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10. Notes Receivable

3 Months Ended

Mar. 31, 2020

Accounts and Financing Receivable, after Allowance for Credit Loss [Abstract]

Some franchisees, as well as the purchaser of our previously owned California locations, have borrowed funds from us primarily to finance the initial purchase price of sold locations. Notes outstanding were approximately $9.6 million and $11.4 million as of March 31, 2020 and December 31, 2019, respectively, net of allowance for losses.

Notes receivable bear interest at a fixed rate between 6.0% and 10.0%. Notes are generally secured by the assets of each location and the ownership interests in the franchisee. Interest income on franchisee notes is reported in other miscellaneous income in our consolidated statements of operations and was approximately $198,000 and $-0- in the quarters ended March 31, 2020 and March 31, 2019, respectively.

We estimate the allowance for loss for franchisees discretely from the allowance for loss from non-franchisees because of the level of detailed sales information available to us. There have been no historic losses for either segment.

Based on our review of the financial condition of the borrowers, the underlying collateral value, and the potential future impact of COVID-19 on certain borrowers’ economic performance and estimated future cash flows, we have established an allowance of approximately $1.4 million as of March 31, 2020 for potentially uncollectible notes receivable. There were no loans in default as of March 31, 2020.

The following table summarizes changes in our notes receivable balance to franchisees:

Balance as of December 31, 2019	$	9,702,471
Notes issued		38,000
Payments received		(438,410	)
Change in valuation allowance		(366,472	)
Balance as of March 31, 2020	$	8,935,589

The following table summarizes changes in our notes receivable balance to non-franchisees:

Balance as of December 31, 2019	$	1,707,238
Accrued interest		43,155
Total unpaid balance		1,750,393
Change in valuation allowance		(1,080,868	)
Balance as of March 31, 2020	$	669,525