Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
The accompanying notes are an integral part of these consolidated financial statements
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2022 and 2021
Note 1. Business Activity
Overview
The primary business of Wilhelmina International, Inc. and its subsidiaries (collectively, “Wilhelmina” or the “Company”) is fashion model management. These business operations are headquartered in New York City. The Company’s predecessor was founded in 1967 by Wilhelmina Cooper, a renowned fashion model, and became one of the oldest, best known and largest fashion model management companies in the world. Since its founding, Wilhelmina has grown to include operations located in Los Angeles, Miami, and London, as well as a network of licensees. Wilhelmina provides traditional, full-service fashion model and talent management services, specializing in the representation and management of models, entertainers, athletes and other talent, to various clients, including retailers, designers, advertising agencies, print and electronic media and catalog companies.
Note 2. Summary of Significant Accounting Policies
The consolidated financial statements are prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”). The following is a summary of significant policies used in the preparation of the accompanying financial statements.
Principles of Consolidation and Basis of Presentation
The financial statements include the consolidated accounts of Wilhelmina and its wholly-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation. Certain prior period amounts on the Consolidated Balance Sheets and Consolidated Statement of Cash Flows have been reclassified to conform to the current period presentation.
Revenue Recognition
The Company has adopted the requirements of Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASC 606”). ASC 606 establishes a principle for recognizing revenue upon the transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services.
Under the revenue standard, the Company recognizes revenues when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. The Company recognizes revenues following the five-step model prescribed under ASU No. 2014-09: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) the Company satisfies the performance obligation.
Service Revenues
Our service revenues are derived primarily from fashion model bookings and representation of social media influencers and actors for commercials, film, and television. Revenues from services are recognized net of amounts owed to model 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, when the customer obtains control of the Company’s product, which occurs at a point in time, typically when the talent has completed the contractual requirement. The Company expenses incremental costs of obtaining a contract as and when incurred because the expected amortization period of the asset that it would have recognized is one year or less or the amount is immaterial. Our performance obligations are primarily satisfied at a point in time when the talent has completed the contractual requirements.
A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The performance obligations for most of the Company’s core modeling bookings are satisfied on the day of the event, and the “day rate” total fee is agreed in advance, when the customer books the model for a particular date. For contracts with multiple performance obligations (which are typically all satisfied within 1 to 3 days), we allocate the contract’s transaction price to each performance obligation based on the estimated relative standalone selling price.
Wilhelmina operates broadly as a modeling and talent agency. The models and talent represented by the Company have discretion in agreeing to the price for a photoshoot or other service and may decline any job opportunity for any reason. After bookings are arranged by the Company, models and talent provide their personal services directly to the Company’s clients. The Company charges commissions to both models/talent and customers, which is a fixed percentage of the billing rate for the model or talent. Based on these and other factors, the Company acts as an agent in the service transaction and, therefore, reports service revenues on a basis net of pass-through model or talent cost.
Although service revenues are reported on a net basis, accounts receivable are recorded at the amount of gross amounts billed to customers, inclusive of model costs. As a result, both accounts receivable and amounts due to models appear large relative to total revenue.
Service revenues from international sales accounted for 7.8% and 12.1% of the Company’s consolidated services revenues for the years ended December 31, 2022 and 2021, respectively.
License Fees
License fees, in connection with the licensing of the “Wilhelmina” name, are collected on a quarterly basis under the terms of Wilhelmina’s agreements with licensees. The Company recognizes revenue relating to license fees where payment is deemed to be probable, over the license period.
Contract Assets
Contract assets, which primarily relate to the Company’s right to consideration for work completed but not billed at the reporting date are included within accounts receivable and approximated $1.9 million and $0.8 million at December 31, 2022 and 2021, respectively.
Advances to Models
Advances to models for the cost of initial portfolios and other out-of-pocket costs, which are reimbursable only from collections from the Company’s clients as a result of future work, are expensed to model costs as incurred net of such costs that are expected to be recouped.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates that affect the amounts reported in the consolidated financial statements and the accompanying notes. Accounting estimates and assumptions discussed herein are those that management considers to be the most critical to an understanding of the consolidated financial statements because they inherently involve significant judgments and uncertainties. Estimates are used for, but not limited to revenue recognition, allowance for doubtful accounts, useful lives for depreciation and amortization, income taxes, the assumptions used for share-based compensation, and impairments of goodwill and intangible assets. All of these estimates reflect management’s judgment about current economic and market conditions and their effects based on information available as of the date of these consolidated financial statements. If such conditions persist longer or deteriorate further than expected, it is reasonably possible that the judgments and estimates could change, which may result in future impairments of assets among other effects.
Cash and Cash Equivalents
As of December 31, 2022, the Company held cash in banks of $12.0 million. The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. There were no cash equivalents as of December 31, 2022 and 2021.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are accounted for at net realizable value, do not bear interest and are short-term in nature. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability to collect on accounts receivable. Based on management’s assessment, the Company provides for estimated uncollectible amounts through a charge to earnings and a credit to the allowance. At December 31, 2022, the Company had an allowance of $1.7 million, and recorded a $0.2 million bad debt charge to earnings. Balances that remain outstanding after the Company has used reasonable collection efforts are written off through a charge to the allowance and a credit to accounts receivable. The Company generally does not require collateral.
Although service revenues are reported on a basis net of model costs, accounts receivable are recorded at the amount of gross amounts billed to customers inclusive of model costs. As a result, both accounts receivable and amounts due to models appear large relative to total revenue.
Concentrations of Credit Risk
The balance sheet items that potentially subject the Company to concentrations of credit risk are primarily cash and cash equivalents and accounts receivable. The Company maintains its cash balances in several different financial institutions in New York, Los Angeles, Miami, and London. Balances in accounts other than “noninterest-bearing transaction accounts” are insured up to Federal Deposit Insurance Corporation (“FDIC”) limits of $250 thousand per institution. At December 31, 2022, the Company had cash balances in excess of FDIC insurance coverage of approximately $7.1 million. Balances in London accounts are covered by Financial Services Compensation Scheme (“FSCS”) limits of £75 thousand or approximately $0.1 million per institution. At December 31, 2022, the Company had cash balances in excess of FSCS coverage of approximately $3.7 million. Concentrations of credit risk with accounts receivable are mitigated by the Company’s large number of clients and their dispersion across different industries and geographical areas. The Company performs ongoing credit evaluations of its clients and maintains an allowance for doubtful accounts based upon the expected collectability of all accounts receivable.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization, based upon the shorter of the estimated useful lives (ranging from two to seven years) of the assets or terms of the leases, are computed by use of the straight-line method. Leasehold improvements are amortized based upon the shorter of the terms of the leases or asset lives. When property and equipment are retired or sold, the cost and accumulated depreciation and amortization are eliminated from the related accounts and gains or losses, if any, are reflected in the consolidated statement of operations.
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If it is determined that impairment has occurred, the amount of the impairment is charged to operations. No such events or changes in circumstances were noted for the years ended December 31, 2022 and 2021.
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price in a business combination over the fair value of the tangible and intangible assets acquired and the liabilities assumed. The Company’s intangible assets other than goodwill consist of trademarks and trade name. Goodwill and intangible assets with indefinite lives are not subject to amortization, but rather to an annual assessment of impairment by applying a fair-value based test. A significant amount of judgment is required in estimating fair value and performing goodwill impairment tests.
There were no changes to the $7.5 million carrying amount of goodwill during 2021 or 2022. There were no changes to the carrying amount of $8.5 million trademarks and trade names intangible assets during 2021 or 2022.
No asset impairment charges were incurred relating to the Company’s goodwill or intangible assets during 2021 and 2022.
The process of estimating the fair value of goodwill is subjective and requires the Company to make estimates that may significantly impact the outcome of the analysis. A qualitative assessment considers events and circumstances such as macroeconomic conditions, industry and market conditions, cost factors, and overall financial performance. If after performing this assessment, the Company concludes it is more likely than not that the fair value of the reporting unit is less than its carrying amount, then the Company performs the quantitative test. Under the quantitative test, a goodwill impairment is identified by comparing the fair value to the carrying amount, including goodwill. If the carrying amount exceeds the fair value, goodwill is considered impaired and an impairment charge is recognized in an amount equal to the excess, not to exceed the carrying amount of goodwill.
At least annually, the Company assesses whether the carrying value of its goodwill and intangible assets exceeds their fair value and, if necessary, records an impairment loss equal to any such excess. Declines in the Company’s stock price could result in future goodwill impairment charges. The Company sometimes utilizes an independent valuation specialist to assist with the determination of fair value. 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 such events or changes in circumstances were noted for the year ended December 31, 2022.
Due to Models
Due to models represents the liability for amounts owed to talent for jobs that have taken place, but where the model or talent fee has not yet been paid, typically due to the Company awaiting receipt of payment from the customer. The due to model liabilities are accrued in the period in which the event takes place consistent with when the revenue is recognized. The Company’s contractual agreements with models typically condition payment to talent after the collection of fees from the customer.
Although service revenues are reported on a basis net of model costs, accounts receivable are recorded at the amount of gross amounts billed to customers inclusive of model costs. As a result, both accounts receivable and amounts due to models appear large relative to total revenue.
Contract Liabilities
We record deferred revenue, which is a contract liability, when we have entered into a contract with a customer and cash payments are received prior to satisfaction of the related performance obligation.
Advertising
The Company expenses all advertising costs as incurred. Advertising expense, included in office and general expense in the consolidated statements of operations and comprehensive income, was $22 thousand and $11 thousand in the years ended December 31, 2022 and 2021, respectively.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax base and operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company continually assesses the need for a tax valuation allowance based on all available information.
Accounting for uncertainty in income taxes recognized in an enterprise’s financial statements requires a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Also, consideration should be given to de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Tax positions are subject to change in the future, as a number of years may elapse before a particular matter for which an established reserve is audited and finally resolved. Federal tax returns for tax years 2019 through 2021 remained open for examination as of December 31, 2022.
Share-Based Compensation
The Company utilizes share-based awards as a form of compensation for certain officers. The Company records compensation expense for all awards granted. The Company uses the Black-Scholes valuation model and straight-line amortization of compensation expense over the requisite service period for each separately vesting portion of the grants.
Fair Value Measurements
The Company has adopted the provisions of ASC 820, “Fair Value Measurements” (“ASC 820”), for financial assets and financial liabilities. ASC 820 defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosure about fair value measurements. ASC 820 applies to all financial instruments that are being measured and reported on a fair value basis. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a fair value hierarchy that prioritizes the inputs used in valuation methodologies into the following three levels:
| • | Level 1 Inputs-Unadjusted: quoted prices in active markets for identical assets or liabilities. |
| • | Level 2 Inputs-Observable: inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| • | Level 3 Inputs-Unobservable: inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or other valuation techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. |
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13 “Financial Instruments -Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. ASU 2016-13 replaces the incurred loss impairment model with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates. The Company believes the primary impact of ASU 2016-13 will relate to the Company’s assessment of its allowance of doubtful accounts on trade receivables. The guidance was effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The Company adopted this standard in the first quarter of 2023, and does not expect the adoption to have a material impact on the Company’s consolidated financial statements.
Note 3. Debt
The Company previously had a credit agreement with Amegy Bank which provided a $3.0 million revolving line of credit, subject to a borrowing base derived from 80% of eligible accounts receivable (as defined) and the Company’s minimum net worth covenant. The revolving line of credit bore interest at prime plus 0.50% payable monthly. The revolving line of credit expired October 24, 2022.
On July 16, 2018, the Company amended its credit agreement with Amegy Bank to provide for a 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. 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. On August 31, 2021, the Company prepaid, without penalty, the $0.6 million remaining balance of the additional term loan. As of December 31, 2022, there was no outstanding balance on the term 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 federal Paycheck Protection Program (the “PPP”). The Sub PPP Loan originally matured on April 13, 2022 and bore interest at a rate of 1.00% per annum. As allowed under the Paycheck Protection Flexibility Act, the Sub PPP Loan was extended to mature on April 13, 2025. On March 27, 2021, the Company received notice from the SBA that the Sub PPP loan, including $17 thousand accrued interest, had been fully forgiven, resulting in $1.9 million of gain on forgiveness of loan recorded within other (income) expenses during the quarter ended March 31, 2021.
On April 18, 2020, the Company executed a Business Loan Agreement and a Promissory Note each dated April 17, 2020 (collectively, the “Parent PPP Loan Documents”), with respect to a loan in the amount of $128 thousand (the “Parent PPP Loan”) from Amegy Bank. The Parent PPP Loan was also obtained pursuant to the PPP. The Parent PPP Loan originally matured on April 17, 2022 and bore interest at a rate of 1.00% per annum. As allowed under the Paycheck Protection Flexibility Act, the Parent PPP Loan was extended to mature on April 17, 2025. On April 3, 2021, the Company received notice from the SBA that the Parent PPP Loan, including $1 thousand accrued interest, had been fully forgiven, resulting in $0.1 million of gain on forgiveness of loan recorded within other (income) expense during the quarter ended June 30, 2021. Under the PPP, the SBA reserves the right to audit any PPP loan forgiveness application for a period of six years from the date of loan forgiveness.
Note 4. Property and Equipment
Property and equipment at December 31, 2022 and 2021 was comprised of the following (in thousands):
| |
|
December 31, 2022 |
|
|
December 31, 2021 |
|
| Furniture and fixtures |
|
$ |
422 |
|
|
$ |
392 |
|
| Software and software development costs |
|
|
- |
|
|
|
2,944 |
|
| Computer and equipment |
|
|
1,033 |
|
|
|
890 |
|
| Leasehold improvements |
|
|
68 |
|
|
|
36 |
|
| Total |
|
|
1,523 |
|
|
|
4,262 |
|
| Less: Accumulated depreciation |
|
|
(1,216 |
) |
|
|
(4,094 |
) |
| Property and equipment, net |
|
$ |
307 |
|
|
$ |
168 |
|
During 2022, $3.0 million of fully depreciated assets were disposed compared to $2.1 million during 2021. For the years ended December 31, 2022 and 2021, depreciation expense totaled $0.1 million and $0.8 million, respectively. Depreciation expense decreased primarily due to reduced depreciation of assets that became fully amortized in 2021.
Note 5. Leases
The Company is obligated under non-cancelable lease agreements for the rental of office space and various other lease agreements for the leasing of office equipment. These operating leases expire at various dates through 2030. In addition to the minimum base rent, the office space lease agreements provide that the Company shall pay its pro-rata share of real estate taxes and operating costs as defined in the lease agreements. The Company also leases certain corporate office facilities from an affiliate.
During 2022, $0.1 million of lease payments were classified as amortization expense, and included within cash used in financing activities on the Company’s statement of cash flows. At December 31, 2022, the weighted-average remaining lease term was 6.1 years for operating leases and 2.5 years for finance type leases. At December 31, 2022, the weighted average discount rate was 5.6% for operating leases and 4.8% for finance type leases.
The following table presents additional information regarding the Company’s financing and operating leases for the years ended December 31, 2022 and 2021 (in thousands):
| |
|
Year ended December 31, 2022 |
|
|
Year ended December 31, 2021 |
|
| Finance lease expense |
|
|
|
|
|
|
|
|
| Amortization of ROU assets |
|
$ |
64 |
|
|
$ |
77 |
|
| Interest on lease liabilities |
|
|
8 |
|
|
|
9 |
|
| Operating lease expense |
|
|
608 |
|
|
|
629 |
|
| Short term lease expense |
|
|
353 |
|
|
|
279 |
|
| |
|
|
|
|
|
|
|
|
| Cash paid for amounts included in the measurement of lease liabilities for finance leases |
|
|
|
|
|
|
|
|
| Financing cash flows |
|
|
68 |
|
|
|
87 |
|
| |
|
|
|
|
|
|
|
|
| Cash paid for amounts included in the measurement of lease liabilities for operating leases |
|
|
|
|
|
|
|
|
| Operating cash flows |
|
|
523 |
|
|
|
580 |
|
| |
|
|
|
|
|
|
|
|
| ROU assets obtained in exchange for lease liabilities |
|
|
|
|
|
|
|
|
| Finance leases |
|
|
- |
|
|
|
58 |
|
| Operating leases |
|
|
2,341 |
|
|
|
1,749 |
|
As of December 31, 2022, future maturities of lease liabilities were as follows (in thousands):
| | | Operating | | | Finance | |
| 2023 | | $ | 586 | | | $ | 68 | |
| 2024 | | | 723 | | | | 63 | |
| 2025 | | | 801 | | | | 13 | |
| 2026 | | | 813 | | | | 11 | |
| 2027 | | | 478 | | | | - | |
| Thereafter | | | 1,081 | | | | - | |
| Total | | | 4,482 | | | | 155 | |
| Less: Present value discount | | | (767 | ) | | | (8 | ) |
| Lease liability | | $ | 3,715 | | | $ | 147 | |
The following table summarizes future minimum payments under the current lease agreements:
| Years Ending December 31 |
|
Amount (in thousands) |
|
| 2023 |
|
$ |
803 |
|
| 2024 |
|
|
818 |
|
| 2025 |
|
|
814 |
|
| 2026 |
|
|
825 |
|
| 2027 |
|
|
479 |
|
| Thereafter |
|
|
1,081 |
|
| Total |
|
$ |
4,820 |
|
Rent expense totaled approximately $1.0 million and $0.9 million for the years ended December 31, 2022 and 2021.
Note 6. Commitments and Contingencies
On October 24, 2013, a putative class action lawsuit was brought against the Company by former Wilhelmina model Alex Shanklin and others, including Louisa Raske, Carina Vretman, Grecia Palomares and Michelle Griffin Trotter (the “Shanklin Litigation”), in New York State Supreme Court (New York County) by the same lead counsel who represented plaintiffs in a prior, now-dismissed action brought by Louisa Raske (the “Raske Litigation”). The claims in the Shanklin Litigation initially included breach of contract and unjust enrichment allegations arising out of matters similar to the Raske Litigation, such as the handling and reporting of funds on behalf of models and the use of model images. Other parties named as defendants in the Shanklin Litigation included other model management companies, advertising firms, and certain advertisers. On January 6, 2014, the Company moved to dismiss the Amended Complaint in the Shanklin Litigation for failure to state a claim upon which relief can be granted and other grounds, and other defendants also filed motions to dismiss. On August 11, 2014, the court denied the motion to dismiss as to Wilhelmina and other of the model management defendants. Separately, on March 3, 2014, the judge assigned to the Shanklin Litigation wrote the Office of the New York Attorney General bringing the case to its attention, generally describing the claims asserted therein against the model management defendants, and stating that the case “may involve matters in the public interest.” The judge’s letter also enclosed a copy of his decision in the Raske Litigation, which dismissed that case.
Plaintiffs retained substitute counsel, who filed a Second and then Third Amended Complaint. Plaintiffs’ Third Amended Complaint asserts causes of action for alleged breaches of the plaintiffs' management contracts with the defendants, conversion, breach of the duty of good faith and fair dealing, and unjust enrichment. The Third Amended Complaint also alleges that the plaintiff models were at all relevant times employees, and not independent contractors, of the model management defendants, and that defendants violated the New York Labor Law in several respects, including, among other things, by allegedly failing to pay the models the minimum wages and overtime pay required thereunder, not maintaining accurate payroll records, and not providing plaintiffs with full explanations of how their wages and deductions therefrom were computed. The Third Amended Complaint seeks certification of the action as a class action, damages in an amount to be determined at trial, plus interest, costs, attorneys’ fees, and such other relief as the court deems proper. On October 6, 2015, Wilhelmina filed a motion to dismiss as to most of the plaintiffs’ claims. The Court entered a decision granting in part and denying in part Wilhelmina’s motion to dismiss on May 26, 2017. The Court (i) dismissed three of the five New York Labor Law causes of action, along with the conversion, breach of the duty of good faith and fair dealing and unjust enrichment causes of action, in their entirety, and (ii) permitted only the breach of contract causes of action, and some plaintiffs’ remaining two New York Labor Law causes of action to continue, within a limited time frame. The plaintiffs and Wilhelmina each appealed, and the decision was affirmed on May 24, 2018. On August 16, 2017, Wilhelmina timely filed its Answer to the Third Amended Complaint.
On June 6, 2016, another putative class action lawsuit was brought against the Company by former Wilhelmina model Shawn Pressley and others, including Roberta Little (the “Pressley Litigation”), in New York State Supreme Court (New York County) by the same counsel representing the plaintiffs in the Shanklin Litigation, and asserting identical, although more recent, claims as those in the Shanklin Litigation. The Amended Complaint, asserting essentially the same types of claims as in the Shanklin action, was filed on August 16, 2017. Wilhelmina filed a motion to dismiss the Amended Complaint on September 29, 2017, which was granted in part and denied in part on May 10, 2018. Some New York Labor Law and contract claims remain in the case. Pressley has withdrawn from the case, leaving Roberta Little as the sole remaining named plaintiff in the Pressley Litigation. On July 12, 2019, the Company filed its Answer and Counterclaim against Little.
On May 1, 2019, the Plaintiffs in the Shanklin Litigation (except Raske) and the Pressley Litigation filed motions for class certification on their contract claims and the remaining New York Labor Law Claims. On July 12, 2019, Wilhelmina filed its opposition to the motions for class certification and filed a cross-motion for summary judgment against Shanklin, Vretman, Palomares, Trotter and Little, and a motion for summary judgment against Raske.
By Order dated May 8, 2020 (the “Class Certification Order”), the Court denied class certification in the Pressley case, denied class certification with respect to the breach of contract and alleged unpaid usage claims, granted class certification as to the New York Labor Law causes of action asserted by Vretman, Palomares and Trotter, and declined to rule on Wilhelmina’s motions for summary judgment, denying them without prejudice to be re-filed at a later date. Currently the parties are engaging in merits discovery.
The Company believes the claims asserted in the Shanklin Litigation and Pressley Litigation are without merit and intends to continue to vigorously defend the actions. Nonetheless, an adverse outcome in either case is at least reasonably possible. However, the Company is presently unable to reasonably estimate the amount or range of possible loss in either case. Therefore, no amount has been accrued as of December 31, 2022 related to these matters.
In addition to the legal proceedings disclosed herein, the Company is also engaged in various legal proceedings that are routine in nature and incidental to its business. None of these routine proceedings, either individually or in the aggregate, are believed likely, in the Company's opinion, to have a material adverse effect on its consolidated financial position or its results of operations.
Note 7. Income Taxes
The following table summarizes the income tax benefit (expense) for the years ended December 31, 2022 and 2021 (in thousands):
| | | 2022 | | | 2021 | |
| Current: | | | | | | | | |
| Federal | | $ | (62 | ) | | $ | - | |
| State | | | (47 | ) | | | (34 | ) |
| Foreign | | | - | | | | (190 | ) |
| Current Total | | | (109 | ) | | | (224 | ) |
| Deferred: | | | | | | | | |
| Federal | | | 1,057 | | | | (552 | ) |
| State | | | 6 | | | | (47 | ) |
| Deferred Total | | | 1,063 | | | | (599 | ) |
| Total | | $ | 954 | | | $ | (823 | ) |
The income tax benefit (expense) differs from the amount computed by applying the statutory federal and state income tax rates to the net income before income tax. The following table shows the reasons for these differences (in thousands):
| | | 2022 | | | 2021 | |
| Computed income tax expense at statutory rate | | $ | (540 | ) | | $ | (1,122 | ) |
| Decrease (increase) in taxes resulting from: | | | | | | | | |
| Permanent and other deductions, net | | | (12 | ) | | | 419 | |
| Global intangible low-taxed income | | | (80 | ) | | | (204 | ) |
| Foreign income taxes | | | 196 | | | | 156 | |
| State income taxes, net of federal benefit | | | (104 | ) | | | (119 | ) |
| Deferred tax effects | | | - | | | | 55 | |
| Valuation allowance | | | 1,494 | | | | (8 | ) |
| Total income tax benefit (expense) | | $ | 954 | | | $ | (823 | ) |
| Effective tax rate | | | (34.9% | ) | | | 15.4 | % |
The Company’s effective tax rate was -34.9% and 15.4% for the years ended December 31, 2022 and 2021. The income tax benefit in 2022 and low effective tax rate was primarily the result of the full release of a previous $1.5 million valuation allowance against deferred tax assets. In 2021, the effective tax rate was primarily driven by $2.0 million non-taxable gain on forgiveness of PPP loans, which was the result of governmental actions to mitigate the impacts of the COVID-19 pandemic.
Generally, the Company’s combined effective tax rate is high relative to reported income before taxes as a result of valuation allowances on deferred tax assets, certain amortization expense, stock based compensation, and corporate overhead not being deductible and income being attributable to certain states in which it operates. In recent years, the majority of taxes paid by the Company were state and foreign taxes, not U.S. federal taxes. The Company operates in three states which have relatively high tax rates: California, New York, and Florida. In 2021, the effective tax rate was lower than in typical years due to PPP loan forgiveness, which was not subject to income tax. Realization of net operating loss carryforwards, foreign tax credits, and other deferred tax temporary differences are contingent upon future taxable earnings. The Company’s deferred tax assets are reviewed for expected utilization by assessing the available positive and negative factors surrounding recoverability, including projected future taxable income, reversal of existing taxable temporary differences, tax-planning strategies, and results of recent operations. A valuation allowance is recorded when it is more likely than not that a deferred tax asset will not be realized.
For the year ended December 31, 2021, Wilhelmina maintained a full $1.5 million valuation allowance against its deferred tax assets. As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. In connection with its assessment for the third quarter of 2022, management determined that there was sufficient evidence to conclude that it was more likely than not that all deferred tax assets were realizable. This evidence included three years of cumulative pretax income, excluding nonrecurring items, and expected reversal of existing taxable temporary differences. Consequently, the full valuation allowance against our deferred tax assets was released in 2022, resulting in a $1.5 million income tax benefit. The Company will continue to assess the evidence used to determine the need for a valuation allowance and may reinstate the valuation allowance in future periods if warranted by changes in estimated future income and other factors.
As of December 31, 2022, the Company had no federal income tax loss carryforwards.
The following table shows the tax effect of significant temporary differences, which comprise the deferred tax asset and liability (in thousands):
| | | 2022 | | | 2021 | |
| Deferred tax asset: | | | | | | | | |
| Net operating loss carryforward | | $ | 63 | | | $ | 293 | |
| Foreign tax credits | | | 474 | | | | 495 | |
| Accrued expenses | | | 573 | | | | 552 | |
| Allowance for doubtful accounts | | | 82 | | | | 78 | |
| Lease liability | | | 1,008 | | | | 493 | |
| Share-based compensation | | | 117 | | | | 66 | |
| Other intangible assets | | | 11 | | | | 20 | |
| Less: Valuation allowance | | | - | | | | (1,494 | ) |
| Total deferred income tax asset | | | 2,328 | | | | 503 | |
| Deferred tax liability: | | | | | | | | |
| Property and equipment | | | (77 | ) | | | (39 | ) |
| Right of use asset | | | (971 | ) | | | (469 | ) |
| Intangible assets-brand name | | | (1,183 | ) | | | (1,183 | ) |
| Goodwill | | | (395 | ) | | | (340 | ) |
| Other intangible assets | | | (687 | ) | | | (520 | ) |
| Total deferred income tax liability | | | (3,313 | ) | | | (2,551 | ) |
| Deferred income tax, net | | $ | (985 | ) | | $ | (2,048 | ) |
Net deferred tax assets and liabilities are presented as noncurrent within the Company’s consolidated balance sheets. Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when the taxes are actually paid or recovered. The Company recognizes a valuation allowance for deferred tax assets when it is more likely than not that these assets will not be realized. In making this determination, all positive and negative evidence is considered, including future reversals of existing taxable temporary differences, tax planning strategies, future taxable income, and taxable income in prior carryback years.
At December 31, 2021, the Company had $1.1 million of U.S. federal net operating loss carryforwards. At December 31, 2022, the Company had no U.S. federal net operating loss carryforwards and has $0.5 million of foreign tax credit carryforwards which expire between 2023 and 2031.
The Company does not believe that it had any significant uncertain tax positions at December 31, 2022 and December 31, 2021, nor is this expected to change within the next twelve months due to the settlement and expiration of statutes of limitation.
The U.S. Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017 and introduced significant changes to U.S. income tax law. Effective in 2018, the Tax Act reduced the U.S. statutory tax rate from 35% to 21% and created new taxes on certain foreign-sourced earnings and certain related-party payments, which are referred to as the global intangible low-taxed income tax and base erosion tax, respectively. In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income (“GILTI”) provisions of the Tax Act. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The Company elected to treat any potential GILTI inclusions as a period cost.
Note 8. Treasury Stock
During 2012, the Board of Directors authorized a stock repurchase program whereby the Company could repurchase up to 500,000 shares of its outstanding common stock. During 2013, the Board of Directors renewed and extended the Company’s share repurchase authority to enable it to repurchase up to an aggregate of 1,000,000 shares of common stock. In 2016, the Board of Directors increased by an additional 500,000 shares the number of shares of the Company’s common stock, which may be repurchased under its stock repurchase program to an aggregate of 1,500,000 shares. The shares may be repurchased from time to time in the open market or through privately negotiated transactions at prices the Company deems appropriate. The program does not obligate the Company to acquire any particular amount of common stock and may be modified or suspended at any time at the Company’s discretion.
From 2012 through December 31, 2022, the Company repurchased an aggregate of 1,314,694 shares of common stock at an average price of approximately $4.85 per share, for a total of approximately $6.4 million in repurchases under the stock repurchase program. During the year ended December 31, 2022, no shares were repurchased. The repurchase of an additional 185,306 shares is presently authorized under the stock repurchase program.
Note 9. Related Parties
The Executive Chairman of the Company, Mark E. Schwarz, is also the chairman, chief executive officer and portfolio manager of Newcastle Capital Management, L.P. (“NCM”). NCM is the general partner of Newcastle Partners L.P. (“Newcastle”), which is the largest shareholder of the Company.
The Company’s corporate headquarters are located at the offices of NCM. The Company utilizes NCM facilities on a month-to-month basis at $2.5 thousand per month, pursuant to a services agreement entered into between the parties. The Company incurred expenses pursuant to the services agreement totaling $30 thousand for each of the years ended December 31, 2022 and 2021. The Company did not owe NCM any amounts under the services agreement as of December 31, 2022.
In the second quarter of 2021, the Company recorded $32 thousand related to the recovery of short-swing profits disgorged from one of the Company’s shareholders under Section 16(b) of the Securities Exchange Act of 1934, as amended. The Company recognized these related party proceeds as an increase to additional paid-in capital in the accompanying consolidated balance sheet, as well as cash provided by financing activities in the accompanying consolidated statement of cash flows for 2021.
Note 10. Stock Options and Stock Purchase Warrants
During 2015, shareholders of the Company approved the 2015 Incentive Plan which authorized the issuance of up to 500,000 shares of the common stock pursuant to stock options, restricted stock, stock appreciation rights and other equity incentives awarded to directors, officers, consultants, advisors and employees of the Company. Stock option awards under the 2015 Incentive Plan are granted at the market value of the common stock on the date of grant, vest over service periods of one to five years and terminate not more than ten years from the date of grant.
Under the 2015 Incentive Plan, no stock option awards were granted during 2022. Stock option awards covering 120,000 shares of the common stock were granted during 2021. No stock options were exercised during either 2022 or 2021.
The following table shows a summary of stock option transactions under the 2015 Incentive Plan during 2022 and 2021:
| | | Number of Shares | | | Weighted Average Exercise Price | |
| Outstanding, January 1, 2021 | | | 60,000 | | | $ | 6.93 | |
| Granted | | | 120,000 | | | | 5.43 | |
| Exercised | | | - | | | | - | |
| Forfeited or expired | | | - | | | | - | |
| Outstanding, December 31, 2021 | | | 180,000 | | | $ | 5.93 | |
| Granted | | | - | | | | - | |
| Exercised | | | - | | | | - | |
| Forfeited or expired | | | - | | | | - | |
| Outstanding, December 31, 2022 | | | 180,000 | | | $ | 5.93 | |
Weighted average remaining contractual life was 5.85 years at December 31, 2022 and 6.85 years at December 31, 2021. The exercise price of all stock options was below the market value at both December 31, 2022 and 2021. Therefore, there is no intrinsic value at December 31, 2022 and 2021. Total unrecognized compensation expense on options outstanding as of December 31, 2022 was $0.1 million. Options to purchase 98,500 shares of common stock were exercisable as of December 31, 2022.
The Company estimates the fair value of each stock option granted on the date of grant using the Black-Scholes option pricing model. Expected volatilities are based on the historical volatility of Wilhelmina’s and similar companies’ common stock for a period equal to the expected term. The risk-free interest rates for periods within the contractual term of the options are based on rates for U.S. Treasury Notes with maturity dates corresponding to the options’ expected lives on the dates of grant. Expected term is determined based on the option term.
The following table lists the inputs to the Black-Scholes model used for the fair value measurement of the stock options granted during 2021. No stock options were granted during 2022.
| | | Year Ended
December 31, 2021 | |
| | | | | |
| Weighted average fair value at the measurement date ($) | | | 3.1 | |
| Dividend yield (%) | | | 0 | |
| Expected volatility of the share prices (%) | | | 68.9 | |
| Risk-free interest rate (%) | | | 1.3 | |
| Expected life of share options (years) | | | 4.0 to 6.3 | |
| Weighted average share price ($) | | | 5.4 | |
Note 11. Benefit Plans
The Company has established a 401(k) Plan for eligible employees of the Company. Generally, all employees of the Company who are at least twenty-one years of age are eligible to participate in the 401(k) Plan. The 401(k) Plan is a defined contribution plan, which provides that participants may make voluntary salary deferral contributions, on a pretax basis, between 1% and 100% of their compensation in the form of voluntary payroll deductions, up to a maximum amount as indexed for cost-of-living adjustments. The Company may make discretionary contributions. No discretionary contributions were made during the years ended December 31, 2022 and 2021.
Note 12. Cybersecurity Incident
In November 2021, the Company determined that it had recently been the victim of criminal fraud known to law enforcement authorities as “business e-mail compromise fraud” which involved employee e-mail impersonation and fraudulent payment requests targeting the finance department of a division of the Company. The fraud resulted in unauthorized transfers of funds aggregating approximately $0.7 million, as well as approximately $10 thousand of professional service fees to address the fraud. The Company recovered $0.2 million. As a result, the Company recorded a charge of $0.6 million in 2021 within operating expenses on the consolidated statements of operations.
The Company is continuing to pursue the recovery of the remaining $0.6 million and is cooperating with U.S. federal law enforcement authorities who are actively pursuing an investigation. It is presently unclear whether or to what extent any additional amounts will be recovered. Any additional recoveries will be recognized as a gain on recovery in the period that the funds are received.