Our corporate headquarters is located in leased offices in Tampa, Florida. The leases consist of approximately 91,500 square feet and expire in September 2025 and May 2030. Our insurance brokerage business leases office space in approximately 50 operating locations primarily located throughout the southeastern U.S. These offices are generally located in shopping centers and small office parks, generally with lease terms between two and five years. These facilities are suitable for our needs and we believe that they are well maintained.
The following selected consolidated financial data of BRP Group for each of the three years ended December 31, 2019 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,
Revenues for the year ended December 31, 2019 were $137.8 million, an increase of $58.0 million, or 73%, as compared to the same period of 2018. Our revenue growth was primarily attributable to our 2019 Partnerships, which comprised $43.0 million in revenues, in addition to organic growth of $7.8 million and a full year of contribution from Partners acquired in 2018.
Operating expenses for the year ended December 31, 2019 were $142.9 million, an increase of $72.6 million, or 103%, as compared to the same period of 2018. The increase in operating expenses was primarily attributable to our 2019 Partnerships, which comprised $52.7 million of operating expenses (including an increase in the fair value of contingent consideration of $14.0 million), $4.7 million of expenses related to the Initial Public Offering, increased compensation for sales and support related to our growth and continued investments in Growth Services to support our growth.
Net loss for the year ended December 31, 2019 was $22.5 million, an increase of $25.1 million as compared to net income of $2.7 million in the same period of 2018.
Organic Revenue for the year ended December 31, 2019 was $87.7 million as compared to $56.8 million for the same period of 2018. Organic Revenue Growth was $7.8 million, or 10%, for 2019 and $8.8 million, or 18%, for 2018. 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.
We utilize strategic acquisitions, which we refer to as Partnerships, to complement and expand our business. The financial impact of Partnerships may affect the comparability of our results from period to period. Our acquisition strategy also entails certain risks, including the risks that we may not be able to successfully source, close, integrate and effectively manage businesses that we acquire. To mitigate that risk, we have a professional team focused on finding new Partners and integrating new Partnerships. We plan to execute on numerous Partnerships annually as it is a key pillar in our long-term growth strategy over the next ten years.
Effective March 1, 2019, we entered into an asset purchase agreement to purchase certain assets and intellectual and intangible rights and assume certain liabilities of Lykes Insurance, Inc., a Middle Market Partnership for cash consideration of $36.0 million and fair value of noncontrolling interest of $1.0 million. The acquisition was made to expand our Middle Market business presence in Florida. We recognized total revenues and net income from the Lykes Partnership of $8.8 million and $1.4 million, respectively, during 2019. As a result of the Lykes Partnership, we recognized goodwill in the amount of $25.9 million. The factors contributing to the recognition of the amount of goodwill are based on strategic benefits that are expected to be realized from acquiring Lykes’ assembled workforce in addition to other synergies gained from integrating Lykes’ operations into our consolidated structure. We incurred approximately $152,000 in acquisition-related costs for Lykes during 2019.
Given the uncertainty regarding the spread and severity of COVID-19 and the adverse effects on the national and global economy, the related financial impact on our business cannot be accurately predicted at this time. We intend to continue to execute on our strategic plans and operational initiatives during the outbreak. However, the uncertainties associated with the protective and preventative measures being put in place or recommended by both governmental entities and other businesses, among other uncertainties, may result in delays or modifications to these plans and initiatives. See Item 1A. “Risk Factors - Risks Relating to our Business - The occurrence of natural or man-made disasters, including the recent novel coronavirus (COVID-19) outbreak, could result in declines in business and increases in claims that could adversely affect our business, financial condition and results of operations.”
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements for the years ended December 31, 2019 and 2018 and the related notes and other financial information included elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under Item 1A. Risk Factors.
The following is a discussion of our consolidated results of operations for each of the years ended December 31, 2019 and 2018.
The following table sets forth our commissions and fees by major source by amount for the years ended December 31, 2019 and 2018:
Agency bill revenue primarily represents commission revenue earned by providing insurance placement services to clients wherein we act as an agent on behalf of the Client. Agency bill revenue increased by $25.7 million for the year ended December 31, 2019 as compared to the same period of 2018. This increase was primarily attributable to $23.4 million related to our 2019 Partnerships and the remainder was primarily attributable to organic growth.
Amortization expense increased by $7.4 million for the year ended December 31, 2019 as compared to the same period of 2018. This increase was driven by amortization related to $72.7 million of intangible assets capitalized in connection with our 2019 Partnerships.
Change in fair value of contingent consideration was $10.8 million for the year ended December 31, 2019 as compared to $1.2 million for the year ended December 31, 2018. 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. We had a significantly higher estimate for the contingent earnout liability of the MSI Partnership at the end of 2019 related to growth of their business during the period under consolidation.
Restricted cash increased $3.4 million as a result of restricted trust accounts we hold in connection with the MSI Partnership.
Goodwill increased $98.7 million primarily as a result of the MSI, Lykes and Foundation Insurance Partnerships, which contributed $50.2 million, $25.9 million and $21.5 million, respectively, to goodwill during 2019.
Revolving lines of credit increased $6.5 million due to draws used for closing Partnerships during 2019.
Related party debt decreased $36.9 million due to the payoff and termination of the Villages Credit Agreement in 2019.
Contingent earnout liabilities increased $39.5 million primarily as a result of an increase in the fair value of the liability recorded in connection with the MSI Partnership.
Equity accounts were all reset in connection with the Reorganization Transactions. Refer to Item 1. Business for a discussion of these transactions.
do not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations;
Adjusted Diluted EPS measures our per share earnings excluding certain expenses as discussed above and assuming all shares of Class B common stock were exchanged for Class A common stock. Adjusted Diluted EPS is calculated as Adjusted Net Income divided by adjusted dilutive weighted-average shares outstanding. We believe Adjusted Diluted EPS is useful to investors because it enables them to better evaluate per share operating performance across reporting periods.
The following table reconciles Adjusted EBITDA and Adjusted EBITDA Margin to net income (loss), which we consider to be the most directly comparable GAAP financial measure to Adjusted EBITDA and Adjusted EBITDA Margin:
The following table reconciles Organic Revenue to commissions and fees, which we consider to be the most directly comparable GAAP financial measure to Organic Revenue:
As discussed in Note 2 to our audited consolidated financial statements for the year ended December 31, 2019 included under Item 8 of this 10-K, the Company changed its method of accounting for commissions and fees from contracts with customers as a result of the adoption of ASC Topic 606, Revenue from Contracts with Customers, effective January 1, 2018, under the modified retrospective method. Under the modified retrospective method, the Company was not required to restate comparative financial information prior to the adoption of these standards and therefore such information presented prior to January 1, 2018 continues to be reported under the Company’s previous accounting policies. As such, an adjustment is made to remove the impact of the adoption from the calculation of organic growth when the impact is measured across periods that are not comparable.
Excludes the first twelve months of such commissions and fees generated from newly acquired Partners.
Organic Revenue for the year ended December 31, 2018 used to calculate Organic Revenue Growth for the year ended December 31, 2019 was $79.9 million, which is adjusted to reflect revenues from Partnerships that reached the twelve-month owned mark during the year ended December 31, 2019.
Represents corporate income taxes at assumed effective tax rate of 9.9% applied to adjusted pre-tax income.
Commissions and fees increased across all Operating Groups for the year ended December 31, 2019 as compared to the same period of 2018. These increases were primarily attributable to our 2019 Partners, which contributed $9.6 million, $31.2 million and $2.2 million to the Middle Market, Specialty and MainStreet Operating Groups, respectively, during 2019, in addition to organic growth and a full year of contribution from our 2018 Partners, which accounted for $6.8 million, $1.1 million and $1.0 million to the Middle Market, Specialty and MainStreet Operating Groups, respectively. The Middle Market Operating Group also had $1.4 million of higher contingent revenue during 2019. We expect higher loss ratios in our Middle Market and MainStreet Operating Groups to reduce contingent revenue during the first half of 2020 and increase base commissions and fees towards the end of 2020 and into 2021 for those Operating Groups.
Policies in force for the MSI Partnership grew by 99,393, or 36%, to 374,591 at December 31, 2019 from 275,198 at December 31, 2018. Since the MSI Partnership was not completed until April 2019, the 36% policies in force growth was calculated including periods during which MSI was not owned by the Company.
Commissions, employee compensation and benefits expenses increased across all Operating Groups for the year ended December 31, 2019 as compared to the same period of 2018. These increases were primarily attributable to our 2019 Partners, which contributed $6.0 million, $21.5 million and $1.2 million to the Middle Market, Specialty and MainStreet Operating Groups, respectively, during 2019. During 2019, we also had full year of contribution from our 2018 Partners, which accounted for $2.9 million, $1.1 million and $0.7 million of the Middle Market, Specialty and MainStreet Operating Groups, respectively. Corporate and Other incurred $1.9 million in bonuses and $1.3 million in share-based compensation related to the Initial Public Offering during 2019. Commissions, employee compensation and benefits expenses also increased as a result of hiring new roles necessary as a public company, including a chief operating officer, chief accounting officer and general counsel, in addition to continued investments in Growth Services to support our growth, which costs are allocated among the Operating Groups.
Other operating expenses increased across all Operating Groups for the year ended December 31, 2019 as compared to the same period of 2018. These increases were attributable in part to our 2019 Partners, which contributed $1.3 million and $2.0 million to the Middle Market and Specialty Operating Groups, respectively. The remainder of the increases in the four Operating Groups were driven by organic growth. The increase in Corporate and Other is primarily related to costs related to our Initial Public Offering in 2019. We expect our other operating expenses to continue to increase in 2020 in relation to 2019 as a result of ongoing public company costs.
Amortization expense increased across all Operating Groups for the year ended December 31, 2019 as compared to the same period of 2018. These increases were driven by amortization related to $10.6 million, $52.7 million and $8.7 million of intangible assets capitalized in connection with Middle Market, Specialty and MainStreet Partnerships, respectively, during 2019.
As of December 31, 2019, our cash and cash equivalents were $67.7 million. We believe that our cash and cash equivalents, proceeds from the Initial Public Offering, cash flow from operations and available borrowings under the JPMorgan Credit Agreement will be sufficient to fund our working capital and meet our commitments for the foreseeable future. However, we expect that we will require additional funding to continue to execute on our Partnership strategy. Such funding could include the incurrence of additional debt or the issuance of equity. Additional funds may not be available on a timely basis, on favorable terms, or at all, and such funds, if raised, may not be sufficient to enable us to continue to implement our long-term Partnership strategy. If we are not able to raise funds when needed, we could be forced to delay or reduce the number of Partnerships that we complete.
At December 31, 2019, the variable rate in effect for the JPMorgan Credit Agreement was the London Interbank Offered Rate (“LIBOR”) due to a pricing option and the applicable interest rate on the Revolving Credit Commitment was 3.81%.
The JPMorgan Credit Agreement contains covenants that, among other things, restrict our ability to make certain restricted payments, incur additional debt, engage in certain asset sales, mergers, acquisitions or similar transactions, create liens on assets, engage in certain transactions with affiliates, change our business or make certain investments. Following the Initial Public Offering, the JPMorgan Credit Agreement continues to contain these covenants, including a covenant that restricts BRP’s ability to make dividends or other distributions to BRP Group.
As of September 30, 2019, we had borrowings under the Villages Credit Agreement consisting of a non-revolving line of credit up to $125.0 million. The line of credit under the Villages Credit Agreement bore interest at a fixed rate of 8.75% per annum and matured in September 2024, or such later date as the parties may agree. On October 28, 2019, BRP used a portion of the proceeds it received from the sale of newly-issued LLC Units to BRP Group in connection with the Initial Public Offering to repay in full the outstanding indebtedness and accrued interest under the Villages Credit Agreement in the amount of $89.0 million and concurrently terminated the Villages 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 $58.5 million for the year ended December 31, 2019 as compared to the same period of 2018. Cash consideration paid for business combinations and asset acquisitions increased $57.1 million primarily as a result of the MSI, Lykes and Foundation Insurance Partnerships during 2019.
The primary sources and uses of cash for financing activities relate to the issuance of our Class A common stock, borrowings from and repayment to our Credit Agreements, payment of debt issuance costs, payment of contingent and guaranteed earnout consideration, distributions and contributions, and other equity transactions. Net cash provided by financing activities increased $116.5 million for the year ended December 31, 2019 as compared to the same period of 2018. Proceeds from our initial public offering netted us $246.2 million during 2019. We used $31.3 million of these proceeds to purchase LLC Units from our Chairman and Villages Invesco. Net cash paid in relation to our Credit Agreements increased $17.7 million primarily as a result of the repayment of $154.6 million to the Credit Agreements, offset in part by additional borrowings to fund our Partnerships during 2019. In addition, we had cash payments of $12.5 million related to the repurchase of membership interests from members.
Includes $48.8 million of current and noncurrent estimated contingent earnout liabilities at December 31, 2019.
On October 28, 2019, BRP Group entered into the Tax Receivable Agreement with BRP’s LLC Members that provides for the 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 as a result of (i) any increase in tax basis in BRP assets resulting from (a) acquisitions by BRP Group of BRP’s LLC Units from BRP’s LLC Members in connection with the Initial Public Offering, (b) the acquisition of LLC Units from BRP’s LLC Members using the net proceeds from any future offering, (c) redemptions or exchanges by BRP’s LLC Members of LLC Units and the corresponding number of shares of Class B common stock for shares of Class A common stock or cash or (d) payments under the Tax Receivable Agreement, and (ii) tax benefits related to imputed interest resulting from payments made under the Tax Receivable Agreement.
Holders of BRP’s LLC Units (other than BRP Group) may, subject to certain conditions and transfer restrictions described above, redeem or exchange their LLC Units for shares of Class A common stock of BRP Group on a one-for-one basis. BRP intends to make an election under Section 754 of the Internal Revenue Code of 1986, as amended, and the regulations thereunder (the “Code”) effective for each taxable year in which a redemption or exchange of LLC Units for shares of Class A common stock occurs, which is expected to result in increases to the tax basis of the assets of BRP at the time of a redemption or exchange of LLC Units. The redemptions or exchanges are expected to result in increases in the tax basis of the tangible and intangible assets of BRP. These increases in tax basis may reduce the amount of tax that BRP Group would otherwise be required to pay in the future. We have entered into a Tax Receivable Agreement with the BRP’s LLC Members that provides for the payment by us to the 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 we actually realize as a result of (i) any increase in tax basis in BRP Group’s assets resulting from (a) the purchase of LLC Units from any of the BRP’s LLC Members using the net proceeds from any future offering, (b) redemptions or exchanges by the BRP’s LLC Members of LLC Units for shares of our Class A common stock or (c) payments under the Tax Receivable Agreement and (ii) tax benefits related to imputed interest deemed arising as a result of payments made under the Tax Receivable Agreement. This payment obligation is an obligation of BRP Group and not of BRP. 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 (calculated with certain assumptions) to the amount of such taxes that BRP Group would have been required to pay had there been no increase to the tax basis of the assets of BRP as a result of the redemptions or exchanges and had BRP Group 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, the amount and timing of our income, the tax rates then applicable and the portion of our payments under the Tax Receivable Agreement constituting imputed interest. We anticipate that we 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:
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.
We earn commission revenue by acting as an agent or broker on behalf of our clients and Insurance Company Partners to provide insurance placement services to clients. Commission revenue is usually a percentage of the premium paid by clients and generally depend upon the type of insurance, the particular insurance company and the nature of the services provided. Commission revenue is 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 makes its best estimate of direct bill commissions at the policy effective date, particularly in employee benefits within the Middle Market Operating Group, which is subject to change based on enrollment and other factors over the policy period. Commissions revenue is recorded net of an allowance for estimated policy cancellations, which is determined based on an evaluation of historical and current cancellation data. Given a hypothetical 1% increase in our policy cancellation rate, our annual allowance for estimated policy cancellations would have increased by $1.2 million for the year ended December 31, 2019.
We are entitled to commissions each year for multi-year Medicare contracts. We have applied a constraint to renewal commission that limits commissions and fees recognized on new policies to the policy year in effect, and revenue recognized on renewal policies to the receipt of periodic cash, when a risk of significant reversal exists based on (1) insufficient history; and (2) the influence of external factors outside of our control including policyholder discretion over plans and Insurance Company Partner relationships, political influence, and a contractual provision, which limits our right to receive renewal commissions to ongoing compliance and regulatory approval of the relevant Insurance Company Partner.
Costs to obtain contracts includes compensation in the form of producer commissions paid on new business. These incremental costs are capitalized as deferred commission expense and amortized over five years, which represents management’s estimate of the average period over which a Client maintains its initial coverage relationship with the original Insurance Company Partner. Given a hypothetical one-year increase in the amortization period for deferred commission expense, our annual expense related to deferred commissions would have decreased by $173,000 for the year ended December 31, 2019.
Goodwill is not amortized but rather is evaluated for impairment at least annually or more frequently if indicators of impairment are present. Indicators of impairment include a reduction of expected future cash flows of our reporting units, a significant negative trend in the economy or insurance industry, and a sustained significant decrease in our market capitalization.
The quantitative goodwill impairment test requires the fair value of each reporting unit to be compared to its book or carrying value. If the carrying value of a reporting unit is determined to be less than the fair value of the reporting unit, goodwill is deemed not to be impaired. If the carrying value of a reporting unit is greater than the fair value, an impairment charge is recorded for the amount that the carrying amount of the reporting unit, including goodwill, exceeds its fair value, limited to amount of goodwill of the reporting unit.
During 2019, we performed an impairment evaluation for each of our reporting units beginning with a qualitative assessment. The qualitative factors we considered included general economic conditions, limitations on accessing capital, industry and market considerations, cost factors such as commissions expense that could have a negative effect on future cash flows, overall financial performance including declining cash flows and a decline in actual or anticipated commissions and fees, earnings or key statistics, and other entity-specific events such as changes in management and loss of key personnel or customers. We determined that based on the overall results and outlook of our reporting units, company and industry, including consideration of the effect of our new Partnerships, there was no indication of goodwill impairment at December 31, 2019. As such, no further testing was required.
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, 2019. 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 straight-line method from the date of grant to recognize compensation expense for equity awards with service conditions and the ratable method for equity awards with 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 are required to establish a valuation allowance for deferred tax assets and record a charge to income if it is determined, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred taxes in 2019 have been reduced by a full valuation allowance due to a determination that it is more likely than not that all of the deferred tax assets will not be realized based on the weight of all available evidence.
To the Board of Directors and Stockholders of BRP Group, Inc.
The following table presents the assets and liabilities of the Company’s consolidated variable interest entities, which are included on the consolidated balance sheets above. The assets in the table below include those assets that can only be used to settle obligations of the consolidated variable interest entities.
BRP Group is a diversified insurance agency and services organization that markets and sells insurance products and services to its customers throughout the U.S., although a significant portion of the Company’s business is concentrated in the southeastern U.S. BRP Group and its subsidiaries operate through four reportable segments (“Operating Groups”), including Middle Market, Specialty, MainStreet, and Medicare, which are discussed in more detail in Note 25.
BRP and BRP Group have been under the common control of our Chairman, Lowry Baldwin, before and after the Reorganization Transactions. Prior to the Reorganization Transactions, Mr. Baldwin held a controlling interest in Baldwin Investment Group Holdings, LLC (“BIGH”), which was the controlling owner of BRP through its majority ownership of BRP’s common units. In addition, Mr. Baldwin was the sole shareholder of BRP Group. Upon reorganization, BRP Group became the sole managing member of BRP. Holders of the Class B common stock hold a majority of the voting power of BRP Group and stockholders of a majority of the Class B common stock, including BIGH, executed a Voting Agreement in which they agreed to vote in the same manner as Mr. Baldwin. As a result, Mr. Baldwin continues to control BRP Group subsequent to the Initial Public Offering and Reorganization Transactions. Accordingly, we have accounted for the Reorganization Transactions as a transaction between entities under common control in accordance with Accounting Standards Codification (“ASC”) Topic 805-50, Business Combinations - Related Issues, under which the financial information of BRP Group has been combined with that of BRP as of the earliest period presented.
Topic 810 also requires that the equity of a noncontrolling interest shall be reported in the consolidated balance sheets within total equity of the Company. Certain redeemable noncontrolling interests are reported in the consolidated balance sheets as mezzanine equity. Topic 810 also requires revenues, expenses, gains, losses, net income or loss, and other comprehensive income or loss to be reported in the consolidated financial statements at consolidated amounts, which include amounts attributable to the owners of the parent and the noncontrolling interests. Refer to the Redeemable Noncontrolling Interest and Noncontrolling Interest sections of Note 2 for additional information.
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). The guidance in ASU 2016-02 supersedes the lease recognition requirements in ASC Topic 840, Leases. ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. The FASB has subsequently issued several additional ASUs related to leases, which improved upon, and provided transition relief for, the guidance issued in ASU 2016-02 and extended the adoption date for nonpublic business entities. This guidance is effective for the fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021, with early adoption permitted. The Company is currently evaluating the full effect that the adoption of this standard will have on its consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 provides guidance on the classification of contingent consideration payments made after a business combination and other cash receipts and payments. The Company adopted ASU 2016-15 effective January 1, 2019 and has applied the guidance retrospectively for its consolidated statement of cash flows for the years ended December 31, 2019 and 2018. The Company applied the guidance in ASU 2016-15 to its payment of contingent consideration liabilities related to business combinations and the payment of debt extinguishment costs, which impacted the presentation of the cash flows, but did not otherwise impact on the Company’s results of operations or financial condition.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”), which requires that the statement of cash flows explain the changes during the period of cash and cash equivalents inclusive of amounts categorized as restricted cash. The Company adopted ASU 2016-18 effective January 1, 2019. With the adoption of ASU 2016-18, the statements of cash flows detail the change in the balance of cash and cash equivalents and restricted cash. The adoption of this guidance did not have any effect on cash flows for the year ended December 31, 2018.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which amends the guidance on goodwill. Under ASU 2017-04, goodwill impairment is measured as the amount by which a reporting unit’s carrying value exceeds its fair value, while not exceeding the carrying value of goodwill. ASU 2017-04 eliminates existing guidance that requires an entity to determine goodwill impairment by calculating the implied fair value of goodwill by hypothetically assigning the fair value of a reporting unit to all its assets and liabilities as if that reporting unit had been acquired in a business combination. The Company early adopted this guidance for impairment tests effective January 1, 2019 and it did not have any impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) (“Topic 820”): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which modifies the disclosure requirements related to fair value measurement, by removing certain disclosure requirements related to the fair value hierarchy, modifying existing disclosure requirements related to measurement uncertainty and adding new disclosure requirements, such as disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and disclosing the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in ASU 2018-13 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The adoption of this standard is not expected to have a significant impact on the Company’s consolidated financial statements.
Effective January 1, 2018, the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (“Topic 606”) and all related amendments that established Topic 606. The Company adopted these standards by recognizing the cumulative effect as an adjustment to opening retained earnings at January 1, 2018 under the modified retrospective method for contracts not completed as of the day of adoption. The Company elected the practical expedient to evaluate only contracts not completed at the date of initial application. The cumulative impact of adopting Topic 606 on January 1, 2018 was an increase in retained earnings and noncontrolling interest within members’ equity (deficit) totaling $6.8 million.
The Company earns service fee revenue in its Middle Market segment by receiving negotiated fees in lieu of a commission and consulting revenue from services other than securing insurance coverage. Service fee and consulting revenues from certain agreements are recognized over time depending on when the services within the contract are satisfied and when the Company has transferred control of the related services to the customer.
Commissions and fees for brokerage services may be invoiced near the effective date of the underlying policy or over the term of the arrangement in installments during the policy period. However, regardless of the payment terms, commissions are recognized at a point in time upon the effective date of bound insurance coverage, as no performance obligation exists after coverage is bound.
The Company may receive a profit-sharing commission from an Insurance Company Partner, which is based primarily on underwriting results, but may also contain considerations for volume, growth, loss performance, or retention. 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. 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 revenue that is not subject to significant reversal, which often coincides with the earlier of written notice 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 based on constraints 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.
Restricted cash includes amounts that are legally restricted as to use or withdrawal. Restricted cash represents cash collected from customers that is payable to insurance companies and for which segregation of this cash is required by contract with the relevant insurance company providing coverage or by law within the state. The Company holds restricted cash specifically in its role as an MGA.
Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful life or the reasonably assured lease term at inception of the lease. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts. The difference between the net book value of the assets and proceeds from disposal is recognized as a gain or loss on disposal, which is included in other income (expense), net in the consolidated statements of comprehensive income (loss). Routine maintenance and repairs are charged to expense as incurred, while costs of improvements and renewals are capitalized.
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. No impairment was recorded for the years ended December 31, 2019 and 2018.
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 income (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.
The Company accounts for contingent consideration relating to asset acquisitions as a contingent earnout liability and an increase to the cost of the acquired assets on a relative fair value basis at the date of the acquisition. Once recognized, the contingent earnout liability is not derecognized until the contingency is resolved and the consideration is issued or becomes issuable. If the amount initially recognized as a liability exceeds the fair value of the contingent consideration issued or issuable, the entity recognizes that amount as a reduction of the cost of the asset acquisition. The ultimate settlement of contingent earnout liabilities relating to asset acquisitions may be for amounts that are materially different from the amounts initially recorded.
The Company determines the fair value of contingently returnable consideration and contingent earnout liabilities based on future cash flow projections under various potential scenarios and weighs the probability of these outcomes as discussed further in Note 23.
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, which were classified in mezzanine equity on the Company’s consolidated balance sheets at December 31, 2018.
Redeemable noncontrolling interests are reported at estimated redemption value measured as the greater of estimated fair value at the end of each reporting period or the historical cost basis of the redeemable noncontrolling interest adjusted for cumulative earnings or loss allocations. The resulting increases or decreases to redemption value, if applicable, are recognized as adjustments to retained earnings.
The accounts of the following joint ventures have been consolidated into the Company’s consolidated financial statements since their respective inceptions until the Reorganization Transactions. The noncontrolling ownership interests in the Company’s subsidiaries described below are presented as redeemable noncontrolling interest in the consolidated financial statements prior to the Reorganization Transactions.
In 2018, BRP Black Insurance, LLC (“Black”) was formed in order to acquire substantially all the assets and liabilities of Black Insurance and Financial Services, LLC from Christopher R. Black (“Chris Black”). Chris Black had a 40% ownership interest in Black prior to the Reorganization Transactions.
In 2018, Baldwin Krystyn Sherman Partners, LLC (“BKS”) acquired substantially all the assets and liabilities of Montoya Property & Casualty Insurance from Montoya and Associates, LLC (“Montoya & Associates”). Montoya & Associates had a 1.5% ownership interest in BKS prior to the Reorganization Transactions.
In 2019, BIH acquired 70% of the membership interests of Millennial Specialty Insurance, LLC from Millennial Specialty Holdco, LLC (“MSH”). MSH had a 30% ownership interest in Millennial Specialty Insurance, LLC prior to the Reorganization Transactions.
In 2019, BKS Financial Investments, LLC was formed to acquire substantially all the assets and liabilities of Fiduciary Partners Investment Consulting, LLC and 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.
In 2019, BRP Foundation, LLC (“Foundation”) was formed in order to acquire substantially all the assets and liabilities of Foundation Insurance of Florida, LLC from its members (“Foundation Members”). The Foundation Members had a 20% ownership interest in Foundation prior to the Reorganization Transactions.
In conjunction with the Reorganization Transactions as discussed in Note 3, the Company executed its call rights for the majority of the redeemable noncontrolling ownership interests, which were converted into permanent equity through the issuance of Class B common stock and LLC Units. Refer to Note 15 for additional discussion of redeemable noncontrolling interest.
Noncontrolling interests are reported at historical cost basis adjusted for cumulative earnings or loss allocations and classified as a component of stockholders’/members’ equity (deficit) on the consolidated balance sheets. Noncontrolling interest as presented herein as of and for the year ended December 31, 2018 consists of the noncontrolling interest holdings of BRP. Noncontrolling interest as presented as of and for the year ended December 31, 2019 consists of the noncontrolling interest holdings of BRP Group subsequent to the Reorganization Transactions. The controlling interest holdings of BRP for the period from January 1, 2019 through October 27, 2019 have been reclassified to noncontrolling interest holdings of BRP Group for presentation of activity for the year ended December 31, 2019.
The Company’s purchase of BRP’s LLC Units concurrent with the Initial Public Offering, and the future exchanges of LLC Units from BRP’s LLC Members and the corresponding number of shares of Class B common stock for shares of Class A common stock, is expected to result in increases in its share of the tax basis of the tangible and intangible assets of BRP, which will increase the tax depreciation and amortization deductions that otherwise would not have been available to BRP Group. These increases in tax basis and tax depreciation and amortization deductions are expected to reduce the amount of cash taxes that BRP Group would otherwise be required to pay in the future. BRP Group has entered into a Tax Receivable Agreement, with the other members of BRP that requires it to pay them 85% of the amount of cash savings, if any, in U.S. federal, state, and local income tax that BRP Group actually realizes (or, under certain circumstances, is deemed to realize) as a result of the increases in tax basis in connection with exchanges by the recipients described above and certain other tax benefits attributable to payments under the Tax Receivable Agreement.
Share-based payments to employees and non-employee directors are measured based on the estimated grant-date fair value. The grant-date fair value of restricted stock awards is equal to the market value of BRP Group’s Class A common stock on the date of grant. The Company recognizes share-based compensation expense over the requisite service period for awards expected to ultimately vest. The Company recognizes forfeitures as they occur.
BRP amended and restated its amended and restated limited liability company agreement (the “Amended LLC Agreement”) to, among other things, appoint BRP Group as the sole managing member of BRP and to modify BRP’s capital structure to reclassify all the equity interests into a single class of LLC units (the “LLC Units”);
under the Amended LLC Agreement, BRP’s LLC Members have the right to require BRP to redeem all or a portion of their LLC Units for, at BRP Group’s election, newly-issued shares of Class A common stock on a one-for-one basis or a cash payment;
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 used the net proceeds from the Initial Public Offering to acquire 14,000,000 newly-issued LLC Units from Baldwin Risk Partners, LLC, 1,800,000 LLC Units from Lowry Baldwin, the Company’s Chairman, and 600,000 LLC Units from The Villages Invesco, LLC (“Villages Invesco”), one of our significant shareholders, at a purchase price per LLC Unit equal to the initial public offering price of Class A common stock after underwriting discounts and commissions; and
In conjunction with the Reorganization Transactions, BRP issued LLC Units to equity holders of its Partners (other than certain joint ventures) in exchange for all of the equity interests in such Partners not held by BRP prior to such exchange. In each of the Partner operating agreements, BRP held a right to acquire the equity interests of the Partners of the underlying subsidiaries. Acquisition of the Partners’ equity interests was recorded in accordance with Topic 810. Previously redeemable Voting Common Units were replaced with LLC Units that do not contain a similar redemption provision while certain redeemable noncontrolling interests remain redeemable subsequent to the conversion.
Voting Common Units held by the majority founder, which comprised members’ equity prior to the reorganization, were converted into 18,933,907 shares of Class B common stock and LLC Units.
Management Incentive Units were converted to 5,627,155 restricted shares of Class B common stock and LLC Units.
The Company completed four business combinations for an aggregate purchase price of $173.5 million during the year ended December 31, 2019. 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. For financial statement purposes, goodwill is not amortized 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 fifteen 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 23. Any subsequent changes in the fair value of contingent earnout liabilities will be recorded in the consolidated statements of comprehensive income (loss) when incurred.
Fiduciary Partners Retirement Group, Inc., Fiduciary Partners Group, LLC and Fiduciary Partners Investment Consulting, LLC (“Fiduciary Partners”), a Middle Market Partnership effective July 1, 2019, was made to expand our employee benefits group business in the Middle Market Operating Group.
The operating results of these business combinations have been included in the consolidated statements of comprehensive income (loss) since their respective acquisition dates. The Company recognized total revenues and net loss from its business combinations of $42.8 million and $9.8 million, respectively, for the year ended December 31, 2019.
Acquisition-related costs incurred in connection with these business combinations are recorded in operating expenses in the consolidated statements of comprehensive income (loss). The Company incurred acquisition-related costs from its business combinations of $528,000 for the year ended December 31, 2019.
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, 2019. Due to the complexity of valuing the consideration paid and the purchase price allocation and the timing of these activities, certain amounts included in the consolidated financial statements may be provisional and subject to additional adjustments within the measurement period as permitted by Topic 805. The Company recorded measurement period adjustments for the Lykes and MSI Partnerships, which are reflected in the table below. Any measurement period adjustments related to prior period business combinations have been reflected as current period adjustments for the year ended December 31, 2019 in accordance with Topic 805.
The Company made adjustments within the measurement period to the purchase price allocations for Lykes and MSI during the year ended December 31, 2019, which have been reflected in the table. The Lykes adjustment resulted in an increase to net assets before goodwill and a reduction to goodwill of $2.7 million. The MSI adjustment resulted in an increase to intangible assets and a reduction to goodwill of $3.6 million.
The Company determined that it is the primary beneficiary of its VIEs, which, at December 31, 2018, included The Villages Insurance Partners, LLC (“TVIP”) and the Company’s joint ventures, BKS-IPEO JV Partners, LLC (“iPEO”), Laureate Insurance Partners, LLC (“Laureate”), BKS Smith, LLC (“Smith”), BKS MS, LLC (“Saunders”) and BKS Partners Galati Marine Solutions, LLC (“Galati”). In connection with the Initial Public Offering and Reorganization Transaction, the Company acquired the equity interests of TVIP and iPEO, which became wholly-owned subsidiaries of BRP and, accordingly, are no longer VIEs of the Company. The Company has consolidated its VIEs into the consolidated financial statements.
Total revenues and expenses of the Company’s consolidated VIEs included in the consolidated statements of comprehensive income (loss) were $579,000 and $727,000, respectively, for the year ended December 31, 2019 and $13.4 million and $9.5 million, respectively, for the year ended December 31, 2018.
The following table provides disaggregated commissions and fees revenue by major source:
Profit-sharing revenue represents bonus-type revenue that is earned by the Company as a sales incentive provided by certain Insurance Company Partners.
Policy fee revenue represents revenue earned for acting in the capacity of an MGA on behalf of the Insurance Company Partner and fulfilling certain services including delivery of policy documents, processing payments and other administrative functions. Installment fee revenue represents revenue earned by the Company for providing payment processing services on behalf of the Insurance Company Partner related to policy premiums paid on an installment basis.
Other income consists primarily of Medicare marketing income that is based on agreed-upon cost reimbursement for fulfilling specific targeted marketing campaigns.
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.
The table below provides a rollforward of deferred commission expense, which is included as a component of other assets on the balance sheets:
Amortization expense recorded for intangible assets was $10.0 million and $2.6 million for the years ended December 31, 2019 and 2018, respectively.
Refer to Note 4 for a summary of goodwill recorded in connection with business combinations during the year ended December 31, 2019. The changes in carrying value of goodwill by reportable segment for the period are as follows:
Certain Risk Advisors were deemed probable of meeting the performance condition after having achieved the first milestone related to their advisor incentive agreements. On a quarterly basis thereafter, the Company estimated the fair value of each advisor’s book of business and recorded compensation expense and an increase to the advisor incentive liability. The Company recognized compensation expense related to advisor incentives of $1.1 million and $1.2 million for the years ended December 31, 2019 and 2018, respectively.
The Company recorded debt issuance costs related to the Second Amendment of $356,000 during the year ended December 31, 2018. The Second Amendment was accounted for as a modification of debt, and therefore, the previously unamortized debt costs continued to be amortized over the term of the new agreement.
The Term Loan required quarterly principal payments of $107,648 through the maturity date in May 2023, at which time all remaining unpaid amounts were due. The Revolving Lines of Credit required monthly interest payments. Interest was payable monthly based on London Interbank Offered Rate (“LIBOR”) plus an applicable margin. The applicable interest rate was 6.00% at December 31, 2018. In addition, any unused commitment on the Revolving Lines of Credit accrued a commitment fee of 0.25% per annum. The balance of the Term Loan, Working Capital Line and Acquisitions Line was $1.9 million, $0.5 million and $33.4 million, respectively, at December 31, 2018.
On November 25, 2019, the Company repaid a portion of the Revolving Lines of Credit in the amount of $65.0 million, which resulted in remaining borrowing capacity of $85.0 million under the JPMorgan Credit Agreement.
On December 19, 2019, the Company executed the fourth amended and restated JPMorgan Credit Agreement (the “Fourth Amendment”), which (i) replaced the existing Revolving Lines of Credit with a revolving credit commitment (the “Revolving Credit Commitment”) with an aggregate borrowing capacity of $225.0 million, of which no more than $65.0 million is available for working capital purposes and the entirety of which is available to fund acquisitions permitted under the JPMorgan Credit Agreement; (ii) replaced Cadence Bank, N.A. as existing agent with JPMorgan Chase Bank, N.A. as successor agent and lead arranger; and (iii) changed the maturity date of the JPMorgan Credit Agreement to September 23, 2024. The facility also has an accordion feature that allows the Company to increase the aggregate borrowing capacity to $300.0 million, which we utilized by entering into the Incremental Facility Amendment No. 1 to the JP Morgan Credit Agreement on March 12, 2020.
The Company recorded debt issuance costs related to the Fourth Amendment of $541,000 during the year ended December 31, 2019. The Fourth 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 Fourth Amendment of $167,000 during the year ended December 31, 2019.
The Revolving Credit Commitment is collateralized by a first priority lien on substantially all the assets of the Company, including a pledge of all equity securities of each of its subsidiaries. The interest rate of the Revolving Credit Commitment is based on, depending on the type of loan, the Eurodollar rate or the Alternative Based Rate, plus in each case, a margin based on Total Leverage Ratio (as defined in the JPMorgan Credit Agreement) as set forth in the pricing grid below, provided that under no circumstances will the LIBO Rate (as defined in the JPMorgan Credit Agreement) used in the determination of the Eurodollar rate be less than 0.00% or the Alternate Base Rate be less than 1.00%:
The Minority Founders’ Units also contain certain put and call rights in conjunction with termination at the greater of fair value or a floor, as defined in the Operating Agreement. The Minority Founders’ Units are reported at estimated redemption value in redeemable members’ capital and are measured as the greater of estimated fair value at the end of each reporting period or the historical cost basis of the redeemable common units adjusted for cumulative earnings or loss allocations.
During March 2019, the Company repurchased 595,780 Minority Founders’ Units for $12.5 million.
Villages holds certain put rights and the Company holds certain call rights with respect to Voting Common Units (“Villages’ Units”) issued in connection with the Company’s non-revolving loan with Villages (“Related Party Debt”), which is described in Note 18.
Each Rollover Member, other than W. David Cox and Michael P. Ryan, had the right to require the Company to redeem all (but not less than all) of the Rollover Members’ Units, by sending a written notice of exercise of such option to the Company. Rollover Members W. David Cox and Michael P. Ryan had the right to require the Company to redeem all or any portion of the Rollover Members’ Units under the same circumstances. The Rollover Members’ put rights could be redeemed at any time after forty-eight months from the date of the respective agreement for all Rollover Members other than Chris Black, Montoya & Associates, and AB Holdco for which the put rights can be redeemed at up to 25% per year for each of the four years after forty-eight months from the date of the respective agreement.
The Company had the right to redeem all (but not less than all) of the Rollover Members’ Units by sending a written notice of exercise of such option to the Rollover Member, provided that the Company has or can obtain the financial resources to pay the entire purchase price for the Rollover Member’s Units in cash at the closing of the purchase and sale. The Company’s call right could be redeemed at any time after the earlier of a termination event, as defined in the agreement, or forty-eight months after the date of the respective agreement.
In conjunction with the Reorganization Transactions as discussed in Note 3, the Company executed its call rights for the majority of the Rollover Members’ Units, which were converted into permanent equity consisting of 9,615,911 shares of Class B common stock and LLC Units. Rollover Members equity holdings held by Smith and Saunders, two of the Company’s VIEs, were not converted to permanent equity and remain redeemable and a component of redeemable noncontrolling interest subsequent to the conversion. All put rights no longer exist; however, some of these LLC Units and Class B common stock are not eligible to be converted into A shares until certain time has passed since the initial acquisition.
Voting Common Units held by the majority founder (“Majority Founder’s Units”) are presented as a component of members’ deficit on the consolidated balance sheets. The Company may issue, and a Member may own, one or more classes of units. A Member is defined as any person on record as the owner of one or more units.
During 2018, a Risk Advisor contributed capital to BKS in connection with certain business combinations and was issued an additional 6,765 Non-Voting Common Units.
During May 2019, a member of senior management exercised his option to purchase 61,982 Non-Voting Common Units of BRP for $612,000.
In conjunction with the Reorganization Transactions as discussed in Note 3, the majority of Non-Voting Common Units were converted into permanent equity consisting of 232,596 shares of Class B common stock and LLC Units. Non-Voting Common Units held by Laureate, a VIE, were not converted to permanent equity, and therefore, remain a component of redeemable noncontrolling interest subsequent to the reorganization.
The following table shows a rollforward of our common stock outstanding since the Initial Public Offering:
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, Inc. 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).
Under the Amended LLC Agreement, BRP’s LLC Members have the right, from and after the completion of the Initial Public Offering (subject to the terms of the Amended LLC Agreement), to require BRP Group to redeem all or a portion of their LLC Units for, at BRP Group’s election, newly-issued shares of Class A common stock on a one-for-one basis or a cash payment equal to the volume weighted average market price of one share of BRP Group’s Class A common stock for each LLC Unit redeemed. Additionally, in the event of a redemption request by a BRP LLC Member, BRP Group may, at its option, effect a direct exchange of cash or Class A common stock for LLC Units in lieu of such a redemption. Shares of Class B common stock will be canceled on a one-for-one basis if BRP Group, at the election of a BRP LLC Member, redeems or exchanges LLC Units of such BRP LLC Member pursuant to the terms of the Amended LLC Agreement. Except for transfers to BRP Group pursuant to the Amended LLC Agreement or to certain permitted transferees, BRP’s LLC Members are not permitted to sell, transfer or otherwise dispose of any LLC Units or shares of Class B common stock.
The Villages Credit Agreement required that the Company issue Voting Common Units to Villages concurrently with each additional advance made on the non-revolving line of credit. The Company issued 261,604 units at a share price of $11.50 in connection with these advances during the year ended December 31, 2018 based on the most recent Company valuation. The issuance of these Voting Common Units is reflected in redeemable members’ capital in the accompanying consolidated statements of members’ equity (deficit) and mezzanine equity at December 31, 2018. Total expense incurred related to the issuance of these Voting Common Units was $3.0 million for the year ended December 31, 2018. This expense is included in interest expense in the consolidated statements of comprehensive income (loss) as the issuance most closely represented fees paid to Villages as a replacement for a debt discount.
On October 28, 2019, BRP used a portion of the proceeds it received from the sale of LLC Units to BRP Group in connection with the Initial Public Offering to repay in full the outstanding indebtedness and accrued interest under the Villages Credit Agreement in the amount of $89.0 million and concurrently terminated the Villages Credit Agreement. The Company recorded a loss on debt extinguishment of $6.2 million in connection therewith during the year ended December 31, 2019.
The Company serves as a broker for Villages. Commission revenue recorded as a result of these transactions was $1.3 million and $1.4 million for the years ended December 31, 2019 and 2018, respectively.
The Company has various agreements to lease office space from wholly-owned subsidiaries of Villages. Rent expense ranges from approximately $2,000 to $12,500 per month, per lease. Lease agreements expire on various dates through 2023. Total rent expense incurred with respect to Villages and its wholly-owned subsidiaries was $499,000 and $493,000 for the years ended December 31, 2019 and 2018, respectively.
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 $238,000 and $255,000 for the years ended December 31, 2019 and 2018, respectively.
The following table summarizes the activity for awards granted by the Company under the MIU Plan:
For certain MIUs granted in May and September 2019, the individuals are not entitled to dividends and therefore, an estimated dividend yield rate of 1.2% and 1.4%, respectively, was applied as management’s best estimate of future dividends based on projections and industry data.
On October 24, 2019, the Company adopted the BRP Group, Inc. Omnibus Incentive Plan (the “Omnibus Plan”) to motivate and reward employees (“Colleagues”) and other individuals to perform at the highest level and contribute significantly to the Company’s success, thereby furthering the best interests of BRP Group’s shareholders. The Omnibus Plan permits the grant of stock options (both nonqualified and incentive stock options), stock appreciation rights (the “SARs”), restricted stock awards, restricted stock unit awards, or RSUs, performance awards, other cash-based awards and other stock-based awards to the Company’s officers, employees, non-employee directors and consultants and advisors. Such awards may be for partial-year, annual or multi-year periods.
The Omnibus Plan provides for the Company to make awards of 696,000 shares of Class A common stock at December 31, 2019. 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 1,252,414 shares at January 1, 2020.
At December 31, 2019, there were 192,316 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.
In connection with the Initial Public Offering, BRP Group granted an aggregate of 273,880 shares of restricted stock under the Omnibus Plan to its Colleagues, subject to four-year cliff vesting. These grants are one-time grants solely related to the Initial Public Offering. In addition and as discussed further in Note 3, the Company issued 204,807 and 22,243 shares of restricted stock in connection with settling its obligations under the Advisor Incentive Plan and the Participation Plan, respectively. The Advisor Incentive Plan awards and the Participation Plan awards are subject to the vesting requirements of the original awards. The Company issued new shares of Class A common stock upon the grant of these restricted stock awards. Although these restricted stock awards are not fully vested, the Class A common shares are considered outstanding for purposes of these financial statements.
On December 5, 2019, the Company granted an aggregate of 2,754 shares of restricted stock under the Omnibus Plan to its non-employee directors, which vested immediately upon issuance.
The Company sponsors a 401(k) retirement plan for Colleagues who meet specific age and service requirements. This plan allows for participants to make salary deferral contributions. Employer matching and profit-sharing contributions to this plan are discretionary. Company contributions were $700,000 and $458,000 for the years ended December 31, 2019 and 2018, respectively.
BRP intends to make an election under Section 754 of the Internal Revenue Code of 1986, as amended, and the regulations thereunder (the “Code”) effective for each taxable year in which a redemption or exchange of LLC Units and corresponding Class B common stock for shares of Class A common stock occurs. There were exchanges that occurred during 2019 that are expected to result in tax basis adjustments to the assets of BRP that will be allocated to the Company and thus produce favorable tax attributes. The anticipated tax basis adjustments are expected to reduce the amount of tax that BRP Group would otherwise be required to pay in the future. The Company has determined that it is more likely than not that these benefits will not be realized.
to the extent it is estimated that the Company 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, the Company will reduce the deferred tax asset with a valuation allowance; and
During the period presented, potentially dilutive securities include restricted stock awards and shares of Class B common stock that are convertible on a one-for-one basis into shares of our Class A common stock. The 330,244 shares of unvested restricted Class A common stock were excluded from the diluted calculation, as their inclusion would have been anti-dilutive as the Company was in a net loss position. In addition, the 43,257,738 shares of Class B common stock have been excluded in computing diluted net earnings per share because including them on an “if-converted” basis would have an anti-dilutive effect. The shares of Class B common stock do not share in the earnings or losses attributable to BRP Group, and therefore, are not participating securities. Accordingly, a separate presentation of basic and diluted earnings per share of Class B common stock under the two-class method has not been included.
Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.
Inputs to the valuation methodology are quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Methodologies used for assets and liabilities measured at fair value on a recurring basis at December 31, 2019 and 2018 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, 2019 represents a contingent right of return from Fiduciary Partners to reimburse the Company for a portion of the purchase price as part of the Fiduciary Partners transaction. The Company has assessed the maximum estimated refund relating to the contingently returnable consideration to be $1.3 million at December 31, 2019.
The fair value of the contingent earnout liabilities is based on the present value of the expected future payments to be made to the companies we have acquired (“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. Revenue and EBITDA growth rates generally ranged from 10% to 20%. 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 7.25% to 18.25%. 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 fair value of the contingent earnout liability 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 $10.6 million for the year ended December 31, 2019. The Company has assessed the maximum estimated exposure to the contingent earnout liabilities to be $103.9 million at December 31, 2019.
The Company conducts its operations in a leased facility and leases equipment under noncancelable operating leases.
Total rent expense under noncancelable operating leases was $4.2 million and $3.0 million for the years ended December 31, 2019 and 2018, respectively.
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. There are no intersegment net sales that occurred during the reporting periods.
Effective January 1, 2020, the Company entered into an asset purchase agreement to purchase certain assets and intellectual and intangible rights and assume certain liabilities of Lanier Upshaw, Inc. for consideration consisting of $24.5 million of cash, 389,727 shares of Class A common stock and a maximum potential contingent earnout consideration of $11.0 million. The Partnership was made to expand our Middle Market presence in the healthcare, higher education, construction, property and non-profit businesses throughout Florida and other states. The Company has determined that this transaction will be treated as a business combination in accordance with Topic 805, although its initial evaluation and determination of consideration paid and certain assets and liabilities acquired has not yet been completed.