Quarterly Report for Quarter Ending February 28, 2026 (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 59 franchised and 3 licensed units at February 28, 2026 compared to 61 franchised and 4 licensed units at February 28, 2025. System-wide revenues for the three months ended February 28, 2026 were $9.6 million and February 28, 2025 was $9.4 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 February 28, 2026, the Company employed 10 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 February 28, 2026 versus Three Months Ended February 28, 2025

For the three months ended February 28, 2026 and February 28, 2025, the Company reported net income of $119,000 and $116,000, respectively. Total revenue of $724,000 decreased $33,000, or 4.4%, for the three months ended February 28, 2026, as compared to total revenue of $757,000 for the three months ended February 28, 2025.

Royalty fee revenue of $466,000, for the quarter ended February 28, 2026, increased $9,000, or 2.0%, from the $457,000 for quarter ended February 28, 2025.

Franchise fee revenue was $8,000, for the quarter ended February 28, 2026, a decrease of $1,000, or 11.1%, from $9,000 for February 28, 2025. In the first quarter 2026 and 2025 there was one transfer and then both years had normal annual amortization.

Licensing fee and other income decreased to $52,000 for the three months ended February 28, 2026 from $74,000 for the three months ended February 28, 2025, a decrease of $22,000, or 29.7%. This decrease was primarily attributable to a $5,000 reduction in settlement revenue that had been recognized in the prior-year period from a closed location, a $2,000 decline in license fee revenue resulting from the closure of a licensed establishment in 2025, and a $15,000 decrease in non-traditional revenue due to temporarily reduced vendor rebates and the timing of franchisee purchases.

Marketing fund revenues were $198,000 for the three months ended February 28, 2026, compared to $217,000 for the three months ended February 28, 2025, a decrease of $19,000, or 8.8%. The decrease in marketing fund revenues was offset by a corresponding $19,000 decrease in marketing fund expenses.

Total operating expenses of $571,000, for the quarter ended February 28, 2026, decreased $39,000, or 6.4% from $610,000 for the quarter ended February 28, 2025. The decrease in 2026 operating expenses was primarily related to a decrease in marketing fund expenses of $19,000, and a decrease in payroll and payroll related expenses of $50,000. These were offset by an increase in February 28, 2026 professional services of $20,000, which included increased filing fees for annual Franchise Disclosure Document, an increase in employee benefits of $5,000 and an increase in general expenses of $5,000 compared to same period 2025.

Interest income was $13,000 for the quarter ended February 28, 2026, decreasing $2,000, or 13.3% from $15,000 for the three months ended February 28, 2025, primarily because of reduced short-term interest rates in 2026 compared to 2025.

For the three months ended February 28, 2026 and 2025 the provision for income tax was $47,000 and $46,000, respectively.

Earnings per share, as reported for basic and diluted outstanding shares, was $0.02 for the quarters ended February 28, 2026 and 2025.

Liquidity and Capital Resources

At February 28, 2026, the Company had working capital of $1,865,000 and unrestricted cash of $2,109,000. At February 28, 2025 the Company had working capital of $1,662,000, and unrestricted cash of $2,005,000.

During the three months ended February 28, 2026, the Company had net income of $119,000 and operating activities provided cash of $182,000. The principal adjustments to reconcile the net income to cash provided by operating activities for the three months ending February 28, 2026 was depreciation and amortization of $1,000 and noncash lease expense of $22,000, less deferred tax expense of $16,000. In addition, changes in operating assets and liabilities increased cash by $56,000. During the three months ended February 28, 2025, the Company had net income of $116,000 and operating activities provided cash of $105,000. The principal adjustments to reconcile the net income to cash provided by operating activities for the three months ending February 28, 2025 was depreciation and amortization of $1,000 and noncash lease expense of $22,000, less $1,000 provision for credit losses and deferred tax expense of $20,000. In addition, changes in operating assets and liabilities decreased cash by $14,000.

Cash distributions/dividends used $145,000 and $218,000 in financing activities for the three months ending February 28, 2026 and February 28, 2025, 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 2026, a $0.02 cash distribution/dividend was declared for the first quarter, and a $0.01 cash distribution/dividend was declared for the second 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, 2026, as the classification or combination is dependent upon the Company's earnings and profits for tax purposes for its fiscal year ending November 30, 2026.

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.

In November 2024, the Financial Accounting Standards Board issued Accounting Standards Update No. 2024-03, Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures ("ASU 2024-03"), which requires public business entities to provide enhanced disclosures that disaggregate certain expense captions in the notes to the financial statements to improve transparency about components of expense categories such as purchases of inventory, employee compensation, depreciation, amortization and related items. ASU 2024-03 does not change the recognition or measurement of expenses presented on the face of the income statement, but will require additional tabular disclosures in the notes for annual and interim reporting periods. The guidance is effective for fiscal years beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027, with early adoption permitted. The Company has not adopted this standard and is currently evaluating the potential effect the standard will have on its consolidated financial statements disclosures.

On July 30, 2025 the FASB issued ASU 2025-05, "Measurement of Credit Losses for Accounts Receivable and Contract Assets". The ASU relates to estimating credit losses under CECL for current accounts receivable and current contract assets arising from revenue transactions accounted for under ASC 606, Revenue from Contracts with Customers, including those acquired in a transaction accounted for under ASC 805, Business Combinations. The ASU does not apply to other types of accounts receivable and loans.

For all entities, the ASU provides a practical expedient to assume that current conditions as of the balance sheet date will persist through the reasonable and supportable forecast period for eligible assets. Entities will still be required to adjust historical data used in the estimation to reflect current conditions. The new guidance will be effective for interim and annual periods beginning after December 15, 2025 and is to be adopted on a prospective basis. The Company will adopt ASU 2025-09 for fiscal year ending November 30, 2027.

Management does not believe that there are any recently issued and effective or not yet effective accounting pronouncements as of February 28, 2026 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, 2025, filed with the Securities and Exchange Commission on February 24, 2026.