Unaudited Preliminary Results
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", the "Group" or the "Company")
Unaudited Preliminary results for the year ended 31 December 2023
Record financial performance and excellent strategic progress with acquisitions deepening geographic reach and policy expertise
Public Policy Holding Company, Inc., the government relations and public affairs group providing clients with a fully integrated and comprehensive range of services, is pleased to announce its unaudited full year results for the year ended 31 December 2023.
Financial Highlights
· Revenue increased 24.1% to a record $135.0m (2022: $108.8m), growing by 2.0% organically, displaying the inherent strength of the Group through the economic cycle
· Underlying EBITDA rose by 12.4% to $35.1m (2022: $31.2m), in line with market expectations and achieved at a margin of 26.0%, within the Group's target range of between 25% and 30%
· Underlying Net Income increased by 13.9% to $26.5m (2022: $23.3m)
· Balance sheet remains strong with cash generated from operations of $21.6m and a year-end net cash position of $3.4m, comprising $14.3m cash offset by outstanding debt of $10.9m, reflecting very low leverage levels and positioning the Group well to deliver further value accretive M&A
· Declaration of a final dividend of $0.097 per Common Outstanding Share, taking the total dividend for 2023 to $0.143 per share, representing an increase of 2% year-on-year and in line with the Group's dividend policy
|
All in $m, unless otherwise noted |
2023 |
2022 |
Change |
|
Revenue |
135.0 |
108.8 |
24.1% |
|
EBITDA - Underlying |
35.1 |
31.2 |
12.4% |
|
EBITDA margin - Underlying (%) |
26.0% |
28.7% |
-2.7pts |
|
Net Income - Underlying |
26.5 |
23.3 |
13.9% |
|
EPS - Underlying ($) (basic) |
0.2354 |
0.2145 |
9.7 % |
|
EPS - Underlying ($) (fully diluted) |
0.2271 |
0.2113 |
7.5% |
|
Dividend per Share ($) |
0.1430 |
0.1400 |
2.1% |
|
Dividend |
16.4 |
15.5 |
5.7% |
|
Cash flow from Operations |
21.6 |
20.7 |
4.5% |
|
Net Cash at year end |
3.4 |
21.0 |
-83.8% |
Operational Highlights
· Excellent strategic progress, sustaining and organically growing the core offering in challenging markets while pursuing successful, value accretive acquisitions to broaden services and geographic reach
· Ended 2023 as the #1 federal lobbying agency in the US1, with the Group's federal lobbying firms collectively reporting $68.3m of disclosed revenue
· Successful acquisition of MultiState Associates, Inc. ("MultiState" or "MultiState Associates") on 1 March 2023, proving the attractiveness of the holding company proposition to unlock growth and value
o Multistate delivered a strong full-year performance, contributing healthily to Group revenue and EBITDA
· All business segments achieved year-on-year growth, demonstrating the strength and breadth of the Group's services
· Improved client diversification, with the top 10 Group clients representing 8.8% of total revenue, down from 9.6% in 2022 and reflecting sustained progress from 2021, when the top 10 represented 13.1%
· The Group ended 2023 with c.1,200 total clients, compared c.850 in 2022. The current client roster includes 137 Fortune 500 clients and related trade associations, while directly serving 44 Fortune 100 clients
· Number of clients spending $100k or greater per year was 468, a year-on-year increase of 23%
o The growth of clients spending $100k or greater demonstrates the Group is successfully cross selling its services with multiple operating companies advising on specific policy areas and specialisms
o Launched Concordant Advisory, the Group's first organically developed offering, in November 2023 to enhance cross-selling between operating companies and geographies and better support clients with strategic communications challenges, for which public policy is paramount for their growth
· Continued focus on people, with the lowest employee attrition rates on record, while adding key talent in specialist areas including AI, aerospace and defence, technology and energy transformation. These sector specialisms are central to today's broader policy agenda
· Number of employees as at 31 December 2023 totalled 333, up from 244 as at 31 December 2022
1Source: 2023 Lobbying Disclosure Act
Current trading and Outlook
· Current year-to-date trading is promising, and the Group continues to grow organically, supported by new client wins across sectors, including RTX Corporation (formerly Raytheon Technologies), Phillips 66, Nuclear Innovation Alliance, Dynavax Technologies and Fight Colorectal Cancer
· In the medium term the Group expects organic revenue growth, on average, to be between 5% and 10%, supplemented by growth from M&A
· The Group continues to target an Underlying EBITDA margin of between 25% and 30%
· Pipeline of strategic and accretive acquisition opportunities in the US and Europe remains strong, as the Group looks to broaden its market position in federal and state advocacy, as well as in the adjacent strategic communications and public affairs markets
Stewart Hall, CEO, commented:
"PPHC has performed extremely well in what have undoubtedly been some of the toughest macro conditions we have seen since our inception ten years ago. In 2023, the unpredictability of politics - not just in the US but globally - was mixed with increased interest rates and broader macro-uncertainty. It is therefore testament to our broad offering and operating companies that our clients are ever-increasingly relying on our support in navigating these difficult times.
"The increasing demand for our services has enabled us to generate solid levels of organic growth and healthy expansion in total client numbers. Strategically, we are progressing well with a healthy pipeline of value accretive acquisition opportunities and the strength of our holding company model being validated by the outperformance of our two most recent acquisitions.
"While global uncertainty persists in 2024, we are extremely well positioned to capitalise on what continues to be a positive trajectory for our wider markets. We therefore look forward with a high degree of confidence in our people, operations, expertise and ability to continue to deliver profitable growth in the years ahead."
Enquiries
|
Public Policy Holding Company Inc. Stewart Hall, CEO Roel Smits, CFO
|
+1 (202) 688 0020
|
|
Stifel (Nominated Adviser & Broker) Fred Walsh, Tom Marsh
|
+44 (0) 20 7710 7600 |
|
Buchanan Communications (Media Enquiries) Chris Lane, Toto Berger |
+44 (0) 20 7466 5000 |
About PPHC
Incorporated in 2014, PPHC is a US-based government relations and public affairs group providing clients with a fully integrated and comprehensive range of services including government and public relations, research and digital advocacy campaigns. Engaged by over 1200 clients, including companies, trade associations and non-governmental organisations, the Group is active in all major sectors of the U.S. economy, including healthcare and pharmaceuticals, financial services, energy, technology, telecoms and transportation. PPHC's services support clients to enhance and defend their reputations, advance policy goals, manage regulatory risk, and engage with US federal and state-level policy makers, stakeholders, media and the public.
PPHC operates a holding company structure and currently has eight operating entities comprising Crossroads Strategies, Forbes Tate Partners, Seven Letter, O'Neill & Associates, Alpine Group Partners, KP Public Affairs, MultiState Associates and Concordant Advisory. Operating in the strategic communications market, the Group has a strong track record of organic and acquisitive growth, the latter focused on enhancing its capabilities and to establish new verticals, either within new geographies or new related offerings.
For more information, see www.pphcompany.com.
Chairman's Statement
On behalf of the Board of Directors, I am pleased to report a strong performance in 2023, in which the Group was successful in displaying its ability to generate robust organic growth in challenging macro-economic circumstances. This is testament to the broad strength and diversity of the Group's operations and reflective of the quality of service PPHC provides in federal and state advocacy, public affairs and strategic communications. In addition, it demonstrates the Group is more than capable of delivering excellent growth and good profitability and margin levels through the economic cycle, on what remain excellent market fundamentals.
Despite considerable macro-economic challenges and an unpredictable political climate, the Group has achieved continued financial success and operational progress towards its stated strategy of creating and becoming the world's premier provider of government relations and related services to corporates on a global basis. This has included the earnings accretive acquisition of a market-leading firm, MultiState Associates, the strong integration, and impressive growth of KP Public Affairs, a 2022 acquisition, and the timely development of new and deepened enhanced offerings and expertise in areas such as artificial intelligence, renewable/transitional energy, and defense/aerospace.
The 2023 performance also demonstrates the professionalism of the Group's management and their prudent approach to cost control, which is greatly to their credit. Their ability, resilience and discipline demonstrate the quality of service our clients receive and the stability of the Group's eight operating companies.
The quality and deep experience of our broader teams have proved more vital than ever in helping clients navigate risks and seize on opportunities amidst significant partisanship and unpredictability in the US and around the world. This quality sets us apart and positions us to deliver for clients in 2024 and beyond.
Board appointments
I was extremely pleased to welcome Keenan Austin Reed onto the Board as an Executive Director in December 2023. Keenan is one of the top lobbyists in Washington and has made a highly positive impact at Alpine Group and PPHC since she joined in 2021. Her advisory expertise and wider interests, along with strong relationships among clients and political stakeholders, further strengthen the Board as we continue to expand our offering and broaden our geographical footprint.
I was also pleased to welcome Roel Smits to the Board as Chief Financial Officer, succeeding Bill Chess who remains on the Board as an Executive Director and assumed the new position of Chief Administrative Officer. Roel joined PPHC in May 2022 as Deputy CFO having previously acted as CFO at Kantar, the data analytics and brand consulting company owned by WPP and Bain Capital. Roel's appointment has added strength to the executive team and he has already made a significant contribution to the Group.
Dividend
On 12 March 2024, the Board declared a final dividend of $0.097 per share for 2023, taking the total dividend for the year to $0.143 per share, up 2% from prior year. This will represent a total aggregate dividend for the year of approximately $16.4 million, equivalent to approximately 62% of the Group's Underlying Net Profit (based on the current number of common outstanding shares). The final dividend of $0.097 per share is payable to the holders of record of all of the issued and outstanding shares of the Company's Common Stock as of the close of business on the record date, 26 April 2024. The ex-dividend date is 25 April 2024.
Simon Lee
Chair of the Board
March 2024
Chief Executive Officer's report
To our valued investors, clients, employees and partners: thank you.
As we reflect on the past year, which was, undoubtedly, one of the most challenging business environments we've seen in our operating history, we demonstrated the high value of our services to clients and the benefits of our scale. Despite the many headwinds, including high interest rates, a drive for corporate efficiencies, war on two continents and political unrest around the world, we have remained laser-focused on delivering results for our clients.
Specifically, in our Government Relations/Lobbying segment - which represents 71% of Group revenue and remains our core differentiator - the year behind us was full of unpredictability with control of the US House and Senate narrowly split and the 2024 Presidential campaign already at full pace. We faced, and continue to face, multiple government shutdown threats, an ousted House speakership, and what has been called the "most unproductive Congress in modern history" by Axios.
Politics aside, if possible, it is in this very environment where our extensive congressional relationships and bipartisan approach have proven to be most instrumental. Our policy and political expertise have enabled our clients to cut through the noise, make strategic calculations, and ultimately to achieve their goals, despite the historic volatility.
All three of our federal-focused lobbying firms (Alpine Group Partners, Crossroads Strategies, and Forbes Tate Partners) experienced growth in each quarter of the year, as ranked by the public disclosures that are required for our industry, and we ended the year as the top federal lobbying agency in the US. Additionally, both of our recent strategic acquisitions (KP Public Affairs in 2022 and MultiState Associates in 2023) have performed ahead of internal forecasts. This demonstrates the critical importance of state and local government relations being more and more integrated into comprehensive policy communications and proving the value of our holding company model that rewards referrals and cross-sales to drive accelerated growth.
In our Public Affairs and research segment - which represents 24% of Group revenue - we experienced a higher degree of client caution, project delays, and outright budget pull-back as has been seen across the sector by firms of all sizes. However, it is a testament to our policy-focused portfolio that our client retention measures remained industry leading. Senior clients continue to rely heavily on our expertise to navigate the tumultuous political environment even though, in some cases, they held back on their communications campaigns and project-oriented services.
Now a decade ago, we started PPHC with a vision to provide effective government relations and advocacy services at a new level of scale and sophistication, with unmatched professionalism and seamless geographical reach. We pledged to offer our clients a new approach to navigating complex policy issues and regulatory systems and to drive positive change like no one else in the industry. And, so, as we kick off our 10th year since the founding of this endeavour, I'm proud to report that we've not only achieved tremendous progress towards this ambitious goal, but we've also attracted, developed and retained some of the most trusted strategic advisors and policy experts in the world.
I am proud to share that we have initiated a process to better understand our Group-wide ESG risks and opportunities and to establish a responsible approach to the development of our ESG strategy. Conducting a materiality assessment reinforced our understanding and will inform the foundations of our strategy. A more detailed discussion of this process and the next phase of our process will be included in the 2023 Annual Report.
To our outstanding team of managers, client counsellors and policy experts, I thank you for your continued excellence, commitment to our cause, and care on behalf of our clients.
And, finally, to our clients, now over 1,200, we look forward to furthering your goals and making a difference in the decade ahead.
Sincerely,
G. Stewart Hall
Chief Executive Officer
Financial Review
Demonstrating the stability of our core business operations in the midst of significant economic and political headwinds, in addition to the dedication of our management teams, PPHC achieved overall revenue growth of 24.1% to $135 million.
|
All in $m, unless otherwise noted |
2023 |
2022 |
Change |
|
Revenue |
135.0 |
108.8 |
24.1% |
|
EBITDA - Underlying |
35.1 |
31.2 |
12.4% |
|
EBITDA margin - Underlying (%) |
26.0% |
28.7% |
-2.7pts |
|
Net Income - Underlying |
26.5 |
23.3 |
13.9% |
|
EPS - Underlying ($) (basic) |
0.2354 |
0.2145 |
9.7 % |
|
EPS - Underlying ($) (fully diluted) |
0.2271 |
0.2113 |
7.5% |
|
Dividend per Share ($) |
0.1430 |
0.1400 |
2.1% |
|
Dividend |
16.4 |
15.5 |
5.7% |
|
Cash flow from Operations |
21.6 |
20.7 |
4.5% |
|
Net Cash at year end |
3.4 |
21.0 |
-83.8% |
PPHC's results for the year ended 31 December 2023 represent its second full reporting year post-IPO in December 2021. Strong levels of client engagement and activity have driven the Group's revenue up 24.1% to $135.0m (2022: $108.8m). All areas of the Group's business, i.e. government relations, public affairs advisory, and diversified services, achieved growth when compared to 2022.
Equally important, underlying profit remained strong despite the absorption of higher costs related to being a public company, the related increased investment in new hires, and various M&A related charges, with an underlying EBITDA for the year of $35.1m (2022: $31.2m) at a margin of 26.0% (2022: 28.7%), within our guided range of between 25% and 30%.
The Group's cash position at the end of the year remained strong at $14.3m (2022: $21.2m), following the generation of $21.6m operational cash flow, the acquisition activity in 2023 funded through the attraction of a bank financing package, and the payment of dividends. After offsetting against the outstanding bank debt of $10.9m, the Group's net cash position was $3.4m
|
Underlying Profit & Loss Statement |
|
|
|
|
|
|
|
|
|
All in $m, unless otherwise noted |
|
|
2023FY |
2022FY |
|
change |
|
|
Revenue |
|
|
135.0 |
108.8 |
|
24.1% |
|
|
Operational expenses |
|
|
(99.9) |
(77.6) |
|
28.7% |
|
|
EBITDA (Underlying) |
|
|
35.1 |
31.2 |
|
12.4% |
|
|
EBITDA margin (Underlying) |
|
|
26.0% |
28.7% |
|
-2.7pts |
|
|
Depreciation |
|
|
(0.1) |
(0.1) |
|
19.3% |
|
|
EBIT (Underlying) |
|
|
34.9 |
31.1 |
|
12.4% |
|
|
Interest |
|
|
(0.9) |
(0.0) |
|
N/M |
|
|
EBT (Underlying) |
|
|
34.0 |
31.1 |
|
9.5% |
|
|
Taxes |
|
|
(7.5) |
(7.8) |
|
-3.8% |
|
|
Effective tax rate |
|
|
-22.1% |
-25.1% |
|
-3.0pts |
|
|
Net Income (Underlying) |
|
|
26.5 |
23.3 |
|
13.9% |
|
|
Net income margin (Underlying) |
|
|
19.6% |
21.4% |
|
-1.8pts |
|
Bridge from Underlying to Reported results |
|
|
|
|
|
|
|
|
All in $m, unless otherwise noted |
|
|
2023FY |
2022FY |
|
|
|
Net Income (Underlying) |
|
|
26.5 |
23.3 |
|
|
|
Share-based accounting charge |
|
|
(30.9) |
(33.4) |
|
|
|
Post-combination compensation charge |
|
|
(6.3) |
(2.4) |
|
|
|
Change in fair value of contingent consideration |
|
|
(1.7) |
- |
|
|
|
Gain on bargain purchase, net of deferred taxes |
|
|
4.8 |
- |
|
|
|
Long Term Incentive Program charges |
|
|
(2.8) |
(0.3) |
|
|
|
Amortization intangibles |
|
|
(3.9) |
(2.1) |
|
|
|
Net Income (Reported) |
|
|
(14.2) |
(15.0) |
|
Revenue
The Group's total revenue for 2023 increased by 24.1% to $135.0 million (2022: $108.8 million). The organic growth rate was 2% while the Company benefitted greatly from the acquisitions of KP Public Affairs on 1 October 2022 and MultiState Associates on 1 March 2023.
Organic growth of 2% is a pleasing result, and compares favourably to the muted growth published by other peers in the public affairs sector. This supports the Group's ability to deliver 5% to 10% organic growth per annum on average through the cycle.
In 2023, our government relations business increased by 22% (4% organically) and remained robust as we supported clients in managing their risks and opportunities. Our public affairs business increased by 5% (-4% organically), with growth dampened by a reduction in project work.
With the acquisition of MultiState in March 2023, the Group incorporated new service lines, such as legislative tracking and lobbying compliance, into the portfolio. Going forward, these will be reported under a new business line called Diversified Services.
The Group ended 2023 with approximately 1,200 clients, of which 468 accounted for a net revenue of equal or greater than $100k per annum (up from 382 in 2022). The degree of client concentration is very low: our largest client represented 1.6% of total revenue, similar to 2022. Our top 10 clients represented 8.8% of total revenues, down from 10% last year.
Profit
Underlying EBITDA of $35.1 million was achieved at a margin of 26.0%, in line with our guidance that margins will typically move within the range of 25% to 30%.
|
Long term Underlying EBITDA |
2018 |
2019 |
2020 |
2021 |
2022 |
2023 |
|
Underlying EBITDA ($m) |
9.3 |
13.5 |
21.5 |
32.0 |
31.2 |
35.1 |
|
Underlying EBITDA as % of Revenue |
27.4% |
24.4% |
27.8% |
32.2% |
28.7% |
26.0% |
We are very pleased that the Group recorded an Underlying EBITDA at record levels, and that the margin has been maintained within our indicated range; especially in the light of the facts that since 2022, our profit has been impacted by previously communicated additional expenses relating to the Group's first years as a public company. Those incremental costs, included within the calculation of Underlying EBITDA, included legal and registration fees, compliance costs, M&A related expenses, investments in staff at the Group's holding company, and in talent acquisition. We expect to make further investments in 2024 to build out our platform.
At an after-tax level, 2023 Underlying Net Income - which constitutes the basis of our dividend calculation - amounted to $26.5 million, 14% higher than the $23.3 million for 2022.
Employees
The Group started 2023 with 244 employees operating out across six member companies. By end of year, this number had increased to 333 people, which includes 76 from the MultiState acquisition. On average, during 2023 we had 308 employees.
Other
The Group's net finance costs for the year were $959k (2022: $17k), illustrating the acquisition of $14 million bank debt at the time of the MultiState acquisition. By 31 December 2023, this facility had been paid down to a level of $10.9 million.
The tax accrual for 2023 amounted to $7.5 million (2022: $7.8 million), which represents an effective rate of 22.1% to our Underlying Profit. This was lower than the 25.1% we reported in 2022, driven by permanent and temporary differences between GAAP results and taxable results.
Balance sheet and cash flow
The Group's net cash position as of 31 December 2022 was $3.4 million (2022: $21.0 million), taking into account the $10.9 million borrowings at that time. Our strong financial position enabled us to make the interim dividend payments and allowed us to progress acquisitions.
|
Cash Flow |
|
|
|
|
|
|
|
All in $m, unless otherwise noted |
|
|
2023FY |
2022FY |
|
|
EBITDA (Underlying) |
|
|
35.1 |
31.2 |
|
|
Interest |
|
|
(0.9) |
(0.0) |
|
|
Taxes |
|
|
(7.5) |
(7.8) |
|
|
Changes in Working Capital |
|
|
(5.0) |
(2.7) |
|
|
Operational Cash flow |
|
|
21.6 |
20.7 |
|
|
|
|
|
|
|
|
|
Capex |
|
|
(0.2) |
- |
|
|
Acquisitions - Earnout Payments (cash) |
|
|
(3.6) |
- |
|
|
Acquisitions - Completion Payments (cash) |
|
|
(17.6) |
(11.9) |
|
|
Note receivable to related parties |
|
|
(1.8) |
- |
|
|
Investment Cash flow |
|
|
(23.2) |
(11.9) |
|
|
|
|
|
|
|
|
|
Change in Debt balance |
|
|
11.1 |
(0.0) |
|
|
Debt issuance costs |
|
|
(0.5) |
- |
|
|
Dividend payment |
|
|
(15.8) |
(5.6) |
|
|
Financing Cash Flow |
|
|
(5.2) |
(5.6) |
|
|
|
|
|
|
|
|
|
Cash generated |
|
|
(6.9) |
3.2 |
|
|
|
|
|
|
|
|
Balances end of period |
|
|
|
|
|
|
|
Cash balance |
|
|
14.3 |
21.2 |
|
|
Debt balance |
|
|
(10.9) |
(0.2) |
|
|
Net cash balance |
|
|
3.4 |
21.0 |
Dividend
The Board of Directors of the Company have declared a final dividend for 2023 of $0.097 per Common Share, which equates to an aggregate amount, based on the current number of outstanding Common Shares, of approximately $11.2 million, payable to the holders of record of all of the issued and outstanding shares of the Company's Common Stock as of the close of business on the record date, 26 April 2024. The ex-dividend date is 25 April, 2024. The dividend will be paid no later than 24 May, 2024
An interim payment of $5.2 million was already made in October 2023 ($0.046 based on the outstanding Common Shares at that time), in line with the Company's intent to pay about one third of the expected total dividend for the year as an interim dividend.
Consequently, the Group's total dividends for the financial year will be $0.143 per share. This represents, based on the current number of outstanding Common Shares, a total aggregate dividend for the year of approximately $16.4 million, equivalent to approximately 62% of the Group's Underlying Net Profit.
|
Dividend |
|
|
|
|
|
|
|
|
|
All in $m, unless otherwise noted |
|
|
2023FY |
2022FY |
|
change |
|
|
Net Income (Underlying) |
|
|
26.5 |
23.3 |
|
13.9% |
|
|
Cash flow from Operations |
|
|
21.6 |
20.7 |
|
4.5% |
|
|
Dividend |
|
|
16.4 |
15.5 |
|
5.7% |
|
|
Pay out ratio |
|
|
61.8% |
66.7% |
|
-4.8pts |
|
|
Payable in calendar year (interim dividend) |
|
|
5.2 |
4.9 |
|
6.8% |
|
|
Payable next calendar year (final dividend) |
|
|
11.2 |
10.6 |
|
5.1% |
|
Per share |
|
|
2023FY |
2022FY |
|
change |
|
|
|
# wghtd avg shrs - GAAP - basic and diluted |
|
'000 |
108,606 |
108,137 |
|
0.4% |
|
|
# wghtd avg shrs - Legally outstndng - basic |
|
'000 |
112,597 |
108,476 |
|
3.8% |
|
|
# wghtd avg shrs - Legally outstndng - diluted |
|
'000 |
116,693 |
110,147 |
|
5.9% |
|
|
EPS - GAAP reported (basic and fully diluted) |
|
$ |
(0.1312) |
(0.1388) |
|
-5.5% |
|
|
EPS - Underlying (basic) |
|
$ |
0.2354 |
0.2145 |
|
9.7% |
|
|
EPS - Underlying (fully diluted) |
|
$ |
0.2271 |
0.2113 |
|
7.5% |
|
|
DPS - based on # shares at time of payment |
|
$ |
0.1430 |
0.1400 |
|
2.1% |
|
|
Operational CF per share - Underlying (basic) |
|
|
0.1919 |
0.1906 |
|
0.7% |
Note to Investors:
In accordance with a letter provided to shareholders by Link, certain IRS forms are required to be completed.
More details and links to these forms can be found at https://pphcompany.com/notice-to-investors/
Medium Term Financial Guidance
· Management continues to expect revenue to grow by 5 to 10% organically per annum, on average, supplemented by growth from M&A transactions.
· The Group continues to manage the business such that Underlying EBITDA as percentage of revenue is estimated to range between 25% and 30%.
· We expect to make further investments in 2024 to continue to build out our platform to support further growth into the medium term.
Basis of preparation
The financial statements have been prepared in accordance with US GAAP (Generally Accepted Accounting Principles).
When the Company purchases services or goods on behalf of its clients (for example in the case of media purchases), the Group does not recognize the purchased goods as net revenue, but only the net fees earned on the purchases. Therefore, purchases on behalf of clients do not materially impact the top-line or the margins.
Management believes that Underlying EBITDA and Underlying Net Income are more useful performance indicators than the reported Net Income. Six elements distinguish our Underlying Net Income from our Reported Net Income:
(1) Share-based accounting charge: As already mentioned in the previous reports, the shares retained by employee shareholders following the IPO are subject to a vesting schedule; Also, their employment agreements contain certain provisions which enable cash derived from the sale of shares at the time of the IPO to be clawed back and forfeited on certain events of termination of employment. These items create a share-based accounting noncash charge in accordance with accounting guidance under US GAAP (Accounting Standards Codification, 718- 10-S99-2, compensation-stock compensation). Based on the value of the Company at the time of admission ($197 million) and taking into account the 14.6% of pre-admission employee shares sold in 2021, the 2023 non-cash charge is $30.9 million (2022: $33.4 million). This share-based accounting non-cash charge has no impact on either tax or Company operations.
(2) Post-combination compensation charge: In 2023, The Group completed the acquisition of MultiState Associates on 1 March, 2023. In 2022, the Group completed the acquisition of KP Public Affairs on 1 October 2022. Also, the Engage team was brought in-house (digital services supplier to Forbes Tate Partners) on 1 November 2022. To protect the interests of the Group, the shares issued as part of these three transactions were made subject to vesting schedules.
And also, to a certain degree, the cash paid as part of these transactions can be clawed back and forfeited on certain events of termination of employment. The addition of these provisions to purchase price paid creates a post-combination compensation charge in accordance with accounting guidance under US GAAP (Accounting Standards Codification, ASC 805-10-55-25). The 2023 charge is $6.3 million (2022: $2.4 million). Again, this is a non-cash charge and has no impact on either tax or Company operations.
(3) LTIP charges. In 2022 the Group issued the first stock-based compensation units under the Omnibus Plan. This plan was introduced at the time of the IPO and allows the Group to issue up to a certain number of stock-related units (e.g. options, restricted stock). In 2023 PPHC issued 0.7 million (2022: 2.8 million) stock options at a premium exercise price (market price at time of grant plus 20%), exercisable at the 3rd anniversary of the grant. Also, the Group issued 2.3 million restricted stock units, 3.0 million restricted stock awards, and 1.9 million stock appreciation awards. The charges relating to these issuances, $2.8 million in 2023 (2022: $0.3 million), as reflected in our P&L were computed using the Black Scholes method.
(4) Amortization of intangibles: The non-cash amortization charge of $3.9 million (2022: $2.2 million) relates to the amortization of customer relationships, developed technology, and noncompete agreements per ASC 805.
(5) Bargain purchase: As laid out in point 2, because a significant part of the purchase price of the acquisition of MultiState Associates is tied to continued employment, this part has been accounted for as post-combination compensation. As a consequence, the book purchase price is lower than the tax purchase price. The reason for the bargain purchase gain is tied directly to the tax purchase price significantly exceeding the book purchase price and is not a reflection of a true bargain purchase of the actual intangible and tangible assets of MultiState Associates.
(6) Change in Contingent Consideration: The contingent consideration liability recorded as part of the acquisitions of KP Public Affairs and MultiState Associates is adjusted at each reporting period for the change in the estimated fair value of that liability. The fair value changes over time based on management assumptions, the passage of time, and other external inputs, such as discount rates and volatility. The change in the estimated fair value of the contingent consideration is recorded as a non-operating expense of $1.7 million in 2023. There was no change in the fair value of the contingent consideration in 2022.
For the calculation of Earnings per Share (EPS) based on GAAP Profit, as a denominator, the Group uses the weighted average number of Common Outstanding shares during the period. For the calculation of Earnings per Share (EPS) based on Underlying Profit, as a denominator, the Group uses the weighted average number of Legally Issued shares during the period. This comprehends all the Common Outstanding shares, as well as those shares that were yet unvested but entitled the owner to dividends and voting rights (e.g. shares issued in relation to one of our post-IPO acquisitions). Consequently, the weighted average number of legally issued shares in 2023 was 112,596,711 (2022: 108,476,437) and on a fully diluted basis (taking into account any issued stock instrument, regardless of exercise price), this number was 116,692,759 (2022: 110,146,640).
|
PUBLIC POLICY HOLDING COMPANY, INC. AND SUBSIDIARIES |
||
|
Consolidated Balance Sheets |
||
|
December 31, 2023 and 2022 |
||
|
|
|
|
|
|
|
|
|
|
2023 |
2022 |
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
Current assets: |
|
|
|
Cash |
$ 14,341,376 |
$ 21,202,456 |
|
Contract receivables, net |
14,063,469 |
11,585,267 |
|
Amounts due from related parties |
1,054,231 |
- |
|
Notes receivable - related parties, current portion |
350,000 |
- |
|
Income taxes receivable |
975,050 |
- |
|
Prepaid post-combination compensation, current portion |
3,426,318 |
441,852 |
|
Prepaid expenses and other current assets |
2,694,149 |
1,975,957 |
|
|
|
|
|
Total current assets |
36,904,593 |
35,205,532 |
|
|
|
|
|
Property and equipment, net |
801,355 |
688,313 |
|
Notes receivable - related parties, long term |
1,913,000 |
513,000 |
|
Operating lease right of use asset |
21,434,360 |
16,239,667 |
|
Goodwill |
47,909,832 |
47,909,832 |
|
Other intangible assets, net |
26,869,331 |
18,575,116 |
|
Deferred income tax asset |
7,737,200 |
2,278,400 |
|
Prepaid post-combination compensation, long term |
3,954,034 |
515,500 |
|
Other long-term assets |
162,473 |
118,887 |
|
|
|
|
|
Total assets |
$ 147,686,178 |
$ 122,044,247 |
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
Accounts payable and accrued expenses |
$ 18,593,014 |
$ 12,336,324 |
|
Income taxes payable |
- |
4,150,389 |
|
Amounts owed to related parties |
- |
1,276,479 |
|
Deferred revenue |
2,197,220 |
2,860,889 |
|
Operating lease liability due within one year |
4,181,155 |
3,907,543 |
|
Contingent consideration, current portion |
1,444,110 |
1,779,000 |
|
Other liability, current portion |
534,540 |
1,821,600 |
|
Notes payable, current portion, net |
3,370,421 |
20,664 |
|
|
|
|
|
Total current liabilities |
30,320,460 |
28,152,888 |
|
|
|
|
|
Notes payable, long term, net |
7,570,951 |
189,975 |
|
Contingent consideration, long term |
5,475,515 |
2,466,000 |
|
Other liability, long term |
1,585,294 |
435,060 |
|
Operating lease liability, long term |
20,665,349 |
14,815,236 |
|
|
|
|
|
Total liabilities |
65,617,569 |
46,059,159 |
|
|
|
|
|
Common stock, $0.001 par value, 1,000,000,000 |
|
|
|
shares authorized, 115,271,961 and 109,346,480 shares |
|
|
|
issued and outstanding, respectively |
109,542 |
108,024 |
|
Additional paid-in capital |
156,884,144 |
120,713,626 |
|
Accumulated deficit |
(74,925,077) |
(44,836,562) |
|
|
|
|
|
Total stockholders' equity |
82,068,609 |
75,985,088 |
|
|
|
|
|
Total liabilities and stockholders' equity |
$ 147,686,178 |
$ 122,044,247 |
|
|
|
|
|
PUBLIC POLICY HOLDING COMPANY, INC. AND SUBSIDIARIES |
||
|
Consolidated Statements of Operations |
||
|
For the Years Ended December 31, 2023 and 2022 |
||
|
|
|
|
|
|
|
|
|
|
2023 |
2022 |
|
|
|
|
|
Revenue |
$ 134,985,822 |
$ 108,814,491 |
|
|
|
|
|
Expenses: |
|
|
|
Personnel cost |
70,782,459 |
53,089,741 |
|
Employee bonuses |
13,178,302 |
11,010,439 |
|
General and administrative expenses |
10,929,617 |
9,608,195 |
|
Occupancy expense |
5,027,501 |
3,933,014 |
|
Depreciation and amortization expense |
3,998,073 |
2,229,197 |
|
Long term incentive program charges |
2,796,000 |
317,679 |
|
|
|
|
|
Total expenses before share-based |
|
|
|
accounting (ASC 718-10-S99-2) charge |
|
|
|
and post-combination compensation (ASC 805-10-55-25) charge |
106,711,952 |
80,188,265 |
|
|
|
|
|
Income from operations before share-based |
|
|
|
accounting (ASC 718-10-S99-2) charge |
|
|
|
and post-combination compensation (ASC 805-10-55-25) charge |
28,273,870 |
28,626,226 |
|
|
|
|
|
Share-based accounting (ASC 718-10-S99-2) charge |
30,904,000 |
33,392,300 |
|
Post-combination compensation (ASC 805-10-55-25) charge |
6,295,060 |
2,441,052 |
|
|
|
|
|
Loss from operations |
(8,925,190) |
(7,207,126) |
|
|
|
|
|
Gain on bargain purchase, net of deferred taxes |
4,835,777 |
- |
|
Change in fair value of contingent consideration |
(1,711,235) |
- |
|
Interest income |
17,955 |
12,888 |
|
Interest expense |
(958,779) |
(16,873) |
|
|
|
|
|
Net loss before income taxes |
(6,741,472) |
(7,211,111) |
|
|
|
|
|
Income tax expense |
7,502,800 |
7,797,600 |
|
|
|
|
|
Net loss |
$ (14,244,272) |
$ (15,008,711) |
|
|
|
|
|
Net loss per share attributable to common |
|
|
|
stockholders, basic and diluted |
$ (0.13) |
$ (0.14) |
|
|
|
|
|
Weighted average common shares outstanding, |
|
|
|
basic and diluted |
108,606,133 |
108,136,853 |
|
|
|
|
|
|
|
|
PUBLIC POLICY HOLDING COMPANY, INC. AND SUBSIDIARIES |
|||||
|
Consolidated Statements of Stockholders' Equity |
|||||
|
For the Years Ended December 31, 2023 and 2022 |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
Total |
|
|
Common Stock |
Paid-In |
Accumulated |
Stockholders' |
|
|
|
Shares |
Amount |
Capital |
Deficit |
Equity |
|
|
|
|
|
|
|
|
Balance as of December 31, 2021 |
108,240,050 |
$ 108,240 |
$ 86,892,903 |
$ (24,255,813) |
$ 62,745,330 |
|
|
|
|
|
|
|
|
Stock option expense |
- |
- |
317,679 |
- |
317,679 |
|
|
|
|
|
|
|
|
Dividends |
- |
- |
- |
(5,572,254) |
(5,572,254) |
|
|
|
|
|
|
|
|
Forfeiture of unvested restricted stock |
(215,662) |
(216) |
- |
216 |
- |
|
|
|
|
|
|
|
|
Share-based accounting (ASC 718-10-S99-2) charge |
- |
- |
33,392,300 |
- |
33,392,300 |
|
|
|
|
|
|
|
|
Post-combination compensation (ASC 805-10-55-25) charge-shares |
- |
- |
110,744 |
- |
110,744 |
|
|
|
|
|
|
|
|
Net loss |
- |
- |
- |
(15,008,711) |
(15,008,711) |
|
|
|
|
|
|
|
|
Balance as of December 31, 2022 |
108,024,388 |
108,024 |
120,713,626 |
(44,836,562) |
75,985,088 |
|
|
|
|
|
|
|
|
Issuance of common stock for acquisition |
767,401 |
768 |
1,231,232 |
- |
1,232,000 |
|
|
|
|
|
|
|
|
Forfeiture of unvested restricted stock |
(69,576) |
(70) |
- |
70 |
- |
|
|
|
|
|
|
|
|
Vesting of restricted stock awards |
820,007 |
820 |
- |
(820) |
- |
|
|
|
|
|
|
|
|
Dividends |
- |
- |
- |
(15,843,493) |
(15,843,493) |
|
|
|
|
|
|
|
|
Long term incentive program charges |
- |
- |
2,506,000 |
- |
2,506,000 |
|
|
|
|
|
|
|
|
Post-combination compensation (ASC 805-10-55-25) charge-shares |
- |
- |
1,529,286 |
- |
1,529,286 |
|
|
|
|
|
|
|
|
Share-based accounting (ASC 718-10-S99-2) charge |
- |
- |
30,904,000 |
- |
30,904,000 |
|
|
|
|
|
|
|
|
Net loss |
- |
- |
- |
(14,244,272) |
(14,244,272) |
|
|
|
|
|
|
|
|
Balance as of December 31, 2023 |
109,542,220 |
$ 109,542 |
$156,884,144 |
$ (74,925,077) |
$ 82,068,609 |
|
|
|
|
|
PUBLIC POLICY HOLDING COMPANY, INC. AND SUBSIDIARIES |
||
|
Consolidated Statements of Cash Flows |
||
|
For the Years Ended December 31, 2023 and 2022 |
||
|
|
|
|
|
|
|
|
|
|
2023 |
2022 |
|
|
|
|
|
Cash flows from operating activities |
|
|
|
|
|
|
|
Net loss |
$ (14,244,272) |
$ (15,008,711) |
|
Adjustments to reconcile net loss to net cash |
|
|
|
provided by (used in) operating activities: |
|
|
|
Depreciation |
119,688 |
100,285 |
|
Amortization expense - intangibles |
3,878,386 |
2,128,912 |
|
Amortization of right of use assets |
3,725,388 |
3,115,249 |
|
Amortization of prepaid post-combination compensation (ASC 805-10-55-25) |
3,081,000 |
73,648 |
|
Amortization of debt discount |
125,203 |
- |
|
Provision for deferred income taxes |
(367,400) |
(589,961) |
|
Share-based accounting (ASC 718-10-S99-2) charge |
30,904,000 |
33,392,300 |
|
Stock-based compensation |
2,648,000 |
317,679 |
|
Post-combination compensation (ASC 805-10-55-25) charge-shares |
1,529,286 |
110,744 |
|
Change in fair value of contingent consideration |
1,711,235 |
- |
|
Gain on bargain purchase |
(4,835,777) |
- |
|
(Increase) decrease in |
|
|
|
Accounts receivable, net |
(2,478,202) |
(3,935,801) |
|
Other assets |
(570,601) |
(368,068) |
|
Increase (decrease) in |
|
|
|
Accounts payable and accrued expenses |
6,114,690 |
3,805,605 |
|
Income taxes payable |
(5,192,760) |
3,627,889 |
|
Deferred revenue |
(5,345,073) |
682,806 |
|
Operating lease liability |
(3,044,269) |
(3,362,168) |
|
Other liability |
1,684,774 |
2,256,660 |
|
Transactions with members/related parties |
2,159,517 |
(5,669,466) |
|
|
|
|
|
Net cash provided by operating activities |
21,602,813 |
20,677,602 |
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
Purchases of property and equipment |
(232,730) |
- |
|
Payment of contingent consideration and other liability |
(3,643,200) |
- |
|
Proceeds issued for notes receivable - related parties |
(1,750,000) |
- |
|
Cash paid for acquisitions |
(17,600,000) |
(11,912,460) |
|
|
|
|
|
Net cash used in investing activities |
(23,225,930) |
(11,912,460) |
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
Proceeds from notes payable |
14,000,000 |
- |
|
Payment of debt issuance costs |
(450,729) |
- |
|
Proceeds from line of credit |
1,000,000 |
- |
|
Payment of line of credit |
(1,000,000) |
- |
|
Principal payment of notes payable |
(2,943,741) |
(26,073) |
|
Distributions |
(15,843,493) |
(5,572,254) |
|
|
|
|
|
Net cash used in financing activities |
(5,237,963) |
(5,598,327) |
|
|
|
|
|
Net decrease in cash and cash equivalents |
(6,861,080) |
3,166,815 |
|
|
|
|
|
Cash and cash equivalents as of beginning of year |
21,202,456 |
18,035,641 |
|
|
|
|
|
Cash and cash equivalents as of end of year |
$ 14,341,376 |
$ 21,202,456 |
|
|
|
|
|
Supplemental disclosure of cash flow information |
|
|
|
|
|
|
|
Cash paid for interest |
$ 833,576 |
$ 16,873 |
|
|
|
|
|
Cash paid for income taxes |
$ 12,427,539 |
$ 4,770,409 |
|
|
|
|
|
Right of use assets obtained with lease liabilities |
$ 8,858,106 |
$ 3,447,345 |
|
|
|
|
|
Contingent consideration issued for acquisitions |
$ 2,784,990 |
$ 4,245,000 |
|
|
|
|
|
Common stock issued for acquisition |
$ 1,232,000 |
$ - |
|
|
|
|
|
Increase in deferred revenue from acquisitions |
$ 4,681,404 |
$ 436,911 |
|
|
|
|
|
Increase in other assets and due from related party from acquisition |
$ 4,681,404 |
$ 117,571 |
NOTE 1 ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation:
Public Policy Holding Company, Inc. ("PPHC-Inc.") was incorporated on February 4, 2021. From PPHC-Inc.'s incorporation until December 10, 2021 (the "Conversion Date"), all of the issued and outstanding shares of stock of PPHC-Inc. were owned by Public Policy Holding Company, LLC ("PPHC-LLC"), which (i) was organized as a Delaware limited liability company on July 1, 2014, and (ii) owned certain wholly-owned operating subsidiaries, all organized as Delaware limited liability companies (the "Subsidiaries," and collectively with PPHC-Inc., the "Company"). On the Conversion Date, PPHC-LLC contributed and assigned substantially all of its assets and liabilities (including all of the Subsidiaries, but excluding certain specified assets and liabilities) to PPHC-Inc. in exchange for the issuance by PPHC-Inc. of 100,000,000 shares (the "Contribution Shares") of Common Stock, par value $0.001 per share ("Common Stock") of PPHC-Inc. Pursuant to a formula approved by the Executive Board and General Board of PPHC-LLC (the "Waterfall"), PPHC LLC then liquidated and distributed the Contribution Shares to each of PPHC-LLC's owners who (other than The Alpine Group, Inc.), in turn, distributed such shares to their respective owners in accordance with the Waterfall (collectively, the "Company Conversion").
The Company provides consulting services in the areas of Governmental Relations, Public Affairs and other ancillary areas, exclusively in the United States of America ("U.S.").
The Company has prepared the accompanying consolidated financial statements in conformity with generally accepted accounting principles in the United States of America ("GAAP"). Such consolidated financial statements reflect all adjustments that are, in management's opinion, necessary to present fairly, in all material respects, the Company's financial position, results of operations and cash flows, and are presented in U.S. Dollars. All material intercompany transactions and balances have been eliminated in consolidation.
Principles of Consolidation:
The consolidated financial statements include all of the accounts of the entities listed below:
Parent company:
Public Policy Holding Company, Inc.
Wholly owned operating subsidiaries:
Crossroads Strategies, LLC
Forbes Tate Partners, LLC
Blue Engine Message & Media, LLC, doing business as Seven Letter
O'Neill & Partners LLC, doing business as O'Neill & Associates
Alpine Group Partners, LLC
KP Public Affairs, LLC
MultiState Associates, Inc.
Concordant LLC
On January 1, 2020, the Company formed Seven Letter ONA to do business in the State of Massachusetts. Revenue and expense from Seven Letter ONA will be allocated to Seven Letter and O'Neill & Associates. During January 2024, the activities of Seven Letter ONA were transferred to Seven Letter and Seven Letter ONA ceased to exist.
Initial Public Offering:
On December 16, 2021, PPHC-Inc. completed an initial public offering and placement ("IPO") of its shares of Common Stock, and the admission of Common Stock to trading on the AIM market of the London Stock Exchange.
The PPHC-LLC Limited Liability Company Agreement ("LLC Agreement") provided for the payment of a "Holdings Distribution Discount" in connection with a sale or IPO of the Company, amounting to $4,462,540 (excluding an interest accrual which is being waived). The Holdings Distribution Discount represents the difference between an operating subsidiary paying three percent of its revenues annually to PPHC-LLC (which has historically been paid by all operating subsidiaries other than Crossroads Strategies, LLC and Forbes Tate Partners, LLC), and each of Crossroads Strategies, LLC and Forbes Tate, LLC, which, as the founding businesses acquired by PPHC-LLC, have paid approximately five percent of their respective revenues annually to PPHC-LLC. Historically, PPHC-LLC and its members viewed this obligation of PPHC-LLC (triggered by the IPO) as an obligation to refund Crossroads Strategies, LLC and Forbes Tate, LLC, their relative overpayments (compared to the other operating subsidiaries) because had those overpayments not been made to PPHC-LLC, those amounts could have been paid as additional bonuses or distributions to the owners of Crossroads Strategies, LLC and Forbes Tate, LLC. This obligation of PPHC-LLC has been contributed and assigned to and assumed by the Company as part of the Contribution Agreement entered into in connection with the Company Conversion. Upon the Company's payment of the Holdings Distribution Discount to Crossroads Strategies, LLC and Forbes Tate, LLC, it is anticipated that Crossroads Strategies, LLC and Forbes Tate, LLC will, in turn, distribute such amounts to their respective owners including but not limited to Stewart Hall and Zachary Williams. The Holdings Distribution Discount of approximately $4,463,000 was paid in full during 2022.
During 2021, all the ultimate owners of PPHC-LLC ("Group Executives") entered into Executive Employment Agreements. The Group Executives sold some of their Common Stock in conjunction with the IPO ("Liquidated Pre-IPO Shares") but retained the majority of their shares ("Retained Pre-IPO Shares"). The Retained Pre-IPO Shares are subject to a vesting schedule under which the Common Stock held by each Group Executive will vest in equal installments on the first five anniversaries of the effective date of the IPO, provided that the Group Executive remains continuously employed by the employer; this vesting schedule applies to all the Company's employees holding Common Stock at the time of the IPO. In the event that a Group Executive's employment terminates (other than on death or "disability", or by the employer without "cause", or by the Group Executive for what is deemed to be for a "good reason") then the unvested proportion of the Retained Pre-IPO Shares which have not vested, will not vest and will be automatically forfeited and clawed back as of the date of such termination. In the event a Group Executive's employment terminates on death or "disability," or by the employer without "cause," or by the Group Executive for what is deemed to be "good reason," then all unvested shares will vest automatically as of the date of such termination. The Executive Employment Agreements also contain certain provisions which enable cash derived from the sale of Liquidated Pre-IPO Shares and Retained Pre-IPO Shares that have vested to be clawed back and forfeited on certain events of termination of employment or breaches of certain provisions of the Executive Employment Agreements. Pursuant to the Executive Employment Agreements for Group Executives employed by Alpine Group Partners, a pro-rata portion of the Retained Pre-IPO Shares held by (and the Liquidated Pre-IPO Shares sold by) The Alpine Group Inc. are subject to vesting, forfeiture and claw back based on the employment of certain of those Group Executives.
The addition of the vesting provisions to previously issued shares creates a share-based accounting charge in accordance with the accounting guidance in Accounting Standards Codification ("ASC") 718-10-S99-2, Compensation-Stock Compensation. See Note 7.
Revenue Recognition:
The Company generates the majority of its revenue by providing consulting services related to Government Relations, Public Affairs and Diversified Services. In determining the method and amount of revenue to recognize, the Company has to make judgments and estimates. Specifically, complex arrangements with nonstandard terms and conditions may require management's judgment in interpreting the contract to determine the appropriate accounting, including whether the promised services specified in an arrangement are distinct performance obligations and should be accounted for separately, and how to allocate the transaction price, including any variable consideration, to the separate performance obligations. When a contract contains multiple performance obligations, the Company allocates the transaction price to each performance obligation based on its estimate of the stand-alone selling price. Other judgments include determining whether performance obligations are satisfied over-time or at a point-in-time and the selection of the method to measure progress towards completion.
The Company's general practice is to establish an agreement with a client with a fixed monthly payment at the beginning of each month for the month's service to be performed. Most of the consulting service contracts are based on one of the following types of contract arrangements:
· Fixed-fee arrangements require the client to pay a fixed fee in exchange for a predetermined set of professional services. The Company recognizes revenue at the beginning of the month for that month's services.
· Additional services include items such as 1) advertisement placement and management, 2) video production, and 3) website development, in which third-party companies may be engaged to achieve specific business objectives. These services are either in a separate contract or within the fixed-fee consulting contract, in which the Company usually receives a markup on the cost incurred by the Company. The Company recognizes revenues earned to date in an amount that is probable or unlikely to reverse and by applying the proportional performance method when the criteria for revenue recognition is met. Any out-of-pocket administrative expenses incurred are billed at cost.
Certain services provided by the Company include the utilization of a third-party in the delivery of those services. These services are primarily related to the production of an advertising campaign or media buying services. The Company has determined that it acts as an agent and is solely arranging for the third-parties to provide services to the customer. Specifically, the Company does not control the specified services before transferring those services to the customer, and is not primarily responsible for the performance of the third-party services, nor can the Company redirect those services to fulfill any other contracts. The Company does not have discretion in establishing the third-party pricing in its contracts with customers. For these performance obligations for which the Company acts as an agent, the Company records revenue as the net amount of the gross billings less amounts remitted to the third-party.
The following table provides disaggregated revenue by revenue type for the periods ended December 31:
|
|
2023 |
2022 |
|
|
|
|
|
Lobbying revenue |
$ 95,476,619 |
$ 78,177,680 |
|
Public affairs revenue |
32,256,518 |
30,636,811 |
|
Diversified Services |
7,252,685 |
- |
|
|
|
|
|
Total revenue |
$ 134,985,822 |
$ 108,814,491 |
See the Segment Reporting Note 11 for a description of the principal activities, by reportable segment, from which the Company generates revenue.
As of January 1, 2023 and 2022, the accounts receivable, net and deferred revenue was approximately $11,585,000 and $2,861,000 and $8,214,000 and $1,943,000, respectively. The following table provides information about receivables, contract assets and contract liabilities from contracts with customers as of December 31:
|
|
2023 |
2022 |
|
|
|
|
|
Accounts receivable |
$ 14,248,444 |
$ 12,142,367 |
|
Unbilled receivables |
609,163 |
37,803 |
|
Allowance for doubtful accounts |
(794,138) |
(594,900) |
|
Contract liabilities (deferred revenue) |
2,197,220 |
2,860,889 |
Contract liabilities relate to advance consideration received from customers under the terms of the Company's contracts primarily related to retainer fees and reimbursements of third-party expenses, both of which are generally recognized shortly after billing. Deferred revenue of approximately $2,197,000 and $2,861,000 from December 31, 2023 and 2022 is expected to be recognized as revenue in 2024 and 2023, respectively.
Cash and Cash Equivalents:
The Company considers all cash investments with original maturities of three months or less to be cash equivalents. At times, the Company maintains cash accounts that exceed federally insured limits, but management does not believe that this results in any significant credit risk.
Accounts Receivable:
The Company provides for an allowance for doubtful accounts based on management's best estimate of possible losses determined principally on the basis of historical experience and specific allowances for known troubled accounts, if needed. Accounts are generally considered past due after the contracted payment terms, which are generally net 30 day terms. All accounts or portions thereof that are deemed to be uncollectible or that require an excessive collection cost are written off to the allowance for doubtful accounts. As of December 31, 2023 and 2022, the balance of allowance for doubtful accounts approximated $794,000 and $595,000.
Leases:
A lease is defined as a contract that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. The Company accounts for its leases in accordance with the guidance in Accounting Standards Codification ("ASC") 842 ("ASC 842"). Substantially all of the leases in which the Company is the lessee are comprised of real estate property for remote office spaces and corporate office space. Substantially all of the leases are classified as operating leases.
As of December 31, 2023 and 2022, the Company had approximately $21,434,000 and $16,240,000, respectively, of operating lease ROU assets and $24,847,000 and $18,723,000, respectively of operating lease liabilities on the Company's Consolidated Balance Sheets. The Company has elected not to recognize right-of-use ("ROU") assets and lease liabilities arising from short-term leases, leases with initial terms of twelve months or less, or equipment leases (deemed immaterial) on the Consolidated Balance Sheets.
These leases may contain terms and conditions of options to extend or terminate the lease, which are recognized as part of the ROU assets and lease liabilities when an economic benefit to exercise the option exists and there is a significant probability that the Company will exercise the option. If these criteria are not met, the options are not included in the Company's ROU assets and lease liabilities. Variable lease payment amounts that cannot be determined at the commencement of the lease, such as common area maintenance expenses and increases in lease payments based on changes in index rates, are not included in the ROU assets or liabilities. These variable lease payments are expensed as incurred.
As of December 31, 2023, these leases do not contain material residual value guarantees or impose restrictions or covenants related to dividends or the Company's ability to incur additional financial obligations.
The discount rate for operating leases was based on market rates from a bank for obligations with comparable terms effective at the lease inception date. The following table presents lease costs, future minimum lease payments and other lease information as of December 31:
|
2024........................................................................................................................ |
$ 5,278,220 |
|
2025........................................................................................................................ |
5,518,176 |
|
2026........................................................................................................................ |
5,554,996 |
|
2027........................................................................................................................ |
4,640,618 |
|
2028........................................................................................................................ |
4,060,012 |
|
Thereafter............................................................................................................... |
3,596,703 |
|
|
|
|
Total future minimum lease payments |
28,648,725 |
|
Amount representing interest |
(3,802,221) |
|
|
|
|
Present value of net future minimum lease payments |
$ 24,846,504 |
During 2023, the Company entered into a lease amendment to lease additional space for one of its current offices. The lease for the additional space had not commenced as of December 31, 2023 and a corresponding right-of-use asset and lease liability has not been recorded. The Company commenced the use of this lease January 2024. The estimated future payments for this lease amendment total approximately $915,000.
Lease Cost
|
|
Year ended December 31: |
|
|
|
2023 |
2022 |
|
|
|
|
|
Operating lease cost (cost resulting from lease payments) |
$ 4,898,528 |
$ 4,011,764 |
|
Variable lease cost (cost excluded from lease payments) |
428,064 |
264,179 |
|
Sublease income |
(410,879) |
(396,000) |
|
|
|
|
|
Net lease cost |
$ 4,915,713 |
$ 3,879,943 |
|
|
|
|
|
Operating lease - operating cash flows (fixed payments) |
$ 3,968,498 |
$ 4,264,516 |
|
|
|
|
|
Weighted average lease term - operating leases |
5.4 years |
5.2 years |
|
Weighted average discount rate - operating leases |
5.30% |
4.80% |
The Company subleases office space to third parties under separate sublease agreements, which are generally month-to-month leases.
Property and equipment:
Property and equipment consist of furniture, equipment and leasehold improvements and is carried at cost less accumulated depreciation. Depreciation is provided generally on a straight-line method over the estimated useful lives of the related assets ranging from 5 to 15 years.
Business Combination
In a business combination, the acquisition method of accounting requires that the assets acquired and liabilities assumed be recorded as of the date of the acquisition at their respective fair values with limited exceptions. Assets acquired and liabilities assumed in a business combination that arise from contingencies are generally recognized at fair value. If fair value cannot be determined, the asset or liability is recognized if probable and reasonably estimable; if these criteria are not met, no asset or liability is recognized. Transaction costs are expensed as incurred. The operating results of the acquired business are reflected in the Company's consolidated financial statements after the date of acquisition.
Goodwill and indefinite-lived intangible assets:
Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed in business combinations and is allocated to the appropriate reporting unit when acquired. Acquired intangible assets are recorded at fair value.
Goodwill is evaluated for impairment annually during the fourth quarter, or more frequently if an event occurs, or circumstances change that could more likely than not reduce the fair value of a reporting unit below its carrying value. Goodwill is typically assigned to the reporting unit, which consolidates the acquisition. Components within the same reportable segment are aggregated and deemed a single reporting unit if the components have similar economic characteristics. As of December 31, 2023, the Company's reporting units consisted of Government Relations Consulting, Public Affairs Consulting and Diversified Services. Goodwill is evaluated for impairment using either a qualitative or quantitative approach for each of the Company's reporting units. Generally, a qualitative approach is first performed to determine whether a quantitative goodwill impairment test is necessary. If management determines, after performing an assessment based on qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount or that a fair value of the reporting unit substantially in excess of the carrying amount cannot be assured, then a quantitative goodwill impairment test would be required. The quantitative test for goodwill impairment is performed by determining the fair value of the related reporting units. Fair value is measured based on the discounted cash flow method, which requires management to estimate a number of factors for each reporting unit, including projected future operating results, anticipated future cash flows and discount rates. Management has performed its evaluation and determined the fair value of each reporting unit is greater than the carrying amount and, accordingly, the Company has not recorded any impairment charges related to goodwill for the years ended December 31, 2023 and 2022.
Indefinite-lived intangible assets are tested for impairment annually during the fourth quarter, or more frequently if an event occurs or circumstances change that could more likely than not reduce the fair value below its carrying value. The Company's indefinite-lived intangible assets consist of trademarks acquired through various business acquisitions. The Company has the option to first assess qualitative factors to determine whether events or circumstances indicate it is more likely than not that the fair value of the trademarks is greater than the carrying amount, in which case a quantitative impairment test is not required. Management has performed its evaluation and determined that the trademarks are not impaired for the years ended December 31, 2023 and 2022.
Other intangible assets:
The Company's definite-lived intangible assets consists of customer relationships, developed technology and noncompete agreements that have been acquired through various acquisitions. The Company amortizes these assets over their estimated useful lives.
Impairment of long-lived assets:
Long-lived assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for an amount by which the carrying amount of the asset exceeds the fair value of the asset. The Company has not recorded any impairment charges related to long-lived assets for the years ended December 31, 2023 and 2022.
Deferred revenue:
Deferred revenue represents prepayment by the customers for services that have yet to be performed. As of December 31, 2023 and 2022, deferred revenue was approximately $2,197,000 and $2,861,000, respectively. Deferred revenue is expected to be recognized as revenue within a year.
Accounts payable and accrued expenses:
Accounts payable and accrued expenses consist of the following as of December 31:
|
|
2023 |
2022 |
|
|
|
|
|
Accounts payable |
$ 4,348,493 |
$ 1,199,130 |
|
Bonus payable |
12,389,037 |
9,425,261 |
|
Other accrued expenses |
1,855,484 |
1,711,933 |
|
|
|
|
|
Total |
$ 18,593,014 |
$ 12,336,324 |
Marketing and advertising costs:
The Company expenses marketing and advertising costs as incurred. Marketing and advertising expense for the years ended December 31, 2023 and 2022 was approximately $216,000 and $182,000, respectively.
Income taxes:
The Company utilizes the asset and liability method in the Company's accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. The Company records a valuation allowance against deferred tax assets when realization of the tax benefit is uncertain.
A valuation allowance is recorded, if necessary, to reduce net deferred taxes to their realizable values if management believes it is more likely than not that the net deferred tax assets will not be realized.
The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.
Estimates:
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Share-based accounting charge and stock option expense:
The Company accounts for its share-based accounting (ASC 718-10-S99-2) charge using the fair value method. The fair value method requires the Company to estimate the grant-date fair value of its share-based awards and amortize this fair value to expense over the requisite service period or vesting term. For restricted and nonvested stock awards, the grant-date fair value is based upon the market price of the Company's common stock on the date of the grant. For stock options, the grant-date fair value is based on the Black-Scholes Option Pricing Model. For stock appreciation rights ("SARs") recorded as a liability, the Company adjusts the value of the SARs based on the fair value at each reporting date, which is calculated based on the Black-Scholes Option Pricing Model. The Company records forfeitures as they occur.
Segment information:
GAAP requires segmentation based on an entity's internal organization and reporting of revenue and operating income based upon internal accounting methods commonly referred to as the "management approach." Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker ("CODM"), or decision-making group, in deciding how to allocate resources and in assessing performance. The Company's CODM is its Chief Executive Officer. The Company's operations are conducted in three reportable segments. These segments consist of Government Relations Consulting, Public Affairs Consulting and Diversified Services.
Basic and diluted earnings (loss) per share:
The Company computes earnings (loss) per share in accordance with ASC 260, Earnings per Share, which requires presentation of both basic and diluted earnings per share on the face of the consolidated statements of operations. Basic earnings (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of outstanding shares during the period. Diluted earnings (loss) per share gives effect to all dilutive potential common shares outstanding during the period. Due to their anti-dilutive effect, the calculation of diluted net loss per share for the years ended December 31, 2023 and 2022 does not include the common stock equivalent shares below:
|
|
December 31, 2023 |
December 31, 2022 |
|
|
|
|
|
Common shares outstanding |
109,542,220 |
108,024,388 |
|
|
|
|
|
Nonvested shares outstanding |
5,729,741 |
1,322,092 |
|
|
|
|
|
Legally outstanding shares |
115,271,961 |
109,346,480 |
|
|
|
|
|
Stock options and RSUs outstanding |
5,314,056 |
2,718,809 |
|
|
|
|
|
Total fully diluted shares |
120,586,017 |
112,065,289 |
The following table includes the weighted average shares outstanding for each respective period:
|
|
December 31, 2023 |
December 31, 2022 |
|
|
|
|
|
Common shares, weighted average |
108,606,133 |
108,136,853 |
|
|
|
|
|
Nonvested shares, weighted average |
3,990,578 |
339,584 |
|
|
|
|
|
Legally outstanding shares, weighted average |
112,596,711 |
108,476,437 |
|
|
|
|
|
Stock options and RSUs, weighted average |
4,096,048 |
1,670,203 |
|
|
|
|
|
Total fully diluted, weighted average |
116,692,759 |
110,146,640 |
Fair value of financial instruments:
As a basis for determining the fair value of certain of the Company's financial instruments, the Company utilizes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1 - Observable inputs such as quoted prices in active markets for identical assets or liabilities;
Level 2 - Observable inputs, other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. Assets and liabilities measured at fair value are classified in their entirety based on the level of input that is significant to the fair value measurement. The Company's assessment of the significant of a particular input to the entire fair value measurement requires management to make judgments and consider the factors specific to the asset or liability.
The carrying values of cash, accounts receivable, and accounts payable and accrued expenses at December 31, 2023 and 2022 approximated their fair value due to the short maturity of these instruments.
The Company's financial instruments that are measured on a recurring basis consist of contingent consideration from the acquisition of KP LLC and Multistate Associates, Inc. The fair value of the contingent consideration was measured using Level 3 inputs.
The following table summarized the change in fair value, as determined by Level 3 inputs, for the contingent consideration using the unobservable Level 3 inputs:
|
Balance at December 31, 2021 |
$ - |
|
|
|
|
Fair value at issuance |
4,245,000 |
|
Change in fair value |
- |
|
|
|
|
Balance at December 31, 2022 |
4,245,000 |
|
|
|
|
Fair value at issuance |
2,784,990 |
|
Payout of contingent consideration |
(1,821,600) |
|
Change in fair value |
1,711,235 |
|
|
|
|
Balance at December 31, 2023 |
$ 6,919,625 |
The change in fair value of the contingent consideration of approximately $1,711,000 for the year ended December 31, 2023, consisted of changes in the fair value of the contingent consideration for MultiState Associates, Inc and KP LLC. The change in fair value was primarily due to the effect of the change in the forecasted growth rate of each entity.
The Company performed Monte Carlo simulations to estimate the achievement and amount of certain future operating results. The Monte Carlo simulations utilize estimates including; expected volatility of future operating results, discount rates applicable to future results, and expected growth rates. The table below documents the Monte Carlo assumptions and inputs (which are Level 3 inputs) each balance sheet date:
|
|
As of December 31, 2023 |
||
|
|
Valuation Methodology |
Significant Unobservable Input |
Range |
|
|
|
|
|
|
Contingent Consideration |
Monte Carlo Simulation Method |
Discount rate for credit risk and time value |
4.8% to 6.5% |
|
|
|
Discount rate for future profit after tax |
14.6% to 21.0% |
|
|
|
Expected volatility of future annual profit after tax |
33.0% to 37.0% |
|
|
|
Forecasted growth rate |
4.9% to 30.3% |
|
|
As of December 31, 2022 |
||
|
|
Valuation Methodology |
Significant Unobservable Input |
Range |
|
|
|
|
|
|
Contingent Consideration |
Monte Carlo Simulation Method |
Discount rate for credit risk and time value |
5.9% to 6.2% |
|
|
|
Discount rate for future profit after tax |
20.0% to 22.2% |
|
|
|
Expected volatility of future annual profit after tax |
30.0% to 35.0% |
|
|
|
Forecasted growth rate |
3.0% to 17.8% |
Assumptions related to future operating performance are based on management's annual and ongoing budgeting, forecasting and planning processes and represent management's best estimate of the future results of the Company's operations at a point in time. These estimates are subject to many assumptions, such as the economic environments in which the Company operates, demand for services and competitor actions. Estimated calculations of the future annual profit after tax amounts are discounted to present value using a market participant, weighted average cost of capital, which considers the risk inherent in the probability adjusted future annual profit after tax amounts from services provided. The financial and credit market volatility directly impacts certain inputs and assumptions used to develop the weighted average cost of capital such as the risk-free interest rate, industry beta, debt interest rate, and our market capital structure. These assumptions are based on significant inputs not observable in the market and thus represent Level 3 measurements within the fair value hierarchy. The use of different inputs and assumptions could increase or decrease our estimated fair value calculations of the contingent consideration.
Contingent Consideration:
The Company estimates and records the acquisition date fair value of contingent consideration as part of purchase price consideration for acquisitions. Additionally, each reporting period, the Company estimates changes in the fair value of contingent consideration and recognizes any change in fair value in the consolidated statements of operations. The estimate of the fair value of contingent consideration requires very subjective assumptions to be made of future operating results, discount rates and probabilities assigned to various potential operating result scenarios. Future revisions to these assumptions could materially change the estimate of the fair value of contingent consideration and, therefore, materially affect the Company's future financial results. The contingent consideration liability is to be settled through a combination of cash and shares of common stock based and the amount is dependent on the achievement of certain future operating results.
Reclassification:
Certain categorizations of the December 31, 2022 segment disclosures have been reclassified to conform to the December 31, 2023 presentation. In addition, the classification of the December 31, 2022 personnel cost, general and administrative expenses, accounts receivable and prepaid expenses and other current assets were reclassified to conform to the December 31, 2023 presentation. These reclassifications had no impact on the total results or net assets of the Company.
Adoption of New Accounting Pronouncement:
During 2023, the Company adopted Accounting Standards Update No. 2016-13 ("ASU 2016-13"), Financial Instruments-Credit Losses. ASU 2016-13 requires organizations to measure all expected credit losses for instruments held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This guidance is applicable for the Company's accounts receivable. However, the adoption of ASU 2016-13 did not have a material impact to the Company's valuation of its accounts receivable.
Subsequent events:
Management has evaluated the subsequent events for disclosure in these consolidated financial statements through DATE, the date these consolidated financial statements were available for issuance, and determined that no events have occurred that would require adjustment to or disclosure in these consolidated financial statements.
NOTE 2 ACQUISITIONS
KP Public Affairs LLC
On October 1, 2022, the Company entered into an Asset Purchase Agreement ("KP Agreement") and acquired certain assets and assumed certain liabilities of KP Public Affairs LLC ("Seller" or "KP LLC") through the creation of a wholly-owned subsidiary, KP Public Affairs, LLC ("KP"). At the closing of the transaction, the Company paid the Seller cash in the amount of $10,306,800 ("Closing Cash Payment") and issued 739,589 shares of the Company's common stock ("Closing Share Payment") to Seller at an aggregate fair value of $1,145,200.
During the year ended December 31, 2023, the Company paid the Seller an additional amount of consideration totaling $4,048,000 ("KP Closing True-Up Payment") based on the specific operating results of KP through December 31, 2022. The payment of the KP Closing True-Up Payment was pro-rated as $3,643,200 in cash and 245,389 shares of common stock ("KP True-Up Shares") at an aggregate fair value of $404,000. There are additional contingent payments that the Seller can earn in the future depending on certain operating results that are achieved. The total amount of consideration that the Company could be required to pay to the Seller in the amount of cash and stock ("Seller Shares") is $35,000,000. The equity component of the contingent payments ranges between 20% and 35%.
The KP Agreement provides certain forfeiture provisions applicable to any future cash or share payments owed, which generally require the owners of KP LLC ("Owner" or "Owners") to remain employed by the Company for a certain period of time to receive the full amount of those future payments. There are certain exceptions to the forfeiture provisions if termination of employment occurs under certain permitted events ("Acceleration Event") as defined in the KP Agreement.
In addition, under certain circumstances outlined in the KP Agreement, the Company can claw back a portion of certain payments previously paid if an Owner is not employed by the Company as of December 31, 2026.
If an Owner's employment is terminated as a result of an Acceleration Event, a percentage of the unvested Seller Shares (representing such Owner's ownership percentage in Seller) shall become fully vested. The Seller Shares issued have some restrictions but they also have certain legal rights consistent with the Company's other shares of Common Stock outstanding, including certain voting rights and the rights to dividends paid by the Company. In addition, the KP Agreement contains certain provisions requiring the forfeiture of a percentage of all cash and shares received by Seller if certain restrictive covenants are breached by an Owner.
Reasons for the Acquisition
The Company acquired KP LLC to expand its governmental and public affairs consulting services provided to state and local governments. Specifically, KP LLC provides significant services to companies and organizations doing business in the state of California.
Accounting for the Acquisition
The acquisition of Seller was accounted for as a business combination and reflects the application of acquisition accounting in accordance with ASC 805, Business Combinations ("ASC 805"). The acquired assets, including identifiable intangible assets and liabilities assumed, have been recorded at their estimated fair values with the excess purchase price assigned to goodwill.
Purchase Consideration
The Company determined that certain consideration provided to Sellers in the KP Agreement does not qualify as purchase consideration in accordance with the guidance of ASC 805. The Company determined that the purchase consideration consists of the amount of cash payments owed to Sellers that are not subject to a vesting or claw back provision that is directly linked to the continued employment of Sellers. The total purchase consideration consisted of the following amounts:
|
Closing Cash Payment |
$ 10,306,800 |
|
Contingent consideration |
4,245,000 |
|
|
|
|
Total purchase consideration |
$ 14,551,800 |
The contingent consideration consists of the estimated fair value of the Closing True-Up Cash Payment, Interim Earnout Cash Payment, and Final Earnout Cash Payment that are not subject to a vesting requirement or claw back provision directly linked to the future employment of Owners.
Purchase Price Allocation
The allocation of the purchase consideration resulted in the following amounts being allocated to the assets acquired and liabilities assumed as of the purchase date of October 1, 2022 based on their respective estimated fair values summarized below:
|
Cash |
$ 139,547 |
|
Other current assets |
69,000 |
|
Right of use assets |
3,273,766 |
|
Tradename |
1,091,000 |
|
Noncompete agreements |
306,000 |
|
Customer relationship |
5,861,000 |
|
Deferred income tax asset |
4,277,500 |
|
Goodwill |
3,016,300 |
|
Other current liabilities |
(208,547) |
|
Lease liability |
(3,273,766) |
|
|
|
|
Total estimated purchase price |
$ 14,551,800 |
The identified definite-lived intangible assets were as follows:
|
Definite-lived intangible assets |
Weighted-average 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.
The fair value of the contingent consideration was performed using Monte Carlo simulations to estimate the achievement and amount of certain future operating results. The Monte Carlo simulations utilize estimates including; expected volatility of future operating results, discount rates applicable to future results, and expected growth rates. The table below provides the significant inputs to the calculation of the contingent consideration as of the acquisition date:
|
Significant Unobservable Input |
Range |
|
|
|
|
Discount rate for credit risk and time value |
5.9 % to 6.2 % |
|
Discount rate for future profit after tax |
20.0% to 22.2% |
|
Expected volatility of future annual profit after tax |
30.0% to 35.0% |
|
Forecasted growth rate |
3.0% to 17.8% |
Engage LLC
On November 1, 2022, the Company (through its wholly-owned subsidiary, Forbes Tate Partners, LLC) entered into an Asset Purchase Agreement ("Engage Agreement") and acquired certain assets and assumed certain liabilities of Engage LLC ("Engage"). At the closing of the transaction, the Company paid Engage cash in the amount of $1,925,000 ("Engage Cash Payment") and issued 487,301 shares of the Company's common stock ("Engage Restricted Shares") at an aggregate fair value of $825,000.
A portion of the Engage Cash Payment was designated to certain owners ("Junior Principal(s)") of Engage and the remaining of the Engage Cash Payment was designated to the other owners ("Senior Principal(s)") of Engage. In addition, all of the Engage Restricted Shares were issued to the Senior Principals. There are no vesting requirements or claw back provisions linked to continuing employment for the Engage Cash Payment paid to the Junior Principals. There are vesting requirements and claw back provisions linked to continuing employment of the Senior Principals for the Engage Cash Payment paid and Engage Restricted Shares issued to the Senior Principals.
Each of the Senior Principals will vest in the Engage Restricted Shares as long as they remain continuously employed through each applicable vesting date, except if the termination occurs under certain permitted events ("Engage Acceleration Event") as defined in the Engage Agreement. If one of the Senior Principals is terminated as a result of an Engage Acceleration Event, all of such Senior Principal's unvested Engage Restricted Shares shall become fully vested.
The Engage Restricted Shares issued have some restrictions but they also have certain legal rights consistent with the Company's other shares of Common Stock outstanding, including certain voting rights and the rights to dividends paid by the Company.
With respect to the Engage Cash Payment, each of the Senior Principals have a vesting requirement related to their respective cash payment. If any of the Senior Principals is terminated as a result of an Engage Acceleration Event, all of such Senior Principal's unvested Engage Cash Payment shall become fully vested,
In addition, the Engage Agreement contains certain provisions requiring the forfeiture of a respective Senior Principal's Engage Restricted Shares and a portion of the Engage Cash Payment made to both the Junior Principals and Senior Principals if certain restrictive covenants are breached by the respective Junior Principal or Senior Principal.
Reasons for the Acquisition
The Company acquired Engage to expand its governmental and public affairs consulting services provided within the U.S.
Accounting for the Acquisition
The acquisition of Engage was accounted for as a business combination and reflects the application of acquisition accounting in accordance with ASC 805, Business Combinations ("ASC 805"). The acquired assets, including identifiable intangible assets and liabilities assumed, have been recorded at their estimated fair values with the excess purchase price assigned to goodwill.
Purchase Consideration
The Company determined that certain consideration provided to Engage in the Engage Agreement does not qualify as purchase consideration in accordance with the guidance of ASC 805. The Company determined that the purchase consideration consists of the amount of Engage Cash Payment paid to the Junior Principals and the Engage Cash Payment to the Senior Principals that is not subject to vesting or claw back linked to continuing employment, which totaled $894,000. The value of the Engage Restricted Shares of $825,000 and the remaining Engage Cash Payment amount of $1,031,000 ("Prepaid Post-Combination Compensation") will be recognized as a charge to expense in accordance with ASC 805-10-55-25 (See Note 6).
Purchase Price Allocation
The allocation of the purchase consideration resulted in the following amounts being allocated to the assets acquired and liabilities assumed as of the purchase date of November 1, 2022 based on their respective estimated fair values summarized below:
|
Cash |
$ 179,793 |
|
Other current assets |
48,571 |
|
Right of use assets |
173,579 |
|
Tradename |
14,000 |
|
Noncompete agreements |
140,000 |
|
Customer relationship |
414,461 |
|
Deferred income tax asset |
325,539 |
|
Other current liabilities |
(228,364) |
|
Lease liability |
(173,579) |
|
|
|
|
Total estimated purchase price |
$ 894,000 |
In 2023, during the measurement period, the Company determined that an adjustment to increase the Company's deferred tax asset of $281,000 was necessary and a corresponding gain on bargain purchase was recorded.
The identified definite-lived intangible assets were as follows:
|
Definite-lived intangible assets |
Weighted-average 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.
MultiState Associates, Inc.
On March 1, 2023, the Company entered into an Asset Purchase Agreement ("MultiState Agreement") and acquired certain assets and assumed certain liabilities of MultiState Associates, Inc. ("MS Seller" or "MultiState") through the creation of a wholly-owned subsidiary, MultiState Associates, LLC ("MS LLC"). At the closing of the transaction, the Company paid the Seller cash in the amount of $17,600,000 ("MS Closing Cash Payment") and issued 2,740,717 shares of the Company's common stock ("MS Closing Share Payment") to Seller at an aggregate fair value of $4,400,000, of which, 1,973,316 shares have vesting requirements ("MS Vesting Shares").
In addition, there are additional contingent payments that the MS Seller can earn in the future depending on certain operating results that are achieved. The total amount of consideration that the Company could be required to pay to the MS Seller in the amount of cash and stock ("MS Seller Shares") is $70,000,000. The equity component of the contingent payments is 50%.
The MultiState Agreement provides certain forfeiture provisions applicable to any future cash or share payments owed, which generally require certain owners of MS LLC ("MS Owner" or "MS Owners") to remain employed by the Company for a certain period of time to receive the full amount of those future payments. There are certain exceptions to the forfeiture provisions if termination of employment occurs under certain permitted events ("MS Acceleration Event") as defined in the MultiState Agreement.
In addition, under certain circumstances outlined in the MultiState Agreement, the Company can claw back a portion of certain payments previously paid if an MS Owner is not employed by the Company as of certain future dates.
If an MS Owner's employment is terminated as a result of an MS Acceleration Event, a percentage of the unvested MS Seller Shares (representing such MS Owner's ownership percentage in MS Seller) shall become fully vested. The MS Seller Shares issued have some restrictions but they also have certain legal rights consistent with the Company's other shares of Common Stock outstanding, including certain voting rights and the rights to dividends paid by the Company. In addition, the MultiState Agreement contains certain provisions requiring the forfeiture of a percentage of all cash and shares received by MS Seller if certain restrictive covenants are breached by an MS Owner.
Reasons for the Acquisition
The Company acquired MultiState to expand the scope of its consulting services provided in respect of federal, state and local governments. Specifically, MultiState provides lobbying compliance, legislative activity tracking, lobbying brokerage and other consulting services to Fortune 500 companies, non-profit organizations, elected officials and leading advocacy and trade associations throughout the United States.
Accounting for the Acquisition
The acquisition of MS Seller was accounted for as a business combination and reflects the application of acquisition accounting in accordance with ASC 805, Business Combinations ("ASC 805"). The acquired assets, including identifiable intangible assets and liabilities assumed, have been recorded at their estimated fair values.
Purchase Consideration
The Company determined that certain consideration provided to MS Sellers in the MultiState Agreement does not qualify as purchase consideration in accordance with the guidance of ASC 805. The Company determined that the purchase consideration consists of the amount of cash and share payments owed to MS Sellers that are not subject to a vesting or claw back provision that is directly linked to the continued employment of MS Sellers. The total purchase consideration consisted of the following amounts:
|
MS Closing Cash Payment |
$ 8,096,000 |
|
MS Closing Share Payment |
1,232,000 |
|
Contingent consideration |
2,784,990 |
|
|
|
|
Total purchase consideration |
$ 12,112,990 |
The contingent consideration consists of the estimated fair value of future payments that are not subject to vesting or claw back provisions tied to continued employment.
Purchase Price Allocation
The provisional allocation of the purchase consideration resulted in the following amounts being allocated to the assets acquired and liabilities assumed as of the purchase date of March 1, 2023 based on their respective estimated fair values is summarized below:
|
Receivable from MS Sellers |
$ 4,490,227 |
|
Other current assets |
191,177 |
|
Right of use assets |
61,976 |
|
Tradename |
2,202,000 |
|
Noncompete agreements |
525,000 |
|
Customer relationships |
5,507,600 |
|
Developed technology |
3,938,000 |
|
Deferred income tax asset |
4,743,079 |
|
Deferred revenue |
(4,681,404) |
|
Lease liability |
(309,888) |
|
|
|
|
Net assets acquired |
16,667,767 |
|
Less estimated purchase price |
(12,112,990) |
|
|
|
|
Gain on bargain purchase |
$ 4,554,777 |
The identified definite-lived intangible assets were as follows:
|
Definite-lived intangible assets |
Weighted-average useful life (in years) |
Amount |
|
|
|
|
|
Customer relationships |
7 |
$5,507,600 |
|
Developed technology |
7 |
$3,938,000 |
|
Noncompete agreements |
5 |
$525,000 |
The fair value of customer relationships was determined using the income approach, which requires management to estimate a number of factors for each reporting unit, including projected future operating results, anticipating future cash flows and discount rates. The fair value of the developed technology was determined using the relief from royalty method, which requires management to estimate a number of factors, including the estimated future revenues expected to be generated from the technology and a hypothetical royalty rate attributable to the technology. The fair value of noncompete agreements was determined using an income approach method, which requires management to estimate a number of factors related to the expected future cash flows of MS LLC and the potential impact and probability of competition, assuming such noncompete agreements were not in place. The primary factors that contributed to the gain on bargain purchase recognized from the MS LLC acquisition include the requirement for the key employees of MS LLC to stay employees of the Company for a significant period of time.
The fair value of the contingent consideration was performed using Monte Carlo simulations to estimate the achievement and amount of certain future operating results. The Monte Carlo simulations utilize estimates including; expected volatility of future operating results, discount rates applicable to future results, and expected growth rates. The table below provides the significant inputs to the calculation of the contingent consideration as of the acquisition date:
|
Significant Unobservable Input |
Range |
|
|
|
|
Discount rate for credit risk and time value |
5.7 % to 7.0 % |
|
Discount rate for future profit after tax |
15.9% to 16.6% |
|
Expected volatility of future annual profit after tax |
36.0% to 38.0% |
|
Forecasted growth rate |
3.0% to 14.4% |
NOTE 3: RELATED PARTY TRANSACTIONS
As of December 31, 2023, the amounts due from related parties of approximately $1,054,000 include the amount expected to be paid to the Company related to working capital adjustments associated with the MultiState acquisition.
During December 2021, the Company entered into a term note agreement ("2021 Note") with The Alpine Group, Inc. ("Alpine Inc"). The 2021 Note provided Alpine Inc with the ability to request a one-time borrowing of up to $750,000 from the Company at any time prior to December 31, 2022. The purpose of the 2021 Note was to provide Alpine Inc with funds to cover certain federal and state income taxes to be owed by Alpine Inc in connection with the sale of shares of the Company's common stock in the IPO. During April 2022, the Company advanced $513,000 to Alpine Inc in accordance with the terms of the 2021 Note. The interest rate on the 2021 Note is equal to the Prime Rate as published in the Wall Street Journal. The 2021 Note requires an annual payment of accrued and unpaid interest on the last business day of December each year and through the maturity date of January 16, 2025. The 2021 Note and accrued interest balance as of December 31, 2023 and 2022 was approximately $531,000 and $526,000, which are recorded in notes receivable - related parties and prepaid expenses and other current assets.
During November 2023, the Company entered into term note agreements ("2023 Notes") with certain employees of the Alpine Group Partners, LLC totaling $1,750,000. The interest rate on the 2023 Notes is 7.5% and the notes are payable in annual installments of $350,000 plus all accrued and unpaid interest beginning on November 1, 2024 with a maturity date of November 1, 2028 or the effective date of the termination of employment of the respective employee borrower for any reason, if earlier than the maturity date. As of December 31, 2023, the 2023 Notes were recorded in notes receivable - related parties.
NOTE 4: GOODWILL AND INTANGIBLE ASSETS
Goodwill
Goodwill is an indefinite lived asset with balances as follows as of December 31:
|
|
2023 |
2022 |
|
|
|
|
|
Goodwill |
$ 47,909,832 |
$ 47,909,832 |
As of December, 31, 2023 and 2022, there have been no impairments to goodwill. During 2022, goodwill increased by approximately $3,015,000 as a result of the acquisition of KP LLC and Engage. See Note 2.
Goodwill is allocated to each segment as follows, as of December 31:
|
|
2023 |
2022 |
|
|
|
|
|
Goodwill |
|
|
|
Government Relations Consulting |
$ 35,512,601 |
$ 35,512,601 |
|
Public Affairs Consulting |
12,397,231 |
12,397,231 |
|
Diversified Services |
- |
- |
|
|
|
|
|
Total |
$ 47,909,832 |
$ 47,909,832 |
Intangible Assets
The Company's intangible assets consist of customer relationship assets acquired through various acquisitions as well as developed technology and noncompete agreements acquired through the acquisition of MS LLC, KP LLC and Engage, which are definite lived assets and are amortized over their estimated useful lives. The estimated useful lives for the customer relationship and developed technology assets range from 7 to 9 years and the estimated useful lives for the noncompete agreements range from 4 to 5 years. In addition, intangible assets consist of tradenames, which are indefinite lived assets and evaluated for impairment on an annual basis or more frequently as needed. The cost of the Company's tradenames, customer relationships, developed technology and noncompete agreements, and the accumulated amortization of the Company's customer relationships, developed technology and noncompete agreements is as follows as of December 31:
|
|
2023 |
2022 |
|
|
|
|
|
Customer relationships |
$ 27,104,400 |
$ 21,754,800 |
|
Developed technology |
3,938,000 |
- |
|
Noncompete agreements |
971,000 |
446,000 |
|
Accumulated amortization |
(12,264,069) |
(8,543,684) |
|
|
|
|
|
Total definite lived assets, net |
19,749,331 |
13,657,116 |
|
|
|
|
|
Tradenames |
7,120,000 |
4,918,000 |
|
|
|
|
|
Total intangible assets, net |
$ 26,869,331 |
$ 18,575,116 |
Amortization expense for customer relationship and noncompete agreement assets approximated $3,878,000 and $2,129,000 for 2023 and 2022, respectively.
The approximate estimated future amortization expense for the next five years is as follows:
|
|
Amortization |
|
|
|
|
2024....................................................................................................................... |
$ 3,910,000 |
|
2025....................................................................................................................... |
3,894,000 |
|
2026....................................................................................................................... |
3,742,000 |
|
2027....................................................................................................................... |
3,692,000 |
|
2028....................................................................................................................... |
2,263,000 |
|
Thereafter.............................................................................................................. |
2,248,000 |
|
|
|
|
Total |
$ 19,749,000 |
NOTE 5 LINE OF CREDIT AND NOTES PAYABLE
A) Bank credit facility
On February 28, 2023, the Company entered into a $17,000,000 credit facility with a bank ("Credit Facility"). The Credit Facility has two components, Facility 1 is a Senior Secured Line of Credit in the amount of up to $3,000,000 and Facility 2 is a Senior Secured Term Loan in the amount of $14,000,000. The interest rate on Facility 1 and Facility 2 is the Bloomberg Short-Term Bank Yield Index plus 225 basis points. The Credit Facility is collateralized by substantially all of the net assets of the Company. The Credit Facility matures on January 31, 2026. The Company has drawn $14,000,000 from Facility 2 and utilized those funds as part of the consideration to acquire MultiState. During 2023, the Company utilized $1,000,000 from Facility 1 for the MultiState acquisition. The Company paid approximately $451,000 in debt issuance costs for the Credit Facility and has recorded this amount as a debt discount and is amortizing the debt discount to interest expense over the term of the Credit Facility using the straight-line method, which approximates the effective interest method.
The Company is required to make monthly payments of principal of $291,667 plus interest beginning in March 2023 through the maturity date of January 31, 2026 for the Facility 2. The principal payment for Facility 1 is due on the maturity date for that facility, which is January 31, 2026. Periodic interest-only payments are due on Facility 1 through the maturity date. The Company incurred interest expense of approximately $922,000 for the Credit Facility during the year ended December 31, 2023, which consisted of $797,000 of cash interest and $125,000 of non-cash amortization of debt discount.
As of December 31, 2023, Facility 1 had been repaid in full. The Company is able to re-borrow up to $3,000,000 under Facility 1 or 80% of the Company's eligible receivables, whichever is less.
The Company's Facility 2 consists of the following as of December 31, 2023:
|
Facility 2 |
$ 11,083,333 |
|
|
|
|
Less unamortized debt issuance costs |
(325,527) |
|
|
|
|
Total debt, net of unamortized debt issuance costs |
10,757,806 |
|
|
|
|
Less current portion |
3,349,757 |
|
|
|
|
Total Facility 2, long-term |
$ 7,408,049 |
As of December 31, 2023, the future principal maturities of Facility 2 is as follows:
|
2024 |
$ 3,500,000 |
|
2025 |
3,500,000 |
|
2026 |
4,083,333 |
|
|
|
|
Total |
$ 11,083,333 |
B) Note payable - landlord
The Company executed a lease amendment on March 23, 2018, and received a loan of approximately $316,000 to fund certain tenant improvements. The Company shall repay the loan in equal monthly principal and interest installments over the lease term at an interest rate of 8%, with the final payment due on March 1, 2029. Notwithstanding the foregoing, the Company may submit a notice to the landlord to prepay the outstanding balance upon terms to be agreed upon by the landlord and the Company. The balance on the loan as of December 31, 2023 and 2022, was approximately $184,000 and $211,000, respectively. Interest expense on the note payable - landlord for the year ended December 31, 2023 and 2022 was approximately $16,000 and $17,000, respectively.
As of December 31, 2023, the future maturities of this note payable at December 31 is as follows:
|
2024........................................................................................................................ |
$ 29,321 |
|
2025........................................................................................................................ |
31,755 |
|
2026........................................................................................................................ |
34,390 |
|
2027........................................................................................................................ |
37,245 |
|
2028........................................................................................................................ |
40,240 |
|
Thereafter............................................................................................................... |
10,555 |
|
|
|
|
Total |
$ 183,506 |
NOTE 6 STOCKHOLDERS' EQUITY AND SHARE-BASED ACCOUNTING CHARGE
As of December 31, 2023, the authorized capital of the Company consists of 1,100,000,000 shares of capital stock, $0.001 par value per share, of which 1,000,000,000 shares are designated as common stock and 100,000,000 shares are designated as preferred stock. There are no shares of preferred stock outstanding.
As of December 31, 2023 and 2022, the number of the Company's shares of common stock outstanding for legal purposes was greater than the number of shares of common stock outstanding for accounting purposes. Therefore, the difference between the legally outstanding shares of common stock on the face of the balance sheet and the amount outstanding on the statement of equity consists of shares issued with restrictions (collectively "Restricted Shares") as follows:
|
|
December 31, 2023 |
December 31, 2022 |
|
|
|
|
|
Statement of Equity |
109,542,220 |
108,024,388 |
|
|
|
|
|
Restricted Shares: |
|
|
|
KP Closing Share Payment |
739,589 |
739,589 |
|
KP Earnout Shares |
245,389 |
- |
|
Engage Restricted Shares |
487,301 |
487,301 |
|
MS Vesting Shares |
1,973,316 |
- |
|
RSAs Unvested |
2,188,944 |
- |
|
Other Restricted Shares |
95,202 |
95,202 |
|
|
|
|
|
Total Restricted Shares |
5,729,741 |
1,322,092 |
|
|
|
|
|
Legally Outstanding Shares |
115,271,961 |
109,346,480 |
|
|
|
|
|
Stock Options Outstanding |
3,089,056 |
2,718,809 |
|
RSUs Outstanding |
2,225,000 |
- |
|
|
|
|
|
Fully Diluted Shares Outstanding |
120,586,017 |
112,065,289 |
The weighted-average common shares outstanding, basic and diluted reported on the consolidated statement of operations is 108,606,133 and 108,136,853, which is different from the 109,542,220 and 108,024,388 ending shares as of December 31, 2023 and 2022 due to the first numbers representing an average during the year compared to the amount outstanding at the end of the year.
Other Restricted Shares consists of restricted stock awards in 2022 to convert a consultant of the Company to a full-time employee ("Consultant Award"). The Consultant Award was valued at approximately $178,000 and vests equally on each of January 1, 2023, January 1, 2024 and January 1, 2025.
ASC 718-10-S99-2 Charge
As discussed in Note 1, during 2021 the Company entered into Executive Employment Agreements with Group Executives. As a result, the addition of the vesting provisions to previously issued shares created a share-based accounting charge in accordance with the accounting guidance in ASC 718-10-S99-2, Compensation-Stock Compensation. As a result, the Company recorded a share-based accounting (ASC 718-10-S99-2) charge of approximately $30,904,000 and $33,392,000 for the years ended December 31, 2023 and 2022, respectively.
As of December 31, 2023, there were 82,687,340 Retained Pre-IPO Shares, held by current employees and subject to vesting requirements, and 36,060,828 of these shares were fully vested. These shares were issued in 2021 and the weighted-average grant date fair value of these shares was $1.82 as of the grant date. As of December 31, 2023, the unrecognized compensation cost from these restricted shares was approximately $89,796,000, which is expected to be recognized over a weighted-average period of 3.0 years.
ASC 805-10-55-25 Charge
During 2022 and 2023, the Company acquired KP LLC, Engage and MS LLC (see Note 2) for a combination of cash, shares of Company Common Stock and future contingent payments ("Acquisition Payments"). As described in Note 2, a portion of the Acquisition Payments are subject to vesting and/or claw back provisions that are directly linked to the continuing employment of the Owners of KP LLC, Senior Principals of Engage or MS Owners, respectively ("Post-Combination Payments"). As a result, in accordance with the guidance of ASC 805-10-55-25, Business Combinations, the Post-Combination Payments are not considered part of the purchase consideration for these acquisitions and the fair value of the Post-Combination Payments is being recognized as a charge for post-combination compensation over the period of the applicable vesting requirement or the period over which the claw back rights linked to employment lapse.
The approximate total other liability consists of amounts expected to be paid in cash or stock in the future for post-combination compensation and is comprised of the following as of:
|
|
December 31, 2023 |
December 31, 2022 |
|
|
|
|
|
Other liability, current portion |
$ 536,000 |
$ 1,822,000 |
|
Other liability, long term |
1,585,000 |
435,000 |
|
|
|
|
|
Total |
$ 2,121,000 |
$ 2,257,000 |
For the years ended December 31, 2023 and 2022, the post-combination compensation charge recorded by the Company was approximately $6,295,000 and $2,441,000, respectively. This amount consists of the following components:
|
|
For the years ended |
|
|
|
December 31, 2023 |
December 31, 2022 |
|
|
|
|
|
Additions to other liability |
$ 1,685,000 |
$ 2,257,000 |
|
Vesting of common stock |
1,529,000 |
111,000 |
|
Amortization of prepaid post-combination compensation |
3,081,000 |
73,000 |
|
|
|
|
|
Total |
$ 6,295,000 |
$ 2,441,000 |
As of December 31, 2023, the unrecognized post-combination compensation charge was approximately $21,722,000, which is expected to be recognized over a weighted-average period of 2.4 years. The actual amount of Post-Combination Payments is subject to significant estimates and could change materially in the future.
NOTE 7 OMNIBUS INCENTIVE PLAN
During 2021, the Company adopted the Public Policy Holding Company, Inc. 2021 Omnibus Incentive Plan (the "Omnibus Plan"), under which Options (both nonqualified options, and incentive stock options subject to favorable U.S. income tax treatment), stock appreciation rights, restricted stock units, restricted stock, unrestricted stock, cash-based awards and dividend equivalent rights may be issued. An award may not be granted if the number of common shares committed to be issued under that award exceeds ten percent of the ordinary shares of the Company in issue immediately before that day, when added to the number of common shares which have been issued, or committed to be issued, to satisfy awards under the Omnibus Plan, or options or awards under any other employee share plan operated by the Company, granted in the five previous years.
As of December 31, 2023, the total amount of shares authorized by the Board of Directors under the Omnibus Plan was 11,527,196, with a total of 3,204,189 available for issuance. During the years ended December 31, 2023 and 2022 the Company granted 652,000 and 2,794,859 Options to employees. In addition, during the year ended December 31, 2023, the Company granted 2,250,000 restricted stock units ("RSUs"), and 3,008,951 restricted stock awards ("RSAs"). The stock options have a contractual term of ten years and vest three years after their issuance. The RSUs vest over a three-year period with one-third vesting each year after the grant date. 820,007 RSAs vested on December 31, 2023, 50,000 RSAs vest in October 2024 and 2,138,944 RSAs that vest over a five year period. The RSAs include voting and dividend rights prior to vesting.
Options
Determining the appropriate fair value model and the related assumptions requires judgment. The fair value of each option granted is estimated using a Black-Scholes option-pricing model on the date of grant as follows:
|
|
For the year ended |
For the year ended |
|
|
December 31, 2023 |
December 31, 2022 |
|
|
|
|
|
Estimated dividend yield |
6.00% |
6.00% |
|
Expected stock price volatility |
60.00% |
60.00% |
|
Risk-free interest rate |
3.8% |
2.7% to 4.1% |
|
Expected life of option (in years) |
6.50 |
6.50 |
|
Weighted-average fair value per share |
$ 0.54 |
$ 0.58 |
The expected volatility rates are estimated based on the actual volatility of comparable public companies over the expected term. The expected term represents the average time that Options that vest are expected to be outstanding. Due to limited historical data, the Company calculates the expected life based on the midpoint between the vesting date and the contractual term, which is in accordance with the simplified method. The risk-free rate is based on the United States Treasury yield curve during the expected life of the option.
The following summarizes the stock option activity for the years ended December 31, 2023 and 2022:
|
|
|
|
Weighted |
|
|
|
|
Weighted |
Average |
|
|
|
|
Average |
Contractual |
Aggregate |
|
|
Number of |
Exercise |
Term |
Intrinsic |
|
|
Shares |
Price |
(in years) |
Value |
|
|
|
|
|
|
|
Outstanding as of December 31, 2021 |
- |
$ - |
- |
$ - |
|
Granted* |
2,794,859 |
2.13 |
- |
- |
|
Exercised |
- |
- |
- |
- |
|
Cancelled/Forfeited* |
(76,050) |
2.13 |
- |
- |
|
|
|
|
|
|
|
Outstanding as of December 31, 2022* |
2,718,809 |
$ 2.13 |
9.4 |
$ - |
|
Granted* |
652,000 |
2.04 |
- |
- |
|
Exercised |
- |
- |
- |
- |
|
Cancelled/Forfeited* |
(281,753) |
2.21 |
- |
- |
|
|
|
|
|
|
|
Outstanding as of December 31, 2023* |
3,089,056 |
$ 2.21 |
8.9 |
$ - |
|
Exercisable as of December 31, 2023 |
- |
- |
- |
- |
|
|
|
|
|
|
|
Vested and expected to vest |
|
|
|
|
|
as of December 31, 2023* |
3,089,056 |
$ 2.21 |
8.9 |
$ - |
The following table summarizes certain information about the stock options outstanding and exercisable as of December 31, 2023:
|
Exercise Price |
Number of Options Outstanding |
Weighted-Average Remaining Life |
Number of Options Exercisable |
|
|
|
|
|
|
$2.04* |
652,000 |
9.4 |
- |
|
2.22* |
100,000 |
8.8 |
- |
|
2.25* |
2,287,056 |
8.4 |
- |
|
2.27* |
50,000 |
8.6 |
- |
|
|
|
|
|
|
|
3,089,056 |
|
- |
*The applicable exercise prices have been adjusted based on the applicable exchange rate of GBP to U.S. Dollars at the end of each period presented.
Option expense for the years ended December 31, 2023 and 2022 was approximately $518,000 and $318,000. As of December 31, 2023, there was approximately $926,000 of total unrecognized compensation cost related to non-vested stock-based compensation arrangements, which is expected to be recognized over a weighted-average period of 1.6 years.
Restricted Stock Units ("RSUs")
During the year ended December 31, 2023, the Company issued 2,250,000 RSUs to employees. The Company had not issued any RSUs prior to 2023. Determining the appropriate fair value model and the related assumptions requires judgment. The fair value of each RSU granted is estimated using a Black-Scholes option-pricing model on the date of grant as follows:
|
|
Year ended December 31, 2023 |
|
|
|
|
Estimated dividend yield |
6.00% |
|
Expected stock price volatility |
60.00% |
|
Risk-free interest rate |
3.9% to 5.4% |
|
Expected life of instrument (in years) |
1 to 3 years |
|
Weighted-average fair value per share |
$ 1.41 |
Activity in the Company's non-vested RSUs for the year ended December 31, 2023 was as follows:
|
|
|
Weighted |
|
|
|
Average Grant Date |
|
|
Number of |
Fair |
|
|
RSUs |
Value |
|
|
|
|
|
Nonvested as of December 31, 2022 |
- |
$ - |
|
|
|
|
|
Granted |
2,250,000 |
1.41 |
|
Vested |
- |
- |
|
Cancelled/Forfeited |
(25,000) |
1.47 |
|
|
|
|
|
Nonvested as of December 31, 2023* |
2,225,000 |
$ 1.41 |
RSU expense for the year ended December 31, 2023 was approximately $553,000. As of December 31, 2023, there was approximately $2,615,000 of total unrecognized compensation cost related to non-vested RSU arrangements, which is expected to be recognized over a weighted-average period of 1.5 years.
Restricted Stock Awards ("RSAs")
During the year ended December 31, 2023, the Company issued 3,008,951 RSAs to employees. The Company had not issued any RSAs prior to 2023. Determining the appropriate fair value model and the related assumptions requires judgment. The fair value of each RSA granted is estimated using a Black-Scholes option-pricing model on the date of grant as follows:
|
|
Year ended December 31, 2023 |
|
|
|
|
Estimated dividend yield |
6.00% |
|
Expected stock price volatility |
60.00% |
|
Risk-free interest rate |
4.9% to 5.4% |
|
Expected life of instrument (in years) |
1 to 5 years |
|
Weighted-average fair value per share |
$ 1.31 |
Activity in the Company's non-vested RSAs for the year ended December 31, 2023 was as follows:
|
|
|
Weighted |
|
|
|
Average Grant Date |
|
|
Number of |
Fair |
|
|
RSAs |
Value |
|
|
|
|
|
Nonvested as of December 31, 2022 |
- |
$ - |
|
|
|
|
|
Granted |
3,008,951 |
1.31 |
|
Vested |
(820,007) |
1.61 |
|
Cancelled/Forfeited |
- |
- |
|
|
|
|
|
Nonvested as of December 31, 2023 |
2,188,944 |
$ 1.19 |
RSA expense for the year ended December 31, 2023 was approximately $1,435,000. As of December 31, 2023, there was approximately $2,498,000 of total unrecognized compensation cost related to non-vested RSA arrangements, which is expected to be recognized over a weighted-average period of 2.6 years.
Stock Appreciation Rights ("SARs")
During the year ended December 31, 2023, the Company issued 1,850,000 SARs to employees. SARs are not issued shares or committed shares to be issued and therefore do not count against the total number of shares that can be issued under the Omnibus Plan. Upon exercise of a SAR, the Company shall pay the grantee in cash an amount equal to the excess of the fair market value of a share of stock on the effective date of exercise in excess of the exercise price of the SAR. This cash settlement feature requires the SARs to be classified as a liability and marked to market at each reporting period. The SARs vest over a three-year period with one-third vesting each year after the grant date. The Company had not issued any SARs prior to 2023. Determining the appropriate fair value model and the related assumptions requires judgment. The fair value of each SAR granted is estimated using a Black-Scholes option-pricing model and the fair value is adjusted at each reporting period. Each SAR has a cash settlement feature and is recorded as a liability in the Company's consolidated balance sheets. As of December 31, 2023, the total liability was $290,000. The fair value of the SARs was calculated as follows as of December 31, 2023:
|
|
Year ended December 31, 2023 |
|
|
|
|
Estimated dividend yield |
6.00% |
|
Expected stock price volatility |
60.00% |
|
Risk-free interest rate |
4.7% |
|
Expected life of option (in years) |
4.5 to 5.5 years |
|
Weighted-average fair value per share |
$ 0.46 |
|
|
|
Weighted |
|
|
|
Average |
|
|
Number of |
Exercise |
|
|
Shares |
Price |
|
|
|
|
|
Outstanding as of December 31, 2022 |
- |
$ - |
|
|
|
|
|
Granted |
1,850,000 |
1.70 |
|
Exercised |
- |
- |
|
Cancelled/Forfeited |
(90,000) |
1.70 |
|
|
|
|
|
Outstanding as of December 31, 2023 |
1,760,000 |
1.70 |
|
|
|
|
|
Exercisable as of December 31, 2023 |
- |
- |
|
|
|
|
|
Vested and expected to vest |
|
|
|
as of December 31, 2023 |
1,760,000 |
$ 1.70 |
SAR expense for the year ended December 31, 2023 was approximately $290,000. The amount of the future expense for all SARs issued will depend upon the value of the Company's common stock and other factors at each future reporting date.
NOTE 8 INCOME TAXES
The components of income tax expense attributable to income before income taxes for the years ended December 31, 2023 and 2022, consisted of the following:
|
|
2023 |
2022 |
|
|
|
|
|
Current tax expense: |
|
|
|
Federal |
$ 5,861,100 |
$ 5,944,400 |
|
State |
2,274,500 |
2,443,100 |
|
|
|
|
|
|
8,135,600 |
8,387,500 |
|
|
|
|
|
Deferred tax expense (benefit): |
|
|
|
Federal |
$ (491,700) |
$ (475,500) |
|
State |
(141,100) |
(114,400) |
|
|
|
|
|
|
(632,800) |
(589,900) |
|
|
|
|
|
Total Provision for Income Taxes: |
$ 7,502,800 |
$ 7,797,600 |
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The acquisitions of KP LLC, Engage, and Multistate were taxable asset acquisitions. As such, the purchase consideration for these acquisitions generated tax-deductible goodwill in the combined amount of approximately $34,123,000. A deferred tax asset has been recorded in relation to the excess of the tax deductible goodwill as compared to the GAAP carrying value of goodwill. Of the $34,123,000 of tax deductible goodwill, approximately $19,839,000 is eligible for amortization during the 2023 tax year.
As of December 31, 2023, there are no known items that would result in a material liability related to uncertain tax positions, as such, there are no unrecognized tax benefits. The Company's policy is to recognize interest and penalties related to uncertain tax positions in the provision for income taxes. As of December 31, 2023, the Company had no accrued interest or penalties related to uncertain tax positions.
Significant components of the Company's deferred tax assets and liabilities are as follows as of December 31:
|
|
|
|
|
|
|
|
|
|
2023 |
2022 |
|
|
|
|
|
Deferred income tax assets: |
|
|
|
Other assets |
$ 244,900 |
$ 197,600 |
|
Long term incentive plan |
847,700 |
- |
|
Goodwill |
8,082,100 |
4,797,000 |
|
ASC 842 Lease liability |
6,764,200 |
5,107,000 |
|
|
|
|
|
Total deferred income tax assets |
15,938,900 |
10,101,600 |
|
|
|
|
|
Deferred income tax liabilities: |
|
|
|
Property and equipment |
(218,200) |
(188,200) |
|
Prepaid compensation |
- |
(281,000) |
|
Intangible assets |
(2,148,200) |
(2,924,000) |
|
Right of use asset |
(5,835,300) |
(4,430,000) |
|
|
|
|
|
Total deferred income tax liabilities |
(8,201,700) |
(7,823,200) |
|
|
|
|
|
Total Net Deferred Tax Asset (Liability): |
$ 7,737,200 |
$ 2,278,400 |
A reconciliation for the difference between actual income tax expense (benefit) compared to the amount computed by applying the statutory federal income tax rate to net loss before income tax of ($6,741,472) and ($7,211,111) for the years ended December 31, 2023 and 2022, is as follows:
|
|
|
|
|
|
|
|
December 31, 2023 |
December 31, 2022 |
||
|
|
Amount |
% of Pretax Earnings |
Amount |
% of Pretax Earnings |
|
|
|
|
|
|
|
Federal income tax benefit at statutory rate |
$ (1,415,700) |
(21.0) |
$ (1,514,300) |
(21.0) |
|
State income taxes, net of federal income tax benefit |
(419,600) |
(6.2) |
(452,800) |
(6.3) |
|
Prepaid post-combination expense |
1,713,800 |
25.4 |
665,900 |
9.3 |
|
Other nondeductible expenses |
(762,200) |
(11.3) |
- |
- |
|
Share-based accounting charge |
8,413,400 |
124.8 |
9,109,200 |
126.3 |
|
Other |
(26,900) |
(0.4) |
(10,400) |
(0.1) |
|
|
|
|
|
|
|
Total Provision for Income Taxes |
$ 7,502,800 |
111.3 |
$ 7,797,600 |
108.2 |
The Company's 2022 and 2023 tax years are open under the statute of limitations for examination by the taxing authorities.
NOTE 9 RETIREMENT PLAN
Effective January 1, 2020, the Company established the Public Policy Holding Company, LLC 401(k) Plan ("PPHC Plan"). The PPHC Plan covers employees that reach certain age and length of service requirements. Eligible employees can contribute into the plans through salary deferral. The PPHC Plan does not have any employer contribution and expenses are immaterial.
NOTE 10 CONCENTRATION OF CREDIT RISK
Geographic location
A significant portion of the Company's assets are located in the Washington D.C. metropolitan area. Therefore, the Company is subject to certain economic risks resulting from the majority of its revenue being derived from one geographic location.
NOTE 11 SEGMENT REPORTING
As of December 31, 2023, the Company has three reportable segments; Government Relations Consulting, Public Affairs Consulting and Diversified Services. Government Relations Consulting services include federal and state advocacy, strategic guidance, political intelligence and issue monitoring. Public Affairs Consulting services include crisis communications, community relations, social and digital podcasting, public opinion research, branding and messaging, relationship marketing and litigation support. Diversified Services were introduced with the acquisition of MS LLC, and currently include Lobbying Compliance services and Legislative Tracking.
Other is primarily comprised of depreciation, amortization, interest expense, taxes, share-based accounting charges, post-combination compensation charges, long term incentive program charges, and gain on bargain purchase. The Company's CODM does not evaluate these items at the segment level.
The Company measures the results of its segments using, among other measures, each segment's net revenue and contribution margin, which excludes depreciation, amortization, interest expense, taxes and other non-cash charges. The Company's CODM does not evaluate these items or total assets and liabilities at the segment level but rather evaluates these items on a consolidated basis. Information for the Company's segments, as well as for other, including the reconciliation to net income (loss) is provided in the following tables:
|
For the Year Ended December 31, 2022 |
|||||
|
|
|
|
|
|
|
|
|
Government Relations |
Public Affairs |
Diversified Services |
Other |
Total |
|
|
|
|
|
|
|
|
Revenue |
$ 95,476,619 |
$ 32,256,518 |
$7,252,685 |
$ - |
$ 134,985,822 |
|
|
|
|
|
|
|
|
Contribution Margin |
$27,601,680 |
$ 5,207,392 |
$ 2,258,872 |
$ - |
$ 35,067,944 |
|
Depreciation |
- |
- |
- |
(119,688) |
(119,688) |
|
Interest, net |
- |
- |
- |
(940,824) |
(940,824) |
|
Taxes |
- |
- |
- |
(7,502,800) |
(7,502,800) |
|
Share-based accounting charge |
- |
- |
- |
(30,904,000) |
(30,904,000) |
|
Post-combination compensation charge |
- |
- |
- |
(6,295,060) |
(6,295,060) |
|
Long term incentive program charges |
- |
- |
- |
(2,796,000) |
(2,796,000) |
|
Change in contingent consideration |
- |
- |
- |
(1,711,235) |
(1,711,235) |
|
Amortization of intangibles |
- |
- |
- |
(3,878,386) |
(3,878,386) |
|
Gain on bargain purchase, net of taxes |
- |
- |
- |
4,835,777 |
4,835,777 |
|
|
|
|
|
|
|
|
Net income (loss) |
$27,601,680 |
$ 5,207,392 |
$ 2,258,872 |
$ (49,312,216) |
$ (14,244,272) |
|
|
|
|
|
|
|
|
Goodwill at end of period |
$35,512,601 |
$ 12,397,231 |
$ - |
$ - |
$ 47,909,832 |
|
For the Year Ended December 31, 2022 |
|||||
|
|
|
|
|
|
|
|
|
Government Relations |
Public Affairs |
Diversified Services |
Other |
Total |
|
|
|
|
|
|
|
|
Revenue |
$ 78,177,680 |
$ 30,636,811 |
$ - |
$ - |
$108,814,491 |
|
|
|
|
|
|
|
|
Contribution Margin |
$24,439,990 |
$ 6,746,000 |
$ - |
$ - |
$ 31,185,990 |
|
Depreciation |
- |
- |
- |
(100,285) |
(100,285) |
|
Interest |
- |
- |
- |
(16,873) |
(16,873) |
|
Taxes |
- |
- |
- |
(7,797,600) |
(7,797,600) |
|
Share-based accounting charge |
- |
- |
- |
(33,392,300) |
(33,392,300) |
|
Post-combination compensation charge |
- |
- |
- |
(2,441,052) |
(2,441,052) |
|
Long term incentive program charges |
- |
- |
- |
(317,679) |
(317,679) |
|
Amortization of intangibles |
- |
- |
- |
(2,128,912) |
(2,128,912) |
|
Gain on bargain purchase, net of taxes |
- |
- |
- |
- |
- |
|
|
|
|
|
|
|
|
Net income (loss) |
$24,439,990 |
$ 6,746,000 |
$ - |
$(46,194,701) |
$ (15,008,711) |
|
|
|
|
|
|
|
|
Goodwill at end of period |
$35,512,601 |
$ 12,397,231 |
$ - |
$ - |
$ 47,909,832 |
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