UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 20172020

OR

For the transition period from ________ to ________

Commission File Number 001-36589

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

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] 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] 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):

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] No

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

WILHELMINA INTERNATIONAL, INC. AND SUBSIDIARIES

Quarterly Report on Form 10-Q

For the Three and Nine Months Ended September 30, 20172020

PART I

FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

WILHELMINA INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data) 

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

WILHELMINA INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

For the Three and Nine Months Ended September 30, 2020 and 2019

(In thousands, except per share data)

(Unaudited)

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

WILHELMINA INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOMESHAREHOLDERS’ EQUITY

For the Three and Nine Months Ended September 30, 20172020 and 20162019

(In thousands, except per share data)thousands)

(Unaudited)

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

WILHELMINA INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW

For the Nine Months Ended September 30, 2020 and 2019

(In thousands)

(Unaudited)

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

WILHELMINA INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW

For the Nine Months Ended September 30, 2017 and 2016

(In thousands)

(Unaudited)

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

WILHELMINA INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 9. Common Stock

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 thousand for the three and nine months ended both September 30, 20172020 and 2016.2019. The Company did not owe NCM any amounts under the services agreement as of September 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

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 nine months ended September 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, as amended.

2019.

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. During the third quarter of 2020, bookings increased from the preceding 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 have filed for bankruptcy in 2020 and others may be unable to pay amounts already owed to the Company, resulting in increased future bad debt expense. These customers also may not emerge from the pandemic with the financial ability, or need, to purchase Wilhelmina’s services to the extent that they did in previous years. Some 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, as economic activities resumes 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 nine months of 2020. Although some clients increased activity and bookings during the third quarter of 2020, rising COVID-19 infection rates in cities where Wilhelmina operates could lead to a slower economic recovery in those markets, and possible additional business closings or local mandates that could slow the recovery in our operations there. Since Wilhelmina extends customary payment terms to its clients, even as bookings resume, there is likely to be a lag before significant cash collections return. In the meantime, the Company continues to have significant employee, office rent, and other expenses.

Reduced outstanding accounts receivable available as collateral under the Company’s credit agreement with Amegy Bank has a largelimited 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 diverse client base, it is not immune to global economic conditions. 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:

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.

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:

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.

Analysis of Consolidated Statements of Operations and Service Revenues

* Not Meaningfulmeaningful

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 nine 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 temporarily barred in the cities where Wilhelmina operates. The decreasedecreases of 10.4%38.8% and 13.0%48.2% for the three and nine months ended September 30, 2017,2020, when compared to the three and nine months ended September 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 decreased by 78.6%35.3% and 58.5%54.3% for the three and nine months ended September 30, 2017,2020, when compared to three and nine months ended in September 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 increased by 0.3%120 basis points for the three months ended September 30, 2017,2020, when compared to the three months ended September 30, 20162019, primarily due to higher recovery ofa reduction in travel related model chargebacks, an increasecosts in higher2020. Gross profit margin celebrity revenue, and a decrease in client reimbursable expenses in 2017. Fordecreased by 80 basis points for the nine months ended September 30, 2017,2020, when compared to the nine months ended September 30, 2016,2019 primarily due to a larger percentage of consolidated revenue from the gross profitAperture division in 2020, which is lower margin remained relatively unchanged.than traditional core model 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 decrease49.4% and 28.4% decreases in salaries and service costs of 7.0% and 8.5% forduring the three and nine months ended September 30, 2017,2020, when compared to the three and nine months ended September 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.

2019, employee layoffs in July 2020, temporary reductions in staff salaries, 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%23.5% and 15.2% for the three and nine months ended September 30, 20172020, when compared to the three months ended September 30, 2016, was primarily due to costs associated with the Company’s 50th anniversary 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% was2019, were primarily due to $233 thousand related to the recruiting of the Company’s Chief Executive Officerreduced legal fees, rent expense, computer expense, utilities, postage, and Chief Financial Officer and $160 thousand of non-income taxother office expenses, that were incurred during the first nine months of 2016.partially offset by an increase in bad debt expense.

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 unchanged for the three and nine months ended September 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 nine months ended September 30, 2019. Fixed asset purchases (mostly related to technology and computer equipment and technology)equipment) totaled approximately $122$2 thousand and $600$90 thousand during the three months and nine months ended September 30, 2017,2020, compared to $367$97 thousand and $1,118$304 thousand for the three and nine months ended September 30, 2016.2019.

Goodwill Impairment

No goodwill impairment charges were incurred during the three months ended September 30, 2020 and 2019. The Company incurred $0.8 million of goodwill impairment during the nine months ended September 30, 2020, compared to none during the nine months ended September 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%42.2% and 6.4%17.0% for the three and nine months ended September 30, 2017 respectively,2020, compared to the three and nine months ended September 30, 2016. The increase was2019, primarily due to increase in professional services fees and an increase inlower corporate travel costs.costs, and temporary reductions in fees to the Company’s Board of Directors..

Operating Income and Loss and Operating Margin

Operating income of $114 thousand and operating margin decreased by 2.4% and 2.1%of 1.1% for the three months ended September 30, 2020 compared to operating loss of $149 thousand and negative operating margin of 0.9% for the three months ended September 30, 2019, due to decreased operating expenses resulting from costs savings initiatives during 2020, partially offset by lower revenue net of model costs. Operating loss of $4.7 million and negative operating margin of 15.7% for the nine months ended September 30, 2017, when2020 compared to operating income of $488 thousand and positive operating margin of 0.9% for the three and nine months ended September 30, 2016, primarily2019 due to decreases in revenues outpacing reductions indecreased revenue net of model costs, partially offset by lower operating expenses.

Foreign Currency TranslationExchange

The Company realized $18gain of $14 thousand and $54$65 thousand offrom foreign currency exchange loss during the three and nine months ended September 30, 2017, as compared to a2020, and gain of $1$3 thousand and $8 thousand$0 from foreign currency exchange during the three and nine months ended September 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 nine months ended September 30, 20172020 and September 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 of $0.1 million for the three months ended September 30, 2020 compared to loss before income taxes of $0.2 million for the three months ended September 30, 2019 primarily due to the increase in operating income. Loss before income taxes of $4.7 million for the nine months ended September 30, 2020 compared to income before income taxes of $0.4 million for the nine months ended September 30, 2019 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 expense of $85 thousand and $0.7 million for the three and nine months ended September 30, 2020, compared to income tax benefit of $7 thousand and income tax expense of $0.2 million for the three and nine months ended September 30, 2019. As of September 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 nine 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

The Company had net income of $22 thousand for the three months ended September 30, 2020 compared to net loss of $0.2 million for the three months ended September 30, 2019, as a result of the increased income before taxes partially offset by increased income tax expense. The Company had net loss of $5.3 million for the nine months ended September 30, 2020 compared to net income of $0.2 million for the nine months ended September 30, 2019, primarily as a result of the combined impact of decreased income before taxes and increased income tax expense.

Liquidity and Capital Resources

The Company’s cash balance decreased to $5.0 million at September 30, 2020 from $7.0 million at December 31, 2019. The cash balances decreased as a result of $3.2 million net cash used in operating activities, $0.1 million net cash used in investing activities, and $0.1 million negative effect of foreign currency translation, partially offset by $1.3 million cash provided by financing activities.

Net cash used in operating activities of $3.2 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 $1.3 million of cash from financing activities was primarily attributable to receipt of $2.0 million of PPP loans, partially offset by $0.6 million of 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 balance decreased to $2.6 million at September 30, 2017, from $5.7 million at December 31, 2016. Forflows during the nine months ended September 30, 2017, cash balances decreased2020, primarily as a resultdue to reduced bookings and modeling jobs and delayed payments from customers. The Company has taken actions to address the impact of cash flows usedCOVID-19 by operations of $2.2 million, capital expenditures of $0.6 million,reducing expenses and $0.4 millionhas the ability to implement more significant cost savings measures if the current limitations on non-essential work persist for repayment on the an extended period.

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 September 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 bearsbore interest at 4.5% per annum and iswas 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 aschedule. The $0.6 million final payment of principal and interest duewas paid on October 24,28, 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.

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 September 30, 2020, a total of $1.4 million was outstanding on the two Amegy Bank term loans, of which $0.6 million was repaid on October 28, 2020..

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 waiverwaivers from Amegy Bank of its failurefailures to satisfy the fixed coverage ratio for the quarter ended June 30, 2017. On August 1, 2017, the Company entered into an Eighth Amendment to Credit Agreement with Amegy Bank eliminating the requirement to test the fixed charge coverage ratio, the minimum tangible net worth, and the borrowing base for the quarterquarters ended June 30, 2020 and September 30, 2017.2020. On November 10, 2020, the Company entered into a Fifteenth Amendment to Credit Agreement (the “Fifteenth Amendment”) with Amegy Bank. The Fifteenth Amendment waived the minimum tangible net worth covenant until December 31, 2021, after which a minimum tangible net worth of $1.5 million will be required. The Fifteenth Amendment also revised the calculation of the fixed charge coverage ratio such that it will be tested at December 31, 2020 based on the preceding six month period, tested at March 31, 2021 based on the preceding nine month period, and tested at June 30, 2021 and subsequent periods using a twelve month rolling period.

Paycheck Protection Program Loan

On April 15, 2020, Wilhelmina International, Ltd. (the “Borrower”), a wholly-owned subsidiary of the Company, executed a Business Loan Agreement and a Promissory Note each dated April 13, 2020 (collectively, the “Sub PPP Loan Documents”), with respect to a loan in the amount of $1.8 million (the “Sub PPP Loan”) from Amegy Bank. The Sub PPP Loan was obtained pursuant to the PPP. The Sub PPP Loan 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 willPPP. In the event all or any portion of the PPP Loans is forgiven, the amount forgiven is applied to outstanding principal, and would be sufficient to fund operations forrecorded as income, net of any tax effect.

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

PPP Loans.

Off-Balance Sheet Arrangements

As of September 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.

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.

Goodwillin which such determination is made and Intangible Assets

Goodwill consists primarily of customercould have a material impact on our financial condition 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.operating results.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are accounted for at net realizable value, do not bear interest and are short-term in nature. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability to collect on accounts receivable. Based on management’s assessment, the Company provides for estimated uncollectible amounts through a charge to earnings and a credit to the 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.assesses relevant events and circumstances that may impact the fair value and the carrying amount of the reporting unit. The identification of relevant events and circumstances and how these may impact a reporting unit’s fair value or carrying amount involve significant judgments and assumptions. The judgment and assumptions include the identification of macroeconomic conditions, industry and market considerations, overall financial performance, Company specific events and share price trends, an assessment of whether each relevant factor will impact the impairment test positively or negatively, and the magnitude of any such impact.

Accounting for uncertainty in income taxes recognized in an enterprise’s financial statements requires a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Also, consideration should be given to de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. There was no change to the net amount of assets and liabilities recognized in the consolidated balance sheets as a result of the Company’s tax positions.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

Not required for smaller reporting company