Edgar Filing: BAB, INC.

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: August 31, 2009

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 issuer (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). o Yes o 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 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 September 21, 2009, BAB, Inc. had: 7,263,508 shares of Common Stock outstanding.

TABLE OF CONTENTS

PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements

Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operation

Item 3	Quantitative and Qualitative Disclosures About Market Risk

Item 4T	Controls and Procedures

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds

Item 3	Defaults Upon Senior Securities

Item 4	Submission of Matters to a Vote of Security Holders

Item 5	Other Information

Item 6	Exhibits

SIGNATURE

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PART I

ITEM 1.

FINANCIAL STATEMENTS

BAB, Inc.

Consolidated Balance Sheet

	August 31, 2009 (Unaudited)			November 30, 2008
ASSETS
Current Assets
Cash	$	1,050,064		$	1,207,108
Restricted cash		230,417			293,994
Receivables
Trade accounts and notes receivable (net of allowance for doubtful accounts of $18,452 in 2009 and $3,841 in 2008 )		96,057			104,153
Marketing fund contributions receivable from franchisees and stores		14,939			13,245
Inventories		38,849			51,331
Prepaid expenses and other current assets		132,014			145,953
Total Current Assets		1,562,340			1,815,784

Property, plant and equipment (net of accumulated depreciation of $571,884in 2009 and $554,111 in 2008)		31,357			47,980
Trademarks		431,224			763,667
Goodwill		1,493,771			3,542,772
Definite lived intangible assets (net of accumulated amortization of $320,880in 2009 and $313,560 in 2008)		80,316			86,324
Deferred tax asset		500,000			500,000
Total Noncurrent Assets		2,536,668			4,940,743
Total Assets	$	4,099,008		$	6,756,527

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt	$	24,145		$	24,145
Accounts payable		35,296			49,353
Accrued expenses and other current liabilities		293,437			313,329
Unexpended marketing fund contributions		192,610			254,493
Deferred franchise fee revenue		26,500			125,000
Deferred licensing revenue		25,082			36,996
Total Current Liabilities		597,070			803,316

Long-term debt (net of current portion)		204,371			204,371
Total Liabilities		801,441			1,007,687

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 August 31, 2009 and November 30, 2008		13,508,257			13,508,257
Additional paid-in capital		964,954			957,264
Treasury stock		(222,781	)		(222,781	)
Accumulated deficit		(10,952,863	)		(8,493,900	)
Total Stockholders' Equity		3,297,567			5,748,840
Total Liabilities and Stockholders' Equity	$	4,099,008		$	6,756,527

SEE ACCOMPANYING NOTES

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BAB, Inc.

Consolidated Statements of Operations

For the Quarters Ended August 31, 2009 and 2008

(Unaudited)

	3 Months Ended August 31,						9 Months Ended August 31,
REVENUES	2009			2008			2009			2008

Royalty fees from franchised stores	$	460,889		$	531,908		$	1,387,561		$	1,604,611
Net sales by Company-owned stores		121,014			136,056			347,546			389,896
Franchise fees		25,000			20,000			75,000			160,000
Licensing fees and other income		216,880			244,421			588,742			694,418
Total Revenues		823,783			932,385			2,398,849			2,848,925
OPERATING EXPENSES
Store food, beverage and paper costs		35,954			44,046			105,205			128,836
Store payroll and other operating expenses		115,865			123,711			340,788			349,863
Selling, general and administrative expenses:
Payroll and payroll-related expenses		311,139			331,031			987,882			1,064,664
Occupancy		34,076			38,038			107,437			108,808
Advertising and promotion		20,289			31,384			57,758			114,971
Professional service fees		58,647			60,924			147,532			169,176
Depreciation and amortization		6,265			9,209			25,093			27,793
Impairment of goodwill and other intangibles		-			-			2,399,057			-
Other		127,128			134,322			399,242			418,739
Total Operating Expenses		709,363			772,665			4,569,994			2,382,850
Income/(Loss) from operations		114,420			159,720			(2,171,145	)		466,075
Interest income		3,116			5,607			10,863			25,522
Interest expense		(2,714	)		(2,987	)		(8,141	)		(8,962	)
Income/(Loss) before provision for income taxes		114,822			162,340			(2,168,423	)		482,635
Provision (benefit) for income taxes
Current tax (benefit)		-			-			-			-
Deferred tax (benefit)		-			-			-			-
		-			-			-			-
Net Income/(Loss)	$	114,822		$	162,340		$	(2,168,423	)	$	482,635
Net Income/(Loss) per share - Basic	$	0.02		$	0.02		$	(0.30	)	$	0.07
Net Income/(Loss) per share - Diluted	$	0.02		$	0.02		$	(0.30	)	$	0.07

Weighted average shares outstanding - Basic		7,263,508			7,263,508			7,263,508			7,263,508
Weighted average shares outstanding - Diluted		7,263,508			7,271,548			7,263,508			7,272,847
Cash dividends declared per share	$	-		$	0.02		$	0.04		$	0.08

SEE ACCOMPANYING NOTES

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BAB, Inc.

Consolidated Statements of Cash Flows

For the Quarters Ended August 31, 2009 and 2008

(Unaudited)

	2009			2008
Operating activities
Net income/(loss)	$	(2,168,423	)	$	482,635
Depreciation and amortization		25,093			27,793
Goodwill and intangible impairment		2,399,057			-
Provision for uncollectible accounts, net of recoveries		7,486			(1,777	)
Share-based compensation		7,690			19,490
Changes in:
Trade accounts receivable and notes receivable		610			(10,156	)
Restricted cash		63,577			(50,253	)
Marketing fund contributions receivable		(1,694	)		19,458
Inventories		12,482			(2,252	)
Prepaid expenses and other		13,938			18,963
Accounts payable		(14,056	)		(11,966	)
Accrued liabilities		(19,892	)		(49,150	)
Unexpended marketing fund contributions		(61,883	)		22,387
Deferred revenue		(110,413	)		(150,812	)
Net Cash Provided by Operating Activities		153,572			314,360

Investing activities
Purchase of equipment		(1,150	)		(990	)
Capitalization of trademark renewals		(18,926	)		(37,939	)
Net Cash Used In Investing Activities		(20,076	)		(38,929	)

Financing activities
Payment of dividends		(290,540	)		(581,081	)
Net Cash Used In Financing Activities		(290,540	)		(581,081	)


Net Decrease in Cash		(157,044	)		(305,650	)

Cash, Beginning of Period		1,207,108			1,510,292
Cash, End of Period	$	1,050,064		$	1,204,642


Supplemental disclosure of cash flow information:
Interest paid	$	-		$	-
Income taxes paid	$	9,706		$	576

SEE ACCOMPANYING NOTES

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BAB, Inc.

Notes to Unaudited Consolidated Financial Statements

Quarter and Year to Date Periods Ended August 31, 2009 and 2008

(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"), My Favorite Muffin ("MFM") and Brewster's Coffee trade names. At August 31, 2009, the Company had 106 franchised units in operation in 26 states, including 2 International units in United Arab Emirates. The Company additionally derives licensing fee income from the sale of its trademark bagels, muffins and coffee through 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 Your All Day Bakery Cafe," featuring these products as well as a variety of specialty bagel sandwiches and related products. 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-KSB for the year ended November 30, 2008 which was filed February 20, 2009. 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 August 31, 2009 are as follows:

Stores open:

Company-owned			1
Franchisees			106
Licensed			3
Under development			2
Total			112

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3. (Loss)/Earnings per Share

The following table sets forth the computation of basic and diluted earnings/ (loss) per share:

	3 months ended August 31,				9 months ended August 31,
	2009		2008		2009			2008
Numerator:
Net income/(loss) available to common shareholders	$	114,822	$	162,340	$	(2,168,423	)	$	482,635

Denominator:
Weighted average outstanding shares
Basic		7,263,508		7,263,508		7,263,508			7,263,508

Earnings/loss per Share - Basic	$	0.02	$	0.02	$	(0.30	)	$	0.07

Effect of dilutive common stock		-		8,040		-			9,339

Weighted average outstanding shares
Diluted		7,263,508		7,271,548		7,263,508			7,272,847

Earnings/loss per share - Diluted	$	0.02	$	0.02	$	(0.30	)	$	0.07

368,373 potential shares attributable to outstanding stock options were excluded from the calculation of diluted earnings per share for the three and nine months ended August 31, 2009 because their inclusion would have been anti-dilutive.

4. Long-Term Debt

The total debt balance of $228,516 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 August 31, 2009, 1,400,000 stock options were granted to directors, officers and employees. As of August 31, 2009, there were 1,031,627 stock options exercised or forfeited under the Plan.

	9 Months Ended
	August 31, 2009		August 31, 2008
	Options		Options
Options Outstanding at beginning of period		369,373		392,373
Granted		0		0
Forfeited		1,000		0
Exercised		0		0
Options Outstanding at end of period		368,373		392,373

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 $8,000 for the nine months ended August 31, 2009 and $19,000 for the nine months ended August 31, 2008.

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As of August 31, 2009, there was approximately $22,000 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 2.3 years.

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 August 31, 2009:

Options Outstanding								Options Exercisable
Outstanding at 8/31/2009		Wghtd. Avg. Remaining Life		Wghtd. Avg. Exercise Price		Aggregate Intrinsic Value		Exercisable at 8/31/2009		Wghtd. Avg. Exercise Price		Aggregate Intrinsic Value
	368,373		6.54	$	1.12	$	-		189,373	$	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 $.46 as of the last business day of the period ended August 31, 2009. No options were exercised during the quarter ended August 31, 2009.

6. Goodwill and Other Intangible Assets

In accordance with SFAS No. 142, goodwill and indefinite-lived intangible assets are tested for impairment upon adoption of the standard and annually thereafter. SFAS No. 142 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. SFAS No. 142 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 SFAS No. 142, 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, 2009 and it was found that the carrying value of the goodwill and intangible assets were impaired.

An impairment test was performed at February 28, 2009 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 exceed their carrying value by $2,399,000.

A charge of $2,399,000 was recorded against goodwill and other intangibles at February 28, 2009. Management does not believe that any further impairment exists at August 31, 2009.

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7. Segment Information

The following table presents segment information for the nine months ended August 31, 2009 and 2008:

	Net Revenues				Operating Income (Loss)
	9 Months Ended August 31,				9 Months Ended August 31,
	2009		2008		2009			2008
Company Store Operations		569,258	$	619,056	$	(135,461	)	$	(112,390	)
Franchise Operations and Licensing Fees		1,829,591		2,229,869		1,028,369			1,245,797
	$	2,398,849	$	2,848,925	$	892,908		$	1,133,407
Corporate Expenses, including impairment						(3,064,053	)		(667,332	)
Interest Income, Net of Interest Expense						2,722			16,560
Net (Loss)/Income					$	(2,168,423	)	$	482,635

Total segment assets changed for the nine months ended August 31, 2009 as compared to November 30, 2008. This change represented impairment of intangible assets of $2,399,057. Trademarks and goodwill are $1,924,995 at August 31, 2009 compared to $4,306,439 at November 30, 2008. Other changes in segment assets were not significant.

8. Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141R, Business Combinations, which replaces FASB Statement No. 141. SFAS No. 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non controlling interest in the acquiree and the goodwill acquired. The Statement also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business combination. SFAS No. 141R is effective for fiscal years beginning after December 15, 2008 (Company’s Fiscal 2010). The Company does not believe adoption of SFAS No. 141R will have a material effect on the Company’s current consolidated financial statements, but would impact any future business combinations entered into after adoption of the pronouncement.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements – an amendment of Accounting Research Bulletin 51, which establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. The Statement also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008 (Company’s Fiscal 2010). The Company does not believe adoption of SFAS No. 160 will have a material effect on the Company’s consolidated financial statements.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events. SFAS No. 165 is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date—that is, whether that date represents the date the financial statements were issued or were available to be issued. SFAS No. 165 is effective for interim and annual periods ending after June 15, 2009 and shall be applied prospectively. As the requirements under SFAS 165 are consistent with its current practice, the implementation of this standard did not have an impact on the Company’s consolidated financial statements. The Company has evaluated subsequent events from September 1, 2009 through October 14, 2009 and has included all required disclosures as of the date it filed this quarterly report on Form 10-Q.

In June 2009, the FASB issued SFAS No. 168, “The ‘FASB Accounting Standards Codification’ and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162” (“SFAS 168”). SFAS 168 establishes the “FASB Accounting Standards Codification” (“Codification”), which is effective for financial statements for periods ended after September 15, 2009. SFAS 168 does not alter current U.S. generally accepted accounting principles, but rather integrates existing accounting standards with other authoritative guidance. As a result of the integration, SFAS 168 will be a single source of authoritative guidance for non-governmental entities and will also supersede all other previously issued non-SEC accounting and reporting guidance. The Company does not believe adoption of SFAS No. 168 will have a material effect on the Company’s consolidated financial statements.

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9. Subsequent Event

On September 10, 2009, the Company declared a $0.01 dividend per share cash dividend payable on October 5, 2009 to stock holders of record at the close of business on September 21, 2009. There are no other significant or reportable subsequent events as of the date of this filing.

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-KSB 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.

General

The Company has 1 Company-owned store, 106 franchised and 3 licensed units at August 31, 2009. Units in operation at August 31, 2008 included 1 Company-owned store, 118 franchised and 3 licensed units. System-wide revenues for the nine months ended August 31, 2009 were $28.8 million as compared to August 31, 2008 which were $33.3 million.

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).

The Company had 17 employees at the Corporate level to oversee operations of the franchise, licensed and Company-owned store operations at August 31, 2009 and 18 at August 31, 2008.

Results of Operations

Three Months Ended August 31, 2009 versus Three Months Ended August 31, 2008

For the three months ended August 31, 2009, the Company reported net income of $115,000 versus net income of $162,000 for the same period in 2008. Total revenue of $824,000 decreased $108,000, or 11.6%, for the three months ended August 31, 2009, as compared to total revenue of $932,000 for the three months ended August 31, 2008.

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Royalty fee revenue of $461,000, for the quarter ended August 31, 2009, decreased $71,000, or 13.3%, from the $532,000 for quarter ended August 31, 2008. The Company had 106 franchise locations at August 31, 2009 as compared to 118 locations at August 31, 2008. The current general economic downturn has negatively impacted our franchise network resulting in reduced royalty revenue.

Franchise fee revenue of $25,000, for the quarter ended August 31, 2009, increased $5,000, or 25.0%, from $20,000 for the quarter ended August 31, 2008. One store opened and one transferred during the quarter ended August 31, 2009, versus one store opening in the same quarter of 2008.

Licensing fee and other income of $217,000, for the quarter ended August 31, 2009, decreased $27,000, or 11.1%, from $244,000 for the quarter ended August 31, 2008. The general economic downturn is responsible for the decreased franchise network which in turn is responsible for the $25,000 decrease in license fee revenue in 2009 compared to 2008.

Company-owned store sales of $121,000, for the quarter ended August 31, 2009, decreased $15,000, or 11.0%, from $136,000 for the quarter ended August 31, 2008.

Total operating expenses of $709,000 decreased $64,000, or 8.3%, for the quarter ended August 31, 2009, from $773,000 in 2008. The $64,000 decrease in total operating expenses was primarily due to payroll expenses decreasing $20,000, due to one less employee, Company-owned store expenses, including cost of goods sold, decreasing $16,000, travel expenses decreasing $15,000 and advertising and promotional expenses decreasing $11,000 in 2009 compared to 2008.

Interest income of $3,000 decreased $3,000, or 50.0% for the quarter ended August 31, 2009, from $6,000 for the same period in 2008, due to lower cash balances and interest rates in 2009.

Interest expense for the third quarters 2009 and 2008 was $3,000.

Net income per share, as reported for basic and diluted outstanding shares for three months ended August 31, 2009 and August 31, 2008 was $0.02 per share.

Nine Months Ended August 31, 2009 versus Nine Months Ended August 31, 2008

For the nine months ended August 31, 2009, the Company reported a net loss of $2,168,000 versus net income of $483,000 for the same period in 2008. This loss was due to an impairment charge for goodwill and other intangibles in the first quarter 2009 of $2,399,000 (See Note 6). Total revenue of $2,399,000 decreased $450,000, or 15.8%, for the nine months ended August 31, 2009, as compared to total revenue of $2,849,000 for the nine months ended August 31, 2008.

Royalty fee revenue of $1,388,000, for the nine months ended August 31, 2009, decreased $217,000, or 13.5%, from the $1,605,000 for the nine months ended August 31, 2008. The Company had 106 franchise locations at August 31, 2009 as compared to 118 locations at August 31, 2008. The current general economic downturn has negatively impacted our franchise network resulting in reduced royalty revenue.

Franchise fee revenue of $75,000, for the nine months ended August 31, 2009, decreased $85,000, or 53.1%, from $160,000 for the nine months ended August 31, 2008. Three stores opened and two transferred during the nine months ended August 31, 2009, versus seven stores opening, including one BAB Xpress and one satellite, and nine transferring in the same period of 2008.

Licensing fee and other income of $589,000, for the nine months ended August 31, 2009, decreased $105,000, or 15.1%, from $694,000 for the nine months ended August 31, 2008. The general economic downturn is responsible for the decreased franchise network which in turn is responsible for a $92,000 decrease in license fee revenue in 2009 compared to 2008.

Company-owned store sales of $348,000, for the nine months ended August 31, 2009, decreased $42,000, or 10.8%, from $390,000 for the same period of 2008.

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Total operating expenses of $4,570,000 included a noncash impairment charge of $2,399,000 recorded in the first quarter 2009 (See Note 6). Operating expenses excluding the noncash impairment charge were $2,171,000, which decreased $212,000, or 8.9%, for the nine months ended August 31, 2009, from $2,383,000 in 2008. The $212,000 decrease in 2009 total operating expenses excluding the impairment charge was primarily due to payroll expenses decreasing $77,000, due to decreased employee awards and one less employee, advertising and promotional expense decreasing $57,000, Company-owned store expenses, including cost of goods sold decreasing $33,000 and legal and accounting expenses decreasing $21,000 in 2009 compared to 2008.

Interest income of $11,000 decreased $15,000, or 57.7% for the nine months ended August 31, 2009, from $26,000 for the same period in 2008, due to lower cash balances and interest rates in 2009.

Interest expense of $8,000 decreased $1,000, or 11.1% for the nine months ended August 31, 2009, $9,000 for the same period 2008.

Net loss per share, as reported for outstanding shares for nine months ended August 31, 2009 was ($0.30) versus net income per share for basic and diluted of $0.07 for the nine months ended August 31, 2008.

Liquidity and Capital Resources

The net cash provided by operating activities totaled $154,000 for the nine months ended August 31, 2009, versus cash provided by operating activities of $314,000 for the same period in 2008. Cash provided by operating activities principally represents a net loss of $2,168,000, plus depreciation and amortization of $25,000, goodwill and intangible impairment of $2,399,000, share-based compensation of $8,000 and the provision for uncollectible accounts of $7,000, plus changes in trade accounts and notes receivable of $1,000, restricted cash of $64,000, inventories of $12,000, prepaid expenses and other assets of $14,000, less changes in Marketing Fund contributions receivable of $2,000, accounts payable of $14,000, accrued liabilities of $20,000, unexpended Marketing Fund contributions of $62,000 and deferred revenue of $110,000. Operating activities in 2008 provided $314,000, represented by net income of $483,000, plus depreciation and amortization of $28,000 and share-based compensation of $19,000, plus changes in Marketing Fund contributions receivable of $19,000, prepaid expenses and other assets of $19,000 and unexpended Marketing Fund contributions of $22,000, less changes in trade and notes receivable of $10,000, restricted cash of $50,000, inventories of $2,000, accounts payable of $12,000, accrued liabilities of $49,000 and deferred revenue of $151,000.

Cash used in investing activities during the nine months ended August 31, 2009 totaled $20,000 with $19,000 for trademark renewal expenditures and $1,000 for purchase of equipment. Cash used during 2008 totaled $39,000 and included the purchase of equipment of $1,000 and trademark renewal expenditures of $38,000.

Financing activities used $291,000 and $581,000 during the nine months ended August 31, 2009 and 2008, respectively for the payment of cash dividends.

Dividend Policy

It is the Company’s intent that future dividends will be considered after reviewing returns to shareholders, 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 future dividends. The Company will continue to analyze its ability to pay dividends on a quarterly basis.

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.

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Recent Accounting Pronouncements

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-KSB for the fiscal year ended November 30, 2008, filed with the Securities and Exchange Commission on February 20, 2009. 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 nine months ended August 31, 2009.

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ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

BAB, Inc. has no significant interest, currency or derivative market risk.

ITEM 4T.

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, 2009 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 third fiscal quarter 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”).

PART II

ITEM 1.

LEGAL PROCEEDINGS

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

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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: October 14, 2009	/s/ Jeffrey M. Gorden
	Jeffrey M. Gorden
	Chief Financial Officer

INDEX TO EXHIBITS

(a) EXHIBITS

The following exhibits are filed herewith.

INDEX NUMBER	DESCRIPTION
21.1	List of Subsidiaries of the Company
31.1	Section 302 of the Sarbanes-Oxley Act of 2002 Certification of Chief Executive Officer
31.2	Section 302 of the Sarbanes-Oxley Act of 2002 Certification of Chief Financial Officer
32.1	Section 906 of the Sarbanes-Oxley Act of 2002 Certification of Chief Executive Officer
32.2	Section 906 of the Sarbanes-Oxley Act of 2002 Certification of Chief Financial Officer