Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
OR
o
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, TX
76262
(Address of principal executive offices)
(Zip Code)

(214) 838-5500
(Registrant's telephone number, including area code)

Not applicable
(Former name or former address, if changed since last report)

Indicate by check mark if 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule-405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post 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  
o
 
Accelerated filer  
o
Non-accelerated filer  
þ
(Do not check if a smaller reporting company)
Smaller reporting company
o
 
 
 
Emerging growth company
þ
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes þ No
As of August 8, 2018, there were 13,533,267 shares of Class A common stock outstanding and 22,746,667 shares of Class B common stock outstanding.





Table of contents
 
 
 
 
 
Page
Part I
 
 
Item 1.
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 Matters
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
Item 5.
Other Information
Item 6.
Exhibits
 
 
 
 


2



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:
 
Agency Fees: Fees separate from commissions charged directly to clients for efforts performed in the issuance of new insurance policies.
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.
Corporate Channel: The Corporate Channel distributes insurance through a network of company-owned and financed operations with employees that are hired, trained and managed by Goosehead.
Corporate Channel Adjusted EBITDA: Segment earnings before interest, income taxes, depreciation and amortization allocable to the Corporate Channel, adjusted to exclude equity-based compensation.
Franchise Agreement: Agreements governing our relationships with Franchisees.
Franchise Channel: The Franchise Channel network consists of Franchisee operations that are owned and managed by Franchisees. These business owners have a contractual relationship with Goosehead to use our processes, training, implementation, systems and back-office support team to place insurance. In exchange, Goosehead is entitled to an Initial Franchise Fee and Royalty Fees.
Franchise Channel Adjusted EBITDA: Segment earnings before interest, income taxes, depreciation and amortization, adjusted to exclude other non-operating items allocable to the Franchise Channel and equity-based compensation.
Franchisee: An individual or entity who has entered into a Franchise Agreement with us.
Initial Franchise Fee: Contracted fees paid by Franchisees to compensate Goosehead for the training and onboarding of new franchise locations.
LLC Unit: a limited liability company unit of Goosehead Financial, LLC.
New Business Revenue: Commissions received from Carriers, Agency Fees received from clients, and Royalty Fees received from Franchisees relating to policies in their first term.
New Business Revenue (Corporate): Commissions received from Carriers and Agency Fees charged to clients relating to policies in their first term sold in the Corporate Channel.
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?” Customers 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: The members of Goosehead Financial, LLC prior to the closing of the initial public offering of Goosehead Insurance, Inc.
Renewal Revenue: Commissions received from Carriers and Royalty Fees received from Franchisees after the first term of policies.
Renewal Revenue (Corporate): Commissions received from Carriers after the first term of policies originally sold in the Corporate Channel.
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 in the Franchise Channel.
Segment: One of the two Goosehead sales distribution channels, the Corporate Channel or the Franchise Channel.
Segment Adjusted EBITDA: Either Corporate Channel Adjusted EBITDA or Franchise Channel Adjusted EBITDA.
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.


3




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 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 “Risk factors” in our prospectus (the “Final Prospectus”) relating to our Registration Statement on Form S-1, as amended (Registration No. 333-224080), filed with the U.S. Securities and Exchange Commission (the “SEC”) pursuant to Rule 424(b) under the U.S. Securities Act of 1933, as amended. You should specifically consider the numerous risks outlined under “Risk factors” in the Final Prospectus.
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 prospectus to conform our prior statements to actual results or revised expectations.

4



PART I

Item 1. Condensed Consolidated Financial Statements (Unaudited)
 
 
Page
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Income
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
Franchise Fees Receivable
Note 4
Allowance for Uncollectible Agency Fees
Note 5
Note Payable
Note 6
Commitments and Contingencies
Note 7
Income Taxes
Note 8
Other Income
Note 9
Stockholder's Equity
Note 10
Equity-Based Compensation
Note 11
Segment Information
Note 12
Litigation
Note 13
Subsequent Events

5





Goosehead Insurance, Inc.
Condensed Consolidated Balance Sheets
(Unaudited) 
  

June 30

December 31
  

2018

2017
Assets




Current Assets




Cash and cash equivalents

$
18,938,455


$
4,947,671

Restricted cash

616,414


417,911

Commissions and agency fees receivable, net

1,958,539


1,268,172

Receivable from franchisees, net

396,922


564,087

Prepaid expenses

937,826


521,362

Total current assets

22,848,156


7,719,203

Receivable from franchisees, net of current portion

1,841,844


1,360,686

Property and equipment, net of accumulated depreciation

6,934,029


6,845,121

Intangible assets, net of accumulated amortization

241,286


216,468

Other assets

149,806


565,191

Total assets

$
32,015,121


$
16,706,669

Liabilities and Stockholders’ Equity




Current Liabilities:




Accounts payable and accrued expenses

$
4,305,386


$
2,759,241

Premiums payable

616,414


417,911

Unearned revenue

510,000


1,062,050

Dividends payable



550,000

Deferred rent

420,850


477,818

Note payable

500,000


500,000

Total current liabilities

6,352,650


5,767,020

Deferred income taxes, net
 
90,532

 

Deferred rent, net of current portion

4,252,020


3,916,257

Note payable, net of current portion

48,004,034


48,156,340

Total liabilities

58,699,236


57,839,617

Commitments and contingencies (see note 6)




Members’ deficit



(41,132,948
)
Class A common stock, $.01 par value per share - 300,000,000 shares authorized, 13,533,267 shares issued and outstanding as of June 30, 2018, zero issued and outstanding as of December 31, 2017

135,333



Class B common stock, $.01 par value per share - 50,000,000 shares authorized, 22,746,667 issued and outstanding as of June 30, 2018, zero issued and outstanding as of December 31, 2017

227,467



Additional paid in capital

89,033,692



Accumulated deficit

(7,558,112
)


Total stockholders' equity and members' deficit

81,838,380


(41,132,948
)
Non-controlling interests

(108,522,495
)


Total equity

(26,684,115
)

(41,132,948
)
Total liabilities and stockholders' equity

$
32,015,121


$
16,706,669


See Notes to the Condensed Consolidated Financial Statements


6



Goosehead Insurance, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
  

Three Months Ended June 30

Six Months Ended June 30
  

2018

2017

2018

2017
Revenues:








Commissions and agency fees

$
8,716,016


$
6,854,232


$
18,311,592


$
13,216,078

Franchise revenues

5,969,392


3,969,912


10,879,920


7,451,028

Interest income

102,304


54,486


185,081


102,473

Total revenues

14,787,712


10,878,630


29,376,593


20,769,579

Operating Expenses:








Employee compensation and benefits (including Class B unit compensation of $26,134,271 for the three and six months ended June 30, 2018 and $184,613 for the three and six months ended 2017)

33,854,619


5,575,415


40,690,044


10,443,062

General and administrative expenses

3,025,695


2,011,268


5,399,317


3,844,867

Bad debts

305,965


323,208


585,654


575,090

Depreciation and amortization

350,548


158,177


687,483


295,834

Total operating expenses

37,536,827


8,068,068


47,362,498


15,158,853

(Loss) Income from operations

(22,749,115
)

2,810,562


(17,985,905
)

5,610,726

Other Income (Expense):








Other Income



3,540,932




3,540,932

Interest expense

(972,158
)

(527,038
)

(1,967,560
)

(1,059,753
)
(Loss) Income before taxes

(23,721,273
)

5,824,456


(19,953,465
)

8,091,905

Income tax expense

154,093




154,093



Net (Loss) Income

(23,875,366
)

5,824,456


(20,107,558
)

8,091,905

Less: net (loss) income attributable to non-controlling interests

(14,640,985
)

5,824,456


(10,873,177
)

8,091,905

Net (Loss) Income attributable to Goosehead Insurance, Inc.

$
(9,234,381
)

$


$
(9,234,381
)

$

Earnings per share:












Basic

$
(0.68
)

n/a


$
(0.68
)

n/a

Diluted

$
(0.68
)

n/a


$
(0.68
)

n/a

Weighted average shares of Class A common stock outstanding












Basic

13,533,267


n/a


13,533,267


n/a

Diluted

13,533,267


n/a


13,533,267


n/a














Pro forma net income:












Pro forma income before taxes attributable to Goosehead Insurance, Inc.

n/a


2,172,659


n/a


3,018,471

Pro forma income tax expense

n/a


$
(519,266
)

n/a


$
(721,415
)
Pro forma net income attributable to Goosehead Insurance, Inc.

n/a


$
1,653,393


n/a


$
2,297,056










Pro forma earnings per share:












Basic

n/a


$
0.12


n/a

 
$
0.17

Diluted

n/a


$
0.12


n/a

 
$
0.16

Pro forma weighted average shares of Class A common stock outstanding:












Basic

n/a


13,533,267


n/a


13,533,267

Diluted

n/a


14,329,293


n/a


14,329,293


See Notes to the Condensed Consolidated Financial Statements

7



Goosehead Insurance, Inc.
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Members' deficit
 
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, December 31, 2017
$
(41,132,948
)
 

 

 
$

 
$

 
$

 
$

 
$

 
$

 
$
(41,132,948
)
Net income prior to the Reorganization Transactions
4,388,937

 

 

 

 

 

 

 

 

 
4,388,937

Distributions prior to the Reorganization Transactions
(1,278,249
)
 

 

 

 

 

 

 

 

 
(1,278,249
)
Balance prior to the Reorganization Transactions
(38,022,260
)
 

 

 

 

 

 

 

 

 
(38,022,260
)
Effects of the Reorganization Transactions
38,022,260

 

 
22,746,667

 

 
227,467

 
(132,202,468
)
 
(7,378,625
)
 
(139,353,626
)
 
(12,401,967
)
 
(113,733,333
)
Initial non-controlling interest allocation

 

 

 

 

 
97,071,040

 

 
97,071,040

 
(97,071,040
)
 

Issuance of Class A common stock sold in initial public offering, net of offering costs

 
13,533,267

 

 
135,333

 

 
123,994,257

 

 
124,129,590

 

 
124,129,590

Distributions subsequent to initial public offering

 

 

 

 

 

 
(745,000
)
 
(745,000
)
 

 
(745,000
)
Net income subsequent to initial public offering

 

 

 

 

 

 
565,513

 
565,513

 
950,512

 
1,516,025

Equity-based compensation subsequent to initial public offering

 

 

 

 

 
259,727

 

 
259,727

 

 
259,727

Deferred tax adjustments

 

 

 

 

 
(88,864
)
 

 
(88,864
)
 

 
(88,864
)
Balance June 30, 2018
$

 
13,533,267

 
22,746,667

 
$
135,333

 
$
227,467

 
$
89,033,692

 
$
(7,558,112
)
 
$
81,838,380

 
$
(108,522,495
)
 
$
(26,684,115
)

See Notes to the Condensed Consolidated Financial Statements

8



Goosehead Insurance, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
  
 
For the six months ended June 30
  
 
2018
 
2017
Cash flows from operating activities:
 
 
 
 
Net (loss) income
 
$
(20,107,558
)
 
$
8,091,905

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
687,483

 
295,834

Bad debt expense
 
585,654

 
575,090

Equity-based compensation
 
26,272,248

 

Deferred income taxes
 
1,667

 

Changes in operating assets and liabilities:
 
 
 
 
Commissions and agency fees receivable
 
(1,113,522
)
 
(366,478
)
Receivable from franchisees
 
(487,344
)
 
(920,310
)
Prepaid expenses
 
(416,464
)
 
(223,101
)
Other assets
 
415,385

 
(147,344
)
Accounts payable and accrued expenses
 
1,546,144

 
140,932

Deferred rent
 
278,795

 
(79,790
)
Premiums payable
 
198,503

 
251,515

Unearned revenue
 
(552,050
)
 
(140,000
)
Net cash provided by operating activities
 
7,308,941

 
7,478,253

Cash flows from investing activities:
 
 
 
 
Changes in restricted cash
 
(198,503
)
 
(251,515
)
Proceeds from notes receivable
 
10,852

 
288,494

Purchase of software
 
(79,170
)
 
(93,297
)
Purchase of property and equipment
 
(722,944
)
 
(877,583
)
Net cash used for investing activities
 
(989,765
)
 
(933,901
)
Cash flows from financing activities:
 
 
 
 
Loan origination fees
 
98,600

 
66,000

Repayment of note payable
 
(250,000
)
 
(150,000
)
Proceeds from the issuance of Class A common stock sold in initial public offering, net of underwriting discounts and offering costs
 
86,891,920

 

Member distributions
 
(79,068,912
)
 
(2,565,387
)
Net cash provided by (used for) financing activities
 
7,671,608

 
(2,649,387
)
Net increase in cash and cash equivalents
 
13,990,784

 
3,894,965

Cash, beginning of period
 
4,947,671

 
3,778,098

Cash, end of period
 
$
18,938,455

 
$
7,673,063

 
 
 
 
 
Supplemental disclosures:
 
 
 
 
Management fee note repayment through issuance of Class A common stock
 
$
37,237,670

 
$

 
 
 
 
 
See Notes to the Condensed Consolidated Financial Statements

9

Goosehead Insurance, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)


1. Organization
On May 1, 2018 Goosehead Insurance, Inc. ("GSHD") completed an initial public offering (the “Offering”) of 9,809,500 shares of Class A common stock at a price of $10.00 per share, which included 1,279,500 shares issued pursuant to the underwriter's over-allotment option. GSHD became the sole managing member of Goosehead Financial, LLC (“GF”). GF was organized on January 1, 2016 as a Delaware Limited Liability Company and is headquartered in Westlake, TX. The operations of GF represent the predecessor to GSHD prior to the Offering, and the consolidated and combined entities of GF are described in more detail below. Information for any periods prior to May 1, 2018 relates to GF and its subsidiaries and affiliates.
GSHD (collectively with its combined and consolidated subsidiaries and affiliates, 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 operations of the corporate-owned units are recorded in Texas Wasatch Insurance Services, L.P. (“TWIS”)—a Texas limited partnership headquartered in Westlake, TX and operating since 2003. TWIS is 99.6% owned by Goosehead Insurance Holdings, LLC (“GIH”), a wholly owned subsidiary of GF. The Company had seven and four corporate-owned locations in operation at June 30, 2018 and 2017, respectively.
The operations of the franchise units are recorded in Goosehead Insurance Agency, LLC (“GIA”)—a Delaware limited liability company headquartered in Westlake, TX and operating since 2011. GIA is 100% owned by GIH. Franchisees are provided access to insurance Carrier Appointments, product training, technology infrastructure, client service centers and back office services. During the three months ended June 30, 2018 and 2017, the Company sold 55 and 34 franchise locations, respectively and had 385 and 244 operating franchise locations as of June 30, 2018 and 2017, respectively. No franchises were purchased by the Company during the three months ended June 30, 2018 or 2017.
In connection with the Offering, both Goosehead Management, LLC (“GM”) and Texas Wasatch Insurance Holdings Group LLC (“TWIHG”) became wholly owned indirect subsidiaries of GF. Both GM and TWIHG are non-operating holding companies created to receive management fees from the operating entities TWIS and GIA.
All intercompany accounts and transactions have been eliminated in consolidation of GF.
Reorganization Transactions
In connection with the Offering, the company completed the following transactions (the "Reorganization Transactions"):
The GF limited liability company agreement was amended to, among other things, i) appoint GSHD as the sole managing member of GF and ii) modify the capital structure of GF by reclassifying the interests previously held by Pre-IPO LLC Members into a single new class of non-voting LLC Units.
GSHD was authorized to issue two classes of common stock. 9,809,500 shares of Class A common stock were issued pursuant to the Offering, including the underwriters' over-allotment option. 22,746,667 shares of Class B common stock were issued to the Pre-IPO LLC Members in an amount equal to the number of LLC Units held by each such Pre-IPO LLC Member in exchange for certain management rights of GF. Each share of Class A common stock and Class B common stock entitles its holder to one vote per share on all matters submitted to a vote of GSHD's stockholders. Each share of Class B common stock can be exchanged for one share of Class A common stock or, at GSHD's discretion, a cash payment equal to the volume weighted average market price of one share of Class A common stock, thus canceling the share of Class B common stock on a one-for-one basis.
The Goosehead Management Holders and Texas Wasatch Holders indirectly transferred their ownership interests in GM and TWIHG, respectively, to GSHD in exchange for the Goosehead Management Note and Texas Wasatch Note. The aggregate principal amount of the Goosehead Management Note and the Texas Wasatch Note was approximately $114 million. Because the net proceeds from the Offering were insufficient to repay the aggregate principal amount of the notes, 3,723,767 shares of Class A common stock were issued to the Goosehead Management Holders and the Texas Wasatch Holders for the difference. GSHD contributed direct and indirect ownership interests in each of TWIHG and GM to GF.

10

Goosehead Insurance, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

Following completion of the Reorganization Transactions and the Offering, GSHD owns 37.3% of GF and the Pre-IPO LLC Members own the remaining 62.7%. GSHD is the sole managing member of GF and, although GSHD holds a minority economic interest in GF, GSHD 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 consolidated financial statements.

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 position at June 30, 2018, and the condensed consolidated results of operations, and cash flows for the periods ended June 30, 2018 and 2017. The interim period condensed consolidated financial statements should be read in conjunction with the Consolidated and Combined Financial Statements that are included in the Final Prospectus.
2. Summary of Significant Accounting Policies

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.

Capitalized IPO Related Costs

In connection with the Offering, the Company incurred costs which were recorded in other assets on the condensed consolidated balance sheet. Upon completion of the Offering, these deferred costs were charged against the proceeds from the Offering with a corresponding reduction to additional paid-in capital. There were $0 and $170 thousand of IPO related costs included in other assets at June 30, 2018 and December 31, 2017, respectively.

Income Taxes

Prior to the Offering, GF was treated as a partnership for U.S. federal and applicable state and local income tax purposes. As a partnership, GF's taxable income or loss was included in the taxable income of its members. Accordingly, no income tax expense was recorded for federal and state and local jurisdictions for periods prior to the Offering.
In connection with the Offering completed on May 1, 2018, the Company became a taxable entity.
Recently Issued Accounting Pronouncements
Statement of Cash Flows (ASU 2016-18): This standard requires that the Statement of Cash Flows explain the changes during the period of cash and cash equivalents inclusive of amounts categorized as Restricted Cash. As such, upon adoption, the Company’s consolidated statement of cash flows will show the sources and uses of cash that explain the movement in the balance of cash and cash equivalents, inclusive of restricted cash, over the period presented. As an emerging growth company (“EGC”), the standard will become effective for the Company January 1, 2019. The Company is currently evaluating the impact this standard will have on the Company's consolidated financial statements.
Statement of Cash Flows (ASU 2016-15): This standard addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified and applies to all entities, including both business entities and not-for-profit entities that are required to present a statement of cash flows under Topic 230. The standard will become effective for the Company on January 1, 2019. The Company has evaluated the impact of ASU 2016-15 and has determined the impact to be immaterial. The Company does not, at this time, engage in the activities being addressed by the standard.
Revenue from Contracts with Customers (ASU 2014-09): This standard supersedes the existing revenue recognition guidance and provides a new framework for recognizing revenue. The core principle of the standard is

11

Goosehead Insurance, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The new standard also requires significantly more comprehensive disclosures than the existing standard. Guidance subsequent to ASU 2014-09 has been issued to clarify various provisions in the standard, including principal versus agent considerations, identifying performance obligations, licensing transactions, as well as various technical corrections and improvements. This standard may be adopted using either a retrospective or modified retrospective method. According to the superseding standard ASU 2015-14 that deferred the effective dates of the preceding, the standard will become effective for the Company January 1, 2019. The Company is currently in the process of evaluating the impact this standard is expected to have on the consolidated financial statements and expects to adopt the modified retrospective method. The Company expects a material change in the timing of when Contingent Commissions and Initial Franchise Fees are recorded as revenue. As the Company continues the evaluation during 2018, specifically as it relates to revenue recognition (commissions, contingent commissions, and franchise fees, among others), cost deferrals, and systems and processes, the Company will further clarify the expected material impact of the adoption of the standard when it becomes known.
Leases (ASU 2016-02): This standard establishes a new lease accounting model, which introduces the recognition of lease assets and liabilities for those leases classified as operating leases under previous GAAP. It should be applied using a modified retrospective approach, with the option to elect various practical expedients. Early adoption is permitted. The standard will become effective for the Company January 1, 2020. The Company is currently evaluating the impact this standard will have on the Company's consolidated financial statements.
3. Franchise Fees Receivable
The balance of Franchise fees receivable included in Receivable from franchisees consisted of the following at June 30, 2018 and December 31, 2017:
  
 
June 30
 
December 31
  
 
2018
 
2017
Franchise fees receivable
 
$
3,494,516

 
$
2,501,000

Less: Unamortized discount
 
(1,226,136
)
 
(823,391
)
Less: Allowance for uncollectible franchise fees
 
(453,730
)
 
(335,522
)
Total franchise fees receivable
 
$
1,814,650

 
$
1,342,087

Activity in the allowance for uncollectible franchise fees was as follows:
Balance at December 31, 2016
$
193,204

Charges to bad debts
143,364

Write offs
(34,650
)
Balance at June 30, 2017
$
301,918

 
 
Balance at December 31, 2017
$
335,522

Charges to bad debts
162,499

Write offs
(44,291
)
Balance at June 30, 2018
$
453,730


4. Allowance for Uncollectible Agency Fees

12

Goosehead Insurance, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

Activity in the allowance for uncollectible agency fees was as follows:
 
 
Balance at December 31, 2016
$
166,681

Charges to bad debts
291,233

Write offs
(275,850
)
Balance at June 30, 2017
$
182,064

 
 
Balance at December 31, 2017
$
182,509

Charges to bad debts
423,155

Write offs
(382,192
)
Balance at June 30, 2018
$
223,472


5. Note Payable
On October 27, 2016, GF entered into a credit agreement consisting of a revolving credit facility used for general liquidity and working capital and a note payable used to pay off existing debt and fund a distribution to members.
The $3,000,000 revolving credit facility accrues interest on amounts drawn at LIBOR plus 5.50%. At June 30, 2018 and December 31, 2017, GSHD and GF, respectively, had a letter of credit of $500,000 applied against the maximum borrowing availability, at an interest rate of 5.50%, thus amounts available to draw totaled $2,500,000. No interest was paid during the six months ended June 30, 2018 or during 2017 on the revolving credit facility. The revolving credit facility is collateralized by substantially all the Company’s assets, which includes rights to future commissions.
The note payable on the consolidated balance sheets includes a $50,000,000 term note payable in quarterly installments of $125,000 with a balloon payment of $47,250,000 on October 27, 2022. Interest is calculated at LIBOR plus 5.50% (7.59% and 6.45% at June 30, 2018 and December 31, 2017), and the note is collateralized by substantially all of the Company’s assets, which includes rights to future commissions. The balance of the note payable was $49,375,000, of which $500,000 was current, and $49,625,000, of which $500,000 was current, at June 30, 2018 and December 31, 2017, respectively.
Included as a reduction to the note payable are capitalized loan origination fees, the unamortized balance of which was $870,967 and $969,567 as of June 30, 2018 and December 31, 2017, respectively. The amortization of these loan origination fees is included in interest expense and totaled $49,300 and $98,600 for the three and six months ended June 30, 2018, respectively, and $33,000 and $66,000 for the three and six months ended June 30, 2017, respectively.
Maturities of note payable for the next five years are as follows:
  
Amount

As of June 30, 2018:
 
2018
$
250,000

2019
500,000

2020
500,000

2021
500,000

2022
47,625,000

 
$
49,375,000

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. 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 June 30, 2018 and December 31, 2017, GSHD and GF, respectively, were in compliance with these covenants. Because of both instruments’ origination date and variable interest rate, the note

13

Goosehead Insurance, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

payable balance at June 30, 2018 and December 31, 2017, 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.
The Company refinanced its credit facilities on August 3, 2018. See "Note 13: Subsequent Events" under Part I, Item 1 of this Form 10-Q.
6. Commitments and Contingencies
The Company leases its facilities under non-cancelable operating leases, expiring in various years through 2029. In addition to monthly lease payments, the lease agreements require the Company to reimburse the lessors for its portion of operating costs each year.
The following is a schedule of future minimum lease payments as of June 30, 2018:

 
Amount

2018
$
679,704

2019
1,317,199

2020
1,780,670

2021
1,854,344

2022
1,699,678

2023-2029
8,356,742

 
$
15,688,337

7. Income Taxes
As a result of the Reorganization Transactions and the Offering, GSHD became 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
A reconciliation of income tax expense computed at the U.S. federal statutory income tax rate to the income tax expense recognized is as follows:

14

Goosehead Insurance, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

 
Three months ended
 
Six months ended
 
June 30, 2018

June 30, 2017

 
June 30, 2018

June 30, 2017

(Loss) Income before taxes
$
(23,721,273
)
$
5,824,456

 
$
(19,953,465
)
$
8,091,905

Less: income prior to the Reorganization Transactions
(621,127
)
(5,824,456
)
 
(4,388,937
)
(8,091,905
)
Less: income attributable to non-controlling interests
15,262,112


 
15,262,114


(Loss) Income attributable to Goosehead Insurance, Inc. before taxes
$
(9,080,288
)
$

 
$
(9,080,288
)
$

 
 
 
 
 
 
Income taxes at U.S. federal statutory rate
(1,908,381
)

 
(1,908,381
)

State and local income taxes, net of federal benefit
11,608


 
11,608


Permanent differences
2,050,866


 
2,050,866


Income tax expense
$
154,093

$

 
$
154,093

$


Deferred tax assets and liabilities
The components of deferred tax assets and liabilities are as follows:
 
June 30, 2018
December 31, 2017
Investment in partnership
(90,532
)

Net deferred tax asset (liability)
$
(90,532
)
$

Uncertain tax positions
GSHD has determined there are no material uncertain tax positions as of June 30, 2018.
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 us 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 and six month period ended June 30, 2018, no distributions or redemptions were made that triggered an increase in GSHD's tax basis.


8. Other Income
On June 1, 2017, GF executed a buyout agreement with a franchisee per the terms of a franchise agreement executed in 2014. As part of the buyout, the departing franchisee purchased Goosehead’s economic interests in future royalty fees. Goosehead recognized a $3.5 million gain on the transaction in June 2017 which is included in Other income on the consolidated statement of income.

15

Goosehead Insurance, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)


9. Stockholders' Equity
Class A Common Stock
GSHD has a total of 13,533,267 shares of its Class A common stock outstanding at June 30, 2018. 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 22,746,667 shares of its Class B common stock outstanding at June 30, 2018. 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.

Non-Controlling Interests
Following the Offering, GSHD became 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.
The following table summarizes the ownership interest in GF as of June 30, 2018.
 
June 30, 2018
 
LLC Units
Ownership %
Number of LLC Units held by Goosehead Insurance, Inc.
13,533,267
37.3%
Number of LLC Units held by non-controlling interest holders
22,746,667
62.7%
Number of LLC Units outstanding
36,279,934
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 and six months ended June 30, 2018 was 62.7%. All net income prior to the Offering is attributed to non-controlling interest holders.
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 and six months ended June 30, 2018, divided by the basic weighted average number of

16

Goosehead Insurance, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

Class A common stock as of June 30, 2018. 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. We have not included the effects of conversion of Class B shares to Class A shares in the diluted EPS calculation using the "if-converted" method, because doing so has no impact on diluted EPS.
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30, 2018

 
June 30, 2018

Numerator:
 
 
 
 
Net loss before taxes
 
$
(23,721,273
)
 
$
(19,953,465
)
Less: net loss attributable to non-controlling interests
 
(14,640,985
)
 
(10,873,177
)
Loss before taxes attributable to Goosehead Insurance, Inc.
 
(9,080,288
)
 
(9,080,288
)
Less: income tax expense
 
154,093

 
154,093

Net loss attributable to Goosehead Insurance, Inc.(1)
 
$
(9,234,381
)
 
$
(9,234,381
)
Denominator:
 
 
 
 
Weighted average shares of Class A common stock outstanding
 
13,533,267

 
13,533,267

Effect of dilutive securities:
 
 
 
 
Stock options(2)
 

 

Weighted average shares of Class A common stock outstanding - diluted
 
13,533,267

 
13,533,267

 
 
 
 
 
Earnings per share of Class A common stock - basic
 
$
(0.68
)
 
$
(0.68
)
Earnings per share of Class A common stock - diluted
 
$
(0.68
)
 
$
(0.68
)
(1) Net income attributable to Goosehead Insurance, Inc. excludes all net income prior to the Offering.
(2) 1,649,866 stock options were excluded from the computation of diluted earnings per share of Class A common stock because the effect would have been anti-dilutive, as we recorded a net loss for the three and six months ended June 30, 2018.
The following table sets forth the calculation of pro forma basic EPS based on pro forma net income attributable to GSHD for the three and six months ended June 30, 2017, divided by the pro forma basic weighted average number of Class A common stock as of June 30, 2017. Pro forma diluted earnings per share of Class A common stock is computed by dividing pro forma net income attributable to GSHD by the pro forma weighted average number of shares of Class A common stock outstanding adjusted to give effect to pro forma potentially dilutive securities.

17

Goosehead Insurance, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

 
 
Three Months Ended
 
Six Months Ended
 
 
June 30, 2017

 
June 30, 2017

Numerator:
 
 
 
 
Net income
 
$
5,824,456

 
$
8,091,905

Less: pro forma net income attributable to non-controlling interests
 
3,651,797

 
5,073,434

Pro forma income before taxes attributable to Goosehead Insurance, Inc.
 
2,172,659

 
3,018,471

Less: pro forma income tax expense
 
519,266

 
721,415

Pro forma net income attributable to Goosehead Insurance, Inc.
 
$
1,653,393

 
$
2,297,056

Denominator:
 
 
 
 
Pro forma weighted average shares of Class A common stock outstanding - basic
 
13,533,267

 
13,533,267

Pro forma effect of dilutive securities:
 
 
 
 
Pro forma stock options
 
796,026

 
796,026

Pro forma weighted average shares of Class A common stock outstanding - diluted
 
14,329,293

 
14,329,293

 
 
 
 
 
Pro forma earnings per share of Class A common stock - basic
 
$
0.12

 
$
0.17

Pro forma earnings per share of Class A common stock - diluted
 
$
0.12

 
$
0.16


10. Equity-Based Compensation
A summary of equity-based compensation expense during the three and six months ended June 30, 2018 and June 30, 2017 is as follows:
 
Three months ended June 30,
 
Six months ended June 30,
 
2018
2017
 
2018
2017
Class B unit compensation
$
26,134,272

$
184,613

 
$
26,134,272

$
184,613

Stock options
259,727


 
259,727


Equity-based compensation expense
$
26,393,999

$
184,613

 
$
26,393,999

$
184,613

Class B unit compensation:
Prior to the Offering, certain Pre-IPO LLC Members held non-vesting and non-voting Class B units. In accordance with accounting guidance, any dividends paid to Class B unit holders are recognized as compensation expense when declared, as the Class B non-vesting units are considered to be a non-substantive class of equity. Dividends paid to Class B unit holders prior to the Offering, included in employee compensation and benefits, totaled $122 thousand for the three and six months ended June 30, 2018 and $185 thousand for the three and six ended June 30, 2017.
In connection with the Reorganization Transactions, immediately prior to the Offering, historical Class B interests in TWIHG and GM vested by converting to the Texas Wasatch Note and Goosehead Management Note, respectively, paid with a combination of proceeds from the Offering and shares of Class A common stock. This conversion changed the nature of the Class B interests from a profit sharing arrangement to a substantive class of equity and were expensed under the guidance of ASC 718. At the Offering price of $10.00 per share, GSHD incurred total compensation expense of $6.2 million in connection with the conversion. Class B interests in GF were also deemed vested by converting, along with all pre-offering Class A equity, on a one-to-one basis with the number of LLC units previously owned, to both LLC Units and shares of Class B common stock. This conversion changed the nature of the Class B interests from a profit sharing arrangement to a substantive class of equity and were expensed under the guidance of ASC 718. At the initial public offering price of $10.00 per share, the Company issued a total of 1,978,058 LLC Units and shares of Class B common stock and incurred total compensation expense of $19.8 million as part of the conversion.

18

Goosehead Insurance, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

Stock options:
In connection with the IPO, GSHD granted 1,649,866 options to directors and certain employees. The stock options were granted with a strike price of $10.00 per share (the initial public offering price). The 364,866 director stock options vest quarterly over a three year period, and the 1,285,000 employee stock options vest annually from 2020 to 2022. The grant date fair value was determined using the Black-Scholes valuation model using the following assumptions:
Expected volatility
25
%
Expected dividend yield
%
Expected term (in years)
5.95

Risk-free interest rate
2.59
%
GSHD will recognize the total compensation expense of $5.2 million related to such option grants on a straight-line basis over the requisite service period of the award recipient (three years for directors and four years for certain employees).
In April 2018, GSHD adopted the Omnibus Incentive Plan, which reserved 1,500,000 shares of Class A Common Stock for delivery to directors, officers, and managing directors in connection with future awards granted under the plan. GSHD also adopted an Employee Stock Purchase Plan, which reserved 20,000 shares of Class A Common Stock for delivery to employees. There were no shares outstanding on either of these plans at June 30, 2018.
11. Segment Information
The Company has two reportable segments: Corporate Channel and Franchise Channel. The Corporate Channel consists of company-owned and financed operations with employees who are hired, trained, and managed by Goosehead. The Franchise Channel network consists of franchisee operations that are owned and managed by individual business owners. These business owners have a contractual relationship with Goosehead to use the Company's processes, systems, and back-office support team to sell insurance and manage their business. In exchange, Goosehead is entitled to an initial franchise fee and ongoing royalty fees. Allocations of contingent commissions and certain operating expenses are based on reasonable assumptions and estimates primarily using revenue, headcount and other information. The Company’s chief operating decision maker uses earnings before interest, income taxes, depreciation and amortization, adjusted to exclude equity-based compensation and other income (“Adjusted EBITDA”) as a performance measure to manage resources and make decisions about the business. Summarized financial information concerning the Company’s reportable segments is shown in the following table. There are no intersegment sales, only interest income and interest expense related to an intersegment line of credit, all of which eliminate in consolidation. The “Other” column includes any income and expenses not allocated to reportable segments and corporate-related items, including equity-based compensation, certain legal expenses and interest related to the note payable.


19

Goosehead Insurance, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

 
 
Corporate
Channel
 
Franchise
Channel
 
Other
 
Total
Three months ended June 30, 2018:
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
Commissions and fees
 
$
8,525,189

 
$
190,827

 
$

 
$
8,716,016

Franchise revenues
 

 
5,969,392

 

 
5,969,392

Interest income
 

 
102,304

 

 
102,304

Total
 
8,525,189

 
6,262,523

 

 
14,787,712

Operating expenses:
 
 
 
 
 
 
 
 
Employee compensation and benefits, excluding equity-based compensation
 
4,608,735

 
2,851,885

 

 
7,460,620

General and administrative expenses
 
1,793,893

 
1,112,789

 
119,013

 
3,025,695

Bad debts
 
217,487

 
88,478

 

 
305,965

Total
 
6,620,115

 
4,053,152

 
119,013

 
10,792,280

Adjusted EBITDA
 
1,905,074

 
2,209,371

 
(119,013
)
 
3,995,432

Equity-based compensation
 

 

 
(26,393,999
)
 
(26,393,999
)
Interest expense
 

 

 
(972,158
)
 
(972,158
)
Depreciation and amortization
 
(238,086
)
 
(112,462
)
 

 
(350,548
)
Income tax expense
 

 

 
(154,093
)
 
(154,093
)
Net (loss) income
 
$
1,666,988

 
$
2,096,909

 
$
(27,639,263
)
 
$
(23,875,366
)
At June 30, 2018:
 
 
 
 
 
 
 
 
Total Assets
 
$
12,823,537

 
$
6,146,738

 
$
13,044,846

 
$
32,015,121


 
 
Corporate
Channel
 
Franchise
Channel
 
Other
 
Total
Three months ended June 30, 2017:
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
Commissions and fees
 
$
6,517,864

 
$
336,368

 
$

 
$
6,854,232

Franchise revenues
 

 
3,969,912

 

 
3,969,912

Interest income
 

 
54,486

 

 
54,486

Total
 
6,517,864

 
4,360,766

 

 
10,878,630

Operating expenses:
 
 
 
 
 
 
 
 
Employee compensation and benefits, excluding equity-based compensation
 
3,266,789

 
2,124,013

 

 
5,390,802

General and administrative expenses
 
1,169,317

 
831,577

 
10,374

 
2,011,268

Bad debts
 
179,844

 
143,364

 

 
323,208

Total
 
4,615,950

 
3,098,954

 
10,374

 
7,725,278

Adjusted EBITDA
 
1,901,914

 
1,261,812

 
(10,374
)
 
3,153,352

Other income (expense)
 

 
3,540,932

 

 
3,540,932

Equity-based compensation
 

 

 
(184,613
)
 
(184,613
)
Interest expense
 

 

 
(527,038
)
 
(527,038
)
Depreciation and amortization
 
(131,104
)
 
(27,073
)
 

 
(158,177
)
Income tax expense
 

 

 

 

Net (loss) income
 
$
1,770,810

 
$
4,775,671

 
$
(722,025
)
 
$
5,824,456

At June 30, 2017:
 
 
 
 
 
 
 
 
Total Assets
 
$
3,801,297

 
$
3,384,357

 
$
7,123,896

 
$
14,309,550


20

Goosehead Insurance, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

 
 
Corporate
Channel
 
Franchise
Channel
 
Other
 
Total
Six months ended June 30, 2018:
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
Commissions and fees
 
$
16,380,854

 
$
1,930,738

 
$

 
$
18,311,592

Franchise revenues
 

 
10,879,920

 

 
10,879,920

Interest income
 

 
185,081

 

 
185,081

Total
 
16,380,854

 
12,995,739

 

 
29,376,593

Operating expenses:
 

 

 

 

Employee compensation and benefits, excluding equity-based compensation
 
8,653,323

 
5,642,722

 

 
14,296,045

General and administrative expenses
 
3,421,769

 
1,857,931

 
119,617

 
5,399,317

Bad debts
 
423,155

 
162,499

 

 
585,654

Total
 
12,498,247

 
7,663,152

 
119,617

 
20,281,016

Adjusted EBITDA
 
3,882,607

 
5,332,587

 
(119,617
)
 
9,095,577

Equity-based compensation
 

 

 
(26,393,999
)
 
(26,393,999
)
Interest expense
 

 

 
(1,967,560
)
 
(1,967,560
)
Depreciation and amortization
 
(474,268
)
 
(213,215
)
 

 
(687,483
)
Income tax expense
 

 

 
(154,093
)
 
(154,093
)
Net (loss) income
 
$
3,408,339

 
$
5,119,372

 
$
(28,635,269
)
 
$
(20,107,558
)
At June 30, 2018:
 

 

 

 

Total Assets
 
$
12,823,537

 
$
6,146,738

 
$
13,044,846

 
$
32,015,121


 
 
Corporate
Channel
 
Franchise
Channel
 
Other
 
Total
Six months ended June 30, 2017:
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
Commissions and fees
 
$
12,066,969

 
$
1,149,109

 
$

 
$
13,216,078

Franchise revenues
 

 
7,451,028

 

 
7,451,028

Interest income
 

 
102,473

 

 
102,473

Total
 
12,066,969

 
8,702,610

 

 
20,769,579

Operating expenses:
 

 

 

 

Employee compensation and benefits, excluding equity-based compensation
 
6,117,480

 
4,140,969

 

 
10,258,449

General and administrative expenses
 
2,293,889

 
1,525,720

 
25,258

 
3,844,867

Bad debts
 
291,233

 
283,857

 

 
575,090

Total
 
8,702,602

 
5,950,546

 
25,258

 
14,678,406

Adjusted EBITDA
 
3,364,367

 
2,752,064

 
(25,258
)
 
6,091,173

Other income (expense)
 

 
3,540,932

 

 
3,540,932

Equity-based compensation
 

 

 
(184,613
)
 
(184,613
)
Interest expense
 

 

 
(1,059,753
)
 
(1,059,753
)
Depreciation and amortization
 
(245,341
)
 
(50,493
)
 

 
(295,834
)
Income tax expense
 

 

 

 

Net (loss) income
 
$
3,119,026


$
6,242,503


$
(1,269,624
)
 
$
8,091,905

At June 30, 2017:
 

 

 

 

Total Assets
 
$
3,801,297

 
$
3,384,357

 
$
7,123,896

 
$
14,309,550



21

Goosehead Insurance, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

12. 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.
13. Subsequent Events
On August 3, 2018, the Company refinanced its $3.0 million revolving credit facility and $50.0 million term note payable to a $13.0 million revolving credit facility and $40.0 million term note payable in order to obtain a more favorable interest rate on the outstanding debt. The Company has the right, subject to approval by the administrative agent and each issuing bank, to increase the commitments under the credit facilities an additional $50.0 million.
The $13.0 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 August 3, 2018, the Company had $10.0 million drawn against the revolver. At August 3, 2018, the Company had a letter of credit of $500,000 applied against the maximum borrowing availability, thus amounts available to draw totaled $2,500,000. The revolving credit facility is collateralized by substantially all the Company’s assets, which includes rights to future commissions.

The $40.0 million term note is payable in quarterly installments of $500,000 the first twelve months, $750,000 the next twelve months, and $1,250,000 the last twelve months, with a balloon payment on August 3, 2021, and 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.
The interest rate for each leverage ratio tier are as follows:
Leverage Ratio
Interest Rate
< 1.50x
LIBOR + 175.0 bps
> 1.50x
LIBOR + 200.0 bps
> 2.50x
LIBOR + 225.0 bps
> 3.50x
LIBOR + 250.0 bps
Maturities of note payable for the next four years are as follows:
  
Amount

As of August 3, 2018:
 
2018
$
1,000,000

2019
2,500,000

2020
4,000,000

2021
32,500,000

 
$
40,000,000

The loan origination fees will be reflected as a reduction to the note balance and will be amortized through interest expense over three years (the term of the note payable). The amortization of these loan origination fees is included in interest expense. As part of the refinancing, $871 thousand of prior capitalized loan origination fees will be recognized as interest expense in the third quarter of 2018.
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. 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 August 3, 2018, the Company was in compliance with these covenants.

22



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 the Final Prospectus.
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.
The following discussion contains references to the three and six months ended June 30, 2018 and June 30, 2017, which represents the consolidated and combined financial results of our predecessor Goosehead Financial, LLC and its subsidiaries Texas Wasatch Insurance Services, LP, Goosehead Insurance Agency, LLC and its affiliates Goosehead Management, LLC and Texas Wasatch Insurance Holdings Group, LLC.
Financial Highlights for the Second Quarter of 2018:
Total revenue increased 36% from the second quarter of 2017 to $14.8 million
Commissions and Agency fee revenues increased 27% from the second quarter of 2017 to $8.7 million
Franchise revenues increased 50% from the second quarter of 2017 to $6.0 million
Income from operations decreased 909% from the second quarter of 2017 to a loss of $22.7 million, or 154% of total revenues
Net income decreased by 510% from the second quarter of 2017 to a loss of $23.9 million
Adjusted EBITDA*, a non-GAAP measure, increased 27% from the second quarter of 2017 to $4.0 million, or 27% of total revenues
Corporate Channel Adjusted EBITDA increased 0% from the second quarter of 2017 to $1.9 million, or 22% of Corporate Channel revenues
Franchise Channel Adjusted EBITDA increased 75% from the second quarter of 2017 to $2.2 million, or 35% of Franchise channel revenues
Policies in Force increased 49% from June 30, 2017 to 282,369 at June 30, 2018
Corporate sales headcount increased 74% from June 30, 2017 to 148 at June 30, 2018
As of June 30, 2018, 93 of these Corporate sales agents had less than one year of tenure and 55 had greater than one year of tenure
Operating franchises increased 58% from June 30, 2017 to 385 at June 30, 2018
In Texas as of June 30, 2018, 45 operating franchisees had less than one year of tenure and 159 operating franchisees had greater than one year of tenure.
Outside of Texas as of June 30, 2018, 130 operating franchisees had less than one year of tenure and 51 had greater than one year of tenure.
*Adjusted EBITDA is a non-GAAP measure. Reconciliation of Adjusted EBITDA to net income, the most directly comparable financial measure presented in accordance with GAAP, is set forth in the "Key performance indicators" section of Management’s discussion and analysis of financial condition and results of operations of this Form 10-Q.

23



Consolidated results of operations
The following is a discussion of our consolidated results of operations for each of the three and six months ended June 30, 2018 and June 30, 2017. This information is derived from our accompanying consolidated financial statements prepared in accordance with GAAP.

Three and six months ended June 30, 2018 compared to three and six months ended June 30, 2017
The following table summarizes our results of operations for the three months ended June 30, 2018 and 2017:
  
 
Three Months Ended June 30
  
 
2018
 
2017
Revenues:
 
 
 
 
 
 
Commissions and agency fees
 
$
8,716,016

59
%
 
$
6,854,232

63
%
Franchise revenues
 
5,969,392

40
%
 
3,969,912

36
%
Interest income
 
102,304

1
%
 
54,486

1
%
Total revenues
 
14,787,712

100
%
 
10,878,630

100
%
Operating Expenses:
 
 
 
 
 
 
Employee compensation and benefits (including Class B unit compensation of $26,134,271 for the three and six months ended June 30, 2018 and $184,613 for the three and six months ended 2017)
 
33,854,619

90
%
 
5,575,415

69
%
General and administrative expenses
 
3,025,695

8
%
 
2,011,268

25
%
Bad debts
 
305,965

1
%
 
323,208

4
%
Depreciation and amortization
 
350,548

1
%
 
158,177

2
%
Total operating expenses
 
37,536,827

100
%
 
8,068,068

100
%
(Loss) Income from operations
 
(22,749,115
)
 
 
2,810,562

 
Other Income (Expense):
 
 
 
 
 
 
Other Income
 

 
 
3,540,932

 
Interest expense
 
(972,158
)
 
 
(527,038
)
 
(Loss) Income before taxes
 
(23,721,273
)
 
 
5,824,456

 
Income tax expense
 
154,093

 
 

 
Net (Loss) Income
 
(23,875,366
)
 
 
5,824,456

 
Less: net (loss) income attributable to non-controlling interests
 
(14,640,985
)
 
 
5,824,456

 
Net (Loss) Income attributable to Goosehead Insurance, Inc.
 
$
(9,234,381
)
 
 
$

 


24



The following table summarizes our results of operations for the six months ended June 30, 2018 and 2017:
  
 
Six Months Ended June 30
  
 
2018
 
 
2017
 
Revenues:
 
 
 
 
 
 
Commissions and agency fees
 
$
18,311,592

62
%
 
$
13,216,078

64
%
Franchise revenues
 
10,879,920

37
%
 
7,451,028

36
%
Interest income
 
185,081

1
%
 
102,473

%
Total revenues
 
29,376,593

100
%
 
20,769,579

100
%
Operating Expenses:
 
 
 
 
 
 
Employee compensation and benefits (including Class B unit compensation of $26,134,271 for the three and six months ended June 30, 2018 and $184,613 for the three and six months ended 2017)
 
40,690,044

86
%
 
10,443,062

69
%
General and administrative expenses
 
5,399,317

11
%
 
3,844,867

25
%
Bad debts
 
585,654

1
%
 
575,090

4
%
Depreciation and amortization
 
687,483

1
%
 
295,834

2
%
Total operating expenses
 
47,362,498

100
%
 
15,158,853

100
%
(Loss) Income from operations
 
(17,985,905
)
 
 
5,610,726

 
Other Income (Expense):
 
 
 
 
 
 
Other Income
 

 
 
3,540,932

 
Interest expense
 
(1,967,560
)
 
 
(1,059,753
)
 
(Loss) Income before taxes
 
(19,953,465
)
 
 
8,091,905

 
Income tax expense
 
154,093

 
 

 
Net (Loss) Income
 
(20,107,558
)
 
 
8,091,905

 
Less: net (loss) income attributable to non-controlling interests
 
(10,873,177
)
 
 
8,091,905

 
Net (Loss) Income attributable to Goosehead Insurance, Inc.
 
$
(9,234,381
)
 
 
$

 


Revenues
For the three months ended June 30, 2018, revenue increased by 36% to $14.8 million from $10.9 million for the three months ended June 30, 2017. For the six months ended June 30, 2018, revenue increased by 41% to $29.4 million from $20.8 million for the six months ended June 30, 2017.
Commissions and agency fees
  
 
Three Months Ended June 30
 
Six months ended June 30,
  
 
2018

 
2017

 
% Change

 
2018

 
2017

 
% Change

New Business Revenue (Corporate)
 
$
2,310,878

 
$
1,360,378

 
70
 %
 
$
4,109,731

 
$
2,365,193

 
74
%
Agency Fees
 
1,353,382

 
870,668

 
55
 %
 
2,452,518

 
1,599,663

 
53
%
Renewal Revenue (Corporate)
 
4,827,330

 
4,105,697

 
18
 %
 
8,730,521

 
7,258,729

 
20
%
Contingent Commissions (Corporate)
 
33,599

 
181,121

 
(81
)%
 
1,088,084

 
843,384

 
29
%
Contingent Commissions (Franchise)
 
190,827

 
336,368

 
(43
)%
 
1,930,738

 
1,149,109

 
68
%
Commissions and agency fees
 
$
8,716,016

 
$
6,854,232

 
27
 %
 
$
18,311,592

 
$
13,216,078

 
39
%
New Business Revenue (Corporate) increased by $1.0 million, or 70%, to $2.3 million for the three months ended June 30, 2018 from $1.4 million for the three months ended June 30, 2017, and increased by $1.7 million, or 74%, to $4.1 million for the six months ended June 30, 2018 from $2.4 million for the six months ended June 30, 2017. Revenue from Agency Fees increased by $0.5 million, or 55%, to $1.4 million for the three months ended June 30, 2018 from $0.9 million for the three months ended June 30, 2017, and increased by $0.9 million, or 53%, to $2.5 million for the six months ended June 30, 2018 from $1.6 million for the six months ended June 30, 2017. These increases were primarily attributable to an increase in total sales agent head count to 148 at June 30, 2018, from 85 at June 30, 2017, a 74% increase.

25



Renewal Revenue (Corporate) increased by $722 thousand or 18%, to $4.8 million for the three months ended June 30, 2018 from $4.1 million for the three months ended June 30, 2017, and increased by $1.5 million or 20%, to $8.7 million for the six months ended June 30, 2018 from $7.3 million for the six months ended June 30, 2017. These i