of reduced short-term interest rates in the nine months of 2025 compared to the same period 2024.

For the nine months ended August 31, 2025 the provision for income tax was $172,000, compared to $159,000 for the nine months ending August 31, 2024.

Earnings per share, as reported for basic and diluted outstanding shares, was $0.06 for the nine months ended August 31, 2025 and 2024.

Liquidity and Capital Resources

At August 31, 2025, the Company had working capital of $1,793,000 and unrestricted cash of $2,032,000. At August 31, 2024 the Company had working capital of $1,712,000, and unrestricted cash of $1,931,000.

During the nine months ended August 31, 2025, the Company had net income of $438,000 and operating activities provided cash of $456,000. The principal adjustments to reconcile the net income to cash provided by operating activities for the nine months ending August 31, 2025 was depreciation and amortization of $3,000, and noncash lease expense of $65,000, less provision for uncollectible accounts of $1,000 and deferred tax reduction of $63,000. In addition, changes in operating assets and liabilities increased cash by $13,000. During the nine months ended August 31, 2024 the Company had net income of $405,000 and operating activities provided cash of $419,000. The principal adjustments to reconcile the net income to cash provided by operating activities for the nine months ending August 31, 2024 was depreciation and amortization of $3,000, provision for uncollectible accounts of $19,000 and noncash lease expense of $69,000, less deferred tax reduction of $22,000. In addition, changes in operating assets and liabilities decreased cash by $55,000.

During fiscal 2025, net cash used in investing activities was $3,000 and no funds were provided or used in fiscal 2024.

Cash distributions/dividends used $363,000 and $291,000 in financing activities for the nine months ending August 31, 2025 and 2024, respectively.

Cash Distribution and Dividend Policy

It is the Company's intent that future 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 2025, a $0.03 cash distribution/dividend was declared for the first quarter, a $0.01 cash distribution/dividend was declared for the second and third quarters and a $0.01 cash distribution has been declared for the fourth quarter.

Determination of whether distributions are considered a cash distribution, cash dividend or combination of the two will not be made until after December 31, 2025, as the classification or combination is dependent upon the Company's earnings and profits for tax purposes for its fiscal year ending November 30, 2025.

Recent Accounting Pronouncements

In December 2023, the FASB issued ASU 2023-09, "Improvements to Income Tax Disclosures" which is intended to simplify various aspects related to accounting for income taxes. ASU 2023-09 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 2023-09 are effective for public business entities for fiscal years beginning after December 15, 2024, including interim periods therein. Early adoption of the standard is permitted, including adoption in interim or annual periods for which financial statements have not yet been issued. The Company will adopt ASU 2023-09 for fiscal year ending November 30, 2026.

Management does not believe that there are any recently issued and effective or not yet effective accounting pronouncements as of August 31, 2025 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, 2024, filed with the Securities and Exchange Commission on February 26, 2025.