The following discussion contains references to periods prior to The Offering, including January through April 2018 and calendar year 2017, which represents the consolidated and combined financial results of our predecessor Goosehead Financial, LLC and its subsidiaries Texas Wasatch Insurance Services, LP, Goosehead Insurance Agency, LLC and its affiliates Goosehead Management, LLC and Texas Wasatch Insurance Holdings Group, LLC.
The following discussion contains references to the years ended December 31, 2018 and December 31, 2017.
Commissions and Agency fee revenues increased 36% from 2017 to $36.7 million
Corporate Channel Adjusted EBITDA increased 18% from 2017 to $7.5 million, or 22% of Corporate Channel revenues
Franchise Channel Adjusted EBITDA increased 84% from 2017 to $8.6 million, or 33% of Franchise channel revenues
Outside of Texas as of December 31, 2018, 168 operating franchisees had less than one year of tenure and 87 had greater than one year of tenure.
*Adjusted EBITDA and Adjusted EPS are non-GAAP measures. Reconciliation of Adjusted EBITDA to net income (loss) and Adjusted EPS to EPS, the most directly comparable financial measures presented in accordance with
GAAP, are set forth in the "Key performance indicators" section of Management’s discussion and analysis of financial condition and results of operations of this Form 10-K.
Investment in growth. We continue to invest in expanding our national footprint, increasing our revenue producing headcount, and increasing the level of support provided to our salespeople. Our ability to attract and retain top Corporate Channel sales agents and franchise owners, ramp up new agent productivity, and retain existing and future Policies in Force are key to continued profitable growth.
Investment in technology. We continue to develop and invest in our technology platform to drive scalability, adaptability, and efficiency in both the Corporate Channel and Franchise Channel. We believe our significant proprietary investment in our technology is a key competitive advantage that supports our growth rate and operating margins.
Continued retention of existing Book of Business. We have made significant progress in recent years in Client Retention metrics, and maintaining these high levels of Client Retention is key to future profitability. A key lever in driving Client Retention is selling multiple lines of business to clients at the point of initial sale. In our Corporate Channel, we have made significant progress in recent years in this area. We expect to continue to maintain our high levels of cross-selling in the Corporate Channel, and we expect to see improvement in our Franchise Channel as we bring best demonstrated practices to our field of Franchisees.
Increase in margins as business shifts from new to renewal. Because we are entitled to a higher percentage of revenue after the first term of a policy and the higher level of back-office support needed during the first term of an insurance policy, the Company begins to see higher levels of profitability on Renewal Revenue. We will focus simultaneously on converting New Business Revenue to Renewal Revenue through our retention efforts, and on continuing to grow New Business Revenue that will convert and allow us to expand our margins in future periods.
Seasonality and cyclicality of housing market conditions. The majority of our new accounts are sourced by referral sources tied to home closing transactions. Major slowdowns in the various housing markets Goosehead serves could impact our ability to generate new business. We experience seasonality and revenue related to the sale of insurance policies throughout the course of a calendar year that is tied to the seasonality of new home sales. Revenue from home insurance leads is higher from April to August and lower from October through January. While this can impact month-to-month or quarter-to-quarter results, we expect productivity to increase year-over-year.
Goosehead Insurance, Inc. was formed for the purpose of the Offering and has engaged to date only in activities related to Goosehead Financial, LLC. Goosehead Insurance, Inc. is a holding company and its sole material asset is a controlling ownership and profits interest in Goosehead Financial, LLC. All of our business is conducted through Goosehead Financial, LLC and its consolidated subsidiaries and affiliates, and the financial results of Goosehead Financial, LLC and its consolidated subsidiaries are included in the consolidated financial statements of Goosehead Insurance, Inc. Goosehead Financial, LLC is currently taxed as a partnership for federal income tax purposes and, as a result, its members, including Goosehead Insurance, Inc., pay taxes with respect to their allocable shares of its net taxable income.
In 2018, revenue increased by 41% to $60.1 million from $42.7 million in 2017. We discuss below the breakdown of our revenue by stream and line of business.
Employee compensation and benefits. Employee compensation and benefits is our largest expense and consists of (a) base compensation comprising salary, bonuses and benefits paid and payable to employees and (b) equity-based compensation associated with the grants of restricted interest awards to senior employees. We expect to continue to experience a general rise in compensation and benefits expense commensurate with expected growth in headcount and with the need to maintain competitive compensation levels as we expand geographically and create new products and services.
Our compensation arrangements with our employees contain a significant bonus component driven by the results of our operations. Therefore, as our revenues, profitability and the amount of incentive fees earned by our customized separate accounts and specialized funds increase, our compensation costs rise.
For the year ended December 31, 2018, we had $509.0 million in Total Written Premium, representing a 49% increase, compared to $342.3 million for the year ended December 31, 2017. The following table shows Total Written Premium by channel for the years ended 2018 and 2017 (in thousands).
NPS has increased to 89 as of December 31, 2018 from 86 as of December 31, 2017, primarily driven by the service team’s continued focus on delivering highly differentiated service levels.
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.
For the year ended December 31, 2018, New Business Revenue grew 54% to $19.4 million, from $12.6 million for the year ended December 31, 2017. Growth in New Business Revenue is driven by an increase in Corporate Channel sales agent headcount of 50% and growth in franchises in the Franchise Channel of 57%.
Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted EPS are not measures of financial performance under GAAP and should not be considered substitutes for net income or earnings per share, which we consider to be the most directly comparable GAAP measure. 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. Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted EPS have limitations as analytical tools, and when assessing our operating performance, you should not consider Adjusted EBITDA, Adjusted EBITDA Margin, or Adjusted EPS in isolation or as substitutes for net income, earnings per share or other consolidated income statement data prepared in accordance with GAAP. Other companies may calculate Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted EPS differently than we do, limiting their usefulness as comparative measures.
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 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 $4.1 million, or 38%, to $14.8 million for the year ended December 31, 2018, from $10.7 million for the year ended December 31, 2017, driven by Franchise Channel Adjusted EBITDA growth of $3.9 million and by Corporate Channel Adjusted EBITDA growth of $1.2 million.
For the year ended December 31, 2018, Adjusted EBITDA Margin was 25% compared to 25% for the year ended December 31, 2017, primarily driven by Corporate Channel Adjusted EBITDA Margin compression, offset by Franchise Channel Adjusted EBITDA Margin expansion. Corporate Channel Adjusted EBITDA Margin compression can be attributed to increased expenses driven by a 50% increase in Corporate Channel sales agent headcount and investments in technology. As these new sales agents ramp-up production and begin to receive Renewal Revenue (Corporate), we expect them to contribute to future Corporate Channel Adjusted EBITDA Margin
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 to assume a single class of stock (Class A) and assuming non-controlling interest does not exist. Adjusted EPS is a useful measure to management because it eliminates the impact of items that do not relate to business performance and helps compare companies that may not have a dual-share class structure.
(1) Adjusted EBITDA Margin is calculated as Adjusted EBITDA divided by Total Revenue ($14,752/$60,148) and ($10,718/$42,711) for the year ended December 31, 2018 and 2017.
(1) Calculated as the income prior to the Reorganization Transactions divided by the sum of Class A and Class B shares at the time of IPO [ $4.4 million / ( 13.5 million + 22.7 million ). See "Item 8. Financial statements and supplementary data."
(4) Calculated as equity-based compensation divided by the weighted average of Class A and Class B shares outstanding during the period [ $27.1 million / ( 13.6 million + 22.7 million )]
Renewal Revenue (Corporate) increased by $3.2 million, or 21%, to $18.4 million for the year ended December 31, 2018 from $15.2 million for the year ended December 31, 2017. These increases are primarily attributable to an increase in the number of policies in the renewal term at December 31, 2018 compared to December 31, 2017.
Revenue from Contingent Commissions in the Franchise Channel increased $0.9 million, or 60%, to $2.4 million for the year ended December 31, 2018 from $1.5 million for the year ended December 31, 2017. The increase is primarily attributable to the increase in Total Written Premium for year ended December 31, 2018 compared to the year ended December 31, 2017.
Franchise Revenues consist of Royalty Fees, Initial Franchise Fees, and interest income.
Revenue from Renewal Royalty Fees increase by $4.4 million, or 57%, to $12.1 million, for the year ended December 31, 2018 from $7.7 million for the year ended December 31, 2017. The increase in revenue from Renewal Royalty Fees was primarily attributable to an increase in the number of policies in the renewal term, and the higher Royalty Fee rate on renewal business compared to new business (50% vs. 20%, respectively).
Employee compensation and benefits expenses increased by $33.7 million, or 137%, to $58.3 million for 2018 from $24.5 million for 2017. This was primarily attributable to a $23.9 million increase in Class B unit compensation (of which $19.8 million was non-cash vesting of certain Pre-IPO LLC members' equity), a $949 thousand increase in non-cash stock option expense and an increase in total headcount from 2017 to 2018.
General and administrative expenses increased by $4.5 million, or 52%, to $13.1 million for 2018 from $8.6 million for 2017. This increase was attributable to $1.4 million of expenses related to operating as a public company, an increase of $832 thousand in occupancy costs related to our first full year at the Company's new headquarters in Westlake, Texas. The remainder of the increase is attributable to higher costs associated with an increase in operating franchises and employees.
Depreciation and amortization increased by $588 thousand, or 67%, to $1.5 million for 2018 from $0.9 million for 2017. This increase was primarily attributable to the increase in fixed assets during the same period, including a full year of depreciation on the fixed assets put in place in connection with the opening of the Company's corporate headquarters in Westlake, Texas. Additionally, fixed assets increased with continued expansion in the Company's Chicago, Illinois and Henderson, Nevada offices.
Interest expenses increased by $1.8 million, or 72%, to $4.3 million for 2018 from $2.5 million for 2017. This increase was attributable to an increase in the average note payable amount outstanding throughout year, as well as $871 thousand of origination fees from previous debt immediately recognized upon refinance on August 3, 2018, partially offset by the Company refinancing the existing term loan with a lower interest rate.
Franchise Channel Adjusted EBITDA is segment earnings before interest, income taxes, depreciation and amortization, adjusted to exclude other non-operating items.
Neither of Franchise Channel Adjusted EBITDA or Corporate Channel Adjusted EBITDA includes Class B share compensation, which is recorded at the consolidated level.
On October 27, 2016, Goosehead Insurance Holdings, LLC, as borrower representative, entered into a credit agreement (as subsequently amended, the “Credit Agreement”) with Madison Capital Funding LLC, as agent, and the lenders party thereto, consisting of a $3.0 million revolving credit facility (the “Revolving Credit Facility”) and $30.0 million term loan (the “Initial Term Loan”) used to pay off existing debt and fund a distribution to members. On July 14, 2017, Goosehead Insurance Holdings, LLC and the other loan parties entered into the first amendment to the Credit Agreement pursuant to which Goosehead Insurance Holdings, LLC borrowed an additional $10.0 million term loan (the “First Additional Term Loan”) used to fund a distribution to members. On December 20, 2017, the Company executed the second amendment to the Credit Agreement to borrow an additional $10.0 million term loan (together with the Initial Term Loan and the First Additional Term Loan, the “Term Loans”) for payment of a dividend to stockholders and to extend the maturity date of the Term Loans by one year. On April 4, 2018, Goosehead Insurance Holdings, LLC and the other loan parties amended and restated the Credit Agreement to permit the reorganization transactions in connection with the Offering.
On August 3, 2018, Goosehead Insurance Holdings, LLC, as borrower, entered into a credit agreement (the “New
Credit Agreement”) with JPMorgan Chase Bank, N.A., as agent, and the lenders party thereto, consisting of a
$13.0 million revolving credit facility (the “New Revolving Credit Facility”) and $40.0 million term loan (the “New
Interest on amounts drawn under the New Revolving Credit Facility accrues interest on amounts drawn at an initial interest rate of LIBOR plus 2.50%, then at an interest rate determined by the Company's leverage ratio for the preceding period. At December 31, 2018, the Company had $10.0 million drawn against the revolver. At December 31, 2018, the Company had a letter of credit of $417 thousand applied against the maximum borrowing availability, thus amounts available to draw totaled $2.6 million. The revolving credit facility is collateralized by substantially all the Company’s assets, which includes rights to future commissions.
Interest on the New Term Loan is calculated initially at LIBOR plus 2.50%, then at an interest rate determined by the Company’s leverage ratio for the preceding period. The aggregate principal amount of the New Term Loan as of December 31, 2018 is $39.0 million, payable in quarterly installments of (x) $500 thousand from the fiscal quarter ending March 31, 2019 through the fiscal quarter ending June 30, 2019, (y) $750 thousand from the fiscal quarter ending September 30, 2019 through the fiscal quarter ending June 30, 2020, and (z) $1,250 thousand from the fiscal quarter ending September 30, 2020 through the fiscal quarter ending June 30, 2021, with a balloon payment of the entire unpaid principal amount of the term note on August 3, 2021.The New Term Loan is collateralized by substantially all the Company’s assets, which includes rights to future commissions.
The New Credit Agreement contains covenants that, among other things, restrict our ability to make certain restricted payments (including a covenant that restricts Goosehead Financial, LLC’s ability to make dividends or other distributions to Goosehead Insurance, Inc.), incur additional debt, engage in certain asset sales, mergers, acquisitions or similar transactions, create liens on assets, engage in certain transactions with affiliates, change our business or make investments. We may voluntarily prepay in whole or in part the outstanding principal under our New Term Loans at any time prior to the maturity date. In addition, the New Credit Agreement contains financial covenants requiring us to maintain our fixed charge coverage ratio at or above 1.20 to 1.00 and total debt to EBITDA (as defined in the New Credit Agreement) ratio at or below 4.50 to 1.0 (with a step down to 4.00 to 1.00 with respect to any fiscal quarter ending on or after September 30, 2019). Pursuant to the New Credit Agreement, a change of control default will be triggered when (x) any person or group other than Mark Jones and Robyn Jones or their controlled investment affiliates becomes the beneficial owner, directly or indirectly, of more than 50% of the aggregate ordinary voting power represented by our outstanding equity interests, unless Mark Jones and Robyn Jones or their controlled investment affiliates have the ability to elect or designate for election at least a majority of our board of directors or (y) Goosehead Insurance, Inc. ceases to directly own at least 35% of Goosehead Financial, LLC or Goosehead Insurance, Inc. ceases to be the managing member of Goosehead Financial, LLC. Such a default could result in the acceleration of repayment of our and our subsidiaries’ indebtedness, including borrowings under the New Revolving Credit Facility if not waived by the lenders under the New Credit Agreement. The failure by Mark Jones and Robyn Jones to maintain either a minimum voting interest in us or the ability to elect or designate for election at least a majority of our board of directors could trigger a change of control default under our New Credit Agreement.
As of December 31, 2018, the Company was in compliance with these covenants.
tenant reimbursements at the Westlake, Texas headquarters during 2017, a $0.7 million change in commissions and agency fees receivable, and a $0.1 million change in accounts payable and accrued expenses balance.
Net cash used in business investment activities was $2.2 million for 2018 as compared to net cash used in business investment activities of $6.1 million for 2017. This decrease in net cash used in business investment activities was primarily attributable to fixed asset growth directly related to headcount increases, additional office space buildout in Chicago, Austin, and The Woodlands, and the buildout of the new headquarters in Westlake, Texas during the 2017.
Net cash provided by financing activities was $5.6 million for 2018 as compared to net cash used in financing activities of $6.2 million for 2017. This increase in net cash provided by financing activities is due to activity related to the Offering, during which $86.8 million was received as proceeds net of offering costs. This increase in net cash provided by financing activities is offset by an increase in distributions of $54.5 million. The remaining increase is attributable to the refinancing of the existing term loan and revolving credit facility, leading to an increase in repayments of notes payable of $50.3 million, offset by an increase in proceeds received from notes payable of $30.0 million.
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.
The following table represents our contractual obligations as of December 31, 2018, aggregated by type.
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 $1.6 million for year ending December 31, 2018 and $1.0 million for the year ending December 31, 2017.
The Company refinanced its credit facilities on August 3, 2018 in the form of a $40.0 million term loan and $13.0 million revolving credit facility, of which $10.0 million was drawn as of December 31, 2018. The refinancing decreased the Company's borrowing costs by a minimum of 300 bps and shortened the term loan maturity to 3 years.
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 December 31, 2018.
See "Item 7. Management's discussion and analysis of financial condition and results of operation - Tax receivable agreement."
Commissions, fees and Contingent Commissions from Carriers, net of estimated cancellations, are recognized as revenue when the data necessary to reasonably determine such amounts is made available to the Company.
During the 2018, as a result of the redemption of LLC Units, we recognized liabilities totaling $1.7 million relating to our obligations under the Tax Receivable Agreement.
Consolidated statements of income for the years ended December 31, 2018 and December 31, 2017
Consolidated statement of cash flows for the years ended December 31, 2018 and December 31, 2017
To the stockholders and the Board of Directors of Goosehead Insurance, Inc.
The operations of the franchise units are recorded in Goosehead Insurance Agency, LLC (“GIA”)-a Delaware limited liability company headquartered in Westlake, TX and operating since 2011. GIA is 100% owned by Goosehead Insurance Holdings ("GIH"). Franchisees are provided access to insurance Carrier Appointments, product training, technology infrastructure, client service centers and back office services. During years ended December 31, 2018 and 2017, the Company sold 214 and 140 franchise locations, respectively and had 457 and 292 operating franchise locations as of December 31, 2018 and 2017, respectively. No franchises were purchased by the Company during the years ended December 31, 2018 and 2017.
GSHD was authorized to issue two classes of common stock. 9,810 thousand shares of Class A common stock were issued pursuant to the Offering, including the underwriters' over-allotment option. 22,747 thousand shares of Class B common stock were issued to the Pre-IPO LLC Members in an amount equal to the number of LLC Units held by each such Pre-IPO LLC Member in exchange for certain management rights of GF. Each share of Class A common stock and Class B common stock entitles its holder to one vote per share on all matters submitted to a vote of GSHD's stockholders. Each share of Class B common stock can be exchanged for one share of Class A common stock or, at GSHD's discretion, a cash payment equal to the volume weighted average market price of one share of Class A common stock, thus canceling the share of Class B common stock on a one-for-one basis.
The 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.
In the capacity as an insurance broker, the Company will typically collect the first premium payment from the insured and will then remit the premiums to insurance carriers. The Company holds unremitted insurance premiums in a fiduciary capacity until they are disbursed.
Upon issuance of a new policy, the Company typically collects the first premium payment from the insured, and then will remit the full premium amount to the insurance carriers. The insurance carriers collect the remaining premiums directly from the insureds and remit the applicable commissions to the Company. Accordingly, as reported in the accompanying consolidated balance sheet, “commissions” are receivables from the insurance carriers. These direct-bill arrangements consist of a high volume of transactions with small premium amounts, with the billing controlled by the insurance carriers. The income statement and balance sheet effects of the commissions are recorded when collectability can be reasonably assured and determined from the commission statement and the commission payment received from the insurance carriers. The payment and commission statements are generally received within 30 days of the effective date of the policy. During 2018, the Company wrote with 85 insurance carriers, of which 30 provided national coverage. In 2018, two carriers represented more than 10% of total revenue at 17% and 11%. In 2017, three carriers represented more than 10% of total revenue at 18%, 15% and 11%.
Management establishes the policy cancellation reserve based on historical and current data on cancellations and records commissions and agency fees receivable net of the cancellations reserve. The reserve was $386 thousand and $337 thousand at December 31, 2018 and 2017, respectively.
The Company records agency fees receivable net of an allowance for estimated uncollectible accounts to reflect any loss anticipated for the related agency fees receivable balances and charge to bad debts. The agency fees receivable balance consists of numerous small-balance, homogenous accounts. The Company calculates the allowance based on collection history and writes off all uncollected agency fee balances outstanding over ninety days.
The Company collects and reconciles commissions and agency fees on behalf of the franchisees, then calculates the Company’s royalty fees. Royalty fees are recorded monthly when the amounts can be determined from the carrier commission statements reconciled by the Company. The royalty fees are secured by the commissions of the franchisee with no historical losses incurred for uncollectible royalty fees. As such, there is no allowance for doubtful accounts relating to royalty fees.
The Company carries fixed assets at cost, less accumulated depreciation, as stated in the accompanying consolidated balance sheets. Depreciation of property and equipment is calculated using the straight-line method over the estimated useful life of five years for furniture, fixtures and equipment and three years for computer equipment. Leasehold improvements are also amortized using the straight-line method and are amortized over the shorter of the remaining term of the lease or the useful life of the improvement. Expenditures for improvements are capitalized, and expenditures for maintenance and repairs are expensed as incurred. Upon sale or retirement, the cost and related accumulated depreciation and amortization is removed from the related accounts, and the resulting gain or loss, if any, is reflected in income.
When the Company collects initial franchise fees prior to the franchisee being trained and fully on boarded, the amount collected is recognized as unearned revenue until the Company fulfills its performance obligation and is able to recognize the revenue.
Deferred financing costs incurred in connection with the issuance of notes payable are capitalized and amortized to interest expense in accordance with the related debt agreements. Deferred financing costs are included as a reduction in notes payable on the accompanying consolidated balance sheets.
Commissions and contingent commissions from insurance carriers, net of estimated cancellations, are recognized as revenue when the data necessary to reasonably determine such amounts is made available to the Company. Billing is controlled by the insurance carriers, therefore these types of revenue cannot be reasonably determined until the cash or the related policy detail is received by the Company from the insurance carrier. Subsequent commission adjustments, such as endorsements and policy changes, are recognized when the adjustments become known. Agency Fees are recognized as revenue on the date coverage is agreed upon with the client and placed with the Carrier.
The Company expenses advertising costs as they are incurred. Advertising expense for the years ended December 31, 2018 and 2017 was $521 thousand and $270 thousand.
Revenue from Contracts with Customers (ASU 2014-09): This standard supersedes the existing revenue recognition guidance and provides a new framework for recognizing revenue. The core principle of the standard is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The new standard also requires significantly more comprehensive disclosures than the existing standard. Guidance subsequent to ASU 2014-09 has been issued to clarify various provisions in the standard, including principal versus agent considerations, identifying performance obligations, licensing transactions, as well as various technical corrections and improvements. This standard may be adopted using either a retrospective or modified retrospective method. According to the superseding standard ASU 2015-14 that deferred the effective dates of the preceding, and because the Company is filing as an emerging growth company, the standard became effective for the Company January 1, 2019, but the Company is not required to present the impacts of the standard until it files its annual report on Form 10-K for the fiscal year ended December 31, 2019. The Company will continue to refine throughout 2019 the impact this standard is will have on the consolidated financial statements and expects to adopt the modified retrospective method. The primary anticipated impacts of the new standard to the Company's revenues and expenses are as follows:
Franchise revenues, including franchise fees are also likely to change under the new guidance. Currently, initial franchise fees are recognized as revenue in the month the agency owner or initial agency representative attends training. Under the new guidance, the Company anticipates these revenues will likely be recognized over the contract term, typically 10 years.
The Company also expects to recognize an asset for the costs to obtain and/or fulfill a contract and to amortize on a systematic basis that is consistent with the transfer of the services to which the asset relates.
adoption is permitted. The standard will become effective for the Company January 1, 2020. The Company is currently evaluating the impact this standard will have on the Company's consolidated financial statements. However we expect the impact of this guidance on our consolidated financial statements could be significant, as our future minimum operating lease commitments totaled $24.0 million as of December 31, 2018.
The balance of Franchise fees receivable included in Receivable from franchisees in the consolidated balance sheets consisted of the following (in thousands):
Depreciation expense was $1.3 million and $810 thousand for the years ended December 31, 2018 and 2017, respectively.
Amortization expense was $117 thousand and $66 thousand for the years ended December 31, 2018 and 2017, respectively.
The $13.0 million revolving credit facility accrues interest on amounts drawn at an initial interest rate of LIBOR plus 2.5%, then at an interest rate determined by the Company's leverage ratio for the preceding period. At December 31, 2018, the Company had $10.0 million drawn against the revolver. At December 31, 2018, the Company had a letter of credit of $417 thousand applied against the maximum borrowing availability, thus amounts available to draw totaled $2.6 million. The revolving credit facility is collateralized by substantially all the Company’s assets, which includes rights to future commissions. Interest payment on the revolving credit facility totaled $198 thousand for the year ended December 31, 2018.
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.
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 $1.6 million and $1.0 million for the years ended December 31, 2018 and 2017.
The following is a schedule of future minimum lease payments as of December 31, 2018:
GSHD has determined there are no material uncertain tax positions as of December 31, 2018.
GSHD has a total of 13,800 thousand shares of its Class A common stock outstanding at December 31, 2018. Each share of Class A common stock holds economic rights and entitles its holder to one vote per share on all matters submitted to a vote of the stockholders of GSHD.
GSHD has a total of 22,486 thousand shares of its Class B common stock outstanding at December 31, 2018. Each share of Class B common stock has no economic rights but entitles its holder to one vote per share on all matters submitted to a vote of the stockholders of GSHD.
On a quarterly basis, GF makes distributions to the LLC Unit holders on a pro rata basis. For the year ended December 31, 2018, GF made distributions of $3.9 million, of which $3.0 million were made to Pre-IPO LLC Members. The remaining $0.9 million was made to GSHD and was eliminated in consolidation.
Under the amended and restated Goosehead Financial, LLC Agreement, the Pre-IPO LLC Members have the right, from and after the completion of the Offering (subject to the terms of the amended and restated Goosehead Financial, LLC Agreement), to require GSHD to redeem all or a portion of their LLC Units for, at GSHD's election, newly-issued shares of Class A common stock on a one-for-one basis or a cash payment equal to the volume weighted average market price of one share of GSHD's Class A common stock for each LLC Unit redeemed (subject to customary adjustments, including for stock splits, stock dividends and reclassifications) in accordance with the terms of the amended and restated Goosehead Financial, LLC Agreement. Additionally, in the event of a redemption request by a Pre-IPO LLC Member, GSHD may, at its option, effect a direct exchange of cash or Class A common stock for LLC Units in lieu of such a redemption. Shares of Class B common stock will be cancelled on a one-for-one basis if GSHD, at the election of a Pre-IPO LLC Member, redeems or exchanges LLC Units of such Pre-IPO LLC Member pursuant to the terms of the amended and restated Goosehead Financial, LLC Agreement. Except for transfers to GSHD pursuant to the amended and restated Goosehead Financial, LLC Agreement or to certain permitted transferees, the Pre-IPO LLC Members are not permitted to sell, transfer or otherwise dispose of any LLC Units or shares of Class B common stock.
During 2018, an aggregate of 261 thousand LLC Units were redeemed by the non-controlling interest holders. Pursuant to the GF LLC Agreement, we issued 261 thousand shares of Class A common stock in connection with these redemptions and received 261 thousand LLC Interests, increasing our ownership interest in GF LLC. Simultaneously, and in connection with these redemptions, 261 thousand shares of Class B common stock were surrendered and cancelled.
The following table sets forth the calculation of unaudited pro forma basic EPS based on unaudited pro forma net income attributable to GSHD for the year ended December 31, 2017, divided by the unaudited pro forma basic weighted average number of Class A common stock as of December 31, 2017 (in thousands, except per share amounts). Unaudited pro forma diluted earnings per share of Class A common stock is computed by dividing unaudited pro forma net income attributable to GSHD by the unaudited pro forma weighted average number of shares of Class A common stock outstanding adjusted to give effect to unaudited pro forma potentially dilutive securities.
In April 2018, GSHD adopted the Omnibus Incentive Plan, which reserved 1.5 million shares of Class A Common Stock for delivery to directors, officers, and managing directors in connection with future awards granted under the plan. GSHD also adopted an Employee Stock Purchase Plan, which reserved 20 thousand shares of Class A Common Stock for delivery to employees. There were 5 thousand shares outstanding related to the Employee Stock Purchase Plan at December 31, 2018.
(1) Excluded from general and administrative expenses is $135 thousand of state franchise tax that is not calculated based on income.
Any future extraordinary dividends will be declared at the sole discretion of GF's managing members with respect to GF and the Company's board of directors with respect to GSHD. In determining whether a future extraordinary dividend will be declared by the Company, the board of directors may, at its sole discretion, consider the following: the Company's financial condition and operating results, the Company's available cash and current and anticipated
The following tables sets forth certain unaudited quarterly results of operations for the years ended December 31, 2018 and 2017 (in thousands, except per share data). The sum of the four quarters may differ from the annual amount due to rounding: