Goosehead Insurance(GSHD) - 2023 Q2 - Quarterly Report

FORM 10-Q Filing Information This section provides basic identification details for Goosehead Insurance, Inc. and its filing status Registrant Information This section details Goosehead Insurance, Inc.'s identification, filing status, and outstanding common stock as of July 24, 2023 - Goosehead Insurance, Inc. is incorporated in Delaware and headquartered in Westlake, TX[2] - The company's Class A Common Stock (GSHD) is registered on NASDAQ[3] Outstanding Common Stock as of July 24, 2023 | Class | Shares Outstanding | | :---- | :----------------- | | Class A | 23,898,757 | | Class B | 13,795,166 | Table of Contents This section provides an organized listing of all chapters and sub-sections within the Form 10-Q document Commonly Used Defined Terms This section defines key financial and operational terms used throughout the Form 10-Q for clarity Key Definitions This section defines key revenue streams (Core, Cost Recovery, Ancillary) and operational metrics (Client Retention, NPS) - Core Revenue includes Renewal Commissions, Renewal Royalty Fees, New Business Commissions, New Business Royalty Fees, and Agency Fees, representing the most predictable revenue streams[9] - Cost Recovery Revenue consists of Initial Franchise Fees and Interest Income, associated with selling and financing franchises[9] - Ancillary Revenue, such as Contingent Commissions and other income, is supplemental and often unpredictable[9] - Client Retention is calculated by comparing clients with at least one policy in force twelve months prior and at the measurement date[9] - NPS (Net Promoter Score) measures client loyalty based on referral likelihood[9] Special Note Regarding Forward-Looking Statements This section provides a cautionary disclaimer about forward-looking statements, highlighting inherent risks and uncertainties Forward-Looking Statements Disclaimer This disclaimer warns that forward-looking statements are predictions subject to risks, and actual results may differ materially - Forward-looking statements are identified by words like 'may,' 'might,' 'will,' 'expects,' 'plans,' 'anticipates,' 'believes,' 'estimates,' 'predicts,' 'potential' or 'continue'[10] - Actual results, level of activity, performance, or achievements may differ materially from forward-looking statements due to various factors, including those discussed under 'Item 1A. Risk factors' in the Annual Report on Form 10-K[10] - The company is under no duty to update these statements after the Form 10-Q's date[11] PART I This part presents the unaudited condensed consolidated financial statements and management's discussion and analysis Item 1. Condensed Consolidated Financial Statements (Unaudited) This section presents unaudited condensed consolidated financial statements, including operations, balance sheets, equity, cash flows, and detailed notes Condensed Consolidated Statements of Operations The statements show significant increases in total revenues, net income, and operating income for the periods ended June 30, 2023 Key Financial Highlights (Three Months Ended June 30) | Metric (in thousands) | 2023 | 2022 | Change ($) | Change (%) | | :-------------------- | :------ | :------ | :--------- | :--------- | | Total Revenues | $69,277 | $53,022 | $16,255 | 30.7% | | Income from operations| $11,190 | $5,667 | $5,523 | 97.5% | | Net income | $7,180 | $2,389 | $4,791 | 200.5% | | Basic EPS | $0.15 | $0.02 | $0.13 | 650.0% | Key Financial Highlights (Six Months Ended June 30) | Metric (in thousands) | 2023 | 2022 | Change ($) | Change (%) | | :-------------------- | :------- | :------- | :--------- | :--------- | | Total Revenues | $127,232 | $94,300 | $32,932 | 34.9% | | Income from operations| $12,659 | $(435) | $13,094 | >1000% | | Net income | $6,999 | $(2,994) | $9,993 | >1000% | | Basic EPS | $0.15 | $(0.10) | $0.25 | >100% | Condensed Consolidated Balance Sheets Balance sheets show increased total assets and stockholders' equity, with decreased liabilities and non-controlling interests Balance Sheet Summary (in thousands) | Category | June 30, 2023 | December 31, 2022 | Change ($) | | :-------------------- | :------------ | :---------------- | :--------- | | Total Assets | $323,179 | $321,353 | $1,826 | | Total Liabilities | $336,627 | $354,977 | $(18,350) | | Total Stockholders' Equity | $29,670 | $10,670 | $19,000 | | Non-controlling interests | $(43,118) | $(44,294) | $1,176 | | Total Equity | $(13,448) | $(33,624) | $20,176 | - Cash and cash equivalents decreased from $28.7 million at December 31, 2022, to $19.1 million at June 30, 2023[16] - Deferred income taxes, net, increased from $155.3 million to $164.5 million[16] Condensed Consolidated Statements of Stockholders' Equity This statement details changes in equity components from net income, stock options, equity compensation, and LLC Unit redemptions - For the six months ended June 30, 2023, net income attributable to Goosehead Insurance, Inc. was $3,585 thousand, a significant improvement from a net loss of $(1,944) thousand in the prior year[17][18] - Equity-based compensation contributed $12,492 thousand to additional paid-in capital for the six months ended June 30, 2023, up from $10,961 thousand in the prior year[17][18] - Redemption of LLC Units resulted in a decrease in additional paid-in capital of $(2,102) thousand for the six months ended June 30, 2023, while increasing non-controlling interest by $2,102 thousand[17][18] Condensed Consolidated Statements of Cash Flows Cash flows show increased operating cash, but higher investing and financing outflows led to a net decrease in cash Cash Flow Summary (Six Months Ended June 30, in thousands) | Activity | 2023 | 2022 | Change ($) | | :---------------------------- | :------- | :------- | :--------- | | Net cash from operating activities | $16,114 | $10,092 | $6,022 | | Net cash used for investing activities | $(11,286) | $(6,802) | $(4,484) | | Net cash used for financing activities | $(14,294) | $(221) | $(14,073) | | Net increase (decrease) in cash and restricted cash | $(9,466) | $3,069 | $(12,535) | - Cash paid for interest increased to $3,282 thousand in 2023 from $2,143 thousand in 2022[20] - Cash consideration paid for asset acquisitions was $5,270 thousand in 2023, with no comparable amount in 2022[20] Notes to the Condensed Consolidated Financial Statements These notes provide essential context for financial statements, detailing accounting policies, debt, taxes, equity, and impairment Note 1 Organization This note describes GSHD's role as GF's managing member, its insurance services, and changes in corporate and franchise locations - GSHD consolidates GF's financial results and reports non-controlling interest[21] - Corporate-owned locations decreased from 15 in 2022 to 12 in 2023[23] - Operating franchise locations remained stable at 1,344 as of June 30, 2023 and 2022[23] Note 2 Summary of Significant Accounting Policies This note details accounting policies, including asset impairment, income taxes, restricted cash, and the LIBOR to SOFR transition - The Company recorded an impairment expense of $1.1 million for internally-developed software that would not be completed during Q2 2023[31] - An additional impairment expense of $1.4 million for property and equipment and $1.1 million for right-of-use assets was recorded due to plans to sublease two office locations in Q2 2023[32] - The Company transitioned its variable interest rate debt from LIBOR to SOFR on April 26, 2023, under ASU 2020-04[35] Cash and Restricted Cash Balances (in thousands) | Category | June 30, 2023 | June 30, 2022 | | :------------------------ | :------------ | :------------ | | Cash and cash equivalents | $19,131 | $31,121 | | Restricted cash | $1,790 | $2,427 | | Total | $20,921 | $33,548 | Note 3 Revenues This note details revenue recognition policies and disaggregates revenue, showing strong growth in renewal and contingent commissions - Renewal Commissions increased by 27% to $18,541 thousand for the three months ended June 30, 2023, and by 39% to $34,359 thousand for the six months ended June 30, 2023[46] - Renewal Royalty Fees increased by 46% to $27,552 thousand for the three months ended June 30, 2023, and by 53% to $50,304 thousand for the six months ended June 30, 2023[46] - Contingent Commissions increased by 111% to $3,971 thousand for the three months ended June 30, 2023, and by 60% to $5,890 thousand for the six months ended June 30, 2023[46] Disaggregation of Revenue by Type (in thousands) | Revenue Stream | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :---------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Renewal Commissions | $18,541 | $14,541 | $34,359 | $24,748 | | New Business Commissions| $6,257 | $6,730 | $11,774 | $12,097 | | Agency Fees | $2,404 | $3,114 | $4,634 | $5,751 | | Contingent Commissions | $3,971 | $1,880 | $5,890 | $3,678 | | Renewal Royalty Fees | $27,552 | $18,870 | $50,304 | $32,872 | | New Business Royalty Fees| $6,267 | $4,821 | $11,909 | $9,113 | | Initial Franchise Fees | $3,287 | $2,591 | $6,350 | $4,887 | | Other Franchise Revenues| $581 | $145 | $1,198 | $505 | | Interest Income | $417 | $330 | $814 | $649 | | Total Revenues | $69,277 | $53,022 | $127,232 | $94,300 | Note 4 Franchise Fees Receivable Net franchise fees receivable decreased to $16.8 million, reflecting changes in the allowance for uncollectible fees Net Franchise Fees Receivable (in thousands) | Category | June 30, 2023 | December 31, 2022 | | :---------------------------- | :------------ | :---------------- | | Franchise fees receivable | $24,324 | $35,606 | | Less: Unamortized discount | $(7,067) | $(9,896) | | Less: Allowance for uncollectible franchise fees | $(421) | $(487) | | Net franchise fees receivable | $16,836 | $25,223 | Allowance for Uncollectible Franchise Fees Activity (in thousands) | Activity | Six Months Ended June 30, 2023 | | :------------------------ | :----------------------------- | | Balance at Dec 31, 2022 | $487 | | Charges to bad debts | $823 | | Write offs | $(889) | | Balance at June 30, 2023 | $421 | Note 5 Allowance for Uncollectible Agency Fees The allowance for uncollectible agency fees increased to $653 thousand, driven by charges to bad debts and write-offs Allowance for Uncollectible Agency Fees Activity (in thousands) | Activity | Six Months Ended June 30, 2023 | | :------------------------ | :----------------------------- | | Balance at Dec 31, 2022 | $450 | | Charges to bad debts | $876 | | Write offs | $(673) | | Balance at June 30, 2023 | $653 | Note 6 Property and Equipment Net property and equipment decreased to $33.2 million, with depreciation expense increasing to $3.8 million Property and Equipment, Net (in thousands) | Category | June 30, 2023 | December 31, 2022 | | :------------------------ | :------------ | :---------------- | | Total | $52,208 | $50,571 | | Less accumulated depreciation | $(19,032) | $(15,224) | | Property and equipment, net | $33,176 | $35,347 | - Depreciation expense increased by $0.9 million (31%) to $3.8 million for the six months ended June 30, 2023, compared to $2.9 million in the prior year[56] Note 7 Debt This note details debt facilities, the LIBOR to SOFR transition, term note balance, and debt covenant compliance - The Company's credit agreement was amended on April 26, 2023, to replace LIBOR with SOFR as the interest rate benchmark[58] - As of June 30, 2023, the Company had $49.8 million available to draw on its revolving credit facility[59] - An additional $10.0 million payment was made towards the term note on May 31, 2023, reducing the final balloon payment to $55.6 million[60] Term Note Payable Maturities (in thousands) | Year | Amount | | :--- | :----- | | 2023 | $3,750 | | 2024 | $9,375 | | 2025 | $10,000| | 2026 | $58,125| | Total| $81,250| Note 8 Income Taxes This note details income tax expense, deferred tax assets, and the $134.2 million Tax Receivable Agreement liability Income Tax Expense and Effective Tax Rate | Period | Income Tax Expense (in thousands) | Effective Tax Rate | | :------------------------ | :-------------------------------- | :----------------- | | 3 Months Ended June 30, 2023 | $2,301 | 24% | | 3 Months Ended June 30, 2022 | $2,164 | 48% | | 6 Months Ended June 30, 2023 | $2,220 | 24% | | 6 Months Ended June 30, 2022 | $562 | (23)% | - Deferred tax assets increased to $164.5 million at June 30, 2023, from $155.3 million at December 31, 2022, mainly due to LLC Unit redemptions[68] - The liability under the Tax Receivable Agreement (TRA) was $134.2 million as of June 30, 2023, representing 85% of expected tax benefits from basis increases due to LLC Unit redemptions[71] Note 9 Stockholders' Equity This note details Class A and Class B common stock structure and presents basic and diluted EPS calculations - Class A common stock has economic rights and one vote per share, with 23,900 thousand shares outstanding at June 30, 2023[73] - Class B common stock has no economic rights but one vote per share, with 13,795 thousand shares outstanding at June 30, 2023[74] Earnings Per Share (EPS) Summary | Metric | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :----- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Basic EPS | $0.15 | $0.02 | $0.15 | $(0.10) | | Diluted EPS | $0.15 | $0.02 | $0.15 | $(0.10) | Note 10 Non-Controlling Interest This note details non-controlling interest, LLC Unit redemptions, and $12.6 million in distributions to unit holders - GSHD's ownership interest in GF increased to 63.4% as of June 30, 2023[84] - Non-controlling interest holders redeemed 675 thousand LLC Units for Class A common stock during the six months ended June 30, 2023[83] - GF made distributions of $12.6 million to LLC Unit holders for the six months ended June 30, 2023, with $5.2 million going to Pre-IPO LLC Members[80] Note 11 Equity-Based Compensation Equity-based compensation expense, mainly from stock options, increased for both three and six months ended June 30, 2023 Stock Option Expense (in thousands) | Period | 2023 | 2022 | | :------------------------ | :------ | :------ | | 3 Months Ended June 30 | $5,900 | $5,200 | | 6 Months Ended June 30 | $12,500 | $11,000 | Note 12 Litigation Management believes current legal proceedings will not materially adversely affect the Company's financial position or operations - Management believes current litigation will not materially adversely affect the Company's financial position or results of operations[87] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of financial condition, operational results, KPIs, and non-GAAP measures Overview This overview highlights substantial Q2 2023 financial growth in revenue, net income, written premiums, and Adjusted EBITDA - Total revenue increased 31% to $69.3 million in Q2 2023[92] - Net income increased by $4.8 million to $7.2 million in Q2 2023[92] - Total Written Premiums placed increased 36% to $767.3 million[92] - Adjusted EBITDA increased 85% to $23.1 million, representing 33% of total revenues[92] - Policies in Force increased 21% to 1,427,000 at June 30, 2023[92] - Corporate sales headcount decreased 44% to 280 at June 30, 2023[92] Certain Income Statement Line Items This section analyzes revenue streams and operating expenses, noting growth in renewal commissions and increased compensation Revenues Total revenues increased significantly, driven by a 36% rise in Total Written Premium and strong growth in renewal commissions - Total Written Premium, a leading indicator of future revenue, increased 36% to $767 million for the three months ended June 30, 2023[93] - Renewal Commissions increased by 28% to $18.5 million for the three months ended June 30, 2023, driven by more policies in renewal term and premium rate increases[104] - New Business Commissions decreased by 7% to $6.3 million for the three months ended June 30, 2023, primarily due to a decrease in Corporate Sales agents[105] - Revenue from Contingent Commissions increased by $2.1 million to $4.0 million for the three months ended June 30, 2023, attributable to an increase in Total Written Premium[106] - Renewal Royalty Fees increased by 46% to $27.6 million for the three months ended June 30, 2023, due to an increase in renewal policies and rising premium rates[108] - Initial Franchise Fees increased by 27% to $3.3 million for the three months ended June 30, 2023, mainly due to higher franchise turnover accelerating revenue recognition[110] Expenses Operating expenses increased due to higher employee compensation, asset impairment charges, and rising interest expenses - Employee compensation and benefits increased by 18% to $37.5 million for the three months ended June 30, 2023, primarily due to a 14% increase in equity-based compensation[112] - General and administrative expenses increased by 40% to $17.3 million for the three months ended June 30, 2023, mainly due to $3.6 million in asset impairment charges[113] - Bad debts decreased by 46% to $0.9 million for the three months ended June 30, 2023, but increased by 4% to $2.6 million for the six months ended June 30, 2023, due to higher franchise turnover[114] - Interest expenses increased by $0.6 million to $1.7 million for the three months ended June 30, 2023, driven by rising interest rates[116] Key Performance Indicators Key performance indicators show strong growth in Total Written Premium, Policies in Force, NPS, and Renewal Revenue Total Written Premium (in thousands) | Category | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | % Change | | :------------------------ | :--------------------------- | :--------------------------- | :------- | | Corporate sales | $179,638 | $146,844 | 22% | | Franchise sales | $587,614 | $419,117 | 40% | | Total Written Premium | $767,252 | $565,961 | 36% | - Policies in Force increased 21% year-over-year to 1.4 million as of June 30, 2023[121] - Net Promoter Score (NPS) increased to 91 as of June 30, 2023, from 90 in the prior year[123] - Client Retention remained constant at 88% at June 30, 2023, while premium retention was 103%[125] - Renewal Revenue grew 38% to $46.1 million for the three months ended June 30, 2023, driven by client retention and rising premium rates[129] Non-GAAP Measures This section defines and reconciles non-GAAP measures, highlighting significant increases in Core Revenue, Adjusted EBITDA, and Adjusted EPS - Core Revenue increased by 27% to $61.0 million for the three months ended June 30, 2023, driven by higher renewal policies and 103% premium retention[133] - Adjusted EBITDA increased by 85% to $23.1 million for the three months ended June 30, 2023, primarily due to growing higher-margin Renewal Revenue, decreases in Corporate agent headcount, and slower growth in General and Administrative expenses[139] - Adjusted EBITDA Margin was 33% for the three months ended June 30, 2023, up from 24% in the prior year[141] Adjusted EPS Reconciliation | Metric | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | | :-------------------------- | :--------------------------- | :--------------------------- | | Earnings per share - basic (GAAP) | $0.15 | $0.02 | | Add: equity-based compensation | $0.16 | $0.14 | | Add: impairment expense | $0.10 | — | | Adjusted EPS (non-GAAP) | $0.41 | $0.16 | Liquidity and Capital Resources Liquidity is managed through revenues and credit, with increased operating cash offset by higher investing and financing outflows - Net cash provided by operating activities increased by $6.0 million to $16.1 million for the six months ended June 30, 2023[151] - Net cash used for investing activities increased by $4.5 million to $11.3 million, primarily due to $5.3 million in cash paid for asset acquisitions (books of business)[152] - Net cash used for financing activities increased significantly by $14.1 million to $14.3 million, driven by an additional $10.0 million debt repayment and $5.2 million in member distributions[153] - The Tax Receivable Agreement (TRA) obligates the Company to pay Pre-IPO LLC Members 85% of realized cash tax savings from increases in tax basis due to LLC Unit redemptions[157][158] Contractual Obligations, Commitments and Contingencies Total contractual obligations reached $310.9 million, primarily from operating leases, debt, and TRA liabilities Contractual Obligations as of June 30, 2023 (in thousands) | Type of Obligation | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | | :------------------------------ | :------- | :--------------- | :-------- | :-------- | :---------------- | | Operating leases | $80,528 | $10,843 | $23,054 | $22,846 | $23,785 | | Debt obligations payable | $81,250 | $8,125 | $17,500 | $55,625 | — | | Interest expense | $14,923 | $5,649 | $8,272 | $1,002 | — | | Liabilities under the tax receivable agreement | $134,159 | $463 | $32,806 | $16,076 | $84,814 | | Total | $310,860 | $25,080 | $81,632 | $95,549 | $108,599 | - The Company has a $50 million revolving credit facility, with nothing drawn as of June 30, 2023[161] Critical Accounting Policies No significant changes to critical accounting policies have occurred, with minor adjustments to revenue estimation - The Company adjusted techniques for estimating revenues during the period, with an insignificant effect on reported financial results[163] - No significant changes to critical accounting policies have occurred since the December 31, 2022, Annual Report on Form 10-K[163] Recent Accounting Pronouncements This section refers to Note 2 for details on recent accounting pronouncements, including the LIBOR to SOFR transition - Refer to Note 2 for details on recently adopted accounting pronouncements, including ASU 2020-04 (Reference Rate Reform)[164] Item 3. Quantitative and Qualitative Disclosures About Market Risk No material changes to market risk exposure have occurred since the previous Annual Report on Form 10-K - No material changes to market risk exposure have occurred since the previous Annual Report on Form 10-K[165] Item 4. Controls and Procedures Disclosure controls and procedures were effective, with no material changes to internal control during the quarter - Disclosure controls and procedures were effective as of June 30, 2023[166] - No material changes to internal control over financial reporting occurred during the quarter ended June 30, 2023[167] PART II This part addresses legal proceedings, risk factors, equity sales, defaults, and other required disclosures Item 1. Legal Proceedings Information on legal proceedings is incorporated by reference from Note 12, with no material adverse effect expected - Information on legal proceedings is incorporated by reference from Note 12. Litigation[168] Item 1A. Risk Factors No material changes to risk factors have occurred since the Annual Report on Form 10-K for the fiscal year ended December 31, 2022 - No material changes to risk factors have occurred since the Annual Report on Form 10-K for the fiscal year ended December 31, 2022[169] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities occurred, but LLC Units are redeemable for Class A common stock - No unregistered sales of equity securities occurred[170] - LLC Units are redeemable for Class A common stock on a one-for-one basis, with corresponding Class B common stock cancellation[170] Item 3. Defaults Upon Senior Securities No defaults upon senior securities were reported by the Company - No defaults upon senior securities were reported[171] Item 4. Mine Safety Disclosures This item is not applicable to the Company's operations - This item is not applicable[172] Item 5. Other Information No other information was reported under this item - No other information was reported[173] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including agreements, CEO/CFO certifications, and XBRL data files - Exhibit 10.1 is an Agreement dated April 26, 2023, between Goosehead Insurance and P. Ryan Langston[175] - Certifications of the Chief Executive Officer and Chief Financial Officer are included pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[175] - XBRL Instance, Schema, Calculation, Definition, Label, and Presentation Linkbase Documents are filed[175] Signatures The report is duly signed by the Chairman, CEO, and CFO of Goosehead Insurance, Inc. on July 26, 2023 - The report was signed by Mark E. Jones, Chairman and Chief Executive Officer, and Mark E. Jones, Jr., Chief Financial Officer, on July 26, 2023[178]