WILHELMINA INTERNATIONAL, INC. The following is a discussion of the Company's financial condition and results
of operations comparing the calendar years ended
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 digital, mobile, print and television advertising campaigns for consumer goods, e-commerce, 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, and scouting and developing talent.
Although Wilhelmina has a large and diverse client base, it is not immune to global economic conditions, such as the impact from the COVID-19 pandemic. The Company closely monitors economic conditions, client spending, and other industry factors and continually evaluates opportunities to increase the market share of its existing boards and further expand its geographic reach. There can be no assurance as to the effects on Wilhelmina of future economic circumstances, technological developments, client spending patterns, client creditworthiness and other developments and whether, or to what extent, Wilhelmina's efforts to respond to them will be effective.
RESULTS OF OPERATIONS OF THE COMPANY FOR THE YEAR ENDED
In addition to net income, the key financial indicators that the Company reviews to monitor its business are revenues, operating expenses and cash flows.
The Company analyzes revenue by reviewing the mix of revenues generated by the different boards, by geographic locations and from significant clients. Wilhelmina's primary sources of revenue include service revenues from the provision of model and talent services and licensing fees from third-party agencies licensing the use of the "Wilhelmina" trademark. Service revenues are primarily derived from talent fees and services charges paid by the client for bookings directly negotiated by the Company, which are recognized as revenues when earned and collectability is reasonably assured. Wilhelmina also receives commissions paid on bookings by third-party agencies which are recognized when earned and collectability is reasonably assured. See "Critical Accounting Policies - Revenue Recognition.
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--------------------------------------------------------------------------------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 Income
For the Years EndedDecember 31, 2022 and 2021 (in thousands) 2022 2021 Service revenues 17,750 16,069 License fees and other income 30 33 TOTAL REVENUES 17,780 16,102 Salaries and service costs 10,907 8,644 Office and general expenses 3,168 2,973 Amortization and depreciation 193 855 Cybersecurity incident expenses - 575 Corporate overhead 1,093 897 OPERATING INCOME 2,419 2,158 OPERATING MARGIN 13.6 % 13.4 % Foreign exchange (gain) loss (164 ) 80 Gain on forgiveness of loan - (1,994 ) Employee retention credit - (1,320 ) Interest expense 8 51 INCOME BEFORE INCOME TAXES 2,575 5,341 Current income tax expense (109 ) (224 ) Deferred tax benefit (expense) 1,063 (599 ) Effective tax rate (37.0% ) 15.4 % NET INCOME 3,529 4,518
Supplemental Non-GAAP Information
(in thousands) 2022 2021 Gross billings 66,984 56,813 EBITDA 2,776 6,247 Adjusted EBITDA 2,802 3,649
Pre-Corporate EBITDA 3,895 4,546
See pages 14 to 15 for a reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measures and for other important information.
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. The revenue increase of 10.5% for the year ended
License Fees and Other Income
License fees and other income include franchise revenues from independently
owned model agencies that use the Wilhelmina trademark and various services
provided by the Company. License fees decreased by 9.1% for the year ended
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--------------------------------------------------------------------------------Salaries and Service Costs
Salaries and service costs consist of payroll related costs and travel and
entertainment expenses required to deliver the Company's services to its clients
and talents. The 26.2% increase in salaries and service costs for the year ended
Office and General Expenses
Office and general expenses consist of office and equipment rents, advertising
and promotion, insurance expenses, administration and technology cost. During
the year ended
Amortization and Depreciation
Amortization and depreciation expense is incurred with respect to certain
assets, including computer hardware, software, office equipment, furniture and
finance leases. Amortization and depreciation expense decreased by 77.4% for the
year ended
Cybersecurity Incident Expenses
In
Corporate Overhead
Corporate overhead expenses include director and executive officer compensation,
corporate legal, audit and professional fees, corporate office rent, and
travel. Corporate overhead increased by 21.9% for the year ended
Operating Income and Operating Margin
Operating income was
Foreign Currency Loss
The Company realized a gain of
Gain on Forgiveness of Loan
During 2021, the Company received notice from the SBA that
Employee Retention Credit
During 2021, the Company was eligible for a one-time employee retention payroll
tax credit as a refundable credit against certain employment taxes of up to
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--------------------------------------------------------------------------------Interest Expense
Interest expense for the years ended
Income before Income Taxes
Income before income taxes decreased to
Income Taxes
Generally, the Company's combined effective tax rate is high relative to
reported net income as a result of foreign taxes, and income being attributable
to certain states in which it operates. The Company operates in three states,
which have relatively high tax rates:
The income tax benefit in 2022 was primarily the result of the full release of a
previous
Net Income
The Company had net income of
Gross Billings
Gross billings is a non-GAAP financial measure that represents the gross amount
billed to customers on behalf of its clients (models and talent) for services
performed. Gross billings increased 18% for the year ended
Liquidity and Capital Resources
The Company's cash balance increased to
Net cash provided by operating activities of
The Company's primary liquidity needs are for working capital associated with performing services under its client contracts. Generally, the Company incurs significant operating expenses with payment terms shorter than its average collections on billings. Based on budgeted and year-to-date cash flow information, management believes that the Company has sufficient liquidity to meet its projected operational expenses and capital expenditure requirements for the next twelve months and beyond.
13
--------------------------------------------------------------------------------Amegy Bank Credit Agreement
The Company previously had a credit agreement with
On
Paycheck Protection Program Loans
On
On
Important Information Regarding Non-GAAP Financial Measures
The Company reports its financial results in accordance with GAAP. However, management believes that certain non-GAAP financial measures provide users of the Company's financial information with additional useful information in evaluating operating performance. The Company considers Gross Billings, EBITDA, Adjusted EBITDA and Pre-Corporate EBITDA to be important measures of performance because they are key operating metrics of the Company's business, are used by management in its planning and budgeting processes and to monitor and evaluate its financial and operating results and provide stockholders and potential investors with a means to evaluate the Company's financial and operating results against other companies within the Company's industry.
Gross Billings represents the gross amount billed to customers on behalf of its models and talent for services performed. The Company calculates Gross Billings as total revenue plus model costs, which includes 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. The Company calculates EBITDA as net income plus interest expense, income tax expense, and depreciation and amortization expense. The Company calculates "Adjusted EBITDA" as EBITDA plus foreign exchange gain/loss, share-based payment expense and certain significant non-recurring items that the Company may include from time to time. For 2021, these non-recurring items represented gain on forgiveness of PPP loans, employee retention payroll tax credit, and cybersecurity incident expenses. The Company calculates "Pre-Corporate EBITDA" as Adjusted EBITDA plus corporate overhead expense, which includes director compensation, securities laws compliance costs, audit and professional fees, and other public company costs.
Non-GAAP financial measures should be viewed as supplementing, and not as an alternative or substitute for, the Company's financial results prepared in accordance with GAAP. Certain of the items that may be excluded or included in non-GAAP financial measures may be significant items that could impact the Company's financial position, results of operations or cash flows and should therefore be considered in assessing the Company's actual and future financial condition and performance. The methods used by the Company to calculate its non-GAAP financial measures may differ significantly from methods used by other companies to compute similar measures. As a result, any non-GAAP financial measures presented herein may not be comparable to similar measures provided by other companies.
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--------------------------------------------------------------------------------Gross Billings The following is a tabular reconciliation of the non-GAAP financial measure Gross Billings to GAAP total revenues, which the Company believes to be the most comparable GAAP measure (in thousands) 2022 2021 Total revenues 17,780 16,102 Model costs 49,204 40,711 Gross Billings 66,984 56,813
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.
EBITDA, Adjusted EBITDA, and Pre-Corporate EBITDA
The following is a tabular reconciliation of the non-GAAP financial measures EBITDA, Adjusted EBITDA, and Pre-Corporate EBITDA to GAAP net income, which the Company believes to be the most comparable GAAP measure
(in thousands) 2022 2021 Net income$ 3,529 4,518 Interest expense 8 51 Income tax (benefit) expense (954 ) 823 Amortization and depreciation 193 855 EBITDA$ 2,776 $ 6,247 Foreign exchange (gain) loss (164 ) 80 Non-recurring items (1) - (2,739 ) Share based payment expense 190 61 Adjusted EBITDA$ 2,802 $ 3,649 Corporate overhead 1,093 897 Pre-Corporate EBITDA$ 3,895 $ 4,546
(1) Non-recurring items include gain on forgiveness of loans, employee retention credit and cybersecurity incident expenses during 2021
Critical Accounting Policies and Estimates
The consolidated financial statements of the Company are prepared in accordance
with generally accepted accounting practices in
The following items require significant estimation or judgement. For additional information about our accounting policies, refer to "Note 2, Summary of Significant Accounting Policies" in the audited consolidated financial statements included herewith.
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--------------------------------------------------------------------------------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.
Our revenues are derived primarily from fashion model 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.
We report service revenues on a net basis, which represents gross amounts billed net of 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. The Company typically enters into contractual agreements with models under which the Company is obligated to pay talent upon collection of fees from the customer.
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.
Amounts billed that have not yet met the applicable revenue recognition criteria are recorded as deferred revenue within accrued expenses and the related talent costs are recorded as contract liability.
Share Based Compensation
Share-based compensation expense is estimated at the grant date based on the award's fair value as calculated by the Black-Scholes option pricing model and is recognized on a straight line basis as an expense over the requisite service period, which is generally the vesting period. The determination of the fair value of share-based awards on the date of grant using an option pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include the estimated volatility over the expected term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rates, estimated forfeitures and expected dividends.
Income Taxes
We are subject to income taxes in
Deferred tax assets are recognized for unused tax losses, unused tax credits, and deductible temporary differences to the extent 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 loss carry-forwards.
In 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 final tax outcome will not be materially different. To the extent that the final tax outcome is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made and could have a material impact on our financial condition and 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 allowance. 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.
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--------------------------------------------------------------------------------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.
The Company performs impairment testing at least annually and more frequently if
events and circumstances indicate that the asset might be impaired. An
impairment loss is recognized to the extent that the carrying amount exceeds the
reporting unit's fair value. The Company sometimes utilizes an independent
valuation specialist to assist with the determination of fair value. In
accordance with ASU 2017-03, effective
Whenever events or circumstances change, entities have the option to first make a qualitative evaluation about the likelihood of goodwill impairment. If impairment is deemed more likely than not, management would perform the goodwill impairment test. Otherwise, the goodwill impairment test is not required. In assessing the qualitative factors, the Company assesses relevant events and circumstances that may impact the fair value and the carrying amount of the reporting unit. The identification of relevant events and circumstances and how these may impact a reporting unit's fair value or carrying amount involve significant judgments and assumptions. The judgment and assumptions include the identification of macroeconomic conditions, industry and market considerations, overall financial performance, Company specific events and share price trends, an assessment of whether each relevant factor will impact the impairment test positively or negatively, and the magnitude of any such impact.
The Company evaluates indefinite lived trademark and trade name intangible assets for impairment using the relief from royalty method. This valuation approach requires that the Company make a number of assumptions to estimate fair value, including projections of future revenues, royalty rates, tax rates, discount rates, and other relevant variables. The projections in this model are updated annually and will change over time based on historical performance and changing business conditions. If the carrying value exceeded the estimated fair value, an impairment charge would be recognized for the excess amount.
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