UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

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

 

For the quarterly period ended SeptemberJune 30, 20172020

 

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 001-36589

 

WILHELMINA INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)

 

Delaware74-2781950
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)

 

200 Crescent Court, Suite 1400, Dallas, Texas75201
(Address of principal executive offices)(Zip Code)

 

(214) 661-7488
(Registrant’s telephone number, including area code)
 
n/a
(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 par valueWHLMNasdaq Capital Market

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.  [x][ x ] 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). [x][ x ] Yes   [   ] No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.  (Check one):

 

 Large accelerated filer  [   ]Accelerated filer [   ]
 Non-accelerated filer [ ]Smaller reporting company [x][ x ]
 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  [x][ x ] No

 

As of November 9, 2017,August 12, 2020, the registrant had 5,381,6685,157,344 shares of common stock outstanding.

 

1

1

 

WILHELMINA INTERNATIONAL, INC. AND SUBSIDIARIES

 

Quarterly Report on Form 10-Q

 

For the Three and NineSix Months Ended SeptemberJune 30, 20172020

 

PART IFINANCIAL INFORMATION3
   
 Item 1.Financial Statements3
   
  Consolidated Balance SheetSheets as of SeptemberJune 30, 20172020 (Unaudited) and December 31, 201620193
   
  Consolidated Statements of Operations and Comprehensive Income for the Three and NineSix Months Ended SeptemberJune 30, 20172020 and 20162019 (Unaudited)4
   
  Consolidated Statements of Shareholders’ Equity for the Three and Six Months Ended June 30, 2020 and 2019 (Unaudited)5
Consolidated Statements of Cash Flow for the NineSix Months Ended SeptemberJune 30, 20172020 and 20162019 (Unaudited)56
   
  Notes to Consolidated Financial Statements (Unaudited)67
   
 Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations912
   
 Item 3.Quantitative and Qualitative Disclosures About Market Risk1420
   
 Item 4.Controls and Procedures1520
   
PART IIOTHER INFORMATION1621
   
 Item 1.Legal Proceedings1621
   
 Item 1.A.Risk Factors1622
   
 Item 2.Unregistered Sales of Equity Securities and Use of Proceeds1722
   
 Item 3.Defaults Upon Senior Securities1722
   
 Item 4.Mine Safety Disclosures1722
   
 Item 5.Other Information1722
   
 Item 6.Exhibits1823
   
SIGNATURES1924

 

 

2

PART I

 

FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements

WILHELMINA INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data) 

 

  (Unaudited)
September 30,
2017
 December 31,
2016
ASSETS        
Current assets:        
Cash and cash equivalents $2,640  $5,688 
Accounts receivable, net of allowance for doubtful accounts of $2,158 and $1,646, respectively  16,543   16,947 
Prepaid expenses and other current assets  287   847 
Total current assets  19,470   23,482 
         
Property and equipment, net of accumulated depreciation of $2,134 and $1,525, respectively  3,197   3,206 
Trademarks and trade names with indefinite lives  8,467   8,467 
Other intangibles with finite lives, net of accumulated amortization of$8,589 and $8,527, respectively  147   210 
Goodwill  13,192   13,192 
Other assets  115   164 
         
TOTAL ASSETS $44,588  $48,721 
         
LIABILITIES AND SHAREHOLDERS’ EQUITY        
Current liabilities:        
Accounts payable and accrued liabilities $3,916  $4,781 
Due to models  10,975   14,217 
Contingent consideration to seller - current  -   97 
Term loan - current  519   502 
Total current liabilities  15,410   19,597 
         
Long term liabilities:        
Deferred income tax liability  1,532   1,567 
Term loan - non-current  1,756   2,147 
Total long-term liabilities  3,288   3,714 
         
Total liabilities  18,698   23,311 
         
Shareholders’ equity:        
Common stock, $0.01 par value, 9,000,000 and 12,500,000 shares authorized; 6,472,038 shares issued at September 30, 2017 and December 31, 2016  65   65 
Treasury stock, 1,090,370 at September 30, 2017 and December 31, 2016, at cost  (4,893)  (4,893)
Additional paid-in capital  87,748   87,336 
Accumulated deficit  (57,065)  (57,048)
Accumulated other comprehensive income (loss)  35   (50)
Total shareholders’ equity  25,890   25,410 
         
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $44,588  $48,721 

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

3

WILHELMINA INTERNATIONAL, INC. AND SUBSIDIARIES

STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

For the Three and Nine Months Ended September 30, 2017 and 2016

(In thousands, except per share data)

(Unaudited)

  Three Months Ended Nine Months Ended
  September 30, September 30,
  2017 2016 2017 2016
Revenues:                
Revenues $18,712  $20,880  $56,120  $64,512 
License fees and other income  6   28   34   82 
Total revenues  18,718   20,908   56,154   64,594 
                 
Model costs  13,265   14,888   39,910   45,952 
                 
Revenues net of model costs  5,453   6,020   16,244   18,642 
                 
Operating expenses:                
Salaries and service costs  3,447   3,708   10,611   11,594 
Office and general expenses  1,400   1,381   3,832   4,267 
Amortization and depreciation  232   89   672   295 
Corporate overhead  236   192   817   768 
Total operating expenses  5,315   5,370   15,932   16,924 
Operating income  138   650   312   1,718 
                 
Other income (expense):                
Foreign exchange gain (loss)  (18)  1   (54)  8 
Gain (loss) from unconsolidated affiliate  (2)  5   (40)  11 
Interest expense  (31)  (21)  (88)  (21)
Revaluation of contingent liability  -   (30)  -   (30)
Total other income (expense)  (51)  (45)  (182)  (32)
                 
Income before provision for income taxes  87   605   130   1,686 
                 
Provision for income taxes: (expense) benefit                
Current  (57)  (281)  (182)  (648)
Deferred  (4)  (97)  35   (358)
Income tax (expense)  (61)  (378)  (147)  (1,006)
                 
Net income (loss) $26  $227  $(17) $680 
                 
Other comprehensive income (expense):                
Foreign currency translation income (expense)  20   (12)  85   (50)
Total comprehensive income  46   215   68   630 
                 
Basic net income (loss) per common share $0.00  $0.04  $0.00  $0.12 
Diluted net income (loss) per common share $0.00  $0.04  $0.00  $0.12 
                 
Weighted average common shares outstanding-basic  5,382   5,586   5,382   5,716 
Weighted average common shares outstanding-diluted  5,382   5,637   5,382   5,768 
  (Unaudited)  
  June 30,
2020
 December 31,
2019
ASSETS        
Current assets:        
Cash and cash equivalents $5,601  $6,993 
Accounts receivable, net of allowance for doubtful accounts of $1,733 and $1,423, respectively  4,899   9,441 
Prepaid expenses and other current assets  212   243 
Total current assets  10,712   16,677 
         
Property and equipment, net of accumulated depreciation of $4,843 and $4,300, respectively  1,470   1,925 
Right of use assets-operating  746   1,261 
Right of use assets-finance  267   316 
Trademarks and trade names with indefinite lives  8,467   8,467 
Other intangibles with finite lives, net of accumulated amortization of$8,737 and $8,737, respectively  -   - 
Goodwill  7,547   8,347 
Other assets  96   115 
         
TOTAL ASSETS $29,305  $37,108 
         
LIABILITIES AND SHAREHOLDERS’ EQUITY        
Current liabilities:        
Accounts payable and accrued liabilities $3,021  $3,815 
Due to models  4,503   7,495 
Lease liabilities – operating, current  796   1,055 
Lease liabilities – finance, current  96   94 
Term loans – current  1,852   1,257 
Total current liabilities  10,268   13,716 
         
Long term liabilities:        
Net deferred income tax liability  1,323   725 
Lease liabilities – operating, non-current  26   328 
Lease liabilities – finance, non-current  176   225 
Term loans – non-current  1,749   743 
Total long term liabilities  3,274   2,021 
         
Total liabilities  13,542   15,737 
         
Shareholders’ equity:        
Common stock, $0.01 par value, 9,000,000 shares authorized; 6,472,038 shares issued at June 30, 2020 and December 31, 2019  65   65 
Treasury stock, 1,314,694 and 1,309,861 shares at June 30, 2020 and December 31, 2019, at cost  (6,371)  (6,352)
Additional paid-in capital  88,481   88,471 
Accumulated deficit  (66,175)  (60,815)
Accumulated other comprehensive loss  (237)  2 
Total shareholders’ equity  15,763   21,371 
         
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $29,305  $37,108 

 

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

 

4

WILHELMINA INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWOPERATIONS AND COMPREHENSIVE INCOME

For the NineThree and Six Months Ended SeptemberJune 30, 20172020 and 20162019

(In thousands, except per share data)

(Unaudited)

  Three Months Ended Six Months Ended
  June 30, June 30,
  2020 2019 2020 2019
Revenues:                
Service revenues $4,523  $19,940  $19,070  $39,975 
License fees and other income  5   5   10   29 
Total revenues  4,528   19,945   19,080   40,004 
                 
Model costs  3,397   14,156   14,003   28,632 
                 
Revenues, net of model costs  1,131   5,789   5,077   11,372 
                 
Operating expenses:                
Salaries and service costs  2,788   3,589   5,915   7,305 
Office and general expenses  947   1,031   2,002   2,259 
Amortization and depreciation  298   298   592   588 
Goodwill impairment  -   -   800   - 
Corporate overhead  238   251   547   583 
Total operating expenses  4,271   5,169   9,856   10,735 
Operating (loss) income  (3,140)  620   (4,779)  637 
                 
Other expense (income):                
Foreign exchange loss (gain)  14   (12)  (51)  3 
  Interest expense  23   30   50   62 
  Total other expense (income), net  37   18   (1)  65 
                 
(Loss) income before provision for income taxes  (3,177)  602   (4,778)  572 
                 
Provision for income taxes benefit (expense):                
  Current  75   (89)  16   (152)
  Deferred  402   (62)  (598)  (78)
  Income tax benefit (expense)  477   (151)  (582)  (230)
                 
 Net (loss) income $(2,700) $451  $(5,360) $342 
                 
Other comprehensive expense:                
  Foreign currency translation expense  (5)  (59)  (239)  (31)
  Total comprehensive (loss) income  (2,705)  392   (5,599)  311 
                 
Basic net (loss) income per common share $(0.52) $0.09  $(1.04) $0.07 
Diluted net (loss) income per common share $(0.52) $0.09  $(1.04) $0.07 
                 
Weighted average common shares outstanding-basic  5,157   5,187   5,159   5,196 
Weighted average common shares outstanding-diluted  5,157   5,187   5,159   5,196 

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


WILHELMINA INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the Three and Six Months Ended June 30, 2020 and 2019

(In thousands)

(Unaudited)

 

  Common
Shares
 Stock
Amount
 Treasury
Shares
 Stock
Amount
 Additional
Paid-in
Capital
 Accumulated
Deficit
 Accumulated Other Comprehensive Loss Total
Balances at December 31, 2018  6,472  $65   (1,264) $(6,093) $88,255  $(56,029) $(93) $26,105 
Share based payment expense  -   -   -   -   64   -   -   64 
Net loss to common shareholders  -   -   -   -   -   (109)  -   (109)
Purchases of treasury stock  -   -   (4)  (24)  -   -   -   (24)
Foreign currency translation  -   -   -   -   -   -   28   28 
Balances at March 31, 2019  6,472  $65   (1,268) $(6,117) $88,319  $(56,138) $(65) $26,064 
Share based payment expense  -   -   -   -   52   -   -   52 
Net income to common shareholders  -   -   -   -   -   451   -   451 
Purchases of treasury stock  -   -   (25)  (149)  -   -   -   (149)
Foreign currency translation  -   -   -   -   -   -   (59)  (59)
Balances at June 30, 2019  6,472  $65   (1,293) $(6,266) $88,371  $(55,687) $(124) $26,359 

  

Nine Months Ended

September 30,

  2017 2016
Cash flows from operating activities:        
Net income: $(17) $680 
Adjustments to reconcile net income to net cash used in operating activities:        
Amortization and depreciation  672   295 
Share based payment expense  412   253 
Deferred income taxes  (35)  358 
Contingent liability to seller  (97)  30 
Bad debt expense  128   40 
Changes in operating assets and liabilities:        
Accounts receivable  276   (4,832)
Prepaid expenses and other current assets  560   (199)
Other assets  49   108 
Due to models  (3,242)  2,585 
Accounts payable and accrued liabilities  (865)  1,017 
Net cash (used in) provided by operating activities  (2,159)  335 
         
Cash flows from investing activities:        
Purchases of property and equipment  (600)  (1,118)
Net cash used in investing activities  (600)  (1,118)
         
Cash flows from financing activities:        
Purchases of treasury stock  -   (2,775)
Proceeds from term loan  -   2,730 
Repayment of term loan  (374)  - 
Net cash used in financing activities  (374)  (45)
         
Foreign currency effect on cash flows:  85   (50)
         
Net change in cash and cash equivalents:  (3,048)  (878)
Cash and cash equivalents, beginning of period  5,688   4,556 
Cash and cash equivalents, end of period $2,640  $3,678 
         
Supplemental disclosures of cash flow information:        
Cash paid for interest $74  $21 
Cash refund of income taxes $87  $320 
  Common
Shares
 Stock
Amount
 Treasury
Shares
 Stock
Amount
 Additional
Paid-in
Capital
 Accumulated
Deficit
   Total
Balances at December 31, 2019  6,472  $65   (1,310) $(6,352) $88,471  $(60,815) $2  $21,371 
Share based payment expense  -   -   -   -   6   -   -   6 
Net loss to common shareholders  -   -   -   -   -   (2,660)  -   (2,660)
Purchases of treasury stock  -   -   (5)  (19)  -   -   -��  (19)
Foreign currency translation  -   -   -   -   -   -   (234)  (234)
Balances at March 31, 2020  6,472  $65   (1,315) $(6,371) $88,477  $(63,475) $(232) $18,464 
Share based payment expense  -   -   -   -   4   -   -   4 
Net loss to common shareholders  -   -   -   -   -   (2,700)  -   (2,700)
Purchases of treasury stock  -   -   -   -   -   -   -   - 
Foreign currency translation  -   -   -   -   -   -   (5)  (5)
Balances at June 30, 2020  6,472  $65   (1,315) $(6,371) $88,481  $(66,175) $(237) $15,763 

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


WILHELMINA INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW

For the Six Months Ended June 30, 2020 and 2019

(In thousands)

(Unaudited)

  Six Months Ended
June 30,
  2020 2019
Cash flows from operating activities:        
Net (loss) income: $(5,360) $342 
Adjustments to reconcile net (loss) income to net cash used in operating activities:        
Amortization and depreciation  592   588 
Goodwill impairment  800   - 
Share based payment expense  10   116 
Deferred income taxes  598   78 
Bad debt expense  93   24 
Changes in operating assets and liabilities:        
Accounts receivable  4,449   (961)
Prepaid expenses and other current assets  31   (109)
Right of use assets-operating  515   537 
Other assets  19   - 
Due to models  (2,992)  404 
Lease liabilities-operating  (561)  (579)
Accounts payable and accrued liabilities  (794)  (445)
Net cash used in operating activities  (2,600)  (5)
         
Cash flows used in investing activities:        
Purchases of property and equipment  (88)  (207)
Net cash used in investing activities  (88)  (207)
         
Cash flows used in financing activities:        
Purchases of treasury stock  (19)  (173)
Proceeds of term loan  1,975   - 
Payments on finance leases  (47)  (57)
Repayment of term loan  (374)  (272)
Net cash provided by (used in) financing activities  1,535   (502)
         
Foreign currency effect on cash flows:  (239)  (31)
         
Net change in cash and cash equivalents:  (1,392)  (745)
Cash and cash equivalents, beginning of period  6,993   6,748 
Cash and cash equivalents, end of period $5,601  $6,003 
         
Supplemental disclosures of cash flow information:        
Cash paid for interest $45  $60 
Cash paid for income taxes $-  $5 

 

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

 

5

WILHELMINA INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1.  Basis of Presentation

 

The interim consolidated financial statements included herein have been prepared by Wilhelmina International, Inc. (together with its subsidiaries, "Wilhelmina" or the "Company") without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Although certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to those rules and regulations, all adjustments considered necessary in order to make the consolidated financial statements not misleading have been included. In the opinion of the Company’s management, the accompanying interim unaudited consolidated financial statements reflect all adjustments, of a normal recurring nature, that are necessary for a fair presentation of the Company’s consolidated financial position, resultsbalance sheets, statements of operations and comprehensive loss, statements of shareholders’ equity, and statements of cash flows for the periods presented. These interim unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.2019. Certain prior year amounts on the Company’s consolidated statements of cash flows have been reclassified to conform to current year presentation. Results of operations for the interim periods are not necessarily indicative of results that may be expected for any other interim periods or the full fiscal year.

 

Note 2.  Business

 

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 several international markets.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.

COVID-19 Pandemic

On March 11, 2020, the World Health Organization declared the outbreak of novel coronavirus (COVID-19) as a pandemic, which has spread rapidly throughout the United States and the world. 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 has seen a significant reduction in customer bookings, resulting in a negative impact to revenue and earnings. In June 2020, bookings increased from the preceding two months, but remained significantly below pre-pandemic levels.

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, which have had to close stores in the United States and internationally due to orders from local authorities to help slow the spread of COVID-19. Some of these customers 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 capability, or need, to purchase Wilhelmina’s services to the extent that they did in previous years. Some of our model talent have been quarantined with family 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, once economic activities resume and clients increase booking requests, may make it difficult for our talent to be available when and where they are needed. 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 and increased operating losses during the first six months of 2020. Although some clients increased activity and bookings toward the end of the second quarter of 2020, rising COVID-19 infection rates in two of Wilhelmina’s biggest cities, Los Angeles and Miami, could lead to a slower economic recovery in those markets, and possible additional business closings or local mandates that could slow the recovery in our operations there. Since Wilhelmina extends customary payment terms to its clients, even when bookings resume there is likely to be a lag before significant cash collections return. In the meantime, the Company has continued 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 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.. Since the pandemic began, many stock markets, including Nasdaq Capital Market where Wilhelmina’s common stock is listed, have been volatile. A further decline in the Company’s stock price would reduce our 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:

-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”).

-Eliminated all discretionary travel and entertainment expenses.

-Suspended share repurchases.

-Did not renew the leases on two New York City model apartments when the terms ended in June, 2020.

-

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.

-Obtained from the landlord of the Company’s New York City office a deferral of $41 thousand in July 2020 rent until January 2021.

-Negotiated discounts with various vendors and service providers, in effect through the remainder of 2020.

-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. The salary reductions are expected to return to full salaries when business conditions improve.

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.

 

Note 3.  New Accounting Standards

 

Accounting Standard UpdateIn June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU”ASU 2016-13”) 2015-17, which amends the FASB’s prior 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 becomes effective for the Company for annual reporting periods ending after December 15, 2022, including interim periods within those fiscal years. The adoption of ASU 2016-13 is not expected to have a material impact on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-03 “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-03”) effective for periods beginning after December 15, 2019. 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 prior two-step goodwill impairment test, under which a goodwill impairment loss was measured by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The adoption of ASU No. 2017-03 did not have a material impact on the results of the Company’s goodwill impairment testing procedures.

In November 2018, the FASB issued ASU No. 2018-19, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses”  (“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. ASU 2018-19 became effective for the Company for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The adoption of ASU 2018-19 did not have a material impact on the Company’s consolidated financial statements.

In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes - Balance Sheet Classification(Topic 740): Simplifying the Accounting for Income Taxes”. The standard includes multiple key provisions, including removal of Deferredcertain exceptions to ASC 740, Income Taxes requires deferred, and simplification in several other areas such as accounting for a franchise tax assets and liabilities to be netted and classified as non-current inthat is partially based on income. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is currently assessing the consolidated balance sheet. Wilhelmina retrospectively adopted the new accounting standard on January 1, 2017. The impact of adopting this standard but does not expect the change resulted in the nettingadoption of deferred tax assets and liabilities and classification of all deferred taxes as non-current.this guidance to have a material impact on its consolidated financial statements.

 


 

Note 4.  Foreign Currency Translation

 

The functional currency of Londonour subsidiary in the United Kingdom is the British Pound. Assets and liabilities are translated into U.S. dollars at the exchange rates in effect at each balance sheet date, revenues and expenses are translated at average monthly exchange rates, and resulting translation gains or losses are accumulated in other comprehensive income as a separate component of shareholders’ equity.

 

Note 5.  Line of CreditDebt

 

The Company has a credit agreement with Amegy Bank providingwhich 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 $20.0 million. The revolving line of credit bears interest at prime plus 0.5%0.50% payable monthly. As of SeptemberJune 30, 2017,2020, 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 $1.5 million. The revolving line of credit expires on October 24, 2018.credit.

 

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.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 $0.6 million 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 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 May 4, 2017,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 June 30, 2020, a total of $1.6 million was outstanding on the two Amegy Bank term loans.

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 SeventhThirteenth 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 reducingalso waived an existing default caused by the Company’s failure to satisfy the old 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 DecemberMarch 31, 2017.2020 and minimum tangible net worth as of March 31, 2020. The Company obtained a waiver from Amegy Bank of its failure to satisfy the fixed charge coverage ratio, the minimum tangible net worth, and the borrowing base for the quarter ended June 30, 2017. On August 1, 2017,2020. Current economic conditions make it likely that the Company entered into an Eighth Amendment to Credit Agreement with Amegy Bank eliminating the requirement to test the fixed charge coverage ratio for the quarter ended September 30, 2017.will require additional waivers in subsequent periods of 2020.

 

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 revolving lineSub PPP Loan was obtained pursuant to the Paycheck Protection Program of creditthe CARES Act administered by the U.S. Small Business Administration (the “SBA”). The Sub PPP Loan matures on April 13, 2022 and bears interest at a rate of 1.00% per annum. The Sub PPP Loan is payable in 18 equal monthly payments of $104 thousand commencing November 13, 2020.

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 expiredBank. The Parent PPP Loan was also obtained pursuant to the PPP. The Parent PPP Loan matures on April 17, 2022 and bears interest at a rate of 1.00% per annum. The Parent PPP Loan is payable in 18 equal monthly payments of $7 thousand commencing November 13, 2020.


Both the Sub PPP Loan and the Parent PPP Loan (collectively, the “PPP Loans”) may be prepaid at any time prior to maturity with no prepayment penalties. Both the Sub PPP Loan Documents and the Parent PPP Loan Documents contain various provisions related to the PPP, as well customary representations, warranties, covenants, events of default and other provisions. Neither of the PPP Loans is secured by its terms on October 24, 2017. On November 8, 2017,either the Borrower or the Company, and Amegy extendedboth are guaranteed by the revolving lineSBA. All or a portion of creditthe PPP Loans may be forgiven by the SBA upon application by the Borrower or the Company, respectively, accompanied by documentation of expenditures in accordance with the SBA requirements under the PPP. In the event all or any portion of the PPP Loans is forgiven, the amount forgiven is applied to outstanding principal.

As of June 30, 2020, a total of $2.0 million was outstanding on substantially the same terms for one year until October 24, 2018.

PPP Loans.

 

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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.  Further,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, and oral argument on the motion was heard by the Court in June 2016.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 haveeach appealed, the decision. The parties appeared before the Court for a status conference on July 18, 2017, and the Court directed the defendants to answer the Third Amended Complaint bydecision was affirmed on May 24, 2018. On August 16, 2017.2017, Wilhelmina timely filed its Answer to the Third Amended Complaint on that date, and discovery in this action is continuing.  The Company believes the claims asserted in the Third Amended Complaint are without merit, and intends to continue to vigorously defend the action.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.  On June 14, 2016, the Court stayed all proceedings in the Pressley Litigation until a decision was issued on the motion to dismiss in the Shanklin Litigation. At the court conference on July 18, 2017 (mentioned above), the judge directed the plaintiffs to file an amended complaint in the Pressley Litigation, if any, by August 16, 2017, and directed the defendants to move against or answer such amended complaint by September 29, 2017.  The Amended Complaint, asserting essentially the same types of claims as in the Shanklin action, was filed on August 16,th, and 2017.  Wilhelmina filed a motion to dismiss the Amended Complaint on September 29, 2017. Briefing2017, which was granted in part and denied in part on May 10, 2018.  Some New York Labor Law and contract claims remain in the motion to dismiss is continuing,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.

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. 


By Order Dated May 8, 2020 (the “Class Certification Order”), the Court denied class certification in the Pressley case, denied class certification with respect to the breach of contract and alleged unpaid usage claims, granted class certification as to the New York Labor Law causes of action asserted by Vretman, Palomares and Trotter, and declined to rule on Wilhelmina’s motions for summary judgment, denying them without prejudice to be re-filed at a later date. On June 12, 2020, the Plaintiffs in both the Shanklin and Pressley actions filed Notices of Appeal to the Appellate Division. First Department from those portions of the Class Certification Order on which Wilhelmina prevailed, and Little also filed a motion for reargument of the denial of her motion for class certification. On June 22, 2020, Wilhelmina filed Notices of Cross-Appeal from those portions of the Class Certification order that granted class Certification and denied summary judgement. Wilhelmina also opposed Little’s motion for reargument, and that motion is scheduledfully briefed. The Court has direct the parties to be submitted to the Court on November 16, 2017. Discoverynon-binding mediation and that process is proceeding in this case. underway.

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

 

Generally, the Company’s combined effective tax rate is high relative to reported net income as a result of valuation allowances on deferred tax assets, certain amounts of amortization and depreciation expense, stock based compensation, and corporate overhead not being deductible and income being attributable to certain states in which it operates. In recent years, the majority of taxes paid by the Company were state and foreign taxes, not federal U.S. taxes. The Company operates in four states which have relatively high tax rates: California, New York, Illinois, and Florida. Realization of net operating loss carryforwards, foreign tax credits, and other deferred tax temporary differences are contingent upon future taxable earnings. The Company’s deferred tax assets are reviewed for expected utilization by assessing the available positive and negative factors surrounding recoverability, including projected future taxable income, tax-planning strategies, and results of recent operations. A valuation allowance is recorded when it is more likely than not that a deferred tax asset will not be realized. As of SeptemberJune 30, 2017,2020, due primarily to the effects of the COVID-19 pandemic on its business, the Company had federalbelieves it is more likely than not that the benefit from deferred tax assets will not be realized. During the six months ended June 30, 2020, the Company recorded a $1.3 valuation allowance on its deferred tax assets and released a $0.3 million valuation allowance on deferred tax assets relating to the forfeiture of stock options held by the Company’s former Chief Executive Officer. At June 30, 2020, the Company maintained a $1.3 million valuation allowance against its deferred tax assets. The Company will continue to assess the assumptions used to determine the amount of the valuation allowance and may adjust the valuation allowance in future periods based on changes in estimated future income tax loss carryforwards of $1.5 million.and other factors.

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Note 8.   Shareholder EquityTreasury Shares

 

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. On August 12,In 2016, the Board of Directors increased by an additional 500,000 shares the number of shares of the Company’s common stock whichthat 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 SeptemberJune 30, 2017,2020, the Company has repurchased 1,090,3701,314,694 shares of Common Stockcommon stock at an average price of approximately $4.49$4.85 per share, for a total of approximately $4.9$6.4 million in repurchases under the stock repurchase program. NoDuring the first six months of 2020, 4,833 shares were repurchased under the stock repurchase program duringfor approximately $20 thousand. The repurchase of an additional 185,306 shares is presently authorized under the first nine months of 2017.stock repurchase program. Due to COVID-19, the Company has temporarily suspended further share repurchases to preserve liquidity.


 

Note 9. Common Stock

On July 7, 2017, the Company filed with the Delaware Secretary of State a Certificate of Amendment of its Restated Certificate of Incorporation. As approved by shareholders at the Annual Meeting held June 13, 2017, the Certificate of Amendment eliminated any class of preferred stock from the shares of capital stock the Company is authorized to issue and decreased the number of shares of common stock the Company is authorized to issue from 12,500,000 shares to 9,000,000 shares.

Note 10.9.   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 Dvorak (Managing Director at NCM) also serves as 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 $2.5 thousand 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 accounting, legal and administrative services from employees of NCM. The Company incurred expenses pursuant to the services agreement totaling approximately $7.5 thousand and $22.5$15 thousand for the three and ninesix months ended both SeptemberJune 30, 20172020 and 2016.2019. The Company did not owe NCM any amounts under the services agreement as of SeptemberJune 30, 2017.2020.

 

The Company previously owned an unconsolidated 50% interest in Wilhelmina Kids & Creative Management LLC (“Kids”), a New York City-based modeling agency that specialized in representing child models/talents, from newborns to children 14 years

Note 10.  Goodwill

During the first quarter of age. On December 9, 2016, the owners of Kids agreed to dissolve Kids and ceased related business operations of Kids. On March 1, 2017,2020, the Company paid $0.1 million to another ownerdetermined 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 Kids in accordance with the December 9, 2016 agreement to liquidateimpairment test indicated that the enterprise.carrying value of goodwill exceeded its estimated fair value. As a result, Wilhelmina no longer maintains a child models division.during March 2020, the Company recorded an impairment charge of $0.8 million related to its goodwill. No asset impairment charges were incurred during the second quarter of 2020. Further declines in the Company’s stock price could result in additional goodwill impairment charges.

No asset impairment charges were incurred during the first six months of 2019.

Note 11.  Subsequent Events

 

On November 8, 2017,Effective July 1, 2020, Wilhelmina implemented layoffs of approximately 36% of its staff, including employees at each of the CompanyCompany’s five offices, and Amegy extendedeffected temporary salary reductions for the revolving line of credit on substantially the same terms for one year until October 24, 2018remaining staff. The salary reductions are expected to return to full salaries when business conditions improve.

 

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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 and ninesix months ended SeptemberJune 30, 20172020 and 2016.2019. 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, 2016,2019, as amended.

 

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 are subject toreflect 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 Company’s primary business is fashion model management and complementary business activities. The business of talent management firms, such as Wilhelmina, depends heavily on the state of the advertising industry, as demand for talent is driven by Internet, print and television advertising campaigns for consumer goods and retail clients. Wilhelmina believes it has strong brand recognition which enables it to attract and retain top agents and talent to service a broad universe of clients. In order to take advantage of these opportunities and support its continued growth, the Company will need to continue to successfully allocate resources and staffing in a way that enhances its ability to respond to new opportunities. The Company continues to focus on tightly managing costs, recruiting top agents when available, and scouting and developing new talent.

 


COVID-19 Pandemic

On March 11, 2020, the World Health Organization declared the outbreak of novel coronavirus (COVID-19) as a pandemic, which has spread rapidly throughout the United States and the world. 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 has seen a significant reduction in customer bookings, resulting in a negative impact to revenue and earnings. In June 2020, bookings increased from the preceding two months, but remained significantly below pre-pandemic levels.

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 which have had to close stores in the United States and internationally due to orders from local authorities to help slow the spread of COVID-19. Some of these customers 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 capability, or need, to purchase Wilhelmina’s services to the extent that they did in previous years. Some of our model talent have been quarantined with family 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, once economic activities resume and clients increase booking requests, may make it difficult for our talent to be available when and where they are needed. 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 and increased operating losses during the first six months of 2020. Although some clients increased activity and bookings toward the end of the second quarter of 2020, rising COVID-19 infection rates in two of Wilhelmina’s biggest cities, Los Angeles and Miami, could lead to a slower economic recovery in those markets, and possible additional business closings or local mandates that could slow the recovery in our operations there. Since Wilhelmina extends customary payment terms to its clients, even when bookings resume there is likely to be a lag before significant cash collections return. In the meantime, the Company has a largecontinued to have significant employee, office rent, and diverse client base, itother expenses.

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.. Since the pandemic began, many stock markets, including Nasdaq Capital Market where Wilhelmina’s common stock is not immune to global economic conditions. listed, have been volatile. A further decline in the Company’s stock price would reduce our market capitalization and could require additional goodwill or intangible asset impairment writedowns.

The Company closely monitors economic conditions, client spending,has taken the following actions to address the impact of COVID-19 and other industry factorsthe current recessionary environment, in order to efficiently manage the business and continually evaluates opportunitiesmaintain adequate liquidity and maximum flexibility:

-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”).

-Eliminated all discretionary travel and entertainment expenses.

-Suspended share repurchases.

-Did not renew the leases on two New York City model apartments when the terms ended in June, 2020.

-

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.

-Obtained from the landlord of the Company’s New York City office a deferral of $41 thousand in July 2020 rent until January 2021.


-Negotiated discounts with various vendors and service providers, in effect through the remainder of 2020.

-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. The salary reductions are expected to return to full salaries when business conditions improve.

If the quarantines and limitations on non-essential work are re-implemented, or persist for an extended period, the Company may need to increase its market share and further expand its geographic reach.  There can be no assurance as to the effects on Wilhelmina of 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.

implement additional cost savings measures.

 

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. Similarly, in the segments where the Company competes with other leading full-service agencies, Wilhelmina competed successfully during the first nine months of 2017.  

 

With total annual advertising expenditures on major media (newspapers, magazines, television, cinema, outdoor and Internet) exceeding approximately $187$200 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 quarters,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.

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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:

 

increase Wilhelmina’s brand awareness and consideration among advertisers and potential talent;

expand the Wilhelmina network through strategic geographic market development;

expand the women’s high-endhigh end fashion board;

expand the Aperture division’s representation in commercials, film, and television;

expand celebrity and social media influencer representation; and

promote model search contests and events and partneringpartner on media projects (television, film, books, etc.).

 

Due to the increasing ubiquity of the Internet as a standard business tool, the Company has increasingly sought to harness the opportunities of the Internet and other digital media to improve its communications with clients and to facilitate the effective exchange of fashion model and talent information.  The Company continues to make significant investments in technology (including developing in-house art and social media departments) in pursuit of gains in efficiency and better communications with clients.  At the same time, the Internet presents challenges for the Company, including (i) the cannibalization of traditional print media businesses, and (ii) pricing pressures with respect to digital media photo shoots and client engagements.

 

In January 2015, the Company purchased 100% of the outstanding shares of Union Models Management Ltd. in London and renamed it Wilhelmina London Limited (“London”). The strategic acquisition of London established a footprint for the Company and the brand in Western Europe. London also serves as a base of operations to service the Company’s European clients, and as a new talent development office for European models and artists.

In September 2016, Wilhelmina opened a Chicago office to better provide models and talents with direct access to clients in the mid west region of the United States.

Key Financial Indicators

 

TheIn addition to net income, the key financial indicators that the Company reviews to monitor its business are gross billings, revenues, model costs, operating expenses and cash flows.

 

The Company analyzes revenue by reviewing the mix of revenues generated by the different “boards” (each“boards,” each a specific division of the fashion model management operations which specializes by the type of model it represents, (Women, Men, Artist, Showroom, Curve, Celebrity, etc.)) by geographic locations and from significant clients. Wilhelmina has threeWilhelmina’s primary sources of revenue:revenue include: (i) gross billings are revenues from principal relationships where the gross amount billed to the client is recorded as revenue when earned and collectability is reasonably assured; (ii) revenues from agent relationships where commissions paid by models as a percentage of their gross earnings are recorded as revenue when earned and collectability is reasonably assured; and (iii)(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.” Gross billings are an important business metric that ultimately drive profits and cash flows. Model costs represents costs paid to model and artist talent and to mother agents relating to photoshoots and other jobs booked by Wilhelmina.

 


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.

 

10

Analysis of Consolidated Statements of Operations and Service Revenues

(in thousands)

(in thousands) Three Months Ended   Nine Months Ended  
  Sept 30 Sept 30 % Change Sept 30 Sept 30 % Change
  2017 2016 2017 vs 2016 2017 2016 2017 vs 2016
Service revenues  18,712   20,880   (10.4%)  56,120   64,512   (13.0%)
License fees and other income  6   28   (78.6%)  34   82   (58.5%)
TOTAL REVENUES  18,718   20,908   (10.5%)  56,154   64,594   (13.1%)
Model costs  13,265   14,888   (10.9%)  39,910   45,952   (13.1%)
REVENUES NET OF MODEL COSTS  5,453   6,020   (9.4%)  16,244   18,642   (12.9%)
GROSS PROFIT MARGIN  29.1%  28.8%      28.9%  28.9%    
Salaries and service costs  3,447   3,708   (7.0%)  10,611   11,594   (8.5%)
Office and general expenses  1,400   1,381   1.4%  3,832   4,267   (10.2%)
Amortization and depreciation  232   89   160.7%  672   295   127.8%
Corporate overhead  236   192   22.9%  817   768   6.4%
OPERATING INCOME  138   650   (78.8%)  312   1,718   (81.8%)
OPERATING MARGIN  0.7%  3.1%      0.6%  2.7%    
Foreign exchange gain (loss)  (18)  1   *   (54)  8   * 
Gain (loss) from unconsolidated subsidiary  (2)  5   *   (40)  11   * 
Interest Expense  (31)  (21)  47.6%  (88)  (21)  319.0%
Revaluation of contingent liability  -   (30)  *   -   (30)  * 
INCOME BEFORE INCOME TAXES  87   605   (85.6%)  130   1,686   (92.3%)
Income tax expense  (61)  (378)  (83.9%)  (147)  (1,006)  (85.4%)
Effective tax rate  70.1%  62.5%      113.1%  59.7%    
NET (LOSS) INCOME  26   227   (88.5%)  (17)  680   (102.5%)

 

* Not Meaningful

 Three Months EndedSix Months Ended 
 June 30June 30% ChangeJune 30June 30% Change
 202020192020 vs 2019202020192020 vs 2019
Service revenues 4,523  19,940  (77.3%)  19,070  39,975  (52.3%) 
License fees and other income 5  5  -  10  29  (65.5%) 
TOTAL REVENUES 4,528  19,945  (77.3%)  19,080  40,004  (52.3%) 
Model costs 3,397  14,156  (76.0%)  14,003  28,632  (51.1%) 
REVENUES NET OF MODEL COSTS 1,131  5,789  (80.5%)  5,077  11,372  (55.4%) 
GROSS PROFIT MARGIN 25.0%  29.0%     26.6%  28.4%    
Salaries and service costs 2,788  3,589  (22.3%)  5,915  7,305  (19.0%) 
Office and general expenses 947  1,031  (8.1%)  2,002  2,259  (11.4%) 
Amortization and depreciation 298  298  -  592  588  0.7% 
Goodwill Impairment -  -  -  800  -  * 
Corporate overhead 238  251  (5.2%)  547  583  (6.2%) 
OPERATING (LOSS) INCOME (3,140) 620  *  (4,779) 637  * 
OPERATING MARGIN (69.3%) 3.1%     (25.0%) 1.6%    
Foreign exchange loss (gain) 14  (12) *  (51) 3  * 
Interest expense 23  30  (23.3%)  50  62  (19.4%) 
INCOME BEFORE INCOME TAXES (3,177) 602  *  (4,778) 572  * 
Income tax benefit (expense) 477  (151) *  (582) (230) 153.0% 
Effective tax rate 15.0%  25.1%     (12.2%) 40.2%    
NET (LOSS) INCOME (2,700) 451  *  (5,360) 342  * 
* 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. In the first six months of 2020, the COVID-19 pandemic had a material impact on revenues, as many customers cancelled or postponed bookings while non-essential business activities were barred in the cities where Wilhelmina operates. The decreasedecreases of 10.4%77.3% and 13.0%52.3% for the three and ninesix months ended SeptemberJune 30, 2017,2020, when compared to the three and ninesix months ended SeptemberJune 30, 2016, was2019, were primarily due to a decrease in core model bookings. The decrease in core modelcancelled bookings in United States was partially offset by an increase in core model bookingsresulting from COVID-19, as well as the closure of the Wilhelmina Studios division in the London office, bookings from the Aperture division and bookings from the Celebrity division.fourth quarter of 2019.

 

License Fees and Other Income

 

License fees and other income include management and administrative services fees, from an unconsolidated subsidiary, franchise revenues from independently owned model agencies that use the Wilhelmina trademark and various services provided by the Company. License fees were unchanged and decreased by 78.6% and 58.5%65.5% for the three and ninesix months ended SeptemberJune 30, 2017,2020, when compared to three and ninesix months ended in SeptemberJune 30, 2016.2019. The year to date decrease was primarily due to endingthe timing of income from licensing agreements with affiliates.agreements.

 

Gross Profit Margin

 

Gross profit margin increaseddecreased by 0.3%400 and 180 basis points for the three and six months ended SeptemberJune 30, 2017,2020, when compared to the three and six months ended SeptemberJune 30, 20162019, primarily due to higher recoverya larger percentage of consolidated revenue from the Aperture division in 2020, which is lower margin than traditional core model chargebacks, an increase in higher margin celebrity revenue, and a decrease in client reimbursable expenses in 2017. For the nine months ended September 30, 2017, when compared to the nine months ended September 30, 2016, the gross profit margin remained relatively unchanged.bookings,.


 

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 decrease22.3% and 19.0% decreases in salaries and service costs of 7.0% and 8.5% forduring the three and ninesix months ended SeptemberJune 30, 2017,2020, when compared to the three and ninesix months ended SeptemberJune 30, 2016 was2019, were primarily due to severance paid to the Company’s former Chief Executive Officer and another employee in 2016, changes in personnel to better alignresult of the numberclosure of employees at eachthe Wilhelmina office with the needs of each geographic region, and more effective management of T&EStudios division during the first nine monthsfourth quarter of 2017.

11

2019, open positions for two executives that resigned in January 2020 and a reduction in share based payment expense.

 

Office and General Expenses

 

Office and general expenses consist of office and equipment rents, advertising and promotion, insurance expenses, administration and technology cost.  These costs are less directly linked to changes in the Company’s revenues than are salaries and service costs. The increasedecrease in office and general expenses of 1.4%8.1% and 11.4% for the three and six months ended SeptemberJune 30, 20172020, when compared to the three and six months ended SeptemberJune 30, 2016, was2019, were primarily due to costs associated with the Company’s 50th anniversaryreduced legal fees, rent expense, utilities, postage, and other office expenses, partially offset by an increase in 2017 and higher bad debt expense. For the nine months ended September 30, 2017, when compared to the nine months ended in ended September 30, 2016, the decrease of 10.2% was primarily due to $233 thousand related to the recruiting of the Company’s Chief Executive Officer and Chief Financial Officer and $160 thousand of non-income tax expenses that were incurred during the first nine months of 2016.

Amortization and Depreciation

 

Amortization and depreciation expense is incurred with respect to certain assets, including computer hardware, software, office equipment, furniture, and othercertain intangibles. DuringAmortization and depreciation expense was relatively unchnaged for the three and ninesix months ended SeptemberJune 30, 2017, depreciation and amortization expense increased by 160.7% and 127.8%2020 compared to the same periods of the prior year, primarily related to the Company’s new accounting software being placed in service during the fourth quarter of 2016.three and six months ended June 30, 2019. Fixed asset purchases (mostly related to technology and computer equipment and technology)equipment) totaled approximately $122$32 thousand and $600$88 thousand during the three months and ninesix months ended SeptemberJune 30, 2017,2020, compared to $367$112 thousand and $1,118$207 thousand for the three and ninesix months ended SeptemberJune 30, 2016.2019.

Goodwill Impairment

No goodwill impairment charges were incurred during the three months ended June 30, 2020 and 2019. The Company incurred $0.8 million of goodwill impairment during the six months ended June 30, 2020, compared to none during the six months ended June 30, 2019, due to the Company’s first quarter 2020 impairment test indicating that the carrying value of goodwill exceeded the estimated fair value.

 

Corporate Overhead

 

Corporate overhead expenses include director and executive officer compensation, insurance, legal, audit and professional fees, corporate office rent and travel costs.travel. Corporate overhead increaseddecreased by 22.9%5.2% and 6.4%6.2% for the three and ninesix months ended SeptemberJune 30, 2017 respectively,2020, compared to the three and ninesix months ended SeptemberJune 30, 2016. The increase was2019, primarily due to increase in professional services fees and an increase inlower corporate travel costs.

 

Operating Income and Loss and Operating Margin

 

Operating marginincome decreased by 2.4%to losses of $3.1 million and 2.1%$4.8 million for the three and ninesix months ended SeptemberJune 30, 2017, when2020 compared to income of $0.6 million in both the three and ninesix months ended SeptemberJune 30, 2016,2019. As a result, operating margin decreased to negative 69.3% and 25.0% for the three and six months ended June 30, 2020, compared to positive 3.1% and 1.6% for the three and six months ended June 30, 2019. These declines were primarily due to decreases in revenues outpacing reductions inthe result of decreased revenue net of model costs, partially offset by lower operating expenses.

 

Foreign Currency Translation

 

The Company realized $18$14 thousand loss and $54$51 thousand ofgain from foreign currency exchange loss during the three and ninesix months ended SeptemberJune 30, 2017, as compared to a2020, and $12 thousand gain of $1and $3 thousand and $8 thousandloss from foreign currency exchange during the three and nine months ended SeptemberJune 30, 2016. The foreign2019. Foreign currency gain and loss is due to fluctuations in currencies primarily from Great Britain, Europe, and Europe.

Unconsolidated Subsidiary

The losses from an unconsolidated subsidiary for the three and nine months ended September 30, 2017, compared to gains for the same periods of the prior year, are the result of the dissolution of the unconsolidated subsidiary and discontinuation of its operations.Latin America.

 

Interest Expense

 

Interest expense for the three and ninesix months ended SeptemberJune 30, 20172020 and June 30, 2019 was primarily attributable to accrued interest on a term loanloans drawn during the third quarter of 2016.2016 and 2018. See, “Liquidity and Capital Resources.”

Income and Loss before Income Taxes

 

Income before income taxes decreased to losses of $3.2 million and $4.8 million for the three and six months ended June 30, 2020, compared to profit of $0.6 million for both the three and six months ended June 30, 2019, primarily due to the decrease in operating income.


Income Taxes

 

Generally, the Company’s combined effective tax rate is high relative to reported net income as a result of certain amounts ofvaluation 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. Currently, the majority of taxes being paid by the Company are state taxes, not federal taxes. The Company operates in four states, which have relatively high tax rates: California, New York, Illinois, and Florida. The Company had income tax benefit of $0.5 million and income tax expense of $0.6 million for the three and six months ended June 30, 2020, compared to income tax expense of $0.2 million for both the three and six months ended June 30, 2019. As of June 30, 2020, due primarily to the effects of the COVID-19 pandemic on its business, the Company believes it is more likely than not that the benefit from deferred tax assets will not be realized and has established a $1.3 million valuation allowance against its deferred tax assets. The Company recorded income tax expense for the first six months of 2020 despite losses before income taxes due primarily to the valuation allowance recorded against deferred tax assets in the first quarter of 2020.

 

Net Income and Loss

12

 

The Company had a net loss of $2.7 and $5.4 million for the three and six months ended June 30, 2020, compared to net income of $0.5 million and $0.3 million for the three and six months ended June 30, 2019, primarily due to the decrease in operating income and increase in income tax expense in 2020.

Liquidity and Capital Resources

The Company’s cash balance decreased to $5.6 million at June 30, 2020 from $7.0 million at December 31, 2019. The cash balances decreased as a result of $2.6 million net cash used in operating activities, $0.1 million net cash used in investing activities, and $0.2 million negative effect of foreign currency exchange rates, partially offset by $1.5 million cash provided by financing activities.

Net cash used in operating activities of $2.6 million was primarily the result of the net loss and decreases in amounts due to models, lease liabilities, accounts payable and accrued liabilities, partially offset by decreases in accounts receivable and right of use assets. The $0.1 million of cash used in investing activities was attributable to purchases of property and equipment, including software and computer equipment. The $1.5 million of cash from financing activities was primarily attributable to receipt of $2.0 million of PPP loans, partially offset by principal payments on the Company’s Amegy Bank term loans and payments on finance leases.

 

The Company’s primary liquidity needs are for working capital associated with performing services under its client contracts.contracts and servicing its term loans. 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 six months ended June 30, 2020, 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 current limitations on non-essential work persist for an extended period.

 

The Company’s cash balance decreased to $2.6 million at September 30, 2017, from $5.7 million at December 31, 2016. For the nine months ended September 30, 2017, cash balances decreased primarily as a result of cash flows used by operations of $2.2 million, capital expenditures of $0.6 million, and $0.4 million for repayment on the Amegy Bank term loan.

The Company’s use of cash for operating activities included employee bonus payments, payment of accrued non-income taxes, final payment to the former London owner, final payment to another owner of a dissolved unconsolidated subsidiary, and payments due to models/talents during the first nine months of 2017.Credit Agreement

 

The Company has a credit agreement with Amegy Bank providingwhich 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 $20.0 million. The revolving line of credit bears interest at prime plus 0.5%0.50% payable monthly. As of SeptemberJune 30, 2017,2020, 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 $1.5 million. The revolving line of credit expires on October 24, 2018.credit.

 

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.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 $0.6 million final payment of principal and interest due on October 24, 2020.

 

On May 4, 2017,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 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 June 30, 2020, a total of $1.6 million was outstanding on the two Amegy Bank term loans.

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 SeventhThirteenth 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 reducingalso waived an existing default caused by the Company’s failure to satisfy the old 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 DecemberMarch 31, 2017.2020 and minimum tangible net worth as of March 31, 2020. The Company obtained a waiver from Amegy Bank of its failure to satisfy the fixed charge coverage ratio, the minimum tangible net worth, and the borrowing base for the quarter ended June 30, 2017. On August 1, 2017,2020. Current economic conditions make it likely that the Company entered into an Eighth Amendment to Credit Agreement with Amegy Bank eliminating the requirement to test the fixed charge coverage ratio for the quarter ended September 30, 2017.will require additional waivers in subsequent periods of 2020.

 

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 Paycheck Protection Program of the CARES Act administered by the U.S. Small Business Administration (the “SBA”). The Sub PPP Loan matures on April 13, 2022 and bears interest at a rate of 1.00% per annum. The Sub PPP Loan is payable in 18 equal monthly payments of $104 thousand commencing November 13, 2020.

On April 18, 2020, the Company believes its cashexecuted 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 matures on hand combined with cash from operationsApril 17, 2022 and bears interest at a rate of 1.00% per annum. The Parent PPP Loan is payable in 18 equal monthly payments of $7 thousand commencing November 13, 2020.

Both the Sub PPP Loan and the availabilityParent PPP Loan (collectively, the “PPP Loans”) may be prepaid at any time prior to maturity with no prepayment penalties. Both the Sub PPP Loan Documents and the Parent PPP Loan Documents contain various provisions related to the PPP, as well customary representations, warranties, covenants, events of default and other provisions. Neither of the PPP Loans is secured by either the Borrower or the Company, and both are guaranteed by the SBA. All or a portion of the PPP Loans may be forgiven by the SBA upon application by the Borrower or the Company, respectively, accompanied by documentation of expenditures in accordance with the SBA requirements under the revolving credit facility will be sufficientPPP. In the event all or any portion of the PPP Loans is forgiven, the amount forgiven is applied to fund operations foroutstanding principal.

As of June 30, 2020, a total of $2.0 million was outstanding on the next 12 months.

PPP Loans.

 

Off-Balance Sheet Arrangements

 

As of SeptemberJune 30, 2017,2020, the Company had outstanding a $0.2 million irrevocable standby letter of credit under the Company’s revolving credit facility with Amegy Bank. The letter of credit serves as security under the lease relating to the Company’s office space in New York City that expires February 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 consolidated accounts of Wilhelmina and its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.

 

Revenue Recognition

 

In complianceOn January 1, 2018, the Company 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 and artist 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.

Stock Based Compensation

Stock-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 accepted accounting principlesthe vesting period. The determination of the fair value of stock-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, of America, when reporting 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, talentUnited Kingdom, 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 selectionnumerous local jurisdictions.

Deferred tax assets are recognized for unused tax losses, unused tax credits, 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 billeddeductible temporary differences to the client as revenue when earnedextent 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 collectabilitya valuation allowance is reasonably assured, andestablished if it is doubtful we will generate sufficient future taxable income to utilize 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 earned and collectability is reasonably assured, net of pass-through model or talent cost.loss carry-forwards.

 

13

The Company also recognizes management fees as revenuesIn 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 providing services to other modeling agencies as well as consultingour income in connection with services provided to a television production network according totaxes, we can provide no assurance that the terms offinal tax outcome will not be materially different. To the contract.  The Company recognizes royaltyextent that the final tax outcome is different than the amounts recorded, such differences will affect the provision for income when earned based on terms of the contractual agreement. Revenues received in advance are deferred and amortized using the straight-line method over periods pursuant to the related contract. The Company also records fees from licensees when the revenues are earned and collectability is reasonably assured.

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. Any repayments of such costs are credited to model coststaxes in the period received.in which such determination is made and could have a material impact on our financial condition and operating results.


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 seven years. Goodwill and intangible assets with indefinite lives are no longer 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. No asset impairment charges were incurred during the three and nine months ended September 30, 2017 and September 30, 2016.

 

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 valuation allowance.  Balances that remain outstanding after the Company has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable.  The Company generally does not require collateral.

 

Income TaxesGoodwill and Intangible Asset Impairment Testing

 

Income taxes are accounted for underThe Company performs impairment testing at least annually and more frequently if events and circumstances indicate that an asset might be impaired. An impairment loss is recognized to the asset and liability method. Deferred income tax assets and liabilities areextent that the carrying amount exceeds the reporting unit’s fair value. In accordance with ASU 2017-03, effective January 1, 2020, only a one-step qualitative 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 future tax consequences attributablecarrying amount of the reporting unit’s goodwill.

Whenever events or circumstances change, entities have the option to differences betweenfirst make a qualitative evaluation about the financial statement carrying amountslikelihood of existing assets and liabilities and their respective tax bases 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 ratesgoodwill impairment. If impairment 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 September 30, 2017, and as a result of this assessment, the Company believes that its deferred tax assets aredeemed more likely than not, to be realized.management would perform the goodwill impairment test. Otherwise, the goodwill impairment test is not required. In addition,assessing the qualitative factors, the Company continuously evaluates its tax contingencies.

Accounting for uncertainty in income taxes recognized in an enterprise’s financial statements requires a recognition thresholdassesses relevant events and measurement attribute forcircumstances that may impact the financial statement recognitionfair value 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. There was no change to the netcarrying amount of assetsthe reporting unit. The identification of relevant events and liabilities recognized incircumstances 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 consolidated balance sheets as a resultidentification 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 Company’s tax positions.impairment test positively or negatively, and the magnitude of any such impact.

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

 

Not required for smaller reporting company

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Item 4.  Controls and Procedures.

 

The Company maintains disclosure controls and procedures designed to ensure that information it is required to disclose in the reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. The Company’s disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

The Company’s management, including the Company’s principal executive officer and principal financial officer or persons performing similar functions, have evaluated the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on such evaluation, the Company’s principal executive officer and principal financial officer or persons performing similar functions, have concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.

During the most recent fiscal quarter, there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II

 

OTHER INFORMATION

Item 1. Legal Proceedings.

Item 1.Legal Proceedings.

 

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.  Further,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, and oral argument on the motion was heard by the Court in June 2016.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 haveeach appealed, the decision. The parties appeared before the Court for a status conference on July 18, 2017, and the Court directed the defendants to answer the Third Amended Complaint bydecision was affirmed on May 24, 2018. On August 16, 2017.2017, Wilhelmina timely filed its Answer to the Third Amended Complaint on that date, and discovery in this action is continuing.  The Company believes the claims asserted in the Third Amended Complaint are without merit, and intends to continue to vigorously defend the action.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.  On June 14, 2016, the Court stayed all proceedings in the Pressley Litigation until a decision was issued on the motion to dismiss in the Shanklin Litigation. At the court conference on July 18, 2017 (mentioned above), the judge directed the plaintiffs to file an amended complaint in the Pressley Litigation, if any, by August 16, 2017, and directed the defendants to move against or answer such amended complaint by September 29, 2017.  The Amended Complaint, asserting essentially the same types of claims as in the Shanklin action, was filed on August 16,th, and 2017.  Wilhelmina filed a motion to dismiss the Amended Complaint on September 29, 2017. Briefing2017, which was granted in part and denied in part on May 10, 2018.  Some New York Labor Law and contract claims remain in the motion to dismiss is continuing,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.

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. 


By Order Dated May 8, 2020 (the “Class Certification Order”), the Court denied class certification in the Pressley case, denied class certification with respect to the breach of contract and alleged unpaid usage claims, granted class certification as to the New York Labor Law causes of action asserted by Vretman, Palomares and Trotter, and declined to rule on Wilhelmina’s motions for summary judgment, denying them without prejudice to be re-filed at a later date. On June 12, 2020, the Plaintiffs in both the Shanklin and Pressley actions filed Notices of Appeal to the Appellate Division. First Department from those portions of the Class Certification Order on which Wilhelmina prevailed, and Little also filed a motion for reargument of the denial of her motion for class certification. On June 22, 2020, Wilhelmina filed Notices of Cross-Appeal from those portions of the Class Certification order that granted class Certification and denied summary judgement. Wilhelmina also opposed Little’s motion for reargument, and that motion is scheduledfully briefed. The Court has direct the parties to be submitted to the Court on November 16, 2017. Discoverynon-binding mediation and that process is proceeding in this case. underway.

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

 

Item 1.A. Risk Factors.

Item 1.A.Risk Factors.

 

Not required for smaller reporting company.

 

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

 

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.

On August 12, 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. No shares were repurchasedThe Company did not make any purchases pursuant to the stock repurchase program during the nine monthsquarter ended SeptemberJune 30, 2017.2020.

Item 3. Defaults Upon Senior Securities.

Item 3.Defaults Upon Senior Securities.

 

None.

Item 4. Mine Safety Disclosures.

Item 4.Mine Safety Disclosures.

 

Not applicable.

Item 5.Other Information.

 

Item 5. Other Information.Not applicable.

 

On November 8, 2017, the Company and Amegy Bank executed a Ninth Amendment to Credit Agreement and Second Amendment to Line of Credit Note (the “Ninth Amendment”) to be effective as of October 24, 2107. The Ninth Amendment extends the maturity date of the Company’s $4.0 million revolving line of credit for one year until October 24, 2018. The Ninth Amendment also increases the fee payable to Amegy upon issuance of any letter of credit from 1.0% to 1.25% of the face amount of such letter of credit (but not less than $1,000). The foregoing description of the Ninth Amendment is qualified in its entirety by reference to the definitive agreement filed as an exhibit hereto and incorporated herein by this reference.

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Item 6. Exhibits.

Item 6.Exhibits.

 

The following is a list of exhibits filed as part of this Form 10-Q:

 

Exhibit No.Description
  
3.1Restated Certificate of Incorporation of Wilhelmina International, Inc. (incorporated by reference from Exhibit 3.1 to Form S-1/A, datedfiled January 30, 2012).
3.2Certificate of Amendment of the Restated Certificate of Incorporation of Wilhelmina International, Inc. (incorporated by reference from Exhibit 3.1 to the Form 8-K, filed July 15, 2014).
3.3Certificate of Amendment of the Restated Certificate of Incorporation of Wilhelmina International, Inc. (incorporated by reference from Exhibit 3.1 to Form 8-K filed July 12, 2017).
3.4Amended and Restated Bylaws of Wilhelmina International, Inc. (incorporated by reference from Exhibit 3.2 to Form 8-K, filed May 24, 2011).
4.1Form of Stock Certificate of Common Stock of Billing Concepts Corp. (incorporated by reference from Exhibit 4.1 to Form 10-Q, dated March 31,filed May 15, 1998).
10.1EighthBusiness Loan Agreement and Promissory Note, each dated April 13, 2020, between Wilhelmina International, Ltd. and Zions Bancorporation, N.A. dba Amegy Bank (incorporated by reference from Exhibit 10.1 to Form 8-K filed April 21, 2020).
10.2Business Loan Agreement and Promissory Note, each dated April 17, 2020, between Wilhelmina International, Inc. and Zions Bancorporation, N.A. dba Amegy Bank (incorporated by reference from Exhibit 10.2 to Form 8-K filed April 21, 2020).
10.3Fourteenth Amendment to Credit Agreement and waiver dated August 1, 2017,May 12, 2020, by and among Wilhelmina International, Inc., ZB, N.A. dba Amegy Bank and the guarantors signatory thereto (incorporated by reference from Exhibit 10.110.2 to Form 8-K10-Q filed August 4, 2017)May 14, 2020).
10.2Ninth Amendment to Credit Agreement and Second Amendment to Line of Credit Note dated October 24, 2017, by and among Wilhelmina International, Inc., ZB, N.A. dba Amegy Bank and the guarantors signatory thereto.*
31.1Certification of Principal Executive Officer in Accordanceaccordance with Section 302 of the Sarbanes-Oxley Act. *
31.2Certification of Principal Financial Officer in Accordanceaccordance with Section 302 of the Sarbanes-Oxley Act. *
32.1Certification of Principal Executive Officer in Accordanceaccordance with Section 906 of the Sarbanes-Oxley Act. *
32.2Certification of Principal Financial Officer in Accordanceaccordance with Section 906 of the Sarbanes-Oxley Act. *
101.INSXBRL Instance Document *
101.SCHXBRL Taxonomy Extension Schema *
101.CALXBRL Taxonomy Extension Calculation Linkbase *
101.DEFXBRL Taxonomy Extension Definition Linkbase *
101.LABXBRL Taxonomy Extension Label Linkbase *
101.PREXBRL Taxonomy Extension Presentation Linkbase *

________________

* Filed herewith

 

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SIGNATURES

 

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

 

 WILHELMINA INTERNATIONAL, INC. 
 (Registrant) 
   
   
Date:  November 9, 2017August 12, 2020By:/s/ James A. McCarthy 
 Name:James A. McCarthy 
 Title:

Chief Financial Officer

(Principal Financial Officer)principal financial officer)

 

 

 

 

 

 

 

 

 

 

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