Note 2 - Summary of Significant Accounting Policies |
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Significant Accounting Policies [Text Block] | Note 2 - Summary of Significant Accounting PoliciesPrinciples of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition Royalty fees from franchised stores represent a 5% fee on net retail and wholesale sales of franchised units. Royalty revenues are recognized on an accrual basis using actual franchise receipts. Generally, franchisees report and remit royalties on a weekly basis. The majority of month-end receipts are recorded on an accrual basis based on actual numbers from reports received from franchisees shortly after the period-end. Estimates are utilized in certain instances where actual numbers have not been received.The Company recognizes franchise fee revenue on the store’s opening. Direct costs associated with the sale of franchises are deferred until the franchise fee revenue is recognized. These costs include site approval, construction approval, commissions, blueprints and training costs. The Company will recognize revenue upon a signed and completed franchise agreement for a Master Franchise Agreement (“MFA”). The revenue for a MFA is a nonrefundable fee and the amount of the fee is dependent on the area covered by the MFA. In addition there will be ongoing royalty fees as determined by the contract. Big Apple Bagels®, SweetDuet Frozen Yogurt and Gourmet Muffins® and My Favorite Muffin® operating units, licensed units and unopened stores for which a Franchise Agreement has been executed, are as follows:
License fees and other income primarily consist of license fees, Sign Shop revenues and defaulted and terminated franchise contract revenues. Revenue is recorded on an accrual basis. Actual amounts are used to record the majority of license fees although at times it is necessary to use estimates. Revenues and expenses recorded for the Sign Shop, as well as defaulted and terminated franchise contract revenue, are actual amounts. Beginning in December 2017, a majority of franchise signage and point of sale materials was outsourced to a printer that provides consistency and convenience to the franchisees, prior to December 2017, Sign Shop revenue was included in licensing and other income.Segments Accounting standards have established annual reporting standards for an enterprise’s operating segments and related disclosures about its products, services, geographic areas and major customers. The Company’s operations were a single reportable segment and an international segment. The international segment operations are immaterial. Marketing Fund A Marketing Fund has been established for BAB, MFM and SD. Franchised stores are required to contribute a fixed percentage of their net retail sales to the Marketing Fund. Liabilities for unexpended funds received from franchisees are included as a separate line item in accrued expenses and Marketing Fund cash accounts are included in restricted funds in the accompanying Balance Sheet. The Marketing Fund also derives revenues from rebates paid by certain vendors on the sale of BAB and MFM licensed products to franchisees. Cash As of November 30, 2018 and 2017, the Marketing Fund cash balances, which are restricted, were $444,000 and $693,000, respectively.The FDIC maximum insurance on all interest and noninterest bearing checking accounts is $250,000 for each entity. The Company exceeded FDIC limits on its operating and marketing accounts but did not experience any losses.Accounts and Notes Receivable Receivables are carried at original invoice amount less estimates for doubtful accounts. Management determines the allowance for doubtful accounts by reviewing and identifying troubled accounts and by using historical collection experience. A receivable is considered to be past due if any portion of the receivable balance is outstanding 90 days past the due date. Receivables are written off when deemed uncollectible. Recoveries of receivables previously written off are recorded as income when received. Certain receivables have been converted to unsecured interest-bearing notes.Inventories Inventories are valued at the lower of cost or market under the first -in, first -out (FIFO) method.Property, Plant and Equipment Property and equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Estimated useful lives are 3 to 7 years for property and equipment and 10 years, or term of lease if less, for leasehold improvements. Maintenance and repairs are charged to expense as incurred. Expenditures that materially extend the useful lives of assets are capitalized.Goodwill and Other Intangible Assets Accounting 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 Companyfollows this guidance. 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. The Company has elected to conduct its annual test during the first quarter. During the quarter ended February 28, 2018, management qualitatively assessed goodwill to determine whether testing was necessary. Factors that management considers in this assessment include macroeconomic conditions, industry and market considerations, overall financial performance (both current and projected), changes in management and strategy, and changes in the composition and carrying amounts of net assets. If this qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying value, a quantitative assessment is then performed. Based on a qualitative evaluation, management determined that the carrying value of goodwill was not impaired at February 28, 2018, and a quantitative assessment was not considered necessary.Management reviewed the qualitative assessment conducted during the first quarter 2018 at year end and does not believe that any impairment exists at November 30, 2018. The net book value of goodwill and intangible assets with indefinite and definite lives are as follows:
Advertising and Promotion Costs The Company expenses advertising and promotion costs as incurred. Advertising and promotion expense was $14,000 and $24,000 in 2018 and 2017, respectively. All advertising and promotion costs were related to the Company’s franchise operations.Income Taxes Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The benefits from net operating losses carried forward may be impaired or limited in certain circumstances. In addition, a valuation allowance can be provided for deferred tax assets when it is more likely than not that all or some portion of the deferred tax asset will not be realized.The Company files a consolidated U.S. income tax return and tax returns in various state jurisdictions. Review of the Company’s possible tax uncertainties as of November 30, 2018 did not result in any positions requiring disclosure. Should the Company need to record interest and/or penalties related to uncertain tax positions or other tax authority assessments, it would classify such expenses as part of the income tax provision. The Company has not changed any of its tax policies or adopted any new tax positions during the fiscal year ended November 30, 2018 and believes it has filed appropriate tax returns in all jurisdictions for which it has nexus.In November 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015 -17, “Income Taxes (Topic 740 ): Balance Sheet Classification of Deferred Taxes” (“ASU 2015 -17” ). The standard requires that deferred tax assets and liabilities be classified as noncurrent on the balance sheet rather than being separated into current and noncurrent. The Company has adopted ASU 2015 -17 during the year ended November 30, 2018. In accordance with ASU 2015 -17, the deferred tax asset is classified as noncurrent on the balance sheet.On December 22, 2017 the Tax Cuts and Jobs Act (the “Act”) was signed into law. Among other provisions, the Act reduces the Federal statutory corporate income tax rate from 35% to 21%. This rate reduction resulted in a significant decrease in our provisions for income taxes for the year ended November 30, 2018. The Company’s income tax returns, which are filed as a consolidated return under Inc. for the years ending November 30, 2015, 2016 and 2017 are subject to examination by the IRS and corresponding states, generally for three years after they are filed.Earnings Per Share The Company computes earnings per share (“EPS”) under ASC 260 “Earnings per Share.” Basic net earnings are divided by the weighted average number of common shares outstanding during the year to calculate basic net earnings per common share. Diluted net earnings per common share are calculated to give effect to the potential dilution that could occur if options or other contracts to issue common stock were exercised and resulted in the issuance of additional common shares.
At November 30, 2018 and 2017, there are no common stock equivalents. In addition, the weighted average shares do not include any effects for potential shares related to the Preferred Shares Rights Agreement.Fair Value of Financial Instruments The carrying amounts of financial instruments including cash, accounts receivable, notes receivable, accounts payable and short-term debt approximate their fair values because of the relatively short maturity of these instruments. The carrying value of long-term debt, including the current portion, approximate fair value based upon market prices for the same or similar instruments. Leases Lease arrangements are determined at the inception of the contract. Operating leases are included in operating lease right-of-use (“ROU”) assets, other current liabilities, and operating lease liabilities on the consolidated balance sheets. Finance leases are included in property and equipment, other current liabilities, and other long-term liabilities on the consolidated balance sheets. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most leases do not provide an implicit rate, we use an incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.For certain equipment leases, such as vehicles, we account for the lease and non-lease components as a single lease component. Additionally, for certain equipment leases, we apply a portfolio approach to effectively account for the operating lease ROU assets and liabilities. Gift Card Policy Included in accounts payable and accrued expenses at November 30, 2018 and 2017 were liabilities of $146,300 and $156,400, respectively for unredeemed gift cards. We reduce the liability for gift cards when redeemed by a franchisee. If a gift card is not redeemed, we recognize revenue when the likelihood of its redemption becomes remote, generally 6 years from the date of issuance.Recent Accounting Pronouncements On February 25, 2016, the FASB issued ASU No. 2016 -02, Leases, requiring lessees to recognize a right-of-use asset and a lease liability on the balance sheet for all leases with the exception of short-term leases. For lessees, leases will continue to be classified as either operating or finance leases in the income statement. Lessor accounting is similar to the current model but updated to align with certain changes to the lessee model. Lessors will continue to classify leases as operating, direct financing or sales-type leases. The effective date of the new standard for public companies is for fiscal years beginning after December 15, 2018. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition and requires application of the new guidance at the beginning of the earliest comparative period presented. The Company early adopted this standard at the commencement of the new lease beginning October 1, 2018. The Company has classified the new office lease as an operating lease. The adoption of ASU No. 2016 -02 increased the Company’s total assets and liabilities by $ based on a discounted calculation of the future lease payments. A discount rate of 494,000 5.25% was used for the present value calculation of the future lease payments. The results on its operations is equal to amortization of the asset, net of the present value discount, on a straight line basis over the lease term.Revenue from Contracts with Customers, ASU 2014 -09 establishes a comprehensive revenue recognition standard for virtually all industries in U.S. GAAP, including those that previously followed industry-specific guidance such as the real estate, construction and software industries. The revenue standard’s core principle is built on the contract between a vendor and a customer for the provision of goods and services. It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled. The standard requires five basic steps: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, (v) recognize revenue when (or as) the entity satisfies a performance obligation. Entities will generally be required to make more estimates and use more judgment than under current guidance, which will be highlighted for users through increased disclosure requirements.The standard requires that the transaction price received from customers be allocated to each separate and distinct performance obligation. The transaction price attributable to each separate and distinct performance obligation is then recognized as the performance obligations are satisfied. We have evaluated franchise fees and have determined that under the new standard the franchise fee is not separate and distinct from the overall franchise right. Franchise fees received will be recorded as deferred revenue and recognized as revenue over the term of each respective franchise agreement, typically 10 years. Under previous GAAP standards, franchise fees and costs associated with opening a franchise location were netted and the balance of the franchise fee was recognized when the location was opened for business. Upon adoption of Topic 606 in fiscal 2019 franchise fees less nonspecific expenses will be amortized over the life of the franchise contract and specific expenses being recognized immediately. This new standard, as compared to previous years will decrease franchise fee revenue by approximately $20,000 and $25,000 for each BAB and MFM location opened, respectively. The retrospective adjustment to franchise fee revenue for 2019 will increase franchise revenue by approximately $14,000 and the cumulative adjustment as of December 1, 2018 will reduce retained earnings by approximately $83,000. In addition, we have evaluated the impact of our franchise contributions to and subsequent expenditures from our marketing fund. We act as an agent in regard to these franchisee contributions and expenditures and under prior GAAP standards, we have not currently included them in our Consolidated Statements of Income. Upon adoption of Topic 606, we have determined we are the principal in these arrangements and under the new standard we will include them as revenue and expense items. Additionally, we have determined that the advertising services provided to franchisees are highly interrelated with the franchise right and therefore not distinct. Franchisees remit to us a percentage of restaurant sales as consideration for providing the advertising services. As a result, revenues for advertising services are recognized when the related sales occur based on the application of the sales-based royalty exception within Topic 606. We believe the approximate impact on revenues and expenses for 2019, based on 2018 numbers, will increase both revenue and expenses by approximately $ There will 988,000 .not be an impact on our net income. The ASU is effective for the Company, for fiscal years beginning after December 15, 2017. The Company will adopt ASU 2014 -09 for fiscal year ending November 30, 2019 and the Company does not believe that the impact of adoption of this guidance will have a material effect on the Company’s financial position, cash flows or results of operations.In March 2016, the Financial Accounting Standards Board issued ASU 2016 -04, Liabilities – Extinguishments of Liabilities (Subtopic 405 -20 ): Recognition of Breakage for Certain Prepaid Stored-Value Products. The amendments in the ASU are designed to provide guidance and eliminate diversity in the accounting for derecognition of prepaid stored-value product liabilities. Typically, a prepaid stored-value product liability is to be derecognized when it is probable that a significant reversal of the recognized breakage amount will not subsequently occur. This is when the likelihood of the product holder exercising its remaining rights becomes remote. This estimate shall be updated at the end of each period. The amendments in this ASU are effective for the annual reporting periods beginning after December 15, 2017. The Company currently follows a policy of recognizing breakage revenue after a card has been issued and not returned for a predetermined period per the Company policy. Revenue is recognized in the first quarter each year for breakage of prepaid stored-value products. This standard will be adopted in fiscal 2019. The Company does not believe that adoption of this guidance will have a material impact on the Company’s financial position, cash flows or results of operations. In November 2016, the FASB issued ASU No. 2016 -18, Statement of Cash Flows (Topic 230 ): Restricted Cash (a consensus of the FASB Emerging Issues Task Force), (“ASU 2016 -18” ). ASU 2016 -18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016 -18 is effective for all interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted. We do not expect the adoption of ASU 2016 -18 to have a material impact on our Consolidated Statements of Cash Flows.Management does not believe that there are any other recently issued and effective or not yet effective pronouncements as of November 30, 2018 that would have or are expected to have any significant effect on the Company’s financial position, cash flows or results of operations. |