GOOSEHEAD INSURANCE, INC OVERVIEW
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Form 10-Q. 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 report and in the Annual Report on Form 10-K. We are a rapidly growing personal lines independent insurance agency, reinventing the traditional approach to distributing personal lines products and services throughoutthe United States . We were founded with one vision in mind-to provide consumers with superior insurance coverage at the best available price and in a timely manner. By leveraging our differentiated business model and innovative technology platform, we are able to deliver to consumers a superior insurance experience. Our management team continues to own approximately 48% of the company, representing our commitment to the long-term success of the Company.
Financial Highlights for the First Quarter of 2022:
•Total revenue increased 32% from the first quarter of 2021 to
•Core Revenue* increased by 37% from first quarter of 2021 to
•Total Written Premiums placed increased 41% from the prior-year period to
•Net loss increased by
•Adjusted EBITDA* decreased 41% from the first quarter of 2021 to
•Basic and diluted loss per share were
•Policies in Force increased 39% from
•Corporate sales headcount increased 35% from
•As of
•Total franchises increased 41% compared to the prior year period to 2,298; total operating franchises increased 28% fromMarch 31, 2021 to 1,268 atMarch 31, 2022
•In Texas as of
•Outside of
*Core Revenue, Adjusted EBITDA and Adjusted EPS are non-GAAP measures. Reconciliation of Core Revenue to total revenue, Adjusted EBITDA to net income and Adjusted EPS to EPS, the most directly comparable financial measures presented in accordance with GAAP, are set forth under "Key performance indicators".
COVID-19
Given the uncertainty regarding the duration, spread and severity of COVID-19,
and its variant strains, the availability, effectiveness and utilization of
vaccines, and the adverse effects on the national and global economy, home sales
and consumer spending, 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 Item 1A. Risk factors
- Risk relating to our business-The ongoing global COVID-19 pandemic has
negatively impacted the global economy in a
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significant manner and may continue to do so for an extended period of time, and
could also materially adversely affect our business and operating results in the
Annual Report on Form 10-K for more information.
Certain income statement line items
Revenues
For the three months endedMarch 31, 2022 , revenue increased by 32% to$41.3 million from$31.2 million for the three months endedMarch 31, 2021 . Total Written Premium growth, which is the best leading indicator of future revenue growth, was 41% for the three months endedMarch 31, 2022 . Total Written Premium increased to$451 million for the three months endedMarch 31, 2022 from$319 million for the three months endedMarch 31, 2021 . 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 under "Key performance indicators".
Core Revenue:
•Renewal Commissions - highly predictable, higher-margin revenue stream, which is managed by our service team. •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. •New Business Commissions - predictable based on agent headcount and consistent ramp-up of agents, but lower margin than Renewal Commissions because of higher commissions paid to agents and higher back-office costs associated with policies in their first term. This revenue stream has predictably converted into higher-margin Renewal Commissions historically, and we expect this to continue moving forward. •New Business Royalty Fees - predictable based on franchise count and consistent ramp-up of franchises, but lower margin than Renewal Royalty Fees because the Company only receives a royalty fee of 20% on the commissions paid by the Carrier in the first term of every policy and higher back-office costs associated with policies in their first term. This revenue stream has predictably converted into higher-margin Renewal Royalty Fees historically, and we expect this to continue moving forward. •Agency Fees - although predictable based on agent count, Agency Fees do not renew like New Business Commissions and Renewal Commissions.
Cost Recovery Revenue:
•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. •Interest Income - like Initial Franchise Fees, interest income is a Cost Recovery Revenue stream that reimburses the Company for those franchises on a payment plan. Ancillary Revenue: •Contingent Commissions - although high margin, Contingent Commissions are unpredictable and susceptible to weather events and Carrier underwriting results. Management does not rely on Contingent Commissions for operating cash flow or budget planning. •Other Income - book transfer fees, marketing investments from Carriers and other items that are unpredictable and supplemental to other revenue streams.
We discuss below the breakdown of our revenue by stream:
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Three Months Ended March 31,
(in thousands) 2022 2021
Core Revenue:
Renewal Commissions(1) $10,207 25 % $7,757 25 %
Renewal Royalty Fees(2) 14,002 34 % 8,746 28 %
New Business Commissions(1) 5,367 13 % 4,616 15 %
New Business Royalty Fees(2) 4,292 10 % 3,157 10 %
Agency Fees(1) 2,637 6 % 2,424 8 %
Total Core Revenue 36,505 88 % 26,700 86 %
Cost Recovery Revenue:
Initial Franchise Fees(2) 2,296 6 % 1,432 5 %
Interest Income 319 1 % 261 1 %
Total Cost Recovery Revenue 2,615 6 % 1,693 5 %
Ancillary Revenue:
Contingent Commissions(1) 1,798 4 % 2,737 9 %
Other Income(2) 360 1 % 98 - %
Total Ancillary Revenue 2,158 5 % 2,835 9 %
Total Revenues $41,278 100 % $31,228 100 %
(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 operations.
(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.
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Consolidated results of operations
The following is a discussion of our consolidated results of operations for each of the three months endedMarch 31, 2022 and 2021. This information is derived from our accompanying condensed consolidated financial statements prepared in accordance with GAAP.
The following table summarizes our results of operations for the three months
ended
Three Months Ended March 31,
2022 2021
Revenues:
Commissions and agency fees $ 20,009 48 % $ 17,534 56 %
Franchise revenues 20,950 51 % 13,433 43 %
Interest income 319 1 % 261 1 %
Total revenues 41,278 100 % 31,228 100 %
Operating Expenses:
Employee compensation and benefits 31,484 66 % 21,309 67 %
General and administrative expenses 13,524 29 % 9,274 30 %
Bad debts 796 2 % 447 1 %
Depreciation and amortization 1,576 3 % 1,000 3 %
Total operating expenses 47,380 100 % 32,030 100 %
Loss from operations (6,102) (802)
Other Income (Expense):
Other income - 20
Interest expense (883) (601)
Loss before taxes (6,985) (1,383)
Tax benefit (1,602) (294)
Loss Income (5,383) (1,089)
Less: net loss attributable to non-controlling
interests (3,126) (693)
Net loss attributable to Goosehead Insurance
Inc. $ (2,257) $ (396)
Revenues
For the three months ended
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--------------------------------------------------------------------------------Commissions and agency fees
Commissions and agency fees consist of new business commissions, renewal commissions, agency fees, and contingent commissions.
The following table sets forth our commissions and agency fees by amount and as a percentage of our revenues for the periods indicated (in thousands):
Three Months Ended March 31,
2022 2021
Core Revenue:
Renewal Commissions 10,207 51 % 7,757 44 % New Business Commissions
5,367 27 % 4,616 26 %
Agency Fees 2,637 13 % 2,424 14 %
Total Core Revenue: 18,211 91 % 14,797 84 % Ancillary Revenue: Contingent Commissions
1,798 9 % 2,737 16 % Commissions and agency fees
Renewal Commissions increased by$2.5 million or 32%, to$10.2 million for the three months endedMarch 31, 2022 from$7.8 million for the three months endedMarch 31, 2021 . This increase was primarily attributable to an increase in the number of policies in the renewal term fromMarch 31, 2021 toMarch 31, 2022 plus an increase in client retention to 89% as ofMarch 31, 2022 from 88% as ofMarch 31, 2021 .New Business Commission increased by$0.8 million or 16%, to$5.4 million for the three months endedMarch 31, 2022 from$4.6 million for the three months endedMarch 31, 2021 . Revenue from Agency Fees increased by$0.2 million or 9%, to$2.6 million for the three months endedMarch 31, 2022 from$2.4 million for the three months endedMarch 31, 2021 . These increases were primarily attributable to a 35% increase in total sales agent head count to 490 atMarch 31, 2022 , from 363 atMarch 31, 2021 . Revenue from Contingent Commissions decreased by$0.9 million , to$1.8 million for the three months endedMarch 31, 2022 from$2.7 million for the three months endedMarch 31, 2021 . During the first quarter of each year, the actual Contingent Commissions received is reconciled to the amount receivable as of year end. This change in Revenue from Contingent Commissions was primarily attributable to decreases in the amount recorded during the quarter related to this reconciliation. Franchise revenues
Franchise Revenues consist of Royalty Fees, Initial Franchise Fees, and Other Franchise Revenues.
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--------------------------------------------------------------------------------The following table sets forth our franchise revenues by amount and as a percentage of our revenues for the periods indicated (in thousands):
Three Months Ended March 31,
2022 2021
Core Revenues:
Renewal Royalty Fees 14,002 67 % 8,746 65 %
New Business Royalty Fees 4,292 20 % 3,157 24 %
Total Core Revenues: 18,294 87 % 11,903 89 %
Cost Recovery Revenues:
Initial Franchise Fees 2,296 11 % 1,432 11 %
Ancillary Revenues:
Other Franchise Revenues 360 3 % 98 1 %
Franchise revenues $ 20,950 100 % $ 13,433 100 %
Revenue from Renewal Royalty Fees increased by $5.3 million , or 60%, to $14.0
million for the three months ended March 31, 2022 from $8.7 million for the
three months ended March 31, 2021 . The increase in revenue from Renewal Royalty
Fees was primarily attributable to an increase in the number of policies in the
renewal term and an increase in client retention to 89% as of March 31, 2022
from 88% as of March 31, 2021 .
Revenue from New Business Royalty Fees increased by $1.1 million , or 36%, to
$4.3 million for the three months ended March 31, 2022 from $3.2 million for the
three months ended March 31, 2021 . The increase in revenue from New Business
Royalty Fees was primarily attributable to a 28% increase in the total number of
operating franchises to 1,268 at March 31, 2022 , from 987 at March 31, 2021 .
Revenue from Initial Franchise Fees increased by $0.9 million , or 60%, to $2.3
million for the three months ended March 31, 2022 from $1.4 million for the
three months ended March 31, 2021 . The primary reason for this increase is an
increase of 41% in total franchises to 2,298 at March 31, 2022 , from 1,628 at
March 31, 2021 .
Interest income
Interest income increased by $58 thousand , or 22%, to $319 thousand for the
three months ended March 31, 2022 from $261 thousand for the three months ended
March 31, 2021 . This increase was primarily attributable to additional Franchise
Agreements signed under the payment plan option.
Expenses
Employee compensation and benefits
Employee compensation and benefits expenses increased by$10.2 million , or 48%, to$31.5 million for the three months endedMarch 31, 2022 from$21.3 million for the three months endedMarch 31, 2021 . The increase is caused by a 28% increase in total headcount from 2021 to 2022, as well as an increase in equity based compensation of 198%.
General and administrative expenses
General and administrative expenses increased by$4.3 million , or 46%, to$13.5 million for the three months endedMarch 31, 2022 from$9.3 million for the three months endedMarch 31, 2021 . This increase was primarily attributable to higher costs associated with an increase in operating franchises, total employees, addition of five new corporate office locations, and investments made in technology. Additionally, the Company hosted its annual Ascend meeting inFebruary 2022 , which did not take place in 2021 due to COVID.
Bad debts
Bad debts increased by$0.3 million , or 78%, to$0.8 million for the three months endedMarch 31, 2022 from$0.4 million for the three months endedMarch 31, 2021 . The increase in bad debts is attributable to an increase in total franchises and an increase in revenue from Agency fees during the three months endedMarch 31, 2022 from the three months endedMarch 31, 2021 . 25 --------------------------------------------------------------------------------
Depreciation and amortization
Depreciation and amortization increased by$0.6 million , or 58%, to$1.6 million for the three months endedMarch 31, 2022 from$1.0 million for the three months endedMarch 31, 2021 . This increase was primarily attributable to the increase in fixed assets sinceMarch 31, 2021 , including the opening of five additional corporate sales offices, expansion of existing corporate offices and hardware for additional employees hired.
Interest expense
Interest expenses increased by$0.3 million for the three months endedMarch 31, 2022 , to$0.9 million from$0.6 million for the three months endedMarch 31, 2021 . The primary driver of the increase in interest expense is the increase in total borrowing outstanding.
Key performance indicators
Our key operating metrics are discussed below:
Total Written Premium
Total Written Premium represents for any reported period, the total amount of current (non-cancelled) gross premium that is placed with Goosehead's portfolio of Carriers. Total Written Premium placed is an appropriate measure of operating performance because it reflects growth of our business relative to other insurance agencies.
The following tables show Total Written Premium placed by corporate agents and franchisees for the three months ended and 2022 and 2021 (in thousands).
Three Months Ended March 31 , % Change
2022 2021
Corporate sales Total Written Premium$ 110,395 $ 88,946 24 % Franchise sales Total Written Premium 340,516 229,949 48 % Total Written Premium$ 450,911 $ 318,895 41 % Policies in Force
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
NPS
Net Promoter Score (NPS) is calculated based on a single question: "How likely are you to referGoosehead Insurance to a friend, family member or colleague?" Clients that respond with a 6 or below are Detractors, a score of 7 or 8 are called Passives, and a 9 or 10 are Promoters. NPS is calculated by subtracting the percentage of Detractors from the percentage of Promoters. For example, if 50% of respondents were Promoters and 10% were Detractors, NPS is a 40. NPS is a useful gauge of the loyalty of client relationships and can be compared across companies and industries.
NPS has remained steady at 91 as of
Client retention
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.
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Client Retention remained constant at 89% at March 31, 2022 when compared to
December 31, 2021 , again driven by the service team's continued focus on
delivering highly differentiated service levels. For the trailing twelve months
ended March 31, 2022 , we retained 94% of the premiums we distributed in the
trailing twelve months ended March 31, 2021 , which increased modestly from the
93% premium retention at December 31, 2021 . 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.
New Business Revenue
New Business Revenue is commissions received from the Carrier, Agency Fees received from clients, and New Business Royalty Fees relating to policies in their first term.
For the three months endedMarch 31, 2022 , New Business Revenue grew 21% to$12.3 million , from$10.2 million for the three months endedMarch 31, 2021 . Growth in New Business Revenue is driven by an increase in Corporate sales agent headcount of 35% and growth in operating franchises of 28%.
Renewal Revenue
Renewal Revenue is commissions received from the Carrier and Renewal Royalty Fees received after the first term of a policy.
For the three months endedMarch 31, 2022 , Renewal Revenue grew 47% to$24.2 million , from$16.5 million for the three months endedMarch 31, 2021 . Growth in Renewal Revenue was driven by Client Retention of 89% atMarch 31, 2022 . As our agent force matures, the policies they wrote in prior years begins to convert from New Business Revenue to more profitable Renewal Revenue.
Non-GAAP Measures
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 total revenue (with respect to Core Revenue, Cost Recovery Revenue and Ancillary Revenue), net income (with respect to Adjusted EBITDA and Adjusted EBITDA Margin) or earnings per share (with respect to Adjusted EPS), which we consider to be the most directly comparable GAAP measures. 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 total revenue, net income, earnings per share, as applicable, 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
Core Revenue is a supplemental measure of our performance and includes Renewal Commissions, Renewal Royalty Fees, New Business Commissions, New Business Royalty Fees, and Agency Fees. We believe that Core Revenue is an appropriate measure of operating performance because it summarizes all of our revenues from sales of individual insurance policies. Core Revenue increased by$9.8 million , or 37%, to$36.5 million for the three months endedMarch 31, 2022 from$26.7 million for the three months endedMarch 31, 2021 . The primary drivers of the increase are increases in operating franchises, corporate agent sales headcount, the number of policies in the renewal term fromMarch 31, 2021 toMarch 31, 2022 , plus an increase in client retention to 89% as ofMarch 31, 2022 from 88% as ofMarch 31, 2021 . 27 --------------------------------------------------------------------------------
Cost Recovery Revenue
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 increased by$0.9 million , or 54%, to$2.6 million for the three months endedMarch 31, 2022 from$1.7 million for the three months endedMarch 31, 2021 . The primary driver of the increase is an increase in total franchises fromMarch 31, 2021 toMarch 31, 2022 .
Ancillary Revenue
Ancillary Revenue is a supplemental measure of our performance and includes Contingent Commissions and Other Income. We believe that Ancillary Revenue is an appropriate measure of operating performance because it summarizes revenues that are ancillary to our core business. Ancillary Revenue decreased by$0.7 million to$2.2 million for the three months endedMarch 31, 2022 from$2.8 million for the three months endedMarch 31, 2021 . During the first quarter of each year, the actual Contingent Commissions received is reconciled to the amount receivable as of year end. This change in Revenue from Contingent Commissions was primarily attributable to decreases in the amount recorded during the quarter related to this reconciliation.
Adjusted EBITDA
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 decreased by$0.9 million , or (41)%, to$1.3 million for the three months endedMarch 31, 2022 from$2.1 million for the three months endedMarch 31, 2021 . The primary driver of the decrease in Adjusted EBITDA is increases in General and Administrative expenses driven by the Ascend meeting and by increases in corporate agent headcount, operating franchises, and investments in technology, as well as decreases in Ancillary Revenue.
Adjusted EBITDA Margin
Adjusted EBITDA Margin is Adjusted EBITDA as defined above, divided by total revenue excluding other non-operating items. Adjusted EBITDA Margin is helpful in measuring profitability of operations on a consolidated level. For the three months endedMarch 31, 2022 , Adjusted EBITDA Margin was 3% compared to 7% for the three months endedMarch 31, 2021 . The primary drivers of the decrease in Adjusted EBITDA Margin is a decrease in revenue from Contingent Commissions and increases in General and Administrative expenses driven by increases in corporate agent headcount, operating franchises, and investments in technology. 28 --------------------------------------------------------------------------------
Adjusted EPS
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 EPS is a useful measure to management because it eliminates the impact of items that do not relate to business performance.
GAAP to Non-GAAP Reconciliations
Three Months Ended March 31,
2022 2021
Total Revenues $ 41,278 $ 31,228
Core Revenue:
Renewal Commissions(1) $
10,207
Renewal Royalty Fees(2) 14,002 8,746
New Business Commissions(1) 5,367 4,616
New Business Royalty Fees(2)
4,292 3,157
Agency Fees(1) 2,637 2,424
Total Core Revenue 36,505 26,700Cost Recovery Revenue:
Initial Franchise Fees(2) 2,296 1,432
Interest Income 319 261
Total Cost Recovery Revenue 2,615 1,693
Ancillary Revenue:
Contingent Commissions(1) 1,798 2,737
Other Income(2) 360 98
Total Ancillary Revenue
2,158 2,835
Total Revenues $ 41,278 $ 31,228 (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 operations.
(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 and Adjusted EBITDA margin for the three months endedMarch 31, 2022 and 2021 (in thousands): Three Months Ended March 31, 2022 2021 Net Income$ (5,383) $ (1,089) Interest expense 883 601 Depreciation and amortization 1,576 1,000 Tax (benefit) expense (1,602) (294) Equity-based compensation 5,788 1,941 Other (income) expense - (20) Adjusted EBITDA$ 1,262 $ 2,139 Adjusted EBITDA Margin(1) 3 % 7 % (1) Adjusted EBITDA Margin is calculated as Adjusted EBITDA divided by Total Revenue ($1,262 /$41,278 ), and ($2,139 /$31,228 ) for the three months endedMarch 31, 2022 and 2021, respectively. 29 --------------------------------------------------------------------------------
The following tables show a reconciliation from basic earnings per share to
Adjusted EPS (non-GAAP basis) for the three months ended
Three Months Ended March 31,
2022 2021
Earnings per share - basic (GAAP) $ (0.11) $ (0.02)
Add: equity-based compensation(1) 0.16 0.05
Adjusted EPS (non-GAAP) $ 0.04 $ 0.03
(1) Calculated as equity-based compensation divided by sum of weighted average
Class A and Class B shares [$5.8 million /(20.2 million + 16.9 million)] for the
three months ended March 31, 2022 and [$1.9 million / (18.4 million + 18.4
million)] for the three months ended March 31, 2021 .
Liquidity and capital resources
Liquidity and capital resources
We have managed our historical liquidity and capital requirements primarily through the receipt of revenues. Our primary cash flow activities involve: (1) generating cash flow from Commissions and Fees, which largely includes New Business Revenue (Corporate) and Renewal Revenue (Corporate); (2) generating cash flow from Franchise Revenues operations, which largely includes Initial Franchise Fees and Royalty Fees; (3) borrowings, interest payments and repayments under our credit agreement; and (4) issuing shares of Class A common stock. As ofMarch 31, 2022 , our cash and cash equivalents balance was$21.2 million . We have used cash flow from operations primarily to pay compensation and related expenses, general, administrative and other expenses, debt service, special dividends and distributions to our owners.
Credit agreement
See "Note 7. Debt" in the condensed consolidated financial statements included herein for a discussion of the Company's credit facilities.
Comparative cash flows
The following table summarizes our cash flows from operating, investing and financing activities for the periods indicated (in thousands):
Three
Months Ended
2022 2021 Change
Net cash provided by (used for) operating activities
(2,491) (2,100) (391)
Net cash used for financing activities (155) (69) (86)
Net increase in cash and cash equivalents (7,800) 5,719 (13,519)
Cash and cash equivalents, and restricted cash,
beginning of period 30,479 26,236 4,243
Cash and cash equivalents, and restricted cash, end
of period $ 22,679 $ 31,955 $ (9,276)
Operating activities
Net cash used for operating activities was $5.2 million for the three months
ended March 31, 2022 as compared to net cash provided by operating activities of
$7.9 million for the three months ended March 31, 2021 . This decrease in net
cash provided by operating activities was attributable to a decrease in cash
provided from commissions and agency fees receivables of $10.7 million as a
result of the receipts of contingent commissions during the period, a decrease
of $1.2 million in TRA liability, and a $1.8 million increase in cash used from
prepaid expense, offset by an increase of $1.3 million in receivables from
franchisees.
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--------------------------------------------------------------------------------Investing activities
Net cash used for investing activities was$2.5 million for the three months endedMarch 31, 2022 , compared to net cash used in investing activities of$2.1 million for the three months endedMarch 31, 2021 . This increase was driven by continued expansion of corporate offices to support increased hiring.
Financing activities
Net cash used for financing activities was$0.2 million for the three months endedMarch 31, 2022 as compared to net cash used for financing activities of$0.1 million for the three months endedMarch 31, 2021 . This increase in net cash used for financing activities was attributable to repayment of the Company's term note.
Future sources and uses of liquidity
Our sources of liquidity are (1) cash on hand, (2) net working capital, (3) cash flows from operations and (4) our revolving credit facility. Based on our current expectations, we believe that these sources of liquidity will be sufficient to fund our working capital requirements and to meet our commitments in the foreseeable future. We expect that our primary liquidity needs will comprise cash to (1) provide capital to facilitate the organic growth of our business, (2) pay operating expenses, including cash compensation to our employees, (3) make payments under the tax receivable agreement, (4) pay interest and principal due on borrowings under our Credit Agreement (5) pay income taxes, and (6) when deemed advisable by our board of directors, pay dividends.
Dividend policy
There have been no material changes to our dividend policy as described in the Annual Report on Form 10-K.
Tax receivable agreement We entered into a tax receivable agreement with the Pre-IPO LLC Members onMay 1, 2018 that provides for the payment by us to the Pre-IPO LLC Members of 85% of the amount of cash savings, if any, inU.S. federal, state and local income tax or franchise tax that we actually realize as a result of (i) any increase in tax basis inGoosehead Insurance, Inc.'s assets and (ii) tax benefits related to imputed interest deemed arising as a result of payments made under the tax receivable agreement. See "Item 13. Certain relationships and related transactions, and director independence" of the Annual Report on Form 10-K. Holders of Goosehead Financial, LLC Units (other thanGoosehead Insurance, Inc. ) may, subject to certain conditions and transfer restrictions described above, redeem or exchange their LLC Units for shares of Class A common stock ofGoosehead Insurance, Inc. on a one-for-one basis.Goosehead Financial, LLC intends to make an election under Section 754 of the Internal Revenue Code of 1986, as amended, and the regulations thereunder (the "Code") effective for each taxable year in which a redemption or exchange of LLC Units for shares of Class A common stock occurs, which is expected to result in increases to the tax basis of the assets ofGoosehead Financial, LLC at the time of a redemption or exchange of LLC Units. The redemptions or exchanges are expected to result in increases in the tax basis of the tangible and intangible assets ofGoosehead Financial, LLC . These increases in tax basis may reduce the amount of tax thatGoosehead Insurance, Inc. would otherwise be required to pay in the future. We have entered into a tax receivable agreement with the Pre-IPO LLC Members that provides for the payment by us to the Pre-IPO LLC Members of 85% of the amount of cash savings, if any, inU.S. federal, state and local income tax or franchise tax that we actually realize as a result of (i) any increase in tax basis inGoosehead Insurance, Inc.'s assets resulting from (a) the purchase of LLC Units from any of the Pre-IPO LLC Members using the net proceeds from any future offering, (b) redemptions or exchanges by the Pre-IPO LLC Members of LLC Units for shares of our Class A common stock or (c) payments under the tax receivable agreement and (ii) tax benefits related to imputed interest deemed arising as a result of payments made under the tax receivable agreement. This payment obligation is an obligation ofGoosehead Insurance, Inc. and not ofGoosehead Financial, LLC . For purposes of the tax receivable agreement, the cash tax savings in income tax will be computed by comparing the actual income tax liability ofGoosehead Insurance, Inc. (calculated with certain assumptions) to the amount of such taxes thatGoosehead Insurance, Inc. would have been required to pay had there been no increase to the tax basis of the assets ofGoosehead Financial, LLC as a result of the redemptions or exchanges and hadGoosehead Insurance, Inc. not entered into the tax receivable agreement. Estimating the amount of payments that may be made under the tax receivable agreement is by its nature imprecise, insofar as the calculation of amounts payable depends on a variety of factors. While the actual increase in tax basis, as well as the amount and timing of any payments under the tax receivable agreement, will vary depending upon a number of factors, including the timing of redemptions or exchanges, the price of shares of our Class A common stock at the time of the redemption or exchange, the extent to which such redemptions or exchanges are taxable and the 31 -------------------------------------------------------------------------------- amount and timing of our income. See "Item 13. Certain relationships and related transactions, and director independence" of the Annual Report on Form 10-K. We anticipate that we will account for the effects of these increases in tax basis and associated payments under the tax receivable agreement arising from future redemptions or exchanges as follows: •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; •to the extent we estimate that we will not realize the full benefit represented by the deferred tax asset, based on an analysis that will consider, among other things, our expectation of future earnings, we will reduce the deferred tax asset with a valuation allowance; and
•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.
Contractual obligations, commitments and contingencies
The following table represents our contractual obligations as of
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