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11. Notes Receivable

9 Months Ended

Sep. 30, 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 office assets. Notes outstanding net of allowance for losses were approximately $8.5 million and $11.4 million as of September 30, 2020 and December 31, 2019, respectively.

Notes receivable bear interest at a fixed rate between 6.0% and 10.0%. Notes are generally secured by the assets of each office and the ownership interests in the franchise. We report interest income on notes as other miscellaneous income in our consolidated statements of operations. This interest income was approximately $177,000 and $88,000 during the three months ended September 30, 2020 and September 29, 2019, respectively, and approximately $551,000 and $91,000 during the nine months ended September 30, 2020 and September 29, 2019, respectively.

We estimate the allowance for losses for franchisees separately from the allowance for losses from non-franchisees because of the level of detailed sales information available to us with respect to the former. 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 $1.6 million as of September 30, 2020 for potentially uncollectible notes receivable. There were no notes receivable in default as of September 30, 2020.

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

Balance as of December 31, 2019	$	9,702,471
Notes issued		84,629
Accrued interest		60,986
Payments received		(1,434,755	)
Change in valuation allowance		(405,313	)
Balance as of September 30, 2020	$	8,008,018

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

Balance as of December 31, 2019	$	1,707,238
Accrued interest		130,414
Payments received		(130,414	)
Change in valuation allowance		(1,193,359	)
Balance as of September 30, 2020	$	513,879