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 September 30, 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 November 9, 2017
Common Stock, no par value	1,872,761

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 September 30, 2017	3
	Unaudited Condensed Consolidated Statements of Operations for the Quarters and Nine Months Ended September 30, 2016 and 2017	4
	Unaudited Condensed Consolidated Statement of Shareholders’ Equity (Deficit) for the Nine Months ended September 30, 2017	5
	Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 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	27
PART II - OTHER INFORMATION
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 3	Defaults Upon Senior Securities	28
Item 6.	Exhibits	29
Signatures		30

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			September 30, 2017
CURRENT ASSETS:
Cash	$	157,923		$	239,545
Accounts receivable, net of allowance for doubtful accounts of approximately $410,000 and $430,000, respectively		3,212,190			4,011,911
Note receivable		34,195			34,195
Prepaid expenses and other assets		759,749			749,742
Total current assets		4,164,057			5,035,393
PROPERTY AND EQUIPMENT, net		7,279,436			5,562,629
OTHER NONCURRENT ASSETS:
Intangible assets, net		6,721,084			6,087,194
Deferred charges and other assets		155,741			163,991
Note receivable		31,051			7,620
Total assets	$	18,351,369		$	16,856,827
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable	$	2,723,473		$	4,349,373
Accrued expenses		925,776			803,513
Accrued payroll and related expenses		2,164,758			2,522,354
Current maturities of long-term debt		2,500,000			8,757,469
Total current liabilities		8,314,007			16,432,709
LONG-TERM LIABILITIES:
Deferred tax liability, net		1,174,416			284,128
Long-term debt		7,351,006			-
Other long-term obligations		1,081,655			1,058,316
Total liabilities		17,921,084			17,775,153
SHAREHOLDERS’ EQUITY (DEFICIT):
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 1,872,761 shares issued and outstanding, respectively		1,615,001			1,950,287
Accumulated deficit		(1,184,716	)		(2,868,613	)
Total shareholders’ equity (deficit)		430,285			(918,326	)
Total liabilities and shareholders’ equity (deficit)	$	18,351,369		$	16,856,827

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

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BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Quarters Ended September 30,								Nine Months Ended September 30,
	2016				2017				2016				2017
REVENUE:
Dental practice revenue	$	13,988,133			$	14,542,690			$	44,009,444			$	42,915,170
Capitation revenue		1,166,155				1,001,297				3,461,218				3,068,716
		15,154,288				15,543,987				47,470,662				45,983,886
DIRECT EXPENSES:
Clinical salaries and benefits		9,242,477				9,680,390				28,564,107				28,398,877
Dental supplies		729,299				674,402				2,187,229				1,974,995
Laboratory fees		869,014				874,102				2,648,658				2,687,004
Occupancy		1,591,841				1,637,622				4,712,445				4,840,771
Advertising and marketing		176,150				148,257				490,227				485,628
Depreciation and amortization		988,031				869,589				3,026,164				2,748,083
General and administrative		1,394,284				1,464,120				4,139,482				4,014,757
		14,991,096				15,348,482				45,768,312				45,150,115
Contribution from dental offices		163,192				195,505				1,702,350				833,771
CORPORATE EXPENSES:
General and administrative		848,358		(1)		908,267		(1)		2,696,123		(2)		2,879,641		(2)
Stock grant		-				-				-				175,000		(3)
Depreciation and amortization		47,114				38,518				165,994				123,466
OPERATING LOSS		(732,280	)			(751,280	)			(1,159,767	)			(2,344,336	)
OTHER EXPENSE:
Interest expense, net		70,367				110,004				185,240				276,842
LOSS BEFORE INCOME TAXES		(802,647	)			(861,284	)			(1,345,007	)			(2,621,178	)
Income tax benefit		(286,131	)			(303,719	)			(497,653	)			(937,281	)
NET LOSS	$	(516,516	)		$	(557,565	)		$	(847,354	)		$	(1,683,897	)
Net loss per share of Common Stock - Basic	$	(0.28	)		$	(0.30	)		$	(0.46	)		$	(0.90	)
Net loss per share of Common Stock - Diluted	$	(0.28	)		$	(0.30	)		$	(0.46	)		$	(0.90	)
Weighted average number of shares of Common Stock and dilutive securities:
Basic		1,860,261				1,872,761				1,860,334				1,866,580
Diluted		1,860,261				1,872,761				1,860,334				1,866,580

⁽¹⁾ Corporate expense - general and administrative includes $32,309 and $74,031 of stock-based compensation expense pursuant to ASC Topic 718 for the quarters ended September 30, 2016 and 2017, respectively.

⁽²⁾ Corporate expense - general and administrative includes $123,118 and $160,286 of stock-based compensation expense pursuant to ASC Topic 718 for the nine months ended September 30, 2016 and 2017, respectively.

⁽³⁾ The Company issued 12,500 shares of Common Stock under a settlement agreement with an activist shareholder group. The shares were valued at $175,000 based on the closing price of the Common Stock on the date of the grant.

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 (DEFICIT)

(UNAUDITED)

	Common Stock
	Shares		Amount		Accumulated Deficit			Shareholders’ Equity (Deficit)
BALANCES, December 31, 2016		1,860,261	$	1,615,001	$	(1,184,716	)	$	430,285
Stock grant		12,500		175,000		-			175,000
Stock-based compensation expense		-		160,286		-			160,286
Net loss		-		-		(1,683,897	)		(1,683,897	)
BALANCES, September 30, 2017		1,872,761	$	1,950,287	$	(2,868,613	)	$	(918,326	)

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)

	Nine Months Ended September 30,
	2016			2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(847,354	)	$	(1,683,897	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		3,192,158			2,871,549
Stock-based compensation expense		123,118			160,286
Provision for doubtful accounts		635,522			652,086
Benefit from deferred income taxes		(547,765	)		(890,288	)
Stock grant		-			175,000
Changes in assets and liabilities
Accounts receivable		(942,021	)		(1,451,807	)
Prepaid expenses and other assets		(203,301	)		10,007
Deferred charges and other assets		-			(8,250	)
Accounts payable		(49,622	)		1,625,900
Accrued expenses		(211,088	)		(122,263	)
Accrued payroll and related expenses		(91,333	)		357,596
Income taxes payable (receivable)		84,206			-
Other long-term obligations		171,810			(23,339	)
Net cash provided by operating activities		1,314,330			1,672,580
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures		(684,729	)		(520,852	)
Note receivable		19,221			23,431
Net cash used in investing activities		(665,508	)		(497,421	)
CASH FLOWS USED IN FINANCING ACTIVITIES:
Advances – line of credit		16,993,128			20,329,290
Repayments – line of credit		(16,261,772	)		(20,368,477	)
Repayments – reducing revolving loan		(1,000,000	)		(1,054,350	)
Purchase and retirement of Common Stock		(8,860	)		-
Common Stock cash dividends		(409,443	)		-
Net cash used in financing activities		(686,947	)		(1,093,537	)
NET CHANGE IN CASH		(38,125	)		81,622
CASH, beginning of period		258,801			157,923
CASH, end of period	$	220,676		$	239,545

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)

	Nine Months Ended September 30,
	2016		2017
SUPPLEMENTAL DISCLOSURE OF CASH  FLOW INFORMATION:
Cash paid for interest	$	199,982	$	302,589
Cash paid for income taxes	$	50,906	$	-
Cash received for income taxes	$	85,000	$	46,992
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)

September 30, 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 September 30, 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 and nine months ended September 30, 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.

On July 21, 2017, the Company received notice of events of default and acceleration (the “Notice Letter”) from counsel to Guaranty Bank and Trust Company (the “Bank”) in connection with the Loan and Security Agreement, dated as of March 29, 2016, as amended by four amendments (collectively, the “Loan Agreement” or the “Credit Facility”), including the Fourth Amendment to Loan and Security Agreement and Forbearance Agreement dated March 30, 2017 (the “Forbearance Agreement”).  The Notice Letter asserted events of default resulting from the Company’s failure to produce EBITDA of at least $870,000 for the second quarter of 2017 and to reduce the dollar amount of the outstanding reducing revolving loan by at least $500,000 on June 30, 2017.  The Notice Letter further asserted that, as a result of these events of default, the following earlier events of default to which the Forbearance Agreement applied again existed: (i) the Company’s failure to maintain a Maximum Total Cash Flow Leverage Ratio of not more than 3.15x as of December 31, 2016; (ii) the Company’s failure to maintain a Fixed Charge Coverage Ratio of at least 1.35 to 1.00 as of December 31, 2016; and (iii) the Company’s failure to produce EBITDA of at least $650,000 for the fourth quarter of 2016.

The Notice Letter further asserted that the Forbearance Period (as defined in the Forbearance Agreement) has terminated and that the Bank declared its commitments to the Company to be terminated and would charge interest on all obligations of the Company at the default rate effective as of December 31, 2016.  In the Notice Letter, the Bank also declared all obligations of the Company to be immediately due and payable and demanded payment in full of all obligations by no later than July 31, 2017.  The Notice Letter further stated that, although the Bank was not presently exercising its other rights and remedies available upon an event of default, it reserved its right to do so at any time in its sole discretion.

The Company failed to reduce the dollar amount of the outstanding reducing revolver by at least $500,000 on September 30, 2017.  The Company’s revolving line of credit with the Bank was reduced from $1.4 million to $1.1 million on October 1, 2017 as required by the Forbearance Agreement.  Due to these facts, all Bank debt totaling $8.8 million is classified as a current liability on the balance sheet as of September 30, 2017. Under the Credit Facility and related pledge and security agreements, the Bank has liens and security interests on substantially all of the assets of the Company.  The Company continues to have discussions with the Bank regarding a resolution of this matter.  The failure to resolve this matter could have a material adverse effect on the Company, as the Bank could exercise its remedies under the Loan Agreement including foreclosure on the Company’s assets or take other actions.

Due to the above issues, there is substantial doubt about the Company’s ability to continue as a going concern if no additional action takes place.  The Company believes that any resolution with the Bank would involve financing to raise funds to pay down the outstanding principal on the Credit Facility or to refinance the Credit Facility. The Company has had discussions with several potential investors and lenders and has explored several funding options, including the issuance of additional equity or debt and the sale of certain dental practices. The Company has signed a term sheet with a prospective investor and is currently negotiating definitive agreements with that party on an exclusive basis and with the Bank for amendments to the Credit Facility.  The Company therefore believes it will be successful in achieving a resolution with the Bank. However, there can be no assurance that the Company will be successful in completing the necessary financing or other transactions necessary to resolve this matter.

8

 (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 September 30, 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 $41,815 in principal amount was outstanding at September 30, 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 September 30, 2017 or December 31, 2016.

9

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 remained constant at $211,000 for the quarters ended September 30, 2017 and 2016.  Amortization remained constant at $634,000 for the nine months ended September 30, 2017 and 2016.

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 September 30, 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 September 30, 2017 and 2016 was approximately $74,000 and $32,000, respectively, related to stock options.  Total stock-based compensation expense included in the Company’s condensed consolidated statements of operations for the nine months ended September 30, 2017 and 2016 was approximately $160,000 and $123,000, 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 September 30, 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 September 30, 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 modified retrospective method.  The Company plans to adopt ASU 2014-09 beginning January 1, 2018 using the modified retrospective method.  The standard  is not expected to have a material effect on its consolidated financial statements with the exception of additional disclosures. 

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.

10

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.

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(4) LOSS PER SHARE

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

	Quarters Ended September 30,
	2016								2017
	Net Loss			Shares		Per Share Amount			Net Loss			Shares		Per Share Amount
Basic EPS	$	(516,516	)		1,860,261	$	(0.28	)	$	(557,565	)		1,872,761	$	(0.30	)
Effect of Dilutive Stock Options		-			-		-			-			-		-
Diluted EPS	$	(516,516	)		1,860,261	$	(0.28	)	$	(557,565	)		1,872,761	$	(0.30	)

For the quarters ended September 30, 2017 and 2016, options to purchase 542,999 and 509,000 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.

	Nine Months Ended September 30,
	2016								2017
	Net Loss			Shares		Per Share Amount			Net Loss			Shares		Per Share Amount
Basic EPS	$	(847,354	)		1,860,334	$	(0.46	)	$	(1,683,897	)		1,866,580	$	(0.90	)
Effect of Dilutive Stock Options		-			-		-			-			-		-
Diluted EPS	$	(847,354	)		1,860,334	$	(0.46	)	$	(1,683,897	)		1,866,580	$	(0.90	)

For the nine months ended September 30, 2017 and 2016, options to purchase 542,999 and 509,000 shares, respectively, of 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 on March 17, 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 September 30, 2017, there were 331,331 vested options and 49,668 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 September 30, 2017, there were 16,750 vested options and 145,250 unvested options granted under the 2015 Plan.    On June 20, 2017, the independent directors of the Board of Directors were granted 2,000 shares each of restricted Common Stock pursuant to the 2015 Plan. Fifty percent of the shares vest 12 months from the grant date, and the remaining shares vest 24 months from the grant date. As of September 30, 2017, 28,000 shares were available under the 2015 Plan.

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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 September 30,					Nine Months Ended September 30,
Valuation Assumptions	2016 (5)		2017			2016			2017
Expected life (1)		-		4.00			3.25			4.56
Risk-free interest rate (2)		-		1.81	%		1.21	%		1.79	%
Expected volatility (3)		-		55	%		39	%		50	%
Expected dividend yield		-		-			7.81	%		-
Expected forfeiture (4)		-		30.0	%		27.0	%		11.7	%

⁽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.

⁽⁵⁾ The Company did not issue any options during the quarter ended September 30, 2016.

A summary of option activity as of September 30, 2017, and changes during the nine months 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		92,500		$	13.04	$	11.75 - $14.45
Cancelled		(15,167	)	$	16.23	$	10.04 - $17.13
Outstanding at September 30, 2017		542,999		$	15.44	$	10.04 - $19.75		3.5	$	-
Exercisable at September 30, 2017		348,081		$	17.00	$	10.04 - $19.75		2.4	$	-

The weighted average grant date fair value of options granted during the quarter ended September 30, 2017 was $5.68 per share.  No options were granted during the quarter ended September 30, 2016.  As of September 30, 2017, there was approximately $472,000 of total unrecognized compensation expense related to non-vested stock options, which is expected to be recognized over a weighted average period of 2.93 years and there was approximately $116,000 of total unrecognized compensation expense related to non-vested restricted Common Stock, which is expected to be recognized over a weighted average period of 1.72 years.

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(6) LINE OF CREDIT

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 Forbearance Agreement, 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. Subject to any actions the Bank may take pursuant to the Notice Letter, the reducing revolving loan currently 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 September 30, 2017, the revolving line of credit rate was 4.99% and the reducing revolving loan rate was 4.99%.  At September 30, 2017, the Company had approximately $894,000 of borrowings outstanding under the revolving line of credit and approximately $506,000 available for borrowing under the revolving line of credit.  Pursuant to the Notice Letter, the Bank states that it will charge interest at the default interest rate, LIBOR plus 5%, retroactively to December 31, 2016.  At September 30, 2017, the Company had $7.9 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.  In addition, capital expenditures may not exceed $180,000 per quarter.  As a result of the March 2017 amendment to the Credit Facility, dividends and stock repurchases are not permitted  under the Credit Facility.

As disclosed in Note 2, the Company was not  in compliance with the required $870,000 of EBITDA in the second quarter ended June 30, 2017 and did not make a required $500,000 payment at June 30, 2017 to decrease the reducing revolving loan from $8.0 million to $7.5 million. On July 21, 2017, the Company received the Notice Letter.  The Company also did not make a required $500,000 payment at September 30, 2017 to decrease the reducing revolving loan to $7.0 million. The Bank reduced the Company’s revolving line of credit from $1.4 million to $1.1 million on October 1, 2017 as required by the Forbearance Agreement.  Due to these facts, all Bank debt totaling $8.8 million is classified as current as of September 30, 2017.  Company is taking the actions described in Note 2 to address the issues raised by the Notice Letter.

(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 September 30, 2017 and 2016.

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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 September 30, 2017 by level within the fair value hierarchy:

	December 31, 2016 Fair Value Measurement Using						September 30, 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 September 30, 2017, approximately $321,000 of contingent liabilities were recorded on the consolidated balance sheets in other long-term obligations.

(8) STOCK ISSUANCE

During the quarter ended June 30, 2017, the Company issued 12,500 shares of Common Stock under a settlement agreement with an activist shareholder group. The shares were valued at $175,000 based on the closing price of the Common Stock on the date of the grant.

On June 20, 2017, the independent directors of the Board of Directors were granted 2,000 shares each of restricted Common Stock pursuant to the 2015 Plan. Fifty percent of the shares vest 12 months from the grant date, and the remaining shares vest 24 months from the grant date.

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, among other things, the Company’s prospects and performance in future periods, including improvement in operating results, revenue and Adjusted EBITDA, and dentist hiring, the amount of bank debt, compliance with debt covenants and actions by the Company’s lender, negotiation of financing arrangements and amendments to the Company’s credit agreements, dentist count, dentist turnover and recruitment, dentist productivity, net patient visits and patient flow, the impact of certain shareholder maters and strategic or other transactions the Company may undertake.

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 actions that may be taken by the Company’s lender, 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.

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General

The following discussion relates to factors that have affected the results of operations and financial condition of the Company for the quarters and nine months ended September 30, 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 as of September 30, 2017  managed 68 Offices in Colorado, New Mexico and Arizona staffed by 78 general dentists and 28 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 disclosed in Notes 2 and  6 to the condensed consolidated financial statements,the Company has a Loan and Security Agreement, dated as of March 29, 2016, with Guaranty Bank and Trust Company (the “Bank”), as amended by four amendments (collectively, the “Loan Agreement” or the “Credit Facility”), including the Fourth Amendment to Loan and Security Agreement and Forbearance Agreement dated March 30, 2017 (the “Forbearance Agreement”). As disclosed in Note 2 to the condensed consolidated financial statements on July 21, 2017, the Company received notice of events of default and acceleration (the “Notice Letter”) from counsel to the Bank in connection with the Loan Agreement.  The Notice Letter asserted events of default resulting from the Company’s failure to produce EBITDA of at least $870,000 for the second quarter of 2017 and to reduce the dollar amount of the outstanding reducing revolving loan by at least $500,000 on June 30, 2017.  The Notice Letter further asserted, as a result of these events of default, the current applicability of earlier events of default to which the Forbearance Agreement applied: (i) the Company’s failure to maintain a Maximum Total Cash Flow Leverage Ratio of not more than 3.15x as of December 31, 2016; (ii) the Company’s failure to maintain a Fixed Charge Coverage Ratio of at least 1.35 to 1.00as of December 31, 2016; and (iii) the Company’s failure to produce EBITDA of at least $650,000 for the fourth quarter of 2016.

The Notice Letter further asserted that the Forbearance Period (as defined in the Forbearance Agreement) had terminated and that the Bank declared its commitments to the Company to be terminated and would charge interest on all obligations of the Company at the default rate effective as of December 31, 2016.  In the Notice Letter, the Bank also declared all obligations of the Company to be immediately due and payable and demanded payment in full of all obligations by no later than July 31, 2017. The Notice Letter further stated that, although the Bank was not presently exercising its other rights and remedies available upon an event of default, it reserves its right to do so at any time in its sole discretion. The Company also failed to reduce the dollar amount of the outstanding reducing revolver by at least $500,000 on September 30, 2017. The Bank reduced the Company’s revolving line of  credit from $1.4 million to $1.1 million on October 1, 2017 as required by the Forbearance Agreement.  Due to the above facts, all Bank debt totaling $8.8 million is classified as current as of September 30, 2017.

The Company continues to have discussions with the Bank regarding a resolution of this matter.  The Company believes that any resolution with the Bank would involve obtaining financing to raise funds to pay down the outstanding principal on the Credit Facility or to refinance the Credit Facility. The Company has had discussions with several potential investors and lenders and has explored several funding options, including the issuance of additional equity or debt and the sale of certain dental practices.  The Company has signed a term sheet with a prospective investor and is currently negotiating definitive agreements with the party on an exclusive basis and with the Bank for amendments to the Credit Facility.  The Company therefore believes it will be successful in achieving a resolution with the Bank. However, there can be no assurance that the Company will be successful in completing the necessary financing or other transactions necessary to resolve this matter.

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Under the Credit Facility and related pledge and security agreements, the Bank has liens and security interests on substantially all of the assets of the Company. The failure to raise the funds necessary to meet the Bank’s requirements could have a material adverse effect on the Company, as the Bank could exercise its remedies under the Loan Agreement including foreclosure on the Company’s assets or other actions.

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 had 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 delivered a letter to the Company seeking (i) to nominate a Class II director to the Company’s Board of Directors at the Company’s 2017 annual meeting of shareholders, (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.

On May 11, 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 nominated 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 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. Messrs. Climaco, Fulton and O’Neil were elected at the 2017 annual meeting on June 20, 2017. In addition, the shareholder group 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.   The Company issued 12,500 shares of its Common Stock as reimbursement for the activist shareholder group’s reasonable fees and expenses as part of the settlement agreement.

 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 expenses of approximately $396,000 during the nine months ended September 30, 2017 in connection with matters related to the activist shareholder group and the Board of Directors’ evaluation of the Company’s strategic options.

As previously disclosed, as part of the Board of Directors’ 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 the second quarter of 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 improving its results of operations, at the direction of the Board of Directors the Company discontinued the strategic assessment in March 2017.

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 and December 31, 2016. The following table shows the Company’s dentist count since December 31, 2015.

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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
6/30/2017	99
9/30/2017	106

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 to accomplish this objective. The Company believes it is in the initial stages of turning its operations around, including increasing its revenue as discussed in “Results of Operations” below and increasing its dentist count as discussed below.  Several 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 Company also is working 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. The Company believes that these were contributing factors in the increase in dentist count from 99 and June 30, 2017 to 106 at September 30, 2017.  The Company believes it has now achieved more stability in its affiliated dentists and should continue to experience an increase in its dentist count in the future.

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 has taken other actions to reduce expenses and improve profitability. These efforts which commenced mid-September 2017, includes suspension of certain bonus programs and the Company’s contribution to the 401(k) plan along with the elimination of certain support personnel in the dental offices.

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 September 30, 2017, the Company had 27 Offices credentialed for Medicaid in Colorado and 3 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 3.7% of the Company’s revenue in the nine months ended September 30, 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.

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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.

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. 

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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 60 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 September 30, 2017, revenue increased $390,000, or 2.6%, to $15.5 million compared to $15.2 million for the quarter ended September 30, 2016.  For the quarter ended September 30, 2017, net loss increased $41,000 to $(558,000), or $(0.30) per share, compared to $(517,000), or $(0.28) per share, for the quarter ended September 30, 2016.

The Company believes it is in the initial stages of turning its operations around including increasing its dentist count and revenue.  As indicated above, revenue increased 2.6% in the third quarter of 2017 versus the same quarter in 2016 and also increased 5.2% or $765,000 from the second quarter of 2017.  Additionally, the Company experienced a   progressively increasing daily same store sales rate in the third quarter of 2017, culminating in September’s daily same store sales up 6.5% versus September 2016.  This trend has continued through October 2017.  These results are directly related to the Company increasing its dentist count as disclosed in “Recent Developments” above.  While the Company is disappointed in the profitability generated in the third quarter of 2017, it has made certain cost reduction efforts to address this issue.  These efforts are described in “Recent Developments” above.

For the nine months ended September 30, 2017, revenue decreased $1.5 million, or 3.1%, to $46.0 million compared to $47.5 million for the nine months ended September 30, 2016.  For the nine months ended September 30, 2017, net loss increased $837,000 to $(1.7 million), or $(0.90) per share, compared to $(847,000), or $(0.46) per share, for the nine months ended September 30, 2016.

As discussed in “Recent Developments” above, the Company believes that the decrease in the number of dentists in the network and matters related to the activist shareholder group adversely affected revenue in the nine months ended September 30, 2017.  The Company also incurred expenses in connection with the strategic assessment process, which was discontinued in March 2017, and in connection with matters related to the activist shareholder group.

During the first nine months of 2017, the Company generated $1.7 million of cash from operations.  During this period, the Company had capital expenditures of approximately $521,000 and decreased total bank debt by approximately $1.1 million.

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The Company’s Adjusted EBITDA decreased $1.3 million, or 60.0%, to $862,000 for the nine months ended September 30, 2017 compared to $2.2 million for the nine months ended September 30, 2016.  The decrease in Adjusted EBITDA was driven by the increased net loss, a $440,000 increase in income tax benefit and a $321,000 reduction in depreciation and amortization.  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, stock grant expense and income tax benefit to net loss as in the following table:

	Quarters Ended September 30,						Nine Months Ended September 30,
	2016			2017			2016			2017
RECONCILIATION OF ADJUSTED EBITDA:
Net loss	$	(516,516	)	$	(557,565	)	$	(847,354	)	$	(1,683,897	)
Add back:
Depreciation and amortization - Offices		988,031			869,589			3,026,164			2,748,083
Depreciation and amortization - Corporate		47,114			38,518			165,994			123,466
Stock-based compensation expense		32,309			74,031			123,118			160,286
Interest expense, net		70,367			110,004			185,240			276,842
Stock grant		-			-			-			175,000
Income tax benefit		(286,131	)		(303,719	)		(497,653	)		(937,281	)
Adjusted EBITDA		335,174		$	230,858		$	2,155,509		$	862,499

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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.

BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Quarters Ended September 30,								Nine Months Ended September 30,
	2016				2017				2016				2017
REVENUE:		100.0	%			100.0	%			100.0	%			100.0	%
DIRECT EXPENSES:
Clinical salaries and benefits		61.0	%			62.3	%			60.2	%			61.8	%
Dental supplies		4.8	%			4.3	%			4.6	%			4.3	%
Laboratory fees		5.7	%			5.6	%			5.6	%			5.8	%
Occupancy		10.5	%			10.5	%			9.9	%			10.5	%
Advertising and marketing		1.2	%			1.0	%			1.0	%			1.1	%
Depreciation and amortization		6.5	%			5.6	%			6.4	%			6.0	%
General and administrative		9.2	%			9.4	%			8.7	%			8.7	%
		98.9	%			98.7	%			96.4	%			98.2	%
Contribution from dental offices		1.1	%			1.3	%			3.6	%			1.8	%
CORPORATE EXPENSES:
General and administrative		5.6	%	(1)		5.8	%	(1)		5.7	%	(2)		6.3	%	(2)
Stock grant		-				-				-				0.4	%	(3)
Depreciation and amortization		0.3	%			0.2	%			0.3	%			0.3	%
OPERATING LOSS		( 4.8	)%			( 4.8	)%			( 2.4	)%			( 5.1	)%
Interest expense		0.5	%			0.7	%			0.4	%			0.6	%
LOSS BEFORE INCOME TAXES		( 5.3	)%			( 5.5	)%			( 2.8	)%			( 5.7	)%
Income tax benefit		( 1.9	)%			( 2.0	)%			( 1.0	)%			( 2.0	)%
NET LOSS		( 3.4	)%			( 3.6	)%			( 1.8	)%			( 3.7	)%

⁽¹⁾ Corporate expense - general and administrative includes $32,309 and $74,031 of stock-based compensation expense pursuant to ASC Topic 718 for the quarters ended September 30, 2016 and 2017, respectively.

⁽²⁾ Corporate expense - general and administrative includes $123,118 and $160,286 of stock-based compensation expense pursuant to ASC Topic 718 for the nine months ended September 30, 2016 and 2017, respectively.

⁽³⁾ The Company issued 12,500 shares of Common Stock under a settlement agreement with an activist shareholder group. The shares were valued at $175,000 based on the closing price of the Common Stock on the date of the grant.

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Quarter Ended September 30, 2017 Compared to Quarter Ended September 30, 2016:

Revenue

For the quarter ended September 30, 2017, revenue increased $390,000, or 2.6%, to $15.5 million compared to $15.2 million for the quarter ended September 30, 2016.   The Company outlines the factors that it believes contributed to the increase in revenue in “Recent Developments” and in “Results of Operations” above. 

Direct expenses

Clinical salaries and benefits. For the quarter ended September 30, 2017, clinical salaries and benefits increased to $9.7 million compared to $9.2 million for the quarter ended September 30, 2016, an increase of $438,000, or 4.7%.  This increase in clinical salaries and benefits is related to increases of  $254,000 in support personnel payroll expenses, $136,000 in hygienist payroll expenses and $42,000 in dentist payroll expenses. Approximately $23,000 of the increase is related to the Company’s efforts to  build a centralized insurance accounts receivable and patient scheduling team.  As a percentage of revenue, clinical salaries and benefits increased to 62.3% for the quarter ended September 30, 2017 compared to 61.0% for the quarter ended September 30, 2016.  See “Recent Developments” above for a discussion of recent actions taken by the Company to reduce expenses in this category.

Dental supplies. For the quarter ended September 30, 2017, dental supplies decreased to $674,000 compared to $729,000 for the quarter ended September 30, 2016, a decrease of $55,000, or 7.5%.  This decrease is partially related to a dental supply inventory adjustment of $39,000.  As a percentage of revenue, dental supplies decreased from 4.8% for the quarter ended September 30, 2016 to 4.3% for the quarter ended September 30, 2017.

Laboratory fees. For the quarter ended September 30, 2017, laboratory fees increased to $874,000 compared to $869,000 for the quarter ended September 30, 2016, an increase of $5,000, or 0.6%.  As a percentage of revenue, laboratory fees decreased to 5.6 % for the quarter ended September 30, 2017 compared to 5.7% for the quarter ended September 30, 2016.

Occupancy. For the quarters ended September 30, 2017 and September 30, 2016, occupancy expense remained constant at  $1.6 million.  As a percentage of revenue, occupancy expense remained constant at 10.5% for the quarters ended September 30, 2017 and  September 30, 2016.

Advertising and marketing. For the quarter ended September 30, 2017, advertising and marketing expenses decreased to $148,000 compared to $176,000 for the quarter ended September 30, 2016, a decrease of $28,000, or 15.8%.  The decrease in advertising and marketing expenses is attributable to decreased marketing expense at community events as well as a decrease of $9,000 in internet advertising.  As a percentage of revenue, advertising and marketing expenses decreased to 1.0% for the quarter ended September 30, 2017 compared to 1.2% for the quarter ended September 30, 2016.

Depreciation and amortization-Offices.  For the quarter ended September 30, 2017, depreciation and amortization expenses attributable to the Offices decreased to $870,000 compared to approximately $988,000 for the quarter ended September 30, 2016, a decrease of $118,000, or 12.0% as additional assets became fully depreciated.  As a percentage of revenue, depreciation and amortization expenses attributable to the Offices decreased to 5.6% for the quarter ended September 30, 2017 compared to 6.5% for the quarter ended September 30, 2016.

General and administrative-Offices.  For the quarter ended September 30, 2017, general and administrative expenses attributable to the Offices increased to $1.5 million compared to approximately $1.4 million for the quarter ended September 30, 2016, an increase of $70,000, or 5.0%. This increase in general and administrative expenses attributable to the Offices is  related to increases of $56,000 of bad debt expense and $14,000 in professional fees.  As a percentage of revenue, general and administrative expenses attributable to the Offices increased to 9.4% for the quarter ended September 30, 2017 compared to 9.2% for the quarter ended September 30, 2016.

Contribution from dental Offices

As a result of revenue increasing $390,000 and direct expenses increasing $357,000 during the quarter ended September 30, 2017, contribution from dental Offices increased $32,000, or 19.8%,  to $196,000 for the quarter ended September 30, 2017 compared to $163,000 for the quarter ended September 30, 2016.  As a percentage of revenue, contribution from dental Offices increased to 1.3% for the quarter ended September 30, 2017 compared to 1.1% for the quarter ended September 30, 2016.

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Corporate expenses

Corporate expenses - general and administrative. For the quarter ended September 30, 2017, corporate expenses – general and administrative increased to $908,000 compared to $848,000 for the quarter ended September 30, 2016, an increase of $60,000, or 7.1%.  This increase is primarily attributable to the increase in  stock-based compensation expense pursuant to ASC Topic 718 of $42,000 from the quarter ended September 30, 2016 to the quarter ended September 30, 217 along with increases of $19,000 in corporate wages.  As a percentage of revenue, corporate expenses - general and administrative increased to 5.8% for the quarter ended September 30, 2017 compared to 5.6% for the quarter ended September 30, 2016.

Corporate expenses - depreciation and amortization. For the quarter ended September 30, 2017, corporate expenses - depreciation and amortization decreased to $39,000 compared to $47,000 for the quarter ended  September 30, 2016, a decrease of $9,000, or 18.2% as additional assets became fully depreciated.  As a percentage of revenue, corporate expenses – depreciation and amortization decreased to 0.2% for the quarter ended September 30, 2017 compared to 0.3% for the quarter ended September 30, 2016.

Operating loss

As a result of the matters discussed above, the Company’s operating loss increased by $19,000 to $(751,000) for the quarter ended September 30, 2017 compared to $(732,000) for the quarter ended September 30, 2016.  As a percentage of revenue, operating loss remained constant at  (4.8)% for the quarters ended September 30, 2017 and September 30, 2016.

Interest expense, net

For the quarter ended September 30, 2017, interest expense increased to $110,000 compared to $70,000 for the quarter ended September 30, 2016, an increase of $40,000, or 56.3%.  This increase is attributable to higher interest rates on the Credit Facility.  As a percentage of revenue, interest expense increased to 0.7% for the quarter ended September 30, 2017 compared to 0.5% for the quarter ended September 30, 2016.

Net loss

As a result of the above, the Company’s net loss was $(558,000) for the quarter ended September 30, 2017 compared to net loss of $(517,000) for the quarter ended September 30, 2016, an increase of $41,000, or 7.9%.  Net loss for the quarter ended September 30, 2017 was net of income tax benefit of $(304,000), while net loss for the quarter ended September 30, 2016 was net of income tax benefit of $(286,000).  The effective tax rate for the quarter ended September 30, 2017 was 35.3% while the effective tax rate for the quarter ended September 30, 2016 was 35.6%.  As a percentage of revenue, net loss increased to (3.6)% for the quarter ended September 30, 2017 compared to (3.4)% for the quarter ended September 30, 2016.

Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016:

Revenue

For the nine months ended September 30, 2017, revenue decreased $1.5 million, or 3.1%, to $46.0 million compared to $47.5 million for the nine months ended September 30, 2016.  The Company outlines the factors that it believes contributed to the decrease in revenue in “Recent Developments” and in “Results of Operations” above.

Direct expenses

Clinical salaries and benefits. For the nine months ended September 30, 2017, clinical salaries and benefits decreased $165,000, or 0.6%, to $28.4 millioncompared to $28.6 million for the nine months ended September 30, 2016.  This decrease in clinical salaries and benefits is net of an increase of $193,000 in salaries and benefits for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 as the Company builds a centralized insurance accounts receivable and patient scheduling team.  The decrease in clinical salaries and benefits is directly related to the Company’s lower dentist count for the nine months ended September 30, 2017 compared to the same period in 2016.  As a percentage of revenue, clinical salaries and benefits increased to 61.8% for the nine months ended September 30, 2017 compared to 60.2% for the nine months ended September 30, 2016.

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Dental supplies. For the nine months ended September 30, 2017, dental supplies decreased $212,000, or 9.7%,  to $2.0 million compared to $2.2 million for the nine months ended September 30, 2016.  This decrease is directly related to the decrease in revenue during the nine months ended September 30, 2017 compared to the same period in 2016 and a dental supply inventory adjustment of $39,000. As a percentage of revenue, dental supplies decreased to 4.3% for the nine months ended September 30, 2017 compared to 4.6% for the nine months ended September 30, 2016.

Laboratory fees. For the nine months ended September 30, 2017, laboratory fees increased $38,000, or 0.6%, to $2.7 million from $2.6 million for the nine months ended September 30, 2016.   As a percentage of revenue, laboratory fees increased to 5.8% for the nine months ended  September 30, 2017 compared to 5.6% for the nine months ended September 30, 2016.  The increase in  laboratory fees as a percentage of revenue for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 is attributable to a 6.8% increase in the number of crown and bridge procedures completed in the 2017 period compared to the 2016 period.

Occupancy. For the nine months ended September 30, 2017, occupancy expense increased $128,000, or 2.7%, to $4.8 millioncompared to $4.7 million for the nine months ended September 30, 2016.  This increase in occupancy expense is primarily attributable to a $61,000 increase in janitorial expense as the Company changed its vendor for this service and general rent increases.  As a percentage of revenue, occupancy expense increased to 10.5% for the nine months ended September 30, 2017 compared to 9.9% for the nine months ended September 30, 2016.

Advertising and marketing. For the nine months ended September 30, 2017, advertising and marketing expense decreased  to $486,000 compared to $490,000 for the nine months ended September 30, 2016, a decrease of $4,000 or 0.9%.  As a percentage of revenue, advertising and marketing expense increased to 1.1% for the nine months ended September 30, 2017 compared to 1.0% for the nine months ended September 30, 2016.

Depreciation and amortization-Offices.  For the nine months ended September 30, 2017, depreciation and amortization expenses attributable to the Offices decreased to $2.7 million compared to $3.0 million for the nine months ended September 30, 2016, a decrease of $278,000 or 9.2% as additional assets became fully depreciated.  As a percentage of revenue, depreciation and amortization expenses attributable to the Offices decreased to 6.0% for the nine months ended September 30, 2017 compared to 6.4% for the nine months ended September 30, 2016.

General and administrative-Offices.  For the nine months ended September 30, 2017, general and administrative expenses attributable to the Offices decreased to $4.0 million compared to $4.1 million for the nine months ended September 30, 2016, a decrease of $125,000 or 3.0%.  The decrease in general and administrative expenses is primarily attributable to a decrease of $104,000 in taxes mainly due to a reduction of gross receipt taxes in New Mexico which varies directly with revenue.  As a percentage of revenue, general and administrative expenses attributable to the Offices remained constant at  8.4% for the nine months ended September 30, 2017 and September 30, 2016.

Contribution from dental Offices

As a result of revenue decreasing $1.5 million and direct expenses decreasing $618,000 during the nine months ended September 30, 2017, contribution from dental Offices decreased to $834,000 for the nine months ended September 30, 2017 compared to $1.7 million for the nine months ended September 30, 2016, a decrease of $869,000 or 51%. As a percentage of revenue, contribution from dental Offices decreased to 1.8% for the nine months ended September 30, 2017 compared to 3.6% for the nine months ended September 30, 2016.

Corporate expenses

Corporate expenses - general and administrative. For the nine months ended September 30, 2017, corporate expenses – general and administrative increased to $2.9 million compared to $2.7 million for the nine months ended September 30, 2016, an increase of $183,000 or 6.8%.  This increase is primarily attributable to increases in professional fees related to matters involving the activist shareholder group and the strategic assessment process, as discussed in “Recent Developments” above.  The Company incurred additional professional fees including legal fees of approximately $230,000 during the nine months ended September 30, 2017 in connection with matters related to the activist shareholder group and the Board of Directors’ evaluation of the Company’s strategic options.  As a percentage of revenue, corporate expenses - general and administrative increased 6.3% for the nine months ended September 30, 2017 compared to 5.7% for the nine months ended September 30, 2016.

Stock grant.For the nine months ended September 30, 2017, the Company issued 12,500 shares of Common Stock as part of the settlement with the activist shareholder group, as discussed in “Recent Developments” above. The shares were valued at $175,000 based on the stock price on the day of the grant.  As a percentage of revenue, stock grant expense was 0.4% for the nine months ended September 30, 2017.

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Corporate expenses - depreciation and amortization. For the nine months ended September 30, 2017, corporate expenses - depreciation and amortization decreased to $123,000 compared to $166,000 for the nine months ended September 30, 2016, a decrease of $43,000, or 25.6% as additional assets became fully depreciated.  As a percentage of revenue, corporate expenses – depreciation and amortization remained constant at  0.3% for the nine months ended September 30, 2017 and September 30, 2016.

Operating loss

As a result of the decrease in contribution from dental Offices and the increase in corporate expenses discussed above, the Company’s operating loss increased by $1.2 million to $(2.3 million) for the nine months ended September 30, 2017 compared to $(1.2 million) for the nine months ended September 30, 2016.  As a percentage of revenue, operating loss increased to (5.1)% for the nine months ended September 30, 2017 compared to (2.4)% for the nine months ended September 30, 2016.

Interest expense, net

For the nine months ended September 30, 2017, interest expense, net increased to $277,000 compared to $185,000 for the nine months ended September 30, 2016, an increase of $92,000 or 49.5%.  This increase is attributable to higher interest rates on the Credit Facility.  As a percentage of revenue, interest expense, net increased to 0.6% for the nine months ended September 30, 2017 compared to 0.4% for the nine months ended September 30, 2016.

Net loss

As a result of the above, the Company’s net loss was $(1.7 million) for the nine months ended September 30, 2017 compared to net loss of $(847,000) for the nine months ended September 30, 2016, an increase of $837,000, or 98.7%.  Net loss for the nine months ended September 30, 2017 was net of income tax benefit of $(937,000), while net loss for the nine months ended September 30, 2016 was net of income tax benefit of $(498,000). The effective tax rate for the nine months ended September 30, 2017 was 35.8% while the effective tax rate for the nine months ended September 30, 2016 was 37%.   As a percentage of revenue, net loss increased to (3.7%) for the nine months ended September 30, 2017 compared to (1.8)% for the nine months ended September 30, 2016.

Liquidity and Capital Resources

The Company finances its operations through a combination of cash provided by operating activities and bank credit facilities.  As of September 30, 2017, the Company had a working capital deficit of approximately $11.4 million, an accumulated deficit of $(2.9 million) and a cash balance of $240,000.

The terms of the Company’s Credit Facility are described in Note 6 to the condensed consolidated financial statements. On July 21, 2017, the Company received the Notice Letter from counsel to the Bank. For a discussion of the current status of the Credit Facility, including the Notice Letter from the Bank and actions that may be taken by the Bank and by the Company in response to the Notice Letter, please see “Recent Developments” above. Due to the above facts, all Bank debt is classified as current as of September 30, 2017.

On March 30, 2016, the Company terminated its credit facility with Compass Bank.  The Company repaid the outstanding $10.6 million principal amount plus accrued interest under the credit agreement with Compass Bank with borrowings under the Credit Facility.

Net cash provided by operating activities was approximately $1.7 million and $1.3 million for the nine months ended September 30, 2017 and 2016, respectively.  During the nine months ended September 30, 2017, excluding net loss and after adding back non-cash items, the Company’s cash provided by operating activities consisted of an increase in accounts payable and accrued expenses of approximately $1.9 million and a decrease in prepaid expenses and other assets of approximately $10,000, offset  by an increase in accounts receivable of $1.5 million, , a decrease of other long-term obligations of approximately $23,000 and an increase in deferred charges and other assets of approximately $8,000.   During the nine months ended September 30, 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 $172,000 in other long-term obligations and $84,000 in income taxes payable, offset by an increase in accounts receivable of approximately $942,000, a decrease in accounts payable and accrued expenses of approximately $352,000 and an increase in prepaid expenses and other assets of approximately $203,000.

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Net cash used in investing activities was approximately $497,000 and $666,000for the nine months ended September 30, 2017 and 2016, respectively.  For the nine months ended September 30, 2017, the Company invested approximately $521,000 in capital expenditures offset by a decrease in a note receivable of $23,000.  For the nine months ended September 30, 2016, the Company invested approximately $685,000 in capital expenditures, including approximately $62,000 related to one Office that was converted to digital radiography, offset by a decrease in a note receivable of $19,000.

Net cash used in financing activities was approximately $1.1 million and $687,000 for the nine months ended September 30, 2017 and 2016, respectively.  During the nine months ended September 30, 2017, net cash used in financing activities was comprised of approximately $1.1 million used to pay down the Credit Facility.  During the nine months ended September 30, 2016, net cash used in financing activities was comprised of approximately $269,000 used to pay down the Credit Facility, $409,000 for the payment of dividends and $9,000 used in the purchase and retirement of Common Stock. 

As of September 30, 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	$	8,757,469	$	8,757,469	$	-	$	-	$	-
Operating lease obligations		15,211,940		4,214,527		6,406,850		2,772,946		1,817,617
Total	$	23,969,409	$	12,971,996	$	6,406,850	$	2,772,946	$	1,817,617

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” above.  In addition, as discussed in Note 2 and Note 6 to the condensed consolidated financial statements in this report, the Company received the Notice Letter in July 2017 regarding certain events of default by the Company under its Credit Facility, which remain outstanding.  Due to these facts, all Bank debt totaling $8.8 million is classified as current as of September 30, 2017.  Due to the Notice Letter, the Company expects that it will be required to raise additional equity or debt to pay down the outstanding principal on the Credit Facility or to refinance the Credit Facility. The Company continues to have discussions with the Bank regarding a resolution of this matter.  Under the Credit Facility and related pledge and security agreements, the Bank has liens and security interests on substantially all of the assets of the Company.   The failure to resolve this matter could have a material adverse effect on the Company, as the Bank could exercise its remedies under the Loan Agreement including foreclosure on the Company’s assets or take other actions.

Due to the above issues, there is substantial doubt about the Company’s ability to continue as a going concern if no additional action takes place.  The Company believes that any resolution with the Bank would involve financing to raise funds to pay down the outstanding principal on the Credit Facility or to refinance the Credit Facility. The Company has had discussions with several potential investors and lenders and has explored several funding options, including the issuance of additional equity or debt and the sale of certain dental practices. The Company has signed a term sheet with  a prospective investor and is currently negotiating definitive agreements with that party on an exclusive basis and with the Bank for amendments to the Credit Facility.  The Company therefore believes it will be successful in achieving a resolution with the Bank. However, there can be no assurance that the Company will be successful in completing the necessary financing or other transactions necessary to resolve this matter.

 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 September 30, 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 September 30, 2017.

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There has been no change in the Company’s internal control over financial reporting during the three months ended September 30, 2017 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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 September 30, 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 September 30, 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.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

The Company’s Current Report on Form 8-K (SEC File No. 000-23367), as filed with the Securities and Exchange Commission on July 27, 2017, is incorporated by reference herein. See also the discussion in Note 2 and Note 6 to the Company’s condensed consolidated financial statements in this report.

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ITEM 6.   EXHIBITS

Exhibit Number	Description of Document
3.1P	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	Second Amended and Restated Bylaws, incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K (SEC File No. 000-23367), as filed with the Securities and Exchange Commission on July 15, 2016.
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	Loan and Security Agreement, dated March 29, 2016, between the Company and Guaranty Bank and Trust Company, incorporated herein by reference to Exhibit 10.47 to the Company’s Annual Report on Form 10-K (SEC File No. 000-23367), as filed with the Securities and Exchange Commission on March 30, 2016.
10.2	Amendment to Loan and Security Agreement, dated July 29, 2016, by and between the Company and Guaranty Bank and Trust Company, incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (SEC File No. 000-23367), as filed with the Securities and Exchange Commission on August 4, 2016.
10.3	Second Amendment to Loan and Security Agreement, dated November 14, 2016, between the Company and Guaranty Bank and Trust Company, incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q (SEC File No. 000-23367), as filed with the Securities and Exchange Commission on November 14, 2016.
10.4	Third Amendment to Loan and Security Agreement, dated December 9, 2016, between the Company and Guaranty Bank and Trust Company, incorporated herein by reference to Exhibit 10.48 to the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on March 31, 2017.
10.5	Fourth Amendment to Loan and Security Agreement, dated March 30, 2017, between the Company and Guaranty Bank and Trust Company, incorporated herein by reference to Exhibit 10.49 to the Company’s Annual Report on Form 10-K (SEC File No. 000-23367), 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.

P Filed on paper

29

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:  November 14, 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:November 14, 2017	By:	/s/ Dennis N. Genty
	Name:	Dennis N. Genty
	Title:	Chief Financial Officer, Secretary, and Treasurer
		(Principal Financial and Accounting Officer)

30

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.

November 14, 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.

November 14, 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 June 30, 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:	November 14, 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	9 Months Ended
	Sep. 30, 2017	Nov. 09, 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		1,872,761
Document Fiscal Year Focus	2017
Document Fiscal Period Focus	Q3
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2017

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) - USD ($)	Sep. 30, 2017	Dec. 31, 2016
CURRENT ASSETS:
Cash	$ 239,545	$ 157,923
Accounts receivable, net of allowance for doubtful accounts of approximately $410,000 and $430,000, respectively	4,011,911	3,212,190
Note receivable	34,195	34,195
Prepaid expenses and other assets	749,742	759,749
Total current assets	5,035,393	4,164,057
PROPERTY AND EQUIPMENT, net	5,562,629	7,279,436
OTHER NONCURRENT ASSETS:
Intangible assets, net	6,087,194	6,721,084
Deferred charges and other assets	163,991	155,741
Note receivable	7,620	31,051
Total assets	16,856,827	18,351,369
CURRENT LIABILITIES:
Accounts payable	4,349,373	2,723,473
Accrued expenses	803,513	925,776
Accrued payroll and related expenses	2,522,354	2,164,758
Current maturities of long-term debt	8,757,469	2,500,000
Total current liabilities	16,432,709	8,314,007
LONG-TERM LIABILITIES:
Deferred tax liability, net	284,128	1,174,416
Long-term debt	0	7,351,006
Other long-term obligations	1,058,316	1,081,655
Total liabilities	17,775,153	17,921,084
SHAREHOLDERS' EQUITY (DEFICIT):
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 1,872,761 shares issued and outstanding, respectively	1,950,287	1,615,001
Accumulated deficit	(2,868,613)	(1,184,716)
Total shareholders' equity (deficit)	(918,326)	430,285
Total liabilities and shareholders' equity (deficit)	$ 16,856,827	$ 18,351,369

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Parenthetical) - USD ($)	Sep. 30, 2017	Dec. 31, 2016
CURRENT ASSETS:
Allowance for doubtful accounts	$ 430,000	$ 410,000
SHAREHOLDERS' EQUITY (DEFICIT):
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)	1,872,761	1,860,261
Common Stock, outstanding (in shares)	1,872,761	1,860,261

XML

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) - USD ($)	3 Months Ended				9 Months Ended
	Sep. 30, 2017		Sep. 30, 2016		Sep. 30, 2017		Sep. 30, 2016
REVENUE:
Dental practice revenue	$ 14,542,690		$ 13,988,133		$ 42,915,170		$ 44,009,444
Capitation revenue	1,001,297		1,166,155		3,068,716		3,461,218
Total Revenue	15,543,987		15,154,288		45,983,886		47,470,662
DIRECT EXPENSES:
Clinical salaries and benefits	9,680,390		9,242,477		28,398,877		28,564,107
Dental supplies	674,402		729,299		1,974,995		2,187,229
Laboratory fees	874,102		869,014		2,687,004		2,648,658
Occupancy	1,637,622		1,591,841		4,840,771		4,712,445
Advertising and marketing	148,257		176,150		485,628		490,227
Depreciation and amortization	869,589		988,031		2,748,083		3,026,164
General and administrative	1,464,120		1,394,284		4,014,757		4,139,482
Total Direct Expenses	15,348,482		14,991,096		45,150,115		45,768,312
Contribution from dental offices	195,505		163,192		833,771		1,702,350
CORPORATE EXPENSES:
General and administrative	908,267	[1]	848,358	[1]	2,879,641	[2]	2,696,123	[2]
Stock grant	0		0		175,000	[3]	0
Depreciation and amortization	38,518		47,114		123,466		165,994
OPERATING LOSS	(751,280)		(732,280)		(2,344,336)		(1,159,767)
OTHER EXPENSE:
Interest expense, net	110,004		70,367		276,842		185,240
LOSS BEFORE INCOME TAXES	(861,284)		(802,647)		(2,621,178)		(1,345,007)
Income tax benefit	(303,719)		(286,131)		(937,281)		(497,653)
NET LOSS	$ (557,565)		$ (516,516)		$ (1,683,897)		$ (847,354)
Net loss per share of Common Stock - Basic (in dollars per share)	$ (0.30)		$ (0.28)		$ (0.90)		$ (0.46)
Net loss per share of Common Stock - Diluted (in dollars per share)	$ (0.30)		$ (0.28)		$ (0.90)		$ (0.46)
Weighted average number of shares of Common Stock and dilutive securities:
Basic (in shares)	1,872,761		1,860,261		1,866,580		1,860,334
Diluted (in shares)	1,872,761		1,860,261		1,866,580		1,860,334

[1] Corporate expense - general and administrative includes $32,309 and $74,031 of stock-based compensation expense pursuant to ASC Topic 718 for the quarters ended September 30, 2016 and 2017, respectively.

[2] Corporate expense - general and administrative includes $123,118 and $160,286 of stock-based compensation expense pursuant to ASC Topic 718 for the nine months ended September 30, 2016 and 2017, respectively.

[3] The Company issued 12,500 shares of Common Stock under a settlement agreement with an activist shareholder group. The shares were valued at $175,000 based on the closing price of the Common Stock on the date of the grant.

XML

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (Parenthetical) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) [Abstract]
Common stock issued (in shares)			12,500
Value of common stock issued			$ 175,000
General and Administrative Expenses [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Compensation Cost [Line Items]
Stock based compensation expense	$ 74,031	$ 32,309	$ 160,286	$ 123,118

XML

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT) (UNAUDITED) - 9 months ended Sep. 30, 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
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Stock grant	$ 175,000	0	$ 175,000
Stock grant (in shares)	12,500		12,500
Stock-based compensation expense	$ 160,286	0	$ 160,286
Net loss	0	(1,683,897)	(1,683,897)
BALANCES at Sep. 30, 2017	$ 1,950,287	$ (2,868,613)	$ (918,326)
BALANCES (in shares) at Sep. 30, 2017	1,872,761

XML

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - USD ($)	9 Months Ended
	Sep. 30, 2017		Sep. 30, 2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$ (1,683,897)		$ (847,354)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	2,871,549		3,192,158
Stock-based compensation expense	160,286		123,118
Provision for doubtful accounts	652,086		635,522
Benefit from deferred income taxes	(890,288)		(547,765)
Stock grant	175,000	[1]	0
Changes in assets and liabilities
Accounts receivable	(1,451,807)		(942,021)
Prepaid expenses and other assets	10,007		(203,301)
Deferred charges and other assets	(8,250)		0
Accounts payable	1,625,900		(49,622)
Accrued expenses	(122,263)		(211,088)
Accrued payroll and related expenses	357,596		(91,333)
Income taxes payable (receivable)	0		84,206
Other long-term obligations	(23,339)		171,810
Net cash provided by operating activities	1,672,580		1,314,330
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures	(520,852)		(684,729)
Note receivable	23,431		19,221
Net cash used in investing activities	(497,421)		(665,508)
CASH FLOWS USED IN FINANCING ACTIVITIES:
Advances - line of credit	20,329,290		16,993,128
Repayments - line of credit	(20,368,477)		(16,261,772)
Repayments - reducing revolving loan	(1,054,350)		(1,000,000)
Purchase and retirement of Common Stock	0		(8,860)
Common Stock cash dividends	0		(409,443)
Net cash used in financing activities	(1,093,537)		(686,947)
NET CHANGE IN CASH	81,622		(38,125)
CASH, beginning of period	157,923		258,801
CASH, end of period	239,545		220,676
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest	302,589		199,982
Cash paid for income taxes	0		50,906
Cash received for income taxes	46,992		85,000
NON-CASH ITEMS:
Repayments - line of credit with Compass Bank	$ 0		$ 10,617,598

[1] The Company issued 12,500 shares of Common Stock under a settlement agreement with an activist shareholder group. The shares were valued at $175,000 based on the closing price of the Common Stock on the date of the grant.

XML

UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

9 Months Ended

Sep. 30, 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 September 30, 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 and nine months ended September 30, 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.

XML

LIQUIDITY AND FINANCIAL RESOURCES UPDATE

9 Months Ended

Sep. 30, 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.

On July 21, 2017, the Company received notice of events of default and acceleration (the “Notice Letter”) from counsel to Guaranty Bank and Trust Company (the “Bank”) in connection with the Loan and Security Agreement, dated as of March 29, 2016, as amended by four amendments (collectively, the “Loan Agreement” or the “Credit Facility”), including the Fourth Amendment to Loan and Security Agreement and Forbearance Agreement dated March 30, 2017 (the “Forbearance Agreement”).  The Notice Letter asserted events of default resulting from the Company’s failure to produce EBITDA of at least $870,000 for the second quarter of 2017 and to reduce the dollar amount of the outstanding reducing revolving loan by at least $500,000 on June 30, 2017.  The Notice Letter further asserted that, as a result of these events of default, the following earlier events of default to which the Forbearance Agreement applied again existed: (i) the Company’s failure to maintain a Maximum Total Cash Flow Leverage Ratio of not more than 3.15x as of December 31, 2016; (ii) the Company’s failure to maintain a Fixed Charge Coverage Ratio of at least 1.35 to 1.00 as of December 31, 2016; and (iii) the Company’s failure to produce EBITDA of at least $650,000 for the fourth quarter of 2016.

The Notice Letter further asserted that the Forbearance Period (as defined in the Forbearance Agreement) has terminated and that the Bank declared its commitments to the Company to be terminated and would charge interest on all obligations of the Company at the default rate effective as of December 31, 2016.  In the Notice Letter, the Bank also declared all obligations of the Company to be immediately due and payable and demanded payment in full of all obligations by no later than July 31, 2017.  The Notice Letter further stated that, although the Bank was not presently exercising its other rights and remedies available upon an event of default, it reserved its right to do so at any time in its sole discretion.

The Company failed to reduce the dollar amount of the outstanding reducing revolver by at least $500,000 on September 30, 2017.  The Company’s revolving line of credit with the Bank was reduced from $1.4 million to $1.1 million on October 1, 2017 as required by the Forbearance Agreement.  Due to these facts, all Bank debt totaling $8.8 million is classified as a current liability on the balance sheet as of September 30, 2017. Under the Credit Facility and related pledge and security agreements, the Bank has liens and security interests on substantially all of the assets of the Company.  The Company continues to have discussions with the Bank regarding a resolution of this matter.  The failure to resolve this matter could have a material adverse effect on the Company, as the Bank could exercise its remedies under the Loan Agreement including foreclosure on the Company’s assets or take other actions.

Due to the above issues, there is substantial doubt about the Company’s ability to continue as a going concern if no additional action takes place.  The Company believes that any resolution with the Bank would involve financing to raise funds to pay down the outstanding principal on the Credit Facility or to refinance the Credit Facility. The Company has had discussions with several potential investors and lenders and has explored several funding options, including the issuance of additional equity or debt and the sale of certain dental practices. The Company has signed a term sheet with a prospective investor and is currently negotiating definitive agreements with that party on an exclusive basis and with the Bank for amendments to the Credit Facility.  The Company therefore believes it will be successful in achieving a resolution with the Bank. However, there can be no assurance that the Company will be successful in completing the necessary financing or other transactions necessary to resolve this matter.

XML

SIGNIFICANT ACCOUNTING POLICIES

9 Months Ended

Sep. 30, 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 September 30, 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 $41,815 in principal amount was outstanding at September 30, 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 September 30, 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 remained constant at $211,000 for the quarters ended September 30, 2017 and 2016.  Amortization remained constant at $634,000 for the nine months ended September 30, 2017 and 2016.

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 September 30, 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 September 30, 2017 and 2016 was approximately $74,000 and $32,000, respectively, related to stock options.  Total stock-based compensation expense included in the Company’s condensed consolidated statements of operations for the nine months ended September 30, 2017 and 2016 was approximately $160,000 and $123,000, 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 September 30, 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 September 30, 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 modified retrospective method.  The Company plans to adopt ASU 2014-09 beginning January 1, 2018 using the modified retrospective method.  The standard  is not expected to have a material effect on its consolidated financial statements with the exception of additional disclosures. 

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.

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LOSS PER SHARE

9 Months Ended

Sep. 30, 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 September 30,
	2016								2017
	Net Loss			Shares		Per Share Amount			Net Loss			Shares		Per Share Amount
Basic EPS	$	(516,516	)		1,860,261	$	(0.28	)	$	(557,565	)		1,872,761	$	(0.30	)
Effect of Dilutive Stock Options		-			-		-			-			-		-
Diluted EPS	$	(516,516	)		1,860,261	$	(0.28	)	$	(557,565	)		1,872,761	$	(0.30	)

For the quarters ended September 30, 2017 and 2016, options to purchase 542,999 and 509,000 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.

	Nine Months Ended September 30,
	2016								2017
	Net Loss			Shares		Per Share Amount			Net Loss			Shares		Per Share Amount
Basic EPS	$	(847,354	)		1,860,334	$	(0.46	)	$	(1,683,897	)		1,866,580	$	(0.90	)
Effect of Dilutive Stock Options		-			-		-			-			-		-
Diluted EPS	$	(847,354	)		1,860,334	$	(0.46	)	$	(1,683,897	)		1,866,580	$	(0.90	)

For the nine months ended September 30, 2017 and 2016, options to purchase 542,999 and 509,000 shares, respectively, of 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

9 Months Ended

Sep. 30, 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 on March 17, 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 September 30, 2017, there were 331,331 vested options and 49,668 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 September 30, 2017, there were 16,750 vested options and 145,250 unvested options granted under the 2015 Plan.    On June 20, 2017, the independent directors of the Board of Directors were granted 2,000 shares each of restricted Common Stock pursuant to the 2015 Plan. Fifty percent of the shares vest 12 months from the grant date, and the remaining shares vest 24 months from the grant date. As of September 30, 2017, 28,000 shares were available 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 September 30,					Nine Months Ended September 30,
Valuation Assumptions	2016 (5)		2017			2016			2017
Expected life (1)		-		4.00			3.25			4.56
Risk-free interest rate (2)		-		1.81	%		1.21	%		1.79	%
Expected volatility (3)		-		55	%		39	%		50	%
Expected dividend yield		-		-			7.81	%		-
Expected forfeiture (4)		-		30.0	%		27.0	%		11.7	%

⁽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.

⁽⁵⁾ The Company did not issue any options during the quarter ended September 30, 2016.

A summary of option activity as of September 30, 2017, and changes during the nine months 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		92,500		$	13.04	$	11.75 - $14.45
Cancelled		(15,167	)	$	16.23	$	10.04 - $17.13
Outstanding at September 30, 2017		542,999		$	15.44	$	10.04 - $19.75		3.5	$	-
Exercisable at September 30, 2017		348,081		$	17.00	$	10.04 - $19.75		2.4	$	-

The weighted average grant date fair value of options granted during the quarter ended September 30, 2017 was $5.68 per share.  No options were granted during the quarter ended September 30, 2016.  As of September 30, 2017, there was approximately $472,000 of total unrecognized compensation expense related to non-vested stock options, which is expected to be recognized over a weighted average period of 2.93 years and there was approximately $116,000 of total unrecognized compensation expense related to non-vested restricted Common Stock, which is expected to be recognized over a weighted average period of 1.72 years.

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LINE OF CREDIT

9 Months Ended

Sep. 30, 2017

LINE OF CREDIT [Abstract]

LINE OF CREDIT

(6) LINE OF CREDIT

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 Forbearance Agreement, 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. Subject to any actions the Bank may take pursuant to the Notice Letter, the reducing revolving loan currently 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 September 30, 2017, the revolving line of credit rate was 4.99% and the reducing revolving loan rate was 4.99%.  At September 30, 2017, the Company had approximately $894,000 of borrowings outstanding under the revolving line of credit and approximately $506,000 available for borrowing under the revolving line of credit.  Pursuant to the Notice Letter, the Bank states that it will charge interest at the default interest rate, LIBOR plus 5%, retroactively to December 31, 2016.  At September 30, 2017, the Company had $7.9 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.  In addition, capital expenditures may not exceed $180,000 per quarter.  As a result of the March 2017 amendment to the Credit Facility, dividends and stock repurchases are not permitted  under the Credit Facility.

As disclosed in Note 2, the Company was not  in compliance with the required $870,000 of EBITDA in the second quarter ended June 30, 2017 and did not make a required $500,000 payment at June 30, 2017 to decrease the reducing revolving loan from $8.0 million to $7.5 million. On July 21, 2017, the Company received the Notice Letter.  The Company also did not make a required $500,000 payment at September 30, 2017 to decrease the reducing revolving loan to $7.0 million. The Bank reduced the Company’s revolving line of credit from $1.4 million to $1.1 million on October 1, 2017 as required by the Forbearance Agreement.  Due to these facts, all Bank debt totaling $8.8 million is classified as current as of September 30, 2017.  Company is taking the actions described in Note 2 to address the issues raised by the Notice Letter.

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DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

9 Months Ended

Sep. 30, 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 September 30, 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 September 30, 2017 by level within the fair value hierarchy:

	December 31, 2016 Fair Value Measurement Using						September 30, 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 September 30, 2017, approximately $321,000 of contingent liabilities were recorded on the consolidated balance sheets in other long-term obligations.

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STOCK ISSUANCE

9 Months Ended

Sep. 30, 2017

STOCK ISSUANCE [Abstract]

STOCK ISSUANCE

(8) STOCK ISSUANCE

During the quarter ended June 30, 2017, the Company issued 12,500 shares of Common Stock under a settlement agreement with an activist shareholder group. The shares were valued at $175,000 based on the closing price of the Common Stock on the date of the grant.

On June 20, 2017, the independent directors of the Board of Directors were granted 2,000 shares each of restricted Common Stock pursuant to the 2015 Plan. Fifty percent of the shares vest 12 months from the grant date, and the remaining shares vest 24 months from the grant date.

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SIGNIFICANT ACCOUNTING POLICIES (Policies)

9 Months Ended

Sep. 30, 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 September 30, 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 $41,815 in principal amount was outstanding at September 30, 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 September 30, 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 remained constant at $211,000 for the quarters ended September 30, 2017 and 2016.  Amortization remained constant at $634,000 for the nine months ended September 30, 2017 and 2016.

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 September 30, 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 September 30, 2017 and 2016 was approximately $74,000 and $32,000, respectively, related to stock options.  Total stock-based compensation expense included in the Company’s condensed consolidated statements of operations for the nine months ended September 30, 2017 and 2016 was approximately $160,000 and $123,000, 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 September 30, 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 September 30, 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 modified retrospective method.  The Company plans to adopt ASU 2014-09 beginning January 1, 2018 using the modified retrospective method.  The standard  is not expected to have a material effect on its consolidated financial statements with the exception of additional disclosures. 

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.

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LOSS PER SHARE (Tables)

9 Months Ended

Sep. 30, 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 September 30,
	2016								2017
	Net Loss			Shares		Per Share Amount			Net Loss			Shares		Per Share Amount
Basic EPS	$	(516,516	)		1,860,261	$	(0.28	)	$	(557,565	)		1,872,761	$	(0.30	)
Effect of Dilutive Stock Options		-			-		-			-			-		-
Diluted EPS	$	(516,516	)		1,860,261	$	(0.28	)	$	(557,565	)		1,872,761	$	(0.30	)

For the quarters ended September 30, 2017 and 2016, options to purchase 542,999 and 509,000 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.

	Nine Months Ended September 30,
	2016								2017
	Net Loss			Shares		Per Share Amount			Net Loss			Shares		Per Share Amount
Basic EPS	$	(847,354	)		1,860,334	$	(0.46	)	$	(1,683,897	)		1,866,580	$	(0.90	)
Effect of Dilutive Stock Options		-			-		-			-			-		-
Diluted EPS	$	(847,354	)		1,860,334	$	(0.46	)	$	(1,683,897	)		1,866,580	$	(0.90	)

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STOCK-BASED COMPENSATION PLANS (Tables)

9 Months Ended

Sep. 30, 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 September 30,					Nine Months Ended September 30,
Valuation Assumptions	2016 (5)		2017			2016			2017
Expected life (1)		-		4.00			3.25			4.56
Risk-free interest rate (2)		-		1.81	%		1.21	%		1.79	%
Expected volatility (3)		-		55	%		39	%		50	%
Expected dividend yield		-		-			7.81	%		-
Expected forfeiture (4)		-		30.0	%		27.0	%		11.7	%

⁽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.

⁽⁵⁾ The Company did not issue any options during the quarter ended September 30, 2016.

Summary of Option Activity

A summary of option activity as of September 30, 2017, and changes during the nine months 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		92,500		$	13.04	$	11.75 - $14.45
Cancelled		(15,167	)	$	16.23	$	10.04 - $17.13
Outstanding at September 30, 2017		542,999		$	15.44	$	10.04 - $19.75		3.5	$	-
Exercisable at September 30, 2017		348,081		$	17.00	$	10.04 - $19.75		2.4	$	-

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DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Tables)

9 Months Ended

Sep. 30, 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 September 30, 2017 by level within the fair value hierarchy:

	December 31, 2016 Fair Value Measurement Using						September 30, 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		3 Months Ended	9 Months Ended	12 Months Ended
	Jul. 21, 2017 Amendment	Dec. 31, 2016 USD ($)	Sep. 30, 2017 USD ($)	Dec. 31, 2016	Oct. 01, 2017 USD ($)	Jun. 30, 2017 USD ($)
Long-term Debt [Line Items]
Number of amendments made | Amendment	4
Minimum EBITDA amount						$ 870
Amount outstanding			$ 8,800
Revolving Credit Facility [Member]
Long-term Debt [Line Items]
Amount outstanding			500			$ 500
Maximum borrowing capacity			$ 1,400
Revolving Credit Facility [Member] | Subsequent Event [Member]
Long-term Debt [Line Items]
Maximum borrowing capacity					$ 1,100
Line of Credit [Member] | Maximum [Member]
Long-term Debt [Line Items]
Cash flow leverage 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		$ 650

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SIGNIFICANT ACCOUNTING POLICIES (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016	Dec. 31, 2016
Note Receivable [Abstract]
Outstanding principal amount of note receivables	$ 41,815		$ 41,815
Maturity date			Oct. 31, 2018
Interest rate on notes receivable			6.00%
Allowance for doubtful accounts	0		$ 0		$ 0
Intangible Assets [Abstract]
Life of the management agreement			40 years
Amortization period for contract			25 years
Amortization expense	211,000	$ 211,000	$ 634,000	$ 634,000
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	$ 74,000	$ 32,000	$ 160,000	$ 123,000

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LOSS PER SHARE (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Net loss, diluted [Abstract]
Net loss, basic EPS	$ (557,565)	$ (516,516)	$ (1,683,897)	$ (847,354)
Effect of dilutive stock options	0	0	0	0
Net loss, diluted EPS	$ (557,565)	$ (516,516)	$ (1,683,897)	$ (847,354)
Weighted average number of shares outstanding reconciliation [Abstract]
Weighted average number of shares, basic EPS (in shares)	1,872,761	1,860,261	1,866,580	1,860,334
Effect of dilutive stock options, shares (in shares)	0	0	0	0
Weighted average number of shares outstanding, diluted EPS (in shares)	1,872,761	1,860,261	1,866,580	1,860,334
Earnings per share, basic and diluted [Abstract]
Per share amount - basic EPS (in dollars per share)	$ (0.30)	$ (0.28)	$ (0.90)	$ (0.46)
Effect of dilutive stock option (in dollars per share)	0	0	0	0
Per share amount - diluted EPS (in dollars per share)	$ (0.30)	$ (0.28)	$ (0.90)	$ (0.46)
Antidilutive securities (in shares)	542,999	509,000	542,999	509,000

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STOCK-BASED COMPENSATION PLANS (Details) $ / shares in Units, $ in Thousands			3 Months Ended			9 Months Ended		12 Months Ended
		Jun. 20, 2017 shares	Sep. 30, 2017 USD ($) Administrator $ / shares shares	Sep. 30, 2016 $ / shares		Sep. 30, 2017 USD ($) Administrator $ / shares shares	Sep. 30, 2016	Dec. 31, 2016 USD ($) $ / shares shares
Fair value assumptions [Abstract]
Expected life	[1]		4 years	0 years	[2]	4 years 6 months 22 days	3 years 3 months
Risk-free interest rate	[3]		1.81%	0.00%	[2]	1.79%	1.21%
Expected volatility	[4]		55.00%	0.00%	[2]	50.00%	39.00%
Expected dividend yield			0.00%	0.00%	[2]	0.00%	7.81%
Expected forfeiture	[5]		30.00%	0.00%	[2]	11.70%	27.00%
Stock Option [Member]
Options outstanding [Roll Forward]
Outstanding, beginning (in shares) | shares						465,666
Granted (in shares) | shares						92,500
Cancelled (in shares) | shares						(15,167)
Outstanding, ending (in shares) | shares			542,999			542,999		465,666
Exercisable (in shares) | shares			348,081			348,081
Options weighted average exercise price [Roll Forward]
Outstanding, beginning (in dollars per share)						$ 15.94
Granted (in dollars per share)						13.04
Cancelled (in dollars per share)						16.23
Outstanding, ending (in dollars per share)			$ 15.44			15.44		$ 15.94
Exercisable (in dollars per share)			$ 17.00			$ 17.00
Options, additional disclosures [Abstract]
Outstanding, weighted average remaining contractual term						3 years 6 months		3 years 7 months 6 days
Outstanding, aggregate intrinsic value | $			$ 0			$ 0		$ 654
Exercisable, weighted average remaining contractual term						2 years 4 months 24 days
Exercisable, aggregate intrinsic value | $			$ 0			$ 0
Weighted average grant date fair value of options (in dollars per share)			$ 5.68	$ 0
Total unrecognized compensation expense | $			$ 472			$ 472
Weighted average period for recognition						2 years 11 months 5 days
Stock Option [Member] | Minimum [Member]
Range of Exercise Prices [Abstract]
Outstanding, beginning of period (in dollars per share)						$ 10.04
Granted (in dollars per share)						11.75
Cancelled (in dollars per share)						10.04
Outstanding, end of period (in dollars per share)			$ 10.04			10.04		$ 10.04
Exercisable (in dollars per share)			10.04			10.04
Stock Option [Member] | Maximum [Member]
Range of Exercise Prices [Abstract]
Outstanding, beginning of period (in dollars per share)						19.75
Granted (in dollars per share)						14.45
Cancelled (in dollars per share)						17.13
Outstanding, end of period (in dollars per share)			19.75			19.75		$ 19.75
Exercisable (in dollars per share)			$ 19.75			$ 19.75
Restricted Stock [Member]
Options, additional disclosures [Abstract]
Total unrecognized compensation expense | $			$ 116			$ 116
Weighted average period for recognition						1 year 8 months 19 days
2005 Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Vested options (in shares) | shares			331,331			331,331
Unvested options (in shares) | shares			49,668			49,668
2015 Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Minimum number of plan administrators | Administrator			2			2
Vested options (in shares) | shares			16,750			16,750
Unvested options (in shares) | shares			145,250			145,250
Maximum number of shares of Common Stock that can be delivered under the plan (in shares) | shares			200,000			200,000
Shares available for issuance (in shares) | shares			28,000			28,000
2015 Plan [Member] | Restricted Stock [Member]
Options outstanding [Roll Forward]
Granted (in shares) | shares		2,000
Options, additional disclosures [Abstract]
Percentage of vested shares in next 12 months		50.00%
Percentage of vested shares in next 24 months		50.00%

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

[2] The Company did not issue any options during the quarter ended September 30, 2016.

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

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

[5] Forfeitures are estimated based on historical experience.

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LINE OF CREDIT (Details) - USD ($)		3 Months Ended	9 Months Ended	12 Months Ended
	Mar. 29, 2016	Jun. 30, 2017	Sep. 30, 2017	Dec. 31, 2016	Oct. 01, 2017
Long-term Debt [Line Items]
Amount outstanding			$ 8,800,000
Revolving Credit Facility [Member]
Long-term Debt [Line Items]
Maximum borrowing capacity			1,400,000
Amount outstanding		$ 500,000	$ 500,000
Revolving Credit Facility [Member] | Subsequent Event [Member]
Long-term Debt [Line Items]
Maximum borrowing capacity					$ 1,100,000
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			$ 180,000
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			$ 870,000
Domestic Line Of Credit Due March 2018 [Member]
Long-term Debt [Line Items]
Maximum borrowing capacity	$ 2,000,000		800,000
Amount available for borrowing			894,000
Revolving line of credit commitment reduction amount			$ 300,000
Line of credit interest rate			4.99%
Maturity date			Mar. 31, 2018
Domestic Line Of Credit Due March 2021 [Member]
Long-term Debt [Line Items]
Amount outstanding	10,000,000		$ 7,900,000
Amount available for borrowing			$ 506,000
Quarterly payment of loan payable	$ 500,000
Reduction in EBITDA percentage			50.00%
Interest payment on credit facility			$ 2,000,000
Line of credit interest rate			4.99%
Maturity date			Mar. 31, 2021
Quarterly payment of loan payable due		500,000	$ 500,000
Decrease in revolving loan facility		$ 7,500,000	$ 7,000,000
LIBOR Borrowing Rate [Member] | Domestic Line Of Credit Due March 2018 [Member]
Long-term Debt [Line Items]
Basis spread on variable rate				5.00%
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]
Long-term Debt [Line Items]
Basis spread on variable rate				5.00%
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 ($)	9 Months Ended
	Sep. 30, 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

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STOCK ISSUANCE (Details) - USD ($)		3 Months Ended	9 Months Ended
	Jun. 20, 2017	Jun. 30, 2017	Sep. 30, 2017
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Common stock issued (in shares)		12,500	12,500
Value of common stock issued		$ 175,000	$ 175,000
2015 Plan [Member] | Restricted Stock [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Granted (in shares)	2,000
Percentage of vested shares in next 12 months	50.00%
Percentage of vested shares in next 24 months	50.00%