REG - Public Policy Hldg - Full Year Results
20/04/2023 07:00
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RNS Number : 8319W Public Policy Holding Company, Inc. 20 April 2023
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Public Policy Holding Company, Inc.
("PPHC" or the "Group")
Full Year Results for the year ended 31 December 2022
Strong financial performance and sustained growth, driven by robust market
demand
Public Policy Holding Company, Inc., ("PPHC", the "Group" or the "Company"),
the government relations and public affairs group providing clients with a
fully integrated and comprehensive range of services, is pleased to announce
its Full Year Results for the year ended 31 December 2022.
Financial Highlights
· Revenue of $108.8m (2021: $99.3m) reflects an increase of 9.5%, and
6.6% organic growth.
· Underlying EBITDA of $31.2m (2021: $32.0m) is in line with guidance
and was achieved at a margin of 28.7%, within our target range of 25 to 30%.
This followed a truly exceptional 2021 which was driven by a combination of
high pandemic-related spending and the change of control in the White House
· Underlying Profit after tax was $23.3m (2021: $23.9m), reflecting a
margin of 21.4%
· Year-end Net Cash stood at $21.0 million, an increase of 17.9%
· Declared a final dividend of $0.095 per Common Outstanding Share. This
would take the total dividend for 2022 to $0.14 per share.
All in $'000, unless otherwise noted 2021 2022 change
Revenue 99,336 108,814 9.5%
EBITDA - Underlying 32,030 31,186 -2.6%
EBITDA margin - Underlying (%) 32.2% 28.7% -3.6 pts
Net Income - Underlying 23,857 23,271 -2.5%
EPS - Underlying ($) (fully diluted) (**) 0.220 0.211 -4.1%
Dividend 703 15,511 N/M
Free Operational Cash Flow 4,638 20,678 N/M
Net Cash at year end 17,820 21,012 17.9%
Operational highlights
· Successful acquisition of California based KP Public Affairs on 1
October 2022, proving attractiveness of holding company value proposition and
equity + cash offer.
· Key talent additions into Group's founding firms, including deepening
specialisations in new/renewable energy policy, defence contracting, financial
services, and trade policy, all service areas that are central to today's
policy agenda.
· Improved client diversification, with the top 10 Group clients
representing 9.6% of total revenue, down from 13.1% in 2021.
· 2022 total clients greater than 850, up from over 730 in 2021;
includes over 100 Fortune 500 clients and related trade associations.
· Number of clients spending $100,000 or greater per year was 384, a
gain of 11%, and representing 43% of our total clients.
Current trading and Outlook
· MultiState Associates acquired on 1 March 2023, elevating our number
of clients to over 1,000.
· Continued growth into 2023, fuelled by ongoing policy debates over
government spending and the passage of historic spending measures in 2021-22
into sectors such as healthcare, essential manufacturing,
renewable/alternative energies, and infrastructure.
· Management expects revenue to grow by 5 to 10% organically,
supplemented by growth from past and future M&A transactions.
· The Group continues to manage the business such that the Underlying
EBITDA as percentage of revenue is estimated to be between 25% and 30%.
· Continuing to build an attractive pipeline of strategic acquisition
opportunities in the federal and state advocacy markets, as well as in the
adjacent strategic communications and public affairs markets in the US and
abroad.
Stewart Hall, CEO, PPHC commented:
"Our first full year as a listed company saw PPHC deliver on anticipated
margins, net income and dividend for shareholders. We have a well-defined
growth strategy and are demonstrating the successful delivery of its pillars,
including selective M&A to broaden our geographic footprint into
state-based government relations, as well as the expansion of our service
offering. The strategic communications and government affairs markets, both in
the US and internationally, remain fragmented and we are well placed to act as
a natural consolidator with a strong balance sheet.
"Demand for PPHC's services is set to continue, driven partly by $4+ trillion
of US government spending. We anticipate this activity will underpin ongoing
organic growth. We have an attractive pipeline of potential acquisition
opportunities, in line with our focus on broadening our reach into US state
capitals and metropolitan areas, as well as internationally.
"PPHC is well placed to deliver continued growth, both organically and via
acquisitions. We have already completed the acquisition of MultiState,
expanding our service offering and opening new opportunities for collaboration
between our operating businesses. We look forward to continued strategic and
financial progress in 2023."
Enquiries
Public Policy Holding Company Inc. +1 (202) 688 0020
Stewart Hall, CEO
Bill Chess, CFO
Thomas Gensemer, Chief Strategy Officer
Roel Smits, Deputy CFO
Stifel (Nominated Adviser & Broker) +44 (0) 20 7710 7600
Fred Walsh, Tom Marsh
Buchanan Communications (Media Enquiries) +44 (0) 20 7466 5000
pphc@buchanan.uk.com
Chris Lane, Toto Berger, Harry Swinburne
About PPHC
Incorporated in 2014, PPHC is a US-based government relations and public
affairs group providing clients with a fully integrated and comprehensive
range of services including government and public relations, research and
digital advocacy campaigns. Engaged by over 1000 clients, including companies,
trade associations and non-governmental organisations, the Group is active in
all major sectors of the U.S. economy, including healthcare and
pharmaceuticals, financial services, energy, technology, telecoms and
transportation. PPHC's services support clients to enhance and defend their
reputations, advance policy goals, manage regulatory risk, and engage with US
federal and state-level policy makers, stakeholders, media and the public.
PPHC operates a holding company structure and currently has seven operating
entities comprising Crossroads Strategies, Forbes Tate Partners, Seven Letter,
O'Neill & Associates, Alpine Group Partners, KP Public Affairs and
MultiState Associates. Operating in the strategic communications market, the
Group has a strong track record of organic and acquisitive growth, the latter
focused on enhancing its capabilities and to establish new verticals, either
within new geographies or new related offerings.
For more information, see www.pphcompany.com (http://www.pphcompany.com/) .
Chairman's report
On behalf of the Board of Directors of PPHC, I am pleased to introduce this
report reflecting a full year of strong performance post-IPO, a successful
accretive acquisition of a market-leading firm in California, and outstanding
business development and cost management by company leadership in the face of
considerable macro-economic challenges and tremendous partisanship and
unpredictability in the US Federal Government.
The strong performance of the Group throughout 2022, along with the timely
acquisition and early integration of KP Public Affairs, reflects the hard work
and dedication of our leaders and individual employee-owners and staff. We
rely on their shared expertise, good judgement, and steadfast commitment to
excellence, for clients and colleagues alike. I've met so many of the talented
individuals who make up the Group and I look forward to spending more time
with our valued colleagues in the years ahead.
On behalf of my Board colleagues, I would like to thank each of our staff,
clients, business partners, advisors and shareholders for their ongoing
support.
In the eighth full year of PPHC's operations, and our first full-year as an
AIM listed business, we are proud to be reporting strong Group-wide results,
in line with our stated guidance.
With a consistent track record of growth and a revenue CAGR of 29% since 2015,
the management and Board of PPHC is executing on its focused goal to become
the world's premier provider of government relations and public affairs
services to companies, trade organisations and NGO clients.
PPHC operates a portfolio of independently branded firms, each offering a
range of public policy expertise, bi-partisan federal and state advocacy
services, public affairs, and crisis management services to over 1,000
clients.
Clients hire PPHC firms to help enhance and defend their reputations, inform
and advance their public policy goals, manage regulatory risk, or otherwise
engage with US federal and state-level policy makers, regulators and other key
stakeholders.
Each of the Group's firms are bi-partisan, by way of US political
associations, with founders and senior managers operating largely
in-and-around Washington DC with close professional ties to the US Executive
Branch, Congress, and/or regulatory authorities.
According to US Federal Government lobbying reporting, in 2022, PPHC remained
the largest provider of federal contract lobbying services in the US, with
$66.4m of disclosed revenue*. This PPHC service offering, registered federal
and state lobbying, represents approximately 72% of the Group's total for
2022. The Group's stated strategy is to maintain this core offering while
also growing related high-margin service offerings such as public affairs,
research and media management to existing and new clients.
PPHC's acquisition of KP Public Affairs, a leading firm in the State of
California, was completed 1 October 2022, providing the Group with an anchor
in the largest US state market and an important bellwether in US policymaking.
This acquisition represents an important step in our strategy to support our
clients' needs in multiple jurisdictions, including in other US states and in
major international capitals.
Given our performance in 2022, the Board is pleased to have declared a final
dividend of $0.095 per share, taking the total dividend for the year to $0.14
per share. This will represent a total aggregate dividend for the year of
approximately $15.5 million, equivalent to approximately 67% of the Group's
Underlying Net Profit (based on the current number of common outstanding
shares). The final dividend of $0.095 per share is payable to the holders of
record of all of the issued and outstanding shares of the Company's Common
Stock as of the close of business on the record date, 5 May 2023. The
ex-dividend date is 4 May 2023.
*Source: opensecrets.org
Simon Lee
Non-executive Chairman
Chief Executive Officer's report
Across PPHC's companies, our talented policy and strategic communications
specialists committed their year to undertaking critical, high-impact work for
our clients. Working at the highest levels of government and clients' C-suite,
our teams informed, guided, and shaped policy decisions that impact the future
of the United States and the world.
It was an extraordinary year in public policy as we saw democratic
governments, corporate leaders, and ordinary citizens across the world face
simultaneous challenges - the ongoing war in Ukraine disrupting energy markets
and supply chains, historic levels of inflation, and the unrest and
uncertainty in politics.
Taken together, along with ongoing Covid-19 pandemic mitigations and the 'new
normal' of hybrid work, governments have responded with historic spending
measures and regulatory interventions that impact every sector of the global
economy.
In Washington, DC and across the United States, the November 2022 mid-term
elections were the most expensive ever waged. Over $10 billion was spent and
the result was a very narrowly divided US Congress (a Republican-controlled
House, a Democrat-led Senate) and likely stalemate.
Despite such partisan rancour, the Biden Administration did achieve the narrow
passage of record-breaking federal spending bills (now totalling over $4
trillion) to fund economic priorities, including healthcare, clean and
alternative energies, public infrastructure investments and the support of
essential industries (manufacturing of high-end semiconductors, key
pharmaceuticals and more). As such, PPHC enjoyed another strong year for
revenue and profit as our clients engaged in and responded to these challenges
and opportunities.
Group clients, now totalling over 1,000 companies, NGOs and associations in
2023, depend on our firms - both the breadth of our integrated services and
the depth of policy and political expertise - to navigate challenges and
maximise the business opportunities of this hyper-political era.
We have reached current scale and sophistication at an ideal moment in
history, but with that success comes an increased responsibility and
well-deserved scrutiny. Our entire organisation takes pride in the steps we
have taken to increase diversity amongst our team and towards building a
culture of equity and inclusivity. As CEO, I take responsibility for ensuring
that this progress continues and stays a top priority.
As we begin 2023, we remain focused on a clear and differentiated strategy, as
conceived in 2014 and restated upon IPO in 2021. The progress we made in 2022,
carrying into the start of 2023, provides further confidence in the strength
of our business model and strategic ambitions. We foresee continued growth
fuelled by ongoing policy debates over government spending and the passage of
historic spending measures in 2021-22 into sectors such as healthcare,
essential manufacturing, renewable/alternative energies, and infrastructure.
I thank each one of our colleagues, their families, our clients, partners,
advisors, and shareholders. Along with my senior executive team at PPHC, I
look forward to continuing to progress our business strategy.
Stewart Hall
Chief Executive Officer
Financial Review
In our first full year post-IPO, demonstrating the stability of our core
business operations, the dedication of our management teams, and the critical
importance of our work to our clients, revenue grew 9.5% to $108.8 million.
All in $'000, unless otherwise noted 2021 2022 change
Revenue 99,336 108,814 9.5%
EBITDA (Underlying) 32,030 31,186 -2.6%
EBITDA margin (Underlying) (%) 32.2% 28.7% -3.5 pts
Net Income (Underlying) 23,857 23,271 -2.5%
EPS (Underlying) ($) (fully diluted) (**) 0.220 0.211 -4.0%
Dividend 703 15,511 N/M
Free Operational Cash Flow 4,638 20,678 N/M
Net Cash at year end 17,820 21,012 17.9%
PPHC's results for the year ended 31 December 2022 represent its first full
reporting year post-IPO in December 2021. Strong levels of client engagement
and activity have driven the Group's revenue up 9.5% to $108.8m (2021:
$99.3m). All areas of the Group's business, i.e. government relations, public
affairs advisory, and strategic research, achieved growth when compared to
2021.
Equally important, underlying profit remained close to 2021 levels despite the
absorption of higher costs related to being a public company and the related
increased investment in new hires, with an underlying EBITDA for the year of
$31.2m (2021: $32.0m) at a margin of 28.7% (2021: 32.2%), within our guided
range of between 25% and 30%.
The Group's cash position at the end of the year remained strong at $21.0m
(2021: $17.8m), following the generation of $20.7m operational cash flow, the
acquisition activity in Q4 2022, and the payment of dividends.
Underlying Profit & Loss Statement
All in $'000, unless otherwise noted 2021 2022 change
Revenue 99,336 108,814 9.5%
Operational expenses (*) (67,306) (77,629) 15.3%
EBITDA (Underlying) 32,030 31,186 -2.6%
EBITDA margin (Underlying) 32.2% 28.7% -3.5 pts
Depreciation (128) (100)
EBIT (Underlying) 31,903 31,086 -2.6%
Interest (52) (17)
Taxes (*) (7,994) (7,798)
Net Income (Underlying) 23,857 23,271 -2.5%
Net income margin (Underlying) 24.0% 21.4% -2.6 pts
(*) 2021 bonus and taxes are on a proforma basis, using 2022 rates
Bridge from Underlying to Reported results
Net Income (Underlying) 23,857 23,271
Share-based accounting charge (27,609) (33,392)
Post-combination compensation charge (2,441)
Long Term Incentive Program charges (318)
Amortization intangibles (1,885) (2,129)
2021 bonus actual (37,519)
2021 bonus proforma 11,401
2021 tax actual (495)
2021 tax proforma 7,994
Net Income (Reported) (24,256) (15,009)
Revenue
The Group's total revenue for 2022 increased by 9.5% to $108.8 million (2021:
$99.3 million). The growth was primarily organic (6.6%) and also benefitted
from the acquisition of KP Public Affairs on 1 October 2022.
Organic growth of 6.6% reflects the stability of our core business operations
and comes on top of 28% growth in 2021, a banner year as a consequence of
significant pandemic-related spending and the change of control at the
executive branch. Organic growth was driven by a high degree of retention of
existing clients (typically higher in government relations and lower in public
affairs, and on average 75%, based on client count) in combination with new
business wins. New clients were typically either Fortune 500 clients or
advocacy groups and coalitions.
The Group ended 2022 with over 850 clients, of which 384 accounted for a net
revenue of equal or greater than $100,000 per annum (up from 347 in 2021). Our
largest client represented 1.6% of total revenue, down from 2.5% in 2021.
This success was driven by both of our primary business lines, government
relations and public affairs. In 2022, our government relations business
increased by 11% (8% organically) as we supported clients in managing their
risks and opportunities. Our public affairs division increased by 5% (2%
organically), building on a very strong performance in the previous year.
Profit
Underlying EBITDA of $31.2 million was achieved at a margin of 28.7%,
consistent with the margins realised between 2018 and 2020, and in line with
our guidance that margins will typically move within the range of 25% to 30%.
The 32.2% margin of 2021 reflected a truly exceptional year driven by a
combination of high pandemic-related spending and the change of control in the
White House.
Long term Underlying EBITDA 2018 2019 2020 2021 2022
Underlying EBITDA ($m) 9.3 13.5 21.5 32.0 31.2
Underlying EBITDA as % of Revenue 27.4% 24.4% 27.8% 32.2% 28.7%
In 2022, Underlying EBITDA was also impacted by previously communicated
additional expenses relating to the Group's first full year as public company.
Those incremental costs, included within the calculation of Underlying EBITDA,
amounted to approximately $5.4 million and included legal and registration
fees, compliance costs, M&A related expenses, investments in staff at the
Group's holding company, and in talent acquisition. We expect to make further
investments in 2023 to build out our platform.
At an after-tax level, 2022 Underlying Net Income - which constitutes the
basis of our dividend calculation - amounted to $23.3 million, slightly less
than the $23.9 million for 2021 on a proforma basis.
Employees
The Group started 2022 with 187 employees operating out of five offices. By
end of year, this number had increased to 244 people, which includes 30 from
the KP acquisition and 17 people hired when bringing the Engage team, a
supplier to Forbes Tate, in-house. On average, during 2022 we had 206
employees.
Other
The Group's net finance costs for the year were $16k (2021: $52k),
illustrating the absence of any significant debt on the Group's balance sheet.
Tax accrual for 2022 amounted to $7.8 million, which represents a blended
charge of 25.1% to our Underlying Profit. For comparative purposes, we have
applied the same rate when calculating the 2021 proforma Underlying Profit.
Balance sheet and cash flow
The Group's net cash position as of 31 December 2022 was $21.0 million (2021:
$17.8 million), taking into account the $0.2 million borrowings at that time.
Our strong financial position enabled us to make the interim dividend payments
and allowed us to make acquisitions, without borrowing from financial
institutions.
Cash Flow Statement
Net income (24,256) (15,009)
Add back: Share-based compensation 27,609 33,392
Add back: LTIP 318
Add back: Amortization 1,885 2,129
Add back: Depreciation 128 100
All other changes in Working Capital (728) (253)
Operational Cash flow 4,638 20,678
Acquisitions N/A (11,912)
Investment Cash flow N/A (11,912)
Debt repayment N/A (26)
Dividend payment N/A (5,572)
Financing Cash Flow N/A (5,598)
Cash generated N/A 3,167
Dividend
The Board of Directors of the Company have declared a final dividend for 2022
of $0.095 per Common Share, which equates to an aggregate amount, based on the
current number of outstanding Common Shares, of approximately $10.6 million,
payable to the holders of record of all of the issued and outstanding shares
of the Company's Common Stock as of the close of business on the record date,
May 5, 2023. The ex-dividend date is 4 May 2023. The dividend will be paid no
later than 2 June 2023
An interim payment of $4.9 million was already made in October 2022 ($0.045
based on the outstanding Common Shares at that time), in line with the
Company's intent to pay about one third of the expected total dividend for the
year as an interim dividend.
Consequently, the Group' total dividends for the financial year will be $0.14
per share. This represents, based on the current number of outstanding Common
Shares, a total aggregate dividend for the year of approximately $15.5
million, equivalent to approximately 67% of the Group's Underlying Net Profit.
Dividend
All in $'000, unless otherwise noted 2021 2022
Net income - Underlying 23,857 23,271
Free Operational Cash Flow 4,638 20,678
Dividend 703 15,511
Pay out ratio 67%
Payable in calendar year (interim dividend) 4,869
Payable next calendar year (final dividend) 10,642
Per share (**)
2021 2022
# weighted avg shares outstanding - basic 108,240 108,137 '000
# weighted avg shares outstanding - fully diluted 108,240 110,147 '000
EPS - Reported (basic and fully diluted) (0.2241) (0.1388) $
EPS - Underlying (basic) 0.2201 0.2152 $
EPS - Underlying (fully diluted) 0.2201 0.2113 $
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Recent developments
As announced on 1 March 2023, the Group completed the acquisition of
MultiState Associates. This was PPHC's second significant acquisition since
IPO in December 2021. MultiState's services at the state level are highly
complementary to PPHC's with its strength in research and compliance adding to
and enhancing PPHC's broader client offering. The initial consideration of $22
million was funded 80% ($17.6 million) in cash and 20% ($4.4 million) through
the issue of new common shares in PPHC to MultiState. Further earnout payments
are contingent on MultiState achieving profit growth targets between 2022 and
2027, promoting alignment with the Group's growth objectives. Significant
revenue and profit synergy potential exists via the referral of existing
clients from the PPHC network. The acquisition is substantially and
immediately accretive to underlying earnings per share in 2023.
Also announced on 1 March 2023, and related to the MultiState acquisition,
PPHC entered into a $17 million credit facility with Bank of America, N.A.
Key components were:
· Facility 1: a $3 million Senior Secured Line of Credit. The interest
rate payable on this facility is the Bloomberg Short-Term Bank Yield Index
plus 225 basis points.
· Facility 2: $14 million Senior Secured Term Loan. The interest rate
payable on this facility is the Bloomberg Short-Term Bank Yield Index plus 225
basis points.
· The Credit Facility will mature on 31 January 2026.
Credit Facility 2 was deployed alongside balance sheet cash to fund the cash
element of the initial consideration in relation to the acquisition of
MultiState. The Group recognises the importance of its ability to utilise,
depending on market conditions, both the equity and debt markets to fund its
growth strategy. Maintaining flexibility facilitates the Group's wider capital
allocation policy, which includes the payment of dividends, in a de-risked
manner.
Financial Guidance
· Management continues to expect revenue to grow by 5 to 10%
organically, supplemented by growth from past and future M&A
transactions.
· The Group continues to manage the business such that Underlying EBITDA
as percentage of revenue is estimated to range between 25% and 30%.
· We expect to make further investments in 2023 to continue to build out
our platform to support further growth.
Basis of preparation
The Company was incorporated on 4 February 2021, and was admitted to trading
on the AIM market of the London Stock Exchange on 16 December 2021 (the
"IPO"). The 2022 figures, for the consolidated financial statements in this
annual report, represent the first full year of Public Policy Holding Company,
Inc. following its IPO. The comparative figures presented in this report for
the year ended 31 December 2021 are for Public Policy Holding Company, LLC and
its subsidiary companies, the businesses of which were contributed to the
Company immediately prior to the IPO. For the year ended 31 December 2021, the
consolidated figures represent the results of the underlying business for the
whole financial period before and after the IPO. The financial statements have
been prepared in accordance with US GAAP (Generally Accepted Accounting
Principles).
When the Company purchases services or goods on behalf of its clients (for
example in the case of media purchases), the Group does not recognize the
purchased goods as net revenue, but only the net fees earned on the purchases.
Therefore, purchases on behalf of clients do not materially impact the
top-line or the margins.
Management believes that Underlying EBITDA and Underlying Net Income are more
useful performance indicators than the reported Net Income. Four elements
distinguish our Underlying Net Income from our Reported Net Income:
(1) Share-based accounting charge: As already mentioned in last year's report,
the shares retained by employee shareholders following the IPO are subject to
a vesting schedule; Also, their employment agreements contain certain
provisions which enable cash derived from the sale of shares at the time of
the IPO to be clawed back and forfeited on certain events of termination of
employment. These items create a share-based accounting noncash charge in
accordance with accounting guidance under US GAAP (Accounting Standards
Codification, 718- 10-S99-2, compensation-stock compensation). Based on the
value of the Company at the time of admission ($197 million) and taking into
account the 14.6% of pre-admission employee shares sold in 2021, the 2022
non-cash charge is $33.4 million (2021: $27.6 million). This share-based
accounting non-cash charge has no impact on either tax or Company operations.
(2) Post-combination compensation charge: In 2022, the Group completed the
acquisition of KP Public Affairs on 1 October 2022. Also, the Engage team was
brought in-house (digital services supplier to Forbes Tate Partners) on 1
November 2022. To protect the interests of the Group, the shares issued as
part of these two transactions were made subject to vesting schedules.
And also, to a certain degree, the cash paid as part of these transactions can
be clawed back and forfeited on certain events of termination of employment.
The addition of these provisions to purchase price paid creates a
post-combination compensation charge in accordance with accounting guidance
under US GAAP (Accounting Standards Codification, ASC 805-10-55-25). The 2022
charge is $2.4 million (2021: $0 million). Again, this is non-cash charge
and has no impact on either tax or Company operations.
(3) LTIP charges. In 2022 the Group issued the first stock-based compensation
units under the Omnibus Plan. This plan was introduced at the time of the IPO
and allows the Group to issue up to a certain number of stock-related units
(e.g. options, restricted stock). In 2022 PPHC issued 2.8 million stock
options at a premium exercise price (market price at time of grant plus 20%),
exercisable at the 3(rd) anniversary of the grant. The charges relating to
this issue, $0.3 million in 2022, as reflected in our P&L were computed
using the Black Scholes method.
(4) Amortization of intangibles: The non-cash amortization charge of $2.1
million relates to the amortization of customer relationships per ASC 805.
(**) EPS Underlying Net Income for 2021 based on the average number of shares
in the post-IPO period from 16 December 2021 to 31 December 2021, being
108,240,250
Consolidated Balance Sheets
December 31, 2022 and 2021
2022 2021
Assets
Current assets:
Cash $ 21,202,456 $ 18,035,641
Accounts receivable, net 12,149,803 8,214,002
Note receivable - related party, current portion - 263,850
Prepaid post-combination compensation, current portion 441,852 -
Prepaid expenses and other current assets 1,411,421 490,712
Total current assets 35,205,532 27,004,205
Property and equipment, net 688,313 788,598
Note receivable - related party, long term 513,000 -
Operating lease right of use asset 16,239,667 15,907,571
Goodwill 47,909,832 44,893,532
Other intangible assets, net 18,575,116 12,877,567
Deferred income tax asset 2,278,400 -
Prepaid post-combination compensation, long term 515,500 -
Other long-term assets 118,887 553,957
Total assets $ 122,044,247 $ 102,025,430
Liabilities
Current liabilities:
Accounts payable and accrued expenses $ 12,336,324 $ 8,329,355
Income taxes payable 4,150,389 522,500
Amounts owed to related parties 1,276,479 6,696,795
Deferred revenue 2,860,889 1,942,536
Operating lease liability due within one year 3,907,543 3,374,724
Contingent consideration, current portion 1,779,000 -
Other liability, current portion 1,821,600 -
Notes payable, current portion 20,664 20,664
Total current liabilities 28,152,888 20,886,574
Notes payable, long term 189,975 216,048
Deferred income tax liability - 2,914,600
Contingent consideration, long term 2,466,000 -
Other liability, long term 435,060 -
Operating lease liability, long term 14,815,236 15,262,878
Total liabilities 46,059,159 39,280,100
Stockholders' equity
Common stock, $0.001 par value, 1,000,000,000
shares authorized, 109,346,480 and 108,240,250 shares
issued and outstanding, respectively 108,024 108,240
Additional paid-in capital 120,713,626 86,892,903
Accumulated deficit (44,836,562) (24,255,813)
Total stockholders' equity 75,985,088 62,745,330
Total liabilities and stockholders' equity $ 122,044,247 $ 102,025,430
Consolidated Statements of Operations
For the Years Ended December 31, 2022 and 2021
2022 2021
Revenue $ 108,814,491 $ 99,336,460
Expenses:
Personnel cost 52,252,267 44,070,612
Employee bonuses 11,010,439 17,626,133
General and administrative expenses 10,432,781 8,184,253
Occupancy expense 3,933,014 3,650,562
Depreciation and amortization expense 2,229,197 2,012,645
Long term incentive program charges 317,679 -
Profit bonuses - 19,892,634
Total expenses before share-based accounting (ASC 718-10-S99-2) charge
and post-combination compensation (ASC 805-10-55-25) charge 80,175,377 95,436,839
Income from operations before share based accounting (ASC 718-10-S99-2) charge
and post-combination compensation (ASC 805-10-55-25) charge
28,639,114 3,899,621
Share-based accounting (ASC 718-10-S99-2) charge 33,392,300 27,609,214
Post-combination compensation (ASC 805-10-55-25) charge 2,441,052 -
Loss from operations (7,194,238) (23,709,593)
Interest expense 16,873 51,520
Net loss before income taxes (7,211,111) (23,761,113)
Income tax expense 7,797,600 494,700
Net loss $ (15,008,711) $ (24,255,813)
Net loss per share attributable to common
stockholders, basic and diluted $ (0.14) $ (0.24)
Weighted average common shares outstanding,
basic and diluted 108,136,853 100,338,632
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 2022 and 2021
Common Stock
Shares Amount Additional Paid-In Members' Accumulated Deficit Total
Capital Equity Stockholders'
Equity
Balance as of December 31, 2020 - $ - $ - $ 58,672,734 $ - $ 58,672,734
Distributions to members - - - (444,235) - (444,235)
Shares issued due to conversion from LLC to C-Corporation 100,000,000 100,000 58,128,499 (58,228,499) - -
Issuance of common shares, net of commissions and fees of $1,634,554 8,240,050 8,240 13,357,206 - - 13,365,446
Syndication costs - - (4,797,076) - - (4,797,076)
Income tax effect of conversion from LLC to C C-Corporation - - (2,942,400) - - (2,942,400)
Holdings Distribution Discount - - (4,462,540) - - (4,462,540)
Share-based accounting (ASC 718-10-S99-2) charge - - 27,609,214 - - 27,609,214
Net loss - - - - (24,255,813) (24,255,813)
Balance as of December 31, 2021 108,240,050 108,240 86,892,903 - (24,255,813) 62,745,330
Stock option expense - - 317,679 - - 317,679
Dividends - - - - (5,572,254) (5,572,254)
Forfeiture of unvested restricted stock (215,662) (216) - - 216 -
Share-based accounting (ASC 718-10-S99-2) charge - - 33,392,300 - - 33,392,300
Post-combination compensation (ASC 805-55-10-25) charge-shares - - 110,744 - - 110,744
Net loss - - - - (15,008,711) (15,008,711)
Balance as of December 31, 2022 108,024,388 $ 108,024 $ 120,713,626 $ - $ (44,836,562) $ 75,985,088
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2022 and 2021
2022 2021
Cash flows from operating activities
Net loss $ (15,008,711) $ (24,255,813)
Adjustments to reconcile net loss to net cash provided by (used in) operating 100,285 127,833
activities: Depreciation
Amortization expense - intangibles 2,128,912 1,884,812
Amortization of right of use assets 3,115,249 2,943,400
Provision for deferred income taxes (589,961) (27,800)
Share-based accounting (ASC 718-10-S99-2) charge 33,392,300 27,609,214
Stock-based compensation 317,679 -
Amortization of prepaid post-combination compensation (ASC 805-55-10-25) 73,648 -
Post-combination compensation (ASC 805-55-10-25) charge-shares 110,744 -
(Increase) decrease in
Accounts receivable, net (3,935,801) (3,267,547)
Other assets (368,068) (378,012)
Increase (decrease) in
Accounts payable and accrued expenses 3,805,605 2,546,171
Income taxes payable 3,627,889 522,500
Deferred revenue 682,806 1,879,225
Operating lease liability (3,362,168) (2,668,786)
Other liability 2,256,660 -
Transactions with members/related parties (5,669,466) (2,276,974)
Net cash provided by operating activities 20,677,602 4,638,223
Cash flows from investing activities
Purchases of property and equipment - (36,630)
Cash paid for acquisitions and prepaid post-combination compensation, net of (11,912,460) -
cash
Net cash used in investing activities (11,912,460) (36,630)
Cash flows from financing activities
Syndication costs and other stock issuance costs - (4,638,271)
Issuance of common stock - 13,755,665
Net proceeds (payments) from line of credit and (26,073) (1,382,030)
notes payable
Distributions (5,572,254) (444,235)
Net cash provided by (used in) financing activities (5,598,327) 7,291,129
Net increase in cash and cash equivalents 3,166,815 11,892,722
Cash and cash equivalents as of beginning of year 18,035,641 6,142,919
Cash and cash equivalents as of end of year $ 21,202,456 $ 18,035,641
Supplemental disclosure of cash flow information
Cash paid for interest $ 16,873 $ 51,520
Cash paid for income taxes $ 4,770,409 $ -
Right of use assets obtained with lease liabilities $ 3,447,345 $ 3,057,555
Contingent consideration issued for acquisitions $ 4,245,000 $ -
Increase in deferred revenue from acquisitions $ 235,547 $ -
Increase in accounts payable and accrued expenses from acquisitions $ 201,364 $ -
Increase in other assets from acquisitions $117,571 $ -
Income tax effect of conversion of LLC to C-Corporation $ - $ 2,942,400
Holdings Distribution Discount $ - $ 4,462,540
Commissions and fees paid through issuance of common stock $ - $ 1,244,335
Notes to Consolidated Financial Statements
NOTE 1 ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation:
Public Policy Holding Company, Inc. ("PPHC-Inc.") was incorporated on February
4, 2021. From PPHC- Inc.'s incorporation until December 10, 2021 (the
"Conversion Date"), all of the issued and outstanding shares of stock of
PPHC-Inc. were owned by Public Policy Holding Company, LLC ("PPHC-LLC"), which
(i) was organized as a Delaware limited liability company on July 1, 2014, and
(ii) owned certain wholly-owned operating subsidiaries, all organized as
Delaware limited liability companies (the "Subsidiaries," and collectively
with PPHC-Inc., the "Company"). On the Conversion Date, PPHC-LLC contributed
and assigned substantially all of its assets and liabilities (including all of
the Subsidiaries, but excluding certain specified assets and liabilities) to
PPHC-Inc. in exchange for the issuance by PPHC- Inc. of 100,000,000 shares
(the "Contribution Shares") of Common Stock, par value $0.001 per share
("Common Stock") of PPHC-Inc. Pursuant to a formula approved by the Executive
Board and General Board of PPHC-LLC (the "Waterfall"), PPHC LLC then
liquidated and distributed the Contribution Shares to each of PPHC-LLC's
owners who (other than The Alpine Group, Inc.), in turn, distributed such
shares to their respective owners in accordance with the Waterfall
(collectively, the "Company Conversion").
The Company provides governmental and public affairs consulting services
exclusively in the United States of America ("U.S.").
The Company has prepared the accompanying consolidated financial statements in
conformity with generally accepted accounting principles in the United States
of America ("GAAP"). Such consolidated financial statements reflect all
adjustments that are, in management's opinion, necessary to present fairly, in
all material respects, the Company's financial position, results of operations
and cash flows, and are presented in U.S. Dollars. All material intercompany
transactions and balances have been eliminated in consolidation.
Principles of Consolidation:
The consolidated financial statements include all of the accounts of the
entities listed below:
Parent company:
Public Policy Holding Company, Inc.
Wholly owned operating subsidiaries:
Crossroads Strategies, LLC Forbes Tate Partners, LLC
Blue Engine Message & Media, LLC, doing business as Seven Letter O'Neill
& Partners LLC, doing business as O'Neill & Associates Alpine Group
Partners, LLC
KP Public Affairs, LLC
On January 1, 2020, the Company formed Seven Letter ONA to do business in the
State of Massachusetts. Revenue and expense from Seven Letter ONA will be
allocated to Seven Letter and O'Neill & Associates.
Initial Public Offering:
On December 16, 2021, PPHC-Inc. completed an initial public offering and
placement ("IPO") of its shares of Common Stock, and the admission of Common
Stock to trading on the AIM market of the London Stock Exchange.
The PPHC-LLC Limited Liability Company Agreement ("LLC Agreement") provided
for the payment of a "Holdings Distribution Discount" in connection with a
sale or IPO of the Company, amounting to
$4,462,540 (excluding an interest accrual which is being waived). The Holdings
Distribution Discount represents the difference between an operating
subsidiary paying three percent of its revenues annually to PPHC-LLC (which
has historically been paid by all operating subsidiaries other than Crossroads
Strategies, LLC and Forbes Tate Partners, LLC), and each of Crossroads
Strategies, LLC and Forbes Tate, LLC, which, as the founding businesses
acquired by PPHC-LLC, have paid approximately five percent of their respective
revenues annually to PPHC-LLC. Historically, PPHC-LLC and its members viewed
this obligation of PPHC-LLC (triggered by the IPO) as an obligation to refund
Crossroads Strategies, LLC and Forbes Tate, LLC, their relative overpayments
(compared to the other operating subsidiaries) because had those overpayments
not been made to PPHC-LLC, those amounts could have been paid as additional
bonuses or distributions to the owners of Crossroads Strategies, LLC and
Forbes Tate, LLC. This obligation of PPHC-LLC has been contributed and
assigned to and assumed by the Company as part of the Contribution Agreement
entered into in connection with the Company Conversion. Upon the Company's
payment of the Holdings Distribution Discount to Crossroads Strategies, LLC
and Forbes Tate, LLC, it is anticipated that Crossroads Strategies, LLC and
Forbes Tate, LLC will, in turn, distribute such amounts to their respective
owners including but not limited to Stewart Hall and Zachary Williams. As of
December 31, 2021, the Holdings Distribution Discount of approximately
$4,463,000 is included in the amounts owed to related parties in the Company's
Consolidated Balance Sheets. This amount was paid in full during 2022.
In addition, certain assets and liabilities were not contributed by PPHC-LLC
to the Company as part of the Company Conversion. As of December 31, 2021, the
net amount owed to the PPHC-LLC members approximates $2,234,000 and is
included in amounts owed to related parties in the Company's Consolidated
Balance Sheets. This amount was paid in full during 2022.
During 2021, all the ultimate owners of PPHC-LLC ("Group Executives") entered
into Executive Employment Agreements. The Group Executives sold some of their
Common Stock in conjunction with the IPO ("Liquidated Pre-IPO Shares") but
retained the majority of their shares ("Retained Pre-IPO Shares"). The
Retained Pre-IPO Shares are subject to a vesting schedule under which the
Common Stock held by each Group Executive will vest in equal installments on
the first five anniversaries of the effective date of the IPO, provided that
the Group Executive remains continuously employed by the employer; this
vesting schedule applies to all the Company's employees holding Common Stock
at the time of the IPO. In the event that a Group Executive's employment
terminates (other than on death or "disability", or by the employer without
"cause", or by the Group Executive for what is deemed to be for a "good
reason") then the unvested proportion of the Retained Pre-IPO Shares which
have not vested, will not vest and will be automatically forfeited and clawed
back as of the date of such termination. In the event a Group Executive's
employment terminates on death or "disability," or by the employer without
"cause," or by the Group Executive for what is deemed to be "good reason,"
then all unvested shares will vest automatically as of the date of such
termination. The Executive Employment Agreements also contain certain
provisions which enable cash derived from the sale of Liquidated Pre-IPO
Shares and Retained Pre-IPO Shares that have vested to be clawed back and
forfeited on certain events of termination of employment or breaches of
certain provisions of the Executive Employment Agreements. Pursuant to the
Executive Employment Agreements for Group Executives employed by Alpine Group
Partners, a pro-rata portion of the Retained Pre-IPO Shares held by (and the
Liquidated Pre-IPO Shares sold by) The Alpine Group Inc. are subject to
vesting, forfeiture and claw back based on the employment of certain of those
Group Executives.
The addition of the vesting provisions to previously issued shares creates a
share-based accounting charge in accordance with the accounting guidance in
Accounting Standards Codification ("ASC") 718- 10-S99-2, Compensation-Stock
Compensation. See Note 7.
Revenue Recognition:
The Company generates the majority of its revenue by providing consulting
services related to lobbying and public affairs. In determining the method and
amount of revenue to recognize, the Company has to make judgments and
estimates. Specifically, complex arrangements with nonstandard terms and
conditions may require management's judgment in interpreting the contract to
determine the appropriate accounting, including whether the promised services
specified in an arrangement are distinct performance obligations and should be
accounted for separately, and how to allocate the transaction price, including
any variable consideration, to the separate performance obligations. When a
contract contains multiple performance obligations, the Company allocates the
transaction price to each performance obligation based on its estimate of the
stand-alone selling price. Other judgments include determining whether
performance obligations are satisfied over-time or at a point-in-time and the
selection of the method to measure progress towards completion.
The Company's general practice is to establish an agreement with a client with
a fixed monthly payment at the beginning of each month for the month's service
to be performed. Most of the consulting service contracts are based on one of
the following types of contract arrangements:
· Fixed-fee arrangements require the client to pay a fixed fee in
exchange for a predetermined set of professional services. The Company
recognizes revenue at the beginning of the month for that month's services.
· Additional services include items such as 1) advertisement placement
and management, 2) video production, and 3) website development, in which
third-party companies may be engaged to achieve specific business objectives.
These services are either in a separate contract or within the fixed-fee
consulting contract, in which the Company usually receives a fixed 15% markup
on the cost incurred by the Company. The Company recognizes revenues earned to
date in an amount that is probable or unlikely to reverse and by applying the
proportional performance method when the criteria for revenue recognition is
met. Any out-of-pocket administrative expenses incurred are billed at cost.
Certain services provided by the Company include the utilization of a
third-party in the delivery of those services. These services are primarily
related to the production of an advertising campaign or media buying services.
The Company has determined that it acts as an agent and is solely arranging
for the third-parties to provide services to the customer. Specifically, the
Company does not control the specified services before transferring those
services to the customer, and is not primarily responsible for the performance
of the third-party services, nor can the Company redirect those services to
fulfill any other contracts. The Company does not have discretion in
establishing the third-party pricing in its contracts with customers. For
these performance obligations for which the Company acts as an agent, the
Company records revenue as the net amount of the gross billings less amounts
remitted to the third-party.
The following table provides disaggregated revenue by revenue type for the
periods ended December 31:
2022 2021
Lobbying revenue $78,177,680 $70,125,726
Public affairs revenue 30,636,811 29,210,734
Total revenue $ 108,814,491 $99,336,460
See the Segment Reporting Note 11 for a description of the principal
activities, by reportable segment, from which the Company generates revenue.
As of January 1, 2022 and 2021, the accounts receivable, net and deferred
revenue was approximately
$8,214,000 and $1,943,000 and $6,623,000 and $1,502,000, respectively. The
following table provides information about receivables, contract assets and
contract liabilities from contracts with customers as of December 31:
2022 2021
Accounts receivable, net $ 11,585,267 $ 8,109,353
Other receivables 564,536 104,649
Contract liabilities (deferred revenue) 2,860,889 1,942,536
Contract liabilities relate to advance consideration received from customers
under the terms of the Company's contracts primarily related to retainer fees
and reimbursements of third-party expenses, both of which are generally
recognized shortly after billing. The deferred revenue of $1,942,536 and
$1,502,176 from December 31, 2021 and 2020 was recognized as revenue in 2022
and 2021, respectively.
Cash and Cash Equivalents:
The Company considers all cash investments with original maturities of three
months or less to be cash equivalents. At times, the Company maintains cash
accounts that exceed federally insured limits, but management does not believe
that this results in any significant credit risk.
Accounts Receivable:
The Company provides for an allowance for doubtful accounts based on
management's best estimate of possible losses determined principally on the
basis of historical experience and specific allowances for known troubled
accounts, if needed. Accounts are generally considered past due after the
contracted payment terms, which are generally net 30 day terms. All accounts
or portions thereof that are deemed to be uncollectible or that require an
excessive collection cost are written off to the allowance for doubtful
accounts. As of December 31, 2022, the balance of allowance for doubtful
accounts approximated
$595,000. The Company determined that no allowance for doubtful accounts was
necessary as of December 31, 2021.
Leases:
A lease is defined as a contract that conveys the right to control the use of
identified property, plant or equipment for a period of time in exchange for
consideration. The Company accounts for its leases in accordance with the
guidance in Accounting Standards Codification ("ASC") 842 ("ASC 842").
Substantially all of the leases in which the Company is the lessee are
comprised of real estate property for remote office spaces and corporate
office space. Substantially all of the leases are classified as operating
leases.
As of December 31, 2022 and 2021, the Company had approximately $16,240,000
and $15,908,000, respectively, of operating lease ROU assets and $18,723,000
and $18,638,000, respectively of operating lease liabilities on the Company's
Consolidated Balance Sheets. The Company has elected not to recognize
right-of-use ("ROU") assets and lease liabilities arising from short-term
leases, leases with initial terms of twelve months or less, or equipment
leases (deemed immaterial) on the Consolidated Balance Sheets.
These leases may contain terms and conditions of options to extend or
terminate the lease, which are recognized as part of the ROU assets and lease
liabilities when an economic benefit to exercise the option exists and there
is a significant probability that the Company will exercise the option. If
these criteria are not met, the options are not included in the Company's ROU
assets and lease liabilities. Variable lease payment amounts that cannot be
determined at the commencement of the lease, such as common area maintenance
expenses and increases in lease payments based on changes in index rates, are
not included in the ROU assets or liabilities. These variable lease payments
are expensed as incurred.
As of December 31, 2022, these leases do not contain material residual value
guarantees or impose restrictions or covenants related to dividends or the
Company's ability to incur additional financial obligations.
The discount rate for operating leases was based on market rates from a bank
for obligations with comparable terms effective at the lease inception date.
The following table presents lease costs, future minimum lease payments and
other lease information as of December 31:
2023 $ 4,648,767
..................................................................................................................................
2024 3,743,718
..................................................................................................................................
2025 3,742,928
..................................................................................................................................
2026 3,735,364
..................................................................................................................................
2027 2,775,487
..................................................................................................................................
Thereafter.......................................................................................................................... 2,546,780
Total future minimum lease payments 21,193,044
Amount representing interest (2,470,265)
Present value of net future minimum lease payments $18,722,779
Lease Cost
Year ending December 31:
2022 2021
Operating lease cost (cost resulting from lease payments) $ 4,011,764 $ 3,829,749
Variable lease cost (cost excluded from lease payments) 264,179 171,958
Sublease income (396,000) (400,890)
Net lease cost $ 3,879,943 $ 3,600,817
Operating lease - operating cash flows (fixed payments) $ 4,264,516 $ 3,938,149
Weighted average lease term - operating leases 5.2 years 5.1 years
Weighted average discount rate - operating leases 4.80% 3.98%
The Company subleases office space to third parties under separate sublease
agreements, which are scheduled to expire during 2023. The amount of future
sublease income from subtenants as of December 31, 2022 is immaterial.
Property and equipment:
Property and equipment consists of furniture, equipment and leasehold
improvements and is carried at cost less accumulated depreciation.
Depreciation is provided generally on a straight-line method over the
estimated useful lives of the related assets ranging from 5 to 15 years.
Business Combination
In a business combination, the acquisition method of accounting requires that
the assets acquired and liabilities assumed be recorded as of the date of the
acquisition at their respective fair values with limited exceptions. Assets
acquired and liabilities assumed in a business combination that arise from
contingencies are generally recognized at fair value. If fair value cannot be
determined, the asset or liability is recognized if probable and reasonably
estimable; if these criteria are not met, no asset or liability is recognized.
Transaction costs are expensed as incurred. The operating results of the
acquired business are reflected in the Company's consolidated financial
statements after the date of acquisition.
Goodwill and indefinite-lived intangible assets:
Goodwill represents the excess of the purchase price over the fair value of
assets acquired and liabilities assumed in business combinations and is
allocated to the appropriate reporting unit when acquired. Acquired intangible
assets are recorded at fair value.
Goodwill is evaluated for impairment annually during the fourth quarter, or
more frequently if an event occurs, or circumstances change that could more
likely than not reduce the fair value of a reporting unit below its carrying
value. Goodwill is typically assigned to the reporting unit, which
consolidates the acquisition. Components within the same reportable segment
are aggregated and deemed a single reporting unit if the components have
similar economic characteristics. As of December 31, 2022, the Company's
reporting units consisted of Lobbying Consulting and Public Affairs
Consulting. Goodwill is evaluated for impairment using either a qualitative or
quantitative approach for each of the Company's reporting units. Generally, a
qualitative approach is first performed to determine whether a quantitative
goodwill impairment test is necessary. If management determines, after
performing an assessment based on qualitative factors, that the fair value of
the reporting unit is more likely than not less than the carrying amount or
that a fair value of the reporting unit substantially in excess of the
carrying amount cannot be assured, then a quantitative goodwill impairment
test would be required. The quantitative test for goodwill impairment is
performed by determining the fair value of the related reporting units. Fair
value is measured based on the discounted cash flow method, which requires
management to estimate a number of factors for each reporting unit, including
projected future operating results, anticipated future cash flows and discount
rates. Management has performed its evaluation and determined the fair value
of each reporting unit is greater than the carrying amount and, accordingly,
the Company has not recorded any impairment charges related to goodwill for
the years ended December 31, 2022 and 2021.
Indefinite-lived intangible assets are tested for impairment annually during
the fourth quarter, or more frequently if an event occurs or circumstances
change that could more likely than not reduce the fair value below its
carrying value. The Company's indefinite-lived intangible assets consist of
trademarks acquired through various business acquisitions. The Company has the
option to first assess qualitative factors to determine whether events or
circumstances indicate it is more likely than not that the fair value of the
trademarks is greater than the carrying amount, in which case a quantitative
impairment test is not required. Management has performed its evaluation and
determined that the trademarks are not impaired for the years ended December
31, 2022 and 2021.
Customer relationship asset:
The Company's definite-lived intangible asset consists of customer
relationships that have been acquired through various acquisitions. The
Company amortized these assets over their estimated useful lives.
Impairment of long-lived assets:
Long-lived assets subject to amortization are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized for an amount by which the carrying amount of
the asset exceeds the fair value of the asset. The Company has not recorded
any impairment charges related to long-lived assets for the years ended
December 31, 2022 and 2021.
Syndication costs:
Deferred offering costs consist primarily of consulting fees related to the
initial public offering (IPO). Prior to the IPO, all deferred offering costs
were capitalized and included in the consolidated balance sheets. During
December 2021, these costs totaling approximately $4,797,000 were recorded as
a reduction to stockholders' equity.
Deferred revenue:
Deferred revenue represents prepayment by the customers for services that have
yet to be performed. As of December 31, 2022 and 2021, deferred revenue was
approximately $2,861,000 and $1,943,000, respectively. Deferred revenue is
expected to be recognized as revenue within a year.
Accounts payable and accrued expenses:
Accounts payable and accrued expenses consist of the following as of December
31:
2022 2021
Accounts payable $ 1,199,130 $ 2,458,292
Bonus payable 9,425,261 3,945,621
Other accrued expenses 1,711,933 1,925,442
Total $12,336,324 $ 8,329,355
Marketing and advertising costs:
The Company expenses marketing and advertising costs as incurred. Marketing
and advertising expense for the years ended December 31, 2022 and 2021 was
approximately $182,000 and $102,000, respectively.
Income taxes:
Prior to the Conversion Date, PPHC-LLC was a limited liability company whereby
the tax attributes were passed through to and reported on the members of
PPHC-LLC's tax returns.
After the Conversion Date, the Company utilizes the asset and liability method
in the Company's accounting for income taxes. Under this method, deferred tax
assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that are expected to be in effect when the
differences are expected to reverse. The Company records a valuation allowance
against deferred tax assets when realization of the tax benefit is uncertain.
A valuation allowance is recorded, if necessary, to reduce net deferred taxes
to their realizable values if management believes it is more likely than not
that the net deferred tax assets will not be realized.
The Company may recognize the tax benefit from an uncertain tax position only
if it is more likely than not that the tax position will be sustained on
examination by the taxing authorities based on the technical merits of the
position. The tax benefits recognized in the financial statements from such a
position are measured based on the largest benefit that has a greater than 50%
likelihood of being realized upon ultimate settlement.
Profit bonuses:
Prior to the IPO, annual bonus payments were paid as compensation for services
to senior executives and employees based on the profits of the Company.
Estimates:
The preparation of consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements, and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Share-based accounting charge and stock option expense:
The Company accounts for its share-based accounting (ASC 718-10-S99-2) charge
using the fair value method. The fair value method requires the Company to
estimate the grant-date fair value of its share- based awards and amortize
this fair value to expense over the requisite service period or vesting term.
For restricted and nonvested stock awards, the grant-date fair value is based
upon the market price of the Company's common stock on the date of the grant.
For stock options, the grant-date fair value is based on the Black-Scholes
Option Pricing Model. The Company records forfeitures as they occur.
Segment information:
GAAP requires segmentation based on an entity's internal organization and
reporting of revenue and operating income based upon internal accounting
methods commonly referred to as the "management approach." Operating segments
are defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker ("CODM"), or decision making group, in deciding how to allocate
resources and in assessing performance. The Company's CODM is its Chief
Executive Officer. The Company's operations are conducted in two reportable
segments. These segments consist of Lobbying Consulting and Public Affairs
Consulting.
Basic and diluted earnings (loss) per share:
The Company computes earnings (loss) per share in accordance with ASC 260,
Earnings per Share, which requires presentation of both basic and diluted
earnings per share on the face of the consolidated statements of operations.
Basic earnings (loss) per share is computed by dividing net income (loss)
available to common shareholders by the weighted average number of outstanding
shares during the period. Diluted earnings (loss) per share gives effect to
all dilutive potential common shares outstanding during the period. Due to
their anti-dilutive effect, the calculation of diluted net loss per share for
the years ended December 31, 2022 and 2021 does not include the common stock
equivalent shares below:
2022 2021
Common shares outstanding 108,024,388 108,240,050
Stock options outstanding 2,718,809 -
Restricted stock 1,322,092 -
Total common stock equivalents 4,040,901 -
Total fully diluted shares 112,065,289 108,240,050
Fair value of financial instruments:
The carrying values of cash, accounts receivable, and accounts payable and
accrued expenses at December 31, 2022 and 2021 approximated their fair value
due to the short maturity of these instruments.
Reclassification:
Certain categorizations of the 2021 segment disclosures have been reclassified
to conform to the 2022 presentation. These reclassifications had no impact on
the total results or net assets of the Company.
Subsequent events:
Management has evaluated the subsequent events for disclosure in these
consolidated financial statements.
NOTE 2 ACQUISITIONS
KP Public Affairs LLC
On October 1, 2022, the Company entered into an Asset Purchase Agreement ("KP
Agreement") and acquired certain assets and assumed certain liabilities of KP
Public Affairs LLC ("Seller" or "KP LLC") through the creation of a
wholly-owned subsidiary, KP Public Affairs, LLC ("KP"). At the closing of the
transaction, the Company paid the Seller cash in the amount of $10,306,800
("Closing Cash Payment") and issued 739,589 shares of the Company's common
stock ("Closing Share Payment") to Seller at an aggregate fair value of
$1,145,200.
In addition, the Company will pay Seller an additional amount of consideration
totaling up to $4,048,000 ("Closing True-Up Payment") based on specific
operating results (as defined in the KP Agreement) of KP through December 31,
2022. The payment of the Closing True-Up Payment will be pro-rated as ninety
percent cash and ten percent shares of the Company's stock. There are
additional contingent payments that the Seller can earn in the future
depending on certain operating results that are achieved. The total amount of
consideration that the Company could be required to pay to the Seller in the
amount of cash and stock ("Seller Shares") is $35,000,000. The equity
component of the contingent payments ranges between 20% and 35%.
The KP Agreement provides certain forfeiture provisions applicable to any
future cash or share payments owed, which generally require the owners of KP
LLC ("Owner" or "Owners") to remain employed by the Company for a certain
period of time to receive the full amount of those future payments. There are
certain exceptions to the forfeiture provisions if termination of employment
occurs under certain permitted events ("Acceleration Event") as defined in the
KP Agreement.
In addition, under certain circumstances outlined in the KP Agreement, the
Company can claw back a portion of certain payments previously paid if an
Owner is not employed by the Company as of December 31, 2026.
If an Owner's employment is terminated as a result of an Acceleration Event, a
percentage of the unvested Seller Shares (representing such Owner's ownership
percentage in Seller) shall become fully vested. The Seller Shares issued have
some restrictions but they also have certain legal rights consistent with the
Company's other shares of Common Stock outstanding, including certain voting
rights and the rights to dividends paid by the Company. In addition, the KP
Agreement contains certain provisions requiring the forfeiture of a percentage
of all cash and shares received by Seller if certain restrictive covenants are
breached by an Owner.
Reasons for the Acquisition
The Company acquired KP LLC to expand its governmental and public affairs
consulting services provided to state and local governments. Specifically, KP
LLC provides significant services to companies and organizations doing
business in the state of California.
Accounting for the Acquisition
The acquisition of Seller was accounted for as a business combination and
reflects the application of acquisition accounting in accordance with ASC 805,
Business Combinations ("ASC 805"). The acquired assets, including identifiable
intangible assets and liabilities assumed, have been recorded at their
estimated fair values with the excess purchase price assigned to goodwill.
Purchase Consideration
The Company determined that certain consideration provided to Sellers in the
KP Agreement does not qualify as purchase consideration in accordance with the
guidance of ASC 805. The Company determined that the purchase consideration
consists of the amount of cash payments owed to Sellers that are not subject
to a vesting or claw back provision that is directly linked to the continued
employment of Sellers. The total purchase consideration consisted of the
following amounts:
Closing Cash Payment $ 10,306,800
Contingent consideration 4,245,000
Total purchase consideration $ 14,551,800
The contingent consideration consists of the estimated fair value of the
Closing True-Up Cash Payment, Interim Earnout Cash Payment, and Final Earnout
Cash Payment that are not subject to a vesting requirement or claw back
provision directly linked to the future employment of Owners.
Purchase Price Allocation
The allocation of the purchase consideration resulted in the following amounts
being allocated to the assets acquired and liabilities assumed as of the
purchase date of October 1, 2022 based on their respective estimated fair
values summarized below:
Cash $ 139,547
Other current assets 69,000
Right of use assets 3,273,766
Tradename 1,091,000
Noncompete agreements 306,000
Customer relationship 5,861,000
Deferred income tax asset 4,277,500
Goodwill 3,016,300
Other current liabilities (208,547)
Lease liability (3,273,766)
Total estimated purchase price $14,551,800
The identified definite-lived intangible assets were as follows:
Weighted-average
Definite-lived intangible assets useful life (in years) Amount
Customer relationship 7 $5,861,000
Noncompete agreements 5 $306,000
The fair value of customer relationships was determined using the income
approach, which requires management to estimate a number of factors for each
reporting unit, including projected future operating results, anticipating
future cash flows and discount rates. The fair value of noncompete agreements
was determined using an income approach method, which requires management to
estimate a number of factors related to the expected future cash flows of KP
LLC and the potential impact and probability of competition, assuming such
noncompete agreements were not in place. The primary factors that contributed
to the goodwill recognized from the KP LLC acquisition include the key
employees of KP LLC combined with additional synergies expected from
increasing the Company's service capabilities.
Engage LLC
On November 1, 2022, the Company (through its wholly-owned subsidiary, Forbes
Tate Partners, LLC) entered into an Asset Purchase Agreement ("Engage
Agreement") and acquired certain assets and assumed certain liabilities of
Engage LLC ("Engage"). At the closing of the transaction, the Company paid
Engage cash in the amount of $1,925,000 ("Engage Cash Payment") and issued
487,301 shares of the Company's common stock ("Engage Restricted Shares") at
an aggregate fair value of $825,000.
A portion of the Engage Cash Payment was designated to certain owners ("Junior
Principal(s)") of Engage and the remaining of the Engage Cash Payment was
designated to the other owners ("Senior Principal(s)") of Engage. In addition,
all of the Engage Restricted Shares were issued to the Senior Principals.
There are no vesting requirements or claw back provisions linked to continuing
employment for the Engage Cash Payment paid to the Junior Principals. There
are vesting requirements and claw back provisions linked to continuing
employment of the Senior Principals for the Engage Cash Payment paid and
Engage Restricted Shares issued to the Senior Principals.
Each of the Senior Principals will vest in the Engage Restricted Shares as
long as they remain continuously employed through each applicable vesting
date, except if the termination occurs under certain permitted events ("Engage
Acceleration Event") as defined in the Engage Agreement. If one of the Senior
Principals is terminated as a result of an Engage Acceleration Event, all of
such Senior Principal's unvested Engage Restricted Shares shall become fully
vested.
The Engage Restricted Shares issued have some restrictions but they also have
certain legal rights consistent with the Company's other shares of Common
Stock outstanding, including certain voting rights and the rights to dividends
paid by the Company.
With respect to the Engage Cash Payment, each of the Senior Principals have a
vesting requirement related to their respective cash payment. If any of the
Senior Principals is terminated as a result of an Engage Acceleration Event,
all of such Senior Principal's unvested Engage Cash Payment shall become fully
vested,
In addition, the Engage Agreement contains certain provisions requiring the
forfeiture of a respective Senior Principal's Engage Restricted Shares and a
portion of the Engage Cash Payment made to both the Junior Principals and
Senior Principals if certain restrictive covenants are breached by the
respective Junior Principal or Senior Principal.
Reasons for the Acquisition
The Company acquired Engage to expand its governmental and public affairs
consulting services provided within the U.S.
Accounting for the Acquisition
The acquisition of Engage was accounted for as a business combination and
reflects the application of acquisition accounting in accordance with ASC 805,
Business Combinations ("ASC 805"). The acquired assets, including identifiable
intangible assets and liabilities assumed, have been recorded at their
estimated fair values with the excess purchase price assigned to goodwill.
Purchase Consideration
The Company determined that certain consideration provided to Engage in the
Engage Agreement does not qualify as purchase consideration in accordance with
the guidance of ASC 805. The Company determined that the purchase
consideration consists of the amount of Engage Cash Payment paid to the Junior
Principals and the Engage Cash Payment to the Senior Principals that is not
subject to vesting or claw back linked to continuing employment, which totaled
$894,000. The value of the Engage Restricted Shares of $825,000 and the
remaining Engage Cash Payment amount of $1,031,000 ("Prepaid Post- Combination
Compensation") will be recognized as a charge to expense in accordance with
ASC 805-10- 55-25 (See Note 6).
Purchase Price Allocation
The allocation of the purchase consideration resulted in the following amounts
being allocated to the assets acquired and liabilities assumed as of the
purchase date of November 1, 2022 based on their respective estimated fair
values summarized below:
Cash $ 179,793
Other current assets 48,571
Right of use assets 173,579
Tradename 14,000
Noncompete agreements 140,000
Customer relationship 414,461
Deferred income tax asset 325,539
Other current liabilities (228,364)
Lease liability (173,579)
Total estimated purchase price $ 894,000
The identified definite-lived intangible assets were as follows:
Weighted-average
Definite-lived intangible assets useful life (in years) Amount
Customer relationship 7 $414,461
Noncompete agreements 4 $140,000
The fair value of customer relationships was determined using the income
approach, which requires management to estimate a number of factors for each
reporting unit, including projected future operating results, anticipating
future cash flows and discount rates. The fair value of noncompete agreements
was determined using an income approach method, which requires management to
estimate a number of factors related to the expected future cash flows of
Engage and the potential impact and probability of competition, assuming such
noncompete agreements were not in place.
On November 1, 2018, PPHC-LLC advanced $833,000 to the original members of
Blue Engine Message & Media, LLC for the purchase of the ownership
interest of JDA Frontline Partners, LLC in the form of a promissory note. The
note was scheduled to mature on October 31, 2022, and required the borrowers
to make 16 quarterly installment payments of $52,063 commencing on February
15, 2019. Interest on the note was the London Interbank Offered Rate ("LIBOR")
daily floating rate plus 2.4%. The note receivable was repaid in full in April
2022. The note receivable balance as of December 31, 2021, was approximately
$260,000 with interest receivable of approximately $4,000, which are recorded
in note receivable - related party.
NOTE 3 RELATED PARTY TRANSACTIONS
As of December 31, 2021, the amounts owed to related parties include the
Holding Distribution Discount of approximately $4,463,000 and the amount owed
to PPHC-LLC members as part of the Company Conversion of approximately
$2,234,000. These amounts were paid in full during 2022. See Note 1. As of
December 31, 2022, the amounts owed to related parties totaling approximately
$1,276,000 include the amounts expected to be refunded to the owners of KP LLC
and Engage related to the working capital adjustments associated with those
acquisitions.
During December 2021, the Company entered into a term note agreement ("2021
Note") with The Alpine Group, Inc. ("Alpine Inc"). The 2021 Note provided
Alpine Inc with the ability to request a one-time borrowing of up to $750,000
from the Company at any time prior to December 31, 2022. The purpose of the
2021 Note was to provide Alpine Inc with funds to cover certain federal and
state income taxes to be owed by Alpine Inc in connection with the sale of
shares of the Company's common stock in the IPO. During April 2022, the
Company advanced $513,000 to Alpine Inc in accordance with the terms of the
2021 Note. The interest rate on the 2021 Note is equal to the Prime Rate as
published in the Wall Street Journal. The 2021 Note requires an annual payment
of accrued and unpaid interest on the last business day of December each year
and through the maturity date of January 16, 2025. The note receivable and
accrued interest balance as of December 31, 2022 was approximately $526,000,
which are recorded in note receivable - related party and prepaid expenses and
other assets.
NOTE 4: GOODWILL AND INTANGIBLE ASSETS
Goodwill
Goodwill is an indefinite lived asset with balances as follows as of December
31:
2022 2021
Goodwill $ 47,909,832 $ 44,893,532
As of December, 31, 2022 and 2021, there have been no impairments to goodwill
. During 2022, goodwill increased by approximately $3,015,000 as a result of
the acquisition of KP LLC and Engage. See Note 2.
Goodwill is allocated to each segment as follows, as of December 31:
2022 2021
Goodwill
Lobbying consulting $ 35,587,063 $ 34,286,212
Public affairs consulting 12,322,769 10,607,320
Total $ 47,909,832 $ 44,893,532
Intangible Assets
The Company's intangible assets consist of customer relationship assets
acquired through various acquisitions as well as noncompete agreements
acquired through the acquisition of KP LLC and Engage, which are definite
lived assets and are amortized over their estimated useful lives. The
estimated useful lives for the customer relationship assets range from 7 to 9
years and the estimated useful lives for the noncompete agreements range from
4 to 5 years. In addition, intangible assets consist of tradenames, which are
indefinite lived assets and evaluated for impairment on an annual basis or
more frequently as needed. The cost of the Company's tradenames, customer
relationships and noncompete agreements, and the accumulated amortization of
the Company's customer relationships and noncompete agreements is as follows
as of December 31:
2022 2021
Customer relationships $21,596,261 $15,320,800
Noncompete agreements 446,000 -
Accumulated amortization (8,385,145) (6,256,233)
Total indefinite lived assets, net 13,657,116 9,064,567
Tradenames 4,918,000 3,813,000
Total intangible assets, net $18,575,116 $12,877,567
Amortization expense for customer relationship and noncompete agreement assets
approximated $2,129,000 and $1,885,000 for 2022 and 2021, respectively.
The approximate estimated future amortization expense for the next five years
is as follows:
Amortization
2023.........................................................................................................................
$ 2,667,000
2024..................................................................................................................................
2,456,000
2025..................................................................................................................................
2,440,000
2026..................................................................................................................................
2,288,000
2027..................................................................................................................................
2,237,000
NOTE 5 LINE OF CREDIT AND NOTES PAYABLE
A) Line of credit
The Company had a $2,000,000 revolving line of credit, which was secured by
all business assets. As a sub-facility under the line, standby letters of
credit could be issued up to $750,000 to secure office leases. During 2021,
the Company repaid the outstanding balance on the line of credit and closed
the line of credit. Interest expense on the line of credit for the year ended
December 31, 2021 was approximately
$41,000.
B) Note payable - landlord
The Company executed a lease amendment on March 23, 2018, and received a loan
of approximately
$316,000 to fund certain tenant improvements. The Company shall repay the loan
in equal monthly principal and interest installments over the lease term at an
interest rate of 8%, with the final payment due on March 1, 2029.
Notwithstanding the foregoing, the Company may submit a notice to the landlord
to prepay the outstanding balance upon terms to be agreed upon by the landlord
and the Company. The balance on the loan as of December 31, 2022 and 2021, was
approximately $211,000 and $237,000, respectively. Interest expense on the
note payable - landlord for the years ended December 31, 2022 and 2021 was
approximately $17,000 and $19,000, respectively.
As of December 31, 2022, the only outstanding long-term debt is the note
payable - landlord and the future maturities of this note payable at December
31 is as follows:
2023 $ 27,074
...................................................................................................................................
2024 29,321
...................................................................................................................................
2025 31,755
...................................................................................................................................
2026 34,390
...................................................................................................................................
2027 37,245
...................................................................................................................................
Thereafter 50,854
..........................................................................................................................
Total $ 210,639
NOTE 6 STOCKHOLDERS' EQUITY AND SHARE-BASED ACCOUNTING CHARGE
As of December 31, 2022, the authorized capital of the Company consists of
1,100,000,000 shares of capital stock, $0.001 par value per share, of which
1,000,000,000 shares are designated as common stock and 100,000,000 shares are
designated as preferred stock. There are no shares of preferred stock
outstanding.
As of December 31, 2022, the number of the Company's shares of common stock
outstanding for legal purposes was greater than the number of shares of common
stock outstanding for accounting purposes. Therefore, the difference between
the legally outstanding shares of common stock on the face of the balance
sheet of 109,346,480 shares and the amount outstanding on the statement of
equity of 108,024,388 consists of shares issued with restrictions
(collectively "Restricted Shares") as follows:
Statement of Equity, as of December 31, 2022 108,024,388
Restricted Shares:
Closing Share Payment 739,589
Engage Restricted Shares 487,301
Other Restricted Shares 95,202
Total Restricted Shares 1,322,092
Legally Outstanding Shares, as of December 31, 2022 109,346,480
The weighted-average common shares outstanding, basic and diluted reported on
the consolidated statement of operations is 108,136,853, which is different
from the 108,024,388 ending shares as of December 31, 2022 due to the first
number representing an average during the year compared to the amount
outstanding at the end of the year.
Other Restricted Shares consists of shares issued in 2022 to convert a
consultant of the Company to a full-time employee. These shares were valued at
approximately $178,000 and vest equally on each of January 1, 2023, January 1,
2024 and January 1, 2025.
ASC 718-10-S99-2 Charge
As discussed in Note 1, during 2021 the Company entered into Executive
Employment Agreements with Group Executives. As a result, the addition of the
vesting provisions to previously issued shares created a share-based
accounting charge in accordance with the accounting guidance in ASC
718-10-S99-2, Compensation-Stock Compensation. As a result, the Company
recorded a share-based accounting (ASC 718-10-S99-2) charge of $33,392,300 and
$27,609,214 in 2022 and 2021, respectively.
As of December 31, 2022, the total number of Liquidated Pre-IPO Shares subject
to the claw back provisions totaled 11,328,809. As of December 31, 2022, there
were 85,320,625 Retained Pre-IPO Shares subject to vesting requirements and
17,080,032 of these shares were fully vested. These shares were issued in 2021
and the weighted-average grant date fair value of these shares was $1.82 as of
the grant date. As of December 31, 2022, the unrecognized compensation cost
from these restricted shares was approximately $120,826,000, which is expected
to be recognized over a weighted-average period of 4 years.
ASC 805-10-55-25 Charge
During 2022, the Company acquired KP LLC and Engage (see Note 2) for a
combination of cash, shares of Company Common Stock and future contingent
payments ("Acquisition Payments"). As described in Note 2, a portion of the
Acquisition Payments are subject to vesting and/or claw back provisions that
are directly linked to the continuing employment of the Owners of KP LLC or
Senior Principals of Engage, respectively ("Post-Combination Payments"). As a
result, in accordance with the guidance of ASC 805- 10-55-25, Business
Combinations, the Post-Combination Payments are not considered part of the
purchase consideration for these acquisitions and the fair value of the
Post-Combination Payments is being recognized as a charge for post-combination
compensation over the period of the applicable vesting requirement or the
period over which the claw back rights linked to employment lapse.
For the year ended December 31, 2022, the post-combination compensation charge
recorded by the Company was approximately $2,441,000. Approximately $2,257,000
of this amount is recorded as other liability at December 31, 2022.
Approximately $111,000 of the post-combination compensation charge is from the
issuance of Common Stock that vested as of December 31, 2022 and the remaining
approximately $74,000 was from the 2022 amortization of the prepaid
post-combination compensation asset. As of December 31, 2022, the unrecognized
post-combination compensation charge was approximately $10,104,000, which is
expected to be recognized over a weighted-average period of 2.5 years. The
actual amount of Post-Combination Payments is subject to significant estimates
and could change materially in the future.
NOTE 7 OMNIBUS INCENTIVE PLAN
During 2021, the Company adopted the Public Policy Holding Company, Inc. 2021
Omnibus Incentive Plan (the "Omnibus Plan"), under which Options (both
nonqualified options, and incentive stock options subject to favorable U.S.
income tax treatment), stock appreciation rights, restricted stock units,
restricted stock, unrestricted stock, cash-based awards and dividend
equivalent rights may be issued. An award may not be granted if the number of
common shares committed to be issued under that award exceeds ten percent of
the ordinary shares of the Company in issue immediately before that day, when
added to the number of common shares which have been issued, or committed to
be issued, to satisfy awards under the Omnibus Plan, or options or awards
under any other employee share plan operated by the Company, granted in the
five previous years.
As of December 31, 2021, no awards were outstanding under the Omnibus Plan. As
of December 31, 2022, the total amount of shares authorized by the Board of
Directors under the Omnibus Plan was 2,805,852. During the year ended December
31, 2022 the Company granted 2,794,859 stock options to employees. The stock
options have a contractual term of ten years and vest three years after their
issuance.
Determining the appropriate fair value model and the related assumptions
requires judgment. The fair value of each option granted is estimated using a
Black-Scholes option-pricing model on the date of grant as follows:
For the year
ended
December 31,
2022
Estimated dividend yield 6.00%
Expected stock price volatility 60.00%
Risk-free interest rate 2.7% to 4.1%
Expected life of option (in years) 6.50
Weighted-average fair value per share $0.58
The expected volatility rates are estimated based on the actual volatility of
comparable public companies over the expected term. The expected term
represents the average time that options that vest are expected to be
outstanding. Due to limited historical data, the Company calculates the
expected life based on the midpoint between the vesting date and the
contractual term, which is in accordance with the simplified method. The
risk-free rate is based on the United States Treasury yield curve during the
expected life of the option.
The following summarizes the stock option activity for the year ended December
31, 2022:
Weighted
Weighted Average
Average Contractual Aggregate
Number of Exercise Term Intrinsic
Shares Price (in years) Value
Outstanding as of December 31, 2021 - $ - - $ -
Granted* 2,794,859 2.13 - -
Exercised - - - -
Cancelled/Forfeited* (76,050) 2.13 - -
Outstanding as of December 31, 2022* 2,718,809 $ 2.13 9.4 $ -
Exercisable as of December 31, 2022 - - - -
Vested and expected to vest
as of December 31, 2022* 2,718,809 $ 2.13 9.4 $ -
*The options are exercisable in Great British Pounds ("GBP") as the Company's
shares are issued in GBP. The weighted-average exercise price has been
adjusted based on the December 31, 2022 exchange rate of GBP to U.S. Dollars
of 1 GBP equals $1.21.
The following table summarizes certain information about the stock options
outstanding and exercisable as of December 31, 2022:
Number of Options Weighted-Average Number of Options
Exercise Price Outstanding Remaining Life Exercisable
$2.10* 100,000 9.8 -
2.13* 2,568,809 9.4 -
2.15* 50,000 9.6 -
2,718,809 -
Stock option expense for the year ended December 31, 2022 was approximately
$318,000. As of December 31, 2022, there was approximately $1,254,000 of total
unrecognized compensation cost related to non-vested stock-based compensation
arrangements, which is expected to be recognized over a weighted-average
period of 2.4 years.
NOTE 8 INCOME TAXES
Prior to December 10, 2021, the net income (loss) related to the Company's
operations were reported as part of a partnership income tax return for
federal and state income tax purposes. Because the partnership entity was not
subject to income tax at the Company level, no provision for income taxes was
required for periods prior to December 10, 2021.
Due to the Company Conversion that occurred on December 10, 2021, an initial
net deferred tax liability was recorded in conjunction with the Company's
operations that would be taxable at the corporate entity level. An initial
deferred tax liability in the amount of $2,942,400 was recorded, with a
corresponding adjustment to stockholders' equity.
The Company recorded the following income tax expense (benefit) for the year
ended December 31, 2022 and for the period December 10, 2021 through December
31, 2021.
2022 2021
Current tax expense:
Federal $ 5,944,400 $ 375,100
State 2,443,100 147,400
8,387,500 522,500
Deferred tax expense (benefit):
Federal $ (475,500) $ (21,600)
State (114,400) (6,200)
(589,900) (27,800)
Total Provision for Income Taxes: $ 7,797,600 $ 494,700
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. None of the goodwill
that was reported on the Consolidated Balance Sheets as of December 31, 2021
is deductible for income tax purposes. The acquisitions of KP LLC and Engage
are taxable asset acquisitions. As such, the purchase consideration for these
acquisitions will generate tax-deductible goodwill in the combined amount of
approximately $20,760,000. A deferred tax asset has been recorded in relation
to the excess of the tax deductible goodwill as compared to the GAAP carrying
value of goodwill. Of the $20,760,000 of tax deductible goodwill,
approximately $8,300,000 is eligible to begin being amortized for tax purposes
during the 2022 tax year.
Significant components of the Company's deferred tax assets and liabilities
are as follows as of December 31:
2022 2021
Deferred income tax assets:
Other assets $ 197,600 $ 40,600
Goodwill 4,797,000 -
ASC 842 Lease liability 5,107,000 5,036,200
Total deferred income tax assets 10,101,600 5,076,800
Deferred income tax liabilities:
Property and equipment (188,200) (213,100)
Prepaid compensation (281,000) -
Intangible assets (2,924,000) (3,479,800)
Right of use asset (4,430,000) (4,298,500)
Total deferred income tax liabilities (7,823,200) (7,991,400)
Total Net Deferred Tax Asset (Liability): $ 2,278,400 $ (2,914,600)
A reconciliation for the difference between actual income tax expense
(benefit) compared to the amount computed by applying the statutory federal
income tax rate to net loss before income tax of ($7,211,111) and
($25,778,400) for the year ended December 31, 2022 and for the period between
December 10, 2021 and December 31, 2021, is as follows:
December 10, 2021 -
December 31, 2022 December 31, 2021
% of Pretax Earnings % of Pretax Earnings
Amount Amount
Federal income tax benefit at statutory rate $ (1,514,300) 21.0 $ (5,413,500) 21.0
State income taxes, net of federal income tax
benefit (452,800) 6.3 (1,552,300) 6.0
Nondeductible share-based accounting charge 9,775,100 (135.6) 7,460,500 (28.9)
Other (10,400) 0.1 - -
Total Provision for Income Taxes $ 7,797,600 108.2 $ 494,700 (1.9)
As of December 31, 2022, there are no known items that would result in a
material liability related to uncertain tax positions, as such, there are no
unrecognized tax benefits. The Company's policy is to recognize interest and
penalties related to uncertain tax positions in the provision for income
taxes. As of December 31, 2022, the Company had no accrued interest or
penalties related to uncertain tax positions. The Company's 2021 and 2022 tax
years are open under the statute of limitations for examination by the taxing
authorities.
NOTE 9 RETIREMENT PLAN
Effective January 1, 2020, the Company established the Public Policy Holding
Company, LLC 401(k) Plan ("PPHC Plan"). The PPHC Plan covers employees that
reach certain age and length of service requirements. Eligible employees can
contribute into the plans through salary deferral. The PPHC Plan does not have
any employer contribution and expenses are immaterial.
NOTE 10 CONCENTRATION OF CREDIT RISK
Geographic location
Most of the Company's assets are located in the Washington D.C. metropolitan
area. Therefore, the Company is subject to certain economic risks resulting
from the majority of its revenue being derived from one geographic location.
NOTE 11 SEGMENT REPORTING
As of December 31, 2022, the Company has two reportable segments; Lobbying
Consulting and Public Affairs Consulting. Lobbying Consulting services include
federal and state advocacy, strategic guidance, political intelligence and
issue monitoring. Public Affairs Consulting services include crisis
communications, community relations, social and digital podcasting, public
opinion research, branding and messaging, relationship marketing and
litigation support.
Corporate is primarily comprised of selling, general and administrative
expenses. These expenses include corporate office expenses and certain other
centrally managed expenses that are not fully allocated to operating
divisions, salaries, annual bonuses and other miscellaneous benefits for
corporate office employees, financial statement audits and legal, information
technology and other consulting services that are engaged and managed through
the corporate office, and rental expense for properties occupied by corporate
office employees.
The Company measures the results of its segments using, among other measures,
each segment's net revenue and operating income, which includes certain
corporate overhead allocations. The Company's chief operating decision maker
does not evaluate the total assets, liabilities or income tax expenses at the
segment level but rather evaluates these items on a consolidated basis.
Information for the Company's segments, as well as for corporate and support,
including the reconciliation to income (loss) from operations is provided in
the following tables, as of December 31:
2022 2021
Revenue
Lobbying consulting $ 78,177,680 $ 70,125,726
Public affairs consulting 30,636,811 29,210,734
Total $ 108,814,491 $ 99,336,460
2022 2021
Income (loss) from operations
Lobbying consulting $ 26,065,442 $ 4,808,030
Public affairs consulting 8,252,450 878,878
Share-based accounting (ASC 718-10-S99-2) charge (33,392,300) (27,609,214)
Post-combination compensation (ASC 805-10-55-25) charge (2,441,052) -
Corporate (5,678,778) (1,787,287)
Total loss from operations $ (7,194,238) $(23,709,593)
2022 2021
Depreciation and amortization
Lobbying consulting $ 1,834,519 $ 1,728,875
Public affairs consulting 313,340 202,432
Corporate 81,338 81,338
Total depreciation and amortization $ 2,229,197 $ 2,012,645
NOTE 12 SUBSEQUENT EVENTS
On February 28, 2023, the Company entered into a $17,000,000 credit facility
with a bank ("Credit Facility"). The Credit Facility has two components,
Facility 1 is a Senior Secured Line of Credit in the amount of $3,000,000 and
Facility 2 is a Senior Secured Term Loan in the amount of $14,000,000. The
interest rate on Facility 1 and Facility 2 is the Bloomberg Short-Term Bank
Yield Index plus 225 basis points. The Credit Facility is collateralized by
substantially all of the net assets of the Company. The Credit Facility
matures on January 31, 2026. The Company has drawn $14,000,000 from Facility 2
and utilized those funds as part of the consideration to acquire MultiState
Associates, Inc. ("MultiState").
On March 1, 2023, the Company acquired MultiState for initial consideration of
$22,000,000 ("Initial Consideration"). MultiState is a United States based
state and local government relations specialists and a provider of state-based
government relations services, state issues tracking and compliance solutions.
The MultiState Consideration consisted of $17,600,000 in cash and the issuance
of 2,740,717 new shares of the Company's common stock valued at $4,400,000. In
addition to the Initial Consideration, the owners of MultiState could receive
up to three additional payments ("Contingent Payments") based upon the
achievement of certain milestones related to profit growth targets between
2022 and 2027. These Contingent Payments would be paid fifty percent in cash
and fifty percent in shares of the Company's common stock. The maximum amount
of consideration that the Company could pay for the acquisition totals
$70,000,000.
During March 2023, the Company entered into certain lease amendments, which
among other things, added additional square footage of office space and
extended the lease terms. The amended leases were scheduled to expire during
2023. As a result of the lease amendments, the Company's estimated future
minimum lease payments disclosed in Note 1 will increase by approximately
$11,000,000 through January 2031.
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