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 80 operating locations located in 18 states throughout the U.S. These offices are generally located in shopping centers and small office parks, generally with lease terms expiring within two to five years. These facilities are suitable for our needs and we believe that they are well maintained.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with Item 6. Selected Financial Data and our consolidated financial statements and the related notes and other financial information included elsewhere in this Annual Report on Form 10-K. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including those set forth in Item 1A. Risk Factors and included elsewhere in this Annual Report on Form 10-K.
We are a rapidly growing independent insurance distribution firm delivering solutions that give our Clients the peace of mind to pursue their purpose, passion and dreams.
Adjusted EBITDA for the year ended December 31, 2020 was $44.0 million, an increase of $15.4 million as compared to the same period of 2019. Adjusted EBITDA Margin was 18% for 2020 and 21% for 2019.
In March 2020, the World Health Organization declared a novel strain of the coronavirus, COVID-19, a pandemic. This COVID-19 outbreak has become increasingly widespread and severely restricted the level of economic activity around the world. In response to this outbreak, the governments of many countries, states, cities and other geographic regions, including in the United States, have taken preventive or protective actions, such as imposing restrictions on travel and business operations and advising or requiring individuals to limit or forgo their time outside of their homes. In the United States, temporary closures of businesses have been ordered and numerous other businesses have temporarily closed voluntarily. These government actions could severely damage our Clients' businesses.
Our Clients and Colleagues are our first priority and we have taken steps to ensure their safety by implementing a remote work environment for the majority of our Colleagues without disruption to Client service. We have funded the BRP True North Colleague Fund to assist with relief for COVID-19 and other qualifying disasters for our Colleagues experiencing extraordinary hardship and are currently matching Colleague donations dollar-for dollar.
We intend to continue to execute on our strategic plans and operational initiatives during the pandemic. However, given the uncertainty regarding the spread and severity of COVID-19, the duration and scope of the government shutdowns, the nature of societal responses and the adverse effects on the national and global economy, the related financial impact on our business cannot be accurately predicted at this time. The national and global economies have rapidly contracted as a result of COVID-19. The decreased level of economic activity is leading to, and is likely to continue to lead to, a decline in exposure units and rising unemployment. In addition, the uncertainties associated with the protective and preventive measures being put in place or recommended by both governmental entities and other businesses, among other uncertainties, may result in delays or modifications to our plans and initiatives. See Item 1A. “Risk Factors - Risks Relating to our Business - The ongoing novel coronavirus (COVID-19) pandemic could result in declines in business and increases in claims that could adversely affect our business, financial condition and results of operations” in this Annual Report on Form 10-K.
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, 2020 and 2019 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 insurance brokerage market is seasonal and our results of operations are somewhat affected by seasonal trends. Our Adjusted EBITDA and Adjusted EBITDA Margins are typically highest in the first quarter and lowest in the fourth quarter. This variation is primarily due to fluctuations in our revenues, while overhead remains consistent throughout the year. Our revenues are generally highest in the first quarter due to the impact of contingent payments received in the first quarter from Insurance Company Partners that we cannot readily estimate before receipt without the risk of significant reversal and a higher degree of first quarter policy commencements and renewals in Medicare and certain Middle Market lines of business such as employee benefits and commercial. In addition, a higher proportion of our first quarter revenue is derived from our highest margin businesses. As discussed further below, the ongoing COVID-19 pandemic may skew these general trends due to reduced amounts of new business and reductions in business from existing Clients related to the pandemic.
Direct bill revenue represents commission revenue earned by providing insurance placement services to Clients, primarily for private risk management, commercial risk management, employee benefits and Medicare insurance types. Direct bill revenue increased by $34.0 million for the year ended December 31, 2020 as compared to the same period of 2019. The Partnership Contribution accounted for $32.7 million of the increase to direct bill revenue and organic growth for direct bill revenue was $1.3 million.
Policy fee and installment fee revenue represents revenue earned for acting in the capacity of an MGA and providing payment processing and services and other administrative functions on behalf of Insurance Company Partners. Policy fee and installment fee revenue increased by $7.1 million for the year ended December 31, 2020 as compared to the same period of 2019 from our “MGA of the Future” business, which was acquired April 1, 2019 and resides in our Specialty Operating Group.
Our compensation arrangements with our employees contain significant bonus or commission components driven by the results of our operations. Therefore, as we grow commissions and fees, we expect compensation costs to rise.
Commissions, employee compensation and benefits expenses increased by $77.2 million for the year ended December 31, 2020 as compared to the same period of 2019. The Partnership Contribution accounted for $52.9 million of the increase to commissions, employee compensation and benefits. In addition, we had higher share-based compensation expense of $3.2 million and higher base compensation of $6.2 million as a result of hiring to support our growth and fill requisite roles as a public company.
Other operating expenses increased by $23.5 million for the year ended December 31, 2020 as compared to the same period of 2019, which was primarily attributable to increases in professional fees of $10.1 million related to Partnership transactions and public company costs, rent expense of $3.4 million related to expansion of our Tampa offices and through Partnerships, dues and subscriptions of $2.9 million related to investing in technology to support our growth, insurance expense of $1.9 million related to public company costs and our growth, and bank charges of $1.1 million resulting from growth of our renter's insurance business.
Change in fair value of contingent consideration was $20.5 million for the year ended December 31, 2020 as compared to $10.8 million for the same period of 2019. 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.
FINANCIAL CONDITION - COMPARISON OF CONSOLIDATED FINANCIAL CONDITION AT DECEMBER 31, 2020 TO DECEMBER 31, 2019.
Premiums payable to insurance companies increased $85.0 million as a result of our 2020 Partnerships and revenue growth.
Revolving lines of credit decreased $40.4 million due to the paydown of our revolving credit agreement in connection with our Term Loan B financing.
Long-term debt increased $385.4 million related to our Term Loan B financing.
Adjusted EBITDA eliminates the effects of financing, depreciation, amortization, fair value adjustments, and other noncash items and non-recurring costs. We define Adjusted EBITDA as net income (loss) before interest, taxes, depreciation, 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, including those related to raising capital. We believe that Adjusted EBITDA is an appropriate measure of operating performance because it eliminates the impact of expenses that do not relate to business performance, and that the presentation of this measure enhances an investor’s understanding of our financial performance.
Adjusted EBITDA Margin is Adjusted EBITDA divided by commissions and fees. Adjusted EBITDA Margin is a key metric used by management and our board of directors to assess our financial performance. We believe that Adjusted EBITDA Margin is an appropriate measure of operating performance because it eliminates the impact of expenses that do not relate to business performance, and that the presentation of this measure enhances an investor’s understanding of our financial performance. We believe that Adjusted EBITDA Margin is helpful in measuring profitability of operations on a consolidated level.
•do not reflect the interest expense or the cash requirements necessary to service interest or principal payments on our debt;
•do not reflect share-based compensation expense and other non-cash charges; and
•exclude certain tax payments that may represent a reduction in cash available to us.
(1) Represents corporate income taxes at assumed effective tax rate of 9.9% applied to adjusted pre-tax income.
(2) Assumes the full exchange of Class B shares for Class A common stock pursuant to the Amended LLC Agreement.
In the Medicare Operating Group, BRP generates commissions and fees in the form of direct bill insurance placement and marketing income. Marketing income is earned through co-branded marketing campaigns with the Company’s Insurance Company Partners.
Other operating expenses in Corporate and Other increased due to higher costs for professional fees of $6.3 million, insurance expense of $1.6 million, dues and subscriptions of $1.1 million and rent expense of $1.0 million, primarily as a result of being a public company and an increased level of partnership activity during 2020.
Amortization expense increased across all Operating Groups for the year ended December 31, 2020 as compared to the same period of 2018. These increases were driven by amortization related to $459.1 million, $7.4 million and $13.5 million of intangible assets capitalized in connection with Middle Market, Specialty and Medicare Partnerships, respectively, during 2020.
On June 29, 2020, we completed a public offering of 13,225,000 shares of our 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. We purchased 2,475,000 LLC Units from certain of our founders in connection with the offering.
The outstanding principal balance of the Term Loan B is required to be repaid in equal quarterly installments equal to 0.25% of the original principal amount of the Term Loan B beginning with the fiscal quarter ending December 31, 2020, the balance of which is due at maturity. The Revolving Facility is not subject to amortization.
The Revolving Facility and the Term Loan B are collateralized by a first priority lien on substantially all the assets of BRP, including a pledge of all equity securities of certain of its subsidiaries. The New JPM 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, make certain investments or restrict BRP’s ability to make dividends or other distributions to BRP Group. In addition, the New JPM Credit Agreement contains financial covenants requiring us to maintain our Total First Lien Net Leverage Ratio (as defined in the New JPM Credit Agreement) at or below 5.00 to 1.00 and Debt Service Coverage Ratio (as defined in the New JPM Credit Agreement) at or above 2.25 to 1.00.
The following table summarizes our cash flows from operating, investing and financing activities for the periods indicated:
The primary sources and uses of cash for operating activities are net income adjusted for non-cash items and changes in assets and liabilities, or operating working capital. Net cash provided by operating activities increased $24.8 million for the year ended December 31, 2020 as compared to the same period of 2019 driven by higher accounts payable, accrued expenses and other current liabilities balances and a net increase in net loss adjusted for noncash items.
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 earnout consideration, and other equity transactions. Net cash provided by financing activities increased $559.9 million for the year ended December 31, 2020 as compared to the same period of 2019. Proceeds from our public offerings netted us an additional $205.4 million during 2020. We used an additional $46.9 million of these proceeds to purchase LLC Units from our shareholders. Net cash received in relation to our credit agreements increased $377.3 million primarily as a result of proceeds from the Term Loan B of $286.3 million. In addition, we had cash payments of $12.5 million related to the repurchase of membership interests from members in 2019.
(1) The Company leases facilities and equipment under non-cancelable operating leases. Rent expense was $7.6 million and $4.2 million for the years ended December 31, 2020 and 2019, respectively.
We do not invest in any off-balance sheet vehicles that provide liquidity, capital resources, market or credit risk support, or engage in any activities that expose us to any liability that is not reflected in our consolidated financial statements except for those described under the Contractual Obligations section above.
Assuming BRP makes distributions to its members in any given year, the determination to pay dividends, if any, to our Class A common stockholders out of the portion, if any, of such distributions remaining after our payment of taxes, Tax Receivable Agreement payments and expenses (any such portion, an “excess distribution”) will be made at the sole discretion of our board of directors. Our board of directors may change our dividend policy at any time. See Item 5. “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - Dividend Policy.”
To determine the realizability of the Company’s deferred tax assets, the Company analyzed if it was in a cumulative pre-tax income or loss position over a three year period (2018, 2019, and 2020). Based on the analysis, the Company is in a pre-tax book loss position, and therefore has determined that its deferred tax assets are not more likely than not to be realized. As the Company emerges from its cumulative loss position, it will reassess the realizability of its deferred tax assets.
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 $2.3 million for the year ended December 31, 2020.
We continue to acquire significant intangible assets through multiple business combinations. The determination of estimated useful lives of intangible assets, the allocation of purchase price to intangible assets and the determination of the fair value of contingent earnout liabilities require significant judgment and affects the amount of future amortization, potential impairment charges and net fair value gain or loss.
Intangible assets generally consist of purchased customer accounts, distributor relationships, carrier relationships, software and trade names. Purchased customer accounts include the records and files obtained from acquired businesses that contain information about insurance policies and the related insured parties that are essential to policy renewals. We assess the fair value of purchased customer accounts by comparison of a reasonable multiple applied to either the corresponding commissions and fees or EBITDA in addition to considering the estimated future cash flows expected to be received over the estimated future renewal periods of the insurance policies comprising those purchased customer accounts. The valuation of purchased customer accounts involves significant estimates and assumptions concerning matters such as cancellation frequency, expenses and discount rates. Any change in these assumptions could affect the carrying value of purchased customer accounts. 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. Purchased customer accounts, distributor relationships, carrier relationships and trade names are amortized on a basis consistent with the underlying cash flows over the related estimated lives of between one and twenty years. Software is amortized on the straight-line basis over an estimated useful life of two to five years.
The actual increase in tax basis, as well as the amount and timing of any payments under the Tax Receivable Agreement, will vary depending on a number of factors, including, but not limited to, the timing of any future redemptions, exchanges or purchases of the LLC Units held by BRP’s LLC Members, the price of our Class A common stock at the time of the purchase, redemption or exchange, the extent to which redemptions or exchanges are taxable, the amount and timing of the taxable income that we generate in the future, the tax rates then applicable and the portion of our payments under the Tax Receivable Agreement constituting imputed interest.
Please refer to Note 1 to our consolidated financial statements included in Item 8. Financial Statements of this Annual Report on Form 10-K for a discussion of recent accounting pronouncements that may impact us.
We have audited the accompanying consolidated balance sheets of BRP Group, Inc. and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of comprehensive loss, of stockholders' / members’ equity (deficit) and mezzanine equity and of cash flows for the years then ended, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
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 22.
On December 11, 2020, the Company completed a public offering of 10,062,500 shares of its 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.
The consolidated financial statements include the accounts of BRP Group and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
The Company has prepared these consolidated financial statements in accordance with ASC Topic 810, Consolidation (“Topic 810”). Topic 810 requires that if an enterprise is the primary beneficiary of a variable interest entity, the assets, liabilities, and results of operations of the variable interest entity should be included in the consolidated financial statements of the enterprise. The Company has recognized certain entities as variable interest entities of which the Company is the primary beneficiary and has included the accounts of these entities in the consolidated financial statements. Refer to Note 5 for additional information regarding the Company’s variable interest entities.
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”). This update modifies the disclosure requirements related to fair value measurement by removing certain disclosure requirements related to the fair value hierarchy. This update also modifies existing disclosure requirements related to measurement uncertainty and adds 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 Company adopted the guidance in ASU 2018-13 effective January 1, 2020, which impacted the presentation of the fair value measurements disclosure in Note 20 but did not otherwise impact the Company’s consolidated financial statements.
Commission revenue is recorded net of allowances for estimated policy cancellations, which are determined based on an evaluation of historical and current cancellation data.
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 also holds restricted cash specifically in its role as an MGA.
In its capacity as an insurance agent or broker, the Company typically collects premiums from Clients, and after deducting its authorized commissions, remits the net premiums to the appropriate Insurance Company Partners. Accordingly, premiums receivable reflect these amounts due from Clients.
Premiums, commissions and fees receivable are reported net of allowances for estimated policy cancellations and doubtful accounts. The allowance for estimated policy cancellations was $3.2 million and $2.2 million at December 31, 2020 and 2019, respectively, which represents a reserve for future reversals in commission and fee revenues related to the potential cancellation of client insurance policies that were in force as of each year end. The allowance for estimated policy cancellations is established through a charge to revenues. The allowance for estimated policy cancellations is offset in part by a producer commissions chargeback of $1.7 million and $1.2 million at December 31, 2020 and 2019. The producer commissions chargeback is established through a charge to producer commissions expense and is netted against producer commissions payable on the balance sheets.
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 loss. Routine maintenance and repairs are charged to expense as incurred, while costs of improvements and renewals are capitalized.
Deferred financing costs consist of origination fees and debt issuance costs related to obtaining credit facilities. The Company has recorded these costs as an asset and liability on the consolidated balance sheets in accordance with ASC Topic 835-30, Interest. Deferred financing costs associated with revolving credit facilities are included in other assets on the consolidated balance sheets while those related to term loans are recorded as an offset to long-term debt. Deferred financing costs included in other assets were approximately $4.8 million and $1.8 million, net of accumulated amortization of approximately $1.1 million and $470,000 at December 31, 2020 and 2019, respectively. Deferred financing costs and original issue discount included in long-term debt totaled approximately $14.0 million, net of accumulated amortization of approximately $418,000 at December 31, 2020. Such costs are amortized using the effective interest method over the terms of the respective debt. Amortization of deferred financing costs, which is included in interest expense, net in the accompanying consolidated statements of comprehensive loss, was approximately $1.0 million and $1.3 million for the years ended December 31, 2020 and 2019, respectively.
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 20.
•In 2019, BRP Insurance Intermediary Holdings, LLC acquired 70% of the membership interests of Millennial Specialty Insurance, LLC (“MSI”) from Millennial Specialty Holdco, LLC (“MSH”). MSH had a 30% ownership interest in MSI 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. Rollover Members equity holdings held by BKS Smith, LLC and BKS MS, LLC, 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 shares of Class A common stock until certain time has passed since the initial acquisition.
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 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.
Prior to the Company's Initial Public Offering, BRP had advisor incentive agreements with several of its producers (“Risk Advisors”) to incentivize them to stay with the Company and grow their book of business. The incentive rights had a deposit buy-in requirement payable in the form of payroll withholding or other cash payments for which the Company recorded an advisor incentive liability. The incentive rights could be converted to LLC Units after the achievement of certain milestones, subject to approval at the discretion of management. Risk Advisors were deemed probable of meeting the performance condition after having achieved the first milestone related to their advisor incentive agreements.
The Company continues to account for the remaining advisor incentive award as liability-classified share-based payment awards under ASC 718, Compensation - Stock Compensation (“Topic 718”). The Company estimates the fair value of the expected buyout amount each reporting period and records compensation expense and an increase to the advisor incentive liability and will continue to do so until a termination event occurs. Compensation expense for advisor incentive liabilities is included in commissions, employee compensation and benefits in the consolidated statements of comprehensive loss.
During 2019, the Company had a Participation Unit Ownership Plan (the “Participation Plan”), which offered certain Colleagues additional incentives to promote success. The Participation Plan permitted the grant of up to 100,000 participation units, to be settled in cash only. Participation units vested on the fifth anniversary of the date of the grant unless a qualifying event occurs, as outlined in the Participation Plan agreement. The Company’s obligation under the Participation Plan was settled in connection with the Reorganization Transactions as discussed in Note 3.
In connection with the Initial Public Offering, BRP Group and BRP entered into the Reorganization Transactions as follows:
•as sole managing member of BRP, BRP Group consolidates the financial results of BRP and a portion of the net income is allocated to the noncontrolling interest to reflect the entitlement of the owners of BRP’s outstanding equity interests (“BRP’s LLC Members”) to a portion of BRP’s net income;
•BRP Group’s certificate of incorporation authorized the issuance of two classes of common stock including Class A common stock and Class B common stock, each of which entitles its holder to one vote per share on all matters submitted to a vote of the stockholders;
•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 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
•The Company exchanged $2.2 million of its obligation related to advisor incentive liabilities for 204,807 restricted shares of Class A common stock issued under the Company’s Omnibus Incentive Plan. The Company established stockholder notes receivable of $452,000 for the remaining deposit buy-in amounts due from the advisors and relieved advisor incentive liabilities for $2.2 million with an offset to additional paid-in capital of $2.6 million.
•The Company executed its call rights for the Voting Common Units of two minority founders, a component of redeemable members’ capital prior to the reorganization, which were converted into permanent equity consisting of 5,701,107 shares of Class B common stock and LLC Units.
•The Company executed its call rights for the Villages Voting Common Units, a component of redeemable members’ capital prior to the reorganization, which were converted into permanent equity consisting of 3,077,559 shares of Class B common stock and LLC Units.
•The Company executed its call rights for the Rollover Members’ Units, which comprised redeemable noncontrolling interest prior to the reorganization, which were converted into 9,615,911 shares of Class B common stock and LLC Units.
•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 recorded purchase price for certain business combinations also includes an estimation of the fair value of equity interests, which are calculated based on a valuation of the entity with the relevant percentage applied.
The Company completed the following 15 business combinations during the year ended December 31, 2020:
•AgencyRM, a Medicare Partner effective February 1, 2020, was made to expand the Company’s Medicare business presence in Texas.
•VibrantUSA, a Medicare Partner effective February 1, 2020, was made to expand the Company’s Medicare business presence in Washington.
•Southern Protective Group, a Middle Market Partner effective May 1, 2020, was made to expand the Company's risk consulting capabilities in the medical malpractice market.
•Pendulum, a Specialty Partner effective May 1, 2020, was made to expand the Company's specialty risk consulting capabilities in the long-term care and senior living markets.
•Rosenthal, a Middle Market Partner effective June 1, 2020, was made to expand the Company’s capabilities within the habitational real estate industry.
The operating results of these business combinations have been included in the consolidated statements of comprehensive loss since their respective acquisition dates. The Company recognized total revenues and net income from its business combinations of $64.6 million and $8.0 million, respectively, for the year ended December 31, 2020.
(1) The Company made adjustments within the measurement period to the purchase price allocation for Rosenthal during the year ended December 31, 2020, which have been reflected in the table. The adjustments to Rosenthal resulted in an increase to premiums, commissions and fees receivable and a reduction to goodwill of $874,000.
(2) IRP, which is included in the "All Others" column, has an uncapped earnout. The maximum potential earnout consideration represented has been calculated assuming 50% compound annual revenue growth for three years.
The following unaudited pro forma consolidated results of operations are provided for illustrative purposes only and have been presented as if the acquisitions of Lanier, Highland, AgencyRM, VibrantUSA, IRP, Southern Protective Group, Pendulum, Rosenthal, TBA/RBA, Fletcher, MIA, Insgroup, AHT, Burnham and TBM occurred on January 1, 2019. This unaudited pro forma information should not be relied upon as being indicative of the historical results that would have been obtained if the acquisitions had occurred on that date, nor of the results that may be obtained in the future.
The Company determined that it is the primary beneficiary of its VIEs, which, at December 31, 2020 and 2019, include Laureate Insurance Partners, LLC (“Laureate”), BKS Smith, LLC (“Smith”), BKS MS, LLC (“Saunders”) and BKS Partners Galati Marine Solutions, LLC (“Galati”). 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 loss were $841,000 and $718,000, respectively, for the year ended December 31, 2020 and $579,000 and $727,000, respectively, for the year ended December 31, 2019.
The assets of the consolidated VIEs can only be used to settle the obligations of the consolidated VIEs and the creditors of the liabilities of the consolidated VIEs do not have recourse to the Company. The following tables provide a summary of the carrying amounts of the assets and liabilities of the Company’s consolidated VIEs at each of the balance sheet dates:
(1) Direct bill revenue represents commission revenue earned by facilitating the arrangement between individuals or businesses and Insurance Company Partners to provide insurance placement services to Clients, primarily for private risk management, commercial risk management, employee benefits and Medicare insurance types.
(2) Agency bill revenue primarily represents commission revenue earned by facilitating the arrangement between individuals or businesses and Insurance Company Partners to provide insurance placement services to Clients. The Company acts as an agent on behalf of the Client for the term of the insurance policy.
(5) Service fee revenue is earned by receiving negotiated fees in lieu of a commission and consulting revenue is earned by providing specialty insurance consulting.
(6) 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.
•The Company considers the policyholders as representative of its customers in the majority of contractual relationships, with the exception of contracts in its Medicare operating segment, where the Insurance Company Partner is considered its customer.
•The Company recognizes separately contracted commissions revenue at the effective date of insurance placement and considers any ongoing interaction with the customer to be immaterial in the context of the contract.
•Costs to obtain a contract are deferred and recognized 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.
During the year ended December 31, 2020, the Company recognized revenue of $5.4 million related to the contract liabilities balance at December 31, 2019.
The Company pays an incremental amount of compensation in the form of producer commissions on new business. In accordance with ASC Topic 340, Other Assets and Deferred Costs, these incremental costs are deferred and amortized over five years, which represents management's best estimate of the period benefited for the new business. Deferred commission expense represents employee commissions that are capitalized and not yet expensed. The table below provides a rollforward of deferred commission expense, which is included as a component of other assets on the balance sheets:
Depreciation expense recorded for property and equipment was $1.1 million and $542,000 for the years ended December 31, 2020 and 2019, respectively.
Amortization expense recorded for intangible assets was $19.0 million and $10.0 million for the years ended December 31, 2020 and 2019, respectively.
On September 21, 2019, the Company executed the first amendment to the Third Amendment (“Amendment No. 1”), which became effective concurrent with the Initial Public Offering and resulted in a borrowing capacity of $10.0 million for the Working Capital Line and $115.0 million for the Acquisitions Line. Amendment No. 1 also extended the maturity date of the Old JPMorgan Credit Agreement to October 28, 2024.
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 Old 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 Old 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 Old JPMorgan Credit Agreement to September 23, 2024.
On March 12, 2020, the Company entered into the Incremental Facility Amendment No. 1 to the Old JPMorgan Credit Agreement to increase the aggregate borrowing capacity to $300.0 million. The Company capitalized debt issuance costs related to the amendment of $230,000 during the year ended December 31, 2020.
On June 18, 2020, the Company executed the Incremental Facility Amendment No. 3 to the Old JPMorgan Credit Agreement, which (i) increased the aggregate borrowing capacity to $400.0 million and (ii) added a new lender to the syndicate. All other terms of the Old JPMorgan Credit Agreement remain unchanged. The Company capitalized debt issuance costs related to the amendment of $1.7 million during the year ended December 31, 2020.
Interest rates under the Revolving Facility remain the same as the interest rates under the Old JPMorgan Credit Agreement, with 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 Company did not have any outstanding borrowings on the Revolving Facility at December 31, 2020, but was subject to a commitment rate of 0.25%. 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%.
The New JPM Credit Agreement requires the Company to meet certain financial covenants and comply with customary affirmative and negative covenants as listed in the underlying agreement. The Company was in compliance with these covenants at December 31, 2020.
BRP Group’s certificate of incorporation authorized capital stock consisting of 300,000,000 shares of Class A common stock with a par value $0.01 per share, 100,000,000 shares of Class B common stock with a par value of $0.0001 per share, and 50,000,000 shares of preferred stock with a par value of $0.01 per share.
Several of the Reorganization Transactions discussed previously in these notes to consolidated financial statements are related party transactions entered into between the Company and its equity holders and employees. Refer to Note 3 for additional information regarding the Reorganization Transactions. In addition, the Company has an advisor incentive liability with one of its Risk Advisors. Refer to Note 2 for additional information regarding this related party transaction.
During April 2016, the Company entered into the Villages Credit Agreement, which provided for a $100.0 million non-revolving line of credit (“Related Party Debt”) with Holding Company of the Villages, Inc. (“Villages”). The Related Party Debt required quarterly interest payments at a fixed rate per annum of 6.5% beginning July 1, 2016 and continuing on the first day of each calendar quarter thereafter until maturity on April 13, 2023. The agreement required that the Company issue Voting Common Units to Villages upon closing and concurrently with each additional advance made after the closing date. Advances on the Related Party Debt were to be made solely to finance permitted acquisitions or for general working capital purposes.
During the year ended December 31, 2019, the Company recorded interest expense to Villages of $4.9 million related to quarterly interest payments.
Management Incentive Units (“MIUs”) are non-voting units issued to certain senior management. Issuances can vest immediately or be subject to vesting terms according to time-based benchmarks or performance-based benchmarks that vary between issuance. MIUs are forfeited if certain vesting provisions are not met. Certain MIUs participate in distributions from the date of issuance while other MIUs were issued at a profits interest and therefore only participate in distributions in the event of liquidation. For the MIUs that management has deemed not probable of vesting, no share-based compensation expense is recorded.
The Company recorded compensation expense related to MIUs of $1.2 million and $1.9 million for the years ended December 31, 2020 and 2019, respectively, which is included in commissions, employee compensation and benefits in the consolidated statements of comprehensive loss. The compensation expense recorded for the year ended December 31, 2019 includes $1.1 million associated with certain awards for which the vesting was accelerated in connection with the successful Initial Public Offering,
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 share-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 is administered by the Compensation Committee, the majority of the members of which are independent members of the board of directors. Under the Omnibus Plan, the aggregate value of all compensation paid to a non-employee director under the plan in any calendar year may not exceed $250,000. Each contractual term of an option granted is fixed by the Compensation Committee, and except for limited circumstances, the term cannot exceed ten years from the grant date. Restricted stock awards, RSUs and performance-share awards have a vesting period as defined by the applicable award agreement.
The total fair value of shares that vested and settled during the years ended December 31, 2020 and 2019 was $2.1 million and $2.4 million, respectively.
On November 27, 2020, the Company adopted the BRP Group, Inc. Partnership Inducement Award Plan (the “Inducement Plan”) to motivate and reward new Colleagues who join the Company, primarily through partnerships, to perform at the highest level and contribute significantly to the Company's success, thereby furthering the best interests of the Company and its shareholders. The Inducement Plan permits the grant of stock options (both nonqualified and incentive stock options), SARs, restricted stock awards, RSUs, performance awards, other cash-based awards and other share-based awards. Such awards have a minimum vesting period of one year.
The Inducement Plan is administered by the Compensation Committee, the majority of the members of which are independent members of the board of directors. Each contractual term of an option granted is fixed by the Compensation Committee, and except for limited circumstances, the term cannot exceed ten years from the grant date. Restricted stock awards, RSUs and performance-share awards have a vesting period as defined by the applicable award agreement.
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 $1.3 million and $700,000 for the years ended December 31, 2020 and 2019, respectively.
As the Initial Public Offering occurred during the year ended December 31, 2019, and BRP Group had no business transactions or activities prior to the Initial Public Offering, no amounts related to the provision for income taxes were incurred for the period from January 1, 2019 to October 27, 2019.
Deferred tax balances reflect the impact of temporary differences between the carrying amount of assets and liabilities and their tax basis and are stated at the tax rates in effect when the temporary differences are expected to be recovered or settled. The Company assessed the future realization of the tax benefit of its existing deferred tax assets and concluded that it is more likely than not that all of the deferred tax assets will not be realized in the future. As a result, the Company recorded a valuation allowance of $55.1 million and $35.5 million against its deferred tax assets at December 31, 2020 and 2019, respectively.
As of December 31, 2020 and 2019, the Company has not recognized any uncertain tax positions, penalties, or interest as management has concluded that no such positions exist. The Company is subject to examination for tax years beginning with the year ended December 31, 2019. The Company is not currently subject to income tax audits in any U.S. or state jurisdictions for any tax year.
•record an increase in deferred tax assets for the estimated income tax effects of the increases in tax basis based on enacted federal and state tax rates at the date of the redemption or exchange;
•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
•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.
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 826,027 and 330,244 shares of unvested restricted Class A common stock were excluded from the diluted calculation for the year ended December 31, 2020 and the period from October 28, 2019 through December 31, 2019, respectively, as their inclusion would have been anti-dilutive because the Company was in a net loss position. In addition, the 49,828,383 and 43,257,738 shares of Class B common stock have been excluded in computing diluted net earnings per share for the year ended December 31, 2020 and the period from October 28, 2019 through December 31, 2019, respectively, 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.
The following is a calculation of the basic and diluted weighted-average number of shares of Class A common stock outstanding and net loss per share for the year ended December 31, 2020 and for the period from October 28, 2019 through December 31, 2019. The weighted average number of shares of Class A common stock outstanding for the period from October 28, 2019 to December 31, 2019 is based on the actual days in which the shares were outstanding for the period.
Level 1: 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.
Level 2: 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.
The following table summarizes Company’s liabilities measured at fair value on a recurring basis within each level of the fair value hierarchy:
Significantly all of the change in fair value of contingent consideration during the years ended December 31, 2020 and 2019, respectively, related to assets and liabilities that were held at the end of the respective periods.
•Middle Market provides expertly-designed private risk management, commercial risk management and employee benefits solutions for mid-to-large size businesses and high net worth individuals and families.
•Specialty represents a wholesale co-brokerage platform that delivers specialty insurers, professionals, individuals and niche industry businesses expanded access to exclusive specialty markets, capabilities and programs requiring complex underwriting and placement. Specialty also represents a leading technology platform, MGA of the Future, which is a national renter’s insurance product distributed via sub-agent partners and property management software providers, which has expanded distribution capabilities for new products through our wholesale and retail networks.
•MainStreet offers personal insurance, commercial insurance and life and health solutions to individuals and businesses in their communities.
In the Middle Market, MainStreet and Specialty Operating Groups, the Company generates commissions and fees from insurance placement under both agency bill and direct bill arrangements. In addition, BRP generates profit sharing income in each of those segments based on either the underlying book of business or performance, such as loss ratios. In the Middle Market Operating Group only, the Company generates fees from service fee and consulting arrangements. Service fee arrangements are in place with certain customers in lieu of commission arrangements.
Summarized financial information concerning the Company’s Operating Groups is shown in the following tables. The Corporate and Other non-reportable segment includes any expenses not allocated to the Operating Groups and corporate-related items, including related party and third-party interest expense. Intersegment revenue and expenses are eliminated through the Corporate and Other column. Service center expenses and other overhead are allocated to the Company’s Operating Groups based on either revenue or headcount as applicable to each expense.
(1) The Middle Market Operating Group recorded intercompany commissions and fees revenue from activity with the Specialty Operating Group of $507,000 for the year ended December 31, 2020. The MainStreet Operating Group recorded intercompany commissions and fees revenue from activity with the Middle Market Operating Group of $200,000 for the year ended December 31, 2020. The Medicare Operating group recorded intercompany commissions and fees revenue from activity within the Medicare Operating Group of $324,000 for the year ended December 31, 2020. Intercompany commissions and fees and intercompany commissions, employee compensation and benefits expense are eliminated through Corporate and Other.
On March 8, 2021, the Company entered into two additional interest rate cap transactions. The first was for a notional amount of $300.0 million at a 1-month LIBOR interest rate of 1.50% for $817,000, effective March 10, 2021 and with an expiration of March 10, 2024. The second was for a notional amount of $300.0 million at a 1-month LIBOR interest rate of 0.75% for $75,000, effective March 10, 2021 and with an expiration of March 10, 2022.