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