Note 2 - Summary of Significant Accounting Policies

6 Months Ended

May 31, 2025

Notes to Financial Statements

Significant Accounting Policies [Text Block]

2. Summary of Significant Accounting Policies

Unaudited Consolidated Financial Statements

The accompanying unaudited Condensed Consolidated Financial Statements of BAB, Inc. have been prepared pursuant to generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) for Form 10-Q. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of the financial statements and accompanying notes are in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported periods. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, demand deposits and treasury notes with banks and equity firms with original maturities of less than 90 days. The balance of bank accounts may, at times, exceed federally insured credit limits. The Company has not experienced any loss in such accounts and believes it is not subject to any significant credit risk related to cash at May 31, 2025.

Accounts Receivable and Notes Receivable

The CECL reserve methodology requires companies to measure expected credit losses on financial instruments based on the total estimated amount to be collected over the lifetime of the instrument. Under the CECL model, reserves may be established against financial asset balances even if the risk of loss is remote or has not yet manifested itself. The Company records specific reserves against account balances of franchisees deemed at-risk when a potential loss is likely or imminent as a result of prolonged payment delinquency (greater than 90 days past due) and where notable credit deterioration has become evident. For financial assets that are not currently deemed at-risk, an allowance is recorded based on expected loss rates derived pursuant to the Company's CECL methodology that assesses four components - historical losses, current conditions, reasonable and supportable forecasts, and a reversion to history, if applicable.

The Company considers its portfolio segments to be the following:

Accounts Receivable (Franchise-Related): Most of the Company’s short-term receivables due from franchisees are derived from royalty, advertising and other franchise-related fees.

Notes Receivable: Notes receivable balances primarily relate to the conversion of (1) certain past due franchisee accounts receivable or (2) early franchise termination fees converted to notes receivable. These notes are usually not collateralized. The current notes receivable are reserved in their entirety and have specific reserves recorded against them amounting to $50,129 as of May 31, 2025.

Accounts Receivables (Vendor Related): Receivables due from vendors and distributors consist of royalty receivables related to the sale of certain food products to franchisees through the Company’s network of suppliers and distributors and are included as part of Accounts Receivable.

Receivable balances by portfolio segment are as follows:

	May 31, 2025			November 30, 2024
Accounts Receivable (Franchisee Related)	$	58,250		$	69,284
Accounts Receivable (Vendor Related)		26,650			18,200
Notes Receivable		50,129			51,103
		135,029			138,587
Less: Allowance for Credit Losses		(50,129	)		(51,103	)
Total Receivables		84,900			87,484
Less: Current Portion		(84,900	)		(87,484	)
Long-Term Receivables	$	-		$	-

The Company's internal credit quality indicators for all portfolio segments primarily consider delinquency. Current and collateralized lease receivables have an internal risk rating of Grade I. The Company does not currently have any uncollateralized lease receivables. Past due lease receivables would be assigned an internal risk rating of Grade II-IV, depending on significance of delinquency. For uncollateralized notes receivable, the Company also considers the status of the franchisee note holder and the term of the note. Notes receivable from current franchisees are considered to have an elevated risk of credit loss based on their common origination from past due franchise accounts receivable but have some indication of collectability given ongoing operations (Internal Grade II). Notes receivable due from payers who no longer have an operating franchise are considered to have a high likelihood of credit loss (Internal Grade III). That likelihood increases if the note is outstanding for longer than one year (Internal Grade IV). At May 31, 2025, all notes receivable were due from former franchisees and had an original term over one year.

Changes in the allowance for credit losses during the six months ended May 31, 2025 were as follows:

	Accounts Receivable (Franchise Related)		Accounts Receivable (Vendor Related)		Notes Receivable			Lease Receivable, Net		Total
Balance at November 30, 2024	$	-	$	-	$	51,103		$	-	$	51,103
Adjustments to Allowance for Adoption of ASU 2016-13		-		-		-			-		-
Write-offs		-		-		-			-		-
Recoveries		-		-		(974	)		-		(974	)
Provision for Credit Losses		-		-		-			-		-
Balance at May 31, 2025	$	-	$	-	$	50,129		$	-	$	50,129

The Company considers a receivable past due 31 days after the payment due date. The delinquency status of receivables (other than accounts receivable) at May 31, 2025 was as follows:

	Current		0-30 days Past Due		30-60 days Past Due		60-90 days past due		Over 90 days past due		Total
Notes Receivable	$	37,956	$	550	$	250	$	500	$	10,873	$	50,129
	$	37,956	$	550	$	250	$	500	$	10,873	$	50,129

The fiscal year of origination of the Company's gross notes receivable and lease receivables by risk rating are as follows

	2024		2023		2022		2021		2020		Prior		Total
Risk rating
Internal Grade I	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Internal Grade II		-		-		-		-		-		-		-
Internal Grade III		21,370		17,886		-		-		-		-		39,256
Internal Grade IV		-		-		-		-		-		10,873		10,873
Notes and Lease Receivables,
Net of Unamortized Interest	$	21,370	$	17,886	$	-	$	-	$	-	$	10,873	$	50,129

Property, Plant and Equipment

Property, equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Estimated useful lives are 3 to 7 years for property and equipment and 10 years, or term of lease if less, for leasehold improvements. Maintenance and repairs are charged to expense as incurred. Expenditures that materially extend the useful lives of assets are capitalized.

Other Assets

Other assets include a minority investment in AHQ Systems, Inc. The shares were issued to BAB, Inc. as compensation for consulting services and are valued at $2,250. The value of the investment is immaterial and has not been adjusted to fair market value.

Advertising and Promotion Costs

The Company expenses advertising and promotion costs as incurred. All advertising and promotion costs were related to the Company’s franchise operations.

Lease Liabilities

The company accounts for leases under ASC 842. Lease arrangements are determined at the inception of the contract. Operating leases are included in operating lease right-of-use (“ROU”) assets and other current and long-term operating lease liabilities on the consolidated balance sheets. Finance leases are included in property and equipment, other current liabilities, and other long-term liabilities on the consolidated balance sheets. 

Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most leases do not provide an implicit rate, we use an incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

Recent Accounting Pronouncements

In December 2023, the FASB issued ASU 2023-09, “Improvements to Income Tax Disclosures” which is intended to simplify various aspects related to accounting for income taxes. ASU 2023-09 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The amendments in ASU 2023-09 are effective for public business entities for fiscal years beginning after December 15, 2024, including interim periods therein. Early adoption of the standard is permitted, including adoption in interim or annual periods for which financial statements have not yet been issued. The Company will adopt ASU 2023-09 for fiscal year ending November 30, 2026.

Management does not believe that there are any recently issued and effective or not yet effective accounting pronouncements as of May 31, 2025 that would have or are expected to have any significant effect on the Company’s financial position, cash flows or income statement.

Statement of Cash Flows

The chart below shows the cash and restricted cash within the consolidated statements of cash flows as of May 31, 2025 and 2024 were as follows:

	May 31, 2025		May 31, 2024
Cash and cash equivalents	$	2,048,454	$	1,937,678
Restricted cash		286,328		229,919
Total cash and restricted cash	$	2,334,782	$	2,167,597