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Item 7. Management’s Discussion and Analysis

2021-02-26 compared with 2020-03-16 · 112 added, 196 removed, 431 unchanged (42% of the section changed)

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The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Item 6.

Selected financial data” and our financial statements and the related notes and other financial information included elsewhere in this Annual Report.

Selected financial data” and our consolidated financial statements and the related notes and other financial information included elsewhere in this Annual Report.

In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions.

Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under “Risk factors” and elsewhere in this Annual Report.

This discussion includes references to non-GAAP financial measures as defined in the rules of the Securities and Exchange Commission (‘SEC’).

We present such non-GAAP financial measures, specifically, Core Revenue, Adjusted EBITDA and Adjusted EP S non-GAAP financial measures, as we believe such information is of interest to the investment community because it provides additional meaningful methods of evaluating certain aspects of the Company’s operating performance from period to period on a basis that may not be otherwise apparent under U.S.

GAAP, and these provide a measure against which our businesses may be assessed in the future.

Our methods of calculating these measures may differ from those used by other companies and therefore comparability may be limited.

These financial measures should be viewed in addition to, not in lieu of, the consolidated financial statements for the year ended December 31, 2020.

See ‘Non-GAAP Financial Measures’ below for further discussion of our Core Revenue, Adjusted EBITDA and Adjusted EP S non-GAAP financial measures

The following discussion contains references to periods prior to the Offering, including January through April 2018, which represents the consolidated and combined financial results of our predecessor Goosehead Financial, LLC and its subsidiaries Texas Wasatch Insurance Services, LP, Goosehead Insurance Agency, LLC and its affiliates Goosehead Management, LLC and Texas Wasatch Insurance Holdings Group, LLC.

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The following discussion contains references to the years ended December 31, 2020 and December 31, 2019.

See Goosehead’s Annual Report on Form 10-K for the year ended December 31, 2019 for a discussion of the changes from year ended December 31, 2018 to the year ended December 31, 2019.

Financial Highlights for 2020:

• Total revenue increased 51% from 2019 to $117.0 million;

if reported under ASC 605, total revenue would have grown 40% to $84.1 million.

• Total Written Premiums increased 45% from 2018 to $739.0 million.

Core Revenues* of $95.1 million increased 41% over 2019

• Total Written Premiums Placed increased 45% from 2019 to $1.074 billion

• Net income increased by $8.4 million from 2019 to $18.8 million

if reported under ASC 605, net income would have increased to $15.3 million.

• Adjusted EBITDA*, a non-GAAP measure, increased 59% from 2019 to $27.8 million, or 24% of total revenues

if reported under ASC 605, Adjusted EBITDA would have been $22.9 million or 27% of total revenues.

• Basic earnings per share was $0.55 and Adjusted EPS*, a non-GAAP measure, was $0.68 for the year ended December 31, 2020.

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◦ Outside of Texas as of December 31, 2020, 285 operating franchises had less than one year of tenure and 378 had greater than one year of tenure.

*Adjusted EBITDA and Adjusted EPS are non-GAAP measures.

*Core Revenue, Adjusted EBITDA and Adjusted EPS are non-GAAP measures.

Reconciliation of Adjusted EBITDA to net income (loss) and Adjusted EPS to EPS, the most directly comparable financial measures presented in accordance with GAAP, are set forth in the "Key performance indicators" section of Management’s discussion and analysis of financial condition and results of operations of this Form 10-K.

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We will continue to market actively for new franchises in our established markets, including Texas, which represent over 97% of the U.S.

We are now licensed with the necessary state departments of commerce and insurance and registered as a franchisor in all of the lower 48 states in the U.S.

We are now licensed with the necessary state departments of commerce and insurance and registered as a franchisor in all 50 states in the U.S.

• Continued retention of existing Book of Business.

We have made significant progress in recent years in Client Retention metrics, and maintaining these high levels of Client Retention is key to future profitability.

A key lever in driving Client Retention is selling multiple lines of business to clients at the point of initial sale.

In our Corporate Channel, we have made significant progress in recent years in this area.

We expect to continue to maintain our high levels of cross-selling in the Corporate Channel, and we expect to see improvement in our Franchise Channel as we bring best demonstrated practices to our field of Franchisees.

• Increase in margins as business shifts from new to renewal.

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To operate as a public company, we are required to continue to implement changes in certain aspects of our business and develop, manage, and train management level and other employees to comply with on-going public company requirements.

We also incur expenses as a public company, including public reporting obligations, proxy statements, stockholder meetings, stock exchange fees and transfer agent fees.

We also incur expenses as a public

company, including public reporting obligations, proxy statements, stockholder meetings, stock exchange fees and transfer agent fees.

Effects of the reorganization on our corporate structure

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is a holding company and its sole material asset is a controlling ownership and profits interest in Goosehead Financial, LLC.

All of our business is conducted through

Goosehead Financial, LLC and its consolidated subsidiaries, and the financial results of Goosehead Financial, LLC and its consolidated subsidiaries are included in the consolidated financial statements of Goosehead Insurance, Inc.

All of our business is conducted through Goosehead Financial, LLC and its consolidated subsidiaries, and the financial results of Goosehead Financial, LLC and its consolidated subsidiaries are included in the consolidated financial statements of Goosehead Insurance, Inc.

Goosehead Financial, LLC is currently taxed as a partnership for federal income tax purposes and, as a result, its members, including Goosehead Insurance, Inc., pay taxes with respect to their allocable shares of its net taxable income.

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Certain relationships and related transactions, and director independence".

Novel coronavirus ("COVID-19")

An outbreak of a novel strain of the coronavirus, COVID-19, was recognized as a pandemic by the World Health Organization on March 11, 2020.

This COVID-19 outbreak has severely restricted the level of economic activity around the world.

In response to this outbreak, the governments of many countries, states, cities and other geographic regions, including in the United States, have taken preventative or protective actions, such as imposing restrictions on travel and business operations and advising or requiring individuals to limit or forego their time outside of their homes.

In the United States, temporary closures of businesses have been ordered and numerous other businesses have temporarily closed voluntarily.

During the first quarter, the Company reduced workforce density at all corporate offices by requiring employees to work from home.

Additionally, the Company indefinitely suspended all corporate travel, field support visits, in-person marketing efforts and in-person team meetings.

Leveraging the Company's cloud based technology, video conferencing technology and importantly the Company's mortgage activity database to continue marketing efforts allowed operations to be largely uninterrupted.

During the third quarter, the Company began bringing employees back to the office on a reduced and rotational basis.

The Company will continue to follow all local government and CDC guidelines in reopening corporate offices.

Changes in consumer behavior linked to the COVID-19 pandemic, may have resulted in reduced loss ratios throughout 2020, increasing the amount of revenue from Contingent Commissions the Company expects to receive.

During the first quarter, we took steps to strengthen our liquidity, including amending our credit agreement on March 6, 2020 to increase the term loan available borrowing to $80.0 million and to increase the amount available under our revolving credit facility to $25.0 million.

Because of the continued strength and resiliency of our business and our outlook for the remainder of 2020, we declared a special dividend which was distributed during the third quarter.

See "Liquidity and capital resources”.

Given the uncertainty regarding the spread and severity of COVID-19 and the adverse effects on the national and global economy, the related financial impact on our business cannot be accurately predicted at this time.

We continue to monitor the rapidly evolving situation and guidance from the authorities, including federal, state and local public health officials and as a result may take additional actions.

While we intend to continue to execute on our strategic plans and operational initiatives during the outbreak, in these circumstances, there may be developments outside our control requiring us to adjust our operating plan.

See Part II, Item 1A.

“Risk Factors—The global outbreak of the coronavirus disease (COVID-19) may negatively impact the global economy in a significant manner for an extended period of time, and could also materially adversely affect our business and operating results.”

Certain income statement line items

Effective Annual Report on Form 10-K for the year ended December 31, 2019, the Company adopted new accounting guidance, ASU 2014-09 - Revenue from Contracts with Customers ("Topic 606"), related to revenue from contracts with customers.

Effective as of the Annual Report on Form 10-K for the year ended December 31, 2019, the Company adopted new accounting guidance, ASU 2014-09 - Revenue from Contracts with Customers ("Topic 606"), related to revenue from contracts with customers.

The Company adopted Topic 606 using the modified retrospective method, which applies the new guidance prospectively, beginning as of 2019, the year of adoption.

Accordingly, the adoption of Topic 606 using the modified retrospective method does not impact prior years' financial statements.

Accordingly, the adoption of Topic 606 using the modified retrospective method does not impact consolidated financial statements prior to 2019.

In 2020, revenue increased by 51% to $117.0 million from $77.5 million in 2019.

If 2019 results were reported under ASC 605, total revenue would have grown 40% to $84.1 million in 2019.

Total Written Premium growth, which is the best leading indicator of future revenue growth, was 45% to $739.0 million from $509.0 million in 2018.

Total Written Premiums drive our current and future Core Revenue and gives us potential opportunities to earn Ancillary Revenue in the form of Contingent Commissions.

Total Written Premium growth, which is the best leading indicator of future revenue growth, was 45% to $1.074 billion from $739 million in 2019.

Total Written Premiums Placed drive our current and future Core Revenue and gives us potential opportunities to earn Ancillary Revenue in the form of Contingent Commissions.

Our various revenue streams do not equally contribute to the long-term value of Goosehead.

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Years ended December 31, 2020

(in thousands) 2019 2018 % Growth

(in thousands) 2020 (ASC 606) 2019 (ASC 606) 2018 (ASC 605) % Growth

Core Revenue:

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Total Revenues $ 117,014 100 % $ 77,486 100 % $ 60,148 100 % 51 %

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

(2) Renewal Royalty Fees, New Business Royalty Fees, Initial Franchise Fees, and Other Income are included in "Franchise revenues" as shown on the Consolidated statements of income.

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

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

Core Revenue:

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All commissions received in the Corporate Channel after the first term of the policy are recognized as Renewal Commissions, which are higher margin due to lower servicing costs.

For all policies that renew in our Franchise Channel, we receive 50% of the commissions received from the Carrier as Renewal Royalty Fees, creating a mechanical increase in revenue of 120% if we renew at historical rates, and higher margin due to

lower servicing costs on higher revenue.

For this reason, and because we are placing an increasing percentage of Total Written Premium in the Franchise Channel, Core Revenue growth will lag that of Total Written Premium.

As discussed later in this “Item 7.

Management’s discussion and analysis of financial condition and results of operations”, Core Revenue was not significantly impacted by the adoption of Topic 606.

The total impact to Core Revenue in 2019 due to the adoption of Topic 606 was a decrease of $53 thousand.

Cost Recovery Revenue:

The Company charges every franchise an Initial Franchise Fee, which, on a cash flow basis, covers our costs to recruit, train, onboard, and support the franchise for the first year.

The Initial Franchise Fee is determined by the state of the Franchise location and the payment terms, as follows:

Initial franchise fees

Payment terms TX/LA/OK Other

$ 40,000 $ 25,000

Payment plan:

Down payment $ 10,000 $ 10,000

Paid over 5 years 50,000 30,000

Total Paid $ 60,000 $ 40,000

Historically, the Company has recognized the pay-in-full amount as revenue when the franchise completes initial training because that is when those fees are non-refundable.

Under Topic 606, however, we must recognize the revenue over the 10-year life of the contract.

The change in revenue recognition has no impact on the total cash flow or overall economics of the business.

The table below shows what the impact of Topic 606 on Initial Franchise Fees (in thousands) .

Legacy GAAP As recognized under Topic 606 Impact of Standard

2019 $ 6,640 $ 3,784 (43) %

If the franchise elects the payment plan, the difference between the pay-in-full and the payment plan amounts ($20 thousand in Texas, Louisiana, and Oklahoma and $15 thousand in all other states) is recognized as Interest Income using the interest rate method over the 5-year term of the payment plan.

The Initial Franchise Fee is determined by the state of the Franchise location and the payment terms.

The Company recognizes revenue over the 10-year life of the contract.

If the franchise elects the payment plan, the difference between the pay-in-full and the payment plan amounts is recognized as Interest Income using the interest rate method over the 5-year term of the payment plan.

Ancillary Revenue:

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Although the Company can control the amount of business placed with the Carriers, loss ratios depend on many factors that are outside of our control, such as weather events and Carrier underwriting accuracy.

As such, we view these Contingent Commissions as a bonus and have historically returned the cash from the Continent Commissions to shareholders by way of a special dividend.

The Company has historically recognized the Contingent Commission revenue when the cash or statement showing the amount to be paid was received from the Carriers, which was typically in the first quarter following the year in which the Contingent Commissions were earned.

Under Topic 606, however, we must estimate the amount to be received during the period over which the Contingent Commissions are earned.

The table below shows what the impact of Topic 606 on Contingent Commissions (in thousands) .

Legacy GAAP As recognized under Topic 606 Impact of Standard

2019 $ 9,118 $ 5,423 (41) %

Below is a summary showing the historical Contingent Commissions as a percentage of Total Written Premium for the period in which the Contingent Commissions were earned (in thousands).

Total Written Premium Contingent Commissions Received % of Premium

2016 $ 240,994 $ 1,648 0.68 %

2017 342,330 2,659 0.78 %

As such, we view these Contingent Commissions as a

bonus and have historically returned the cash from the Continent Commissions to shareholders by way of a special dividend.

The Company estimates the amount to be received during the period over which the Contingent Commissions are earned.

Below is a summary showing the historical Contingent Commissions as a percentage of Total Written Premiums Placed for the period in which the Contingent Commissions were earned (in thousands).

Total Written Premium Contingent

Commission Revenue

(ASC 606) % of Premium

2019 739,009 5,423 0.73 %

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Historical average 1.14 %

Although Contingent Commissions can vary significantly from year-to-year, when viewed over several years Contingent Commissions received have historically represented approximately 0.94% of Total Written Premium at year-end.

Contingent Commissions can vary significantly from year-to-year and should be viewed over several years.

Since the Company adopted ASC 606 in 2019, revenue from Contingent Commissions have historically represented approximately 1.14% of Total Written Premium at year-end.

Most of our Contingent Commissions are earned in the year prior to when they are received.

The Contingent Commissions earned in 2018, but paid in 2019 were above the historical average as a percentage of premium at 1.23%.

For the year ended December 31, 2019, $5.4 million of Contingent Commissions were earned (below our historical average as a percentage of premium), of which $3.6 million was still receivable at December 31, 2019.

As such, we expect the Contingent Commissions paid in the first quarter of 2020 to also be lower than the historical average.

However, the majority of the Contingent Commission plans with our Carriers remain in place from year to year, and the plans in place restart at the beginning of each plan year, so we don't expect this this trend to continue.

For the year ended December 31, 2020, $16.7 million of Contingent Commissions were earned (significantly above our historical average as a percentage of premium), of which $15.1 million was still receivable at December 31, 2020.

Contingent Commissions are paid by Carriers based upon the profitability, volume and/or growth of the business placed with such companies during the prior year, therefore, Contingent Commissions earned can vary greatly from year to year.

Premium by line of business

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Year Ended December 31,

2020 2019 2018

Line of business

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Due to our purely organic-focused growth strategy, virtually all of our investments in future growth are in people and certain technologies.

Therefore, the majority of our investments are not capitalizable and are recognized immediately on our statement of income.

Therefore, the majority of our investments are not capitalizable and are recognized immediately on our statement of operations.

Employee compensation and benefits.

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service team compensation costs are allocated based on the number of cases processed for each Segment, our rent expense by location is allocated based on the full time equivalent count and Segment, and our technology charges are allocated based on the number of individual licenses used by each Segment.

Effects of Topic 606

The below illustrates the impact of Topic 606 on the Company's income statement line items for the year ended December 31, 2019.

ASC 605 Impact of Adoption ASC 606

Core Revenue:

Renewal Commissions (1)

$ 22,620 $ 304 $ 22,924

Renewal Royalty Fees (2)

19,240 222 19,462

New Business Commissions (1)

11,892 69 11,961

New Business Royalty Fees (2)

7,307 (158) 7,149

Agency Fees (1)

6,548 (490) 6,058

Total Core Revenue 67,607 (53) 67,554

Cost Recovery Revenue:

Initial Franchise Fees (2)

6,640 (2,856) 3,784

Interest Income 625 (8) 617

Total Cost Recovery Revenue 7,265 (2,864) 4,401

Ancillary Revenue:

Contingent Commissions (1)

9,118 (3,695) 5,423

Other Income (2)

Total Ancillary Revenue 9,226 (3,695) 5,531

Total Revenues 84,098 (6,612) 77,486

Operating Expenses:

Employee compensation and benefits, excluding equity-based compensation 40,312 (123) 40,189

General and administrative expenses 19,042 — 19,042

Bad debts 1,817 (1,092) 725

Total 61,171 (1,215) 59,956

Adjusted EBITDA 22,927 (5,397) 17,530

Adjusted EBITDA Margin 27 % (4) % 23 %

Equity-based compensation (1,526) — (1,526)

Interest expense (2,387) — (2,387)

Depreciation and amortization (1,931) — (1,931)

Tax expense (1,758) 454 (1,304)

Net Income 15,325 (4,943) 10,382

net income attributable to non-controlling interests 10,006 (3,191) 6,815

Net Income attributable to Goosehead Insurance Inc.

$ 5,319 $ (1,752) $ 3,567

Earnings per share:

Basic $ 0.36 $ (0.12) $ 0.24

Diluted $ 0.33 $ (0.11) $ 0.22

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

(2) Renewal Royalty Fees, New Business Royalty Fees, Initial Franchise Fees, and Other Income are included in "Franchise revenues" as shown on the Consolidated statements of income.

Key performance indicators

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We believe that Total Written Premium is an appropriate measure of operating performance because it reflects growth of our business relative to other insurance agencies.

For the year ended December 31, 2019, we had $739.0 million in Total Written Premium, representing a 45% increase, compared to $509.0 million for the year ended December 31, 2018.

For the year ended December 31, 2020, we had $1.074 billion in Total Written Premium, representing a 45% increase, compared to $739 million for the year ended December 31, 2019.

The following table shows Total Written Premium by channel for the years ended 2020 and 2019 (in thousands) .

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NPS is a useful gauge of the loyalty of client relationships and can be compared across companies and industries.

NPS has remained steady at 89 as of December 31, 2019 when compared to December 31, 2018, primarily driven by the service team’s continued focus on delivering highly differentiated service levels.

NPS has increased to 92 as of December 31, 2020 from 89 at December 31, 2019, primarily driven by the service team’s continued focus on delivering highly differentiated service levels.

Client Retention

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Our retention rate is even stronger on a premium basis.

In 2019, we retained 91% of the premiums we distributed in 2018, a modest decrease from premium retention in 2018 of 94% due to lower premium increases from our Carriers during the year.Our premium retention rate is higher than our Client Retention rate as a result of both premiums increasing year over year and additional coverages sold by our sales and service teams.

In 2020, we retained 89% of the premiums we distributed in 2019, a modest decrease from premium retention in 2019 of 91% due to lower premium increases from our Carriers during the year.

Our premium retention rate is higher than our Client Retention rate as a result of both premiums increasing year over year and additional coverages sold by our sales and service teams.

New Business Revenue

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For the year ended December 31, 2020, New Business Revenue grew 46% to $36.9 million, from $25.2 million for the year ended December 31, 2019.

Growth in New Business Revenue is driven by an increase in Corporate Channel sales agent headcount of 49% and growth in franchises in the Franchise Channel of 34%.

Growth in New Business Revenue is driven by an increase in Corporate Channel sales agent headcount of 47% and growth in operating franchises of 45%.

Renewal Revenue

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The primary driver of the increase is increases in operating franchises, corporate agent sales headcount, and number of policies in the renewal term from December 31, 2019 to December 31, 2020.

If reported under ASC 605, Core Revenue would have increased $17.8 million.

Cost Recovery Revenue

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We believe that Cost Recovery Revenue is an appropriate measure of operating performance because it summarizes revenues that are viewed by management as cost recovery mechanisms.

Cost Recovery Revenue decreased by $2.1 million, or 32%, to $4.4 million for the year ended December 31, 2019 from $6.5 million for the year ended December 31, 2018.

The primary driver of the decrease is the adoption of ASC 606.

If reported under ASC 605, Cost Recovery Revenue would have increased $0.8 million.

Cost Recovery Revenue increased by $0.6 million, or 15%, to $5.1 million for the year ended December 31, 2020 from $4.4 million for the year ended December 31, 2019.

The primary driver of the increase is a larger number of franchises in the system.

Ancillary Revenue

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Ancillary Revenue increased by $11.4 million, or 205%, to $16.9 million for the year ended December 31, 2020 from $5.5 million for the year ended December 31, 2019.

The primary driver of the increase is increases in Total Written Premium from December 31, 2018 to December 31, 2019, offset by the impact of ASC 606.

If reported under ASC 605, Ancillary Revenue would have increased $5.4 million.

The primary driver of the growth is an increase in Total Written Premium from December 31, 2019 to December 31, 2020 and very favorable loss ratios with our carriers.

Adjusted EBITDA

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Adjusted EBITDA is defined as net income (the most directly comparable GAAP measure) before interest, income taxes, depreciation and amortization, adjusted to exclude equity-based compensation and other non-operating items, including, among other things, certain non-cash charges and certain non-recurring or non-operating gains or losses.

Adjusted EBITDA increased by $2.8 million, or 19%, to $17.5 million for the year ended December 31, 2019, from $14.8 million for the year ended December 31, 2018, driven by Franchise Channel Adjusted EBITDA growth of $1.8 million and by Corporate Channel Adjusted EBITDA growth of $2.4 million.

If reported under ASC 605, Adjusted EBITDA would have been $22.9 million, or an increase of 55%.

See “—Certain income statement line items—Effects of Topic 606" for additional information regarding the impact that the adoption of Topic 606 had on income statement line items.

Adjusted EBITDA increased by $10.3 million, or 59%, to $27.8 million for the year ended December 31, 2020, from $17.5 million for the year ended December 31, 2019, driven primarily by a significant increase in high-margin revenue from Contingent Commissions.

Adjusted EBITDA Margin

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For the year ended December 31, 2020, Adjusted EBITDA Margin was 24% compared to 23% for the year ended December 31, 2019.

If reported under ASC 605, Adjusted EBITDA Margin would have been 27%.

If reported under ASC 605, margin expansion is primarily driven by Corporate Channel Adjusted EBITDA Margin expansion, Franchise Channel Adjusted EBITDA Margin expansion, and slightly offset by expenses not included in either channel.

Corporate Channel Adjusted EBITDA Margin expansion can be attributed to growth in higher margin Renewal Revenue, offset by expenses driven by a 49% increase in Corporate Channel sales agent headcount and investments in technology.

As these new sales agents ramp-up production and begin to generate Renewal Revenue (Corporate), we expect them to continue to contribute to further Corporate Channel Adjusted EBITDA Margin expansion.

Franchise Channel Adjusted EBITDA Margin expansion is attributed to growth in more profitable Renewal Revenue as a percentage of total revenue and the increase in Contingent Commissions, offset by higher employee compensation and benefits and general and administrative expenses from investments in hiring and technology.

The Adjusted EBITDA margin expansion came from a significant increase in high-margin Contingent Commissions, offset by investments to grow the Corporate sales agents 47%, increase the recruiting team to 98 people, plus additional investments in systems technology and public company costs related to SOX internal controls compliance.

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 to assume a single class of stock (Class A) and assuming non-controlling interest does not exist.

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Year ended December 31,

2019 (ASC 606) 2019 (ASC 605) 2018

2020 (ASC 606) 2019 (ASC 606) 2018 (ASC 605)

Total Revenues $ 117,014 $ 77,486 $ 60,148

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Total Revenues $ 117,014 $ 77,486 $ 60,148

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

(2) Renewal Royalty Fees, New Business Royalty Fees, Initial Franchise Fees, and Other Income are included in "Franchise revenues" as shown on the Consolidated statements of income.

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

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

The following tables show a reconciliation from net income to Adjusted EBITDA for the year ended December 31, 2020, 2019, and 2018 (in thousands) :

Year ended December 31,

2019 (ASC 606)

2019 (ASC 605)

2020 (ASC 606) 2019 (ASC 606) 2018 (ASC 605)

Net income (loss) $ 18,755 $ 10,382 $ (18,667)

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Depreciation and amortization 3,147 1,931 1,464

Tax expense 1,304 1,758 449

Tax expense (benefit) (1,035) 1,304 449

Equity-based compensation 4,745 1,526 27,083

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24 % 23 % 25 %

(1) Adjusted EBITDA Margin is calculated as Adjusted EBITDA divided by Total Revenue ($17,530 / $77,486) for the year ended December 31, 2019 under ASC 606, ($22,928/$84,098) for the year ended December 31, 2019 under ASC 605, and ($14,752 /$60,148) for the year ended December 31, 2018.

(1) Adjusted EBITDA Margin is calculated as Adjusted EBITDA divided by Total Revenue excluding other non-operating items ($27,832 / $117,014) for the year ended December 31, 2020, ($17,530 / $77,486) for the year ended December 31, 2019, and ($14,752 /$60,148) for the year ended December 31, 2018 under ASC 605.

The following tables show a reconciliation from basic earnings per share to Adjusted EPS for the year ended December 31, 2020, 2019, and 2018.

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Year ended December 31,

2019 (ASC 606)

2019 (ASC 605)

2020 (ASC 606) 2019 (ASC 606) 2018 (ASC 605)

Earnings (loss) per share - basic (GAAP) $ 0.55 $ 0.24 $ (0.66)

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(3) Calculated as the origination fees of previous debt immediately recognized upon refinance divided by sum of Class A and Class B shares at the time of the refinance [ $871 thousand / ( 13.5 million + 22.7 million )]

(4) Calculated as equity-based compensation divided by the weighted average of Class A and Class B shares outstanding during the period 2019 - [ $1.5 million / ( 14.9 million + 21.4 million )] 2018 - [ $27.1 million / ( 13.6 million + 22.7 million )]

(4) Calculated as equity-based compensation divided by the weighted average of Class A and Class B shares outstanding during the period 2020 - [$4.7 million / ( 16.8 million + 19.7 million ) 2019 - [ $1.5 million / ( 14.9 million + 21.4 million )] 2018 - [ $27.1 million / ( 13.6 million + 22.7 million )]

Consolidated results of operations

The following is a discussion of our consolidated results of operations for each of the years ended December 31, 2019 (under ASC 606) and December 31, 2018 (under ASC 605).

The following is a discussion of our consolidated results of operations for each of the years ended December 31, 2020, December 31, 2019, and December 31, 2018 (under ASC 605).

This information is derived from our accompanying consolidated financial statements prepared in accordance with GAAP.

Year ended December 31, 2019 compared to year ended December 31, 2018

The following table summarizes our results of operations for the years ended December 31, 2020, 2019, and 2018:

Year Ended December 31,

2020 (ASC 606) 2019 (ASC 606) 2018 (ASC 605)

Commissions and agency fees $ 71,811 61 % $ 46,366 60 % $ 36,704 61 %

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Income (loss) from operations 19,940 14,073 (13,930)

Other Expense:

Other expense — (22)

Other Income (Expense):

Other income (expense) 90 — (22)

Interest expense (2,310) (2,387) (4,266)

Income (loss) before taxes 17,720 11,686 (18,218)

Tax expense 1,304 449

Tax expense (benefit) (1,035) 1,304 449

Net Income (loss) 18,755 10,382 (18,667)

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In 2020, revenue increased by 51% to $117.0 million from $77.5 million in 2019.

If reported under ASC 605, 2019 revenue would have increased by 40% to $84.1 million.

See “—Certain income statement line items—Effects of Topic 606" for additional information regarding the impact that the adoption of Topic 606 had on income statement line items.

Commissions and agency fees

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Year Ended December 31

2020 (ASC 606) 2019 (ASC 606) 2018 (ASC 605)

Core Revenue:

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Agency Fees 8,921 12 % 6,058 13 % 5,169 14 %

Total Core Revenue:

40,943 88 % 32,873 90 %

Total 55,136 77 % 40,943 88 % 32,873 90 %

Ancillary Revenue:

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Revenue from Contingent Commissions increased by $11.3 million, or 208%, to $16.7 million for the year ended December 31, 2020, from $5.4 million for the year ended December 31, 2019.

The increase is primarily attributable to the increase in Total Written Premium for year ended December 31, 2019 compared to the year ended December 31, 2018.

If reported under ASC 605, 2019 Contingent Commissions would have increased by 138% to $9.1 million.

See “—Certain income statement line items—Effects of Topic 606" for additional information regarding the impact that the adoption of Topic 606 had on income statement line items.

The increase is primarily attributable to the increase in Total Written Premium for year ended December 31, 2020 compared to the year ended December 31, 2019 and a more profitable book of business with the Carriers that offer contingency programs.

Franchise Revenues

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Year Ended December 31,

2020 (ASC 606) 2019 (ASC 606) 2018 (ASC 605)

Core Revenues:

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New Business Royalty Fees 10,623 24 % 7,149 23 % 4,873 21 %

Total Core Revenues:

26,611 87 % 16,977 74 %

Total 39,932 90 % 26,611 87 % 16,977 74 %

Cost Recovery Revenues:

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The increase in revenue from New Business Royalty Fees was primarily attributable to an increase in the total number of operating franchises at December 31, 2020 compared to December 31, 2019.

Initial Franchise Fee revenue decreased approximately $2.3 million, or 37%, to $3.8 million for the year ended December 31, 2019 from $6.0 million for the year ended December 31, 2018.

The primary driver of the decrease in Initial Franchise Fees related to the application of Topic 606, which decreased Initial Franchise Fees by $2.9 million, offset by a larger number of franchises that launched during 2019.

Under ASC 605, the Company would recognize Initial Franchise Fees as revenue in the month the agency owner or initial agency representative attended training.

Under the new accounting standard, the Company recognizes the Initial Franchise Fee ratably over the 10-year term of the franchise agreement.

If reported under ASC 605, Initial Franchise Fee revenue would have increased $0.6 million, or 10%, from the year ended December 31, 2018.

See “—Certain income statement line items—Effects of Topic 606" for additional information regarding the impact that the adoption of Topic 606 had on income statement line items.

Initial Franchise Fee revenue increased approximately $0.5 million, or 12%, to $4.2 million for the year ended December 31, 2020 from $3.8 million for the year ended December 31, 2019.

The primary driver of the increase in Initial Franchise Fees was the increase in total franchises.

Under Topic 606, the Company recognizes the Initial Franchise Fee ratably over the 10-year term of the franchise agreement.

Interest Income

Interest Income increased $195 thousand, or 46% to $617 thousand for 2019 from $422 thousand for 2018 .

Interest Income increased $0.2 million, or 32% to $0.8 million for 2020 from $0.6 million for 2019 .

This increase was primarily attributable to additional Franchise Agreements signed under the payment plan option.

Employee compensation and benefits

Employee compensation and benefits expenses decreased by $16.5 million, or 28%, to $41.7 million for 2019 from $58.3 million for 2018.

This was primarily attributable to a $26.1 million decrease in Class B unit compensation (of which $19.8 million was non-cash vesting of certain Pre-IPO LLC members' equity during 2018), offset by a $0.6 million increase in non-cash stock option expense and an increase in total headcount from 2018 to 2019.

Employee compensation and benefits expenses increased by $25.1 million, or 60%, to $66.8 million for 2020 from $41.7 million for 2019.

This was attributable to an increase in total headcount from 2019 to 2020, as well as additional stock options granted during 2020.

General and administrative expenses

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The remainder of the increase is attributable to higher costs associated with an increase in operating franchises and employees.

Bad debts decreased by $0.6 million, or 44%, to $0.7 million for 2019 from $1.3 million for 2018.

This decrease was primarily attributable to the impact of adopting Topic 606, offset by increases in Agency Fees sold by the company.

If reported under ASC 605, bad debts would have increased 40% to $1.8 million.

See “—Certain income statement line items—Effects of Topic 606" for additional information regarding the impact that the adoption of Topic 606 had on income statement line items.

Bad debts increased by $0.9 million, or 117%, to $1.6 million for 2020 from $0.7 million for 2019.

This increase was primarily attributable to increases in Agency Fees sold by the company.

Depreciation and amortization

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Other income (expense)

During 2018 the Company incurred expenses of $22 thousand related to the disposal of fixed assets located in the previous headquarters, compared to other income of $0 in 2019.

During 2020 the Company had other income of $90,000 related to legal settlement proceeds and sublease income, compared to $0 in 2019.

Interest expense

Interest expenses decreased by $1.9 million, or 44%, to $2.4 million for 2019 from $4.3 million for 2018.

This decrease was attributable to a decrease in the average note outstanding and a lower average interest rate throughout year.

Additionally, during 2018, $871 thousand of origination fees from previous debt were immediately recognized upon refinance on August 3, 2018.

Segment adjusted EBITDA

Corporate Channel Adjusted EBITDA is segment earnings before interest, income taxes, depreciation and amortization allocable to the Corporate Channel.

Corporate Channel Adjusted EBITDA increased by $2.4 million, or 32%, to $9.9 million for 2019 from $7.5 million for 2018, primarily attributable to an increase in New Business Commissions and Agency Fees of $3.5 million driven by increased hiring and agent ramp-up, plus an increase in more profitable Renewal Commissions of $4.6 million, offset by employee compensation and benefits from increased hiring of $4.9 million and the impact of adopting Topic 606.

If reported under ASC 605, Corporate Channel Adjusted EBITDA would have increased 52% to $11.5 million.

See “—Certain income statement line items—Effects of Topic 606" for additional information regarding the impact that the adoption of Topic 606 had on income statement line items.

Franchise Channel Adjusted EBITDA is segment earnings before interest, income taxes, depreciation and amortization, adjusted to exclude other non-operating items.

Franchise Channel Adjusted EBITDA increased by $1.8 million, or 21%, to $10.5 million for 2019 from $8.6 million for 2018, primarily attributable to an increase in New Business Royalty Fees of $2.3 million and Contingent Commissions of $1.1 million from an increase in operating agencies and Total Written Premium, plus an increase in more profitable Renewal Royalty Fees of $7.4 million and offset by the impact of adopting Topic 606.

If reported under ASC 605, Franchise Channel Adjusted EBITDA would have increased 67% to $14.3 million.

See “—Certain income statement line items—Effects of Topic 606" for additional information regarding the impact that the adoption of Topic 606 had on income statement line items.

Neither of Franchise Channel Adjusted EBITDA or Corporate Channel Adjusted EBITDA includes Class B share compensation, which is recorded at the consolidated level.

Interest expenses decreased by $77,000, or 3%, to $2.3 million for 2020 from $2.4 million for 2019.

This decrease was attributable to a lower average interest rate throughout year as the company continues to de-lever its debt through Adjusted EBITDA growth.

Liquidity and capital resources

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(1) generating cash flow from Corporate Channel operations, which largely includes Renewal Revenue (Corporate) and New Business Revenue (Corporate);

(2) generating cash flow from Franchise Channel operations, which largely includes Royalty Fees and Initial Franchise Fees;

(2) generating cash flow from Franchise Channel operations, which largely includes Royalty

Fees and Initial Franchise Fees;

(3) making distributions to the Goosehead Management Holders and Texas Wasatch Holders;

3 unchanged sentences

Credit agreement

Debt" for a discussion of the Company's credit facilities.

The Company refinanced its credit facilities on March 6, 2020;

see "Note 16:

Subsequent Events."

Debt" in the consolidated financial statements included herein for a discussion of the Company's credit facilities.

Comparative cash flows

1 unchanged sentence

Year Ended December 31

2020 2019 2018

Net cash provided by operating activities $ 24,643 $ 21,241 $ 10,275

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Net cash provided by operational activities was $24.6 million for 2020 as compared to net cash provided by operational activities of $21.2 million for 2019.

This increase in net cash provided by operational activities was primarily attributable to a $29.0 million increase in net income, offset by a $25.4 million decrease in non-cash equity based compensation.

Additionally, $6.3 million of the increase related to changes contract liabilities, $3.7 million of the increase related to a decrease in commissions and agency fees receivable, slightly offset by a $3.5 million related to a increase in receivable from franchisees.

This increase in net cash provided by operational activities was primarily attributable to a $8.4 million increase in net income and a $5.1 million increase in contract liabilities, offset by a $9.8 million decrease in deferred rent.

Business investment activities

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Financing activities

Net cash used in financing activities was $20.9 million for 2019 as compared to net cash provided by financing activities of $5.6 million for 2018.

This increase in net cash used financing activities is due to the $15.0 million dividend paid in 2019.

During 2018, there was activity related to the Offering, during which $86.9 million was received as proceeds net of offering costs, offset by distributions of $80.1 million.

Net cash used in financing activities was $3.3 million for 2020 as compared to net cash used by financing activities of $20.9 million for 2019.

This decrease in net cash used financing activities is due to the $64.8 million increase in proceeds received from notes payable during 2020, offset by a $25.3 million increase in repayments made on notes payable and a $26.0 million increase in distributions and dividends paid during 2020.

Future sources and uses of liquidity

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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 for year ending December 31, 2019 and $1.6 million for the year ending December 31, 2018.

(2) The Company refinanced its credit facilities on August 3, 2018 in the form of a $40.0 million term loan and $13.0 million revolving credit facility, of which $10.0 million was drawn as of December 31, 2019.

The refinancing decreased the Company's borrowing costs by a minimum of 300 bps and shortened the term loan maturity to 3 years.

The Company refinanced its credit facilities on March 6, 2020;

see "Note 16:

Subsequent Events."

Rent expense was $3.1 million, $1.9 million, and $1.6 million for year ending December 31, 2020, 2019, and 2018.

(2) The Company refinanced its credit facilities on March 6, 2020 in the form of a $80 million term loan and $25 million revolving credit facility, of which $5 million was drawn as of December 31, 2020.

(3) Interest payments on our outstanding debt obligations under our Credit Agreement.

5 unchanged sentences

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 consolidated financial statements except for those described under “—Contractual obligations, commitments and contingencies” above.

Critical accounting policies

Critical accounting policies and estimates

We prepare our consolidated financial statements in accordance with GAAP.

7 unchanged sentences

The adoption of the new revenue standard on January 1, 2019 has increased the significance of judgments and estimates management must make to apply the guidance.

In particular, judgments related to the amount of variable revenue consideration to ultimately be received on commission revenue, royalty fees, and contingent commissions, which was previously recognized when the Company received notification from the insurance carrier, now requires significant judgments and estimates.

In particular, judgments related to the amount of variable revenue consideration to ultimately be received on commission revenue, royalty fees, and contingent commissions, which were previously recognized when the Company received notification from the insurance carrier, now require significant judgments and estimates.

The Company adjusts its estimates of revenue recognized for commissions and royalty fees based on cash collections during the terms of the policies.

Under the new standard, certain costs to obtain or fulfill a contract that were previously expensed as incurred have been capitalized.

3 unchanged sentences

In connection with the Offering we entered into a tax receivable agreement with the Pre-IPO LLC Members that will provide for the payment by us to the Pre-IPO LLC Members of 85% of the amount of cash savings, if any, in U.S.

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 Financial, LLC’s assets resulting from (a) the acquisition of LLC Units using the net proceeds from any future offering, (b) redemptions or exchanges by the Pre-IPO LLC Members of LLC Units and the corresponding number of shares of Class B common stock 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.

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 Financial, LLC’s assets resulting from (a) the acquisition of LLC Units using the net proceeds from any future offering, (b) redemptions or exchanges by the Pre-IPO LLC Members of LLC Units and the corresponding number of shares of Class B common stock 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.

The actual increase in tax basis, as well as the amount and timing of any payments under the tax receivable agreement, will vary depending on a number of factors, including, but not limited to, the timing of any future redemptions, exchanges or purchases of the LLC Units held by Pre-IPO LLC Members, the price of our Class A common stock at the time of the purchase, redemption or exchange, the extent to which redemptions or exchanges are taxable, the amount and timing of the taxable income that we generate in the future, the tax rates then applicable and the portion of our payments under the tax receivable agreement constituting imputed interest.

During the 2019, as a result of the redemption of LLC Units, we recognized liabilities totaling $13.4 million relating to our obligations under the Tax Receivable Agreement.

Emerging growth company

Pursuant to the JOBS Act, an emerging growth company is provided the option to adopt new or revised accounting standards that may be issued by FASB or the SEC either (i) within the same periods as those otherwise applicable to non-emerging growth companies or (ii) within the same time periods as private companies.

We intend to continue to take advantage of the exemption for complying with new or revised accounting standards within the same time periods as private companies.

Accordingly, the information contained herein may be different than the information you receive from other public companies.

We also intend to continue to take advantage of some of the reduced regulatory and reporting requirements of emerging growth companies pursuant to the JOBS Act so long as we qualify as an emerging growth company, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation, and exemptions from the requirements of holding non-binding advisory votes on executive compensation and golden parachute payments.

As of December 31, 2020, as a result of the redemption of LLC Units, we recognized liabilities totaling $61.6 million relating to our obligations under the Tax Receivable Agreement.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis