Audit: Soft Warfare used Base 1 grant funds for allowable items but missed original spending deadline

A Legislative Post Audit review presented on Feb. 24 found that Soft Warfare, a cybersecurity and software company, spent Base 1 grant funds on items the award agreement allowed but failed to spend all funds within the original two-year deadline.

Kristen, a Legislative Post Audit auditor, told the committee the audit's short answer: "Soft Warfare spent Base 1 grant funds on items generally allowed in its grant award, but it did not spend all funds within 2 years as the original contract required." The audit covered spending documentation through Sept. 30, 2024.

The audit said the Base 1 grant program was created in December 2021, used federal pandemic (ARPA) funds and was administered by the Kansas Department of Commerce. Commerce awarded $99 million to 35 recipients by April 13, 2022. Soft Warfare received a $3,000,000 award in April 2022 for a project the company estimated would cost $4,000,000, with the company providing a required 25% match (about $1,000,000).

Audit findings presented to the committee noted that, through Sept. 30, 2024, Soft Warfare had spent just over $1.6 million of the $3.0 million grant on costs tied to the Great Bend data center site. The company purchased land and an existing building in Great Bend and spent grant funds on renovations, data center containers (described in the audit as large modular enclosures to house servers), legal fees, audit services and office equipment. The audit team also visited Great Bend and observed items shown in spending documentation.

Kristen said matching contributions totaled just over $900,000 through Sept. 30, 2024, and that "almost or just over 90% of the matching funds that Soft Warfare spent were for salaries and payroll expenses," about $700,000 covering payroll from January 2019 through April 2022. The audit noted those payroll costs preceded the grant award but were allowed under Commerce guidance for matching funds.

The audit flagged a timing issue: as of June 30, 2024 (just before the original July 6, 2024 contract deadline), Soft Warfare had spent about $1.2 million of grant funds and roughly $1.8 million remained. The company requested two deadline extensions; the second, submitted Dec. 2, 2024, was granted by Wood O'Brien (the third-party contractor overseeing monitoring on behalf of Commerce). The Department of Commerce and Soft Warfare executed a revised contract on Jan. 23, 2025, moving the spending deadline to June 30, 2025. Committee members were told Commerce also views federal guidance as allowing Base 1 grant funds to be spent through Dec. 30, 2026, under applicable federal rules.

Department of Commerce official Bob North told the committee the department believes the expenses were eligible and that changes during project implementation (for example, buying an existing building rather than building new) are common. "We are carrying out the direction that we got from the spark committee," North said, adding that Commerce and its vendor view the project as eligible and on track.

Tim Schachter, general counsel and head of government affairs for Soft Warfare, told the committee the company pivoted to purchasing and rehabbing an existing facility to avoid construction delays. "We've been diligent in administering this project since inception, in good communication with the Department of Commerce," Schachter said, and said the company is targeting completion by the end of the second quarter of 2025 and intends to staff the Great Bend site.

Several lawmakers pressed Commerce and the company on program oversight, eligibility of pre-award payroll as match and the absence so far of local hiring in Barton County. Representative Williams said the situation was "stunningly bad" and asked for the scoring and application materials for review; Commerce said some of those records may be closed under existing records policy. Senator Tyson and others asked whether the grant routinely allowed pre-award payroll as match and whether clawback provisions would apply if the project is not completed.

Commerce officials told the committee there are addendum procedures when budgets change and that extension and amendment practices are common. They said the grant agreements include mechanisms for extensions to the federal deadline and clawbacks if conditions are not met.

The committee placed the completed audit on the consent calendar and accepted it as part of the consent items during the same meeting.

Votes at a glance: Consent calendar - Approval of minutes from the Feb. 3 meeting: approved (no recorded objections). Representative Hall Bridal recorded an abstention. - Acceptance of the completed Legislative Post Audit limited-scope audit of Soft Warfare: approved as part of the consent calendar (no recorded objections; Representative Hall Bridal abstained).

What happens next Committee members asked for follow-up materials. Lawmakers requested (1) Soft Warfare's application and scoring used by Commerce, (2) documentation of who contacted the company about the grant, and (3) clarification about Commerce practices for allowing pre-award expenses as match. Commerce and Soft Warfare said they would provide additional information to the committee. The revised grant deadline currently in the executed amendment is June 30, 2025; under federal guidance identified by Commerce, Base 1 funds may be spent through Dec. 30, 2026.

Because the project remains incomplete, the audit made no enforcement recommendation but the committee discussed potential further follow-up, including additional audits of Commerce grant administration.