ITEM 1. FINANCIAL STATEMENTS
BAB, Inc.
Consolidated Balance Sheet
|
|
|
February 28,2013
|
|
|
November 30, 2012
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
Cash
|
|
$
|
826,887
|
|
|
$
|
1,256,257
|
|
|
Restricted cash
|
|
|
355,629
|
|
|
|
376,837
|
|
|
Receivables
|
|
|
|
|
|
|
|
|
|
Trade ac
counts and notes receivable (net of allowance for
doubtful accounts of $16,892 in 2013 and $25,580 in 2012 )
|
|
|
81,001
|
|
|
|
86,070
|
|
|
Marketing fund contributions receivable from franchisees and stores
|
|
|
10,152
|
|
|
|
16,385
|
|
|
Inventories
|
|
|
25,678
|
|
|
|
26,953
|
|
|
Prepaid expenses and other current assets
|
|
|
88,377
|
|
|
|
65,991
|
|
|
Total Current Assets
|
|
|
1,387,724
|
|
|
|
1,828,493
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment (net of accumulated depreciation of $140,316 i
n 2013 and $139,293 in 2012)
|
|
|
9,749
|
|
|
|
10,773
|
|
|
Assets held for sale
|
|
|
3,783
|
|
|
|
3,783
|
|
|
Trademarks
|
|
|
445,022
|
|
|
|
445,022
|
|
|
Goodwill
|
|
|
1,493,771
|
|
|
|
1,493,771
|
|
|
Definite lived intangible assets (net of accumulated amortization of $57,880
in 2013 and $54,560 in 2012)
|
|
|
56,540
|
|
|
|
59,710
|
|
|
Deferred tax asset
|
|
|
248,000
|
|
|
|
248,000
|
|
|
Total Noncurrent Assets
|
|
|
2,256,865
|
|
|
|
2,261,059
|
|
|
Total Assets
|
|
$
|
3,644,589
|
|
|
$
|
4,089,552
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
29,070
|
|
|
$
|
29,070
|
|
|
Accounts payable
|
|
|
16,127
|
|
|
|
14,120
|
|
|
Accrued expenses and other current liabilities
|
|
|
314,790
|
|
|
|
328,288
|
|
|
Unexpended marketing fund contributions
|
|
|
366,036
|
|
|
|
393,477
|
|
|
Deferred franchise fee revenue
|
|
|
60,000
|
|
|
|
25,000
|
|
|
Deferred licensing revenue
|
|
|
33,333
|
|
|
|
45,833
|
|
|
Total Current Liabilities
|
|
|
819,356
|
|
|
|
835,788
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt (net of current portion)
|
|
|
95,762
|
|
|
|
95,762
|
|
|
Total Liabilities
|
|
|
915,118
|
|
|
|
931,550
|
|
|
|
|
|
|
|
|
|
|
|
|
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 February 28, 2013 and November 30, 2012
|
|
|
13,508,257
|
|
|
|
13,508,257
|
|
|
Additional paid-in capital
|
|
|
987,034
|
|
|
|
987,034
|
|
|
Treasury stock
|
|
|
(222,781
|
)
|
|
|
(222,781
|
)
|
|
Accumulated deficit
|
|
|
(11,543,039
|
)
|
|
|
(11,114,508
|
)
|
|
Total Stockholders' Equity
|
|
|
2,729,471
|
|
|
|
3,158,002
|
|
|
Total Liabilities and Stockholders' Equity
|
|
$
|
3,644,589
|
|
|
$
|
4,089,552
|
|
SEE ACCOMPANYING NOTES
BAB, Inc.
Consolidated Statements of Income
For the Quarters Ended February 28, 2013 and February 29, 2012
(Unaudited)
|
|
|
February 28, 2013
|
|
|
February 29, 2012
|
|
|
REVENUES
|
|
|
|
|
|
|
|
Royalty fees from franchised stores
|
|
$
|
419,919
|
|
|
$
|
442,921
|
|
|
Franchise fees
|
|
|
-
|
|
|
|
5,000
|
|
|
Licensing fees and other income
|
|
|
115,160
|
|
|
|
119,571
|
|
|
Total Revenues
|
|
|
535,079
|
|
|
|
567,492
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses:
|
|
|
|
|
|
|
|
|
|
Payroll and payroll-related expenses
|
|
|
378,638
|
|
|
|
368,251
|
|
|
Occupancy
|
|
|
41,563
|
|
|
|
19,508
|
|
|
Advertising and promotion
|
|
|
17,477
|
|
|
|
11,817
|
|
|
Professional service fees
|
|
|
60,783
|
|
|
|
60,222
|
|
|
Travel
|
|
|
17,015
|
|
|
|
14,017
|
|
|
Depreciation and amortization
|
|
|
4,344
|
|
|
|
4,784
|
|
|
Other
|
|
|
79,440
|
|
|
|
77,966
|
|
|
Total Operating Expenses
|
|
|
599,260
|
|
|
|
556,565
|
|
|
(Loss)/Income from operations
|
|
|
(64,181
|
)
|
|
|
10,927
|
|
|
Interest income
|
|
|
307
|
|
|
|
706
|
|
|
Interest expense
|
|
|
(1,482
|
)
|
|
|
(1,812
|
)
|
|
Net (Loss)/Income
|
|
|
(65,356
|
)
|
|
|
9,821
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/Earnings per share - Basic and Diluted
|
|
$
|
(0.009
|
)
|
|
$
|
0.001
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - Basic
|
|
|
7,263,508
|
|
|
|
7,263,508
|
|
|
Effect of dilutive common stock
|
|
|
2,193
|
|
|
|
1,757
|
|
|
Weighted average shares outstanding - Diluted
|
|
|
7,265,701
|
|
|
|
7,265,265
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash distributions declared per share
|
|
$
|
0.05
|
|
|
$
|
0.01
|
|
SEE ACCOMPANYING NOTES
BAB, Inc.
Consolidated Statements of Cash Flows
For the Quarters Ended February 28, 2013 and February 29, 2012
(Unaudited)
|
|
|
February 28, 2013
|
|
|
February 29, 2012
|
|
|
Operating activities
|
|
|
|
|
|
|
|
Net (loss)/income
|
|
$
|
(65,356
|
)
|
|
$
|
9,821
|
|
|
Adjustments to reconcile net income to cash flows provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,344
|
|
|
|
4,784
|
|
|
Provision for uncollectible accounts, net of recoveries
|
|
|
(5,807
|
)
|
|
|
(2,107
|
)
|
|
Changes in:
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable and notes receivable
|
|
|
10,876
|
|
|
|
38,391
|
|
|
Restricted cash
|
|
|
21,208
|
|
|
|
12,189
|
|
|
Marketing fund contributions receivable
|
|
|
6,233
|
|
|
|
6,197
|
|
|
Inventories
|
|
|
1,275
|
|
|
|
(8,210
|
)
|
|
Prepaid expenses and other
|
|
|
(22,386
|
)
|
|
|
(6,668
|
)
|
|
Accounts payable
|
|
|
2,007
|
|
|
|
(146
|
)
|
|
Accrued liabilities
|
|
|
(13,498
|
)
|
|
|
62,893
|
|
|
Unexpended marketing fund contributions
|
|
|
(27,441
|
)
|
|
|
(18,403
|
)
|
|
Deferred revenue
|
|
|
22,500
|
|
|
|
17,083
|
|
|
Net Cash (Used)/Provided by Operating Activities
|
|
|
(66,045
|
)
|
|
|
115,824
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
Capitalization of trademark renewals
|
|
|
(150
|
)
|
|
|
-
|
|
|
Net Cash Used In Investing Activities
|
|
|
(150
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
Cash distributions/dividends
|
|
|
(363,175
|
)
|
|
|
(217,905
|
)
|
|
Net Cash Used In Financing Activities
|
|
|
(363,175
|
)
|
|
|
(217,905
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Decrease in Cash
|
|
|
(429,370
|
)
|
|
|
(102,081
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash, Beginning of Period
|
|
|
1,256,257
|
|
|
|
1,236,125
|
|
|
Cash, End of Period
|
|
$
|
826,887
|
|
|
$
|
1,134,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Income taxes paid
|
|
$
|
8,450
|
|
|
$
|
-
|
|
S
EE ACCOMPANYING NOTES
BAB, Inc.
Notes to Unaudited Consolidated Financial Statements
For the Quarters Ended February 28, 2013 and February 29, 2012
(Unaudited)
Note 1 - Nature of Operations
BAB, Inc (“the Company”) has two wholly owned subsidiaries: BAB Systems, Inc. (“Systems”) and BAB Operations, Inc. (“Operations”). Systems was incorporated on December 2, 1992, and was primarily established to franchise Big Apple Bagel (“BAB”) specialty bagel retail stores. My Favorite Muffin Too, Inc., a New Jersey corporation, was acquired on May 13, 1997 and is included as a part of Systems. Brewster’s Franchise Corporations (“Brewster’s”) was established on February 15, 1996 and is also included as a part of Systems. Brewster’s coffee is sold in BAB and My Favorite Muffin (“MFM”) locations as well as through license agreements. Operations was formed on August 30, 1995, primarily to operate Company-owned stores. There are currently no Company-owned stores. The assets of Jacobs Bros. Bagels (“Jacobs Bros.”) were acquired on February 1, 1999, and any branded wholesale business uses this trademark.
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 and MFM trade names. At February 28, 2013 the Company had 98 franchise units and 6 licensed units in operation in 24 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 Kohr Bros. Frozen Custard, Kaleidoscoops, Green Beans Coffee, Sodexo and through direct home delivery of specialty muffin gift baskets and coffee. Also included in licensing fees and other income is Operation’s Sign Shop results. For franchise consistency and convenience, the Sign Shop provides the majority of signage to franchisees, including but not limited to, posters, menu panels, build charts, outside window stickers and counter signs.
On May 7, 2012 the Company issued a press release announcing the launch of its new franchise concept, SweetDuet Frozen Yogurt & Gourmet Muffins (“SweetDuet”), which it is hoping to roll out in fiscal 2013. While BAB will be offering franchises in all 50 states, its initial development focus is targeted for the Midwest, specifically Illinois, Michigan, Wisconsin and Ohio. As part of its introductory development plan, BAB will be donating 10% of the initial franchise fee from its first 50 SweetDuet units to the Cystic Fibrosis Foundation, of which BAB is a corporate sponsor. SweetDuet, as its name implies, is a fusion concept, pairing self-serve frozen yogurt with BAB’s exclusive line of My Favorite Muffin gourmet muffins, broadening the shop’s offering and thereby differentiating itself from the numerous frozen yogurt outlets already populating the market. SweetDuet shops will also include BAB’s Brewster’s Coffee and a streamlined breakfast menu. The SweetDuet concept will be included as part of Systems franchise operating and financial information.
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, 2012 which was filed February 22, 2013. 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. Locations Open and Under Development
Locations which are open or under development at February 28, 2013 are as follows:
|
Locations open:
|
|
|
|
|
|
|
|
|
|
Franchisees
|
|
|
98
|
|
|
Licensed
|
|
|
6
|
|
|
Under development
|
|
|
2
|
|
|
Total
|
|
|
106
|
|
3. (Loss)/Earnings per Share
The following table sets forth the computation of basic and diluted earnings per share:
|
|
|
February 28, 2013
|
|
|
February 29, 2012
|
|
|
Numerator:
|
|
|
|
|
|
|
|
Net (loss)/income available to common shareholders
|
|
$
|
(65,356
|
)
|
|
$
|
9,821
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average outstanding shares
Basic
|
|
|
7,263,508
|
|
|
|
7,263,508
|
|
|
(Loss)/Earnings per Share - Basic
|
|
$
|
(0.009
|
)
|
|
$
|
0.001
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive common stock
|
|
|
2,193
|
|
|
|
1,757
|
|
Weighted average outstanding shares
Diluted
|
|
|
7,265,701
|
|
|
|
7,265,265
|
|
|
(Loss)/Earnings per share - Diluted
|
|
$
|
(0.009
|
)
|
|
$
|
0.001
|
|
The Company excluded 350,400 potential shares attributable to outstanding stock options from the calculation of diluted earnings per share for the three months ended February 28, 2013 and February 29, 2012 because their inclusion would have been anti-dilutive.
4. Long-Term Debt
The total debt balance of $125,000 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 February 28, 2013, 1,400,000 stock options were granted to directors, officers and employees. As of February 28, 2013, there were 1,031,627 stock options exercised or forfeited under the Plan.
|
|
|
February 28, 2013
|
|
|
February 29, 2012
|
|
|
|
|
Options
|
|
|
Options
|
|
|
Options Outstanding at beginning of period
|
|
|
368,373
|
|
|
|
368,373
|
|
|
Granted
|
|
|
0
|
|
|
|
0
|
|
|
Forfeited
|
|
|
0
|
|
|
|
0
|
|
|
Exercised
|
|
|
0
|
|
|
|
0
|
|
|
Options Outstanding at end of period
|
|
|
368,373
|
|
|
|
368,373
|
|
All compensation cost arising from share-based payment arrangements in payroll-related expenses was expensed as of November 30, 2011.
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 February 28, 2013:
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
Outstanding
|
|
|
Wghtd. Avg.
|
|
|
Wghtd. Avg.
|
|
|
Aggregate
|
|
|
Exercisable
|
|
|
Wghtd. Avg.
|
|
|
Aggregate
|
|
|
at 2/28/13
|
|
|
Remaining Life
|
|
|
Exercise Price
|
|
|
Intrinsic Value
|
|
|
at 2/28/13
|
|
|
Exercise Price
|
|
|
Intrinsic Value
|
|
|
|
368,373
|
|
|
|
3.05
|
|
|
$
|
1.16
|
|
|
$
|
-
|
|
|
|
368,373
|
|
|
$
|
1.16
|
|
|
$
|
-
|
|
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 $0.63 as of the last business day of the period ended February 28, 2013. No options were exercised during the three month period ended February 28, 2013.
6. Goodwill and Other Intangible Assets
Accounting Standard Codification (“ASC”) 350, “Goodwill and Other Intangible Assets” requires that assets with indefinite lives no longer be amortized, but instead be subject to annual impairment tests. The Company follows this guidance.
ASU No. 2012-02,
Intangibles – Goodwill and Other: Testing Indefinite-Lived Intangible Assets for Impairment
provides an entity the option to make a qualitative assessment about the likelihood that an indefinite-lived intangible asset is impaired to determine whether it should perform a quantitative impairment test. The update also enhances consistency of impairment testing guidance among long-lived asset categories by permitting entities to assess qualitative factors to determine whether it is necessary to calculate the asset’s fair value when testing for impairment, which is equivalent to the impairment testing requirements for other long-lived assets. The Company adopted this guidance for its fiscal year ending November 30, 2012.
The Company tests goodwill that is not subject to amortization for impairment annually or more frequently if events or circumstances indicate that impairment is possible. Goodwill was tested at the end of the first quarter, February 28, 2013 and it was found that the carrying value of goodwill and intangible assets were not impaired.
The impairment test performed February 28, 2013 was based on a discounted cash flow model using management’s business plan projected for expected cash flows. Based on the computation it was determined that no impairment has occurred. An impairment test was performed at February 29, 2012 and based on the computation using discounted cash flows, it was also determined that no impairment occurred.
7. Recent Accounting Pronouncements
Management does not believe that there are any recently issued and effective, or not yet effective, pronouncements as of February 28, 2013 that would have, or are expected to have, any significant effect on the Company’s consolidated financial position, cash flows or results of operations.
8. Equity
On December 3, 2012 the Board of Directors declared a cash distribution/dividend of $0.05 per share. This was a $0.01 quarterly and a $0.04 per share special distribution/dividend. This was paid December 27, 2012 to shareholders of record as of December 17, 2012. The total cash distribution during this quarter was $363,175.
There is no cash distribution/dividend payable included in accrued expenses for February 28, 2013. A cash distribution/dividend in the amount of $0.01 per share, totaling $72,635 was declared on March 14, 2013, payable April 11, 2013 to shareholders of record as of March 28, 2013. Included in accrued expenses and other liabilities at February 29, 2012 is a cash distribution/dividend payable in the amount of $72,635 declared February 27, 2012 and paid April 9, 2012.
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.
General
There are 98 franchised and 6 licensed units at February 28, 2013. Units in operation at February 29, 2012 included 101 franchised and 7 licensed units. System-wide revenues for the three months ended February 28, 2013 were $8.5 million as compared to February 29, 2012 which were $9.0 million.
The Company's revenues are derived primarily from the ongoing royalties paid to the Company by its franchisees and receipt of initial franchise fees. Additionally, the Company derives revenue from the sale of licensed products (My Favorite Muffin mix, Big Apple Bagels cream cheese and Brewster's coffee), and through licensing and nontraditional channels of distribution (Kohr Bros., Braeda Café, Kaleidoscoops, Green Beans Coffee and Sodexo). Also included in licensing fees and other income is Operation’s Sign Shop revenue. The Sign Shop provides the majority of signage, which includes but is not limited to, posters, menu panels, build charts, outside window stickers and counter signs to franchisees to provide consistency and convenience.
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
.
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.
The Company earns a licensing fee from the sale of BAB branded products, which includes coffee, cream cheese, muffin mix, scoop and bake muffin batter and par baked bagels from a third-party commercial bakery, to the franchised and licensed
units.
As of February 28, 2013, the Company employed 15 full-time and 4 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.
Results of Operations
Three Months Ended February 28, 2013 versus February 29, 2012
For the three months ended February 28, 2013 and February 29, 2012, the Company reported a net loss of $65,000 and net income of $10,000, respectively. Total revenue of $535,000 decreased $32,000, or 5.6%, for the three months ended February 28, 2013, as compared to total revenue of $567,000 for the three months ended February 29, 2012.
Royalty fee revenue of $420,000, for the quarter ended February 28, 2013, decreased $23,000, or 5.2%, from the $443,000 for quarter ended February 29, 2013. The Company had three fewer franchise locations at February 28, 2013 compared to February 29, 2012
.
There was no franchise fee revenue during the first quarter February 28, 2013 versus $5,000 for a store transfer for the quarter ended February 29, 2012.
Licensing fee and other income of $115,000, for the quarter ended February 28, 2013, decreased $4,000, from $119,000 for the quarter ended February 29, 2013. License fee revenue decreased $6,000, offset by an increase in Sign Shop revenue of $2,000 in the first quarter 2013 compared to the same period 2012.
Total operating expenses of $599,000 increased $42,000, or 7.5%, for the quarter ended February 28, 2013, from $557,000 for the same period 2012. The increase in total operating expenses in 2013 as compared to same period 2012 was primarily due to an increase of $22,000 in occupancy expense because of an office lease renewal construction credit received in 2012, an increase in payroll in 2013 due to an additional employee and an increase in advertising expenses in 2013 of $6,000 relating to the SweetDuet concept.
Interest income was less than $1,000 during the first quarter of 2013 compared to $1,000 in the same period 2012.
Interest expense was $1,000 for quarter ended February 28, 2013 compared to $2,000 for the same period 2012.
Earnings per share, as reported for basic and diluted outstanding shares for the first quarter ended February 28, 2013 was a loss of $0.009 per share compared to income of $0.001 for the same period 2012.
Liquidity and Capital Resources
At February 28, 2013, the Company had working capital of $568,000 and unrestricted cash of $827,000. At November 30, 2012 the Company had working capital of $993,000 and unrestricted cash of $1,256,000.
During the first quarter of 2013, the Company had a net loss of $65,000 and operating activities used cash of $66,000. The principal adjustments to reconcile net income to cash used in operating activities were depreciation and amortization of $4,000, less provision for uncollectible accounts of $6,000. In addition, changes in operating assets and liabilities increased cash by $1,000. During February 29, 2012, the Company had net income of $10,000 and operating activities provided cash of $116,000. The principal adjustments to reconcile net income to cash provided by operating activities for first quarter 2012 were depreciation and amortization of $5,000 less the provision for uncollectible accounts of $2,000. In addition changes in operating assets and liabilities increased cash by $103,000.
For the three months ended February 28, 2013 the Company used less than $1,000 for investing activities and none for the three months ended February 29, 2012.
The Company used $363,000 and $218,000 for cash distribution/dividend payments during the three month period ended February 28, 2013 and February 29, 2012, respectively.
Although there can be no assurances that the Company will be able to pay cash distributions/dividends in the future, it is the Company’s intent that future cash distributions/dividends will be considered based on profitability expectations and financing needs and will be declared at the discretion of the Board of Directors. It is the Company’s intent going forward to declare and pay cash distributions/dividends on a quarterly basis if warranted. On March 14, 2013, the Board of Directors authorized a $0.01 per share quarterly cash distribution/dividend to shareholders of record as of March 28, 2013 payable April 11, 2013.
The Company believes execution of its cash distribution/dividend policy will not have any material adverse effects on its cash or its ability to fund current operations or future capital investments.
The Company has no financial covenants on its outstanding debt.
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.
The Company believes that for tax purposes the cash distribution declared in 2013 may be treated as a return of capital to stockholders depending on each stockholder’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 made until after December 31, 2013, as the classification or combination is dependent upon the Company’s earnings and profits for tax purposes for its fiscal year ending November 30, 2013.
The Company believes execution of this policy will not have any material adverse effect on its ability to fund current operations or future capital investments.
Recent Accounting Pronouncements
Management does not believe that there are any recently issued and effective, or not yet effective, pronouncements as of February 28, 2013 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 revenue recognition, valuation of long-lived and intangible assets, deferred tax assets and the related valuation allowance. Details regarding the Company's use of these policies and the related estimates are described in the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 2012, filed with the Securities and Exchange Commission on February 22, 2013. 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 three months ended February 28, 2013.