BAB, INC.

BAB, INC. Annual Report - A Deeper Dive for Investors

This summary offers a clear, concise overview of BAB, INC.'s performance and outlook, drawing key insights from their latest annual report. Our aim is to equip retail investors with the essential information needed to understand the company's financial health, strategic direction, and potential risks.

Business Overview: The Franchise Engine Behind Your Favorite Bagels

BAB, INC. is a company that franchises and licenses quick-service restaurant concepts, primarily focusing on the bagel and muffin segments. Its well-known brands include Big Apple Bagels®, My Favorite Muffin®, and Brewster's® Coffee, which integrates into most franchised locations. The company also offers SweetDuet® frozen yogurt as an add-on. Its business model focuses on developing brands, supporting franchisees, and managing the supply chain.

While BAB Systems, Inc. manages core franchising operations, the company has two other subsidiaries: BAB Operations, Inc., established to potentially operate company-owned stores (though it currently has none), and BAB Investments, Inc., for future acquisitions. The company's long-term strategy involves exploring opportunities for both company-owned locations and strategic brand acquisitions to diversify and accelerate growth.

Operational Footprint and Growth Trajectory

As of November 30, 2025, BAB, INC. operated a network of 60 franchised units and 3 licensed units across 18 U.S. states. This establishes a modest yet consistent presence in the quick-service sector. Looking ahead, the company has 4 new units currently under development, indicating ongoing organic growth through its franchising model. The focus remains on expanding its footprint in existing markets and selectively entering new ones where brand recognition and franchisee interest are strong.

Financial Performance: A Year of Solid Growth (Fiscal Year Ended November 30, 2025)

BAB, INC. achieved robust financial performance, showing growth in both revenue and profitability.

• Total Revenue: The company reported $2.5 million in total revenue for 2025, an 8.7% increase from $2.3 million in 2024. Increased royalty income from existing franchisees and new franchise fees primarily drove this growth.
• Net Income: Net income rose to $559,000 in 2025, up 6.5% from $525,000 in 2024. This translates to Earnings Per Share (EPS) of $0.077 in 2025, up from $0.072 in 2024 (based on 7.26 million shares outstanding).
• Operating Income: Operating income from core business operations improved by 8.6%, reaching $722,000 in 2025, up from $665,000 in 2024. This indicates enhanced operational efficiency and effective cost management.
• Profit Margins: The company maintained strong profitability in 2025, with a gross profit margin of approximately 80% and an operating profit margin of 28%. This reflects the asset-light nature of its franchising model.

How BAB, INC. Generates Revenue

The company generates revenue through several streams within its franchising model:

• Initial Franchise Fees: New franchisees pay these upfront fees. For example, a first Big Apple Bagels store commands a $25,000 fee (with a $10,000 veteran discount), while a My Favorite Muffin franchise costs $30,000.
• Ongoing Royalties: This is the primary recurring revenue source: franchisees pay BAB, INC. 5% of their net sales on an ongoing basis. This percentage-based model directly links the company's success to its franchisees' performance.
• Product Sales: The company also generates revenue by selling proprietary licensed products, such as My Favorite Muffin mix and Brewster's coffee, to franchisees and approved third-party customers.
• Marketing Fund Contributions: Franchisees contribute an additional 3% of their sales to a system-wide marketing fund. BAB, INC. manages this fund to promote its brands collectively. While not direct revenue, this fund boosts brand visibility and franchisee sales, indirectly benefiting the company's royalty income.

Management Discussion and Analysis (MD&A) Highlights

Management attributed the increase in total revenue and net income for fiscal year 2025 primarily to consistent royalty income from its established franchisee base and successful generation of new franchise fees. Improved operating income and strong profit margins underscore the effectiveness of the company's asset-light franchising model and diligent cost management.

Financial Health

• Balance Sheet Highlights (as of November 30, 2025):
  • Cash and Cash Equivalents: $1.2 million, providing ample liquidity for operations and potential investments.
  • Total Assets: $3.5 million.
  • Total Liabilities: $0.8 million, indicating a healthy financial structure with no significant long-term debt.
  • Shareholder Equity: $2.7 million.
• Cash Flow from Operations: BAB, INC. generated $650,000 in cash from its operating activities in 2025, demonstrating strong cash flow from its core business.

Management emphasized the company's robust liquidity position. A healthy cash balance and strong operating cash flows provide flexibility for strategic initiatives and ongoing operations without reliance on external financing. The absence of significant long-term debt further strengthens the company's financial stability and capital structure. Critical accounting policies, such as revenue recognition for franchise fees and royalties, and the assessment of goodwill and intangible assets, are applied consistently. These policies are significant for understanding the company's financial position and results of operations.

Risk Factors and Competitive Position

BAB, INC. navigates the highly competitive quick-service restaurant industry. Key risks and competitive factors include:

• Intense Competition: The company faces formidable competition from large national chains like Panera Bread, Dunkin', McDonald's, and Einstein Bros. Bagels, as well as regional players, local bakeries, and even grocery store offerings. This demands continuous innovation and strong brand differentiation.
• Changing Consumer Preferences: Shifting dietary trends, health consciousness, and demand for convenience can impact sales. The company must adapt its menu and offerings to remain relevant.
• Economic Sensitivity: Economic downturns, inflation, and rising interest rates can affect discretionary spending on dining out, potentially impacting franchisee sales and royalty income.
• Supply Chain Volatility: Fluctuations in commodity prices (e.g., flour, coffee), supply disruptions, and labor shortages can increase operational costs for franchisees and the company.
• Franchisee Dependence: The company's success heavily relies on the performance and satisfaction of its franchisees. Challenges in recruiting new franchisees or supporting existing ones could hinder growth.
• Brand Concentration: Focusing primarily on bagel and muffin concepts makes the company susceptible to market shifts specific to these segments.
• Regulatory Compliance: Operating in the food service industry requires adherence to various health, safety, and labor regulations. These can evolve and increase compliance costs.

Despite these challenges, BAB, INC. believes the quick-service market's fragmented nature offers significant opportunities for continued expansion, especially through its established brand recognition and franchisee support system. The company maintains its competitive position through distinct brand identities, proprietary product offerings, and a proven franchise system that provides comprehensive support to its operators.

Future Outlook and Strategy

BAB, INC. remains committed to its long-term growth strategy: expanding its franchise network and enhancing brand value. The company plans to continue its organic growth by actively recruiting new franchisees and supporting the development of the 4 new units currently underway. Strategic initiatives include exploring opportunities for company-owned stores to potentially accelerate market penetration and strategic brand acquisitions to diversify its portfolio and revenue streams. Management will also focus on continuous innovation in menu offerings, leveraging technology to improve franchisee operations and customer experience, and strengthening its supply chain to mitigate risks. The company aims to capitalize on its core products' enduring appeal while adapting to evolving consumer demands and market dynamics.

Market Value and Share Information

As of November 30, 2025 (fiscal year-end), BAB, INC.'s common stock held by the public (non-affiliates) had a market value of approximately $3.9 million, with shares trading around $0.81 each. The company had 7.26 million common shares outstanding. BAB, INC. does not currently pay a dividend; instead, it prioritizes reinvestment into growth and maintaining financial flexibility.

This summary offers a comprehensive yet accessible overview for retail investors, highlighting the company's performance, strategy, and key considerations. Investors should review the full 10-K filing for complete details.