10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2017

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-23367

BIRNER DENTAL MANAGEMENT SERVICES, INC.

(Exact name of registrant as specified in its charter)

COLORADO	84-1307044
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

1777 S. HARRISON STREET, SUITE 1400 DENVER, COLORADO	80210
(Address of principal executive offices)	(Zip Code)

(303) 691-0680

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  ☒  No   ☐    

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  ☒  No   ☐    

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☐	Non-accelerated filer  ☐	Smaller reporting company ☒
		(Do not check if a smaller reporting company)

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ☐  No  ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Shares Outstanding as of May 2, 2017
Common Stock, no par value	1,860,261

BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q

PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements	Page
	Unaudited Condensed Consolidated Balance Sheets as of December 31, 2016 and March 31, 2017	3
	Unaudited Condensed Consolidated Statements of Operations for the Quarters Ended March 31, 2016 and 2017	4
	Unaudited Condensed Consolidated Statement of Shareholders’ Equity for the Quarter Ended March 31, 2017	5
	Unaudited Condensed Consolidated Statements of Cash Flows for the Quarters Ended March 31, 2016 and 2017	6
	Notes to Unaudited Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 4.	Controls and Procedures	24
PART II - OTHER INFORMATION
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 6.	Exhibits	26
Signatures		27

2

PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

ASSETS	December 31, 2016			March 31, 2017
CURRENT ASSETS:
Cash	$	157,923		$	208,670
Accounts receivable, net of allowance for doubtful accounts of approximately $410,000 and $410,000, respectively		3,212,190			3,849,498
Note receivable		34,195			34,195
Prepaid expenses and other assets		759,749			735,400
Total current assets		4,164,057			4,827,763
PROPERTY AND EQUIPMENT, net		7,279,436			6,636,109
OTHER NONCURRENT ASSETS:
Intangible assets, net		6,721,084			6,509,476
Deferred charges and other assets		155,741			163,991
Note receivable		31,051			23,358
Total assets	$	18,351,369		$	18,160,697
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	2,723,473		$	2,861,371
Accrued expenses		925,776			1,074,744
Accrued payroll and related expenses		2,164,758			2,652,495
Income taxes payable		-			122,042
Current maturities of long-term debt		2,500,000			3,284,195
Total current liabilities		8,314,007			9,994,847
LONG-TERM LIABILITIES:
Deferred tax liability, net		1,174,416			935,712
Long-term debt		7,351,006			5,912,112
Other long-term obligations		1,081,655			1,077,564
Total liabilities		17,921,084			17,920,235
SHAREHOLDERS' EQUITY:
Preferred Stock, no par value, 10,000,000 shares authorized; none outstanding		-			-
Common Stock, no par value, 20,000,000 shares authorized; 1,860,261 and 1,860,261 shares issued and outstanding, respectively		1,615,001			1,650,237
Accumulated deficit		(1,184,716	)		(1,409,775	)
Total shareholders' equity		430,285			240,462
Total liabilities and shareholders' equity	$	18,351,369		$	18,160,697

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Quarters Ended March 31,
	2016				2017
REVENUE:
Dental practice revenue	$	15,366,543			$	14,618,704
Capitation revenue		1,064,690				1,041,976
		16,431,233				15,660,680
DIRECT EXPENSES:
Clinical salaries and benefits		9,870,950				9,466,299
Dental supplies		725,273				628,406
Laboratory fees		871,615				881,141
Occupancy		1,566,805				1,550,259
Advertising and marketing		158,870				169,904
Depreciation and amortization		1,020,091				964,802
General and administrative		1,403,210				1,263,626
		15,616,814				14,924,437
Contribution from dental offices		814,419				736,243
CORPORATE EXPENSES:
General and administrative		876,906		(1)		959,458		(1)
Depreciation and amortization		62,799				46,084
OPERATING LOSS		(125,286	)			(269,299	)
Interest expense, net		39,322				72,423
LOSS BEFORE INCOME TAXES		(164,608	)			(341,722	)
Income tax benefit		(64,198	)			(116,663	)
NET LOSS	$	(100,410	)		$	(225,059	)
Net loss per share of Common Stock - Basic	$	(0.05	)		$	(0.12	)
Net loss per share of Common Stock - Diluted	$	(0.05	)		$	(0.12	)
Weighted average number of shares of Common Stock and dilutive securities:
Basic		1,860,482				1,860,261
Diluted		1,860,482				1,860,261

⁽¹⁾ Corporate expenses - general and administrative includes $46,707 and $35,236 of stock-based compensation expense pursuant to ASC Topic 718 for the quarters ended March 31, 2016 and 2017, respectively.

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

(UNAUDITED)

	Common Stock
	Shares		Amount		Accumulated deficit			Shareholders' Equity
BALANCES, December 31, 2016		1,860,261	$	1,615,001	$	(1,184,716	)	$	430,285
Stock-based compensation expense		-		35,236		-			35,236
Net loss		-		-		(225,059	)		(225,059	)
BALANCES, March 31, 2017		1,860,261	$	1,650,237	$	(1,409,775	)	$	240,462

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Quarters Ended March 31,
	2016			2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(100,410	)	$	(225,059	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		1,082,890			1,010,886
Stock-based compensation expense		46,707			35,236
Provision for doubtful accounts		234,920			160,010
Benefit from deferred income taxes		(203,784	)		(238,704	)
Changes in assets and liabilities:
Accounts receivable		(674,138	)		(797,318	)
Prepaid expenses and other assets		(224,092	)		24,349
Deferred charges and other assets		-			(8,250	)
Accounts payable		(674,586	)		137,898
Accrued expenses		(158,318	)		148,968
Accrued payroll and related expenses		372,834			487,737
Income taxes payable (receivable)		224,587			122,042
Other long-term obligations		87,471			(4,091	)
Net cash provided by operating activities		14,081			853,704
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures		(246,248	)		(155,951	)
Note receivable		7,247			7,693
Net cash used in investing activities		(239,001	)		(148,258	)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Advances – line of credit		6,761,108			6,339,788
Repayments – line of credit		(5,851,088	)		(5,994,487	)
Repayments – reducing revolving loan		-			(1,000,000	)
Purchase and retirement of Common Stock		(8,860	)		-
Common stock cash dividends		(409,443	)		-
Net cash provided by (used in) financing activities		491,717			(654,699	)
NET CHANGE IN CASH		266,797			50,747
CASH, beginning of period		258,801			157,923
CASH, end of period	$	525,598		$	208,670

The accompanying notes are an integral part of these condensed consolidated financial statements.

6

BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Quarters Ended March 31,
	2016		2017
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest	$	50,759	$	89,382
Cash paid for income taxes	$	-	$	-
Cash received for income taxes	$	85,000	$	-
NON-CASH ITEMS:
Repayments - line of credit with Compass Bank	$	10,617,598	$	-

The accompanying notes are an integral part of these condensed consolidated financial statements.

7

BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2017

(1) UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The condensed consolidated financial statements included herein are unaudited and have been prepared by Birner Dental Management Services, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures included herein are adequate to make the information presented not misleading. A description of the Company’s accounting policies and other financial information is included in the audited consolidated financial statements as filed with the SEC in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of the Company as of March 31, 2017 and the results of operations and cash flows for the periods presented.  All such adjustments are of a normal recurring nature.  The results of operations for the quarter ended March 31, 2017 are not necessarily indicative of the results that may be achieved for a full fiscal year and cannot be used to indicate financial performance for the entire year.

(2) LIQUIDITY AND FINANCIAL RESOURCES UPDATE

The Company has historically operated with negative working capital and has been able to meet its current obligations as a result of strong operating cash flows and availability on its revolving lines of credit.  Recent decreases in operating cash flows have led the Company to take certain actions.  The Company believes that cash generated from operations and borrowings under its Credit Facility will be sufficient to fund its anticipated working capital needs and capital expenditures for at least the next 12 months.  In order to meet its long-term liquidity needs, the Company may need to issue additional equity or debt securities or engage in other borrowings or financing activities, subject to market and other conditions.  There can be no assurance that such additional financing will be available on terms acceptable to the Company or at all. The failure to raise the funds necessary to finance its future cash requirements could adversely affect the Company’s ability to pursue its strategy and could negatively affect its operations in future periods.

In late September 2016, the Company hired a new, fully dedicated dentist recruiter to replace the previous recruiter.  The Company believes the new recruiter is making progress in increasing its number of dentists.  On January 30, 2017, the Company added a highly experienced Chief Dental Officer to work directly with its network dentists in their offices, which the Company believes will help reduce dentist turnover, improve dentist performance and enhance dentist recruitment going forward.  The Company also has begun to work with an additional experienced dentist on a part time consulting basis to further improve retention and productivity.  In addition, the Company has begun to offer equity buy-in opportunities for dentists, which it believes will also aid in recruiting and retaining dentists and reducing dentist turnover.

Management is also continuously seeking to reduce expenses and, on February 1, 2017, the Company’s Chief Executive Officer, Chief Financial Officer and outside directors all took 20 percent reductions in base salary and director fees, respectively, amounting to approximately $175,000 in annual expense savings.  Additionally, one of the Company’s two offices in Fort Collins, Colorado that had negative earnings before interest, taxes, depreciation, amortization and stock-based compensation expense (“Adjusted EBITDA”) of $78,000 in 2016 was consolidated with another newer office at the end of January 2017.  The Company is considering other actions to reduce expenses and improve profitability.

The Company has prepared its business plan for the ensuing twelve months and believes it has sufficient liquidity and financial resources to operate for the ensuing twelve month period.

(3) SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation/Basis of Consolidation

The accompanying condensed consolidated financial statements have been prepared on the accrual basis of accounting. These financial statements present the financial position and results of operations of the Company and the dental offices (“Offices”), which are under the control of the Company.  The Offices are organized as professional corporations (“P.C.s”) and the Company provides business services to the Offices under long-term management agreements (the “Management Agreements”).  All intercompany accounts and transactions have been eliminated in the consolidation.

The Company treats Offices as consolidated subsidiaries where it has a long-term and unilateral controlling financial interest over the assets and operations of the Offices. The Company maintains control of substantially all of its Offices via the Management Agreements. The Company is a business service organization and does not engage in the practice of dentistry or the provision of dental hygiene services. These services are provided by licensed professionals. Certain key features of these arrangements either enable the Company at any time and in its sole discretion to cause a change in the shareholder of the P.C. (i.e., ''nominee shareholder'') or allow the Company to vote the shares of stock held by the owner of the P.C. and to elect a majority of the board of directors of the P.C.  The accompanying condensed consolidated statements of operations reflect revenue, which is the amount billed to patients less contractual adjustments. Direct expenses consist of all the expenses incurred in operating the Offices and paid by the Company.  Under the Management Agreements, the Company assumes responsibility for the management of most aspects of the Offices' business (the Company does not engage in the practice of dentistry or the provision of dental hygiene services), including personnel recruitment and training; comprehensive administrative, business and marketing support and advice; and facilities, equipment, and support personnel as required to operate the practices.

8

The Company prepares its consolidated financial statements in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, which provides for consolidation of variable interest entities (“VIEs”) of which the Company is the primary beneficiary. The Company has concluded that the P.C.s meet the definition of VIEs as defined by this standard and that the Company is the primary beneficiary of these VIEs.  This conclusion was reached because the Company has the power to direct significant activities of the VIEs and the Company is obligated to absorb losses of and/or provide rights to receive benefits from the VIEs.

Revenue

Revenue is generally recognized when services are provided and is reported at estimated net realizable amounts due from insurance companies, preferred provider and health maintenance organizations (i.e., third-party payors) and patients for services rendered, net of contractual and other adjustments.  Dental services are billed and collected by the Company in the name of the Offices.

Revenue under certain third-party payor agreements is subject to audit and retroactive adjustments. To the Company’s knowledge, there are no material claims, disputes or other unsettled matters that exist concerning third-party reimbursements as of March 31, 2017.

Most of the Company’s patients are insured under third-party payor agreements. The Company’s billing system generates contractual adjustments for each patient encounter based on fee schedules for the patient’s insurance plan.  The services provided are attached to the patient’s fee schedule based on the insurance the patient has at the time the service is provided.  Therefore, the revenue that is recorded by the billing system is based on insurance contractual amounts. Additionally, each patient at the time of service signs a form agreeing that the patient is ultimately responsible for the contracted fee if the insurance company does not pay the fee for any reason.

Note Receivable

A note receivable was created as part of a dental Office acquisition, of which approximately $58,000 in principal amount was outstanding at March 31, 2017.  The note has equal monthly principal and interest amortization payments and a maturity date of October 31, 2018.  The note bears interest at 6%, which is accrued monthly.  If the note is uncollectible, an allowance for doubtful accounts will be created.  There was no allowance for doubtful accounts for the note as of March 31, 2017 or December 31, 2016.

.

Intangible Assets

The Company's dental practice acquisitions involve the purchase of tangible and intangible assets and the assumption of certain liabilities of the acquired dental Offices. As part of the purchase price allocation, the Company allocates the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed, based on estimated fair market values. Costs of acquisition in excess of the net estimated fair value of tangible assets acquired and liabilities assumed are allocated to the Management Agreement related to the Office. The Management Agreement represents the Company's right to manage the Offices during the 40-year term of the Management Agreement. The assigned value of the Management Agreement is amortized using the straight-line method over a period of 25 years.  Amortization was approximately $212,000 and $211,000 for the quarters ended March 31, 2017 and 2016, respectively.

The Management Agreements cannot be terminated by a P.C. without cause, consisting primarily of bankruptcy or material default by the Company.

If facts and circumstances indicate that the carrying value of long-lived and intangible assets may be impaired, the Company will perform an evaluation of recoverability. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset will be compared to the asset’s carrying amount to determine if a write-down to market value or discounted cash flow value is required.  There were no impairment write-downs associated with the Company’s long-lived and intangible assets during the quarters ended March 31, 2017 and 2016.

9

Stock-Based Compensation Expense

The Company recognizes compensation expense on a straight line basis over the requisite service period of the award. Total stock-based compensation expense included in the Company’s condensed consolidated statements of operations for the quarters ended March 31, 2017 and 2016 was approximately $35,000 and $47,000, respectively, related to stock options.  Total stock-based compensation expense was recorded as a component of corporate general and administrative expense.

The Black-Scholes option-pricing model was used to estimate the option fair values. The option-pricing model requires a number of assumptions, of which the most significant are expected stock price volatility, the expected pre-vesting forfeiture rate, expected dividend rate and the expected option term (the amount of time from the grant date until the options are exercised or expire). Expected volatility was calculated based upon actual historical stock price movements over the most recent period ended March 31, 2017 equal to the expected option term. Expected pre-vesting forfeitures were estimated based on historical pre-vesting forfeitures over the most recent period ended March 31, 2017 for the expected option term.

Recent Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606).  This update will establish a comprehensive revenue recognition standard for virtually all industries in GAAP.  ASU 2014-09 will change the amount and timing of revenue and cost recognition, implementation, disclosures and documentation.  In August 2015, the FASB issued ASU No. 2015-14, which deferred the effective date of ASU 2014-09 until annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period.  ASU No. 2014-09 may be adopted under the full retrospective method or simplified transition method.  Entities are permitted to adopt the revenue standard early, beginning with annual reporting periods after December 15, 2016.  The Company plans to adopt ASU 2014-09 beginning January 1, 2018 and it is not expected to have a material effect on its consolidated financial statements. 

In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes.  This update eliminates the current requirement for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet.  Instead, the Company will be required to classify all deferred tax assets and liabilities as noncurrent.  This guidance is effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016.  The Company adopted this guidance and it did not have a material effect on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842).  Under the new guidance, lessees will be required to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months.  ASU 2016-02 is effective for fiscal years beginning after December 15, 2018.  The Company anticipates the adoption of ASU 2016-02 will have a material impact on its consolidated financial statements by increasing both total assets and total liabilities on the balance sheet.

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting.  The objective of the new guidance is to simplify the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification of the statement of cash flows.   ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years.  ASU 2016-09 did not have a material effect on the Company’s consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments.  This update addresses diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows.  The update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice.  The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted.  ASU 2016-15 is not expected to have a material effect on the Company’s consolidated financial statements.

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other than Inventory. The guidance requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The guidance becomes effective for annual reporting periods beginning after December 15, 2017 with early adoption permitted This ASU is required to be adopted using the modified retrospective approach, with a cumulative catch-up adjustment to retained earnings in the period of adoption. The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements, but at this time does not believe there will be a material effect on its consolidated financial statements.

10

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, to address diversity in practice in the classification and presentation of changes in restricted cash. The accounting update requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash or restricted cash equivalents should be included with cash and cash equivalents when reconciling beginning-of-period and end-of-period amounts shown on the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. This is an expansive set of revisions to the cash flow presentation standards, but at this time the Company does not believe that these changes will have a material effect on its consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. The guidance removes the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance becomes effective for annual reporting periods beginning after December 15, 2019 with early adoption permitted, and is applied prospectively. The Company is currently evaluating this guidance and its impact on its results of operations, financial position, and consolidated financial statements.

(4) LOSS PER SHARE

The Company calculates earnings (loss) per share (“EPS”)  in accordance with ASC Topic 260.

	Quarters Ended March 31,
	2016								2017
	Net Loss			Shares		Per Share Amount			Net Loss			Shares		Per Share Amount
Basic EPS	$	(100,410	)		1,860,482	$	(0.05	)	$	(225,059	)		1,860,261	$	(0.12	)
Effect of Dilutive Stock Options		-			-		-			-			-		-
Diluted EPS	$	(100,410	)		1,860,482	$	(0.05	)	$	(225,059	)		1,860,261	$	(0.12	)

For the quarters ended March 31, 2017 and 2016, options to purchase 500,666 and 544,666 shares, respectively, of the Company’s common stock (“Common Stock”) were not included in the computation of diluted EPS because their effect was anti-dilutive.

(5) STOCK-BASED COMPENSATION PLANS

The Company’s 2005 Equity Incentive Plan, as amended (“2005 Plan”), terminated in March 2015.  The 2005 Plan provided for the grant of incentive stock options, restricted stock, restricted stock units and stock grants to eligible employees (including officers and employee-directors) and non-statutory stock options to eligible employees, directors and consultants.  As of March 31, 2017, there were 338,415 vested options and 56,251 unvested options granted under the 2005 Plan that remained outstanding in accordance with their terms and there were no shares available for issuance under the 2005 Plan due to its termination.

The Company’s shareholders approved the 2015 Equity Incentive Plan (“2015 Plan”) in June 2015.  The 2015 Plan replaces the 2005 Plan.  The maximum number of shares of Common Stock that may be delivered to participants and their beneficiaries under the 2015 Plan is 200,000.  The 2015 Plan provides for the grant of incentive stock options, stock appreciation right awards, restricted stock awards, stock unit awards and other stock-based awards to eligible recipients.  The objectives of the 2015 Plan are to attract and retain the best possible candidates for positions of responsibility and provide for additional performance incentives by providing eligible employees with the opportunity to acquire equity in the Company.  The 2015 Plan is administered by a committee of two or more outside directors from the Company’s Board of Directors (the “Committee”). The Committee determines the eligible individuals to whom awards under the 2015 Plan may be granted, as well as the time or times at which awards will be granted, the number of shares subject to awards to be granted to any eligible individual, the term of the award, vesting terms and conditions and any other terms and conditions of the grant in addition to those contained in the 2015 Plan.  Each grant under the 2015 Plan will be confirmed by and subject to the terms of an award agreement.  As of March 31, 2017, there were 16,750 vested options and 89,250 unvested options granted under the 2015 Plan and 94,000 shares available for issuance under the 2015 Plan.

11

The Company uses the Black-Scholes option-pricing model to estimate the fair value of each option granted with the following weighted average assumptions:

	Quarters Ended March 31,
Valuation Assumptions	2016			2017
Expected life (1)		3.3			4.0
Risk-free interest rate (2)		1.21	%		1.85	%
Expected volatility (3)		39	%		51	%
Expected dividend yield		7.81	%		0.00	%
Expected forfeiture (4)		27.00	%		30.00	%

⁽¹⁾ The expected life, in years, of stock options is estimated based on historical experience.

⁽²⁾ The risk-free interest rate is based on U.S. Treasury bills whose term is consistent with the expected life of the stock options.

⁽³⁾ The expected volatility is estimated based on historical and current stock price data for the Company.

⁽⁴⁾ Forfeitures are estimated based on historical experience.

A summary of option activity as of March 31, 2017, and changes during the quarter then ended, is presented below:

	Number of Options		Weighted- Average Exercise Price		Range of Exercise Prices		Weighted- Average Remaining Contractual Term (years)		Aggregate Intrinsic Value (thousands)
Outstanding at January 1, 2017		465,666	$	15.94	$	10.04 - $19.75		3.6	$	654
Granted		35,000	$	12.56	$	12.25 - $14.45
Outstanding at March 31, 2017		500,666	$	15.70	$	10.04 - $19.75		3.6	$	254
Exercisable at March 31, 2017		355,165	$	17.00	$	10.04 - $19.75		2.8	$	66

The weighted average grant date fair values of options granted were $5.20 per share and $1.74 per share during the quarters ended March 31, 2017 and 2016, respectively.  As of March 31, 2017, there was approximately $234,000 of total unrecognized compensation expense related to non-vested stock options, which is expected to be recognized over a weighted average period of 3.29 years.

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(6) LINE OF CREDIT

On March 29, 2016, the Company entered into the Credit Facility.  The Credit Facility initially consisted of a $2.0 million revolving line of credit and a $10.0 million reducing revolving loan.  The revolving line of credit matures on March 31, 2018.  As amended by the March 2017 amendment, the revolving line of credit commitment reduces in four $300,000 increments during 2017 through maturity from $2.0 million to $800,000.  The reducing revolving loan matures on March 31, 2021 and requires mandatory reductions of $500,000 per calendar quarter, with a further reduction on April 30, 2018 equal to the product of (i) 50% multiplied by (ii) EBITDA for 2017 minus capital expenditures for 2017, interest payments on the Credit Facility paid in 2017, $2.0 million, and cash taxes paid during 2017.  The reducing revolving loan allows the Company to drawdown, repay and re-draw loans advanced to it within the available balance.  Interest varies between LIBOR plus 3.10% and LIBOR plus 3.75% depending on the Company’s funded debt-to-EBITDA ratio.  As of March 31, 2017, the revolving line of credit rate was 4.73% and the reducing revolving loan rate was 4.73%.  At March 31, 2017, the Company had approximately $1.3 million of borrowings outstanding under the revolving line of credit and approximately $716,000 available for borrowing under the revolving line of credit.  At March 31, 2017, the Company had $8.0 million of borrowings outstanding under the reducing revolving loan.  The Credit Facility is collateralized by substantially all of the assets of the Company.  As amended by the March 2017 amendment, the Credit Facility requires the Company to maintain (i) a funded debt-to-EBITDA ratio of no more than 2.5 to 1.00 for the twelve months ending December 31, 2017 and thereafter, (ii) a fixed charge coverage ratio for the immediately preceding twelve months of not less than 1.25 to 1.00 for the quarter ending December 31, 2017 and each quarter thereafter, and (iii) to generate at least $870,000 of EBITDA in each of the first three quarters of 2017.

As disclosed in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations--Recent Developments” below, the Company decided to discontinue the strategic assessment begun in the second quarter of 2016 and as a result incurred $104,000 in expenses associated with this strategic assessment in the first quarter of 2017.  When the Credit Facility was amended in March 2017, the Bank agreed to exclude up to $120,000 of such expenses in determining compliance with the Credit Facility EBITDA covenant for each of the first three quarters of 2017.  Therefore, for purposes of determining compliance with the Credit Facility EBITDA covenant in the first quarter of 2017, the Company generated $881,000 in EBITDA and was in compliance with the EBITDA covenant as of March 31, 2017.  The Company also was in compliance with the other amended Credit Facility covenants as of March 31, 2017.  In addition, capital expenditures may not exceed $180,000 per quarter.  After entering into the Credit Facility in March 2016, dividends and stock repurchases were prohibited under the Credit Facility and, as a result of the March 2017 amendment to the Credit Facility, dividends and stock repurchases currently are not permitted under the Credit Facility.

The March 2017 amendment to the Credit Facility also included a forbearance by the Bank regarding covenant defaults by the Company as of December 31, 2016 with respect to the then-existing funded debt-to-EBITDA ratio of no more than 3.15 to 1.00 for the twelve months ended December 31, 2016, fixed charge coverage ratio of at least 1.35 to 1.00 for the quarter ended December 31, 2016 and EBITDA of at least $650,000 for the quarter ended December 31, 2016.  The forbearance remains in effect provided that the Company complies with the amended Credit Facility covenants.  There can be no assurances that the Bank will not change the terms of the Credit Facility or cease to forbear or continue to extend credit to the Company.  Any such actions or failure by the Company to maintain compliance with the Credit Facility in the future could have a material adverse effect on the Company.

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(7) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

ASC Topic 825, ''Disclosures About Fair Value of Financial Instruments,'' requires disclosure about the fair value of financial instruments. Carrying amounts for all financial instruments included in current assets and current liabilities approximate estimated fair values due to the short maturity of those instruments. The fair values of the Company's long-term debt are based on similar rates currently available to the Company.  The Company believes the book value approximates fair value for the notes receivable.

The Company follows ASC Topic 820, “Fair Value Measurements and Disclosures,” which defines fair value, establishes a framework for using fair value to measure assets and liabilities, and expands disclosures about fair value measurements.  The statement establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.  Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company.  Unobservable inputs are inputs that reflect the Company’s assumptions of what market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.  The hierarchy is broken down into three levels based on the reliability of the inputs as follows:

Level 1: Quoted prices are available in active markets for identical assets or liabilities.

Level 2: Quoted prices in active markets for similar assets and liabilities that are observable for the asset or liability; or

Level 3: Unobservable pricing inputs that are generally less observable from objective sources, such as discounted cash flow models or valuations.

ASC Topic 820 requires financial assets and liabilities to be classified based on the lowest level of input that is significant to the fair value measurement.  The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels. There were no transfers between the fair value hierarchy levels during the quarters ended March 31, 2017 and 2016.

The following table represents the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2016 and March 31, 2017 by level within the fair value hierarchy:

	December 31, 2016 Fair Value Measurement Using						March 31, 2017 Fair Value Measurement Using
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Contingent Liabilities Balance	$	-		-	$	321,000	$	-		-	$	321,000

Contingent Liabilities

As part of an Office acquisition completed in 2009, the Company recorded contingent liabilities to recognize an estimated amount to be paid as part of the acquisition agreement.  These contingent liabilities are recorded at estimated fair values as of the date of acquisition, are payable upon the exercise of a put option by the seller beginning four years after the acquisition date and no later than ten years after the acquisition date, and are calculated at a multiple of the then trailing twelve-months operating cash flows.  The Company remeasures the contingent liability to fair value each reporting date until the contingency is resolved.  Any changes to the fair value are recognized into the income statement when determined.  As of March 31, 2017, approximately $321,000 of contingent liabilities were recorded on the consolidated balance sheets in other long-term obligations.

(8) SUBSEQUENT EVENTS

On May 9, 2017, the Company reached a mutual settlement agreement with the activist shareholder group  to end a potential proxy contest related to the Company’s 2017 annual meeting of shareholders in connection with the matters described in the shareholder group’s Schedule 13D. Under the terms of the settlement agreement, the Company will nominate John M. Climaco and Gregory G. Fulton for election to its Board of Directors at the 2017 annual meeting, along with incumbent director Brooks G. O’Neil. As part of the settlement agreement, the shareholder group has agreed to withdraw its proposals for the annual meeting and to vote in favor of the above slate of director nominees at the 2017 annual meeting. In addition, the shareholder group has agreed to a standstill that generally extends until the later of the 2018 annual meeting of shareholders and the date that neither Mr. Climaco nor Mr. Fulton serves on the Board of Directors, except that the shareholder group may propose nominees for director for the 2018 annual meeting in accordance with the Company’s bylaws.

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

The statements contained in this report that are not historical in nature are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, included in this report that address activities, events or developments that we expect, believe, intend or anticipate will or may occur in the future, are forward-looking statements. When used in this document, the words “estimate,” “believe,” “anticipate,” “project” and similar expressions are intended to identify forward-looking statements. Forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy and some of which might not even be anticipated. These forward-looking statements include statements in this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” regarding intent, belief or current expectations of the Company or its officers with respect to the development of de novo offices or acquisition of additional dental practices (“Offices”) and the successful integration of such Offices into the Company’s network, recruitment of additional dentists, funding of the Company’s expansion, capital expenditures, payment or nonpayment of dividends and cash outlays for income taxes and other purposes.

Such forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from anticipated results. These risks and uncertainties include regulatory constraints, changes in laws or regulations concerning the practice of dentistry or dental practice management companies, the availability of suitable new markets and suitable locations within such markets, changes in the Company’s operating or expansion strategy, the general economy of the United States and the specific markets in which the Company’s Offices are located, trends in the health care, dental care and managed care industries, as well as the risk factors set forth in Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, and other factors as may be identified from time to time in the Company’s filings with the Securities and Exchange Commission or in the Company’s press releases.

General

The following discussion relates to factors that have affected the results of operations and financial condition of the Company for the quarters ended March 31, 2017 and 2016. This information should be read in conjunction with the Company’s condensed consolidated financial statements and related notes thereto included elsewhere in this report.

Overview

The Company was formed in May 1995 and currently manages 68 Offices in Colorado, New Mexico and Arizona staffed by 71 general dentists and 31 specialists. The Company derives all of its revenue from its Management Agreements with professional corporations (“P.C.s”), which conduct the practice at each Office. In addition, the Company assumes a number of responsibilities when it develops a de novo Office or acquires an existing dental practice.  These responsibilities are set forth in a Management Agreement, as described below.

The Company was formed with the intention of becoming the leading provider of business services to dental practices in Colorado. The Company’s growth and success in the Colorado market led to its expansion into the New Mexico and Arizona markets. The Company’s growth strategy is to focus on greater utilization of existing physical capacity through recruiting more dentists and support staff and through development of de novo Offices and selective acquisitions.

During the first quarter of 2017, the Company consolidated the dental services of one of its Fort Collins, Colorado Offices into another Office and subsequently closed the first Office.

Recent Developments

As previously disclosed, beginning in May 2016, an activist shareholder group led by a former officer of the Company began making a series of public disclosures critical of the Company, its Board of Directors and management. These included disclosures regarding private communications between the Company and its Board of Directors and themselves and between the Company and certain other parties that have expressed an interest in the Company. The shareholder group also threatened to take certain actions against the Company and its Board of Directors.  In March 2017, the activist shareholder group, including several additional parties, filed a Schedule 13D with the SEC disclosing that it jointly held beneficial ownership of approximately 31.1% of the Company’s Common Stock.  As described in the Schedule 13D filing, the activist shareholder group has delivered a letter to the Company seeking (i) to nominate a Class II director to the Company’s Board of Directors, (ii) to make proposals to amend certain provisions of the Company’s articles of incorporation and bylaws, including a proposal to increase the size of the Company’s Board of Directors to ten directors, and (iii) to nominate directors to fill the five new directorships proposed by the activist shareholder group.

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As previously disclosed, the Company has expressed concerns that the matters involving the activist shareholder group were highly distracting to the management and employees of the Company and may be adversely affecting its business and results of operations.  Additionally, the Company incurred additional expenses of approximately $300,000 during the last 12 months in connection with matters related to the activist shareholder group and the Board of Directors’ ongoing evaluation of the Company’s strategic options.  The Company expects to continue to incur expenses of the kind described in this paragraph, including expenses related to the activist shareholder group’s most recent Schedule 13D filing, during the six months ended June 30, 2017 and possibly in subsequent quarters.

On May 9, 2017, the Company reached a mutual settlement agreement with the activist shareholder group  to end a potential proxy contest related to the Company’s 2017 annual meeting of shareholders in connection with the matters described in the shareholder group’s Schedule 13D. Under the terms of the settlement agreement, the Company will nominate John M. Climaco and Gregory G. Fulton for election to its Board of Directors at the 2017 annual meeting, along with incumbent director Brooks G. O’Neil. As part of the settlement agreement, the shareholder group has agreed to withdraw its proposals for the annual meeting and to vote in favor of the above slate of director nominees at the 2017 annual meeting. In addition, the shareholder group has agreed to a standstill that generally extends until the later of the 2018 annual meeting of shareholders and the date that neither Mr. Climaco nor Mr. Fulton serves on the Board of Directors, except that the shareholder group may propose nominees for director for the 2018 annual meeting in accordance with the Company’s bylaws.

As previously disclosed, as part of the Board of Directors’ ongoing evaluation of the Company’s strategic options, the Company engaged an investment banking firm with significant experience in the Company’s industry as its financial advisor in 2016.  The Board has been closely monitoring the Company’s financial performance, assessing the Company’s strategic options and carefully considering expressions of interest in the Company.  In order to help facilitate a re-doubled focus on improved operations, the Company discontinued the strategic assessment begun in the second quarter of 2016.

Despite challenging comparisons of the quarter ended March 31, 2017 to the same quarter in 2016, the Company believes there are meaningful signs of progress.  Management and the Board of Directors are intensely focused on reversing the negative trends in the Company’s results of operations and have taken a number of actions in to accomplish this objective.

Related in part to the factors noted previously, the Company believes much of the decline in revenue and earnings before interest, taxes, depreciation, amortization and stock-based compensation expense (“Adjusted EBITDA”) has been driven by a decrease in the number of dentists in the network from 116 dentists as of December 31, 2015 to a low of 98 dentists at September 30, 2016.  Two significant steps have been taken to reverse this adverse trend.

In late September 2016, the Company hired a new, fully dedicated dentist recruiter to replace the previous recruiter.  As shown in the table below, the Company believes the new recruiter is making progress in increasing its number of dentists.  On January 30, 2017, the Company also added a highly experienced Chief Dental Officer to work directly with its network dentists in their offices, which the Company believes will help reduce dentist turnover, improve dentist performance and enhance dentist recruitment going forward.   The early results of this effort have been sufficiently encouraging that the Company has begun to work with an additional experienced dentist on a part time consulting basis to further improve retention and productivity.  In addition, the Company has begun to offer equity buy-in opportunities for dentists, which it believes will also aid in recruiting and retaining dentists and reducing dentist turnover.

	Dentist Count
Date		Total
12/31/2015		116
3/31/2016		112
6/30/2016		102
9/30/2016		98
12/31/2016		98
3/31/2017		102

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Management is also continuously seeking to reduce expenses and, on February 1, 2017, the Company’s Chief Executive Officer, Chief Financial Officer and outside directors all took 20 percent reductions in base salary and director fees, respectively, amounting to approximately $175,000 in annual expense savings.  Additionally, one of the Company’s two offices in Fort Collins, Colorado that had negative Adjusted EBITDA of $78,000 in 2016 was consolidated with a newer second office at the end of January 2017.  The Company is considering other actions to reduce expenses and improve profitability.  Although corporate general and administrative expenses increased by $83,000 in the three months ended March 31, 2017 compared to the three months ended March 31, 2016, this increase was caused by an increase of $135,000 in professional fees primarily related to matters involving the activist shareholder group and the Board of Directors’ ongoing evaluation of the Company’s strategic options, As discussed above, the Company reached a mutual settlement agreement with the activist shareholder group on May 9, 2017, and the strategic assessment has been discontinued to enable the Company to focus on ongoing operations.

In January 2016, the Company started the process of credentialing some of its Offices for Medicaid, a revenue source that the Company had not previously accessed.  As of March 31, 2017, the Company had 28 Offices credentialed for Medicaid in Colorado and 4 Offices credentialed for Medicaid in New Mexico.  Revenue from Medicaid accounted for 1.1% of the Company’s revenue in 2016.  Revenue from Medicaid accounted for 2.9% of the Company’s revenue in the quarter ended March 31, 2017.  The Company expects revenue from Medicaid to increase in 2017.

Critical Accounting Policies

The Company’s critical accounting policies are set forth in its Annual Report on Form 10-K for the year ended December 31, 2016.  There have been no significant changes to these policies since the filing of that report.

Components of Revenue and Expenses

Revenue represents the revenue of the Offices, reported at estimated realizable amounts, received from third-party payors and patients for dental services rendered at the Offices, net of contractual and other adjustments.  Substantially all of the Company’s patients are insured under third-party payor agreements.  The Company’s billing system generates contractual adjustments for each patient encounter based on fee schedules for the patient’s insurance plan.  The services provided are attached to the patient’s fee schedule based on the insurance the patient has at the time the service is provided.  Therefore, the revenue that is recorded by the billing system is based on insurance contractual amounts.  Additionally, each patient at the time of service signs a form agreeing that the patient is ultimately responsible for the contracted fee if the insurance company does not pay the fee for any reason.

Direct expenses consist of clinical salaries and benefits paid to dentists, dental hygienists and dental assistants and the expenses incurred by the Company in connection with managing the Offices, including salaries and benefits of other employees at the Offices, supplies, laboratory fees, occupancy costs, advertising and marketing, depreciation and amortization and general and administrative expenses (including office supplies, equipment leases, management information systems and other expenses related to dental practice operations). The Company also incurs personnel and administrative expenses in connection with maintaining a corporate function that provides management, administrative, marketing, development and professional services to the Offices.

Under each of the Management Agreements, the Company provides business and marketing services at the Offices, including (i) providing capital, (ii) designing and implementing advertising and marketing programs, (iii) negotiating for the purchase of supplies, (iv) staffing, (v) recruiting, (vi) training of non-dental personnel, (vii) billing and collecting patient fees, (viii) arranging for certain legal and accounting services and (ix) negotiating with managed care organizations. The P.C. is responsible for, among other things, (i) supervision of all dentists, dental hygienists and dental assistants, (ii) complying with all laws, rules and regulations relating to dentists, dental hygienists and dental assistants and (iii) maintaining proper patient records. The Company has made, and intends to make in the future, loans to P.C.s to fund their acquisition of dental assets from third parties in order to comply with state dental practice laws.  Because the Company’s financial statements are consolidated with the financial statements of the P.C.s, these loans are eliminated in consolidation.

Under the typical Management Agreement, the P.C. pays the Company a management fee equal to the Adjusted Gross Center Revenue of the P.C. less compensation paid to the dentists, dental hygienists and dental assistants employed at the Office of the P.C.  Adjusted Gross Center Revenue is comprised of all fees and charges booked each month by or on behalf of the P.C. as a result of dental services provided to patients at the Office, less any adjustments for uncollectible accounts, professional courtesies and other activities that do not generate a collectible fee. The Company’s costs include all direct and indirect costs, overhead and expenses relating to the Company’s provision of management services to the Office under the Management Agreement, including (i) salaries, benefits and other direct costs of Company employees who work at the Office, (ii) direct costs of all Company employees or consultants who provide services to or in connection with the Office, (iii) utilities, janitorial, laboratory, supplies, advertising and other expenses incurred by the Company in carrying out its obligations under the Management Agreement, (iv) depreciation expense associated with the P.C.’s assets and the assets of the Company used at the Office, and the amortization of intangible asset value relating to the Office, (v) interest expense on indebtedness incurred by the Company to finance any of its obligations under the Management Agreement, (vi) general and malpractice insurance expenses, lease expenses and dentist recruitment expenses, (vii) personal property and other taxes assessed on the Company’s or the P.C.’s assets used in connection with the operation of the Office, (viii) out-of-pocket expenses of the Company’s personnel related to mergers or acquisitions involving the P.C., (ix) corporate overhead charges or any other expenses of the Company including the P.C.’s pro rata share of the expenses of the accounting and computer services provided by the Company, and (x) a collection reserve in the amount of 5.0% of Adjusted Gross Center Revenue. As a result, substantially all costs associated with the provision of dental services at the Office are borne by the Company, except for the compensation of the dentists, dental hygienists and dental assistants who work at the Office.  This enables the Company to manage the profitability of the Offices.  Each Management Agreement is for a term of 40 years.  Each Management Agreement generally may be terminated by the P.C. only for cause, which includes a material default by or bankruptcy of the Company. Upon expiration or termination of a Management Agreement by either party, the P.C. must satisfy all obligations it has to the Company.

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Revenue is derived principally from fee-for-service revenue and revenue from capitated managed dental care plans. Fee-for-service revenue consists of P.C. revenue received from indemnity dental plans, preferred provider plans and direct payments by patients not covered by any third-party payment arrangement. Managed dental care revenue consists of P.C. revenue received from capitated managed dental care plans, including capitation payments and patient co-payments. Capitated managed dental care contracts are between dental benefits organizations and the P.C.s. Under the Management Agreements, the Company negotiates and administers these contracts on behalf of the P.C.s. Under a capitated managed dental care contract, the dental group practice provides dental services to the members of the dental benefits organization and receives a fixed monthly capitation payment for each plan member covered for a specific schedule of services regardless of the quantity or cost of services to the participating dental group practice obligated to provide them. This arrangement shifts the risk of utilization of these services to the dental group practice providing the dental services. Because the Company assumes responsibility under the Management Agreements for all aspects of the operation of the dental practices (other than the practice of dentistry) and thus bears all costs of the P.C.s associated with the provision of dental services at the Office (other than compensation of dentists, dental hygienists and dental assistants), the risk of over-utilization of dental services at the Office under capitated managed dental care plans is effectively shifted to the Company. In addition, dental group practices participating in a capitated managed dental care plan often receive supplemental payments for more complicated or elective procedures. In contrast, under traditional indemnity insurance arrangements, the insurance company pays whatever reasonable charges are billed by the dental group practice for the dental services provided. 

The Company seeks to increase its revenue by increasing the patient volume at existing Offices through effective advertising and marketing programs and by adding additional specialty services.  The Company also seeks to increase revenue by opening de novo Offices and by making selective acquisitions of dental practices.  The Company seeks to supplement fee-for-service revenue with revenue from contracts with capitated managed dental care plans. Although the Company’s fee-for-service business generally provides a greater margin than its capitated managed dental care business, capitated managed dental care business increases facility utilization and dentist productivity.  The relative percentage of the Company’s revenue derived from fee-for-service business and capitated managed dental care contracts varies from market to market depending on the availability of capitated managed dental care contracts in any particular market and the Company’s ability to negotiate favorable contractual terms. In addition, the profitability of capitated managed dental care revenue varies from market to market depending on the level of capitation payments and co-payments in proportion to the level of benefits required to be provided.

The Company’s policy is to collect any patient co-payments at the time the service is provided.  If the patient owes additional amounts that are not covered by insurance, Offices collect by sending monthly invoices, placing phone calls and sending collection letters.  Interest at 18% per annum is charged on all account balances greater than 90 days old.  Patient accounts receivable that are over 120 days past due and that appear to not be collectible are written off as bad debt, and those in excess of $100 are sent to an outside collections agency.

Results of Operations

For the quarter ended March 31, 2017, revenue decreased $771,000, or 4.7%, to $15.7 million compared to $16.4 million for the quarter ended March 31, 2016.  For the quarter ended March 31, 2017, net loss increased $125,000 to $(225,000), or $(.12) per share, compared to $(100,000), or $(0.05) per share, for the quarter ended March 31, 2016.

During the quarter ended March 31, 2017, the Company generated $854,000 of cash from operations.  During this period, the Company had capital expenditures of approximately $156,000.

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The Company’s Adjusted EBITDA decreased $227,000, or 22.7%, to $777,000 for the quarter ended March 31, 2017 compared to $1.0 million for the quarter ended March 31, 2016.  Although Adjusted EBITDA is not a GAAP measure of performance or liquidity, the Company believes that it may be useful to an investor in evaluating the Company’s ability to meet future debt service, capital expenditures and working capital requirements. However, investors should not consider this measure in isolation or as a substitute for operating income, cash flows from operating activities or any other measure for determining the Company’s operating performance or liquidity that is calculated in accordance with GAAP. In addition, because Adjusted EBITDA is not calculated in accordance with GAAP, it may not necessarily be comparable to similarly titled measures employed by other companies. A reconciliation of Adjusted EBITDA to net loss is made by adding depreciation and amortization expense - Offices, depreciation and amortization expense – Corporate, stock-based compensation expense, interest expense, net and income tax benefit to net loss as in the following table:

	Quarters Ended March 31,
	2016			2017
RECONCILIATION OF ADJUSTED EBITDA:
Net loss	$	(100,410	)	$	(225,059	)
Add back:
Depreciation and amortization - Offices		1,020,091			964,802
Depreciation and amortization - Corporate		62,799			46,084
Stock-based compensation expense		46,707			35,236
Interest expense, net		39,323			72,423
Income tax benefit		(64,198	)		(116,663	)
Adjusted EBITDA	$	1,004,312		$	776,823

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The following table sets forth the percentages of revenue represented by certain items reflected in the Company’s condensed consolidated statements of operations. The information contained in the following table represents the historical results of the Company. The information that follows should be read in conjunction with the Company’s condensed consolidated financial statements and related notes thereto contained elsewhere in this report.  Percentage amounts may not add due to rounding.

BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Quarters Ended March 31,
	2016				2017
Revenue		100.0	%			100.0	%
Direct Expenses:
Clinical salaries and benefits		60.1	%			60.4	%
Dental supplies		4.4	%			4.0	%
Laboratory fees		5.3	%			5.6	%
Occupancy		9.5	%			9.9	%
Advertising and marketing		1.0	%			1.1	%
Depreciation and amortization		6.2	%			6.2	%
General and administrative		8.5	%			8.1	%
		95.0	%			95.3	%
Contribution from dental offices		5.0	%			4.7	%
Corporate Expenses:
General and administrative		5.3	%	(1)		6.1	%	(1)
Depreciation and amortization		0.4	%			0.3	%
Operating loss		( 0.8	)%			( 1.7	)%
Interest expense		0.2	%			0.5	%
Loss before income taxes		( 1.0	)%			( 2.2	)%
Income tax benefit		( 0.4	)%			( 0.7	)%
Net loss		( 0.6	)%			( 1.4	)%

⁽¹⁾ Corporate expenses - general and administrative includes $46,707 and $35,236 of stock-based compensation expense pursuant to ASC Topic 718 for the quarters ended March 31, 2016 and 2017, respectively.

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Quarter Ended March 31, 2017 Compared to Quarter Ended March 31, 2016:

Revenue

For the quarter ended March 31, 2017, revenue decreased $771,000, or 4.7%, to $15.7 million compared to $16.4 million for the quarter ended March 31, 2016.  The Company outlines the factors that it believes contributed to the decrease in revenue in “Recent Developments” above.  One de novo Office, which opened during the first quarter of 2016, accounted for an increase of $33,000 in revenue during the quarter ended March 31, 2017 compared to the quarter ended March 31, 2016.

Direct expenses

Clinical salaries and benefits. For the quarter ended March 31, 2017, clinical salaries and benefits decreased $405,000, or 4.1%, to $9.5 million compared to $9.9 million for the quarter ended March 31, 2016.  Clinical salaries decreased $413,000 at the 67 Offices open during each full quarter primarily due to the lower dentist count in the quarter ended March 31, 2017.  This $413,000 decrease in clinical salaries and benefits is net of an increase of $77,000 in salaries and benefits for the quarter ended March 31, 2017 compared to the quarter ended March 31, 2016 as the Company builds a centralized insurance accounts receivable and patient scheduling team.  The de novo Office accounted for an offsetting  $9,000 increase in clinical salaries and benefits during the quarter ended March 31, 2017.  As a percentage of revenue, clinical salaries and benefits increased to 60.4% for the quarter ended March 31, 2017 compared to 60.1% for the quarter ended March 31, 2016.

Dental supplies. For the quarter ended March 31, 2017, dental supplies decreased to $628,000 compared to $725,000 for the quarter ended March 31, 2016, a decrease of $97,000, or 13.4%.  This decrease is directly related to the decrease in revenue during the quarter ended March 31, 2017.  For the 67 Offices open during each full quarter, there were decreases of $41,000 in general dental supplies, $28,000 in specialty dental supplies and $23,000 in hygiene dental supplies.  The de novo Office accounted for a decrease of $5,000 of dental supplies during the quarter ended March 31, 2017.  As a percentage of revenue, dental supplies decreased to 4.0% for the quarter ended March 31, 2017 compared to 4.4% for the quarter ended March 31, 2016.

Laboratory fees. For the quarter ended March 31, 2017, laboratory fees increased to $881,000 compared to $872,000 for the quarter ended March 31, 2016, an increase of $10,000, or 1.1%.  Laboratory fees increased $7,000 at the 67 Offices open during each full quarter.  The de novo Office accounted for $3,000 of the increased laboratory fees during the quarter ended March 31, 2017.  The increase in laboratory fees is attributable to increases in surgically placed dental implants.  As a percentage of revenue, laboratory fees increased to 5.6% for the quarter ended March 31, 2017 compared to 5.3% for the quarter ended March 31, 2016.

Occupancy. For the quarter ended March 31, 2017, occupancy expense decreased $17,000, or 1.1%, to $1.6 million compared to the quarter ended March 31, 2016.  Because of higher expenses in the quarter ended March 31, 2016 related to the opening of the de novo Office, the de novo Office accounted for a decrease of $48,000 of occupancy expense during the quarter ended March 31, 2017 while occupancy expense increased $31,000 at the 67 Offices open during each full quarter.  As a percentage of revenue, occupancy expense increased to 9.9% for the quarter ended March 31, 2017 compared to 9.5% for the quarter ended March 31, 2016.

Advertising and marketing. For the quarter ended March 31, 2017, advertising and marketing expenses increased to $170,000 compared to $159,000 for the quarter ended March 31, 2016, an increase of $11,000, or 6.9%.  Advertising and marketing expenses increased $18,000 at the 67 Offices open during each full quarter while the de novo Office accounted for a decrease of $7,000 of advertising and marketing expenses during the quarter ended March 31, 2017.  The increase in advertising and marketing expenses is attributable to an increase in internet and social media advertising.  As a percentage of revenue, advertising and marketing expenses increased to 1.1% for the quarter ended March 31, 2017 compared to 1.0% for the quarter ended March 31, 2016.  The Company regularly adjusts its advertising and marketing expenditures in response to market conditions and performance in individual markets.

Depreciation and amortization-Offices.  For the quarter ended March 31, 2017, depreciation and amortization expenses attributable to the Offices decreased to $965,000 compared to $1.0 million for the quarter ended March 31, 2016, a decrease of $55,000, or 5.4%.  There was a decrease of $56,000 in depreciation and amortization expenses attributable to the 67 Offices open during each full quarter.  Additionally, the de novo Office accounted for $1,000 of depreciation and amortization expenses attributable to the Offices during the quarter ended March 31, 2017.  As a percentage of revenue, depreciation and amortization expenses attributable to the Offices remained constant at 6.2% for the quarters ended March 31, 2017 and 2016.

21

General and administrative-Offices.  For the quarter ended March 31, 2017, general and administrative expenses attributable to the Offices decreased to $1.3 million compared to $1.4 million for the quarter ended March 31, 2016, a decrease of $140,000, or 9.9%.  The decrease in general and administrative expenses is attributable to decreases of $75,000 in bad debt expense, $24,000 in taxes and $18,000 in equipment repairs and maintenance expenses at the 67 Offices open during each full quarter.  The de novo Office accounted for a decrease of $28,000 of general and administrative expenses during the quarter ended March 31, 2017.  As a percentage of revenue, general and administrative expenses decreased to 8.1% for the quarter ended March 31, 2017 compared to 8.5% for the quarter ended March 31, 2016.

Contribution from dental Offices

As a result of revenue decreasing $771,000 and direct expenses decreasing $692,000 during the quarter ended March 31, 2017, contribution from dental Offices decreased $78,000, or 9.6%, to $736,000 for the quarter ended March 31, 2017 compared to $814,000 for the quarter ended March 31, 2016.  As a percentage of revenue, contribution from dental Offices decreased to 4.7% for the quarter ended March 31, 2017 compared to 5.0% for the quarter ended March 31, 2016.

Corporate expenses

Corporate expenses - general and administrative. For the quarter ended March 31, 2017, corporate expenses – general and administrative increased to $959,000 compared to $877,000 for the quarter ended March 31, 2016, an increase of $83,000, or 9.4%.  This increase is attributable to an increase of $135,000 in professional fees primarily related to matters involving the activist shareholder group and the Board of Directors’ ongoing evaluation of the Company’s strategic options, as discussed in “Recent Developments” above, offset by a decrease of $62,000 in health insurance.    As a percentage of revenue, corporate expenses - general and administrative increased to 6.1% for the quarter ended March 31, 2017 compared to 5.3% for the quarter ended March 31, 2016.

Corporate expenses - depreciation and amortization. For the quarter ended March 31, 2017, corporate expenses - depreciation and amortization decreased to $46,000 compared to $63,000 for the quarter ended March 31, 2016, a decrease of $17,000, or 26.6%.  As a percentage of revenue, corporate expenses – depreciation and amortization decreased to 0.3% for the quarter ended March 31, 2017 compared to 0.4% for the quarter ended March 31, 2016.

Operating loss

As a result of the matters discussed above, the Company’s operating loss increased by $144,000 to $(269,000) for the quarter ended March 31, 2017 compared to $(125,000) for the quarter ended March 31, 2016.  As a percentage of revenue, operating loss increased to (1.7%) for the quarter ended March 31, 2017 compared to (0.8%) for the quarter ended March 31, 2016.

Interest expense, net

For the quarter ended March 31, 2017, interest expense, net increased to $72,000 compared to $39,000 for the quarter ended March 31, 2016, an increase of $33,000, or 84.2%.  This increase in interest expense, net was caused by a higher interest rate on the Credit Facility.  As a percentage of revenue, interest expense increased to 0.5% for the quarter ended March 31, 2017 compared to 0.2% for the quarter ended March 31, 2016.

Net loss

As a result of the above, the Company’s net loss was $(225,000) for the quarter ended March 31, 2017 compared to $(100,000) for the quarter ended March 31, 2016, an increase of $125,000, or 124.1%.  Net loss for the quarter ended March 31, 2017 was net of income tax benefit of $(117,000), while net loss for the quarter ended March 31, 2016 was net of income tax benefit of $(64,000).  The effective tax rate for the quarter ended March 31, 2017 was 34.1%, while the effective tax rate for the quarter ended March 31, 2016 was 39.0%.  As a percentage of revenue, net loss increased to (1.4%) for the quarter ended March 31, 2017 compared to (0.6%) for the quarter ended March 31, 2016.

Liquidity and Capital Resources

The Company finances its operations and growth through a combination of cash provided by operating activities and bank credit facilities.  As of March 31, 2017, the Company had a working capital deficit of approximately $5.2 million, accumulated deficit of $1.4 million and a cash balance of $209,000.

22

On March 29, 2016, the Company entered into a Loan and Security Agreement with Guaranty Bank and Trust Company (“the Bank”), which was subsequently amended, most recently on March 30, 2017 (as amended, the “Credit Facility”).  The Credit Facility initially consisted of a $2.0 million revolving line of credit and a $10.0 million reducing revolving loan.  The revolving line of credit matures on March 31, 2018.  As amended by the March 2017 amendment, the revolving line of credit commitment reduces in four $300,000 increments during 2017 through maturity from $2.0 million to $800,000.  The reducing revolving loan matures on March 31, 2021 and requires mandatory reductions of $500,000 per calendar quarter, with a further reduction on April 30, 2018 equal to the product of (i) 50% multiplied by (ii) EBITDA for 2017 minus capital expenditures for 2017, interest payments on the Credit Facility paid in 2017, $2.0 million, and cash taxes paid during 2017.  The reducing revolving loan allows the Company to drawdown, repay and re-draw loans advanced to it within the available balance.  Interest varies between LIBOR plus 3.10% and LIBOR plus 3.75% depending on the Company’s funded debt-to-EBITDA ratio.  As of March 31, 2017, the revolving line of credit rate was 4.73% and the reducing revolving loan rate was 4.73%.  At March 31, 2017, the Company had approximately $1.3 million of borrowings outstanding under the revolving line of credit and approximately $716,000 available for borrowing under the revolving line of credit.  At March 31, 2017, the Company had $8.0 million of borrowings outstanding under the reducing revolving loan.  The Credit Facility is collateralized by substantially all of the assets of the Company.  As amended by the March 2017 amendment, the Credit Facility requires the Company to maintain (i) a funded debt-to-EBITDA ratio of no more than 2.5 to 1.00 for the twelve months ending December 31, 2017 and thereafter, (ii) a fixed charge coverage ratio for the immediately preceding twelve months of not less than 1.25 to 1.00 for the quarter ending December 31, 2017 and each quarter thereafter, and (iii) to generate at least $870,000 of EBITDA in each of the first three quarters of 2017.

As disclosed in “Recent Developments”, the Company decided to discontinue the strategic assessment begun in the second quarter of 2016 and as a result incurred $104,000 in expenses associated with this strategic assessment in the first quarter of 2017.  When the Credit Facility was amended in March 2017, the Bank agreed to exclude up to $120,000 of such expenses in determining compliance with the Credit Facility EBITDA covenant for each of the first three quarters of 2017.  Therefore, for purposes of determining compliance with the Credit Facility EBITDA covenant in the first quarter of 2017, the Company generated $881,000 in EBITDA and was in compliance with EBITDA covenant as of March 31, 2017.  The Company also was in compliance with the other amended Credit Facility covenants as of March 31, 2017.  In addition, capital expenditures may not exceed $180,000 per quarter.  After entering into the Credit Facility in March 2016, dividends and stock repurchases were prohibited under the Credit Facility and, as a result of the March 2017 amendment to the Credit Facility, dividends and stock repurchases currently are not permitted under the Credit Facility.

The March 2017 amendment to the Credit Facility also included a forbearance by the Bank regarding covenant defaults by the Company as of December 31, 2016 with respect to the then-existing funded debt-to-EBITDA ratio of no more than 3.15 to 1.00 for the twelve months ended December 31, 2016, fixed charge coverage ratio of at least 1.35 to 1.00 for the quarter ended December 31, 2016 and EBITDA of at least $650,000 for the quarter ended December 31, 2016.  The forbearance remains in effect provided that the Company complies with the amended Credit Facility covenants.  There can be no assurances that the Bank will not change the terms of the Credit Facility or cease to forbear or continue to extend credit to the Company.  Any such actions or failure by the Company to maintain compliance with the Credit Facility in the future could have a material adverse effect on the Company.

Net cash provided by operating activities was approximately $854,000 and $14,000 for the quarters ended March 31, 2017 and 2016, respectively.  During the quarter ended March 31, 2017, excluding net loss and after adding back non-cash items, the Company’s cash provided by operating activities consisted primarily of increases of approximately $775,000 in accounts payable and accrued expenses, $122,000 in income taxes payable and $24,000 in prepaid expenses and other assets, offset by an increase in accounts receivable of approximately $797,000.  During the quarter ended March 31, 2016, excluding net loss and after adding back non-cash items, the Company’s cash provided by operating activities consisted primarily of increases of approximately $225,000 in income taxes payable and $87,000 in other long-term obligations, offset by an increase in accounts receivable of approximately $674,000, a decrease in accounts payable and accrued expenses of approximately $460,000 and an increase in prepaid expenses and other assets of approximately $224,000.

Net cash used in investing activities was approximately $148,000 and $239,000 for the quarters ended March 31, 2017 and 2016, respectively.  For the quarter ended March 31, 2017, the Company invested approximately $156,000 in capital expenditures, offset by a decrease in a note receivable of $8,000.  For the quarter ended March 31, 2016, the Company invested approximately $246,000 in capital expenditures, including approximately $121,000 for a de novo Office that opened during the first quarter of 2016 and $56,000 related to one Office that was converted to digital radiography, offset by a decrease in a note receivable of $7,000.

23

Net cash used in financing activities was approximately $655,000 for the quarter ended March 31, 2017 and net cash provided by financing activities was approximately $492,000 for the quarter ended March 31, 2016.  During the quarter ended March 31, 2017, net cash used in financing activities was comprised of approximately $655,000 used to pay down the Credit Facility.  During the quarter ended March 31, 2016, net cash provided by financing activities was comprised of approximately $910,000  in net advances under the Credit Facility after giving effect to the repayment of the Compass Bank credit facility, offset by approximately $409,000 for the payment of dividends.  Partially contributing to the net advances under the new Credit Facility was a requirement that the Company leave excess cash at Compass Bank to satisfy outstanding checks. 

As of March 31, 2017, the Company had the following debt and lease obligations:

			Payments due by Period
	Total		1 year		2-3 years		4-5 years		More than 5 years
Debt obligations	$	9,196,307	$	3,284,195	$	4,000,000	$	1,912,112	$	-
Operating lease obligations		16,575,952		4,266,111		6,815,588		3,476,495		2,017,758
Total	$	25,772,259	$	7,550,306	$	10,815,588	$	5,388,607	$	2,017,758

The Company has historically operated with negative working capital and has been able to meet its current obligations as a result of strong operating cash flows and availability on its revolving lines of credit.  Recent decreases in operating cash flows have led the Company to take certain actions, which are described in “Recent Developments” and “Results of Operations” above.  The Company believes that cash generated from operations and borrowings under its Credit Facility will be sufficient to fund its anticipated working capital needs and capital expenditures for at least the next 12 months.  In order to meet its long-term liquidity needs, the Company may need to issue additional equity or debt securities or engage in other borrowings or financing activities, subject to market and other conditions.  There can be no assurance that such additional financing will be available on terms acceptable to the Company or at all. The failure to raise the funds necessary to finance its future cash requirements could adversely affect the Company’s ability to pursue its strategy and could negatively affect its operations in future periods.

ITEM 4.  CONTROLS AND PROCEDURES

Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, the Company evaluated the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, or the “Exchange Act”) as of March 31, 2017.  On the basis of this review, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2017.

There has been no change in the Company’s internal control over financial reporting during the three months ended March 31, 2017 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

24

PART II.  OTHER INFORMATION

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

The Company did not purchase any shares of its Common Stock during the period January 1, 2017 through March 31, 2017.  The Company’s stock repurchase program has been ongoing for more than ten years and there is no expiration date for the program.  Common Stock repurchases may be made from time to time as the Company’s management deems appropriate.  As of March 31, 2017, the dollar value of shares that may be purchased under the stock repurchase program was approximately $876,000.  In March 2016, the Company entered into the Credit Facility.  Through the remainder of 2016, Common Stock repurchases were prohibited under the Credit Facility and, as a result of the March 2017 amendment to the Credit Facility, Common Stock repurchases are not currently permitted under the Credit Facility.

25

ITEM 6.   EXHIBITS

Exhibit Number	Description of Document
3.1	Amended and Restated Articles of Incorporation, incorporated herein by reference to Exhibits 3.1 and 3.2 to the Company’s Registration Statement on Form S-1 (SEC File No. 333-36391), as filed with the Securities and Exchange Commission on September 25, 1997.
3.2	Amended and Restated Bylaws, incorporated herein by reference to Exhibit 3.3 to the Company’s Registration Statement on Form S-1 (SEC File No. 333-36391), as filed with the Securities and Exchange Commission on September 25, 1997.
4.1	Reference is made to Exhibits 3.1 and 3.2.
4.2	Specimen Stock Certificate, incorporated herein by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-1/A (SEC File No. 333-36391), as filed with the Securities and Exchange Commission on November 25, 1997.
10.1	Fourth Amendment to Loan and Security Agreement and Forbearance Agreement, dated as of March 30, 2017, between the Company and Guaranty Bank and Trust Company, incorporated by reference to Exhibit 10.49 to the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on March 31, 2017.
31.1	Rule 13a-14(a) Certification of the Chief Executive Officer.
31.2	Rule 13a-14(a) Certification of the Chief Financial Officer.
32.1*	Section 1350 Certifications of the Chief Executive Officer and the Chief Financial Officer.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

* Furnished herewith.

26

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	BIRNER DENTAL MANAGEMENT SERVICES, INC.
Date:  May 12, 2017	By:	/s/ Frederic W.J. Birner
	Name:	Frederic W.J. Birner
	Title:	Chairman of the Board and Chief Executive Officer
		(Principal Executive Officer)

Date:May 12, 2017	By:	/s/ Dennis N. Genty
	Name:	Dennis N. Genty
	Title:	Chief Financial Officer, Secretary, and Treasurer
		(Principal Financial and Accounting Officer)

27

Index of Exhibits

Exhibit Number	Description of Document
3.1	Amended and Restated Articles of Incorporation, incorporated herein by reference to Exhibits 3.1 and 3.2 to the Company’s Registration Statement on Form S-1 (SEC File No. 333-36391), as filed with the Securities and Exchange Commission on September 25, 1997.
3.2	Amended and Restated Bylaws, incorporated herein by reference to Exhibit 3.3 to the Company’s Registration Statement on Form S-1 (SEC File No. 333-36391), as filed with the Securities and Exchange Commission on September 25, 1997.
4.1	Reference is made to Exhibits 3.1 and 3.2.
4.2	Specimen Stock Certificate, incorporated herein by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-1/A (SEC File No. 333-36391), as filed with the Securities and Exchange Commission on November 25, 1997.
10.1	Fourth Amendment to Loan and Security Agreement and Forbearance Agreement, dated as of March 30, 2017, between the Company and Guaranty Bank and Trust Company, incorporated by reference to Exhibit 10.49 to the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on March 31, 2017.
31.1	Rule 13a-14(a) Certification of the Chief Executive Officer.
31.2	Rule 13a-14(a) Certification of the Chief Financial Officer.
32.1*	Section 1350 Certifications of the Chief Executive Officer and the Chief Financial Officer.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

* Furnished herewith.

28

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Frederic W.J. Birner, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Birner Dental Management Services, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

May 12, 2017	By:	/s/ Frederic W.J. Birner
	Name:	Frederic W.J. Birner
	Title:	Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Dennis N. Genty, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Birner Dental Management Services, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

May 12, 2017	By:	/s/ Dennis N. Genty
	Name:	Dennis N. Genty
	Title:	Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATIONS PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

(18 U.S.C. SECTION 1350)

In connection with the Quarterly Report on Form 10-Q of Birner Dental Management Services, Inc., a Colorado corporation (the “Company”), for the quarter ended March 31, 2017, as filed with the Securities and Exchange Commission (the “Report”), the undersigned, who are the Chief Executive Officer and the Chief Financial Officer of the Company, respectively, do each hereby certify, pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350), that to his knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m, or 78o(d)); and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:	May 12, 2017
By:	/s/ Frederic W.J. Birner
Name:	Frederic W.J. Birner
Title:	Chief Executive Officer
By:	/s/ Dennis N. Genty
Name:	Dennis N. Genty
Title:	Chief Financial Officer

XML

Document and Entity Information - shares	3 Months Ended
	Mar. 31, 2017	May 02, 2017
Document and Entity Information [Abstract]
Entity Registrant Name	BIRNER DENTAL MANAGEMENT SERVICES INC
Entity Central Index Key	0000948072
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	No
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		1,860,261
Document Fiscal Year Focus	2017
Document Fiscal Period Focus	Q1
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Mar. 31, 2017

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) - USD ($)	Mar. 31, 2017	Dec. 31, 2016
CURRENT ASSETS:
Cash	$ 208,670	$ 157,923
Accounts receivable, net of allowance for doubtful accounts of approximately $410,000 and $410,000, respectively	3,849,498	3,212,190
Note receivable	34,195	34,195
Prepaid expenses and other assets	735,400	759,749
Total current assets	4,827,763	4,164,057
PROPERTY AND EQUIPMENT, net	6,636,109	7,279,436
OTHER NONCURRENT ASSETS:
Intangible assets, net	6,509,476	6,721,084
Deferred charges and other assets	163,991	155,741
Note receivable	23,358	31,051
Total assets	18,160,697	18,351,369
CURRENT LIABILITIES:
Accounts payable	2,861,371	2,723,473
Accrued expenses	1,074,744	925,776
Accrued payroll and related expenses	2,652,495	2,164,758
Income taxes payable	122,042	0
Current maturities of long-term debt	3,284,195	2,500,000
Total current liabilities	9,994,847	8,314,007
LONG-TERM LIABILITIES:
Deferred tax liability, net	935,712	1,174,416
Long-term debt	5,912,112	7,351,006
Other long-term obligations	1,077,564	1,081,655
Total liabilities	17,920,235	17,921,084
SHAREHOLDERS' EQUITY:
Preferred Stock, no par value, 10,000,000 shares authorized; none outstanding	0	0
Common Stock, no par value, 20,000,000 shares authorized; 1,860,261 and 1,860,261 shares issued and outstanding, respectively	1,650,237	1,615,001
Accumulated deficit	(1,409,775)	(1,184,716)
Total shareholders' equity	240,462	430,285
Total liabilities and shareholders' equity	$ 18,160,697	$ 18,351,369

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Parenthetical) - USD ($)	Mar. 31, 2017	Dec. 31, 2016
CURRENT ASSETS:
Allowance for doubtful accounts	$ 410,000	$ 410,000
SHAREHOLDERS' EQUITY:
Preferred Stock, par value (in dollars per share)	$ 0	$ 0
Preferred Stock, authorized (in shares)	10,000,000	10,000,000
Preferred Stock, outstanding (in shares)	0	0
Common Stock, par value (in dollars per share)	$ 0	$ 0
Common Stock, authorized (in shares)	20,000,000	20,000,000
Common Stock, issued (in shares)	1,860,261	1,860,261
Common Stock, outstanding (in shares)	1,860,261	1,860,261

XML

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) - USD ($)		3 Months Ended
		Mar. 31, 2017	Mar. 31, 2016
REVENUE:
Dental practice revenue		$ 14,618,704	$ 15,366,543
Capitation revenue		1,041,976	1,064,690
Total Revenue		15,660,680	16,431,233
DIRECT EXPENSES:
Clinical salaries and benefits		9,466,299	9,870,950
Dental supplies		628,406	725,273
Laboratory fees		881,141	871,615
Occupancy		1,550,259	1,566,805
Advertising and marketing		169,904	158,870
Depreciation and amortization		964,802	1,020,091
General and administrative		1,263,626	1,403,210
Total Direct Expenses		14,924,437	15,616,814
Contribution from dental offices		736,243	814,419
CORPORATE EXPENSES:
General and administrative	[1]	959,458	876,906
Depreciation and amortization		46,084	62,799
OPERATING LOSS		(269,299)	(125,286)
Interest expense, net		72,423	39,322
LOSS BEFORE INCOME TAXES		(341,722)	(164,608)
Income tax benefit		(116,663)	(64,198)
NET LOSS		$ (225,059)	$ (100,410)
Net loss per share of Common Stock - Basic (in dollars per share)		$ (0.12)	$ (0.05)
Net loss per share of Common Stock - Diluted (in dollars per share)		$ (0.12)	$ (0.05)
Weighted average number of shares of Common Stock and dilutive securities:
Basic (in shares)		1,860,261	1,860,482
Diluted (in shares)		1,860,261	1,860,482

[1] Corporate expenses - general and administrative includes $46,707 and $35,236 of stock-based compensation expense pursuant to ASC Topic 718 for the quarters ended March 31, 2016 and 2017, respectively.

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (Parenthetical) - USD ($)	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
General and Administrative Expenses [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Compensation Cost [Line Items]
Stock based compensation expense	$ 35,236	$ 46,707

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CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED) - 3 months ended Mar. 31, 2017 - USD ($)	Common Stock [Member]	Accumulated deficit [Member]	Total
BALANCES at Dec. 31, 2016	$ 1,615,001	$ (1,184,716)	$ 430,285
BALANCES (in shares) at Dec. 31, 2016	1,860,261		1,860,261
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Stock-based compensation expense	$ 35,236	0	$ 35,236
Net loss	0	(225,059)	(225,059)
BALANCES at Mar. 31, 2017	$ 1,650,237	$ (1,409,775)	$ 240,462
BALANCES (in shares) at Mar. 31, 2017	1,860,261		1,860,261

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - USD ($)	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$ (225,059)	$ (100,410)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	1,010,886	1,082,890
Stock-based compensation expense	35,236	46,707
Provision for doubtful accounts	160,010	234,920
Benefit from deferred income taxes	(238,704)	(203,784)
Changes in assets and liabilities:
Accounts receivable	(797,318)	(674,138)
Prepaid expenses and other assets	24,349	(224,092)
Deferred charges and other assets	(8,250)	0
Accounts payable	137,898	(674,586)
Accrued expenses	148,968	(158,318)
Accrued payroll and related expenses	487,737	372,834
Income taxes payable (receivable)	122,042	224,587
Other long-term obligations	(4,091)	87,471
Net cash provided by operating activities	853,704	14,081
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures	(155,951)	(246,248)
Note receivable	7,693	7,247
Net cash used in investing activities	(148,258)	(239,001)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Advances - line of credit	6,339,788	6,761,108
Repayments - line of credit	(5,994,487)	(5,851,088)
Repayments - reducing revolving loan	(1,000,000)	0
Purchase and retirement of Common Stock	0	(8,860)
Common stock cash dividends	0	(409,443)
Net cash provided by (used in) financing activities	(654,699)	491,717
NET CHANGE IN CASH	50,747	266,797
CASH, beginning of period	157,923	258,801
CASH, end of period	208,670	525,598
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest	89,382	50,759
Cash paid for income taxes	0	0
Cash received for income taxes	0	85,000
NON-CASH ITEMS:
Repayments - line of credit with Compass Bank	$ 0	$ 10,617,598

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UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

3 Months Ended

Mar. 31, 2017

UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS [Abstract]

UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The condensed consolidated financial statements included herein are unaudited and have been prepared by Birner Dental Management Services, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures included herein are adequate to make the information presented not misleading. A description of the Company’s accounting policies and other financial information is included in the audited consolidated financial statements as filed with the SEC in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of the Company as of March 31, 2017 and the results of operations and cash flows for the periods presented.  All such adjustments are of a normal recurring nature.  The results of operations for the quarter ended March 31, 2017 are not necessarily indicative of the results that may be achieved for a full fiscal year and cannot be used to indicate financial performance for the entire year.

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LIQUIDITY AND FINANCIAL RESOURCES UPDATE

3 Months Ended

Mar. 31, 2017

LIQUIDITY AND FINANCIAL RESOURCES UPDATE [Abstract]

LIQUIDITY AND FINANCIAL RESOURCES UPDATE

(2) LIQUIDITY AND FINANCIAL RESOURCES UPDATE

The Company has historically operated with negative working capital and has been able to meet its current obligations as a result of strong operating cash flows and availability on its revolving lines of credit.  Recent decreases in operating cash flows have led the Company to take certain actions.  The Company believes that cash generated from operations and borrowings under its Credit Facility will be sufficient to fund its anticipated working capital needs and capital expenditures for at least the next 12 months.  In order to meet its long-term liquidity needs, the Company may need to issue additional equity or debt securities or engage in other borrowings or financing activities, subject to market and other conditions.  There can be no assurance that such additional financing will be available on terms acceptable to the Company or at all. The failure to raise the funds necessary to finance its future cash requirements could adversely affect the Company’s ability to pursue its strategy and could negatively affect its operations in future periods.

In late September 2016, the Company hired a new, fully dedicated dentist recruiter to replace the previous recruiter.  The Company believes the new recruiter is making progress in increasing its number of dentists.  On January 30, 2017, the Company added a highly experienced Chief Dental Officer to work directly with its network dentists in their offices, which the Company believes will help reduce dentist turnover, improve dentist performance and enhance dentist recruitment going forward.  The Company also has begun to work with an additional experienced dentist on a part time consulting basis to further improve retention and productivity.  In addition, the Company has begun to offer equity buy-in opportunities for dentists, which it believes will also aid in recruiting and retaining dentists and reducing dentist turnover.

Management is also continuously seeking to reduce expenses and, on February 1, 2017, the Company’s Chief Executive Officer, Chief Financial Officer and outside directors all took 20 percent reductions in base salary and director fees, respectively, amounting to approximately $175,000 in annual expense savings.  Additionally, one of the Company’s two offices in Fort Collins, Colorado that had negative earnings before interest, taxes, depreciation, amortization and stock-based compensation expense (“Adjusted EBITDA”) of $78,000 in 2016 was consolidated with another newer office at the end of January 2017.  The Company is considering other actions to reduce expenses and improve profitability.

The Company has prepared its business plan for the ensuing twelve months and believes it has sufficient liquidity and financial resources to operate for the ensuing twelve month period.

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SIGNIFICANT ACCOUNTING POLICIES

3 Months Ended

Mar. 31, 2017

SIGNIFICANT ACCOUNTING POLICIES [Abstract]

SIGNIFICANT ACCOUNTING POLICIES

(3) SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation/Basis of Consolidation

The accompanying condensed consolidated financial statements have been prepared on the accrual basis of accounting. These financial statements present the financial position and results of operations of the Company and the dental offices (“Offices”), which are under the control of the Company.  The Offices are organized as professional corporations (“P.C.s”) and the Company provides business services to the Offices under long-term management agreements (the “Management Agreements”).  All intercompany accounts and transactions have been eliminated in the consolidation.

The Company treats Offices as consolidated subsidiaries where it has a long-term and unilateral controlling financial interest over the assets and operations of the Offices. The Company maintains control of substantially all of its Offices via the Management Agreements. The Company is a business service organization and does not engage in the practice of dentistry or the provision of dental hygiene services. These services are provided by licensed professionals. Certain key features of these arrangements either enable the Company at any time and in its sole discretion to cause a change in the shareholder of the P.C. (i.e., ''nominee shareholder'') or allow the Company to vote the shares of stock held by the owner of the P.C. and to elect a majority of the board of directors of the P.C.  The accompanying condensed consolidated statements of operations reflect revenue, which is the amount billed to patients less contractual adjustments. Direct expenses consist of all the expenses incurred in operating the Offices and paid by the Company.  Under the Management Agreements, the Company assumes responsibility for the management of most aspects of the Offices' business (the Company does not engage in the practice of dentistry or the provision of dental hygiene services), including personnel recruitment and training; comprehensive administrative, business and marketing support and advice; and facilities, equipment, and support personnel as required to operate the practices.

The Company prepares its consolidated financial statements in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, which provides for consolidation of variable interest entities (“VIEs”) of which the Company is the primary beneficiary. The Company has concluded that the P.C.s meet the definition of VIEs as defined by this standard and that the Company is the primary beneficiary of these VIEs.  This conclusion was reached because the Company has the power to direct significant activities of the VIEs and the Company is obligated to absorb losses of and/or provide rights to receive benefits from the VIEs.

Revenue

Revenue is generally recognized when services are provided and is reported at estimated net realizable amounts due from insurance companies, preferred provider and health maintenance organizations (i.e., third-party payors) and patients for services rendered, net of contractual and other adjustments.  Dental services are billed and collected by the Company in the name of the Offices.

Revenue under certain third-party payor agreements is subject to audit and retroactive adjustments. To the Company’s knowledge, there are no material claims, disputes or other unsettled matters that exist concerning third-party reimbursements as of March 31, 2017.

Most of the Company’s patients are insured under third-party payor agreements. The Company’s billing system generates contractual adjustments for each patient encounter based on fee schedules for the patient’s insurance plan.  The services provided are attached to the patient’s fee schedule based on the insurance the patient has at the time the service is provided.  Therefore, the revenue that is recorded by the billing system is based on insurance contractual amounts. Additionally, each patient at the time of service signs a form agreeing that the patient is ultimately responsible for the contracted fee if the insurance company does not pay the fee for any reason.

Note Receivable

A note receivable was created as part of a dental Office acquisition, of which approximately $58,000 in principal amount was outstanding at March 31, 2017.  The note has equal monthly principal and interest amortization payments and a maturity date of October 31, 2018.  The note bears interest at 6%, which is accrued monthly.  If the note is uncollectible, an allowance for doubtful accounts will be created.  There was no allowance for doubtful accounts for the note as of March 31, 2017 or December 31, 2016.

.

Intangible Assets

The Company's dental practice acquisitions involve the purchase of tangible and intangible assets and the assumption of certain liabilities of the acquired dental Offices. As part of the purchase price allocation, the Company allocates the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed, based on estimated fair market values. Costs of acquisition in excess of the net estimated fair value of tangible assets acquired and liabilities assumed are allocated to the Management Agreement related to the Office. The Management Agreement represents the Company's right to manage the Offices during the 40-year term of the Management Agreement. The assigned value of the Management Agreement is amortized using the straight-line method over a period of 25 years.  Amortization was approximately $212,000 and $211,000 for the quarters ended March 31, 2017 and 2016, respectively.

The Management Agreements cannot be terminated by a P.C. without cause, consisting primarily of bankruptcy or material default by the Company.

If facts and circumstances indicate that the carrying value of long-lived and intangible assets may be impaired, the Company will perform an evaluation of recoverability. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset will be compared to the asset’s carrying amount to determine if a write-down to market value or discounted cash flow value is required.  There were no impairment write-downs associated with the Company’s long-lived and intangible assets during the quarters ended March 31, 2017 and 2016.

Stock-Based Compensation Expense

The Company recognizes compensation expense on a straight line basis over the requisite service period of the award. Total stock-based compensation expense included in the Company’s condensed consolidated statements of operations for the quarters ended March 31, 2017 and 2016 was approximately $35,000 and $47,000, respectively, related to stock options.  Total stock-based compensation expense was recorded as a component of corporate general and administrative expense.

The Black-Scholes option-pricing model was used to estimate the option fair values. The option-pricing model requires a number of assumptions, of which the most significant are expected stock price volatility, the expected pre-vesting forfeiture rate, expected dividend rate and the expected option term (the amount of time from the grant date until the options are exercised or expire). Expected volatility was calculated based upon actual historical stock price movements over the most recent period ended March 31, 2017 equal to the expected option term. Expected pre-vesting forfeitures were estimated based on historical pre-vesting forfeitures over the most recent period ended March 31, 2017 for the expected option term.

Recent Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606).  This update will establish a comprehensive revenue recognition standard for virtually all industries in GAAP.  ASU 2014-09 will change the amount and timing of revenue and cost recognition, implementation, disclosures and documentation.  In August 2015, the FASB issued ASU No. 2015-14, which deferred the effective date of ASU 2014-09 until annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period.  ASU No. 2014-09 may be adopted under the full retrospective method or simplified transition method.  Entities are permitted to adopt the revenue standard early, beginning with annual reporting periods after December 15, 2016.  The Company plans to adopt ASU 2014-09 beginning January 1, 2018 and it is not expected to have a material effect on its consolidated financial statements. 

In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes.  This update eliminates the current requirement for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet.  Instead, the Company will be required to classify all deferred tax assets and liabilities as noncurrent.  This guidance is effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016.  The Company adopted this guidance and it did not have a material effect on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842).  Under the new guidance, lessees will be required to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months.  ASU 2016-02 is effective for fiscal years beginning after December 15, 2018.  The Company anticipates the adoption of ASU 2016-02 will have a material impact on its consolidated financial statements by increasing both total assets and total liabilities on the balance sheet.

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting.  The objective of the new guidance is to simplify the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification of the statement of cash flows.   ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years.  ASU 2016-09 did not have a material effect on the Company’s consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments.  This update addresses diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows.  The update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice.  The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted.  ASU 2016-15 is not expected to have a material effect on the Company’s consolidated financial statements.

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other than Inventory. The guidance requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The guidance becomes effective for annual reporting periods beginning after December 15, 2017 with early adoption permitted This ASU is required to be adopted using the modified retrospective approach, with a cumulative catch-up adjustment to retained earnings in the period of adoption. The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements, but at this time does not believe there will be a material effect on its consolidated financial statements.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, to address diversity in practice in the classification and presentation of changes in restricted cash. The accounting update requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash or restricted cash equivalents should be included with cash and cash equivalents when reconciling beginning-of-period and end-of-period amounts shown on the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. This is an expansive set of revisions to the cash flow presentation standards, but at this time the Company does not believe that these changes will have a material effect on its consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. The guidance removes the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance becomes effective for annual reporting periods beginning after December 15, 2019 with early adoption permitted, and is applied prospectively. The Company is currently evaluating this guidance and its impact on its results of operations, financial position, and consolidated financial statements.

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LOSS PER SHARE

3 Months Ended

Mar. 31, 2017

LOSS PER SHARE [Abstract]

LOSS PER SHARE

(4) LOSS PER SHARE

The Company calculates earnings (loss) per share (“EPS”)  in accordance with ASC Topic 260.

	Quarters Ended March 31,
	2016								2017
	Net Loss			Shares		Per Share Amount			Net Loss			Shares		Per Share Amount
Basic EPS	$	(100,410	)		1,860,482	$	(0.05	)	$	(225,059	)		1,860,261	$	(0.12	)
Effect of Dilutive Stock Options		-			-		-			-			-		-
Diluted EPS	$	(100,410	)		1,860,482	$	(0.05	)	$	(225,059	)		1,860,261	$	(0.12	)

For the quarters ended March 31, 2017 and 2016, options to purchase 500,666 and 544,666 shares, respectively, of the Company’s common stock (“Common Stock”) were not included in the computation of diluted EPS because their effect was anti-dilutive.

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STOCK-BASED COMPENSATION PLANS

3 Months Ended

Mar. 31, 2017

STOCK-BASED COMPENSATION PLANS [Abstract]

STOCK-BASED COMPENSATION PLANS

(5) STOCK-BASED COMPENSATION PLANS

The Company’s 2005 Equity Incentive Plan, as amended (“2005 Plan”), terminated in March 2015.  The 2005 Plan provided for the grant of incentive stock options, restricted stock, restricted stock units and stock grants to eligible employees (including officers and employee-directors) and non-statutory stock options to eligible employees, directors and consultants.  As of March 31, 2017, there were 338,415 vested options and 56,251 unvested options granted under the 2005 Plan that remained outstanding in accordance with their terms and there were no shares available for issuance under the 2005 Plan due to its termination.

The Company’s shareholders approved the 2015 Equity Incentive Plan (“2015 Plan”) in June 2015.  The 2015 Plan replaces the 2005 Plan.  The maximum number of shares of Common Stock that may be delivered to participants and their beneficiaries under the 2015 Plan is 200,000.  The 2015 Plan provides for the grant of incentive stock options, stock appreciation right awards, restricted stock awards, stock unit awards and other stock-based awards to eligible recipients.  The objectives of the 2015 Plan are to attract and retain the best possible candidates for positions of responsibility and provide for additional performance incentives by providing eligible employees with the opportunity to acquire equity in the Company.  The 2015 Plan is administered by a committee of two or more outside directors from the Company’s Board of Directors (the “Committee”). The Committee determines the eligible individuals to whom awards under the 2015 Plan may be granted, as well as the time or times at which awards will be granted, the number of shares subject to awards to be granted to any eligible individual, the term of the award, vesting terms and conditions and any other terms and conditions of the grant in addition to those contained in the 2015 Plan.  Each grant under the 2015 Plan will be confirmed by and subject to the terms of an award agreement.  As of March 31, 2017, there were 16,750 vested options and 89,250 unvested options granted under the 2015 Plan and 94,000 shares available for issuance under the 2015 Plan.

The Company uses the Black-Scholes option-pricing model to estimate the fair value of each option granted with the following weighted average assumptions:

	Quarters Ended March 31,
Valuation Assumptions	2016			2017
Expected life (1)		3.3			4.0
Risk-free interest rate (2)		1.21	%		1.85	%
Expected volatility (3)		39	%		51	%
Expected dividend yield		7.81	%		0.00	%
Expected forfeiture (4)		27.00	%		30.00	%

⁽¹⁾ The expected life, in years, of stock options is estimated based on historical experience.

⁽²⁾ The risk-free interest rate is based on U.S. Treasury bills whose term is consistent with the expected life of the stock options.

⁽³⁾ The expected volatility is estimated based on historical and current stock price data for the Company.

⁽⁴⁾ Forfeitures are estimated based on historical experience.

A summary of option activity as of March 31, 2017, and changes during the quarter then ended, is presented below:

	Number of Options		Weighted- Average Exercise Price		Range of Exercise Prices		Weighted- Average Remaining Contractual Term (years)		Aggregate Intrinsic Value (thousands)
Outstanding at January 1, 2017		465,666	$	15.94	$	10.04 - $19.75		3.6	$	654
Granted		35,000	$	12.56	$	12.25 - $14.45
Outstanding at March 31, 2017		500,666	$	15.70	$	10.04 - $19.75		3.6	$	254
Exercisable at March 31, 2017		355,165	$	17.00	$	10.04 - $19.75		2.8	$	66

The weighted average grant date fair values of options granted were $5.20 per share and $1.74 per share during the quarters ended March 31, 2017 and 2016, respectively.  As of March 31, 2017, there was approximately $234,000 of total unrecognized compensation expense related to non-vested stock options, which is expected to be recognized over a weighted average period of 3.29 years.

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LINE OF CREDIT

3 Months Ended

Mar. 31, 2017

LINE OF CREDIT [Abstract]

LINE OF CREDIT

(6) LINE OF CREDIT

On March 29, 2016, the Company entered into the Credit Facility.  The Credit Facility initially consisted of a $2.0 million revolving line of credit and a $10.0 million reducing revolving loan.  The revolving line of credit matures on March 31, 2018.  As amended by the March 2017 amendment, the revolving line of credit commitment reduces in four $300,000 increments during 2017 through maturity from $2.0 million to $800,000.  The reducing revolving loan matures on March 31, 2021 and requires mandatory reductions of $500,000 per calendar quarter, with a further reduction on April 30, 2018 equal to the product of (i) 50% multiplied by (ii) EBITDA for 2017 minus capital expenditures for 2017, interest payments on the Credit Facility paid in 2017, $2.0 million, and cash taxes paid during 2017.  The reducing revolving loan allows the Company to drawdown, repay and re-draw loans advanced to it within the available balance.  Interest varies between LIBOR plus 3.10% and LIBOR plus 3.75% depending on the Company’s funded debt-to-EBITDA ratio.  As of March 31, 2017, the revolving line of credit rate was 4.73% and the reducing revolving loan rate was 4.73%.  At March 31, 2017, the Company had approximately $1.3 million of borrowings outstanding under the revolving line of credit and approximately $716,000 available for borrowing under the revolving line of credit.  At March 31, 2017, the Company had $8.0 million of borrowings outstanding under the reducing revolving loan.  The Credit Facility is collateralized by substantially all of the assets of the Company.  As amended by the March 2017 amendment, the Credit Facility requires the Company to maintain (i) a funded debt-to-EBITDA ratio of no more than 2.5 to 1.00 for the twelve months ending December 31, 2017 and thereafter, (ii) a fixed charge coverage ratio for the immediately preceding twelve months of not less than 1.25 to 1.00 for the quarter ending December 31, 2017 and each quarter thereafter, and (iii) to generate at least $870,000 of EBITDA in each of the first three quarters of 2017.

As disclosed in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations--Recent Developments” below, the Company decided to discontinue the strategic assessment begun in the second quarter of 2016 and as a result incurred $104,000 in expenses associated with this strategic assessment in the first quarter of 2017.  When the Credit Facility was amended in March 2017, the Bank agreed to exclude up to $120,000 of such expenses in determining compliance with the Credit Facility EBITDA covenant for each of the first three quarters of 2017.  Therefore, for purposes of determining compliance with the Credit Facility EBITDA covenant in the first quarter of 2017, the Company generated $881,000 in EBITDA and was in compliance with the EBITDA covenant as of March 31, 2017.  The Company also was in compliance with the other amended Credit Facility covenants as of March 31, 2017.  In addition, capital expenditures may not exceed $180,000 per quarter.  After entering into the Credit Facility in March 2016, dividends and stock repurchases were prohibited under the Credit Facility and, as a result of the March 2017 amendment to the Credit Facility, dividends and stock repurchases currently are not permitted under the Credit Facility.

The March 2017 amendment to the Credit Facility also included a forbearance by the Bank regarding covenant defaults by the Company as of December 31, 2016 with respect to the then-existing funded debt-to-EBITDA ratio of no more than 3.15 to 1.00 for the twelve months ended December 31, 2016, fixed charge coverage ratio of at least 1.35 to 1.00 for the quarter ended December 31, 2016 and EBITDA of at least $650,000 for the quarter ended December 31, 2016.  The forbearance remains in effect provided that the Company complies with the amended Credit Facility covenants.  There can be no assurances that the Bank will not change the terms of the Credit Facility or cease to forbear or continue to extend credit to the Company.  Any such actions or failure by the Company to maintain compliance with the Credit Facility in the future could have a material adverse effect on the Company.

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DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

3 Months Ended

Mar. 31, 2017

DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS [Abstract]

DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

(7) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

ASC Topic 825, ''Disclosures About Fair Value of Financial Instruments,'' requires disclosure about the fair value of financial instruments. Carrying amounts for all financial instruments included in current assets and current liabilities approximate estimated fair values due to the short maturity of those instruments. The fair values of the Company's long-term debt are based on similar rates currently available to the Company.  The Company believes the book value approximates fair value for the notes receivable.

The Company follows ASC Topic 820, “Fair Value Measurements and Disclosures,” which defines fair value, establishes a framework for using fair value to measure assets and liabilities, and expands disclosures about fair value measurements.  The statement establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.  Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company.  Unobservable inputs are inputs that reflect the Company’s assumptions of what market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.  The hierarchy is broken down into three levels based on the reliability of the inputs as follows:

Level 1: Quoted prices are available in active markets for identical assets or liabilities.

Level 2: Quoted prices in active markets for similar assets and liabilities that are observable for the asset or liability; or

Level 3: Unobservable pricing inputs that are generally less observable from objective sources, such as discounted cash flow models or valuations.

ASC Topic 820 requires financial assets and liabilities to be classified based on the lowest level of input that is significant to the fair value measurement.  The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels. There were no transfers between the fair value hierarchy levels during the quarters ended March 31, 2017 and 2016.

The following table represents the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2016 and March 31, 2017 by level within the fair value hierarchy:

	December 31, 2016 Fair Value Measurement Using						March 31, 2017 Fair Value Measurement Using
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Contingent Liabilities Balance	$	-		-	$	321,000	$	-		-	$	321,000

Contingent Liabilities

As part of an Office acquisition completed in 2009, the Company recorded contingent liabilities to recognize an estimated amount to be paid as part of the acquisition agreement.  These contingent liabilities are recorded at estimated fair values as of the date of acquisition, are payable upon the exercise of a put option by the seller beginning four years after the acquisition date and no later than ten years after the acquisition date, and are calculated at a multiple of the then trailing twelve-months operating cash flows.  The Company remeasures the contingent liability to fair value each reporting date until the contingency is resolved.  Any changes to the fair value are recognized into the income statement when determined.  As of March 31, 2017, approximately $321,000 of contingent liabilities were recorded on the consolidated balance sheets in other long-term obligations.

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SUBSEQUENT EVENTS

3 Months Ended

Mar. 31, 2017

SUBSEQUENT EVENTS [Abstract]

SUBSEQUENT EVENTS

(8) SUBSEQUENT EVENTS

On May 9, 2017, the Company reached a mutual settlement agreement with the activist shareholder group  to end a potential proxy contest related to the Company’s 2017 annual meeting of shareholders in connection with the matters described in the shareholder group’s Schedule 13D. Under the terms of the settlement agreement, the Company will nominate John M. Climaco and Gregory G. Fulton for election to its Board of Directors at the 2017 annual meeting, along with incumbent director Brooks G. O’Neil. As part of the settlement agreement, the shareholder group has agreed to withdraw its proposals for the annual meeting and to vote in favor of the above slate of director nominees at the 2017 annual meeting. In addition, the shareholder group has agreed to a standstill that generally extends until the later of the 2018 annual meeting of shareholders and the date that neither Mr. Climaco nor Mr. Fulton serves on the Board of Directors, except that the shareholder group may propose nominees for director for the 2018 annual meeting in accordance with the Company’s bylaws.

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SIGNIFICANT ACCOUNTING POLICIES (Policies)

3 Months Ended

Mar. 31, 2017

SIGNIFICANT ACCOUNTING POLICIES [Abstract]

Basis of Presentation/Basis of Consolidation

Basis of Presentation/Basis of Consolidation

The accompanying condensed consolidated financial statements have been prepared on the accrual basis of accounting. These financial statements present the financial position and results of operations of the Company and the dental offices (“Offices”), which are under the control of the Company.  The Offices are organized as professional corporations (“P.C.s”) and the Company provides business services to the Offices under long-term management agreements (the “Management Agreements”).  All intercompany accounts and transactions have been eliminated in the consolidation.

The Company treats Offices as consolidated subsidiaries where it has a long-term and unilateral controlling financial interest over the assets and operations of the Offices. The Company maintains control of substantially all of its Offices via the Management Agreements. The Company is a business service organization and does not engage in the practice of dentistry or the provision of dental hygiene services. These services are provided by licensed professionals. Certain key features of these arrangements either enable the Company at any time and in its sole discretion to cause a change in the shareholder of the P.C. (i.e., ''nominee shareholder'') or allow the Company to vote the shares of stock held by the owner of the P.C. and to elect a majority of the board of directors of the P.C.  The accompanying condensed consolidated statements of operations reflect revenue, which is the amount billed to patients less contractual adjustments. Direct expenses consist of all the expenses incurred in operating the Offices and paid by the Company.  Under the Management Agreements, the Company assumes responsibility for the management of most aspects of the Offices' business (the Company does not engage in the practice of dentistry or the provision of dental hygiene services), including personnel recruitment and training; comprehensive administrative, business and marketing support and advice; and facilities, equipment, and support personnel as required to operate the practices.

The Company prepares its consolidated financial statements in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, which provides for consolidation of variable interest entities (“VIEs”) of which the Company is the primary beneficiary. The Company has concluded that the P.C.s meet the definition of VIEs as defined by this standard and that the Company is the primary beneficiary of these VIEs.  This conclusion was reached because the Company has the power to direct significant activities of the VIEs and the Company is obligated to absorb losses of and/or provide rights to receive benefits from the VIEs.

Revenue

Revenue

Revenue is generally recognized when services are provided and is reported at estimated net realizable amounts due from insurance companies, preferred provider and health maintenance organizations (i.e., third-party payors) and patients for services rendered, net of contractual and other adjustments.  Dental services are billed and collected by the Company in the name of the Offices.

Revenue under certain third-party payor agreements is subject to audit and retroactive adjustments. To the Company’s knowledge, there are no material claims, disputes or other unsettled matters that exist concerning third-party reimbursements as of March 31, 2017.

Most of the Company’s patients are insured under third-party payor agreements. The Company’s billing system generates contractual adjustments for each patient encounter based on fee schedules for the patient’s insurance plan.  The services provided are attached to the patient’s fee schedule based on the insurance the patient has at the time the service is provided.  Therefore, the revenue that is recorded by the billing system is based on insurance contractual amounts. Additionally, each patient at the time of service signs a form agreeing that the patient is ultimately responsible for the contracted fee if the insurance company does not pay the fee for any reason.

Note Receivable

Note Receivable

A note receivable was created as part of a dental Office acquisition, of which approximately $58,000 in principal amount was outstanding at March 31, 2017.  The note has equal monthly principal and interest amortization payments and a maturity date of October 31, 2018.  The note bears interest at 6%, which is accrued monthly.  If the note is uncollectible, an allowance for doubtful accounts will be created.  There was no allowance for doubtful accounts for the note as of March 31, 2017 or December 31, 2016.

Intangible Assets

Intangible Assets

The Company's dental practice acquisitions involve the purchase of tangible and intangible assets and the assumption of certain liabilities of the acquired dental Offices. As part of the purchase price allocation, the Company allocates the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed, based on estimated fair market values. Costs of acquisition in excess of the net estimated fair value of tangible assets acquired and liabilities assumed are allocated to the Management Agreement related to the Office. The Management Agreement represents the Company's right to manage the Offices during the 40-year term of the Management Agreement. The assigned value of the Management Agreement is amortized using the straight-line method over a period of 25 years.  Amortization was approximately $212,000 and $211,000 for the quarters ended March 31, 2017 and 2016, respectively.

The Management Agreements cannot be terminated by a P.C. without cause, consisting primarily of bankruptcy or material default by the Company.

If facts and circumstances indicate that the carrying value of long-lived and intangible assets may be impaired, the Company will perform an evaluation of recoverability. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset will be compared to the asset’s carrying amount to determine if a write-down to market value or discounted cash flow value is required.  There were no impairment write-downs associated with the Company’s long-lived and intangible assets during the quarters ended March 31, 2017 and 2016.

Stock-Based Compensation Expense

Stock-Based Compensation Expense

The Company recognizes compensation expense on a straight line basis over the requisite service period of the award. Total stock-based compensation expense included in the Company’s condensed consolidated statements of operations for the quarters ended March 31, 2017 and 2016 was approximately $35,000 and $47,000, respectively, related to stock options.  Total stock-based compensation expense was recorded as a component of corporate general and administrative expense.

The Black-Scholes option-pricing model was used to estimate the option fair values. The option-pricing model requires a number of assumptions, of which the most significant are expected stock price volatility, the expected pre-vesting forfeiture rate, expected dividend rate and the expected option term (the amount of time from the grant date until the options are exercised or expire). Expected volatility was calculated based upon actual historical stock price movements over the most recent period ended March 31, 2017 equal to the expected option term. Expected pre-vesting forfeitures were estimated based on historical pre-vesting forfeitures over the most recent period ended March 31, 2017 for the expected option term.

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606).  This update will establish a comprehensive revenue recognition standard for virtually all industries in GAAP.  ASU 2014-09 will change the amount and timing of revenue and cost recognition, implementation, disclosures and documentation.  In August 2015, the FASB issued ASU No. 2015-14, which deferred the effective date of ASU 2014-09 until annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period.  ASU No. 2014-09 may be adopted under the full retrospective method or simplified transition method.  Entities are permitted to adopt the revenue standard early, beginning with annual reporting periods after December 15, 2016.  The Company plans to adopt ASU 2014-09 beginning January 1, 2018 and it is not expected to have a material effect on its consolidated financial statements. 

In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes.  This update eliminates the current requirement for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet.  Instead, the Company will be required to classify all deferred tax assets and liabilities as noncurrent.  This guidance is effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016.  The Company adopted this guidance and it did not have a material effect on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842).  Under the new guidance, lessees will be required to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months.  ASU 2016-02 is effective for fiscal years beginning after December 15, 2018.  The Company anticipates the adoption of ASU 2016-02 will have a material impact on its consolidated financial statements by increasing both total assets and total liabilities on the balance sheet.

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting.  The objective of the new guidance is to simplify the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification of the statement of cash flows.   ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years.  ASU 2016-09 did not have a material effect on the Company’s consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments.  This update addresses diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows.  The update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice.  The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted.  ASU 2016-15 is not expected to have a material effect on the Company’s consolidated financial statements.

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other than Inventory. The guidance requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The guidance becomes effective for annual reporting periods beginning after December 15, 2017 with early adoption permitted This ASU is required to be adopted using the modified retrospective approach, with a cumulative catch-up adjustment to retained earnings in the period of adoption. The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements, but at this time does not believe there will be a material effect on its consolidated financial statements.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, to address diversity in practice in the classification and presentation of changes in restricted cash. The accounting update requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash or restricted cash equivalents should be included with cash and cash equivalents when reconciling beginning-of-period and end-of-period amounts shown on the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. This is an expansive set of revisions to the cash flow presentation standards, but at this time the Company does not believe that these changes will have a material effect on its consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. The guidance removes the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance becomes effective for annual reporting periods beginning after December 15, 2019 with early adoption permitted, and is applied prospectively. The Company is currently evaluating this guidance and its impact on its results of operations, financial position, and consolidated financial statements.

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LOSS PER SHARE (Tables)

3 Months Ended

Mar. 31, 2017

LOSS PER SHARE [Abstract]

Earnings (Loss) Per Share Calculation

The Company calculates earnings (loss) per share (“EPS”)  in accordance with ASC Topic 260.

	Quarters Ended March 31,
	2016								2017
	Net Loss			Shares		Per Share Amount			Net Loss			Shares		Per Share Amount
Basic EPS	$	(100,410	)		1,860,482	$	(0.05	)	$	(225,059	)		1,860,261	$	(0.12	)
Effect of Dilutive Stock Options		-			-		-			-			-		-
Diluted EPS	$	(100,410	)		1,860,482	$	(0.05	)	$	(225,059	)		1,860,261	$	(0.12	)

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STOCK-BASED COMPENSATION PLANS (Tables)

3 Months Ended

Mar. 31, 2017

STOCK-BASED COMPENSATION PLANS [Abstract]

Estimated Fair Value Option Granted

The Company uses the Black-Scholes option-pricing model to estimate the fair value of each option granted with the following weighted average assumptions:

	Quarters Ended March 31,
Valuation Assumptions	2016			2017
Expected life (1)		3.3			4.0
Risk-free interest rate (2)		1.21	%		1.85	%
Expected volatility (3)		39	%		51	%
Expected dividend yield		7.81	%		0.00	%
Expected forfeiture (4)		27.00	%		30.00	%

⁽¹⁾ The expected life, in years, of stock options is estimated based on historical experience.

⁽²⁾ The risk-free interest rate is based on U.S. Treasury bills whose term is consistent with the expected life of the stock options.

⁽³⁾ The expected volatility is estimated based on historical and current stock price data for the Company.

⁽⁴⁾ Forfeitures are estimated based on historical experience.

Summary of Option Activity

A summary of option activity as of March 31, 2017, and changes during the quarter then ended, is presented below:

	Number of Options		Weighted- Average Exercise Price		Range of Exercise Prices		Weighted- Average Remaining Contractual Term (years)		Aggregate Intrinsic Value (thousands)
Outstanding at January 1, 2017		465,666	$	15.94	$	10.04 - $19.75		3.6	$	654
Granted		35,000	$	12.56	$	12.25 - $14.45
Outstanding at March 31, 2017		500,666	$	15.70	$	10.04 - $19.75		3.6	$	254
Exercisable at March 31, 2017		355,165	$	17.00	$	10.04 - $19.75		2.8	$	66

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DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Tables)

3 Months Ended

Mar. 31, 2017

DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS [Abstract]

Fair Value, Assets and Liabilities Measured on Recurring Basis

The following table represents the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2016 and March 31, 2017 by level within the fair value hierarchy:

	December 31, 2016 Fair Value Measurement Using						March 31, 2017 Fair Value Measurement Using
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Contingent Liabilities Balance	$	-		-	$	321,000	$	-		-	$	321,000

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LIQUIDITY AND FINANCIAL RESOURCES UPDATE (Details) $ in Thousands	Feb. 01, 2017 USD ($)	Dec. 31, 2016 USD ($) Office
Related Party Transaction [Line Items]
Number of offices that had negative EBITDA | Office		1
Number of offices | Office		2
Adjusted EBITDA | $		$ 78
CEO, CFO, and Outside Directors [Member]
Related Party Transaction [Line Items]
Percentage reduction of base salary and directors fees	20.00%
Annual savings from reduction of base salary and directors fees | $	$ 175

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SIGNIFICANT ACCOUNTING POLICIES (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016	Dec. 31, 2016
Note Receivable [Abstract]
Outstanding principal amount of note receivables	$ 58
Maturity date	Oct. 31, 2018
Interest rate on notes receivable	6.00%
Allowance for doubtful accounts	$ 0		$ 0
Intangible Assets [Abstract]
Life of the management agreement	40 years
Amortization period for contract	25 years
Amortization expense	$ 212	$ 211
Impairment of Long-Lived and Intangible Assets [Abstract]
Impairment of long-lived and intangible assets	0	0
Stock Options [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock based compensation expense	$ 35	$ 47

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LOSS PER SHARE (Details) - USD ($)	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Net loss, diluted [Abstract]
Net loss, basic EPS	$ (225,059)	$ (100,410)
Effect of dilutive stock options	0	0
Net loss, diluted EPS	$ (225,059)	$ (100,410)
Weighted average number of shares outstanding reconciliation [Abstract]
Weighted average number of shares, basic EPS (in shares)	1,860,261	1,860,482
Effect of dilutive stock options, shares (in shares)	0	0
Weighted average number of shares outstanding, diluted EPS (in shares)	1,860,261	1,860,482
Earnings per share, basic and diluted [Abstract]
Per share amount - basic EPS (in dollars per share)	$ (0.12)	$ (0.05)
Effect of dilutive stock option (in dollars per share)	0	0
Per share amount - diluted EPS (in dollars per share)	$ (0.12)	$ (0.05)
Antidilutive securities (in shares)	500,666	544,666

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STOCK-BASED COMPENSATION PLANS (Details) $ / shares in Units, $ in Thousands		3 Months Ended		12 Months Ended
		Mar. 31, 2017 USD ($) Administrator $ / shares shares	Mar. 31, 2016 $ / shares	Dec. 31, 2016 USD ($) $ / shares shares
Fair value assumptions [Abstract]
Expected life	[1]	4 years	3 years 3 months 18 days
Risk-free interest rate	[2]	1.85%	1.21%
Expected volatility	[3]	51.00%	39.00%
Expected dividend yield		0.00%	7.81%
Expected forfeiture	[4]	30.00%	27.00%
Options outstanding [Roll Forward]
Outstanding, beginning (in shares) | shares		465,666
Granted (in shares) | shares		35,000
Outstanding, ending (in shares) | shares		500,666		465,666
Exercisable (in shares) | shares		355,165
Options weighted average exercise price [Roll Forward]
Outstanding, beginning (in dollars per share)		$ 15.94
Granted (in dollars per share)		12.56
Outstanding, ending (in dollars per share)		15.70		$ 15.94
Exercisable (in dollars per share)		$ 17.00
Options, additional disclosures [Abstract]
Outstanding, weighted average remaining contractual term		3 years 7 months 6 days		3 years 7 months 6 days
Outstanding, aggregate intrinsic value | $		$ 254		$ 654
Exercisable, weighted average remaining contractual term		2 years 9 months 18 days
Exercisable, aggregate intrinsic value | $		$ 66
Weighted average grant date fair value of options (in dollars per share)		$ 5.20	$ 1.74
Total unrecognized compensation expense | $		$ 234
Weighted average period for recognition		3 years 3 months 14 days
Minimum [Member]
Range of Exercise Prices [Abstract]
Outstanding, beginning of period (in dollars per share)		$ 10.04
Granted (in dollars per share)		12.25
Outstanding, end of period (in dollars per share)		10.04		$ 10.04
Exercisable (in dollars per share)		10.04
Maximum [Member]
Range of Exercise Prices [Abstract]
Outstanding, beginning of period (in dollars per share)		19.75
Granted (in dollars per share)		14.45
Outstanding, end of period (in dollars per share)		19.75		$ 19.75
Exercisable (in dollars per share)		$ 19.75
2005 Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Vested options (in shares) | shares		338,415
Unvested options (in shares) | shares		56,251
2015 Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares available for issuance (in shares) | shares		94,000
Minimum number of plan administrators | Administrator		2
Vested options (in shares) | shares		16,750
Unvested options (in shares) | shares		89,250
Maximum number of shares of Common Stock that can be delivered under the plan (in shares) | shares		200,000

[1] The expected life, in years, of stock options is estimated based on historical experience.

[2] The risk-free interest rate is based on U.S. Treasury bills whose term is consistent with the expected life of the stock options.

[3] The expected volatility is estimated based on historical and current stock price data for the Company.

[4] Forfeitures are estimated based on historical experience.

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LINE OF CREDIT (Details) $ in Thousands		3 Months Ended		12 Months Ended
	Mar. 29, 2016 USD ($)	Mar. 31, 2017 USD ($)	Dec. 31, 2016 USD ($)	Dec. 31, 2016
Line of Credit [Member]
Long-term Debt [Line Items]
Expense associated with strategic assessment		$ 104
Maximum amount excluded in determining EBITDA covenant in each of first three quarters of 2017		120
EBITDA generated		$ 881
Line of Credit [Member] | Maximum [Member]
Long-term Debt [Line Items]
Debt To EBITDA ratio for the twelve months ending December 31, 2017 and thereafter		2.5
Capital expenditure per quarter		$ 180
Debt To EBITDA ratio				3.15
Line of Credit [Member] | Minimum [Member]
Long-term Debt [Line Items]
Fixed charge coverage ratio		1.25	1.35
Amount of generated EBITDA required to comply with covenant in each of first three quarters of 2017		$ 870
Amount of generated EBITDA			$ 650
Domestic Line Of Credit Due March 2018 [Member]
Long-term Debt [Line Items]
Maximum borrowing capacity	$ 2,000	800
Amount available for borrowing		$ 1,300
Revolving line of credit commitment reduction amount	300
Line of credit interest rate		4.73%
Maturity date		Mar. 31, 2018
Domestic Line Of Credit Due March 2021 [Member]
Long-term Debt [Line Items]
Amount outstanding	10,000	$ 8,000
Amount available for borrowing		$ 716
Quarterly payment of loan payable	$ 500
Reduction in EBITDA percentage		50.00%
Interest payment on credit facilty		$ 2,000
Line of credit interest rate		4.73%
Maturity date		Mar. 31, 2021
LIBOR Borrowing Rate [Member] | Domestic Line Of Credit Due March 2018 [Member] | Maximum [Member]
Long-term Debt [Line Items]
Basis spread on variable rate	3.75%
LIBOR Borrowing Rate [Member] | Domestic Line Of Credit Due March 2018 [Member] | Minimum [Member]
Long-term Debt [Line Items]
Basis spread on variable rate	3.10%
LIBOR Borrowing Rate [Member] | Domestic Line Of Credit Due March 2021 [Member] | Maximum [Member]
Long-term Debt [Line Items]
Basis spread on variable rate	3.75%
LIBOR Borrowing Rate [Member] | Domestic Line Of Credit Due March 2021 [Member] | Minimum [Member]
Long-term Debt [Line Items]
Basis spread on variable rate	3.10%

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DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Details) - USD ($)	3 Months Ended
	Mar. 31, 2017	Dec. 31, 2016
Contingent Liabilities [Abstract]
Number of trailing months of operating cash flow used to determine contingent liability	12 months
Minimum [Member]
Contingent Liabilities [Abstract]
Number of years until the contingent liability becomes payable	4 years
Maximum [Member]
Contingent Liabilities [Abstract]
Number of years until the contingent liability becomes payable	10 years
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 1 [Member]
Liabilities, Fair Value Disclosure [Abstract]
Contingent Liabilities Balance	$ 0	$ 0
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 2 [Member]
Liabilities, Fair Value Disclosure [Abstract]
Contingent Liabilities Balance	0	0
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 3 [Member]
Liabilities, Fair Value Disclosure [Abstract]
Contingent Liabilities Balance	$ 321,000	$ 321,000