form10q.htm


FORM 10-Q
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended: May 31, 2010
o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ________________ to _________________
 
Commission file number: 0-31555
BAB, Inc.
(Name of small business issuer in its charter)

Delaware
36-4389547
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 500 Lake Cook Road, Suite 475, Deerfield, Illinois 60015
 
(Address of principal executive offices) (Zip Code)
 
Issuer's telephone number (847) 948-7520
 
Indicate by checkmark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes o   No o
 
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  o     Accelerated filer   o      Non-accelerated filer  o  (Do not check if a smaller reporting company)      Smaller reporting company  x
 
Indicate by checkmark whether the registrant is a shell company.   Yes o       No x
 
As of June 23, 2010, BAB, Inc. had: 7,263,508 shares of Common Stock outstanding.
 


 
 

 
 
TABLE OF CONTENTS
 
PART I
FINANCIAL INFORMATION
   
Item 1.
   
Item 2
   
Item 3
   
Item 4T
   
PART II
OTHER INFORMATION
   
Item 1.
   
Item 2
   
Item 3
   
Item 4
   
Item 5
   
Item 6
   
 

 
2

 
PART I
 
ITEM 1.

BAB, Inc.
Consolidated Balance Sheet
             
   
May 31,
   
November 30,
 
   
2010
   
2009
 
   
(Unaudited)
       
ASSETS
           
Current Assets
           
Cash
  $ 1,136,417     $ 1,072,526  
Restricted cash
    213,320       211,748  
Receivables
               
Trade accounts and notes receivable (net of allowance for
               
doubtful accounts of $9,607 in 2010 and $8,712 in 2009 )
    120,640       103,346  
Marketing fund contributions receivable from franchisees and stores
    16,478       14,209  
Inventories
    32,797       37,946  
Prepaid expenses and other current assets
    74,287       105,981  
Total Current Assets
    1,593,939       1,545,756  
                 
Property, plant and equipment (net of accumulated depreciation of $583,116 in 2010 and $575,407 in 2009)
    41,362       27,834  
Trademarks
    435,860       434,960  
Goodwill
    1,493,771       1,493,771  
Definite lived intangible assets (net of accumulated amortization of $116,160 in 2010 and $113,494 in 2009)
    74,961       79,794  
Deferred tax asset
    248,000       248,000  
Total Noncurrent Assets
    2,293,954       2,284,359  
Total Assets
  $ 3,887,893     $ 3,830,115  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current Liabilities
               
Current portion of long-term debt
  $ 25,292     $ 25,292  
Accounts payable
    50,859       36,975  
Accrued expenses and other current liabilities
    344,562       268,077  
Unexpended marketing fund contributions
    192,089       173,211  
Deferred franchise fee revenue
    76,000       30,000  
Deferred licensing revenue
    23,750       39,583  
Total Current Liabilities
    712,552       573,138  
                 
Long-term debt (net of current portion)
    179,078       179,078  
Total Liabilities
    891,630       752,216  
                 
Stockholders' Equity
               
Common stock ($.001 par value; 15,000,000 shares authorized; 8,466,953 shares issued and 7,263,508 shares outstanding as of May 31, 2010 and November 30, 2009
    13,508,257       13,508,257  
Additional paid-in capital
    972,415       967,441  
Treasury stock
    (222,781 )     (222,781 )
Accumulated deficit
    (11,261,628 )     (11,175,018 )
Total Stockholders' Equity
    2,996,263       3,077,899  
Total Liabilities and Stockholders' Equity
  $ 3,887,893     $ 3,830,115  

SEE ACCOMPANYING NOTES

 
3


BAB, Inc.
Consolidated Statements of Operations
For the Quarters Ended May 31, 2010 and 2009
(Unaudited)
                         
   
3 months ended May 31,
 
6 months ended May 31,
 
   
2010
   
2009
   
2010
   
2009
 
REVENUES
                       
Royalty fees from franchised stores
  $ 449,936     $ 484,037     $ 857,551     $ 926,672  
Net sales by Company-owned stores
    116,138       118,103       220,868       226,532  
Franchise fees
    -       5,000       25,000       50,000  
Licensing fees and other income
    143,715       190,055       253,951       371,861  
          Total Revenues
    709,789       797,195       1,357,370       1,575,065  
                                 
OPERATING EXPENSES
                         
Store food, beverage and paper costs
    34,321       35,872       64,063       69,252  
Store payroll and other operating expenses
    68,194       109,958       152,006       224,923  
Selling, general and administrative expenses:
         
     Payroll and payroll-related expenses
    301,616       312,503       594,024       676,743  
     Occupancy
    36,725       38,860       72,664       73,361  
     Advertising and promotion
    17,912       21,500       34,262       37,469  
     Professional service fees
    33,308       31,105       104,751       88,885  
     Depreciation and amortization
    6,951       9,556       13,052       18,828  
     Impairment of goodwill and other intangibles
    -       -       -       2,399,057  
     Other
    99,208       128,121       189,392       272,113  
          Total Operating Expenses
    598,235       687,475       1,224,214       3,860,631  
Income/(Loss) from operations
    111,554       109,720       133,156       (2,285,566 )
     Interest income
    1,414       4,446       2,993       7,748  
     Interest expense
    (2,427 )     (2,714 )     (4,854 )     (5,427 )
Income/(Loss) before provision for income taxes
    110,541       111,452       131,295       (2,283,245 )
Provision (benefit) for income taxes
                 
     Current tax (benefit)
    -       -       -       -  
     Deferred tax (benefit)
    -       -       -       -  
      -       -       -       -  
Net Income/(Loss)
  $ 110,541     $ 111,452     $ 131,295     $ (2,283,245 )
                                 
Net Income/(Loss) per share - Basic and Diluted
    0.02       0.02       0.02       (0.31 )
                                 
Weighted average shares outstanding - Basic and Diluted
    7,263,508       7,263,508       7,263,508       7,263,508  
Cash distributions declared per share
  $ 0.02     $ 0.02     $ 0.03     $ 0.04  
                                 
SEE ACCOMPANYING NOTES

 
4


BAB, Inc.
Consolidated Statements of Cash Flows
For the Quarters Ended May 31, 2010 and 2009
 (Unaudited)

   
2010
   
2009
 
Operating activities
           
Net income/(loss)
  $ 131,295     $ (2,283,245 )
Depreciation and amortization
    13,052       18,828  
Goodwill and intangible impairment
    -       2,399,057  
Provision for uncollectible accounts, net of recoveries
    (11,604 )     7,486  
Share-based compensation
    4,974       5,203  
Changes in:
               
Trade accounts receivable and notes receivable
    (5,690 )     6,096  
Restricted cash
    (1,572 )     56,378  
Marketing fund contributions receivable
    (2,269 )     533  
Inventories
    5,149       9,565  
Prepaid expenses and other
    31,694       39,106  
Accounts payable
    13,884       (25,369 )
Accrued liabilities
    3,850       (36,605 )
Unexpended marketing fund contributions
    18,878       (56,911 )
Deferred revenue
    30,167       (70,998 )
Net Cash Provided by Operating Activities
    231,808       69,124  
                 
Investing activities
               
Purchase of equipment
    (21,237 )     -  
Capitalization of trademark renewals
    (1,410 )     (12,374 )
Net Cash Used In Investing Activities
    (22,647 )     (12,374 )
                 
Financing activities
               
Cash distributions/dividends
    (145,270 )     (217,905 )
Net Cash Used In Financing Activities
    (145,270 )     (217,905 )
                 
                 
                  Net Increase/Decrease in Cash
    63,891       (161,155 )
                 
                              Cash, Beginning of Period
    1,072,526       1,207,108  
                              Cash, End of Period
  $ 1,136,417     $ 1,045,953  
                 
                 
Supplemental disclosure of cash flow information:
         
Interest paid
  $ -     $ -  
Income taxes paid
  $ -     $ -  

 SEE ACCOMPANYING NOTES

 
5


BAB, Inc.
Notes to Unaudited Consolidated Financial Statements
Quarter and Year to Date Periods Ended May 31, 2010 and 2009
(Unaudited)
 
 
Note 1 - Nature of Operations
 
BAB, Inc. (the "Company") was incorporated under the laws of the State of Delaware on July 12, 2000.  The Company currently operates franchises and licenses bagel and muffin retail units under the Big Apple Bagels ("BAB") and My Favorite Muffin ("MFM") trade names. At May 31 2010, the Company had 104 units in operation in 25 states. The Company additionally derives income from the sale of its trademark bagels, muffins and coffee through nontraditional channels of distribution including under licensing agreements with Mrs. Fields Famous Brands (Mrs. Fields), Kohr Bros. Frozen Custard and through direct home delivery of specialty muffin gift baskets and coffee.

The BAB brand franchised and Company-owned stores feature daily baked bagels, flavored cream cheeses, premium coffees, gourmet bagel sandwiches and other related products. Licensed BAB units serve the Company's par-baked frozen bagel and related products baked daily.  BAB units are primarily concentrated in the Midwest and Western United States.  The MFM brand consists of units operating as "My Favorite Muffin," featuring a large variety of freshly baked muffins, coffees and related products, and units operating as "My Favorite Muffin and Bagel Cafe," featuring these products as well as a variety of specialty bagel sandwiches and related products.  MFM units are primarily in the Middle Atlantic States.   Although the Company doesn't actively market Brewster's stand-alone franchises, Brewster's coffee products are sold in the Company-owned store and most franchised units.
 
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, 2009 which was filed February 23, 2010.  In the opinion of the Company's management, the condensed consolidated financial statements for the unaudited interim periods presented include all adjustments, including normal recurring adjustments, necessary to fairly present the results of such interim periods 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.
 
2. Stores Open and Under Development
 
Stores which are open or under development at May 31, 2010 are as follows:
 
Stores open:
     
       
Company-owned
    1  
Franchisees
    99  
Licensed
    4  
Under development
    3  
Total
    107  

 
6

 
3. (Loss)/Earnings per Share
 
The following table sets forth the computation of basic and diluted earnings/ (loss) per share:
 
   
3 months ended May 31,
   
6 months ended May 31,
 
   
2010
   
2009
   
2010
   
2009
 
Numerator:
                       
Net (loss)/income available to common shareholders
  $ 110,541     $ 111,452     $ 131,295     $ (2,283,245 )
                                 
Denominator:
                               
Weighted average outstanding shares
                               
Basic and diluted
    7,263,508       7,263,508       7,263,508       7,263,508  
                                 
Earnings/(Loss) per Share - Basic and Diluted
    0.02       0.02       0.02       (0.31 )
 
368,373 potential shares attributable to outstanding stock options were excluded from the calculation of diluted earnings per share for the three and six months ended May 31, 2010 because their inclusion would have been anti-dilutive.
 
4.  Long-Term Debt
 
The total debt balance of $204,370 represents a note payable to a former shareholder that requires an annual payment of $35,000, including interest at 4.75%, due October 1 and running through 2016.
 
5.  Stock Options
 
In May 2001, the Company approved a Long-Term Incentive and Stock Option Plan (Plan).  The Plan reserves 1,400,000 shares of common stock for grant.  As of May 31, 2010, 1,400,000 stock options were granted to directors, officers and employees.  As of May 31, 2010, there were 1,031,627 stock options exercised or forfeited under the Plan.
 
   
6 Months Ended
 
   
May 31, 2010
   
May 31, 2009
 
   
Options
   
Options
 
Options Outstanding at beginning of period
    368,373       369,373  
Granted
    0       0  
Forfeited
    0       0  
Exercised
    0       0  
Options Outstanding at end of period
    368,373       369,373  
 
The Company recorded compensation cost arising from share-based payment arrangements in payroll-related expenses on the Condensed Consolidated Statement of Operations for the Company’s stock option plan of approximately $5,000 for the six months ended May 31, 2010 and 2009.
 
As of May 31, 2010, there was approximately $15,000 of total unrecognized compensation cost related to non-vested stock option compensation arrangements granted under the incentive plan.  That cost is to be recognized over a weighted average period of approximately 1.5 years.
 
 
7


The Company uses historical volatility of common stock over a period equal to the expected life of the options to estimate their fair value.  The dividend yield assumption is based on the Company’s history and expectation of future dividend payouts on the common stock. The risk-free interest rate is based on the implied yield available on U.S. treasury zero-coupon issues with an equivalent remaining term. The expected term of the options represents the estimated period of time until exercise and is based on historical experience of similar awards, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior. To value option grants and other awards for actual and pro forma stock-based compensation, the Company uses the Black-Scholes option valuation model. When the measurement date is certain, the fair value of each option grant is estimated on the date of grant and is based on the assumptions used for the expected stock price volatility, expected term, risk-free interest rates and future dividend payments.

The Company’s stock option terms expire in 10 years and vary in vesting from immediate to a vesting period of five years.

The following table summarizes the stock options outstanding and exercisable at May 31, 2010:

Options Outstanding
 
Options Exercisable
Outstanding
 
Wghtd. Avg.
   
Wghtd. Avg.
   
Aggregate
 
Exercisable
 
Wghtd. Avg.
  Aggregate    
at 5/31/2010
 
Remaining Life
   
Exercise Price
   
Intrinsic Value
 
at 5/31/2010
 
Exercise Price
  Intrinsic Value
 
        368,373
    5.80     $ 1.16     $ -   188,373   $ 1.00   $                                                     -

There is no computation for the aggregate intrinsic value in the table above because the outstanding options weighted average exercise price was greater than the Company’s closing stock price of $.42 as of the last business day of the period ended May 31, 2010.  No options were exercised during the quarter ended May 31, 2010.
 
 6. Goodwill and Other Intangible Assets
 
In accordance with ASC 350, goodwill and indefinite-lived intangible assets are tested for impairment upon adoption of the standard and annually thereafter.  ASC 350 requires that goodwill be tested for impairment using a two-step process.  The first step is to identify a potential impairment and the second step measures the amount of the impairment loss, if any.   Goodwill is deemed to be impaired if the carrying amount of a reporting unit's net assets exceeds its estimated fair value.  ASC 350 requires that indefinite-lived intangible assets be tested for impairment using a one-step process, which consists of a comparison of the fair value to the carrying value of the intangible asset.  Intangible assets are deemed to be impaired if the net book value exceeds the estimated fair value.
 
Following the guidelines contained in ASC 350, the corporation 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.  Goodwill and intangible assets were tested at the end of the first fiscal quarter, February 28, 2010 and it was found that the carrying value of the goodwill and intangible assets was not impaired.  No events or circumstances occurred in the second quarter of 2010 to indicate that an impairment test was necessary.

An impairment test was performed at February 28, 2010 based on a discounted cash flow model using management’s business plans projected for expected future cash flows.  Based on the computation of the discounted cash flows, it was determined that the fair value of goodwill and intangible assets did not exceed their carrying value.

 
8

 
7. Segment Information
 
The following table presents segment information for the six months ended May 31, 2010 and 2009:
 
   
Net Revenues
   
Operating Income (Loss)
 
   
6 Months Ended May 31
   
6 Months Ended May 31
 
   
2010
   
2009
   
2010
   
2009
 
Company Store Operations
    263,306     $ 374,115     $ (73,321 )   $ (95,957 )
Franchise Operations and Licensing Fees
    1,094,064       1,200,950       649,047       657,951  
    $ 1,357,370     $ 1,575,065     $ 575,726     $ 561,994  
Corporate Expenses, including impairment
      (442,570 )     (2,847,560 )
Interest Income, Net of Interest Expense
      (1,861 )     2,321  
Net (Loss)/Income
                  $ 131,295     $ (2,283,245 )
 
Total segment assets were substantially unchanged for the six months ended May 31, 2010 as compared to November 30, 2009.
 
8.  Recent Accounting Pronouncements
 
In August 2009, the FASB issued ASU 2009-05 to provide guidance on measuring the fair value of liabilities under ASC 820, Fair Value Measurements and Disclosures. ASU 2009-05 became effective for us during the quarter ended February 28, 2010. ASU 2009-05 provides guidance regarding valuation for liabilities which trade as an asset in an active market. The adoption of this guidance did not have an impact on our consolidated financial position, cash flows or results of operations.

Management does not believe that there are any other recently issued and effective or not yet effective pronouncements as of May 31, 2010 that would have or are expected to have any significant effect on the Company’s consolidated financial position, cash flows or results of operations.
 
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Certain statements contained in Management's Discussion and Analysis of Financial Condition and Results of Operations, including statements regarding the development of the Company's business, the markets for the Company's products, anticipated capital expenditures, and the effects of completed and proposed acquisitions, and other statements contained herein regarding matters that are not historical facts, are forward-looking statements as is within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Because such statements include risks and uncertainties, actual results could differ materially from those expressed or implied by such forward-looking statements as set forth in this report, the Company's Annual Report on Form 10-K and other reports that the Company files with the Securities and Exchange Commission. Certain risks and uncertainties are wholly or partially outside the control of the Company and its management, including its ability to attract new franchisees; the continued success of current franchisees; the effects of competition on franchisees and Company-owned store results; 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.
 
 
9

 
General
 
The Company has 1 Company-owned store, 99 franchised and 4 licensed units at May 31, 2010.  Units in operation at May 31, 2009 included 1 Company-owned store, 107 franchised and 3 licensed units.  System-wide revenues for the six months ended May 31, 2010 were $17.7 million as compared to May 31, 2009 which were $19.2 million.
 
The Company's revenues are derived primarily from ongoing royalties paid to the Company by its franchisees, from the operation of the Company-owned store, receipt of franchise fees and from receipt of licensing fees.
 
Royalty fees from franchised stores represent a fee of 5% 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 last 10 weeks’ average.
 
The Company recognizes franchise fee revenue upon the opening of a franchise store. Direct costs associated with the franchise sale are deferred until the franchise fee revenue is recognized.  These costs include site approval, construction approval, commissions, blueprints and training costs.

In addition, the Company earns a licensing fee from the sale of BAB branded products, which includes coffee, cream cheese, muffin mix and par baked bagels from a third-party commercial bakery to the franchised and licensed units.

As of May 31, 2010, the Company employed 25 persons, consisting of 10 working in the Company-owned store, of which 9 are part-time employees.  The remaining 15 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.
 
The Company's revenues are derived primarily from ongoing royalties paid to the Company by its franchisees, from the operation of Company-owned stores and receipt of 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 licensing agreements (Kohr Bros. and Mrs. Fields Famous Brands).
 
Results of Operations
 
Three Months Ended May 31, 2010 versus Three Months Ended May 31, 2009
 
For the three months ended May 31, 2010 and 2009, the Company reported net income of $111,000.  Total revenue of $710,000 decreased $87,000, or 10.9%, for the three months ended May 31, 2010, as compared to total revenue of $797,000 for the three months ended May 31, 2009.
 
Royalty fee revenue of $450,000, for the quarter ended May 31, 2010, decreased $34,000, or 7.0%, from the $484,000 for quarter ended May 31, 2009.  The Company had 99 franchise locations at May 31, 2010 as compared to 107 locations at May 31, 2009.  The decrease in stores and the general economic downturn has negatively impacted our franchise network and resulting royalty revenue.
 
There was no franchise fee revenue for quarter ended May 31, 2010 versus franchise fee revenue of $5,000 due to a store transfer for the quarter ended May 31, 2009.
 
 
10

 
Licensing fee and other income of $144,000, for the quarter ended May 31, 2010, decreased $46,000, or 24.2%, from $190,000 for the quarter ended May 31, 2009.  Rent revenue decreased $41,000 due to the termination of the Lincoln, NE sublease on December 31, 2009, Sign Shop revenues decreased $2,000 and license fee revenue decreased $8,000, offset by an increase of $5,000 in default/early termination fee revenue in 2010 compared to 2009.
 
Company-owned store sales of $116,000, for the quarter ended May 31, 2010, decreased $2,000, or 1.7%, from $118,000 for the quarter ended May 31, 2009.
 
Total operating expenses of $598,000 decreased $89,000, or 13.0%, for the quarter ended May 31, 2010, from $687,000 in 2009.  The $89,000 decrease in total operating expenses was primarily due to a $38,000 decrease in rent expense for Lincoln, NE (the lease terminated December 31, 2009), a $14,000 decrease in bad debt expense due to recovery from one customer in 2010, a $10,000 decrease in payroll expense due to one less employee, a $6,000 decrease in Company-owned store expense, which includes cost of goods sold, a $10,000 decrease in travel expense, a $5,000 decrease in Sign Shop expense which is part of SG&A and a $4,000 decrease in advertising and promotional expense in 2010 compared to 2009.
 
Interest income of $1,000 decreased $3,000, or 75.0% for the quarter ended May 31, 2010, from $4,000 for the same period in 2009.  Lower interest rates and a change in investment instruments in 2010 resulted in the lower interest income.  As opposed to using an outside investment sweep account, funds are now held in the bank account and earnings on the balances are used to offset bank fees.  Bank fees were approximately $1,000 less for 2010 second quarter compared to same period prior year.
 
Interest expense of $2,000 decreased $1,000, or 33.3% for the quarter ended May 31, 2010, from $3,000 for the same period in 2009.
 
Net income per share, as reported for basic and diluted outstanding shares for three months ended May 31, 2010 and May 31, 2009 was $0.02 per share.
 
Six Months Ended May 31, 2010 versus Six Months Ended May 31, 2009
 
For the six months ended May 31, 2010, the Company reported a net income of $131,000 versus a net loss of $2,283,000 for the same period in 2009.  The prior year loss was due to an impairment charge for goodwill and other intangibles in the first quarter 2009 of $2,399,000.  Total revenue of $1,357,000 decreased $218,000, or 13.8%, for the six months ended May 31, 2010, as compared to total revenue of $1,575,000 for the six months ended May 31, 2009.
 
Royalty fee revenue of $857,000, for the six months ended May 31, 2010, decreased $70,000, or 7.6%, from the $927,000 for the six months ended May 31, 2009.  The Company had 99 franchise locations at May 31, 2010 as compared to 107 locations at May 31, 2009.  The decrease in stores and the general economic downturn have negatively impacted our franchise network and resulting royalty revenue.
 
Franchise fee revenue of $25,000, for the six months ended May 31, 2010, decreased $25,000, or 50.0%, from $50,000 for the six months ended May 31, 2009.  One store opened during the six months ended May 31, 2010, versus two stores opening and one transferring in the same period of 2009.
 
Licensing fee and other income of $254,000, for the six months ended May 31, 2010, decreased $118,000, or 31.7%, from $372,000 for the six months ended May 31, 2009.  Rent revenue decreased $80,000 due to the termination of the Lincoln, NE sublease on December 31, 2009, Sign Shop revenue decreased $25,000 and licensing fee revenue decreased $22,000 primarily due to less stores and the general economic downturn, offset by a $9,000 default/early termination fee revenue increase in 2010 compared to 2009.
 
 
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Company-owned store sales of $221,000, for the six months ended May 31, 2010, decreased $5,000, or 2.2%, from $226,000 for the same period of 2009.
 
Total operating expenses of $1,224,000 decreased $238,000 or 16.3%, for the six months ended May 31, 2010 from $1,462,000 excluding the impairment charge of $2,399,000, in 2009.  The $238,000 decrease in total operating expenses was primarily due to an $83,000 decrease in payroll expense, due to decreased employee awards and one less employee, a $68,000 decrease in rent expense for Lincoln, NE, (the lease terminated December 31, 2009), an $18,000 decrease in travel expense due to more in-house pre-visit analysis in 2010, a $25,000 decrease in Sign Shop expense which is part of SG&A, a $19,000 decrease in bad debt expense primarily due to recovery of 2009 bad debt in 2010, a $11,000 decrease in Company-owned store expense, which includes cost of goods sold, and a $17,000 decrease in franchise development expense, offset by a $16,000 increase in legal and accounting expense primarily due to higher legal fees for franchise related contract issues in 2010 compared to 2009.
 
Interest income of $3,000 decreased $5,000, or 62.5% for the six months ended May 31, 2010, from $8,000 for the same period in 2009.  Lower interest rates and a change in investment instruments in 2010 resulted in the lower interest income.  As opposed to using an outside investment sweep account, funds are now held in the bank account and earnings on the balances are used to offset bank fees.  Bank fees were approximately $1,000 less for the six months ended May 31, 2010, versus the same period 2009.
 
Interest expense for the six months ended May 31, 2010 and 2009 was $5,000.
 
Net income per share, as reported for basic and diluted outstanding shares for six months ended May 31, 2010 was $0.02 compared to net loss per share of $0.31 for May 31, 2009.
 
Liquidity and Capital Resources
 
The net cash provided by operating activities totaled $232,000 for the six months ended May 31, 2010, versus cash provided by operating activities of $69,000 for the same period in 2009. Cash provided by operating activities principally represents net income of $131,000, plus depreciation and amortization of $13,000, share-based compensation of $5,000 less the provision for uncollectible accounts of $12,000, plus inventories of $5,000, prepaid expenses and other assets of $32,000 accounts payable of $14,000, accrued liabilities of $4,000, unexpended Marketing Fund contributions of $19,000 and deferred revenue of $30,000, less changes in trade accounts and notes receivable of $6,000, restricted cash of $2,000 and Marketing Fund contributions receivable of $2,000.  Operating activities in 2009 provided cash of $69,000, represented by a net loss of $2,283,000, plus depreciation and amortization of $19,000, goodwill and intangible impairment of $2,399,000, share-based compensation of $5,000 and provision for uncollectible accounts of $7,000, plus changes in accounts and notes receivable of $6,000, restricted cash of $56,000, Marketing Fund contributions receivable of $1,000, inventories of $10,000 and prepaid expenses and other assets of $39,000, less changes in accounts payable of $25,000, accrued liabilities of $37,000, unexpended Marketing Fund contributions of $57,000 and deferred revenue of $71,000.
 
Cash used in investing activities during the six months ended May 31, 2010 totaled $23,000.  Equipment was purchased for $21,000 and trademark renewal expenditures were $2,000.  Cash used during 2009 totaled $12,000 for trademark renewal expenditures.
 
Financing activities used $145,000 for the six months ended May 31, 2010 for payment of cash distributions.  Financing activities for 2009 was $218,000 for the payment of cash dividends.
 
Cash Distribution and Dividend Policy
 
It is the Company’s intent that future cash distributions/dividends will be considered after reviewing profitability expectations and financing needs and will be declared at the discretion of the Board of Directors.  Due to the general economic downturn and its impact on the Company, there can be no assurance that the Company will generate sufficient earnings to pay out cash distributions/dividends.  The Company will continue to analyze its ability to pay cash distributions/dividends on a quarterly basis.
 
 
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The Company believes that for tax purposes the cash distribution declared in 2010 may be treated as a return of capital to shareholders depending on each shareholder’s basis or it may be treated as a dividend or a combination of the two.  Determination of whether it is a cash distribution, cash dividend or combination of the two will not be determined until after December 31, 2010, as the classification or combination is dependent upon the Company’s earnings and profit for tax purposes for its fiscal year ending November 30, 2010.
 
The Company believes execution of this policy will not have any material adverse effects on its ability to fund current operations or future capital investments.
 
The Company has no financial covenants on any of its outstanding debt.
 
Recent Accounting Pronouncements
 
In August 2009, the FASB issued ASU 2009-05 to provide guidance on measuring the fair value of liabilities under ASC 820, Fair Value Measurements and Disclosures. ASU 2009-05 became effective for us during the quarter ended February 28, 2010. ASU 2009-05 provides guidance regarding valuation for liabilities which trade as an asset in an active market. The adoption of this guidance did not have an impact on our consolidated financial position, cash flows or results of operations.

Management does not believe that there are any other recently issued and effective or not yet effective pronouncements as of May 31, 2010 that would have or are expected to have any significant effect on the Company’s consolidated financial position, cash flows or results of operations.

Critical Accounting Policies
 
The Company has identified significant accounting policies that, as a result of the judgments, uncertainties, uniqueness and complexities of the underlying accounting standards and operations involved, could result in material changes to its financial condition or results of operations under different conditions or using different assumptions.  The Company's most critical accounting policies are related to the following areas: revenue recognition, 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, 2009, filed with the Securities and Exchange Commission on February 23, 2010.  There have been no material changes to the Company's critical accounting policies that impact the Company's financial condition, results of operations or cash flows for the six months ended May 31, 2010.
 
 
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 
BAB, Inc. has no significant interest, currency or derivative market risk.
 
 
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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 May 31, 2010 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.

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 six months of fiscal year 2010 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
 
ITEM 1.
 
None.
 
ITEM 2.
UNREGISTERED SALES OF EQUITY AND USE OF PROCEEDS
 
None.
 
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
 
None.
 
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
None
 
ITEM 5.
OTHER INFORMATION
 
None.
 
ITEM 6.
EXHIBITS
 
 See index to exhibits
 
 
SIGNATURE
 
In accordance with the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
BAB, Inc.
 
Dated:  July 12, 2010
/s/ Jeffrey M. Gorden
 
Jeffrey M. Gorden
 
Chief Financial Officer

 
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INDEX TO EXHIBITS
 
(a)  EXHIBITS
 
The following exhibits are filed herewith.
 
INDEX NUMBER
DESCRIPTION
List of Subsidiaries of the Company
Section 302 of the Sarbanes-Oxley Act of 2002   Certification of Chief Executive Officer
Section 302 of the Sarbanes-Oxley Act of 2002   Certification of Chief Financial Officer
Section 906 of the Sarbanes-Oxley Act of 2002   Certification of Chief Executive Officer
Section 906 of the Sarbanes-Oxley Act of 2002   Certification of Chief Financial Officer
 
 
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