Accounts Receivable, Short-Term and Long-Term Notes Receivable

9 Months Ended

Sep. 30, 2015

Debt Disclosure [Abstract]

Accounts Receivable, Short-Term and Long-Term Notes Receivable

Management reviews accounts receivable, short-term and long-term notes receivable on a quarterly basis to determine if any receivables are potentially uncollectible. An allowance for doubtful accounts is determined based on a combination of historical experience, length of time outstanding, customer credit worthiness, and current economic trends.  As of December 31, 2014, approximately $825,000 of our accounts were fully reserved.  We recorded a bad debt reserve of $1,140,877 during the nine months ended September 30, 2015 and wrote off uncollectable accounts during the nine months ended September 30, 2015 in the amount of $1,032,994, all of which were fully reserved.  As of September 30, 2015, the Company has recorded an allowance for doubtful accounts of $932,934.

Long-term receivables relate to notes receivable from the financing of set-up and license fees.  Initial set up and licensing fees are $22,500 for the Company’s Engage License and clients typically contribute cash upfront of 20% and the remaining 80% is financed over a 3 year term.  The Company’s Thrive License clients typically contribute cash upfront of 50% and the remaining 50% is financed over a 2 year term.

Notes receivable aged over 30 days past due are considered delinquent and notes receivable aged over 60 days past due with known collection issues are placed on non-accrual status. Interest revenue is not recognized on notes receivable while on non-accrual status. Cash payments received on non-accrual receivables are applied towards the principal. When notes receivable on non-accrual status are again less than 60 days past due, recognition of interest revenue for notes receivable is resumed.  The Company charges interest rates on notes receivable averaging 14% which approximates a fair value.  The Company recorded approximately $28,000 and $93,000 in interest income for the three months and nine months ended September 30, 2015, respectively and approximately $15,000 and $35,000 in interest income for the three months and nine months ended September 30, 2014, respectively.

The allowance for doubtful accounts on long-term receivables is the Company's best estimate of the amount of probable credit losses related to the Company's existing note receivables.  The allowance for doubtful accounts is the Company's best estimate of probable credit losses related to trade receivables and notes receivable based upon the aging of the receivables, historical collection data, internal assessments of credit quality and the economic conditions in the business subprime industry, as well as in the economy as a whole. The Company charges off uncollectable amounts against the reserve in the period in which it determines they are uncollectable.

The Company determined that certain accounts with terminated services were uncollectable and wrote their remaining balances of $1,032,994 off to the reserve.  The Company identified those accounts with irregular payment histories and with low probabilities of collection. The Company established a reserve of $884,000 for the remaining balances of those accounts. Unearned income on notes receivable is amortized using the effective interest method.  Based upon the Company's methodology, the notes receivable balances with reserves and the reserves associated with those balances are as follows:

	September 30, 2015
	Gross Notes Receivable				Reserve				Net Notes Receivable
	Current		Long-Term		Current		Long-Term		Current		Long-Term
Customer Notes Receivable	$	739,788	$	822,319	$	290,369	$	370,377	$	449,419	$	451,942
Accounts Receivable	$	793,830			$	272,188			$	521,642

	December 31, 2014
	Gross Notes Receivable				Reserve				Net Notes Receivable
	Current		Long-Term		Current		Long-Term		Current		Long-Term
Customer Notes Receivable	$	760,417	$	1,028,805	$	286,571	$	349,954	$	473,846	$	678,851
Accounts Receivable	$	344,313			$	188,527			$	155,786

The roll forward of the allowance for doubtful accounts related to notes receivable and accounts receivable is as follows:

	Notes Receivable				Accounts Receivable
	Current		Long-Term		Current		Long-Term
Balance at December 31, 2014	$	286,571	$	349,954	$	188,527	$	-
Incremental Provision	$	358,450	$	364,370	$	418,056	$	-
Charge offs	$	(354,652)	$	(343,947)	$	(334,395)	$	-
Balance at September 30, 2015	$	290,369	$	370,377	$	272,188	$	-

The allowance for doubtful accounts as a percentage of total receivables (which included accounts receivables and short and long-term notes receivables) was approximately 40% as of September 30, 2015 and approximately 39% as of December 31, 2014.

Short-term notes receivable

The Company received a Secured Convertible Promissory Note (the “Note”) for a principal amount of $410,000 from a third party in September 2014. The Note bears interest at the rate of 5.25% per annum and matured in four months. For the three months and nine months ended September 30, 2015, the Company has recorded $18,461 and $27,381, respectively of interest income from this Note.  $90,000 of the principal amount was paid during first quarter of 2015, $20,000 was paid during the second quarter of 2015, $20,000 was paid during the third quarter.  For the three months ended September 30, 2015, we recorded bad debt expense related to the Note of approximately $172,000.