Quarterly Report for Quarter Ending August 31, 2026 (Form 10-Q)

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 August 31, 2026 compared to 60 franchised and 4 licensed units at August 31, 2025. System-wide revenues, meaning revenues for the entire franchise system, for the nine months ended August 31, 2026 were $31.3 million and August 31, 2025 were $30.5 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, 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, 2026, the Company employed 7 full-time employees and 2 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 August 31, 2026 versus Three Months Ended August 31, 2025

For the three months ended August 31, 2026 and August 31, 2025, the Company reported net income of $227,000 and $168,000, respectively. Total revenue of $908,000 increased $139,000, or 18.1%, for the three months ended August 31, 2026, as compared to total revenue of $769,000 for the three months ended August 31, 2025. Our total revenue for the three months ended August 31, 2026 increased compared to the prior period primarily due to an increase 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 increase has no impact on net income.

Royalty fee revenue of $531,000, for the quarter ended August 31, 2026, increased $19,000, or 3.7%, from the $512,000 for quarter ended August 31, 2025.

Franchise fee revenue was $3,000 for the quarter ended August 31, 2026, unchanged from $3,000 for the quarter ended August 31, 2025. In the third quarter of 2026 and 2025 there were no transfers or store openings, and both years had normal amortization.

Licensing fee and other income increased to $72,000 for the three months ended August 31, 2026, from $67,000 for the three months ended August 31, 2025, an increase of $5,000, or 7.5%. The increase was driven by an increase in nontraditional revenue of $11,000, offset by a decrease in settlement revenue of $5,000.

Marketing fund revenues were $302,000 for the three months ended August 31, 2026, compared to $187,000 for the three months ended August 31, 2025, an increase of $115,000, or 61.5%. The increase in marketing fund revenues was offset by a corresponding $115,000 increase in marketing fund expenses.

Total operating expenses of $607,000 for the quarter ended August 31, 2026 increased $57,000, or 10.4%, from $550,000 for the quarter ended August 31, 2025. The increase in 2026 operating expenses was primarily related to an increase in marketing fund expenses of $115,000 and an increase in professional service fees of $12,000, partially offset by a decrease in payroll expenses of $62,000 due to the retirement of an employee and reduced hours of another employee, a decrease in employee benefits of $4,000, and decreases in occupancy and travel expenses of $2,000 each compared to the same period in 2025.

Interest income was $13,000 for the quarter ended August 31, 2026, decreasing $2,000, or 13.3%, from $15,000 for the three months ended August 31, 2025.

For the three months ended August 31, 2026 and 2025, the provision for income tax was $87,000 and $66,000, respectively.

Earnings per share, as reported for basic and diluted outstanding shares, were $0.03 and $0.02 for the quarters ended August 31, 2026 and 2025, respectively.

Nine Months Ended August 31, 2026 versus Nine Months Ended August 31, 2025

For the nine months ended August 31, 2026 and August 31, 2025, the Company reported net income of $533,000 and $438,000, respectively. Total revenue of $2,435,000 increased $101,000, or 4.3%, for the nine months ended August 31, 2026, as compared to total revenue of $2,334,000 for the nine months ended August 31, 2025. Our total revenue for the nine months ended August 31, 2026 increased compared to the prior period primarily due to an increase in marketing fund expenses of $76,000, 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 increase has no impact on net income.

Royalty fee revenue of $1,517,000, for the nine months ended August 31, 2026, increased $36,000, or 2.4%, from the $1,481,000 for the nine months ended August 31, 2025.

Franchise fee revenue was $18,000 for the nine months ended August 31, 2026, increasing $3,000, or 20.0%, from $15,000 for the nine months ended August 31, 2025. In the nine months of 2026 there was one store opening compared to one transfer in the same period in 2025, with both years having normal monthly amortization. Licensing fee and other income of $193,000 for the nine months ended August 31, 2026 decreased $14,000, or 6.8%, from $207,000 for the same period in 2025. Settlement revenue decreased $17,000, sign shop revenue decreased $7,000, and license fee revenue decreased $6,000, offset by a $16,000 increase in gift card revenue in the nine months ended August 31, 2026 compared to the nine months ended August 31, 2025. Marketing fund revenues of $707,000 for the nine months ended August 31, 2026 increased $76,000, or 12.0%, from $631,000 for the nine months ended August 31, 2025.

Management continues to review expenses and control costs in a time of rising costs. Total operating expenses of $1,734,000, for the nine months ended August 31, 2026, decreased $33,000, or 1.9% from $1,767,000 for the nine months ended August 31, 2025. There were decreases in expenses for the nine months ended August 31, 2026 compared to August 31, 2025 in payroll expenses of $139,000 due to the retirement of an employee and reduced hours of another employee, and in travel of $5,000. These decreases were offset by an increase in marketing fund expenses of $76,000, an increase in professional services of $26,000 due to legal fees related to trademarks now being expensed directly and a new outside accounting services contract, and an increase in depreciation and amortization of $11,000 due to the full amortization of the remaining definite lived intangible assets.

Interest income was $39,000 for the nine months ended August 31, 2026, decreasing $4,000, or 9.3% from $43,000 for the nine months ended August 31, 2025 primarily because of reduced short-term interest rates in the nine months of 2026 compared to the same period 2025.

For the nine months ended August 31, 2026 and 2025, the provision for income tax was $207,000 and $172,000, respectively.

Earnings per share, as reported for basic and diluted outstanding shares, were $0.07 and $0.06 for the nine months ended August 31, 2026 and 2025, respectively.

Liquidity and Capital Resources

At August 31, 2026, the Company had working capital of $2,150,000 and unrestricted cash of $2,405,000. At August 31, 2025, the Company had working capital of $1,793,000, and unrestricted cash of $2,032,000.

During the nine months ended August 31, 2026, the Company had net income of $533,000 and operating activities provided cash of $731,000. The principal adjustments to reconcile the net income to cash provided by operating activities for the nine months ending August 31, 2026 were depreciation and amortization of $14,000 and noncash lease expense of $65,000, less a deferred tax reduction of $57,000. In addition, changes in operating assets and liabilities increased cash by $176,000.

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, 2026, no funds were provided by or used in investing activities. During the nine months ended August 31, 2025, net cash used in investing activities was $3,000.

Cash distributions/dividends used $291,000 and $363,000 in financing activities for the nine months ending August 31, 2026 and 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. Previously, dividends were paid quarterly when funds were available, and the Board has continued to declare a cash distribution/dividend each quarter of fiscal 2026: a $0.02 cash distribution/dividend for the first quarter, a $0.01 cash distribution/dividend for each of the second and third quarters, and a $0.01 cash distribution/dividend for the fourth quarter, which was declared on September 10, 2026. Going forward, the Company expects to pay dividends semi-annually, subject to availability of funds and Board approval.

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 enhance the transparency and decision usefulness of income tax disclosures. ASU 2023-09 requires public business entities to disclose, on an annual basis, specific categories in the effective tax rate reconciliation and additional information for reconciling items that meet a quantitative threshold. The ASU also requires disclosure of income taxes paid, net of refunds, disaggregated by federal, state and foreign taxes and by individual jurisdictions that meet a quantitative threshold, as well as income or loss before income taxes and income tax expense or benefit disaggregated between domestic and foreign. The amendments in ASU 2023-09 are effective for public business entities for annual periods beginning after December 15, 2024, and are to be applied on a prospective basis, with retrospective application permitted. Early adoption is permitted for annual financial statements that have not yet been issued. ASU 2023-09 affects income tax disclosures only and does not change the recognition or measurement of income taxes. The Company will adopt ASU 2023-09 for fiscal year ending November 30, 2026, and the expanded disclosures will first be presented in the Company's Annual Report on Form 10-K for that year.

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 2025-05 for fiscal year ending November 30, 2027.

Other than ASU 2024-03, which the Company is currently evaluating, management does not believe that there are any recently issued and effective or not yet effective accounting pronouncements as of August 31, 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 and the valuation of long-lived and intangible assets. 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.