UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2017March 31, 2020

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,May 14, 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, 2017March 31, 2020

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

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)

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

WILHELMINA INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

For the Three Months Ended March 31, 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 CASH FLOWSHAREHOLDERS’ EQUITY

For the NineThree Months Ended September 30, 2017March 31, 2020 and 20162019

(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 Three Months Ended March 31, 2020 and 2019

(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)

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 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 are currently 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 is uncertainty around the duration.

Postponed and cancelled bookings related to the pandemic contributed significantly to reduced revenues and increased operating losses during the first quarter of 2020. Subsequent periods may show similar or greater declines until business conditions improve. 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 will continue 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:

If the current quarantines and limitations on non-essential work persist for an extended period, the Company may need to implement more significant cost savings measures.

its consolidated financial statements.

maximum borrowing capacity to $3.0 million. Under the Fourteenth Amendment, Amegy Bank also waived an existing default caused by the Company’s failure to satisfy both the minimum fixed charge coverage ratio through March 31, 2020 and minimum tangible net worth as of March 31, 2020. Current economic conditions make it likely that the Company will require additional waivers in subsequent periods of 2020.

and other factors.

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.

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 a director of the Company.

The Company’s corporate headquarters are located at 200 Crescent Court, Suite 1400, Dallas, Texas 75201, which are also the offices of NCM. The Company occupies a portion of NCM space on a month-to-month basis at $2.5 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$8 thousand for the three and nine months ended both September 30, 2017March 31, 2020 and 2016.2019. The Company did not owe NCM any amounts under the services agreement as of September 30, 2017.March 31, 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 of age. On December 9, 2016, the owners of Kids agreed to dissolve Kids and ceased related business operations of Kids. On

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, 2017March 31, 2020 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.

AlthoughCOVID-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 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 locations. Many of our 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 are currently 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 is uncertainty around the duration.

Postponed and cancelled bookings related to the pandemic contributed significantly to reduced revenues and increased operating losses in the first quarter of 2020. Subsequent periods may show similar or greater declines until business conditions improve. 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 will continue to have significant employee, office rent, and other expenses.

Reduced outstanding accounts receivable available as collateral under our credit agreement with Amegy Bank has a largelimited our access to additional financing. Net losses in recent periods have also impacted compliance with the covenants under the Amegy Bank credit agreement, further impeding our 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,could require additional goodwill or intangible asset impairment writedowns.

In response to the outbreak, we have prioritized the health and safety of our employees. We have temporarily closed our offices, which will remain closed until it is not immunedeemed safe to global economic conditions. reopen, consistent with local orders. Most employees are currently working remotely and have been able to successfully conduct business, despite very few customers currently booking jobs.

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 current quarantines and limitations on non-essential work 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 more significant 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, 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 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 quarter of 2020, the COVID-19 pandemic had a material impact on revenues, as most bookings for the second half of March 2020 were cancelled once non-essential business activities were barred in the cities where Wilhelmina operates. The decrease of 10.4% and 13.0%27.4% for the three and nine months ended September 30, 2017,March 31, 2020, when compared to the three and nine months ended September 30, 2016,March 31, 2019, was primarily due to cancelled bookings resulting from COVID-19, a decrease in core model bookings. The decrease in core model bookings, in United States was partially offset by an increase in core model bookingsand 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 decreased by 78.6% and 58.5%79.2% for the three and nine months ended September 30, 2017,March 31, 2020, when compared to three and nine months ended in September 30, 2016.March 31, 2019. The 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%70 basis points for the three months ended September 30, 2017,March 31, 2020, when compared to the three months ended September 30, 2016March 31, 2019 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 15.9% decrease in salaries and service costs of 7.0% and 8.5% forduring the three and nine months ended September 30, 2017,March 31, 2020, when compared to the three and nine months ended September 30, 2016March 31, 2019 was 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, 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%14.1% for the three months ended September 30, 2017March 31, 2020 when compared to the three months ended September 30, 2016,March 31, 2019, was primarily due to costs associated with the Company’s 50th anniversaryreduced legal expense, rent expense, 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. During the threeAmortization and nine months ended September 30, 2017, depreciation and amortization expense increased by 160.7% and 127.8%1.4% for the three months ended March 31, 2020 compared to the same periodsthree months ended March 31, 2019, primarily due to new equipment, which will be depreciated going forward, partially offset by reduced amortization of the prior year, primarily related to the Company’s new accounting software being placedintangible assets that became fully amortized in service during the fourth quarter of 2016.2019. Fixed asset purchases (mostly related to technology and computer equipment and technology)equipment) totaled approximately $122 thousand and $600$56 thousand during the three months and nine months ended September 30, 2017,March 31, 2020, compared to $367 thousand and $1,118$95 thousand for the three and nine months ended September 30, 2016.March 31, 2019.

Goodwill Impairment

As of March 31, 2020, the Company determined that declines in revenue, COVID-19 impacts on our retail clients, and recent declines in its stock price triggered the requirement for goodwill impairment testing. The impairment test indicated that the carrying value of goodwill exceeded its estimated fair value and resulted in an impairment charge of $0.8 million. There were no impairment charges in the first quarter of 2019.

Corporate Overhead

Corporate overhead expenses include director and executive officer compensation, insurance, legal, audit and professional fees, corporate office rent, travel, and travelother public company costs. Corporate overhead increaseddecreased by 22.9% and 6.4%6.9% for the three and nine months ended September 30, 2017 respectively,March 31, 2020, compared to the three and nine months ended September 30, 2016. The increase wasMarch 31, 2019, primarily due to increase in professional services fees and an increase inlower corporate travel costs.costs achieved by holding corporate meetings telephonically during the first quarter of 2020.

Operating Income and Operating Margin

Operating marginincome decreased by 2.4% and 2.1%to a loss of $1.6 million for the three and nine months ended September 30, 2017, whenMarch 31, 2020, compared to operating income of $17 thousand for the three and nine months ended September 30, 2016,March 31, 2019. As a result, operating margin decreased to negative 11.3% for the three months ended March 31, 2020, compared to 0.0% for the three months ended March 31, 2019. In both cases, the decline was primarily due to decreases in revenues outpacing reductions inthe result of decreased revenue net of model costs and goodwill impairment, partially offset by lower operating expenses.

Foreign Currency TranslationGain and Loss

The Company realized $18$65 thousand of foreign currency exchange gains during the three months ended March 31, 2020, and $54$15 thousand of foreign currency exchange loss during the three and nine months ended September 30, 2017, as compared to a gain of $1 thousand and $8 thousand during the three and nine months ended September 30, 2016. The foreignMarch 31, 2019. Foreign currency gain and loss is due to fluctuations in currencies primarily from Great Britain, Europe, and Europe.Latin America.

Unconsolidated Subsidiary

Interest Expense

Interest expense for the three and nine months ended September 30, 2017March 31, 2020 and March 31, 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.”

Loss before Income Taxes

Loss before income taxes was $1.6 million for the three months ended March 31, 2020, compared to $30 thousand for the three months ended March 31, 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 of 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. Income tax expense was $1.1 million for the three months ended March 31, 2020 compared to $79 thousand for the three months ended March 31, 2019. As of March 31, 2020, due primarily tothe effects of the COVID-19 pandemic and its impact our business, the Company believes it is more likely than not that the benefit from deferred tax assets will not be realized and has maintained a $1.2 million valuation allowance against its deferred tax assets.

Net Loss

The Company had a net loss of $2.7 million for the three months ended March 31, 2020, compared to $109 thousand for the three months ended March 31, 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 $5.3 million at March 31, 2020 from $7.0 million at December 31, 2019. The cash balances decreased as a result of $1.2 million net cash used in operating activities, $0.1 million net cash used in investing activities and $0.2 cash used in financing activities.

Net cash used in operating activities of $1.2 million was primarily the result of decreases in amounts due to models, lease liabilities, accounts payable and accrued liabilities, partially offset by a decrease in accounts receivable 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 $0.2 million of cash used in financing activities was primarily attributable to principal payments on the Company’s term loan.

The Company’s primary liquidity needs are for working capital associated with performing services under its client contracts.contracts and servicing its term loan. Generally, the Company incurs significant operating expenses with payment terms shorter than its average collections on billings. The COVID-19 pandemic has had an impact on the Company’s cash flows during the three months ended March 31, 2020, primarily due to delayed payments from customers. The pandemic could have a more significant impact on the Company’s cash flows in subsequent periods due to the lack of bookings and modeling jobs currently taking place, and due to the customary payment terms extended to clients. 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 quarantines and 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 September 30, 2017,March 31, 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$2.0 million. The revolving line of credit expires on October 24, 2018.

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

On May 4, 2017,July 16, 2018, the Company entered into a Seventh Amendment toamended its Credit Agreement with Amegy Bank reducingto provide for an additional term loan of up to $1.0 million that could be drawn by the Company’s fixed charge coverage ratioCompany through December 31, 2017. The Company obtained a waiver from Amegy BankJuly 12, 2019, for the purpose of repurchases of its failurecommon 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 satisfyfully amortize the fixed coverage ratio foroutstanding principal balance in 60 months with the quarter ended June 30, 2017. On August 1, 2017,balance of principal and accrued interest due on July 12, 2023. The amendment also revised the Company entered into an Eighth Amendment to Credit Agreement with Amegy Bank eliminating the requirement to testcalculation of the fixed charge coverage ratio for the quarter ended September 30, 2017.three quarters following the maturity date of the previous term loan.

The Company believes its cash on hand combined with cash from operations andAmounts outstanding under the additional term loan further reduce the availability under the Company’s revolving line of credit facility will be sufficientwith Amegy Bank. On August 1, 2018, the Company drew $0.7 million of the additional term loan and used the proceeds to fund operations for the nextpurchase of 100,000 shares of its common stock in a private transaction. On December 12, months.2018, the Company drew $0.3 million of the additional term loan and used the proceeds to partially fund a purchase of 50,000 shares of its common stock in a private transaction. As of March 31, 2020, a total of $1.8 million was outstanding on the two 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 Thirteenth Amendment to Credit Agreement (the “Thirteenth Amendment”) with ZB, N.A. dba Amegy Bank. The Thirteenth Amendment amended the minimum net worth covenant to require the Company to maintain tangible net worth (as defined therein) of $4.0 million, determined on a quarterly basis. Under the Thirteenth Amendment, Amegy Bank also waived an existing default caused by the Company’s failure to satisfy the 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 ZB, N.A. dba Amegy Bank. The Fourteenth Amendment amended the line of credit to reduce the maximum borrowing capacity to $3.0 million. Under the Fourteenth Amendment, Amegy Bank also waived an existing default caused by the Company’s failure to satisfy both the minimum fixed charge coverage ratio through March 31, 2020 and minimum tangible net worth as of March 31, 2020. Current economic conditions make it likely that the Company will require additional waivers in subsequent periods of 2020.

Off-Balance Sheet Arrangements

As of September 30, 2017,March 31, 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 compliance with generally accepted accounting principles in the United States of America, when reporting revenue gross as a principal versus net as an agent,On January 1, 2018, the Company assesses whetheradopted the Company,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 modeltransfer of promised goods or services to customers, in an amount that reflects the talent is the primary obligor. The Company evaluates the terms of its model, talent and client agreements as part of this assessment. In addition, the Company gives appropriateexpected consideration to other key indicators such as latitudereceived in establishing price, discretion in modelexchange for those goods or talent selection and credit risk the Company undertakes. The Company operates broadly as a modeling agency and in those relationships with models and talents where the key indicators suggest the Company acts as a principal, the Company records the gross amount billed to the client as revenue when earned and collectability is reasonably assured, and the related costs incurred to the model or talent as model or talent cost. In other model and talent relationships, where the Company believes the key indicators suggest the Company acts as an agent on behalf of the model or talent, the Company records revenue when earned and collectability is reasonably assured, net of pass-through model or talent cost.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 also recognizes managementtypically 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 revenues for providing services to other modeling agenciescalculated by the Black-Scholes option pricing model and is recognized on a straight line basis as an expense over the requisite service period, which is generally the vesting period. The determination of the fair value of stock-based awards on the date of grant using an option pricing model is affected by our stock price as well as consultingassumptions 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 connection with services provided to a television production network accordingthe United States, the United Kingdom, and numerous local jurisdictions.

Deferred tax assets are recognized for unused tax losses, unused tax credits, and deductible temporary differences to the terms ofextent that it is probable that future taxable profits will be available against which they can be used. Unused tax loss carry-forwards are reviewed at each reporting date and a valuation allowance is established if it is doubtful we will generate sufficient future taxable income to utilize the contract.  The Company recognizes royalty 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.loss carry-forwards.

Advances to modelsIn determining the amount of current and deferred income tax, we take into account whether additional taxes, interest, or penalties may be due. Although we believe that we have adequately reserved for our income taxes, we can provide no assurance that the cost of initial portfolios and other out-of-pocket costs, which are reimbursable only from collections fromfinal tax outcome will not be materially different. To the Company’s clients as a result of future work, are expensed to model costs as incurred. Any repayments ofextent that the final tax outcome is different than the amounts recorded, such costs are credited to model costsdifferences will affect the provision for income taxes 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 the asset and liability method. Deferred income tax assets and liabilities aremight be impaired.

An impairment loss is recognized to the extent 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

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

Remediation of Material Weakness

As discussed in the Company’s internal controls over financial reportingAnnual Report on Form 10-K for the year ended December 31, 2019, the Company’s management previously determined that have materially affected, or are reasonably likely to materially affect, the Company’sundue reliance on Level 2 and Level 3 inputs in goodwill impairment testing had resulted in a material weakness in internal control over financial reporting. This material weakness did not result in a material misstatement of any previously filed financial statements but posed a risk of material misstatement that might not be prevented or detected on a timely basis.

During the first quarter of 2020, management addressed this control deficiency by increasing reliance on the Level 1 input of the Company’s market capitalization in evaluating goodwill for impairment. Management changed its control procedures to prioritize the appropriate Level 1 input and reviewed the related calculations. Due to a decrease in market capitalization during the first quarter of 2020, management concluded that a goodwill impairment of $0.8 million should be recorded at March 31, 2020. As a result of these changes and subsequent review and testing, management has concluded that the previously reported material weakness has been remediated and no longer existed as of March 31, 2020.

PART II

OTHER INFORMATION

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 motion is scheduled to be submittedPressley 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 Courtmotions for class certification and filed a cross-motion for summary judgment against Shanklin, Vretman, Palomares, Trotter and Little, and a motion for summary judgment against Raske.  Wilhelmina’s reply papers in further support of its summary judgment motions were filed on November 16, 2017. Discovery is proceeding in this case. October 23, 2019. The motions for class certification and summary judgment were argued on December 4, 2019, and the parties are awaiting decision.

The Company believes the claims asserted in the Shanklin and Pressley LitigationLitigations 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.

Not required for smaller reporting company.

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 following table furnishes information for purchases made pursuant to the stock repurchase program during the nine monthsquarter ended September 30, 2017.March 31, 2020: