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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q | | | | | |
(Mark One) |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2022
OR | | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______ to ______
Commission file number: 001-38466
GOOSEHEAD INSURANCE, INC.
(Exact name of registrant as specified in its charter)
| | | | | |
Delaware | 82-3886022 |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
1500 Solana Blvd, Building 4, Suite 4500 | |
Westlake | |
Texas | 76262 |
(Address of principal executive offices) | (Zip Code) |
(469) 480-3669
(Registrant's telephone number, including area code)
Not applicable
(Former name or former address, 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 |
Class A Common Stock, par value $.01 per share | GSHD | NASDAQ |
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. þ Yes o 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).
þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 | ☑ | | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | | Smaller reporting company | ☐ |
| | | Emerging growth company | ☐ |
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☑ No
As of April 27, 2022, there were 20,416,358 shares of Class A common stock outstanding and 16,710,886 shares of Class B common stock outstanding.
Table of contents | | | | | | | | |
| | |
| | Page |
Part I | | |
Item 1. | Condensed Consolidated Financial Statements (Unaudited) | |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | |
Item 4. | Controls and Procedures | |
| | |
Part II | | |
Item 1. | Legal Proceedings | |
Item 1A. | Risk Factors | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | |
Item 3. | Defaults Upon Senior Securities | |
Item 4. | Mine Safety Disclosures | |
Item 5. | Other Information | |
Item 6. | Exhibits | |
| | |
| |
Commonly used defined terms
As used in this Quarterly Report on Form 10-Q ("Form 10-Q"), unless the context indicates or otherwise requires, the following terms have the following meanings:
•Ancillary Revenue: Revenue that is supplemental to our Core Revenue and Cost Recovery Revenue, Ancillary Revenue is unpredictable and often outside of the Company's control. Included in Ancillary Revenue are Contingent Commissions and other income.
•Agency Fees: Fees separate from commissions charged directly to clients for efforts performed in the issuance of new insurance policies.
•Annual Report on Form 10-K: The Company's annual report on Form 10-K for the year ended December 31, 2021.
•ASC 606 ("Topic 606"): ASU 2014-09 - Revenue from Contracts with Customers.
•ASC 842 ("Topic 842"): ASU 2016-02 - Leases.
•Carrier: An insurance company.
•Carrier Appointment: A contractual relationship with a Carrier.
•Client Retention: Calculated by comparing the number of all clients that had at least one policy in force twelve months prior to the date of measurement and still have at least one policy in force at the date of measurement.
•Contingent Commission: Revenue in the form of contractual payments from Carriers contingent upon several factors, including growth and profitability of the business placed with the Carrier.
•Core Revenue: The most predictable revenue stream for the Company, these revenues consist of New Business Revenue and Renewal Revenue. New Business Revenue is lower-margin, but fairly predictable. Renewal Revenue is higher-margin and very predictable.
•Cost Recovery Revenue: Revenue received by the Company associated with cost recovery efforts associated with selling and financing franchises. Included in Cost Recovery Revenue are Initial Franchise Fees and Interest Income.
•Franchise Agreement: Agreements governing our relationships with Franchisees.
•Franchisee: An individual or entity who has entered into a Franchise Agreement with us.
•GF: Goosehead Financial, LLC.
•Initial Franchise Fee: Contracted fees paid by Franchisees to compensate Goosehead for the training, onboarding and ongoing support of new franchise locations.
•LLC Unit: a limited liability company unit of Goosehead Financial, LLC.
•New Business Commission: Commissions received from Carriers relating to policies in their first term.
•New Business Revenue: New Business Commissions, Agency Fees, and New Business Royalty Fees.
•New Business Royalty Fees: Royalty Fees received from Franchisees relating to policies in their first term
•NPS: Net Promoter Score is calculated based on a single question: “How likely are you to refer Goosehead Insurance to a friend, family member or colleague?” Clients that respond with a 6 or below are Detractors, a score of 7 or 8 are called Passives, and a 9 or 10 are Promoters. NPS is calculated by subtracting the percentage of Detractors from the percentage of Promoters.
•Policies in Force: As of any reported date, the total count of current (non-cancelled) policies placed by us with our Carriers.
•Pre-IPO LLC Members: owners of LLC Units of GF prior to the Offering.
•Renewal Revenue: Renewal Commissions and Renewal Royalty Fees.
•Royalty Fees: Fees paid by Franchisees to the Company that are tied to the gross commissions paid by the Carriers related to policies sold or renewed by a franchisee.
•The Offering: The initial public offering completed by Goosehead Insurance, Inc. on May 1, 2018.
•Total Written Premium: As of any reported date, the total amount of current (non-cancelled) gross premium that is placed with Goosehead’s portfolio of Carriers.
Special note regarding forward-looking statements
We have made statements in this Form 10-Q 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 the potential impact of COVID-19 on the Company's business, 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 the caption entitled “Item 1A. Risk factors” in the Annual Report on Form 10-K.
The forward-looking statements included in this Form 10-Q are made only as of the date hereof. 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 Form 10-Q to conform our prior statements to actual results or revised expectations.
PART I
Item 1. Condensed Consolidated Financial Statements (Unaudited) | | | | | | | | |
| | Page |
Condensed Consolidated Statements of Operations | |
Condensed Consolidated Balance Sheets | |
Condensed Consolidated Statements of Stockholders' Equity | |
Condensed Consolidated Statements of Cash Flows | |
Notes to the Condensed Consolidated Financial Statements | |
Note 1 | Organization | |
Note 2 | Summary of significant accounting policies | |
Note 3 | Revenues | |
Note 4 | Franchise fees receivable | |
Note 5 | Allowance for uncollectible agency fees | |
Note 6 | Property and equipment | |
Note 7 | Debt | |
Note 8 | Income taxes | |
Note 9 | Stockholder's equity | |
Note 10 | Non-controlling interest | |
Note 11 | Equity-based compensation | |
Note 12 | Segment information | |
Note 13 | Litigation | |
| | |
Goosehead Insurance, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share amounts) | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | | 2022 | | 2021 |
Revenues: | | | | | | | | |
Commissions and agency fees | | | | | | $ | 20,009 | | | $ | 17,534 | |
Franchise revenues | | | | | | 20,950 | | | 13,433 | |
Interest income | | | | | | 319 | | | 261 | |
Total revenues | | | | | | 41,278 | | | 31,228 | |
Operating Expenses: | | | | | | | | |
Employee compensation and benefits | | | | | | 31,484 | | | 21,309 | |
General and administrative expenses | | | | | | 13,524 | | | 9,274 | |
Bad debts | | | | | | 796 | | | 447 | |
Depreciation and amortization | | | | | | 1,576 | | | 1,000 | |
Total operating expenses | | | | | | 47,380 | | | 32,030 | |
Loss from operations | | | | | | (6,102) | | | (802) | |
Other Income (Expense): | | | | | | | | |
Other income | | | | | | — | | | 20 | |
Interest expense | | | | | | (883) | | | (601) | |
Loss before taxes | | | | | | (6,985) | | | (1,383) | |
Tax benefit | | | | | | (1,602) | | | (294) | |
Net loss | | | | | | (5,383) | | | (1,089) | |
Less: net loss attributable to non-controlling interests | | | | | | (3,126) | | | (693) | |
Net loss attributable to Goosehead Insurance, Inc. | | | | | | $ | (2,257) | | | $ | (396) | |
Earnings per share: | | | | | | | | |
Basic | | | | | | $ | (0.11) | | | $ | (0.02) | |
Diluted | | | | | | $ | (0.11) | | | $ | (0.02) | |
Weighted average shares of Class A common stock outstanding | | | | | | | | |
Basic | | | | | | 20,240 | | | 18,375 | |
Diluted | | | | | | 20,240 | | | 18,375 | |
| | | | | | | | |
| | | | | | | | |
See Notes to the Condensed Consolidated Financial Statements
Goosehead Insurance, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except per share amounts) | | | | | | | | | | | | | | |
| | March 31, | | December 31, |
| | 2022 | | 2021 |
Assets | | | | |
Current Assets: | | | | |
Cash and cash equivalents | | $ | 21,187 | | | $ | 28,526 | |
Restricted cash | | 1,492 | | | 1,953 | |
| | | | |
Commissions and agency fees receivable, net | | 8,804 | | | 12,056 | |
Receivable from franchisees, net | | 252 | | | 493 | |
Prepaid expenses | | 10,458 | | | 4,785 | |
| | | | |
Total current assets | | 42,193 | | | 47,813 | |
Receivable from franchisees, net of current portion | | 31,537 | | | 29,180 | |
Property and equipment, net of accumulated depreciation | | 25,257 | | | 24,933 | |
Right-of-use asset | | 37,421 | | | 32,656 | |
Intangible assets, net of accumulated amortization | | 3,399 | | | 2,798 | |
Deferred income taxes, net | | 128,977 | | | 125,676 | |
Other assets | | 6,487 | | | 4,742 | |
Total assets | | $ | 275,271 | | | $ | 267,798 | |
Liabilities and Stockholders’ Equity | | | | |
Current Liabilities: | | | | |
Accounts payable and accrued expenses | | $ | 6,742 | | | $ | 10,502 | |
Premiums payable | | 1,492 | | | 1,953 | |
| | | | |
Lease liability | | 5,634 | | | 4,893 | |
| | | | |
Contract liabilities | | 6,214 | | | 6,054 | |
Note payable | | 5,000 | | | 4,375 | |
Total current liabilities | | 25,082 | | | 27,777 | |
Lease liability, net of current portion | | 52,363 | | | 47,335 | |
| | | | |
Note payable, net of current portion | | 117,167 | | | 118,361 | |
Contract liabilities, net of current portion | | 45,362 | | | 42,554 | |
Liabilities under tax receivable agreement | | 103,194 | | | 100,959 | |
Total liabilities | | 343,168 | | | 336,986 | |
| | | | |
Class A common stock, $0.01 par value per share - 300,000 shares authorized, 20,321 shares issued and outstanding as of March 31, 2022, 20,198 shares issued and outstanding as of December 31, 2021 | | 201 | | | 200 | |
Class B common stock, $0.01 par value per share - 50,000 shares authorized, 16,808 issued and outstanding as of March 31, 2022, 16,909 shares issued and outstanding as of December 31, 2021 | | 169 | | | 170 | |
Additional paid in capital | | 52,589 | | | 46,281 | |
Accumulated deficit | | (63,406) | | | (60,671) | |
Total stockholders' equity | | (10,447) | | | (14,020) | |
Non-controlling interests | | (57,450) | | | (55,168) | |
Total equity | | (67,897) | | | (69,188) | |
Total liabilities and equity | | $ | 275,271 | | | $ | 267,798 | |
See Notes to the Condensed Consolidated Financial Statements
Goosehead Insurance, Inc.
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited)
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Issued shares of Class A common stock | | Issued shares of Class B common stock | | Class A Common stock | | Class B Common Stock | | Additional paid in capital | | Accumulated deficit | | Total stockholders' equity | | Non-controlling interest | | Total equity |
Balance, January 1, 2022 | | 20,198 | | | 16,909 | | | 200 | | | 170 | | | 46,281 | | | (60,671) | | | (14,020) | | | (55,168) | | | (69,188) | |
| | | | | | | | | | | | | | | | | | |
Net loss | | — | | | — | | | — | | | — | | | — | | | (2,257) | | | (2,257) | | | (3,126) | | | (5,383) | |
Exercise of stock options | | 19 | | | — | | | — | | | — | | | 256 | | | — | | | 256 | | | — | | | 256 | |
Equity-based compensation | | — | | | — | | | — | | | — | | | 5,788 | | | — | | | 5,788 | | | — | | | 5,788 | |
Activity under employee stock purchase plan | | 3 | | | — | | | — | | | — | | | 214 | | | — | | | 214 | | | — | | | 214 | |
Redemption of LLC Units | | 101 | | | (101) | | | 1 | | | (1) | | | (344) | | | — | | | (344) | | | 344 | | | — | |
Deferred tax adjustments related to Tax Receivable Agreement | | — | | | — | | | — | | | — | | | 394 | | | — | | | 394 | | | 22 | | | 416 | |
Reallocation of Non-controlling interest | | — | | | — | | | — | | | — | | | — | | | (478) | | | (478) | | | 478 | | | — | |
Balance March 31, 2022 | | 20,321 | | | 16,808 | | | 201 | | | 169 | | | 52,589 | | | (63,406) | | | (10,447) | | | (57,450) | | | (67,897) | |
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| | Issued shares of Class A common stock | | Issued shares of Class B common stock | | Class A Common stock | | Class B Common Stock | | Additional paid in capital | | Accumulated deficit | | Total stockholders' equity | | Non-controlling interest | | Total equity |
Balance, January 1, 2021 | | 18,304 | | | 18,447 | | | 183 | | | 184 | | | 29,371 | | | (34,614) | | | (4,876) | | | (33,528) | | | (38,404) | |
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Net loss | | — | | | — | | | — | | | — | | | — | | | (396) | | | (396) | | | (693) | | | (1,089) | |
Exercise of stock options | | 9 | | | | | — | | | | | 226 | | | | | 226 | | | | | 226 | |
Equity-based compensation | | — | | | — | | | — | | | — | | | 1,941 | | | — | | | 1,941 | | | — | | | 1,941 | |
Activity under employee stock purchase plan | | 2 | | | — | | | — | | | — | | | 205 | | | — | | | 205 | | | — | | | 205 | |
Redemption of LLC Units | | 133 | | | (133) | | | 1 | | | (1) | | | (249) | | | — | | | (249) | | | 249 | | | — | |
Deferred tax adjustments related to Tax Receivable Agreement | | — | | | — | | | — | | | — | | | 798 | | | — | | | 798 | | | 18 | | | 816 | |
Reallocation of Non-controlling interest | | — | | | — | | | — | | | — | | | — | | | 2 | | | 2 | | | (2) | | | — | |
Balance March 31, 2021 | | 18,448 | | | 18,314 | | | 184 | | | 183 | | | 32,292 | | | (35,008) | | | (2,349) | | | (33,956) | | | (36,305) | |
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See Notes to the Condensed Consolidated Financial Statements
`Goosehead Insurance, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands) | | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2022 | | 2021 |
Cash flows from operating activities: | | | | |
Net loss | | $ | (5,383) | | | $ | (1,089) | |
Adjustments to reconcile net loss to net cash provided by (used for) operating activities: | | | | |
Depreciation and amortization | | 1,632 | | | 1,066 | |
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Bad debt expense | | 796 | | | 447 | |
Equity-based compensation | | 5,788 | | | 1,941 | |
Impacts of Tax Receivable Agreement | | 2,235 | | | 3,420 | |
Deferred income taxes | | (2,885) | | | (3,574) | |
Noncash lease activity | | 1,004 | | | 13 | |
Changes in operating assets and liabilities: | | | | |
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Receivable from franchisees | | (2,397) | | | (3,694) | |
Commissions and agency fees receivable | | 2,727 | | | 13,424 | |
Prepaid expenses | | (5,673) | | | (3,870) | |
Other assets | | (1,743) | | | (1,337) | |
Accounts payable and accrued expenses | | (3,762) | | | (2,796) | |
Contract liabilities | | 2,968 | | | 3,553 | |
Premiums payable | | (461) | | | (165) | |
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Payments pursuant to the tax receivable agreement | | — | | | 549 | |
Net cash provided by (used for) operating activities | | (5,154) | | | 7,888 | |
Cash flows from investing activities: | | | | |
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Proceeds from notes receivable | | 10 | | | 10 | |
Purchase of software | | (773) | | | (165) | |
Purchase of property and equipment | | (1,728) | | | (1,945) | |
Net cash used for investing activities | | (2,491) | | | (2,100) | |
Cash flows from financing activities: | | | | |
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Repayment of note payable | | (625) | | | (500) | |
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Proceeds from the issuance of Class A common stock | | 470 | | | 431 | |
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Net cash used for financing activities | | (155) | | | (69) | |
Net decrease in cash and restricted cash | | (7,800) | | | 5,719 | |
Cash and cash equivalents, and restricted cash, beginning of period | | 30,479 | | | 26,236 | |
Cash and cash equivalents, and restricted cash, end of period | | $ | 22,679 | | | $ | 31,955 | |
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Supplemental disclosures of cash flow data: | | | | |
Cash paid during the year for interest | | 1,086 | | | 535 | |
Cash paid for income taxes | | 9 | | | — | |
See Notes to the Condensed Consolidated Financial Statements
| | |
Goosehead Insurance, Inc. |
Notes to the Condensed Consolidated Financial Statements (Unaudited) |
1. Organization
Goosehead Insurance, Inc. (“GSHD”) is the sole managing member of Goosehead Financial, LLC (“GF”) and has the sole voting power and control of management of GF. Accordingly, GSHD consolidates the financial results of GF and reports non-controlling interest in GSHD’s condensed consolidated financial statements.
GF was organized on January 1, 2016 as a Delaware Limited Liability Company and is headquartered in Westlake, TX.
GSHD (collectively with its consolidated subsidiaries, the “Company”) provides personal and commercial property and casualty insurance brokerage services for its clients through a network of corporate-owned agencies and franchise units across the nation.
The Company had 15 and 10 corporate-owned locations in operation at March 31, 2022 and 2021, respectively. Franchisees are provided access to insurance Carrier Appointments, product training, technology infrastructure, client service centers and back office services. During the three months ended March 31, 2022 and 2021, the Company onboarded 113 and 117 franchise locations, respectively, and had 1,268 and 987 operating franchise locations as of March 31, 2022 and 2021, respectively. No franchises were purchased by the Company during the three months ended March 31, 2022 or 2021.
All intercompany accounts and transactions have been eliminated in consolidation.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial statements of the Company have been prepared in accordance with the instructions to Form 10-Q. Therefore, they do not include all of the annual disclosures required by accounting principles generally accepted in the United States of America ("GAAP"). However, in the opinion of management, these statements include all adjustments, consisting of normal recurring adjustments, which are necessary for a fair presentation of the condensed consolidated financial positions at March 31, 2022 and December 31, 2021, the condensed consolidated results of operations, stockholders' equity and statements of cash flows for the three months ended March 31, 2022 and 2021. The interim period condensed consolidated financial statements should be read in conjunction with the Consolidated Financial Statements that are included in the Annual Report on Form 10-K.
In accordance with Accounting Standards Codification 280 "Segment Reporting", the Company began reporting one operating segment due to changes in how the Company's chief operating decision maker assesses the Company's performance and allocates resources. See Note 12 "Segment Reporting".
The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results that can be expected for the entire year. The Company experiences seasonal fluctuations of its revenue due to the timing of contingent commission revenue recognition and trends in housing market activity.
Impact of the Coronavirus (“COVID-19”) Pandemic
To date, the pandemic has not increased our costs of or access to capital under our term note and revolving credit facility, and we do not believe it is reasonably likely to do so in the future. In addition, we do not believe that the pandemic will affect our ongoing ability to meet the covenants in our debt instruments, including under our term note and revolving credit facility. To date, the pandemic has not impacted the collectability of receivables or adversely affected our ability to generate new business, add new franchises, or retain existing franchises or policies. Changes in consumer behavior linked to the COVID-19 pandemic may have contributed to reduced loss ratios through the twelve months ended December 31, 2020, increasing the amount of revenue from Contingent Commissions the Company received. Due to the nature of our business, the effect of the COVID-19 pandemic may not be fully reflected in our results of operations until future periods.
| | |
Goosehead Insurance, Inc. |
Notes to the Condensed Consolidated Financial Statements (Unaudited) |
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported period. Accordingly, actual results could differ from those estimates as more information becomes known.
Income Taxes
The Company accounts for income taxes pursuant to the asset and liability method which requires the recognition of deferred income tax assets and liabilities related to the expected future tax consequences arising from temporary differences between the carrying amounts and tax bases of assets and liabilities based on enacted statutory tax rates applicable to the periods in which the temporary differences are expected to reverse. Any effects of changes in income tax rates or laws are included in income tax expense in the period of enactment.
Restricted Cash
The Company holds premiums received from the insured, but not yet remitted to the insurance Carrier in a fiduciary capacity. Premiums received but not yet remitted included in restricted cash were $1.5 million and $1.2 million as of March 31, 2022 and 2021, respectively.
The following is a reconciliation of our cash and restricted cash balances as presented in the condensed consolidated statements of cash flows for the three months ended March 31, 2022 and 2021 (in thousands): | | | | | | | | | | | | | | |
| | March 31, |
| | 2022 | | 2021 |
Cash and cash equivalents | | $ | 21,187 | | | $ | 30,797 | |
Restricted cash | | 1,492 | | | 1,158 | |
Cash and cash equivalents, and restricted cash | | $ | 22,679 | | | $ | 31,955 | |
Recently adopted accounting pronouncements
Simplifying the Accounting for Income Taxes (ASU 2019-12): In 2019, the Financial Accounting Standards Board issued ASU 2019-12 to simplify the accounting for income taxes. The guidance primarily addresses how to (1) recognize a deferred tax liability after we transition to or from the equity method of accounting, (2) evaluate if a step-up in the tax basis of goodwill is related to a business combination or is a separate transaction, (3) recognize all of the effects of a change in tax law in the period of enactment, including adjusting the estimated annual tax rate, and (4) include the amount of tax based on income in the income tax provision and any incremental amount as a tax not based on income for hybrid tax regimes. We adopted the guidance in the first quarter of 2021. The adoption did not have a material impact on our condensed consolidated financial statements or related disclosures.
Reference Rate Reform (ASU 2020-04): In March 2020, the Financial Accounting Standards Board issued ASU 2020-04. Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying U.S. GAAP if certain criteria are met to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued. ASU 2020-04 is effective from March 12, 2020 through December 31, 2022. A substantial portion of our indebtedness bears interest at variable interest rates, primarily based on USD-LIBOR. The adoption of ASU 2020-04 did not have a material impact on our consolidated financial statements. The standard will ease, if warranted, the administrative requirements for accounting for the future effects of the rate reform. Our debt agreement contains a provision to move to the Secured Overnight Financing Rate ("SOFR") if or when LIBOR is phased out.
| | |
Goosehead Insurance, Inc. |
Notes to the Condensed Consolidated Financial Statements (Unaudited) |
3. Revenue
Commissions and fees
The Company earns new and renewal commissions paid by insurance Carriers and fees paid by its clients for the binding of insurance coverage. The transactions price is set as the estimated commissions to be received over the term of the policy based on an estimate of premiums placed, policy changes and cancellations, net of a constraint. These commissions and fees are earned at a point in time upon the effective date of bound insurance coverage, as no performance obligation exists after coverage is bound.
For Agency Fees, the Company enters into a contract with the insured, in which the Company's performance obligation is to place an insurance policy. The transaction price of the agency fee is set at the time the sale is agreed upon, and is included in the contract. Agency Fee revenue is recognized at a point in time, which is the effective date of the policy.
Contingent commission revenue is generated from contracts between the Company and insurance carriers, for which the Company is compensated for certain growth, profitability, or other performance-based metrics. The performance obligations for contingent commissions will vary by contract, but generally include the Company increasing profitable written premium with the insurance carrier. The transaction price for contingent commissions is estimated based on all available information and is recognized over time as the Company completes its performance obligations, as the underlying policies are placed, net of a constraint.
Franchise revenues
Franchise revenues include initial franchise fees and ongoing new and renewal royalty fees from franchisees.
Revenue from initial franchise fees is generated from a contract between the Company and a franchisee. The Company's performance obligation is to provide initial training, onboarding, ongoing support and use of the Company's business operations over the period of the franchise agreement. The transaction price is set by the franchise agreement and revenue is recognized over time as the Company completes its performance obligations.
Revenue from new and renewal royalty fees is recorded by applying the sales- and usage-based royalties exception. Under the sales- and usage-based exception, the Company estimates the anticipated amount of the royalties to be received over the term of the policy based on an estimate of premiums placed by the franchisee, policy changes, and cancellations, net of a constraint. Revenue from royalty fees is recognized over time as the placement of the underlying policies occur.
Contract costs
Additionally, the Company has evaluated ASC Topic 340 - Other Assets and Deferred Cost (“ASC 340”) which requires companies to defer certain incremental cost to obtain customer contracts, and certain costs to fulfill customer contracts.
Incremental cost to obtain - The adoption of ASC 340 resulted in the Company deferring certain costs to obtain customer contracts primarily as they relate to commission-based compensation plans for the franchise sales team, in which the Company pays an incremental amount of compensation on new Franchise Agreements. These incremental costs are deferred and amortized over a 10-year period, which is consistent with the term of the contract.
Costs to fulfill - The Company has evaluated the need to capitalize costs to fulfill customer contracts and has determined that there are no costs that meet the definition for capitalization under ASC 340.
| | |
Goosehead Insurance, Inc. |
Notes to the Condensed Consolidated Financial Statements (Unaudited) |
Disaggregation of Revenue
The following table disaggregates revenue by source (in thousands):
| | | | | | | | | | | |
| | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 |
Type of revenue stream: | | | |
Commissions and agency fees | | | |
Renewal Commissions | | $ | 10,207 | | $ | 7,757 | |
New Business Commissions | | 5,367 | | 4,616 | |
Agency Fees | | 2,637 | | 2,424 | |
Contingent Commissions | | 1,798 | | 2,737 | |
Franchise revenues | | | |
Renewal Royalty Fees | | 14,002 | | 8,746 | |
New Business Royalty Fees | | 4,292 | | 3,157 | |
Initial Franchise Fees | | 2,296 | | 1,432 | |
Other Franchise Revenues | | 360 | | 98 | |
Interest Income | | 319 | | 261 | |
Total Revenues | | $ | 41,278 | | $ | 31,228 | |
| | | |
Timing of revenue recognition: | | | |
Transferred at a point in time | | $ | 18,211 | | $ | 14,797 | |
Transferred over time | | 23,067 | | 16,431 | |
Total Revenues | | $ | 41,278 | | $ | 31,228 | |
Contract Balances
The following table provides information about receivables, cost to obtain, and contract liabilities from contracts with customers (in thousands): | | | | | | | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 | | Increase/(decrease) |
Cost to obtain franchise contracts(1) | $ | 2,196 | | | $ | 1,973 | | | $ | 223 | |
Commissions and agency fees receivable, net(2) | 8,804 | | | 12,056 | | | (3,252) | |
Receivable from franchisees(2) | 31,789 | | | 29,673 | | | 2,116 | |
Contract liabilities(2)(3) | 51,576 | | | 48,608 | | | 2,968 | |
(1) Cost to obtain franchise contracts is included in Other assets on the condensed consolidated balance sheets.
(2) Includes both the current and long term portion of this balance.
(3) Initial Franchise Fees to be recognized over the life of the contract.
The Company records Franchise Fees as contract liabilities on the Condensed Consolidated Balance Sheets when the agreement is executed. Contract liabilities are reduced as fees are recognized in revenue over the expected life of the franchise license. As the term of the franchise license is typically ten years, substantially all of the franchise fee revenue recognized in the period ended March 31, 2022 was included in the contract liabilities balance as of December 31, 2021.
The weighted average remaining amortization period for contract liabilities related to open franchises is 8.1 years.
| | |
Goosehead Insurance, Inc. |
Notes to the Condensed Consolidated Financial Statements (Unaudited) |
Significant changes in contract liabilities are as follows (in thousands):
| | | | | |
| |
Contract liabilities at December 31, 2021 | $ | 48,608 | |
Revenue recognized during the period | 2,296 | |
New deferrals(1) | 672 | |
Contract liabilities at March 31, 2022 | 51,576 | |
(1) Initial Franchise Fees where the consideration is received from the customer for services which are to be transferred to the Franchisee over the expected life of the Franchise Agreement
4. Franchise Fees Receivable
The balance of Franchise fees receivable included in Receivable from franchisees consisted of the following (in thousands): | | | | | | | | | | | | | | |
| | March 31, 2022 | | December 31, 2021 |
Franchise fees receivable(1) | | $ | 43,703 | | | $ | 40,171 | |
Less: Unamortized discount(1) | | (10,557) | | | (9,518) | |
Less: Allowance for uncollectible franchise fees(1) | | (388) | | | (303) | |
Net franchise fees receivable(1) | | $ | 32,758 | | | $ | 30,350 | |
(1) Includes both the current and long term portion of this balance
Activity in the allowance for uncollectible franchise fees was as follows (in thousands): | | | | | | | | |
Balance at December 31, 2021 | | $ | 303 | |
Charges to bad debts | | 271 | |
Write offs | | (186) | |
Balance at March 31, 2022 | | $ | 388 | |
| | |
Balance at December 31, 2020 | | $ | 149 | |
Charges to bad debts | | 161 | |
Write offs | | (150) | |
Balance at March 31, 2021 | | $ | 160 | |
5. Allowance for Uncollectible Agency Fees
Activity in the allowance for uncollectible Agency Fees was as follows (in thousands): | | | | | | | | |
Balance at December 31, 2021 | | $ | 489 | |
Charges to bad debts | | 525 | |
Write offs | | (499) | |
Balance at March 31, 2022 | | $ | 515 | |
| | |
Balance at December 31, 2020 | | $ | 468 | |
Charges to bad debts | | 286 | |
Write offs | | (307) | |
Balance at March 31, 2021 | | $ | 447 | |
| | |
Goosehead Insurance, Inc. |
Notes to the Condensed Consolidated Financial Statements (Unaudited) |
6. Property and equipment
Property and equipment consisted of the following (in thousands): | | | | | | | | | | | | | | |
| | March 31, 2022 | | December 31, 2021 |
Furniture & fixtures | | $ | 7,647 | | | $ | 7,283 | |
Computer equipment | | 3,074 | | | 3,369 | |
Network equipment | | 314 | | | 514 | |
Phone system | | 326 | | | 937 | |
Leasehold improvements | | 24,431 | | | 25,115 | |
Total | | 35,792 | | | 37,218 | |
Less accumulated depreciation | | (10,535) | | | (12,285) | |
Property and equipment, net | | $ | 25,257 | | | $ | 24,933 | |
Depreciation expense was $1.4 million and $0.9 million for three months ended March 31, 2022 and 2021.
7. Debt
On July 21, 2021, the Company refinanced its $25.0 million revolving credit facility and $80.0 million term note payable to a $50.0 million revolving credit facility and $100.0 million term note payable to finance general corporate purposes and the special dividend. The Company also has the right, subject to approval by the administrative agent and each issuing bank, to increase the commitments under the credit facilities by an additional $25.0 million.
The $50.0 million revolving credit facility accrues interest on amounts drawn at an initial interest rate of LIBOR plus 2.50%, then at an interest rate determined by the Company's leverage ratio for the preceding period. At March 31, 2022 the Company was accruing interest at LIBOR plus 250 basis points. At March 31, 2022, the Company had $25.0 million drawn against the revolving credit facility and had a letter of credit of $0.2 million applied against the maximum borrowing availability, payable on July 21, 2026. Thus, amounts available to draw totaled $24.8 million. The revolving credit facility is collateralized by substantially all the Company’s assets, which includes rights to future commissions.
The term note is payable in quarterly installments of $0.6 million the first twelve months, $1.3 million the next twelve months, $1.9 million the next twelve months, and $2.5 million the last twenty-four months, with a balloon payment on July 21, 2026. The note is collateralized by substantially all of the Company’s assets, which includes rights to future commissions. Interest is calculated initially at LIBOR plus 2.50%, then at an interest rate based on the Company's leverage ratio for the preceding period. At March 31, 2022 the Company was accruing interest at LIBOR plus 250 basis points.
The interest rate for each leverage ratio tier is as follows:
| | | | | |
Leverage Ratio | Interest Rate |
< 1.50x | LIBOR + 175 bps |
> 1.50x | LIBOR + 200 bps |
> 2.50x | LIBOR + 225 bps |
> 3.50x | LIBOR + 250 bps |
| | |
Goosehead Insurance, Inc. |
Notes to the Condensed Consolidated Financial Statements (Unaudited) |
Maturities of the term note payable for the next five years are as follows (in thousands):
| | | | | |
| Amount |
2022 | 3,750 | |
2023 | 6,875 | |
2024 | 9,375 | |
2025 | 10,000 | |
2026 | 68,125 | |
Total | $ | 98,125 | |
The Company’s note payable agreement contains certain restrictions and covenants. Under these restrictions, the Company is limited in the amount of debt incurred and distributions payable. As of March 31, 2022, the Company's maximum allowable trailing twelve months debt-to-EBITDA ratio, as defined by the credit agreement, was 4.5x. In addition, the credit agreement contains certain change of control provisions that, if broken, would trigger a default. Finally, the Company must maintain certain financial ratios. As of March 31, 2022, the Company was in compliance with these covenants.
Because of both instruments’ variable interest rate, the note payable balance at March 31, 2022 and December 31, 2021, approximates fair value using Level 2 inputs, described below.
The framework for measuring fair value 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 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are described as follows:
•Level 1—Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets.
•Level 2—Significant other observable inputs other than Level 1 prices such as quoted prices in markets that are not active, quoted prices for similar assets or other inputs that are observable, either directly or indirectly, for substantially the full term of the asset.
•Level 3—Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The asset or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
8. Income Taxes
GSHD is the sole managing member of GF, which is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, GF is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by GF is passed through to and included in the taxable income or loss of its members, including GSHD, on a pro rata basis. GSHD is subject to U.S. federal income taxes, in addition to state and local income taxes, with respect to GSHD's allocable share of income of GF.
Income tax expense (benefit)
Provision for/(benefit from) income taxes for the three months ended March 31, 2022 was $(1.6) million compared to $(294) thousand for the three months ended March 31, 2021. The effective tax rate was 23% for the three months ended March 31, 2022 and 21% for the three months ended March 31, 2021. The increase in the effective tax rate for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 was primarily due to a decrease in exercises of employee stock options.
Deferred taxes
| | |
Goosehead Insurance, Inc. |
Notes to the Condensed Consolidated Financial Statements (Unaudited) |
Deferred tax assets at March 31, 2022 were $129.0 million compared to $125.7 million at December 31, 2021. The primary contributing factor to the increase in deferred tax assets is additional redemptions of LLC Units of GF for shares of Class A common stock of GSHD during the three months ended March 31, 2022.
Tax Receivable Agreement
GF intends to make an election under Section 754 of the Internal Revenue Code of 1986, as amended, and the regulations thereunder (the “Code”) effective for each taxable year in which a redemption or exchange of LLC Units and corresponding Class B common stock for shares of Class A common stock occurs. Future taxable redemptions or exchanges are expected to result in tax basis adjustments to the assets of GF that will be allocated to the Company and thus produce favorable tax attributes. These tax attributes would not be available to GSHD in the absence of those transactions. The anticipated tax basis adjustments are expected to reduce the amount of tax that GSHD would otherwise be required to pay in the future.
GSHD entered into a tax receivable agreement with the Pre-IPO LLC Members on May 1, 2018 that provides for the payment by GSHD to the Pre-IPO LLC Members of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that GSHD actually realizes as a result of (i) any increase in tax basis in GSHD'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 three months ended March 31, 2022, an aggregate of 100,690 LLC Units were redeemed by the Pre-IPO LLC Members for newly issued shares of Class A common stock. In connection with these redemptions, GSHD received 100,690 LLC Units, which resulted in an increase in the tax basis of its investment in GF subject to the provisions of the tax receivable agreement. The Company recognized a liability for the TRA Payments due to the Pre-IPO LLC Members, representing 85% of the aggregate tax benefits the Company expects to realize from the tax basis increases related to the redemptions of LLC Units, after concluding it was probable that such TRA Payments would be paid based on its estimates of future taxable income. As of March 31, 2022, the total amount of TRA Payments due to the Pre-IPO LLC Members under the tax receivable agreement was $103.2 million, of which $0.0 million was current and included in Accounts payables and accrued expenses on the Consolidated Balance Sheet. Future exchanges of LLC Units for Class A common stock will result in additional TRA payments.
Uncertain tax positions
GSHD has determined there are no material uncertain tax positions as of March 31, 2022.
9. Stockholders' Equity
Class A Common Stock
GSHD has a total of 20,321 thousand shares of its Class A common stock outstanding at March 31, 2022. Each share of Class A common stock holds economic rights and entitles its holder to one vote per share on all matters submitted to a vote of the stockholders of GSHD.
Class B Common Stock
GSHD has a total of 16,808 thousand shares of its Class B common stock outstanding at March 31, 2022. Each share of Class B common stock has no economic rights but entitles its holder to one vote per share on all matters submitted to a vote of the stockholders of GSHD.
Holders of Class A common stock and Class B common stock vote together as a single class on all matters presented to GSHD's shareholders for their vote or approval, except as otherwise required by applicable law, by agreement, or by GSHD's certificate of incorporation.
Earnings Per Share
The following table sets forth the calculation of basic earnings per share ("EPS") based on net income attributable to GSHD for the three months ended March 31, 2022 and 2021, divided by the basic weighted average number of Class A common stock as of March 31, 2022 and March 31, 2021 (in thousands, except per share amounts). Diluted earnings per share of Class A common stock is computed by dividing net income attributable to GSHD by the weighted average number of shares of Class A common stock outstanding adjusted to give effect to potentially dilutive securities. The Company has not included the effects of conversion of Class B shares to Class A shares in
| | |
Goosehead Insurance, Inc. |
Notes to the Condensed Consolidated Financial Statements (Unaudited) |
the diluted EPS calculation using the "if-converted" method, because doing so has no impact on diluted EPS. | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | | 2022 | | 2021 |
Numerator: | | | | | | | | |
Loss before taxes | | | | | | $ | (6,985) | | | $ | (1,383) | |
Less: loss before taxes attributable to non-controlling interests | | | | | | (3,126) | | | (693) | |
Loss before taxes attributable to GSHD | | | | | | (3,859) | | | (690) | |
Less: income tax expense (benefit) attributable to GSHD | | | | | | (1,602) | | | (294) | |
Net loss attributable to GSHD | | | | | | $ | (2,257) | | | $ | (396) | |
Denominator: | | | | | | | | |
Weighted average shares of Class A common stock outstanding - basic | | | | | | 20,240 | | | 18,375 | |
Effect of dilutive securities: | | | | | | | | |
Stock options(1) | | | | | | — | | | — | |
Weighted average shares of Class A common stock outstanding - diluted | | | | | | 20,240 | | | 18,375 | |
| | | | | | | | |
Earnings per share of Class A common stock - basic | | | | | | $ | (0.11) | | | $ | (0.02) | |
Earnings per share of Class A common stock - diluted | | | | | | $ | (0.11) | | | $ | (0.02) | |
(1) 2,300 and 1,808 stock options were excluded from the computation of diluted earnings per share of Class A common stock for the three months ended March 31, 2022 and 2021, respectively, because the effect would have been anti-dilutive.
10. Non-controlling interest
GSHD is the sole managing member of GF and, as a result, it consolidates the financial results of GF. GSHD reports a non-controlling interest representing the economic interest in GF held by the other members of GF.
Under the amended and restated Goosehead Financial, LLC Agreement, the Pre-IPO LLC Members have the right, from and after the completion of the Offering (subject to the terms of the amended and restated Goosehead Financial, LLC Agreement), to require GSHD to redeem all or a portion of their LLC Units for, at GSHD's election, newly-issued shares of Class A common stock on a one-for-one basis or a cash payment equal to the volume weighted average market price of one share of GSHD's Class A common stock for each LLC Unit redeemed (subject to customary adjustments, including for stock splits, stock dividends and reclassifications) in accordance with the terms of the amended and restated Goosehead Financial, LLC Agreement. Additionally, in the event of a redemption request by a Pre-IPO LLC Member, GSHD may, at its option, effect a direct exchange of cash or Class A common stock for LLC Units in lieu of such a redemption. Shares of Class B common stock will be cancelled on a one-for-one basis if GSHD, at the election of a Pre-IPO LLC Member, redeems or exchanges LLC Units of such Pre-IPO LLC Member pursuant to the terms of the amended and restated Goosehead Financial, LLC Agreement. Except for transfers to GSHD pursuant to the amended and restated Goosehead Financial, LLC Agreement or to certain permitted transferees, the Pre-IPO LLC Members are not permitted to sell, transfer or otherwise dispose of any LLC Units or shares of Class B common stock.
During the three months ended March 31, 2022, an aggregate of 101 thousand LLC Units were redeemed by the non-controlling interest holders. Pursuant to the GF LLC Agreement, GSHD issued 101 thousand shares of Class A common stock in connection with these redemptions and received 101 thousand LLC Interests, increasing GSHD's ownership interest in GF. Simultaneously, and in connection with these redemptions, and 101 thousand shares of Class B common stock were surrendered and cancelled.
| | |
Goosehead Insurance, Inc. |
Notes to the Condensed Consolidated Financial Statements (Unaudited) |
The following table summarizes the ownership interest in GF as of March 31, 2022 (in thousands): | | | | | | | | |
| March 31, 2022 |
| LLC Units | Ownership % |
Number of LLC Units held by GSHD | 20,321 | 54.7% |
Number of LLC Units held by non-controlling interest holders | 16,808 | 45.3% |
Number of LLC Units outstanding | 37,129 | 100.0% |
The weighted average ownership percentages for the applicable reporting periods are used to attribute net income to GSHD and the non-controlling interest holders. The non-controlling interest holders' weighted average ownership percentage for the three months ended March 31, 2022 was 45.5%.
The following table summarizes the effects of changes in ownership in GF on the equity of GSHD for the three months ended March 31, 2022 and 2021 as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, | | |
| | | | | | 2022 | | 2021 | | | | |
Net income attributable to Goosehead Insurance Inc. | | | | | | $ | (2,257) | | | $ | (396) | | | | | |
Transfers (to) from non-controlling interests: | | | | | | | | | | | | |
Decrease in additional paid-in capital as a result of the redemption of LLC interests | | | | | | (344) | | | (249) | | | | | |
Increase in additional paid-in capital as a result of activity under employee stock purchase plan | | | | | | 214 | | | 205 | | | | | |
Total effect of changes in ownership interest on equity attributable to Goosehead Insurance Inc. | | | | | | $ | (2,387) | | | $ | (440) | | | | | |
11. Equity-Based Compensation
Stock option expense was $5.8 million for the three months ended March 31, 2022. Stock option expense was $1.9 million for the three months ended March 31, 2021.
12. Segment Information
The Company’s Chief Operating Decision Maker, its Chief Executive Officer (“CEO”), reviews the financial information presented on a consolidated basis for purposes of allocating resources and evaluating its financial performance. Accordingly, the Company has determined that it operates in a single reportable segment. As a result, GSHD has modified the presentation of its segment financial information with retrospective application to all prior periods presented. All of the Company’s long-lived assets are located in the United States. Since the Company operates in one operating segment, all required financial segment information can be found in the consolidated financial statements.
13. Litigation
From time to time, GSHD may be involved in various legal proceedings, lawsuits and claims incidental to the conduct of the Company's business. The amount of any loss from the ultimate outcomes is not probable or reasonably estimable. It is the opinion of management that the resolution of outstanding claims will not have a material adverse effect on the financial position or results of operations of the Company.
Item 2: Management’s discussion and analysis of financial condition and results of operations
OVERVIEW
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 Form 10-Q. 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 “Risk factors” and elsewhere in this report and in the Annual Report on Form 10-K.
We are a rapidly growing personal lines independent insurance agency, reinventing the traditional approach to distributing personal lines products and services throughout the United States. We were founded with one vision in mind—to provide consumers with superior insurance coverage at the best available price and in a timely manner. By leveraging our differentiated business model and innovative technology platform, we are able to deliver to consumers a superior insurance experience. Our management team continues to own approximately 48% of the company, representing our commitment to the long-term success of the Company.
Financial Highlights for the First Quarter of 2022:
•Total revenue increased 32% from the first quarter of 2021 to $41.3 million
•Core Revenue* increased by 37% from first quarter of 2021 to $36.5 million
•Total Written Premiums placed increased 41% from the prior-year period to $450.9 million
•Net loss increased by $4.3 million from the first quarter of 2021 to of $5.4 million, or (13)% of total revenues
•Adjusted EBITDA* decreased 41% from the first quarter of 2021 to $1.3 million, or 3% of total revenues.
•Basic and diluted loss per share were $(0.11), and Adjusted EPS* was $0.04 per share for the three months ended March 31, 2022
•Policies in Force increased 39% from March 31, 2021 to 1,097,000 at March 31, 2022
•Corporate sales headcount increased 35% from March 31, 2021 to 490 at March 31, 2022
◦As of March 31, 2022, 297 of these Corporate sales agents had less than one year of tenure and 193 had greater than one year of tenure
•Total franchises increased 41% compared to the prior year period to 2,298; total operating franchises increased 28% from March 31, 2021 to 1,268 at March 31, 2022
◦In Texas as of March 31, 2022, 62 operating Franchisees had less than one year of tenure and 224 operating Franchisees had greater than one year of tenure.
◦Outside of Texas as of March 31, 2022, 321 operating Franchisees had less than one year of tenure and 661 had greater than one year of tenure.
*Core Revenue, Adjusted EBITDA and Adjusted EPS are non-GAAP measures. Reconciliation of Core Revenue to total revenue, Adjusted EBITDA to net income and Adjusted EPS to EPS, the most directly comparable financial measures presented in accordance with GAAP, are set forth under "Key performance indicators".
COVID-19
Given the uncertainty regarding the duration, spread and severity of COVID-19, and its variant strains, the availability, effectiveness and utilization of vaccines, and the adverse effects on the national and global economy, home sales and consumer spending, the related financial impact on our business cannot be accurately predicted at this time. We continue to monitor the rapidly evolving situation and guidance from the authorities, including federal, state and local public health officials and as a result may take additional actions. While we intend to continue to execute on our strategic plans and operational initiatives during the outbreak, in these circumstances, there may be developments outside our control requiring us to adjust our operating plan. See Item 1A. Risk factors - Risk relating to our business—The ongoing global COVID-19 pandemic has negatively impacted the global economy in a
significant manner and may continue to do so for an extended period of time, and could also materially adversely affect our business and operating results in the Annual Report on Form 10-K for more information.
Certain income statement line items
Revenues
For the three months ended March 31, 2022, revenue increased by 32% to $41.3 million from $31.2 million for the three months ended March 31, 2021. Total Written Premium growth, which is the best leading indicator of future revenue growth, was 41% for the three months ended March 31, 2022. Total Written Premium increased to $451 million for the three months ended March 31, 2022 from $319 million for the three months ended March 31, 2021. Total Written Premiums drive our current and future Core Revenue and gives us potential opportunities to earn Ancillary Revenue in the form of Contingent Commissions.
Our various revenue streams do not equally contribute to the long-term value of Goosehead. For instance, Renewal Revenue and Renewal Royalty Fees are more predictable and have higher margin profiles, thus are higher quality revenue streams for the Company. Alternatively, Contingent Commissions, while high margin, are unpredictable and dependent on insurance company underwriting and forces of nature and thus are lower quality revenue for the Company. Our revenue streams can be viewed in three distinct categories: Core Revenue, Cost Recovery Revenue, and Ancillary Revenue, which are non-GAAP measures. A reconciliation of Core Revenue, Cost Recovery Revenue, and Ancillary Revenue to total revenue, the most directly comparable financial measures presented in accordance with GAAP, are set forth under "Key performance indicators".
Core Revenue:
•Renewal Commissions - highly predictable, higher-margin revenue stream, which is managed by our service team.
•Renewal Royalty Fees - highly predictable, higher-margin revenue stream, which is managed by our service team. For policies in their first renewal term, we see an increase in our share of royalties from 20% to 50% on the commission paid by the Carriers.
•New Business Commissions - predictable based on agent headcount and consistent ramp-up of agents, but lower margin than Renewal Commissions because of higher commissions paid to agents and higher back-office costs associated with policies in their first term. This revenue stream has predictably converted into higher-margin Renewal Commissions historically, and we expect this to continue moving forward.
•New Business Royalty Fees - predictable based on franchise count and consistent ramp-up of franchises, but lower margin than Renewal Royalty Fees because the Company only receives a royalty fee of 20% on the commissions paid by the Carrier in the first term of every policy and higher back-office costs associated with policies in their first term. This revenue stream has predictably converted into higher-margin Renewal Royalty Fees historically, and we expect this to continue moving forward.
•Agency Fees - although predictable based on agent count, Agency Fees do not renew like New Business Commissions and Renewal Commissions.
Cost Recovery Revenue:
•Initial Franchise Fees - one-time Cost Recovery Revenue stream per franchise unit that covers the Company's costs to recruit, train, onboard, and support the franchise for the first year. These fees are fully earned and non-refundable when a franchise attends our initial training.
•Interest Income - like Initial Franchise Fees, interest income is a Cost Recovery Revenue stream that reimburses the Company for those franchises on a payment plan.
Ancillary Revenue:
•Contingent Commissions - although high margin, Contingent Commissions are unpredictable and susceptible to weather events and Carrier underwriting results. Management does not rely on Contingent Commissions for operating cash flow or budget planning.
•Other Income - book transfer fees, marketing investments from Carriers and other items that are unpredictable and supplemental to other revenue streams.
We discuss below the breakdown of our revenue by stream:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
(in thousands) | | | | | | 2022 | | 2021 |
Core Revenue: | | | | | | | | | | | | | | | | |
Renewal Commissions(1) | | | | | | | | | | $10,207 | | 25 | % | | $7,757 | | 25 | % |
Renewal Royalty Fees(2) | | | | | | | | | | 14,002 | | 34 | % | | 8,746 | | 28 | % |
New Business Commissions(1) | | | | | | | | | | 5,367 | | 13 | % | | 4,616 | | 15 | % |
New Business Royalty Fees(2) | | | | | | | | | | 4,292 | | 10 | % | | 3,157 | | 10 | % |
Agency Fees(1) | | | | | | | | | | 2,637 | | 6 | % | | 2,424 | | 8 | % |
Total Core Revenue | | | | | | | | | | 36,505 | | 88 | % | | 26,700 | | 86 | % |
Cost Recovery Revenue: | | | | | | | | | | | | | | | | |
Initial Franchise Fees(2) | | | | | | | | | | 2,296 | | 6 | % | | 1,432 | | 5 | % |
Interest Income | | | | | | | | | | 319 | | 1 | % | | 261 | | 1 | % |
Total Cost Recovery Revenue | | | | | | | | | | 2,615 | | 6 | % | | 1,693 | | 5 | % |
Ancillary Revenue: | | | | | | | | | | | | | | | | |
Contingent Commissions(1) | | | | | | | | | | 1,798 | | 4 | % | | 2,737 | | 9 | % |
Other Income(2) | | | | | | | | | | 360 | | 1 | % | | 98 | | — | % |
Total Ancillary Revenue | | | | | | | | | | 2,158 | | 5 | % | | 2,835 | | 9 | % |
Total Revenues | | | | | | | | | | $41,278 | | 100 | % | | $31,228 | | 100 | % |
(1) Renewal Commissions, New Business Commissions, Agency Fees, and Contingent Commissions are included in "Commissions and agency fees" as shown on the Consolidated statements of operations.
(2) Renewal Royalty Fees, New Business Royalty Fees, Initial Franchise Fees, and Other Income are included in "Franchise revenues" as shown on the Consolidated statements of operations.
Consolidated results of operations
The following is a discussion of our consolidated results of operations for each of the three months ended March 31, 2022 and 2021. This information is derived from our accompanying condensed consolidated financial statements prepared in accordance with GAAP.
The following table summarizes our results of operations for the three months ended March 31, 2022 and 2021 (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | | 2022 | | 2021 |
Revenues: | | | | | | | | | | | | |
Commissions and agency fees | | | | | | | | $ | 20,009 | | 48 | % | | $ | 17,534 | | 56 | % |
Franchise revenues | | | | | | | | 20,950 | | 51 | % | | 13,433 | | 43 | % |
Interest income | | | | | | | | 319 | | 1 | % | | 261 | | 1 | % |
Total revenues | | | | | | | | 41,278 | | 100 | % | | 31,228 | | 100 | % |
Operating Expenses: | | | | | | | | | | | | |
Employee compensation and benefits | | | | | | | | 31,484 | | 66 | % | | 21,309 | | 67 | % |
General and administrative expenses | | | | | | | | 13,524 | | 29 | % | | 9,274 | | 30 | % |
Bad debts | | | | | | | | 796 | | 2 | % | | 447 | | 1 | % |
Depreciation and amortization | | | | | | | | 1,576 | | 3 | % | | 1,000 | | 3 | % |
Total operating expenses | | | | | | | | 47,380 | | 100 | % | | 32,030 | | 100 | % |
Loss from operations | | | | | | | | (6,102) | | | | (802) | | |
Other Income (Expense): | | | | | | | | | | | | |
Other income | | | | | | | | — | | | | 20 | | |
Interest expense | | | | | | | | (883) | | | | (601) | | |
Loss before taxes | | | | | | | | (6,985) | | | | (1,383) | | |
Tax benefit | | | | | | | | (1,602) | | | | (294) | | |
Loss Income | | | | | | | | (5,383) | | | | (1,089) | | |
Less: net loss attributable to non-controlling interests | | | | | | | | (3,126) | | | | (693) | | |
Net loss attributable to Goosehead Insurance Inc. | | | | | | | | $ | (2,257) | | | | $ | (396) | | |
Revenues
For the three months ended March 31, 2022 revenue increased 32% to $41.3 million from $31.2 million for the three months ended March 31, 2021.
Commissions and agency fees
Commissions and agency fees consist of new business commissions, renewal commissions, agency fees, and contingent commissions.
The following table sets forth our commissions and agency fees by amount and as a percentage of our revenues for the periods indicated (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | | 2022 | | 2021 |
Core Revenue: | | | | | | | | | | | | | | | | |
Renewal Commissions | | | | | | | | | | 10,207 | | | 51 | % | | 7,757 | | | 44 | % |
New Business Commissions | | | | | | | | | | 5,367 | | | 27 | % | | 4,616 | | | 26 | % |
Agency Fees | | | | | | | | | | 2,637 | | | 13 | % | | 2,424 | | | 14 | % |
Total Core Revenue: | | | | | | | | | | 18,211 | | | 91 | % | | 14,797 | | | 84 | % |
Ancillary Revenue: | | | | | | | | | | | | | | | | |
Contingent Commissions | | | | | | | | | | 1,798 | | | 9 | % | | 2,737 | | | 16 | % |
Commissions and agency fees | | | | | | | | | | $ | 20,009 | | | 100 | % | | $ | 17,534 | | | 100 | % |
Renewal Commissions increased by $2.5 million or 32%, to $10.2 million for the three months ended March 31, 2022 from $7.8 million for the three months ended March 31, 2021. This increase was primarily attributable to an increase in the number of policies in the renewal term from March 31, 2021 to March 31, 2022 plus an increase in client retention to 89% as of March 31, 2022 from 88% as of March 31, 2021.
New Business Commission increased by $0.8 million or 16%, to $5.4 million for the three months ended March 31, 2022 from $4.6 million for the three months ended March 31, 2021. Revenue from Agency Fees increased by $0.2 million or 9%, to $2.6 million for the three months ended March 31, 2022 from $2.4 million for the three months ended March 31, 2021. These increases were primarily attributable to a 35% increase in total sales agent head count to 490 at March 31, 2022, from 363 at March 31, 2021.
Revenue from Contingent Commissions decreased by $0.9 million, to $1.8 million for the three months ended March 31, 2022 from $2.7 million for the three months ended March 31, 2021. During the first quarter of each year, the actual Contingent Commissions received is reconciled to the amount receivable as of year end. This change in Revenue from Contingent Commissions was primarily attributable to decreases in the amount recorded during the quarter related to this reconciliation.
Franchise revenues
Franchise Revenues consist of Royalty Fees, Initial Franchise Fees, and Other Franchise Revenues.
The following table sets forth our franchise revenues by amount and as a percentage of our revenues for the periods indicated (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | | 2022 | | 2021 |
Core Revenues: | | | | | | | | | | | | | | | | |
Renewal Royalty Fees | | | | | | | | | | 14,002 | | | 67 | % | | 8,746 | | | 65 | % |
New Business Royalty Fees | | | | | | | | | | 4,292 | | | 20 | % | | 3,157 | | | 24 | % |
Total Core Revenues: | | | | | | | | | | 18,294 | | | 87 | % | | 11,903 | | | 89 | % |
Cost Recovery Revenues: | | | | | | | | | | | | | | | | |
Initial Franchise Fees | | | | | | | | | | 2,296 | | | 11 | % | | 1,432 | | | 11 | % |
Ancillary Revenues: | | | | | | | | | | | | | | | | |
Other Franchise Revenues | | | | | | | | | | 360 | | | 3 | % | | 98 | | | 1 | % |
Franchise revenues | | | | | | | | | | $ | 20,950 | | | 100 | % | | $ | 13,433 | | | 100 | % |
Revenue from Renewal Royalty Fees increased by $5.3 million, or 60%, to $14.0 million for the three months ended March 31, 2022 from $8.7 million for the three months ended March 31, 2021. The increase in revenue from Renewal Royalty Fees was primarily attributable to an increase in the number of policies in the renewal term and an increase in client retention to 89% as of March 31, 2022 from 88% as of March 31, 2021.
Revenue from New Business Royalty Fees increased by $1.1 million, or 36%, to $4.3 million for the three months ended March 31, 2022 from $3.2 million for the three months ended March 31, 2021. The increase in revenue from New Business Royalty Fees was primarily attributable to a 28% increase in the total number of operating franchises to 1,268 at March 31, 2022, from 987 at March 31, 2021.
Revenue from Initial Franchise Fees increased by $0.9 million, or 60%, to $2.3 million for the three months ended March 31, 2022 from $1.4 million for the three months ended March 31, 2021. The primary reason for this increase is an increase of 41% in total franchises to 2,298 at March 31, 2022, from 1,628 at March 31, 2021.
Interest income
Interest income increased by $58 thousand, or 22%, to $319 thousand for the three months ended March 31, 2022 from $261 thousand for the three months ended March 31, 2021. This increase was primarily attributable to additional Franchise Agreements signed under the payment plan option.
Expenses
Employee compensation and benefits
Employee compensation and benefits expenses increased by $10.2 million, or 48%, to $31.5 million for the three months ended March 31, 2022 from $21.3 million for the three months ended March 31, 2021. The increase is caused by a 28% increase in total headcount from 2021 to 2022, as well as an increase in equity based compensation of 198%.
General and administrative expenses
General and administrative expenses increased by $4.3 million, or 46%, to $13.5 million for the three months ended March 31, 2022 from $9.3 million for the three months ended March 31, 2021. This increase was primarily attributable to higher costs associated with an increase in operating franchises, total employees, addition of five new corporate office locations, and investments made in technology. Additionally, the Company hosted its annual Ascend meeting in February 2022, which did not take place in 2021 due to COVID.
Bad debts
Bad debts increased by $0.3 million, or 78%, to $0.8 million for the three months ended March 31, 2022 from $0.4 million for the three months ended March 31, 2021. The increase in bad debts is attributable to an increase in total franchises and an increase in revenue from Agency fees during the three months ended March 31, 2022 from the three months ended March 31, 2021.
Depreciation and amortization
Depreciation and amortization increased by $0.6 million, or 58%, to $1.6 million for the three months ended March 31, 2022 from $1.0 million for the three months ended March 31, 2021. This increase was primarily attributable to the increase in fixed assets since March 31, 2021, including the opening of five additional corporate sales offices, expansion of existing corporate offices and hardware for additional employees hired.
Interest expense
Interest expenses increased by $0.3 million for the three months ended March 31, 2022, to $0.9 million from $0.6 million for the three months ended March 31, 2021. The primary driver of the increase in interest expense is the increase in total borrowing outstanding.
Key performance indicators
Our key operating metrics are discussed below:
Total Written Premium
Total Written Premium represents for any reported period, the total amount of current (non-cancelled) gross premium that is placed with Goosehead’s portfolio of Carriers. Total Written Premium placed is an appropriate measure of operating performance because it reflects growth of our business relative to other insurance agencies.
The following tables show Total Written Premium placed by corporate agents and franchisees for the three months ended and 2022 and 2021 (in thousands). | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | % Change |
| | 2022 | | 2021 | | |
Corporate sales Total Written Premium | | $ | 110,395 | | | $ | 88,946 | | | 24 | % |
Franchise sales Total Written Premium | | 340,516 | | | 229,949 | | | 48 | % |
Total Written Premium | | $ | 450,911 | | | $ | 318,895 | | | 41 | % |
Policies in Force
Policies in Force means as of any reported date, the total count of current (non-cancelled) policies placed with Goosehead’s portfolio of Carriers. We believe that Policies in Force is an appropriate measure of operating performance because it reflects growth of our business relative to other insurance agencies.
As of March 31, 2022, we had 1,097,000 in Policies in Force compared to 1,011,000 as of December 31, 2021 and 788,000 as of March 31, 2021, representing a 9% and 39% increase, respectively.
NPS
Net Promoter Score (NPS) is calculated based on a single question: “How likely are you to refer Goosehead Insurance to a friend, family member or colleague?” Clients that respond with a 6 or below are Detractors, a
score of 7 or 8 are called Passives, and a 9 or 10 are Promoters. NPS is calculated by subtracting the percentage of Detractors from the percentage of Promoters. For example, if 50% of respondents were Promoters and 10% were Detractors, NPS is a 40. NPS is a useful gauge of the loyalty of client relationships and can be compared across companies and industries.
NPS has remained steady at 91 as of March 31, 2022 due to the service team’s continued focus on delivering highly differentiated service levels.
Client retention
Client Retention is calculated by comparing the number of all clients that had at least one policy in force twelve months prior to the date of measurement and still have at least one policy in force at the date of measurement. We believe Client Retention is useful as a measure of how well Goosehead retains clients year-over-year and minimizes defections.
Client Retention remained constant at 89% at March 31, 2022 when compared to December 31, 2021, again driven by the service team’s continued focus on delivering highly differentiated service levels. For the trailing twelve months ended March 31, 2022, we retained 94% of the premiums we distributed in the trailing twelve months ended March 31, 2021, which increased modestly from the 93% premium retention at December 31, 2021. Our premium retention rate is higher than our Client Retention rate as a result of both premiums increasing year over year and additional coverages sold by our sales and service teams.
New Business Revenue
New Business Revenue is commissions received from the Carrier, Agency Fees received from clients, and New Business Royalty Fees relating to policies in their first term.
For the three months ended March 31, 2022, New Business Revenue grew 21% to $12.3 million, from $10.2 million for the three months ended March 31, 2021. Growth in New Business Revenue is driven by an increase in Corporate sales agent headcount of 35% and growth in operating franchises of 28%.
Renewal Revenue
Renewal Revenue is commissions received from the Carrier and Renewal Royalty Fees received after the first term of a policy.
For the three months ended March 31, 2022, Renewal Revenue grew 47% to $24.2 million, from $16.5 million for the three months ended March 31, 2021. Growth in Renewal Revenue was driven by Client Retention of 89% at March 31, 2022. As our agent force matures, the policies they wrote in prior years begins to convert from New Business Revenue to more profitable Renewal Revenue.
Non-GAAP Measures
Core Revenue, Cost Recovery Revenue, Ancillary Revenue, Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted EPS are not measures of financial performance under GAAP and should not be considered substitutes for total revenue (with respect to Core Revenue, Cost Recovery Revenue and Ancillary Revenue), net income (with respect to Adjusted EBITDA and Adjusted EBITDA Margin) or earnings per share (with respect to Adjusted EPS), which we consider to be the most directly comparable GAAP measures. We refer to these measures as "non-GAAP financial measures." We consider these non-GAAP financial measures to be useful metrics for management and investors to facilitate operating performance comparisons from period to period by excluding potential differences caused by variations in capital structures, tax position, depreciation, amortization and certain other items that we believe are not representative of our core business. Core Revenue, Cost Recovery Revenue, Ancillary Revenue, Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted EPS have limitations as analytical tools, and when assessing our operating performance, you should not consider Core Revenue, Cost Recovery Revenue, Ancillary Revenue, Adjusted EBITDA, Adjusted EBITDA Margin, or Adjusted EPS in isolation or as substitutes for total revenue, net income, earnings per share, as applicable, or other consolidated income statement data prepared in accordance with GAAP. Other companies may calculate Core Revenue, Cost Recovery Revenue, Ancillary Revenue, Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted EPS differently than we do, limiting their usefulness as comparative measures.
Core Revenue
Core Revenue is a supplemental measure of our performance and includes Renewal Commissions, Renewal Royalty Fees, New Business Commissions, New Business Royalty Fees, and Agency Fees. We believe that Core Revenue is an appropriate measure of operating performance because it summarizes all of our revenues from sales of individual insurance policies.
Core Revenue increased by $9.8 million, or 37%, to $36.5 million for the three months ended March 31, 2022 from $26.7 million for the three months ended March 31, 2021. The primary drivers of the increase are increases in operating franchises, corporate agent sales headcount, the number of policies in the renewal term from March 31, 2021 to March 31, 2022, plus an increase in client retention to 89% as of March 31, 2022 from 88% as of March 31, 2021.
Cost Recovery Revenue
Cost Recovery Revenue is a supplemental measure of our performance and includes Initial Franchise Fees and Interest Income. We believe that Cost Recovery Revenue is an appropriate measure of operating performance because it summarizes revenues that are viewed by management as cost recovery mechanisms.
Cost Recovery Revenue increased by $0.9 million, or 54%, to $2.6 million for the three months ended March 31, 2022 from $1.7 million for the three months ended March 31, 2021. The primary driver of the increase is an increase in total franchises from March 31, 2021 to March 31, 2022.
Ancillary Revenue
Ancillary Revenue is a supplemental measure of our performance and includes Contingent Commissions and Other Income. We believe that Ancillary Revenue is an appropriate measure of operating performance because it summarizes revenues that are ancillary to our core business.
Ancillary Revenue decreased by $0.7 million to $2.2 million for the three months ended March 31, 2022 from $2.8 million for the three months ended March 31, 2021. During the first quarter of each year, the actual Contingent Commissions received is reconciled to the amount receivable as of year end. This change in Revenue from Contingent Commissions was primarily attributable to decreases in the amount recorded during the quarter related to this reconciliation.
Adjusted EBITDA
Adjusted EBITDA is a supplemental measure of our performance. We believe that Adjusted EBITDA is an appropriate measure of operating performance because it eliminates the impact of items that do not relate to business performance. Adjusted EBITDA is defined as net income (the most directly comparable GAAP measure) before interest, income taxes, depreciation and amortization, adjusted to exclude equity-based compensation and other non-operating items, including, among other things, certain non-cash charges and certain non-recurring or non-operating gains or losses.
Adjusted EBITDA decreased by $0.9 million, or (41)%, to $1.3 million for the three months ended March 31, 2022 from $2.1 million for the three months ended March 31, 2021. The primary driver of the decrease in Adjusted EBITDA is increases in General and Administrative expenses driven by the Ascend meeting and by increases in corporate agent headcount, operating franchises, and investments in technology, as well as decreases in Ancillary Revenue.
Adjusted EBITDA Margin
Adjusted EBITDA Margin is Adjusted EBITDA as defined above, divided by total revenue excluding other non-operating items. Adjusted EBITDA Margin is helpful in measuring profitability of operations on a consolidated level.
For the three months ended March 31, 2022, Adjusted EBITDA Margin was 3% compared to 7% for the three months ended March 31, 2021. The primary drivers of the decrease in Adjusted EBITDA Margin is a decrease in revenue from Contingent Commissions and increases in General and Administrative expenses driven by increases in corporate agent headcount, operating franchises, and investments in technology.
Adjusted EPS
Adjusted EPS is a supplemental measure of our performance, defined as earnings per share (the most directly comparable GAAP measure) before non-recurring or non-operating income and expenses. Adjusted EPS is a useful measure to management because it eliminates the impact of items that do not relate to business performance.
GAAP to Non-GAAP Reconciliations
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2022 | | 2021 |
Total Revenues | | | | | $ | 41,278 | | | $ | 31,228 | |
| | | | | | | |
Core Revenue: | | | | | | | |
Renewal Commissions(1) | | | | | $ | 10,207 | | | $ | 7,757 | |
Renewal Royalty Fees(2) | | | | | 14,002 | | | 8,746 | |
New Business Commissions(1) | | | | | 5,367 | | | 4,616 | |
New Business Royalty Fees(2) | | | | | 4,292 | | | 3,157 | |
Agency Fees(1) | | | | | 2,637 | | | 2,424 | |
Total Core Revenue | | | | | 36,505 | | | 26,700 | |
Cost Recovery Revenue: | | | | | | | |
Initial Franchise Fees(2) | | | | | 2,296 | | | 1,432 | |
Interest Income | | | | | 319 | | | 261 | |
Total Cost Recovery Revenue | | | | | 2,615 | | | 1,693 | |
Ancillary Revenue: | | | | | | | |
Contingent Commissions(1) | | | | | 1,798 | | | 2,737 | |
Other Income(2) | | | | | 360 | | | 98 | |
Total Ancillary Revenue | | | | | 2,158 | | | 2,835 | |
Total Revenues | | | | | $ | 41,278 | | | $ | 31,228 | |
(1) Renewal Commissions, New Business Commissions, Agency Fees, and Contingent Commissions are included in "Commissions and agency fees" as shown on the Consolidated statements of operations.
(2) Renewal Royalty Fees, New Business Royalty Fees, Initial Franchise Fees, and Other Income are included in "Franchise revenues" as shown on the Consolidated statements of operations.
The following tables show a reconciliation from net income to Adjusted EBITDA and Adjusted EBITDA margin for the three months ended March 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | | 2022 | | 2021 |
Net Income | | | | | | $ | (5,383) | | | $ | (1,089) | |
Interest expense | | | | | | 883 | | | 601 | |
Depreciation and amortization | | | | | | 1,576 | | | 1,000 | |
Tax (benefit) expense | | | | | | (1,602) | | | (294) | |
Equity-based compensation | | | | | | 5,788 | | | 1,941 | |
Other (income) expense | | | | | | — | | | (20) | |
Adjusted EBITDA | | | | | | $ | 1,262 | | | $ | 2,139 | |
Adjusted EBITDA Margin(1) | | | | | | 3 | % | | 7 | % |
(1) Adjusted EBITDA Margin is calculated as Adjusted EBITDA divided by Total Revenue ($1,262/$41,278), and ($2,139/$31,228) for the three months ended March 31, 2022 and 2021, respectively.
The following tables show a reconciliation from basic earnings per share to Adjusted EPS (non-GAAP basis) for the three months ended March 31, 2022 (in thousands, except per share amounts). Note that totals may not sum due to rounding: | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | | 2022 | | 2021 |
Earnings per share - basic (GAAP) | | | | | | $ | (0.11) | | | $ | (0.02) | |
Add: equity-based compensation(1) | | | | | | 0.16 | | | 0.05 | |
Adjusted EPS (non-GAAP) | | | | | | $ | 0.04 | | | $ | 0.03 | |
(1) Calculated as equity-based compensation divided by sum of weighted average Class A and Class B shares [$5.8 million/(20.2 million + 16.9 million)] for the three months ended March 31, 2022 and [$1.9 million/ (18.4 million + 18.4 million)] for the three months ended March 31, 2021.
Liquidity and capital resources
Liquidity and capital resources
We have managed our historical liquidity and capital requirements primarily through the receipt of revenues. Our primary cash flow activities involve: (1) generating cash flow from Commissions and Fees, which largely includes New Business Revenue (Corporate) and Renewal Revenue (Corporate); (2) generating cash flow from Franchise Revenues operations, which largely includes Initial Franchise Fees and Royalty Fees; (3) borrowings, interest payments and repayments under our credit agreement; and (4) issuing shares of Class A common stock. As of March 31, 2022, our cash and cash equivalents balance was $21.2 million. We have used cash flow from operations primarily to pay compensation and related expenses, general, administrative and other expenses, debt service, special dividends and distributions to our owners.
Credit agreement
See "Note 7. Debt" in the condensed consolidated financial statements included herein for a discussion of the Company's credit facilities.
Comparative cash flows
The following table summarizes our cash flows from operating, investing and financing activities for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2022 | | 2021 | | Change |
Net cash provided by (used for) operating activities | | $ | (5,154) | | | $ | 7,888 | | | $ | (13,042) | |
Net cash used for investing activities | | (2,491) | | | (2,100) | | | (391) | |
Net cash used for financing activities | | (155) | | | (69) | | | (86) | |
Net increase in cash and cash equivalents | | (7,800) | | | 5,719 | | | (13,519) | |
Cash and cash equivalents, and restricted cash, beginning of period | | 30,479 | | | 26,236 | | | 4,243 | |
Cash and cash equivalents, and restricted cash, end of period | | $ | 22,679 | | | $ | 31,955 | | | $ | (9,276) | |
Operating activities
Net cash used for operating activities was $5.2 million for the three months ended March 31, 2022 as compared to net cash provided by operating activities of $7.9 million for the three months ended March 31, 2021. This decrease in net cash provided by operating activities was attributable to a decrease in cash provided from commissions and agency fees receivables of $10.7 million as a result of the receipts of contingent commissions during the period, a decrease of $1.2 million in TRA liability, and a $1.8 million increase in cash used from prepaid expense, offset by an increase of $1.3 million in receivables from franchisees.
Investing activities
Net cash used for investing activities was $2.5 million for the three months ended March 31, 2022, compared to net cash used in investing activities of $2.1 million for the three months ended March 31, 2021. This increase was driven by continued expansion of corporate offices to support increased hiring.
Financing activities
Net cash used for financing activities was $0.2 million for the three months ended March 31, 2022 as compared to net cash used for financing activities of $0.1 million for the three months ended March 31, 2021. This increase in net cash used for financing activities was attributable to repayment of the Company's term note.
Future sources and uses of liquidity
Our sources of liquidity are (1) cash on hand, (2) net working capital, (3) cash flows from operations and (4) our revolving credit facility. Based on our current expectations, we believe that these sources of liquidity will be sufficient to fund our working capital requirements and to meet our commitments in the foreseeable future.
We expect that our primary liquidity needs will comprise cash to (1) provide capital to facilitate the organic growth of our business, (2) pay operating expenses, including cash compensation to our employees, (3) make payments under the tax receivable agreement, (4) pay interest and principal due on borrowings under our Credit Agreement (5) pay income taxes, and (6) when deemed advisable by our board of directors, pay dividends.
Dividend policy
There have been no material changes to our dividend policy as described in the Annual Report on Form 10-K.
Tax receivable agreement
We entered into a tax receivable agreement with the Pre-IPO LLC Members on May 1, 2018 that provides for the payment by us to the Pre-IPO LLC Members of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that we actually realize as a result of (i) any increase in tax basis in Goosehead Insurance, Inc.’s assets and (ii) tax benefits related to imputed interest deemed arising as a result of payments made under the tax receivable agreement. See "Item 13. Certain relationships and related transactions, and director independence" of the Annual Report on Form 10-K.
Holders of Goosehead Financial, LLC Units (other than Goosehead Insurance, Inc.) may, subject to certain conditions and transfer restrictions described above, redeem or exchange their LLC Units for shares of Class A common stock of Goosehead Insurance, Inc. on a one-for-one basis. Goosehead Financial, LLC intends to make an election under Section 754 of the Internal Revenue Code of 1986, as amended, and the regulations thereunder (the “Code”) effective for each taxable year in which a redemption or exchange of LLC Units for shares of Class A common stock occurs, which is expected to result in increases to the tax basis of the assets of Goosehead Financial, LLC at the time of a redemption or exchange of LLC Units. The redemptions or exchanges are expected to result in increases in the tax basis of the tangible and intangible assets of Goosehead Financial, LLC. These increases in tax basis may reduce the amount of tax that Goosehead Insurance, Inc. would otherwise be required to pay in the future. We have entered into a tax receivable agreement with the Pre-IPO LLC Members that provides for the payment by us to the Pre-IPO LLC Members of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that we actually realize as a result of (i) any increase in tax basis in Goosehead Insurance, Inc.’s assets resulting from (a) the purchase of LLC Units from any of the Pre-IPO LLC Members using the net proceeds from any future offering, (b) redemptions or exchanges by the Pre-IPO LLC Members of LLC Units for shares of our Class A common stock or (c) payments under the tax receivable agreement and (ii) tax benefits related to imputed interest deemed arising as a result of payments made under the tax receivable agreement. This payment obligation is an obligation of Goosehead Insurance, Inc. and not of Goosehead Financial, LLC. For purposes of the tax receivable agreement, the cash tax savings in income tax will be computed by comparing the actual income tax liability of Goosehead Insurance, Inc. (calculated with certain assumptions) to the amount of such taxes that Goosehead Insurance, Inc. would have been required to pay had there been no increase to the tax basis of the assets of Goosehead Financial, LLC as a result of the redemptions or exchanges and had Goosehead Insurance, Inc. not entered into the tax receivable agreement. Estimating the amount of payments that may be made under the tax receivable agreement is by its nature imprecise, insofar as the calculation of amounts payable depends on a variety of factors. While the actual increase in tax basis, as well as the amount and timing of any payments under the tax receivable agreement, will vary depending upon a number of factors, including the timing of redemptions or exchanges, the price of shares of our Class A common stock at the time of the redemption or exchange, the extent to which such redemptions or exchanges are taxable and the
amount and timing of our income. See "Item 13. Certain relationships and related transactions, and director independence" of the Annual Report on Form 10-K. We anticipate that we will account for the effects of these increases in tax basis and associated payments under the tax receivable agreement arising from future redemptions or exchanges as follows:
•we will record an increase in deferred tax assets for the estimated income tax effects of the increases in tax basis based on enacted federal and state tax rates at the date of the redemption or exchange;
•to the extent we estimate that we will not realize the full benefit represented by the deferred tax asset, based on an analysis that will consider, among other things, our expectation of future earnings, we will reduce the deferred tax asset with a valuation allowance; and
•we will record 85% of the estimated realizable tax benefit (which is the recorded deferred tax asset less any recorded valuation allowance) as an increase to the liability due under the tax receivable agreement and the remaining 15% of the estimated realizable tax benefit as an increase to additional paid-in capital.
All of the effects of changes in any of our estimates after the date of the redemption or exchange will be included in net income. Similarly, the effect of subsequent changes in the enacted tax rates will be included in net income.
Contractual obligations, commitments and contingencies
The following table represents our contractual obligations as of March 31, 2022, aggregated by type (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Contractual obligations, commitments and contingencies |
(in thousands) | | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
Operating leases(1) | | $ | 66,090 | | | $ | 5,190 | | | $ | 16,575 | | | $ | 16,955 | | | $ | 27,370 | |
Debt obligations payable(2) | | 98,125 | | | 5,000 | | | 17,500 | | | 75,625 | | | — | |
Interest expense(3) | | 17,586 | | | 8,313 | | | 3,203 | | | 6,070 | | | — | |
Liabilities under the tax receivable agreement(4) | | 103,193 | | | — | | | 16,353 | | | 11,864 | | | 74,976 | |
Total | | $ | 284,994 | | | $ | 18,503 | | | $ | 53,631 | | | $ | 110,514 | | | $ | 102,346 | |
(1)The Company leases its facilities under non-cancelable operating leases. In addition to monthly lease payments, the lease agreements require the Company to reimburse the lessors for its portion of operating costs each year. Rent expense was $1.4 million and $945 thousand for the three months ended March 31, 2022 and 2021.
(2)The Company refinanced its credit facilities on July 21, 2021 in the form of a $100 million term loan, and $25 million revolving credit facility, of which $25 million was drawn as of March 31, 2022.
(3)Interest expense includes interest payments on our outstanding debt obligations under our credit agreement. Our debt obligations have variable interest rates. We have calculated future interest obligations based on the interest rate for our debt obligations as of March 31, 2022.
(4)See "Item 2. Management's discussion and analysis of financial condition and results of operation - Tax receivable agreement."
Off-balance sheet arrangements
We do not invest in any off-balance sheet vehicles that provide liquidity, capital resources, market or credit risk support, or engage in any activities that expose us to any liability that is not reflected in our condensed consolidated financial statements except for those described under “Contractual obligations, commitments and contingencies” above.
Critical accounting policies
Our discussion and analysis of our consolidated financial condition and results of operations is based upon the accompanying condensed consolidated financial statements and notes thereto, which have been prepared in accordance with GAAP. The preparation of the condensed consolidated financial statements requires us to make estimates, judgments and assumptions, which we believe to be reasonable, based on the information available. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. Variances in the estimates or assumptions used to actual experience could yield materially different accounting results. On an ongoing basis, we evaluate the continued appropriateness of our accounting policies and resulting estimates to make adjustments we consider appropriate
under the facts and circumstances. There have been no significant changes to our critical accounting policies as disclosed in the Annual Report on Form 10-K.
Recent accounting pronouncements
See "Note 2: Summary of Significant Accounting Policies—Recently Issued Accounting Pronouncements” under Part I, Item 1 of this Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to our exposure to market risks as described in "Item 7A. Quantitative and qualitative disclosure of market risks" in the Annual Report on Form 10-K.
Item 4. 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 such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of March 31, 2022. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
There were no changes to our internal control over financial reporting that occurred during the quarter ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II
Item 1. Legal Proceedings
The information required by this Item is incorporated by reference to "Part I, Item I, Note 13. Litigation" in the condensed consolidated financial statements included herein.
Item 1A. Risk Factors
There have been no material changes to the risk factors disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Subject to the terms of the amended and restated Goosehead Financial LLC Agreement, each LLC Unit is redeemable (along with the cancellation of the corresponding share of Class B common stock) for one share of Class A common stock.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
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101.INS | XBRL Instance Document |
101.SCH | XBRL Schema Document |
101.CAL | XBRL Calculation Linkbase Document |
101.DEF | XBRL Definition Linkbase Document |
101.LAB | XBRL Label Linkbase Document |
101.PRE | XBRL Presentation Linkbase |
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, we have duly caused this report to be signed on our behalf by the undersigned thereunto duly authorized.
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| | GOOSEHEAD INSURANCE, INC. |
| |
Date: | April 27, 2022 | By: | | /s/ Mark E. Jones |
| | | | Mark E. Jones |
| | | | Chairman and Chief Executive Officer |
| | | | (Principal Executive Officer) |
| |
Date: | April 27, 2022 | By: | | /s/ Mark S. Colby |
| | | | Mark S. Colby |
| | | | Chief Financial Officer |
| | | | (Principal Financial Officer and Principal Accounting Officer) |