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 69 franchised and 4 licensed units at August 31, 2022 compared to 71
franchised and 3 licensed units at August 31, 2021. System-wide revenues for
the nine months ended August 31, 2022 were $28.3 million and August 31, 2021 was
$25.5 million.
The Company's revenues are derived primarily from the ongoing royalties paid to
the Company by its franchisees and receipt of initial franchise fees.
Additionally, the Company derives revenue from the sale of licensed products (My
Favorite Muffin mix, 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 August 31, 2022, 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 August 31, 2022 versus Three Months Ended August 31, 2021
For the three months ended August 31, 2022 and August 31, 2021, the Company
reported net income of $164,000 and $133,000, respectively. Total revenue of
$882,000 increased $93,000, or 11.8%, for the three months ended August 31,
2022, as compared to total revenue of $789,000 for the three months ended August
31, 2021.
Royalty fee revenue of $482,000, for the quarter ended August 31, 2022,
increased $27,000, or 5.9%, from the $455,000 for quarter ended August 31, 2021.
The increase in royalties for the quarter ended August 31, 2022 compared to the
quarter ended August 31, 2021, was primarily due to franchisees' continued
increase in usage of online ordering and delivery services in their areas,
combined with the fact that COVID-19 still had some impact on restaurant
patronage during the summer of 2021.
Franchise fee revenue was $16,000, for the quarter ended August 31, 2022 and
$4,000 for 2021. In the third quarter 2022 there was one store opened and one
transfer compared to no store openings or transfers in 2021. Licensing fee and
other income of $97,000, for the quarter ended August 31, 2022, increased
$31,000 or 47.0% from $66,000 for same quarter 2021.
Marketing Fund revenues of $287,000, for the quarter ended August 31, 2022,
increased $23,000, or 8.7% from $264,000 for the quarter ended August 31, 2021.
The primary reason Marketing Fund revenue increased in 2022 is that store
revenues increased in 2022.
Total operating expenses of $653,000, for the quarter ended August 31, 2022,
increased $62,000, or 10.5% from $591,000 for the quarter ended August 31, 2021.
The increase was primarily related to an increase in Marketing Fund expenses of
$23,000, payroll expense of $22,000, employee benefit expense of $7,000, travel
expense of $2,000, franchise development of $8,000, occupancy expense of $3,000
and professional services of $6,000, offset by a decrease in advertising and
promotion of $6,000 and general operating expenses of $2,000.
For the three months ended August 31, 2022 the provision for income tax was
$65,000, compared to $66,000 for the three months ending August 31, 2021.
Earnings per share, as reported for basic and diluted outstanding shares for the
quarters was $0.02 for quarters ended August 2022 and 2021.
Nine Months Ended August 31, 2022 versus Nine Months Ended August 31, 2021
For the nine months ended August 31, 2022 and August 31, 2021, the Company
reported net income of $321,000 and $553,000, respectively. Total revenue of
$2,445,000 increased $185,000, or 8.2%, for the nine months ended August 31,
2022, as compared to total revenue of $2,260,000 for the nine months ended
August 31, 2021.
Royalty fee revenue of $1,362,000, for the nine months ended August 31, 2022,
increased $140,000, or 11.5%, from the $1,222,000 for nine months ended August
31, 2021. The increase in royalties for the nine months ended August 31, 2022
was primarily due to franchisees' continued increase in usage of online ordering
and delivery services in their areas, combined with the fact that COVID-19 still
had some impact on restaurant patronage during the same period in 2021.
Franchise fee revenues of $34,000, for the nine months ended August 31, 2022,
decreased $4,000, or 13.3%, from the $30,000 for the nine months ended August
31, 2021. The $4,000 decrease was driven by several factors. For the nine-month
period ended August 31, 2022, in addition to the normal franchise fee
amortization, the Company recorded revenue for three store transfers and one
store opening. For the nine months ended August 31, 2021, the Company had one
store transfer and recognized additional franchise fee amortization of $14,000
related to a store that closed prior to the end of its ten-year franchise
agreement.
Licensing fee and other income of $241,000, for the nine months ended August 31,
2022, decreased $51,000 or 17.5% from $292,000 for same period 2021. For the
nine months ended August 31, 2022 there was an $83,000 decrease in settlement
income because a store closed and paid settlement fee to close, there was a
$4,000 decrease in Sign Shop revenue, offset by an increase of $31,000 in
license and nontraditional revenue, and an increase in lease income of $5,000 in
2022 compared to same period 2021.
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Marketing Fund revenues of $808,000, for the nine months ended August 31, 2022,
increased $92,000, or 12.8% from $716,000 for the nine months ended August 31,
2021. The primary reason Marketing Fund revenue increased for the nine months of
2022 were increased store revenues in 2022. In 2021 there was still some slight
COVID-19 concerns for restaurant patrons which is reflected in the lower royalty
sales volume.
Total operating expenses of $1,996,000, for the nine months ended August 31,
2022, increased $193,000, or 10.7% from $1,803,000 for the same period 2021. The
increase was primarily related to an increase in Marketing Fund expenses of
$92,000, a $72,000 increase in salaries with an additional Business Consultant
and a salary increase January 2022 for all employees, a $15,000 increase in
employee benefits, an $8,000 increase in travel and an increase in franchise
development of $18,000. This was offset by an $11,000 decrease in professional
services and a $1,000 decrease in advertising and promotion.
For the nine months ended August 31, 2022 the provision for income tax was
$129,000 compared to a $133,000 income tax provision for the nine months ending
August 31, 2021. In 2022 deferred taxes were $34,000 versus 2021 of $102,000 in
deferred taxes. The federal and state effective tax rate used to compute income
tax expense is a federal rate of 21% and a state rate of 7.11%, which is net of
the federal tax effect.
In fiscal 2021, the Company's income included the $228,000 of forgiveness, but
it is excluded from federal and state tax calculations as a permanent
difference, thereby reducing the federal and state effective rate from the
customary effective tax rate used to compute income tax expense.
Earnings per share, as reported for basic and diluted outstanding shares for the
nine months ended August 2022 and 2021 were $0.04 and $0.08, respectively. In
2021 the Paycheck Protection Program loan forgiveness accounted for $0.03 of the
$0.08 earnings per share.
Liquidity and Capital Resources
At August 31, 2022, the Company had working capital of $1,260,000 and
unrestricted cash of $1,544,000. At August 31, 2021 the Company had working
capital of $1,172,000 and unrestricted cash of $1,458,000.
During the nine months ended August 31, 2022, the Company had net income of
$321,000 and operating activities provided cash of $548,000. The principal
adjustments to reconcile the net income to cash provided by operating activities
for the nine months ending August 31, 2022 was depreciation and amortization of
$4,000, deferred tax expense of $34,000 and noncash lease expense of 74,000,
less the recovery of uncollectible accounts of $3,000 and $5,000 in sales-type
lease income. In addition, changes in operating assets and liabilities increased
cash by $123,000. During the nine months ended August 31, 2021, the Company had
net income of $553,000 and operating activities provided cash of $595,000. The
principal adjustments to reconcile the net income to cash provided by operating
activities for the nine months ending August 31, 2021 was depreciation and
amortization of $4,000, deferred tax expense of $102,000 and noncash lease
expense of $74,000, less PPP loan forgiveness of $228,000 and the recovery of
uncollectible accounts of $2,000. In addition, changes in operating assets and
liabilities increased cash by $93,000.
The Company had no investing activity in 2022 compared to $3,000 for the same
period 2021.
Cash distributions/dividends used $218,000 in financing activities for the nine
months ending August 31, 2022 and 2021.
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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 fiscal 2022 a $0.01 cash
distribution has been declared for the first and second and third quarters.
Determination of whether distributions are considered a cash distribution, cash
dividend or combination of the two will not be made until after December 31,
2022, as the classification or combination is dependent upon the Company's
earnings and profits for tax purposes for its fiscal year ending November 30,
2022.
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 2019-13 for fiscal year ending November 30, 2024 and the
adoption of this guidance is not expected to have any material impact on the
Company's financial position, cash flows or results of operations.
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, 2024 and the adoption
of this guidance is not expected to have any material impact on the Company's
financial position, cash flows or results of operations.
Management does not believe that there are any recently issued and effective or
not yet effective accounting pronouncements as of August 31, 2022 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, 2021, filed with the Securities and Exchange Commission on
February 25, 2022.
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