Document

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 September 30, 2019


☐			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 November 1, 2019, there were 15,206,440 shares of Class A common stock outstanding and 21,082,051 shares of Class B common stock outstanding.

Table of contents



		Page
Part I
Item 1.	Condensed Consolidated Financial Statements (Unaudited)	5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42
Item 4.	Controls and Procedures	42

Part II
Item 1.	Legal Matters	43
Item 1A.	Risk Factors	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3.	Defaults Upon Senior Securities	43
Item 4.	Mine Safety	43
Item 5.	Other Information	43
Item 6.	Exhibits	44

SIGNATURES			44

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.

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.

PART I

Item 1. Condensed Consolidated Financial Statements (Unaudited)


		Page
Condensed Consolidated Statements of Income			6
Condensed Consolidated Balance Sheets			7
Condensed Consolidated Statements of Stockholders' Equity			8
Condensed Consolidated Statements of Cash Flows			10
Notes to the Condensed Consolidated Financial Statements			11
Note 1	Organization	12
Note 2	Summary of Significant Accounting Policies	12
Note 3	Franchise Fees Receivable	14
Note 4	Allowance for Uncollectible Agency Fees	15
Note 5	Property and equipment	15
Note 6	Note Payable	15
Note 7	Commitments and Contingencies	17
Note 8	Income Taxes	17
Note 9	Stockholders' Equity	20
Note 10	Equity-Based Compensation	25
Note 11	Dividends	25
Note 12	Segment Information	25
Note 13	Litigation	28

Goosehead Insurance, Inc.

Condensed Consolidated Statements of Income

(Unaudited)

(In thousands, except per share amounts)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2019		2018		2019		2018
Revenues:
Commissions and agency fees	$	11,739	$	9,760	$	38,672	$	28,072
Franchise revenues	9,261		6,180		24,564		17,060
Interest income	169		114		452		299
Total revenues	21,169		16,054		63,688		45,431
Operating Expenses:
Employee compensation and benefits (including Class B unit compensation of $0 for the three and nine months ended September 30, 2019, and $0 and $26,134 for the three and nine months ended September 30, 2018, respectively)	11,412		8,956		30,981		49,646
General and administrative expenses	5,169		3,694		13,800		9,093
Bad debts	399		399		1,282		984
Depreciation and amortization	516		352		1,391		1,039
Total operating expenses	17,496		13,401		47,454		60,762
Income (loss) from operations	3,673		2,653		16,234		(15,331)
Other Income (Expense):
Other income (expense)	—		(22)		—		(22)
Interest expense	(609)		(1,631)		(1,861)		(3,598)
Income (loss) before taxes	3,064		1,000		14,373		(18,951)
Tax expense	301		164		1,475		318
Net income (loss)	2,763		836		12,898		(19,269)
Less: net income (loss) attributable to non-controlling interests	1,765		595		8,525		(10,278)
Net income (loss) attributable to Goosehead Insurance, Inc.	$	998	$	241	$	4,373	$	(8,991)
Earnings (loss) per share:
Basic	$	0.07	$	0.02	$	0.30	$	(0.66)
Diluted	$	0.06	$	0.02	$	0.27	$	(0.66)
Weighted average shares of Class A common stock outstanding
Basic	15,140		13,533		14,746		13,533
Diluted	16,451		14,614		15,936		13,533

Dividends declared per share	$	—	$	—	$	0.41	$	—

See Notes to the Condensed Consolidated Financial Statements

Goosehead Insurance, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except per share amounts)


	September 30,		December 31,
	2019		2018
Assets
Current Assets:
Cash and cash equivalents	$	10,820	$	18,635
Restricted cash	728		376

Commissions and agency fees receivable, net	2,181		2,016
Receivable from franchisees, net	1,474		703
Prepaid expenses	1,829		1,109
Other assets	69		—
Total current assets	17,101		22,839
Receivable from franchisees, net of current portion	2,607		2,048
Property and equipment, net of accumulated depreciation	9,610		7,575
Intangible assets, net of accumulated amortization	442		248
Deferred income taxes, net	14,503		1,958
Other assets	158		130
Total assets	$	44,421	$	34,798
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable and accrued expenses	$	4,355	$	3,978
Premiums payable	728		376
Unearned revenue	330		530

Deferred rent	632		428
Note payable	3,500		2,500
Total current liabilities	9,545		7,812

Deferred rent, net of current portion	6,712		4,548
Note payable, net of current portion	43,355		45,947
Liabilities under tax receivable agreement, net of current portion	12,659		1,694
Total liabilities	72,271		60,001
Commitments and contingencies (see note 7)
Class A common stock, $0.01 par value per share - 300,000 shares authorized, 15,173 shares issued and outstanding as of September 30, 2019, 13,800 shares issued and outstanding as of December 31, 2018	152		138
Class B common stock, $0.01 par value per share - 50,000 shares authorized, 21,115 issued and outstanding as of September 30, 2019, 22,486 shares issued and outstanding as of December 31, 2018	210		224
Additional paid in capital	13,792		11,899
Accumulated deficit	(22,350)		(20,761)
Total stockholders' equity	(8,196)		(8,500)
Non-controlling interests	(19,654)		(16,703)
Total equity	(27,850)		(25,203)
Total liabilities and stockholders' equity	$	44,421	$	34,798

See Notes to the Condensed Consolidated Financial Statements

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	11,899	(20,761)	(8,500)	(16,703)	(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)	(679)	—	(679)	679	—
Deferred tax adjustments related to Tax Receivable Agreement	—	—	—	—	911	—	911	—	911
Balance March 31, 2019	14,522	21,763	145	217	12,499	(24,251)	(11,390)	(20,461)	(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)	(477)	—	(477)	477	—
Deferred tax adjustments related to Tax Receivable Agreement	—	—	—	—	684	—	684	—	684
Balance June 30, 2019	15,013	21,275	150	212	13,216	(23,348)	(9,770)	(20,778)	(30,548)
Distributions	—	—	—	—	—	—	—	(786)	(786)
Net income	—	—	—	—	—	998	998	1,765	2,763
Equity-based compensation	—	—	—	—	396	—	396	—	396
Redemption of LLC Units	160	(160)	2	(2)	(145)	—	(145)	145	—
Deferred tax adjustments related to Tax Receivable Agreement	—	—	—	—	325	—	325	—	325
Balance September 30, 2019	15,173	21,115	152	210	13,792	(22,350)	(8,196)	(19,654)	(27,850)


	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	(94,180)	(21,562)	(115,515)	(36,241)	(113,734)
Initial non-controlling interest allocation	—	—	—	—	—	(18,920)	—	(18,920)	18,920	—
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	11,065	(20,996)	(9,569)	(17,115)	(26,684)
Additional capitalized offering costs on initial public offering	—	—	—	—	—	(119)	—	(119)	—	(119)
Distributions subsequent to initial public offering	—	—	—	—	—	—	—	—	(900)	(900)
Net income subsequent to initial public offering	—	—	—	—	—	—	145	145	693	838
Equity-based compensation subsequent to initial public offering	—	—	—	—	—	344	—	344	—	344
Deferred tax adjustments	—	—	—	—	—	—	—	—	—	—
Balance September 30, 2018	—	13,533	22,747	135	227	11,290	(20,851)	(9,199)	(17,322)	(26,521)
Distributions subsequent to initial public offering	—	—	—	—	—	—	—	—	(90)	(90)
Net income subsequent to initial public offering	—	—	—	—	—	—	90	90	515	605
Equity-based compensation subsequent to initial public offering	—	—	—	—	—	345	—	345	—	345
Activity under employee stock purchase plan	—	5	—	—	—	143	—	143	—	143
Redemption of LLC Units	—	261	(261)	3	(3)	(194)	—	(194)	194	—
Deferred tax adjustments related to Tax Receivable Agreement	—	—	—	—	—	315	—	315	—	315
Balance December 31, 2018	—	13,799	22,486	138