The Company adopted ASC 842, Leases (‘ASC 842’) and ASC 606, Revenue from Contracts with Customers (‘ASC 606’) in 2020 and 2019, respectively. Financial information presented for years prior to the respective adoptions has not been adjusted in accordance with the provisions of those new standards.
Our historical results are not necessarily indicative of the results expected for any future period. You should read the following financial data together with Part I, Item 1A, “Risk Factors,” Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our audited consolidated financial statements and related notes appearing elsewhere in this report, and our audited consolidated financial statements and related notes included in our annual reports on Form 10-K for the years ended December 31, 2019 and December 31, 2018 previously filed with the SEC.
(1)The impact from the adoption of ASC 606 may affect the comparability to 2018. See Form 10-K for the year ended December 31, 2019 for additional information regarding the impact.
Our methods of calculating these measures may differ from those used by other companies and therefore comparability may be limited. These financial measures should be viewed in addition to, not in lieu of, the consolidated financial statements for the year ended December 31, 2020. See ‘Non-GAAP Financial Measures’ below for further discussion of our Core Revenue, Adjusted EBITDA and Adjusted EPS non-GAAP financial measures
The following discussion contains references to periods prior to the Offering, including January through April 2018, 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.
•Total revenue increased 51% from 2019 to $117.0 million; Core Revenues* of $95.1 million increased 41% over 2019
•Total Written Premiums Placed increased 45% from 2019 to $1.074 billion
•Net income increased by $8.4 million from 2019 to $18.8 million
•Adjusted EBITDA*, a non-GAAP measure, increased 59% from 2019 to $27.8 million, or 24% of total revenues
•Basic earnings per share was $0.55 and Adjusted EPS*, a non-GAAP measure, was $0.68 for the year ended December 31, 2020.
•Policies in Force increased 48% from December 31, 2019 to 713,000 at December 31, 2020.
•Operating franchises increased 45% from December 31, 2019 to 891 at December 31, 2020.
•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 and operating margins.
•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 97% 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 50 states in the U.S.
•Cost of being a public company. To operate as a public company, we are required to continue to implement changes in certain aspects of our business and develop, manage, and train management level and other employees to comply with on-going public company requirements. We also incur expenses as a public
company, including public reporting obligations, proxy statements, stockholder meetings, stock exchange fees and transfer agent fees.
Given the uncertainty regarding the spread and severity of COVID-19 and the adverse effects on the national and global economy, the related financial impact on our business cannot be accurately predicted at this time. We continue to monitor the rapidly evolving situation and guidance from the authorities, including federal, state and local public health officials and as a result may take additional actions. While we intend to continue to execute on our strategic plans and operational initiatives during the outbreak, in these circumstances, there may be developments outside our control requiring us to adjust our operating plan. See Part II, Item 1A. “Risk Factors-The global outbreak of the coronavirus disease (COVID-19) may negatively impact the global economy in a significant manner for an extended period of time, and could also materially adversely affect our business and operating results.”
In 2020, revenue increased by 51% to $117.0 million from $77.5 million in 2019. Total Written Premium growth, which is the best leading indicator of future revenue growth, was 45% to $1.074 billion from $739 million in 2019. Total Written Premiums Placed 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.
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. The Company recognizes revenue over the 10-year life of the contract. If the franchise elects the payment plan, the difference between the pay-in-full and the payment plan amounts is recognized as Interest Income using the interest rate method over the 5-year term of the payment plan.
Below is a summary showing the historical Contingent Commissions as a percentage of Total Written Premiums Placed for the period in which the Contingent Commissions were earned (in thousands).
Policies in Force means as of any reported date, the total count of current (non-cancelled) policies placed with Goosehead’s portfolio of Carriers. We believe that Policies in Force is an appropriate measure of operating performance because it reflects growth of our business relative to other insurance agencies.
As of December 31, 2020, we had 713,000 Policies in Force compared to 482,000 as of December 31, 2019, representing a 48% increase.
NPS has increased to 92 as of December 31, 2020 from 89 at December 31, 2019, primarily driven by the service team’s continued focus on delivering highly differentiated service levels.
For the year ended December 31, 2020, Renewal Revenue grew 37% to $58.2 million, from $42.4 million for the year ended December 31, 2019. Growth in Renewal Revenue was driven by Client Retention of 88% at December 31, 2020. 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 $27.5 million, or 41%, to $95.1 million for the year ended December 31, 2020 from $67.6 million for the year ended December 31, 2019. 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, 2019 to December 31, 2020.
Cost Recovery Revenue increased by $0.6 million, or 15%, to $5.1 million for the year ended December 31, 2020 from $4.4 million for the year ended December 31, 2019. The primary driver of the increase is a larger number of franchises in the system.
Adjusted EBITDA increased by $10.3 million, or 59%, to $27.8 million for the year ended December 31, 2020, from $17.5 million for the year ended December 31, 2019, driven primarily by a significant increase in high-margin revenue from Contingent Commissions.
(2) Renewal Royalty Fees, New Business Royalty Fees, Initial Franchise Fees, and Other Income are included in "Franchise revenues" as shown on the Consolidated statements of operations.
The following tables show a reconciliation from net income to Adjusted EBITDA for the year ended December 31, 2020, 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, 2020, 2019, and 2018. Note that totals may not sum due to rounding:
(1) Calculated for the full year 2018 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."
(3) Calculated as the origination fees of previous debt immediately recognized upon refinance divided by sum of Class A and Class B shares at the time of the refinance [ $871 thousand / ( 13.5 million + 22.7 million )]
(4) Calculated as equity-based compensation divided by the weighted average of Class A and Class B shares outstanding during the period 2020 - [$4.7 million / ( 16.8 million + 19.7 million ) 2019 - [ $1.5 million / ( 14.9 million + 21.4 million )] 2018 - [ $27.1 million / ( 13.6 million + 22.7 million )]
The following is a discussion of our consolidated results of operations for each of the years ended December 31, 2020, December 31, 2019, and December 31, 2018 (under ASC 605). This information is derived from our accompanying consolidated financial statements prepared in accordance with GAAP.
The following table summarizes our results of operations for the years ended December 31, 2020, 2019, and 2018:
In 2020, revenue increased by 51% to $117.0 million from $77.5 million in 2019.
Renewal Commissions increased by $6.0 million, or 26%, to $28.9 million for the year ended December 31, 2020 from $22.9 million for the year ended December 31, 2019. These increases are primarily attributable to an increase in the number of policies in the renewal term at December 31, 2020 compared to December 31, 2019.
Revenue from Contingent Commissions increased by $11.3 million, or 208%, to $16.7 million for the year ended December 31, 2020, from $5.4 million for the year ended December 31, 2019. The increase is primarily attributable to the increase in Total Written Premium for year ended December 31, 2020 compared to the year ended December 31, 2019 and a more profitable book of business with the Carriers that offer contingency programs.
Revenue from New Business Royalty Fees increased by $3.5 million, or 49%, to $10.6 million for the year ended December 31, 2020 from $7.1 million for the year ended December 31, 2019. 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, 2020 compared to December 31, 2019.
Initial Franchise Fee revenue increased approximately $0.5 million, or 12%, to $4.2 million for the year ended December 31, 2020 from $3.8 million for the year ended December 31, 2019. The primary driver of the increase in Initial Franchise Fees was the increase in total franchises. Under Topic 606, the Company recognizes the Initial Franchise Fee ratably over the 10-year term of the franchise agreement.
Interest Income increased $0.2 million, or 32% to $0.8 million for 2020 from $0.6 million for 2019. This increase was primarily attributable to additional Franchise Agreements signed under the payment plan option.
Employee compensation and benefits expenses increased by $25.1 million, or 60%, to $66.8 million for 2020 from $41.7 million for 2019. This was attributable to an increase in total headcount from 2019 to 2020, as well as additional stock options granted during 2020.
Depreciation and amortization increased by $1.2 million, or 63%, to $3.1 million for 2020 from $1.9 million for 2019. 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.
See "Note 9. Debt" in the consolidated financial statements included herein for a discussion of the Company's credit facilities.
Net cash provided by operational activities was $24.6 million for 2020 as compared to net cash provided by operational activities of $21.2 million for 2019. This increase in net cash provided by operational activities was primarily attributable to a $8.4 million increase in net income and a $5.1 million increase in contract liabilities, offset by a $9.8 million decrease in deferred rent.
Assuming Goosehead Financial, LLC makes distributions to its members in any given year, the determination to pay dividends, if any, to our Class A common stockholders out of the portion, if any, of such distributions remaining after our payment of taxes, tax receivable agreement payments and expenses (any such portion, an “excess distribution”) will be made at the sole discretion of our board of directors. Our board of directors may change our dividend policy at any time. See “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and
The following table represents our contractual obligations as of December 31, 2020, aggregated by type.
(1)The Company leases its facilities under non-cancelable operating leases. In addition to monthly lease payments, the lease agreements require the Company to reimburse the lessors for its portion of operating costs each year. Rent expense was $3.1 million, $1.9 million, and $1.6 million for year ending December 31, 2020, 2019, and 2018.
(2)The Company refinanced its credit facilities on March 6, 2020 in the form of a $80 million term loan and $25 million revolving credit facility, of which $5 million was drawn as of December 31, 2020.
(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, 2020.
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, 2020.
The actual increase in tax basis, as well as the amount and timing of any payments under the tax receivable agreement, will vary depending on a number of factors, including, but not limited to, the timing of any future redemptions, exchanges or purchases of the LLC Units held by Pre-IPO LLC Members, the price of our Class A common stock at the time of the purchase, redemption or exchange, the extent to which redemptions or exchanges are taxable, the amount and timing of the taxable income that we generate in the future, the tax rates then applicable and the portion of our payments under the tax receivable agreement constituting imputed interest.
As of December 31, 2020, as a result of the redemption of LLC Units, we recognized liabilities totaling $61.6 million relating to our obligations under the Tax Receivable Agreement.
support and use of the Company’s business operations over the period of the franchise agreement based on a percentage of commissions earned by franchisees from insurance carriers. Royalty fees revenue is recognized over time under the sales- and usage-based exception on the effective date of policies placed by franchisees. The Company estimates the amount of commissions and royalty fees revenue to recognize on the effective date a policy is placed into service based on estimates of premiums placed, policy changes, and cancellations, net of a constraint. Management adjusts its estimates of revenue recognized for commissions and royalty fees based on cash collections during the terms of the policies. For the year ended December 31, 2020, commissions and agency fees was $71.8 million, of which $46.2 million relates to new and renewal commissions. For the year ended December 31, 2020, franchise revenue was $44.4 million, of which $39.9 million relates to new and renewal royalty fees.
◦Compared the adjustments of revenue based on cash collections used by management to historical cash collection rates for portfolios of policies with the same remaining policy term.
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 nine corporate-owned locations in operation at December 31, 2020 and seven at December 31 2019 and 2018.
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"), which is 100% owned by GF. Franchisees are provided access to insurance Carrier Appointments, product training, technology infrastructure, client service centers and back office services. During years ended December 31, 2020, 2019, and 2018, the Company onboarded 337, 247, and 214 franchise locations, respectively and had 891, 614, and 457 operating franchise locations as of December 31, 2020 and 2019, respectively. No franchises were purchased by the Company during the years ended December 31, 2020, 2019, and 2018.
•The Goosehead Management Holders and Texas Wasatch Holders indirectly transferred their ownership interests in GM and TWIHG, respectively, to GSHD in exchange for the Goosehead Management Note and Texas Wasatch Note. The aggregate principal amount of the Goosehead Management Note and the Texas Wasatch Note was approximately $114 million. Because the net proceeds from the Offering were insufficient to repay the aggregate principal amount of the notes, 3,724 thousand shares of Class A common stock
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 2020, the Company wrote with over 140 insurance carriers, of which 45 provided national coverage. In 2020, three carriers represented more than 10% of total revenue at 20%,13% and 12%. 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%.
The adoption of the new revenue standard on January 1, 2019 has increased the significance of judgments and estimates management must make to apply the guidance. In particular, judgments related to the amount of variable revenue consideration to ultimately be received on commission revenue, royalty fees, and contingent commissions, which were previously recognized when the Company received notification from the insurance carrier, now require significant judgments and estimates. The Company adjusts its estimates of revenue recognized for commissions and royalty fees based on cash collections during the terms of the policies.
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, 2020
The primary leased asset class of the Company is real estate. For leases with an original term longer than one year, lease liabilities are initially recognized on the lease commencement date based on the present value of the future minimum lease payments over the lease term, including non-lease components such as fixed common area maintenance costs and other fixed costs for generally all leases. A corresponding right of use ("ROU") asset is initially recognized equal to the lease liability adjusted for any lease prepayments, initial direct costs and lease incentives and amortized into rent expense, which is mapped to general and administrative expenses in the consolidated statements of operations.
The discount rates used in determining the present value of leases represent our collateralized borrowing rate considering each lease's term. The lease term includes options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Certain leases have renewal options that can be exercised at the discretion of the Company. Rent expense is generally recognized on a straight-line basis over the lease term and included in General and administrative expenses in the Consolidated Statement of Operations. See Note 15 for further information.
Deferred rent consists of rent abatement affecting the timing of cash rent payments related to the Company’s corporate office leases, as well as lease incentives such as construction allowances. In 2019, deferred rent was record as a liability and amortized over the lease term as a reduction to rent expense. In 2020, upon the adoption of ASC 842, the entire cumulative deferred rent balance under ASC 840 was treated as an adjustment to the ROU balance.
Prior to the Offering, GF was treated as a partnership for U.S. federal and applicable state and local income tax purposes. As a partnership, GF's taxable income or loss was included in the taxable income of its members. Accordingly, no income tax expense was recorded for federal and state and local jurisdictions for periods prior to the Offering.
In connection with the Offering completed on May 1, 2018, the Company became a taxable entity.
The Company expenses advertising costs as they are incurred. Advertising expense for the years ended December 31, 2020, 2019, and 2018 was $879 thousand, $812 thousand, and $521 thousand.
Reference Rate Reform (ASU 2020-04): In March 2020, the Financial Accounting Standards Board issued ASU 2020-04. Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying U.S. GAAP if certain criteria are met to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued. ASU 2020-04 is effective as of March 12, 2020 through December 31, 2022. A substantial portion of our indebtedness bears interest at variable interest rates, primarily based on USD-LIBOR. The adoption of ASU 2020-04 did not have a material impact on our consolidated financial statements. The standard will ease, if warranted, the administrative requirements for accounting for the future effects of the rate reform. We continue to monitor the impact the discontinuance of LIBOR will have on our contracts and other transactions.
in interim periods. It also adds guidance in certain areas, including the recognition of franchise taxes, recognition of deferred taxes for tax goodwill, allocation of taxes to members of a consolidated group, computation of
Leases (ASU 2016-02): ASU 2016-02 amended the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. The new guidance also required additional disclosures about leases. The Company adopted the requirements of the new standard as of the first day of 2020 using the modified retrospective approach, without restating comparative periods. As part of our adoption, we elected the package of practical expedients, as well as the hindsight practical expedient, permitted under the new guidance, which, among other things, allowed the Company to continue utilizing historical classification of leases. For those leases that fall under the definition of a short-term lease, the Company elected the short-term lease recognition exemption. The adoption of the new standard resulted in the recording of a right-of-use asset of $11.2 million and lease liabilities of $18.5 million, and had no impact on retained earnings as of the beginning of 2020. The standard did not materially impact our Consolidated Statements of Operations and had no impact on cash flows.
Credit Losses (ASU 2016-13):Under the new guidance an entity is required to measure all credit losses on certain financial instruments, including trade receivables and various off-balance sheet credit exposures, using an expected credit loss model. This model incorporates past experience, current conditions and reasonable and supportable forecasts affecting collectability of these instruments. The Company adopted the requirements of the new standard as of the first day of 2020, however, the adoption of the amendment did not have a material effect on our consolidated financial statements or on our disclosures.
Contingent commission revenue is generated from contracts between the Company and insurance carriers, for which the Company is compensated for certain growth, profitability, or other performance-based metrics. The performance obligations for contingent commissions will vary by contract, but generally include the Company increasing profitable written premium with the insurance carrier. The transaction price for Contingent Commissions is estimated based on all available information and is recognized over time as the Company completes its performance obligations, as the underlying policies are placed.
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.
Prior to the adoption of Topic 606, initial franchise fees were recognized as revenue in the month the agency owner or initial agency representative attends training. As a result of the adoption of Topic 606, initial franchise fees are recognized as revenue over the 10-year life of the franchise contract, beginning on the start date of the contract.
Additionally, the Company has evaluated ASC Topic 340 - Other Assets and Deferred Cost (“ASC 340”) which requires companies to defer certain incremental cost to obtain customer contracts, and certain costs to fulfill customer contracts.
Costs to fulfill - The Company has evaluated the need to capitalize costs to fulfill customer contracts and has determined that there are no costs that meet the definition for capitalization under ASC 340.
The following tables disaggregates revenue by segment and source (in thousands):
The following table provides information about receivables, cost to obtain, and contract liabilities from contracts with customers (in thousands):
(3) Initial Franchise Fees to be recognized over the life of the contract
The balance of Franchise fees receivable included in receivable from franchisees in the consolidated balance sheets consisted of the following (in thousands):
Activity in the allowance for uncollectible agency fees was as follows (in thousands):
Depreciation expense was $2.9 million, $1.7 million, and $1.3 million for the years ended December 31, 2020, 2019, and 2018, respectively.
Amortization expense was $288 thousand, $204 thousand, and $117 thousand for the years ended December 31, 2020, 2019, and 2018, respectively.
The $25.0 million 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, 2020, the Company had $5.0 million drawn against the revolver. At December 31, 2020, the Company had a letter of credit of $333 thousand applied against the maximum borrowing availability, thus amounts available to draw totaled $19.7 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 $85 thousand, $450 thousand, and $198 thousand for the years ended December 31, 2020, 2019, and 2018, respectively.
The $80.0 million term note accrues interest at an initial interest rate of LIBOR plus 2.00%, then at an interest rate determined by the Company's leverage ratio for the preceding period. As of December 31, 2020, the Company was in the greater than 1.50x leverage ratio tranche, accruing interest of LIBOR plus 2.00%. The aggregate principal amount of the term note as of December 31, 2020 is $78.5 million, payable in quarterly installments of $0.5 million for the first twelve months, $1.0 million for the next twelve months, and $2.0 million for the last twelve months, with a balloon payment on March 6, 2023.The term note is collateralized by substantially all the Company’s assets, which includes rights to future commissions.
The interest rate for each leverage ratio tier are as follows:
Maturities of the term note payable for the next two calendar years as of December 31, 2020 are as follows (in thousands):
Because of both instruments’ origination date and variable interest rate, the note payable balance at December 31, 2020 and December 31, 2019, approximates fair value using Level 2 inputs, described below.
•Level 1-Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets.
The components of deferred tax assets are as follows (in thousands):
GSHD has a total of 18,304 thousand and 15,238 thousand shares of its Class A common stock outstanding at December 31, 2020 and 2019, respectively. 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 18,447 thousand and 21,055 thousand shares of its Class B common stock outstanding at December 31, 2020 and 2019, 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.
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, 2020 and 2019, divided by the basic weighted average number of Class A common stock as of December 31, 2020 and 2019 (in thousands, except per share amounts). Diluted earnings per share of Class A common stock is computed by dividing net income attributable to GSHD by the weighted average number of shares of Class A common stock outstanding adjusted to give effect to potentially dilutive securities. The
Company has not included the effects of conversion of Class B shares to Class A shares in the diluted EPS calculation using the "if-converted" method, because doing so has no impact on diluted EPS (in thousands):
On a quarterly basis, GF makes distributions to the LLC Unit holders on a pro rata basis. For the years ended December 31, 2020 and 2019, GF made distributions of $4.8 million and $6.3 million, respectively, of which $2.7 million and $3.7 million, respectively, were made to Pre-IPO LLC Members. The remaining $2.2 million and $2.6 million, respectively, were made to GSHD and were 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 canceled 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 2020 and 2019, an aggregate of 2.6 million and 1.4 million LLC Units, respectively, were redeemed by the non-controlling interest holders. Pursuant to the GF LLC Agreement, we issued 2.6 million and 1.4 million shares of
The following table summarizes the ownership interest in GF as of December 31, 2020 and 2019 (in thousands).
A summary of equity-based compensation expense during the years ended December 31, 2020, 2019, and 2018 is as follows (in thousands):
In connection with the Reorganization Transactions, immediately prior to the Offering, historical Class B interests in TWIHG and GM vested by converting to the Texas Wasatch Note and Goosehead Management Note, respectively, paid with a combination of proceeds from the Offering and shares of Class A 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 Topic ASC 718, Compensation - Stock Compensation. At the Offering price
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.
In connection with the IPO, GSHD granted 1,650 thousand options to directors and certain employees. The stock options were granted with a strike price of $10.00 per share (the initial public offering price). The 365 thousand director stock options vest quarterly over a three-year period, and the 1,285 thousand employee stock options vest annually from 2020 to 2022. The grant date fair value was determined using the Black-Scholes valuation model using the following assumptions:
GSHD will recognize the total compensation expense of $5.2 million related to such option grants on a straight-line basis over the requisite service period of the award recipient (three years for directors and four years for certain employees).
As of December 31, 2020, total unrecognized compensation expense related to unvested stock options was $15.1 million, which is expected to be recognized over a weighted average period of 2.59 years. Cash received from stock option exercises during the year ended December 31, 2020 was $4.5 million.
The total fair value of stock options vested during the years ended December 31, 2020, 2019 and 2018 was $1.7 million, $0.4 million and $0.3 million, respectively.
On March 7, 2019, GF approved a $15 million extraordinary dividend to all holders of LLC Units, including GSHD. The board of directors of the Company then declared an extraordinary dividend of $0.41 (rounded) to all holders of Class A common stock of GSHD with a record date of March 18, 2019, paid on or before April 1, 2019. A summary of the total amounts declared by GF is as follows (in thousands):
Effective January 1, 2020, the Company adopted new guidance that requires lessees to recognize on the Consolidated balance sheets all leases with lease terms greater than twelve months as a lease liability with a corresponding right-of-use (“ROU”) asset. Accordingly, the Company recognized operating lease liabilities and ROU asset of $18.5 million and $11.2 million, respectively, on January 1, 2020. For those leases that fall under the definition of a short-term lease, the Company elected the short-term lease recognition exemption.The adoption of the new lease guidance did not have a material impact on the Company’s Consolidated statements of operations. The change in accounting due to the adoption of the new lease guidance did not result in a material change to the net rent expense when compared to December 31, 2019.
At December 31, 2020, Goosehead was obligated under a number of operating leases, exclusively leases for premises and equipment used for business purposes. These leases generally have terms of 7 years or less, determined based on the contractual maturity of the lease, and include periods covered by options to extend or terminate the lease when the Company is reasonably certain that it will exercise those options. None of these lease agreements impose restrictions on the Company’s ability to pay dividends, engage in debt or equity financing transactions or enter into further lease agreements. Certain of these leases contain escalation clauses that will increase rent payments based on maintenance, utility and tax increases, which are non-lease components and variable in nature. The Company elected not to separate lease and non-lease components of a contract for its real estate and equipment leases. As such, real estate lease payments represent payments on both lease and non-lease components.
Operating lease liabilities and ROU asset are recognized at the lease commencement date based on the present value of the future minimum lease payments over the lease term. The future lease payments are discounted at a rate that represents the Company’s collateralized borrowing rate for financing instruments of a similar term. We estimate this for our portfolio of leases using information obtained from our bankers. The ROU asset also includes any lease prepayments made, plus initial direct costs incurred, less any lease incentives received. Rent expense associated with operating leases is recognized on a straight-line basis over the lease term, and generally included in occupancy expense within General and administrative expenses in the Consolidated statements of operations.
The following is a schedule showing the components of lease cost for the year ended December 31, 2020 (in thousands):
The following is a schedule of future maturity of lease liability as of December 31, 2020 (in thousands):
As previously disclosed in the Company's 2019 Annual Report and under previous lease accounting, the minimum lease payments required under operating leases were as follows (in thousands):
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”) as a performance measure to manage resources and make decisions about the business. Summarized financial information concerning the Company’s reportable segments is shown in the following tables (in thousands). There are no intersegment sales, only interest income and interest expense related to an intersegment line of credit, all of which eliminate in consolidation. The “Other” column 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.
The following tables set forth certain unaudited quarterly results of operations for the years ended December 31, 2020, 2019, and 2018 (in thousands, except per share data). The sum of the four quarters may differ from the annual amount due to rounding (in thousands):