Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
The following is a discussion of the interim unaudited
consolidated financial condition and results of operations for the Company and its subsidiaries for the three months ended March 31, 2021
and 2020. It should be read in conjunction with the financial statements of the Company, the notes thereto and other financial information
included elsewhere in this report, and the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains certain
“forward-looking” statements as such term is defined in Section 27A of the Securities Act of 1933, as amended, Section 21E
of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act
of 1995. Such forward looking statements relating to the Company and its subsidiaries are based on the beliefs of the Company’s
management as well as information currently available to the Company’s management. When used in this report, the words
“anticipate,” “believe,” “estimate,” “expect” and “intend” and words or phrases
of similar import, as they relate to the Company or Company management, are intended to identify forward-looking statements. Such
statements reflect the current risks, uncertainties and assumptions related to certain factors including, without limitation, competitive
factors, general economic conditions, the interest rate environment, governmental regulation and supervision, seasonality, changes in
industry practices, one-time events and other factors described herein and in other filings made by the Company with the SEC. Should
any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may
vary materially from those described herein as anticipated, believed, estimated, expected or intended. The Company does not
undertake any obligation to publicly update these forward-looking statements. As a result, you should not place undue reliance on
these forward-looking statements.
OVERVIEW
The primary business of Wilhelmina is fashion
model management. These business operations are headquartered in New York City. The Company’s predecessor was founded in 1967
by Wilhelmina Cooper, a renowned fashion model, and became one of the oldest, best known and largest fashion model management companies
in the world. Since its founding, Wilhelmina has grown to include operations located in Los Angeles, Miami, Chicago, and London,
as well as a network of licensees. Wilhelmina provides traditional, full-service fashion model and talent management services, specializing
in the representation and management of models, entertainers, athletes and other talent, to various clients, including retailers, designers,
advertising agencies, print and electronic media and catalog companies.
COVID-19 Pandemic
On March 11, 2020, the World
Health Organization declared the outbreak of novel coronavirus (COVID-19) as a pandemic, which spread rapidly throughout the United States
and the world. As the global impact of COVID-19 continues, Wilhelmina’s first priority has been to protect the health and safety
of its employees and talent. To help mitigate the spread of the virus and in response to health advisories and governmental actions and
regulations, the Company has modified its business practices and has implemented health and safety measures that are designed to protect
employees and represented talent.
The
Company’s revenues are heavily dependent on the level of economic activity in the United States and the United Kingdom,
particularly in the fashion, advertising and publishing industries, all of which have been negatively impacted by the
pandemic and may not recover as quickly as other sectors of the economy. There have been mandates from federal, state, and
local authorities requiring forced closures of non-essential businesses. As a result, beginning in March 2020, the Company
saw a significant reduction in customer bookings, resulting in a negative impact to revenue and earnings. While bookings
remain below pre-pandemic levels, during the second half of 2020 and the first quarter of 2021, bookings increased from the
preceding months.
In addition to reduced revenue,
business operations have been adversely affected by reductions in productivity, limitations on the ability of customers to make timely
payments, disruptions in talents’ ability to travel to needed locations, and supply chain disruptions impeding clothing or footwear
wardrobe from reaching destinations for photoshoots and other bookings. Many of the Company’s customers are large retail and fashion
companies, some of which have had to close stores in the United States and internationally due to the spread of COVID-19. Some of these
customers have filed for bankruptcy and others may be unable to pay amounts already owed to the Company, resulting in increased future
bad debt expense. These customers also may not emerge from the pandemic with the financial ability, or need, to purchase Wilhelmina’s
services to the extent that they did in previous years. Some model talent have been quarantined far from the major cities where Wilhelmina’s
offices are located, and also away from where most modeling jobs take place. Many U.S. and international airlines have decreased their
flight schedules which, as economic activities resume and clients increase booking requests, may make it difficult for talent to be available
when and where they are needed. The B.1.1.7 variant of the COVID-19 virus, which is believed to spread easily and quickly, has particularly
impacted the United Kingdom, resulting in renewed strict lockdowns that have impacted Wilhelmina’s London operations. While these
disruptions are currently expected to be temporary, there continues to be uncertainty around the duration.
Postponed and cancelled bookings
related to the pandemic contributed significantly to reduced revenues during the first three months of 2021. Although some clients increased
activity and bookings recently, rising COVID-19 infection rates in cities where Wilhelmina operates could lead to a slower economic recovery
in those markets, and possible additional business closings or local mandates that could slow the recovery in operations there. Since
Wilhelmina extends customary payment terms to its clients, even as bookings resume, there is likely to be a lag in cash collections. In
the meantime, the Company continues to have significant employee, office rent, and other expenses.
Reduced outstanding accounts
receivable available as collateral under the Company’s credit agreement with Amegy Bank has limited its access to additional financing.
Net losses during 2020 also impacted compliance with the financial covenants under the Amegy Bank credit agreement, further impeding the
Company’s ability to obtain additional financing. Since the pandemic began, many stock markets, including Nasdaq Capital Market
where Wilhelmina’s common stock is listed, have been volatile. A decline in the Company’s stock price would reduce its market
capitalization and could require additional goodwill or intangible asset impairment writedowns.
The Company has taken the
following actions to address the impact of COVID-19 and the current recessionary environment, in order to efficiently manage the business
and maintain adequate liquidity and maximum flexibility:
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In April 2020, obtained approximately $2.0 million in loans under the Paycheck Protection Program (the “PPP”) of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) administered by the U.S. Small Business Administration (“SBA”). In 2021, the SBA communicated to the Company that these loans have been 100% forgiven.
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-
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Eliminated discretionary travel and entertainment expenses.
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-
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Suspended share repurchases.
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-
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Did not renew the leases on three New York City model apartments when the terms ended in June and August, 2020.
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-
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Did not renew the lease on the Company’s New York City office when the term ended in February 2021, and required all New York based staff to work remotely.
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-
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Suspended efforts to fill two highly compensated executive roles following
the resignation of the Company’s Chief Executive Officer and Vice President in early 2020.
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-
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Negotiated discounts with various vendors and service providers.
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-
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Effective July 1, 2020, implemented
layoffs of approximately 36% of its staff, including employees at each of the Company’s five offices, and effected temporary salary
reductions for the remaining staff.
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On December 27, 2020, the
Consolidated Appropriations Act, 2021 (“CAA”) was signed into law. The CAA expanded eligibility for an employee retention
credit for companies impacted by the pandemic with fewer than five hundred employees and at least a twenty percent decline in gross receipts
compared to the same quarter in 2019, to encourage retention of employees. This payroll tax credit is a refundable tax credit against
certain employment taxes of up to $7 thousand per employee for eligible employers, equal to 70% of qualified wages paid to employees during
a quarter, capped at $10 thousand of qualified wages per employee. For the three months ended March 31, 2021, the Company recorded $0.4
million of Other Income for employee retention credit funds receivable. The CAA provides an election to use the prior quarter’s
gross receipts for purposes of determining eligibility in the current quarter. The Company has elected to use the prior quarter election
for determining eligibility and expects to continue to receive additional tax credits under the CAA for qualified wages through June 30,
2021. The Company has also benefitted from the CAA guidance to treat expenses associated with forgiven PPP loans as tax deductible.
If the quarantines and limitations
on non-essential work are re-implemented, or persist for an extended period, the Company may need to implement additional cost savings
measures.
BREXIT
On January 31, 2020, the United Kingdom (“UK”)
withdrew from the European Union (“EU”). Effective January 1, 2021, new visa requirements and other restrictions limit the
freedom of movement for British workers to travel to the EU for work, which may impact the ability of the Company’s London office
to book modeling photoshoots that take place in the European Union. It may also be more difficult, in the future, for talent represented
by Wilhelmina London, but based in the EU, to travel to London and other parts of the UK for photoshoots and campaign work. New immigration
sponsorship or visa requirements could discourage fashion brands, and other clients, from booking as frequently in London, which has historically
been an international fashion and modeling hub, and could impact the revenue of the Company’s London operations.
Trends and Opportunities
The Company expects that the
combination of Wilhelmina’s main operating base in New York City, the industry’s capital, with the depth and breadth of its
talent pool and client roster and its diversification across various talent management segments, together with its geographical reach,
should make Wilhelmina’s operations more resilient to industry changes and economic swings than those of many of the smaller firms
operating in the industry.
With total annual advertising
expenditures on major media (newspapers, magazines, television, cinema, outdoor and Internet) exceeding approximately $220 billion in
recent years, North America is by far the world’s largest advertising market. For the fashion talent management industry,
including Wilhelmina, advertising expenditures on magazines, television, Internet and outdoor are of particular relevance.
In recent periods, traditional
retail clients in the fashion and beauty industry have had increased competition from digital, social, and new media, reducing their budgets
for advertising and model talent. Wilhelmina reviews the mix of talent and resources available to best operate in the changing environment.
Although Wilhelmina has a
large and diverse client base, it is not immune to global economic conditions. The Company closely monitors economic conditions, client
spending, and other industry factors and continually evaluates opportunities to increase its market share and further expand its geographic
reach. There can be no assurance as to the effects on Wilhelmina of current or future economic circumstances, client spending
patterns, client creditworthiness and other developments and whether, or to what extent, Wilhelmina’s efforts to respond to them
will be effective.
Strategy
Management’s long-term strategy is to increase
value to shareholders through the following initiatives:
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•
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increase Wilhelmina’s brand awareness among advertisers and potential talent;
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•
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expand the women’s high end fashion board;
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•
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expand the Aperture division’s representation in commercials, film, and television;
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•
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expand celebrity and social media influencer representation;
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•
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expand the Wilhelmina network through strategic geographic market development; and
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•
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promote model search contests and events and partner on media projects (television, film, books, etc.).
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The Company makes use of digital technology to effectively
connect with clients and talent, utilizing video conferencing and other digital tools to best position our team to identify opportunities
to grow the careers of the talent we represent and expand our business. The Company has made significant investments in technology, infrastructure,
and personnel, to support our clients and talent.
Key Financial Indicators
In addition to net income,
the key financial indicators that the Company reviews to monitor its business are revenues, model costs, operating expenses and cash flows.
The Company analyzes revenue
by reviewing the mix of revenues generated by the different “boards,” each a specific division of the fashion model management
operations which specializes by the type of model it represents, by geographic locations and from significant clients. Wilhelmina’s
primary sources of revenue include: (i) revenues from principal relationships where the gross amount billed to the client is recorded
as revenue when earned and collectability is reasonably assured; and (ii) separate service charges, paid by clients in addition to the
booking fees, which are calculated as a percentage of the models’ booking fees and are recorded as revenues when earned and collectability
is reasonably assured. See “Critical Accounting Policies - Revenue Recognition.”
Wilhelmina provides professional services. Therefore, salary and service costs represent the
largest part of the Company’s operating expenses. Salary and service costs are comprised of payroll and related costs and travel,
meals and entertainment (“T&E”) to deliver the Company’s services and to enable new business development activities
Analysis of Consolidated Statements of Operations and Service Revenues
|
(in thousands)
|
|
Three Months Ended
|
|
|
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March 31
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March 31
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% Change
|
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|
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2021
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2020
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2021 vs 2020
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|
Service revenues
|
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11,966
|
|
|
|
14,547
|
|
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(17.7
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%)
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|
License fees and other income
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10
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|
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|
5
|
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|
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100
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%
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TOTAL REVENUES
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11,976
|
|
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|
14,552
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(17.7
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%)
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Model costs
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8,639
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10,606
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|
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(18.5
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%)
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REVENUES NET OF MODEL COSTS
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3,337
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|
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3,946
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|
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(15.4
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%)
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|
GROSS PROFIT MARGIN
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|
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27.9
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%
|
|
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27.1
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%
|
|
|
|
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Salaries and service costs
|
|
|
1,871
|
|
|
|
3,127
|
|
|
|
(40.2
|
%)
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|
Office and general expenses
|
|
|
855
|
|
|
|
1,055
|
|
|
|
(19.0
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%)
|
|
Amortization and depreciation
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|
|
266
|
|
|
|
294
|
|
|
|
(9.5
|
%)
|
|
Goodwill impairment
|
|
|
-
|
|
|
|
800
|
|
|
|
(100.0
|
%)
|
|
Corporate overhead
|
|
|
245
|
|
|
|
309
|
|
|
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(20.7
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%)
|
|
OPERATING INCOME (LOSS)
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|
|
100
|
|
|
|
(1,639
|
)
|
|
|
106.1
|
%
|
|
OPERATING MARGIN
|
|
|
0.8
|
%
|
|
|
(11.3
|
%)
|
|
|
|
|
|
Foreign exchange loss (gain)
|
|
|
68
|
|
|
|
(65
|
)
|
|
|
204.6
|
%
|
|
Gain on forgiveness of loan
|
|
|
(1,865
|
)
|
|
|
-
|
|
|
|
*
|
|
|
Employee retention credit
|
|
|
(426
|
)
|
|
|
-
|
|
|
|
*
|
|
|
Interest expense
|
|
|
29
|
|
|
|
27
|
|
|
|
7.4
|
%
|
|
INCOME (LOSS) BEFORE INCOME TAXES
|
|
|
2,294
|
|
|
|
(1,601
|
)
|
|
|
243.3
|
%
|
|
Current income tax expense
|
|
|
(36
|
)
|
|
|
(59
|
)
|
|
|
(39.0
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%)
|
|
Deferred tax expense
|
|
|
(37
|
)
|
|
|
(1,000
|
)
|
|
|
(96.3
|
%)
|
|
Effective tax rate
|
|
|
3.2
|
%
|
|
|
(66.1
|
%)
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
|
2,221
|
|
|
|
(2,660
|
)
|
|
|
183.5
|
%
|
* Not Meaningful
Service Revenues
The Company’s service revenues fluctuate in response
to its clients’ willingness to spend on advertising and the Company’s ability to have the desired talent available. The COVID-19
pandemic had a material impact on revenues, as many customers cancelled or postponed bookings while non-essential business activities
were temporarily barred in the cities where Wilhelmina operates. The decrease of 17.7% for the three months ended March 31, 2021,
when compared to the three months ended March 31, 2020, was primarily due to reduced bookings resulting from COVID-19 (which impacted
all three months of the first quarter of 2021, but only impacted the month of March in 2020), a decrease in core model bookings, and the
closure of the hair and makeup artist division in the third quarter of 2020.
License Fees and Other Income
License fees and other income include franchise revenues
from independently owned model agencies that use the Wilhelmina trademark and various services provided by the Company. License fees increased
by 100.0% for the three months ended March 31, 2021, when compared to three months ended March 31, 2020. The increase was primarily due
to the timing of income from licensing agreements.
Gross Profit Margin
Gross profit margin increased by 80 basis points for
the three months ended March 31, 2021, when compared to the three months ended March 31, 2020 primarily due to a change in board revenue
mix and a reduction in travel related model costs in 2021.
Salaries and Service Costs
Salaries and service costs consist of payroll related
costs and T&E required to deliver the Company’s services to its clients and talents. The 40.2% decrease in salaries and
service costs during the three months ended March 31, 2021, when compared to the three months ended March 31, 2020 was primarily due to
employee layoffs in July 2020, temporary reductions in staff salaries, and the closure of the hair and makeup artist division in the second
half of 2020.
Office and General Expenses
Office and general expenses consist of office and equipment
rents, advertising and promotion, insurance expenses, administration and technology cost. The decrease in office and general expenses
of 19.0% for the three months ended March 31, 2021 when compared to the three months ended March 31, 2020, were primarily due to reduced
rent expense, legal expense, and other office related expenses in 2021.
Amortization and Depreciation
Amortization and depreciation expense is incurred with
respect to certain assets, including computer hardware, software, office equipment, furniture and amortization of finance leases. Amortization
and depreciation expense decreased by 9.5% for the three months ended March 31, 2021 compared to the three months ended March 31, 2020,
primarily due reduced depreciation of assets that became fully amortized in 2020. Fixed asset purchases (mostly related to technology
and computer equipment) totaled approximately $4 thousand and $56 thousand during the three months ended March 31, 2021 and 2020.
Goodwill Impairment
No goodwill impairment charges were incurred during
the three months ended March 31, 2021. In March 2020, the Company determined that recent declines in revenue, COVID-19 impacts on its
retail clients, and declines in its stock price triggered the requirement for goodwill impairment testing. The results of the impairment
test indicated that the carrying value of goodwill exceeded its estimated fair value. As a result, during March 2020, the Company recorded
an impairment charge of $0.8 million related to its goodwill. Further declines in the Company’s stock price could result in additional
goodwill impairment charges.
Corporate Overhead
Corporate overhead expenses include director and executive
officer compensation, legal, audit and professional fees, corporate office rent, travel, and other public company costs. Corporate
overhead decreased by 20.7% for the three months ended March 31, 2021, compared to the three months ended March 31, 2020, primarily due
to a temporary reduction in fees paid to corporate employees and the Company’s directors.
Operating Income and Operating Margin
Operating income increased to $0.1 million for the
three months ended March 31, 2021, compared to an operating loss of $1.6 million for the three months ended March 31, 2020. As a result,
operating margin increased to 0.8% for the three months ended March 31, 2021, compared to negative 11.3% for the three months ended March
31, 2020. In both cases, the increase was primarily the result of lower operating expenses in 2021, partially offset by lower revenue
net of model costs.
Foreign Currency Exchange
The Company realized $68 thousand of foreign currency
exchange loss during the three months ended March 31, 2021, and $65 thousand of foreign currency exchange gain during the three months
ended March 31, 2020. Foreign currency gain and loss is due to fluctuations in currencies from Great Britain, Europe, and Latin America.
Gain on Forgiveness of Loan
On March 27, 2021, the Company
received notice from the Small Business Administration that $1.9 million of loans under the Paycheck Protection Program were forgiven.
The Company recorded this gain on forgiveness of loan during the first quarter of 2021.
Employee Retention Credit Income
During the three months ended March 31, 2021, the Company
was eligible for employee retention credits under the CAA, as a refundable tax credit against certain employment taxes of up to $7,000
per employee. For the three months ended March 31, 2021, the Company recorded $0.4 million of employee retention credit funds receivable.
Interest Expense
Interest expense for the three months ended March 31,
2021 and March 31, 2020 was primarily attributable to accrued interest on term loans drawn during 2016 and 2018 and PPP loans drawn in
2020. See, “Liquidity and Capital Resources.”
Income and Loss before Income Taxes
Income before income taxes was $2.3 million for the
three months ended March 31, 2021, compared to a $1.6 million loss before income taxes for the three months ended March 31, 2020. The
income in 2021 was primarily due to the gain on forgiveness of loan, employee retention credits and operating income. The loss in 2020
was primarily due to operating losses and goodwill impairment expense.
Income Taxes
Generally, the Company’s combined effective tax
rate is high relative to reported net income as a result of certain valuation allowances on deferred tax assets, amortization expense,
foreign taxes, and corporate overhead not being deductible and income being attributable to certain states in which it operates. The Company
operates in four states which have relatively high tax rates: California, New York, Illinois and Florida. In addition, foreign taxes in
the United Kingdom related to our London office are not deductible from U.S. federal taxes. The
Company had income tax expense of $0.1 million for the three months ended March 31, 2021, compared to $1.1 million for the three months
ended March 31, 2020. The higher income tax expense in 2020 was primarily due to a newly established valuation allowance against its deferred
tax assets due to the effects of the COVID-19 pandemic on its business.
Net Income and Loss
Net income for the three months ended March 31, 2021
was $2.2 million compared to $2.7 million net loss for the three months ended March 31, 2020. The increase in net income was primarily
due to an increase in operating income, gain on forgiveness of loan, employee retention credits, and the absence of any further valuation
allowance on deferred tax assets in 2021.
Liquidity and Capital Resources
The Company’s cash balance increased to $5.7
million at March 31, 2021 from $5.6 million at December 31, 2020. The cash balance increased primarily as a result of $0.3 million net
cash provided by operating activities, partially offset by $0.1 million cash used in financing activities.
Net cash provided by operating activities of $0.3 million
was primarily the result of net income and increases in amounts due to models and accounts payable and accrued liabilities, partially
offset by increases in accounts receivable and prepaid and other assets. The $0.1 million of cash used in financing activities was primarily
attributable to principal payments on the Company’s Amegy Bank term loan, and payments on finance leases.
The Company’s primary liquidity needs are for
working capital associated with performing services under its client contracts and servicing its remaining term loan. Generally, the Company
incurs significant operating expenses with payment terms shorter than its average collections on billings. The COVID-19 pandemic has had
an impact on the Company’s cash flows during the quarter ended March 31, 2021, primarily due to reduced bookings and modeling jobs
and delayed payments from customers. The Company has taken actions to address the impact of COVID-19 by reducing expenses and has the
ability to implement more significant cost savings measures if the adverse effects of the pandemic persist for an extended period. Based
on 2021 budgeted and year-to-date cash flow information, management believes that the Company has sufficient liquidity to meet its projected
operational expenses and capital expenditure requirements for the next twelve months.
Amegy Bank Credit Agreement
The Company has a credit agreement with Amegy Bank
which originally provided a $4.0 million revolving line of credit and up to a $3.0 million term loan which could be drawn through October
24, 2016. Amounts outstanding under the term loan reduce the availability under the revolving line of credit. The revolving line of credit
is subject to a borrowing base derived from 80% of eligible accounts receivable (as defined) and the Company’s minimum net worth
covenant. The revolving line of credit bears interest at prime plus 0.50% payable monthly. As of March 31, 2021, the Company had a $0.2
million irrevocable standby letter of credit outstanding under the revolving line of credit and had additional borrowing capacity of $1.8
million. The revolving line of credit presently expires October 24, 2022.
On August 16, 2016, the Company drew $2.7 million of
the term loan and used the proceeds to fund the purchase of shares of its common stock in a private transaction. The term loan bore interest
at 4.5% per annum and was payable in monthly payments of interest only until November, 2016, followed by 47 equal monthly payments of
principal and interest computed on a 60-month amortization schedule. A final $0.6 million payment of principal and interest was paid on
October 28, 2020.
On July 16, 2018, the Company amended its credit agreement
with Amegy Bank to provide for an additional term loan of up to $1.0 million that could be drawn by the Company through July 12, 2019,
for the purpose of repurchases of its common stock. The additional term loan is evidenced by a promissory note bearing interest at 5.15%
per annum and was payable in monthly installments of interest only through July 12, 2019. Thereafter, the note is payable in monthly installments
sufficient to fully amortize the outstanding principal balance in 60 months with the balance of principal and accrued interest due on
July 12, 2023. Amounts outstanding under the additional term loan reduce the availability under the Company’s revolving line of
credit with Amegy Bank. On August 1, 2018, the Company drew $0.7 million of the additional term loan and used the proceeds to fund the
purchase of 100,000 shares of its common stock in a private transaction. On December 12, 2018, the Company drew $0.3 million of the additional
term loan and used the proceeds to partially fund a purchase of 50,000 shares of its common stock in a private transaction. As of March
31, 2021, a total of $0.7 million was outstanding on the term loan.
Reduced outstanding accounts
receivable available as collateral under the Company’s credit agreement with Amegy Bank has limited access to additional financing.
Net losses in recent periods have also impacted compliance with the financial covenants under the Amegy Bank credit agreement, further
impeding the Company’s ability to obtain additional financing. On March 26, 2020, the Company entered into a Thirteenth Amendment
to Credit Agreement (the “Thirteenth Amendment”) with Amegy Bank. The Thirteenth Amendment amended the minimum net worth covenant
to require the Company to maintain tangible net worth (as defined therein) of $4.0 million, determined on a quarterly basis. Under the
Thirteenth Amendment, Amegy Bank also waived an existing default caused by the Company’s failure to satisfy the previously required
$20.0 million minimum net worth covenant as of December 31, 2019. On May 12, 2020, the Company entered into a Fourteenth Amendment to
Credit Agreement (the “Fourteenth Amendment”) with Amegy Bank. The Fourteenth Amendment amended the line of credit to reduce
the maximum borrowing capacity to $3.0 million. Under the Fourteenth Amendment, Amegy Bank also waived an existing default caused by the
Company’s failure to satisfy both the minimum fixed charge coverage ratio through March 31, 2020 and minimum tangible net worth
as of March 31, 2020. The Company obtained waivers from Amegy Bank of its failures to satisfy the fixed charge coverage ratio, the minimum
tangible net worth, and the borrowing base for the quarters ended June 30, 2020 and September 30, 2020. On November 10, 2020, the Company
entered into a Fifteenth Amendment to Credit Agreement (the “Fifteenth Amendment”) with Amegy Bank. The Fifteenth Amendment
waived the minimum tangible net worth covenant until December 31, 2021, after which a minimum tangible net worth of $1.5 million will
be required. The Fifteenth Amendment also revised the calculation of the fixed charge coverage ratio such that it will be tested at December
31, 2020 based on the preceding six month period, tested at March 31, 2021 based on the preceding nine month period, and tested at June
30, 2021 and subsequent periods using a twelve month rolling period.
Paycheck Protection Program Loan
On April 15, 2020, Wilhelmina
International, Ltd. (the “Borrower”), a wholly-owned subsidiary of the Company, executed a Business Loan Agreement and a Promissory
Note each dated April 13, 2020 (collectively, the “Sub PPP Loan Documents”), with respect to a loan in the amount of $1.8
million (the “Sub PPP Loan”) from Amegy Bank. The Sub PPP Loan was obtained pursuant to the PPP. The Sub PPP Loan originally
matured on April 13, 2022 and bore interest at a rate of 1.00% per annum. As allowed under the Paycheck Protection Flexibility Act, the
Sub PPP Loan was extended to mature on April 13, 2025. On March 27, 2021, the Company received notice from the SBA that the Sub PPP loan,
including $17 thousand accrued interest, had been fully forgiven, resulting in $1.9 million of gain on forgiveness of loan recorded during
the first quarter of 2021.
On April 18, 2020, the Company
executed a Business Loan Agreement and a Promissory Note each dated April 17, 2020 (collectively, the “Parent PPP Loan Documents”),
with respect to a loan in the amount of $128 thousand (the “Parent PPP Loan”) from Amegy Bank. The Parent PPP Loan was also
obtained pursuant to the PPP. The Parent PPP Loan originally matured on April 17, 2022 and bore interest at a rate of 1.00% per annum.
As allowed under the Paycheck Protection Flexibility Act, the Parent PPP Loan was extended to mature on April 17, 2025. On April 3, 2021,
the Company received notice from the SBA that the Parent PPP Loan, including $1 thousand accrued interest, had been fully forgiven. Since
the loan was forgiven after the end of the first quarter of 2021, the Parent PPP Loan liability remained on the Company’s balance
sheet at March 31, 2021, and the Company has recorded $129 thousand of gain on forgiveness of loan in the second quarter of 2021.
Off-Balance Sheet Arrangements
As of March 31, 2021, the Company had outstanding a
$0.2 million irrevocable standby letter of credit under the revolving credit facility with Amegy Bank. The letter of credit served as
security under the lease relating to the Company’s office space in New York City that expired on February 2021. The Company expects
to terminate the letter of credit once the final office utility fees are billed and paid during the second quarter of 2021.
Effect of Inflation
Inflation has not historically been a material factor affecting the Company’s
business. General operating expenses, such as salaries, employee benefits, insurance and occupancy costs are subject to normal inflationary
pressures.
Critical Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts
of Wilhelmina and its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.
Revenue Recognition
The Company has adopted the requirements of Accounting
Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASC 606”). ASC 606 establishes
a principle for recognizing revenue upon the transfer of promised goods or services to customers, in an amount that reflects the expected
consideration received in exchange for those goods or services.
Our
revenues are derived primarily from fashion model bookings, and representation of social media influencers and actors for commercials,
film, and television. Our performance obligations are primarily satisfied at a point in time when the talent has completed the contractual
requirements.
A
contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance
obligation is satisfied. The performance obligations for most of the Company’s core modeling bookings are satisfied on the day of
the event, and the “day rate” total fee is agreed in advance when the customer books the model for a particular date. For
contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation based
on the estimated relative standalone selling price.
Model Costs
Model costs include amounts owed to talent, including
taxes required to be withheld and remitted directly to taxing authorities, commissions owed to other agencies, and related costs such
as those paid for photography. Costs are accrued in the period in which the event takes place consistent with when the revenue is recognized.
The Company typically enters into contractual agreements with models under which the Company is obligated to pay talent upon collection
of fees from the customer.
Share Based Compensation
Share-based compensation expense is estimated at the
grant date based on the award’s fair value as calculated by the Black-Scholes option pricing model and is recognized on a straight
line basis as an expense over the requisite service period, which is generally the vesting period. The determination of the fair value
of share-based awards on the date of grant using an option pricing model is affected by our stock price as well as assumptions regarding
a number of complex and subjective variables. These variables include the estimated volatility over the expected term of the awards, actual
and projected employee stock option exercise behaviors, risk-free interest rates, estimated forfeitures and expected dividends.
Income Taxes
We are subject to income taxes in the United States, the United Kingdom,
and numerous local jurisdictions.
Deferred tax assets are recognized for unused tax
losses, unused tax credits, and deductible temporary differences to the extent that it is probable that future taxable profits will be
available against which they can be used. Unused tax loss carry-forwards are reviewed at each reporting date and a valuation allowance
is established if it is doubtful we will generate sufficient future taxable income to utilize the loss carry-forwards.
In determining the amount of current and deferred
income tax, we take into account whether additional taxes, interest, or penalties may be due. Although we believe that we have adequately
reserved for our income taxes, we can provide no assurance that the final tax outcome will not be materially different. To the extent
that the final tax outcome is different than the amounts recorded, such differences will affect the provision for income taxes in the
period in which such determination is made and could have a material impact on our financial condition and operating results.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are accounted for at net realizable
value, do not bear interest and are short-term in nature. The Company maintains an allowance for doubtful accounts for estimated
losses resulting from the inability to collect on accounts receivable. Based on management’s assessment, the Company provides
for estimated uncollectible amounts through a charge to earnings and a credit to the allowance. Balances that remain outstanding
after the Company has used reasonable collection efforts are written off through a charge to the allowance and a credit to accounts receivable. The
Company generally does not require collateral.
Goodwill and Intangible Asset Impairment Testing
The Company performs impairment testing at least
annually and more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to
the extent that the carrying amount exceeds the reporting unit’s fair value. The Company sometimes utilizes an independent valuation
specialist to assist with the determination of fair value. In accordance with ASU 2017-03, effective January 1, 2020, only a one-step
quantitative impairment test is performed, whereby a goodwill impairment loss will be measured as the excess of a reporting unit’s
carrying amount over its fair value. If the carrying amount of the reporting unit’s goodwill exceeds its fair value, an impairment
loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill.
Whenever events or circumstances change, entities have
the option to first make a qualitative evaluation about the likelihood of goodwill impairment. If impairment is deemed more likely than
not, management would perform the goodwill impairment test. Otherwise, the goodwill impairment test is not required. In assessing the
qualitative factors, the Company assesses relevant events and circumstances that may impact the fair value and the carrying amount of
the reporting unit. The identification of relevant events and circumstances and how these may impact a reporting unit’s fair value
or carrying amount involve significant judgments and assumptions. The judgment and assumptions include the identification of macroeconomic
conditions, industry and market considerations, overall financial performance, Company specific events and share price trends, an assessment
of whether each relevant factor will impact the impairment test positively or negatively, and the magnitude of any such impact