Goosehead Insurance, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Figures are unaudited and, unless noted, in U.S. dollars. The company adopted ASC 606 in 2019 using the modified retrospective method; accordingly, Q1 2020 GAAP figures use ASC 606, while Q1 2019 comparatives use ASC 605 and are not directly comparable.
Business context
Goosehead distributes personal and commercial property and casualty insurance through company-operated agencies (Corporate Channel) and independently owned franchises (Franchise Channel). At quarter-end it had 679 operating franchise locations, up 36% year over year, and 530,000 policies in force, up 45%.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Total revenue | $20.4 million | $23.1 million |
| Operating income | $0.2 million | $8.7 million |
| Net income (loss) | $(0.3) million | $7.3 million |
| Net income (loss) attributable to Goosehead Insurance, Inc. | $(0.2) million | $2.5 million |
| Adjusted EBITDA (non-GAAP) | $1.2 million | $9.5 million |
| Operating cash flow | $(1.5) million | $1.8 million |
Accounting-comparable view: Under ASC 605, Q1 2020 revenue would have been $24.9 million, up 8% from Q1 2019; Core Revenue would have been $19.4 million, up 41%; and Adjusted EBITDA would have been $5.3 million, down from $9.5 million. Reported Core Revenue under ASC 606 was $18.2 million, up 32%. Reported Adjusted EBITDA margin was 6%; on the ASC 605 basis, it was 21%, compared with 41% in Q1 2019.
Q1 2020 basic and diluted loss per share was $(0.01), versus earnings per share of $0.17 basic and $0.16 diluted in Q1 2019. No dividend was declared in Q1 2020; Q1 2019 included a $0.41-per-share extraordinary dividend.
At March 31, 2020, cash and cash equivalents were $10.8 million, plus $1.1 million of restricted cash. Current assets were $25.2 million and current liabilities $11.3 million. Total equity was negative $30.0 million. The balance sheet reported note payable of $46.4 million; the company disclosed $47.1 million of gross borrowings under its refinanced facilities. It had $19.7 million available on its revolver. The company used $1.0 million for investing activities and $0.8 million for financing activities during the quarter.
Changes versus the prior period
- ASC 606 reduced reported Q1 2020 revenue by $4.5 million and net income by $3.6 million versus the company’s ASC 605 presentation of the same quarter. The accounting change materially affects comparisons with Q1 2019.
- On the comparable ASC 605 basis, revenue grew, supported by higher policy and franchise activity. Total Written Premium increased 46% to $214.1 million; Corporate Channel premium grew 30% and Franchise Channel premium grew 54%.
- Contingent commissions fell to $3.0 million on the ASC 605 basis from $7.5 million in Q1 2019. Management attributed the decline in part to higher carrier loss ratios in 2019.
- Employee compensation and benefits rose 47% to $13.5 million, and general and administrative expense rose 33% to $5.9 million, reflecting increased staffing, employee-development costs, franchise growth, and technology investment.
- Operating cash flow declined to an outflow, with management citing lower net income and higher cash use for prepaid expenses.
Outlook, risks and unusual items
- Management said the COVID-19 pandemic had not yet adversely affected revenue, receivable collectibility, access to capital, or expected covenant compliance, but warned that future effects were uncertain. Risks include weaker insurance demand, fewer home closings, mortgage defaults, and challenges to sales, training, and franchise support. Employees shifted to remote work and in-person travel and activities were suspended.
- Management believed available cash, working capital, operating cash flow, and the revolving facility would fund foreseeable needs. The company was in compliance with debt covenants at March 31, 2020. Its facilities are secured by substantially all company assets, including rights to future commissions, and bear variable interest rates.
- The March 2020 refinancing established an $80.0 million term facility and a $25.0 million revolver. The company had drawn $42.1 million on the term facility and $5.0 million on the revolver by quarter-end; the remaining $37.9 million term borrowing was to be drawn by June 30, 2020. An April 13 amendment extended that draw deadline and the deadline for a special dividend to December 31, 2020.
- The company owed $23.0 million under its tax receivable agreement, which entitles pre-IPO members to 85% of specified realized tax savings. Future operating lease commitments were approximately $21.9 million. The company said the upcoming lease-accounting standard could have a significant financial-statement impact.
- On April 1, 2020, the company granted 900,000 stock options to managing directors and expected to recognize $917,000 of compensation expense per quarter over four years, beginning in Q2 2020.
- Management reported no material adverse effect from outstanding litigation was expected, though the amount of any potential loss was not reasonably estimable. The company reported effective disclosure controls as of March 31, 2020.
Most important facts for investors to verify
- Separate ASC 606 accounting effects from underlying operating performance when comparing Q1 2020 with prior periods; review the filing’s ASC 605 reconciliations.
- Track contingent commissions and carrier loss ratios, as well as whether policy growth converts into higher-margin renewal revenue.
- Monitor expense growth, cash burn, and the company’s ability to sustain growth while profitability remains pressured.
- Confirm the timing and use of the remaining $37.9 million term borrowing, revolver availability, debt service, and ongoing covenant compliance.
- Assess the eventual effects of COVID-19 on home transactions, insurance demand, franchise operations, and collections.
- Review the tax receivable agreement liability, negative total equity, lease commitments, and expected option-compensation expense.