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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 June 30, 2019
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 August 2, 2019, there were 15,122,323 shares of Class A common stock outstanding and 21,166,168 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 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.
Annual Report on Form 10-K: The Company’s annual report on Form 10-K for the year ended December 31, 2018.
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.
GF: Goosehead Financial, LLC.
GM: Goosehead Management, LLC.
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., which primarily consist of members of management.
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.
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.
TWIHG: Texas Wasatch Insurance Holdings Group, LLC.

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 “Item 1A. Risk factors” in our 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.

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
Property and equipment
Note 6
Note Payable
Note 7
Commitments and Contingencies
Note 8
Income Taxes
Note 9
Stockholders' Equity
Note 10
Equity-Based Compensation
Note 10
Dividends
Note 12
Segment Information
Note 13
Litigation

5





Goosehead Insurance, Inc.
Condensed Consolidated Balance Sheets
(Unaudited) 
(In thousands, except per share amounts)
  

June 30,

December 31,
  

2019

2018
Assets




Current Assets:




Cash and cash equivalents

$
8,427


$
18,635

Restricted cash

579


376

Commissions and agency fees receivable, net

2,392


2,016

Receivable from franchisees, net

1,429


703

Prepaid expenses

1,221


1,109

Total current assets

14,048


22,839

Receivable from franchisees, net of current portion

2,517


2,048

Property and equipment, net of accumulated depreciation

8,417


7,575

Intangible assets, net of accumulated amortization

413


248

Deferred income taxes, net
 
12,498

 
1,958

Other assets

199


130

Total assets

$
38,092


$
34,798

Liabilities and Stockholders’ Equity




Current Liabilities:




Accounts payable and accrued expenses

$
3,177


$
3,978

Premiums payable

579


376

Unearned revenue

495


530

Deferred rent

502


428

Note payable

3,000


2,500

Total current liabilities

7,753


7,812

Deferred rent, net of current portion

5,516


4,548

Note payable, net of current portion

44,554


45,947

Liabilities under tax receivable agreement, net of current portion
 
10,817

 
1,694

Total liabilities

68,640


60,001

Commitments and contingencies (see note 7)




Class A common stock, $.01 par value per share - 300,000 shares authorized, 15,013 shares issued and outstanding as of June 30, 2019, 13,800 shares issued and outstanding as of December 31, 2018

150


138

Class B common stock, $.01 par value per share - 50,000 shares authorized, 21,275 issued and outstanding as of June 30, 2019, 22,486 shares issued and outstanding as of December 31, 2018

212


224

Additional paid in capital

85,221


88,811

Accumulated deficit

(9,165
)

(6,578
)
Total stockholders' equity

76,418


82,595

Non-controlling interests

(106,966
)

(107,798
)
Total equity

(30,548
)

(25,203
)
Total liabilities and stockholders' equity

$
38,092


$
34,798


See Notes to the Condensed Consolidated Financial Statements

6



Goosehead Insurance, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except per share amounts)
  

Three Months Ended June 30,
 
Six Months Ended June 30,
  

2019

2018
 
2019
 
2018
Revenues:




 
 
 
 
Commissions and agency fees

$
10,763


$
8,716

 
$
26,933

 
$
18,312

Franchise revenues

8,475


5,969

 
15,303

 
10,880

Interest income

148


102

 
283

 
185

Total revenues

19,386


14,787

 
42,519

 
29,377

Operating Expenses:




 
 
 
 
Employee compensation and benefits (including Class B unit compensation of $0 for the three and six months ended June 30, 2019 and $26,134 for the three and six months ended June 30, 2018)

10,378


33,855

 
19,569

 
40,690

General and administrative expenses

4,201


3,025

 
8,631

 
5,399

Bad debts

482


306

 
883

 
586

Depreciation and amortization

452


350

 
875

 
687

Total operating expenses

15,513


37,536

 
29,958

 
47,362

Income (loss) from operations

3,873


(22,749
)
 
12,561

 
(17,985
)
Other Income (Expense):




 
 
 
 
Interest expense

(626
)

(972
)
 
(1,252
)
 
(1,968
)
Income (loss) before taxes

3,247


(23,721
)
 
11,309

 
(19,953
)
Tax expense

430


154

 
1,174

 
154

Net income (loss)

2,817


(23,875
)
 
10,135

 
(20,107
)
Less: net income (loss) attributable to non-controlling interests

1,914


(14,641
)
 
6,760

 
(10,873
)
Net income (loss) attributable to Goosehead Insurance, Inc.

$
903


$
(9,234
)
 
$
3,375

 
$
(9,234
)
Earnings (loss) per share:






 
 
 
 
Basic

$
0.06


$
(0.68
)
 
$
0.23

 
$
(0.68
)
Diluted

$
0.06


$
(0.68
)
 
$
0.22

 
$
(0.68
)
Weighted average shares of Class A common stock outstanding






 
 
 
 
Basic

14,876


13,533

 
14,545

 
13,533

Diluted

16,065


13,533

 
15,685

 
13,533

 
 
 
 
 
 
 
 
 
Dividends declared per share
 
$

 
$

 
$
0.41

 
$


See Notes to the Condensed Consolidated Financial Statements

7



Goosehead Insurance, Inc.
Condensed Consolidated Statement 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, December 31, 2018
13,799

 
22,486

 
138

 
224

 
88,811

 
(6,578
)
 
82,595

 
(107,798
)
 
(25,203
)
Distributions

 

 

 

 

 

 

 
(245
)
 
(245
)
Dividends declared

 

 

 

 

 
(5,962
)
 
(5,962
)
 
(9,038
)
 
(15,000
)
Net income

 

 

 

 

 
2,472

 
2,472

 
4,846

 
7,318

Equity-based compensation

 

 

 

 
368

 

 
368

 

 
368

Redemption of LLC Units
723

 
(723
)
 
7

 
(7
)
 
(3,607
)
 

 
(3,607
)
 
3,607

 

Deferred tax adjustments related to Tax Receivable Agreement

 

 

 

 
911

 

 
911

 

 
911

Balance March 31, 2019
14,522

 
21,763

 
145

 
217

 
86,483

 
(10,068
)
 
76,777

 
(108,628
)
 
(31,851
)
Distributions

 

 

 

 

 

 

 
(2,708
)
 
(2,708
)
Net income

 

 

 

 

 
903

 
903

 
1,914

 
2,817

Equity-based compensation

 

 

 

 
368

 

 
368

 

 
368

Activity under employee stock purchase plan
3

 

 

 

 
142

 

 
142

 

 
142

Redemption of LLC Units
488

 
(488
)
 
5

 
(5
)
 
(2,456
)
 

 
(2,456
)
 
2,456

 

Deferred tax adjustments related to Tax Receivable Agreement

 

 

 

 
684

 

 
684

 

 
684

Balance June 30, 2019
15,013

 
21,275

 
150

 
212

 
85,221

 
(9,165
)
 
76,418

 
(106,966
)
 
(30,548
)


8



 
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 at December 31, 2017
(41,133
)
 

 

 

 

 

 

 

 

 
(41,133
)
Net Income
3,768

 

 

 

 

 

 

 

 

 
3,768

Capital withdrawn

 

 

 

 

 

 

 

 

 

Balance March 31, 2018
(37,365
)
 

 

 

 

 

 

 

 

 
(37,365
)
Net income prior to the Reorganization Transactions
621

 

 

 

 

 

 

 

 

 
621

Distributions prior to the Reorganization Transactions
(1,278
)
 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

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

 

 
22,747

 

 
227

 
(132,202
)
 
(7,379
)
 
(139,354
)
 
(12,402
)
 
(113,734
)
Initial non-controlling interest allocation

 

 

 

 

 
97,071

 

 
97,071

 
(97,071
)
 

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

 
13,533

 

 
135

 

 
123,994

 

 
124,129

 

 
124,129

Distributions subsequent to initial public offering

 

 

 

 

 

 

 

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

 

 

 

 

 

 
566

 
566

 
951

 
1,517

Equity-based compensation subsequent to initial public offering

 

 

 

 

 
260

 

 
260

 

 
260

Deferred tax adjustments

 

 

 

 

 
(89
)
 

 
(89
)
 

 
(89
)
Balance June 30, 2018

 
13,533

 
22,747

 
135

 
227

 
89,034

 
(6,813
)
 
82,583

 
(109,267
)
 
(26,684
)


See Notes to the Condensed Consolidated Financial Statements

9



Goosehead Insurance, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
  
 
Six Months Ended June 30,
  
 
2019
 
2018
Cash flows from operating activities:
 
 
 
 
Net income (loss)
 
$
10,135

 
$
(20,107
)
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
982

 
687

Bad debt expense
 
883

 
586

Equity-based compensation
 
736

 
26,272

Adjustments to tax receivable agreement liability
 
9,126

 

Deferred income taxes
 
(8,945
)
 
2

Changes in operating assets and liabilities:
 
 
 
 
Commissions and agency fees receivable
 
(892
)
 
(1,114
)
Receivable from franchisees
 
(1,438
)
 
(487
)
Prepaid expenses
 
(111
)
 
(416
)
Other assets
 
(69
)
 
415

Accounts payable and accrued expenses
 
(935
)
 
1,546

Deferred rent
 
1,042

 
278

Premiums payable
 
203

 
198

Unearned revenue
 
(35
)
 
(552
)
Net cash provided by operating activities
 
10,682

 
7,308

Cash flows from investing activities:
 
 
 
 
Proceeds from notes receivable
 
11

 
11

Purchase of software
 
(251
)
 
(79
)
Purchase of property and equipment
 
(1,636
)
 
(724
)
Net cash used for investing activities
 
(1,876
)
 
(792
)
Cash flows from financing activities:
 
 
 
 
Loan origination fees
 

 
99

Repayment of note payable
 
(1,000
)
 
(250
)
Proceeds from the issuance of Class A common stock
 
142

 
86,892

Member distributions and dividends
 
(17,953
)
 
(79,069
)
Net cash provided by (used for) financing activities
 
(18,811
)
 
7,672

Net increase in cash and restricted cash
 
(10,005
)
 
14,188

Cash and cash equivalents, and restricted cash, beginning of period
 
19,011

 
5,366

Cash and cash equivalents, and restricted cash, end of period
 
$
9,006

 
$
19,554

 
 
 
 
 
Supplemental disclosures of cash flow data:
 
 
 
 
Cash paid during the year for interest
 
1,252

 
1,869

Cash paid for income taxes
 
875

 

Management fee note repayment through issuance of Class A common stock
 

 
37,238

See Notes to the Condensed Consolidated Financial Statements

10

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

Goosehead Insurance, Inc.
 
Notes to the consolidated financial statements
Page
Note 1. Organization
Note 2. Summary of significant accounting policies
Note 3. Franchise fees receivable
Note 4. Allowance for uncollectible agency fees
Note 5. Property and equipment
Note 6. Note payable
Note 7. Commitments and contingencies
Note 8. Income taxes
Note 9. Stockholder's equity
Note 10. Equity-based compensation
Note 11. Dividends
Note 12. Segment information
Note 13. Litigation


11

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 9,810 thousand shares of Class A common stock at a price of $10.00 per share, which included 1,280 thousand shares issued pursuant to the underwriter's over-allotment option. Following completion of the Offering, GSHD owned 37.3% of Goosehead Financial, LLC (“GF”) and the Pre-IPO LLC Members owned 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.
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. Operations for any periods prior to May 1, 2018 are the condensed, consolidated and combined operations of GF and its subsidiaries and affiliates.
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 seven corporate-owned locations in operation at June 30, 2019 and 2018. 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, 2019 and 2018, the Company sold 57 and 55 franchise locations, respectively and had 535 and 385 operating franchise locations as of June 30, 2019 and 2018, respectively. No franchises were purchased by the Company during the three and six months ended June 30, 2019 or 2018.
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 June 30, 2019, the condensed consolidated results of operations and stockholders' equity for the three and six months ended June 30, 2019 and 2018, and the condensed consolidated statements of cash flows for the six months ended June 30, 2019 and 2018. 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.
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
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.
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

12

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

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 $579 thousand and $616 thousand as of June 30, 2019 and 2018, respectively.
The following is a reconciliation of our cash and restricted cash balances as presented in the condensed consolidated statement of cash flows for the six months ended June 30, 2019 and 2018 (in thousands):
 
 
June 30
 
 
2019
 
2018
Cash and cash equivalents
 
$
8,427

 
$
18,938

Restricted cash
 
579

 
616

Cash and cash equivalents, and restricted cash
 
$
9,006

 
$
19,554



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, the Company’s condensed consolidated statement of cash flows shows 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 became effective for the Company January 1, 2019. As shown in the reconciliation above, restricted cash of $616 thousand, which was previously shown as an investing activity has been reclassified and is now included together with cash and cash equivalents to conform to the current period presentation in the condensed consolidated statement of cash flows for the six months ended June 30, 2018 as a result of the adoption of ASU 2016-18.
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 became 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 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, and because the Company is filing as an EGC, the standard became effective for the Company January 1, 2019, but the Company is not required to present the impacts of the standard until it files its Annual Report on Form 10-K for the fiscal year ended December 31, 2019. The Company is continuing to evaluate the impact this standard is expected to have on the consolidated financial statements and expects to adopt the modified retrospective method. The primary anticipated impacts of the new standard to the Company's revenues and expenses are as follows:
Under the new guidance, the Company expects commission revenues will be recognized at the effective date of the policy, which will accelerate some revenues. Currently, commissions from insurance carriers, net of estimated cancellations, are recognized as revenue when the data necessary to reasonably determine such amounts is made

13

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

available to the Company. For contingent commissions, the Company anticipates revenues will be estimated and recorded throughout the year as the underlying business is placed with the insurance carriers as opposed to the Company's historical recognition when the Company received cash, the related policy detail, or other carrier specific information from the insurance carrier, typically in the first quarter of the following year. The effect of this change will result in revenue being recognized more evenly throughout the year.
Franchise revenues, including franchise fees, are also likely to change under the new guidance. Currently, initial franchise fees are recognized as revenue in the month the agency owner or initial agency representative attends training. Under the new guidance, the Company anticipates these revenues will likely be recognized over the contract term, typically 10 years.
The Company also expects to recognize an asset for the costs to obtain and/or fulfill a contract and to amortize on a systematic basis that is consistent with the transfer of services to which the asset relates.
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. However, the Company expects the impact of this guidance on its consolidated financial statements could be significant, as its future minimum operating lease commitments totaled $23.3 million as of June 30, 2019.

3. Franchise Fees Receivable
The balance of Franchise fees receivable included in Receivable from franchisees consisted of the following at June 30, 2019 and December 31, 2018 (in thousands):
  
 
June 30
 
December 31
  
 
2019
 
2018
Franchise fees receivable
 
$
4,595

 
$
3,906

Less: Unamortized discount
 
(1,635
)
 
(1,381
)
Less: Allowance for uncollectible franchise fees
 
(533
)
 
(455
)
Total franchise fees receivable
 
$
2,427

 
$
2,070


Activity in the allowance for uncollectible franchise fees was as follows (in thousands):
Balance at December 31, 2018
 
$
455

Charges to bad debts
 
367

Write offs
 
(289
)
Balance at June 30, 2019
 
$
533

 
 
 
Balance at December 31, 2017
 
$
336

Charges to bad debts
 
163

Write offs
 
(45
)
Balance at June 30, 2018
 
$
454




14

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

4. Allowance for Uncollectible Agency Fees
Activity in the allowance for uncollectible agency fees was as follows (in thousands):
Balance at December 31, 2018
 
$
242

Charges to bad debts
 
516

Write offs
 
(472
)
Balance at June 30, 2019
 
$
286

 
 
 
Balance at December 31, 2017
 
$
183

Charges to bad debts
 
423

Write offs
 
(383
)
Balance at June 30, 2018
 
$
223



5. Property and equipment
Property and equipment consisted of the following at:
 
 
June 30,

 
December 31,

 
 
2019

 
2018

Furniture & fixtures
 
$
2,605

 
$
2,233

Computer equipment
 
1,209

 
1,023

Network equipment
 
252

 
252

Phone system
 
857

 
824

Leasehold improvements
 
7,735

 
6,692

Total
 
12,658

 
11,024

Less accumulated depreciation
 
(4,241
)
 
(3,449
)
Property and equipment, net
 
$
8,417

 
$
7,575


6. Note Payable
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. As of June 30, 2019, the Company was in the greater than 1.50x leverage ratio tranche, accruing interest of LIBOR plus 2.00%. At June 30, 2019, the Company had $10.0 million drawn against the revolver. At June 30, 2019, the Company had a letter of credit of $417 thousand applied against the maximum borrowing availability, thus amounts available to draw totaled $2.6 million. The revolving credit facility is collateralized by substantially all the Company’s assets, which includes rights to future commissions. Interest paid on the revolving credit facility totaled $117 thousand and $239 thousand for the three and six months ended June 30, 2019.
The $40.0 million term note accrues interest at an initial interest rate of LIBOR plus 2.5%, then at an interest rate determined by the Company's leverage ratio for the preceding period. As of June 30, 2019, the Company was in the greater than 1.50x leverage ratio tranche, accruing interest of LIBOR plus 2.00%. The aggregate principal amount of the term note as of June 30, 2019 was $38.0 million, payable in quarterly installments of (x) $750,000 from the fiscal quarter ending September 30, 2019 through the fiscal quarter ending June 30, 2020, and (y) $1,250,000 from the fiscal quarter ending September 30, 2020 through the fiscal quarter ending June 30, 2021, with a balloon

15

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

payment of the entire unpaid principal amount of the term note on August 3, 2021. The term note is collateralized by substantially all the Company’s assets, which includes rights to future commissions.
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 the term note payable for the next three calendar years as of June 30, 2019 are as follows (in thousands):
  
Amount

2019
$
1,500

2020
4,000

2021
32,500

Total
$
38,000


The $10.0 million drawn against the revolver is coterminous with the term loan and is due in full on August 3, 2021.
Loan origination fees of $446 thousand at June 30, 2019 are 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 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, 2019, the Company was in compliance with these covenants.
Because of both instruments’ variable interest rate, the note payable balance at June 30, 2019 and December 31, 2018, 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.

7. 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. Rent expense was $447 thousand and $405 thousand for the three months

16

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

ended June 30, 2019 and 2018. Rent expense was $893 thousand and $810 thousand for the six months ended June 30, 2019 and 2018.
The following is a schedule of future minimum lease payments as of June 30, 2019 (in thousands):

 
Amount

2019
$
917

2020
2,575

2021
2,793

2022
2,762

2023
2,578

2024-2029
11,626

Total
$
23,251


8. 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 (in thousands):
 
Three Months Ended June 30, 2019

Six Months Ended June 30, 2019

Income before taxes
$
3,247

$
11,309

 
 
 
Income taxes at U.S. federal statutory rate
$
681

$
2,374

Tax on income not subject to entity level federal income tax
(365
)
(1,423
)
Permanent Differences:
 
 
Meals & Entertainment
17

25

Non-deductible stock compensation costs
11

11

Non-deductible excess compensation
21

21

State income tax, net of federal benefit
64

167

Other Reconciling items:
 
 
Other
1

(1
)
Income tax expense
$
430

$
1,174




17

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

 
Three Months Ended
June 30, 2018

Six Months Ended
June 30, 2018

(Loss) Income before taxes
$
(23,721
)
$
(19,953
)
Less: income prior to the Reorganization Transactions
(621
)
(4,389
)
Less: income attributable to non-controlling interests
15,262

15,262

(Loss) Income attributable to Goosehead Insurance, Inc. before taxes
$
(9,080
)
$
(9,080
)
 
 
 
Income taxes at U.S. federal statutory rate
(1,908
)
(1,908
)
State and local income taxes, net of federal benefit
11

11

Permanent differences
2,051

2,051

Income tax expense
$
154

$
154

Deferred tax assets and liabilities
The components of deferred tax assets and liabilities are as follows:
 
June 30, 2019
December 31, 2018
Investment in flow-through entity
12,498

1,958

Net deferred tax asset (liability)
$
12,498

$
1,958


Uncertain tax positions
GSHD has determined there are no material uncertain tax positions as of June 30, 2019.
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 and six months ended June 30, 2019, an aggregate of 488 thousand and 1,211 thousand 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 488 thousand and 1,211 thousand 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 June 30, 2019, the total amount of TRA Payments due to the Pre-IPO LLC Members under the tax receivable agreement was $10.8 million, of which $11 thousand was current and included in Accounts payables and accrued expenses on the Consolidated Balance Sheet.


18

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

9. Stockholders' Equity
Class A Common Stock
GSHD has a total of 15,013 thousand shares of its Class A common stock outstanding at June 30, 2019. 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 21,275 thousand shares of its Class B common stock outstanding at June 30, 2019. 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.
On a quarterly basis, GF makes distributions to the LLC Unit holders on a pro rata basis to facilitate the LLC Unit holder's quarterly tax payments. For the three and six months ended June 30, 2019, GF made distributions of $4.5 million and $4.9 million, of which $2.7 million and $3.0 million where made to Pre-IPO LLC Members. The remaining $1.8 million and $2.0 million were made to GSHD and were eliminated in consolidation. For the three and six months ended June 30, 2018, GF made distributions of $2.4 million, of which $2.0 million where made to Pre-IPO LLC Members. The remaining $340 thousand were made to GSHD and were eliminated in consolidation.
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 and six months ended June 30, 2019, an aggregate of 488 thousand and 1,211 thousand LLC Units were redeemed by the non-controlling interest holders. Pursuant to the GF LLC Agreement, GSHD issued 488 thousand and 1,211 thousand shares of Class A common stock in connection with these redemptions and received 488 thousand and 1,211 thousand LLC Interests, increasing GSHD's ownership interest in GF. Simultaneously, and in connection with these redemptions, 488 thousand and 1,211 thousand shares of Class B common stock were surrendered and cancelled.
The following table summarizes the ownership interest in GF as of June 30, 2019 (in thousands).

19

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

 
June 30, 2019
 
LLC Units
Ownership %
Number of LLC Units held by GSHD
15,013
41.4%
Number of LLC Units held by non-controlling interest holders
21,275
58.6%
Number of LLC Units outstanding
36,288
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, 2019 was 59.0% and 59.9%. All net income prior to the Offering is attributed to non-controlling interest holders.

During the third quarter of 2018, the Company corrected a misclassification of $745 thousand of distributions from accumulated deficit to non-controlling interest to properly reflect the distributions made to Pre-IPO LLC Members during the second quarter of 2018. These amounts were previously shown as a change to accumulated deficit on the Company's quarterly report on Form 10-Q for the period ended June 30, 2018.

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, 2019, divided by the basic weighted average number of Class A common stock as of June 30, 2019 (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 (in thousands, except per share amounts). The Company has 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 June 30, 2019
Six Months Ended
June 30, 2019
Numerator:
 
 
 
Income before taxes
 
$
3,247

$
11,309

Less: income before taxes attributable to non-controlling interests
 
1,952

6,861

Income before taxes attributable to GSHD
 
1,295

4,448

Less: income tax expense attributable to GSHD
 
392

1,073

Net income attributable to GSHD
 
$
903

$
3,375

Denominator:
 
 
 
Weighted average shares of Class A common stock outstanding - basic
 
14,876

14,545

Effect of dilutive securities:
 
 
 
Stock options
 
1,189

1,140

Weighted average shares of Class A common stock outstanding - diluted
 
16,065

15,685

 
 
 
 
Earnings per share of Class A common stock - basic
 
$
0.06

$
0.23

Earnings per share of Class A common stock - diluted
 
$
0.06

$
0.22


The following table sets forth the calculation of basic 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 Class A common stock as of June 30, 2018 (in thousands, except per share amounts). Diluted EPS 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

20

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

outstanding adjusted to give effect to potentially dilutive securities (in thousands, except per share amounts). The Company has 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
June 30, 2018
Six Months Ended
June 30, 2018
Numerator:
 
 
 
Net loss before taxes
 
$
(23,721
)
$
(19,953
)
Less: net loss attributable to non-controlling interests
 
(14,641
)
(10,873
)
Loss before taxes attributable to Goosehead Insurance, Inc.
 
(9,080
)
(9,080
)
Less: income tax expense
 
154

154

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

13,533

Effect of dilutive securities:
 
 
 
Stock options(2)
 


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

13,533

 
 
 
 
Earnings per s