Full Year Results

RNS Number : 8319W

Public Policy Holding Company, Inc.

20 April 2023

 

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulations (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 information is now considered to be in the public domain.

Public Policy Holding Company, Inc.

("PPHC" or the "Group")

Full Year Results for the year ended 31 December 2022

Strong financial performance and sustained growth, driven by robust market demand

Public Policy Holding Company, Inc., ("PPHC", the "Group" or the "Company"), the government relations and public affairs group providing clients with a fully integrated and comprehensive range of services, is pleased to announce its Full Year Results for the year ended 31 December 2022.

Financial Highlights

·   Revenue of $108.8m (2021: $99.3m) reflects an increase of 9.5%, and 6.6% organic growth.

·   Underlying EBITDA of $31.2m (2021: $32.0m) is in line with guidance and was achieved at a margin of 28.7%, within our target range of 25 to 30%. This followed a truly exceptional 2021 which was driven by a combination of high pandemic-related spending and the change of control in the White House

·   Underlying Profit after tax was $23.3m (2021: $23.9m), reflecting a margin of 21.4%

·   Year-end Net Cash stood at $21.0 million, an increase of 17.9%

·   Declared a final dividend of $0.095 per Common Outstanding Share. This would take the total dividend for 2022 to $0.14 per share.

All in $'000, unless otherwise noted	2021	2022	change
Revenue	99,336	108,814	9.5%
EBITDA - Underlying	32,030	31,186	-2.6%
EBITDA margin - Underlying (%)	32.2%	28.7%	-3.6 pts
Net Income - Underlying	23,857	23,271	-2.5%
EPS - Underlying ($) (fully diluted) (**)	0.220	0.211	-4.1%
Dividend	703	15,511	N/M
Free Operational Cash Flow	4,638	20,678	N/M
Net Cash at year end	17,820	21,012	17.9%

Operational highlights

·   Successful acquisition of California based KP Public Affairs on 1 October 2022, proving attractiveness of holding company value proposition and equity + cash offer.

·   Key talent additions into Group's founding firms, including deepening specialisations in new/renewable energy policy, defence contracting, financial services, and trade policy, all service areas that are central to today's policy agenda. 

·   Improved client diversification, with the top 10 Group clients representing 9.6% of total revenue, down from 13.1% in 2021.

·   2022 total clients greater than 850, up from over 730 in 2021; includes over 100 Fortune 500 clients and related trade associations. 

·   Number of clients spending $100,000 or greater per year was 384, a gain of 11%, and representing 43% of our total clients.

Current trading and Outlook

·   MultiState Associates acquired on 1 March 2023, elevating our number of clients to over 1,000.

·   Continued growth into 2023, fuelled by ongoing policy debates over government spending and the passage of historic spending measures in 2021-22 into sectors such as healthcare, essential manufacturing, renewable/alternative energies, and infrastructure.

·   Management expects revenue to grow by 5 to 10% organically, supplemented by growth from past and future M&A transactions. 

·   The Group continues to manage the business such that the Underlying EBITDA as percentage of revenue is estimated to be between 25% and 30%. 

·   Continuing to build an attractive pipeline of strategic acquisition opportunities in the federal and state advocacy markets, as well as in the adjacent strategic communications and public affairs markets in the US and abroad.

Stewart Hall, CEO, PPHC commented:

"Our first full year as a listed company saw PPHC deliver on anticipated margins, net income and dividend for shareholders.  We have a well-defined growth strategy and are demonstrating the successful delivery of its pillars, including selective M&A to broaden our geographic footprint into state-based government relations, as well as the expansion of our service offering. The strategic communications and government affairs markets, both in the US and internationally, remain fragmented and we are well placed to act as a natural consolidator with a strong balance sheet.

"Demand for PPHC's services is set to continue, driven partly by $4+ trillion of US government spending. We anticipate this activity will underpin ongoing organic growth. We have an attractive pipeline of potential acquisition opportunities, in line with our focus on broadening our reach into US state capitals and metropolitan areas, as well as internationally.  

"PPHC is well placed to deliver continued growth, both organically and via acquisitions. We have already completed the acquisition of MultiState, expanding our service offering and opening new opportunities for collaboration between our operating businesses. We look forward to continued strategic and financial progress in 2023."

 Enquiries

Public Policy Holding Company Inc. Stewart Hall, CEO Bill Chess, CFO Thomas Gensemer, Chief Strategy Officer Roel Smits, Deputy CFO	[phone]
Stifel (Nominated Adviser & Broker) Fred Walsh, Tom Marsh	[phone]
Buchanan Communications (Media Enquiries) Chris Lane, Toto Berger, Harry Swinburne	[phone] [e-mail]

About PPHC

Incorporated in 2014, PPHC is a US-based government relations and public affairs group providing clients with a fully integrated and comprehensive range of services including government and public relations, research and digital advocacy campaigns. Engaged by over 1000 clients, including companies, trade associations and non-governmental organisations, the Group is active in all major sectors of the U.S. economy, including healthcare and pharmaceuticals, financial services, energy, technology, telecoms and transportation. PPHC's services support clients to enhance and defend their reputations, advance policy goals, manage regulatory risk, and engage with US federal and state-level policy makers, stakeholders, media and the public.

PPHC operates a holding company structure and currently has seven operating entities comprising Crossroads Strategies, Forbes Tate Partners, Seven Letter, O'Neill & Associates, Alpine Group Partners, KP Public Affairs and MultiState Associates. Operating in the strategic communications market, the Group has a strong track record of organic and acquisitive growth, the latter focused on enhancing its capabilities and to establish new verticals, either within new geographies or new related offerings.

For more information, see www.pphcompany.com.

Chairman's report

On behalf of the Board of Directors of PPHC, I am pleased to introduce this report reflecting a full year of strong performance post-IPO, a successful accretive acquisition of a market-leading firm in California, and outstanding business development and cost management by company leadership in the face of considerable macro-economic challenges and tremendous partisanship and unpredictability in the US Federal Government. 

The strong performance of the Group throughout 2022, along with the timely acquisition and early integration of KP Public Affairs, reflects the hard work and dedication of our leaders and individual employee-owners and staff. We rely on their shared expertise, good judgement, and steadfast commitment to excellence, for clients and colleagues alike. I've met so many of the talented individuals who make up the Group and I look forward to spending more time with our valued colleagues in the years ahead.

On behalf of my Board colleagues, I would like to thank each of our staff, clients, business partners, advisors and shareholders for their ongoing support.

In the eighth full year of PPHC's operations, and our first full-year as an AIM listed business, we are proud to be reporting strong Group-wide results, in line with our stated guidance.

With a consistent track record of growth and a revenue CAGR of 29% since 2015, the management and Board of PPHC is executing on its focused goal to become the world's premier provider of government relations and public affairs services to companies, trade organisations and NGO clients.

PPHC operates a portfolio of independently branded firms, each offering a range of public policy expertise, bi-partisan federal and state advocacy services, public affairs, and crisis management services to over 1,000 clients.

Clients hire PPHC firms to help enhance and defend their reputations, inform and advance their public policy goals, manage regulatory risk, or otherwise engage with US federal and state-level policy makers, regulators and other key stakeholders.

Each of the Group's firms are bi-partisan, by way of US political associations, with founders and senior managers operating largely in-and-around Washington DC with close professional ties to the US Executive Branch, Congress, and/or regulatory authorities.

According to US Federal Government lobbying reporting, in 2022, PPHC remained the largest provider of federal contract lobbying services in the US, with $66.4m of disclosed revenue*. This PPHC service offering, registered federal and state lobbying, represents approximately 72% of the Group's total for 2022.  The Group's stated strategy is to maintain this core offering while also growing related high-margin service offerings such as public affairs, research and media management to existing and new clients.

PPHC's acquisition of KP Public Affairs, a leading firm in the State of California, was completed 1 October 2022, providing the Group with an anchor in the largest US state market and an important bellwether in US policymaking. This acquisition represents an important step in our strategy to support our clients' needs in multiple jurisdictions, including in other US states and in major international capitals.

Given our performance in 2022, the Board is pleased to have declared a final dividend of $0.095 per share, taking the total dividend for the year to $0.14 per share. This will represent a total aggregate dividend for the year of approximately $15.5 million, equivalent to approximately 67% of the Group's Underlying Net Profit (based on the current number of common outstanding shares). The final dividend of $0.095 per share is payable to the holders of record of all of the issued and outstanding shares of the Company's Common Stock as of the close of business on the record date, 5 May 2023. The ex-dividend date is 4 May 2023.

*Source: opensecrets.org

Simon Lee

Non-executive Chairman

Chief Executive Officer's report

Across PPHC's companies, our talented policy and strategic communications specialists committed their year to undertaking critical, high-impact work for our clients. Working at the highest levels of government and clients' C-suite, our teams informed, guided, and shaped policy decisions that impact the future of the United States and the world.

It was an extraordinary year in public policy as we saw democratic governments, corporate leaders, and ordinary citizens across the world face simultaneous challenges - the ongoing war in Ukraine disrupting energy markets and supply chains, historic levels of inflation, and the unrest and uncertainty in politics.

Taken together, along with ongoing Covid-19 pandemic mitigations and the 'new normal' of hybrid work, governments have responded with historic spending measures and regulatory interventions that impact every sector of the global economy.

In Washington, DC and across the United States, the November 2022 mid-term elections were the most expensive ever waged. Over $10 billion was spent and the result was a very narrowly divided US Congress (a Republican-controlled House, a Democrat-led Senate) and likely stalemate.

Despite such partisan rancour, the Biden Administration did achieve the narrow passage of record-breaking federal spending bills (now totalling over $4 trillion) to fund economic priorities, including healthcare, clean and alternative energies, public infrastructure investments and the support of essential industries (manufacturing of high-end semiconductors, key pharmaceuticals and more). As such, PPHC enjoyed another strong year for revenue and profit as our clients engaged in and responded to these challenges and opportunities.

Group clients, now totalling over 1,000 companies, NGOs and associations in 2023, depend on our firms - both the breadth of our integrated services and the depth of policy and political expertise - to navigate challenges and maximise the business opportunities of this hyper-political era. 

We have reached current scale and sophistication at an ideal moment in history, but with that success comes an increased responsibility and well-deserved scrutiny. Our entire organisation takes pride in the steps we have taken to increase diversity amongst our team and towards building a culture of equity and inclusivity. As CEO, I take responsibility for ensuring that this progress continues and stays a top priority.

As we begin 2023, we remain focused on a clear and differentiated strategy, as conceived in 2014 and restated upon IPO in 2021. The progress we made in 2022, carrying into the start of 2023, provides further confidence in the strength of our business model and strategic ambitions.  We foresee continued growth fuelled by ongoing policy debates over government spending and the passage of historic spending measures in 2021-22 into sectors such as healthcare, essential manufacturing, renewable/alternative energies, and infrastructure.

I thank each one of our colleagues, their families, our clients, partners, advisors, and shareholders.  Along with my senior executive team at PPHC, I look forward to continuing to progress our business strategy.

Stewart Hall

Chief Executive Officer

Financial Review

In our first full year post-IPO, demonstrating the stability of our core business operations, the dedication of our management teams, and the critical importance of our work to our clients, revenue grew 9.5% to $108.8 million.

All in $'000, unless otherwise noted	2021	2022	change
Revenue	99,336	108,814	9.5%
EBITDA (Underlying)	32,030	31,186	-2.6%
EBITDA margin (Underlying) (%)	32.2%	28.7%	-3.5 pts
Net Income (Underlying)	23,857	23,271	-2.5%
EPS (Underlying) ($) (fully diluted) (**)	0.220	0.211	-4.0%
Dividend	703	15,511	N/M
Free Operational Cash Flow	4,638	20,678	N/M
Net Cash at year end	17,820	21,012	17.9%

PPHC's results for the year ended 31 December 2022 represent its first full reporting year post-IPO in December 2021. Strong levels of client engagement and activity have driven the Group's revenue up 9.5% to $108.8m (2021: $99.3m). All areas of the Group's business, i.e. government relations, public affairs advisory, and strategic research, achieved growth when compared to 2021.

Equally important, underlying profit remained close to 2021 levels despite the absorption of higher costs related to being a public company and the related increased investment in new hires, with an underlying EBITDA for the year of $31.2m (2021: $32.0m) at a margin of 28.7% (2021: 32.2%), within our guided range of between 25% and 30%.

The Group's cash position at the end of the year remained strong at $21.0m (2021: $17.8m), following the generation of $20.7m operational cash flow, the acquisition activity in Q4 2022, and the payment of dividends.

Underlying Profit  & Loss Statement
	All in $'000, unless otherwise noted	2021	2022	change
	Revenue	99,336	108,814	9.5%
	Operational expenses (*)	(67,306)	(77,629)	15.3%
	EBITDA (Underlying)	32,030	31,186	-2.6%
	EBITDA margin (Underlying)	32.2%	28.7%	-3.5 pts
	Depreciation	(128)	(100)
	EBIT (Underlying)	31,903	31,086	-2.6%
	Interest	(52)	(17)
	Taxes (*)	(7,994)	(7,798)
	Net Income (Underlying)	23,857	23,271	-2.5%
	Net income margin (Underlying)	24.0%	21.4%	-2.6 pts
	(*) 2021 bonus and taxes are on a proforma basis, using 2022 rates
Bridge from Underlying to Reported results
	Net Income (Underlying)	23,857	23,271
	Share-based accounting charge	(27,609)	(33,392)
	Post-combination compensation charge		(2,441)
	Long Term Incentive Program charges		(318)
	Amortization intangibles	(1,885)	(2,129)
	2021 bonus actual	(37,519)
	2021 bonus proforma	11,401
	2021 tax actual	(495)
	2021 tax proforma	7,994
	Net Income (Reported)	(24,256)	(15,009)

Revenue

The Group's total revenue for 2022 increased by 9.5% to $108.8 million (2021: $99.3 million). The growth was primarily organic (6.6%) and also benefitted from the acquisition of KP Public Affairs on 1 October 2022.

Organic growth of 6.6% reflects the stability of our core business operations and comes on top of 28% growth in 2021, a banner year as a consequence of significant pandemic-related spending and the change of control at the executive branch.  Organic growth was driven by a high degree of retention of existing clients (typically higher in government relations and lower in public affairs, and on average 75%, based on client count) in combination with new business wins. New clients were typically either Fortune 500 clients or advocacy groups and coalitions.

The Group ended 2022 with over 850 clients, of which 384 accounted for a net revenue of equal or greater than $100,000 per annum (up from 347 in 2021). Our largest client represented 1.6% of total revenue, down from 2.5% in 2021.  This success was driven by both of our primary business lines, government relations and public affairs. In 2022, our government relations business increased by 11% (8% organically) as we supported clients in managing their risks and opportunities. Our public affairs division increased by 5% (2% organically), building on a very strong performance in the previous year.

Profit

Underlying EBITDA of $31.2 million was achieved at a margin of 28.7%, consistent with the margins realised between 2018 and 2020, and in line with our guidance that margins will typically move within the range of 25% to 30%. The 32.2% margin of 2021 reflected a truly exceptional year driven by a combination of high pandemic-related spending and the change of control in the White House.

Long term Underlying EBITDA	2018	2019	2020	2021	2022
Underlying EBITDA ($m)	9.3	13.5	21.5	32.0	31.2
Underlying EBITDA as % of Revenue	27.4%	24.4%	27.8%	32.2%	28.7%

In 2022, Underlying EBITDA was also impacted by previously communicated additional expenses relating to the Group's first full year as public company. Those incremental costs, included within the calculation of Underlying EBITDA, amounted to approximately $5.4 million and included legal and registration fees, compliance costs, M&A related expenses, investments in staff at the Group's holding company, and in talent acquisition. We expect to make further investments in 2023 to build out our platform.

At an after-tax level, 2022 Underlying Net Income - which constitutes the basis of our dividend calculation - amounted to $23.3 million, slightly less than the $23.9 million for 2021 on a proforma basis.

Employees

The Group started 2022 with 187 employees operating out of five offices. By end of year, this number had increased to 244 people, which includes 30 from the KP acquisition and 17 people hired when bringing the Engage team, a supplier to Forbes Tate, in-house. On average, during 2022 we had 206 employees.

Other

The Group's net finance costs for the year were $16k (2021: $52k), illustrating the absence of any significant debt on the Group's balance sheet.

Tax accrual for 2022 amounted to $7.8 million, which represents a blended charge of 25.1% to our Underlying Profit. For comparative purposes, we have applied the same rate when calculating the 2021 proforma Underlying Profit.

Balance sheet and cash flow

The Group's net cash position as of 31 December 2022 was $21.0 million (2021: $17.8 million), taking into account the $0.2 million borrowings at that time. Our strong financial position enabled us to make the interim dividend payments and allowed us to make acquisitions, without borrowing from financial institutions.

Cash Flow Statement
	Net income	(24,256)	(15,009)
	Add back: Share-based compensation	27,609	33,392
	Add back: LTIP		318
	Add back: Amortization	1,885	2,129
	Add back: Depreciation	128	100
	All other changes in Working Capital	(728)	(253)
	Operational Cash flow	4,638	20,678
	Acquisitions	N/A	(11,912)
	Investment Cash flow	N/A	(11,912)
	Debt repayment	N/A	(26)
	Dividend payment	N/A	(5,572)
	Financing Cash Flow	N/A	(5,598)
	Cash generated	N/A	3,167

Dividend

The Board of Directors of the Company have declared a final dividend for 2022 of $0.095 per Common Share, which equates to an aggregate amount, based on the current number of outstanding Common Shares, of approximately $10.6 million, payable to the holders of record of all of the issued and outstanding shares of the Company's Common Stock as of the close of business on the record date, May 5, 2023. The ex-dividend date is 4 May 2023. The dividend will be paid no later than 2 June 2023

An interim payment of $4.9 million was already made in October 2022 ($0.045 based on the outstanding Common Shares at that time), in line with the Company's intent to pay about one third of the expected total dividend for the year as an interim dividend. 

Consequently, the Group' total dividends for the financial year will be $0.14 per share. This represents, based on the current number of outstanding Common Shares, a total aggregate dividend for the year of approximately $15.5 million, equivalent to approximately 67% of the Group's Underlying Net Profit.

Dividend
	All in $'000, unless otherwise noted	2021	2022
	Net income - Underlying	23,857	23,271
	Free Operational Cash Flow	4,638	20,678
	Dividend	703	15,511
	Pay out ratio		67%
	Payable in calendar year (interim dividend)		4,869
	Payable next calendar year (final dividend)		10,642
Per share (**)
		2021	2022
	# weighted avg  shares outstanding - basic	108,240	108,137	'000
	# weighted avg  shares outstanding - fully diluted	108,240	110,147	'000
	EPS - Reported (basic and fully diluted)	(0.2241)	(0.1388)	$
	EPS - Underlying (basic)	0.2201	0.2152	$
	EPS - Underlying (fully diluted)	0.2201	0.2113	$

Note to Investors:

In accordance with a letter provided to shareholders by Link, certain IRS forms are required to be completed.

One of the IRS forms listed below must be completed by person/s within your entity/organisation with appropriate knowledge and signed by a suitably authorised person(s). If you decide another IRS form is more appropriate, please provide it instead.

If the correct documentation is not provided, including any additional information that might be relevant, the default rate of 30% will still apply to payments.

1.   Form W-8BEN-E - titled 'Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities)'. This is usually for non-individuals not resident in the US.

Form W-8BEN-E and instructions can be found at:

https://www.irs.gov/pub/irs-pdf/fw8bene.pdf                      W-8BEN-E  Form
https://www.irs.gov/pub/irs-pdf/iw8bene.pdf                       W-8BEN-E  Instructions

Or,

2.   Form W-9 - titled 'Request for Taxpayer Identification Number and Certification'.
If your mailing address is outside the US it is possible you are a non-US branch of a US entity and accordingly you need to consider whether a form W-9 is required. This is because FATCA, unlike the withholding tax rules, requires an exemption code for a non-US branch of a US entity.

Form W-9 and instructions can be found at:

https://www.irs.gov/pub/irs-pdf/fw9.pdf                              W-9  Form

http://www.irs.gov/pub/irs-pdf/iw9.pdf                               W-9  Form Instructions

Or,

3.   Form W-8IMY - titled 'Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U.S. Branches for United States Tax Withholding and Reporting'. Typically, the Intermediary is the parent company of the shareholder nominee, and not the nominee.
Also, you must adhere to the requirements in the box below including the specific guidance on withholding statements.

Form W-8IMY and instructions can be found at:

www.irs.gov/pub/irs-pdf/fw8imy.pdf   W-8IMY Form (Foreign Intermediaries)
www.irs.gov/pub/irs-pdf/iw8imy.pdf          W-8IMY  Instructions (Foreign Intermediaries)

Response and the form(s) can be scanned and sent to: [e-mail]

Or by post to: Post Room, Link Group, Central Square, 29 Wellington Street, Leeds, LS1 4DL, United Kingdom.

Recent developments

As announced on 1 March 2023, the Group completed the acquisition of MultiState Associates. This was PPHC's second significant acquisition since IPO in December 2021. MultiState's services at the state level are highly complementary to PPHC's with its strength in research and compliance adding to and enhancing PPHC's broader client offering. The initial consideration of $22 million was funded 80% ($17.6 million) in cash and 20% ($4.4 million) through the issue of new common shares in PPHC to MultiState. Further earnout payments are contingent on MultiState achieving profit growth targets between 2022 and 2027, promoting alignment with the Group's growth objectives. Significant revenue and profit synergy potential exists via the referral of existing clients from the PPHC network. The acquisition is substantially and immediately accretive to underlying earnings per share in 2023.

Also announced on 1 March 2023, and related to the MultiState acquisition, PPHC entered into a $17 million credit facility with Bank of America, N.A.  Key components were:

·   Facility 1: a $3 million Senior Secured Line of Credit. The interest rate payable on this facility is the Bloomberg Short-Term Bank Yield Index plus 225 basis points.

·   Facility 2: $14 million Senior Secured Term Loan. The interest rate payable on this facility is the Bloomberg Short-Term Bank Yield Index plus 225 basis points.

·   The Credit Facility will mature on 31 January 2026.

Credit Facility 2 was deployed alongside balance sheet cash to fund the cash element of the initial consideration in relation to the acquisition of MultiState. The Group recognises the importance of its ability to utilise, depending on market conditions, both the equity and debt markets to fund its growth strategy. Maintaining flexibility facilitates the Group's wider capital allocation policy, which includes the payment of dividends, in a de-risked manner.

Financial Guidance

·   Management continues to expect revenue to grow by 5 to 10% organically, supplemented by growth from past and future M&A transactions. 

·   The Group continues to manage the business such that Underlying EBITDA as percentage of revenue is estimated to range between 25% and 30%.

·   We expect to make further investments in 2023 to continue to build out our platform to support further growth.

Basis of preparation

The Company was incorporated on 4 February 2021, and was admitted to trading on the AIM market of the London Stock Exchange on 16 December 2021 (the "IPO"). The 2022 figures, for the consolidated financial statements in this annual report, represent the first full year of Public Policy Holding Company, Inc. following its IPO. The comparative figures presented in this report for the year ended 31 December 2021 are for Public Policy Holding Company, LLC and its subsidiary companies, the businesses of which were contributed to the Company immediately prior to the IPO. For the year ended 31 December 2021, the consolidated figures represent the results of the underlying business for the whole financial period before and after the IPO. The financial statements have been prepared in accordance with US GAAP (Generally Accepted Accounting Principles).

When the Company purchases services or goods on behalf of its clients (for example in the case of media purchases), the Group does not recognize the purchased goods as net revenue, but only the net fees earned on the purchases. Therefore, purchases on behalf of clients do not materially impact the top-line or the margins.

Management believes that Underlying EBITDA and Underlying Net Income are more useful performance indicators than the reported Net Income. Four elements distinguish our Underlying Net Income from our Reported Net Income:

(1) Share-based accounting charge: As already mentioned in last year's report, the shares retained by employee shareholders following the IPO are subject to a vesting schedule; Also, their employment agreements contain certain provisions which enable cash derived from the sale of shares at the time of the IPO to be clawed back and forfeited on certain events of termination of employment. These items create a share-based accounting noncash charge in accordance with accounting guidance under US GAAP (Accounting Standards Codification, 718- 10-S99-2, compensation-stock compensation). Based on the value of the Company at the time of admission ($197 million) and taking into account the 14.6% of pre-admission employee shares sold in 2021, the 2022 non-cash charge is $33.4 million (2021: $27.6 million).  This share-based accounting non-cash charge has no impact on either tax or Company operations.

(2) Post-combination compensation charge: In 2022, the Group completed the acquisition of KP Public Affairs on 1 October 2022. Also, the Engage team was brought in-house (digital services supplier to Forbes Tate Partners) on 1 November 2022. To protect the interests of the Group, the shares issued as part of these two transactions were made subject to vesting schedules. 

And also, to a certain degree, the cash paid as part of these transactions can be clawed back and forfeited on certain events of termination of employment. The addition of these provisions to purchase price paid creates a post-combination compensation charge in accordance with accounting guidance under US GAAP (Accounting Standards Codification, ASC 805-10-55-25). The 2022 charge is $2.4 million (2021: $0 million).  Again, this is non-cash charge and has no impact on either tax or Company operations.

(3) LTIP charges. In 2022 the Group issued the first stock-based compensation units under the Omnibus Plan. This plan was introduced at the time of the IPO and allows the Group to issue up to a certain number of stock-related units (e.g. options, restricted stock).  In 2022 PPHC issued 2.8 million stock options at a premium exercise price (market price at time of grant plus 20%), exercisable at the 3^rd anniversary of the grant.  The charges relating to this issue, $0.3 million in 2022, as reflected in our P&L were computed using the Black Scholes method.

(4) Amortization of intangibles: The non-cash amortization charge of $2.1 million relates to the amortization of customer relationships per ASC 805. 

(**) EPS Underlying Net Income for 2021 based on the average number of shares in the post-IPO period from 16 December 2021 to 31 December 2021, being 108,240,250

Consolidated Balance Sheets

December 31, 2022 and 2021

	2022	2021
Assets
Current assets: Cash	$  21,202,456	$  18,035,641
Accounts receivable, net	12,149,803	8,214,002
Note receivable - related party, current portion	-	263,850
Prepaid post-combination compensation, current portion	441,852	-
Prepaid expenses and other current assets	1,411,421	490,712
Total current assets	35,205,532	27,004,205
Property and equipment, net	688,313	788,598
Note receivable - related party, long term	513,000	-
Operating lease right of use asset	16,239,667	15,907,571
Goodwill	47,909,832	44,893,532
Other intangible assets, net	18,575,116	12,877,567
Deferred income tax asset	2,278,400	-
Prepaid post-combination compensation, long term	515,500	-
Other long-term assets	118,887	553,957
Total assets	$ 122,044,247	$  102,025,430

Liabilities

Current liabilities:

Accounts payable and accrued expenses	$  12,336,324	$  8,329,355
Income taxes payable	4,150,389	522,500
Amounts owed to related parties	1,276,479	6,696,795
Deferred revenue	2,860,889	1,942,536
Operating lease liability due within one year	3,907,543	3,374,724
Contingent consideration, current portion	1,779,000	-
Other liability, current portion	1,821,600	-
Notes payable, current portion	20,664	20,664
Total current liabilities	28,152,888	20,886,574
Notes payable, long term	189,975	216,048
Deferred income tax liability	-	2,914,600
Contingent consideration, long term	2,466,000	-
Other liability, long term	435,060	-
Operating lease liability, long term	14,815,236	15,262,878
Total liabilities	46,059,159	39,280,100

Stockholders' equity

Common stock, $0.001 par value, 1,000,000,000

shares authorized, 109,346,480 and 108,240,250 shares issued and outstanding, respectively	108,024	108,240
Additional paid-in capital	120,713,626	86,892,903
Accumulated deficit	(44,836,562)	(24,255,813)
Total stockholders' equity	75,985,088	62,745,330
Total liabilities and stockholders' equity	$ 122,044,247	$ 102,025,430

Consolidated Statements of Operations

For the Years Ended December 31, 2022 and 2021

	2022	2021
Revenue	$   108,814,491	$ 99,336,460
Expenses: Personnel cost	52,252,267	44,070,612
Employee bonuses	11,010,439	17,626,133
General and administrative expenses	10,432,781	8,184,253
Occupancy expense	3,933,014	3,650,562
Depreciation and amortization expense	2,229,197	2,012,645
Long term incentive program charges	317,679	-
Profit bonuses	-	19,892,634
Total expenses before share-based accounting (ASC 718-10-S99-2) charge and post-combination compensation (ASC 805-10-55-25) charge	80,175,377	95,436,839
Income from operations before share based accounting (ASC 718-10-S99-2) charge and post-combination compensation (ASC 805-10-55-25) charge	28,639,114	3,899,621
Share-based accounting (ASC 718-10-S99-2) charge	33,392,300	27,609,214
Post-combination compensation (ASC 805-10-55-25) charge	2,441,052	-
Loss from operations	(7,194,238)	(23,709,593)
Interest expense	16,873	51,520
Net loss before income taxes	(7,211,111)	(23,761,113)
Income tax expense	7,797,600	494,700
Net loss	$ (15,008,711)	$ (24,255,813)
Net loss per share attributable to common stockholders, basic and diluted	$ (0.14)	$ (0.24)
Weighted average common shares outstanding, basic and diluted	108,136,853	100,338,632

  Consolidated Statements of Stockholders' Equity

For the Years Ended December 31, 2022 and 2021

Common Stock

	Shares	Amount	Additional Paid-In Capital	Members' Equity	Accumulated Deficit	Total Stockholders' Equity
Balance as of December 31, 2020	-	$            -	$            -	$  58,672,734	$            -	$ 58,672,734
Distributions to members	-	-	-	(444,235)	-	(444,235)
Shares issued due to conversion from LLC to C-Corporation	100,000,000	100,000	58,128,499	(58,228,499)	-	-
Issuance of common shares, net of commissions and fees of $1,634,554	8,240,050	8,240	13,357,206	-	-	13,365,446
Syndication costs	-	-	(4,797,076)	-	-	(4,797,076)
Income tax effect of conversion from LLC to C C-Corporation	-	-	(2,942,400)	-	-	(2,942,400)
Holdings Distribution Discount	-	-	(4,462,540)	-	-	(4,462,540)
Share-based accounting (ASC 718-10-S99-2) charge	-	-	27,609,214	-	-	27,609,214
Net loss	-	-	-	-	(24,255,813)	(24,255,813)
Balance as of December 31, 2021	108,240,050	108,240	86,892,903	-	(24,255,813)	62,745,330
Stock option expense	-	-	317,679	-	-	317,679
Dividends	-	-	-	-	(5,572,254)	(5,572,254)
Forfeiture of unvested restricted stock	(215,662)	(216)	-	-	216	-
Share-based accounting (ASC 718-10-S99-2) charge	-	-	33,392,300	-	-	33,392,300
Post-combination compensation (ASC 805-55-10-25) charge-shares	-	-	110,744	-	-	110,744
Net loss	-	-	-	-	(15,008,711)	(15,008,711)
Balance as of December 31, 2022	108,024,388	$ 108,024	$ 120,713,626	$  -	$ (44,836,562)	$   75,985,088

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2022 and 2021

	2022	2021
Cash flows from operating activities
Net loss	$ (15,008,711)	$ (24,255,813)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation	100,285	127,833
Amortization expense - intangibles	2,128,912	1,884,812
Amortization of right of use assets	3,115,249	2,943,400
Provision for deferred income taxes	(589,961)	(27,800)
Share-based accounting (ASC 718-10-S99-2) charge	33,392,300	27,609,214
Stock-based compensation	317,679	-
Amortization of prepaid post-combination compensation (ASC 805-55-10-25)	73,648	-
Post-combination compensation (ASC 805-55-10-25) charge-shares	110,744	-
(Increase) decrease in
Accounts receivable, net	(3,935,801)	(3,267,547)
Other assets	(368,068)	(378,012)
Increase (decrease) in
Accounts payable and accrued expenses	3,805,605	2,546,171
Income taxes payable	3,627,889	522,500
Deferred revenue	682,806	1,879,225
Operating lease liability	(3,362,168)	(2,668,786)
Other liability	2,256,660	-
Transactions with members/related parties	(5,669,466)	(2,276,974)
Net cash provided by operating activities	20,677,602	4, 638,223
Cash flows from investing activities
Purchases of property and equipment	-	(36,630)
Cash paid for acquisitions and prepaid post-combination compensation, net of cash	(11,912,460)	-
Net cash used in investing activities	(11,912,460)	(36,630)
Cash flows from financing activities
Syndication costs and other stock issuance costs	-	(4,638,271)
Issuance of common stock	-	13,755,665
Net proceeds (payments) from line of credit and notes payable	(26,073)	(1,382,030)
Distributions	(5,572,254)	(444,235)
Net cash provided by (used in) financing activities	(5,598,327)	7,291,129
Net increase in cash and cash equivalents	3,166,815	11,892,722
Cash and cash equivalents as of beginning of year	18,035,641	6,142,919
Cash and cash equivalents as of end of year	$ 21,202,456	$ 18,035,641
Supplemental disclosure of cash flow information
Cash paid for interest	$ 16,873	$ 51,520
Cash paid for income taxes	$ 4,770,409	$  -
Right of use assets obtained with lease liabilities	$ 3,447,345	$ 3,057,555
Contingent consideration issued for acquisitions	$ 4,245,000	$  -
Increase in deferred revenue from acquisitions	$ 235,547	$  -
Increase in accounts payable and accrued expenses from acquisitions	$ 201,364	$  -
Increase in other assets from acquisitions	$117,571	$  -
Income tax effect of conversion of LLC to C-Corporation	$  -	$ 2,942,400
Holdings Distribution Discount	$  -	$ 4,462,540
Commissions and fees paid through issuance of common stock	$  -	$ 1,244,335

 

Notes to Consolidated Financial Statements

 

 

NOTE 1           ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Organization and Basis of Presentation:

Public Policy Holding Company, Inc. ("PPHC-Inc.") was incorporated on February 4, 2021. From PPHC- Inc.'s incorporation until December 10, 2021 (the "Conversion Date"), all of the issued and outstanding shares of stock of PPHC-Inc. were owned by Public Policy Holding Company, LLC ("PPHC-LLC"), which (i) was organized as a Delaware limited liability company on July 1, 2014, and (ii) owned certain wholly-owned operating subsidiaries, all organized as Delaware limited liability companies (the "Subsidiaries," and collectively with PPHC-Inc., the "Company"). On the Conversion Date, PPHC-LLC contributed and assigned substantially all of its assets and liabilities (including all of the Subsidiaries, but excluding certain specified assets and liabilities) to PPHC-Inc. in exchange for the issuance by PPHC- Inc. of 100,000,000 shares (the "Contribution Shares") of Common Stock, par value $0.001 per share ("Common Stock") of PPHC-Inc. Pursuant to a formula approved by the Executive Board and General Board of PPHC-LLC (the "Waterfall"), PPHC LLC then liquidated and distributed the Contribution Shares to each of PPHC-LLC's owners who (other than The Alpine Group, Inc.), in turn, distributed such shares to their respective owners in accordance with the Waterfall (collectively, the "Company Conversion").

The Company provides governmental and public affairs consulting services exclusively in the United States of America ("U.S.").

The Company has prepared the accompanying consolidated financial statements in conformity with generally accepted accounting principles in the United States of America ("GAAP"). Such consolidated financial statements reflect all adjustments that are, in management's opinion, necessary to present fairly, in all material respects, the Company's financial position, results of operations and cash flows, and are presented in U.S. Dollars. All material intercompany transactions and balances have been eliminated in consolidation.

Principles of Consolidation:

The consolidated financial statements include all of the accounts of the entities listed below:

Parent company:

Public Policy Holding Company, Inc.

Wholly owned operating subsidiaries:

Crossroads Strategies, LLC Forbes Tate Partners, LLC

Blue Engine Message & Media, LLC, doing business as Seven Letter O'Neill & Partners LLC, doing business as O'Neill & Associates Alpine Group Partners, LLC

KP Public Affairs, LLC

On January 1, 2020, the Company formed Seven Letter ONA to do business in the State of Massachusetts. Revenue and expense from Seven Letter ONA will be allocated to Seven Letter and O'Neill & Associates.

Initial Public Offering:

On December 16, 2021, PPHC-Inc. completed an initial public offering and placement ("IPO") of its shares of Common Stock, and the admission of Common Stock to trading on the AIM market of the London Stock Exchange.

The PPHC-LLC Limited Liability Company Agreement ("LLC Agreement") provided for the payment of a "Holdings Distribution Discount" in connection with a sale or IPO of the Company, amounting to

$4,462,540 (excluding an interest accrual which is being waived). The Holdings Distribution Discount represents the difference between an operating subsidiary paying three percent of its revenues annually to PPHC-LLC (which has historically been paid by all operating subsidiaries other than Crossroads Strategies, LLC and Forbes Tate Partners, LLC), and each of Crossroads Strategies, LLC and Forbes Tate, LLC, which, as the founding businesses acquired by PPHC-LLC, have paid approximately five percent of their respective revenues annually to PPHC-LLC. Historically, PPHC-LLC and its members viewed this obligation of PPHC-LLC (triggered by the IPO) as an obligation to refund Crossroads Strategies, LLC and Forbes Tate, LLC, their relative overpayments (compared to the other operating subsidiaries) because had those overpayments not been made to PPHC-LLC, those amounts could have been paid as additional bonuses or distributions to the owners of Crossroads Strategies, LLC and Forbes Tate, LLC. This obligation of PPHC-LLC has been contributed and assigned to and assumed by the Company as part of the Contribution Agreement entered into in connection with the Company Conversion. Upon the Company's payment of the Holdings Distribution Discount to Crossroads Strategies, LLC and Forbes Tate, LLC, it is anticipated that Crossroads Strategies, LLC and Forbes Tate, LLC will, in turn, distribute such amounts to their respective owners including but not limited to Stewart Hall and Zachary Williams. As of December 31, 2021, the Holdings Distribution Discount of approximately $4,463,000 is included in the amounts owed to related parties in the Company's Consolidated Balance Sheets. This amount was paid in full during 2022.

In addition, certain assets and liabilities were not contributed by PPHC-LLC to the Company as part of the Company Conversion. As of December 31, 2021, the net amount owed to the PPHC-LLC members approximates $2,234,000 and is included in amounts owed to related parties in the Company's Consolidated Balance Sheets. This amount was paid in full during 2022.

During 2021, all the ultimate owners of PPHC-LLC ("Group Executives") entered into Executive Employment Agreements. The Group Executives sold some of their Common Stock in conjunction with the IPO ("Liquidated Pre-IPO Shares") but retained the majority of their shares ("Retained Pre-IPO Shares"). The Retained Pre-IPO Shares are subject to a vesting schedule under which the Common Stock held by each Group Executive will vest in equal installments on the first five anniversaries of the effective date of the IPO, provided that the Group Executive remains continuously employed by the employer; this vesting schedule applies to all the Company's employees holding Common Stock at the time of the IPO. In the event that a Group Executive's employment terminates (other than on death or "disability", or by the employer without "cause", or by the Group Executive for what is deemed to be for a "good reason") then the unvested proportion of the Retained Pre-IPO Shares which have not vested, will not vest and will be automatically forfeited and clawed back as of the date of such termination. In the event a Group Executive's employment terminates on death or "disability," or by the employer without "cause," or by the Group Executive for what is deemed to be "good reason," then all unvested shares will vest automatically as of the date of such termination. The Executive Employment Agreements also contain certain provisions which enable cash derived from the sale of Liquidated Pre-IPO Shares and Retained Pre-IPO Shares that have vested to be clawed back and forfeited on certain events of termination of employment or breaches of certain provisions of the Executive Employment Agreements. Pursuant to the Executive Employment Agreements for Group Executives employed by Alpine Group Partners, a pro-rata portion of the Retained Pre-IPO Shares held by (and the Liquidated Pre-IPO Shares sold by) The Alpine Group Inc. are subject to vesting, forfeiture and claw back based on the employment of certain of those Group Executives.

The addition of the vesting provisions to previously issued shares creates a share-based accounting charge in accordance with the accounting guidance in Accounting Standards Codification ("ASC") 718- 10-S99-2, Compensation-Stock Compensation. See Note 7.

Revenue Recognition:

The Company generates the majority of its revenue by providing consulting services related to lobbying and public affairs. In determining the method and amount of revenue to recognize, the Company has to make judgments and estimates. Specifically, complex arrangements with nonstandard terms and conditions may require management's judgment in interpreting the contract to determine the appropriate accounting, including whether the promised services specified in an arrangement are distinct performance obligations and should be accounted for separately, and how to allocate the transaction price, including any variable consideration, to the separate performance obligations. When a contract contains multiple performance obligations, the Company allocates the transaction price to each performance obligation based on its estimate of the stand-alone selling price. Other judgments include determining whether performance obligations are satisfied over-time or at a point-in-time and the selection of the method to measure progress towards completion.

The Company's general practice is to establish an agreement with a client with a fixed monthly payment at the beginning of each month for the month's service to be performed. Most of the consulting service contracts are based on one of the following types of contract arrangements:

·   Fixed-fee arrangements require the client to pay a fixed fee in exchange for a predetermined set of professional services. The Company recognizes revenue at the beginning of the month for that month's services.

·   Additional services include items such as 1) advertisement placement and management, 2) video production, and 3) website development, in which third-party companies may be engaged to achieve specific business objectives. These services are either in a separate contract or within the fixed-fee consulting contract, in which the Company usually receives a fixed 15% markup on the cost incurred by the Company. The Company recognizes revenues earned to date in an amount that is probable or unlikely to reverse and by applying the proportional performance method when the criteria for revenue recognition is met. Any out-of-pocket administrative expenses incurred are billed at cost.

Certain services provided by the Company include the utilization of a third-party in the delivery of those services. These services are primarily related to the production of an advertising campaign or media buying services. The Company has determined that it acts as an agent and is solely arranging for the third-parties to provide services to the customer. Specifically, the Company does not control the specified services before transferring those services to the customer, and is not primarily responsible for the performance of the third-party services, nor can the Company redirect those services to fulfill any other contracts. The Company does not have discretion in establishing the third-party pricing in its contracts with customers. For these performance obligations for which the Company acts as an agent, the Company records revenue as the net amount of the gross billings less amounts remitted to the third-party.

The following table provides disaggregated revenue by revenue type for the periods ended December 31:

	2022	2021
Lobbying revenue	$ 78,177,680	$70,125,726
Public affairs revenue	30,636,811	29,210,734
Total revenue	$ 108,814,491	$99,336,460

See the Segment Reporting Note 11 for a description of the principal activities, by reportable segment, from which the Company generates revenue.

As of January 1, 2022 and 2021, the accounts receivable, net and deferred revenue was approximately

$8,214,000 and $1,943,000 and $6,623,000 and $1,502,000, respectively. The following table provides information about receivables, contract assets and contract liabilities from contracts with customers as of December 31:

	2022	2021
Accounts receivable, net	$ 11,585,267	$ 8,109,353
Other receivables	564,536	104,649
Contract liabilities (deferred revenue)	2,860,889	1,942,536

Contract liabilities relate to advance consideration received from customers under the terms of the Company's contracts primarily related to retainer fees and reimbursements of third-party expenses, both of which are generally recognized shortly after billing.  The deferred revenue of $1,942,536 and

$1,502,176 from December 31, 2021 and 2020 was recognized as revenue in 2022 and 2021, respectively.

Cash and Cash Equivalents:

The Company considers all cash investments with original maturities of three months or less to be cash equivalents. At times, the Company maintains cash accounts that exceed federally insured limits, but management does not believe that this results in any significant credit risk.

Accounts Receivable:

The Company provides for an allowance for doubtful accounts based on management's best estimate of possible losses determined principally on the basis of historical experience and specific allowances for known troubled accounts, if needed. Accounts are generally considered past due after the contracted payment terms, which are generally net 30 day terms. All accounts or portions thereof that are deemed to be uncollectible or that require an excessive collection cost are written off to the allowance for doubtful accounts. As of December 31, 2022, the balance of allowance for doubtful accounts approximated

$595,000. The Company determined that no allowance for doubtful accounts was necessary as of December 31, 2021.

Leases:

A lease is defined as a contract that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. The Company accounts for its leases in accordance with the guidance in Accounting Standards Codification ("ASC") 842 ("ASC 842"). Substantially all of the leases in which the Company is the lessee are comprised of real estate property for remote office spaces and corporate office space. Substantially all of the leases are classified as operating leases.

As of December 31, 2022 and 2021, the Company had approximately $16,240,000 and $15,908,000, respectively, of operating lease ROU assets and $18,723,000 and $18,638,000, respectively of operating lease liabilities on the Company's Consolidated Balance Sheets. The Company has elected not to recognize right-of-use ("ROU") assets and lease liabilities arising from short-term leases, leases with initial terms of twelve months or less, or equipment leases (deemed immaterial) on the Consolidated Balance Sheets.

These leases may contain terms and conditions of options to extend or terminate the lease, which are recognized as part of the ROU assets and lease liabilities when an economic benefit to exercise the option exists and there is a significant probability that the Company will exercise the option. If these criteria are not met, the options are not included in the Company's ROU assets and lease liabilities. Variable lease payment amounts that cannot be determined at the commencement of the lease, such as common area maintenance expenses and increases in lease payments based on changes in index rates, are not included in the ROU assets or liabilities. These variable lease payments are expensed as incurred.

As of December 31, 2022, these leases do not contain material residual value guarantees or impose restrictions or covenants related to dividends or the Company's ability to incur additional financial obligations.

The discount rate for operating leases was based on market rates from a bank for obligations with comparable terms effective at the lease inception date. The following table presents lease costs, future minimum lease payments and other lease information as of December 31:

2023 ..................................................................................................................................	$ 4,648,767
2024 ..................................................................................................................................	3,743,718
2025 ..................................................................................................................................	3,742,928
2026 ..................................................................................................................................	3,735,364
2027 ..................................................................................................................................	2,775,487
Thereafter..........................................................................................................................	2,546,780
Total future minimum lease payments	21,193,044
Amount representing interest	(2,470,265)
Present value of net future minimum lease payments	$18,722,779

  Lease Cost

Year ending December 31:
	2022	2021
Operating lease cost (cost resulting from lease payments)	$ 4,011,764	$ 3,829,749
Variable lease cost (cost excluded from lease payments)	264,179	171,958
Sublease income	(396,000)	(400,890)
Net lease cost	$ 3,879,943	$ 3,600,817
Operating lease - operating cash flows (fixed payments)	$ 4,264,516	$ 3,938,149
Weighted average lease term - operating leases	5.2 years	5.1 years
Weighted average discount rate - operating leases	4.80%	3.98%

The Company subleases office space to third parties under separate sublease agreements, which are scheduled to expire during 2023. The amount of future sublease income from subtenants as of December 31, 2022 is immaterial.

Property and equipment:

Property and equipment consists of furniture, equipment and leasehold improvements and is carried at cost less accumulated depreciation. Depreciation is provided generally on a straight-line method over the estimated useful lives of the related assets ranging from 5 to 15 years.

Business Combination

In a business combination, the acquisition method of accounting requires that the assets acquired and liabilities assumed be recorded as of the date of the acquisition at their respective fair values with limited exceptions. Assets acquired and liabilities assumed in a business combination that arise from contingencies are generally recognized at fair value. If fair value cannot be determined, the asset or liability is recognized if probable and reasonably estimable; if these criteria are not met, no asset or liability is recognized. Transaction costs are expensed as incurred. The operating results of the acquired business are reflected in the Company's consolidated financial statements after the date of acquisition.

Goodwill and indefinite-lived intangible assets:

Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed in business combinations and is allocated to the appropriate reporting unit when acquired. Acquired intangible assets are recorded at fair value.

Goodwill is evaluated for impairment annually during the fourth quarter, or more frequently if an event occurs, or circumstances change that could more likely than not reduce the fair value of a reporting unit below its carrying value. Goodwill is typically assigned to the reporting unit, which consolidates the acquisition. Components within the same reportable segment are aggregated and deemed a single reporting unit if the components have similar economic characteristics. As of December 31, 2022, the Company's reporting units consisted of Lobbying Consulting and Public Affairs Consulting. Goodwill is evaluated for impairment using either a qualitative or quantitative approach for each of the Company's reporting units. Generally, a qualitative approach is first performed to determine whether a quantitative goodwill impairment test is necessary. If management determines, after performing an assessment based on qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount or that a fair value of the reporting unit substantially in excess of the carrying amount cannot be assured, then a quantitative goodwill impairment test would be required. The quantitative test for goodwill impairment is performed by determining the fair value of the related reporting units. Fair value is measured based on the discounted cash flow method, which requires management to estimate a number of factors for each reporting unit, including projected future operating results, anticipated future cash flows and discount rates. Management has performed its evaluation and determined the fair value of each reporting unit is greater than the carrying amount and, accordingly, the Company has not recorded any impairment charges related to goodwill for the years ended December 31, 2022 and 2021.

Indefinite-lived intangible assets are tested for impairment annually during the fourth quarter, or more frequently if an event occurs or circumstances change that could more likely than not reduce the fair value below its carrying value. The Company's indefinite-lived intangible assets consist of trademarks acquired through various business acquisitions. The Company has the option to first assess qualitative factors to determine whether events or circumstances indicate it is more likely than not that the fair value of the trademarks is greater than the carrying amount, in which case a quantitative impairment test is not required. Management has performed its evaluation and determined that the trademarks are not impaired for the years ended December 31, 2022 and 2021.

Customer relationship asset:

The Company's definite-lived intangible asset consists of customer relationships that have been acquired through various acquisitions. The Company amortized these assets over their estimated useful lives.

Impairment of long-lived assets:

Long-lived assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for an amount by which the carrying amount of the asset exceeds the fair value of the asset. The Company has not recorded any impairment charges related to long-lived assets for the years ended December 31, 2022 and 2021.

Syndication costs:

Deferred offering costs consist primarily of consulting fees related to the initial public offering (IPO). Prior to the IPO, all deferred offering costs were capitalized and included in the consolidated balance sheets. During December 2021, these costs totaling approximately $4,797,000 were recorded as a reduction to stockholders' equity.

Deferred revenue:

Deferred revenue represents prepayment by the customers for services that have yet to be performed. As of December 31, 2022 and 2021, deferred revenue was approximately $2,861,000 and $1,943,000, respectively. Deferred revenue is expected to be recognized as revenue within a year.

Accounts payable and accrued expenses:

Accounts payable and accrued expenses consist of the following as of December 31:

	2022	2021
Accounts payable	$ 1,199,130	$ 2,458,292
Bonus payable	9,425,261	3,945,621
Other accrued expenses	1,711,933	1,925,442
Total	$12,336,324	$ 8,329,355

Marketing and advertising costs:

The Company expenses marketing and advertising costs as incurred. Marketing and advertising expense for the years ended December 31, 2022 and 2021 was approximately $182,000 and $102,000, respectively.

Income taxes:

Prior to the Conversion Date, PPHC-LLC was a limited liability company whereby the tax attributes were passed through to and reported on the members of PPHC-LLC's tax returns.

After the Conversion Date, the Company utilizes the asset and liability method in the Company's accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. The Company records a valuation allowance against deferred tax assets when realization of the tax benefit is uncertain.

A valuation allowance is recorded, if necessary, to reduce net deferred taxes to their realizable values if management believes it is more likely than not that the net deferred tax assets will not be realized.

The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.

Profit bonuses:

Prior to the IPO, annual bonus payments were paid as compensation for services to senior executives and employees based on the profits of the Company.

Estimates:

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Share-based accounting charge and stock option expense:

The Company accounts for its share-based accounting (ASC 718-10-S99-2) charge using the fair value method. The fair value method requires the Company to estimate the grant-date fair value of its share- based awards and amortize this fair value to expense over the requisite service period or vesting term. For restricted and nonvested stock awards, the grant-date fair value is based upon the market price of the Company's common stock on the date of the grant. For stock options, the grant-date fair value is based on the Black-Scholes Option Pricing Model. The Company records forfeitures as they occur.

Segment information:

GAAP requires segmentation based on an entity's internal organization and reporting of revenue and operating income based upon internal accounting methods commonly referred to as the "management approach." Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker ("CODM"), or decision making group, in deciding how to allocate resources and in assessing performance. The Company's CODM is its Chief Executive Officer. The Company's operations are conducted in two reportable segments. These segments consist of Lobbying Consulting and Public Affairs Consulting.

Basic and diluted earnings (loss) per share:

The Company computes earnings (loss) per share in accordance with ASC 260, Earnings per Share, which requires presentation of both basic and diluted earnings per share on the face of the consolidated statements of operations. Basic earnings (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of outstanding shares during the period. Diluted earnings (loss) per share gives effect to all dilutive potential common shares outstanding during the period. Due to their anti-dilutive effect, the calculation of diluted net loss per share for the years ended December 31, 2022 and 2021 does not include the common stock equivalent shares below:

	2022	2021
Common shares outstanding	108,024,388	108,240,050
Stock options outstanding	2,718,809	-
Restricted stock	1,322,092	-
Total common stock equivalents	4,040,901	-
Total fully diluted shares	112,065,289	108,240,050

Fair value of financial instruments:

The carrying values of cash, accounts receivable, and accounts payable and accrued expenses at December 31, 2022 and 2021 approximated their fair value due to the short maturity of these instruments.

Reclassification:

Certain categorizations of the 2021 segment disclosures have been reclassified to conform to the 2022 presentation. These reclassifications had no impact on the total results or net assets of the Company.

Subsequent events:

Management has evaluated the subsequent events for disclosure in these consolidated financial statements.

NOTE 2           ACQUISITIONS

KP Public Affairs LLC

On October 1, 2022, the Company entered into an Asset Purchase Agreement ("KP Agreement") and acquired certain assets and assumed certain liabilities of KP Public Affairs LLC ("Seller" or "KP LLC") through the creation of a wholly-owned subsidiary, KP Public Affairs, LLC ("KP"). At the closing of the transaction, the Company paid the Seller cash in the amount of $10,306,800 ("Closing Cash Payment") and issued 739,589 shares of the Company's common stock ("Closing Share Payment") to Seller at an aggregate fair value of $1,145,200.

In addition, the Company will pay Seller an additional amount of consideration totaling up to $4,048,000 ("Closing True-Up Payment") based on specific operating results (as defined in the KP Agreement) of KP through December 31, 2022. The payment of the Closing True-Up Payment will be pro-rated as ninety percent cash and ten percent shares of the Company's stock. There are additional contingent payments that the Seller can earn in the future depending on certain operating results that are achieved. The total amount of consideration that the Company could be required to pay to the Seller in the amount of cash and stock ("Seller Shares") is $35,000,000. The equity component of the contingent payments ranges between 20% and 35%.

The KP Agreement provides certain forfeiture provisions applicable to any future cash or share payments owed, which generally require the owners of KP LLC ("Owner" or "Owners") to remain employed by the Company for a certain period of time to receive the full amount of those future payments. There are certain exceptions to the forfeiture provisions if termination of employment occurs under certain permitted events ("Acceleration Event") as defined in the KP Agreement.

In addition, under certain circumstances outlined in the KP Agreement, the Company can claw back a portion of certain payments previously paid if an Owner is not employed by the Company as of December 31, 2026.

If an Owner's employment is terminated as a result of an Acceleration Event, a percentage of the unvested Seller Shares (representing such Owner's ownership percentage in Seller) shall become fully vested. The Seller Shares issued have some restrictions but they also have certain legal rights consistent with the Company's other shares of Common Stock outstanding, including certain voting rights and the rights to dividends paid by the Company. In addition, the KP Agreement contains certain provisions requiring the forfeiture of a percentage of all cash and shares received by Seller if certain restrictive covenants are breached by an Owner.

Reasons for the Acquisition

The Company acquired KP LLC to expand its governmental and public affairs consulting services provided to state and local governments. Specifically, KP LLC provides significant services to companies and organizations doing business in the state of California.

Accounting for the Acquisition

The acquisition of Seller was accounted for as a business combination and reflects the application of acquisition accounting in accordance with ASC 805, Business Combinations ("ASC 805"). The acquired assets, including identifiable intangible assets and liabilities assumed, have been recorded at their estimated fair values with the excess purchase price assigned to goodwill.

Purchase Consideration

The Company determined that certain consideration provided to Sellers in the KP Agreement does not qualify as purchase consideration in accordance with the guidance of ASC 805. The Company determined that the purchase consideration consists of the amount of cash payments owed to Sellers that are not subject to a vesting or claw back provision that is directly linked to the continued employment of Sellers. The total purchase consideration consisted of the following amounts:

Closing Cash Payment	$ 10,306,800
Contingent consideration	4,245,000
Total purchase consideration	$ 14,551,800

The contingent consideration consists of the estimated fair value of the Closing True-Up Cash Payment, Interim Earnout Cash Payment, and Final Earnout Cash Payment that are not subject to a vesting requirement or claw back provision directly linked to the future employment of Owners.

Purchase Price Allocation

The allocation of the purchase consideration resulted in the following amounts being allocated to the assets acquired and liabilities assumed as of the purchase date of October 1, 2022 based on their respective estimated fair values summarized below:

Cash	$     139,547
Other current assets	69,000
Right of use assets	3,273,766
Tradename	1,091,000
Noncompete agreements	306,000
Customer relationship	5,861,000
Deferred income tax asset	4,277,500
Goodwill	3,016,300
Other current liabilities	(208,547)
Lease liability	(3,273,766)
Total estimated purchase price	$14,551,800

The identified definite-lived intangible assets were as follows:

Definite-lived intangible assets	Weighted-average useful life (in years)	Amount
Customer relationship	7	$5,861,000
Noncompete agreements	5	$306,000

The fair value of customer relationships was determined using the income approach, which requires management to estimate a number of factors for each reporting unit, including projected future operating results, anticipating future cash flows and discount rates. The fair value of noncompete agreements was determined using an income approach method, which requires management to estimate a number of factors related to the expected future cash flows of KP LLC and the potential impact and probability of competition, assuming such noncompete agreements were not in place. The primary factors that contributed to the goodwill recognized from the KP LLC acquisition include the key employees of KP LLC combined with additional synergies expected from increasing the Company's service capabilities.

Engage LLC

On November 1, 2022, the Company (through its wholly-owned subsidiary, Forbes Tate Partners, LLC) entered into an Asset Purchase Agreement ("Engage Agreement") and acquired certain assets and assumed certain liabilities of Engage LLC ("Engage"). At the closing of the transaction, the Company paid Engage cash in the amount of $1,925,000 ("Engage Cash Payment") and issued 487,301 shares of the Company's common stock ("Engage Restricted Shares") at an aggregate fair value of $825,000.

A portion of the Engage Cash Payment was designated to certain owners ("Junior Principal(s)") of Engage and the remaining of the Engage Cash Payment was designated to the other owners ("Senior Principal(s)") of Engage. In addition, all of the Engage Restricted Shares were issued to the Senior Principals. There are no vesting requirements or claw back provisions linked to continuing employment for the Engage Cash Payment paid to the Junior Principals. There are vesting requirements and claw back provisions linked to continuing employment of the Senior Principals for the Engage Cash Payment paid and Engage Restricted Shares issued to the Senior Principals.

Each of the Senior Principals will vest in the Engage Restricted Shares as long as they remain continuously employed through each applicable vesting date, except if the termination occurs under certain permitted events ("Engage Acceleration Event") as defined in the Engage Agreement. If one of the Senior Principals is terminated as a result of an Engage Acceleration Event, all of such Senior Principal's unvested Engage Restricted Shares shall become fully vested.

The Engage Restricted Shares issued have some restrictions but they also have certain legal rights consistent with the Company's other shares of Common Stock outstanding, including certain voting rights and the rights to dividends paid by the Company.

With respect to the Engage Cash Payment, each of the Senior Principals have a vesting requirement related to their respective cash payment. If any of the Senior Principals is terminated as a result of an Engage Acceleration Event, all of such Senior Principal's unvested Engage Cash Payment shall become fully vested,

In addition, the Engage Agreement contains certain provisions requiring the forfeiture of a respective Senior Principal's Engage Restricted Shares and a portion of the Engage Cash Payment made to both the Junior Principals and Senior Principals if certain restrictive covenants are breached by the respective Junior Principal or Senior Principal.

Reasons for the Acquisition

The Company acquired Engage to expand its governmental and public affairs consulting services provided within the U.S.

Accounting for the Acquisition

The acquisition of Engage was accounted for as a business combination and reflects the application of acquisition accounting in accordance with ASC 805, Business Combinations ("ASC 805"). The acquired assets, including identifiable intangible assets and liabilities assumed, have been recorded at their estimated fair values with the excess purchase price assigned to goodwill.

Purchase Consideration

The Company determined that certain consideration provided to Engage in the Engage Agreement does not qualify as purchase consideration in accordance with the guidance of ASC 805. The Company determined that the purchase consideration consists of the amount of Engage Cash Payment paid to the Junior Principals and the Engage Cash Payment to the Senior Principals that is not subject to vesting or claw back linked to continuing employment, which totaled $894,000. The value of the Engage Restricted Shares of $825,000 and the remaining Engage Cash Payment amount of $1,031,000 ("Prepaid Post- Combination Compensation") will be recognized as a charge to expense in accordance with ASC 805-10- 55-25 (See Note 6).

Purchase Price Allocation

The allocation of the purchase consideration resulted in the following amounts being allocated to the assets acquired and liabilities assumed as of the purchase date of November 1, 2022 based on their respective estimated fair values summarized below:

Cash	$    179,793
Other current assets	48,571
Right of use assets	173,579
Tradename	14,000
Noncompete agreements	140,000
Customer relationship	414,461
Deferred income tax asset	325,539
Other current liabilities	(228,364)
Lease liability	(173,579)
Total estimated purchase price	$ 894,000

The identified definite-lived intangible assets were as follows:

Definite-lived intangible assets	Weighted-average useful life (in years)	Amount
Customer relationship	7	$414,461
Noncompete agreements	4	$140,000

The fair value of customer relationships was determined using the income approach, which requires management to estimate a number of factors for each reporting unit, including projected future operating results, anticipating future cash flows and discount rates. The fair value of noncompete agreements was determined using an income approach method, which requires management to estimate a number of factors related to the expected future cash flows of Engage and the potential impact and probability of competition, assuming such noncompete agreements were not in place.

On November 1, 2018, PPHC-LLC advanced $833,000 to the original members of Blue Engine Message & Media, LLC for the purchase of the ownership interest of JDA Frontline Partners, LLC in the form of a promissory note. The note was scheduled to mature on October 31, 2022, and required the borrowers to make 16 quarterly installment payments of $52,063 commencing on February 15, 2019. Interest on the note was the London Interbank Offered Rate ("LIBOR") daily floating rate plus 2.4%. The note receivable was repaid in full in April 2022. The note receivable balance as of December 31, 2021, was approximately $260,000 with interest receivable of approximately $4,000, which are recorded in note receivable - related party.

NOTE 3           RELATED PARTY TRANSACTIONS

As of December 31, 2021, the amounts owed to related parties include the Holding Distribution Discount of approximately $4,463,000 and the amount owed to PPHC-LLC members as part of the Company Conversion of approximately $2,234,000. These amounts were paid in full during 2022. See Note 1. As of December 31, 2022, the amounts owed to related parties totaling approximately $1,276,000 include the amounts expected to be refunded to the owners of KP LLC and Engage related to the working capital adjustments associated with those acquisitions.

During December 2021, the Company entered into a term note agreement ("2021 Note") with The Alpine Group, Inc. ("Alpine Inc"). The 2021 Note provided Alpine Inc with the ability to request a one-time borrowing of up to $750,000 from the Company at any time prior to December 31, 2022. The purpose of the 2021 Note was to provide Alpine Inc with funds to cover certain federal and state income taxes to be owed by Alpine Inc in connection with the sale of shares of the Company's common stock in the IPO. During April 2022, the Company advanced $513,000 to Alpine Inc in accordance with the terms of the 2021 Note. The interest rate on the 2021 Note is equal to the Prime Rate as published in the Wall Street Journal. The 2021 Note requires an annual payment of accrued and unpaid interest on the last business day of December each year and through the maturity date of January 16, 2025. The note receivable and accrued interest balance as of December 31, 2022 was approximately $526,000, which are recorded in note receivable - related party and prepaid expenses and other assets.

NOTE 4:    GOODWILL AND INTANGIBLE ASSETS

Goodwill

Goodwill is an indefinite lived asset with balances as follows as of December 31:

	2022	2021
Goodwill	$ 47,909,832	$ 44,893,532

As of December, 31, 2022 and 2021, there have been no impairments to goodwill . During 2022, goodwill increased by approximately $3,015,000 as a result of the acquisition of KP LLC and Engage. See Note 2.

Goodwill is allocated to each segment as follows, as of December 31:

	2022	2021
Goodwill
Lobbying consulting	$  35,587,063	$ 34,286,212
Public affairs consulting	12,322,769	10,607,320
Total	$  47,909,832	$ 44,893,532

 

Intangible Assets

The Company's intangible assets consist of customer relationship assets acquired through various acquisitions as well as noncompete agreements acquired through the acquisition of KP LLC and Engage, which are definite lived assets and are amortized over their estimated useful lives. The estimated useful lives for the customer relationship assets range from 7 to 9 years and the estimated useful lives for the noncompete agreements range from 4 to 5 years. In addition, intangible assets consist of tradenames, which are indefinite lived assets and evaluated for impairment on an annual basis or more frequently as needed. The cost of the Company's tradenames, customer relationships and noncompete agreements, and the accumulated amortization of the Company's customer relationships and noncompete agreements is as follows as of December 31:

	2022	2021
Customer relationships	$21,596,261	$15,320,800
Noncompete agreements	446,000	-
Accumulated amortization	(8,385,145)	(6,256,233)
Total indefinite lived assets, net	13,657,116	9,064,567
Tradenames	4,918,000	3,813,000
Total intangible assets, net	$18,575,116	$12,877,567

Amortization expense for customer relationship and noncompete agreement assets approximated $2,129,000 and $1,885,000 for 2022 and 2021, respectively.

The approximate estimated future amortization expense for the next five years is as follows:

                                                                                                   Amortization 

2023.........................................................................................................................   $ 2,667,000

2024..................................................................................................................................  2,456,000

2025..................................................................................................................................  2,440,000

2026..................................................................................................................................  2,288,000

2027..................................................................................................................................  2,237,000

NOTE 5           LINE OF CREDIT AND NOTES PAYABLE

A)  Line of credit

The Company had a $2,000,000 revolving line of credit, which was secured by all business assets. As a sub-facility under the line, standby letters of credit could be issued up to $750,000 to secure office leases. During 2021, the Company repaid the outstanding balance on the line of credit and closed the line of credit. Interest expense on the line of credit for the year ended December 31, 2021 was approximately

$41,000.

B) Note payable - landlord

The Company executed a lease amendment on March 23, 2018, and received a loan of approximately

$316,000 to fund certain tenant improvements. The Company shall repay the loan in equal monthly principal and interest installments over the lease term at an interest rate of 8%, with the final payment due on March 1, 2029. Notwithstanding the foregoing, the Company may submit a notice to the landlord to prepay the outstanding balance upon terms to be agreed upon by the landlord and the Company. The balance on the loan as of December 31, 2022 and 2021, was approximately $211,000 and $237,000, respectively. Interest expense on the note payable - landlord for the years ended December 31, 2022 and 2021 was approximately $17,000 and $19,000, respectively.

As of December 31, 2022, the only outstanding long-term debt is the note payable - landlord and the future maturities of this note payable at December 31 is as follows:

2023 ...................................................................................................................................	$          27,074
2024 ...................................................................................................................................	29,321
2025 ...................................................................................................................................	31,755
2026 ...................................................................................................................................	34,390
2027 ...................................................................................................................................	37,245
Thereafter ..........................................................................................................................	50,854
Total	$          210,639

NOTE 6           STOCKHOLDERS' EQUITY AND SHARE-BASED ACCOUNTING CHARGE

As of December 31, 2022, the authorized capital of the Company consists of 1,100,000,000 shares of capital stock, $0.001 par value per share, of which 1,000,000,000 shares are designated as common stock and 100,000,000 shares are designated as preferred stock. There are no shares of preferred stock outstanding.

As of December 31, 2022, the number of the Company's shares of common stock outstanding for legal purposes was greater than the number of shares of common stock outstanding for accounting purposes. Therefore, the difference between the legally outstanding shares of common stock on the face of the balance sheet of 109,346,480 shares and the amount outstanding on the statement of equity of 108,024,388 consists of shares issued with restrictions (collectively "Restricted Shares") as follows:

Statement of Equity, as of December 31, 2022	108,024,388
Restricted Shares:
Closing Share Payment	739,589
Engage Restricted Shares	487,301
Other Restricted Shares	95,202
Total Restricted Shares	1,322,092
Legally Outstanding Shares, as of December 31, 2022	109,346,480

The weighted-average common shares outstanding, basic and diluted reported on the consolidated statement of operations is 108,136,853, which is different from the 108,024,388 ending shares as of December 31, 2022 due to the first number representing an average during the year compared to the amount outstanding at the end of the year.

Other Restricted Shares consists of shares issued in 2022 to convert a consultant of the Company to a full-time employee. These shares were valued at approximately $178,000 and vest equally on each of January 1, 2023, January 1, 2024 and January 1, 2025.

ASC 718-10-S99-2 Charge

As discussed in Note 1, during 2021 the Company entered into Executive Employment Agreements with Group Executives. As a result, the addition of the vesting provisions to previously issued shares created a share-based accounting charge in accordance with the accounting guidance in ASC 718-10-S99-2, Compensation-Stock Compensation. As a result, the Company recorded a share-based accounting (ASC 718-10-S99-2) charge of $33,392,300 and $27,609,214 in 2022 and 2021, respectively.

As of December 31, 2022, the total number of Liquidated Pre-IPO Shares subject to the claw back provisions totaled 11,328,809. As of December 31, 2022, there were 85,320,625 Retained Pre-IPO Shares subject to vesting requirements and 17,080,032 of these shares were fully vested. These shares were issued in 2021 and the weighted-average grant date fair value of these shares was $1.82 as of the grant date. As of December 31, 2022, the unrecognized compensation cost from these restricted shares was approximately $120,826,000, which is expected to be recognized over a weighted-average period of 4 years.

ASC 805-10-55-25 Charge

During 2022, the Company acquired KP LLC and Engage (see Note 2) for a combination of cash, shares of Company Common Stock and future contingent payments ("Acquisition Payments"). As described in Note 2, a portion of the Acquisition Payments are subject to vesting and/or claw back provisions that are directly linked to the continuing employment of the Owners of KP LLC or Senior Principals of Engage, respectively ("Post-Combination Payments"). As a result, in accordance with the guidance of ASC 805- 10-55-25, Business Combinations, the Post-Combination Payments are not considered part of the purchase consideration for these acquisitions and the fair value of the Post-Combination Payments is being recognized as a charge for post-combination compensation over the period of the applicable vesting requirement or the period over which the claw back rights linked to employment lapse.

For the year ended December 31, 2022, the post-combination compensation charge recorded by the Company was approximately $2,441,000. Approximately $2,257,000 of this amount is recorded as other liability at December 31, 2022. Approximately $111,000 of the post-combination compensation charge is from the issuance of Common Stock that vested as of December 31, 2022 and the remaining approximately $74,000 was from the 2022 amortization of the prepaid post-combination compensation asset. As of December 31, 2022, the unrecognized post-combination compensation charge was approximately $10,104,000, which is expected to be recognized over a weighted-average period of 2.5 years. The actual amount of Post-Combination Payments is subject to significant estimates and could change materially in the future.

NOTE 7           OMNIBUS INCENTIVE PLAN

During 2021, the Company adopted the Public Policy Holding Company, Inc. 2021 Omnibus Incentive Plan (the "Omnibus Plan"), under which Options (both nonqualified options, and incentive stock options subject to favorable U.S. income tax treatment), stock appreciation rights, restricted stock units, restricted stock, unrestricted stock, cash-based awards and dividend equivalent rights may be issued. An award may not be granted if the number of common shares committed to be issued under that award exceeds ten percent of the ordinary shares of the Company in issue immediately before that day, when added to the number of common shares which have been issued, or committed to be issued, to satisfy awards under the Omnibus Plan, or options or awards under any other employee share plan operated by the Company, granted in the five previous years.

As of December 31, 2021, no awards were outstanding under the Omnibus Plan. As of December 31, 2022, the total amount of shares authorized by the Board of Directors under the Omnibus Plan was 2,805,852. During the year ended December 31, 2022 the Company granted 2,794,859 stock options to employees. The stock options have a contractual term of ten years and vest three years after their issuance.

Determining the appropriate fair value model and the related assumptions requires judgment. The fair value of each option granted is estimated using a Black-Scholes option-pricing model on the date of grant as follows:

	For the year ended
	December 31,         2022
Estimated dividend yield	6.00%
Expected stock price volatility	60.00%
Risk-free interest rate	2.7% to 4.1%
Expected life of option (in years)	6.50
Weighted-average fair value per share	$0.58

The expected volatility rates are estimated based on the actual volatility of comparable public companies over the expected term. The expected term represents the average time that options that vest are expected to be outstanding. Due to limited historical data, the Company calculates the expected life based on the midpoint between the vesting date and the contractual term, which is in accordance with the simplified method. The risk-free rate is based on the United States Treasury yield curve during the expected life of the option.

The following summarizes the stock option activity for the year ended December 31, 2022:

			Weighted
		Weighted	Average
		Average	Contractual	Aggregate
	Number of	Exercise	Term	Intrinsic
	Shares	Price	(in years)	Value
Outstanding as of December 31, 2021	-	$           -	-	$           -
Granted*	2,794,859	2.13	-	-
Exercised	-	-	-	-
Cancelled/Forfeited*	(76,050)	2.13	-	-
Outstanding as of December 31, 2022*	2,718,809	$       2.13	9.4	$           -
Exercisable as of December 31, 2022	-	-	-	-
Vested and expected to vest
as of December 31, 2022*	2,718,809	$       2.13	9.4	$           -

*The options are exercisable in Great British Pounds ("GBP") as the Company's shares are issued in GBP. The weighted-average exercise price has been adjusted based on the December 31, 2022 exchange rate of GBP to U.S. Dollars of 1 GBP equals $1.21.

The following table summarizes certain information about the stock options outstanding and exercisable as of December 31, 2022:

Exercise Price	Number of Options Outstanding	Weighted-Average Remaining Life	Number of Options Exercisable
$2.10*	100,000	9.8	-
2.13*	2,568,809	9.4	-
2.15*	50,000	9.6	-
	2,718,809		-

Stock option expense for the year ended December 31, 2022 was approximately $318,000. As of December 31, 2022, there was approximately $1,254,000 of total unrecognized compensation cost related to non-vested stock-based compensation arrangements, which is expected to be recognized over a weighted-average period of 2.4 years.

NOTE 8           INCOME TAXES

Prior to December 10, 2021, the net income (loss) related to the Company's operations were reported as part of a partnership income tax return for federal and state income tax purposes. Because the partnership entity was not subject to income tax at the Company level, no provision for income taxes was required for periods prior to December 10, 2021.

Due to the Company Conversion that occurred on December 10, 2021, an initial net deferred tax liability was recorded in conjunction with the Company's operations that would be taxable at the corporate entity level. An initial deferred tax liability in the amount of $2,942,400 was recorded, with a corresponding adjustment to stockholders' equity.

The Company recorded the following income tax expense (benefit) for the year ended December 31, 2022 and for the period December 10, 2021 through December 31, 2021.

	2022	2021
Current tax expense:
Federal	$    5,944,400	$        375,100
State	2,443,100	147,400
	8,387,500	522,500
Deferred tax expense (benefit):
Federal	$     (475,500)	$         (21,600)
State	(114,400)	(6,200)
	(589,900)	(27,800)
Total Provision for Income Taxes:	$    7,797,600	$        494,700

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. None of the goodwill that was reported on the Consolidated Balance Sheets as of December 31, 2021 is deductible for income tax purposes. The acquisitions of KP LLC and Engage are taxable asset acquisitions. As such, the purchase consideration for these acquisitions will generate tax-deductible goodwill in the combined amount of approximately $20,760,000. A deferred tax asset has been recorded in relation to the excess of the tax deductible goodwill as compared to the GAAP carrying value of goodwill. Of the $20,760,000 of tax deductible goodwill, approximately $8,300,000 is eligible to begin being amortized for tax purposes during the 2022 tax year.

Significant components of the Company's deferred tax assets and liabilities are as follows as of December 31:

	2022	2021
Deferred income tax assets:
Other assets	$     197,600	$       40,600
Goodwill	4,797,000	-
ASC 842 Lease liability	5,107,000	5,036,200
Total deferred income tax assets	10,101,600	5,076,800
Deferred income tax liabilities:
Property and equipment	(188,200)	(213,100)
Prepaid compensation	(281,000)	-
Intangible assets	(2,924,000)	(3,479,800)
Right of use asset	(4,430,000)	(4,298,500)
Total deferred income tax liabilities	(7,823,200)	(7,991,400)
Total Net Deferred Tax Asset (Liability):	$ 2,278,400	$ (2,914,600)

A reconciliation for the difference between actual income tax expense (benefit) compared to the amount computed by applying the statutory federal income tax rate to net loss before income tax of ($7,211,111) and ($25,778,400) for the year ended December 31, 2022 and for the period between December 10, 2021 and December 31, 2021, is as follows:

December 31, 2022			December 10, 2021 - December 31, 2021
	Amount	% of Pretax Earnings	Amount	% of Pretax Earnings
Federal income tax benefit at statutory rate	$ (1,514,300)	21.0	$ (5,413,500)	21.0
State income taxes, net of federal income tax benefit	(452,800)	6.3	(1,552,300)	6.0
Nondeductible share-based accounting charge	9,775,100	(135.6)	7,460,500	(28.9)
Other	(10,400)	0.1	-	-
Total Provision for Income Taxes	$     7,797,600	108.2	$        494,700	(1.9)

As of December 31, 2022, there are no known items that would result in a material liability related to uncertain tax positions, as such, there are no unrecognized tax benefits. The Company's policy is to recognize interest and penalties related to uncertain tax positions in the provision for income taxes. As of December 31, 2022, the Company had no accrued interest or penalties related to uncertain tax positions. The Company's 2021 and 2022 tax years are open under the statute of limitations for examination by the taxing authorities.

NOTE 9           RETIREMENT PLAN

Effective January 1, 2020, the Company established the Public Policy Holding Company, LLC 401(k) Plan ("PPHC Plan"). The PPHC Plan covers employees that reach certain age and length of service requirements. Eligible employees can contribute into the plans through salary deferral. The PPHC Plan does not have any employer contribution and expenses are immaterial.

NOTE 10        CONCENTRATION OF CREDIT RISK

Geographic location

Most of the Company's assets are located in the Washington D.C. metropolitan area. Therefore, the Company is subject to certain economic risks resulting from the majority of its revenue being derived from one geographic location.

NOTE 11        SEGMENT REPORTING

As of December 31, 2022, the Company has two reportable segments; Lobbying Consulting and Public Affairs Consulting. Lobbying Consulting services include federal and state advocacy, strategic guidance, political intelligence and issue monitoring. Public Affairs Consulting services include crisis communications, community relations, social and digital podcasting, public opinion research, branding and messaging, relationship marketing and litigation support.

Corporate is primarily comprised of selling, general and administrative expenses. These expenses include corporate office expenses and certain other centrally managed expenses that are not fully allocated to operating divisions, salaries, annual bonuses and other miscellaneous benefits for corporate office employees, financial statement audits and legal, information technology and other consulting services that are engaged and managed through the corporate office, and rental expense for properties occupied by corporate office employees.

The Company measures the results of its segments using, among other measures, each segment's net revenue and operating income, which includes certain corporate overhead allocations. The Company's chief operating decision maker does not evaluate the total assets, liabilities or income tax expenses at the segment level but rather evaluates these items on a consolidated basis. Information for the Company's segments, as well as for corporate and support, including the reconciliation to income (loss) from operations is provided in the following tables, as of December 31:

	2022	2021
Revenue
Lobbying consulting	$ 78,177,680	$ 70,125,726
Public affairs consulting	30,636,811	29,210,734
Total	$ 108,814,491	$ 99,336,460

	2022	2021
Income (loss) from operations
Lobbying consulting	$    26,065,442	$ 4,808,030
Public affairs consulting	8,252,450	878,878
Share-based accounting (ASC 718-10-S99-2) charge	(33,392,300)	(27,609,214)
Post-combination compensation (ASC 805-10-55-25) charge	(2,441,052)	-
Corporate	(5,678,778)	(1,787,287)
Total loss from operations	$    (7,194,238)	$(23,709,593)

	2022	2021
Depreciation and amortization
Lobbying consulting	$          1,834,519	$ 1,728,875
Public affairs consulting	313,340	202,432
Corporate	81,338	81,338
Total depreciation and amortization	$          2,229,197	$ 2,012,645

NOTE 12        SUBSEQUENT EVENTS

On February 28, 2023, the Company entered into a $17,000,000 credit facility with a bank ("Credit Facility"). The Credit Facility has two components, Facility 1 is a Senior Secured Line of Credit in the amount of $3,000,000 and Facility 2 is a Senior Secured Term Loan in the amount of $14,000,000. The interest rate on Facility 1 and Facility 2 is the Bloomberg Short-Term Bank Yield Index plus 225 basis points. The Credit Facility is collateralized by substantially all of the net assets of the Company. The Credit Facility matures on January 31, 2026. The Company has drawn $14,000,000 from Facility 2 and utilized those funds as part of the consideration to acquire MultiState Associates, Inc. ("MultiState").

On March 1, 2023, the Company acquired MultiState for initial consideration of $22,000,000 ("Initial Consideration"). MultiState is a United States based state and local government relations specialists and a provider of state-based government relations services, state issues tracking and compliance solutions. The MultiState Consideration consisted of $17,600,000 in cash and the issuance of 2,740,717 new shares of the Company's common stock valued at $4,400,000. In addition to the Initial Consideration, the owners of MultiState could receive up to three additional payments ("Contingent Payments") based upon the achievement of certain milestones related to profit growth targets between 2022 and 2027. These Contingent Payments would be paid fifty percent in cash and fifty percent in shares of the Company's common stock. The maximum amount of consideration that the Company could pay for the acquisition totals $70,000,000.

During March 2023, the Company entered into certain lease amendments, which among other things, added additional square footage of office space and extended the lease terms. The amended leases were scheduled to expire during 2023. As a result of the lease amendments, the Company's estimated future minimum lease payments disclosed in Note 1 will increase by approximately $11,000,000 through January 2031.

 

END

 

 

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