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Notes Receivable

9 Months Ended

Sep. 30, 2021

Note 10 - Notes Receivable

Several franchisees, as well as the purchaser of our previously owned California locations, borrowed funds from us primarily to finance the initial purchase price of office assets. In March of 2021, we sold approximately $5.3 million of notes receivable to Bass, a related party. Virtually all of the notes sold to Bass originated from the sale of branch locations acquired in the Merger. These notes were sold at their current outstanding principal value. The proceeds from the sale of these notes were used to finance the Snelling and Link transactions.

Notes outstanding, net of allowance for losses, were approximately $4.3 million and $8.1 million as of September 30, 2021 and December 31, 2020, respectively. Notes receivable generally bear interest at a fixed rate between 6.0% and 10.0%. Notes receivable are generally secured by the assets of each office and the ownership interests in the franchise. We report interest income on notes receivable as other miscellaneous income in our consolidated statements of operations. Interest income was approximately $54,000 and $177,000 during the three months ended September 30, 2021 and September 30, 2020, respectively. Interest income was approximately $285,000 and $551,000 during the nine months ended September 30, 2021 and September 30, 2020, 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.

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 $1.9 million and $1.6 million as of September 30, 2021 and December 31, 2020, respectively, for potentially uncollectible notes receivable.

The following table summarizes our notes receivable balance to franchisees:

	September 30, 2021			December 31, 2020
Note receivable	$	4,577,795		$	8,023,807
Allowance for losses		(405,313	)		(405,313	)
Notes receivable, net	$	4,172,482		$	7,618,494

During 2020, one of our debtors experienced significant economic hardships due to the impacts of COVID-19. As a result, we restructured one note receivable in an effort to increase the probability of repayment. We granted near-term payment concessions to help the debtor attempt to improve its financial condition so it may eventually be able to repay the amount due. In the quarter ended September 30, 2021, this debtor defaulted on the forbearance agreement and we recognized an additional impairment in the value of this note of approximately $307,000. We recognized interest income on this note of approximately $-0- and $44,000 during the three months ended September 30, 2021 and September 30, 2020, respectively. We recognized interest income on this note of approximately $83,000 and $130,000 during the nine months ended September 30, 2021 and September 30, 2020, respectively.

The following table summarizes our note receivable balance that has been deemed impaired:

	September 30, 2021			December 31, 2020
Note receivable	$	1,640,393		$	1,640,393
Allowance for losses		(1,500,800	)		(1,193,359	)
Notes receivable, net	$	139,593		$	447,034

During the quarter ended September 30, 2021, we incurred an additional impairment of approximately $307,000 which is included in selling, general and administrative expenses in our consolidated statement of income.