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2: EX-31.1 Certification -- §302 - SOA'02 HTML 25K
3: EX-31.2 Certification -- §302 - SOA'02 HTML 25K
4: EX-32 Certification -- §906 - SOA'02 HTML 23K
11: R1 DEI Statement HTML 82K
12: R2 Consolidated Balance Sheets (Unaudited) HTML 137K
13: R3 Consolidated Balance Sheets (Unaudited) HTML 32K
(Parenthetical)
14: R4 Consolidated Statements of Comprehensive Income HTML 107K
(Unaudited)
15: R5 Consolidated Statements of Stockholders' Equity HTML 96K
and Mezzanine Equity (Unaudited)
16: R6 Consolidated Statements of Cash Flows (Unaudited) HTML 121K
17: R7 Business and Basis of Presentation (Notes) HTML 33K
18: R8 Significant Accounting Policies (Notes) HTML 25K
19: R9 Business Combinations (Notes) HTML 93K
20: R10 Variable Interest Entities (Notes) HTML 79K
21: R11 Revenue (Notes) HTML 53K
22: R12 Contract Assets and Liabilities (Notes) HTML 27K
23: R13 Deferred Commission Expense (Notes) HTML 37K
24: R14 Intangible Assets, Net and Goodwill (Notes) HTML 63K
25: R15 Long-term Debt (Notes) HTML 27K
26: R16 Related Party Transactions (Notes) HTML 26K
27: R17 Share-Based Compensation (Notes) HTML 34K
28: R18 Earnings (Loss) Per Share (Notes) HTML 51K
29: R19 Fair Value Measurements (Notes) HTML 67K
30: R20 Commitments and Contingencies HTML 24K
31: R21 Segment Reporting (Notes) HTML 84K
32: R22 Subsequent Events (Notes) HTML 28K
33: R23 Significant Accounting Policies (Policies) HTML 43K
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36: R26 Revenue (Tables) HTML 46K
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44: R34 Business and Basis of Presentation - Additional HTML 22K
Information (Details)
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Information (Details)
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(Details)
47: R37 Business Combinations - Schedule of Business HTML 92K
Acquisitions (Details)
48: R38 Business Combinations - Schedule of HTML 36K
Weighted-Average Lives of Intangible Assets
Acquired in Business Combinations (Details)
49: R39 Business Combinations - Schedule of Future HTML 32K
Amortization of Intangible Assets Acquired in
Business Combinations (Details)
50: R40 Business Combinations - Schedule of Pro Forma HTML 38K
Information (Details)
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Information (Details)
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Intangible Assets (Details)
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Information (Details)
60: R50 Intangible Assets, Net and Goodwill - Schedule of HTML 51K
Goodwill (Details)
61: R51 Long-term Debt - Additional Information (Details) HTML 107K
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Non-vested Awards under omnibus Plan (Details)
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66: R56 Earnings (Loss) Per Share Schedule of Earnings Per HTML 49K
Share (Details)
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Liabilities Measured at Fair Value on a Recurring
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(Exact name of registrant as specified in its charter)
______________________________
iDelaware
i61-1937225
(State
or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
i4211 W. Boy Scout Blvd., iSuite
800, iTampa, iFloridai33607
(Address of principal executive offices) (Zip Code)
(i866) i279-0698
(Registrant’s telephone number, including area code)
Not Applicable
(Former Name, former address and former fiscal year, if changed since last report)
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iClass
A Common Stock, par value $0.01 per share
iBRP
iNasdaq Global Select Market
______________________________
Indicate by check
mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes☒ No ☐
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
iAccelerated
filer
☒
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging growth company
i☒
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. i☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes i☐ No ☒
As of August 4, 2021, there were i47,147,295shares of Class A common stock outstanding and i52,543,601 shares of Class B common stock outstanding.
We have made statements in this report, including matters discussed under Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Part II, Item 1. Legal Proceedings, Part II, Item 1A. Risk Factors and in other sections of this report, that are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “may,”“might,”“will,”“should,”“expects,”“plans,”“anticipates,”“believes,”“estimates,”“predicts,”“potential” or “continue,” the negative of these terms and other comparable terminology. These forward-looking statements, which are subject to risks, uncertainties and assumptions about us, may include projections of our future financial performance, our anticipated growth strategies and anticipated trends
in our business. These statements are only predictions based on our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements, including those factors discussed under Part II, Item 1A. You should specifically consider the numerous risks outlined under Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K filed with the SEC on March 11, 2021.
Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness
of any of these forward-looking statements. We are under no duty to update any of these forward-looking statements after the date of this report to conform our prior statements to actual results or revised expectations.
Commonly Used Defined Terms
The following terms have the following meanings throughout this Quarterly Report on Form 10-Q unless the context indicates or requires otherwise:
Book of Business Insurance policies bound by us on behalf of our Clients
bps Basis points
Clients Our
insureds
Colleagues Our employees
Exchange Act Securities Exchange Act of 1934, as amended
Insurance Company Partners Insurance companies with which we have a contractual relationship
LIBOR London Interbank Offered Rate
MGA Managing General Agent
MSI Millennial Specialty Insurance, a 2019 Partner
JPM Credit Agreement Credit Agreement, dated as of October 14, 2020, between Baldwin Risk Partners, LLC, as borrower, JPMorgan Chase Bank, N.A., as the Administrative Agent, the Guarantors party thereto, the Lenders party thereto and the Issuing Lenders party thereto, as amended by the Amendment
No. 1 to Credit Agreement dated as of May 7, 2021, Amendment No. 2 to Credit Agreement dated as of June 2, 2021 and Amendment No. 3 to Credit Agreement dated as of August 6, 2021
Operating Groups Our reportable segments
Partners Companies that we have acquired, or in the case of asset acquisitions, the producers
Partnerships Strategic acquisitions made by the Company
Risk Advisors Our producers
SEC U.S. Securities and Exchange Commission
Securities Act Securities
Act of 1933, as amended
Tax Receivable Agreement Tax Receivable Agreement between BRP Group, Inc. and the holders of LLC Units in Baldwin Risk Partners, LLC entered into on October 28, 2019
Liabilities,
Mezzanine Equity and Stockholders’ Equity
Current liabilities:
Premiums payable to insurance companies
$
i177,578
$
i135,576
Producer
commissions payable
i32,367
i24,260
Accrued
expenses and other current liabilities
i49,639
i47,490
Due
to related parties
i65
i—
Current
portion of long-term debt
i5,000
i4,000
Current
portion of contingent earnout liabilities
i90,160
i6,094
Total
current liabilities
i354,809
i217,420
Revolving
lines of credit
i20,000
i—
Long-term
debt, less current portion
i477,985
i381,382
Contingent
earnout liabilities, less current portion
i88,092
i158,725
Other
liabilities
i3,067
i2,419
Total
liabilities
i943,953
i759,946
Commitments
and contingencies (Note 14)
Mezzanine equity:
Redeemable noncontrolling interest
i173
i98
Stockholders’
equity:
Class A common stock, par value $ii0.01/
per share, ii300,000,000/ shares authorized; ii46,583,582/
and ii44,953,166/ shares issued and outstanding at June 30,
2021 and December 31, 2020, respectively
i466
i450
Class
B common stock, par value $ii0.0001/ per share, ii100,000,000/
shares authorized; ii49,575,871/ and ii49,828,383/
shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively
i5
i5
Additional
paid-in capital
i404,025
i392,139
Accumulated
deficit
(i19,489)
(i24,346)
Notes
receivable from stockholders
(i306)
(i465)
Total
stockholders’ equity attributable to BRP Group, Inc.
i384,701
i367,783
Noncontrolling
interest
i407,473
i402,087
Total
stockholders’ equity
i792,174
i769,870
Total
liabilities, mezzanine equity and stockholders’ equity
$
i1,736,300
$
i1,529,914
See
accompanying Notes to Condensed Consolidated Financial Statements. 5
BRP GROUP, INC.
Condensed Consolidated Balance Sheets (Continued)
(Unaudited)
The following table presents the assets and liabilities of the Company’s consolidated variable interest entities, which are included on the condensed consolidated balance sheets above. The assets in the table below include those assets that can only be used to settle obligations of the consolidated variable interest entities.
See
accompanying Notes to Condensed Consolidated Financial Statements. 9
BRP GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the Six Months Ended
June 30,
(in thousands)
2021
2020
Cash flows from operating activities:
Net income (loss)
$
i10,510
$
(i3,152)
Adjustments
to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization
i22,446
i8,451
Change
in fair value of contingent consideration
i11,822
i6,242
Share-based
compensation expense
i8,087
i3,117
Amortization
of deferred financing costs
i1,443
i195
Change
in fair value of interest rate caps
i825
i—
Payment
of contingent earnout consideration in excess of purchase price accrual
(i602)
(i1,316)
Other
fair value adjustments
i94
i—
Changes
in operating assets and liabilities, net of effect of acquisitions:
Premiums, commissions and fees receivable, net
(i52,357)
(i9,464)
Prepaid
expenses and other current assets
(i2,254)
(i334)
Due
from related parties
i84
(i78)
Accounts
payable, accrued expenses and other current liabilities
i49,321
i39,983
Net
cash provided by operating activities
i49,419
i43,644
Cash
flows from investing activities:
Capital expenditures
(i1,756)
(i2,619)
Cash
consideration paid for asset acquisitions, net of cash received
(i1,575)
(i695)
Cash
consideration paid for business combinations, net of cash received
(i24,276)
(i224,112)
Net
cash used in investing activities
(i27,607)
(i227,426)
Cash
flows from financing activities:
Proceeds from issuance of Class A common stock, net of underwriting discounts
i—
i167,346
Redemption
and repurchase of LLC Units and Class B common stock
i—
(i32,610)
Payment
of common stock offering costs
i—
(i769)
Payment
of contingent and guaranteed earnout consideration
(i828)
(i665)
Proceeds
from revolving line of credit
i20,000
i185,637
Proceeds
from long-term debt
i97,914
i—
Payments
on long-term debt
(i1,000)
i—
Payments
of debt issuance costs
(i634)
(i1,918)
Purchase
of interest rate caps
(i3,461)
i—
Proceeds
from repayment of stockholder notes receivable
i159
i115
Other
i—
i11
Net
cash provided by financing activities
i112,150
i317,147
Net
increase in cash and cash equivalents and restricted cash
i133,962
i133,365
Cash
and cash equivalents and restricted cash at beginning of period
i142,022
i71,071
Cash
and cash equivalents and restricted cash at end of period
$
i275,984
$
i204,436
See
accompanying Notes to Condensed Consolidated Financial Statements. 10
BRP GROUP, INC.
Condensed Consolidated Statements of Cash Flows (Continued)
(Unaudited)
For the Six Months Ended June 30,
(in
thousands)
2021
2020
Supplemental schedule of cash flow information:
Cash paid during the period for interest
$
i11,024
$
i1,486
Disclosure
of non-cash investing and financing activities:
Equity issued in business combinations
$
i3,714
$
i52,130
Contingent
earnout liabilities assumed in business combinations
i7,764
i25,188
Noncash
debt issuance costs incurred
i3,823
i—
Capital
expenditures incurred but not yet paid
i33
i—
See
accompanying Notes to Condensed Consolidated Financial Statements. 11
BRP GROUP, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. iBusiness
and Basis of Presentation
BRP Group, Inc. (“BRP Group”) was incorporated in the state of Delaware on iJuly 1, 2019. 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 Operating Groups, including Middle Market, Specialty, MainStreet, and Medicare, which are discussed in more detail in Note 15. The term the “Company” refers to BRP Group and its consolidated subsidiaries.
Principles of Consolidation
i
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.
As the sole manager of Baldwin Risk Partners, LLC (“BRP”), BRP Group operates and controls all the business and affairs of BRP, and has the sole voting interest in, and controls the management of, BRP. Accordingly, BRP Group consolidates BRP in its consolidated financial statements, resulting in a noncontrolling interest related to the membership interests of BRP (the “LLC Units”) held by BRP’s LLC members in its consolidated financial statements.
The Company has prepared these consolidated financial statements in accordance with Accounting Standards Codification (“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 4 for additional information regarding the Company’s variable interest entities.
Topic 810 also requires that the equity of a noncontrolling interest shall be reported on the condensed consolidated balance sheets within total equity of the
Company. Certain redeemable noncontrolling interests are reported on the condensed consolidated balance sheets as mezzanine equity. Topic 810 also requires revenues, expenses, gains, losses, net income or loss, and other comprehensive income or loss to be reported in the consolidated financial statements at consolidated amounts, which include amounts attributable to the owners of the parent and the noncontrolling interests.
Unaudited Interim Financial Reporting
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and applicable rules and regulations of the SEC regarding interim financial reporting. Accordingly, they do not include all the information and related notes required by GAAP for complete consolidated financial
statements. In the opinion of management, all adjustments, consisting of recurring accruals, considered necessary for fair statement have been included. The accompanying balance sheet for the year ended December 31, 2020 was derived from audited financial statements, but does not include all disclosures required by GAAP. Accordingly, these unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto for the year ended December 31, 2020 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 11, 2021.
Use
of Estimates
iThe preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. Significant estimates underlying the accompanying consolidated financial statements include the application of guidance for revenue recognition, including determination of allowances for estimated policy cancellations;
the determination of fair value in relation to business combinations and purchase price allocation; impairment of long-lived assets including goodwill; valuation of the Tax Receivable Agreement liability and income taxes; and share-based compensation.
12
Recent Accounting Pronouncements
i
As an emerging growth company, the Jumpstart Our Business Startups
Act of 2012 (the “JOBS Act”) permits the Company an extended transition period for complying with new or revised accounting standards affecting public companies. The Company has elected to use this extended transition period and adopt certain new accounting standards on the private company timeline, which means that the Company’s financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards on a non-delayed basis. The Company has elected the extended transition period for the adoption of the Accounting Standards Updates (“ASUs”)
below, except those where early adoption was both permitted and elected.
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). The guidance in ASU 2016-02 supersedes the lease recognition requirements in ASC Topic 840, Leases. ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. The FASB has subsequently issued several additional ASUs related to leases, which improved upon, provided interpretation of and transition relief for, the guidance issued in ASU 2016-02 and extended the adoption date for nonpublic business entities. This guidance is effective for the fiscal years beginning after December 15, 2021,
and interim periods within fiscal years beginning after December 15, 2022, with early adoption permitted. The Company is currently evaluating the full effect that the adoption of this standard will have on its consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Statements (“ASU 2016-13”), which amends the guidance for recognizing credit losses on financial instruments measured at amortized cost. ASU 2016-13 replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The FASB has subsequently
issued several additional ASUs related to credit losses, which improved upon, provided interpretation of and transition relief for, the guidance issued in ASU 2016-13 and extended the adoption date for nonpublic business entities. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022, with early adoption permitted. The Company is currently evaluating the full effect that the adoption of this standard will have on its consolidated financial statements.
2. iSignificant
Accounting Policies
There have been no material changes in the Company’s significant accounting policies from those that were disclosed for the year ended December 31, 2020 in the Company’s Annual Report on Form 10-K filed with the SEC on March 11, 2021, except as noted below.
Derivative Instruments
iThe
Company utilizes derivative financial instruments, consisting of interest rate caps, to manage the Company’s interest rate exposure. Derivative instruments are recognized as assets or liabilities at fair value on the condensed consolidated balance sheets. The Company has not designated these derivatives as hedging instruments for accounting purposes and, accordingly, the changes in fair value of these derivatives are recognized in earnings. Cash payments and receipts under the derivative instruments are classified within cash flows from financing activities on the accompanying statements of cash flows. The Company does not use derivative instruments for trading or speculative purposes.
Concentrations
of Credit Risk
iFinancial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents. The Company manages this risk using high creditworthy financial institutions. Interest-bearing accounts and noninterest-bearing accounts are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $i250,000.
Deposits exceed amounts insured by the FDIC. The Company has not experienced any losses from its deposits./
3. iBusiness Combinations
The
Company completed ifive business combinations for an aggregate purchase price of $i41.1 million during
the six months ended June 30, 2021. In accordance with ASC Topic 805, Business Combinations (“Topic 805”), total consideration was first allocated to the fair value of assets acquired, including liabilities assumed, with the excess being recorded as goodwill. For financial statement purposes, goodwill is not amortized but rather is evaluated for impairment at least annually or more frequently if an event or change in circumstances occurs that indicates goodwill may be impaired. Goodwill is deductible for tax purposes and will be amortized over a period of i15
years.
13
The recorded purchase price for most business combinations includes an estimation of the fair value of contingent consideration obligations associated with potential earnout provisions, which are generally based on recurring revenue. The contingent earnout consideration amounts identified in the tables below are measured at fair value within Level 3 of the fair value hierarchy as discussed further in Note 13. Any subsequent changes in the fair value of contingent earnout liabilities will be recorded in the condensed consolidated statements of comprehensive income (loss) when incurred.
The recorded purchase price for many business combinations also includes an estimation of the fair value of equity interests,
which is calculated based on the value of the Company’s Class A common stock on the closing date taking into account a discount for lack of marketability. Any equity interests granted in shares of Class B common stock also include an upward adjustment for the cash flow associated with the Tax Receivable Agreement.
The Company completed the following business combinations during the six months ended June 30, 2021:
•LeaseTrack Services LLC and Effective Coverage LLC (“LeaseTrack”), a Specialty Partner effective iFebruary
1, 2021, was made to provide a complementary service offering to the MGA of the Future’s Master Tenant product for property managers and distribution partners.
•Riley Financial, Inc. (operating as “Medicare Help Now”), a Medicare Partner effective iMarch 1, 2021, was made to further bolster the Company’s Medicare business presence in the Pacific Northwest.
•Tim
Altman, Inc. (operating as “Only Medicare Solutions”), a Medicare Partner effective iApril 1, 2021, was made to expand the Company’s Pacific Northwest Medicare Advantage presence.
•Seniors’ Insurance Services of Washington, Inc. (“Seniors’ Insurance Services”), a Medicare Partner effective iApril
30, 2021, was made to strengthen and expand the Company’s Medicare presence in the Pacific Northwest.
•Mid-Continent Companies, Ltd. and Mid-Continent Securities Ltd. (“Mid-Continent”), a Middle Market Partner effective iApril 30, 2021, was made to expand the Company’s capabilities
and Middle Market presence in Texas.
The operating results of these business combinations have been included in the condensed consolidated statements of comprehensive income (loss) since their respective acquisition dates. The Company recognized total revenues and net loss from these business combinations of $i2.3 million
and $i785,000, respectively, for the six months ended June 30, 2021.
Acquisition-related costs incurred in connection with these business combinations are recorded in other operating expenses in the condensed consolidated statements of comprehensive income (loss). The
Company incurred acquisition-related costs from these business combinations of $i835,000 for the six months ended June 30, 2021.
Due to the complexity of valuing the consideration paid and the purchase price allocation and the timing of these activities, certain amounts included in the consolidated financial statements may be provisional and subject to additional adjustments within the measurement period as permitted
by Topic 805. Specifically, the Company's valuations of premiums, commissions and fees receivable in accordance with Topic 606 are estimates subject to change based on relevant factors over the policy period. The valuations of intangible assets are also estimates based on assumptions of factors such as discount rates and growth rates. Accordingly, these assets are subject to measurement period adjustments as determined after the passage of time. Any measurement period adjustments related to prior period business combinations are reflected as current period adjustments in accordance with Topic 805. Refer to Note 8 for information regarding measurement period adjustments recorded during the six months ended June 30, 2021.
14
i
The
table below provides a summary of the total consideration and the estimated purchase price allocations made for each of the business acquisitions that became effective during the six months ended June 30, 2021. The “All Others” column includes amounts for the Medicare Help Now, Only Medicare Solutions, Seniors’ Insurance Services and Mid-Continent business combinations.
(in thousands)
LeaseTrack
All
Others
Totals
Cash consideration paid
$
i12,984
$
i14,021
$
i27,005
Fair
value of contingent earnout consideration
i6,116
i1,648
i7,764
Fair
value of equity interest
i1,652
i2,062
i3,714
Deferred
payment
i—
i2,592
i2,592
Total
consideration
$
i20,752
$
i20,323
$
i41,075
Cash
$
i100
$
i155
$
i255
Restricted
cash
i2
i—
i2
Premiums,
commissions and fees receivable
i729
i1,077
i1,806
Property
and equipment
i43
i—
i43
Other
assets
i—
i13
i13
Intangible
assets
i5,200
i11,797
i16,997
Goodwill
i15,026
i7,553
i22,579
Total
assets acquired
i21,100
i20,595
i41,695
Premiums
payable to insurance companies
(i318)
i—
(i318)
Producer
commissions payable
(i4)
(i268)
(i272)
Accrued
expenses and other current liabilities
(i26)
(i4)
(i30)
Total
liabilities acquired
(i348)
(i272)
(i620)
Net
assets acquired
$
i20,752
$
i20,323
$
i41,075
Maximum
potential contingent earnout consideration
$
i8,500
$
i10,462
$
i18,962
/
The
factors contributing to the recognition of the amount of goodwill are based on expanding business presence into new geographic locations and service markets, strategic benefits expected to be realized from acquiring the Partners’ assembled workforce and technology, in addition to other synergies gained from integrating the Partners’ operations into our consolidated structure.
i
The intangible assets acquired in connection with business combinations during the six months ended June
30, 2021 have the following values and estimated weighted-average lives:
(in thousands, except weighted-average lives)
Amount
Weighted-Average Life
Purchased customer accounts
$
i9,669
i17.9
years
Distributor relationships
i4,858
i20.0
years
Software
i2,095
i5.0
years
Trade names
i375
i4.6
years
/
15
i
Future annual estimated amortization expense over the next five years for intangible assets acquired in connection
with business combinations during the six months ended June 30, 2021 is as follows:
(in thousands)
Amount
For the remainder of 2021
$
i568
2022
i1,297
2023
i1,265
2024
i1,320
2025
i1,391
/i
The
following unaudited pro forma consolidated results of operations are provided for illustrative purposes only and have been presented as if the acquisitions of LeaseTrack, Medicare Help Now, Only Medicare Solutions, Seniors’ Insurance Services and Mid-Continent occurred on January 1, 2020. 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.
For
the Three Months Ended June 30,
For the Six Months Ended June 30,
(in thousands, except per share data)
2021
2020
2021
2020
Pro forma results:
Revenues
$
i120,195
$
i52,880
$
i276,248
$
i110,724
Net
income (loss)
(i20,028)
(i8,055)
i12,081
(i1,329)
Net
income (loss) attributable to BRP Group, Inc.
(i9,719)
(i3,656)
i5,614
(i1,518)
Basic
earnings (loss) per share
$
(i0.22)
$
(i0.18)
$
i0.13
$
(i0.08)
Diluted
earnings (loss) per share
$
(i0.22)
$
(i0.18)
$
i0.12
$
(i0.08)
Weighted-average
shares of Class A common stock outstanding - basic
i44,686
i20,642
i44,537
i20,176
Weighted-average
shares of Class A common stock outstanding - diluted
i44,686
i20,642
i46,239
i20,176
/
4.
iVariable Interest Entities
Topic 810 requires a reporting entity to consolidate a variable interest entity (“VIE”) when the reporting entity has a variable interest or combination of variable interests that provide the entity with a controlling financial interest in the VIE. The Company continually assesses whether it has a controlling financial interest in each of its VIEs to determine if it is the primary beneficiary of
the VIE and should, therefore, consolidate each of the VIEs. A reporting entity is considered to have a controlling financial interest in a VIE if it has (i) the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, and (ii) the obligation to absorb the losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE.
The Company determined that it is the primary beneficiary of its VIEs, which, at June 30, 2021 and December 31, 2020, 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 condensed consolidated statements of comprehensive income (loss) were $i250,000 and $i161,000,
respectively, for the three months ended June 30, 2021 and $i165,000 and $i150,000, respectively, for the three months ended June 30, 2020.
Total revenues and expenses of the Company’s consolidated VIEs included in the condensed consolidated statements of comprehensive income (loss) were $i463,000 and $i317,000,
respectively, for the six months ended June 30, 2021 and $i403,000 and $i339,000, respectively, for the six months ended June 30, 2020.
16
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. iThe 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:
The following table provides disaggregated commissions and fees revenue by major source:
For
the Three Months Ended June 30,
For the Six Months Ended June 30,
(in thousands)
2021
2020
2021
2020
Direct bill revenue (1)
$
i50,358
$
i22,430
$
i144,863
$
i50,539
Agency
bill revenue (2)
i47,293
i20,256
i82,633
i36,685
Profit-sharing
revenue (3)
i8,175
i2,626
i18,467
i7,750
Policy
fee and installment fee revenue (4)
i4,792
i3,653
i9,268
i7,035
Consulting
and service fee revenue (5)
i5,726
i793
i11,006
i1,508
Other
income (6)
i3,362
i1,510
i6,297
i1,910
Total
commissions and fees
$
i119,706
$
i51,268
$
i272,534
$
i105,427
__________
(1) Direct
bill revenue represents commission revenue earned by facilitating the arrangement between individuals or businesses and Insurance Company Partners by providing 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 by providing insurance placement services to Clients. The Company acts as an agent on behalf of the Client for the term of the insurance policy.
(3) Profit-sharing revenue represents bonus-type revenue that is earned by the
Company as a sales incentive provided by certain Insurance Company Partners.
(4) Policy fee revenue represents revenue earned for acting in the capacity of an MGA on behalf of the Insurance Company Partner and fulfilling certain services including delivery of policy documents, processing payments and other administrative functions. Installment fee revenue represents revenue earned by the Company for providing payment processing services on behalf of the Insurance Company Partner related to policy premiums paid on an installment basis.
(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 application of ASC Topic 606, Revenue from Contracts with Customers (“Topic 606”), requires the use of management judgment. The following are the areas of most significant judgment as it relates to Topic 606:
•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.
•Contracts in the Medicare operating segment are multi-year arrangements in which the Company is entitled to renewal commissions. However, the Company has applied a constraint to renewal commission that limits revenue recognized on new policies to the policy year in effect, and revenue recognized on renewed policies to the receipt of periodic
cash, when a risk of significant reversals exists based on: (i) insufficient history; and (ii) the influence of external factors outside of the Company’s control, including policyholder discretion over plans and Insurance Company Partner relationship, political influence, and a contractual provision, which limits the Company’s right to receive renewal commissions to ongoing compliance and regulatory approval of the relevant Insurance Company Partner and compliance with the Centers for Medicare and Medicaid Services.
•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.
•Variable consideration includes estimates of direct bill commissions, a reserve for policy cancellations and an estimate of profit-sharing revenue.
•Costs to obtain a contract are deferred and recognized over ifive 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.
•Due to the relatively short time period between the information gathering phase and binding insurance coverage, the Company has determined that costs to fulfill contracts are not significant. Therefore, costs to fulfill a contract are expensed as incurred.
Contract assets arise when the Company recognizes revenue for amounts which have not yet been billed and contract liabilities
relate to payments received in advance of performance under the contract before the transfer of a good or service to the customer. Contract assets are included in premiums, commissions and fees receivable, net and contract liabilities are included in accrued expenses and other current liabilities on the condensed consolidated balance sheets. iThe
balances of contract assets and liabilities arising from contracts with customers are as follows:
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 estimate of the average benefit period
for new business. Deferred commission expense represents employee commissions that are capitalized and not yet expensed and are included in other assets on the condensed consolidated balance sheets. iThe table below provides a rollforward of deferred commission expense for each of the three and six months ended June 30, 2021 and 2020:
For
the Three Months Ended June 30,
For the Six Months Ended June 30,
(in thousands)
2021
2020
2021
2020
Balance at beginning of period
$
i5,164
$
i3,792
$
i4,751
$
i3,621
Costs
capitalized
i1,351
i617
i2,186
i1,109
Amortization
(i479)
(i349)
(i901)
(i670)
Balance
at end of period
$
i6,036
$
i4,060
$
i6,036
$
i4,060
8.
iIntangible Assets, Net and Goodwill
The Company recognizes certain separately identifiable intangible assets acquired in connection with business combinations and asset acquisitions. Refer to Note 3 for a summary of intangible assets acquired in connection with business combinations during the six months ended June 30, 2021. iIntangible
assets consist of the following:
(1) During
the six months ended June 30, 2021, the Company recorded measurement period adjustments relating to certain businesses acquired in the fourth quarter of 2020, which decreased purchased customer accounts and trade names by $i4.6 million and $i156,000,
respectively.
Amortization expense recorded for intangible assets was $i10.7 million and $i4.5 million for
the three months ended June 30, 2021 and 2020, respectively, and $i21.3 million and $i8.0
million for the six months ended June 30, 2021 and 2020, respectively.
19
Refer to Note 3 for a summary of goodwill recorded in connection with business combinations during the six months ended June 30, 2021. iThe changes in carrying value
of goodwill by Operating Group for the period are as follows:
(1) Measurement
period adjustments relating to businesses acquired in the fourth quarter of 2020 increased accrued expenses and other current liabilities by $i93,000, decreased property and equipment by $i124,000
and decreased cash consideration by $i2.5 million.
9. iLong-Term
Debt
On October 14, 2020, the Company entered into a credit agreement with JPMorgan Chase Bank, N.A to provide senior secured credit facilities in an aggregate principal amount of $i800.0 million (the "JPM Credit Agreement"), which consisted of (i) a term loan facility in the principal amount of $i400.0 million
maturing in 2027 (the “Existing Term Loan B”) and (ii) a revolving credit facility with commitments in an aggregate principal amount of $i400.0 million maturing in 2025 (the “Revolving Facility”).
The Existing Term Loan B accrued interest at LIBOR plus i400
basis points (“bps”) with a floor of i4.75%. Borrowings under the Revolving Facility accrue interest at LIBOR plus i200 bps to LIBOR plus i300
bps based on the total net leverage ratio. The outstanding borrowings on the Revolving Facility of $i20.0 million had an applicable interest rate of i2.34% at June 30,
2021. In addition, the Revolving Facility is subject to a commitment fee of i0.30%.
On May 7, 2021, the Company entered into Amendment No. 1 to the JPM Credit Agreement, under which (a) the financial covenant requiring the Company to maintain a Total First Lien Net Leverage Ratio (as defined in the JPM Credit
Agreement) at or below i5.00 to 1.00 was amended to increase such level to i6.00 to 1.00, and (b) the financial covenant
requiring the Company to maintain a Debt Service Coverage Ratio (as defined in the JPM Credit Agreement) at or above i2.25 to 1.00 was removed.
On June 2, 2021, the Company entered into Amendment No. 2 to the JPM Credit Agreement to provide for a new senior secured first lien term loan facility
in an aggregate principal amount of $i500.0 million maturing in 2027 (the “New Term Loan B”). The New Term Loan B bears interest at LIBOR plus i350
bps, subject to a LIBOR floor of i50 bps. The applicable interest rate on the Term Loan B at June 30, 2021 was i4.00%. The
Company used a portion of the proceeds from the New Term Loan B to repay in full the Company’s obligations under the Existing Term Loan B. The remaining terms of the New Term Loan B and the terms of the Revolving Facility remained relatively unchanged.
The 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 June 30, 2021.
Interest Rate Caps
The
Company entered into interest rate caps to mitigate its exposure to interest rate risk by limiting the impact of interest rate changes on cash flows. In March 2021, the Company executed three interest rate cap agreements, each with a notional amount of $iii300.0// million
(the “Interest Rate Cap Agreements”), which collectively limit the exposure of the variable component of interest rates under its Term Loan B to a maximum of i4.75%. The Interest Rate Cap Agreements were entered into with financial institutions at positions with participating interest rate caps of i0.75%,
i1.50%, and i2.50%, expiring on March 10, 2022, March 10, 2024 and March 8, 2026, respectively. The interest
rate caps are recorded at an aggregate fair value of $i2.6 million at June 30, 2021 and included as a component of other assets on the condensed consolidated balance sheets. The Company recorded a fair value loss of $ii825,000/
related to the interest rate caps for the three and six months ended June 30, 2021, which is included as a component of other expense, net in the condensed consolidated statements of comprehensive income (loss).
20
10. iRelated
Party Transactions
Commission Revenue
The Company serves as a broker for Holding Company of the Villages, Inc. (“The Villages”) and certain affiliated entities. Commission revenue recorded as a result of transactions with The Villages was $i667,000 and $i452,000
for the three months ended June 30, 2021 and 2020, respectively, and $i1.3 millionand $i721,000
for the six months ended June 30, 2021 and 2020, respectively.
Rent Expense
The Company has various agreements to lease office space from wholly-owned subsidiaries of The Villages. Total rent expense incurred with respect to The Villages and its wholly-owned subsidiaries was $i130,000
and $i151,000 for the three months ended June 30, 2021 and 2020, respectively, and $i261,000
and $i284,000 for the six months ended June 30, 2021 and 2020, respectively.
The Company has various agreements to lease office space from other related party entities. Total rent expense incurred with respect to related parties other than The Villages was $i524,000
and $i516,000 for the three months ended June 30, 2021 and 2020, respectively, and $i1.0
million and $i764,000 for the six months ended June 30, 2021 and 2020, respectively.
11. iShare-Based
Compensation
Omnibus Incentive Plan and Partnership Inducement Award Plan
The Company has an Omnibus Incentive Plan (the “Omnibus Plan”) and a Partnership Inducement Award Plan (the “Inducement Plan” and collectively, the “Plans”) to motivate and reward Colleagues and other individuals, including those who join the Company through Partnerships, to perform at the highest level and contribute significantly to the Company’s success, thereby furthering the best interests of its shareholders. The Omnibus Plan and the Inducement Plan provide for the
Company to make awards of i3,844,044 and i1,500,000
shares of Class A common stock, respectively, at June 30, 2021.
During the six months ended June 30, 2021, the Company made awards of restricted stock, unrestricted stock and performance-based restricted stock units under the Plans to its non-employee directors and Colleagues. Performance-based restricted stock unit awards were issued under the Omnibus Plan in connection with the Long-Term Incentive Plan, which is discussed in further detail below. Shares of unrestricted stock issued to directors during the six months ended June 30, 2021 were vested upon issuance while restricted stock issued to Colleagues, Risk Advisors and executive officers generally either cliff vest after i4
years or vest ratably over i3 to i5 years.
i
The
following table summarizes the activity for non-vested awards granted by the Company under the Plans:
The
total fair value of shares that vested and settled under the Plans during the six months ended June 30, 2021 was $i3.9 million.
Share-based compensation includes expense recognized for management incentive units and advisor incentives, in addition to issuances under
the Plans. The Company recognizes share-based compensation expense for the Plans net of actual forfeitures. The Company recorded total share-based compensation expense of $i4.5 million and $i2.0
million for the three months ended June 30, 2021 and 2020, respectively, and $i8.1 million and $i3.1
million for the six months ended June 30, 2021 and 2020, respectively, which is included in commissions, employee compensation and benefits expense in the condensed consolidated statements of comprehensive income (loss).
21
Long-Term Incentive Plan
On May 3, 2021, the Company’s Compensation Committee approved a new form of performance-based restricted stock unit award agreement (the “Form PSU Award Agreement”) under the
Company’s Omnibus Plan in connection with the granting of performance-based restricted stock unit (“PSU”) awards to its executive officers. The Form PSU Award Agreement provides for the granting of PSUs which generally vest in the quarter following the end of a performance period of ithree years. The number of PSUs, if any, that will be earned pursuant to a PSU award will depend on the level of performance achieved with respect to applicable performance goals during the performance period.
On
May 3, 2021, the Compensation Committee awarded the Company’s executive officers incentive compensation awards of (i) PSUs with an aggregate target grant date value of $i3.1 million and (ii) restricted stock with an aggregate grant
date value of $i1.0 million. The restricted stock will vest in equal annual installments over ifive
years, with the first installment vesting on March 15, 2022. The incentive compensation awards have an aggregate maximum value of $i8.8 million.
12.
iEarnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) attributable to BRP Group, Inc. by the weighted-average number of shares of Class A common stock outstanding during the period. Diluted earnings (loss) per share is computed giving effect to all potentially dilutive shares of Class B common stock.
During the periods presented, potentially dilutive securities include restricted stock awards and shares of Class B common stock that are cancellable upon the redemption
or exchange, on a one-for-one basis, of LLC Units for shares of our Class A common stock. The i1,864,337 shares of unvested restricted Class A common stock were excluded from the diluted calculation for the three months ended June 30, 2021 and the i398,024
shares of unvested restricted Class A common stock were excluded from the diluted calculation for the three and six months ended June 30, 2020 as their inclusion would have been anti-dilutive because the Company was in a net loss position during these periods. In addition, the i49,575,871 and i45,458,763
outstanding shares of Class B common stock and the corresponding LLC Units have been excluded from the diluted calculation for all periods presented 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.
i
The following
is a calculation of the basic and diluted weighted-average number of shares of Class A common stock outstanding and earnings (loss) per share for the three and six months ended June 30, 2021 and 2020.
For
the Three Months Ended June 30,
For the Six Months Ended June 30,
(in thousands, except per share data)
2021
2020
2021
2020
Basic earnings (loss) per share:
Net
income (loss) attributable to BRP Group, Inc.
$
(i9,756)
$
(i3,588)
$
i4,857
$
(i2,120)
Shares
used for basic earnings (loss) per share:
Weighted-average shares of Class A common stock outstanding - basic
i44,671
i20,426
i44,464
i19,960
Basic
earnings (loss) per share
$
(i0.22)
$
(i0.18)
$
i0.11
$
(i0.11)
Diluted
earnings (loss) per share:
Net income (loss) attributable to BRP Group, Inc.
$
(i9,756)
$
(i3,588)
$
i4,857
$
(i2,120)
Shares
used for diluted earnings (loss) per share:
Weighted-average shares of Class A common stock outstanding
i44,671
i20,426
i44,464
i19,960
Dilutive
effect of unvested restricted shares of Class A common stock
i—
i—
i1,696
i—
Weighted-average
shares of Class A common stock outstanding - diluted
i44,671
i20,426
i46,160
i19,960
Diluted
earnings (loss) per share
$
(i0.22)
$
(i0.18)
$
i0.11
$
(i0.11)
/
22
13.
iFair Value Measurements
Topic 820 established a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy under Topic 820 are described below:
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.
Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
The fair value measurement level for assets and liabilities within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
i
The following table summarizes the Company’s assets and liabilities measured at fair value on a recurring basis within each level of the fair value hierarchy:
Methodologies
used for assets and liabilities measured at fair value on a recurring basis within Level 3 of the fair value hierarchy at June 30, 2021 and December 31, 2020 are based on limited unobservable inputs. These methods may produce a fair value calculation that may not be indicative of the net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
The fair value of interest rate caps was $i2.6 million
at June 30, 2021. The fair value of interest rate caps are determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates rise above the strike rate of the caps. The variable interest rates used in the calculation of projected receipts on the cap are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities.
The fair value of contingent earnout liabilities is based on sales projections for the acquired entities, which are reassessed each reporting period. Based on the Company’s ongoing assessment of the fair value of its contingent earnout liabilities, the Company
recorded a net increase in the estimated fair value of such liabilities of $i11.8 million for the six months ended June 30, 2021. The Company has assessed the maximum estimated exposure to the contingent earnout liabilities to be $i531.0
million at June 30, 2021.
23
The Company measures contingently returnable consideration and contingent earnout liabilities at fair value at each reporting period using significant unobservable inputs classified within Level 3 of the fair value hierarchy. The Company uses a probability weighted value analysis as a valuation technique to convert future estimated cash flows to a single present value amount. The significant unobservable inputs used in the fair value measurements are sales projections over the earnout period, and the probability
outcome percentages assigned to each scenario. Significant increases or decreases to either of these inputs would result in a significantly higher or lower asset or liability with a higher asset capped by the contractual maximum of the contingently returnable consideration and a higher liability capped by the contractual maximum of the contingent earnout liabilities. Ultimately, the asset and liability will be equivalent to the amount settled, and the difference between the fair value estimate and amount settled will be recorded in earnings for business combinations, or as a reduction of the cost of the assets acquired for asset acquisitions. Refer to Note 3 for additional information regarding contingent earnout consideration recorded in connection with business combinations.
The fair value of the contingent earnout liabilities is based on the present value of the expected future payments to be made to Partners in accordance
with the provisions outlined in the respective purchase agreements, which is a Level 3 fair value measurement. In determining fair value, the Company estimates the Partner’s future performance using financial projections developed by management for the Partner and market participant assumptions that were derived for revenue growth, profitability based on earnings before income taxes, depreciation and amortization (“EBITDA”), or the number of rental units tracked. Revenue and EBITDA growth rates generally ranged from i10%
to i24% at June 30, 2021 and from i7%
to i20% at December 31, 2020. The Company estimates future payments using the earnout formula and performance targets specified in each purchase agreement and these financial projections. These payments are discounted to present value using a risk-adjusted rate that takes into consideration market-based rates of return that reflect the ability of the Partner to achieve the targets. These discount
rates generally ranged from i5.25% to i18.50% at June 30,
2021 and from i5.00% to i18.00% at December 31,
2020. Changes in financial projections, market participant assumptions for revenue growth and profitability, or the risk-adjusted discount rate, would result in a change in the fair value of contingent consideration.
i
The following table sets forth a summary of the changes in the fair value of the Company’s contingently returnable consideration
and contingent earnout liabilities, which are measured at fair value on a recurring basis utilizing Level 3 assumptions in their valuation:
(2) During the six months ended June 30, 2021, the Company recorded measurement period adjustments relating to businesses acquired in the fourth quarter of 2020. These adjustments decreased contingent earnout liabilities by $i4.7 million,
which offsets issuances of $i7.8 million from business combinations in the current period.
Substantially all of the change in fair value of contingent consideration during the six months ended June 30, 2021 and 2020 related to assets and liabilities that were held at the end of the respective
periods.
Fair Value of Other Financial Instruments
The fair value of long-term debt is classified as Level 2 within the fair value hierarchy. Fair value is based on an estimate using a discounted cash flow analysis based on current borrowing rates for similar types of borrowing arrangements. The fair value of long-term debt was approximately $i484.1 million at June 30, 2021 compared to a carrying value of $i500.0
million. The fair value of long-term debt was approximately $i402.0 million at December 31, 2020 compared to a carrying value of $i399.0 million. The carrying
value of long-term debt is netted against unamortized debt discount and issuance costs of $i17.0 million and $i13.6
million at June 30, 2021 and December 31, 2020, respectively, for balance sheet presentation.
24
14. iCommitments and Contingencies
The
Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity.
15. iSegment Information
BRP
Group’s business is divided into ifour Operating Groups: Middle Market, Specialty, MainStreet, and Medicare.
•Middle Market provides 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.
•Medicare offers consultation for government assistance programs and solutions, including traditional Medicare and Medicare Advantage, to seniors and Medicare-eligible individuals through a network of agents.
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, the Company 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.
In the Medicare Operating Group, the Company
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.
The Company’s chief operating decision maker, the chief executive officer, uses net income before interest, taxes, depreciation, amortization, and one-time transactional-related expenses or non-recurring items to manage resources and make decisions about the business.
i
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 $i109,000 for the three months ended June 30, 2021. The MainStreet Operating Group recorded intercompany commissions and fees revenue from activity with the Middle Market Operating Group of $i61,000
for the three months ended June 30, 2021. The Medicare Operating group recorded intercompany commissions and fees revenue from activity with itself of $i66,000 for the three months ended June 30, 2021. These intercompany commissions and fees are eliminated through Corporate and Other.
(1) The
Middle Market Operating Group recorded intercompany commissions and fees revenue from activity with the Specialty Operating Group of $i468,000 for the six months ended June 30, 2021. The MainStreet Operating Group recorded intercompany commissions and fees revenue from activity with the Middle Market Operating Group of $i91,000
for the six months ended June 30, 2021. The Medicare Operating group recorded intercompany commissions and fees revenue from activity with itself of $i160,000 for the six months ended June 30, 2021. These intercompany commissions and fees are eliminated through Corporate and Other.
On July 1, 2021, the Company purchased certain assets and intellectual and intangible rights and assumed certain liabilities of RogersGray Inc., Breakwater Brokerage, LLC and Monomoy Insurance Group, LLC (collectively, “RogersGray”) for upfront consideration consisting of $i138.1
million of cash (which was reduced by the value of shares of Class A common stock issued to RogersGray colleagues in connection with the Partnership) and i1,950,232 LLC Units (and the corresponding i1,950,232
shares of Class B common stock). RogersGray will also have the opportunity to receive additional contingent consideration payable in cash, shares of Class A common stock, or a combination of both at the Company’s sole option. The Partnership enhances and further expands the Company’s geographic footprint and product offerings in New England and the broader Northeast region. The Company has not yet completed its evaluation and determination of consideration paid, certain assets and liabilities acquired, or treatment of this transaction as either a business combination or asset acquisition in accordance with Topic 805.
On August
2, 2021, the Company purchased certain assets and intellectual and intangible rights and assumed certain liabilities of FounderShield LLC, AlphaRoot LLC, ReShield LLC, and Scale Underwriting Services LLC (collectively, “FounderShield”) for upfront consideration consisting of $i26.7 million of cash (which was reduced by the value of shares of Class A common stock issued to FounderShield colleagues in connection
with the Partnership), i304,628 shares of Class A common stock and i364,174
LLC Units (and the corresponding i364,174 shares of Class B common stock). FounderShield will also have the opportunity to receive additional contingent consideration payable in cash, shares of Class A common stock, or a combination of both at the Company’s sole option. The Partnership brings to BRP Group unique expertise for rapidly-scaling companies in numerous high-growth
industry verticals across the Technology & Fintech, Life Sciences and Emerging Markets sectors. The Company has not yet completed its evaluation and determination of consideration paid, certain assets and liabilities acquired, or treatment of this transaction as either a business combination or asset acquisition in accordance with Topic 805.
26
On August 2, 2021, the Company purchased certain assets and intellectual and intangible rights and assumed certain liabilities of The Capital Group, LLC, The Capital
Group Association Consultants, LLC, US Underwriters, LLC, and TCG Financial Management Company, LLC, including the membership interests of The Capital Group Investment Advisory Services, LLC (collectively, “TCG”) for upfront consideration consisting of $i40.4 million of cash (which was reduced by the value of shares of Class A common stock issued to TCG colleagues in connection with the Partnership) and i653,324
LLC Units (and the corresponding i653,324 shares of Class B common stock). TCG will also have the opportunity to receive additional contingent consideration payable in cash, shares of Class A common stock, or a combination of both at the Company’s sole option. The Partnership adds scale and density in the critical D.C. Metro region. The
Company has not yet completed its evaluation and determination of consideration paid, certain assets and liabilities acquired, or treatment of this transaction as either a business combination or asset acquisition in accordance with Topic 805.
JPM Credit Agreement
On August 6, 2021, the Company entered into Amendment No. 3 to the JPM Credit Agreement, under which the aggregate principal amount of the Revolving Facility was increased from $i400.0 million
to $i475.0 million. The other terms of the Revolving Facility and the terms of the New Term Loan B remained unchanged.
27
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and in the Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on March 11, 2021. 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 Part II, Item 1A. Risk Factors and Note Regarding Forward-Looking Statements included elsewhere in this Quarterly Report on Form 10-Q and in the Annual Report
on Form 10-K.
BRP Group, Inc. (“BRP Group,” the “Company,”“we,”“us” or “our”) is a rapidly growing independent insurance distribution firm delivering solutions that give our Clients the peace of mind to pursue their purpose, passion and dreams. We support our Clients, Colleagues, Insurance Company Partners and communities through the deployment of vanguard resources and capital to drive organic and inorganic growth. We are innovating the industry by taking a holistic and tailored approach to risk management, insurance and employee benefits. Our growth plan includes increased geographic representation across the U.S., expanded client
value propositions and new lines of insurance to meet the needs of evolving lifestyles, business risks and healthcare funding. We are a destination employer supported by an award-winning culture, powered by exceptional people and fueled by industry-leading growth and innovation.
We represent over 600,000 Clients across the United States and internationally. Our 2,100 Colleagues include approximately 340 Risk Advisors, who are fiercely independent, relentlessly competitive and “insurance geeks.” We have approximately 100 offices in 18 states, all of which are equipped to provide diversified products and services to empower our clients at every stage through our four Operating Groups.
•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, as well as their families.
•MainStreet offers personal insurance, commercial insurance and life and health solutions to individuals and businesses in their communities.
•Medicare offers consultation for government assistance programs and solutions to seniors and Medicare-eligible individuals through a network of agents.
•Specialty delivers specialty insurers, professionals, individuals and niche industry businesses expanded access to exclusive specialty markets, capabilities and programs requiring complex underwriting and placement.
In 2011, we adopted the “Azimuth” as our corporate constitution. Named
after a historical navigation tool used to find “true north,” the Azimuth asserts our core values, business basics and stakeholder promises. The ideals encompassed by the Azimuth support our mission to deliver indispensable, tailored insurance and risk management insights and solutions to our clients. We strive to be regarded as the preeminent insurance advisory firm fueled by relationships, powered by people and exemplified by client adoption and loyalty. This type of environment is upheld by the distinct vernacular we use to describe our services and culture. We are a firm, instead of an agency; we have Colleagues, instead of employees; we have Risk Advisors, instead of producers/agents. We serve Clients instead of customers and we refer to our acquisitions as Partnerships. We refer to insurance brokerages that we have acquired, or in the case of asset acquisitions, the producers, as Partners.
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 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 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.
28
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.
PARTNERSHIPS
We utilize strategic acquisitions, which we refer to as Partnerships, to complement and expand our business. We source Partnerships through proprietary deal flow,
competitive auctions and cultivated industry relationships. We are currently considering Partnership opportunities in all of our Operating Groups, including businesses to complement or expand our MGA of the Future that are valued at higher purchase price multiples than businesses in our other Operating Groups.
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, value, 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 five Partnerships
for an aggregate purchase price of $41.1 million during the six months ended June 30, 2021 and nine Partnerships for an aggregate purchase price of $309.4 million during the six months ended June 30, 2020. Partnerships completed during 2021 added $1.8 million of premiums, commissions and fees receivable, $17.0 million of intangible assets and $22.6 million of goodwill to the condensed consolidated balance sheet.
We entered into Amendment No. 2 to the JPM Credit Agreement in June 2021 for an upsized, new $500 million senior secured first lien term loan facility maturing in 2027 (the “New Term Loan B”), which represented a $100 million increase in the aggregate principal amount of our existing senior secured first lien term loan facility, and Amendment No. 3 to the JPM Credit Agreement in August 2021 for an upsize of the
aggregate principal amount of the revolving credit facility thereunder from $400.0 million to $475.0 million. These transactions provide us incremental capacity to assist in funding our Partnership pipeline with a reduction in our cost of capital.
For additional information on the Partnerships that we have completed during 2021, see Note 3 to our condensed consolidated financial statements included in Part I, Item 1. Financial Statements of this report.
NOVEL CORONAVIRUS (COVID-19)
The extent to which the COVID-19 pandemic and the related economic impact may affect our financial condition or results of operations is uncertain. The extent of the impact on our operational and financial performance will depend on various factors,
including the availability, effectiveness and utilization of vaccines for COVID-19 and its variant strains, new information that may emerge concerning the severity of COVID-19 and its variants, actions to contain or limit their spread, including any related federal, state or local governmental orders or restrictions and the duration and spread of the outbreak.
Our Clients and Colleagues remain our first priority and we will continue to evaluate conditions with their safety in mind. 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 and its variant strains, 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. See Part I, Item 1A. “Risk Factors - The ongoing novel coronavirus (COVID-19) pandemic could and resulting government actions (including travel bans, lock downs, maximum occupancy limits and similar actions) could result in declines in business and increases in claims that could adversely affect our business, financial condition and results of operations” in our Annual Report on Form 10-K filed with the SEC on March 11, 2021.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30,
2021 AND 2020
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements for the three and six months ended June 30, 2021 and the related notes and other financial information included elsewhere in this report. 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 Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K filed with the SEC on March 11,
2021.
29
The following is a discussion of our consolidated results of operations for the three and six months ended June 30, 2021 and 2020.
For
the Three Months Ended June 30,
For the Six Months Ended June 30,
(in thousands)
2021
2020
Variance
2021
2020
Variance
Revenues:
Commissions
and fees
$
119,706
$
51,268
$
68,438
$
272,534
$
105,427
$
167,107
Operating
expenses:
Commissions, employee compensation and benefits
89,065
39,263
49,802
178,440
73,811
104,629
Other
operating expenses
19,200
9,546
9,654
36,768
18,431
18,337
Amortization expense
10,742
4,450
6,292
21,279
8,046
13,233
Change
in fair value of contingent consideration
13,325
4,581
8,744
11,822
6,242
5,580
Depreciation expense
573
240
333
1,167
405
762
Total
operating expenses
132,905
58,080
74,825
249,476
106,935
142,541
Operating
income (loss)
(13,199)
(6,812)
(6,387)
23,058
(1,508)
24,566
Other
expense:
Interest expense, net
(5,848)
(1,047)
(4,801)
(11,491)
(1,632)
(9,859)
Other
expense, net
(1,057)
—
(1,057)
(1,057)
—
(1,057)
Total other expense
(6,905)
(1,047)
(5,858)
(12,548)
(1,632)
(10,916)
Income
(loss) before income taxes
(20,104)
(7,859)
(12,245)
10,510
(3,140)
13,650
Income tax provision
—
—
—
—
12
(12)
Net
income (loss)
(20,104)
(7,859)
(12,245)
10,510
(3,152)
13,662
Less: net income (loss) attributable to noncontrolling interests
(10,348)
(4,271)
(6,077)
5,653
(1,032)
6,685
Net
income (loss) attributable to BRP Group, Inc.
$
(9,756)
$
(3,588)
$
(6,168)
$
4,857
$
(2,120)
$
6,977
Commissions
and Fees
We earn commissions and fees by facilitating the arrangement between Insurance Company Partners and individuals or businesses for the carrier to provide insurance to the insured party. Our commissions and fees are usually a percentage of the premium paid by the insured and generally depends on the type of insurance, the particular Insurance Company Partner and the nature of the services provided. Under certain arrangements with Clients, we earn pre-negotiated service fees in lieu of commissions. Additionally, we may also receive from Insurance Company Partners a profit-sharing commission, or straight override, which represent forms of variable consideration associated with the placement of coverage and are based primarily on underwriting results, but may also contain considerations for volume, growth or retention.
Commissions and fees increased $68.4 million and $167.1 million
for the three and six months ended June 30, 2021 as compared to the same periods of 2020, respectively. This increase was related to amounts attributable to Partners acquired during 2020 and 2021 prior to their having reached the twelve-month owned mark (such amounts, the “Partnership Contribution”) and organic growth. The Partnership Contribution accounted for $51.9 million and $143.1 million of the increase to commissions and fees for the quarter and year-to-date periods, respectively, and organic growth accounted for $16.5 million and $23.9 million of the increase for the quarter and year-to-date periods, respectively.
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Major Sources of Commissions and Fees
The
following table sets forth our commissions and fees by major source for the periods indicated:
For the Three Months Ended June 30,
For
the Six Months Ended June 30,
(in thousands)
2021
2020
Variance
2021
2020
Variance
Direct bill revenue
$
50,358
$
22,430
$
27,928
$
144,863
$
50,539
$
94,324
Agency
bill revenue
47,293
20,256
27,037
82,633
36,685
45,948
Profit-sharing revenue
8,175
2,626
5,549
18,467
7,750
10,717
Policy
fee and installment fee revenue
4,792
3,653
1,139
9,268
7,035
2,233
Consulting and service fee revenue
5,726
793
4,933
11,006
1,508
9,498
Other
income
3,362
1,510
1,852
6,297
1,910
4,387
Total commissions and fees
$
119,706
$
51,268
$
68,438
$
272,534
$
105,427
$
167,107
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 $27.9 million and $94.3 million for the three and six months ended June 30, 2021 as compared to the same periods of 2020, respectively. The Partnership Contribution accounted for $24.0 million and $88.0 million of the increase to direct bill revenue for the quarter and year-to-date periods, respectively. Organic growth for direct bill revenue was $3.9 million and $6.3 million for the quarter and year-to-date periods, respectively.
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 $27.0
million and $45.9 million for the three and six months ended June 30, 2021 as compared to the same periods of 2020, respectively. The Partnership Contribution accounted for $18.5 million and $34.2 million of the increase to agency bill revenue for the quarter and year-to-date periods, respectively. Organic growth for agency bill revenue was $8.5 million and $11.8 million for the quarter and year-to-date periods, respectively.
Profit-sharing revenue represents bonus-type or contingent revenue that is earned by us as a sales incentive provided by certain Insurance Company Partners. Profit-sharing revenue increased $5.5 million and $10.7 million for the three and six months ended June 30, 2021 as compared to the same periods of 2020, respectively, as a result of the Partnership Contribution of $4.8 million and $10.2 million, respectively,
and organic growth of $0.7 million and $0.5 million, respectively. Profit-sharing revenue was affected by higher loss ratios in our Middle Market and MainStreet Operating Groups, which is particularly acute in the Florida homeowners marketplace.
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 $1.1 million and $2.2 million during the three and six months ended June 30, 2021 as compared to the same periods of 2020, respectively. These fees are generated by our Specialty Operating Group.
Consulting and service fee revenue represents fees received in lieu of a commission and specialty insurance consulting revenue.
Consulting and service fee revenue increased $4.9 million and $9.5 million for the three and six months ended June 30, 2021 as compared to the same periods of 2020, respectively, as a result of the Partnership Contribution of $3.1 million and $7.0 million, respectively, and organic growth of $1.8 million and $2.5 million, respectively.
Other income consists of Medicare marketing income that is based on agreed-upon cost reimbursement for fulfilling specific targeted marketing campaigns in addition to other fee income and premium financing income generated across all Operating Groups. Other income increased $1.9 million and $4.4 million for the three and six months ended June 30, 2021 as compared to the same periods of 2020, respectively. The Partnership Contribution accounted for $1.5 million and $3.9 million for the quarter and
year-to-date periods, respectively, and organic growth comprised $0.4 million and $0.5 million for the quarter and year-to-date periods, respectively.
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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 stock awards to senior management, Colleagues, 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 $49.8 million and $104.6 million for the three and six months ended June 30, 2021 as compared to the same periods of 2020, respectively. The Partnership Contribution accounted for $34.7 million and $78.4 million of the increase to commissions,
employee compensation and benefits for the quarter and year-to-date periods, respectively. Share-based compensation expense increased $2.6 million and $5.0 million, respectively, as a result of equity grants awarded to all newly hired Colleagues, including those who joined us through Partnerships, and grants to reward Colleagues, including members of senior management. The remaining increase in commissions, employee compensation and benefits expense can be attributed to higher commissions expense relating to our organic growth and higher compensation and benefits relating to hiring to support our growth.
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. Our occupancy-related costs and professional services expenses, in particular,
generally increase or decrease in relative proportion to the number of our employees and the overall size and scale of our business operations. In addition, we have invested in the expansion of our Tampa offices to accommodate our growth plans, which has resulted in an increase to rent expense beginning in April 2020. Certain corporate expenses are allocated to the Operating Groups.
Other operating expenses increased $9.7 million for the three months ended June 30, 2021 as compared to the same period of 2020, which was primarily attributable to increases in rent expense of $2.0 million relating to expansion of our operating locations, professional fees of $1.6 million related to Partnership transactions and public company costs, dues and subscriptions of $1.2 million from our investment in technology to support our growth, travel and entertainment of $1.1 million relating to
Partnership travel and lodging, software and internet of $1.1 million relating to Partners who joined us in 2020 and consulting fees of $0.7 million relating to our investment in technology to support our growth.
Other operating expenses increased $18.3 million for the six months ended June 30, 2021 as compared to the same period of 2020, which was primarily attributable to increases in rent expense of $4.7 million relating to expansion of our corporate offices and operating locations, dues and subscriptions of $2.7 million from our investment in technology to support our growth, professional fees of $2.3 million related to Partnership transactions and public company costs, software and internet of $2.0 million relating to Partners who joined us in 2020, travel and entertainment of $1.1 million relating to Partnership travel and lodging costs, consulting fees of $1.4 million
relating to our investment in technology to support our growth, licenses and taxes of $0.7 million and advertising and marketing of $0.6 million.
Amortization Expense
Amortization expense increased $6.3 million and $13.2 million for the three and six months ended June 30, 2021 as compared to the same periods of 2020, respectively, which was driven by amortization related to Partners acquired over the past twelve months.
Change in Fair Value of Contingent Consideration
Change in fair value of contingent consideration was $13.3 million for the three months ended June 30, 2021 as compared to $4.6 million for the same period of 2020. Change in fair value of contingent consideration was $11.8 million
for the six months ended June 30, 2021 as compared to $6.2 million for the same period of 2020. 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.
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Interest Expense, Net
Interest expense, net increased $4.8 million and $9.9 million for the three and six months ended June 30, 2021 as compared to the same periods of 2020, respectively, resulting from a higher average interest rate and higher average borrowings under the JPM Credit Agreement in effect during the first half of 2021 compared to the credit
facilities in place during the first half of 2020.
Our total assets and total liabilities increased $206.4 million and $184.0 million, respectively, at June 30, 2021 as compared to December 31, 2020. The most significant changes in assets and liabilities are described below.
Cash and cash equivalents and restricted cash increased $134.0 million as a result of operating, investing and financing activities
illustrated in the condensed consolidated statement of cash flows and discussed further under the Sources and Uses of Cash section below.
Premiums, commissions and fees receivable, net increased $54.2 million as a result of revenue growth and the timing of revenue recognition under direct bill policies in employee benefits for which payment is received monthly through the duration of the year.
Goodwill increased $20.3 million as a result of Partnerships completed during the first half of 202, offset in part by measurement period adjustments for certain Partnerships formed in the fourth quarter 2020.
Premiums payable to insurance companies and producer commissions payable increased $42.0 million and $8.1 million, respectively, as a result of revenue growth.
Revolving lines of credit increased $20.0
million as a result of borrowing on our Revolving Facility for general working capital purposes in the second quarter of 2021.
Long-term debt increased $97.6 million as a result of having upsized our term loan to $500.0 million during the second quarter of 2021.
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 to BRP Group, Inc. (for Adjusted Net Income) or diluted earnings (loss) per share (for Adjusted Diluted EPS), which we consider to be the most directly comparable GAAP measures. These non-GAAP financial measures have limitations as analytical tools, and when assessing our operating performance, you should not consider these non-GAAP financial measures in isolation or as substitutes for commissions and fees, net income (loss), net income (loss) attributable to BRP Group, Inc. or other consolidated income statement data prepared in accordance with GAAP. Other companies in our industry may define or calculate these non-GAAP financial measures differently than we do, and accordingly these measures may not be comparable to similarly titled measures used by other companies.
Adjusted EBITDA eliminates the effects of financing, depreciation, amortization and change in fair value of contingent consideration. 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.
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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 share-based compensation expense and other non-cash charges; and
•exclude certain tax payments that may represent a reduction in cash available to us.
We calculate Organic Revenue Growth based on commissions and fees for the relevant period by excluding the first twelve months of commissions and fees generated from new Partners.
Organic Revenue Growth is the change in Organic Revenue period-to-period, with prior period results adjusted for Organic Revenues that were excluded in the prior period because the relevant Partners had not yet reached the twelve-month owned mark, but which reach the twelve-month owned mark in the current period. For example, revenues from a Partner acquired on June 1, 2020 are excluded from Organic Revenue for 2020. However, after June 1, 2021, results from June 1, 2020 to December 31, 2020 for such Partners are compared to results from June 1, 2021 to December 31, 2021 for purposes of calculating Organic Revenue Growth in 2021. Organic Revenue Growth is a key metric used
by management and our board of directors to assess our financial performance. We believe that Organic Revenue and Organic Revenue Growth are appropriate measures of operating performance as they allow investors to measure, analyze and compare growth in a meaningful and consistent manner.
Adjusted Net Income is presented for the purpose of calculating Adjusted Diluted EPS. We define Adjusted Net Income as net income (loss) attributable to BRP Group, Inc. adjusted for amortization, change in fair value of contingent consideration and certain items of income and expense, including share-based compensation expense, transaction-related expenses related to Partnerships including severance, and certain non-recurring costs that, in the opinion of management, significantly affect the period-over-period assessment of operating results, and the related tax effect of those adjustments.
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.
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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 Three Months Ended June 30,
For the Six Months Ended June 30,
(in thousands, except percentages)
2021
2020
2021
2020
Commissions and fees
$
119,706
$
51,268
$
272,534
$
105,427
Net
income (loss)
$
(20,104)
$
(7,859)
$
10,510
$
(3,152)
Adjustments to net income (loss):
Amortization
expense
10,742
4,450
21,279
8,046
Change in fair value of contingent consideration
13,325
4,581
11,822
6,242
Interest
expense, net
5,848
1,047
11,491
1,632
Share-based compensation
4,545
1,978
8,087
3,117
Transaction-related
Partnership expenses
3,225
2,020
5,670
3,868
Depreciation expense
573
240
1,167
405
Change
in fair value of interest rate caps
825
—
825
—
Capital related expenses
—
1,000
—
1,000
Severance
related to Partnership activity
—
360
—
413
Income tax provision
—
—
—
12
Other
1,412
568
2,271
834
Adjusted
EBITDA
$
20,391
$
8,385
$
73,122
$
22,417
Adjusted EBITDA Margin
17
%
16
%
27
%
21
%
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 Three Months Ended June 30,
For
the Six Months Ended June 30,
(in thousands, except percentages)
2021
2020
2021
2020
Commissions and fees
$
119,706
$
51,268
$
272,534
$
105,427
Partnership
commissions and fees (1)
(51,893)
(12,064)
(143,108)
(34,932)
Organic Revenue
$
67,813
$
39,204
$
129,426
$
70,495
Organic
Revenue Growth (2)
$
16,482
$
6,130
$
23,929
$
7,584
Organic Revenue Growth % (2)
32
%
19
%
23
%
12
%
__________
(1) Includes
the first twelve months of such commissions and fees generated from newly acquired Partners. Amount for the six months ended June 30, 2021 is reduced by approximately $830,000 for the timing of certain cash receipts that were fully constrained under ASC 606 in the post-partnership period for our partnership with Agency RM, which closed February 1, 2020.
(2) Organic Revenue for the three and six months ended June 30, 2020 used to calculate Organic Revenue Growth for the three and six months ended June 30, 2021 was $51.3 million and $105.5 million, respectively, which is adjusted to reflect revenues from Partnerships that reached the twelve-month owned mark during the three and six months ended June
30, 2021.
35
Adjusted Net Income and Adjusted Diluted EPS
The following table reconciles Adjusted Net Income to net income (loss) attributable to BRP Group, Inc. and reconciles Adjusted Diluted EPS to diluted earnings (loss) per share attributable to BRP Group, Inc. Class A common stock:
For
the Three Months Ended June 30,
For the Six Months Ended June 30,
(in thousands, except per share data)
2021
2020
2021
2020
Net income (loss) attributable to BRP Group, Inc.
$
(9,756)
$
(3,588)
$
4,857
$
(2,120)
Net
income (loss) attributable to noncontrolling interests
(10,348)
(4,271)
5,653
(1,032)
Amortization expense
10,742
4,450
21,279
8,046
Change
in fair value of contingent consideration
13,325
4,581
11,822
6,242
Share-based compensation
4,545
1,978
8,087
3,117
Transaction-related
Partnership expenses
3,225
2,020
5,670
3,868
Amortization of deferred financing costs
750
119
1,443
195
Change
in fair value of interest rate caps
825
—
825
—
Capital related expenses
—
1,000
—
1,000
Severance
related to Partnership activity
—
360
—
413
Other
1,412
568
2,271
834
Adjusted
pre-tax income
14,720
7,217
61,907
20,563
Adjusted income taxes (1)
1,457
715
6,129
2,036
Adjusted
Net Income
$
13,263
$
6,502
$
55,778
$
18,527
Weighted-average shares of Class A
common stock outstanding - diluted
44,671
20,426
46,160
19,960
Dilutive effect of unvested restricted shares of Class A common stock
Effect
of exchange of Class B shares and net income attributable to noncontrolling interests per share
0.01
0.06
—
0.06
Other adjustments to earnings per share
0.37
0.23
0.53
0.37
Adjusted
income taxes per share
(0.02)
(0.01)
(0.06)
(0.03)
Adjusted Diluted EPS
$
0.14
$
0.10
$
0.58
$
0.29
___________
(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 Third Amended and Restated Limited Liability Company Agreement of BRP, as amended (the “Amended LLC Agreement”).
36
OPERATING GROUP RESULTS
Commissions and Fees
In the Middle Market, MainStreet and Specialty Operating Groups, we generate commissions and fees
from insurance placement under both agency bill and direct bill arrangements. In addition, we generate 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, we generate fees from service fee and consulting arrangements. Service fee arrangements are in place with certain customers in lieu of commission arrangements.
In the Medicare Operating Group, we generate commissions and fees in the form of direct bill insurance placement and marketing income. Marketing income is earned through co-branded marketing campaigns with our Insurance Company Partners.
The following table sets forth our commissions and fees by Operating Group by amount and as a percentage of our commissions and fees:
Commissions
and Fees by Operating Group (in thousands, except percentages)
Commissions
and fees for our Middle Market Operating Group increased $55.4 million for the second quarter of 2021 as compared to the same period of 2020 as a result of the Partnership Contribution of $50.0 million and organic growth of $5.4 million. Middle Market experienced organic growth in base commissions and fees of $2.9 million, consulting and service fees of $1.8 million and contingents of $0.4 million during the period.
Commissions and fees for our Middle Market Operating Group increased $143.9 million for the first half of 2021 as compared to the same period of 2020 as a result of the Partnership Contribution of $137.1 million and organic growth of $6.8 million. Middle Market experienced organic growth in base commissions and fees of $3.9 million, consulting and service fees of $2.5 million and contingents of $0.2 million during the period.
Commissions and fees for our Specialty Operating
Group increased $10.6 million for the second quarter of 2021 as compared to the same period of 2020 as a result of organic growth of $9.8 million, which is attributable to growth in our renter’s insurance product and Connected Risk Solutions, in addition to the Partnership Contribution of $0.9 million.
Commissions and fees for our Specialty Operating Group increased $18.3 million for the first half of 2021 as compared to the same period of 2020 as a result of organic growth of $16.6 million, which is attributable to growth in our renter’s insurance product and Connected Risk Solutions, in addition to the Partnership Contribution of $1.7 million.
Policies in force for Specialty’s MGA of the Future grew by 159,307, or 36%, to 605,295 at June 30, 2021 from 445,988 at June 30, 2020.
Commissions
and fees for our MainStreet Operating Group increased $0.9 million for the second quarter of 2021 as compared to the same period of 2020 primarily as a result of organic growth in base commissions and fees.
Commissions and fees for our MainStreet Operating Group increased $0.8 million for the first half of 2021 as compared to the same period of 2020. MainStreet had organic growth in base commissions and fees of $1.4 million, which was offset in part by a decrease in organic contingent revenue of $0.8 million resulting from higher loss ratios due to challenges in the Florida insurance marketplace.
37
Commissions and fees for our Medicare Operating Group increased $1.8 million for the second quarter of 2021 as compared
to the same period of 2020 as a result of the Partnership Contribution of $1.2 million and organic growth of $0.6 million.
Commissions and fees for our Medicare Operating Group increased $4.8 million for the first half of 2021 as compared to the same period of 2020 as a result of the Partnership Contribution of $4.4 million and organic growth of $0.4 million. Continued COVID-19 protocols, including social distancing, reduced our Medicare agents' ability to meet person-to-person in our normal venues, which impacted our ability to sell new business during the 2021 Annual Enrollment Period.
Revenue reported for Corporate and Other relates to the elimination of intercompany revenue. During the second quarter of 2021, the Middle Market Operating Group recorded intercompany commissions and fees from activity with the Specialty Operating Group of $109,000; the MainStreet Operating Group
recorded intercompany commissions and fees from activity with the Middle Market Operating Group of $61,000; and the Medicare Operating Group recorded intercompany commissions and fees from activity with itself of $66,000. During the first half of 2021, the Middle Market Operating Group recorded intercompany commissions and fees from activity with the Specialty Operating Group of $468,000; the MainStreet Operating Group recorded intercompany commissions and fees from activity with the Middle Market Operating Group of $91,000; and the Medicare Operating Group recorded intercompany commissions and fees from activity with itself of $160,000. These amounts were eliminated through Corporate and Other.
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:
Commissions, Employee Compensation
and Benefits by Operating Group (in thousands, except percentages)
Commissions,
employee compensation and benefits expenses increased across all Operating Groups for the second quarter of 2021 as compared to the same period of 2020. The Partnership Contribution accounted for $33.2 million, $0.8 million and $0.7 million of the increase to commissions, employee compensation and benefits expenses in the Middle Market, Specialty and Medicare Operating Groups, respectively. Commissions, employee compensation and benefits expenses also increased across all Operating Groups as a result of continued investments in Growth Services to support our growth, which costs are primarily allocated among the Operating Groups, and continued investment in sales and service talent.
Commissions, employee compensation and benefits expenses increased across all Operating Groups for the first half of 2021 as compared to the same period of 2020. The Partnership Contribution accounted for $74.6 million, $1.5 million and $2.4 million
of the increase to commissions, employee compensation and benefits expenses in the Middle Market, Specialty and Medicare Operating Groups, respectively. Commissions, employee compensation and benefits expenses also increased across all Operating Groups as a result of continued investments in Growth Services to support our growth, which costs are primarily allocated among the Operating Groups, and continued investment in sales and service talent.
Commissions, employee compensation and benefits expenses for Corporate and Other increased as a result of additional share-based compensation expense incurred during the quarter.
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Other Operating Expenses
The following table sets forth
our other operating expenses by Operating Group by amount and as a percentage of our other operating expenses:
Other
Operating Expenses by Operating Group (in thousands, except percentages)
Other
operating expenses for our Middle Market Operating Group increased $7.2 million for the second quarter of 2021 as compared to the same period of 2020 driven by higher costs for rent expense of $1.6 million, professional fees of $1.6 million, software and internet of $1.2 million, dues and subscriptions of $0.6 million, colleague education and welfare of $0.4 million and consulting of $0.3 million. Other operating expenses for our Specialty Operating Group increased $0.8 million for the second quarter of 2021 as compared to the same period of 2020 driven by higher costs for bank charges, consulting fees and rent expense of $0.2 million each. The increases in our operating costs are related to our growth, both organically and through Partnerships, during the previous twelve months.
Other operating expenses for our Middle Market Operating Group increased $12.4 million for the first half of 2021 as compared to the same period
of 2020 driven by higher costs for rent expense of $3.6 million, software and internet of $1.9 million, dues and subscriptions of $1.5 million, professional fees of $1.0 million, consulting of $0.8 million and travel and entertainment of $0.7 million. Other operating expenses for our Specialty Operating Group increased $1.3 million for the first half of 2021 as compared to the same period of 2020 driven by higher costs for bank charges, rent expense, consulting fees, dues and subscriptions and professional fees of $0.2 million each. Other operating expenses for our Medicare Operating Group increased $0.7 million for the first half of 2021 as compared to the same period of 2020 driven by higher costs for advertising and marketing and rent expense of $0.2 million each. The increases in our operating costs are related to our growth, both organically and through Partnerships, during the previous twelve months.
Other operating expenses
in Corporate and Other increased $1.3 million for the second quarter of 2021 as compared to the same period of 2020 due to higher costs for travel and entertainment of $0.5 million, dues and subscriptions of $0.4 million, colleague education and welfare of $0.2 million and rent expense of $0.1 million.
Other operating expenses in Corporate and Other increased $3.6 million for the first half of 2021 as compared to the same period of 2020 due to higher costs for professional fees of $1.1 million, dues and subscriptions of $0.9 million and rent expense of $0.6 million related to expansion of our Tampa offices.
39
Amortization Expense
The following table sets forth our amortization
by Operating Group by amount and as a percentage of our amortization:
Amortization
Expense by Operating Group (in thousands, except percentages)
Amortization expense increased for our Middle Market and Medicare Operating Groups for the three and six months ended June 30, 2021 as compared to the same periods of 2020 driven by amortization related to Partners acquired over the past twelve months. Amortization for the remaining groups was relatively flat.
Change in Fair Value of Contingent Consideration
The following table sets forth our change in fair value of contingent consideration by Operating Group by amount and as a percentage of our change in fair value of contingent consideration:
Change
in Fair Value of Contingent Consideration by Operating Group (in thousands, except percentages)
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.
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 JPM Credit Agreement, (v) pay contingent earnout liabilities, including the contingent earnout liability
of up to $61.5 million due to MSI in the third quarter of 2022, and (vi) pay income taxes. We have historically financed our operations and funded our debt service through the sale of our insurance products and services. In addition, we have financed significant cash needs to fund growth through the acquisition of Partners through debt and equity financing.
40
At June 30, 2021, our cash and cash equivalents were $224.5 million. We believe that our cash and cash equivalents, cash flow from operations and available borrowings under the JPM 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 and 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.
JPM Credit Agreement
On October 14, 2020, we entered into the JPM Credit Agreement with JPMorgan Chase Bank, N.A., to provide senior secured credit facilities in an aggregate principal amount of $800.0 million. The amount consists of (i) a term loan facility in the principal amount of $400.0 million maturing in 2027 (the “Existing Term Loan B”) and (ii)
a revolving credit facility with commitments in an aggregate principal amount of $400.0 million maturing in 2025 (the “Revolving Facility”).
On June 2, 2021, we entered into Amendment No. 2 to the JPM Credit Agreement to provide for a new senior secured first lien term loan facility in an aggregate principal amount of $500.0 million maturing in 2027 (the “New Term Loan B”), a portion of the proceeds from which were used to repay in full the obligations under the Existing Term Loan B. On August 6, 2021, we entered into Amendment No. 3 to the JPM Credit Agreement to provide for an increase in the aggregate principal amount of the Revolving Facility from $400.0 million to $475.0 million. The Revolving Facility and the remaining proceeds of the New Term Loan B are available to finance working capital needs and for
other general corporate purposes of BRP and certain of its subsidiaries (including acquisitions and other investments permitted under the JPM Credit Agreement).
The New Term Loan B bears interest at LIBOR plus 350 basis points (“bps”) with a LIBOR floor of 50 bps. The applicable interest rate on the New Term Loan B at June 30, 2021 was 4.00%. Borrowings under the Revolving Facility accrue interest at LIBOR plus 200 bps to LIBOR plus 300 bps based on total net leverage ratio. BRP will pay a letter of credit fee equal to the margin then in effect with respect to LIBOR loans under the Revolving Facility multiplied by the daily amount available to be drawn under any letter of credit, a fronting fee and any customary documentary and processing charges for any letter of credit issued
under the JPM Credit Agreement.
The outstanding principal balance of the New Term Loan B is required to be repaid in equal quarterly installments equal to 0.25% of the original principal amount of the New Term Loan B beginning with the fiscal quarter ending September 30, 2021, the balance of which is due at maturity. The Revolving Facility is not subject to amortization.
The Revolving Facility and the New 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 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 JPM Credit Agreement contains financial covenants requiring us to maintain our Total First Lien Net Leverage Ratio (as defined in the JPM Credit Agreement) at or below 6.00 to 1.00.
Contractual Obligations
The following table represents our contractual obligations, aggregated by type, at June 30, 2021:
Payments
Due by Period
(in thousands)
Total
Less than 1 year
1-3 years
3-5 years
More than 5 years
Operating leases (1)
$
69,682
$
11,719
$
18,403
$
15,447
$
24,113
Debt
obligations payable (2)
642,330
25,500
50,100
48,332
518,398
Maximum future acquisition contingency payments (3)
530,990
125,467
405,523
—
—
Total
$
1,243,002
$
162,686
$
474,026
$
63,779
$
542,511
__________
(1) The
Company leases facilities and equipment under noncancelable operating leases. Rent expense was $7.4 million and $2.7 million for the six months ended June 30, 2021 and 2020, respectively.
(2) Represents scheduled debt obligations and estimated interest payments under the JPM Credit Agreement.
(3) Includes $178.3 million of current and noncurrent estimated contingent earnout liabilities at June 30, 2021.
41
Tax Receivable Agreement
We expect to obtain an increase in our share
of our tax basis of the assets when BRP’s LLC Units are redeemed or exchanged for shares of BRP Group’s Class A common stock. This increase in tax basis may have the effect of reducing the future amounts paid to various tax authorities. The increase in tax basis may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.
We have a Tax Receivable Agreement that provides for the payment by us to the parties to the Tax Receivable Agreement of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that we actually realize as a result of (i) any increase in tax basis in BRP Group’s assets and (ii) tax benefits related to imputed interest deemed arising as a result of payments made under the tax receivable agreement.
During the six months ended
June 30, 2021, we redeemed 252,512 LLC Units of BRP on a one-for-one basis for shares of Class A common stock and cancelled the corresponding shares of Class B common stock, which triggered an increase in BRP Group’s tax basis but did not result in a tax benefit to the LLC Unit holders.
SOURCES AND USES OF CASH
The following table summarizes our cash flows from operating, investing and financing activities for the periods indicated:
For
the Six Months Ended June 30,
(in thousands)
2021
2020
Variance
Net cash provided by operating activities
$
49,419
$
43,644
$
5,775
Net
cash used in investing activities
(27,607)
(227,426)
199,819
Net cash provided by financing activities
112,150
317,147
(204,997)
Net increase in cash and cash equivalents and restricted cash
133,962
133,365
597
Cash
and cash equivalents and restricted cash at beginning of period
142,022
71,071
70,951
Cash and cash equivalents and restricted cash at end of period
$
275,984
$
204,436
$
71,548
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 increased $5.8 million for the six months ended June 30, 2021 as compared to the same period of 2020 driven by an increase in operating cash resulting from a net increase in net income adjusted for noncash items and increases in operating liabilities balances, partially offset by a decrease in cash relating to a higher balance in premiums, commissions and fees receivable driven by revenue growth and the timing of revenue recognition under direct bill policies in employee benefits for which payment is received monthly through the duration of the year.
Investing Activities
The primary sources and uses of cash for investing activities
relate to cash consideration paid to fund Partnerships and other investments, as well as capital expenditures. Net cash used in investing activities decreased $199.8 million for the six months ended June 30, 2021 as compared to the same period of 2020. Cash consideration paid to fund Partnerships and other asset acquisitions decreased $199.0 million as a result of a decrease in the size of the aggregate Partnerships we completed during the first half of 2021 compared to the same period of 2020.
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 earnout consideration, and other equity transactions. Net cash provided by financing activities decreased
$205.0 million for the six months ended June 30, 2021 as compared to the same period of 2020 primarily as a result of an equity raise that we completed during the first half of 2020 which generated $166.6 million in financing cash and a decrease in net borrowings on our credit facilities of $68.7 million, offset in part by a decrease in redemptions of LLC Units and Class B common stock resulting in $32.6 million less financing cash outflows.
42
CRITICAL ACCOUNTING ESTIMATES
In preparing our financial statements in accordance with GAAP, we are required
to make estimates and assumptions that affect the amounts of assets, liabilities, revenue, expenses, disclosure of contingent assets and liabilities and accompanying disclosures. We evaluate our estimates and assumptions on an ongoing basis. These estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances; although, actual results may differ from these estimates and assumptions. To the extent that there are differences between our estimates and actual results, our financial condition, results of operations and cash flows will be affected.
There have been no material changes in our critical accounting policies during the three months ended June 30, 2021 as compared to those disclosed in the Critical Accounting Estimates section under Management’s Discussion and Analysis of Financial Condition and Results
of Operations of our Annual Report on Form 10-K filed with the SEC on March 11, 2021.
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 will cease to be an emerging growth company, and therefore will no longer be able to take advantage of these exemptions, at December 31, 2021 because we had more than $700.0 million in market value of our stock held by non-affiliates measured as of June
30, 2021 (and we have been a public company for at least 12 months and have filed one annual report on Form 10-K).
RECENT ACCOUNTING PRONOUNCEMENTS
Please refer to Note 1 to our condensed consolidated financial statements included in Part I, Item 1. Financial Statements of this report for a discussion of recent accounting pronouncements that may impact us.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential loss arising from adverse changes in market rates and prices, such as premium amounts, interest rates
and equity prices. We are exposed to market risk through our investments and borrowings under the JPM Credit Agreement. We use derivative instruments to mitigate our risk related to the effect of rising interest rates on our cash flows. However, we do not use derivative instruments for trading or speculative purposes.
Our invested assets are held primarily as cash and cash equivalents, restricted cash, certificates of deposit, U.S. treasury securities and professionally managed short duration fixed income funds. These investments are subject to interest rate risk. The fair values of our invested assets at June 30, 2021 and December 31, 2020 approximated their respective carrying values due to their short-term duration and therefore, such market risk is not considered to be material.
Insurance
premium pricing has historically been cyclical, based on the underwriting capacity of the insurance industry and economic conditions. External events, such as terrorist attacks, man-made and natural disasters, can also have significant impacts on the insurance market. We use the terms ‘‘soft market’’ and ‘‘hard market’’ to describe the business cycles experienced by the industry. A soft market is an insurance market characterized by a period of declining premium rates, which can negatively affect commissions earned by insurance agents. A hard market is an insurance market characterized by a period of rising premium rates, which, absent other changes, can positively affect commissions earned by insurance agents.
We do not actively invest or trade in equity securities. In addition, we generally dispose of any significant equity securities held by Partners received in conjunction with an acquisition shortly after the acquisition
date.
43
At June 30, 2021, we had $500.0 million of borrowings outstanding under the JPM Credit Agreement New Term Loan B. These borrowings bear interest on a floating basis tied to either the prime rate or one of various other variable rates as defined in the JPM Credit Agreement. The variable rate currently in effect for the New Term Loan B is LIBOR.
During March 2021, we entered into three interest rate cap agreements, each with a notional amount of $300.0 million, to limit the potential impact of interest rate changes on cash flows. The interest rate cap agreements mitigate the interest rate volatility on $300.0 million of debt to a maximum of 4.75%. Taking the interest
rate cap agreements into consideration, an increase of 100 basis points in the LIBOR at June 30, 2021 would have increased our annual interest expense for the JPM Credit Agreement by $2.0 million. However, the interest rate on the New Term Loan B is subject to a floor of 4.00% so the interest rate applicable to the New Term Loan B will only change if LIBOR fluctuates in excess of 50 bps per annum.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure
controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this Quarterly Report on Form 10-Q. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its
principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, because of the material weaknesses in our internal control over financial reporting described in our Annual Report on Form 10-K for the year ended December 31, 2020, our disclosure controls and procedures were not effective as of June 30, 2021.
Notwithstanding such material weaknesses in internal control over financial
reporting, our management concluded that our consolidated financial statements in this Quarterly Report on Form 10-Q present fairly, in all material respects, the Company’s financial position, results of operations and cash flows for the periods presented in conformity with GAAP.
Remediation Status of Material Weaknesses
As part of our commitment to strengthening our internal control over financial reporting, we have implemented remedial actions under the oversight our Board of Directors to address these deficiencies, including:
•improving the design of key controls and procedures over business combinations, revenue, information technology and other key business processes;
•implementing
new enterprise resource planning (“ERP”) software, in connection with which we updated processes and enhanced our internal controls over financial reporting;
•implementing an ongoing monitoring program to ensure the control framework is appropriately implemented and comprehensively sustained over time;
•further augmenting leadership and staff responsible for internal control over financial reporting; and
•continuing to train employees responsible for control execution and oversight concerning (i) clarified roles and responsibilities, (ii) completeness and accuracy of data used in performing controls and (iii) control execution standards such as timeliness and required evidence.
Though we made progress towards remediation
this quarter, the material weakness will not be considered fully remediated until the applicable controls operate for a sufficient period of time and management has concluded, through formal testing, that these controls are operating effectively.
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Changes in Internal Control over Financial Reporting
Except with respect to our ongoing remediation efforts described above, there were no changes in our internal control over financial reporting that occurred during the quarter-ended June 30, 2021 that materially affected, or that are reasonably likely to materially affect our internal control over financial reporting.
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PART
II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial position, results of operations or liquidity.
ITEM 1A. RISK FACTORS
See the risk factors outlined under Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K filed with the SEC on March 11, 2021.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Sales of Unregistered Securities
The following list sets forth information regarding all unregistered securities sold or issued by us since March 31, 2021 and the subsequent period prior to the filing of this Quarterly Report on Form 10-Q. No underwriters were involved in these sales. There was no general solicitation of investors or advertising, and we did not pay or give, directly or indirectly, any commission or other remuneration, in connection with the offering of these securities. In the transactions described below, the recipients of the securities represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were affixed to the securities issued in
these transactions.
•On April 1, 2021, as partial consideration for the acquisition by BRP Medicare Insurance III, LLC, an indirect subsidiary of BRP Group, of substantially all of the assets of Tim Altman, Inc. (operating as “Only Medicare Solutions”), BRP Group issued 17,982 shares of Class A common stock.
•On April 30, 2021, as partial consideration for the acquisition by Insgroup, LLC and BKS Financial Investments, LLC, each an indirect subsidiary of BRP Group, of substantially all of the assets of Mid-Continent Companies, Ltd. and Mid-Continent Securities Ltd., BRP Group issued 44,170 shares of Class A common stock.
•On July
1, 2021, as partial consideration for the acquisition by Baldwin Krystyn Sherman Partners, LLC and Millennial Specialty Insurance, LLC (“MSI”), each an indirect subsidiary of BRP Group, of substantially all of the assets of RogersGray, Inc., Breakwater Insurance Brokerage, LLC, and Monomoy Insurance Group, LLC, BRP Group issued 7,447 shares of Class A common stock and 1,950,232 shares of Class B common stock and the corresponding 1,950,232 LLC Units of BRP.
•On July 30, 2021, as partial consideration for the acquisition by Armfield, Harrison & Thomas, LLC (“AHT”), an indirect subsidiary of BRP Group, of substantially all of the assets of EBSME, LLC, BRP Group issued 28,861 shares of Class A common stock.
•On August
2, 2021, as partial consideration for the acquisition by MSI, an indirect subsidiary of BRP Group, of substantially all of the assets of FounderShield LLC, AlphaRoot LLC, ReShield LLC, and Scale Underwriting Services LLC, BRP Group issued 304,628 shares of Class A common stock and 364,174 shares of Class B common stock and the corresponding 364,174 LLC Units of BRP.
•On August 2, 2021, as partial consideration for the acquisition by AHT and BRP Financial Services Holdings, LLC, each an indirect subsidiary of BRP Group, of substantially all of the assets of The Capital Group, LLC, The Capital Group Association Consultants, LLC, US Underwriters, LLC, and TCG Financial Management Company, LLC, and the membership interests of The Capital Group Investment Advisory Services, LLC, BRP Group issued 653,324 shares of Class B common stock and the corresponding
653,324 LLC Units of BRP.
•On August 4, 2021, as partial consideration for the acquisition of substantially all of the assets of River Oak Risk, LLC and River Oak Risk Holdings, LLC, BRP Group issued 179,845 shares of Class A common stock.
The securities described above were issued to a limited number of investors, all of which had sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment, and for nominal consideration. The offer, sale and issuance of the securities described above were deemed to be exempt from registration under the Securities Act in reliance upon Section 4(a)(2) of the Securities Act as transactions by an issuer not involving any public offering.
Subject
to the terms of the Amended LLC Agreement, each LLC Unit of BRP is redeemable or exercisable (along with the cancellation of the corresponding share of Class B common Stock) into one share of Class A common stock.
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Issuer Purchases of Equity Securities
The following table provides information about our repurchase of shares of our Class A common stock during the three months ended June 30, 2021:
Total
Number of Shares Purchased(1)
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Maximum Value that may yet be Purchased under the Plans or Programs
(1) We
purchased 35,296 shares during the three months ended June 30, 2021, which were acquired from our employees to cover required tax withholding on the vesting of shares granted under the BRP Group, Inc. Omnibus Incentive Plan.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
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ITEM
6. EXHIBITS
The following exhibits are filed as a part of this Quarterly Report on Form 10-Q:
Cover
Page Interactive Data File (formatted in inline XBRL and included in Exhibit 101)
__________
* Filed or furnished herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.