Note 1.  Business Activity

 

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 in various local markets in the U.S. and internationally. Wilhelmina provides traditional, full-service fashion model and talent management services, specializing in the representation and management of models, entertainers, artists, athletes and other talent, to various clients, including retailers, designers, advertising agencies, print and electronic media and catalog companies.

Note 2.  Summary of Significant Accounting Policies

 

The consolidated financial statements are prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”). The following is a summary of significant policies used in the preparation of the accompanying financial statements.

 

Principles of Consolidation and Basis of Presentation

 

The financial statements include the consolidated 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. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized.

 

The new revenue standard became effective for the Company on January 1, 2018 and was adopted using the modified retrospective method. The adoption of the new revenue standard as of January 1, 2018 did not change the Company’s revenue recognition as its revenues continue to be recognized when the customer takes control of its product. As the Company did not identify any material accounting changes that impacted the amount of reported revenues, no adjustment to retained earnings was required upon adoption.

 

The Company adopted the standard to contracts that were not completed at the date of initial application (January 1, 2018).

 

Under the new revenue standard, the Company recognizes revenues when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. The Company recognizes revenues following the five-step model prescribed under ASU No. 2014-09: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) the Company satisfies the performance obligation.

 

Service Revenues

 

Our service revenues are derived primarily from fashion model and artist bookings, and representation of social media influencers and actors for commercials, film, and television. Revenues from services are recognized and related model costs are accrued when the customer obtains control of the Company’s product, which occurs at a point in time, typically when the talent has completed the contractual requirement. The Company expenses incremental costs of obtaining a contract as and when incurred because the expected amortization period of the asset that it would have recognized is one year or less or the amount is immaterial. Our performance obligations are primarily satisfied at a point in time when the talent has completed the contractual requirements.

 

F-7

 

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 (which are typically all satisfied within 1 to 3 days), we allocate the contract’s transaction price to each performance obligation based on the estimated relative standalone selling price.

 

When reporting service revenue gross as a principal versus net as an agent, the Company assesses whether the Company, the model or the talent is the primary obligor. The Company evaluates the terms of its model, talent and client agreements as part of this assessment. In addition, the Company gives appropriate consideration to other key indicators such as latitude in establishing price, discretion in model or talent selection and credit risk the Company undertakes. The Company operates broadly as a modeling agency and in those relationships with models and talents where the key indicators suggest the Company acts as a principal, the Company records the gross amount billed to the client as revenue, when the revenues are earned and collectability is probable, and the related costs incurred to the model or talent as model or talent cost. In other model and talent relationships, where the Company believes the key indicators suggest the Company acts as an agent on behalf of the model or talent, the Company records revenue, when the revenues are earned and collectability is probable, net of pass-through model or talent cost.

 

License Fees

 

License fees, in connection with the licensing of the “Wilhelmina” name, are collected on a monthly or quarterly basis under the terms of Wilhelmina’s agreements with licensees. The Company recognizes revenue relating to license fees where payment is deemed to be probable, over the license period.

 

Contract Assets

 

Contract assets, which primarily relate to the Company’s right to consideration for work completed but not billed at the reporting date are included within accounts receivable and approximated $2.1 million and $1.5 million at December 31, 2019 and 2018, respectively.

 

Advances to Models

 

Advances to models for the cost of initial portfolios and other out-of-pocket costs, which are reimbursable only from collections from the Company’s clients as a result of future work, are expensed to model costs as incurred. Due to the inherent uncertainty of future work for any individual model, any recoupment of such costs are credited to model costs in the period received.

 

Use of Estimates

 

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates that affect the amounts reported in the consolidated financial statements and the accompanying notes. Accounting estimates and assumptions discussed herein are those that management considers to be the most critical to an understanding of the consolidated financial statements because they inherently involve significant judgments and uncertainties. Estimates are used for, but not limited to revenue recognition, allowance for doubtful accounts, useful lives for depreciation and amortization, income taxes, the assumptions used for stock-based compensation, and impairments of goodwill and long-lived assets. All of these estimates reflect management’s judgment about current economic and market conditions and their effects based on information available as of the date of these consolidated financial statements. If such conditions persist longer or deteriorate further than expected, it is reasonably possible that the judgments and estimates could change, which may result in future impairments of assets among other effects.

 

Cash Equivalents

 

The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.

 

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. At December 31, 2019, the Company had an allowance of $1.4 million, and recorded an $11 thousand bad debt charge to earnings. 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.

 

Concentrations of Credit Risk

 

The balance sheet items that potentially subject the Company to concentrations of credit risk are primarily cash and cash equivalents and accounts receivable.  The Company maintains its cash balances in several different financial institutions in New York, Los Angeles, Miami, and London. Balances in accounts other than “noninterest-bearing transaction accounts” are insured up to Federal Deposit Insurance Corporation (“FDIC”) limits of $250 thousand per institution. At December 31, 2019, the Company had cash balances in excess of FDIC insurance coverage of approximately $4.3 million. Balances in London accounts are covered by Financial Services Compensation Scheme (“FSCS”) limits of £75 thousand or approximately $0.1 million per institution. At December 31, 2019, the Company had cash balances in excess of FSCS coverage of approximately $2.3 million. Concentrations of credit risk with accounts receivable are mitigated by the Company’s large number of clients and their dispersion across different industries and geographical areas. The Company performs ongoing credit evaluations of its clients and maintains an allowance for doubtful accounts based upon the expected collectability of all accounts receivable.

 

Property and Equipment

 

Property and equipment are stated at cost. Depreciation and amortization, based upon the estimated useful lives (ranging from two to seven years) of the assets or terms of the leases, are computed by use of the straight-line method. Leasehold improvements are amortized based upon the shorter of the terms of the leases or asset lives. When property and equipment are retired or sold, the cost and accumulated depreciation and amortization are eliminated from the related accounts and gains or losses, if any, are reflected in the consolidated statement of operations.

 

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If it is determined that impairment has occurred, the amount of the impairment is charged to operations.

 

Goodwill and Intangible Assets

 

Goodwill consists primarily of customer and talent relationships arising from past business acquisitions. Intangible assets with finite lives are amortized over useful lives ranging from two to eight years. Goodwill and intangible assets with indefinite lives are not subject to amortization, but rather to an annual assessment of impairment by applying a fair-value based test. A significant amount of judgment is required in estimating fair value and performing goodwill impairment tests.  

 

The Company annually assesses whether the carrying value of its intangible assets exceeds their fair value and, if necessary, records an impairment loss equal to any such excess. Each interim reporting period, the Company assesses whether events or circumstances have occurred which indicate that the carrying amount of an intangible asset exceeds its fair value. If the carrying amount of the intangible asset exceeds its fair value, an asset impairment charge will be recognized in an amount equal to that excess.

 

The process of estimating the fair value of goodwill is subjective and requires the Company to make estimates that may significantly impact the outcome of the analysis. A qualitative assessment considers events and circumstances such as macroeconomic conditions, industry and market conditions, cost factors, and overall financial performance. If after performing this assessment, the Company concludes it is more likely than not that the fair value of the reporting unit is less than its carrying amount, then the Company performs the quantitative test.

 

Under the quantitative test, a goodwill impairment is identified by comparing the fair value to the carrying amount, including goodwill. If the carrying amount exceeds the fair value, goodwill is considered impaired and an impairment charge is recognized in an amount equal to the excess, not to exceed the carrying amount of goodwill.

 

Due to Models

 

Due to models represents the liability for amounts owed to talent for jobs that have taken place, but where the model or talent fee has not yet been paid, typically due to the Company awaiting receipt of payment from the customer. The due to model liabilities are accrued in the period in which the event takes place consistent with when the revenue is recognized. The Company’s contractual agreements with models typically condition payment to talent upon the collection of fees from the customer.

 

 

Advertising

 

The Company expenses all advertising costs as incurred. Advertising expense for the year ended December 31, 2019 approximated $35 thousand, relatively consistent with $33 thousand of advertising expense for the year ended December 31, 2018.

 

Income Taxes

 

Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax base and operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company continually assesses the need for a tax valuation allowance based on all available information. As of December 31, 2019, the Company maintained a $0.3 million valuation allowance against its deferred tax assets relating to stock options held by the Company’s former Chief Executive Officer, which were forfeited in connection with the effectiveness of his resignation on January 26, 2020. In December 2019, the Company recorded a $0.3 million deferred income tax benefit related to the $4.8 million goodwill impairment charge.

 

Accounting for uncertainty in income taxes recognized in an enterprise’s financial statements requires a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Also, consideration should be given to de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Tax positions are subject to change in the future, as a number of years may elapse before a particular matter for which an established reserve is audited and finally resolved. Federal tax returns for tax years 2016 through 2018 remained open for examination as of December 31, 2019.

 

Stock-Based Compensation

 

The Company utilizes stock-based awards as a form of compensation for certain officers. The Company records compensation expense for all awards granted. The Company uses the Black-Scholes valuation model and straight-line amortization of compensation expense over the requisite service period for each separately vesting portion of the grants.

 

Fair Value Measurements

 

The Company has adopted the provisions of ASC 820, “Fair Value Measurements” (“ASC 820”), for financial assets and financial liabilities. ASC 820 defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosure about fair value measurements. ASC 820 applies to all financial instruments that are being measured and reported on a fair value basis. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a fair value hierarchy that prioritizes the inputs used in valuation methodologies into the following three levels:

 

•

Level 1 Inputs-Unadjusted: quoted prices in active markets for identical assets or liabilities.

•

Level 2 Inputs-Observable: inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

•

Level 3 Inputs-Unobservable: inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or other valuation techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

 

 

 

ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” In June 2016, the FASB issued guidance which amends the FASB’s guidance on the impairment of financial instruments. The ASU adds to GAAP an impairment model (known as the “current expected credit loss model”) that is based on expected losses rather than incurred losses. ASU 2016-13 is effective for annual reporting periods ending after December 15, 2019, including interim periods within those fiscal years. The Company is currently evaluating the impact of adoption on the Company’s consolidated financial statements.

 

ASU No. 2017-03 “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” In January 2017, the FASB issued ASU 2017-03, effective for periods beginning after December 15, 2019, with an election to adopt early. The ASU requires only a one-step qualitative impairment test, whereby a goodwill impairment loss will be measured as the excess of a reporting unit’s carrying amount over its fair value. It eliminates Step 2 of the current two-step goodwill impairment test, under which a goodwill impairment loss is measured by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The impact of the new standard will be dependent on the specific facts and circumstances of future individual impairments, if any.

 

ASU No. 2018-19, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses.” In November 2018, the FASB issued ASU 2018-19, which clarifies that receivables arising from operating leases are not within the scope of the credit losses standard, but rather, should be accounted for in accordance with the lease standard. In general, the amendments in this standard are effective for public business entities that meet the definition of a SEC filer for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company is currently evaluating the impact of adoption on the Company’s consolidated financial statements.

 

Note 3.  Debt

 

The Company has a credit agreement with Amegy Bank which provides a $4.0 million revolving line of credit and previously provided 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 also subject to a borrowing base derived from 80% of eligible accounts receivable (as defined) and the Company’s minimum net worth covenant of $22.0 million. The revolving line of credit bears interest at prime plus 0.50% payable monthly. As of December 31, 2019, 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 $1.4 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 bears interest at 4.5% per annum and is 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 and a final payment of principal and interest due on October 24, 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. The amendment also revised the calculation of the fixed charge coverage ratio for the three quarters following the maturity date of the previous term loan.

 

Amounts outstanding under the additional term loan further 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 December 31, 2019, a total of $2.0 million was outstanding on the two term loans.

 

As of December 31, 2019, future maturities of long term debt were as follows (in thousands):

 

2020		$	1,257
2021			194
2022			204
2023			345
Total			2,000

 

 

Note 5.   Leases

 

The Company is obligated under non-cancelable lease agreements for the rental of office space and various other lease agreements for the leasing of office equipment. These operating leases expire at various dates through 2024. In addition to the minimum base rent, the office space lease agreements provide that the Company shall pay its pro-rata share of real estate taxes and operating costs as defined in the lease agreement. The Company also leases certain corporate office space from an affiliate.

 

During  2019, $0.1 million of lease payments historically included as rent expense within office and general expenses were classified as amortization expense, and included within cash used in financing activities on the Company’s statement of cash flows. At December 31, 2019, the weighted-average remaining lease term was 1.3 years for operating leases and 4.1 years for finance type leases. At December 31, 2019, the weighted average discount rate was 4.7% for operating leases and 5.1% for finance type leases.

 

The following table presents additional information regarding Wilhelmina’s financing and operating leases for the year ended December 31, 2019 (in thousands):

 

		Year ended December 31, 2019
Finance lease expense
Amortization of ROU assets		$	102
Interest on lease liabilities			8
Operating lease expense			1,159
Short term lease expense			273
Cash paid for amounts included in the measurement of lease liabilities for finance leases
Financing cash flows			113
Cash paid for amounts included in the measurement of lease liabilities for operating leases
Operating cash flows			1,236
ROU assets obtained in exchange for lease liabilities
Finance leases			452
Operating leases			2,404

 

 

As of December 31, 2019, future maturities of lease liabilities were as follows (in thousands):

 

		Operating				Finance
2020		$	1,135			$	109
2021			369				86
2022			-				55
2023			-				55
2024			-				50
Total			1,504				355
Less: Present value discount			(121	)			(36	)
Lease liability		$	1,383			$	319

 

The following table summarizes future minimum payments under the current lease agreements:

 

Years Ending December 31		Amount (in thousands)
2020		$	1,365
2021			410
2022			50
2023			50
2024			50
Total		$	1,925

 

Rent expense totaled approximately $1.5 million and $1.9 million for the years ended December 31, 2019 and 2018 respectively.

Note 6.  Commitments and Contingencies

 

On October 24, 2013, a putative class action lawsuit was brought against the Company by former Wilhelmina model Alex Shanklin and others, including Louisa Raske, Carina Vretman, Grecia Palomares and Michelle Griffin Trotter (the “Shanklin Litigation”), in New York State Supreme Court (New York County) by the same lead counsel who represented plaintiffs in a prior, now-dismissed action brought by Louisa Raske (the “Raske Litigation”).  The claims in the Shanklin Litigation initially included breach of contract and unjust enrichment allegations arising out of matters similar to the Raske Litigation, such as the handling and reporting of funds on behalf of models and the use of model images.  Other parties named as defendants in the Shanklin Litigation include other model management companies, advertising firms, and certain advertisers.  On January 6, 2014, the Company moved to dismiss the Amended Complaint in the Shanklin Litigation for failure to state a claim upon which relief can be granted and other grounds, and other defendants also filed motions to dismiss.  On August 11, 2014, the court denied the motion to dismiss as to Wilhelmina and other of the model management defendants.  Separately, on March 3, 2014, the judge assigned to the Shanklin Litigation wrote the Office of the New York Attorney General bringing the case to its attention, generally describing the claims asserted therein against the model management defendants, and stating that the case “may involve matters in the public interest.” The judge’s letter also enclosed a copy of his decision in the Raske Litigation, which dismissed that case. 

 

Plaintiffs retained substitute counsel, who filed a Second and then Third Amended Complaint. Plaintiffs’ Third Amended Complaint asserts causes of action for alleged breaches of the plaintiffs' management contracts with the defendants, conversion, breach of the duty of good faith and fair dealing, and unjust enrichment.  The Third Amended Complaint also alleges that the plaintiff models were at all relevant times employees, and not independent contractors, of the model management defendants, and that defendants violated the New York Labor Law in several respects, including, among other things, by allegedly failing to pay the models the minimum wages and overtime pay required thereunder, not maintaining accurate payroll records, and not providing plaintiffs with full explanations of how their wages and deductions therefrom were computed.  The Third Amended Complaint seeks certification of the action as a class action, damages in an amount to be determined at trial, plus interest, costs, attorneys’ fees, and such other relief as the court deems proper.  On October 6, 2015, Wilhelmina filed a motion to dismiss as to most of the plaintiffs’ claims.  The Court entered a decision granting in part and denying in part Wilhelmina’s motion to dismiss on May 26, 2017.  The Court (i) dismissed three of the five New York Labor Law causes of action, along with the conversion, breach of the duty of good faith and fair dealing and unjust enrichment causes of action, in their entirety, and (ii) permitted only the breach of contract causes of action, and some plaintiffs’ remaining two New York Labor Law causes of action to continue, within a limited time frame.  The plaintiffs and Wilhelmina each appealed, and the decision was affirmed on May 24, 2018. On August 16, 2017, Wilhelmina timely filed its Answer to the Third Amended Complaint.

 

On June 6, 2016, another putative class action lawsuit was brought against the Company by former Wilhelmina model Shawn Pressley and others, including Roberta Little (the “Pressley Litigation”), in New York State Supreme Court (New York County) by the same counsel representing the plaintiffs in the Shanklin Litigation, and asserting identical, although more recent, claims as those in the Shanklin Litigation.  The Amended Complaint, asserting essentially the same types of claims as in the Shanklin action, was filed on August 16, 2017.  Wilhelmina filed a motion to dismiss the Amended Complaint on September 29, 2017, which was granted in part and denied in part on May 10, 2018.  Some New York Labor Law and contract claims remain in the case.  Pressley has withdrawn from the case, leaving Roberta Little as the sole remaining named plaintiff in the Pressley Litigation.  On July 12, 2019, the Company filed its Answer and Counterclaim against Little.

 

F-13

 

 

On May 1, 2019, the Plaintiffs in the Shanklin Litigation (except Raske) and the Pressley Litigation filed motions for class certification on their contract claims and the remaining New York Labor Law Claims. On July 12, 2019, Wilhelmina filed its opposition to the motions for class certification and filed a cross-motion for summary judgment against Shanklin, Vretman, Palomares, Trotter and Little, and a motion for summary judgment against Raske.  Wilhelmina’s reply papers in further support of its summary judgment motions were filed on October 23, 2019. The motions for class certification and summary judgement were argued on December 4, 2019, and the parties are awaiting decision.

 

The Company believes the claims asserted in the Shanklin and Pressley Litigations are without merit and intends to continue to vigorously defend the actions.

 

In addition to the legal proceedings disclosed herein, the Company is also engaged in various legal proceedings that are routine in nature and incidental to its business. None of these routine proceedings, either individually or in the aggregate, are believed likely, in the Company's opinion, to have a material adverse effect on its consolidated financial position or its results of operations.

Note 7.  Income Taxes

 

The following table summarizes the income tax (expense) benefit for the years ended December 31, 2019 and 2018 (in thousands):

 

		2019				2018
Current:
Federal		$	-			$	-
State			(30	)			(26	)
Foreign			(276	)			(198	)
Current Total			(306	)			(224	)
Deferred:
Federal			(36	)			(153	)
State			(58	)			44
Foreign			-				-
Deferred Total			(94	)			(109	)
Total		$	(400	)		$	(333	)

The income tax expense differs from the amount computed by applying the statutory federal and state income tax rates to the net income before income tax.  The following table shows the reasons for these differences (in thousands):

 

		2019				2018
Computed income tax benefit (expense) at statutory rate		$	944			$	(228	)
Increase in taxes resulting from:
Permanent and other deductions, net			(782	)			(34	)
Global intangible low-taxed income			(200	)			(149	)
Foreign income taxes			-				55
State income taxes, net of federal benefit			(9	)			26
Deferred tax effects			(13	)			(3	)
Valuation allowance – forfeiture of stock options			(340	)			-
Total income tax expense		$	(400	)		$	(333	)

 

A tax provision of $0.4 million was recorded in 2019. The provision was primarily due to the $0.3 million valuation allowance on deferred tax assets related to stock options held by the Company’s former Chief Executive Officer, which were forfeited in connection with the effectiveness of his resignation on January 26, 2020 and foreign taxes in the United Kingdom related to our London office that are not deductible from U.S. federal taxes. A $3.5 million permanent tax difference arose from the $4.8 million goodwill impairment recorded in 2019. Therefore, the impairment charge resulted in only a $0.3 million income tax benefit.

 

A tax provision of $0.3 million was recorded in 2018. The expense was primarily due to income before provision for income taxes and foreign taxes in the United Kingdom related to our London office that are not deductible from U.S. federal taxes.

 

 

The following table shows the tax effect of significant temporary differences, which comprise the deferred tax asset and liability (in thousands):

 

		2019				2018
Deferred tax asset:
Net operating loss carryforward		$	103			$	114
Foreign tax credits			483				483
Accrued expenses			580				649
Allowance for doubtful accounts			85				144
Stock-based compensation			384				336
Other intangible assets			36				45
Interest expense limitation			11				-
Less: Valuation allowance - forfeiture of stock options			(340	)			-
Total deferred income tax asset			1,342				1,771
Deferred tax liability:
Property and equipment			(393	)			(545	)
Intangible assets-brand name			(1,079	)			(1,079	)
Goodwill			(257	)			(497	)
Other intangible assets			(338	)			(281	)
Total deferred income tax liability			(2,067	)			(2,402	)
Net deferred tax liability		$	(725	)		$	(631	)

 

The presentation of net deferred tax assets and liabilities for each jurisdiction are presented as noncurrent within the Company’s Consolidated Balance Sheets. Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when the taxes are actually paid or recovered. The Company recognizes a valuation allowance for deferred tax assets when it is more likely than not that these assets will not be realized. In making this determination, all positive and negative evidence is considered, including future reversals of existing taxable temporary differences, tax planning strategies, future taxable income, and taxable income in prior carryback years.

 

At December 31, 2019 and December 31, 2018, the Company has $0.5 million of federal net operating loss carryforwards, which expire in 2037. Additionally, the Company has $0.5 million of U.S. federal foreign tax credit carryforwards, which expire between 2023 and 2029.

 

The Company does not believe that it has any significant uncertain tax positions at December 31, 2019 and December 31, 2018, nor is this expected to change within the next twelve months due to the settlement and expiration of statutes of limitation.

 

The U.S. Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017 and introduced significant changes to U.S. income tax law. Effective in 2018, the Tax Act reduced the U.S. statutory tax rate from 35% to 21% and created new taxes on certain foreign-sourced earnings and certain related-party payments, which are referred to as the global intangible low-taxed income tax and base erosion tax, respectively.

 

In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income (“GILTI”) provisions of the Tax Act. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The Company elected to treat any potential GILTI inclusions as a period cost.

Note 8.  Treasury Stock

 

During 2012, the Board of Directors authorized a stock repurchase program whereby the Company could repurchase up to 500,000 shares of its outstanding common stock. During 2013, the Board of Directors renewed and extended the Company’s share repurchase authority to enable it to repurchase up to an aggregate of 1,000,000 shares of common stock. In 2016, the Board of Directors increased by an additional 500,000 shares the number of shares of the Company’s common stock, which may be repurchased under its stock repurchase program to an aggregate of 1,500,000 shares. The shares may be repurchased from time to time in the open market or through privately negotiated transactions at prices the Company deems appropriate. The program does not obligate the Company to acquire any particular amount of common stock and may be modified or suspended at any time at the Company’s discretion.

 

From 2012 through December 31, 2019, the Company repurchased an aggregate of 1,309,861 shares of common stock at an average price of approximately $4.85 per share, for a total of approximately $6.4 million in repurchases under the stock repurchase program. During the year ended December 31, 2019, 45,707 shares were repurchased at an average price of $5.66 per share. The repurchase of an additional 190,139 shares is presently authorized under the stock repurchase program.

F-15

 

Note 9.  Related Parties

 

The Executive Chairman of the Company, Mark E. Schwarz, is also the chairman, chief executive officer and portfolio manager of Newcastle Capital Management, L.P. (“NCM”). NCM is the general partner of Newcastle Partners L.P. (“Newcastle”), which is the largest shareholder of the Company. James A. Dvorak (Managing Director at NCM) also serves as a director of the Company.

 

The Company’s corporate headquarters are located at 200 Crescent Court, Suite 1400, Dallas, Texas 75201, which are also the offices of NCM. The Company occupies a portion of NCM space on a month-to-month basis at $2,500 per month, pursuant to a services agreement entered into between the parties. Pursuant to the services agreement, the Company receives the use of NCM’s facilities and equipment and administrative services from employees of NCM. The Company incurred expenses pursuant to the services agreement totaling approximately $30 thousand for each of the years ended December 31, 2019 and 2018. The Company did not owe NCM any amounts under the services agreement as of December 31, 2019.

 

Note 10.  Stock Options and Stock Purchase Warrants

 

During 2015, shareholders of the Company approved the 2015 Incentive Plan which authorized the issuance of up to an additional 500,000 shares of the common stock pursuant to stock options, restricted stock, stock appreciation rights and other equity incentives awarded to directors, officers, consultants, advisors and employees of the Company. Stock option awards under the 2015 Incentive Plan are granted at the market value of the common stock on the date of grant, have vesting periods of five years, and expire to the extent unexercised after ten years.

 

Under the 2015 Incentive Plan, no stock option awards were granted during 2019 or 2018. No stock options were exercised during either 2019 or 2018.

 

The following table shows a summary of stock option transactions under the Incentive Plans during 2019 and 2018:

 

		Number of Shares				Weighted Average Exercise Price
Outstanding, January 1, 2018			460,000			$	7.34
Granted			-				-
Exercised			-				-
Forfeited or expired			-				-
Outstanding, December 31, 2018			460,000			$	7.34
Granted			-				-
Exercised			-				-
Forfeited or expired			-				-
Outstanding, December 31, 2019			460,000			$	7.34

 

Weighted average remaining contractual life was 6.61 years at December 31, 2019 and 7.61 years at December 31, 2018. The exercise price of all stock options was below the market value at both December 31, 2019 and 2018. Therefore, there is no intrinsic value at December 31, 2019 and 2018. Total unrecognized compensation expense on options outstanding as of December 31, 2019 was $0.2 million. Options to purchase 230,000 shares of common stock were exercisable as of December 31, 2019.

 

 

The Company estimates the fair value of each stock option granted on the date of grant using the Black-Scholes option pricing model. Expected volatilities are based on the historical volatility of Wilhelmina’s and similar companies’ common stock for a period equal to the expected term. The risk-free interest rates for periods within the contractual term of the options are based on rates for U.S. Treasury Notes with maturity dates corresponding to the options’ expected lives on the dates of grant. Expected term is determined based on the option term of ten years.

Note 11.  Benefit Plans

 

The Company has established a 401(k) Plan for eligible employees of the Company. Generally, all employees of the Company who are at least twenty-one years of age are eligible to participate in the 401(k) Plan. The 401(k) Plan is a defined contribution plan, which provides that participants may make voluntary salary deferral contributions, on a pretax basis, between 1% and 100% of their compensation in the form of voluntary payroll deductions, up to a maximum amount as indexed for cost-of-living adjustments. The Company may make discretionary contributions. No discretionary contributions were made during the years ended December 31, 2019 and 2018.

Note 12.  Goodwill and Intangible Assets

 

The following table summarizes the goodwill as of December 31, 2019 and 2018 (in thousands):

 

Goodwill:		Goodwill				Impairment
2019 Goodwill
U.S. goodwill		$	12,563			$	(4,845	)
London goodwill			629				-
Total		$	13,192			$	(4,845	)
2018 Goodwill
U.S. goodwill		$	12,563			$	-
London goodwill			629				-
Total		$	13,192			$	-

 

In December 2019, the Company determined there was a triggering event, primarily caused by a sustained decrease in the Company’s stock price. The results of the goodwill impairment test indicated that the carrying value exceeded the estimated fair value. Thus, during December 2019, the Company recorded an impairment charge of $4.8 million related to its goodwill. Further declines in the Company’s stock price could result in additional goodwill impairment charges.

 

No asset impairment charges were incurred during the year ended December 31, 2018

 

F-17

 

 

The following table summarizes the intangible assets with finite lives as of December 31, 2019 and 2018 (in thousands):

 

Intangible assets subject to amortization:		Gross Cost				Accumulated Amortization				Weighted-average amortization period (in years)
2019 Intangibles:
Customer lists		$	3,204			$	(3,204	)			5.0
Non-compete agreements			1,054				(1,054	)			6.5
Talent and model contractual relationships			2,846				(2,846	)			3.8
Employee contractual relationships			1,633				(1,633	)			5.0
Total		$	8,737			$	(8,737	)			5.1
2018 Intangibles:
Customer lists		$	3,204			$	(3,194	)			5.0
Non-compete agreements			1,054				(1,054	)			6.5
Talent and model contractual relationships			2,846				(2,803	)			3.8
Employee contractual relationships			1,633				(1,633	)			5.0
Total		$	8,737			$	(8,684	)			5.1

 

Amortization expense totaled $0.1 million for each of the years ended December 31, 2019 and 2018.