10-Q

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 August 31, 2018
[ ]	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 check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.  Large accelerated filer ☐      Accelerated filer ☐       Non-accelerated filer ☐      (Do not check if a smaller reporting company)      Smaller reporting company ☒     Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐                                    

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

As of October 12, 2018 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 Operations	10
Item 3	Quantitative and Qualitative Disclosures About Market Risk	14
Item 4	Controls and Procedures	14
PART II	OTHER INFORMATION	15
Item 1.	Legal Proceedings	15
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	15
Item 3	Defaults Upon Senior Securities	15
Item 4	Mine Safety Disclosures	15
Item 5	Other Information	15
Item 6	Exhibits	15
SIGNATURE		15

2

PART I

ITEM 1. FINANCIAL STATEMENTS

BAB, Inc.

Consolidated Balance Sheets

	August 31, 2018			November 30, 2017
	(unaudited)
ASSETS
Current Assets
Cash	$	948,818		$	792,655
Restricted cash		571,882			693,425
Receivables
Trade accounts and notes receivable (net of allowance for doubtful accounts of $16,227 in 2018 and $19,438 in 2017 )		75,681			56,342
Marketing fund contributions receivable from franchisees and stores		16,223			12,635
Inventories		3,697			19,761
Prepaid expenses and other current assets		93,891			85,770
Total Current Assets		1,710,192			1,660,588
Property, plant and equipment (net of accumulated depreciation of $154,844 in 2018 and $154,762 in 2017)		1,322			5,515
Trademarks		459,637			459,637
Goodwill		1,493,771			1,493,771
Definite lived intangible assets (net of accumulated amortization of $123,646 in 2018 and $123,398 in 2017)		6,578			-
Deferred tax asset		248,000			248,000
Total Noncurrent Assets		2,209,308			2,206,923
Total Assets	$	3,919,500		$	3,867,511
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable	$	40,211		$	43,741
Accrued expenses and other current liabilities		260,098			243,397
Unexpended marketing fund contributions		587,958			706,856
Deferred franchise fee revenue		-			-
Deferred licensing revenue		15,476			18,155
Current and Total Liabilities		903,743			1,012,149
Stockholders' Equity
Preferred shares -$.001 par value; 4,000,000 authorized; no shares outstanding as of August 31, 2018 and November 30, 2017		-			-
Preferred shares -$.001 par value; 1,000,000 Series A authorized; no shares outstanding as of August 31, 2018 and November 30, 2017		-			-
Common stock -$.001 par value; 15,000,000 shares authorized; 8,466,953 shares issued and 7,263,508 shares outstanding as of August 31, 2018 and November 30, 2017		13,508,257			13,508,257
Additional paid-in capital		987,034			987,034
Treasury stock		(222,781	)		(222,781	)
Accumulated deficit		(11,256,753	)		(11,417,148	)
Total Stockholders' Equity		3,015,757			2,855,362
Total Liabilities and Stockholders' Equity	$	3,919,500		$	3,867,511

SEE ACCOMPANYING NOTES

3

BAB, Inc.

Consolidated Statements of Income

For the Three and Nine Month Periods Ended August 31, 2018 and 2017

 (Unaudited)

	Three months ended August 31,				Nine months ended August 31,
	2018		2017		2018		2017
REVENUES
Royalty fees from franchised stores	$	431,786	$	446,778	$	1,242,272	$	1,295,021
Franchise fees		18,000		10,000		19,500		50,000
Licensing fees and other income		106,402		107,049		355,354		319,404
Total Revenues		556,188		563,827		1,617,126		1,664,425
OPERATING EXPENSES
Selling, general and administrative expenses:
Payroll and payroll-related expenses		228,806		258,601		666,499		767,585
Occupancy		41,017		43,913		123,908		133,708
Advertising and promotion		875		5,997		3,047		17,709
Professional service fees		26,768		29,079		104,287		106,653
Travel		10,847		9,686		28,070		28,562
Employee benefit expense		33,121		42,245		91,147		122,498
Depreciation and amortization		288		617		728		10,995
Other		41,928		41,640		133,569		156,001
Total Operating Expenses		383,650		431,778		1,151,255		1,343,711
Income from operations		172,538		132,049		465,871		320,714
Interest income		17		24		64		87
Income before provision for income taxes		172,555		132,073		465,935		320,801
Provision for income taxes
Current tax		-		-		15,000		-
Net Income	$	172,555	$	132,073	$	450,935	$	320,801
Earnings per share - Basic and Diluted	$	0.02	$	0.02	$	0.06	$	0.04
Weighted average shares outstanding - Basic and Diluted		7,263,508		7,263,508		7,263,508		7,263,508
Cash distributions declared per share	$	0.01	$	0.01	$	0.04	$	0.04

SEE ACCOMPANYING NOTES

4

BAB, Inc.

Consolidated Statements of Cash Flows

For the Nine Months Ended August 31, 2018 and 2017

 (Unaudited)

	For the nine months ended:
	August 31, 2018			August 31, 2017
Operating activities
Net Income	$	450,935		$	320,801
Adjustments to reconcile net income to cash
flows provided by operating activities:
Depreciation and amortization		728			10,995
Provision for uncollectible accounts, net of recoveries		(3,210	)		(5,001	)
Proceeds from sale of property and equipment		4,516			-
Changes in:
Trade accounts receivable and notes receivable		(16,129	)		1,494
Restricted cash		121,543			(103,213	)
Marketing fund contributions receivable		(3,588	)		(593	)
Inventories		15,260			(10,810	)
Prepaid expenses and other		(8,121	)		(17,059	)
Accounts payable		(3,530	)		(3,718	)
Accrued liabilities		16,701			(93,524	)
Unexpended marketing fund contributions		(118,898	)		104,347
Deferred revenue		(2,679	)		(65,179	)
Net Cash Provided by Operating Activities		453,528			138,540
Investing activities
Purchase of equipment		-			(4,915	)
Capitalization of trademark renewals		(6,825	)		(4,455	)
Net Cash Used In Investing Activities		(6,825	)		(9,370	)
Financing activities
Cash distributions/dividends		(290,540	)		(290,541	)
Net Cash Used In Financing Activities		(290,540	)		(290,541	)
Net Increase (Decrease) in Cash		156,163			(161,371	)
Cash, Beginning of Period		792,655			907,116
Cash, End of Period	$	948,818		$	745,745
Supplemental disclosure of cash flow information:
Interest paid	$	-		$	-
Income taxes paid	$	769		$	18,173

 SEE ACCOMPANYING NOTES

5

BAB, Inc.

Notes to Unaudited Consolidated Financial Statements

For the Three and Nine Month Periods Ended August 31, 2018 and 2017

 (Unaudited)

Note 1. Nature of Operations

BAB, Inc. (“the Company”) has three wholly owned subsidiaries: BAB Systems, Inc. (“Systems”), BAB Operations, Inc. (“Operations”) and BAB Investments, Inc (“Investments”). Systems was incorporated on December 2, 1992, and was primarily established to franchise Big Apple Bagels® (“BAB”) specialty bagel retail stores. My Favorite Muffin® (“MFM”), was acquired in 1997 and is included as a part of Systems. Brewster’s® Coffee (“Brewster’s”) was established in 1996 and the coffee is sold in BAB and MFM locations as well as through license agreements. SweetDuet (“SD”) frozen yogurt can be added as an additional brand in a BAB or MFM location. 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. Investments was incorporated September 9, 2009 to be used for the purpose of acquisitions. To date, there have been no acquisitions.

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 under the BAB and MFM and SD trade names. At August 31, 2018, the Company had 79 franchise units and 4 licensed units in operation in 24 states and the United Arab Emirates.  The Company additionally derives income from the sale of its trademark bagels, muffins and coffee through nontraditional channels of distribution including under a licensing agreement with Green Beans Coffee.  Also, included in licensing fees and other income is Operations Sign Shop results.  For franchise consistency and convenience, the Sign Shop provided the majority of signage to franchisees, including but not limited to, menu panels, build charts, interior and exterior signage and point of purchase materials.  Beginning December 2017, a majority of franchise signage and point of sale materials is being outsourced to a printer that will be able to provide consistency and convenience to the franchisees.  The printer will be independently billing and collecting funds from the franchisee, but the outsourcing of signage will not have a material effect on revenues or net income. 

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. SD frozen yogurt can be added as an additional brand in a BAB or MFM location. Although the Company doesn't actively market Brewster's stand-alone franchises, Brewster's coffee products are sold in most franchised units.    

The Company is leveraging on the natural synergy of distributing muffin products in existing 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.

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, 2017 which was filed February 26, 2018.  In the opinion of the Company's management, the condensed consolidated financial statements for the unaudited interim period presented include all adjustments, including normal recurring adjustments, necessary to fairly present the results of such interim period 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.

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2. Units Open and Under Development

Units which are open or under development at August 31, 2018 are as follows:

Stores open:
Franchisee-owned stores	79
Licensed Units	4
	83
Unopened stores with Franchise
Agreements	2
Total operating units and units with Franchise Agreements	85

3. Earnings per Share

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

	For the three months ended August 31,				For the nine months ended August 31,
	2018		2017		2018		2017
Numerator:
Net income available to common shareholders	$	172,555	$	136,005	$	450,935	$	320,801
Denominator:
Weighted average outstanding shares
Basic and diluted		7,263,508		7,263,508		7,263,508		7,263,508
Earnings per Share - Basic and Diluted	$	0.02	$	0.02	$	0.06	$	0.04

 4. 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. The Company has elected to conduct its annual test during the first quarter. During the quarter ended February 28, 2018, management qualitatively assessed goodwill to determine whether testing was necessary. Factors that management considers in this assessment include macroeconomic conditions, industry and market considerations, overall financial performance (both current and projected), changes in management and strategy, and changes in the composition and carrying amounts of net assets. If this qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying value, a quantitative assessment is then performed. Based on a qualitative evaluation, management determined that the carrying value of goodwill was not impaired at August 31, 2018, and a quantitative assessment was not considered necessary.

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5. 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 standard requires that the transaction price received from customers be allocated to each separate and distinct performance obligation. The transaction price attributable to each separate and distinct performance obligation is then recognized as the performance obligations are satisfied. We have evaluated franchise fees and have determined that under the new standard the franchise fee is not separate and distinct from the overall franchise right. Franchise fees received will be recorded as deferred revenue and recognized as revenue over the term of each respective franchise agreement, typically 10 years.  The Company is still evaluating the financial impact that this change will have on our financial statements.

We have evaluated the impact of our franchise contributions to and subsequent expenditures from our marketing fund. We act as an agent in regard to these franchisee contributions and expenditures and as such we do not currently include them in our Consolidated Statements of Income. We have determined we are the principal in these arrangements and under the new standard we will include them as revenue and expense items.  The Company is still evaluating the specific effect of this change. We believe it will have a material impact on our gross amount of reported revenues and expenses but we do not expect a significant impact on our net income.  The Company will adopt ASU 2014-09 for fiscal year ending November 30, 2019.

On February 25, 2016, the FASB issued ASU No. 2016-02, Leases, requiring lessees to recognize a right-of-use asset and a lease liability on the balance sheet for all leases with the exception of short-term leases. For lessees, leases will continue to be classified as either operating or finance leases in the income statement. Lessor accounting is similar to the current model but updated to align with certain changes to the lessee model. Lessors will continue to classify leases as operating, direct financing or sales-type leases. The effective date of the new standard for public companies is for fiscal years beginning after December 15, 2018. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition and requires application of the new guidance at the beginning of the earliest comparative period presented.  The Company is planning on early adoption of this standard at the commencement of the new lease beginning October 1, 2018.  The Company will classify the new office lease as an operating lease. The adoption of ASU No. 2016-02 is expected to increase the Company’s total assets and liabilities by approximately $500,000 based on a discounted calculation of the future lease payments, as of October 1, 2018. A discount rate of 4% is used for the present value calculation of the future lease payments. The Company expects the impact on the results of its operations to equal the amortization of the asset, net of the present value discount, on a straight line basis over the lease term.

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5. Recent Accounting Pronouncements (continued)

In March 2016, the Financial Accounting Standards Board issued ASU 2016-04, Liabilities – Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products. The amendments in the ASU are designed to provide guidance and eliminate diversity in the accounting for derecognition of prepaid stored-value product liabilities. Typically, a prepaid stored-value product liability is to be derecognized when it is probable that a significant reversal of the recognized breakage amount will not subsequently occur. This is when the likelihood of the product holder exercising its remaining rights becomes remote. This estimate shall be updated at the end of each reporting period. The amendments in this ASU are effective for the annual reporting periods beginning after December 15, 2017, including the interim periods within that reporting period. Early adoption is permitted. The Company does not believe that adoption of this guidance will have a material impact on the Company’s 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 August 31, 2018 that would have or are expected to have any significant effect on the Company’s financial position, cash flows or results of operations.

6. Stockholder’s Equity

The Board of Directors declared a cash distribution/dividend on March 15, June 7 and September 7, 2017 of $0.01 per share, paid April 20, July 13, and October 13, 2017, respectively. On December 5, 2017, a $0.01 quarterly and a $0.01 special cash distribution/dividend per share was declared and paid on January 12, 2018 and a $0.01 per share quarterly cash distribution/dividend was declared on March 7, 2018 and June 4, 2018 paid April 13, 2018 and July 6, 2018, respectively.

On September 4, 2018, the Board of Directors declared a $0.01 per share quarterly cash distribution/dividend to shareholders of record as of September 18, 2018, to be paid October 2, 2018.

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, Inc. and its stockholders from efforts to obtain control of BAB, Inc. that the Board of Directors determines are not in the best interest of BAB, Inc. and its stockholders. BAB, Inc. issued one Right for each current share of stock outstanding at the close of business on May 13, 2013. The rights will not be exercisable unless a person or group acquires 15% (20% institutional investors) or more of BAB, Inc.’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.

On June 18, 2014 an amendment to the Preferred Shares Rights Agreement was filed appointing American Stock Transfer & Trust Company, LLC as successor to Illinois Stock Transfer Company. All original rights and provisions remain unchanged. On August 18, 2015 an amendment was filed to the Preferred Shares Rights Agreement changing the final expiration date to mean the fifth anniversary of the date of the original agreement. All other original rights and provisions remain the same. On May 22, 2017 an amendment was filed extending the final expiration date to mean the seventh anniversary date of the original agreement. All other original rights and provisions remain the same.

7. Subsequent Event

On June 13, 2018 a lease was signed between BAB Systems, Inc. and TR Deerfield Office LLC., its current lessor The lease is for sixty-six (66) months commencing on October 1, 2018 and continuing through March 31, 2024. The Company will reduce the current square footage from 7,144 square feet to 5,298 square feet.

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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 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 79 franchised and 4 licensed units at August 31, 2018 compared to 83 franchised and 3 licensed units at August 31, 2017.  System-wide revenues for the nine months ended August 31, 2018 were $25.2 million as compared to August 31, 2017 which were $26.3 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 nontraditional channels of distribution (Green Beans Coffee).  Also, included in licensing fees and other income is Operations Sign Shop results.  For franchise consistency and convenience, the Sign Shop provided the majority of signage to franchisees, including but not limited to, menu panels, build charts, interior and exterior signage and point of purchase materials.  Beginning December 2017, a majority of franchise signage and point of sale materials is being outsourced to a printer that will be able to provide consistency and convenience to the franchisees.  The printer will be independently billing and collecting funds from the franchisee, but the outsourcing of signage will not have a material effect on revenues or net income.  

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. 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.

10

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, 2018, the Company employed 13 full-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

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.

Results of Operations

Three Months Ended August 31, 2018 versus Three Months Ended August 31, 2017

For the three months ended August 31, 2018 and 2017, the Company reported net income of $173,000 and $132,000, respectively. Total revenue of $556,000 decreased $8,000, or 1.4%, for the three months ended August 31, 2018, as compared to total revenue of $564,000 for the three months ended August 31, 2017.

Royalty fee revenue of $432,000, for the quarter ended August 31, 2018, decreased $15,000, or 3.4%, from the $447,000 for quarter ended August 31, 2017.

Franchise fee revenues of $18,000, for the quarter ended August 31, 2018, increased $8,000, or 80.0% from the $10,000 for the quarter ended August 31, 2017. There were no store openings for third quarters 2018 or 2017 and three transfers in the quarter ended August 31, 2018 compared to two store transfers in the three months ending August 31, 2017.

Licensing fee and other income of $106,000, for the quarter ended August 31, 2018, decreased $1,000, or 0.9% from $107,000 for the quarter ended August 31, 2017. License fees and settlement income increased $31,000, offset by a decrease in Sign Shop revenue of $15,000 and $17,000 decrease in rebate income in the three months ended August 31, 2018 compared to the same period 2017.

Total operating expenses of $384,000, for the quarter ended August 31, 2018 decreased $48,000, or 11.1% from $432,000 for the quarter ended August 31, 2017. The 2018 decrease was primarily due to a decrease in salary expenses of $30,000, a decrease in employee benefit expense of $9,000, a decrease in advertising and promotion of $5,000, a decrease in occupancy of $3,000, a decrease in professional services of $2,000, and a decrease in Sign Shop cost of goods sold of $7,000, offset by an increase in general business expenses of $4,000, an increase in insurance of $2,000 and an increase in travel versus 2017.

Earnings per share, as reported for basic and diluted outstanding shares for the quarter ended August 31, 2018 and 2017 was $0.02.

Nine Months Ended August 31, 2018 versus Nine Months Ended August 31, 2017

For the nine months ended August 31, 2018 and 2017, the Company reported net income of $451,000 and $321,000, respectively.  Total revenue of $1,617,000 decreased $47,000, or 2.8%, for the nine months ended August 31, 2018, as compared to total revenue of $1,664,000 for the nine months ended August 31, 2017. 

Royalty fee revenue of $1,242,000, for the nine months ended August 31, 2018, decreased $53,000, or 4.1%, from the $1,295,000 for the nine months ended August 31, 2017. Royalty revenues decreased primarily due to decreased sales and fewer stores.

Franchise fee revenues of $20,000, for the nine months ended August 31, 2018, decreased $30,000, or 60.0%, from the $50,000 for the nine months ended August 31, 2017. For the nine months of 2018 there were four transfers compared to two stores opened and two transfers for the same period in 2017.

11

Licensing fee and other income of $355,000, for the nine months ended August 31, 2018, decreased $36,000, or 11.3%, from $319,000 for the nine months ended August 31, 2017.  The increase in 2018 was primarily due to an increase in settlement income of $100,000, an increase of $15,000 in gift card breakage and a $10,000 increase in rebate and license fee income versus 2017, offset by a decrease in 2018 of $44,000 in Sign Shop revenue and a decrease of $45,000 in traditional revenue compared to 2017.

Total operating expenses of $1,151,000 decreased $193,000, or 14.4%, for the nine months ended August 31, 2018, from $1,344,000 for the same period 2017.  The decrease in 2018 was primarily due to a decrease in payroll of $101,000, a $31,000 decrease in employee benefits, a $17,000 decrease in franchise development, a $15,000 decrease in advertising and promotion, a $10,000 decrease in both occupancy expense and depreciation and amortization and a $3,000 decrease in professional fees. There was a $12,000 decrease in Sign Shop cost of goods sold, offset by a $3,000 increase in shipping and handling expense, a $2,000 increase in provision for uncollectible accounts and a $1,000 increase in general expenses compared to same period 2017. 

There was a $15,000 income tax expense recorded for the nine months ended August 31, 2018 compared to none in the same period 2017.

Earnings per share, as reported for basic and diluted outstanding shares for the nine months ended August 31, 2018 and 2017 was $0.06 and $0.04 per share, respectively.

Liquidity and Capital Resources

At August 31, 2018, the Company had working capital of $806,000 and unrestricted cash of $949,000. At November 30, 2017 the Company had working capital of $648,000 and unrestricted cash of $793,000.

During the nine months ended August 31, 2018, the Company had net income of $451,000 and operating activities provided cash of $454,000. The principal adjustments to reconcile net income to cash provided in operating activities for the nine months ending August 31, 2018 were depreciation and amortization of $1,000 and $5,000 proceeds from the sale of equipment, less a provision for uncollectible accounts of $3,000. In addition, changes in operating assets and liabilities increased cash by less than $1,000. During the nine months ended August 31, 2017 the Company had net income of $321,000 and operating activities provided cash of $139,000. The principal adjustments to reconcile the net income to cash provided in operating activities for the nine months ending August 31, 2017 were depreciation and amortization of $11,000 less a provision for uncollectible accounts of $5,000. In addition, changes in operating assets and liabilities decreased cash by $188,000.

The Company used $7,000 and $9,000 for investing activities for the nine months ended August 31, 2018 and 2017, respectively.

The Company used $291,000 for cash distribution/dividend payments during the nine month periods ended August 31, 2018 and 2017.

On September 4, 2018, the Board of Directors declared a $0.01 quarterly cash distribution/dividend to shareholders of record as of September 18, 2018, payable October 2, 2018. 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.

12

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. 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.

Determination of whether it is a cash distribution, cash dividend or combination of the two will not be made until after December 31, 2018, as the classification or combination is dependent upon the Company’s earnings and profits for tax purposes for its fiscal year ending November 30, 2018.

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 and Adopted 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 standard requires that the transaction price received from customers be allocated to each separate and distinct performance obligation. The transaction price attributable to each separate and distinct performance obligation is then recognized as the performance obligations are satisfied. We have evaluated franchise fees and have determined that under the new standard the franchise fee is not separate and distinct from the overall franchise right. Franchise fees received will be recorded as deferred revenue and recognized as revenue over the term of each respective franchise agreement, typically 10 years.  The Company is still evaluating the financial impact that this change will have on our financial statements.

We have evaluated the impact of our franchise contributions to and subsequent expenditures from our marketing fund. We act as an agent in regard to these franchisee contributions and expenditures and as such we do not currently include them in our Consolidated Statements of Income. We have determined we are the principal in these arrangements and under the new standard we will include them as revenue and expense items.  The Company is still evaluating the specific effect of this change. We believe it will have a material impact on our gross amount of reported revenues and expenses but we do not expect a significant impact on our net income.  The Company will adopt ASU 2014-09 for fiscal year ending November 30, 2019.

13

On February 25, 2016, the FASB issued ASU No. 2016-02, Leases, requiring lessees to recognize a right-of-use asset and a lease liability on the balance sheet for all leases with the exception of short-term leases. For lessees, leases will continue to be classified as either operating or finance leases in the income statement. Lessor accounting is similar to the current model but updated to align with certain changes to the lessee model. Lessors will continue to classify leases as operating, direct financing or sales-type leases. The effective date of the new standard for public companies is for fiscal years beginning after December 15, 2018. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition and requires application of the new guidance at the beginning of the earliest comparative period presented.  The Company is planning on early adoption of this standard at the commencement of the new lease beginning October 1, 2018.  The Company will classify the new office lease as an operating lease. The adoption of ASU No. 2016-02 is expected to increase the Company’s total assets and liabilities by approximately $500,000 based on a discounted calculation of the future lease payments, as of October 1, 2018. A discount rate of 4% is used for the present value calculation of the future lease payments. The Company expects the impact on the results of its operations to equal the amortization of the asset, net of the present value discount, on a straight line basis over the lease term.

Management does not believe that there are any other recently issued and effective or not yet effective pronouncements 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, 2017, filed with the Securities and Exchange Commission on February 26, 2018.  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 nine months ended August 31, 2018.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 August 31, 2018 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.

14

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 2018 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

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. We know of no pending or threatened proceeding or claim to which we are or will be a party.

ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES 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

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:  October 12, 2018	/s/ Geraldine Conn
	Geraldine Conn
	Chief Financial Officer

15

INDEX TO EXHIBITS

(a)  EXHIBITS

The following exhibits are filed herewith.

INDEX NUMBER	DESCRIPTION
3.1	Articles of Incorporation (See Form 10-KSB for year ended November 30, 2006 filed February 28, 2007)
3.2	Bylaws of the Company (See Form 10-KSB for year ended November 30, 2006 filed February 28, 2007)
4.1	Preferred Shares Rights Agreement (See Form 8-K filed May 7, 2013)
4.2	Preferred Shares Rights Agreement Amendment No. 1 (See Form 8-K filed June 18, 2014)
4.3	Preferred Shares Rights Agreement Amendment No. 2 (See Form 8-K filed August 18, 2015)
4.4	Preferred Shares Rights Agreement Amendment No. 3 (See Form 8-K filed May 22, 2017)
21.1	List of Subsidiaries of the Company
31.1	Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Section 906 of the Sarbanes-Oxley Act of 2002

101.INS	XBRL Instance Document, filed herewith
101.SCH	XBRL Taxonomy Extension Schema Document, filed herewith
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document, filed herewith
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document, filed herewith
101.LAB	XBRL Taxonomy Extension Label Linkbase Document, filed herewith
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document, filed herewith

16

EX-21.1

Exhibit 21.1

SUBSIDIARIES OF BAB, INC.

BAB Systems, Inc., an Illinois corporation

BAB Operations, Inc., an Illinois corporation

BAB Investments, Inc., an Illinois corporation

EX-31.1

Exhibit 31.1

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13A-14 (a) OR RULE 15d-14 (a) OF THE SECURITIES EXCHANGE ACT OF 1934.

I, Michael W. Evans, certify that:

(1) I have reviewed this quarterly report on Form 10-Q of BAB, Inc.

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(4) The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a -15(e) and 15d -15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a – 15(f) and 15d -15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

(5) The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: October 12, 2018	By:  /s/ Michael W. Evans
	Michael W. Evans, Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13A-14 (a) OR RULE 15d-14 (a) OF THE SECURITIES EXCHANGE ACT OF 1934.

I, Geraldine Conn, certify that:

(1) I have reviewed this quarterly report on Form 10-Q of BAB, Inc.

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;

(4) The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a -15(e) and 15d -15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d -15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

(5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.  

Date: October 12, 2018	By: /s/ Geraldine Conn
	Geraldine Conn, Chief Financial Officer

EX-32.1

Exhibit 32.1

BAB, Inc.

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the BAB, Inc. (the "Company") Quarterly Report on Form 10-Q for the period ended August 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael W. Evans, Chief Executive Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition, results of operations, and cash flows of the Company.

Date:  October 12, 2018		By:  /s/ Michael W. Evans
	Michael W. Evans, Chief Executive Officer

EX-32.2

Exhibit 32.2

BAB, Inc.

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the BAB, Inc. (the "Company") Quarterly Report on Form 10-Q for the period ended August 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Geraldine Conn, Chief Financial Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition, results of operations, and cash flows of the Company.

Date:  October 12, 2018		By:   /s/ Geraldine Conn
	Geraldine Conn, Chief Financial Officer

XML

Document And Entity Information - shares	9 Months Ended
	Aug. 31, 2018	Oct. 12, 2018
Document Information [Line Items]
Entity Registrant Name	BAB, INC.
Entity Central Index Key	0001123596
Trading Symbol	babb
Current Fiscal Year End Date	--11-30
Entity Filer Category	Non-accelerated Filer
Entity Current Reporting Status	Yes
Entity Common Stock, Shares Outstanding (in shares)		7,263,508
Document Type	10-Q
Document Period End Date	Aug. 31, 2018
Document Fiscal Year Focus	2018
Document Fiscal Period Focus	Q3
Amendment Flag	false
Entity Emerging Growth Company	false
Entity Small Business	true

XML

Consolidated Balance Sheets (Current Period Unaudited) - USD ($)	Aug. 31, 2018	Nov. 30, 2017
Current Assets
Cash	$ 948,818	$ 792,655
Restricted cash	571,882	693,425
Receivables
Trade accounts and notes receivable (net of allowance for doubtful accounts of $16,227 in 2018 and $19,438 in 2017 )	75,681	56,342
Marketing fund contributions receivable from franchisees and stores	16,223	12,635
Inventories	3,697	19,761
Prepaid expenses and other current assets	93,891	85,770
Total Current Assets	1,710,192	1,660,588
Property, plant and equipment (net of accumulated depreciation of $154,844 in 2018 and $154,762 in 2017)	1,322	5,515
Trademarks	459,637	459,637
Goodwill	1,493,771	1,493,771
Definite lived intangible assets (net of accumulated amortization of $123,646 in 2018 and $123,398 in 2017)	6,578
Deferred tax asset	248,000	248,000
Total Noncurrent Assets	2,209,308	2,206,923
Total Assets	3,919,500	3,867,511
Current Liabilities
Accounts payable	40,211	43,741
Accrued expenses and other current liabilities	260,098	243,397
Unexpended marketing fund contributions	587,958	706,856
Deferred franchise fee revenue
Deferred licensing revenue	15,476	18,155
Current and Total Liabilities	903,743	1,012,149
Stockholders' Equity
Preferred shares
Common stock -$.001 par value; 15,000,000 shares authorized; 8,466,953 shares issued and 7,263,508 shares outstanding as of August 31, 2018 and November 30, 2017	13,508,257	13,508,257
Additional paid-in capital	987,034	987,034
Treasury stock	(222,781)	(222,781)
Accumulated deficit	(11,256,753)	(11,417,148)
Total Stockholders' Equity	3,015,757	2,855,362
Total Liabilities and Stockholders' Equity	3,919,500	3,867,511
Series A Preferred Stock [Member]
Stockholders' Equity
Preferred shares

XML

Consolidated Balance Sheets (Current Period Unaudited) (Parentheticals) - USD ($)	Aug. 31, 2018	Nov. 30, 2017
Trade accounts and notes receivable, allowance for doubtful accounts	$ 16,227	$ 19,438
Property, plant and equipment, accumulated depreciation	154,844	154,762
Definite lived intangible assets, accumulated amortization	$ 123,646	$ 123,398
Preferred shares, par value (in dollars per share)	$ 0.001	$ 0.001
Preferred shares, shares authorized (in shares)	4,000,000	4,000,000
Preferred shares, shares outstanding (in shares)	0	0
Common stock, par value (in dollars per share)	$ 0.001	$ 0.001
Common stock, shares authorized (in shares)	15,000,000	15,000,000
Common stock, shares issued (in shares)	8,466,953	8,466,953
Common stock, shares outstanding (in shares)	7,263,508	7,263,508
Series A Preferred Stock [Member]
Preferred shares, par value (in dollars per share)	$ 0.001	$ 0.001
Preferred shares, shares authorized (in shares)	1,000,000	1,000,000
Preferred shares, shares outstanding (in shares)	0	0

XML

Consolidated Statements of Income (Unaudited) - USD ($)	3 Months Ended		9 Months Ended
	Aug. 31, 2018	Aug. 31, 2017	Aug. 31, 2018	Aug. 31, 2017
REVENUES
Total Revenues	$ 556,188	$ 563,827	$ 1,617,126	$ 1,664,425
OPERATING EXPENSES
Payroll and payroll-related expenses	228,806	258,601	666,499	767,585
Occupancy	41,017	43,913	123,908	133,708
Advertising and promotion	875	5,997	3,047	17,709
Professional service fees	26,768	29,079	104,287	106,653
Travel	10,847	9,686	28,070	28,562
Employee benefit expense	33,121	42,245	91,147	122,498
Depreciation and amortization	288	617	728	10,995
Other	41,928	41,640	133,569	156,001
Total Operating Expenses	383,650	431,778	1,151,255	1,343,711
Income from operations	172,538	132,049	465,871	320,714
Interest income	17	24	64	87
Income before provision for income taxes	172,555	132,073	465,935	320,801
Provision for income taxes
Current tax			15,000
Net Income	$ 172,555	$ 132,073	$ 450,935	$ 320,801
Earnings per share - Basic and Diluted (in dollars per share)	$ 0.02	$ 0.02	$ 0.06	$ 0.04
Weighted average shares outstanding - Basic and Diluted (in shares)	7,263,508	7,263,508	7,263,508	7,263,508
Cash distributions declared per share (in dollars per share)	$ 0.01	$ 0.01	$ 0.04	$ 0.04
Royalty [Member]
REVENUES
Total Revenues	$ 431,786	$ 446,778	$ 1,242,272	$ 1,295,021
Franchise [Member]
REVENUES
Total Revenues	18,000	10,000	19,500	50,000
License [Member]
REVENUES
Total Revenues	$ 106,402	$ 107,049	$ 355,354	$ 319,404

XML

Consolidated Statements of Cash Flows (Unaudited) - USD ($)	9 Months Ended
	Aug. 31, 2018	Aug. 31, 2017
Operating activities
Net Income	$ 450,935	$ 320,801
Adjustments to reconcile net income to cash flows (used in)/provided by operating activities:
Depreciation and amortization	728	10,995
Provision for uncollectible accounts, net of recoveries	(3,210)	(5,001)
Proceeds from sale of property and equipment	4,516
Changes in:
Trade accounts receivable and notes receivable	(16,129)	1,494
Restricted cash	121,543	(103,213)
Marketing fund contributions receivable	(3,588)	(593)
Inventories	15,260	(10,810)
Prepaid expenses and other	(8,121)	(17,059)
Accounts payable	(3,530)	(3,718)
Accrued liabilities	16,701	(93,524)
Unexpended marketing fund contributions	(118,898)	104,347
Deferred revenue	(2,679)	(65,179)
Net Cash Provided by Operating Activities	453,528	138,540
Investing activities
Purchase of equipment		(4,915)
Capitalization of trademark renewals	(6,825)	(4,455)
Net Cash Used In Investing Activities	(6,825)	(9,370)
Financing activities
Cash distributions/dividends	(290,540)	(290,541)
Net Cash Used In Financing Activities	(290,540)	(290,541)
Net Increase (Decrease) in Cash	156,163	(161,371)
Cash, Beginning of Period	792,655	907,116
Cash, End of Period	948,818	745,745
Supplemental disclosure of cash flow information:
Interest paid
Income taxes paid	$ 769	$ 18,173

XML

Note 1 - Nature of Operations

9 Months Ended

Aug. 31, 2018

Notes to Financial Statements

Nature of Operations [Text Block]

Note

1.

Nature of Operations

BAB, Inc. (“the Company”) has

three

wholly owned subsidiaries: BAB Systems, Inc. (“Systems”), BAB Operations, Inc. (“Operations”) and BAB Investments, Inc (“Investments”). Systems was incorporated on

December 2, 1992,

and was primarily established to franchise Big Apple Bagels® (“BAB”) specialty bagel retail stores. My Favorite Muffin® (“MFM”), was acquired in

1997

and is included as a part of Systems. Brewster’s® Coffee (“Brewster’s”) was established in

1996

and the coffee is sold in BAB and MFM locations as well as through license agreements. SweetDuet (“SD”) frozen yogurt can be added as an additional brand in a BAB or MFM location. 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. Investments was incorporated

September 9, 2009

to be used for the purpose of acquisitions. To date, there have been

no

acquisitions.

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 under the BAB and MFM and SD trade names. At

August 31, 2018,

the Company had

79

franchise units and

4

licensed units in operation in

24

states and the United Arab Emirates.  The Company additionally derives income from the sale of its trademark bagels, muffins and coffee through nontraditional channels of distribution including under a licensing agreement with Green Beans Coffee.  Also, included in licensing fees and other income is Operations Sign Shop results.  For franchise consistency and convenience, the Sign Shop provided the majority of signage to franchisees, including but

not

limited to, menu panels, build charts, interior and exterior signage and point of purchase materials.  Beginning

December 2017,

a majority of franchise signage and point of sale materials is being outsourced to a printer that will be able to provide consistency and convenience to the franchisees.  The printer will be independently billing and collecting funds from the franchisee, but the outsourcing of signage will

not

have a material effect on revenues or net income. 

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. SD frozen yogurt can be added as an additional brand in a BAB or MFM location. Although the Company doesn't actively market Brewster's stand-alone franchises, Brewster's coffee products are sold in most franchised units.    

The Company is leveraging on the natural synergy of distributing muffin products in existing 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.

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, 2017

which was filed

February 26, 2018. 

In the opinion of the Company's management, the condensed consolidated financial statements for the unaudited interim period presented include all adjustments, including normal recurring adjustments, necessary to fairly present the results of such interim period 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.

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Note 2 - Units Open and Under Development

9 Months Ended

Aug. 31, 2018

Notes to Financial Statements

Units Open and Under Development [Text Block]

2.

Units

Open and Under Development

Units which are open or under development at

August 31, 2018

are as follows:

Stores open:
Franchisee-owned stores	79
Licensed Units	4
	83
Unopened stores with Franchise
Agreements	2
Total operating units and units with Franchise Agreements	85

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Note 3 - Earnings Per Share

9 Months Ended

Aug. 31, 2018

Notes to Financial Statements

Earnings Per Share [Text Block]

3.

Earnings per Share

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

	For the three months ended August 31,				For the nine months ended August 31,
	2018		2017		2018		2017
Numerator:
Net income available to common shareholders	$	172,555	$	136,005	$	450,935	$	320,801
Denominator:
Weighted average outstanding shares
Basic and diluted		7,263,508		7,263,508		7,263,508		7,263,508
Earnings per Share - Basic and Diluted	$	0.02	$	0.02	$	0.06	$	0.04

XML

Note 4 - Goodwill and Other Intangible Assets

9 Months Ended

Aug. 31, 2018

Notes to Financial Statements

Goodwill and Intangible Assets Disclosure [Text Block]

 

4.

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. The Company has elected to conduct its annual test during the

first

quarter. During the quarter ended

February 28, 2018,

management qualitatively assessed goodwill to determine whether testing was necessary. Factors that management considers in this assessment include macroeconomic conditions, industry and market considerations, overall financial performance (both current and projected), changes in management and strategy, and changes in the composition and carrying amounts of net assets. If this qualitative assessment indicates that it is more likely than

not

that the fair value of a reporting unit is less than its carrying value, a quantitative assessment is then performed. Based on a qualitative evaluation, management determined that the carrying value of goodwill was

not

impaired at

August 31, 2018,

and a quantitative assessment was

not

considered necessary.

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Note 5 - Recent Accounting Pronouncements

9 Months Ended

Aug. 31, 2018

Notes to Financial Statements

Description of New Accounting Pronouncements Not yet Adopted [Text Block]

5.

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 standard requires that the transaction price received from customers be allocated to each separate and distinct performance obligation. The transaction price attributable to each separate and distinct performance obligation is then recognized as the performance obligations are satisfied. We have evaluated franchise fees and have determined that under the new standard the franchise fee is

not

separate and distinct from the overall franchise right. Franchise fees received will be recorded as deferred revenue and recognized as revenue over the term of each respective franchise agreement, typically

10

years.  The Company is still evaluating the financial impact that this change will have on our financial statements.

We have evaluated the impact of our franchise contributions to and subsequent expenditures from our marketing fund. We act as an agent in regard to these franchisee contributions and expenditures and as such we do

not

currently include them in our Consolidated Statements of Income. We have determined we are the principal in these arrangements and under the new standard we will include them as revenue and expense items.  The Company is still evaluating the specific effect of this change. We believe it will have a material impact on our gross amount of reported revenues and expenses but we do

not

expect a significant impact on our net income.  The Company will adopt ASU

2014

-

09

for fiscal year ending

November 30, 2019.

On

February 25, 2016,

the FASB issued ASU

No.

2016

-

02,

Leases, requiring lessees to recognize a right-of-use asset and a lease liability on the balance sheet for all leases with the exception of short-term leases. For lessees, leases will continue to be classified as either operating or finance leases in the income statement. Lessor accounting is similar to the current model but updated to align with certain changes to the lessee model. Lessors will continue to classify leases as operating, direct financing or sales-type leases. The effective date of the new standard for public companies is for fiscal years beginning after

December 15, 2018.

Early adoption is permitted. The new standard must be adopted using a modified retrospective transition and requires application of the new guidance at the beginning of the earliest comparative period presented.  The Company is planning on early adoption of this standard at the commencement of the new lease beginning

October 1, 2018. 

The Company will classify the new office lease as an operating lease. The adoption of ASU

No.

2016

-

02

is expected to increase the Company’s total assets and liabilities by approximately

$500,000

based on a discounted calculation of the future lease payments, as of

October 1, 2018.

A discount rate of

4%

is used for the present value calculation of the future lease payments. The Company expects the impact on the results of its operations to equal the amortization of the asset, net of the present value discount, on a straight line basis over the lease term.

In

March 2016,

the Financial Accounting Standards Board issued ASU

2016

-

04,

 Liabilities – Extinguishments of Liabilities (Subtopic

405

-

20

): Recognition of Breakage for Certain Prepaid Stored-Value Products. The amendments in the ASU are designed to provide guidance and eliminate diversity in the accounting for derecognition of prepaid stored-value product liabilities. Typically, a prepaid stored-value product liability is to be derecognized when it is probable that a significant reversal of the recognized breakage amount will

not

subsequently occur. This is when the likelihood of the product holder exercising its remaining rights becomes remote. This estimate shall be updated at the end of each reporting period. The amendments in this ASU are effective for the annual reporting periods beginning after

December 15, 2017,

including the interim periods within that reporting period. Early adoption is permitted. The Company does

not

believe that adoption of this guidance will have a material impact on the Company’s 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

August 31, 2018

that would have or are expected to have any significant effect on the Company’s financial position, cash flows or results of operations.

XML

Note 6 - Stockholder's Equity

9 Months Ended

Aug. 31, 2018

Notes to Financial Statements

Stockholders' Equity Note Disclosure [Text Block]

6

. Stockholder’s Equity

The Board of Directors declared a cash distribution/dividend on

March 15

,

June 7

and

September 7, 2017

of

$0.01

per share, paid

April 20,

July 13,

and

October 13, 2017,

respectively. On

December 5, 2017

,

a

$0.01

quarterly and a

$0.01

special cash distribution/dividend per share was declared and paid on

January 12, 2018

and a

$0.01

per share quarterly cash distribution/dividend was declared on

March 7, 2018

and

June 4, 2018

paid

April 13, 2018

and

July 6, 2018

,

respectively.

On

September 4, 2018

,

the Board of Directors declared a

$0.01

per share quarterly cash distribution/dividend to shareholders of record as of

September 18, 2018

,

to be paid

October 2, 2018

.

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, Inc. and its stockholders from efforts to obtain control of BAB, Inc. that the Board of Directors determines are

not

in the best interest of BAB, Inc. and its stockholders. BAB, Inc. issued

one

Right for each current share of stock outstanding at the close of business on

May 13, 2013.

The rights will

not

be exercisable unless a person or group acquires

15%

(

20%

institutional investors) or more of BAB, Inc.’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.

On

June 18, 2014

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

August 18, 2015

an amendment was filed to the Preferred Shares Rights Agreement changing the final expiration date to mean the

fifth

anniversary of the date of the original agreement. All other original rights and provisions remain the same. On

May 22, 2017

an amendment was filed extending the final expiration date to mean the

seventh

anniversary date of the original agreement. All other original rights and provisions remain the same.

XML

Note 7 - Subsequent Event

9 Months Ended

Aug. 31, 2018

Notes to Financial Statements

Subsequent Events [Text Block]

7.

Subsequent Event

On

June 13, 2018

a lease was signed between BAB Systems, Inc. and TR Deerfield Office LLC., its current lessor The lease is for

sixty-six

(

66

) months commencing on

October 1, 2018

and continuing through

March 31, 2024.

The Company will reduce the current square footage from

7,144

square feet to

5,298

square feet.

XML

Note 2 - Units Open and Under Development (Tables)

9 Months Ended

Aug. 31, 2018

Notes Tables

Schedule of Franchisor Disclosure [Table Text Block]

Stores open:
Franchisee-owned stores	79
Licensed Units	4
	83
Unopened stores with Franchise
Agreements	2
Total operating units and units with Franchise Agreements	85

XML

Note 3 - Earnings Per Share (Tables)

9 Months Ended

Aug. 31, 2018

Notes Tables

Schedule of Earnings Per Share, Basic and Diluted [Table Text Block]

	For the three months ended August 31,				For the nine months ended August 31,
	2018		2017		2018		2017
Numerator:
Net income available to common shareholders	$	172,555	$	136,005	$	450,935	$	320,801
Denominator:
Weighted average outstanding shares
Basic and diluted		7,263,508		7,263,508		7,263,508		7,263,508
Earnings per Share - Basic and Diluted	$	0.02	$	0.02	$	0.06	$	0.04

XML

Note 1 - Nature of Operations (Details Textual)	Aug. 31, 2018
Number of Wholly Owned Subsidiaries	3

XML

Note 2 - Units Open and Under Development - Operating Units (Details)	Aug. 31, 2018
Number of stores	85
Franchised Units [Member]
Number of stores	79
Licensed Units [Member]
Number of stores	4
Total Franchised Owned and Licensed Units [Member]
Number of stores	83
Unopened Store [Member]
Number of stores	2

XML

Note 3 - Earnings Per Share - Computation of Earnings Per Share (Details) - USD ($)	3 Months Ended		9 Months Ended
	Aug. 31, 2018	Aug. 31, 2017	Aug. 31, 2018	Aug. 31, 2017
Net income available to common shareholders	$ 172,555	$ 136,005	$ 450,935	$ 320,801
Basic and diluted (in shares)	7,263,508	7,263,508	7,263,508	7,263,508
Earnings per share - Basic and Diluted (in dollars per share)	$ 0.02	$ 0.02	$ 0.06	$ 0.04

XML

Note 5 - Recent Accounting Pronouncements (Details Textual) - USD ($)	Oct. 01, 2018	Aug. 31, 2018
Lessee, Operating Lease, Discount Rate		4.00%
Accounting Standards Update 2016-02 [Member] | Subsequent Event [Member]
Operating Lease, Right-of-Use Asset	$ 500,000
Operating Lease, Liability, Total	$ 500,000

XML

Note 6 - Stockholder's Equity (Details Textual) - $ / shares																		3 Months Ended		9 Months Ended
	Sep. 04, 2018	Jul. 06, 2018	Jun. 04, 2018	Apr. 13, 2018	Mar. 07, 2018	Jan. 12, 2018	Dec. 05, 2017	Oct. 13, 2017	Sep. 07, 2017	Jul. 13, 2017	Jun. 07, 2017	May 22, 2017	Apr. 20, 2017	Mar. 15, 2017	Aug. 18, 2015	May 13, 2013	May 06, 2013	Aug. 31, 2018	Aug. 31, 2017	Aug. 31, 2018	Aug. 31, 2017
Common Stock, Dividends, Per Share, Declared																		$ 0.01	$ 0.01	$ 0.04	$ 0.04
Preferred Stock Dividends Number of Rights Declared																	1
Preferred Stock Dividends Number of Rights Issued																1
Preferred Stock Dividends Number of Rights Minimum Percent of Common Stock that must be Acquired to Make Rights Exercisable																	15.00%
Preferred Stock Dividends Number of Rights Minimum Percent of Common Stock that Must be Acquired to Make Rights Exercisable, Institutional Investors																	20.00%
Right to Purchase Series A Preferred Stock [Member]
Class of Warrant or Right, Number of Securities Called by Each Warrant or Right																	0.001
Class of Warrant or Right, Exercise Price of Warrants or Rights																	$ 0.90
Class of Warrant or Right, Term												7 years			5 years		3 years
Quarterly Dividend [Member]
Common Stock, Dividends, Per Share, Declared	$ 0.01	$ 0.01				$ 0.01			$ 0.01		$ 0.01			$ 0.01
Common Stock, Dividends, Per Share, Cash Paid			$ 0.01	$ 0.01	$ 0.01	0.01		$ 0.01		$ 0.01			$ 0.01
Dividends Payable, Date Declared			Jun. 04, 2018		Mar. 07, 2018		Dec. 05, 2017		Sep. 07, 2017		Jun. 07, 2017			Mar. 15, 2017
Dividends Payable, Date to be Paid		Jul. 06, 2018		Apr. 13, 2018
Quarterly Dividend [Member] | Subsequent Event [Member]
Dividends Payable, Date Declared	Sep. 04, 2018
Dividends Payable, Date to be Paid	Oct. 02, 2018
Dividends Payable, Date of Record	Sep. 18, 2018
Special Cash Distribution [Member]
Common Stock, Dividends, Per Share, Declared						$ 0.01
Dividends Payable, Date Declared						Jan. 12, 2018

XML

Note 7 - Subsequent Event (Details Textual) - Lease Between BAB Systems, Inc. and TR Deerfield Office LLC [Member] - ft²	Oct. 01, 2018	Jun. 13, 2018
Lessee, Operating Lease, Term of Contract		5 years 180 days
Area of Real Estate Property		7,144
Scenario, Forecast [Member]
Area of Real Estate Property	5,298