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Item 7. Management’s Discussion and Analysis

2022-02-28 compared with 2021-02-26 · 79 added, 102 removed, 441 unchanged (29% of the section changed)

Management’s discussion and analysis of financial condition and results of operations

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

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

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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.

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.

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By leveraging our differentiated business model and innovative technology platform, we are able to deliver a superior insurance experience to our clients.

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

The following discussion contains references to the years ended December 31, 2021, December 31, 2020, and December 31, 2019.

See Goosehead’s Annual Report on Form 10-K for the year ended December 31, 2020 for a discussion of the changes from year ended December 31, 2019 to the year ended December 31, 2020.

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• Total Written Premiums Placed increased 45% from 2020 to $1.6 billion

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

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

• Net income decreased by $10.5 million from 2020 to $8.3 million

• Adjusted EBITDA*, a non-GAAP measure, decreased by 25% from 2020 to $20.8 million, or 14% of total revenues

• Basic earnings per share was $0.28 and Adjusted EPS*, a non-GAAP measure, was $0.48 for the year ended December 31, 2021.

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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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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.

We expect that redemptions and exchanges of LLC Units will result in increases in the tax basis in our share of the tangible and intangible assets of Goosehead Financial, LLC that otherwise would not have been available.

These increases in tax basis may reduce the amount of tax that we would otherwise be required to pay in the future.

Prior redemptions and exchanges of LLC Units have resulted, and we expect future redemptions and exchanges will result in increases in the tax basis in our share of the tangible and intangible assets of Goosehead Financial, LLC that otherwise would not have been available.

These increases in tax basis have reduced the amount of tax we are required to pay, and may reduce the amount of tax that we would otherwise be required to pay in the future.

The tax receivable agreement requires Goosehead Insurance, Inc.

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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.

The COVID-19 pandemic 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.

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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.”

“Risk Factors—The ongoing global COVID-19 pandemic has negatively impacted the global economy in a significant manner and may continue to do so for an extended period of time, and could also materially adversely affect our business and operating results.”

Certain income statement line items

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 consolidated financial statements prior to 2019.

In 2021, revenue increased by 29% to $151.3 million from $117.0 million in 2020.

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 Premium growth, which is the best leading indicator of future revenue growth, was 45% to $1.6 billion from $1.1 billion in 2020.

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.

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Years ended December 31, 2021

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

(in thousands) 2021 2020 2019 % Growth

Core 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.

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.

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Total Written Premium Contingent

Commission Revenue

(ASC 606) % of Premium

Commission Revenue % of Premium

2019 739,009 5,423 0.73 %

2020 1,074,076 16,675 1.55 %

Historical average 1.14 %

2021 1,559,858 9,926 0.64 %

3-year average 0.97 %

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.

Since 2019, revenue from Contingent Commissions have historically represented approximately 0.97% of Total Written Premium at year-end.

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

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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.

For the year ended December 31, 2021, $9.9 million of Contingent Commissions were earned (significantly below our historical average as a percentage of premium), of which $7.4 million was still receivable at December 31, 2021.

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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Employee compensation and benefits.

Employee compensation and benefits is our largest expense and consists of (a) base compensation comprising salary, bonuses and benefits paid and payable to employees, (b) stock option awards for our senior employees, and (c) pre-IPO equity-based compensation associated with the grants of restricted interest awards to senior employees.

Employee compensation and benefits is our largest expense and consists of (a) base compensation comprising salary, bonuses and benefits paid and payable to employees, and (b) stock option awards for our senior employees.

We expect to continue to experience a general rise in compensation and benefits expense commensurate with expected growth in headcount and with the need to maintain competitive compensation levels as we expand geographically and create new products and services.

General and administrative expenses.

General and administrative expenses include travel, accounting, legal and other professional fees, commissions, placement fees, office expenses, depreciation and other costs associated with our operations.

General and administrative expenses include technology, travel, accounting, legal and other professional fees, commissions, placement fees, office expenses, depreciation and other costs associated with our operations.

Our occupancy-related costs and professional services expenses, in particular, generally increase or decrease in relative proportion to the number of our employees and the overall size and scale of our business operations.

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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.

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, 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.

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, 2021, we had $1.6 billion in Total Written Premium, representing a 45% increase, compared to $1.1 billion for the year ended December 31, 2020.

The following table shows Total Written Premium by channel for the years ended 2021 and 2020 (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 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.

NPS has decreased modestly to 91 as of December 31, 2021 from 92 at December 31, 2020, primarily driven by the service team’s continued focus on delivering highly differentiated service levels.

Client Retention

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We believe Client Retention is useful as a measure of how well Goosehead retains clients year-over-year and minimizes defections.

Client Retention has remained steady at 88% at December 31, 2020 when compared to December 31, 2019, again driven by the service team’s continued focus on delivering highly differentiated service levels.

Client Retention increased to 89% at December 31, 2021 when compared to 88% at December 31, 2020, again driven by the service team’s continued focus on delivering highly differentiated service levels.

Our retention rate is even stronger on a premium basis.

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.

In 2021, we retained 93% of the premiums we distributed in 2020, an increase from premium retention in 2020 of 89% due to improved client retention and 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.

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Core Revenue increased by $38.3 million, or 40%, to $133.4 million for the year ended December 31, 2021 from $95.1 million for the year ended December 31, 2020.

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.

The primary driver of the increase is growth in operating franchises, corporate agent sales headcount, and number of policies in the renewal term from December 31, 2020 to December 31, 2021.

Cost Recovery Revenue

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

Ancillary Revenue decreased by $6.7 million, or 39%, to $10.2 million for the year ended December 31, 2021 from $16.9 million for the year ended December 31, 2020.

The primary driver of the decrease from December 31, 2020 to December 31, 2021 was unfavorable 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 $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 decreased by $7.0 million, or 25%, to $20.8 million for the year ended December 31, 2021, from $27.8 million for the year ended December 31, 2020, driven primarily by a significant decrease in high-margin revenue from Contingent Commissions.

Adjusted EBITDA Margin

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For the year ended December 31, 2021, Adjusted EBITDA Margin was 14% compared to 24% for the year ended December 31, 2020.

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.

The Adjusted EBITDA margin reduction came from a significant decrease in high-margin Contingent Commissions, investments to grow the Corporate sales agents 39%, plus additional investments in systems technology.

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,

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

2021 2020 2019

Total Revenues $ 151,312 $ 117,014 $ 77,486

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

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

The following table show a reconciliation from net income to Adjusted EBITDA for the year ended December 31, 2021, 2020, and 2019 (in thousands) :

Year ended December 31,

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

2021 2020 2019

Net income (loss) $ 8,296 $ 18,755 $ 10,382

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14 % 24 % 23 %

(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.

(1) Adjusted EBITDA Margin is calculated as Adjusted EBITDA divided by Total Revenue excluding other non-operating items ($20,838 / $151,312) for the year ended December 31, 2021, ($27,832 / $117,014) for the year ended December 31, 2020, and ($17,530 /$77,486) for the year ended December 31, 2019.

The following tables show a reconciliation from basic earnings per share to Adjusted EPS for the years ended December 31, 2021, 2020, and 2019.

Note that totals may not sum due to rounding:

Year ended December 31,

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

2021 2020 2019

Earnings (loss) per share - basic (GAAP) $ 0.28 $ 0.55 $ 0.24

income prior to the Reorganization Transactions (1)

estimated controlling interest taxes on income prior to Reorganization Transactions (2)

origination fees from previous debt immediately recognized upon refinance (3)

equity-based compensation (1)

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Adjusted EPS (non-GAAP) $ 0.48 $ 0.68 $ 0.28

(1) Calculated for the full year 2018 as the income prior to the Reorganization Transactions divided by the sum of Class A and Class B shares at the time of IPO [ $4.4 million / ( 13.5 million + 22.7 million ).

Financial statements and supplementary data."

(2) Calculated as the income prior to the Reorganization Transactions, times the controlling interest percentage at the time of IPO, times the assumed effective tax rate of 25%, divided by the count of Class A shares at the time of the IPO [ $4.4 million * 37.3% * 25% / 13.5 million ].

(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 )]

(1) Calculated as equity-based compensation divided by the weighted average of Class A and Class B shares outstanding during the period 2021 - [$7.3 million / ( 19.2 million + 17.7 million ) 2020 - [ $4.7 million / ( 16.8 million + 19.7 million )] 2019 - [ $1.5 million / ( 14.9 million + 21.4 million )]

Consolidated results of operations

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).

The following is a discussion of our consolidated results of operations for each of the years ended December 31, 2021, December 31, 2020, and December 31, 2019.

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

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

For further discussion regarding our consolidated results of operations for the year ended December 31, 2020 as compared to the year ended

December 31, 2019, refer to "Part II, Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations," in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

The following table summarizes our results of operations for the years ended December 31, 2021, 2020, and 2019 (in thousands) :

Year Ended December 31,

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

2021 2020 2019

Commissions and agency fees $ 82,651 54 % $ 71,811 61 % $ 46,366 60 %

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Operating Expenses:

Employee compensation and benefits (including Class B unit compensation $26,134 for the year ended December 31, 2018) 66,819 69 % 41,715 66 % 58,256 79 %

Employee compensation and benefits 93,038 66 % 66,819 69 % 41,715 66 %

General and administrative expenses 41,729 29 % 25,532 26 % 19,042 30 %

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Total operating expenses 142,639 100 % 97,074 100 % 63,413 100 %

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

Other Income (Expense):

Other income (expense) 90 — (22)

Income from operations 8,673 19,940 14,073

Other Income:

Other income 185 90 —

Interest expense (2,854) (2,310) (2,387)

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

Income before taxes 6,004 17,720 11,686

Tax expense (benefit) (2,292) (1,035) 1,304

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

net income (loss) attributable to non-controlling interests 9,468 6,815 (9,764)

Net Income (loss) attributable to Goosehead Insurance Inc.

Net Income 8,296 18,755 10,382

net income attributable to non-controlling interests 2,893 9,468 6,815

Net Income attributable to Goosehead Insurance Inc.

$ 5,403 $ 9,287 $ 3,567

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Year Ended December 31

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

2021 2020 2019

Core Revenue:

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These increases were primarily attributable to an increase in total sales agent head count to 506 at December 31, 2021, from 364 at December 31, 2020, a 39% increase.

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

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

Revenue from Contingent Commissions decreased by $6.7 million, or (40)%, to $9.9 million for the year ended December 31, 2021, from $16.7 million for the year ended December 31, 2020.

The decrease is primarily attributable to the increase in loss ratios in our 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)

2021 2020 2019

Core Revenues:

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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

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General and administrative expenses increased by $16.2 million, or 63%, to $41.7 million for 2021 from $25.5 million for 2020.

This increase was attributable to $1.0 million of expenses related to operating as a public company, and increases in expenses related to continued development of technology of $4.5 million.

This increase was attributable to travel expenses related to the ease of travel restrictions in 2021 and increases in expenses related to continued development of technology.

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

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Other income (expense)

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

During 2021 the Company had other income of $185,000 related to franchise transfer fees and sublease income, compared to $90,000 in 2020.

Interest expense

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.

Interest expenses increased by $0.6 million, or 24%, to $2.9 million for 2021 from $2.3 million for 2020.

This increase is attributable to an increase in the average debt balance during the year.

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;

and (4) borrowings, interest payments and repayments under our Credit Agreement.

As of December 31, 2020, our unrestricted cash and cash equivalents, and restricted cash was $26.2 million.

December 31, 2021, our unrestricted cash and cash equivalents, and restricted cash was $30.5 million.

We have used cash flow from operations primarily to pay compensation and related expenses, general, administrative and other expenses, debt service and distributions to our owners.

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Net cash used for investing activities (15,375) (10,333) (4,078)

Net cash (used for) provided by financing activities (3,334) (20,914) 5,592

Net cash used for financing activities (15,826) (3,334) (20,914)

Net increase (decrease) in cash and cash equivalents 4,243 10,976 (3,751)

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Cash and cash equivalents, and restricted cash, end of period $ 30,479 $ 26,236 $ 15,260

Operational activities

Operating activities

Net cash provided by operational activities was $35.4 million for 2021 as compared to net cash provided by operational activities of $24.6 million for 2020.

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

This increase in net cash provided by operational activities was primarily attributable to a $17.6 million increase in cash provided by commissions and fees receivable, offset by a $10.5 million decrease in net income.

Investing activities

Net cash used in business investment activities was $15.4 million for 2021 as compared to net cash used in business investment activities of $10.3 million for 2020.

This increase in net cash used in business investment activities was primarily attributable to fixed asset growth directly related to headcount increases and additional office space buildout during the year.

This increase in net cash used in business investment activities was primarily attributable to intangible assets growth related to investments in the digital agent, as well as fixed asset growth directly related to headcount increases and additional office space buildout during the year.

Financing activities

Net cash used in financing activities was $15.8 million for 2021 as compared to net cash used by financing activities of $3.3 million for 2020.

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.

This increase in net cash used financing activities is due to the $20.2 million decrease in proceeds received from notes payable during 2021, offset by a $23.5 million decrease in repayments made on notes payable and a $15.3 million increase in distributions and dividends paid during 2021.

Future sources and uses of liquidity

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Dividend policy

Assuming Goosehead Financial, LLC makes distributions to its members in any given year, the determination to pay dividends, if any, to our Class A common stockholders out of the portion, if any, of such distributions remaining after our payment of taxes, tax receivable agreement payments and expenses (any such portion, an “excess distribution”) will be made at the sole discretion of our board of directors.

distribution”) will be made at the sole discretion of our board of directors.

Our board of directors may change our dividend policy at any time.

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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.

Goosehead Financial, LLC has made 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 has resulted and 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.

Prior redemptions and exchanges have resulted, and we expect future redemptions and exchanges will result in increases in the tax basis of the tangible and intangible assets of Goosehead Financial, LLC.

These increases in tax basis have reduced the amount of tax we are required to pay, and may reduce the amount of tax that Goosehead Insurance, Inc.

would otherwise be required to pay in the future.

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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.

While the actual increase in tax basis from future purchases, redemptions or exchanges, 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".

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 historically accounted, and anticipate that we will continue to account for the effects of these increases in tax basis and associated payments under the tax receivable agreement arising from 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;

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Rent expense was $4.8 million, $1.9 million, and $1.6 million for year ending December 31, 2021, 2020, and 2019.

(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.

(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 $25 million was drawn as of December 31, 2021.

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

3 unchanged sentences

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

Critical accounting policies and estimates

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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.

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

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

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

As of December 31, 2021, as a result of the prior redemptions of LLC Units, we recognized liabilities totaling $101.0 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