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 68 franchised and 4 licensed units at February 28, 2023 compared to 69
franchised and 4 licensed units at February 28, 2022. System-wide revenues for
the three months ended February 28, 2023 were $9.2 million and February 28, 2022
was $8.6 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 and Brewster's coffee), and
through nontraditional channels of distribution.
Royalty fees represent a 5% fee on net retail and wholesale sales of franchised
units. Royalty revenues are recognized on an accrual basis using actual
franchise receipts. Generally, franchisees report and remit royalties on a
weekly basis. The majority of month-end receipts are recorded on an accrual
basis based on actual numbers from reports received from franchisees shortly
after the month-end. Estimates are utilized in certain instances where actual
numbers have not been received and such estimates are based on the average of
the last 10 weeks' actual reported sales.
There are two items involving revenue recognition of contracts that require us
to make subjective judgments: the determination of which performance obligations
are distinct within the context of the overall contract and the estimated
stand-alone selling price of each obligation. In instances where our contract
includes significant customization or modification services, the customization
and modification services are generally combined and recorded as one distinct
performance obligation.
The Company earns licensing fees from the sale of BAB branded products, which
includes coffee, cream cheese, muffin mix and frozen bagels from a third-party
commercial bakery, to the franchised and licensed units.
As of February 28, 2023, the Company employed 12 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 with its employees to be good.
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Results of Operations
Three Months Ended February 28, 2023 versus Three Months Ended February 28, 2022
For the three months ended February 28, 2023 and February 28, 2022, the Company
reported net income of $35,000 and $63,000, respectively. Total revenue of
$746,000 increased $8,000, or 1.0%, for the three months ended February 28,
2023, as compared to total revenue of $738,000 for the three months ended
February 28, 2022.
Royalty fee revenue of $443,000, for the quarter ended February 28, 2023,
increased $29,000, or 7.0%, from the $414,000 for quarter ended February 28,
2022. The increase in royalties for the quarter ended February 28, 2023 compared
to the quarter ended February 28, 2022, was primarily due to franchisees'
continued increase in usage of online ordering and delivery services in their
areas and an increase in pricing.
Franchise fee revenue was $4,000, for the quarter ended February 28, 2023,
decreased $5,000, or 55.6%, from $9,000 for February 28, 2022. In the first
quarter 2023 there were no store transfers, compared to one transfer in same
period in 2022. Licensing fee and other income of $60,000, for the quarter ended
February 28, 2023, decreased $10,000 or 14.3% from $70,000 for same quarter
2022.
Marketing Fund revenues of $238,000, for the quarter ended February 28, 2023,
decreased $7,000, or 2.9% from $245,000 for the quarter ended February 28, 2022.
Total operating expenses of $696,000, for the quarter ended February 28, 2023,
increased $46,000, or 7.1% from $650,000 for the quarter ended February 28,
2022. The increase was primarily related to an increase in, payroll expense of
$36,000. Employees received a Holiday bonus in December 2022, increasing fiscal
2023 payroll expense by $36,000 and there was no employee Holiday bonus in the
same period 2022. In addition, in the first quarter of fiscal 2023, there were
increases in occupancy expense of $1,000, professional services of $9,000 and
other of $12,000 which included $6,000 of computer and maintenance expense,
$2,000 in business insurance, $3,000 in general expenses and a change in bad
debt provision of $1,000, offset by a decrease in Marketing Fund expenses of
$7,000, travel expense of $1,000 and employee benefit expense of $3,000.
For the three months ended February 28, 2023 the provision for income tax was
$14,000, compared to $26,000 for the three months ending February 28, 2022.
Earnings per share, as reported for basic and diluted outstanding shares for the
quarters was $0.00 for quarter ended February 28, 2023 versus $0.01 For February
28, 2022.
Liquidity and Capital Resources
At February 28, 2023, the Company had working capital of $1,288,000 and
unrestricted cash of $1,598,000. At February 28, 2022 the Company had working
capital of $1,159,000 and unrestricted cash of $1,494,000.
During the three months ended February 28, 2023, the Company had net income of
$35,000 and operating activities provided cash of $180,000. The principal
adjustments to reconcile the net income to cash provided by operating activities
for the three months ending February 28, 2023 was depreciation and amortization
of $1,000, and noncash lease expense of $25,000. In addition, changes in
operating assets and liabilities increased cash by $119,000. During the three
months ended February 28, 2022, the Company had net income of $63,000 and
operating activities provided cash of $142,000. The principal adjustments to
reconcile the net income to cash provided by operating activities for the three
months ending February 28, 2022 was depreciation and amortization of $1,000,
deferred tax expense of $17,000 and noncash lease expense of $25,000, less the
recovery of uncollectible accounts of $1,000. In addition, changes in operating
assets and liabilities increased cash by $37,000.
The Company had no investing activity for the first three months of 2023
compared to $10,000 for same period 2022.
Cash distributions/dividends used $145,000 in financing activities for the three
months ending February 28, 2023 and $73,000 for the three months ending February
28, 2022.
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Cash Distribution and Dividend Policy
The Company continues to monitor any possibly re-occurring impact of the
Coronavirus variants on its operations when determining the future cash
distribution/dividend payments. It is the Company's intent that future cash
distributions/dividend payments will be considered after reviewing profitability
expectations and financing needs and will be declared at the discretion of the
Board of Directors. The Company will continue to analyze its ability to pay cash
distributions/dividends on a quarterly basis. For 2023, a $0.01 cash
distribution has been declared for the first quarter.
Determination of whether distributions are considered a cash distribution, cash
dividend or combination of the two will not be made until after December 31,
2023, as the classification or combination is dependent upon the Company's
earnings and profits for tax purposes for its fiscal year ending November 30,
2023.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses
(Topic 326): Measurement of Credit Losses on Financial Instruments. The
standard's main goal is to improve financial reporting by requiring earlier
recognition of credit losses on financing receivables and other financial assets
in scope, including trade receivables. The amendments in this update broaden the
information that an entity must consider in developing its expected credit loss
estimate for assets measured either collectively or individually. The guidance
in ASU 2016-13 is effective for public companies for fiscal years and for
interim periods with those fiscal years beginning after December 15, 2023. The
Company will adopt ASU 2016-13 for fiscal year ending November 30, 2025.
In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740):
Simplifying the Accounting for Income Taxes," which is intended to simplify
various aspects related to accounting for income taxes. ASU 2019-12 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 2019-12 are effective for public business entities for fiscal years
beginning after December 15, 2023, 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 2019-12 for fiscal year ending November 30, 2025.
Management does not believe that there are any recently issued and effective or
not yet effective accounting pronouncements as of February 28, 2023 that would
have or are expected to have any significant effect on the Company's financial
position, cash flows or income statement.
Critical Accounting Policies
The Company has identified other significant accounting policies that, as a
result of the judgments, uncertainties, uniqueness and complexities of the
underlying accounting standards and operations involved could result in material
changes to its financial condition or results of operations under different
conditions or using different assumptions. The Company's most critical
accounting policies are related to revenue recognition, valuation of long-lived
and intangible assets, deferred tax assets and the related valuation allowance.
Details regarding the Company's use of these policies and the related estimates
are described in the Company's Annual Report on Form 10-K for the fiscal year
ended November 30, 2022, filed with the Securities and Exchange Commission on
February 24, 2023.
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