REG - Public Policy Hldg - Unaudited Preliminary Results
13/03/2024 07:00
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RNS Number : 5943G Public Policy Holding Company, Inc. 13 March 2024
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(EU) No. 596/2014 as it forms part of UK domestic law by virtue of the
European Union (Withdrawal) Act 2018 ('MAR'). Upon the publication of this
announcement via a Regulatory Information Service ('RIS'), this inside
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Public Policy Holding Company, Inc.
("PPHC", the "Group" or the "Company")
Unaudited Preliminary results for the year ended 31 December 2023
Record financial performance and excellent strategic progress with
acquisitions deepening geographic reach and policy expertise
Public Policy Holding Company, Inc., the government relations and public
affairs group providing clients with a fully integrated and comprehensive
range of services, is pleased to announce its unaudited full year results for
the year ended 31 December 2023.
Financial Highlights
· Revenue increased 24.1% to a record $135.0m (2022: $108.8m),
growing by 2.0% organically, displaying the inherent strength of the Group
through the economic cycle
· Underlying EBITDA rose by 12.4% to $35.1m (2022: $31.2m), in
line with market expectations and achieved at a margin of 26.0%, within the
Group's target range of between 25% and 30%
· Underlying Net Income increased by 13.9%
to $26.5m (2022: $23.3m)
· Balance sheet remains strong with cash generated from operations
of $21.6m and a year-end net cash position of $3.4m, comprising $14.3m cash
offset by outstanding debt of $10.9m, reflecting very low leverage levels and
positioning the Group well to deliver further value accretive M&A
· Declaration of a final dividend of $0.097 per Common
Outstanding Share, taking the total dividend for 2023 to $0.143 per share,
representing an increase of 2% year-on-year and in line with the Group's
dividend policy
All in $m, unless otherwise noted 2023 2022 Change
Revenue 135.0 108.8 24.1%
EBITDA - Underlying 35.1 31.2 12.4%
EBITDA margin - Underlying (%) 26.0% 28.7% -2.7pts
Net Income - Underlying 26.5 23.3 13.9%
EPS - Underlying ($) (basic) 0.2354 0.2145 9.7 %
EPS - Underlying ($) (fully diluted) 0.2271 0.2113 7.5%
Dividend per Share ($) 0.1430 0.1400 2.1%
Dividend 16.4 15.5 5.7%
Cash flow from Operations 21.6 20.7 4.5%
Net Cash at year end 3.4 21.0 -83.8%
Operational Highlights
· Excellent strategic progress, sustaining and organically growing
the core offering in challenging markets while pursuing successful, value
accretive acquisitions to broaden services and geographic reach
· Ended 2023 as the #1 federal lobbying agency in the US(1), with
the Group's federal lobbying firms collectively reporting $68.3m of disclosed
revenue
· Successful acquisition of MultiState Associates, Inc.
("MultiState" or "MultiState Associates") on 1 March 2023, proving the
attractiveness of the holding company proposition to unlock growth and value
o Multistate delivered a strong full-year performance, contributing
healthily to Group revenue and EBITDA
· All business segments achieved year-on-year growth, demonstrating
the strength and breadth of the Group's services
· Improved client diversification, with the top 10 Group clients
representing 8.8% of total revenue, down from 9.6% in 2022 and reflecting
sustained progress from 2021, when the top 10 represented 13.1%
· The Group ended 2023 with c.1,200 total clients, compared c.850
in 2022. The current client roster includes 137 Fortune 500 clients and
related trade associations, while directly serving 44 Fortune 100 clients
· Number of clients spending $100k or greater per year was 468, a
year-on-year increase of 23%
o The growth of clients spending $100k or greater demonstrates the Group is
successfully cross selling its services with multiple operating companies
advising on specific policy areas and specialisms
o Launched Concordant Advisory, the Group's first organically developed
offering, in November 2023 to enhance cross-selling between operating
companies and geographies and better support clients with strategic
communications challenges, for which public policy is paramount for their
growth
· Continued focus on people, with the lowest employee attrition
rates on record, while adding key talent in specialist areas including AI,
aerospace and defence, technology and energy transformation. These sector
specialisms are central to today's broader policy agenda
· Number of employees as at 31 December 2023 totalled 333, up from
244 as at 31 December 2022
(1)Source: 2023 Lobbying Disclosure Act
Current trading and Outlook
· Current year-to-date trading is promising, and the Group
continues to grow organically, supported by new client wins across sectors,
including RTX Corporation (formerly Raytheon Technologies), Phillips 66,
Nuclear Innovation Alliance, Dynavax Technologies and Fight Colorectal
Cancer
· In the medium term the Group expects organic revenue growth, on
average, to be between 5% and 10%, supplemented by growth from M&A
· The Group continues to target an Underlying EBITDA margin of
between 25% and 30%
· Pipeline of strategic and accretive acquisition opportunities in
the US and Europe remains strong, as the Group looks to broaden its market
position in federal and state advocacy, as well as in the adjacent strategic
communications and public affairs markets
Stewart Hall, CEO, commented:
"PPHC has performed extremely well in what have undoubtedly been some of the
toughest macro conditions we have seen since our inception ten years ago. In
2023, the unpredictability of politics - not just in the US but globally - was
mixed with increased interest rates and broader macro-uncertainty. It is
therefore testament to our broad offering and operating companies that our
clients are ever-increasingly relying on our support in navigating these
difficult times.
"The increasing demand for our services has enabled us to generate solid
levels of organic growth and healthy expansion in total client numbers.
Strategically, we are progressing well with a healthy pipeline of value
accretive acquisition opportunities and the strength of our holding company
model being validated by the outperformance of our two most recent
acquisitions.
"While global uncertainty persists in 2024, we are extremely well positioned
to capitalise on what continues to be a positive trajectory for our wider
markets. We therefore look forward with a high degree of confidence in our
people, operations, expertise and ability to continue to deliver profitable
growth in the years ahead."
Enquiries
Public Policy Holding Company Inc. +1 (202) 688 0020
Stewart Hall, CEO
Roel Smits, 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
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 1200 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 eight operating
entities comprising Crossroads Strategies, Forbes Tate Partners, Seven Letter,
O'Neill & Associates, Alpine Group Partners, KP Public Affairs, MultiState
Associates and Concordant Advisory. 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 Statement
On behalf of the Board of Directors, I am pleased to report a strong
performance in 2023, in which the Group was successful in displaying its
ability to generate robust organic growth in challenging macro-economic
circumstances. This is testament to the broad strength and diversity of the
Group's operations and reflective of the quality of service PPHC provides in
federal and state advocacy, public affairs and strategic communications. In
addition, it demonstrates the Group is more than capable of delivering
excellent growth and good profitability and margin levels through the economic
cycle, on what remain excellent market fundamentals.
Despite considerable macro-economic challenges and an unpredictable political
climate, the Group has achieved continued financial success and operational
progress towards its stated strategy of creating and becoming the world's
premier provider of government relations and related services to corporates on
a global basis. This has included the earnings accretive acquisition of a
market-leading firm, MultiState Associates, the strong integration, and
impressive growth of KP Public Affairs, a 2022 acquisition, and the timely
development of new and deepened enhanced offerings and expertise in areas such
as artificial intelligence, renewable/transitional energy, and
defense/aerospace.
The 2023 performance also demonstrates the professionalism of the Group's
management and their prudent approach to cost control, which is greatly to
their credit. Their ability, resilience and discipline demonstrate the quality
of service our clients receive and the stability of the Group's eight
operating companies.
The quality and deep experience of our broader teams have proved more vital
than ever in helping clients navigate risks and seize on opportunities amidst
significant partisanship and unpredictability in the US and around the world.
This quality sets us apart and positions us to deliver for clients in 2024 and
beyond.
Board appointments
I was extremely pleased to welcome Keenan Austin Reed onto the Board as an
Executive Director in December 2023. Keenan is one of the top lobbyists in
Washington and has made a highly positive impact at Alpine Group and PPHC
since she joined in 2021. Her advisory expertise and wider interests, along
with strong relationships among clients and political stakeholders, further
strengthen the Board as we continue to expand our offering and broaden our
geographical footprint.
I was also pleased to welcome Roel Smits to the Board as Chief Financial
Officer, succeeding Bill Chess who remains on the Board as an Executive
Director and assumed the new position of Chief Administrative Officer. Roel
joined PPHC in May 2022 as Deputy CFO having previously acted as CFO at
Kantar, the data analytics and brand consulting company owned by WPP and Bain
Capital. Roel's appointment has added strength to the executive team and he
has already made a significant contribution to the Group.
Dividend
On 12 March 2024, the Board declared a final dividend of $0.097 per share for
2023, taking the total dividend for the year to $0.143 per share, up 2% from
prior year. This will represent a total aggregate dividend for the year of
approximately $16.4 million, equivalent to approximately 62% of the Group's
Underlying Net Profit (based on the current number of common outstanding
shares). The final dividend of $0.097 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, 26 April 2024. The
ex-dividend date is 25 April 2024.
Simon Lee
Chair of the Board
March 2024
Chief Executive Officer's report
To our valued investors, clients, employees and partners: thank you.
As we reflect on the past year, which was, undoubtedly, one of the most
challenging business environments we've seen in our operating history, we
demonstrated the high value of our services to clients and the benefits of our
scale. Despite the many headwinds, including high interest rates, a drive for
corporate efficiencies, war on two continents and political unrest around the
world, we have remained laser-focused on delivering results for our clients.
Specifically, in our Government Relations/Lobbying segment - which represents
71% of Group revenue and remains our core differentiator - the year behind us
was full of unpredictability with control of the US House and Senate narrowly
split and the 2024 Presidential campaign already at full pace. We faced, and
continue to face, multiple government shutdown threats, an ousted House
speakership, and what has been called the "most unproductive Congress in
modern history" by Axios.
Politics aside, if possible, it is in this very environment where our
extensive congressional relationships and bipartisan approach have proven to
be most instrumental. Our policy and political expertise have enabled our
clients to cut through the noise, make strategic calculations, and ultimately
to achieve their goals, despite the historic volatility.
All three of our federal-focused lobbying firms (Alpine Group Partners,
Crossroads Strategies, and Forbes Tate Partners) experienced growth in each
quarter of the year, as ranked by the public disclosures that are required for
our industry, and we ended the year as the top federal lobbying agency in the
US. Additionally, both of our recent strategic acquisitions (KP Public Affairs
in 2022 and MultiState Associates in 2023) have performed ahead of internal
forecasts. This demonstrates the critical importance of state and local
government relations being more and more integrated into comprehensive policy
communications and proving the value of our holding company model that rewards
referrals and cross-sales to drive accelerated growth.
In our Public Affairs and research segment - which represents 24% of Group
revenue - we experienced a higher degree of client caution, project delays,
and outright budget pull-back as has been seen across the sector by firms of
all sizes. However, it is a testament to our policy-focused portfolio that our
client retention measures remained industry leading. Senior clients continue
to rely heavily on our expertise to navigate the tumultuous political
environment even though, in some cases, they held back on their communications
campaigns and project-oriented services.
Now a decade ago, we started PPHC with a vision to provide effective
government relations and advocacy services at a new level of scale and
sophistication, with unmatched professionalism and seamless geographical
reach. We pledged to offer our clients a new approach to navigating complex
policy issues and regulatory systems and to drive positive change like no one
else in the industry. And, so, as we kick off our 10(th) year since the
founding of this endeavour, I'm proud to report that we've not only achieved
tremendous progress towards this ambitious goal, but we've also attracted,
developed and retained some of the most trusted strategic advisors and policy
experts in the world.
I am proud to share that we have initiated a process to better understand our
Group-wide ESG risks and opportunities and to establish a responsible approach
to the development of our ESG strategy. Conducting a materiality assessment
reinforced our understanding and will inform the foundations of our
strategy. A more detailed discussion of this process and the next phase of
our process will be included in the 2023 Annual Report.
To our outstanding team of managers, client counsellors and policy experts, I
thank you for your continued excellence, commitment to our cause, and care on
behalf of our clients.
And, finally, to our clients, now over 1,200, we look forward to furthering
your goals and making a difference in the decade ahead.
Sincerely,
G. Stewart Hall
Chief Executive Officer
Financial Review
Demonstrating the stability of our core business operations in the midst of
significant economic and political headwinds, in addition to the dedication of
our management teams, PPHC achieved overall revenue growth of 24.1% to $135
million.
All in $m, unless otherwise noted 2023 2022 Change
Revenue 135.0 108.8 24.1%
EBITDA - Underlying 35.1 31.2 12.4%
EBITDA margin - Underlying (%) 26.0% 28.7% -2.7pts
Net Income - Underlying 26.5 23.3 13.9%
EPS - Underlying ($) (basic) 0.2354 0.2145 9.7 %
EPS - Underlying ($) (fully diluted) 0.2271 0.2113 7.5%
Dividend per Share ($) 0.1430 0.1400 2.1%
Dividend 16.4 15.5 5.7%
Cash flow from Operations 21.6 20.7 4.5%
Net Cash at year end 3.4 21.0 -83.8%
PPHC's results for the year ended 31 December 2023 represent its second full
reporting year post-IPO in December 2021. Strong levels of client engagement
and activity have driven the Group's revenue up 24.1%
to $135.0m (2022: $108.8m). All areas of the Group's business, i.e.
government relations, public affairs advisory, and diversified services,
achieved growth when compared to 2022.
Equally important, underlying profit remained strong despite the absorption of
higher costs related to being a public company, the related increased
investment in new hires, and various M&A related charges, with an
underlying EBITDA for the year of $35.1m (2022: $31.2m) at a margin of
26.0% (2022: 28.7%), within our guided range of between 25% and 30%.
The Group's cash position at the end of the year remained strong
at $14.3m (2022: $21.2m), following the generation of $21.6m operational
cash flow, the acquisition activity in 2023 funded through the attraction of a
bank financing package, and the payment of dividends. After offsetting against
the outstanding bank debt of $10.9m, the Group's net cash position was $3.4m
Underlying Profit & Loss Statement
All in $m, unless otherwise noted 2023FY 2022FY change
Revenue 135.0 108.8 24.1%
Operational expenses (99.9) (77.6) 28.7%
EBITDA (Underlying) 35.1 31.2 12.4%
EBITDA margin (Underlying) 26.0% 28.7% -2.7pts
Depreciation (0.1) (0.1) 19.3%
EBIT (Underlying) 34.9 31.1 12.4%
Interest (0.9) (0.0) N/M
EBT (Underlying) 34.0 31.1 9.5%
Taxes (7.5) (7.8) -3.8%
Effective tax rate -22.1% -25.1% -3.0pts
Net Income (Underlying) 26.5 23.3 13.9%
Net income margin (Underlying) 19.6% 21.4% -1.8pts
Bridge from Underlying to Reported results
All in $m, unless otherwise noted 2023FY 2022FY
Net Income (Underlying) 26.5 23.3
Share-based accounting charge (30.9) (33.4)
Post-combination compensation charge (6.3) (2.4)
Change in fair value of contingent consideration (1.7) -
Gain on bargain purchase, net of deferred taxes 4.8 -
Long Term Incentive Program charges (2.8) (0.3)
Amortization intangibles (3.9) (2.1)
Net Income (Reported) (14.2) (15.0)
Revenue
The Group's total revenue for 2023 increased by 24.1% to $135.0
million (2022: $108.8 million). The organic growth rate was 2% while the
Company benefitted greatly from the acquisitions of KP Public Affairs on 1
October 2022 and MultiState Associates on 1 March 2023.
Organic growth of 2% is a pleasing result, and compares favourably to the
muted growth published by other peers in the public affairs sector. This
supports the Group's ability to deliver 5% to 10% organic growth per annum on
average through the cycle.
In 2023, our government relations business increased by 22% (4% organically)
and remained robust as we supported clients in managing their risks and
opportunities. Our public affairs business increased by 5% (-4% organically),
with growth dampened by a reduction in project work.
With the acquisition of MultiState in March 2023, the Group incorporated new
service lines, such as legislative tracking and lobbying compliance, into the
portfolio. Going forward, these will be reported under a new business line
called Diversified Services.
The Group ended 2023 with approximately 1,200 clients, of which 468 accounted
for a net revenue of equal or greater than $100k per annum (up from 382 in
2022). The degree of client concentration is very low: our largest client
represented 1.6% of total revenue, similar to 2022. Our top 10 clients
represented 8.8% of total revenues, down from 10% last year.
Profit
Underlying EBITDA of $35.1 million was achieved at a margin of 26.0%, in
line with our guidance that margins will typically move within the range of
25% to 30%.
Long term Underlying EBITDA 2018 2019 2020 2021 2022 2023
Underlying EBITDA ($m) 9.3 13.5 21.5 32.0 31.2 35.1
Underlying EBITDA as % of Revenue 27.4% 24.4% 27.8% 32.2% 28.7% 26.0%
We are very pleased that the Group recorded an Underlying EBITDA at record
levels, and that the margin has been maintained within our indicated range;
especially in the light of the facts that since 2022, our profit has been
impacted by previously communicated additional expenses relating to the
Group's first years as a public company. Those incremental costs, included
within the calculation of Underlying EBITDA, 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 2024 to build out our platform.
At an after-tax level, 2023 Underlying Net Income - which constitutes the
basis of our dividend calculation - amounted to $26.5 million, 14% higher
than the $23.3 million for 2022.
Employees
The Group started 2023 with 244 employees operating out across six member
companies. By end of year, this number had increased to 333 people, which
includes 76 from the MultiState acquisition. On average, during 2023 we had
308 employees.
Other
The Group's net finance costs for the year were $959k (2022: $17k),
illustrating the acquisition of $14 million bank debt at the time of the
MultiState acquisition. By 31 December 2023, this facility had been paid down
to a level of $10.9 million.
The tax accrual for 2023 amounted to $7.5 million (2022: $7.8 million), which
represents an effective rate of 22.1% to our Underlying Profit. This was lower
than the 25.1% we reported in 2022, driven by permanent and temporary
differences between GAAP results and taxable results.
Balance sheet and cash flow
The Group's net cash position as of 31 December 2022 was $3.4
million (2022: $21.0 million), taking into account the $10.9
million borrowings at that time. Our strong financial position enabled us to
make the interim dividend payments and allowed us to progress acquisitions.
Cash Flow
All in $m, unless otherwise noted 2023FY 2022FY
EBITDA (Underlying) 35.1 31.2
Interest (0.9) (0.0)
Taxes (7.5) (7.8)
Changes in Working Capital (5.0) (2.7)
Operational Cash flow 21.6 20.7
Capex (0.2) -
Acquisitions - Earnout Payments (cash) (3.6) -
Acquisitions - Completion Payments (cash) (17.6) (11.9)
Note receivable to related parties (1.8) -
Investment Cash flow (23.2) (11.9)
Change in Debt balance 11.1 (0.0)
Debt issuance costs (0.5) -
Dividend payment (15.8) (5.6)
Financing Cash Flow (5.2) (5.6)
Cash generated (6.9) 3.2
Balances end of period
Cash balance 14.3 21.2
Debt balance (10.9) (0.2)
Net cash balance 3.4 21.0
Dividend
The Board of Directors of the Company have declared a final dividend for 2023
of $0.097 per Common Share, which equates to an aggregate amount, based on
the current number of outstanding Common Shares, of approximately $11.2
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, 26 April 2024. The ex-dividend date is 25 April, 2024. The dividend will
be paid no later than 24 May, 2024
An interim payment of $5.2 million was already made in October 2023
($0.046 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's total dividends for the financial year will
be $0.143 per share. This represents, based on the current number of
outstanding Common Shares, a total aggregate dividend for the year of
approximately $16.4 million, equivalent to approximately 62% of the Group's
Underlying Net Profit.
Dividend
All in $m, unless otherwise noted 2023FY 2022FY change
Net Income (Underlying) 26.5 23.3 13.9%
Cash flow from Operations 21.6 20.7 4.5%
Dividend 16.4 15.5 5.7%
Pay out ratio 61.8% 66.7% -4.8pts
Payable in calendar year (interim dividend) 5.2 4.9 6.8%
Payable next calendar year (final dividend) 11.2 10.6 5.1%
Per share 2023FY 2022FY change
# wghtd avg shrs - GAAP - basic and diluted '000 108,606 108,137 0.4%
# wghtd avg shrs - Legally outstndng - basic '000 112,597 108,476 3.8%
# wghtd avg shrs - Legally outstndng - diluted '000 116,693 110,147 5.9%
EPS - GAAP reported (basic and fully diluted) $ (0.1312) (0.1388) -5.5%
EPS - Underlying (basic) $ 0.2354 0.2145 9.7%
EPS - Underlying (fully diluted) $ 0.2271 0.2113 7.5%
DPS - based on # shares at time of payment $ 0.1430 0.1400 2.1%
Operational CF per share - Underlying (basic) 0.1919 0.1906 0.7%
Note to Investors:
In accordance with a letter provided to shareholders by Link, certain IRS
forms are required to be completed.
More details and links to these forms can be found at
https://pphcompany.com/notice-to-investors/
(https://nam11.safelinks.protection.outlook.com/?url=https%3A%2F%2Fpphcompany.com%2Fnotice-to-investors%2F&data=05%7C01%7Callison.sedberry%40pphcompany.com%7C314e9afc3cc540f4b81908dbb3af5182%7Cd89047a20db846939b061697f2e8c9b8%7C0%7C0%7C638301337797949402%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&sdata=1BvwReP1aIIPuFdnrNNtZl%2FBiQ9K1hwhvJrSUbQys6I%3D&reserved=0)
Medium Term Financial Guidance
· Management continues to expect revenue to grow by 5 to 10%
organically per annum, on average, supplemented by growth from 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 2024 to continue to
build out our platform to support further growth into the medium term.
Basis of preparation
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. Six elements
distinguish our Underlying Net Income from our Reported Net Income:
(1) Share-based accounting charge: As already mentioned in the previous
reports, 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 2023
non-cash charge is $30.9 million (2022: $33.4 million). This share-based
accounting non-cash charge has no impact on either tax or Company operations.
(2) Post-combination compensation charge: In 2023, The Group completed the
acquisition of MultiState Associates on 1 March, 2023. 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 three 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 2023
charge is $6.3 million (2022: $2.4 million). Again, this is a 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 2023 PPHC issued 0.7 million (2022: 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. Also, the
Group issued 2.3 million restricted stock units, 3.0 million restricted stock
awards, and 1.9 million stock appreciation awards. The charges relating to
these issuances, $2.8 million in 2023 (2022: $0.3 million), as reflected in
our P&L were computed using the Black Scholes method.
(4) Amortization of intangibles: The non-cash amortization charge of $3.9
million (2022: $2.2 million) relates to the amortization of customer
relationships, developed technology, and noncompete agreements per ASC 805.
(5) Bargain purchase: As laid out in point 2, because a significant part of
the purchase price of the acquisition of MultiState Associates is tied to
continued employment, this part has been accounted for as post-combination
compensation. As a consequence, the book purchase price is lower than the tax
purchase price. The reason for the bargain purchase gain is tied directly to
the tax purchase price significantly exceeding the book purchase price and is
not a reflection of a true bargain purchase of the actual intangible and
tangible assets of MultiState Associates.
(6) Change in Contingent Consideration: The contingent consideration liability
recorded as part of the acquisitions of KP Public Affairs and MultiState
Associates is adjusted at each reporting period for the change in the
estimated fair value of that liability. The fair value changes over time
based on management assumptions, the passage of time, and other external
inputs, such as discount rates and volatility. The change in the estimated
fair value of the contingent consideration is recorded as a non-operating
expense of $1.7 million in 2023. There was no change in the fair value of
the contingent consideration in 2022.
For the calculation of Earnings per Share (EPS) based on GAAP Profit, as a
denominator, the Group uses the weighted average number of Common Outstanding
shares during the period. For the calculation of Earnings per Share (EPS)
based on Underlying Profit, as a denominator, the Group uses the weighted
average number of Legally Issued shares during the period. This comprehends
all the Common Outstanding shares, as well as those shares that were yet
unvested but entitled the owner to dividends and voting rights (e.g. shares
issued in relation to one of our post-IPO acquisitions). Consequently, the
weighted average number of legally issued shares in 2023 was 112,596,711
(2022: 108,476,437) and on a fully diluted basis (taking into account any
issued stock instrument, regardless of exercise price), this number was
116,692,759 (2022: 110,146,640).
PUBLIC POLICY HOLDING COMPANY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2023 and 2022
2023 2022
Assets
Current assets:
Cash $ 14,341,376 $ 21,202,456
Contract receivables, net 14,063,469 11,585,267
Amounts due from related parties 1,054,231 -
Notes receivable - related parties, current portion 350,000 -
Income taxes receivable 975,050 -
Prepaid post-combination compensation, current portion 3,426,318 441,852
Prepaid expenses and other current assets 2,694,149 1,975,957
Total current assets 36,904,593 35,205,532
Property and equipment, net 801,355 688,313
Notes receivable - related parties, long term 1,913,000 513,000
Operating lease right of use asset 21,434,360 16,239,667
Goodwill 47,909,832 47,909,832
Other intangible assets, net 26,869,331 18,575,116
Deferred income tax asset 7,737,200 2,278,400
Prepaid post-combination compensation, long term 3,954,034 515,500
Other long-term assets 162,473 118,887
Total assets $ 147,686,178 $ 122,044,247
Liabilities
Current liabilities:
Accounts payable and accrued expenses $ 18,593,014 $ 12,336,324
Income taxes payable - 4,150,389
Amounts owed to related parties - 1,276,479
Deferred revenue 2,197,220 2,860,889
Operating lease liability due within one year 4,181,155 3,907,543
Contingent consideration, current portion 1,444,110 1,779,000
Other liability, current portion 534,540 1,821,600
Notes payable, current portion, net 3,370,421 20,664
Total current liabilities 30,320,460 28,152,888
Notes payable, long term, net 7,570,951 189,975
Contingent consideration, long term 5,475,515 2,466,000
Other liability, long term 1,585,294 435,060
Operating lease liability, long term 20,665,349 14,815,236
Total liabilities 65,617,569 46,059,159
Common stock, $0.001 par value, 1,000,000,000
shares authorized, 115,271,961 and 109,346,480 shares
issued and outstanding, respectively 109,542 108,024
Additional paid-in capital 156,884,144 120,713,626
Accumulated deficit (74,925,077) (44,836,562)
Total stockholders' equity 82,068,609 75,985,088
Total liabilities and stockholders' equity $ 147,686,178 $ 122,044,247
PUBLIC POLICY HOLDING COMPANY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended December 31, 2023 and 2022
2023 2022
Revenue $ 134,985,822 $ 108,814,491
Expenses:
Personnel cost 70,782,459 53,089,741
Employee bonuses 13,178,302 11,010,439
General and administrative expenses 10,929,617 9,608,195
Occupancy expense 5,027,501 3,933,014
Depreciation and amortization expense 3,998,073 2,229,197
Long term incentive program charges 2,796,000 317,679
Total expenses before share-based
accounting (ASC 718-10-S99-2) charge
and post-combination compensation (ASC 805-10-55-25) charge 106,711,952 80,188,265
Income from operations before share-based
accounting (ASC 718-10-S99-2) charge
and post-combination compensation (ASC 805-10-55-25) charge 28,273,870 28,626,226
Share-based accounting (ASC 718-10-S99-2) charge 30,904,000 33,392,300
Post-combination compensation (ASC 805-10-55-25) charge 6,295,060 2,441,052
Loss from operations (8,925,190) (7,207,126)
Gain on bargain purchase, net of deferred taxes 4,835,777 -
Change in fair value of contingent consideration (1,711,235) -
Interest income 17,955 12,888
Interest expense (958,779) (16,873)
Net loss before income taxes (6,741,472) (7,211,111)
Income tax expense 7,502,800 7,797,600
Net loss $ (14,244,272) $ (15,008,711)
Net loss per share attributable to common
stockholders, basic and diluted $ (0.13) $ (0.14)
Weighted average common shares outstanding,
basic and diluted 108,606,133 108,136,853
PUBLIC POLICY HOLDING COMPANY, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 2023 and 2022
Additional Total
Common Stock Paid-In Accumulated Stockholders'
Shares Amount Capital Deficit Equity
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 805-10-55-25) 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
Issuance of common stock for acquisition 767,401 768 1,231,232 - 1,232,000
Forfeiture of unvested restricted stock (69,576) (70) - 70 -
Vesting of restricted stock awards 820,007 820 - (820) -
Dividends - - - (15,843,493) (15,843,493)
Long term incentive program charges - - 2,506,000 - 2,506,000
Post-combination compensation (ASC 805-10-55-25) charge-shares - - 1,529,286 - 1,529,286
Share-based accounting (ASC 718-10-S99-2) charge - - 30,904,000 - 30,904,000
Net loss - - - (14,244,272) (14,244,272)
Balance as of December 31, 2023 109,542,220 $ 109,542 $156,884,144 $ (74,925,077) $ 82,068,609
PUBLIC POLICY HOLDING COMPANY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2023 and 2022
2023 2022
Cash flows from operating activities
Net loss $ (14,244,272) $ (15,008,711)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 119,688 100,285
Amortization expense - intangibles 3,878,386 2,128,912
Amortization of right of use assets 3,725,388 3,115,249
Amortization of prepaid post-combination compensation (ASC 805-10-55-25) 3,081,000 73,648
Amortization of debt discount 125,203 -
Provision for deferred income taxes (367,400) (589,961)
Share-based accounting (ASC 718-10-S99-2) charge 30,904,000 33,392,300
Stock-based compensation 2,648,000 317,679
Post-combination compensation (ASC 805-10-55-25) charge-shares 1,529,286 110,744
Change in fair value of contingent consideration 1,711,235 -
Gain on bargain purchase (4,835,777) -
(Increase) decrease in
Accounts receivable, net (2,478,202) (3,935,801)
Other assets (570,601) (368,068)
Increase (decrease) in
Accounts payable and accrued expenses 6,114,690 3,805,605
Income taxes payable (5,192,760) 3,627,889
Deferred revenue (5,345,073) 682,806
Operating lease liability (3,044,269) (3,362,168)
Other liability 1,684,774 2,256,660
Transactions with members/related parties 2,159,517 (5,669,466)
Net cash provided by operating activities 21,602,813 20,677,602
Cash flows from investing activities
Purchases of property and equipment (232,730) -
Payment of contingent consideration and other liability (3,643,200) -
Proceeds issued for notes receivable - related parties (1,750,000) -
Cash paid for acquisitions (17,600,000) (11,912,460)
Net cash used in investing activities (23,225,930) (11,912,460)
Cash flows from financing activities
Proceeds from notes payable 14,000,000 -
Payment of debt issuance costs (450,729) -
Proceeds from line of credit 1,000,000 -
Payment of line of credit (1,000,000) -
Principal payment of notes payable (2,943,741) (26,073)
Distributions (15,843,493) (5,572,254)
Net cash used in financing activities (5,237,963) (5,598,327)
Net decrease in cash and cash equivalents (6,861,080) 3,166,815
Cash and cash equivalents as of beginning of year 21,202,456 18,035,641
Cash and cash equivalents as of end of year $ 14,341,376 $ 21,202,456
Supplemental disclosure of cash flow information
Cash paid for interest $ 833,576 $ 16,873
Cash paid for income taxes $ 12,427,539 $ 4,770,409
Right of use assets obtained with lease liabilities $ 8,858,106 $ 3,447,345
Contingent consideration issued for acquisitions $ 2,784,990 $ 4,245,000
Common stock issued for acquisition $ 1,232,000 $ -
Increase in deferred revenue from acquisitions $ 4,681,404 $ 436,911
Increase in other assets and due from related party from acquisition $ 4,681,404 $ 117,571
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 consulting services in the areas of Governmental
Relations, Public Affairs and other ancillary areas, 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
MultiState Associates, Inc.
Concordant 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. During January 2024,
the activities of Seven Letter ONA were transferred to Seven Letter and Seven
Letter ONA ceased to exist.
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. The Holdings
Distribution Discount of approximately $4,463,000 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 Government Relations, Public Affairs and Diversified
Services. 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 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:
2023 2022
Lobbying revenue $ 95,476,619 $ 78,177,680
Public affairs revenue 32,256,518 30,636,811
Diversified Services 7,252,685 -
Total revenue $ 134,985,822 $ 108,814,491
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, 2023 and 2022, the accounts receivable, net and deferred
revenue was approximately $11,585,000 and $2,861,000 and $8,214,000 and
$1,943,000, respectively. The following table provides information about
receivables, contract assets and contract liabilities from contracts with
customers as of December 31:
2023 2022
Accounts receivable $ 14,248,444 $ 12,142,367
Unbilled receivables 609,163 37,803
Allowance for doubtful accounts (794,138) (594,900)
Contract liabilities (deferred revenue) 2,197,220 2,860,889
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. Deferred revenue of approximately
$2,197,000 and $2,861,000 from December 31, 2023 and 2022 is expected to be
recognized as revenue in 2024 and 2023, 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, 2023 and 2022, the balance of allowance for
doubtful accounts approximated $794,000 and $595,000.
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, 2023 and 2022, the Company had approximately $21,434,000
and $16,240,000, respectively, of operating lease ROU assets and $24,847,000
and $18,723,000, 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, 2023, 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:
2024........................................................................................................................ $ 5,278,220
2025........................................................................................................................ 5,518,176
2026........................................................................................................................ 5,554,996
2027........................................................................................................................ 4,640,618
2028........................................................................................................................ 4,060,012
Thereafter............................................................................................................... 3,596,703
Total future minimum lease payments 28,648,725
Amount representing interest (3,802,221)
Present value of net future minimum lease payments $ 24,846,504
During 2023, the Company entered into a lease amendment to lease additional
space for one of its current offices. The lease for the additional space had
not commenced as of December 31, 2023 and a corresponding right-of-use asset
and lease liability has not been recorded. The Company commenced the use of
this lease January 2024. The estimated future payments for this lease
amendment total approximately $915,000.
Lease Cost
Year ended December 31:
2023 2022
Operating lease cost (cost resulting from lease payments) $ 4,898,528 $ 4,011,764
Variable lease cost (cost excluded from lease payments) 428,064 264,179
Sublease income (410,879) (396,000)
Net lease cost $ 4,915,713 $ 3,879,943
Operating lease - operating cash flows (fixed payments) $ 3,968,498 $ 4,264,516
Weighted average lease term - operating leases 5.4 years 5.2 years
Weighted average discount rate - operating leases 5.30% 4.80%
The Company subleases office space to third parties under separate sublease
agreements, which are generally month-to-month leases.
Property and equipment:
Property and equipment consist 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, 2023, the Company's
reporting units consisted of Government Relations Consulting, Public Affairs
Consulting and Diversified Services. 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, 2023 and 2022.
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, 2023 and 2022.
Other intangible assets:
The Company's definite-lived intangible assets consists of customer
relationships, developed technology and noncompete agreements that have been
acquired through various acquisitions. The Company amortizes 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, 2023 and 2022.
Deferred revenue:
Deferred revenue represents prepayment by the customers for services that have
yet to be performed. As of December 31, 2023 and 2022, deferred revenue was
approximately $2,197,000 and $2,861,000, 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:
2023 2022
Accounts payable $ 4,348,493 $ 1,199,130
Bonus payable 12,389,037 9,425,261
Other accrued expenses 1,855,484 1,711,933
Total $ 18,593,014 $ 12,336,324
Marketing and advertising costs:
The Company expenses marketing and advertising costs as incurred. Marketing
and advertising expense for the years ended December 31, 2023 and 2022 was
approximately $216,000 and $182,000, respectively.
Income taxes:
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.
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. For stock appreciation rights ("SARs") recorded as a liability,
the Company adjusts the value of the SARs based on the fair value at each
reporting date, which is calculated 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 three reportable
segments. These segments consist of Government Relations Consulting, Public
Affairs Consulting and Diversified Services.
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, 2023 and 2022 does not include the common stock
equivalent shares below:
December 31, 2023 December 31, 2022
Common shares outstanding 109,542,220 108,024,388
Nonvested shares outstanding 5,729,741 1,322,092
Legally outstanding shares 115,271,961 109,346,480
Stock options and RSUs outstanding 5,314,056 2,718,809
Total fully diluted shares 120,586,017 112,065,289
The following table includes the weighted average shares outstanding for each
respective period:
December 31, 2023 December 31, 2022
Common shares, weighted average 108,606,133 108,136,853
Nonvested shares, weighted average 3,990,578 339,584
Legally outstanding shares, weighted average 112,596,711 108,476,437
Stock options and RSUs, weighted average 4,096,048 1,670,203
Total fully diluted, weighted average 116,692,759 110,146,640
Fair value of financial instruments:
As a basis for determining the fair value of certain of the Company's
financial instruments, the Company utilizes a three-tier fair value hierarchy,
which prioritizes the inputs used in measuring fair value as follows:
Level 1 - Observable inputs such as quoted prices in active
markets for identical assets or liabilities;
Level 2 - Observable inputs, other than Level 1 prices, such as quoted prices
for similar assets or liabilities, quoted prices in markets that are not
active, or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the assets or
liabilities; and
Level 3 - Unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the assets or
liabilities.
This hierarchy requires the Company to use observable market data, when
available, and to minimize the use of unobservable inputs when determining
fair value. Assets and liabilities measured at fair value are classified in
their entirety based on the level of input that is significant to the fair
value measurement. The Company's assessment of the significant of a
particular input to the entire fair value measurement requires management to
make judgments and consider the factors specific to the asset or liability.
The carrying values of cash, accounts receivable, and accounts payable and
accrued expenses at December 31, 2023 and 2022 approximated their fair value
due to the short maturity of these instruments.
The Company's financial instruments that are measured on a recurring basis
consist of contingent consideration from the acquisition of KP LLC and
Multistate Associates, Inc. The fair value of the contingent consideration
was measured using Level 3 inputs.
The following table summarized the change in fair value, as determined by
Level 3 inputs, for the contingent consideration using the unobservable Level
3 inputs:
Balance at December 31, 2021 $ -
Fair value at issuance 4,245,000
Change in fair value -
Balance at December 31, 2022 4,245,000
Fair value at issuance 2,784,990
Payout of contingent consideration (1,821,600)
Change in fair value 1,711,235
Balance at December 31, 2023 $ 6,919,625
The change in fair value of the contingent consideration of approximately
$1,711,000 for the year ended December 31, 2023, consisted of changes in the
fair value of the contingent consideration for MultiState Associates, Inc and
KP LLC. The change in fair value was primarily due to the effect of the
change in the forecasted growth rate of each entity.
The Company performed Monte Carlo simulations to estimate the achievement and
amount of certain future operating results. The Monte Carlo simulations
utilize estimates including; expected volatility of future operating results,
discount rates applicable to future results, and expected growth rates. The
table below documents the Monte Carlo assumptions and inputs (which are Level
3 inputs) each balance sheet date:
As of December 31, 2023
Valuation Methodology Significant Unobservable Input Range
Contingent Consideration Monte Carlo Simulation Method Discount rate for credit risk and time value 4.8% to 6.5%
Discount rate for future profit after tax 14.6% to 21.0%
Expected volatility of future annual profit after tax 33.0% to 37.0%
Forecasted growth rate 4.9% to 30.3%
As of December 31, 2022
Valuation Methodology Significant Unobservable Input Range
Contingent Consideration Monte Carlo Simulation Method Discount rate for credit risk and time value 5.9% to 6.2%
Discount rate for future profit after tax 20.0% to 22.2%
Expected volatility of future annual profit after tax 30.0% to 35.0%
Forecasted growth rate 3.0% to 17.8%
Assumptions related to future operating performance are based on management's
annual and ongoing budgeting, forecasting and planning processes and represent
management's best estimate of the future results of the Company's operations
at a point in time. These estimates are subject to many assumptions, such as
the economic environments in which the Company operates, demand for services
and competitor actions. Estimated calculations of the future annual profit
after tax amounts are discounted to present value using a market participant,
weighted average cost of capital, which considers the risk inherent in the
probability adjusted future annual profit after tax amounts from services
provided. The financial and credit market volatility directly impacts
certain inputs and assumptions used to develop the weighted average cost of
capital such as the risk-free interest rate, industry beta, debt interest
rate, and our market capital structure. These assumptions are based on
significant inputs not observable in the market and thus represent Level 3
measurements within the fair value hierarchy. The use of different inputs
and assumptions could increase or decrease our estimated fair value
calculations of the contingent consideration.
Contingent Consideration:
The Company estimates and records the acquisition date fair value of
contingent consideration as part of purchase price consideration for
acquisitions. Additionally, each reporting period, the Company estimates
changes in the fair value of contingent consideration and recognizes any
change in fair value in the consolidated statements of operations. The
estimate of the fair value of contingent consideration requires very
subjective assumptions to be made of future operating results, discount rates
and probabilities assigned to various potential operating result scenarios.
Future revisions to these assumptions could materially change the estimate of
the fair value of contingent consideration and, therefore, materially affect
the Company's future financial results. The contingent consideration
liability is to be settled through a combination of cash and shares of common
stock based and the amount is dependent on the achievement of certain future
operating results.
Reclassification:
Certain categorizations of the December 31, 2022 segment disclosures have been
reclassified to conform to the December 31, 2023 presentation. In addition,
the classification of the December 31, 2022 personnel cost, general and
administrative expenses, accounts receivable and prepaid expenses and other
current assets were reclassified to conform to the December 31, 2023
presentation. These reclassifications had no impact on the total results or
net assets of the Company.
Adoption of New Accounting Pronouncement:
During 2023, the Company adopted Accounting Standards Update No. 2016-13 ("ASU
2016-13"), Financial Instruments-Credit Losses. ASU 2016-13 requires
organizations to measure all expected credit losses for instruments held at
the reporting date based on historical experience, current conditions, and
reasonable and supportable forecasts. This guidance is applicable for the
Company's accounts receivable. However, the adoption of ASU 2016-13 did not
have a material impact to the Company's valuation of its accounts receivable.
Subsequent events:
Management has evaluated the subsequent events for disclosure in these
consolidated financial statements through DATE, the date these consolidated
financial statements were available for issuance, and determined that no
events have occurred that would require adjustment to or 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.
During the year ended December 31, 2023, the Company paid the Seller an
additional amount of consideration totaling $4,048,000 ("KP Closing True-Up
Payment") based on the specific operating results of KP through December 31,
2022. The payment of the KP Closing True-Up Payment was pro-rated as
$3,643,200 in cash and 245,389 shares of common stock ("KP True-Up Shares") at
an aggregate fair value of $404,000. 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:
Definite-lived intangible assets Weighted-average Amount
useful life (in years)
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.
The fair value of the contingent consideration was performed using Monte Carlo
simulations to estimate the achievement and amount of certain future operating
results. The Monte Carlo simulations utilize estimates including; expected
volatility of future operating results, discount rates applicable to future
results, and expected growth rates. The table below provides the significant
inputs to the calculation of the contingent consideration as of the
acquisition date:
Significant Unobservable Input Range
Discount rate for credit risk and time value 5.9 % to 6.2 %
Discount rate for future profit after tax 20.0% to 22.2%
Expected volatility of future annual profit after tax 30.0% to 35.0%
Forecasted growth rate 3.0% to 17.8%
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
In 2023, during the measurement period, the Company determined that an
adjustment to increase the Company's deferred tax asset of $281,000 was
necessary and a corresponding gain on bargain purchase was recorded.
The identified definite-lived intangible assets were as follows:
Definite-lived intangible assets Weighted-average Amount
useful life (in years)
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.
MultiState Associates, Inc.
On March 1, 2023, the Company entered into an Asset Purchase Agreement
("MultiState Agreement") and acquired certain assets and assumed certain
liabilities of MultiState Associates, Inc. ("MS Seller" or "MultiState")
through the creation of a wholly-owned subsidiary, MultiState Associates, LLC
("MS LLC"). At the closing of the transaction, the Company paid the Seller
cash in the amount of $17,600,000 ("MS Closing Cash Payment") and issued
2,740,717 shares of the Company's common stock ("MS Closing Share Payment") to
Seller at an aggregate fair value of $4,400,000, of which, 1,973,316 shares
have vesting requirements ("MS Vesting Shares").
In addition, there are additional contingent payments that the MS 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 MS Seller in the amount of cash and stock ("MS Seller Shares") is
$70,000,000. The equity component of the contingent payments is 50%.
The MultiState Agreement provides certain forfeiture provisions applicable to
any future cash or share payments owed, which generally require certain owners
of MS LLC ("MS Owner" or "MS 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 ("MS Acceleration Event") as
defined in the MultiState Agreement.
In addition, under certain circumstances outlined in the MultiState Agreement,
the Company can claw back a portion of certain payments previously paid if an
MS Owner is not employed by the Company as of certain future dates.
If an MS Owner's employment is terminated as a result of an MS Acceleration
Event, a percentage of the unvested MS Seller Shares (representing such MS
Owner's ownership percentage in MS Seller) shall become fully vested. The MS
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 MultiState Agreement contains certain provisions
requiring the forfeiture of a percentage of all cash and shares received by MS
Seller if certain restrictive covenants are breached by an MS Owner.
Reasons for the Acquisition
The Company acquired MultiState to expand the scope of its consulting services
provided in respect of federal, state and local governments. Specifically,
MultiState provides lobbying compliance, legislative activity tracking,
lobbying brokerage and other consulting services to Fortune 500 companies,
non-profit organizations, elected officials and leading advocacy and trade
associations throughout the United States.
Accounting for the Acquisition
The acquisition of MS 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.
Purchase Consideration
The Company determined that certain consideration provided to MS Sellers in
the MultiState 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 and share payments owed
to MS Sellers that are not subject to a vesting or claw back provision that is
directly linked to the continued employment of MS Sellers. The total
purchase consideration consisted of the following amounts:
MS Closing Cash Payment $ 8,096,000
MS Closing Share Payment 1,232,000
Contingent consideration 2,784,990
Total purchase consideration $ 12,112,990
The contingent consideration consists of the estimated fair value of future
payments that are not subject to vesting or claw back provisions tied to
continued employment.
Purchase Price Allocation
The provisional 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 March 1, 2023 based on their respective
estimated fair values is summarized below:
Receivable from MS Sellers $ 4,490,227
Other current assets 191,177
Right of use assets 61,976
Tradename 2,202,000
Noncompete agreements 525,000
Customer relationships 5,507,600
Developed technology 3,938,000
Deferred income tax asset 4,743,079
Deferred revenue (4,681,404)
Lease liability (309,888)
Net assets acquired 16,667,767
Less estimated purchase price (12,112,990)
Gain on bargain purchase $ 4,554,777
The identified definite-lived intangible assets were as follows:
Definite-lived intangible assets Weighted-average Amount
useful life (in years)
Customer relationships 7 $5,507,600
Developed technology 7 $3,938,000
Noncompete agreements 5 $525,000
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 the developed
technology was determined using the relief from royalty method, which requires
management to estimate a number of factors, including the estimated future
revenues expected to be generated from the technology and a hypothetical
royalty rate attributable to the technology. 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 MS LLC and the potential impact and probability of competition,
assuming such noncompete agreements were not in place. The primary factors
that contributed to the gain on bargain purchase recognized from the MS LLC
acquisition include the requirement for the key employees of MS LLC to stay
employees of the Company for a significant period of time.
The fair value of the contingent consideration was performed using Monte Carlo
simulations to estimate the achievement and amount of certain future operating
results. The Monte Carlo simulations utilize estimates including; expected
volatility of future operating results, discount rates applicable to future
results, and expected growth rates. The table below provides the significant
inputs to the calculation of the contingent consideration as of the
acquisition date:
Significant Unobservable Input Range
Discount rate for credit risk and time value 5.7 % to 7.0 %
Discount rate for future profit after tax 15.9% to 16.6%
Expected volatility of future annual profit after tax 36.0% to 38.0%
Forecasted growth rate 3.0% to 14.4%
NOTE 3: RELATED PARTY TRANSACTIONS
As of December 31, 2023, the amounts due from related parties of approximately
$1,054,000 include the amount expected to be paid to the Company related to
working capital adjustments associated with the MultiState acquisition.
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 2021 Note and accrued
interest balance as of December 31, 2023 and 2022 was approximately $531,000
and $526,000, which are recorded in notes receivable - related parties and
prepaid expenses and other current assets.
During November 2023, the Company entered into term note agreements ("2023
Notes") with certain employees of the Alpine Group Partners, LLC totaling
$1,750,000. The interest rate on the 2023 Notes is 7.5% and the notes are
payable in annual installments of $350,000 plus all accrued and unpaid
interest beginning on November 1, 2024 with a maturity date of November 1,
2028 or the effective date of the termination of employment of the respective
employee borrower for any reason, if earlier than the maturity date. As of
December 31, 2023, the 2023 Notes were recorded in notes receivable - related
parties.
NOTE 4: GOODWILL AND INTANGIBLE ASSETS
Goodwill
Goodwill is an indefinite lived asset with balances as follows as of December
31:
2023 2022
Goodwill $ 47,909,832 $ 47,909,832
As of December, 31, 2023 and 2022, 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:
2023 2022
Goodwill
Government Relations Consulting $ 35,512,601 $ 35,512,601
Public Affairs Consulting 12,397,231 12,397,231
Diversified Services - -
Total $ 47,909,832 $ 47,909,832
Intangible Assets
The Company's intangible assets consist of customer relationship assets
acquired through various acquisitions as well as developed technology and
noncompete agreements acquired through the acquisition of MS LLC, 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 and
developed technology 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, developed
technology and noncompete agreements, and the accumulated amortization of the
Company's customer relationships, developed technology and noncompete
agreements is as follows as of December 31:
2023 2022
Customer relationships $ 27,104,400 $ 21,754,800
Developed technology 3,938,000 -
Noncompete agreements 971,000 446,000
Accumulated amortization (12,264,069) (8,543,684)
Total definite lived assets, net 19,749,331 13,657,116
Tradenames 7,120,000 4,918,000
Total intangible assets, net $ 26,869,331 $ 18,575,116
Amortization expense for customer relationship and noncompete agreement assets
approximated $3,878,000 and $2,129,000 for 2023 and 2022, respectively.
The approximate estimated future amortization expense for the next five years
is as follows:
Amortization
2024....................................................................................................................... $ 3,910,000
2025....................................................................................................................... 3,894,000
2026....................................................................................................................... 3,742,000
2027....................................................................................................................... 3,692,000
2028....................................................................................................................... 2,263,000
Thereafter.............................................................................................................. 2,248,000
Total $ 19,749,000
NOTE 5 LINE OF CREDIT AND NOTES PAYABLE
A) Bank credit facility
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 up to
$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. During 2023, the Company utilized
$1,000,000 from Facility 1 for the MultiState acquisition. The Company paid
approximately $451,000 in debt issuance costs for the Credit Facility and has
recorded this amount as a debt discount and is amortizing the debt discount to
interest expense over the term of the Credit Facility using the straight-line
method, which approximates the effective interest method.
The Company is required to make monthly payments of principal of $291,667 plus
interest beginning in March 2023 through the maturity date of January 31, 2026
for the Facility 2. The principal payment for Facility 1 is due on the
maturity date for that facility, which is January 31, 2026. Periodic
interest-only payments are due on Facility 1 through the maturity date. The
Company incurred interest expense of approximately $922,000 for the Credit
Facility during the year ended December 31, 2023, which consisted of $797,000
of cash interest and $125,000 of non-cash amortization of debt discount.
As of December 31, 2023, Facility 1 had been repaid in full. The Company is
able to re-borrow up to $3,000,000 under Facility 1 or 80% of the Company's
eligible receivables, whichever is less.
The Company's Facility 2 consists of the following as of December 31, 2023:
Facility 2 $ 11,083,333
Less unamortized debt issuance costs (325,527)
Total debt, net of unamortized debt issuance costs 10,757,806
Less current portion 3,349,757
Total Facility 2, long-term $ 7,408,049
As of December 31, 2023, the future principal maturities of Facility 2 is as
follows:
2024 $ 3,500,000
2025 3,500,000
2026 4,083,333
Total $ 11,083,333
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, 2023 and
2022, was approximately $184,000 and $211,000, respectively. Interest
expense on the note payable - landlord for the year ended December 31, 2023
and 2022 was approximately $16,000 and $17,000, respectively.
As of December 31, 2023, the future maturities of this note payable at
December 31 is as follows:
2024........................................................................................................................ $ 29,321
2025........................................................................................................................ 31,755
2026........................................................................................................................ 34,390
2027........................................................................................................................ 37,245
2028........................................................................................................................ 40,240
Thereafter............................................................................................................... 10,555
Total $ 183,506
NOTE 6 STOCKHOLDERS' EQUITY AND SHARE-BASED ACCOUNTING
CHARGE
As of December 31, 2023, 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, 2023 and 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 and the amount outstanding on the statement of equity consists
of shares issued with restrictions (collectively "Restricted Shares") as
follows:
December 31, 2023 December 31, 2022
Statement of Equity 109,542,220 108,024,388
Restricted Shares:
KP Closing Share Payment 739,589 739,589
KP Earnout Shares 245,389 -
Engage Restricted Shares 487,301 487,301
MS Vesting Shares 1,973,316 -
RSAs Unvested 2,188,944 -
Other Restricted Shares 95,202 95,202
Total Restricted Shares 5,729,741 1,322,092
Legally Outstanding Shares 115,271,961 109,346,480
Stock Options Outstanding 3,089,056 2,718,809
RSUs Outstanding 2,225,000 -
Fully Diluted Shares Outstanding 120,586,017 112,065,289
The weighted-average common shares outstanding, basic and diluted reported on
the consolidated statement of operations is 108,606,133 and 108,136,853, which
is different from the 109,542,220 and 108,024,388 ending shares as of December
31, 2023 and 2022 due to the first numbers representing an average during the
year compared to the amount outstanding at the end of the year.
Other Restricted Shares consists of restricted stock awards in 2022 to convert
a consultant of the Company to a full-time employee ("Consultant Award").
The Consultant Award was valued at approximately $178,000 and vests 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 approximately
$30,904,000 and $33,392,000 for the years ended December 31, 2023 and 2022,
respectively.
As of December 31, 2023, there were 82,687,340 Retained Pre-IPO Shares, held
by current employees and subject to vesting requirements, and 36,060,828 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, 2023, the unrecognized compensation cost from
these restricted shares was approximately $89,796,000, which is expected to be
recognized over a weighted-average period of 3.0 years.
ASC 805-10-55-25 Charge
During 2022 and 2023, the Company acquired KP LLC, Engage and MS LLC (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, Senior Principals of Engage or MS Owners, 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.
The approximate total other liability consists of amounts expected to be paid
in cash or stock in the future for post-combination compensation and is
comprised of the following as of:
December 31, 2023 December 31, 2022
Other liability, current portion $ 536,000 $ 1,822,000
Other liability, long term 1,585,000 435,000
Total $ 2,121,000 $ 2,257,000
For the years ended December 31, 2023 and 2022, the post-combination
compensation charge recorded by the Company was approximately $6,295,000 and
$2,441,000, respectively. This amount consists of the following components:
For the years ended
December 31, 2023 December 31, 2022
Additions to other liability $ 1,685,000 $ 2,257,000
Vesting of common stock 1,529,000 111,000
Amortization of prepaid post-combination compensation 3,081,000 73,000
Total $ 6,295,000 $ 2,441,000
As of December 31, 2023, the unrecognized post-combination compensation charge
was approximately $21,722,000, which is expected to be recognized over a
weighted-average period of 2.4 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, 2023, the total amount of shares authorized by the Board of
Directors under the Omnibus Plan was 11,527,196, with a total of 3,204,189
available for issuance. During the years ended December 31, 2023 and 2022 the
Company granted 652,000 and 2,794,859 Options to employees. In addition,
during the year ended December 31, 2023, the Company granted 2,250,000
restricted stock units ("RSUs"), and 3,008,951 restricted stock awards
("RSAs"). The stock options have a contractual term of ten years and vest
three years after their issuance. The RSUs vest over a three-year period
with one-third vesting each year after the grant date. 820,007 RSAs vested
on December 31, 2023, 50,000 RSAs vest in October 2024 and 2,138,944 RSAs that
vest over a five year period. The RSAs include voting and dividend rights
prior to vesting.
Options
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 For the year ended
December 31, 2023 December 31, 2022
Estimated dividend yield 6.00% 6.00%
Expected stock price volatility 60.00% 60.00%
Risk-free interest rate 3.8% 2.7% to 4.1%
Expected life of option (in years) 6.50 6.50
Weighted-average fair value per share $ 0.54 $ 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 years ended
December 31, 2023 and 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 $ -
Granted* 652,000 2.04 - -
Exercised - - - -
Cancelled/Forfeited* (281,753) 2.21 - -
Outstanding as of December 31, 2023* 3,089,056 $ 2.21 8.9 $ -
Exercisable as of December 31, 2023 - - - -
Vested and expected to vest
as of December 31, 2023* 3,089,056 $ 2.21 8.9 $ -
The following table summarizes certain information about the stock options
outstanding and exercisable as of December 31, 2023:
Exercise Price Number of Options Outstanding Weighted-Average Remaining Life Number of Options Exercisable
$2.04* 652,000 9.4 -
2.22* 100,000 8.8 -
2.25* 2,287,056 8.4 -
2.27* 50,000 8.6 -
3,089,056 -
*The applicable exercise prices have been adjusted based on the applicable
exchange rate of GBP to U.S. Dollars at the end of each period presented.
Option expense for the years ended December 31, 2023 and 2022 was
approximately $518,000 and $318,000. As of December 31, 2023, there was
approximately $926,000 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 1.6 years.
Restricted Stock Units ("RSUs")
During the year ended December 31, 2023, the Company issued 2,250,000 RSUs to
employees. The Company had not issued any RSUs prior to 2023. Determining the
appropriate fair value model and the related assumptions requires judgment.
The fair value of each RSU granted is estimated using a Black-Scholes
option-pricing model on the date of grant as follows:
Year ended December 31, 2023
Estimated dividend yield 6.00%
Expected stock price volatility 60.00%
Risk-free interest rate 3.9% to 5.4%
Expected life of instrument (in years) 1 to 3 years
Weighted-average fair value per share $ 1.41
Activity in the Company's non-vested RSUs for the year ended December 31, 2023
was as follows:
Weighted
Average Grant Date
Number of Fair
RSUs Value
Nonvested as of December 31, 2022 - $ -
Granted 2,250,000 1.41
Vested - -
Cancelled/Forfeited (25,000) 1.47
Nonvested as of December 31, 2023* 2,225,000 $ 1.41
RSU expense for the year ended December 31, 2023 was approximately $553,000.
As of December 31, 2023, there was approximately $2,615,000 of total
unrecognized compensation cost related to non-vested RSU arrangements, which
is expected to be recognized over a weighted-average period of 1.5 years.
Restricted Stock Awards ("RSAs")
During the year ended December 31, 2023, the Company issued 3,008,951 RSAs to
employees. The Company had not issued any RSAs prior to 2023. Determining the
appropriate fair value model and the related assumptions requires judgment.
The fair value of each RSA granted is estimated using a Black-Scholes
option-pricing model on the date of grant as follows:
Year ended December 31, 2023
Estimated dividend yield 6.00%
Expected stock price volatility 60.00%
Risk-free interest rate 4.9% to 5.4%
Expected life of instrument (in years) 1 to 5 years
Weighted-average fair value per share $ 1.31
Activity in the Company's non-vested RSAs for the year ended December 31, 2023
was as follows:
Weighted
Average Grant Date
Number of Fair
RSAs Value
Nonvested as of December 31, 2022 - $ -
Granted 3,008,951 1.31
Vested (820,007) 1.61
Cancelled/Forfeited - -
Nonvested as of December 31, 2023 2,188,944 $ 1.19
RSA expense for the year ended December 31, 2023 was approximately
$1,435,000. As of December 31, 2023, there was approximately $2,498,000 of
total unrecognized compensation cost related to non-vested RSA arrangements,
which is expected to be recognized over a weighted-average period of 2.6
years.
Stock Appreciation Rights ("SARs")
During the year ended December 31, 2023, the Company issued 1,850,000 SARs to
employees. SARs are not issued shares or committed shares to be issued and
therefore do not count against the total number of shares that can be issued
under the Omnibus Plan. Upon exercise of a SAR, the Company shall pay the
grantee in cash an amount equal to the excess of the fair market value of a
share of stock on the effective date of exercise in excess of the exercise
price of the SAR. This cash settlement feature requires the SARs to be
classified as a liability and marked to market at each reporting period.
The SARs vest over a three-year period with one-third vesting each year after
the grant date. The Company had not issued any SARs prior to 2023. Determining
the appropriate fair value model and the related assumptions requires
judgment. The fair value of each SAR granted is estimated using a
Black-Scholes option-pricing model and the fair value is adjusted at each
reporting period. Each SAR has a cash settlement feature and is recorded as
a liability in the Company's consolidated balance sheets. As of December 31,
2023, the total liability was $290,000. The fair value of the SARs was
calculated as follows as of December 31, 2023:
Year ended December 31, 2023
Estimated dividend yield 6.00%
Expected stock price volatility 60.00%
Risk-free interest rate 4.7%
Expected life of option (in years) 4.5 to 5.5 years
Weighted-average fair value per share $ 0.46
Weighted
Average
Number of Exercise
Shares Price
Outstanding as of December 31, 2022 - $ -
Granted 1,850,000 1.70
Exercised - -
Cancelled/Forfeited (90,000) 1.70
Outstanding as of December 31, 2023 1,760,000 1.70
Exercisable as of December 31, 2023 - -
Vested and expected to vest
as of December 31, 2023 1,760,000 $ 1.70
SAR expense for the year ended December 31, 2023 was approximately $290,000.
The amount of the future expense for all SARs issued will depend upon the
value of the Company's common stock and other factors at each future reporting
date.
NOTE 8 INCOME TAXES
The components of income tax expense attributable to income before income
taxes for the years ended December 31, 2023 and 2022, consisted of the
following:
2023 2022
Current tax expense:
Federal $ 5,861,100 $ 5,944,400
State 2,274,500 2,443,100
8,135,600 8,387,500
Deferred tax expense (benefit):
Federal $ (491,700) $ (475,500)
State (141,100) (114,400)
(632,800) (589,900)
Total Provision for Income Taxes: $ 7,502,800 $ 7,797,600
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. The acquisitions of KP
LLC, Engage, and Multistate were taxable asset acquisitions. As such, the
purchase consideration for these acquisitions generated tax-deductible
goodwill in the combined amount of approximately $34,123,000. 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
$34,123,000 of tax deductible goodwill, approximately $19,839,000 is eligible
for amortization during the 2023 tax year.
As of December 31, 2023, 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, 2023, the Company had no accrued interest or
penalties related to uncertain tax positions.
Significant components of the Company's deferred tax assets and liabilities
are as follows as of December 31:
2023 2022
Deferred income tax assets:
Other assets $ 244,900 $ 197,600
Long term incentive plan 847,700 -
Goodwill 8,082,100 4,797,000
ASC 842 Lease liability 6,764,200 5,107,000
Total deferred income tax assets 15,938,900 10,101,600
Deferred income tax liabilities:
Property and equipment (218,200) (188,200)
Prepaid compensation - (281,000)
Intangible assets (2,148,200) (2,924,000)
Right of use asset (5,835,300) (4,430,000)
Total deferred income tax liabilities (8,201,700) (7,823,200)
Total Net Deferred Tax Asset (Liability): $ 7,737,200 $ 2,278,400
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 ($6,741,472) and ($7,211,111)
for the years ended December 31, 2023 and 2022, is as follows:
December 31, 2023 December 31, 2022
Amount % of Pretax Earnings Amount % of Pretax Earnings
Federal income tax benefit at statutory rate $ (1,415,700) (21.0) $ (1,514,300) (21.0)
State income taxes, net of federal income tax benefit (419,600) (452,800) (6.3)
(6.2)
Prepaid post-combination expense 1,713,800 25.4 665,900 9.3
Other nondeductible expenses (762,200) (11.3) - -
Share-based accounting charge 8,413,400 124.8 9,109,200 126.3
Other (26,900) (0.4) (10,400) (0.1)
Total Provision for Income Taxes $ 7,502,800 111.3 $ 7,797,600 108.2
The Company's 2022 and 2023 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
A significant portion 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, 2023, the Company has three reportable segments; Government
Relations Consulting, Public Affairs Consulting and Diversified Services.
Government Relations 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. Diversified
Services were introduced with the acquisition of MS LLC, and currently include
Lobbying Compliance services and Legislative Tracking.
Other is primarily comprised of depreciation, amortization, interest expense,
taxes, share-based accounting charges, post-combination compensation charges,
long term incentive program charges, and gain on bargain purchase. The
Company's CODM does not evaluate these items at the segment level.
The Company measures the results of its segments using, among other measures,
each segment's net revenue and contribution margin, which excludes
depreciation, amortization, interest expense, taxes and other non-cash
charges. The Company's CODM does not evaluate these items or total assets and
liabilities at the segment level but rather evaluates these items on a
consolidated basis. Information for the Company's segments, as well as for
other, including the reconciliation to net income (loss) is provided in the
following tables:
For the Year Ended December 31, 2022
Government Relations Public Affairs Diversified Services Other Total
Revenue $ 95,476,619 $ 32,256,518 $7,252,685 $ - $ 134,985,822
Contribution Margin $27,601,680 $ 5,207,392 $ 2,258,872 $ - $ 35,067,944
Depreciation - - - (119,688) (119,688)
Interest, net - - - (940,824) (940,824)
Taxes - - - (7,502,800) (7,502,800)
Share-based accounting charge - - - (30,904,000) (30,904,000)
Post-combination compensation charge - - - (6,295,060) (6,295,060)
Long term incentive program charges - - - (2,796,000) (2,796,000)
Change in contingent consideration - - - (1,711,235) (1,711,235)
Amortization of intangibles - - - (3,878,386) (3,878,386)
Gain on bargain purchase, net of taxes - - - 4,835,777 4,835,777
Net income (loss) $27,601,680 $ 5,207,392 $ 2,258,872 $ (49,312,216) $ (14,244,272)
Goodwill at end of period $35,512,601 $ 12,397,231 $ - $ - $ 47,909,832
For the Year Ended December 31, 2022
Government Relations Public Affairs Diversified Services Other Total
Revenue $ 78,177,680 $ 30,636,811 $ - $ - $108,814,491
Contribution Margin $24,439,990 $ 6,746,000 $ - $ - $ 31,185,990
Depreciation - - - (100,285) (100,285)
Interest - - - (16,873) (16,873)
Taxes - - - (7,797,600) (7,797,600)
Share-based accounting charge - - - (33,392,300) (33,392,300)
Post-combination compensation charge - - - (2,441,052) (2,441,052)
Long term incentive program charges - - - (317,679) (317,679)
Amortization of intangibles - - - (2,128,912) (2,128,912)
Gain on bargain purchase, net of taxes - - - - -
Net income (loss) $24,439,990 $ 6,746,000 $ - $(46,194,701) $ (15,008,711)
Goodwill at end of period $35,512,601 $ 12,397,231 $ - $ - $ 47,909,832
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. END FR KZGMFNZLGDZMRecent news on Public Policy Holding
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