(Exact name of registrant as specified in its charter)
iDelaware
i82-3886022
(State
or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)
i1500 Solana Blvd, Building 4, Suite 4500
iWestlake
iTexas
i76262
(Address
of principal executive offices)
(Zip Code)
(i469) i480-3669
(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
iClass A Common Stock, par value $.01 per share
iGSHD
iNASDAQ
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. þiYeso 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).
þiYeso 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.
iLarge
Accelerated Filer
☑
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes i☑ No
As of October 26, 2022, there were i21,147,289
shares of Class A common stock outstanding and i16,201,948 shares of Class B common stock outstanding.
As used in this Quarterly Report on Form 10-Q ("Form 10-Q"), unless the context indicates or otherwise requires, the following terms have the following meanings:
•Ancillary Revenue: Revenue that is supplemental to our Core Revenue and Cost Recovery Revenue, Ancillary Revenue is unpredictable and often outside of the Company's control. Included in Ancillary Revenue are Contingent Commissions and other income.
•Agency Fees: Fees separate from commissions charged directly to clients for efforts performed in the issuance of new insurance policies.
•Carrier Appointment: A contractual relationship with a Carrier.
•Client Retention: Calculated by comparing the number of all clients that had at least one policy in force twelve months prior to the date of measurement and still have at least one policy in force at the date of measurement.
•Contingent Commission: Revenue in the form of contractual payments from Carriers contingent upon several factors, including growth and profitability of the business
placed with the Carrier.
•Core Revenue: The most predictable revenue stream for the Company, these revenues consist of New Business Revenue and Renewal Revenue. New Business Revenue is lower-margin, but fairly predictable. Renewal Revenue is higher-margin and very predictable.
•Cost Recovery Revenue: Revenue received by the Company associated with cost recovery efforts associated with selling and financing franchises. Included in Cost Recovery Revenue are Initial Franchise Fees and Interest Income.
•Franchise Agreement: Agreements governing our relationships with Franchisees.
•Franchisee:
An individual or entity who has entered into a Franchise Agreement with us.
•GF: Goosehead Financial, LLC.
•Initial Franchise Fee: Contracted fees paid by Franchisees to compensate Goosehead for the training, onboarding and ongoing support of new franchise locations.
•LLC Unit: a limited liability company unit of Goosehead Financial, LLC.
•New Business Commission: Commissions received from Carriers relating to policies in their first term.
•New Business Revenue: New Business Commissions, Agency Fees, and New Business Royalty Fees.
•New Business Royalty Fees:
Royalty Fees received from Franchisees relating to policies in their first term
•NPS: Net Promoter Score is calculated based on a single question: “How likely are you to refer Goosehead Insurance to a friend, family member or colleague?” Clients that respond with a 6 or below are Detractors, a score of 7 or 8 are called Passives, and a 9 or 10 are Promoters. NPS is calculated by subtracting the percentage of Detractors from the percentage of Promoters.
•Policies in Force: As of any reported date, the total count of current (non-cancelled) policies placed by us with our Carriers.
•Pre-IPO LLC Members: owners of LLC Units of GF prior to the Offering.
•Renewal Revenue: Renewal Commissions and
Renewal Royalty Fees.
•Royalty Fees: Fees paid by Franchisees to the Company that are tied to the gross commissions paid by the Carriers related to policies sold or renewed by a franchisee.
•The Offering: The initial public offering completed by Goosehead Insurance, Inc. on May 1, 2018.
•Total Written Premium: As of any reported date, the total amount of current (non-cancelled) gross premium that is placed with Goosehead’s portfolio of Carriers.
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 the potential impact of COVID-19 on the Company's business, projections of our future financial performance, our anticipated growth strategies and anticipated trends in our business. These statements are only predictions based on our current expectations
and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements, including those factors discussed under the caption entitled “Item 1A. Risk factors” in the Annual Report on Form 10-K.
The forward-looking statements included in this Form 10-Q are made only as of the date hereof. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. We are under no duty to update any of these forward-looking statements after the date of this Form
10-Q to conform our prior statements to actual results or revised expectations.
Class
A common stock, $ii0.01/ par value per share - ii300,000/
shares authorized, ii21,202/ shares issued and outstanding
as of September 30, 2022, ii20,198/
shares issued and outstanding as of December 31, 2021
i210
i200
Class
B common stock, $ii0.01/ par value per share - ii50,000/
shares authorized, ii16,201/ issued and outstanding
as of September 30, 2022, ii16,909/
shares issued and outstanding as of December 31, 2021
i163
i170
Additional
paid in capital
i67,238
i46,281
Accumulated
deficit
(i61,282)
(i60,671)
Total
stockholders' equity (deficit)
i6,329
(i14,020)
Non-controlling
interests
(i51,994)
(i55,168)
Total
equity
(i45,665)
(i69,188)
Total
liabilities and equity
$
i323,988
$
i270,291
See
Notes to the Condensed Consolidated Financial Statements
7
Goosehead Insurance, Inc.
Condensed Consolidated Statements of Stockholders' Equity
Proceeds
from the issuance of Class A common stock
i4,832
i3,589
Member
distributions and dividends
i—
(i60,000)
Net
cash provided by (used for) financing activities
i1,707
(i16,202)
Net
increase in cash and restricted cash
i17,891
i455
Cash
and cash equivalents, and restricted cash, beginning of period
i30,479
i26,236
Cash
and cash equivalents, and restricted cash, end of period
$
i48,370
$
i26,691
Supplemental
disclosures of cash flow data:
Cash paid during the period for interest
i3,242
i1,715
Cash
paid for income taxes
i444
i272
See
Notes to the Condensed Consolidated Financial Statements
11
Goosehead Insurance, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
1. iOrganization
Goosehead
Insurance, Inc. (“GSHD”) is the sole managing member of Goosehead Financial, LLC (“GF”) and has the sole voting power and control of management of GF. Accordingly, GSHD consolidates the financial results of GF and reports non-controlling interest in GSHD’s condensed consolidated financial statements.
GF was organized on January 1, 2016 as a Delaware Limited Liability Company and is headquartered in Westlake, TX.
GSHD (collectively with its consolidated subsidiaries, the “Company”) provides personal and commercial property and casualty insurance brokerage services for its clients through a network of corporate-owned agencies and franchise units across the nation.
The
Company had ii12/ corporate-owned locations in operation at September
30, 2022 and 2021. Franchisees are provided access to insurance Carrier Appointments, product training, technology infrastructure, client service centers and back office services. During the three months ended September 30, 2022 and 2021, the Company onboarded i144 and i92
franchise locations, respectively, and had i1,403 and i1,139 operating franchise locations
as of September 30, 2022 and 2021, respectively. iiiiNo///
franchises were purchased by the Company during the three and nine months ended September 30, 2022 or 2021.
iAll intercompany accounts and transactions have been eliminated in consolidation.
2. iSummary
of Significant Accounting Policies
i
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 September 30, 2022 and December 31, 2021, the condensed consolidated results of operations, stockholders' equity and statements of cash flows for the three and nine months ended September 30, 2022 and 2021. The interim period condensed consolidated financial statements should be read in conjunction with the Consolidated Financial Statements that are included in the Annual Report on Form 10-K.
In accordance with Accounting Standards Codification 280 "Segment Reporting", and in the first
quarter of 2022, the Company began reporting ione operating segment due to changes in how the Company's chief operating decision maker assesses the Company's performance and allocates resources. See Note 12 "Segment Reporting".
/
The
results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the results that can be expected for the entire year. The Company experiences seasonal fluctuations of its revenue due to the timing of contingent commission revenue recognition and trends in housing market activity.
Impact of the Coronavirus (“COVID-19”) Pandemic
To date, the pandemic has not increased our costs of or access to capital under our term note and revolving credit facility, and we do not believe it is reasonably likely to do so in the future. In addition, we do not believe that the pandemic will affect our ongoing ability to meet the covenants in our debt instruments, including under our term note and revolving credit
facility. To date, the pandemic has not impacted the collectability of receivables or adversely affected our ability to generate new business, add new franchises, or retain existing franchises or policies. While contingent commissions initially benefited from lower loss ratios in the early part of the pandemic, we now anticipate lower contingent commissions as customers return to pre-pandemic driving patterns and loss ratios increase. Due to the nature of our business, the effect of the COVID-19 pandemic may not be fully reflected in our results of operations until future periods.
12
Goosehead Insurance, Inc.
Notes
to the Condensed Consolidated Financial Statements (Unaudited)
i
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.
i
Income
Taxes
The Company accounts for income taxes pursuant to the asset and liability method which requires the recognition of deferred income tax assets and liabilities related to the expected future tax consequences arising from temporary differences between the carrying amounts and tax bases of assets and liabilities based on enacted statutory tax rates applicable to the periods in which the temporary differences are expected to reverse. Any effects of changes in income tax rates or laws are included in income tax expense in the period of enactment.
i
Reclassification
Certain
amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period financial statements.
iRestricted 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 $i2.3 million and $i1.2 million as of September
30, 2022 and 2021, respectively.
iiThe following is a reconciliation of our cash and restricted cash balances as presented in the condensed
consolidated statements of cash flows for the nine months ended September 30, 2022 and 2021(in thousands):
Simplifying the Accounting for Income Taxes (ASU 2019-12): In 2019, the Financial Accounting Standards Board issued ASU 2019-12 to simplify the accounting for income taxes. The guidance primarily addresses how to (1) recognize a deferred tax liability after we transition to or from the equity method of accounting, (2) evaluate if a step-up in the tax basis of goodwill is related to a business combination or is a separate transaction, (3) recognize all of the effects of a change in tax law in the period of enactment, including adjusting the estimated annual tax rate, and (4) include the amount of tax based on income in the income tax provision and any incremental amount as a tax not based on income for hybrid tax regimes. We adopted the guidance in the first quarter of 2021. The adoption did not have a material impact on our condensed consolidated financial statements
or related disclosures.
Reference Rate Reform (ASU 2020-04): In March 2020, the Financial Accounting Standards Board issued ASU 2020-04. Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying U.S. GAAP if certain criteria are met to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued. ASU 2020-04 is effective from March 12, 2020 through December 31, 2022. A substantial portion of our indebtedness bears interest at variable interest rates, primarily based on USD-LIBOR. The adoption of ASU 2020-04 did not have a material impact on our condensed consolidated
financial statements. The standard will ease, if warranted, the administrative requirements for accounting for the future effects of the rate reform. Our debt agreement contains a provision to move to the Secured Overnight Financing Rate ("SOFR") if or when LIBOR is phased out.
13
Goosehead Insurance, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
3. iRevenue
Commissions
and fees
The Company earns new and renewal commissions paid by insurance Carriers and fees paid by its clients for the binding of insurance coverage. The transactions price is set as the estimated commissions to be received over the term of the policy based on an estimate of premiums placed, policy changes and cancellations, net of a constraint. These commissions and fees are earned at a point in time upon the effective date of bound insurance coverage, as no performance obligation exists after coverage is bound.
For Agency Fees, the Company enters into a contract with the insured, in which the
Company's performance obligation is to place an insurance policy. The transaction price of the agency fee is set at the time the sale is agreed upon, and is included in the contract. Agency Fee revenue is recognized at a point in time, which is the effective date of the policy.
Contingent commission revenue is generated from contracts between the Company and insurance carriers, for which the Company is compensated for certain growth, profitability, or other performance-based metrics. The performance obligations for contingent commissions will vary by contract,
but generally include the Company increasing profitable written premium with the insurance carrier. The transaction price for contingent commissions is estimated based on all available information and is recognized over time as the Company completes its performance obligations, as the underlying policies are placed, net of a constraint.
Franchise revenues
Franchise revenues include initial franchise fees and ongoing new and renewal royalty fees from franchisees.
Revenue from initial franchise fees is generated from a contract between the
Company and a franchisee. The Company's performance obligation is to provide initial training, onboarding, ongoing support and use of the Company's business operations over the period of the franchise agreement. The transaction price is set by the franchise agreement and revenue is recognized over time as the Company completes its performance obligations.
Revenue from new and renewal royalty fees is recorded by applying the sales- and usage-based royalties exception. Under the sales- and usage-based exception, the Company estimates the anticipated amount
of the royalties to be received over the term of the policy based on an estimate of premiums placed by the franchisee, policy changes, and cancellations, net of a constraint. Revenue from royalty fees is recognized over time as the placement of the underlying policies occur.
The Company has evaluated ASC Topic 340 - Other Assets and Deferred Cost (“ASC 340”) which requires companies to defer certain incremental cost to obtain customer contracts, and certain costs to fulfill customer contracts.
Incremental
cost to obtain - The adoption of ASC 340 resulted in the Company deferring certain costs to obtain customer contracts primarily as they relate to commission-based compensation plans for the franchise sales team, in which the Company pays an incremental amount of compensation on new Franchise Agreements. These incremental costs are deferred and amortized over a i10-year
period, which is consistent with the term of the contract.
Costs to fulfill - The Company has evaluated the need to capitalize costs to fulfill customer contracts and has determined that there are no costs that meet the definition for capitalization under ASC 340.
14
Goosehead Insurance, Inc.
Notes to the
Condensed Consolidated Financial Statements (Unaudited)
Disaggregation of Revenue
i
The following table disaggregates revenue by source (in thousands):
(1)
Cost to obtain franchise contracts is included in Other assets on the condensed consolidated balance sheets.
(2) Includes both the current and long term portion of this balance.
(3) Initial Franchise Fees to be recognized over the life of the contract.
/
The Company records Franchise Fees as contract
liabilities on the Condensed Consolidated Balance Sheets when the agreement is executed. Contract liabilities are reduced as fees are recognized in revenue over the expected life of the franchise license. As the term of the franchise license is typically iten years, substantially all of the franchise fee revenue recognized in the period ended September 30, 2022 was included in the contract liabilities balance as of December
31, 2021.
15
Goosehead Insurance, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
The weighted average remaining amortization period for contract liabilities related to open franchises is i7.9
years.
Significant changes in contract liabilities are as follows (in thousands):
(1) Initial Franchise Fees where the consideration is received from the franchisee for services which are to be transferred to the Franchisee over the expected life of the Franchise Agreement
4.
iFranchise Fees Receivable
i
The balance of Franchise fees receivable included in Receivable from
franchisees consisted of the following (in thousands):
Depreciation
expense was $i4.5 million and $i3.0 million for nine months ended September 30, 2022 and 2021, respectively.
7.
iDebt
On July 21, 2021, the Company refinanced its $i25.0
million revolving credit facility and $i80.0 million term note payable to a $i50.0 million revolving credit facility and $i100.0
million term note payable to finance general corporate purposes and the special dividend. The Company also has the right, subject to approval by the administrative agent and each issuing bank, to increase the commitments under the credit facilities by an additional $i25.0 million.
The $i50.0
million revolving credit facility accrues interest on amounts drawn at an initial interest rate of LIBOR plus i2.50%, then at an interest rate determined by the Company's leverage ratio for the preceding period. At September 30, 2022the Company was accruing interest at LIBOR plus i225
basis points. At September 30, 2022, the Company had $i25.0 million drawn against the revolving credit facility and had a letter of credit of $i0.2 million
applied against the maximum borrowing availability, payable on July 21, 2026. Thus, amounts available to draw totaled $i24.8 million. The revolving credit facility is collateralized by substantially all the Company’s assets, which includes rights to future commissions and royalties.
The term note is payable in quarterly installments of $i0.6 million
the first twelve months, $i1.3 million the next twelve months, $i1.9 million the next twelve months, and $i2.5
million the last twenty-four months, with a balloon payment on July 21, 2026. The note is collateralized by substantially all of the Company’s assets, which includes rights to future commissions and royalties. Interest is calculated initially at LIBOR plus i2.25%, then at an interest rate based on the Company's leverage ratio for the preceding
period. At September 30, 2022the Company was accruing interest at LIBOR plus i225 basis points.
i
The
interest rate for each leverage ratio tier is as follows:
Leverage Ratio
Interest Rate
< i1.50x
LIBOR + i175
bps
> i1.50x
LIBOR + i200 bps
>
i2.50x
LIBOR + i225 bps
> i3.50x
LIBOR
+ i250 bps
/
17
Goosehead Insurance, Inc.
Notes
to the Condensed Consolidated Financial Statements (Unaudited)
i
Maturities of the term note payable for the next five years are as follows (in thousands):
Amount
2022
i1,250
2023
i6,875
2024
i9,375
2025
i10,000
2026
i68,125
Total
$
i95,625
/
The
Company’s note payable agreement contains certain restrictions and covenants. Under these restrictions, the Company is limited in the amount of debt incurred and distributions payable. As of September 30, 2022, the Company's maximum allowable trailing twelve months debt-to-EBITDA ratio, as defined by the credit agreement, was i4x. 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 September 30, 2022, the Company was in compliance with these covenants.
Because of both instruments’ variable interest rate, the note payable balance at September 30, 2022 and December 31, 2021, approximates fair value using Level 2 inputs, described below.
i
The
framework for measuring fair value provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are described as follows:
•Level 1—Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets.
•Level 2—Significant other observable inputs other than Level 1 prices such as quoted prices in markets that are not active, quoted prices for similar assets or other inputs that are observable, either directly or indirectly, for substantially
the full term of the asset.
•Level 3—Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The asset or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
8. iIncome
Taxes
GSHD is the sole managing member of GF, which is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, GF is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by GF is passed through to and included in the taxable income or loss of its members, including GSHD, on a pro rata basis. GSHD is subject to U.S. federal income taxes, in addition to state and local income taxes, with respect to GSHD's allocable share of income of GF.
Income tax expense (benefit)
In accordance with ASC 740, Income Taxes, each interim period is considered integral to the annual period, and tax expense is measured using an estimated annual effective tax rate. An entity is required to record income tax expense each quarter based on its
best estimate of the annual effective tax rate for the full fiscal year and use that rate to provide for income taxes on a current year-to-date basis, as adjusted for discrete taxable events that occur during the interim periods. If, however, the entity is unable to reliably estimate its annual effective tax rate, then the actual effective tax rate for the year-to-date may be the best estimate of the entity’s annual effective tax rate. For the nine months ended September 30, 2022, the Company determined that it was unable to make a reliable estimate of its annual effective tax rate due to the sensitivity of the rate as it relates to its forecasted full year 2022 results.
18
Goosehead
Insurance, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
Provision for/(benefit from) income taxes for the three and nine months ended September 30, 2022 was $(i0.7)
million and $(i0.1) million compared to $(i2.6) million and $(i2.6)
million for the three and nine months ended September 30, 2021, respectively. The effective tax rate was (i28)% and i179%
for the three and nine months ended September 30, 2022 and (i92)% and (i55)%
for the three and nine months ended September 30, 2021. The increase in the effective tax rate for the three and nine months ended September 30, 2022 compared to the three and nine months ended September 30, 2021 was primarily due to a increase in exercises of employee stock options.
Deferred taxes
Deferred tax assets at September 30, 2022 were $i140.2
million compared to $i125.7 million at December 31, 2021. The primary contributing factor to the increase in deferred tax assets is additional redemptions of LLC Units of GF for shares of Class A common stock of GSHD during the nine months ended September 30, 2022.
Tax Receivable Agreement
GF intends to make an election under Section 754 of the Internal Revenue Code of 1986, as amended,
and the regulations thereunder (the “Code”) effective for each taxable year in which a redemption or exchange of LLC Units and corresponding Class B common stock for shares of Class A common stock occurs. Future taxable redemptions or exchanges are expected to result in tax basis adjustments to the assets of GF that will be allocated to the Company and thus produce favorable tax attributes. These tax attributes would not be available to GSHD in the absence of those transactions. The anticipated tax basis adjustments are expected to reduce the amount of tax that GSHD would otherwise be required to pay in the future.
GSHD entered into a tax receivable agreement with the Pre-IPO LLC Members on May 1, 2018 that provides for the payment by GSHD to the Pre-IPO LLC Members of i85%
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 nine months ended September 30, 2022, an aggregate of i491,938 and i707,395
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 i491,938 and i707,395
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 i85% 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 September 30, 2022, the total amount of TRA Payments due to the Pre-IPO LLC Members under the tax receivable agreement was $i112.8 million, of which $i0.4
million was current and included in Accounts payables and accrued expenses on the Condensed Consolidated Balance Sheet. Future exchanges of LLC Units for Class A common stock will result in additional TRA payments.
Uncertain tax positions
GSHD has determined there are ino material uncertain tax positions as of September 30, 2022.
9.
iStockholders' Equity
Class A Common Stock
GSHD has a total of i21,202
shares of its Class A common stock outstanding at September 30, 2022. Each share of Class A common stock holds economic rights and entitles its holder to ione vote per share on all matters submitted to a vote of the stockholders of GSHD.
Class B Common Stock
19
Goosehead
Insurance, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
GSHD has a total of i16,201 shares of its Class B common stock outstanding at September 30, 2022. Each share of Class B common stock has no economic rights but entitles its holder to ione vote
per share on all matters submitted to a vote of the stockholders of GSHD.
Holders of Class A common stock and Class B common stock vote together as a single class on all matters presented to GSHD's shareholders for their vote or approval, except as otherwise required by applicable law, by agreement, or by GSHD's certificate of incorporation.
Earnings Per Share
i
The
following table sets forth the calculation of basic earnings per share ("EPS") based on net income attributable to GSHD for the three and nine months ended September 30, 2022 and 2021, divided by the basic weighted average number of Class A common stock as of September 30, 2022 and 2021(in thousands, except per share amounts). Diluted earnings per share of Class A common stock is computed by dividing net income attributable to GSHD by the weighted average number of shares of Class A common stock outstanding adjusted to give effect to potentially dilutive securities. The Company has not included the effects of conversion of Class
B shares to Class A shares in the diluted EPS calculation using the "if-converted" method, because doing so has no impact on diluted EPS.
Less:
income (loss) before taxes attributable to non-controlling interests
i1,061
i1,332
(i18)
i2,288
Income
(loss) before taxes attributable to GSHD
i1,313
i1,461
(i40)
i2,481
Less:
income tax expense (benefit) attributable to GSHD
(i666)
(i2,575)
(i104)
(i2,646)
Net
income attributable to GSHD
$
i1,979
$
i4,036
$
i64
$
i5,127
Denominator:
Weighted
average shares of Class A common stock outstanding - basic
i20,892
i19,559
i20,531
i18,903
Effect
of dilutive securities:
Stock options(1)
i677
i1,647
i899
i1,667
Weighted
average shares of Class A common stock outstanding - diluted
i21,569
i21,206
i21,430
i20,570
Earnings
per share of Class A common stock - basic
$
i0.09
$
i0.21
$
i—
$
i0.27
Earnings
per share of Class A common stock - diluted
$
i0.09
$
i0.19
$
i—
$
i0.25
(1)
i2,388 and i1,947
stock options were excluded from the computation of diluted earnings per share of Class A common stock for the three and nine months ended September 30, 2022, respectively, because the effect would have been anti-dilutive. i41 and i66
stock options were excluded from the computation of diluted earnings per share of Class A common stock for the three and nine months ended September 30, 2021, respectively, because the effect would have been anti-dilutive.
/
10. iNon-controlling
interest
GSHD is the sole managing member of GF and, as a result, it consolidates the financial results of GF. GSHD reports a non-controlling interest representing the economic interest in GF held by the other members of GF.
Under the amended and restated Goosehead Financial, LLC Agreement, the Pre-IPO LLC Members have the right, from and after the completion of the Offering (subject to the terms of the amended and restated Goosehead Financial, LLC Agreement), to require GSHD to redeem all or a portion of their LLC Units for, at GSHD's election,
20
Goosehead Insurance, Inc.
Notes
to the Condensed Consolidated Financial Statements (Unaudited)
newly-issued shares of Class A common stock on a ione-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 ione-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 nine months ended September 30, 2022, an aggregate of i492 thousand and i707 thousand
LLC Units were redeemed by the non-controlling interest holders. Pursuant to the GF LLC Agreement, GSHD issued i492 thousand and i707 thousand
shares of Class A common stock in connection with these redemptions and received i492 thousand and i707 thousand
LLC Interests, increasing GSHD's ownership interest in GF. Simultaneously, and in connection with these redemptions, and i492 thousand and i707 thousand
shares of Class B common stock were surrendered and cancelled.
iThe following table summarizes the ownership interest in GF as of September 30, 2022(in thousands):
Number
of LLC Units held by non-controlling interest holders
i16,201
i43.3%
Number
of LLC Units outstanding
i37,403
i100.0%
/
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 nine months ended September 30, 2022 was ii44.8/%.
iThe following table summarizes the effects of changes in ownership in GF on the equity of GSHD for the three and nine months ended September 30, 2022 and 2021 as follows (in thousands):
Net income attributable to Goosehead Insurance
Inc.
$
i1,979
$
i4,036
$
i64
$
i5,127
Transfers
(to) from non-controlling interests:
Decrease in additional paid-in capital as a result of the redemption of LLC interests
(i1,579)
(i1,144)
(i2,300)
(i2,673)
Increase
in additional paid-in capital as a result of activity under employee stock purchase plan
i165
i194
i556
i613
Total
effect of changes in ownership interest on equity attributable to Goosehead Insurance Inc.
$
i565
$
i3,086
$
(i1,680)
$
i3,067
/
11.
iEquity-Based Compensation
Stock option expense was $i5.4
million and $i16.4 million for the three and nine months ended September 30, 2022. Stock option expense was $i1.9
million and $i5.6 million for the three and nine months ended September 30, 2021.
21
Goosehead
Insurance, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
12. iSegment Information
The Company’s Chief Operating Decision Maker, its Chief Executive Officer (“CEO”), reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating
financial performance. Management views the Company’s operations and manages its business as ione operating segment. Accordingly, the Company determined that it operates in a single reportable segment. All of the Company’s long-lived assets are located in the United States. As a result, beginning with the first quarter of 2022,
GSHD has modified the presentation of its segment financial information with retrospective application to all prior periods presented. Since the Company operates in ione operating segment, all required financial segment information can be found in the condensed consolidated financial statements.
13.
iLitigation
From time to time, GSHD may be involved in various legal proceedings, lawsuits and claims incidental to the conduct of the Company's business. The amount of any loss from the ultimate outcomes is not probable or reasonably estimable. It is the opinion of management that the resolution of outstanding claims will not have a material adverse effect on the financial position or results of operations of the
Company.
Item 2: Management’s discussion and analysis of financial condition and results of operations
OVERVIEW
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Form 10-Q. In addition to
historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under “Risk factors” and elsewhere in this report and in the Annual Report on Form 10-K.
We are a rapidly growing personal lines independent insurance agency, reinventing the traditional approach to distributing personal lines products and services throughout the United States. We were founded with one vision in mind—to provide consumers with superior insurance coverage at the best available price and in a timely manner. By leveraging our differentiated business model and innovative technology platform, we are able to deliver to consumers a superior insurance experience. Our management
team continues to own approximately 42% of the company, representing our commitment to the long-term success of the Company.
Financial Highlights for the Third Quarter of 2022:
•Total revenue increased 38% from the third quarter of 2021 to $57.7 million
•Core Revenue* increased by 39% from third quarter of 2021 to $51.9 million
•Total Written Premiums placed increased 42% from the prior-year period to $615.6 million
•Net income decreased by $2.3 million from the third quarter of
2021 to $3.0 million, or 5% of total revenues
•Adjusted EBITDA* increased 67% from the third quarter of 2021 to $11.0 million, or 19% of total revenues
•Basic and diluted earnings per share were $0.09 and $0.09, respectively, and Adjusted EPS* was $0.24 per share for the three months ended September 30, 2022
◦As of September 30, 2022, 241 of these Corporate sales agents had less than one year of tenure and 170 had greater than one year of tenure
•Total franchises increased 17% compared to the prior-year period to 2,287; total operating franchises increased 23% from September 30, 2021 to 1,403 at September 30, 2022
◦In Texas as of September 30, 2022, 66 operating Franchisees had less than one year of tenure and 237 operating Franchisees had greater than one year of tenure.
◦Outside
of Texas as of September 30, 2022, 399 operating Franchisees had less than one year of tenure and 701 had greater than one year of tenure.
*Core Revenue, Adjusted EBITDA and Adjusted EPS are non-GAAP measures. Reconciliation of Core Revenue to total revenue, Adjusted EBITDA to net income and Adjusted EPS to EPS, the most directly comparable financial measures presented in accordance with GAAP, are set forth under "Key performance indicators".
COVID-19
For over two years, the COVID-19 pandemic has impacted businesses in the U.S. and globally. Our business has remained resilient throughout the pandemic and demand for our services remains strong. However, uncertainty remains regarding the economic outlook and the ultimate duration, spread and severity of COVID-19, and its variant strains,
the availability, effectiveness and utilization of vaccines, and the adverse effects on the national and global economy, home sales and consumer spending. As a result, the related financial impact on our business cannot be accurately predicted at this time. We continue to monitor the rapidly evolving situation and guidance from the authorities, including federal, state and local public health officials and as a result may take additional actions. While we intend to continue to execute on our strategic plans and operational initiatives during the outbreak, in these
23
circumstances, there may be developments outside our control requiring us to adjust our operating plan. The pandemic has also contributed to inflationary pressures and supply chain disruptions, and these challenges
could persist if governments continue to impose lockdowns, quarantine requirements and other restrictions in order to control rates of COVID-19 infections. For example, increased inflation may result in decreased demand for our services, increases in our operating costs (including our compensation costs), reduced liquidity, and limits on our ability to access credit or otherwise raise capital. See Item 1A. Risk factors - Risk relating to our business—The ongoing global COVID-19 pandemic has negatively impacted the global economy in a significant manner and may continue to do so for an extended period of time, and could also materially adversely affect our business and operating results in the Annual Report on Form 10-K for more information.
Certain income statement line items
Revenues
For
the three months ended September 30, 2022, revenue increased by 38% to $57.7 million from $41.7 million for the three months ended September 30, 2021. For the nine months ended September 30, 2022, revenue increased by 37% to $152.0 million from $111.1 million for the nine months ended September 30, 2021. Total Written Premium growth, which is the best leading indicator of future revenue growth, was 42% for the three months ended September 30, 2022. Total Written Premium increased to $616 million for the three months ended September 30, 2022 from $435 million for the three months ended September 30, 2021. Total written premium
increased by 42% to $1.632 billion for the nine months ended September 30, 2022 from $1.153 billion for the nine months ended September 30, 2021. Total Written Premiums drive our current and future Core Revenue and gives us potential opportunities to earn Ancillary Revenue in the form of Contingent Commissions.
Our various revenue streams do not equally contribute to the long-term value of Goosehead. For instance, Renewal Revenue and Renewal Royalty Fees are more predictable and have higher margin profiles, thus are higher quality revenue streams for the Company. Alternatively, Contingent Commissions, while high margin, are unpredictable and dependent on insurance company underwriting and forces of nature and thus are lower quality revenue
for the Company. Our revenue streams can be viewed in three distinct categories: Core Revenue, Cost Recovery Revenue, and Ancillary Revenue, which are non-GAAP measures. A reconciliation of Core Revenue, Cost Recovery Revenue, and Ancillary Revenue to total revenue, the most directly comparable financial measures presented in accordance with GAAP, are set forth under "Key performance indicators".
Core Revenue:
•Renewal Commissions - highly predictable, higher-margin revenue stream, which is managed by our service team.
•Renewal Royalty Fees - highly predictable, higher-margin revenue stream, which is managed by our service team. For policies in their first renewal term, we see an increase in our
share of royalties from 20% to 50% on the commission paid by the Carriers.
•New Business Commissions - predictable based on agent headcount and consistent ramp-up of agents, but lower margin than Renewal Commissions because of higher commissions paid to agents and higher back-office costs associated with policies in their first term. This revenue stream has predictably converted into higher-margin Renewal Commissions historically, and we expect this to continue moving forward.
•New Business Royalty Fees - predictable based on franchise count and consistent ramp-up of franchises, but lower margin than Renewal Royalty Fees because the Company only receives a royalty fee of 20% on the commissions paid by the Carrier in the first term of every policy
and higher back-office costs associated with policies in their first term. This revenue stream has predictably converted into higher-margin Renewal Royalty Fees historically, and we expect this to continue moving forward.
•Agency Fees - although predictable based on agent count, Agency Fees do not renew like New Business Commissions and Renewal Commissions.
Cost Recovery Revenue:
•Initial Franchise Fees - one-time Cost Recovery Revenue stream per franchise unit that covers the Company's costs to recruit, train, onboard, and support the franchise for the first year. These fees are fully earned and non-refundable when a franchise attends our initial training.
•Interest
Income - like Initial Franchise Fees, interest income is a Cost Recovery Revenue stream that reimburses the Company for those franchises on a payment plan.
24
Ancillary Revenue:
•Contingent Commissions - although high margin, Contingent Commissions are unpredictable and susceptible to weather events and Carrier underwriting results. Management does not rely on Contingent Commissions for operating cash flow or budget planning.
•Other Franchise Revenues - book transfer fees, marketing investments from Carriers and other items that are
unpredictable and supplemental to other revenue streams.
We discuss below the breakdown of our revenue by stream:
Three
Months Ended September 30,
Nine Months Ended September 30,
(in thousands)
2022
2021
2022
2021
Core Revenue:
Renewal
Commissions(1)
$16,485
29
%
$10,969
26
%
$41,233
27
%
$29,036
26
%
Renewal
Royalty Fees(2)
21,574
37
%
13,206
32
%
54,446
36
%
33,622
30
%
New
Business Commissions(1)
6,215
11
%
6,013
14
%
18,312
12
%
16,573
15
%
New
Business Royalty Fees(2)
4,866
8
%
4,003
10
%
13,979
9
%
10,840
10
%
Agency
Fees(1)
2,740
5
%
3,050
7
%
8,491
6
%
8,579
8
%
Total
Core Revenue
51,880
90
%
37,241
89
%
136,461
90
%
98,650
89
%
Cost Recovery Revenue:
Initial
Franchise Fees(2)
3,056
5
%
1,680
4
%
7,943
5
%
4,570
4
%
Interest
Income
363
1
%
301
1
%
1,012
1
%
841
1
%
Total Cost Recovery Revenue
3,419
6
%
1,981
5
%
8,955
6
%
5,411
5
%
Ancillary
Revenue:
Contingent Commissions(1)
1,962
3
%
2,388
6
%
5,640
4
%
6,819
6
%
Other
Franchise Revenues(2)
426
1
%
71
—
%
931
1
%
202
—
%
Total
Ancillary Revenue
2,388
4
%
2,459
6
%
6,571
4
%
7,021
6
%
Total Revenues
$57,687
100
%
$41,681
100
%
$151,987
100
%
$111,082
100
%
(1)
Renewal Commissions, New Business Commissions, Agency Fees, and Contingent Commissions are included in "Commissions and agency fees" as shown on the Condensed consolidated statements of operations.
(2) Renewal Royalty Fees, New Business Royalty Fees, Initial Franchise Fees, and Other Franchise Revenues are included in "Franchise revenues" as shown on the Condensed consolidated statements of operations.
25
Consolidated results of operations
The following is a discussion of our
consolidated results of operations for each of the three and nine months ended September 30, 2022 and 2021. This information is derived from our accompanying condensed consolidated financial statements prepared in accordance with GAAP.
The following table summarizes our results of operations for the three and nine months ended September 30, 2022 and 2021(in thousands):
Less:
net income (loss) attributable to non-controlling interests
1,061
1,332
(18)
2,288
Net income attributable to Goosehead Insurance Inc.
$
1,979
$
4,036
$
64
$
5,127
Revenues
For
the three months ended September 30, 2022 revenue increased 38% to $57.7 million from $41.7 million for the three months ended September 30, 2021. For the nine months ended September 30, 2022 revenue increased 37% to $152.0 million from $111.1 million for the nine months ended September 30, 2021.
26
Commissions and agency fees
Commissions and agency fees consist of new business commissions, renewal commissions, agency fees, and contingent commissions.
The following table sets forth our
commissions and agency fees by amount and as a percentage of our revenues for the periods indicated (in thousands):
Renewal
Commissions increased by $5.5 million or 50%, to $16.5 million for the three months ended September 30, 2022 from $11.0 million for the three months ended September 30, 2021. Renewal Commissions increased by $12.2 million or 42%, to $41.2 million for the nine months ended September 30, 2022 from $29.0 million for the nine months ended September 30, 2021. This increase was primarily attributable to an increase in the number of policies in the renewal term from September 30, 2021 to September 30, 2022 as well as steady client retention of 88% as of September 30, 2022.
New Business
Commissions remained flat at approximately $6.2 million for the three months ended September 30, 2022 and 2021. New Business Commission increased by $1.7 million or 10%, to $18.3 million for the nine months ended September 30, 2022 from $16.6 million for the nine months ended September 30, 2021. Revenue from Agency Fees decreased by $0.3 million or 10% to $2.7 million for the three months ended September 30, 2022 from $3.1 million for the three months ended September 30, 2021. Increases in New Business Commissions during the nine months ended September 30, 2022 were a result of higher average Corporate agent headcount over
the nine months ended September 30, 2021. Revenue from Agency Fees decreased by $0.1 million or 1%, to $8.5 million for the nine months ended September 30, 2022 from $8.6 million for the nine months ended September 30, 2021. These decreases were primarily attributable to a 18% decrease in total sales agent head count to 411 at September 30, 2022, from 502 at September 30, 2021.
Revenue from Contingent Commissions decreased by $0.4 million, to $2.0 million for the three months ended September 30, 2022 from $2.4 million for the three months ended September 30, 2021. Revenue from Contingent
Commissions decreased by $1.2 million, to $5.6 million for the nine months ended September 30, 2022 from $6.8 million for the nine months ended September 30, 2021. The decrease during the three months ended September 30, 2022 was primarily attributable to increases in loss ratio related to specific Contingent Commission programs.
Franchise revenues
Franchise Revenues consist of Royalty Fees, Initial Franchise Fees, and Other Franchise Revenues.
27
The following table sets forth our franchise revenues by amount and as a percentage of our
revenues for the periods indicated (in thousands):
Revenue
from Renewal Royalty Fees increased by $8.4 million, or 63%, to $21.6 million for the three months ended September 30, 2022 from $13.2 million for the three months ended September 30, 2021. Revenue from Renewal Royalty Fees increased by $20.8 million, or 62%, to $54.4 million for the nine months ended September 30, 2022 from $33.6 million for the nine months ended September 30, 2021. The increase in revenue from Renewal Royalty Fees was primarily attributable to an increase in the number of policies in the renewal term and steady client retention at 88% as of September 30, 2022 and September 30, 2021.
Revenue from New Business Royalty
Fees increased by $0.9 million, or 22%, to $4.9 million for the three months ended September 30, 2022 from $4.0 million for the three months ended September 30, 2021. Revenue from New Business Royalty Fees increased by $3.1 million, or 29%, to $14.0 million for the nine months ended September 30, 2022 from $10.8 million for the nine months ended September 30, 2021. The increase in revenue from New Business Royalty Fees was primarily attributable to a 23% increase in the total number of operating franchises to 1,403 at September 30, 2022, from 1,139 at September 30, 2021.
Revenue from Initial Franchise Fees increased by $1.4 million,
or 82%, to $3.1 million for the three months ended September 30, 2022 from $1.7 million for the three months ended September 30, 2021. Revenue from Initial Franchise Fees increased by $3.4 million, or 74%, to $7.9 million for the nine months ended September 30, 2022 from $4.6 million for the nine months ended September 30, 2021. The primary reason for this increase is an increase of 17% in total franchises to 2,287 at September 30, 2022, from 1,958 at September 30, 2021 and higher turnover of franchises during the quarter, which accelerates recognition of Initial Franchise Fees for terminated franchises.
Interest income
Interest
income increased by $0.1 million, or 21%, to $0.4 million for the three months ended September 30, 2022 from $0.3 million for the three months ended September 30, 2021. Interest income increased by $0.2 million, or 20%, to $1.0 million for the nine months ended September 30, 2022 from $0.8 million for the nine months ended September 30, 2021. This increase was primarily attributable to additional Franchise Agreements signed under the payment plan option.
Expenses
Employee compensation and benefits
Employee compensation and benefits expenses increased by $10.3 million, or 39%, to $36.3 million for the three months ended September
30, 2022 from $26.1 million for the three months ended September 30, 2021. Employee compensation and benefits expenses increased by $29.6 million, or 42%, to $99.5 million for the nine months ended September 30, 2022 from $69.9 million for the nine months ended September 30, 2021. The increase is caused by a 19% increase in total headcount from 2021 to 2022, as well as an increase in equity-based compensation of 190% related to stock option awards during the year.
28
General and administrative expenses
General and administrative expenses increased by $3.3 million, or 33%, to
$13.5 million for the three months ended September 30, 2022 from $10.1 million for the three months ended September 30, 2021. General and administrative expenses increased by $9.8 million, or 33%, to $39.4 million for the nine months ended September 30, 2022 from $29.5 million for the nine months ended September 30, 2021. This increase was primarily attributable to higher costs associated with an increase in operating franchises, total employees, addition of three new corporate office locations, and investments made in technology. Additionally, the Company hosted its annual Ascend meeting in February 2022, which did not take place in 2021
due to COVID.
Bad debts
Bad debts increased by $1.6 million, or 215%, to $2.3 million for the three months ended September 30, 2022 from $0.7 million for the three months ended September 30, 2021. Bad debts increased by $2.9 million, or 161%, to $4.8 million for the nine months ended September 30, 2022 from $1.8 million for the nine months ended September 30, 2021. The increase in bad debts is attributable to an increase in total franchises combined with higher franchise turnover during the three and nine months ended September 30, 2022 from the three and nine months ended September 30, 2021.
Depreciation
and amortization
Depreciation and amortization increased by $0.6 million, or 52%, to $1.8 million for the three months ended September 30, 2022 from $1.2 million for the three months ended September 30, 2021. Depreciation and amortization increased by $1.7 million, or 52%, to $5.0 million for the nine months ended September 30, 2022 from $3.3 million for the nine months ended September 30, 2021. This increase was primarily attributable to the increase in fixed assets since September 30, 2021, including the expansion of existing corporate offices and computer equipment for additional employees hired.
Interest expense
Interest
expenses increased by $0.7 million for the three months ended September 30, 2022, to $1.4 million from $0.8 million for the three months ended September 30, 2021. Interest expenses increased by $1.5 million for the nine months ended September 30, 2022, to $3.4 million from $1.9 million for the nine months ended September 30, 2021. The primary driver of the increase in interest expense is the increase in the interest rate environment and total borrowing outstanding.
Key performance indicators
Our key operating metrics are discussed below:
Total
Written Premium
Total Written Premium represents for any reported period, the total amount of current (non-cancelled) gross premium that is placed with Goosehead’s portfolio of Carriers. Total Written Premium placed is an appropriate measure of operating performance because it reflects growth of our business relative to other insurance agencies.
The following tables show Total Written Premium placed by corporate agents and franchisees for the three and nine months ended and 2022and2021 (in thousands).
Three
Months Ended September 30,
% Change
2022
2021
Corporate sales Total Written Premium
$
151,212
$
116,605
30
%
Franchise
sales Total Written Premium
464,363
318,147
46
%
Total Written Premium
$
615,575
$
434,752
42
%
29
Nine
Months Ended September 30,
% Change
2022
2021
Corporate sales Total Written Premium
$
408,450
$
318,008
28
%
Franchise
sales Total Written Premium
1,223,997
834,559
47
%
Total Written Premium
$
1,632,447
$
1,152,567
42
%
Policies
in Force
Policies in Force means as of any reported date, the total count of current (non-cancelled) policies placed with Goosehead’s portfolio of Carriers. We believe that Policies in Force is an appropriate measure of operating performance because it reflects growth of our business relative to other insurance agencies.
Net Promoter Score (NPS) is calculated based on a single question: “How likely are you to refer Goosehead Insurance to a friend,
family member or colleague?” Clients that respond with a 6 or below are Detractors, a
score of 7 or 8 are called Passives, and a 9 or 10 are Promoters. NPS is calculated by subtracting the percentage of Detractors from the percentage of Promoters. For example, if 50% of respondents were Promoters and 10% were Detractors, NPS is a 40. NPS is a useful gauge of the loyalty of client relationships and can be compared across companies and industries.
Client Retention is calculated by comparing the number of all clients that had at least one policy in force twelve months prior to the date of measurement
and still have at least one policy in force at the date of measurement. We believe Client Retention is useful as a measure of how well Goosehead retains clients year-over-year and minimizes defections.
Client Retention dipped slightly to 88% at September 30, 2022 when compared to 89% at December 31, 2021. For the trailing twelve months ended September 30, 2022, we retained 98% of the premiums we distributed in the trailing twelve months ended September 30, 2021, which increased from the 93% premium retention at December 31, 2021. Our premium retention rate is higher than our Client Retention rate as a result of both premiums increasing year over year and additional coverages sold
by our sales and service teams.
New Business Revenue
New Business Revenue is commissions received from the Carrier, Agency Fees received from clients, and New Business Royalty Fees relating to policies in their first term.
For the three months ended September 30, 2022, New Business Revenue grew 6% to $13.8 million, from $13.1 million for the three months ended September 30, 2021. For the nine months ended September 30, 2022, New Business Revenue grew 13% to $40.8 million, from $36.0 million for the nine months ended September 30, 2021. Growth in New Business Revenue is primarily driven by growth in operating franchises of 23%.
Renewal
Revenue
Renewal Revenue is commissions received from the Carrier and Renewal Royalty Fees received after the first term of a policy.
For the three months ended September 30, 2022, Renewal Revenue grew 57% to $38.1 million, from $24.2 million for the three months ended September 30, 2021. For the nine months ended September 30, 2022, Renewal Revenue grew 53% to $95.7 million, from $62.7 million for the nine months ended September 30, 2021. Growth in Renewal Revenue was driven by Client Retention of 88% at September 30, 2022, and rising premium rates. As our agent force matures, the policies they wrote in prior years begins to convert
from New Business Revenue to more profitable Renewal Revenue.
30
Non-GAAP Measures
Core Revenue, Cost Recovery Revenue, Ancillary Revenue, Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted EPS are not measures of financial performance under GAAP and should not be considered substitutes for total revenue (with respect to Core Revenue, Cost Recovery Revenue and Ancillary Revenue), net income (with respect to Adjusted EBITDA and Adjusted EBITDA Margin) or earnings per share (with respect to Adjusted EPS), which we consider to be the most directly comparable GAAP measures. We refer to these measures as "non-GAAP financial measures." We consider these non-GAAP financial measures to be useful metrics for management and investors
to facilitate operating performance comparisons from period to period by excluding potential differences caused by variations in capital structures, tax position, depreciation, amortization and certain other items that we believe are not representative of our core business. Core Revenue, Cost Recovery Revenue, Ancillary Revenue, Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted EPS have limitations as analytical tools, and when assessing our operating performance, you should not consider Core Revenue, Cost Recovery Revenue, Ancillary Revenue, Adjusted EBITDA, Adjusted EBITDA Margin, or Adjusted EPS in isolation or as substitutes for total revenue, net income, earnings per share, as applicable, or other consolidated income statement data prepared in accordance with GAAP. Other companies may calculate Core Revenue, Cost Recovery Revenue, Ancillary Revenue, Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted EPS differently than we do, limiting their usefulness as
comparative measures.
Core Revenue
Core Revenue is a supplemental measure of our performance and includes Renewal Commissions, Renewal Royalty Fees, New Business Commissions, New Business Royalty Fees, and Agency Fees. We believe that Core Revenue is an appropriate measure of operating performance because it summarizes all of our revenues from sales of individual insurance policies.
Core Revenue increased by $14.6 million, or 39%, to $51.9 million for the three months ended September 30, 2022 from $37.2 million for the three months ended September 30, 2021. Core Revenue increased by $37.8 million, or 38%, to $136.5 million for the nine months ended September 30, 2022 from $98.7 million
for the nine months ended September 30, 2021. The primary drivers of the increase are increases in operating franchises, the number of policies in the renewal term from September 30, 2021 to September 30, 2022, as well as continued strong client retention of 88% as of September 30, 2022 and 2021.
Cost Recovery Revenue
Cost Recovery Revenue is a supplemental measure of our performance and includes Initial Franchise Fees and Interest Income. We believe that Cost Recovery Revenue is an appropriate measure of operating performance because it summarizes revenues that are viewed by management as cost recovery mechanisms.
Cost
Recovery Revenue increased by $1.4 million, or 73%, to $3.4 million for the three months ended September 30, 2022 from $2.0 million for the three months ended September 30, 2021. Cost Recovery Revenue increased by $3.5 million, or 65%, to $9.0 million for the nine months ended September 30, 2022 from $5.4 million for the nine months ended September 30, 2021. The primary driver of the increase is an increase in total franchises from September 30, 2021 to September 30, 2022.
Ancillary Revenue
Ancillary Revenue is a supplemental measure of our performance and includes Contingent Commissions
and Other Franchise Revenues. We believe that Ancillary Revenue is an appropriate measure of operating performance because it summarizes revenues that are ancillary to our core business.
Ancillary Revenue decreased by $0.1 million to $2.4 million for the three months ended September 30, 2022 from $2.5 million for the three months ended September 30, 2021. Ancillary Revenue decreased by $0.5 million to $6.6 million for the nine months ended September 30, 2022 from $7.0 million for the nine months ended September 30, 2021.
Adjusted EBITDA
Adjusted EBITDA is a supplemental measure of our performance. We believe that
Adjusted EBITDA is an appropriate measure of operating performance because it eliminates the impact of items that do not relate to business performance. Adjusted EBITDA is defined as net income (the most directly comparable GAAP measure) before interest, income taxes, depreciation and amortization, adjusted to exclude equity-based compensation and
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other non-operating items, including, among other things, certain non-cash charges and certain non-recurring or non-operating gains or losses.
Adjusted EBITDA increased by $4.4 million, or 67%, to $11.0 million for the three months ended September 30, 2022 from $6.6 million for the three months ended September
30, 2021. Adjusted EBITDA increased by $9.3 million, or 60%, to $24.8 million for the nine months ended September 30, 2022 from $15.5 million for the nine months ended September 30, 2021. The primary driver of the increase in Adjusted EBITDA during the quarter and year to date is growing Core Revenue combined with slower growth in General and Administrative expenses.
Adjusted EBITDA Margin
Adjusted EBITDA Margin is Adjusted EBITDA as defined above, divided by total revenue excluding other non-operating items. Adjusted EBITDA Margin is helpful in measuring profitability of operations on a consolidated level.
For the three months ended September 30, 2022, Adjusted EBITDA Margin was 19%
compared to 16% for the three months ended September 30, 2021. For the nine months ended September 30, 2022, Adjusted EBITDA Margin was 16% compared to 14% for the nine months ended September 30, 2021. The primary drivers of the increase in Adjusted EBITDA Margin are growing Core Revenue combined with slower growth in General and Administrative expenses.
Adjusted EPS
Adjusted EPS is a supplemental measure of our performance, defined as earnings per share (the most directly comparable GAAP measure) before non-recurring or non-operating income and expenses. Adjusted EPS is a useful measure to management because it eliminates the impact of items that do not relate to business performance.
GAAP
to Non-GAAP Reconciliations
The following tables show a reconciliation from Total Revenues to Core Revenue, Cost Recovery Revenue, and Ancillary Revenue for the three and nine months ended September 30, 2022 and 2021(in thousands):
(1)
Renewal Commissions, New Business Commissions, Agency Fees, and Contingent Commissions are included in "Commissions and agency fees" as shown on the condensed consolidated statements of operations.
(2) Renewal Royalty Fees, New Business Royalty Fees, Initial Franchise Fees, and Other Franchise Revenues are included in "Franchise revenues" as shown on the condensed consolidated statements of operations.
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The following tables show a reconciliation from net income to Adjusted EBITDA and Adjusted EBITDA margin for the three and nine months ended September 30, 2022 and 2021(in
thousands):
(1)
Adjusted EBITDA Margin is calculated as Adjusted EBITDA divided by Total Revenue ($10,992/$57,687), and ($6,581/$41,681) for the three months ended September 30, 2022 and 2021, respectively. Adjusted EBITDA Margin is calculated as Adjusted EBITDA divided by Total Revenue ($24,752/$151,987), and ($15,490/$111,082) for the nine months ended September 30, 2022 and 2021, respectively.
The following tables show a reconciliation from basic earnings per share to Adjusted EPS (non-GAAP basis) for the three and nine months ended September 30, 2022 and 2021. Note that totals may not sum due to rounding:
(1)
Calculated as equity-based compensation divided by sum of weighted average Class A and Class B shares [$5.4 million/(20.9 million + 16.4 million)] for the three months ended September 30, 2022 and [$1.9 million/ (19.6 million + 17.3 million)] for the three months ended September 30, 2021. Calculated as equity-based compensation divided by sum of weighted average Class A and Class B shares [$16.4 million/(20.5 million + 16.7 million)] for the nine months ended September 30, 2022 and [$5.6 million/ (18.9 million + 17.9 million)] for the nine months ended September 30, 2021.
Liquidity
and capital resources
Liquidity and capital resources
We have managed our historical liquidity and capital requirements primarily through the receipt of revenues. Our primary cash flow activities involve: (1) generating cash flow from Commissions and Fees, which largely includes New Business Revenue, Renewal Revenue, and Agency Fees; (2) generating cash flow from Franchise Revenues operations, which largely includes Initial Franchise Fees and Royalty Fees; (3) borrowings, interest payments and repayments under our credit agreement; and (4) issuing shares of Class A common stock. As of September 30, 2022, our cash and cash equivalents balance was $46.1 million. We have used cash flow from operations primarily to pay compensation and related expenses, general, administrative and other expenses, debt service, special dividends and distributions
to our owners.
Credit agreement
See "Note 7. Debt" in the condensed consolidated financial statements included herein for a discussion of the Company's credit facilities.
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Comparative cash flows
The following table summarizes our cash flows from operating, investing and financing activities for the periods indicated (in thousands):
Net cash provided by (used for) financing activities
1,707
(16,202)
17,909
Net increase in cash and cash equivalents
17,891
455
17,436
Cash
and cash equivalents, and restricted cash, beginning of period
30,479
26,236
4,243
Cash and cash equivalents, and restricted cash, end of period
$
48,370
$
26,691
$
21,679
Operating
activities
Net cash provided by operating activities was $33.0 million for the nine months ended September 30, 2022 as compared to net cash provided by operating activities of $26.8 million for the nine months ended September 30, 2021. This increase in net cash provided by operating activities was attributable to an increase in equity based compensation of $10.7 million, offset by a decrease of $2.0 million in accounts payable and accrued expenses.
Investing activities
Net cash used for investing activities was $16.8 million for the nine months ended September 30, 2022, compared to net cash used for investing activities of $10.1 million for the nine months ended
September 30, 2021. This increase was driven by an increase in the purchase of assets.
Financing activities
Net cash provided by financing activities was $1.7 million for the nine months ended September 30, 2022 as compared to net cash used for financing activities of $16.2 million for the nine months ended September 30, 2021. This increase in net cash provided by financing activities was attributable to the payment of a $60.0 million dividend, offset by a $44.6 million increase in note payables in nine months ended September 30, 2021.
Future sources and uses of liquidity
Our
sources of liquidity are (1) cash on hand, (2) net working capital, (3) cash flows from operations and (4) our revolving credit facility. Based on our current expectations, we believe that these sources of liquidity will be sufficient to fund our working capital requirements and to meet our commitments in the foreseeable future.
We expect that our primary liquidity needs will comprise cash to (1) provide capital to facilitate the organic growth of our business, (2) pay operating expenses, including cash compensation to our employees, (3) make payments under the tax receivable agreement, (4) pay interest and principal due on borrowings under our Credit Agreement (5) pay income taxes, and (6) when deemed advisable by our board of directors, pay dividends.
Dividend policy
There have been no material changes to our dividend policy as described
in the Annual Report on Form 10-K.
Tax receivable agreement
We entered into a tax receivable agreement with the Pre-IPO LLC Members on May 1, 2018 that provides for the payment by us to the Pre-IPO LLC Members of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that we actually realize as a result of (i) any increase in tax basis in Goosehead Insurance, Inc.’s assets and (ii) tax benefits related to imputed interest deemed arising as a result of payments made under the tax receivable agreement. See "Item 13. Certain relationships and related transactions, and director independence" of the Annual Report on Form 10-K.
Holders of Goosehead Financial, LLC Units (other than Goosehead Insurance, Inc.) may, subject to certain conditions
and transfer restrictions described above, redeem or exchange their LLC Units for shares of Class A common stock of Goosehead Insurance, Inc. on a one-for-one basis. Goosehead Financial, LLC intends to make an
34
election under Section 754 of the Internal Revenue Code of 1986, as amended, and the regulations thereunder (the “Code”) effective for each taxable year in which a redemption or exchange of LLC Units for shares of Class A common stock occurs, which is expected to result in increases to the tax basis of the assets of Goosehead Financial, LLC at the time of a redemption or exchange of LLC Units. The redemptions or exchanges are expected to result in increases in the tax basis of the tangible and intangible assets of Goosehead Financial, LLC. These increases
in tax basis may reduce the amount of tax that Goosehead Insurance, Inc. would otherwise be required to pay in the future. We have entered into a tax receivable agreement with the Pre-IPO LLC Members that provides for the payment by us to the Pre-IPO LLC Members of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that we actually realize as a result of (i) any increase in tax basis in Goosehead Insurance, Inc.’s assets resulting from (a) the purchase of LLC Units from any of the Pre-IPO LLC Members using the net proceeds from any future offering, (b) redemptions or exchanges by the Pre-IPO LLC Members of LLC Units for shares of our Class A common stock or (c) payments under the tax receivable agreement and (ii) tax benefits related to imputed interest deemed arising as a result of payments made under the tax receivable agreement. This payment obligation is an obligation of Goosehead Insurance, Inc. and not of Goosehead
Financial, LLC. For purposes of the tax receivable agreement, the cash tax savings in income tax will be computed by comparing the actual income tax liability of Goosehead Insurance, Inc. (calculated with certain assumptions) to the amount of such taxes that Goosehead Insurance, Inc. would have been required to pay had there been no increase to the tax basis of the assets of Goosehead Financial, LLC as a result of the redemptions or exchanges and had Goosehead Insurance, Inc. not entered into the tax receivable agreement. Estimating the amount of payments that may be made under the tax receivable agreement is by its nature imprecise, insofar as the calculation of amounts payable depends on a variety of factors. While the actual increase in tax basis, as well as the amount and timing of any payments under the tax receivable agreement, will vary depending upon a number of factors, including the timing of redemptions or exchanges, the price of shares of our Class A common
stock at the time of the redemption or exchange, the extent to which such redemptions or exchanges are taxable and the amount and timing of our income. See "Item 13. Certain relationships and related transactions, and director independence" of the Annual Report on Form 10-K. We anticipate that we will account for the effects of these increases in tax basis and associated payments under the tax receivable agreement arising from future redemptions or exchanges as follows:
•we will record an increase in deferred tax assets for the estimated income tax effects of the increases in tax basis based on enacted federal and state tax rates at the date of the redemption or exchange;
•to the extent we estimate that we will not realize the full benefit represented by the deferred tax asset, based on an analysis that will consider, among
other things, our expectation of future earnings, we will reduce the deferred tax asset with a valuation allowance; and
•we will record 85% of the estimated realizable tax benefit (which is the recorded deferred tax asset less any recorded valuation allowance) as an increase to the liability due under the tax receivable agreement and the remaining 15% of the estimated realizable tax benefit as an increase to additional paid-in capital.
All of the effects of changes in any of our estimates after the date of the redemption or exchange will be included in net income. Similarly, the effect of subsequent changes in the enacted tax rates will be included in net income.
Contractual
obligations, commitments and contingencies
The following table represents our contractual obligations as of September 30, 2022, aggregated by type (in thousands).
Contractual obligations, commitments and contingencies
(in
thousands)
Total
Less than 1 year
1-3 years
3-5 years
More than 5 years
Operating leases(1)
$
85,971
$
1,948
$
32,313
$
11,535
$
40,175
Debt
obligations payable(2)
95,625
6,250
18,750
70,625
—
Interest expense(3)
34,149
5,265
3,158
25,726
—
Liabilities
under the tax receivable agreement(4)
112,753
359
19,672
16,196
76,526
Total
$
328,498
$
13,822
$
73,893
$
124,082
$
116,701
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(1)The
Company leases its facilities under non-cancelable operating leases. In addition to monthly lease payments, the lease agreements require the Company to reimburse the lessors for its portion of operating costs each year. Rent expense was $1.7 million and $0.7 million for the three months ended September 30, 2022 and 2021.
(2)The Company refinanced its credit facilities on July 21, 2021 in the form of a $100 million term loan, and $25 million revolving credit facility, of which $25 million was drawn as of September 30, 2022.
(3)Interest
expense includes interest payments on our outstanding debt obligations under our credit agreement. Our debt obligations have variable interest rates. We have calculated future interest obligations based on the interest rate for our debt obligations as of September 30, 2022.
(4)See "Item 2. Management's discussion and analysis of financial condition and results of operation - Tax receivable agreement."
Off-balance sheet arrangements
We do not invest in any off-balance sheet vehicles that provide liquidity, capital resources, market or credit risk support, or engage in any activities that expose us to any liability
that is not reflected in our condensed consolidated financial statements except for those described under “Contractual obligations, commitments and contingencies” above.
Critical accounting policies
Our discussion and analysis of our consolidated financial condition and results of operations is based upon the accompanying condensed consolidated financial statements and notes thereto, which have been prepared in accordance with GAAP. The preparation of the condensed consolidated financial statements requires us to make estimates, judgments and assumptions, which we believe to be reasonable, based on the information available. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses,
and related disclosures of contingent assets and liabilities. Variances in the estimates or assumptions used to actual experience could yield materially different accounting results. On an ongoing basis, we evaluate the continued appropriateness of our accounting policies and resulting estimates to make adjustments we consider appropriate under the facts and circumstances. There have been no significant changes to our critical accounting policies as disclosed in the Annual Report on Form 10-K.
Recent accounting pronouncements
See "Note 2: Summary of Significant Accounting Policies—Recently Issued Accounting Pronouncements” under Part I, Item 1 of this Form 10-Q.
Item
3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to our exposure to market risks as described in "Item 7A. Quantitative and qualitative disclosure of market risks" in the Annual Report on Form 10-K.
Item 4. Controls and Procedures
Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures were effective as of September 30, 2022. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
There were no changes to our internal control over financial reporting that occurred during the quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART
II
Item 1. Legal Proceedings
The information required by this Item is incorporated by reference to "Part I, Item I, Note 13. Litigation" in the condensed consolidated financial statements included herein.
Item 1A. Risk Factors
There have been no material changes to the risk factors disclosed in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Subject to the terms of the amended and restated Goosehead Financial, LLC Agreement, each LLC Unit is redeemable (along with the cancellation of the corresponding share of Class B common stock) for one share of Class A common stock.
Pursuant to the requirements of the Securities Exchange Act of 1934, we have duly caused this report to be signed on our behalf by the undersigned thereunto duly authorized.
