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Note 10 - Notes Receivable

6 Months Ended

Jun. 30, 2022

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

Note 10 - Notes Receivable

Notes from Franchisees

Several franchisees borrowed funds from us primarily to finance the initial purchase price of office assets, including intangible assets.

Notes outstanding, net of allowance for losses, were approximately $4.0 million and $3.9 million as of June 30, 2022 and December 31, 2021, 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 thousand and $96 thousand during the three months ended June 30, 2022 and June 30, 2021, respectively. Interest income was approximately $147 thousand and $231 thousand during the six months ended June 30, 2022 and June 30, 2021, 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 the economy on certain borrowers’ economic performance and estimated future cash flows, we have established an allowance of approximately $405 thousand as of June 30, 2022 and December 31, 2021 for potentially uncollectible notes receivable from franchisees.

The following table summarizes our notes receivable balance to franchisees (in thousands):

	*June 30, 2022*			*December 31, 2021*
Note receivable	$	4,352		$	4,268
Allowance for losses		(405	)		(405	)
Notes receivable, net	$	3,947		$	3,863

Notes from Non-Franchisees

In connection with the Snelling acquisition, we sold certain California locations that had been company-owned by Snelling to the California purchaser (the “California Purchaser”). These locations are permitted to operate under the Snelling trademark pursuant to a license agreement paying us a royalty of 9% of their gross margin. The aggregate sale price for these locations consisted of cash, a promissory note that bears interest at 6.0% per annum, plus the right to receive a portion of revenue generated, subject to certain conditions being satisfied (the "California Conditions"). Similarly, in connection with the LINK acquisition, we assigned certain franchise agreements we purchased in the transaction, all located in California, to the California Purchaser. These franchisees operate pursuant to a LINK trademark sublicense agreement whereby they pay us 9% of the gross margin of their offices in exchange for a sublicense to utilize the LINK tradename.

During 2020, the California Purchaser experienced significant economic hardships due to the impacts of COVID-19 and the related government mandates in the state. As a result, we restructured a portion of the notes 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. During the three months ended June 30, 2022 we have been asked to provide a third forbearance agreement and avoid foreclosure action. We are currently negotiating the terms and conditions related to that agreement. As part of the forbearance we will likely have to forgive additional payments due on the notes. After reviewing the potential outcomes, we recorded an additional impairment of approximately $233 thousand at June 30, 2022, bringing the note balance down to approximately $71 thousand, which we expect to collect before the end of 2022.

For notes to non-franchisees, we recognized interest income on this note of approximately $-0- and $96 thousand during the three months ended June 30, 2022 and June 30, 2021, respectively. We recognized interest income on this note of approximately $41 thousand and $231 thousand during the six months ended June 30, 2022 and June 30, 2021, respectively.

The following table summarizes our non-franchisee note receivable balance that has been deemed impaired (in thousands):

	*June 30, 2022*			*December 31, 2021*
Note receivable	$	1,805		$	1,805
Allowance for losses		(1,734	)		(1,501	)
Notes receivable, net	$	71		$	304