BAB, INC. (0001123596) (Filer)

FORM 10-Q

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

(Mark One)

BAB, Inc.

(Name of small business issuer in its charter)

500 Lake Cook Road, Suite 475, Deerfield, Illinois 60015

(Address of principal executive offices) (Zip Code)

Issuer's telephone number (847) 948-7520

Securities registered pursuant to Section 12(b) of the Act:

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 every Interactive Data File required to be submitted 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 such files).   Yes ☒   No ☐      

Indicate by checkmark whether the registrant is a large accelerated filer, accelerated filer, a non-accelerated filer, or a smaller reporting company. Large accelerated filer ☐      Accelerated filer ☐     Non-accelerated filer ☒     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 13, 2026 BAB, Inc. had: 7,263,508 shares of Common Stock outstanding.

TABLE OF CONTENTS

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PART I

BAB, Inc.

Condensed Consolidated Balance Sheets 

August 31, 2026 (Unaudited) and November 30, 2025

SEE ACCOMPANYING NOTES

3

BAB, Inc.

Condensed Consolidated Statements of Income

For the Three Months and Nine Months ended August 31, 2026 and 2025

(Unaudited)

SEE ACCOMPANYING NOTES

4

BAB, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

For the Nine Months ended August 31, 2026 and August 31, 2025

(Unaudited)

SEE ACCOMPANYING NOTES

5

BAB, Inc.

Condensed Consolidated Statements of Cash Flows

For the Nine Months ended August 31, 2026 and August 31, 2025

(Unaudited)

SEE ACCOMPANYING NOTES

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BAB, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

For the Three and Nine Months ended August 31, 2026 and 2025

(Unaudited)

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 (“Brewster’s”) was established in 1996 and the coffee is sold in BAB and MFM locations. SweetDuet® (“SD”) frozen yogurt can be added as an additional brand in a BAB location. Operations was formed in 1995, primarily to operate Company-owned stores of which there are currently none. The assets of Jacobs Bros. Bagels (“Jacobs Bros.”) were acquired in 1999, and any branded wholesale business uses this trademark. Investments was incorporated in 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, MFM and SD trade names. At August 31, 2026, the Company had 59 franchise units and 3 licensed units in operation in 18 states. There are 6 units under development. The Company additionally derives income from the sale of its trademark bagels, muffins and coffee through nontraditional channels of distribution including under licensing agreements.

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. BAB units are primarily concentrated in the Midwestern United States. The MFM brand consists of units operating as “My Favorite Muffin Gourmet Muffin Bakery®” (“MFM Bakery”), featuring a large variety of freshly baked muffins and coffees and units operating as “My Favorite Muffin Your All-Day Bakery Café®” (“MFM Cafe”) featuring these products as well as a variety of specialty bagel sandwiches and related products. The SweetDuet® is a branded self-serve frozen yogurt that 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 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 Company has a minority interest in Athletes HQ Systems, Inc. (“AHQ”). AHQ franchises indoor baseball and softball practice and coaching facilities with knowledgeable instructors.

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, 2025 which was filed February 24, 2026. 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. 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 in conformity with U.S. GAAP 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 August 31, 2026.

Accounts Receivable and Notes Receivable

The Current Expected Credit Losses (“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 three components - historical losses, current conditions, and reasonable and supportable forecasts, 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. Notes receivable prior to 2026 are reserved in their entirety and have specific reserves recorded against them amounting to $49,350 as of August 31, 2026.

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.

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2. Summary of Significant Accounting Policies (Continued)

Accounts Receivable and Notes Receivable (Continued)

Receivable balances by portfolio segment are as follows:

The Company's internal credit quality indicators for all portfolio segments primarily consider delinquency. 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 August 31, 2026, all notes receivable were due from former franchisees and have original terms over one year.

Changes in the allowance for credit losses during the nine months ended August 31, 2026 and August 31, 2025 were as follows:

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2. Summary of Significant Accounting Policies (Continued)

Accounts Receivable and Notes Receivable (Continued)

The Company considers a receivable past due 31 days after the payment due date. The delinquency status of receivables (other than accounts receivable) at August 31, 2026 was as follows:

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

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.

Goodwill and Other Intangible Assets

Accounting Standards Codification (“ASC”) 350, Intangibles - Goodwill and Other, requires that goodwill and intangible assets with indefinite lives not be amortized, but instead be tested for impairment at least annually. The Company follows this guidance.

Following the guidelines contained in ASC 350, the Company tests goodwill and intangible assets that are 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 quarters ended August 31, 2026 and 2025, 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.

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2. Summary of Significant Accounting Policies (Continued)

Prepaid Expenses and Other Current Assets

Other current assets include a minority investment in AHQ Systems, Inc. The shares were issued to BAB, Inc. as compensation for consulting services and were recorded at a value of $2,250, based on fair market value at the time the services were performed. A total of 150,000 shares were issued, representing a 15% ownership interest. This is considered a related-party investment. The investment is immaterial.

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.

Income Taxes

The Company accounts for income taxes in accordance with ASC Topic 740, Income Taxes. Deferred tax assets and liabilities are classified as noncurrent on the balance sheet. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The benefits from net operating losses carried forward may be impaired or limited in certain circumstances.

The Company files a consolidated U.S. income tax return and tax returns in various state jurisdictions. Review of the Company’s possible tax uncertainties as of August 31, 2026 did not result in any positions requiring disclosure. Should the Company need to record interest and/or penalties related to uncertain tax positions or other tax authority assessments, it would classify such expenses as part of the income tax provision. The Company has not changed any of its tax policies or adopted any new tax positions during the nine months ended August 31, 2026 and believes it has filed appropriate tax returns in all jurisdictions for which it has nexus.

The Company’s income tax returns, which are filed as a consolidated return, for the years ending November 30, 2023, 2024 and 2025 are subject to examination by the IRS and corresponding states, generally for three years after they are filed.

Leases

The company accounts for leases under ASC 842, Leases. 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.

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Note 2 Summary of Significant Accounting Policies (Continued)

Accounting Pronouncements

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

In November 2024, the Financial Accounting Standards Board issued Accounting Standards Update No. 2024‑03, Income Statement — Reporting Comprehensive Income — Expense Disaggregation Disclosures (“ASU 2024‑03”), which requires public business entities to provide enhanced disclosures that disaggregate certain expense captions in the notes to the financial statements to improve transparency about components of expense categories such as purchases of inventory, employee compensation, depreciation, amortization and related items. ASU 2024‑03 does not change the recognition or measurement of expenses presented on the face of the income statement, but will require additional tabular disclosures in the notes for annual and interim reporting periods. The guidance is effective for fiscal years beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027, with early adoption permitted. The Company has not adopted this standard and is currently evaluating the potential effect the standard will have on its consolidated financial statements disclosures.

On July 30, 2025 the FASB issued ASU 2025-05, “Measurement of Credit Losses for Accounts Receivable and Contract Assets”. The ASU relates to estimating credit losses under CECL for current accounts receivable and current contract assets arising from revenue transactions accounted for under ASC 606, Revenue from Contracts with Customers, including those acquired in a transaction accounted for under ASC 805, Business Combinations. The ASU does not apply to other types of accounts receivable and loans.

For all entities, the ASU provides a practical expedient to assume that current conditions as of the balance sheet date will persist through the reasonable and supportable forecast period for eligible assets. Entities will still be required to adjust historical data used in the estimation to reflect current conditions. The new guidance will be effective for interim and annual periods beginning after December 15, 2025 and is to be adopted on a prospective basis. The Company will adopt ASU 2025-05 for fiscal year ending November 30, 2027.

Other than ASU 2024-03, which the Company is currently evaluating, management does not believe that there are any recently issued and effective or not yet effective accounting pronouncements as of August 31, 2026 that would have or are expected to have any significant effect on the Company’s financial position, cash flows or income statement.

Segments

The Company operates as a single operating and reportable segment consisting of its franchising and licensing operations. In accordance with ASC 280, Segment Reporting, as amended by ASU 2023-07, Improvements to Reportable Segment Disclosures, the Company’s chief operating decision maker assesses performance and allocates resources based on consolidated net income as reported in the Condensed Consolidated Statements of Income. The significant segment expenses and other segment items regularly provided to the chief operating decision maker are the expense captions presented in the Condensed Consolidated Statements of Income.

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2. Summary of Significant Accounting Policies (Continued)

Statement of Cash Flows

The chart below shows the cash and restricted cash within the consolidated statements of cash flows as of August 31, 2026 and 2025 were as follows:

3. Revenue Recognition

Franchise and Related Revenue

The Company sells individual franchises. The franchise agreements typically require the franchisee to pay an initial, non-refundable fee prior to opening the respective location(s), and continuing royalty fees on a weekly basis based upon a percentage of franchisee net sales. The initial term of franchise agreements are typically 10 years.  Subject to the Company’s approval, a franchisee may generally renew the franchise agreement upon its expiration.  If approved, a franchisee may transfer a franchise agreement to a new or existing franchisee, at which point a transfer fee is typically paid by the current owner which then terminates that franchise agreement. A franchise agreement is signed with the new franchisee with no franchise fee required. If a contract is terminated prior to its term, it is a breach of contract and a penalty is assessed based on a formula reviewed and approved by management. Revenue generated from a contract breach is termed settlement income by the Company and included in licensing fees and other income.

Under the terms of our franchise agreements, the Company typically promises to provide franchise rights, pre-opening services such as blueprints, operational materials, planning and functional training courses, and ongoing services, such as management of the marketing fund. The Company considers certain pre-opening activities and the franchise rights and related ongoing services to represent two separate performance obligations. The franchise fee revenue has been allocated to the two separate performance obligations using a residual approach. The Company has estimated the value of performance obligations related to certain pre-opening activities deemed to be distinct based on cost plus an applicable margin, and assigned the remaining amount of the initial franchise fee to the franchise rights and ongoing services. Revenue allocated to preopening activities is recognized when (or as) these services are performed. Revenue allocated to franchise rights and ongoing services is deferred until the store opens, and recognized on a straight-line basis over the duration of the agreement, as this ensures that revenue recognition aligns with the customer’s access to the franchise right.

Royalty fees from franchised stores 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.

Royalty revenue is recognized during the respective franchise agreement based on the royalties earned each period as the underlying franchise store sales occur.

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.

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3. Revenue Recognition (Continued)

Gift Card Breakage Revenue

The Company sells gift cards to its customers through franchised retail stores and through its Corporate office. The Company’s gift cards do not have an expiration date and are not redeemable for cash except where required by law. An obligation is recorded at the time of sale of the gift card and is included in accrued expenses on the Company’s Condensed Consolidated Balance Sheets. Until redemption, outstanding customer balances are recorded as a liability. When a gift card is redeemed for product at a franchised store, the sale is reported within that franchisee’s store revenue, and the related royalty and marketing fees paid to the Company are reported in the Condensed Consolidated Statements of Income.

The liability is reduced when the gift cards are redeemed by a franchise. Although there are no expiration dates for our gift cards, based on our analysis of historical gift card redemption patterns, we can reasonably estimate the amount of gift cards for which redemption is remote, which is referred to as “breakage.” The Company recognizes gift card breakage proportional to actual gift card redemptions on a quarterly basis and the corresponding revenue is included in licensing fees and other revenue. Significant judgments and estimates are required in determining the breakage rate and will be reassessed each quarter. During the three months and nine months ended August 31, 2026, management reassessed its breakage estimate and recognized an additional $16,702 and $45,925 of income, respectively, based on the likelihood of the redemption of certain gift cards becoming remote.

Nontraditional and rebate revenue

As part of the Company’s franchise agreements, the franchisee purchases products and supplies from designated vendors.  The Company may receive various fees and rebates from the vendors and distributors on product purchases by franchisees.  In addition, the Company may collect various initial fees, and those fees are classified as deferred revenue in the balance sheet and straight lined over the life of the contract. The Company does not possess control of the products prior to their transfer to the franchisee and products are delivered to franchisees directly from the vendor or their distributors. The Company recognizes the rebates as franchisees purchase products and supplies from vendors or distributors and recognizes the initial fees over the contract life and the fees are reported as licensing fees and other income in the Condensed Consolidated Statements of Income.

Marketing Fund

Franchise agreements require the franchisee to pay continuing marketing fees on a weekly basis, based on a percentage of franchisee sales. Marketing fees are not paid on franchise wholesale sales. The marketing fees are used for internal and external marketing services and expenditures benefiting franchisees system-wide as well as specific franchisees and are considered a separate and distinct performance obligation. Contributions to the marketing fund are deferred and recognized as revenue as the underlying marketing expenditures are incurred, matching revenue to the marketing services delivered. The Company acts as the principal as it is primarily responsible for the fulfillment and control of the marketing services. As a result, the Company records marketing fees in revenues and related marketing fund expenditures in expenses in the Condensed Consolidated Statements of Income. The Condensed Consolidated Balance Sheets include marketing fund cash (reported as restricted cash), marketing fund accounts receivable and unexpended marketing fund contributions.

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3. Revenue Recognition (continued)

Disaggregation of Revenue

The following table presents disaggregation of revenue from contracts with customers:

Contract Balances

The balance of contract liabilities includes franchise fees and license fees that have ongoing contract rights and the fees are being straight lined over the contract life. Contract liabilities also include marketing fund balances and gift card liability balances.

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3. Revenue Recognition (continued)

Contract Balances (continued)

Transaction price allocated to remaining performance obligations (franchise agreements and license fee agreements) is expected to be recognized in the fiscal years ending November 30 as follows:

*represents the estimate for the remainder of 2026

4. Units Open and Under Development

Units which are open or under development are as follows:

5. Earnings per Share

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

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6. Goodwill and Other Intangible Assets

Management reviewed and updated the qualitative assessment conducted during the first quarter of 2026 and does not believe that any impairment exists as of August 31, 2026. No impairment was identified for the nine months ending August 31, 2025.

The net book value of goodwill and intangible assets with indefinite and definite lives are as follows:

7. Lease Commitments

The Company rents its office under an operating lease which requires it to pay base rent, real estate taxes, insurance and general repairs and maintenance.  The lease was originally signed in June of 2018, effective October 1, 2018, expiring on March 31, 2024.  On February 15, 2024, a lease amendment was signed, effective April 1, 2024 for a 6-year period, expiring March 31, 2030, with an option to renew for a 5-year period.  The amendment continues to require the Company to pay base rent, real estate taxes, insurance and general repairs and maintenance.  The amendment includes a ten-month rent abatement over the lease term, specifically defined in the agreement, and tenant allowance in the amount of $158,940. The tenant allowance is to be applied evenly to the 62 months that were not abated. The renewal option has not been included in the measurement of the lease liability. 

Monthly rent expense is recognized on a straight-line basis over the term of the lease. At August 31, 2026 the weighted average remaining lease term was 43 months. The lease amendment is reflected in the balance of the Lease Liability on the balance sheet at the present value of the lease payments using an 8.50% discount rate. The discount rate was considered to be an estimate of the Company’s incremental borrowing rate.

Gross future minimum annual rental commitments as of August 31, 2026 are as follows:

* The obligation as presented represents payments due from September 1, 2026 through fiscal year ending November 30, 2026, which represents a partial year.

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8. Income Taxes

For the three months ended August 31, 2026, the Company recorded current tax expense of $86,996 and no deferred tax adjustment, for a total tax provision of $86,996, with an effective tax rate of 27.7%. For the nine months ended August 31, 2026, the Company recorded current tax expense of $263,822 and a deferred tax benefit of $57,026, for a total tax provision of $206,796, with an effective tax rate of 27.9%.

For the three months ended August 31, 2025, the Company recorded current tax expense of $89,879 and a deferred tax benefit of $24,079, for a total tax provision of $65,800, with an effective tax rate of 28.2%. For the nine months ended August 31, 2025, the Company recorded current tax expense of $235,013 and a deferred tax benefit of $63,213, for a total tax provision of $171,800, with an effective tax rate of 28.2%.

9. Stockholder’s Equity

On June 4, 2026, the Board declared a $0.01 cash distribution/dividend per share, to stockholders of record on June 23, 2026, paid on July 14, 2026. On March 10, 2026, the Board declared a $0.01 cash distribution/dividend per share, to stockholders of record on March 30, 2026, paid on April 20, 2026. On December 9, 2025 the Board declared a $0.02 cash distribution/dividend per share, of $0.01 quarterly and $0.01 special, to stockholders of record as of December 30, 2025 paid January 21, 2026.

On September 9, 2025 the Board declared a $0.01 quarterly cash distribution/dividend per share, to stockholders of record as of September 26, 2025, paid October 15, 2025. On June 6, 2025 the Board declared a $0.01 quarterly cash distribution/dividend per share, to stockholders of record as of June 26, 2025, paid July 14, 2025. On March 7, 2025 the Board declared a $0.01 quarterly cash distribution/dividend per share, to stockholders of record as of March 24, 2025, paid April 14, 2025. On December 4, 2024 the Board declared a $0.03 cash distribution/dividend per share, $0.01 quarterly and $0.02 special, to stockholders of record as of December 23, 2024, paid January 9, 2025.

On May 6, 2013, the Board authorized and declared a dividend distribution of one right for each outstanding share of the common stock of the Company to stockholders of record at the close of business on May 13, 2013. 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 complete terms of the Rights are set forth in a Preferred Shares Rights Agreement, dated May 6, 2013, between the Company and IST Shareholder Services, as rights agent. 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.

The Board adopted the Rights Agreement to protect stockholders from coercive or otherwise unfair takeover tactics. In general terms, it works by imposing a significant penalty upon any person or group, other than exempt person as defined in the agreement, that acquires 15% (or 20% in the case of certain institutional investors who report their holdings on Schedule 13G) or more of the Common Shares without the approval of the Board. As a result, the overall effect of the Rights Agreement and the issuance of the Rights may be to render more difficult a merger, tender or exchange offer or other business combination involving the Company that is not approved by the Board. However, neither the Rights Agreement nor the Rights should interfere with any merger, tender or exchange offer or other business combination approved by the Board.

Full details about the Rights Plan are contained in a Form 8-K filed by the Company with the U.S. Securities and Exchange Commission on May 7, 2013.

On November 19, 2025 an amendment was filed to the Preferred Shares Rights Agreement changing the final expiration date to mean the sixteenth anniversary of the date of the original agreement. All other original rights and provisions remain the same.

10. Subsequent Event

On September 10, 2026 the Board of Directors (“Board”) declared a $0.01 cash distribution/dividend per share, to stockholders of record as of September 29, 2026 payable October 20, 2026.

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Certain statements contained in Management's Discussion and Analysis of Financial Condition and Results of Operations, including statements regarding the development of the Company's business, the markets for the Company's products, anticipated capital expenditures, and the effects of completed and proposed acquisitions, and other statements contained herein regarding matters that are not historical facts, are forward-looking statements as is within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Because such statements include risks and uncertainties, actual results could differ materially from those expressed or implied by such forward-looking statements as set forth in this report, the Company's Annual Report on Form 10-K and other reports that the Company files with the Securities and Exchange Commission. Certain risks and uncertainties are wholly or partially outside the control of the Company and its management, including its ability to attract new franchisees; the continued success of current franchisees; the effects of competition on franchisees and consumer acceptance of the Company's products in new and existing markets; fluctuation in development and operating costs; brand awareness; availability and terms of capital; adverse publicity; acceptance of new product offerings; availability of locations and terms of sites for store development; food, labor and employee benefit costs; changes in government regulation (including increases in the minimum wage); regional economic and weather conditions; the hiring, training, and retention of skilled corporate and restaurant management; and the integration and assimilation of acquired concepts. Accordingly, readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The Company undertakes no obligation to publicly release the results of any revision to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

General

There are 59 franchised and 3 licensed units at August 31, 2026 compared to 60 franchised and 4 licensed units at August 31, 2025. System-wide revenues, meaning revenues for the entire franchise system, for the nine months ended August 31, 2026 were $31.3 million and August 31, 2025 were $30.5 million.

The Company's revenues are derived primarily from the ongoing royalties paid to the Company by its franchisees and receipt of initial franchise fees.  Additionally, the Company derives revenue from the sale of licensed products (My Favorite Muffin mix, and Brewster's coffee), and through nontraditional channels of distribution.

Royalty fees represent a 5% fee on net retail and wholesale sales of franchised units. Royalty revenues are recognized on an accrual basis using actual franchise receipts. Generally, franchisees report and remit royalties on a weekly basis. The majority of month-end receipts are recorded on an accrual basis based on actual numbers from reports received from franchisees shortly after the month-end. Estimates are utilized in certain instances where actual numbers have not been received and such estimates are based on the average of the last 10 weeks’ actual reported sales.

There are two items involving revenue recognition of contracts that require us to make subjective judgments: the determination of which performance obligations are distinct within the context of the overall contract and the estimated stand-alone selling price of each obligation. In instances where our contract includes significant customization or modification services, the customization and modification services are generally combined and recorded as one distinct performance obligation.

The Company earns licensing fees from the sale of BAB branded products, which includes coffee, cream cheese, muffin mix and frozen bagels from a third-party commercial bakery, to the franchised and licensed units.

As of August 31, 2026, the Company employed 7 full-time employees and 2 part-time employees at the Corporate office. The employees are responsible for corporate management and oversight, accounting, advertising and franchising.  None of the Company's employees are subject to any collective bargaining agreements and management considers its relations with its employees to be good.

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Results of Operations

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

For the three months ended August 31, 2026 and August 31, 2025, the Company reported net income of $227,000 and $168,000, respectively. Total revenue of $908,000 increased $139,000, or 18.1%, for the three months ended August 31, 2026, as compared to total revenue of $769,000 for the three months ended August 31, 2025. Our total revenue for the three months ended August 31, 2026 increased compared to the prior period primarily due to an increase in marketing fund expenses, which drive the recognition of marketing fund revenue. Under U.S. GAAP, we recognize marketing fund revenue at the time the related marketing fund expenses are incurred. As marketing fund revenue and expense directly offset each other in any given period, the increase has no impact on net income.

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

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

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

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

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

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

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

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

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

For the nine months ended August 31, 2026 and August 31, 2025, the Company reported net income of $533,000 and $438,000, respectively. Total revenue of $2,435,000 increased $101,000, or 4.3%, for the nine months ended August 31, 2026, as compared to total revenue of $2,334,000 for the nine months ended August 31, 2025. Our total revenue for the nine months ended August 31, 2026 increased compared to the prior period primarily due to an increase in marketing fund expenses of $76,000, which drive the recognition of marketing fund revenue. Under U.S. GAAP, we recognize marketing fund revenue at the time the related marketing fund expenses are incurred. As marketing fund revenue and expense directly offset each other in any given period, the increase has no impact on net income.

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

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

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

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

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

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

Liquidity and Capital Resources

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

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

During the nine months ended August 31, 2025, the Company had net income of $438,000 and operating activities provided cash of $456,000. The principal adjustments to reconcile the net income to cash provided by operating activities for the nine months ending August 31, 2025 was depreciation and amortization of $3,000, and noncash lease expense of $65,000, less provision for uncollectible accounts of $1,000 and deferred tax reduction of $63,000. In addition, changes in operating assets and liabilities increased cash by $13,000.

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

Cash distributions/dividends used $291,000 and $363,000 in financing activities for the nine months ending August 31, 2026 and 2025, respectively.

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Cash Distribution and Dividend Policy

It is the Company’s intent that future cash distributions/dividend payments will be considered after reviewing profitability expectations and financing needs and will be declared at the discretion of the Board of Directors. Previously, dividends were paid quarterly when funds were available, and the Board has continued to declare a cash distribution/dividend each quarter of fiscal 2026: a $0.02 cash distribution/dividend for the first quarter, a $0.01 cash distribution/dividend for each of the second and third quarters, and a $0.01 cash distribution/dividend for the fourth quarter, which was declared on September 10, 2026. Going forward, the Company expects to pay dividends semi-annually, subject to availability of funds and Board approval.

Determination of whether distributions are considered a cash distribution, cash dividend or combination of the two will not be made until after December 31, 2026, as the classification or combination is dependent upon the Company’s earnings and profits for tax purposes for its fiscal year ending November 30, 2026.

Recent Accounting Pronouncements

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

In November 2024, the Financial Accounting Standards Board issued Accounting Standards Update No. 2024‑03, Income Statement — Reporting Comprehensive Income — Expense Disaggregation Disclosures (“ASU 2024‑03”), which requires public business entities to provide enhanced disclosures that disaggregate certain expense captions in the notes to the financial statements to improve transparency about components of expense categories such as purchases of inventory, employee compensation, depreciation, amortization and related items. ASU 2024‑03 does not change the recognition or measurement of expenses presented on the face of the income statement, but will require additional tabular disclosures in the notes for annual and interim reporting periods. The guidance is effective for fiscal years beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027, with early adoption permitted. The Company has not adopted this standard and is currently evaluating the potential effect the standard will have on its consolidated financial statements disclosures.

On July 30, 2025 the FASB issued ASU 2025-05, “Measurement of Credit Losses for Accounts Receivable and Contract Assets”. The ASU relates to estimating credit losses under CECL for current accounts receivable and current contract assets arising from revenue transactions accounted for under ASC 606, Revenue from Contracts with Customers, including those acquired in a transaction accounted for under ASC 805, Business Combinations. The ASU does not apply to other types of accounts receivable and loans.

For all entities, the ASU provides a practical expedient to assume that current conditions as of the balance sheet date will persist through the reasonable and supportable forecast period for eligible assets. Entities will still be required to adjust historical data used in the estimation to reflect current conditions. The new guidance will be effective for interim and annual periods beginning after December 15, 2025 and is to be adopted on a prospective basis. The Company will adopt ASU 2025-05 for fiscal year ending November 30, 2027.

Other than ASU 2024-03, which the Company is currently evaluating, management does not believe that there are any recently issued and effective or not yet effective accounting pronouncements as of August 31, 2026 that would have or are expected to have any significant effect on the Company’s financial position, cash flows or income statement.

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Critical Accounting Policies

The Company has identified other significant accounting policies that, as a result of the judgments, uncertainties, uniqueness and complexities of the underlying accounting standards and operations involved could result in material changes to its financial condition or results of operations under different conditions or using different assumptions. The Company's most critical accounting policies are related to revenue recognition and the valuation of long-lived and intangible assets. Details regarding the Company's use of these policies and the related estimates are described in the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 2025, filed with the Securities and Exchange Commission on February 24, 2026. 

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, 2026 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.

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 quarter ending August 31, 2026 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”).

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PART II

We may be 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, after consulting legal counsel, 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.

None.

None.

Not applicable

There was no adoption, modification or termination of any Rule 10b5-1 or non-Rule 10b5-1 plans by any Directors or Officers of the Company in the nine months ended August 31, 2026.

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(a)   EXHIBITS

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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.

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