Goosehead Insurance, Inc. - Quarter Report: 2023 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


(Mark One)
☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to ______

Commission file number: 001-38466

GOOSEHEAD INSURANCE, INC.

(Exact name of registrant as specified in its charter)


Delaware			82-3886022
(State or other jurisdiction of incorporation or organization)			(IRS Employer Identification No.)
1500 Solana Blvd, Building 4, Suite 4500
Westlake
Texas			76262
(Address of principal executive offices)			(Zip Code)

(469) 480-3669

(Registrant's telephone number, including area code)

Not applicable

(Former name or former address, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
Class A Common Stock, par value $.01 per share	GSHD	NASDAQ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

þ Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

☑

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☑ No

As of October 31, 2023, there were 24,449,883 shares of Class A common stock outstanding and 13,415,165 shares of Class B common stock outstanding.

Table of contents



		Page
Part I
Item 1.	Condensed Consolidated Financial Statements (Unaudited)	5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39
Item 4.	Controls and Procedures	39

Part II
Item 1.	Legal Proceedings	40
Item 1A.	Risk Factors	40
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40
Item 3.	Defaults Upon Senior Securities	40
Item 4.	Mine Safety Disclosures	40
Item 5.	Other Information	40
Item 6.	Exhibits	41

SIGNATURES		41

Commonly used defined terms

As used in this Quarterly Report on Form 10-Q ("Form 10-Q"), unless the context indicates or otherwise requires, the following terms have the following meanings:

•Ancillary Revenue: Revenue that is supplemental to our Core Revenue and Cost Recovery Revenue, Ancillary Revenue is unpredictable and often outside of the Company's control. Included in Ancillary Revenue are Contingent Commissions and other income.

•Agency Fees: Fees separate from commissions charged directly to clients for efforts performed in the issuance of new insurance policies.

•Annual Report on Form 10-K: The Company's annual report on Form 10-K for the fiscal year ended December 31, 2022.

•Carrier: An insurance company.

•Carrier Appointment: A contractual relationship with a Carrier.

•Client Retention: 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.

•Contingent Commission: Revenue in the form of contractual payments from Carriers contingent upon several factors, including growth and profitability of the business placed with the Carrier.

•Core Revenue: The most predictable revenue stream for the Company, these revenues consist of New Business Revenue and Renewal Revenue. New Business Revenue is lower-margin, but fairly predictable. Renewal Revenue is higher-margin and very predictable.

•Cost Recovery Revenue: Revenue received by the Company associated with cost recovery efforts associated with selling and financing franchises. Included in Cost Recovery Revenue are Initial Franchise Fees and Interest Income.

•Franchise Agreement: Agreements governing our relationships with Franchisees.

•Franchisee: An individual or entity who has entered into a Franchise Agreement with us.

•GF: Goosehead Financial, LLC.

•Initial Franchise Fee: Contracted fees paid by Franchisees to compensate Goosehead for the training, onboarding and ongoing support of new franchise locations.

•LLC Unit: a limited liability company unit of Goosehead Financial, LLC.

•New Business Commission: Commissions received from Carriers relating to policies in their first term.

•New Business Revenue: New Business Commissions, Agency Fees, and New Business Royalty Fees.

•New Business Royalty Fees: Royalty Fees received from Franchisees relating to policies in their first term

•NPS: Net Promoter Score is calculated based on a single question: “How likely are you to refer Goosehead 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.

•Policies in Force: As of any reported date, the total count of current (non-cancelled) policies placed by us with our Carriers.

•Policy Term: The contractual period the policy provides insurance coverage to the insured.

•Pre-IPO LLC Members: owners of LLC Units of GF prior to the Offering.

•Renewal Commission: Commissions received from Carriers relating to a policy in a renewal term.

•Renewal Revenue: Renewal Commissions and Renewal Royalty Fees.

•Renewal Royalty Fees: Royalty Fees received from Franchisees relating to a policy in a renewal term.

•Royalty Fees: Fees paid by Franchisees to the Company that are tied to the gross commissions paid by the Carriers related to policies sold or renewed by a franchisee.

•The Offering: The initial public offering completed by Goosehead Insurance, Inc. on May 1, 2018.

•Total Written Premium: As of any reported date, the total amount of current (non-cancelled) gross premium that is placed with Goosehead’s portfolio of Carriers.

Special note regarding forward-looking statements

We have made statements in this Form 10-Q that are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “may,” “might,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” the negative of these terms and other comparable terminology. These forward-looking statements, which are subject to risks, uncertainties and assumptions about us, may include projections of our future financial performance, our anticipated growth strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements, including those factors discussed under the caption entitled “Item 1A. Risk factors” in the Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

The forward-looking statements included in this Form 10-Q are made only as of the date hereof. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. We are under no duty to update any of these forward-looking statements after the date of this Form 10-Q to conform our prior statements to actual results or revised expectations.

PART I

Item 1. Condensed Consolidated Financial Statements (Unaudited)


		Page
Condensed Consolidated Statements of Operations		6
Condensed Consolidated Balance Sheets		7
Condensed Consolidated Statements of Stockholders' Equity		8
Condensed Consolidated Statements of Cash Flows		11
Notes to the Condensed Consolidated Financial Statements		12
Note 1	Organization	12
Note 2	Summary of significant accounting policies	12
Note 3	Revenues	15
Note 4	Franchise fees receivable	17
Note 5	Allowance for uncollectible agency fees	17
Note 6	Property and equipment	18
Note 7	Debt	18
Note 8	Income taxes	19
Note 9	Stockholder's equity	20
Note 10	Non-controlling interest	21
Note 11	Equity-based compensation	22

Note 12	Litigation	23

Goosehead Insurance, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share amounts)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Revenues:
Commissions and agency fees	$	31,980	$	27,402	$	88,637	$	73,676
Franchise revenues	38,729		29,922		108,490		77,299
Interest income	321		363		1,135		1,012
Total revenues	71,030		57,687		198,262		151,987
Operating Expenses:
Employee compensation and benefits	39,436		36,328		113,801		99,471
General and administrative expenses	14,831		13,456		48,019		39,358
Bad debts	797		2,306		3,352		4,762
Depreciation and amortization	2,352		1,809		6,817		5,043
Total operating expenses	57,416		53,899		171,989		148,634
Income from operations	13,614		3,788		26,273		3,353
Other Income (Expense):

Interest expense	(1,617)		(1,414)		(5,057)		(3,411)
Income (loss) before taxes	11,997		2,374		21,216		(58)
Tax expense (benefit)	724		(666)		2,944		(104)
Net income	11,273		3,040		18,272		46
Less: net income (loss) attributable to non-controlling interests	4,339		1,061		7,753		(18)
Net income attributable to Goosehead Insurance, Inc.	$	6,934	$	1,979	$	10,519	$	64
Earnings per share:
Basic	$	0.29	$	0.09	$	0.44	$	—
Diluted	$	0.28	$	0.09	$	0.43	$	—
Weighted average shares of Class A common stock outstanding
Basic	24,124		20,892		23,674		20,531
Diluted	24,891		21,569		24,274		21,430

See Notes to the Condensed Consolidated Financial Statements

Goosehead Insurance, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except per share amounts)


	September 30,		December 31,
	2023		2022
Assets
Current Assets:
Cash and cash equivalents	$	35,203	$	28,743
Restricted cash	1,858		1,644

Commissions and agency fees receivable, net	12,327		14,440
Receivable from franchisees, net	9,147		4,932
Prepaid expenses	9,445		4,334

Total current assets	67,980		54,093
Receivable from franchisees, net of current portion	12,411		23,835
Property and equipment, net of accumulated depreciation	31,707		35,347
Right-of-use asset	39,846		44,080
Intangible assets, net of accumulated amortization	14,785		4,487
Deferred income taxes, net	170,761		155,318
Other assets	3,967		4,193
Total assets	$	341,457	$	321,353
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable and accrued expenses	$	14,779	$	15,958
Premiums payable	1,858		1,644

Lease liability	8,749		6,627

Contract liabilities	4,831		6,031
Note payable	8,750		6,875
Total current liabilities	38,967		37,135
Lease liability, net of current portion	59,687		64,947

Note payable, net of current portion	70,005		86,711
Contract liabilities, net of current portion	27,128		40,522
Liabilities under tax receivable agreement	139,909		125,662
Total liabilities	335,696		354,977

Class A common stock, $0.01 par value per share - 300,000 shares authorized, 24,446 shares issued and outstanding as of September 30, 2023, 23,034 shares issued and outstanding as of December 31, 2022	244		228
Class B common stock, $0.01 par value per share - 50,000 shares authorized, 13,415 issued and outstanding as of September 30, 2023, 14,471 shares issued and outstanding as of December 31, 2022	134		146
Additional paid in capital	96,752		70,866
Accumulated deficit	(50,546)		(60,570)
Total stockholders' equity	46,584		10,670
Non-controlling interests	(40,823)		(44,294)
Total equity	5,761		(33,624)
Total liabilities and equity	$	341,457	$	321,353

See Notes to the Condensed Consolidated Financial Statements

Goosehead Insurance, Inc.

Condensed Consolidated Statements of Stockholders' Equity

(Unaudited)

(In thousands)


	Issued shares of Class A common stock	Issued shares of Class B common stock	Class A Common stock		Class B Common Stock		Additional paid in capital		Accumulated deficit		Total stockholders' equity		Non-controlling interest		Total equity
Balance January 1, 2023	23,034	14,471	$	228	$	146	$	70,866	$	(60,570)	$	10,670	$	(44,294)	$	(33,624)

Net loss	—	—	—		—		—		(81)		(81)		(100)		(181)
Exercise of stock options	17	—	—		—		173		—		173		—		173
Equity-based compensation	—	—	—		—		6,620		—		6,620		—		6,620
Activity under employee stock purchase plan	4	—	—		—		201		—		201		—		201
Redemption of LLC Units	323	(323)	3		(3)		(990)		—		(990)		990		—
Deferred tax adjustments related to Tax Receivable Agreement	—	—	—		—		699		—		699		129		828
Reallocation of Non-controlling interest	—	—	—		—		—		(103)		(103)		103		—
Balance March 31, 2023	23,379	14,147	$	231	$	143	$	77,569	$	(60,754)	$	17,189	$	(43,173)	$	(25,984)




Distributions	—	—	—		—		—		—		—		(5,206)		(5,206)
Net income	—	—	—		—		—		3,666		3,666		3,514		7,180
Exercise of stock options	167	—	2		—		3,516		—		3,518		—		3,518
Equity-based compensation	—	—	—		—		5,872		—		5,872		—		5,872
Activity under employee stock purchase plan	2	—	—		—		144		—		144		—		144
Redemption of LLC Units	352	(352)	4		(4)		(1,112)		—		(1,112)		1,112		—
Deferred tax adjustments related to Tax Receivable Agreement	—	—	—		—		870		—		870		157		1,027
Reallocation of Non-controlling interest	—	—	—		—		—		(477)		(477)		477		—
Balance June 30, 2023	23,900	13,795	$	237	$	139	$	86,859	$	(57,565)	$	29,670	$	(43,118)	$	(13,448)


	Issued shares of Class A common stock	Issued shares of Class B common stock	Class A Common stock		Class B Common Stock		Additional paid in capital		Accumulated deficit		Total stockholders' equity		Non-controlling interest		Total equity
Balance, June 30, 2023	23,900	13,795	$	237	$	139	$	86,859	$	(57,565)	$	29,670	$	(43,118)	$	(13,448)
Distributions	—	—	—		—		—		—		—		(3,275)		(3,275)
Net income	—	—	—		—		—		6,934		6,934		4,339		11,273
Exercise of stock options	164	—	2		—		3,364		—		3,366		—		3,366
Equity-based compensation	—	—	—		—		6,459		—		6,459		—		6,459
Activity under employee stock purchase plan	2	—	—		—		135		—		135		—		135
Redemption of LLC Units	380	(380)	4		(4)		(1,154)		—		(1,154)		1,154		—
Deferred tax adjustments related to Tax Receivable Agreement	—	—	—		—		1,090		—		1,090		162		1,252
Reallocation of Non-controlling interest	—	—	—		—		—		85		85		(85)		—
Balance September 30 2023	24,446	13,415	$	244	$	134	$	96,752	$	(50,546)	$	46,584	$	(40,823)	$	5,761


	Issued shares of Class A common stock	Issued shares of Class B common stock	Class A Common stock		Class B Common Stock		Additional paid in capital		Accumulated deficit		Total stockholders' equity		Non-controlling interest		Total equity
Balance January 1, 2022	20,198	16,909	$	200	$	170	$	46,281	$	(60,671)	$	(14,020)	$	(55,168)	$	(69,188)

Net loss	—	—	—		—		—		(2,257)		(2,257)		(3,126)		(5,383)
Exercise of stock options	19	—	—		—		256		—		256		—		256
Equity-based compensation	—	—	—		—		5,788		—		5,788		—		5,788
Activity under employee stock purchase plan	3	—	—		—		214		—		214		—		214
Redemption of LLC Units	101	(101)	1		(1)		(344)		—		(344)		344		—
Deferred tax adjustments related to Tax Receivable Agreement	—	—	—		—		394		—		394		22		416
Reallocation of Non-controlling interest	—	—	—		—		—		(478)		(478)		478		—
Balance March 31, 2022	20,321	16,808	$	201	$	169	$	52,589	$	(63,406)	$	(10,447)	$	(57,450)	$	(67,897)





Net income	—	—	—		—		—		342		342		2,047		2,389
Exercise of stock options	94	—	1		—		1,007		—		1,008		—		1,008
Equity-based compensation	—	—	—		—		5,173		—		5,173		—		5,173
Activity under employee stock purchase plan	4	—	—		—		177		—		177		—		177
Redemption of LLC Units	115	(115)	1		(1)		(377)		—		(377)		377		—
Deferred tax adjustments related to Tax Receivable Agreement	—	—	—		—		373		—		373		30		403
Reallocation of Non-controlling interest	—	—	—		—		—		(226)		(226)		226		—
Balance June 30, 2022	20,534	16,693	$	203	$	168	$	58,942	$	(63,290)	$	(3,977)	$	(54,770)	$	(58,747)



Net income	—	—	—	—	—	1,979	1,979	1,061	3,040
Exercise of stock options	171	—	2	—	3,004	—	3,006	—	3,006
Equity-based compensation	—	—	—	—	5,395	—	5,395	—	5,395
Activity under employee stock purchase plan	5	—	—	—	165	—	165	—	165
Redemption of LLC Units	492	(492)	5	(5)	(1,579)	—	(1,579)	1,579	—
Deferred tax adjustments related to Tax Receivable Agreement	—	—	—	—	1,311	—	1,311	165	1,476
Reallocation of Non-controlling interest	—	—	—	—	—	29	29	(29)	—
Balance September 30, 2022	21,202	16,201	210	163	67,238	(61,282)	6,329	(51,994)	(45,665)

See Notes to the Condensed Consolidated Financial Statements

Goosehead Insurance, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)


	Nine Months Ended September 30,
	2023		2022
Cash flows from operating activities:
Net income	$	18,272	$	46
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	6,986		5,212

Impairment expense	3,628		—
Bad debt expense	3,352		4,762
Equity-based compensation	18,951		16,356
Impacts of Tax Receivable Agreement	14,665		11,794
Deferred income taxes	(12,336)		(12,274)
Noncash lease activity	(31)		8,857
Changes in operating assets and liabilities:

Receivable from franchisees	5,470		(2,021)
Commissions and agency fees receivable	854		(878)
Prepaid expenses	(5,111)		(788)
Other assets	226		(646)
Accounts payable and accrued expenses	(2,964)		136
Contract liabilities	(14,594)		2,151
Premiums payable	(142)		310

Net cash provided by operating activities	37,227		33,017
Cash flows from investing activities:
Proceeds from notes receivable	34		32
Purchase of software	(4,645)		(2,094)
Cash consideration paid for asset acquisitions	(6,043)		—
Purchase of property and equipment	(3,955)		(14,771)
Net cash used for investing activities	(14,609)		(16,833)
Cash flows from financing activities:

Repayment of note payable	(15,000)		(3,125)

Proceeds from the issuance of Class A common stock	7,537		4,832
Member distributions and dividends	(8,481)		—
Net cash provided by (used for) financing activities	(15,944)		1,707
Net increase in cash and restricted cash	6,674		17,891
Cash and cash equivalents, and restricted cash, beginning of period	30,387		30,479
Cash and cash equivalents, and restricted cash, end of period	$	37,061	$	48,370

Supplemental disclosures of cash flow data:
Cash paid during the period for interest	$	4,849	$	3,242
Cash paid for income taxes	608		444

See Notes to the Condensed Consolidated Financial Statements


Goosehead Insurance, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)

1. Organization

Goosehead Insurance, Inc. (“GSHD”) is the sole managing member of Goosehead Financial, LLC (“GF”) and 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 condensed consolidated financial statements.

GF was organized on January 1, 2016 as a Delaware Limited Liability Company and is headquartered in Westlake, TX.

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 Company had 13 and 12 corporate-owned locations in operation at September 30, 2023 and 2022, respectively. Franchisees are provided access to Carrier Appointments, product training, technology infrastructure, client service centers and back office services. During the three months ended September 30, 2023 and 2022, the Company onboarded 30 and 144 franchise locations, respectively, and had 1,285 and 1,403 operating franchise locations as of September 30, 2023 and 2022, respectively. No franchises were purchased during the three and nine months ended September 30, 2023 and 2022.

All intercompany accounts and transactions have been eliminated in consolidation.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements of the Company have been prepared in accordance with the instructions to Form 10-Q. Therefore, they do not include all of the annual disclosures required by accounting principles generally accepted in the United States of America ("GAAP"). However, in the opinion of management, these statements include all adjustments, consisting of normal recurring adjustments, which are necessary for a fair presentation of the condensed consolidated financial positions at September 30, 2023 and December 31, 2022, the condensed consolidated results of operations, stockholders' equity and statements of cash flows for the three and nine months ended September 30, 2023 and 2022. The interim period condensed consolidated financial statements should be read in conjunction with the Consolidated Financial Statements that are included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

The results of operations for the three and nine months ended September 30, 2023 are not necessarily indicative of the results that can be expected for the entire year. The Company experiences seasonal fluctuations of its revenue due to the timing of contingent commission revenue recognition and trends in housing market activity.

Reclassification

Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period financial statements.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported period. Accordingly, actual results could differ from those estimates as more information becomes known.

Intangible Assets

Intangible assets are stated at cost less accumulated amortization and reflect amounts paid for the Company’s web domain, computer software costs, and purchased books of business (customer accounts). The web domain is amortized over a useful life of fifteen years, computer software costs are amortized over a useful life of three years, and books of business (customer accounts) are amortized over a useful life of eight years. During the three and nine months ended September 30, 2023, the Company purchased books of business (customer accounts) totaling $0.0 million and $6.5 million, respectively.


Goosehead Insurance, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)

Asset Impairment

The Company reviews all of its identifiable assets for impairment periodically and whenever events or changes in business circumstances indicate that the carrying value of the assets may not be recoverable. In reviewing identifiable assets, if the undiscounted future cash flows were less than the carrying amount of the respective assets, an indicator of impairment would exist, and further analysis would be required to determine whether or not a loss would need to be charged against current period earnings as a component of general and administrative expenses.

Based on a review of intangible assets during the three months ended June 30, 2023, the Company identified a group of internally-developed software assets that had not been placed into service and would not be completed. As a result, the Company determined the assets had no fair value and recorded an impairment expense of $1.1 million related to the asset group.

Based on a review of tangible assets during the three months ended June 30, 2023, the Company identified two office leases that will be subleased and completed a recoverability assessment for assets at those locations. Based on the results of the recoverability assessment, the Company determined that the undiscounted cash flows of the assets were below their carrying values. As a result, the Company compared the fair values of the assets to their carrying values and recorded an impairment expense of $1.4 million of property and equipment and $1.1 million of right-of-use asset for the amount the carrying values exceeded the fair values. The Company determined the fair values by estimating sublease cash flows based on market rates for similar properties and discounted them using the Company's internal borrowing rate.

No additional impairment was identified during the three months ended September 30, 2023.

Income Taxes

The Company accounts for income taxes pursuant to the asset and liability method which requires the recognition of deferred income tax assets and liabilities related to the expected future tax consequences arising from temporary differences between the carrying amounts and tax bases of assets and liabilities based on enacted statutory tax rates applicable to the periods in which the temporary differences are expected to reverse. Any effects of changes in income tax rates or laws are included in income tax expense in the period of enactment.

Restricted Cash

The Company holds premiums received from the insured, but not yet remitted to the Carrier, in a fiduciary capacity. Premiums received but not yet remitted included in restricted cash were $1.9 million and $2.3 million as of September 30, 2023 and 2022, respectively.

The following is a reconciliation of our cash and restricted cash balances as presented in the condensed consolidated statements of cash flows for the nine months ended September 30, 2023 and 2022 (in thousands):


	September 30,
	2023		2022
Cash and cash equivalents	$	35,203	$	46,107
Restricted cash	1,858		2,263
Cash and cash equivalents, and restricted cash	$	37,061	$	48,370


Goosehead Insurance, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)

Recently adopted accounting pronouncements

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 from March 12, 2020 through December 31, 2022. In December 2022, ASU 2022-06 extended the effective period through December 31, 2024. 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 condensed consolidated financial statements. The standard will ease, if warranted, the administrative requirements for accounting for the future effects of the rate reform. Our debt agreement contains a provision to move to the Secured Overnight Financing Rate ("SOFR") if or when LIBOR is phased out. On April 26, 2023, the Company entered into an Amendment No.1 to the Second Amended and Restated Credit Agreement executing the provision to move to SOFR from LIBOR. Under the allowable expedients, a modification of a debt contract that is only a replacement of the reference rate is accounted for as a non-substantial modification.


Goosehead Insurance, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)

3. Revenue

Commissions and fees

The Company earns new and renewal commissions paid by insurance carriers, royalty fees from new and renewal commissions earned by franchisees, and fees paid by clients for the identification and placement of insurance coverage. These commissions, fees and royalties are earned at a point in time upon the effective date of the insurance policy, as no performance obligation exists after coverage is bound and the unilateral enforceable right to terminate expires. The transaction price for the commissions and fees is set as the estimated amount to be received for the current policy, including the initial commission earned for the current policy term, adjusted and constrained for an estimate of changes to the commission that may arise due to (1) changes to the policy premium during the current policy term and/or (2) cancellation of the policy before the end of the current term. The Company defines the term of the policy as the contractual period the policy provides insurance coverage to the insured, which is typically 1 year.

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.

Contingent commission revenue is generated from contracts between the Company and 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 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, net of a constraint.

Franchise revenues

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 amount of royalties to be received for the current policy, including the initial commission earned for the current policy term, adjusted and constrained for an estimate of changes to the commission that may arise due to (1) changes to the policy premium during the current policy term and/or (2) cancellation of the policy before the end of the current term. Revenue from royalty fees is recognized over time as the placement of the underlying policies occur.

Contract costs

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.

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 for the franchise sales team, 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 contract.

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.


Goosehead Insurance, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)

Disaggregation of Revenue

The following table disaggregates revenue by source (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Type of revenue stream:
Commissions and agency fees
Renewal Commissions	$	19,036	$	16,485	$	53,395	$	41,233
New Business Commissions	6,125		6,215		17,899		18,312
Agency Fees	2,008		2,740		6,642		8,491
Contingent Commissions	4,811		1,962		10,701		5,640
Franchise revenues
Renewal Royalty Fees	30,040		21,574		80,344		54,446
New Business Royalty Fees	5,910		4,866		17,819		13,979
Initial Franchise Fees	2,430		3,056		8,780		7,943
Other Franchise Revenues	349		426		1,547		931
Interest Income	321		363		1,135		1,012
Total Revenues	$	71,030	$	57,687	$	198,262	$	151,987

Timing of revenue recognition:
Transferred at a point in time	$	27,169	$	25,440	$	77,936	$	68,036
Transferred over time	43,861		32,247		120,326		83,951
Total Revenues	$	71,030	$	57,687	$	198,262	$	151,987

Contract Balances

The following table provides information about receivables, cost to obtain, and contract liabilities from contracts with customers (in thousands):


	September 30, 2023		December 31, 2022		Increase/(decrease)
Cost to obtain franchise contracts(1)	$	2,616	$	3,255	$	(639)
Commissions and agency fees receivable, net(2)	12,327		14,440		(2,113)
Receivable from franchisees(2)	21,558		28,767		(7,209)
Contract liabilities(2)(3)	31,959		46,553		(14,594)

(1) Cost to obtain franchise contracts is included in Other assets on the condensed consolidated balance sheets.

(2) Includes both the current and long term portion of this balance.

(3) Initial Franchise Fees to be recognized over the life of the contract.

The Company records Franchise Fees as contract liabilities on the Condensed Consolidated Balance Sheets when the agreement is executed. Contract liabilities are reduced as fees are recognized in revenue over the expected life of the franchise license. As the term of the franchise license is typically ten years, substantially all of the franchise fee revenue recognized in the period ended September 30, 2023 was included in the contract liabilities balance as of December 31, 2022.

The weighted average remaining amortization period for contract liabilities related to open franchises is 7.2 years.


Goosehead Insurance, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)

Significant changes in contract liabilities are as follows (in thousands):



Contract liabilities at December 31, 2022	$	46,553
Revenue recognized during the period	(8,780)
New deferrals(1)	3,445
Write offs(2)	(9,259)
Contract liabilities at September 30, 2023	$	31,959

(1) Initial Franchise Fees where the consideration is received from the franchisee for services which are to be transferred to the Franchisee over the expected life of the Franchise Agreement.

(2) Franchise Fees, net of recognized revenue, no longer deferred due to the termination of the Franchise Agreement.

4. Franchise Fees Receivable

The balance of Franchise fees receivable included in Receivable from franchisees consisted of the following (in thousands):


	September 30, 2023		December 31, 2022
Franchise fees receivable(1)	$	19,861	$	35,606
Less: Unamortized discount(1)	(5,734)		(9,896)
Less: Allowance for uncollectible franchise fees(1)	(285)		(487)
Net franchise fees receivable(1)	$	13,842	$	25,223

(1) Includes both the current and long term portion of this balance.

Activity in the allowance for uncollectible franchise fees was as follows (in thousands):


Balance at December 31, 2022	$	487
Charges to bad debts	963
Write offs	(1,165)
Balance at September 30, 2023	$	285

Balance at December 31, 2021	$	303
Charges to bad debts	3,099
Write offs	(2,840)
Balance at September 30, 2022	$	562

5. Allowance for Uncollectible Agency Fees

Activity in the allowance for uncollectible agency fees was as follows (in thousands):


Balance at December 31, 2022	$	450
Charges to bad debts	1,174
Write offs	(1,004)
Balance at September 30, 2023	$	620

Balance at December 31, 2021	$	489
Charges to bad debts	1,663
Write offs	(1,658)
Balance at September 30, 2022	$	494


Goosehead Insurance, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)

6. Property and equipment

Property and equipment consisted of the following (in thousands):


	September 30, 2023		December 31, 2022
Furniture & fixtures	$	11,276	$	9,772
Computer equipment	4,071		4,041
Network equipment	436		423
Phone system	326		326
Leasehold improvements	36,228		36,009
Total	52,337		50,571
Less accumulated depreciation	(20,630)		(15,224)
Property and equipment, net	$	31,707	$	35,347

Depreciation expense was $5.7 million and $4.5 million for nine months ended September 30, 2023 and 2022, respectively.

7. Debt

On July 21, 2021, the Company refinanced its $25.0 million revolving credit facility and $80.0 million term note payable to a $50.0 million revolving credit facility and $100.0 million term note payable in order to obtain a more favorable interest rate on the outstanding debt. The Company also has the right, subject to approval by the administrative agent and each issuing bank, to increase the commitments under the credit facilities by an additional $25.0 million.

On April 26, 2023, the Company entered into Amendment No.1 ("Amendment") of the Second Amended and Restated Credit Agreement, which provided that LIBOR should be replaced with SOFR.

The $50.0 million revolving credit facility accrues interest on amounts drawn at an initial interest rate of LIBOR plus 250 basis points, then at an interest rate determined by the Company's leverage ratio for the preceding period. At September 30, 2023 the Company was accruing interest at SOFR plus 200 basis points. At September 30, 2023, the Company had nothing drawn against the revolving credit facility and had a letter of credit of $0.2 million applied against the maximum borrowing availability, payable on July 21, 2026. Thus, amounts available to draw totaled $49.8 million. The revolving credit facility is collateralized by substantially all the Company’s assets, which includes rights to future commissions and royalties.

The term note is payable in quarterly installments of $0.6 million the first twelve months, $1.3 million the next twelve months, $1.9 million the next twelve months, and $2.5 million the last twenty-four months, with a balloon payment of $65.6 million on July 21, 2026. On May 31, 2023, the Company paid an additional $10.0 million toward the term note, reducing the final balloon payment to $55.6 million. The note is collateralized by substantially all of the Company’s assets, which includes rights to future commissions and royalties. Interest is calculated initially at LIBOR plus 225 basis points, then at an interest rate based on the Company's leverage ratio for the preceding period. At September 30, 2023 the Company was accruing interest at SOFR plus 200 basis points.

The interest rate for each leverage ratio tier is as follows:


Leverage Ratio			Interest Rate
< 1.50x			SOFR + 175 bps
> 1.50x			SOFR + 200 bps
> 2.50x			SOFR + 225 bps
> 3.50x			SOFR + 250 bps


Goosehead Insurance, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)

Maturities of the term note payable for the next five years are as follows (in thousands):


	Amount
2023	$	1,875
2024	9,375
2025	10,000
2026	58,125
2027	—
Total	$	79,375

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. As of September 30, 2023, the Company's maximum allowable trailing twelve months debt-to-EBITDA ratio, as defined by the credit agreement, was 4x. 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 September 30, 2023, the Company was in compliance with these covenants.

Because of both instruments’ variable interest rate, the note payable balance at September 30, 2023 and December 31, 2022, approximates fair value using Level 2 inputs, described below.

The framework for measuring fair value provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are described as follows:

•Level 1—Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets.

•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.

•Level 3—Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The asset or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.

8. Income Taxes

GSHD is the sole managing member of GF, which is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, GF is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by GF is passed through to and included in the taxable income or loss of its members, including GSHD, on a pro rata basis. GSHD is subject to U.S. federal income taxes, in addition to state and local income taxes, with respect to GSHD's allocable share of income of GF.

Income tax expense (benefit)

Provision expense (benefit) from income taxes for the three and nine months ended September 30, 2023 was $0.7 million and $2.9 million compared to $(0.7) million and $(0.1) million for the three and nine months ended September 30, 2022. The effective tax rate was 6% and 14% for the three and nine months ended September 30, 2023 and (28)% and 179% for the three and nine months ended September 30, 2022. The increase in the effective tax rate for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 was primarily due to an increase in pre-tax income between periods. The decrease in the effective tax rate for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 was primarily


Goosehead Insurance, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)

due to an increase in pre-tax income between periods from net loss to net income and an increase in taxes from a tax benefit to tax expense.

Deferred taxes

Deferred tax assets at September 30, 2023 were $170.8 million compared to $155.3 million at December 31, 2022. The primary contributing factor to the increase in deferred tax assets is additional redemptions of LLC Units of GF for shares of Class A common stock of GSHD during the nine months ended September 30, 2023.

Tax Receivable Agreement

GF 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 and corresponding Class B common stock for shares of Class A common stock occurs. Future taxable redemptions or exchanges are expected to result in tax basis adjustments to the assets of GF that will be allocated to the Company and thus produce favorable tax attributes. These tax attributes would not be available to GSHD in the absence of those transactions. The anticipated tax basis adjustments are expected to reduce the amount of tax that GSHD would otherwise be required to pay in the future.

GSHD entered into a tax receivable agreement with the Pre-IPO LLC Members on May 1, 2018 that provides for the payment by GSHD to the Pre-IPO LLC Members of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that GSHD actually realizes as a result of (i) any increase in tax basis in GSHD's assets and (ii) tax benefits related to imputed interest deemed arising as a result of payments made under the tax receivable agreement.

During the three and nine months ended September 30, 2023, an aggregate of 380,001 and 1,055,458 LLC Units were redeemed by the Pre-IPO LLC Members for newly issued shares of Class A common stock. In connection with these redemptions, GSHD received 380,001 and 1,055,458 LLC Units, which resulted in an increase in the tax basis of its investment in GF subject to the provisions of the tax receivable agreement. The Company recognized a liability for the TRA Payments due to the Pre-IPO LLC Members, representing 85% of the aggregate tax benefits the Company expects to realize from the tax basis increases related to the redemptions of LLC Units, after concluding it was probable that such TRA Payments would be paid based on its estimates of future taxable income. As of September 30, 2023, the total amount of TRA Payments due to the Pre-IPO LLC Members under the tax receivable agreement was $140.3 million, of which $0.4 million was current and included in Accounts payables and accrued expenses on the Condensed Consolidated Balance Sheet. Future exchanges of LLC Units for Class A common stock will result in additional TRA payments.

Uncertain tax positions

GSHD has determined there are no material uncertain tax positions as of September 30, 2023.

9. Stockholders' Equity

Class A Common Stock

GSHD has a total of 24,446 thousand shares of its Class A common stock outstanding at September 30, 2023. 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.

Class B Common Stock

GSHD has a total of 13,415 thousand shares of its Class B common stock outstanding at September 30, 2023. 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.

Holders of Class A common stock and Class B common stock vote together as a single class on all matters presented to GSHD's shareholders for their vote or approval, except as otherwise required by applicable law, by agreement, or by GSHD's certificate of incorporation.


Goosehead Insurance, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)

Earnings Per Share

The following table sets forth the calculation of basic earnings per share ("EPS") based on net income attributable to GSHD for the three and nine months ended September 30, 2023 and 2022, divided by the basic weighted average number of Class A common stock as of September 30, 2023 and 2022 (in thousands, except per share amounts). Diluted EPS 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. Diluted EPS was computed using the treasury stock method for stock options.

Shares of the Company’s Class B common stock do not share in the earnings or losses attributable to Goosehead Insurance, Inc. and are therefore not participating securities. As such, separate presentation of basic and diluted EPS of Class B common stock under the two-class method has not been presented. Shares of the Company’s Class B common stock are, however, considered potentially dilutive shares of Class A common stock because shares of Class B common stock, together with the related LLC Units, are exchangeable into shares of Class A common stock on a one-for-one basis.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Numerator:
Income (loss) before taxes	$	11,997	$	2,374	$	21,216	$	(58)
Less: income (loss) before taxes attributable to non-controlling interests	4,339		1,061		7,753		(18)
Income (loss) before taxes attributable to GSHD	7,658		1,313		13,463		(40)
Less: income tax expense (benefit) attributable to GSHD	724		(666)		2,944		(104)
Net income attributable to GSHD	$	6,934	$	1,979	$	10,519	$	64
Denominator:
Weighted average shares of Class A common stock outstanding - basic	24,124		20,892		23,674		20,531
Effect of dilutive securities:
Stock options(1)	767		677		601		899
Weighted average shares of Class A common stock outstanding - diluted	24,891		21,569		24,274		21,430

Earnings per share of Class A common stock - basic	$	0.29	$	0.09	$	0.44	$	—
Earnings per share of Class A common stock - diluted	$	0.28	$	0.09	$	0.43	$	—

(1) 1,055 and 1,800 stock options were excluded from the computation of diluted earnings per share of Class A common stock for the three and nine months ended September 30, 2023 because the effect would have been anti-dilutive. 2,388 and 1,947 stock options were excluded from the computation of diluted earnings per share of Class A common stock for the three and nine months ended September 30, 2022 because the effect would have been anti-dilutive.

10. Non-controlling interest

GSHD is the sole managing member of GF and, as a result, it consolidates the financial results of GF. GSHD reports a non-controlling interest representing the economic interest in GF held by the other members of GF.

GF makes distributions to the LLC Unit holders on a pro rata basis to facilitate the LLC Unit holder's quarterly tax payments. For the three and nine months ended September 30, 2023, GF made distributions of $8.7 million and $21.4 million, of which $3.3 million and $8.5 million was made to Pre-IPO LLC Members. The remaining $5.5 million and $12.9 million was made to GSHD and was eliminated in consolidation.


Goosehead Insurance, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)

Under the amended and restated Goosehead Financial, LLC Agreement, the Pre-IPO LLC Members have the right, from and after the completion of the Offering (subject to the terms of the amended and restated Goosehead Financial, LLC Agreement), to require GSHD to redeem all or a portion of their LLC Units for, at GSHD's election, newly-issued shares of Class A common stock on a one-for-one basis or a cash payment equal to the volume weighted average market price of one share of GSHD's Class A common stock for each LLC Unit redeemed (subject to customary adjustments, including for stock splits, stock dividends and reclassifications) in accordance with the terms of the amended and restated Goosehead Financial, LLC Agreement. Additionally, in the event of a redemption request by a Pre-IPO LLC Member, GSHD may, at its option, effect a direct exchange of cash or Class A common stock for LLC Units in lieu of such a redemption. Shares of Class B common stock will be cancelled on a one-for-one basis if GSHD, at the election of a Pre-IPO LLC Member, redeems or exchanges LLC Units of such Pre-IPO LLC Member pursuant to the terms of the amended and restated Goosehead Financial, LLC Agreement. Except for transfers to GSHD pursuant to the amended and restated Goosehead Financial, LLC Agreement or to certain permitted transferees, the Pre-IPO LLC Members are not permitted to sell, transfer or otherwise dispose of any LLC Units or shares of Class B common stock.

During the three and nine months ended September 30, 2023, an aggregate of 380 thousand and 1,055 thousand LLC Units were redeemed by the non-controlling interest holders. Pursuant to the GF LLC Agreement, GSHD issued 380 thousand and 1,055 thousand shares of Class A common stock in connection with these redemptions and received 380 thousand and 1,055 thousand LLC Interests, increasing GSHD's ownership interest in GF. Simultaneously, and in connection with these redemptions, 380 thousand and 1,055 thousand shares of Class B common stock were surrendered and cancelled.

The following table summarizes the ownership interest in GF as of September 30, 2023 (in thousands):


	September 30, 2023
	LLC Units	Ownership %
Number of LLC Units held by GSHD	24,446	64.6%
Number of LLC Units held by non-controlling interest holders	13,415	35.4%
Number of LLC Units outstanding	37,861	100.0%

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 percentages for the three and nine months ended September 30, 2023 were 36.1% and 37.1%, respectively.

The following table summarizes the effects of changes in ownership in GF on the equity of GSHD for the three and nine months ended September 30, 2023 and 2022 as follows (in thousands):


	Three Months Ended September 30,			Nine Months Ended September 30,
		2023		2022		2023		2022
Net income attributable to Goosehead Insurance, Inc.		$	6,934	$	1,979	$	10,519	$	64
Transfers (to) from non-controlling interests:
Decrease in additional paid-in capital as a result of the redemption of LLC interests		(1,154)		(1,579)		(3,256)		(2,300)
Increase in additional paid-in capital as a result of activity under employee stock purchase plan		135		165		479		556
Total effect of changes in ownership interest on equity attributable to Goosehead Insurance, Inc.		$	5,915	$	565	$	7,742	$	(1,680)

11. Equity-Based Compensation

Stock option expense was $6.5 million and $19.0 million for the three and nine months ended September 30, 2023. Stock option expense was $5.4 million and $16.4 million for the three and nine months ended September 30, 2022.


Goosehead Insurance, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)

12. Litigation

From time to time, GSHD may be involved in various legal proceedings, lawsuits and claims incidental to the conduct of the Company's business. The Company records accruals for legal contingencies to the extent that it has concluded that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. When a material loss contingency is reasonably possible but not probable, the Company does not record a liability, but instead discloses the nature and the amount of the claim, and an estimate of the loss or range of loss, if such an estimate can be made. In the opinion of the Company's management, the likely results of any ongoing legal matters are not expected, either individually or in the aggregate, to have a material adverse effect on the Company's financial position, results of operations or cash flows.

On November 10, 2022, a verified stockholder class action complaint for declaratory relief, captioned Mickey Dollens v. Goosehead Insurance, Inc., C.A. No. 2022-1018-JTL, was filed in the Court of Chancery of the State of Delaware (the “Dollens Action”), alleging certain corporate governance documents adopted by the Company were invalid under Delaware law. On August 8, 2023, the parties entered into a proposed settlement providing for certain non-monetary benefits to the class (i.e., revisions to the Company's Stockholder Agreement). A hearing is set for February 16, 2024 to, among other things, consider whether to grant final approval of the proposed settlement. Additionally, the plaintiffs intends to petition the Court for attorneys’ fees and litigation expenses. While there can be no assurance regarding the ultimate outcome of the petition, the Company believes a potential loss, if any, would not be material.

Item 2: Management’s discussion and analysis of financial condition and results of operations

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 for the fiscal year ended December 31, 2022.

We are a rapidly growing personal lines independent insurance agency, reinventing the traditional approach to distributing personal lines products and services throughout the 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 36% of the company, representing our commitment to the long-term success of the Company.

Financial Highlights for the Third Quarter of 2023:

•Total revenue increased 23% from the third quarter of 2022 to $71.0 million

•Core Revenue* increased by 22% from the third quarter of 2022 to $63.1 million

•Total Written Premiums placed increased 30% from the prior-year period to $802.9 million

•Net income increased by $8.2 million from the third quarter of 2022 to $11.3 million, or 16% of total revenues

•Adjusted EBITDA* increased 104% from the third quarter of 2022 to $22.4 million, or 32% of total revenues

•Basic and diluted earnings per share were $0.29 and $0.28, respectively, and Adjusted EPS* was $0.46 per share for the three months ended September 30, 2023

•Policies in Force increased 18% from September 30, 2022 to 1,456,000 at September 30, 2023

•Corporate sales headcount decreased 23% from September 30, 2022 to 316 at September 30, 2023

◦As of September 30, 2023, 132 of these Corporate sales agents had less than one year of tenure and 184 had greater than one year of tenure

•Total franchises decreased 31% compared to the prior-year period to 1,584; total operating franchises decreased 8% from September 30, 2022 to 1,285 at September 30, 2023

◦In Texas as of September 30, 2023, 48 operating Franchisees had less than one year of tenure and 259 operating Franchisees had greater than one year of tenure

◦Outside of Texas as of September 30, 2023, 206 operating Franchisees had less than one year of tenure and 772 had greater than one year of tenure

*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".

Certain income statement line items

Revenues

For the three months ended September 30, 2023, revenue increased by 23% to $71.0 million from $57.7 million for the three months ended September 30, 2022. For the nine months ended September 30, 2023, revenue increased by 30% to $198.3 million from $152.0 million for the nine months ended September 30, 2022. Total Written Premium, which we believe is the best leading indicator of future revenue, increased 30% to $803 million for the three months ended September 30, 2023 from $616 million for the three months ended September 30, 2022. Total Written Premium increased 35% for the nine months ended September 30, 2023 to $2,208 million from $1,632 million for the nine months ended September 30, 2022. Total Written Premiums drive our current and future Core Revenue and give 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 measure 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 Franchise Revenues - 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:


	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2023			2022			2023			2022
Core Revenue:
Renewal Commissions(1)	$19,036	27	%	$16,485	29	%	$53,395	27	%	$41,233	27	%
Renewal Royalty Fees(2)	30,040	42	%	21,574	37	%	80,344	41	%	54,446	36	%
New Business Commissions(1)	6,125	9	%	6,215	11	%	17,899	9	%	18,312	12	%
New Business Royalty Fees(2)	5,910	8	%	4,866	8	%	17,819	9	%	13,979	9	%
Agency Fees(1)	2,008	3	%	2,740	5	%	6,642	3	%	8,491	6	%
Total Core Revenue	63,119	89	%	51,880	90	%	176,099	89	%	136,461	90	%
Cost Recovery Revenue:
Initial Franchise Fees(2)	2,430	3	%	3,056	5	%	8,780	4	%	7,943	5	%
Interest Income	321	—	%	363	1	%	1,135	1	%	1,012	1	%
Total Cost Recovery Revenue	2,751	4	%	3,419	6	%	9,915	5	%	8,955	6	%
Ancillary Revenue:
Contingent Commissions(1)	4,811	7	%	1,962	3	%	10,701	5	%	5,640	4	%
Other Franchise Revenues(2)	349	—	%	426	1	%	1,547	1	%	931	1	%
Total Ancillary Revenue	5,160	7	%	2,388	4	%	12,248	6	%	6,571	4	%
Total Revenues	$71,030	100	%	$57,687	100	%	$198,262	100	%	$151,987	100	%

(1) Renewal Commissions, New Business Commissions, Agency Fees, and Contingent Commissions are included in "Commissions and agency fees" as shown on the Condensed consolidated statements of operations.

(2) Renewal Royalty Fees, New Business Royalty Fees, Initial Franchise Fees, and Other Franchise Revenues are included in "Franchise revenues" as shown on the Condensed consolidated statements of operations.

Consolidated results of operations

The following is a discussion of our consolidated results of operations for each of the three and nine months ended September 30, 2023 and 2022. 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 and nine months ended September 30, 2023 and 2022 (in thousands):


	Three Months Ended September 30,								Nine Months Ended September 30,
	2023				2022				2023				2022
Revenues:
Commissions and agency fees	$	31,980	45	%	$	27,402	48	%	$	88,637	45	%	$	73,676	48	%
Franchise revenues	38,729		55	%	29,922		52	%	108,490		55	%	77,299		51	%
Interest income	321		—	%	363		1	%	1,135		1	%	1,012		1	%
Total revenues	71,030		100	%	57,687		100	%	198,262		100	%	151,987		100	%
Operating Expenses:
Employee compensation and benefits	39,436		69	%	36,328		67	%	113,801		66	%	99,471		67	%
General and administrative expenses	14,831		26	%	13,456		25	%	48,019		28	%	39,358		26	%
Bad debts	797		1	%	2,306		4	%	3,352		2	%	4,762		3	%
Depreciation and amortization	2,352		4	%	1,809		3	%	6,817		4	%	5,043		3	%
Total operating expenses	57,416		100	%	53,899		100	%	171,989		100	%	148,634		100	%
Income from operations	13,614				3,788				26,273				3,353
Other Income (Expense):

Interest expense	(1,617)				(1,414)				(5,057)				(3,411)
Income (loss) before taxes	11,997				2,374				21,216				(58)
Tax expense (benefit)	724				(666)				2,944				(104)
Net income	11,273				3,040				18,272				46
Less: net income (loss) attributable to non-controlling interests	4,339				1,061				7,753				(18)
Net income attributable to Goosehead Insurance, Inc.	$	6,934			$	1,979			$	10,519			$	64

Revenues

For the three months ended September 30, 2023 revenue increased 23% to $71.0 million from $57.7 million for the three months ended September 30, 2022. For the nine months ended September 30, 2023 revenue increased 30% to $198.3 million from $152.0 million for the nine months ended September 30, 2022.

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 these revenue streams by amount and as a percentage of total commissions and agency fees for the periods indicated (in thousands):


	Three Months Ended September 30,								Nine Months Ended September 30,
	2023				2022				2023				2022
Core Revenue:
Renewal Commissions	$	19,036	60	%	$	16,485	59	%	$	53,395	60	%	$	41,233	56	%
New Business Commissions	6,125		19	%	6,215		23	%	17,899		20	%	18,312		25	%
Agency Fees	2,008		6	%	2,740		10	%	6,642		8	%	8,491		12	%
Total Core Revenue:	27,169		85	%	25,440		93	%	77,936		88	%	68,036		92	%
Ancillary Revenue:
Contingent Commissions	4,811		15	%	1,962		7	%	10,701		12	%	5,640		8	%
Commissions and agency fees	$	31,980	100	%	$	27,402	100	%	$	88,637	100	%	$	73,676	100	%

Renewal Commissions increased by $2.6 million or 15%, to $19.0 million for the three months ended September 30, 2023 from $16.5 million for the three months ended September 30, 2022. Renewal Commissions increased by $12.2 million or 29%, to $53.4 million for the nine months ended September 30, 2023 from $41.2 million for the nine months ended September 30, 2022. The increases during the three and nine months ended September 30, 2023 were primarily attributable to an increase in the number of policies in the renewal term from September 30, 2022 to September 30, 2023 and premium rate increases, offset by a slight decline in client retention to 87% as of September 30, 2023 from 88% as of September 30, 2022.

New Business Commissions decreased by $0.1 million, or 1%, to $6.1 million for the three months ended September 30, 2023 from $6.2 million for the three months ended September 30, 2022. New Business Commissions decreased by $0.4 million or 2%, to $17.9 million for the nine months ended September 30, 2023 from $18.3 million for the nine months ended September 30, 2022. The decrease during the three and nine months ended September 30, 2023 was primarily driven by a decrease in the number of Corporate Sales agents. Revenue from Agency Fees decreased by $0.7 million or 27% to $2.0 million for the three months ended September 30, 2023 from $2.7 million for the three months ended September 30, 2022. Revenue from Agency Fees decreased by $1.8 million or 22%, to $6.6 million for the nine months ended September 30, 2023 from $8.5 million for the nine months ended September 30, 2022. The decrease in Agency Fees during the three and nine months ended September 30, 2023 was primarily attributable to a decrease in the percentage of policies written where an Agency Fee was charged.

Revenue from Contingent Commissions increased by $2.8 million, to $4.8 million for the three months ended September 30, 2023 from $2.0 million for the three months ended September 30, 2022. Revenue from Contingent Commissions increased by $5.1 million, to $10.7 million for the nine months ended September 30, 2023 from $5.6 million for the nine months ended September 30, 2022. The increase during the three and nine months ended September 30, 2023 was primarily attributable to an increase in Total Written Premium as well as receiving and qualifying for additional contingent commissions.

Franchise revenues

Franchise Revenues consist of Royalty Fees, Initial Franchise Fees, and Other Franchise Revenues.

The following table sets forth these revenue streams by amount and as a percentage of franchise revenues for the periods indicated (in thousands):


	Three Months Ended September 30,								Nine Months Ended September 30,
	2023				2022				2023				2022
Core Revenues:
Renewal Royalty Fees	$	30,040	78	%	$	21,574	72	%	$	80,344	74	%	$	54,446	70	%
New Business Royalty Fees	5,910		15	%	4,866		16	%	17,819		16	%	13,979		18	%
Total Core Revenues:	35,950		93	%	26,440		88	%	98,163		90	%	68,425		89	%
Cost Recovery Revenues:
Initial Franchise Fees	2,430		6	%	3,056		10	%	8,780		8	%	7,943		10	%
Ancillary Revenues:
Other Franchise Revenues	349		1	%	426		1	%	1,547		2	%	931		2	%
Franchise revenues	$	38,729	100	%	$	29,922	100	%	$	108,490	100	%	$	77,299	100	%

Revenue from Renewal Royalty Fees increased by $8.5 million, or 39%, to $30.0 million for the three months ended September 30, 2023 from $21.6 million for the three months ended September 30, 2022. Revenue from Renewal Royalty Fees increased by $25.9 million, or 48%, to $80.3 million for the nine months ended September 30, 2023 from $54.4 million for the nine months ended September 30, 2022. The increase in revenue from Renewal Royalty Fees during the three and nine months ended September 30, 2023 was primarily attributable to an increase in the number of policies in the renewal term and rising premium rates, offset by a slight decline in client retention to 87% as of September 30, 2023 from 88% as of September 30, 2022.

Revenue from New Business Royalty Fees increased by $1.0 million, or 21%, to $5.9 million for the three months ended September 30, 2023 from $4.9 million for the three months ended September 30, 2022. Revenue from New Business Royalty Fees increased by $3.8 million, or 27%, to $17.8 million for the nine months ended September 30, 2023 from $14.0 million for the nine months ended September 30, 2022. The increase in revenue from New Business Royalty Fees during the three and nine months ended September 30, 2023 was primarily attributable to an increase in agent productivity and rising premium rates.

Revenue from Initial Franchise Fees decreased by $0.6 million, or 20%, to $2.4 million for the three months ended September 30, 2023 from $3.1 million for the three months ended September 30, 2022. The 20% decrease was primarily attributable to a decrease in total franchises. Revenue from Initial Franchise Fees increased by $0.8 million, or 11%, to $8.8 million for the nine months ended September 30, 2023 from $7.9 million for the nine months ended September 30, 2022. The primary reason for this increase was higher turnover of franchises during the period, which accelerates recognition of Initial Franchise Fees for terminated franchises.

Interest income

Interest income decreased by $0.1 million, or 12%, to $0.3 million for the three months ended September 30, 2023 from $0.4 million for the three months ended September 30, 2022. The decrease was primarily attributable to the decrease in the average Franchise Agreements currently under a payment plan option. Interest income increased by $0.1 million, or 12%, to $1.1 million for the nine months ended September 30, 2023 from $1.0 million for the nine months ended September 30, 2022. The increase was primarily attributable to higher average Franchise Agreements signed under the payment plan option.

Expenses

Employee compensation and benefits

Employee compensation and benefits expenses increased by $3.1 million, or 9%, to $39.4 million for the three months ended September 30, 2023 from $36.3 million for the three months ended September 30, 2022. The 9% increase was primarily related to the hiring of more experienced team members, particularly at the leadership level, and a 20% increase in equity based compensation related to stock option awards during the year. Employee compensation and benefits expenses increased by $14.3 million, or 14%, to $113.8 million for the nine months ended September 30, 2023 from $99.5 million for the nine months ended September 30, 2022. The 14% increase was primarily related to the hiring of more experienced team members, particularly at the leadership level, and an increase in equity-based compensation of 16% related to stock option awards during the year.

General and administrative expenses

General and administrative expenses increased by $1.4 million, or 10%, to $14.8 million for the three months ended September 30, 2023 from $13.5 million for the three months ended September 30, 2022. The 10% increase was primarily related to increased spend on software and professional services. General and administrative expenses increased by $8.7 million, or 22%, to $48.0 million for the nine months ended September 30, 2023 from $39.4 million for the nine months ended September 30, 2022. This increase was primarily attributable to $3.6 million asset impairment charges related to internally developed software and impairment of two office locations the Company determined to sublease, increased spend on rent-related costs due to expansion of our corporate office space, and increased spending on software and professional services.

Bad debts

Bad debts decreased by $1.5 million, or 65%, to $0.8 million for the three months ended September 30, 2023 from $2.3 million for the three months ended September 30, 2022. Bad debts decreased by $1.4 million, or 30%, to $3.4 million for the nine months ended September 30, 2023 from $4.8 million for the nine months ended September 30, 2022. The decrease during the three and nine months ended September 30, 2023 was primarily attributable to a decrease in the average tenure of a terminated franchise.

Depreciation and amortization

Depreciation and amortization increased by $0.5 million, or 30%, to $2.4 million for the three months ended September 30, 2023 from $1.8 million for the three months ended September 30, 2022. Depreciation and amortization increased by $1.8 million, or 35%, to $6.8 million for the nine months ended September 30, 2023 from $5.0 million for the nine months ended September 30, 2022. This increase during the three and nine months ended September 30, 2023 was primarily attributable to the increase in fixed assets due to office expansion since September 30, 2022 as well as book of business purchases during the nine months ended September 30, 2023.

Interest expense

Interest expenses increased by $0.2 million for the three months ended September 30, 2023, to $1.6 million from $1.4 million for the three months ended September 30, 2022. Interest expenses increased by $1.6 million for the nine months ended September 30, 2023, to $5.1 million from $3.4 million for the nine months ended September 30, 2022. The primary driver of this increase during the three and nine months ended September 30, 2023 was the rising interest rate environment, partially offset by a decrease in total borrowings 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 and nine months ended 2023 and 2022 (in thousands).


	Three Months Ended September 30,				% Change
	2023		2022
Corporate sales Total Written Premium	$	182,483	$	151,212	21	%
Franchise sales Total Written Premium	620,456		464,363		34	%
Total Written Premium	$	802,939	$	615,575	30	%


	Nine Months Ended September 30,				% Change
	2023		2022
Corporate sales Total Written Premium	$	508,951	$	408,450	25	%
Franchise sales Total Written Premium	1,698,952		1,223,997		39	%
Total Written Premium	$	2,207,903	$	1,632,447	35	%

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 September 30, 2023, we had 1.5 million Policies in Force compared to 1.3 million as of December 31, 2022 and 1.2 million as of September 30, 2022, representing a 13% and 18% increase, respectively.

NPS

Net Promoter Score (NPS) is calculated based on a single question: “How likely are you to refer Goosehead 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 increased to 92 as of September 30, 2023, from 90 as of September 30, 2022.

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.

Client Retention decreased modestly to 87% at September 30, 2023 when compared to 88% at December 31, 2022. For the trailing twelve months ended September 30, 2023, we retained 102% of the premiums we distributed in the trailing twelve months ended September 30, 2022, which increased from the 100% premium retention at December 31, 2022. 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 ended September 30, 2023, New Business Revenue grew 2% to $14.0 million, from $13.8 million for the three months ended September 30, 2022. For the nine months ended September 30, 2023, New Business Revenue grew 4% to $42.4 million, from $40.8 million for the nine months ended September 30, 2022. Growth in New Business Revenue during the three and nine months ended September 30, 2023 was primarily driven by growth in agent productivity and rising premium rates.

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 ended September 30, 2023, Renewal Revenue grew 29% to $49.1 million, from $38.1 million for the three months ended September 30, 2022. For the nine months ended September 30, 2023, Renewal Revenue grew 40% to $133.7 million, from $95.7 million for the nine months ended September 30, 2022. Growth in Renewal Revenue during the three and nine months ended September 30, 2023 was primarily driven by Client Retention of 87% at September 30, 2023, and rising premium rates.

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, net income, net income margin or earnings per share, 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 $11.2 million, or 22%, to $63.1 million for the three months ended September 30, 2023 from $51.9 million for the three months ended September 30, 2022. Core Revenue increased by $39.6 million, or 29%, to $176.1 million for the nine months ended September 30, 2023 from $136.5 million for the nine months ended September 30, 2022. The primary drivers of the increase during the three and nine months ended September 30, 2023 were the higher number of policies in the renewal term from September 30, 2022 to September 30, 2023 as well as premium retention of 102% as of September 30, 2023.

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 decreased by $0.7 million, or 20%, to $2.8 million for the three months ended September 30, 2023 from $3.4 million for the three months ended September 30, 2022. The primary driver of the decrease was a decrease in total franchises. Cost Recovery Revenue increased by $1.0 million, or 11%, to $9.9 million for the nine months ended September 30, 2023 from $9.0 million for the nine months ended September 30, 2022. The primary driver of the increase was an increase in terminations of franchises, which accelerates recognition of initial franchise fee revenue.

Ancillary Revenue

Ancillary Revenue is a supplemental measure of our performance and includes Contingent Commissions and Other Franchise Revenues. 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 increased by $2.8 million to $5.2 million for the three months ended September 30, 2023 from $2.4 million for the three months ended September 30, 2022. Ancillary Revenue increased by $5.7 million to $12.2 million for the nine months ended September 30, 2023 from $6.6 million for the nine months ended September 30, 2022.

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, impairment expense, and other non-operating items, including, among other things, certain non-cash charges and certain non-recurring or non-operating gains or losses.

Adjusted EBITDA increased by $11.4 million, or 104%, to $22.4 million for the three months ended September 30, 2023 from $11.0 million for the three months ended September 30, 2022. Adjusted EBITDA increased by $30.9 million, or 125%, to $55.7 million for the nine months ended September 30, 2023 from $24.8 million for the nine months ended September 30, 2022. The primary drivers of the increase in Adjusted EBITDA during the three and nine months ended September 30, 2023 were growing higher margin Renewal Revenue, decreases in Corporate agent headcount, and slower growth in General and Administrative expenses.

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 ended September 30, 2023, Adjusted EBITDA Margin was 32% compared to 19% for the three months ended September 30, 2022. For the nine months ended September 30, 2023, Adjusted EBITDA Margin was 28% compared to 16% for the nine months ended September 30, 2022. The primary drivers of the increase in Adjusted EBITDA Margin during the three and nine months ended September 30, 2023 were growing higher margin Renewal Revenue, decreases in Corporate agent headcount, and slower growth in General and Administrative expenses.

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

The following tables show a reconciliation from Total Revenues to Core Revenue, Cost Recovery Revenue, and Ancillary Revenue for the three and nine months ended September 30, 2023 and 2022 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Total Revenues	$	71,030	$	57,687	$	198,262	$	151,987

Core Revenue:
Renewal Commissions(1)	$	19,036	$	16,485	$	53,395	$	41,233
Renewal Royalty Fees(2)	30,040		21,574		80,344		54,446
New Business Commissions(1)	6,125		6,215		17,899		18,312
New Business Royalty Fees(2)	5,910		4,866		17,819		13,979
Agency Fees(1)	2,008		2,740		6,642		8,491
Total Core Revenue	63,119		51,880		176,099		136,461
Cost Recovery Revenue:
Initial Franchise Fees(2)	2,430		3,056		8,780		7,943
Interest Income	321		363		1,135		1,012
Total Cost Recovery Revenue	2,751		3,419		9,915		8,955
Ancillary Revenue:
Contingent Commissions(1)	4,811		1,962		10,701		5,640
Other Franchise Revenues(2)	349		426		1,547		931
Total Ancillary Revenue	5,160		2,388		12,248		6,571
Total Revenues	$	71,030	$	57,687	$	198,262	$	151,987

(1) Renewal Commissions, New Business Commissions, Agency Fees, and Contingent Commissions are included in "Commissions and agency fees" as shown on the condensed consolidated statements of operations.

(2) Renewal Royalty Fees, New Business Royalty Fees, Initial Franchise Fees, and Other Franchise Revenues are included in "Franchise revenues" as shown on the condensed consolidated statements of operations.

The following tables show a reconciliation from net income to Adjusted EBITDA and Adjusted EBITDA margin for the three and nine months ended September 30, 2023 and 2022 (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
Net Income	$	11,273		$	3,040		$	18,272		$	46
Interest expense	1,617			1,414			5,057			3,411
Depreciation and amortization	2,352			1,809			6,817			5,043
Tax expense (benefit)	724			(666)			2,944			(104)
Equity-based compensation	6,459			5,395			18,951			16,356
Impairment expense	—			—			3,628			—

Adjusted EBITDA	$	22,425		$	10,992		$	55,669		$	24,752
Adjusted EBITDA Margin(1)	32		%	19		%	28		%	16		%

(1) Adjusted EBITDA Margin is calculated as Adjusted EBITDA divided by Total Revenue ($22,425/$71,030), and ($10,992/$57,687) for the three months ended September 30, 2023 and 2022, respectively and ($55,669/$198,262), and ($24,752/$151,987) for the nine months ended September 30, 2023 and 2022, respectively.

The following tables show a reconciliation from basic earnings per share to Adjusted EPS (non-GAAP basis) for the three and nine months ended September 30, 2023 and 2022. Note that totals may not sum due to rounding:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Earnings per share - basic (GAAP)	$	0.29	$	0.09	$	0.44	$	—
Add: equity-based compensation(1)	0.17		0.14		0.50		0.44
Add: impairment expense(2)	—		—		0.10		—
Adjusted EPS (non-GAAP)	$	0.46	$	0.24	$	1.04	$	0.44

(1) Calculated as equity-based compensation divided by sum of weighted average Class A and Class B shares [$6.5 million/(24.1 million + 13.6 million)] for the three months ended September 30, 2023 and [$5.4 million/ (20.9 million + 16.4 million)] for the three months ended September 30, 2022. Calculated as equity-based compensation divided by sum of weighted average Class A and Class B shares [$19.0 million/(23.7 million + 14.0 million)] for the nine months ended September 30, 2023 and [$16.4 million/ (20.5 million + 16.7 million)] for the nine months ended September 30, 2022.

(2) Calculated as impairment expense divided by sum of weighted average Class A and Class B shares [$0.0 million/(24.1 million + 13.6 million)] for the three months ended September 30, 2023. Calculated as impairment expense divided by sum of weighted average Class A and Class B shares [$3.6 million/(23.7 million + 14.0 million)] for the nine months ended September 30, 2023.

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, Renewal Revenue, and Agency Fees; (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 of September 30, 2023, our cash and cash equivalents balance was $35.2 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):


	Nine Months Ended September 30,
	2023		2022		Change
Net cash provided by operating activities	$	37,227	$	33,017	$	4,210
Net cash used for investing activities	(14,609)		(16,833)		2,224
Net cash provided by (used for) financing activities	(15,944)		1,707		(17,651)
Net increase in cash and cash equivalents	6,674		17,891		(11,217)
Cash and cash equivalents, and restricted cash, beginning of period	30,387		30,479		(92)
Cash and cash equivalents, and restricted cash, end of period	$	37,061	$	48,370	$	(11,309)

Operating activities

Net cash provided by operating activities was $37.2 million for the nine months ended September 30, 2023 as compared to net cash provided by operating activities of $33.0 million for the nine months ended September 30, 2022. This increase in net cash provided by operating activities was primarily attributable to an increase in net income of $18.2 million, a decrease in receivables from franchisees of $7.5 million, partially offset by a decrease of $16.7 million in contract liabilities and a $4.3 million increase to prepaid expenses.

Investing activities

Net cash used for investing activities was $14.6 million for the nine months ended September 30, 2023, compared to net cash used for investing activities of $16.8 million for the nine months ended September 30, 2022. This decrease was primarily driven by a $10.8 million decrease in the purchase of property and equipment partially offset by $6.0 million in cash paid for purchases of books of business.

Financing activities

Net cash used for financing activities was $15.9 million for the nine months ended September 30, 2023 as compared to net cash provided by financing activities of $1.7 million for the nine months ended September 30, 2022. This increase in net cash provided by (used for) financing activities was primarily driven by an additional $10.0 million payment of notes payable and $8.5 million in member distributions.

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 for the fiscal year ended December 31, 2022.

Tax receivable agreement

We entered into a tax receivable agreement with the Pre-IPO LLC Members on May 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, in U.S. federal, state and local income tax or franchise tax that we actually realize as a result of (i) any increase in tax basis in Goosehead 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 for the fiscal year ended December 31, 2022.

Holders of Goosehead Financial, LLC Units (other than Goosehead 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 of Goosehead 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 of Goosehead 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 of Goosehead Financial, LLC. These increases in tax basis may reduce the amount of tax that Goosehead 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, in U.S. federal, state and local income tax or franchise tax that we actually realize as a result of (i) any increase in tax basis in Goosehead 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 of Goosehead Insurance, Inc. and not of Goosehead 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 of Goosehead Insurance, Inc. (calculated with certain assumptions) to the amount of such taxes that Goosehead Insurance, Inc. would have been required to pay had there been no increase to the tax basis of the assets of Goosehead Financial, LLC as a result of the redemptions or exchanges and had Goosehead 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 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 September 30, 2023, aggregated by type (in thousands):


	Contractual obligations, commitments and contingencies
	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Operating leases(1)	$	78,082	$	11,246	$	23,141	$	22,528	$	21,167
Debt obligations payable(2)	79,375		8,750		70,625		—		—
Interest expense(3)	13,885		5,677		8,208		—		—
Liabilities under the tax receivable agreement(4)	140,327		418		33,678		16,777		89,454
Total	$	311,669	$	26,091	$	135,652	$	39,305	$	110,621

(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 $1.9 million and $1.7 million for the three months ended September 30, 2023 and 2022.

(2)The Company refinanced its credit facilities on July 21, 2021 in the form of a $100 million term loan, and $50 million revolving credit facility, of which nothing was drawn as of September 30, 2023.

(3)Interest expense includes 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 September 30, 2023.

(4)See "Item 2. Management's discussion and analysis of financial condition and results of operation - Tax receivable agreement."

Off-balance sheet arrangements

We do not invest in any off-balance sheet vehicles that provide liquidity, capital resources, market or credit risk support, or engage in any activities that expose us to any liability that is not reflected in our condensed consolidated financial statements except for those described under “Contractual obligations, commitments and contingencies” above.

Critical accounting policies

Our discussion and analysis of our consolidated financial condition and results of operations is based upon the accompanying condensed consolidated financial statements and notes thereto, which have been prepared in accordance with GAAP. The preparation of the condensed consolidated financial statements requires us to make

estimates, judgments and assumptions, which we believe to be reasonable, based on the information available. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. Variances in the estimates or assumptions used to actual experience could yield materially different accounting results. On an ongoing basis, we evaluate the continued appropriateness of our accounting policies and resulting estimates to make adjustments we consider appropriate under the facts and circumstances. During the period ended September 30, 2023, we adjusted the techniques we use for estimating revenues, which had an insignificant effect on reported financial results. There have been no significant changes to our critical accounting policies as disclosed in the Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

Recent accounting pronouncements

See "Note 2. Summary of Significant Accounting Policies—Recently Issued Accounting Pronouncements” under Part I, Item 1 of this Form 10-Q.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes to our exposure to market risks as described in "Item 7A. Quantitative and qualitative disclosure of market risks" in the Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

Item 4. Controls and Procedures

Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of September 30, 2023. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

There were no changes to our internal control over financial reporting that occurred during the quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

Item 1. Legal Proceedings

The information required by this Item is incorporated by reference to "Part I, Item I, Note 12. Litigation" in the condensed consolidated financial statements included herein.

Item 1A. Risk Factors

There have been no material changes to the risk factors disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Subject to the terms of the amended and restated Goosehead Financial, LLC Agreement, each LLC Unit is redeemable (along with the cancellation of the corresponding share of Class B common stock) for one share of Class A common stock.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits


Exhibit 31.1			Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2			Certifications of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32			Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS			XBRL Instance Document
101.SCH			XBRL Schema Document
101.CAL			XBRL Calculation Linkbase Document
101.DEF			XBRL Definition Linkbase Document
101.LAB			XBRL Label Linkbase Document
101.PRE			XBRL Presentation Linkbase

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, we have duly caused this report to be signed on our behalf by the undersigned thereunto duly authorized.

GOOSEHEAD INSURANCE, INC.

Date:

November 9, 2023

By:

/s/ Mark E. Jones

Mark E. Jones

Chairman and Chief Executive Officer

(Principal Executive Officer)

Date:

November 9, 2023

By:

/s/ Mark E. Jones, Jr.

Mark E. Jones, Jr.

Chief Financial Officer

(Principal Financial Officer and Principal Accounting Officer)