Our headquarters is located in leased offices in Westlake, Texas. The lease consists of approximately 108,000 square feet and expires in January 2029. As of December 31, 2019, our company-owned insurance brokerage business leases approximately 150,124 square feet of office space in Texas, Nevada, and Illinois under eight leases. These offices are typically located in small office parks, generally with lease terms of five to ten years. We believe that all of our properties and facilities are well maintained.
The following selected consolidated historical financial data of GSHD should be read in conjunction with, and are qualified by reference to, "Item 1A. Risk factors," "
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Item 6. Selected financial data” and our financial statements and the related notes and other financial information included elsewhere in this Annual Report. 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 Annual Report.
•Total revenue increased 29% from 2018 to $77.5 million; if reported under ASC 605, total revenue would have grown 40% to $84.1 million.
•Net income increased by $29.0 million from 2018 to $10.4 million; if reported under ASC 605, net income would have increased to $15.3 million.
•Policies in Force increased 44% from December 31, 2018 to 482,000 at December 31, 2019.
•Corporate sales headcount increased 49% from December 31, 2018 to 248 at December 31, 2019.
◦In Texas as of December 31, 2019, 18 operating franchises had less than one year of tenure and 180 operating franchisees had greater than one year of tenure.
•Continued penetration of Franchise Channel into existing markets. We will continue to market actively for new franchises in our established markets, including Texas, which represent over 90% of the U.S. population. We are now licensed with the necessary state departments of commerce and insurance and registered as a franchisor in all of the lower 48 states in the U.S.
•Increase in margins as business shifts from new to renewal. Because we are entitled to a higher percentage of Royalty Fees 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.
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 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 2019, revenue increased by 29% to $77.5 million from $60.1 million in 2018. If 2019 results were reported under ASC 605, total revenue would have grown 40% to $84.1 million in 2019. Total Written Premium growth, which is the best leading indicator of future revenue growth, was 45% to $739.0 million from $509.0 million in 2018. 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 in the "Key performance indicators" section of Management’s discussion and analysis of financial condition and results of operations of this Form 10-K.
•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.
•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.
The Company's primary source of revenue is through the placement of insurance policies. We are paid a percentage of the premium from the Carriers in the form of New Business Commissions and, in states which allow it, we charge Agency Fees for the placement of the policy. For policies placed by the Franchise Channel, we receive 20% of the commissions and fees received as New Business Royalties during the first term of the policy. All clients are serviced by our world-class service centers, allowing for predictable retention of our Book of Business, which has historically been 88%. All commissions received in the Corporate Channel after the first term of the policy are recognized as Renewal Commissions, which are higher margin due to lower servicing costs. For all policies that renew in our Franchise Channel, we receive 50% of the commissions received from the Carrier as Renewal Royalty Fees, creating a mechanical increase in revenue of 120% if we renew at historical rates, and higher margin due to
lower servicing costs on higher revenue. For this reason, and because we are placing an increasing percentage of Total Written Premium in the Franchise Channel, Core Revenue growth will lag that of Total Written Premium.
The Company charges every franchise an Initial Franchise Fee, which, on a cash flow basis, covers our costs to recruit, train, onboard, and support the franchise for the first year. The Initial Franchise Fee is determined by the state of the Franchise location and the payment terms, as follows:
Historically, the Company has recognized the pay-in-full amount as revenue when the franchise completes initial training because that is when those fees are non-refundable. Under Topic 606, however, we must recognize the revenue over the 10-year life of the contract. The change in revenue recognition has no impact on the total cash flow or overall economics of the business. The table below shows what the impact of Topic 606 on Initial Franchise Fees (in thousands).
If the franchise elects the payment plan, the difference between the pay-in-full and the payment plan amounts ($20 thousand in Texas, Louisiana, and Oklahoma and $15 thousand in all other states) is recognized as Interest Income using the interest rate method over the 5-year term of the payment plan.
The table below shows what the impact of Topic 606 on Contingent Commissions (in thousands).
Although Contingent Commissions can vary significantly from year-to-year, when viewed over several years Contingent Commissions received have historically represented approximately 0.94% of Total Written Premium at year-end. Most of our Contingent Commissions are earned in the year prior to when they are received. The Contingent Commissions earned in 2018, but paid in 2019 were above the historical average as a percentage of premium at 1.23%. For the year ended December 31, 2019, $5.4 million of Contingent Commissions were earned (below our historical average as a percentage of premium), of which $3.6 million was still receivable at December 31, 2019. As such, we expect the Contingent Commissions paid in the first quarter of 2020 to also be lower than the historical average. However, the majority of the Contingent Commission plans with our Carriers remain in place from year to year, and the plans in place restart at the beginning of each plan year, so we don't expect this this trend to continue.
We are a distributor of insurance policies in a range of primarily personal lines of business including homeowner’s insurance, automotive, dwelling property insurance, flood, wind and earthquake insurance, excess liability or umbrella insurance, specialty lines insurance (motorcycle, recreational vehicle, and other insurance), commercial lines insurance (general liability, property and auto insurance for small businesses) and life insurance. The following table sets forth our Total Written Premium placed by line of business by amount and as a percentage of our Total Written Premium for the periods indicated (in thousands):
General and administrative expenses. General and administrative expenses include travel, accounting, legal and other professional fees, commissions, placement fees, office expenses, depreciation and other costs associated with our operations. Our occupancy-related costs and professional services expenses, in particular, generally increase or decrease in relative proportion to the number of our employees and the overall size and scale of our business operations. Expenses allocated to the Segments related to our service centers and other overhead are applied to the appropriate Segment using a transfer pricing methodology that seeks to maximize the scale efficiencies of our business by sharing certain expenses across the two Segments. These shared expenses are then allocated between the two Segments based on certain cost drivers related to each expense. Examples of specific expenses and their cost drivers include, but are not limited to: service team compensation costs are allocated based on the number of cases processed for each Segment, our rent expense by location is allocated based on the full time equivalent count and Segment, and our technology charges are allocated based on the number of individual licenses used by each Segment.
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. We believe that Total Written Premium is an appropriate measure of operating performance because it reflects growth of our business relative to other insurance agencies.
For the year ended December 31, 2019, we had $739.0 million in Total Written Premium, representing a 45% increase, compared to $509.0 million for the year ended December 31, 2018. The following table shows Total Written Premium by channel for the years ended 2019 and 2018 (in thousands).
As of December 31, 2019, we had 482,000 Policies in Force compared to 334,000 as of December 31, 2018, representing a 44% increase.
NPS has remained steady at 89 as of December 31, 2019 when compared to December 31, 2018, primarily driven by the service team’s continued focus on delivering highly differentiated service levels.
Client Retention has remained steady at 88% at December 31, 2019 when compared to December 31, 2018, again driven by the service team’s continued focus on delivering highly differentiated service levels. Our retention rate is even stronger on a premium basis. In 2019, we retained 91% of the premiums we distributed in 2018, a modest decrease from premium retention in 2018 of 94% due to lower premium increases from our Carriers during the year.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.
For the year ended December 31, 2019, New Business Revenue grew 30% to $25.2 million, from $19.4 million for the year ended December 31, 2018. Growth in New Business Revenue is driven by an increase in Corporate Channel sales agent headcount of 49% and growth in franchises in the Franchise Channel of 34%.
For the year ended December 31, 2019, Renewal Revenue grew 39% to $30.5 million, from $22.9 million for the year ended December 31, 2018. Growth in Renewal Revenue was driven by Client Retention of 88% at December 31, 2019. As our agent force matures on both the Corporate Channel and the Franchise Channel, the policies they wrote in prior years begins to convert from New Business Revenue to more profitable Renewal Revenue.
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 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. 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 net income, earnings per share 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 increased by $17.7 million, or 36%, to $67.6 million for the year ended December 31, 2019 from $49.9 million for the year ended December 31, 2018. The primary driver of the increase is increases in operating franchises, corporate agent sales headcount, and number of policies in the renewal term from December 31, 2018 to December 31, 2019. If reported under ASC 605, Core Revenue would have increased $17.8 million.
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 decreased by $2.1 million, or 32%, to $4.4 million for the year ended December 31, 2019 from $6.5 million for the year ended December 31, 2018. The primary driver of the decrease is the adoption of ASC 606. If reported under ASC 605, Cost Recovery Revenue would have increased $0.8 million.
Ancillary Revenue increased by $1.7 million, or 44%, to $5.5 million for the year ended December 31, 2019 from $3.8 million for the year ended December 31, 2018. The primary driver of the increase is increases in Total Written Premium from December 31, 2018 to December 31, 2019, offset by the impact of ASC 606. If reported under ASC 605, Ancillary Revenue would have increased $5.4 million.
Adjusted EBITDA increased by $2.8 million, or 19%, to $17.5 million for the year ended December 31, 2019, from $14.8 million for the year ended December 31, 2018, driven by Franchise Channel Adjusted EBITDA growth of $1.8 million and by Corporate Channel Adjusted EBITDA growth of $2.4 million. If reported under ASC 605, Adjusted EBITDA would have been $22.9 million, or an increase of 55%. See “-Certain income statement line items-Effects of Topic 606" for additional information regarding the impact that the adoption of Topic 606 had on income statement line items.
For the year ended December 31, 2019, Adjusted EBITDA Margin was 23% compared to 25% for the year ended December 31, 2018. If reported under ASC 605, Adjusted EBITDA Margin would have been 27%. If reported under ASC 605, margin expansion is primarily driven by Corporate Channel Adjusted EBITDA Margin expansion, Franchise Channel Adjusted EBITDA Margin expansion, and slightly offset by expenses not included in either channel. Corporate Channel Adjusted EBITDA Margin expansion can be attributed to growth in higher margin Renewal Revenue, offset by expenses driven by a 49% increase in Corporate Channel sales agent headcount and investments in technology. As these new sales agents ramp-up production and begin to generate Renewal Revenue (Corporate), we expect them to continue to contribute to further Corporate Channel Adjusted EBITDA Margin expansion. Franchise Channel Adjusted EBITDA Margin expansion is attributed to growth in more profitable Renewal Revenue as a percentage of total revenue and the increase in Contingent Commissions, offset by higher employee compensation and benefits and general and administrative expenses from investments in hiring and technology.
(1) Renewal Commissions, New Business Commissions, Agency Fees, and Contingent Commissions are included in "Commissions and agency fees" as shown on the Consolidated statements of income.
The following tables show a reconciliation from net income to Adjusted EBITDA for the year ended December 31, 2019 and 2018 (in thousands):
The following tables show a reconciliation from basic earnings per share to Adjusted EPS for the year ended December 31, 2019 and 2018. Note that totals may not sum due to rounding:
The following is a discussion of our consolidated results of operations for each of the years ended December 31, 2019 (under ASC 606) and December 31, 2018 (under ASC 605). This information is derived from our accompanying consolidated financial statements prepared in accordance with GAAP.
In 2019, revenue increased by 29% to $77.5 million from $60.1 million in 2018. If reported under ASC 605, 2019 revenue would have increased by 40% to $84.1 million. See “-Certain income statement line items-Effects of Topic 606" for additional information regarding the impact that the adoption of Topic 606 had on income statement line items.
Renewal Commissions increased by $4.6 million, or 25%, to $22.9 million for the year ended December 31, 2019 from $18.4 million for the year ended December 31, 2018. These increases are primarily attributable to an increase in the number of policies in the renewal term at December 31, 2019 compared to December 31, 2018.
Revenue from Contingent Commissions increased by $1.6 million, or 42%, to $5.4 million for the year ended December 31, 2019, from $3.8 million for the year ended December 31, 2018. The increase is primarily attributable to the increase in Total Written Premium for year ended December 31, 2019 compared to the year ended December 31, 2018. If reported under ASC 605, 2019 Contingent Commissions would have increased by 138% to $9.1 million. See “-Certain income statement line items-Effects of Topic 606" for additional information regarding the impact that the adoption of Topic 606 had on income statement line items.
Revenue from Renewal Royalty Fees increase by $7.4 million, or 61%, to $19.5 million, for the year ended December 31, 2019 from $12.1 million for the year ended December 31, 2018. 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).
Revenue from New Business Royalty Fees increased by $2.3 million, or 47%, to $7.1 million for the year ended December 31, 2019 from $4.9 million for the year ended December 31, 2018. The increase in revenue from New Business Royalty Fees was primarily attributable to an increase in the total number of operating franchises at December 31, 2019 compared to December 31, 2018.
Initial Franchise Fee revenue decreased approximately $2.3 million, or 37%, to $3.8 million for the year ended December 31, 2019 from $6.0 million for the year ended December 31, 2018. The primary driver of the decrease in Initial Franchise Fees related to the application of Topic 606, which decreased Initial Franchise Fees by $2.9 million, offset by a larger number of franchises that launched during 2019. Under ASC 605, the Company would recognize Initial Franchise Fees as revenue in the month the agency owner or initial agency representative attended training. Under the new accounting standard, the Company recognizes the Initial Franchise Fee ratably over the 10-year term of the franchise agreement. If reported under ASC 605, Initial Franchise Fee revenue would have increased $0.6 million, or 10%, from the year ended December 31, 2018. See “-Certain income statement line items-Effects of Topic 606" for additional information regarding the impact that the adoption of Topic 606 had on income statement line items.
General and administrative expenses increased by $6.0 million, or 46%, to $19.0 million for 2019 from $13.1 million for 2018. This increase was attributable to $1.5 million of expenses related to operating as a public company, and increases in expenses related to continued development of technology of $1.0 million. The remainder of the increase is attributable to higher costs associated with an increase in operating franchises and employees.
Bad debts decreased by $0.6 million, or 44%, to $0.7 million for 2019 from $1.3 million for 2018. This decrease was primarily attributable to the impact of adopting Topic 606, offset by increases in Agency Fees sold by the company. If reported under ASC 605, bad debts would have increased 40% to $1.8 million. See “-Certain income statement line items-Effects of Topic 606" for additional information regarding the impact that the adoption of Topic 606 had on income statement line items.
Depreciation and amortization increased by $0.5 million, or 32%, to $1.9 million for 2019 from $1.5 million for 2018. 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 additional hiring and lease space taken during the year.
Corporate Channel Adjusted EBITDA is segment earnings before interest, income taxes, depreciation and amortization allocable to the Corporate Channel.
Corporate Channel Adjusted EBITDA increased by $2.4 million, or 32%, to $9.9 million for 2019 from $7.5 million for 2018, primarily attributable to an increase in New Business Commissions and Agency Fees of $3.5 million driven by increased hiring and agent ramp-up, plus an increase in more profitable Renewal Commissions of $4.6 million, offset by employee compensation and benefits from increased hiring of $4.9 million and the impact of adopting Topic 606. If reported under ASC 605, Corporate Channel Adjusted EBITDA would have increased 52% to $11.5 million. See “-Certain income statement line items-Effects of Topic 606" for additional information regarding the impact that the adoption of Topic 606 had on income statement line items.
Franchise Channel Adjusted EBITDA increased by $1.8 million, or 21%, to $10.5 million for 2019 from $8.6 million for 2018, primarily attributable to an increase in New Business Royalty Fees of $2.3 million and Contingent Commissions of $1.1 million from an increase in operating agencies and Total Written Premium, plus an increase in more profitable Renewal Royalty Fees of $7.4 million and offset by the impact of adopting Topic 606. If reported under ASC 605, Franchise Channel Adjusted EBITDA would have increased 67% to $14.3 million. See “-Certain income statement line items-Effects of Topic 606" for additional information regarding the impact that the adoption of Topic 606 had on income statement line items.
Net cash provided by operational activities was $21.2 million for 2019 as compared to net cash provided by operational activities of $10.3 million for 2018. This increase in net cash provided by operational activities was primarily attributable to a $29.0 million increase in net income, offset by a $25.4 million decrease in non-cash equity based compensation. Additionally, $6.3 million of the increase related to changes contract liabilities, $3.7 million of the increase related to a decrease in commissions and agency fees receivable, slightly offset by a $3.5 million related to a increase in receivable from franchisees.
Net cash used in business investment activities was $4.1 million for 2019 as compared to net cash used in business investment activities of $2.2 million for 2018. This increase in net cash used in business investment activities was primarily attributable to fixed asset growth directly related to headcount increases and additional office space buildout during the year.
•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;
(2)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, 2019. The refinancing decreased the Company's borrowing costs by a minimum of 300 bps and shortened the term loan maturity to 3 years. The Company refinanced its credit facilities on March 6, 2020; see "Note 16: Subsequent Events."
(3)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, 2019.
Under the new standard, certain costs to obtain or fulfill a contract that were previously expensed as incurred have been capitalized. The Company capitalizes the incremental costs to obtain contracts primarily related to commission payments. These deferred costs are amortized over the expected life of the underlying franchise fee, and are included in Other assets in the Company's consolidated balance sheet as of December 31, 2019.
In connection with the Offering we entered into a tax receivable agreement with the Pre-IPO LLC Members that will provide for the payment by us to the Pre-IPO LLC Members of 85% of the amount of cash savings, if any, in U.S.
Pursuant to the JOBS Act, an emerging growth company is provided the option to adopt new or revised accounting standards that may be issued by FASB or the SEC either (i) within the same periods as those otherwise applicable to non-emerging growth companies or (ii) within the same time periods as private companies. We intend to continue to take advantage of the exemption for complying with new or revised accounting standards within the same time periods as private companies. Accordingly, the information contained herein may be different than the information you receive from other public companies.
We have audited the accompanying consolidated balance sheets of Goosehead Insurance, Inc. and subsidiaries (the "Company") as of December 31, 2019 and 2018, the related consolidated statements of income, stockholders’ equity, and cash flows, for each of the two years in the period ended December 31, 2019, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
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 operations of the corporate-owned units are recorded in Texas Wasatch Insurance Services, L.P. (“TWIS”)-a Texas limited partnership headquartered in Westlake, TX and operating since 2003. TWIS is a wholly owned subsidiary of GF. The Company had seven corporate-owned locations in operation at December 31, 2019 and 2018.
•The GF limited liability company agreement was amended to, among other things, i) appoint GSHD as the sole managing member of GF and ii) modify the capital structure of GF by reclassifying the interests previously held by Pre-IPO LLC Members into a single new class of non-voting LLC Units.
Following completion of the Reorganization Transactions and the Offering, GSHD owned 37.3% of GF and the Pre-IPO LLC Members owned the remaining 62.7%. GSHD is the sole managing member of GF and, although GSHD holds a minority economic interest in GF, GSHD has the sole voting power and control of management of GF. Accordingly, GSHD consolidates the financial results of GF and reports non-controlling interest in GSHD's consolidated financial statements.
The Company maintains its cash in bank deposit accounts that, at times, may exceed federally insured limits; however, the Company has not historically experienced any losses in these accounts. The Company believes it is not exposed to any significant credit risk. The Company currently holds no financial instruments that would be considered cash equivalents.
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 $923 thousand and $376 thousand as of December 31, 2019 and 2018, respectively.
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 at the contract effective date and generally are based on a percentage of premiums for insurance coverage. During 2019, the Company wrote with over 100 insurance carriers, of which 35 provided national coverage. In 2019, two carriers represented more than 10% of total revenue at 16% and 10%. In 2018, two carriers represented more than 10% of total revenue at 17% and 11%.
At the start date of the franchise agreement, an entry to franchise fees receivable is recorded along with an entry for a contract liability, to be amortized to franchise fees within Franchise revenues over the 10-year life of the franchise contract. Franchisees have the option to pay the full amount of franchise fees up front or to pay a deposit up front and the remaining balance by payment plan over time. The franchisees that elect to pay the initial franchise fee over a term extending greater than one year pay in total an amount that exceeds the amount due had they paid the full amount up front. As such, the payment plan option is treated as a zero-interest rate note, which creates an imputation of interest. The imputed interest is recorded as a discount on the franchise fee receivable and amortized using the interest rate method over the life of the payment plan. The amount of interest recorded in 2019 and 2018 related to franchise fees on a payment plan was $606 thousand and $418 thousand, respectively, and is included in Interest income.
Premiums payable represent premium payments that have been received from insureds, but not yet remitted to the insurance carriers.
When the Company collects Initial Franchise Fees prior to the franchisee start date, the amount collected is recognized as unearned revenue until the Company fulfills its performance obligation and is able to recognize the revenue. Prior to the adoption of Revenue from Contracts with Customers (ASU 2014-09) (“Topic 606”), unearned revenue was recorded as Initial Franchise Fees received prior to the date the franchisee attended training. Amounts
Deferred financing costs incurred in connection with the issuance of debt 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.
Leases (ASU 2016-02): This standard establishes a new lease accounting model, which introduces the recognition of lease assets and liabilities for those leases classified as operating leases under previous GAAP. It should be applied using a modified retrospective approach, with the option to elect various practical expedients. Early adoption is permitted. The standard will become effective for the Company January 1, 2021, 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, 2021. 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 $22.3 million as of December 31, 2019.
Revenue from Contracts with Customers (ASU 2014-09) (“Topic 606”): 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 for 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. Additionally, the guidance requires improved disclosure to help users of financial statements better understand the nature, amount, timing and uncertainty of revenue that is recognized. 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. 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 was not required to present the impacts of the standard until this annual report on Form 10-K for the fiscal year ended December 31, 2019.
This standard may be adopted using either a retrospective or modified retrospective method. The Company adopted this standard by recognizing the cumulative effect as an adjustment to opening accumulated deficit and non-controlling interests at January 1, 2019, under the modified retrospective method for contracts not completed as of the day of adoption. Under the modified retrospective method, the Company was not required to restate comparative financial information prior to the adoption of these standards and, therefore, such information presented prior to January 1, 2019 continue to be reported under the Company’s previous accounting policies. The details of the significant changes and quantitative impact of the changes are discussed below and in "Note 3. Revenues."
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.
Prior to the adoption of Topic 606, Agency Fees were recognized as revenue on the date coverage was agreed upon with the client and placed with the Carrier. As a result of the adoption of Topic 606, Agency Fees are recognized as revenue on the effective date of the policy, generally later than they had been previously.
Contingent commission revenue is generated from contracts between the Company and insurance carriers, for which the Company is compensated for certain growth, profitability, 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.
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. Revenue from royalty fees is recognized over time as the placement of the underlying policies occur.
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 in the Franchise Channel, in which the Company pays an incremental amount of compensation on new franchise agreements. These incremental costs are deferred and amortized over a 10-year period, which is consistent with the term of the contact.
The following table disaggregates revenue by segment and source for 2019:
(1) Initial franchise fees to be recognized over the life of the contract
(1) Initial franchise fees where the consideration is received from the customer for services which are to be transferred to the franchisee over the term of the franchise agreement
Depreciation expense was $1.7 million and $1.3 million for the years ended December 31, 2019 and 2018, respectively.
On August 3, 2018, the Company refinanced its $3.0 million revolving credit facility and $50.0 million term note payable to a $13.0 million revolving credit facility and $40 million term note payable in order to obtain a more favorable interest rate on the outstanding debt. The Company has the right, subject to approval by the administrative agent and each issuing bank, to increase the commitments under the credit facilities an additional $50.0 million. The Company treated the refinancing as an extinguishment of the existing debt.
The $10.0 million drawn against the revolver is coterminous with the term loan and is due in full on August 3, 2021.
The Company’s note payable agreement contains certain restrictions and covenants. Under these restrictions, the Company is limited in the amount of debt incurred and distributions payable. In addition, the credit agreement contains certain change of control provisions that, if broken, would trigger a default. Finally, the Company must maintain certain financial ratios. As of December 31, 2019, the Company was in compliance with these covenants.
The Company refinanced its credit facilities on March 6, 2020. See "Note 16: Subsequent Events."
Because of both instruments’ origination date and variable interest rate, the note payable balance at December 31, 2019 and December 31, 2018, approximates fair value using Level 2 inputs, described below.
•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 following is a schedule of future minimum lease payments as of December 31, 2019 (in thousands):
GSHD has determined there are no material uncertain tax positions as of December 31, 2019.
GSHD has a total of 21,055 thousand and 22,486 thousand shares of its Class B common stock outstanding at December 31, 2019 and 2018, respectively. 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.
Subsequent to the issuance of the Company’s Annual report on Form 10-K for the year ended December 31, 2018, the Company determined that there was an error in the initial allocation of the effects of the Reorganization Transactions and of the non-controlling interest as presented in the consolidated statement of stockholders’ equity for the year ended December 31, 2018. This resulted in misstatements of activity in and balances of additional paid in capital, accumulated deficit, total stockholders' equity and non-controlling interest within the consolidated statement of stockholders' equity and consolidated balance sheet as of and for the year ended December 31, 2018. The Company evaluated the materiality of these misstatements from quantitative and qualitative perspectives and concluded the misstatements are not material to the prior period.
The following table sets forth the calculation of basic earnings per share ("EPS") based on net income attributable to GSHD for the years ended December 31, 2019 and 2018, divided by the basic weighted average number of Class A common stock as of December 31, 2019 and 2018 (in thousands, except per
(1) Net income attributable to GSHD for the year ended December 31, 2018 excludes all net income prior to the Offering.
During 2019 and 2018, an aggregate of 1.4 million and 261 thousand LLC Units, respectively, were redeemed by the non-controlling interest holders. Pursuant to the GF LLC Agreement, we issued 1.4 million and 261 thousand shares of Class A common stock in connection with these redemptions and received 1.4 million and 261 thousand LLC Interests, increasing our ownership interest in GF LLC. Simultaneously, and in connection with these redemptions, 1.4 million and 261 thousand shares of Class B common stock were surrendered and canceled.
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 years ended December 31, 2019 and 2018 was 59.0% and 62.6%, respectively. All net income prior to the Offering is attributed to non-controlling interest holders.
The following table summarizes the effects of changes in ownership in GF on the equity of GSHD for the years ended December 31, 2019 and 2018 is as follows (in thousands):
A summary of equity-based compensation expense during the years ended December 31, 2019 and 2018 is as follows (in thousands):
Class B interests in GF were also deemed vested by converting, along with all pre-offering Class A equity, on a one-to-one basis with the number of LLC units previously owned, to both LLC Units and shares of Class B common stock. This conversion changed the nature of the Class B interests from a profit sharing arrangement to a substantive class of equity and were expensed under the guidance of ASC 718. At the initial public offering price of$10.00 per share, the Company issued a total of 2.0 million LLC Units and shares of Class B common stock and incurred total compensation expense of $19.8 million as part of the conversion, recognized in the second quarter of 2018.
includes any income and expenses not allocated to reportable segments and corporate-related items, including equity-based compensation, certain legal expenses and interest related to the note payable.
purposes. The Company has the right, subject to approval by the administrative agent and each issuing bank, to increase the commitments under the credit facilities an additional $50 million.
Maturities of note payable for the next four years are as follows (in thousands):
The following tables set forth certain unaudited quarterly results of operations for the years ended December 31, 2019 and 2018 (in thousands, except per share data) under ASC 605. The sum of the four quarters may differ from the annual amount due to rounding:
(1) The quarterly results are shown under ASC 605, as the Company was required to show the impact of the changes in revenue recognition on a full-year basis for 2019.