BRP GROUP, INC. 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. The following discussion contains references to periods prior to the Initial Public Offering, including the period fromJanuary 1, 2019 throughOctober 27, 2019 and calendar year 2018. The financial information ofBRP Group has been combined with that of BRP as of the earliest period presented. EXECUTIVE SUMMARY OF 2019 FINANCIAL RESULTS 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.
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The following is a summary of our 2019 financial results: Revenues for the year endedDecember 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 endedDecember 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. Interest expense, net for the year endedDecember 31, 2019 was$10.6 million , an increase of$4.0 million , or 61%, as compared to the same period of 2018. Interest expense, net increased as a result of higher total debt balances during the second and third quarters of 2019 resulting from draws on our Credit Agreements to fund cash consideration for Partnerships, a higher interest rate on the Villages Credit Agreement that went into effect inMarch 2019 until this facility was closed inOctober 2019 , and higher amortization of deferred financing costs related to refinancing our Credit Agreements on several occasions during 2019. Loss on extinguishment of debt was$6.7 million for the year endedDecember 31, 2019 , of which$6.2 million related to our repayment in full of the outstanding indebtedness under the Villages Credit Agreement in connection with the Initial Public Offering. The remaining loss related to refinancing the JPMorgan Credit Agreement on several occasions during 2019. Net loss for the year endedDecember 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. Adjusted EBITDA for the year endedDecember 31, 2019 was$28.5 million , an increase of$12.5 million as compared to the same period of 2018. Adjusted EBITDA margin was 21% for 2019 and 20% for 2018. Organic Revenue for the year endedDecember 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. PARTNERSHIPS 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. We completed six Partnerships for an aggregate purchase price of$174.1 million during 2019 and twelve Partnerships for an aggregate purchase price of$66.4 million during 2018. The most significant Partnerships that we have completed during 2019 are discussed in greater detail below. Refer to Note 4 to BRP's consolidated financial statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K for additional information on the Partnerships that we have completed during 2019. EffectiveMarch 1, 2019 , we entered into an asset purchase agreement to purchase certain assets and intellectual and intangible rights and assume certain liabilities ofLykes Insurance, Inc. , aMiddle 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 inFlorida . We recognized total revenues and net income from theLykes Partnership of$8.8 million and$1.4 million , respectively, during 2019. As a result of theLykes 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.
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EffectiveApril 1, 2019 , we entered into a securities purchase agreement to purchase the membership interests ofMillennial Specialty Insurance LLC , aSpecialty Partnership , for cash consideration of$45.5 million , fair value of contingent earnout consideration of$25.6 million , fair value of noncontrolling interest of$31.0 million and a trust balance adjustment of$1.1 million . The Partnership was made to obtain access to certain technology and invest in executive talent for building and growing MGA of the Future and to apply its functionality to other insurance placement products, as well as to expand our market share in specialty renter's insurance. MGA of the Future 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. We recognized total revenues and net loss from theMSI Partnership of$31.2 million and$12.3 million , respectively, during 2019. As a result of theMSI Partnership , we recognized goodwill in the amount of$50.2 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 MSI's MGA platform. We incurred approximately$233,000 in acquisition-related costs for MSI during 2019. The maximum potential contingent earnout consideration available to be earned by MSI is$61.5 million . EffectiveAugust 1, 2019 , we entered into an asset purchase agreement with an unrelated third party to purchase certain assets and intellectual and intangible rights and assume certain liabilities ofFoundation Insurance of Florida, LLC for cash consideration of$20.8 million , fair value of noncontrolling interest of$6.0 million and fair value of contingent earnout consideration of$3.3 million . The Partnership was made to expand our MainStreet business presence inFlorida . We recognized total revenues and net income from theFoundation Insurance Partnership of$2.1 million and$1.4 million , respectively, during 2019. As a result of theFoundation Insurance Partnership , we recognized goodwill in the amount of$21.5 million . The factors contributing to the recognition of the amount of goodwill are based on strategic benefits that are expected to be realized from acquiringFoundation Insurance's assembled workforce in addition to other synergies gained from integratingFoundation Insurance's operations into our consolidated structure. We incurred approximately$51,000 in acquisition-related costs forFoundation Insurance during 2019. The maximum potential contingent earnout consideration available to be earned byFoundation Insurance is$21.8 million . As of the date of this Annual Report on Form 10-K, we have completed four Partnerships during 2020 for consideration consisting of$44.3 million of cash, 487,534 shares of Class A common stock, 286,624 units of membership interests of BRP (and a corresponding number of shares of Class B common stock issued pursuant to the terms of the Amended LLC Agreement) and a maximum potential contingent earnout consideration of$16.8 million . NOVEL CORONAVIRUS (COVID-19) An outbreak of a novel strain of the coronavirus, COVID-19, was recently identified inChina and has subsequently been recognized as a pandemic by theWorld Health Organization . This COVID-19 outbreak has 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 inthe United States , have taken preventative or protective actions, such as imposing restrictions on travel and business operations and advising or requiring individuals to limit or forego their time outside of their homes. Inthe United States , temporary closures of businesses have been ordered and numerous other businesses have temporarily closed voluntarily. These actions have expanded significantly in the past several weeks and are expected to continue to expand. 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 ENDEDDECEMBER 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 endedDecember 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.
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The following is a discussion of our consolidated results of operations for each
of the years ended
For the Years Ended December 31,
(in thousands) 2019 2018 Variance
Revenues:
Commissions and fees $ 137,841 $ 79,880 $ 57,961
Operating expenses:
Commissions, employee compensation and benefits 96,955 51,654 45,301
Other operating expenses 24,576 14,379 10,197
Amortization expense 10,007 2,582 7,425
Change in fair value of contingent consideration 10,829 1,228 9,601
Depreciation expense 542 508 34
Total operating expenses 142,909 70,351 72,558
Operating income (loss) (5,068 ) 9,529 (14,597 )
Other income (expense):
Interest expense, net (10,640 ) (6,625 ) (4,015 )
Loss on extinguishment of debt (6,732 ) - (6,732 )
Other income (expense), net 3 (215 ) 218
Total other expense (17,369 ) (6,840 ) (10,529 )
Income (loss) before income taxes (22,437 ) 2,689 (25,126 )
Income tax expense 17 - 17
Net income (loss) (22,454 ) 2,689 (25,143 )
Less: net income (loss) attributable to
noncontrolling interests (13,804 ) 3,313 (17,117 )
Net loss attributable to BRP Group, Inc. $ (8,650 ) $
(624 )
Seasonality
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 revenue, 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 fromInsurance 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. Partnerships can significantly impact Adjusted EBITDA and Adjusted EBITDA Margins in a given year and may increase the amount of seasonality within the business, especially results attributable to Partnerships that have not been fully integrated into our business or owned by us for a full year. Commissions and Fees We earn commissions and fees by facilitating the arrangement betweenInsurance Company Partners and individuals or businesses for the carrier to provide insurance to the insured party. Our commissions and fees are usually a percentage of the premium paid by the insured and generally depends on the type of insurance, the particular Insurance Company Partner and the nature of the services provided. Under certain arrangements with clients, we earn pre-negotiated service fees in lieu of commissions. Additionally, we may also receive fromInsurance Company Partners a profit-sharing commission, or straight override, which represent forms of variable consideration associated with the placement of coverage and are based primarily on underwriting results, but may also contain considerations for volume, growth or retention.
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Commissions and fees increased by$58.0 million for the year endedDecember 31, 2019 as compared to the same period of 2018. This increase was primarily attributable to 2019 Partnerships, which comprised$43.0 million in commissions and fees, in addition to organic growth of$7.8 million and a full year of contribution from Partners acquired in 2018. Major Sources of Commissions and Fees The following table sets forth our commissions and fees by major source by amount for the years endedDecember 31, 2019 and 2018: For the Years Ended December 31, (in thousands) 2019 2018 Variance Direct bill revenue$ 70,835 $ 52,210 $ 18,625 Agency bill revenue 43,619 17,967 25,652 Profit-sharing revenue 9,598 6,007 3,591 Policy fee and installment fee revenue 8,154 - 8,154 Consulting and service fee revenue 2,709 2,660 49 Other income 2,926 1,036 1,890 Total commissions and fees$ 137,841 $ 79,880 $ 57,961 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$18.6 million for the year endedDecember 31, 2019 as compared to the same period of 2018. This increase was primarily attributable to organic growth and a full year of contribution from Partners acquired in 2018. In addition, 2019 Partnerships accounted for$8.0 million of this increase. 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 endedDecember 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. Profit-sharing revenue represents bonus-type revenue that is earned by us as a sales incentive provided by certainInsurance Company Partners . Profit-sharing revenue increased by$3.6 million for the year endedDecember 31, 2019 as compared to the same period of 2018. This increase was partially attributable to$2.2 million related to our MSI Partner. 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 ofInsurance Company Partners . We earned$8.2 million of policy fee and installment fee revenue during 2019 from ourSpecialty Operating Group . Commissions, Employee Compensation and Benefits Commissions, employee compensation and benefits is our largest expense. It consists of (a) base compensation comprising salary, bonuses and benefits paid and payable to Colleagues, commissions paid to Colleagues and outside commissions paid to others; and (b) equity-based compensation associated with the grants of restricted interest awards to senior management,Risk Advisors and executives. We expect to continue to experience a general rise in commissions, employee compensation and benefits expense commensurate with expected growth in our sales and headcount and as a result of increasing employee compensation related to ongoing public company costs. We operate in competitive markets for human capital and need to maintain competitive compensation levels as we expand geographically and create new products and services. 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$45.3 million for the year endedDecember 31, 2019 as compared to the same period of 2018. This increase was primarily attributable to$28.7 million related to 2019 Partnerships, an additional$4.9 million attributable to Partners acquired in 2018,$1.9 million in bonuses and$1.3 million in share-based compensation related to the Initial Public Offering, increased compensation as a result of hiring new executive roles necessary as a public company, including a chief operating officer, chief accounting officer and general counsel, increased compensation for sales and support related to our growth and continued investments in Growth Services to support our growth.
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Other Operating Expenses Other operating expenses include travel, accounting, legal and other professional fees, placement fees, rent, office expenses, depreciation and other costs associated with our operations. We expect our other operating expenses to continue to increase in absolute terms as a result of ongoing public company costs, including those associated with compliance with the Sarbanes-Oxley Act and other regulations governing public companies, increased costs of directors' and officers' liability insurance, and increased professional services expenses, particularly associated with the adoption of new accounting standards and integration of acquired businesses. Our occupancy-related costs and professional services expenses, in particular, generally increase or decrease in relative proportion to the number of our employees and the overall size and scale of our business operations. In addition, we are investing in the expansion of ourTampa offices to accommodate our growth plans, which will result in an increase to rent expense beginning inApril 2020 . Certain corporate expenses are allocated to the Operating Groups. Other operating expenses increased by$10.2 million for the year endedDecember 31, 2019 as compared to the same period of 2018. This increase was primarily attributable to$2.8 million of expenses related to the Initial Public Offering and$3.4 million of additional operating expenses from 2019 Partners such as additional rent and increased software costs, increased professional fees, travel, and other expenses related to those new Partners. Amortization Expense Amortization expense increased by$7.4 million for the year endedDecember 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 Change in fair value of contingent consideration was$10.8 million for the year endedDecember 31, 2019 as compared to$1.2 million for the year endedDecember 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 theMSI Partnership at the end of 2019 related to growth of their business during the period under consolidation. Interest Expense, Net Interest expense, net increased by$4.0 million for the year endedDecember 31, 2019 as compared to the same period of 2018. This increase was attributable to higher total debt balances during the second and third quarters of 2019 resulting from draws on our Credit Agreements to fund cash consideration for Partnerships, a higher interest rate on the Villages Credit Agreement that went into effect inMarch 2019 until this facility was closed inOctober 2019 , and higher amortization of deferred financing costs related to refinancing our Credit Agreements on several occasions during 2019. Loss on Extinguishment of Debt Loss on extinguishment of debt was$6.7 million for the year endedDecember 31, 2019 , of which$6.2 million related to our repayment in full of the outstanding indebtedness under the Villages Credit Agreement in connection with the Initial Public Offering. The remaining loss related to refinancing the JPMorgan Credit Agreement on several occasions during 2019. FINANCIAL CONDITION - COMPARISON OF CONSOLIDATED FINANCIAL CONDITION ATDECEMBER 31, 2019 TODECEMBER 31, 2018 . Our total assets and total liabilities increased$258.9 million and$44.5 million , respectively, atDecember 31, 2019 as compared toDecember 31, 2018 . The most significant changes in assets and liabilities are described below. Cash and cash equivalents increased$59.7 million as a result of$241.4 million of net proceeds received from the Initial Public Offering, offset in part by$89.0 million in cash used to repay in full and concurrently terminate the Villages Credit Agreement and$65.0 million of cash used to repay a portion of the JPMorgan Credit Agreement. Restricted cash increased$3.4 million as a result of restricted trust accounts we hold in connection with theMSI Partnership . Premiums, commissions and fees receivable, net increased$29.4 million as a result of our revenue growth. Intangible assets, net increased$62.7 million primarily as a result of the MSI, Lykes and Foundation Insurance Partnerships, which contributed$52.7 million ,$8.7 million and$8.7 million , respectively, to gross intangible assets during 2019.These additions were offset in part by$10.0 million of amortization during 2019. 40
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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. Premiums payable to insurance companies increased$27.3 million as a result of our revenue growth. Accrued expenses and other current liabilities increased$7.1 million as a result of higher contract liabilities relating to our revenue growth, higher accrued expenses relating to costs associated with being a public company and new Partnerships, and higher accrued compensation and benefits from 2019 bonus accruals relating to an increase in the number of executives and other Colleagues in 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 theMSI Partnership . Equity accounts were all reset in connection with the Reorganization Transactions. Refer to Item 1. Business for a discussion of these transactions. NON-GAAP FINANCIAL MEASURES Adjusted EBITDA, Adjusted EBITDA Margin, Organic Revenue, Organic Revenue Growth, Adjusted Net Income and Adjusted Diluted Earnings Per Share ("EPS"), are not measures of financial performance under GAAP and should not be considered substitutes for GAAP measures, including commissions and fees (for Organic Revenue and Organic Revenue Growth), net income (loss) (for Adjusted EBITDA and Adjusted EBITDA Margin) net income (loss) attributable toBRP Group, Inc. (for Adjusted Net Income) or diluted EPS (for Adjusted Diluted EPS), which we consider to be the most directly comparable GAAP measures. These non-GAAP financial measures have limitations as analytical tools, and when assessing our operating performance, you should not consider these non-GAAP financial measures in isolation or as substitutes for commissions and fees, net income (loss) or other consolidated income statement data prepared in accordance with GAAP. Other companies in our industry may define or calculate these non-GAAP financial measures differently than we do, and accordingly these measures may not be comparable to similarly titled measures used by other companies. Adjusted EBITDA eliminates the effects of financing, depreciation and amortization. We define Adjusted EBITDA as net income (loss) before interest, taxes, depreciation, amortization 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 the Initial Public Offering and loss on modification and extinguishment of debt. 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 is a key metric used by management and our board of directors to assess our financial performance. 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. We believe that Adjusted EBITDA Margin is helpful in measuring profitability of operations on a consolidated level. Adjusted EBITDA and Adjusted EBITDA Margin have important limitations as analytical tools. For example, Adjusted EBITDA and Adjusted EBITDA Margin: • do not reflect any cash capital expenditure requirements for the assets being depreciated and amortized that may have to be replaced in the future;
• do not reflect changes in, or cash requirements for, our working capital
needs;
• do not reflect the impact of certain cash charges resulting from matters
we consider not to be indicative of our ongoing operations;
• do not reflect the interest expense or the cash requirements necessary to
service interest or principal payments on our debt;
• do not reflect stock-based compensation expense and other non-cash
charges; and
• exclude certain tax payments that may represent a reduction in cash
available to us.
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We calculate Organic Revenue Growth based on commissions and fees for the relevant period by excluding (i) the first twelve months of commissions and fees generated from new Partners and (ii) the impact of the change in our method of accounting for commissions and fees from contracts with customers as a result of the adoption of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers, effectiveJanuary 1, 2018 , under the New Revenue Standard on our 2018 commissions and fees when the impact is measured across periods that are not comparable. Organic Revenue Growth is the change in Organic Revenue period-to-period, with prior period results adjusted for Organic Revenues that were excluded in the prior period because the relevant Partners had not yet reached the twelve-month owned mark, but which have reached the twelve-month owned mark in the current period. For example, revenues from a Partner acquired onJune 1, 2018 are excluded from Organic Revenue for 2018. However, afterJune 1, 2019 , results fromJune 1, 2018 toDecember 31, 2018 for such Partners are compared to results fromJune 1, 2019 toDecember 31, 2019 for purposes of calculating Organic Revenue Growth in 2019. Organic Revenue Growth is a key metric used by management and our board of directors to assess our financial performance. We believe that Organic Revenue and Organic Revenue Growth are appropriate measures of operating performance as they allow investors to measure, analyze and compare growth in a meaningful and consistent manner. Adjusted Net Income is presented for the purpose of calculating Adjusted Diluted EPS. We define Adjusted Net Income as net income (loss) adjusted for amortization, and certain items of income and expense, including costs related to our Initial Public Offering, share-based compensation expense, transaction-related expenses related to Partnerships including severance, and certain non-recurring costs that, in the opinion of management, significantly affect the period-over-period assessment of operating results, and the related tax effect of those adjustments. 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. Adjusted EBITDA and Adjusted EBITDA Margin 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: For the Years Ended December 31, (in thousands) 2019 2018 Commissions and fees $
137,841
Net income (loss)$ (22,454 ) $ 2,689 Adjustments to net income (loss): Change in fair value of contingent consideration 10,829 1,228 Interest expense, net 10,640 6,625 Amortization expense 10,007 2,582 Loss on extinguishment of debt 6,732 - Initial Public Offering expenses 4,739 - Share-based compensation 4,561 1,549 Transaction-related Partnership expenses 2,204 682 Depreciation expense 542 508 Severance related to Partnership activity 329 - Income tax provision 17 - Other 375 180 Adjusted EBITDA $ 28,521$ 16,043 Adjusted EBITDA Margin 21 % 20 % 42
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Organic Revenue and Organic Revenue Growth
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:
For the Years Ended December 31,
(in thousands) 2019 2018
Commissions and fees $ 137,841 $ 79,880
New Revenue Standard (1) - (200 )
Partnership commissions and fees (2) (50,163 ) (22,897 )
Organic Revenue (3) $ 87,678 $ 56,783
Organic Revenue Growth (3) 7,780
8,794
Organic Revenue Growth % (3) 10 %
18 %
__________
(1) As discussed in Note 2 to our audited consolidated financial statements for
the year ended
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
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
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.
(2) Excludes the first twelve months of such commissions and fees generated from
newly acquired Partners.
(3) Organic Revenue for the year ended
Organic Revenue Growth for the year ended
million, which is adjusted to reflect revenues from Partnerships that reached
the twelve-month owned mark during the year ended December 31, 2019 .
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Adjusted Net Income and Adjusted Diluted EPS The following table reconciles Adjusted Net Income to net loss attributable toBRP Group, Inc. and reconciles Adjusted Diluted EPS to diluted net loss per share attributable toBRP Group, Inc. Class A common stock: For the Year Ended (in thousands) December 31, 2019 Net loss attributable to BRP Group, Inc. $ (8,650 ) Net loss attributable to noncontrolling interests (13,804 ) Change in fair value of contingent consideration
10,829
Amortization expense
10,007
Loss on extinguishment of debt
6,732
Initial Public Offering expenses
4,739
Share-based compensation
4,561
Transaction-related Partnership expenses
2,204
Amortization of deferred financing costs
1,312
Severance related to Partnership activity 329 Other 375 Adjusted pre-tax income 18,634 Adjusted income taxes (1) 1,845 Adjusted Net Income $ 16,789
Weighted-average shares of Class A common stock outstanding - diluted
17,917
Dilutive effect off unvested restricted shares of Class A common stock
330
Exchange of Class B shares (2)
43,194
Adjusted dilutive weighted-average shares outstanding 61,441 Adjusted Diluted EPS $ 0.27 Diluted net loss per share $
(0.48 ) Effect of exchange of Class B shares and net loss attributable to noncontrolling interests per share
0.11
Other adjustments to net loss per share
0.67
Adjusted income taxes per share (0.03 ) Adjusted Diluted EPS $ 0.27 ___________
(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.
RESULTS OF OPERATIONS BY OPERATING GROUP Commissions and Fees 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 theMiddle 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. In theMedicare 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'sInsurance Company Partners .
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The following table sets forth our commissions and fees by
For the Years Ended December 31,
2019 2018 Variance
Percent
Change
from Prior
(in thousands) Amount Percent of Business Amount Percent of Business Amount Year
Commissions and fees
by Operating Group
Middle Market $ 56,394 41 % $ 36,629 46 % $ 19,765 54 %
Specialty 44,913 33 % 12,729 16 % 32,184 253 %
MainStreet 25,533 19 % 20,940 26 % 4,593 22 %
Medicare 11,001 8 % 9,582 12 % 1,419 15 %
$ 137,841 $ 79,880 $ 57,961
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
The following table sets forth our commissions, employee compensation and
benefits by Operating Group by amount and as a percentage of our commissions,
employee compensation and benefits:
For the Years Ended December 31,
2019 2018 Variance
Percent
Change
from Prior
(in thousands) Amount Percent of Business Amount Percent of Business Amount Year
Commissions, employee
compensation and
benefits by Operating
Group
Middle Market $ 37,560 39 % $ 25,905 50 % $ 11,655 45 %
Specialty 32,505 34 % 9,437 18 % 23,068 244 %
MainStreet 14,727 15 % 11,237 22 % 3,490 31 %
Medicare 5,576 6 % 4,503 9 % 1,073 24 %
Corporate and Other 6,587 7 % 572 1 % 6,015 n/m
$ 96,955 $ 51,654 $ 45,301
__________
n/m not meaningful
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Commissions, employee compensation and benefits expenses increased across all Operating Groups for the year endedDecember 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$1.3 million in share-based compensation related to the Initial Public Offering during 2019. Commissions, employee compensation and benefits expenses also increased as a result of hiring new roles necessary as a public company, including a chief operating officer, chief accounting officer and general counsel, in addition to continued investments in Growth Services to support our growth, which costs are allocated among the Operating Groups. Other Operating Expenses The following table sets forth our other operating expenses byOperating Group by amount and as a percentage of our operating expenses: For the Years Ended December 31, 2019 2018 Variance Percent Change from Prior (in thousands) Amount Percent of Business Amount Percent of Business Amount Year Other operating expenses by Operating Group Middle Market$ 8,396 34 %$ 6,083 42 %$ 2,313 38 % Specialty 3,318 14 % 1,285 9 % 2,033 158 % MainStreet 3,888 16 % 3,562 25 % 326 9 % Medicare 2,079 8 % 1,779 12 % 300 17 % Corporate and Other 6,895 28 % 1,670 12 % 5,225 313 %$ 24,576 $ 14,379 $ 10,197 Other operating expenses increased across all Operating Groups for the year endedDecember 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$2.0 million to the Middle Market and Specialty Operating Groups, respectively. The remainder of the increases in the four Operating Groups were driven by organic growth. The increase in Corporate and Other is primarily related to costs related to our Initial Public Offering in 2019. We expect our other operating expenses to continue to increase in 2020 in relation to 2019 as a result of ongoing public company costs. Amortization Expense The following table sets forth our amortization byOperating Group by amount and as a percentage of our amortization: For the Years Ended December 31, 2019 2018 Variance Percent Change from (in thousands) Amount Percent of Business Amount Percent of Business Amount Prior Year Amortization by Operating Group Middle Market$ 1,861 19 %$ 588 23 %$ 1,273 216 % Specialty 6,466 65 % 909 35 % 5,557 n/m MainStreet 1,280 13 % 756 29 % 524 69 % Medicare 381 4 % 259 10 % 122 47 % Corporate and Other 19 - % 70 3 % (51 ) (73 )%$ 10,007 $ 2,582 $ 7,425 __________ n/m not meaningful 46
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Amortization expense increased across all Operating Groups for the year endedDecember 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$8.7 million of intangible assets capitalized in connection with Middle Market, Specialty and MainStreet Partnerships, respectively, during 2019. Change in Fair Value of Contingent Consideration The following table sets forth our change in fair value of contingent consideration byOperating Group by amount and as a percentage of our change in fair value of contingent consideration: For the Years Ended December 31, 2019 2018 Variance Percent Change from (in thousands) Amount Percent of Business Amount Percent of Business Amount Prior Year Change in fair value of contingent consideration by Operating Group Middle Market$ (1,378 ) (13 )%$ 325 26 %$ (1,703 ) n/m Specialty 13,513 125 % 383 31 % 13,130 n/m MainStreet (971 ) (9 )% 520 42 % (1,491 ) (287 )% Medicare (335 ) (3 )% - - % (335 ) - %$ 10,829 $ 1,228 $ 9,601 __________ n/m not meaningful The change in fair value of contingent consideration results from fluctuations in the value of the relevant measurement basis, normally revenue or EBITDA of our Partners.The Specialty Operating Group recorded a loss of$13.5 million during 2019 as a result of a higher estimate for the contingent consideration liability of theMSI Partnership related to growth of business. LIQUIDITY AND CAPITAL RESOURCES Our primary liquidity needs for the foreseeable future will include cash to (i) provide capital to facilitate the organic growth of our business and to fund future Partnerships, (ii) pay operating expenses, including cash compensation to our employees and expenses related to being a public company, (iii) make payments under the Tax Receivable Agreement, (iv) pay interest and principal due on borrowings under the JPMorgan Credit Agreement, (v) pay contingent earnout liabilities, and (vi) pay income taxes. We have historically financed our operations, funded our debt service and distributions to our owners through the sale of our insurance products and services. In addition, we financed significant cash needs to fund growth through the acquisition of Partners through debt financing. OnOctober 28, 2019 ,BRP Group sold an aggregate of 18,859,300 shares of Class A common stock including 2,459,300 shares pursuant to the underwriters' over-allotment option, which subsequently settled onNovember 26, 2019 . The shares were sold at an initial offering price of$14.00 per share for net proceeds of$241.4 million after deducting underwriting discounts and commissions of$17.8 million and net offering expenses of$4.8 million payable by BRP. As ofDecember 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. See Item 1A. "Risk Factors - Risks Relating to our Business - We may not be able to successfully identify and acquire Partners or integrate Partners into our company, and we may become subject to certain liabilities assumed or incurred in connection with our Partnerships that could harm our business, results of operations and financial condition."
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Credit Agreements As ofDecember 31, 2019 , we had an aggregate borrowing capacity of$225.0 million under the revolving credit commitment (the "Revolving Credit Commitment") of the JPMorgan Credit Agreement, which matures onSeptember 23, 2024 and 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. The facility also had an accordion feature that allows us to increase the aggregate borrowing capacity from$225.0 million to$300.0 million , which we utilized by entering into the Incremental Facility Amendment No. 1 to the JPMorgan Credit Agreement onMarch 12, 2020 . The outstanding balance of the Revolving Credit Commitment was$40.4 million atDecember 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 Base 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%: Applicable Margin for Applicable Margin for Alternate Base Rate Total Net Leverage Ratio Eurodollar Loans Loans < 2.50x 200 bps 100 bps ? 2.50x < 3.00x 225 bps 125 bps ? 3.00x < 3.75x 250 bps 150 bps ? 3.75x 300 bps 200 bps AtDecember 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 toBRP Group . In addition, the JPMorgan Credit Agreement contains financial covenants requiring us to maintain our Total Leverage Ratio (as defined in the JPMorgan Credit Agreement) at or below 5.00 to 1.00 up to but excludingSeptember 21, 2022 (with scheduled annual step downs to 4.75 to 1.00 and 4.50 to 1.00 beginning in 2022 and with step ups of 0.50 to 1.00 and 0.25 to 1.00 for the first and second quarters, respectively, after any Material Acquisition (as defined in the JPMorgan Credit Agreement)), Debt Service Coverage Ratio (as defined in the JPMorgan Credit Agreement) at or above 2.00 to 1.00 up to but excludingSeptember 21, 2022 (with scheduled annual step ups to 2.25 to 1.00 and 2.50 to 1.00 beginning in 2022) and Senior Leverage Ratio (as defined in the JPMorgan Credit Agreement) at or below 4.50 to 1.00 up to but excludingSeptember 21, 2022 (with scheduled annual step downs to 4.25 to 1.00 and 4.00 to 1.00 beginning in 2022 and with step ups of 0.50 to 1.00 and 0.25 to 1.00 for the first and second quarters, respectively, after any Material Acquisition). As ofSeptember 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 inSeptember 2024 , or such later date as the parties may agree. OnOctober 28, 2019 , BRP used a portion of the proceeds it received from the sale of newly-issued LLC Units toBRP 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.
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Source and Uses of Cash The following table summarizes our cash flows from operating, investing and financing activities for the periods indicated:
For the Years Ended
2019 2018 Variance
Net cash provided by operating activities
11,793 $ 221
Net cash used in investing activities (101,020 ) (42,526 ) (58,494 )
Net cash provided by financing activities 152,082 35,605 116,477
Net increase in cash and cash equivalents and
restricted cash 63,076 4,872 58,204
Cash and cash equivalents and restricted cash
at beginning of year 7,995 3,123 4,872
Cash and cash equivalents and restricted cash
at end of year $ 71,071 $ 7,995 $ 63,076
Operating Activities
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 remained relatively
consistent for the year ended December 31, 2019 as compared to the same period
of 2018. Significant changes in operating cash resulted from increases in
commissions and fees receivable net and accounts payable, accrued expenses and
other current liabilities, which can be attributed to growth in our business
resulting from Partnerships and organic growth.
Investing Activities
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.
Financing Activities
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.
Contractual Obligations
The following table represents our contractual obligations, aggregated by type,
at December 31, 2019 :
Payments Due by Period
Less than More than
(in thousands) Total 1 year 1-3 years 3-5 years 5 years
Operating leases (1) $ 41,195 $ 4,586 $ 10,860 $ 9,007 $ 16,742
Debt obligations payable (2) 49,180 1,539 3,078 44,563 -
Maximum future acquisition
contingency payments (3) 103,888 7,112 95,839 937 -
Total $ 194,263 $ 13,237 $ 109,777 $ 54,507 $ 16,742 __________
(1) The Company leases facilities and equipment under noncancelable operating
leases. Rent expense was
(2) Represents scheduled debt obligation and interest payments.
(3) Includes
liabilities at December 31, 2019 .
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Off-Balance Sheet Arrangements 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. Dividend PolicyAssuming Baldwin Risk Partners, LLC 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 ofEquity Securities - Dividend Policy." Tax Receivable Agreement OnOctober 28, 2019 ,BRP Group entered into the Tax Receivable Agreement with BRP's LLC Members that provides for the payment byBRP Group toBRP's LLC Members of 85% of the amount of cash savings, if any, inU.S. federal, state and local income tax or franchise tax thatBRP Group actually realizes as a result of (i) any increase in tax basis in BRP assets resulting from (a) acquisitions byBRP 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 thanBRP Group ) may, subject to certain conditions and transfer restrictions described above, redeem or exchange their LLC Units for shares of Class A common stock ofBRP 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 thatBRP 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, inU.S. federal, state and local income tax or franchise tax that we actually realize as a result of (i) any increase in tax basis inBRP 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 ofBRP 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 ofBRP Group (calculated with certain assumptions) to the amount of such taxes thatBRP 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 hadBRP 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 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 we estimate that we will not realize the full benefit
represented by the deferred tax asset, based on an analysis that will
consider, among other things, our expectation of future earnings, we will
reduce the deferred tax asset with a valuation allowance; and
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• 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.
All of the effects of changes in any of our estimates after the date of the redemption or exchange will be included in net income. Similarly, the effect of subsequent changes in the enacted tax rates will be included in net income. CRITICAL ACCOUNTING ESTIMATES Our consolidated financial statements are prepared in accordance with GAAP, which requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of commissions and fees and expenses during the reporting period. Our estimates, judgments and assumptions are continually evaluated based on historical experience and factors we believe to be reasonable under the circumstances. The results involve judgments about the carrying value of assets and liabilities not readily apparent from other sources and actual results could differ from those estimates. The areas that we believe are critical accounting estimates, as discussed below, affect the more significant estimates, judgments and assumptions used to prepare our consolidated financial statements. Different assumptions in the application of these policies could result in material changes in our consolidated financial position or consolidated results of operations. Commissions and Fees Recognition We earn commission revenue by acting as an agent or broker on behalf of our clients andInsurance 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 theMiddle 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 endedDecember 31, 2019 . We earn consulting and service fee revenues by negotiating fees in lieu of a commission by providing specialty insurance consulting. Consulting and service fee revenue 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. We earn policy fee revenue for acting in the capacity of a managing general agent on behalf of the Insurance Company Partner and fulfilling certain services and administrative functions during the term of the insurance policy. Policy fee revenue is deferred and recognized over the life of the policy. We earn installment fee revenue related to policy premiums paid on an installment basis for payment processing services performed on behalf of theInsurance Company Partner. The Company recognizes installment fee revenue in the period the services are performed. Profit-sharing commissions represent a form of variable consideration, which includes additional commissions over base commissions received fromInsurance Company Partners . Profit-sharing commissions associated with relatively predictable measures are estimated with a constraint applied and recognized at a point in time. The profit-sharing commissions are recorded as the underlying policies that contribute to the achievement of the metric are placed with any adjustments recognized when payments are received or as additional information that affects the estimate becomes available. A constraint of variable consideration is necessary when commissions and fees are subject to significant reversal. Profit-sharing commissions associated with loss performance are uncertain, and therefore, are subject to significant reversal through catastrophic loss season and as loss data remains subject to material change. The constraint is relieved when management estimates commissions and fees that are not subject to significant reversal, which often coincides with the earlier of written notification from the Insurance Company Partner that the target has been achieved or cash collection. Year-end amounts incorporate estimates based on confirmation fromInsurance Company Partners after calculation of potential loss ratios that are impacted by catastrophic losses. The consolidated financial statements include estimates that are not subject to significant reversal and incorporates information received fromInsurance 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. 51
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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 relevantInsurance 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 endedDecember 31, 2019 . Business Combinations and Purchase Price Allocation 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. Business combination purchase prices are typically based upon a multiple of average adjusted EBITDA or commission and fees earned over a one to three-year period within a minimum and maximum price range. We perform a purchase price allocation in connection with our business combinations, in connection with which we record the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed, including contingent consideration relating to potential earnout provisions. The excess of the purchase price of the business combination over the fair value of the net assets acquired is recorded as goodwill. Intangible assets generally consist of purchased customer accounts, 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. Carrier relationships consist of relationships withInsurance Company Partners that were not previously established. Trade names consist of acquired business names with potential customer base recognition. Purchased customer accounts, carrier relationships and trade names are amortized on a basis consistent with the underlying cash flows over the related estimated lives of between five and twenty years. Software is amortized on the straight-line basis over an estimated useful life of three to five years. The fair value of contingent earnout liabilities and contingently returnable consideration is based upon estimated payments expected to be or paid to, or clawed back from, the sellers of the acquired businesses as measured by expected future cash flow projections under various scenarios. We use a probability weighted value analysis as a valuation technique to convert future estimated cash flows under various scenarios to a single present value amount. We assess the fair value of these liabilities and assets at each balance sheet date based on the expected performance of the associated business and any changes in fair value are recorded through change in fair value of contingent consideration in the consolidated statements of comprehensive income (loss). Impairment of Long-lived Assets Including Goodwill In applying the acquisition method of accounting for business combinations, the excess of the purchase price of an acquisition over the fair value of the identifiable tangible and intangible assets and liabilities acquired is assigned to goodwill. Intangible assets are initially valued at fair value using generally accepted valuation methods appropriate for the type of intangible asset. Definite-lived intangible assets are amortized over their estimated useful lives and evaluated for impairment whenever an event occurs that indicates the asset may be impaired.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.
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We test for goodwill impairment at the reporting unit level, which is anOperating Group or one level below anOperating Group . We have four reporting units, which are also our Operating Groups. We have the option of performing a qualitative assessment to determine whether a quantitative impairment test is necessary. If, after assessing qualitative factors, we determine it is more likely than not that the fair value of a reporting unit is less than the carrying amount, then we proceed to the quantitative assessment. 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 atDecember 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 atDecember 31, 2019 . Any impairment charges that we may record in the future could materially impact our results of operations. Tax Receivable Agreement Liability OnOctober 28, 2019 ,BRP Group entered into the Tax Receivable Agreement with BRP's LLC Members that provides for the payment byBRP Group toBRP's LLC Members of 85% of the amount of cash savings, if any, inU.S. federal, state and local income tax or franchise tax thatBRP Group actually realizes as a result of (i) any increase in tax basis in BRP assets resulting from (a) acquisitions byBRP 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. 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. Advisor Incentive Liabilities We have granted Advisor incentive rights to certain advisors to incentivize them to stay with us and grow their Book of Business. The Advisor incentive rights grant the Advisor the right to equity shares after the achievement of certain milestones. We account for the advisor incentive awards as liability-classified share-based payment awards under ASC Topic 718, Compensation - Stock Compensation. Once a milestone is deemed probable of occurring, we record an advisor incentive liability and compensation expense based on the fair value of the grants which are remeasured each reporting period through the settlement date .The fair value of the award is determined by projecting the future value of the Advisor's Book of Business and multiplying it by the Advisor's proceeds sharing right. Significant increases or decreases in the fair value of the award would result in a significantly higher or lower liability. Ultimately, the liability will be equivalent to the amount settled, and the difference between the fair value estimate and the amount settled will be recorded in earnings.
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Share-Based Compensation 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 theU.S. Treasury yield curve in effect at the time of the grant. Income Taxes We record a tax provision for the anticipated tax consequences of the reported results of operations. We compute the provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. We measure deferred tax assets and liabilities using the currently enacted tax rates in each jurisdiction that applies to taxable income in effect for the years in which those tax assets are expected to be realized or settled. 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. Our evaluation of the realizability of the deferred tax assets focuses on identifying significant, objective evidence that we will more likely than not be able to realize our deferred tax assets in the future. We consider both positive and negative evidence when evaluating the need for a valuation allowance, which is highly judgmental and requires subjective weighting of such evidence. EMERGING GROWTH COMPANY STATUS We are an emerging growth company, as defined in the Jumpstart Our Business Startups ("JOBS") Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period for the implementation of new or revised accounting standards. We have elected to use the extended transition period for complying with new or revised accounting standards and as a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates. We have also elected to take advantage of some of the reduced regulatory and reporting requirements of emerging growth companies pursuant to the JOBS Act, including not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation and exemptions from the requirements of holding non-binding advisory votes on executive compensation and golden parachute payments, if applicable. We may take advantage of these exemptions up until the last day of the fiscal year following the fifth anniversary of our Initial Public Offering or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than$1.07 billion in annual revenue, we have more than$700.0 million in market value of our stock held by non-affiliates (and we have been a public company for at least 12 months and have filed one annual report on Form 10-K) or we issue more than$1.0 billion of non-convertible debt securities over a three-year period. RECENT ACCOUNTING PRONOUNCEMENTS 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.
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