The following selected consolidated financial data of BRP Group for each of the four years ended December 31, 2020 has been derived from our consolidated financial statements and should be read in conjunction with, and are qualified, by reference to, Item 1A. Risk Factors,
The following discussion contains references to periods prior to the Initial Public Offering, including the period from January 1, 2019 through October 27, 2019. The financial information of BRP Group has been combined with that of BRP as of the earliest period presented.
Revenues for the year ended December 31, 2020 were $240.9 million, an increase of $103.1 million, or 75%, as compared to the same period of 2019. This increase was related to amounts attributable to Partners acquired during 2019 and 2020 prior to their having reached the twelve-month owned mark (such amounts, the “Partnership Contribution”) and organic growth. The Partnership Contribution accounted for $81.3 million of the increase to revenues and organic growth accounted for $21.8 million.
Operating expenses for the year ended December 31, 2020 were $262.9 million, an increase of $119.9 million, or 84%, as compared to the same period of 2019. The increase in operating expenses was primarily attributable to the Partnership Contribution, which comprised $69.3 million of operating expenses excluding fair value adjustments, an increase in the fair value of contingent consideration of $9.7 million, increased compensation for sales and support, including investments in new product development, and continued investments in Growth Services to support our growth.
Interest expense, net for the year ended December 31, 2020 was $7.9 million, a decrease of $2.8 million, or 26%, as compared to the same period of 2019. Interest expense, net decreased as a result of a significantly lower interest rate and lower average borrowings under the Revolving Credit Commitment in effect during the first nine months of 2020 compared to credit facilities in place during 2019. This was offset in part by $400.0 million in term loan borrowings at a 4.75% interest rate in the fourth quarter of 2020 under the New JPM Credit Agreement.
Net loss for the year ended December 31, 2020 was $29.9 million, an increase of $7.4 million as compared to net loss of $22.5 million in the same period of 2019.
Organic Revenue for the year ended December 31, 2020 was $159.7 million as compared to $87.7 million for the same period of 2019. Organic Revenue Growth was $21.8 million, or 16%, for 2020 and $7.8 million, or 10%, for 2019. Refer to the Non-GAAP Financial Measures section below for reconciliations of Adjusted EBITDA, Adjusted EBITDA Margin, Organic Revenue and Organic Revenue Growth to the most directly comparable GAAP financial measures.
Refer to Note 4 to BRP’s consolidated financial statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K for additional information on the Partnerships that we have completed during 2020.
The following is a discussion of our consolidated results of operations for each of the years ended December 31, 2020 and 2019.
Partnerships can significantly impact Adjusted EBITDA and Adjusted EBITDA Margins in a given year and may increase the amount of seasonality within the business, especially results attributable to Partnerships that have not been fully integrated into our business or owned by us for a full year.
We earn commissions and fees by facilitating the arrangement between Insurance Company Partners and individuals or businesses for the carrier to provide insurance to the insured party. Our commissions and fees are usually a percentage of the premium paid by the insured and generally depends on the type of insurance, the particular Insurance Company Partner and the nature of the services provided. Under certain arrangements with Clients, we earn pre-negotiated service fees in lieu of commissions. Additionally, we may also receive from Insurance Company Partners a profit-sharing commission, or straight override, which represent forms of variable consideration associated with the placement of coverage and are based primarily on underwriting results, but may also contain considerations for volume, growth or retention.
The following table sets forth our commissions and fees by major source by amount for the years ended December 31, 2020 and 2019:
Profit-sharing revenue represents bonus-type revenue that is earned by us as a sales incentive provided by certain Insurance Company Partners. Profit-sharing revenue increased by $6.8 million for the year ended December 31, 2020 as compared to the same period of 2019. The Partnership Contribution accounted for $5.3 million of the increase to profit-sharing revenue and organic growth for profit-sharing revenue was $1.5 million.
Other income consists of Medicare marketing income that is based on agreed-upon cost reimbursement for fulfilling specific targeted marketing campaigns in addition to other fee income and premium financing income generated across all Operating Groups. Other income increased by $6.3 million for the year ended December 31, 2020 as compared to the same period of 2019. The Partnership Contribution accounted for $5.2 million of the increase to other income and organic growth for other income was $1.1 million.
Commissions, employee compensation and benefits is our largest expense. It consists of (a) base compensation comprising salary, bonuses and benefits paid and payable to Colleagues, commissions paid to Colleagues and outside commissions paid to others; and (b) equity-based compensation associated with the grants of restricted interest awards to senior management, Risk Advisors and executives. We expect to continue to experience a general rise in commissions, employee compensation and benefits expense commensurate with expected growth in our sales and headcount and as a result of increasing employee compensation related to ongoing public company costs. We operate in competitive markets for human capital and need to maintain competitive compensation levels as we expand geographically and create new products and services.
Other operating expenses include travel, accounting, legal and other professional fees, placement fees, rent, office expenses and other costs associated with our operations. Our other operating expenses have increased in absolute terms as a result of ongoing public company costs, including those associated with compliance with the Sarbanes-Oxley Act and other regulations governing public companies, increased costs of directors’ and officers’ liability insurance, and increased professional services expenses, particularly associated with the adoption of new accounting standards and integration of acquired businesses. Our occupancy-related costs and professional services expenses, in particular, generally increase or decrease in relative proportion to the number of our employees and the overall size and scale of our business operations. In addition, we have invested in the expansion of our Tampa offices to accommodate our growth plans, which has resulted in an increase to rent expense beginning in April 2020. Certain corporate expenses are allocated to the Operating Groups.
Amortization expense increased by $9.0 million for the year ended December 31, 2020 as compared to the same period of 2019. This increase was driven by the capitalization of intangible assets related to Partners acquired during 2019 and 2020.
Interest expense, net decreased by $2.8 million for the year ended December 31, 2020 as compared to the same period of 2019 resulting from a significantly lower interest rate and lower average borrowings under the Revolving Credit Commitment in effect during the first nine months of 2020 compared to credit facilities in place during 2019. This was offset in part by $400.0 million in term loan borrowings at a 4.75% interest rate in the fourth quarter of 2020 under the New JPM Credit Agreement, which is discussed under the Liquidity and Capital Resources section below.
Cash and cash equivalents increased $40.8 million as a result of increased operations related to our 2020 Partners, borrowings under our credit facilities and proceeds from our public offerings, offset by cash consideration paid to acquire our 2020 Partners.
Restricted cash increased $30.2 million as a result of restricted trust accounts related to our 2020 Partnerships.
Premiums, commissions and fees receivable, net increased $96.7 million as a result of our 2020 Partnerships and revenue growth.
Intangible assets, net increased $461.9 million as a result of our 2020 Partnerships, which contributed $480.0 million to gross intangible assets during 2020, offset in part by $19.0 million of amortization during the year.
Goodwill increased $487.0 million as a result of our 2020 Partnerships.
Accrued expenses and other current liabilities increased $35.2 million as a result of higher contract liabilities relating to our revenue growth and new Partners, higher accrued expenses relating to costs associated with being a public company and new Partners, and higher accrued compensation and benefits from 2020 bonus accruals relating to an increase in the number of executives and other Colleagues in 2020 and new Partner costs.
Contingent earnout liabilities increased $116.1 million primarily as a result of our 2020 Partnerships, which contributed $98.5 million to this obligation, and $20.5 million in fair value adjustments.
Adjusted EBITDA, Adjusted EBITDA Margin, Organic Revenue, Organic Revenue Growth, Adjusted Net Income and Adjusted Diluted Earnings Per Share (“EPS”), are not measures of financial performance under GAAP and should not be considered substitutes for GAAP measures, including commissions and fees (for Organic Revenue and Organic Revenue Growth), net income (loss) (for Adjusted EBITDA and Adjusted EBITDA Margin) net income (loss) attributable to BRP Group, Inc. (for Adjusted Net Income) or diluted earnings (loss) per share ("EPS") (for Adjusted Diluted EPS), which we consider to be the most directly comparable GAAP measures. These non-GAAP financial measures have limitations as analytical tools, and when assessing our operating performance, you should not consider these non-GAAP financial measures in isolation or as substitutes for commissions and fees, net income (loss), net income (loss) attributable to BRP Group, Inc. or other consolidated income statement data prepared in accordance with GAAP. Other companies in our industry may define or calculate these non-GAAP financial measures differently than we do, and accordingly these measures may not be comparable to similarly titled measures used by other companies.
•do not reflect any cash capital expenditure requirements for the assets being depreciated and amortized that may have to be replaced in the future;
•do not reflect changes in, or cash requirements for, our working capital needs;
•do not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations;
We calculate Organic Revenue Growth based on commissions and fees for the relevant period by excluding the first twelve months of commissions and fees generated from new Partners. Organic Revenue Growth is the change in Organic Revenue period-to-period, with prior period results adjusted for Organic Revenues that were excluded in the prior period because the relevant Partners had not yet reached the twelve-month owned mark, but which have reached the twelve-month owned mark in the current period. For example, revenues from a Partner acquired on June 1, 2019 are excluded from Organic Revenue for 2019. However, after June 1, 2020, results from June 1, 2019 to December 31, 2019 for such Partners are compared to results from June 1, 2020 to December 31, 2020 for purposes of calculating Organic Revenue Growth in 2020. Organic Revenue Growth is a key metric used by management and our board of directors to assess our financial performance. We believe that Organic Revenue and Organic Revenue Growth are appropriate measures of operating performance as they allow investors to measure, analyze and compare growth in a meaningful and consistent manner.
Adjusted Net Income is presented for the purpose of calculating Adjusted Diluted EPS. We define Adjusted Net Income as net income (loss) attributable to BRP Group, Inc. adjusted for amortization, change in fair value of contingent consideration and certain items of income and expense, including share-based compensation expense, transaction-related expenses related to Partnerships including severance, and certain non-recurring costs that, in the opinion of management, significantly affect the period-over-period assessment of operating results, and the related tax effect of those adjustments.
The following table reconciles Adjusted EBITDA and Adjusted EBITDA Margin to net loss, which we consider to be the most directly comparable GAAP financial measure to Adjusted EBITDA and Adjusted EBITDA Margin:
(1) Includes the first twelve months of such commissions and fees generated from newly acquired Partners.
(2) Organic Revenue for the year ended December 31, 2019 used to calculate Organic Revenue Growth for the year ended December 31, 2020 was $137.9 million, which is adjusted to reflect revenues from Partnerships that reached the twelve-month owned mark during the year ended December 31, 2020.
The following table reconciles Adjusted Net Income to net loss attributable to BRP Group, Inc. and reconciles Adjusted Diluted EPS to diluted net loss per share attributable to BRP Group, Inc. Class A common stock:
The following table sets forth our commissions and fees by Operating Group by amount and as a percentage of our commissions and fees:
Commissions and fees increased across all Operating Groups for the year ended December 31, 2020 as compared to the same period of 2019. The Partnership Contribution accounted for $43.6 million, $26.8 million, $3.4 million and $7.5 million to the Middle Market, Specialty, MainStreet and Medicare Operating Groups, respectively, during 2020. The remaining variances across the Operating Groups are attributable to organic growth. Early indicators show that continued COVID-19 protocols, which have reduced our Medicare agents' abilities to meet person-to-person in our normal venues, have reduced our lead flow and impacted our ability to sell new business during the 2021 Annual Enrollment Period.
Revenue reported for Corporate and Other relates to the elimination of intercompany revenue. The Middle Market Operating Group recorded intercompany commissions and fees from activity with the Specialty Operating Group of $507,000; the MainStreet Operating Group recorded intercompany commissions and fees from activity with the Middle Market Operating Group of $200,000; and the Medicare Operating Group recorded intercompany commissions and fees from activity within the Medicare Operating Group of $324,000. These amounts were eliminated through Corporate and Other.
Policies in force for the MSI Partnership grew by 149,779, or 40%, to 524,370 at December 31, 2020 from 374,591 at December 31, 2019. Since the MSI Partnership was not completed until April 2019, the 40% policies in force growth was calculated including periods during which MSI was not owned by the Company.
Commissions, employee compensation and benefits expenses for Corporate and Other increased as a result of hiring new roles necessary as a public company and due to $3.2 million of additional share-based compensation expense incurred during 2020.
The following table sets forth our other operating expenses by Operating Group by amount and as a percentage of our operating expenses:
The change in fair value of contingent consideration results from fluctuations in the value of the relevant measurement basis, normally revenue or EBITDA of our Partners. The Specialty Operating Group recorded a loss of $16.8 million during 2020 as a result of a higher estimate for the contingent consideration liability of the MSI Partnership related to growth in MSI's business.
Our primary liquidity needs for the foreseeable future will include cash to (i) provide capital to facilitate the organic growth of our business and to fund future Partnerships, (ii) pay operating expenses, including cash compensation to our employees and expenses related to being a public company, (iii) make payments under the Tax Receivable Agreement, (iv) pay interest and principal due on borrowings under the New JPM Credit Agreement, (v) pay contingent earnout liabilities, and (vi) pay income taxes. We have historically financed our operations and funded our debt service through the sale of our insurance products and services. In addition, we financed significant cash needs to fund growth through the acquisition of Partners through debt and equity financing.
On December 11, 2020, we completed a public offering of 10,062,500 shares of our Class A common stock, including 1,312,500 shares sold pursuant to the underwriters’ over-allotment option. The shares were sold at an offering price of $29.50 per share for net proceeds of $283.2 million after deducting underwriting discounts and commissions of $12.6 million and offering expenses of $1.1 million. We purchased 1,616,667 LLC Units from certain of our founders, executive officers and their affiliated entities in connection with the offering.
Interest rates under the Revolving Facility has borrowings accruing interest on amounts drawn at LIBOR plus 200 basis points (“bps”) to LIBOR plus 300 bps based on total net leverage ratio. The Term Loan B bears interest at LIBOR plus 400 bps with a floor of 4.75%. The applicable interest rate on the Term Loan B at December 31, 2020 was 4.75%. BRP will pay a letter of credit fee equal to the margin then in effect with respect to LIBOR loans under the Revolving Facility multiplied by the daily amount available to be drawn under any letter of credit, a fronting fee and any customary documentary and processing charges for any letter of credit issued under the New JPM Credit Agreement.
The primary sources and uses of cash for investing activities relate to cash consideration paid for business combinations and asset acquisitions, as well as capital expenditures. Net cash used in investing activities increased $576.8 million for the year ended December 31, 2020 as compared to the same period of 2019. Cash consideration paid for business combinations and asset acquisitions increased $572.0 million primarily as a result of the 16 Partnerships completed during 2020.
The following table represents our contractual obligations, aggregated by type, at December 31, 2020:
(3) Includes $164.8 million of current and noncurrent estimated contingent earnout liabilities at December 31, 2020.
•to the extent we estimate that we will not realize the full benefit represented by the deferred tax asset, based on an analysis that will consider, among other things, our expectation of future earnings, we will reduce the deferred tax asset with a valuation allowance; and
•we will record 85% of the estimated realizable tax benefit (which is the recorded deferred tax asset less any recorded valuation allowance) as an increase to the liability due under the Tax Receivable Agreement and the remaining 15% of the estimated realizable tax benefit as an increase to additional paid-in capital.
Profit-sharing commissions represent a form of variable consideration, which includes additional commissions over base commissions received from Insurance Company Partners. Profit-sharing commissions associated with relatively predictable measures are estimated with a constraint applied and recognized at a point in time. The profit-sharing commissions are recorded as the underlying policies that contribute to the achievement of the metric are placed with any adjustments recognized when payments are received or as additional information that affects the estimate becomes available. A constraint of variable consideration is necessary when commissions and fees are subject to significant reversal. Profit-sharing commissions associated with loss performance are uncertain, and therefore, are subject to significant reversal through catastrophic loss season and as loss data remains subject to material change. The constraint is relieved when management estimates commissions and fees that are not subject to significant reversal, which often coincides with the earlier of written notification from the Insurance Company Partner that the target has been achieved or cash collection. Year-end amounts incorporate estimates based on confirmation from Insurance Company Partners after calculation of potential loss ratios that are impacted by catastrophic losses. The consolidated financial statements include estimates that are not subject to significant reversal and incorporates information received from Insurance Company Partners, and where still subject to significant changes in estimates due to loss ratios and external factors that are outside of the Company’s control, a full constraint is applied.
The fair value of contingent earnout liabilities and contingently returnable consideration is based upon estimated payments expected to be or paid to, or clawed back from, the sellers of the acquired businesses as measured by expected future cash flow projections under various scenarios. We use a probability weighted value analysis as a valuation technique to convert future estimated cash flows under various scenarios to a single present value amount. We assess the fair value of these liabilities and assets at each balance sheet date based on the expected performance of the associated business and any changes in fair value are recorded through change in fair value of contingent consideration in the consolidated statements of comprehensive loss.
We review our definite-lived intangible assets and other long-lived assets for impairment whenever an event occurs that indicates the carrying amount of an asset may not be recoverable. There were no indications that the carrying values of our definite-lived intangible assets or other long-lived assets were impaired at December 31, 2020. Any impairment charges that we may record in the future could materially impact our results of operations.
Share-based compensation for periods subsequent to the Initial Public Offering includes restricted stock awards to Colleagues and Class A common stock awards to our board of directors. We measure share-based compensation expense at the grant date based on the fair value of the award and recognize compensation expense over the requisite service period, which is generally the vesting period. We use the ratable method to recognize compensation expense for equity awards with service conditions and performance conditions.
Share-based compensation for periods prior to the Initial Public Offering includes Management Incentive Units awards. These awards vest according to time-based benchmarks or performance-based benchmarks that vary between issuance. The fair value of each time-based and performance-based Management Incentive Unit was estimated on the grant date using a Black-Scholes Model, which requires the input of highly complex and subjective variables, and includes assumptions for expected volatility, expected dividend yield, expected term and the risk-free interest rate. Expected volatility was based on the historical volatility of industry peers. The expected term was calculated by analyzing historical exercise data and obtaining the weighted average of the holding period for similar awards. The risk-free interest rate was based on the U.S. Treasury yield curve in effect at the time of the grant.
We record a tax provision for the anticipated tax consequences of the reported results of operations. We compute the provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. We measure deferred tax assets and liabilities using the currently enacted tax rates in each jurisdiction that applies to taxable income in effect for the years in which those tax assets are expected to be realized or settled.
Our evaluation of the realizability of the deferred tax assets focuses on identifying significant, objective evidence that we will more likely than not be able to realize our deferred tax assets in the future. We consider both positive and negative evidence when evaluating the need for a valuation allowance, which is highly judgmental and requires subjective weighting of such evidence.
On October 28, 2019, BRP Group completed an initial public offering (the “Initial Public Offering”) of its Class A common stock, in which it sold 18,859,300 shares, including 2,459,300 shares pursuant to the underwriters’ over-allotment option that subsequently settled on November 26, 2019. The shares began trading on the Nasdaq Global Select Market (the “Nasdaq”) on October 24, 2019. The shares were sold at an initial offering price of $14.00 per share for net proceeds of $241.4 million after deducting underwriting discounts and commissions of $17.8 million and net offering expenses of $4.8 million.
In connection with the Initial Public Offering, BRP Group and BRP entered into a series of transactions to implement an internal reorganization (the “Reorganization Transactions”), which are described in detail in Note 3.
On June 29, 2020, the Company completed a public offering of 13,225,000 shares of its Class A common stock, including 1,725,000 shares sold pursuant to the underwriters’ over-allotment option. The shares were sold at an offering price of $13.25 per share for net proceeds of $166.5 million after deducting underwriting discounts and commissions of $7.9 million and offering expenses of $798,000.
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. Significant estimates underlying the accompanying consolidated financial statements include the application of guidance for revenue recognition, including determination of allowances for estimated policy cancellations, business combinations and purchase price allocation, impairment of long-lived assets including goodwill, and share-based compensation.
The Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers (“Topic 606”).
The Company earns commission revenue by facilitating the arrangement between Insurance Company Partners and individuals or businesses by providing insurance placement services to insureds (“Clients”) with Insurance Company Partners. Commission revenues are usually a percentage of the premium paid by Clients and generally depend upon the type of insurance, the Insurance Company Partner and the nature of the services provided. In some limited cases, the Company shares commissions with other agents or brokers who have acted jointly with the Company in a transaction. The Company controls the fulfillment of the performance obligation and its relationship with its Insurance Company Partners and the outside agents. Commissions shared with downstream agents or brokers are recorded in commission, employee compensation and benefits expense in the consolidated statements of comprehensive loss. Commissions are earned at a point in time upon the effective date of bound insurance coverage as no performance obligation exists after coverage is bound.
The Company earns policy fee revenue for acting in its capacity as a managing general agent (“MGA”) on behalf of the Insurance Company Partner and fulfilling certain services including delivery of policy documents, processing payments and other administrative functions during the term of the insurance policy. Policy fee revenue is deferred and recognized over the life of the policy. These deferred amounts are recognized as contract liabilities, which is included as a component of accrued expenses and other current liabilities on the consolidated balance sheets. The Company earns installment fee revenue related to policy premiums paid on an installment basis for payment processing services performed on behalf of the Insurance Company Partner. The Company recognizes installment fee revenue in the period the services are performed.
The allowance for doubtful accounts was $48,000 and $50,000 at December 31, 2020 and 2019, respectively. The allowance for doubtful accounts is based on management’s estimate of the amount of receivables that will actually be collected. Accounts are charged to the allowance as they are deemed uncollectible based upon a periodic review of the accounts.
Property and equipment is stated at cost. For financial reporting purposes, depreciation of property and equipment is calculated using the straight-line method over the estimated useful lives of the assets as follows:
Intangible assets are stated at cost, less accumulated amortization, and consist of purchased customer accounts, distributor relationships, carrier relationships, software and trade names acquired in connection with business combinations. Purchased customer accounts, distributor relationships, carrier relationships and trade names are being amortized based on a pattern of economic benefit over an estimated life of 1 to 20 years. Purchased customer accounts primarily consist of records and files that contain information about insurance policies and the related Clients that are essential to policy renewals. Distributor relationships consist of relationships with distributors that were not previously established. Carrier relationships consist of relationships with Insurance Company Partners that were not previously established. Trade names consist of acquired business names with potential customer base recognition. Intangible assets also include software, which is amortized on the straight-line basis over an estimated useful life of 2 to 5 years.
The Company converted to a self-insured health insurance plan beginning in March 2020 for which it carries an insurance program with specific retention levels or high per-claim deductibles for expected losses. The Company records a liability for all unresolved claims and for an estimate of incurred but not reported ("IBNR") claims at the anticipated cost that falls below its specified retention levels or per-claim deductible amounts. In establishing reserves, the Company considers actuarial assumptions and judgments regarding economic conditions and the frequency and severity of claims. The Company had an IBNR reserve of $650,000 at December 31, 2020, which is included in accrued expenses and other current liabilities on the consolidated balance sheets.
The Company accounts for contingent consideration relating to business combinations as either contingently returnable consideration or a contingent earnout liability and a decrease (increase) to goodwill at the date of the acquisition and continually remeasures the asset or liability at each balance sheet date by recording changes in the fair value through change in fair value of contingent consideration in the consolidated statements of comprehensive loss. The ultimate settlement of contingently returnable consideration and contingent earnout liabilities relating to business combinations may be for amounts that are materially different from the amounts initially recorded and may cause volatility in the Company’s results of operations.
ASC Topic 480, Distinguishing Liabilities from Equity (“Topic 480”), requires noncontrolling interests that are redeemable for cash or other assets to be classified outside of permanent equity if they are redeemable (i) at a fixed or determinable price on a fixed or determinable date, (ii) at the option of the holder, or (iii) upon the occurrence of an event that is not solely within the control of the issuer. Prior to the Reorganization Transactions, the equity securities of certain of the Company’s noncontrolling interests contained an embedded put feature that was redeemable at the election of the interest holder. The Company had no control over whether the put option was exercised, and therefore, redemption was outside the Company’s control. As such, these equity securities were recorded as redeemable noncontrolling interests.
•In 2019, BKS Financial Investments, LLC was formed to acquire substantially all the assets and liabilities of Fiduciary Partners Investment Consulting, LLC and Baldwin Krystyn Sherman Partners, LLC (“BKS”) acquired substantially all the assets and liabilities of Fiduciary Partners Retirement Group, Inc. (“FPRG”) and Fiduciary Partners Group, LLC. FPRG had a 0.3% ownership interest in BKS prior to the Reorganization Transactions.
The Company’s obligation related to advisor incentive liabilities of all but one Risk Advisor was settled in connection with the Reorganization Transactions as discussed in Note 3. One Risk Advisor chose not to convert his incentive rights into common stock of BRP Group. As a result, this advisor’s incentive liability remains outstanding at December 31, 2020 and 2019. Advisor incentive liabilities, which are included in other liabilities on the consolidated balance sheet, were approximately $2.4 million and $2.0 million at December 31, 2020 and 2019, respectively.
The carrying values of the Company’s financial assets and liabilities, including cash and cash equivalents, premiums, commissions and fees receivable, premiums payable to insurance companies and accrued expenses and other current liabilities, approximate their fair values because of the short maturity and liquidity of those instruments.
For the year ended December 31, 2020, one Insurance Company Partner accounted for approximately 13% of the Company’s total core commissions. For the year ended December 31, 2019, two Insurance Company Partners accounted for approximately 14% and 10% of the Company’s total core commissions.
•through a series of internal transactions, BRP issued LLC Units to equity holders of companies it has acquired (its “Partners”) (other than certain joint ventures) in exchange for all the equity interests in such Partners not held by BRP prior to such exchange;
•each of the owners of BRP LLC Units prior to the Initial Public Offering (the “Pre-IPO LLC Members”) was issued shares of BRP Group’s Class B common stock in an amount equal to the number of LLC Units held by each such member following the reclassification of the equity interest into LLC Units;
•BRP Group and BRP’s members entered into the Stockholders Agreement, which provides that approval by BRP’s LLC Members is required for certain corporate actions;
•BRP Group entered into the Tax Receivable Agreement, which provides for payment by BRP Group to BRP’s LLC Members of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that BRP Group actually realizes.
The following is a description of the transactions to convert the Company’s obligations related to its advisor incentive agreements and Participation Plan to shares of Class A common stock.
•The Company’s obligation under the Participation Plan of $311,000 was exchanged for 22,243 restricted shares of Class A common stock issued under the Company’s Omnibus Incentive Plan, which resulted in an offset to additional paid-in capital of $311,000.
•The Non-Voting Common Units, which comprised noncontrolling interest prior to the reorganization, were converted into permanent equity consisting of 232,596 shares of Class B common stock and LLC Units.
The Company completed 15 business combinations for an aggregate purchase price of $1.0 billion during the year ended December 31, 2020. In accordance with ASC Topic 805, Business Combinations (“Topic 805”), total consideration was first allocated to the fair value of assets acquired, including liabilities assumed, with the excess being recorded as goodwill. Goodwill is not amortized for financial statement purposes, but rather is evaluated for impairment at least annually or more frequently if an event occurs that indicates goodwill may be impaired. Goodwill is deductible for tax purposes and will be amortized over a period of 15 years.
The recorded purchase price for certain business combinations includes an estimation of the fair value of continent consideration obligations associated with potential earnout provisions, which are generally based on revenue or earnings before income taxes, depreciation and amortization (“EBITDA”). The contingent earnout consideration identified in the tables below are measured at fair value within Level 3 of the fair value hierarchy as discussed further in Note 20. Any subsequent changes in the fair value of contingent earnout liabilities will be recorded in the consolidated statements of comprehensive loss when incurred.
•Lanier, a Middle Market Partner effective January 1, 2020, was made to expand the Company’s Middle Market presence in the healthcare, higher education, construction, property and non-profit businesses throughout Florida and other states.
•Highland, a Specialty Partner effective January 1, 2020, was made to expand the Company’s Specialty presence in the healthcare and cyber insurance businesses and to add capabilities within the real estate business.
•IRP, a Middle Market Partner effective April 1, 2020, was made to expand the Company’s capabilities within the energy and infrastructure business.
•TBA/RBA, a Middle Market Partner effective June 1, 2020, was made to expand the Company’s employee benefits business in Tennessee and across the Southeastern U.S.
•Fletcher, a Medicare Partner effective July 31, 2020, was made to expand the Company’s Medicare business presence in Washington.
•MIA, a Medicare Partner effective July 31, 2020, was made to expand the Company’s Medicare business presence in Tennessee.
•Insgroup, a Middle Market Partner effective November 30, 2020, was made to expand the Company's Middle Market presence in Texas and specifically Houston.
•AHT, a Middle Market Partner effective December 1, 2020, was made to expand the Company's Middle Market presence in the Pacific Northwest, Mid-Atlantic and Northeast regions and to bring deep specialization and expertise across a number of high-growth industry verticals, including Technology, Not-For-Profit, Life Sciences & Healthcare, Manufacturing and Construction.
•Burnham, a Middle Market Partner effective December 31, 2020, was made to expand the Company’s business presence in California.
•TBM, a Middle Market Partner effective December 31, 2020, was made to expand the Company’s property and casualty and risk solution capabilities, particularly multi-family, and provides complementary employee benefit and professional risk management solutions to the Atlanta market.
The table below provides a summary of the total consideration and the estimated purchase price allocations made for each of the business acquisitions that became effective during the year ended December 31, 2020. The "All Others" column includes amounts for the Lanier, Highland, AgencyRM, VibrantUSA, IRP, Southern Protective Group, Pendulum, Fletcher and MIA business combinations.
The factors contributing to the recognition of the amount of goodwill are based on expanding business presence into new geographic locations and service markets, strategic benefits that are expected to be realized from acquiring the Partners’ assembled workforce in addition to other synergies gained from integrating the Partners’ operations into our consolidated structure.
The intangible assets acquired in connection with business combinations during the year ended December 31, 2020 have an estimated weighted-average life as follows:
(3) Profit-sharing revenue represents bonus-type revenue that is earned by the Company as a sales incentive provided by certain Insurance Company Partners.
•Contracts in the Medicare operating segment are multi-year arrangements in which BRP is entitled to renewal commissions. However, the Company has applied a constraint to renewal commission that limits revenue recognized on new policies to the policy year in effect, and revenue recognized on renewed policies to the receipt of periodic cash, when a risk of significant reversals exists based on: (i) insufficient history; and (ii) the influence of external factors outside of the Company’s control including policyholder discretion over plans and Insurance Company Partner relationship, political influence, and a contractual provision, which limits the Company’s right to receive renewal commissions to ongoing compliance and regulatory approval of the relevant Insurance Company Partner and compliance with the Centers for Medicare and Medicaid Services (CMS).
•Variable consideration includes estimates of direct bill commissions, a reserve for policy cancellations and an estimate of profit-sharing income.
•Due to the relatively short time period between the information gathering phase and binding insurance coverage, the Company has determined that costs to fulfill contracts are not significant. Therefore, costs to fulfill a contract are expensed as incurred.
Contract assets arise when the Company recognizes revenue for amounts which have not yet been billed and contract liabilities relate to payments received in advance of performance under the contract before the transfer of a good or service to the customer. Contract assets are included in premiums, commissions and fees receivable, net and contract liabilities are included in accrued expenses and other current liabilities on the consolidated balance sheets. The balances of contract assets and liabilities arising from contracts with customers were as follows:
The Company recognizes certain separately identifiable intangible assets acquired in connection with business combinations and asset acquisitions. The Company had certain transactions that were accounted for as asset acquisitions during each of the years ended December 31, 2020 and 2019 in which substantially all the fair value of the gross assets acquired of $2.4 million and $695,000, respectively, was concentrated in purchased customer accounts. Refer to Note 4 for a summary of intangible assets acquired in connection with business combinations during the year ended December 31, 2020. Intangible assets consist of the following:
As of May 31, 2018, the Company had a syndicated credit agreement with JPMorgan as successor agent and lead arranger (the “Old JPMorgan Credit Agreement”), which provided for a $2.2 million term loan (the “Term Loan”), of which the full principal amount was previously advanced, a $2.0 million revolving credit facility to be used for working capital purposes (the “Working Capital Line”) and a $50.0 million revolving credit facility to be used for acquisition purposes (the “Acquisitions Line” and collectively with the Working Capital Line, the “Revolving Lines of Credit”).
The Company recorded debt issuance costs related to the Third Amendment of $775,000 during the year ended December 31, 2019. The Third Amendment was accounted for as a partial extinguishment and partial modification at the individual tranche and syndicated lender level. Most of the previously unamortized deferred financing costs continued to be amortized over the term of the new agreement. The Company recorded a loss on extinguishment of debt related to the Third Amendment of $115,000 during the year ended December 31, 2019.
The Company recorded debt issuance costs related to Amendment No. 1 of $179,000 during the year ended December 31, 2019. Amendment No. 1 was accounted for as a partial extinguishment and partial modification at the individual tranche and syndicated lender level. Most of the previously unamortized deferred financing costs continued to be amortized over the term of the new agreement. The Company recorded a loss on extinguishment of debt related to Amendment No. 1 of $260,000 during the year ended December 31, 2019.
On October 14, 2020, the Company entered into a new credit agreement with JPMorgan Chase Bank, N.A., to provide new senior secured credit facilities in an aggregate principal amount of $800.0 million (the "New JPM Credit Agreement"). The amount consists of (i) a new term loan facility in the principal amount of $400.0 million maturing in 2027 (the “Term Loan B”) and (ii) a new revolving credit facility with commitments in an aggregate principal amount of $400.0 million maturing in 2025 (the “Revolving Facility”). The Company used a portion of the proceeds from the Term Loan B to repay in full the Company’s obligations under its Old JPMorgan Credit Agreement and concurrently terminated the existing agreement. The Company capitalized debt issuance costs related to the new credit agreement of $15.1 million during the year ended December 31, 2020.
Future annual maturities of the Term Loan B are as follows as of December 31, 2020 (in thousands):
Each share of Class B common stock entitles the stockholder to one vote per share on all matters submitted to a vote of our stockholders. If at any time the ratio at which LLC Units are redeemable or exchangeable for shares of Class A common stock changes from one-for-one, the number of votes to which Class B common stockholders are entitled will be adjusted accordingly. Class B common stockholders do not have cumulative voting rights in the election of directors.
Except for transfers to us pursuant to the Amended LLC Agreement or to certain permitted transferees, the holders of LLC Units are not permitted to sell, transfer or otherwise dispose of any LLC Units or shares of Class B common stock. Stockholders of Class B common stockholders will vote together with Class A common stockholders as a single class on all matters on which stockholders are entitled to vote generally, except as otherwise required by law.
Class B common stockholders do not have any right to receive dividends or to receive a distribution upon a liquidation or winding up of BRP Group. Pursuant to the Stockholders Agreement, the approval of the Pre-IPO LLC Members, is required for substantially all transactions and other matters requiring approval by our stockholders, in addition to other matters such as changing the number of directors on the board, changing the jurisdiction of incorporation, changing the location of the Company’s headquarters, changing the name of the Company, amendments to governing documents, adopting a shareholder rights plan and any changes to the Company’s fiscal year or public accountants. Approval by the Pre-IPO LLC Members is required for any changes to the strategic direction or scope of BRP Group’s and BRP’s business and the hiring and termination of our Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, Chief Partnership Officer or other change to senior management or key employees (including terms of compensation).
In connection with the Initial Public Offering and the Reorganization Transactions, BRP Group became the sole managing member of BRP. As a result, BRP Group began consolidating BRP in its consolidated financial statements as of the closing date of the Initial Public Offering, resulting in a noncontrolling interest related to the LLC Units held by BRP’s members on its consolidated financial statements. Noncontrolling interest previously represented Partners’ equity interests in underlying subsidiaries. Refer to Note 3 for additional information regarding the Reorganization Transactions’ effect on equity.
Due from related parties totaling $19,000 and $43,000 at December 31, 2020 and 2019, respectively, consists of amounts due from related party entities in connection with newly formed partnerships.
The Company serves as a broker for certain entities in which a member of our board of directors has a material interest. Commission revenue recorded as a result of these transactions was $479,000 and $238,000 for the years ended December 31, 2020 and 2019, respectively.
The Company incurred commissions expense of over $600,000 related to two family members of our Chairman, Lowry Baldwin, who are Risk Advisors operating as independent contractors.
The Company has various agreements to lease office space from wholly-owned subsidiaries of Villages. Rent expense ranges from approximately $3,000 to 28,000 per month, per lease. Lease agreements expire on various dates through November 30, 2025. Total rent expense incurred with respect to Villages and its wholly-owned subsidiaries was $540,000 and $499,000 for the years ended December 31, 2020 and 2019, respectively.
The Company has various agreements to lease office space from other related parties. Rent expense ranges from approximately $1,000 to $51,000 per month, per lease. Lease agreements expire on various dates through December 31, 2029. Total rent expense incurred with respect to related parties other than Villages was $1.5 million and $761,000 for the years ended December 31, 2020 and 2019, respectively.
There were 2,504,341 Class B shares related to the MIU Plan that were fully vested upon issuance, another 1,165,586 shares that vested by December 31, 2019 and 609,500 that vested during the year ended December 31, 2020. The following table summarizes the number of non-vested shares of Class B common stock related to the MIU Plan that are expected to vest in each of the following years:
The fair value of each time-based and performance-based MIUs is estimated on the grant date using the Black-Scholes Model using the assumptions noted in the following table. Expected volatility is based on the historical volatility of a peer group of public and private companies. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant. The assumptions noted in the table below represent the weighted average of each assumption for each grant during the year.
The Omnibus Plan provides for the Company to make awards of 1,948,414 shares of Class A common stock at December 31, 2020. The number of shares of Class A common stock reserved for issuance will increase automatically on the first day of each fiscal year by the lesser of (i) 2% of outstanding shares of Class A common stock and Class B common stock on the last day of the immediately preceding fiscal year and (ii) such number of shares as determined by BRP Group’s board of directors. In accordance therewith, the number of authorized shares of Class A common stock reserved for issuance under the plan increased by 1,895,630 shares at January 1, 2021.
At December 31, 2020, there were 811,484 shares underlying the Omnibus Plan that were authorized, but not yet granted. The Company issues new shares of Class A common stock upon the exercise of stock options, the vesting of RSUs and performance shares and the grant of restricted stock awards. During the year ended December 31, 2020, the Company granted restricted stock under the Omnibus Plan to its non-employee directors, executives and Colleagues, including those executives and Colleagues who onboarded in connection with our Partnerships. Shares of restricted stock issued to directors and executives during the year ended December 31, 2020 generally vested immediately upon issuance while shares issued to Colleagues and Risk Advisors generally either cliff vest after 2 to 5 years or vest ratably over 3 to 5 years.
The following table summarizes the activity for non-vested awards granted by the Company under the Omnibus Plan:
The Company recognizes share-based compensation expense for the Omnibus Plan net of actual forfeitures. The Company recorded share-based compensation expense of $6.2 million and $204,000 in connection with the Omnibus Plan for the years ended December 31, 2020 and 2019, respectively, which is included in commissions, employee compensation and benefits expense on the consolidated statements of comprehensive loss. The Company had $10.6 million of total unrecognized compensation cost related to unvested shares of restricted stock at December 31, 2020, which is expected to be recognized over a weighted-average period of 3.1 years.
1,500,000 shares of Class A common stock were available for issuance under the Inducement Plan at December 31, 2020. No awards were granted under the Inducement Plan during the year ended December 31, 2020.
Income tax expense (benefit) at the Company’s effective tax rate differed from the statutory tax rate as follows:
This payment obligation is an obligation of BRP Group, Inc. and not of Baldwin Risk Partners, LLC. For purposes of the Tax Receivable Agreement, the cash tax savings in income tax will be computed by comparing the actual income tax liability of BRP Group, Inc. (calculated with certain assumptions) to the amount of such taxes that BRP Group, Inc. would have been required to pay had there been no increase to the tax basis of the assets of Baldwin Risk Partners, LLC as a result of the redemptions or exchanges and had BRP Group, Inc. not entered into the Tax Receivable Agreement. Estimating the amount of payments that may be made under the Tax Receivable Agreement is by its nature imprecise, insofar as the calculation of amounts payable depends on a variety of factors. While the actual increase in tax basis, as well as the amount and timing of any payments under the Tax Receivable Agreement, will vary depending upon a number of factors, including the timing of redemptions or exchanges, the price of shares of our Class A common stock at the time of the redemption or exchange, the extent to which such redemptions or exchanges are taxable and the amount and timing of our income. The Company will account for the effects of these increases in tax basis and associated payments under the Tax Receivable Agreement arising from future redemptions or exchanges as follows:
Methodologies used for assets and liabilities measured at fair value on a recurring basis at December 31, 2020 and 2019 are based on limited unobservable inputs. These methods may produce a fair value calculation that may not be indicative of the net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
The Company’s contingently returnable consideration at December 31, 2020 and 2019 represents a contingent right of return from a Partner to reimburse the Company for a portion of the purchase price as part of the Partnership transaction. The fair value of the contingently returnable consideration is based on sales projections for the acquired entity, which are reassessed each reporting period. Based on the Company’s ongoing assessment of the fair value of contingently returnable consideration, the Company recorded a net decrease in the estimated fair value of such asset of $70,000 and $251,000 for the years ended December 31, 2020 and 2019, respectively. The contingently returnable consideration measurement period ended on December 31, 2020.
The fair value of the contingent earnout liabilities is based on sales projections for the acquired entities, which are reassessed each reporting period. Based on the Company’s ongoing assessment of the fair value of contingent earnout liability, the Company recorded a net increase in the estimated fair value of such liabilities of $20.4 million and $10.6 million for the years ended December 31, 2020 and 2019, respectively. The Company has assessed the maximum estimated exposure to the contingent earnout liabilities to be $527.1 million at December 31, 2020.
The Company measures contingently returnable consideration and contingent earnout liabilities at fair value at each reporting period using significant unobservable inputs classified within Level 3 of the fair value hierarchy. The Company uses a probability weighted value analysis as a valuation technique to convert future estimated cash flows to a single present value amount. The significant unobservable inputs used in the fair value measurements are sales projections over the earnout period, and the probability outcome percentages assigned to each scenario. Significant increases or decreases to either of these inputs would result in a significantly higher or lower asset or liability with a higher asset capped by the contractual maximum of the contingently returnable consideration and a higher liability capped by the contractual maximum of the contingent earnout consideration. Ultimately, the asset and liability will be equivalent to the amount settled, and the difference between the fair value estimate and amount settled will be recorded in earnings for business combinations, or as a reduction of the cost of the assets acquired for asset acquisitions. Refer to Note 4 for additional information regarding contingently returnable consideration and contingent earnout consideration recorded in connection with business acquisitions.
The fair value of the contingent earnout liabilities is based on the present value of the expected future payments to be made to Partners in accordance with the provisions outlined in the respective purchase agreements, which is a Level 3 fair value measurement. In determining fair value, the Company estimates the Partner’s future performance using financial projections developed by management for the Partner and market participant assumptions that were derived for revenue growth or profitability based on earnings before income taxes, depreciation and amortization (“EBITDA”). Revenue and EBITDA growth rates generally ranged from 7% to 20% at December 31, 2020 and from 10% to 20% at December 31, 2019. The Company estimates future payments using the earnout formula and performance targets specified in each purchase agreement and these financial projections. These payments are discounted to present value using a risk-adjusted rate that takes into consideration market-based rates of return that reflect the ability of the Partner to achieve the targets. These discount rates generally ranged from 5.00% to 18.00% at December 31, 2020 and from 7.25% to 18.25% at December 31, 2019. Changes in financial projections, market participant assumptions for revenue growth and profitability, or the risk-adjusted discount rate, would result in a change in the fair value of contingent consideration.
The following table sets forth a summary of the changes in the fair value of the Company’s contingently returnable consideration and contingent earnout liabilities, which are measured at fair value on a recurring basis utilizing Level 3 assumptions in their valuation:
The fair value of long-term debt and the revolving lines of credit is classified as Level 2 within the fair value hierarchy. Fair value is based on an estimate using a discounted cash flow analysis based on current borrowing rates for similar types of borrowing arrangements. The fair value of long-term debt was approximately $402.0 million at December 31, 2020 compared to a carrying value of $399.0 million. The carrying amount of the Revolving Credit Commitment of $40.4 million approximated fair value at December 31, 2019 as a result of the Old JPMorgan Credit Agreement having been amended and restated at market terms on December 19, 2019.
The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity.
Total rent expense under operating leases was $7.6 million and $4.2 million for the years ended December 31, 2020 and 2019, respectively.
•Medicare offers consultation for government assistance programs and solutions, including traditional Medicare and Medicare Advantage, to seniors and Medicare-eligible individuals through a network of agents.
The Company’s chief operating decision maker, the chief executive officer, uses net income before interest, taxes, depreciation, amortization, and one-time transactional-related expenses or non-recurring items to manage resources and make decisions about the business.
The following tables summarize the Company’s unaudited consolidated results of operations on a quarterly basis for years ended December 31, 2020 and 2019.
On January 1, 2021, the Company issued 571,260 restricted shares of its Class A common stock under the Inducement Plan to certain Colleagues that the board of directors previously approved in connection with the Partnerships with AHT, Burnham and TBM. The restricted shares either cliff vest after 4 years or vest ratably over 3 to 4 years. The upfront cash payments for the AHT and Burnham Partnerships and the upfront equity consideration of the TBM Partnership were reduced by the estimated value of the applicable grants.
On March 4, 2021, the Company entered into an interest rate cap transaction for a notional amount of $300.0 million at a 1-month LIBOR interest rate of 2.50% for $2.6 million. The interest rate cap was effective March 8, 2021 and expires March 8, 2026.