What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-27 compared with 2022-02-28 · 82 added, 79 removed, 441 unchanged (27% of the section changed)

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• Total Written Premiums Placed increased 42% from 2021 to $2.2 billion

• 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

• Net income decreased by $5.7 million from 2021 to $2.6 million, or 1% of total revenues

• Adjusted EBITDA*, a non-GAAP measure, increased by 76% from 2021 to $36.7 million, or 18% of total revenues

• Basic earnings per share was $0.03 and Adjusted EPS*, a non-GAAP measure, was $0.55 for the year ended December 31, 2022.

• Policies in Force increased 27% from December 31, 2021 to 1,284,000 at December 31, 2022.

• Corporate sales headcount increased 39% from December 31, 2020 to 506 at December 31, 2021.

• Corporate sales headcount decreased 37% from December 31, 2021 to 320 at December 31, 2022.

◦ As of December 31, 2022, 165 of these corporate sales agents had less than one year of tenure and 155 had greater than one year of tenure.

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*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.

Reconciliation of Total Core Revenue to Total Revenue, 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 "Key performance indicators" below.

Factors affecting our results of operations

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We continue to invest in expanding our national footprint, increasing our revenue-producing headcount, and increasing the level of support provided to our salespeople.

Our ability to attract and retain top Corporate Channel sales agents and franchise owners, ramp up new agent productivity, and retain existing and future Policies in Force are key to continued profitable growth.

Our ability to attract and retain top corporate sales agents and franchise owners, ramp up new agent productivity, and retain existing and future Policies in Force are key to continued profitable growth.

• Investment in technology.

We continue to develop and invest in our technology platform to drive scalability, adaptability, and efficiency in both the Corporate Channel and Franchise Channel.

We believe our significant proprietary investment in our technology is a key competitive advantage that supports our growth and operating margins.

• Continued penetration of Franchise Channel into existing markets.

We continue to develop and invest in our technology platform to drive scalability, adaptability, and efficiency.

We believe our significant investment in proprietary technology is a key competitive advantage that supports, and will continue to support our growth and operating margins.

• Continued penetration of Franchisees into existing markets.

We will continue to market actively for new franchises in our established markets, including Texas, which represent over 99% of the U.S.

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The majority of our new accounts are sourced by referral sources tied to home closing transactions.

Major slowdowns in the various housing markets Goosehead serves could impact our ability to generate new business.

Major slowdowns in the various housing markets Goosehead serves, including as a result of changes in prevailing interest rates or U.S.

monetary policies that affect interest rates, could impact our ability to generate new business.

We experience seasonality and revenue related to the sale of insurance policies throughout the course of a calendar year that is tied to the seasonality of new home sales.

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While this can impact month-to-month or quarter-to-quarter results, we expect productivity to normalize year-over-year.

• Increases in interest rates.

Our variable rate debt, including our Credit Agreement, exposes us to interest rate risk.

If interest rates were to increase, our debt service obligations on our variable rate indebtedness would increase even if the amount borrowed remained the same.

To the extent that interest rate risk materializes and is not fully mitigated, the resulting increase in interest expense could have a material adverse effect on our results of operations.

• Effect of natural or man-made disasters .

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Certain relationships and related transactions, and director independence".

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.

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.

The spread of COVID-19 and mitigating measures caused unprecedented disruptions to the global economy and

normal business operations across sectors and countries, including the sectors and countries in which we, our clients, Carriers, suppliers and other third parties operate.

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

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

See Part II, Item 1A.

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In 2022, revenue increased by 38% to $209.4 million from $151.3 million in 2021.

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 Premium growth, which is the best indicator of future revenue growth, increased 42% to $2.2 billion in 2022 from $1.6 billion in 2021.

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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• New Business Royalty Fees - predictable based on franchise count and consistent ramp-up of franchises, but lower margin than Renewal Royalty Fees because the Company only receives a royalty fee of 20% on the commissions paid by the Carrier in the first term of every policy and higher back-office costs associated with policies in their first term.

This revenue stream has predictably convert into higher-margin Renewal Royalty Fees historically, and we expect this to continue moving forward.

This revenue stream has predictably converted into higher-margin Renewal Royalty Fees historically, and we expect this to continue moving forward.

• Agency Fees - although predictable based on agent count, Agency Fees do not renew like New Business Commissions and Renewal Commissions.

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We are paid a percentage of the premium from the Carriers in the form of New Business Commissions and, in states which allow it, we charge Agency Fees for the placement of the policy.

For policies placed by the Franchise Channel, we receive 20% of the commissions and fees received as New Business Royalties during the first term of the policy.

For policies placed through franchise sales, we receive

20% of the commissions and fees received as New Business Royalties during the first term of the policy.

All clients are serviced by our world-class service centers, allowing for predictable retention of our Book of Business, which has historically been 88%.

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.

All commissions received in corporate sales 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 related to franchise sales, 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 franchise sales, Core Revenue growth will lag that of Total Written Premium.

Cost Recovery 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 Contingent 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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For the year ended December 31, 2022, $7.7 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, 2022.

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.

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

We are a distributor of insurance policies in a range of primarily personal lines of business including homeowner’s insurance, automotive, dwelling property insurance, flood, wind and earthquake insurance, excess liability or umbrella insurance, specialty lines insurance (motorcycle, recreational vehicle, and other insurance), commercial lines insurance (general liability, property and auto insurance for small businesses) and life insurance.

The following table sets forth our Total Written Premium placed by line of business by amount and as a percentage of our Total Written Premium for the periods indicated ( in thousands ):

The following table sets forth our Total Written Premium placed by line of business by amount and as a percentage of our Total

Written Premium for the periods indicated ( in thousands ):

Year Ended December 31,

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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.

Expenses allocated to the Segments related to our service centers and other overhead are applied to the appropriate Segment using a transfer pricing methodology that seeks to maximize the scale efficiencies of our business by sharing certain expenses across the two Segments.

These shared expenses are then allocated between the two Segments based on certain cost drivers related to each expense.

Examples of specific expenses and their cost drivers include, but are not limited to:

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.

Key performance indicators

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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.

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, 2022, we had $2.2 billion in Total Written Premium, representing a 42% increase, compared to $1.6 billion for the year ended December 31, 2021.

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Year Ended December 31 % Change

Corporate Channel Total Written Premium $ 421,792 $ 320,495 32 %

Franchise Channel Total Written Premium 1,138,066 753,581 51 %

Corporate Sales Total Written Premium $ 554,764 $ 421,792 32 %

Franchise Sales Total Written Premium 1,662,259 1,138,067 46 %

Total Written Premium $ 2,217,023 $ 1,559,859 42 %

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Net Promoter Score (NPS) is calculated based on a single question:

“How likely are you to refer Goosehead Insurance to a friend, family member or colleague?” Clients that respond with a 6 or below are Detractors, a

score of 7 or 8 are called Passives, and a 9 or 10 are Promoters.

“How likely are you to refer Goosehead Insurance to a friend, family member or colleague?” Clients that respond with a 6 or below are Detractors, a score of 7 or 8 are called Passives, and a 9 or 10 are Promoters.

NPS is calculated by subtracting the percentage of Detractors from the percentage of Promoters.

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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 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.

Client Retention decreased modestly to 88% at December 31, 2022 when compared to 89% at December 31, 2021, 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 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.

In 2022, we retained 100% of the premiums we distributed in 2021, an increase from premium retention in 2021 of 93% primarily due to high levels of 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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For the year ended December 31, 2022, New Business Revenue grew 10% to $53.3 million, from $48.2 million for the year ended December 31, 2021.

Growth in New Business Revenue is driven by an increase in Corporate Channel sales agent headcount of 39% and growth in operating franchises of 34%.

Growth in New Business Revenue is driven primarily by growth in operating franchises of 18%.

Renewal Revenue

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For the year ended December 31, 2022, Renewal Revenue grew 58% to $134.9 million, from $85.2 million for the year ended December 31, 2021.

Growth in Renewal Revenue was driven by Client Retention of 89% at December 31, 2021.

As our agent force matures on both the Corporate Channel and the Franchise Channel, the policies they wrote in prior years begins to convert from New Business Revenue to more profitable Renewal Revenue.

Growth in Renewal Revenue was driven primarily by Client Retention of 88% at December 31, 2022, and premium rate increases over the prior year.

As our agent force matures the policies they wrote in prior years begins to convert from New Business Revenue to more profitable Renewal Revenue.

Non-GAAP Financial Measures

Core Revenue, Cost Recovery Revenue, Ancillary Revenue, Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted EPS are not measures of financial performance under GAAP and should not be considered substitutes for net income or earnings per share, which we consider to be the most directly comparable GAAP measure.

Core Revenue, Cost Recovery Revenue, Ancillary Revenue, Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted EPS are not measures of financial performance under GAAP and should not be considered substitutes for total revenue, net income, net income margin or earnings per share, which we consider to be the most directly comparable GAAP measure.

We refer to these measures as "non-GAAP financial measures." We consider these non-GAAP financial measures to be useful metrics for management and investors to facilitate operating performance comparisons from period to period by excluding potential differences caused by variations in capital structures, tax position, depreciation, amortization and certain other items that we believe are not representative of our core business.

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Core Revenue is a supplemental measure of our performance and includes Renewal Commissions, Renewal Royalty Fees, New Business Commissions, New Business Royalty Fees, and Agency Fees.

We believe that Core Revenue is an appropriate measure of operating performance because it summarizes all of our revenues from sales of individual insurance policies.

We believe that Core

Revenue is an appropriate measure of operating performance because it summarizes all of our revenues from sales of individual insurance policies.

Core Revenue increased by $54.8 million, or 41%, to $188.2 million for the year ended December 31, 2022 from $133.4 million for the year ended December 31, 2021.

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.

The primary driver of the increase is growth in operating franchises, high levels of client and premium retention, and number of policies in the renewal term from December 31, 2021 to December 31, 2022.

Cost Recovery Revenue

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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 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 increased by $15.9 million, or 76%, to $36.7 million for the year ended December 31, 2022, from $20.8 million for the year ended December 31, 2021, driven primarily by a significant increase in core revenue.

Adjusted EBITDA Margin

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For the year ended December 31, 2022, Adjusted EBITDA Margin was 18% compared to 14% for the year ended December 31, 2021.

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.

The Adjusted EBITDA margin increase came from a significant increase in core revenue and slower growth in both general and administrative and employee compensation and benefits expenses.

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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Other Income (2)

1,279 297 222

Total Ancillary Revenue 8,963 10,223 16,897

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

The following table shows a reconciliation from net income to Adjusted EBITDA for the year ended December 31, 2022, 2021, and 2020 (in thousands) :

Year ended December 31,

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Adjusted EBITDA $ 36,654 $ 20,838 $ 27,832

Net Income Margin (1)

Adjusted EBITDA Margin (2)

18 % 14 % 24 %

(1) Net Income Margin is calculated as Net Income divided by Total Revenue ($2,630 / $209,390), ($8,296 / $151,312), and ($18,755 / $117,014) for the years ended December 31, 2022, 2021, and 2020.

(2) Adjusted EBITDA Margin is calculated as Adjusted EBITDA divided by Total Revenue excluding other non-operating items ($36,654 / $209,390) for the year ended December 31, 2022, ($20,838 / $151,312) for the year ended December 31, 2021, and ($27,832 /$117,014) for the year ended December 31, 2020.

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

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.

For further discussion regarding our consolidated results of operations for the year ended December 31, 2021 as compared to the year ended December 31, 2020, 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, 2021.

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Commissions and agency fees

Commissions and agency fees consist of Core Revenue from New Business Commissions, Renewal Commissions, and Agency Fees, and Ancillary Revenue from Contingent Commissions generated from the Corporate Channel and Franchise Channel and other income.

Commissions and agency fees consist of Core Revenue from New Business Commissions, Renewal Commissions, and Agency Fees, and Ancillary Revenue from Contingent Commissions generated from corporate sales and franchise sales and other income.

The following table sets forth our commissions and agency fees by amount and as a percentage of our revenues for the periods indicated ( in thousands ):

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Renewal Commissions increased by $18.4 million, or 47%, to $57.5 million for the year ended December 31, 2022 from $39.1 million for the year ended December 31, 2021.

These increases are primarily attributable to an increase in the number of policies in the renewal term at December 31, 2021 compared to December 31, 2020.

These increases are primarily attributable to an increase in the premium retention rate at December 31, 2022 compared to December 31, 2021.

New Business Commissions increased by $2.0 million, or 9%, to $24.1 million for the year ended December 31, 2022 from $22.1 million for the year ended December 31, 2021.

Revenue from Agency Fees increased by $2.6 million, or 29%, to $11.5 million for the year ended December 31, 2021 from $8.9 million for the year ended December 31, 2020.

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 Agency Fees decreased by $0.6 million, or 5%, to $10.9 million for the year ended December 31, 2022 from $11.5 million for the year ended December 31, 2021.

This increase in New Business Commissions is primarily driven by increases in premium per policy, while the decrease in Agency Fees was primarily attributable to a decrease in total sales agent head count to 320 at December 31, 2022, from 506 at December 31, 2021, a 37% decrease.

Revenue from Contingent Commissions decreased by $2.2 million, or 23%, to $7.7 million for the year ended December 31, 2022, from $9.9 million for the year ended December 31, 2021.

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Revenue from Renewal Royalty Fees increase by $31.3 million, or 68%, to $77.3 million, for the year ended December 31, 2022 from $46.1 million for the year ended December 31, 2021.

The increase in revenue from Renewal Royalty Fees was primarily attributable to an increase in the number of policies in the renewal term, and the higher Royalty Fee rate on renewal business compared to new business (50% vs.

The increase in revenue from Renewal Royalty Fees was primarily attributable to an increase in premium retention rate, and the higher Royalty Fee rate on renewal business compared to new business (50% vs.

20%, respectively).

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Initial Franchise Fee revenue increased approximately $4.3 million, or 67%, to $10.9 million for the year ended December 31, 2022 from $6.5 million for the year ended December 31, 2021.

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

The primary driver of the increase in Initial Franchise Fees was the increase in total franchises, as well as the acceleration of Franchise Fee revenue from termination of existing agencies.

Interest Income

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Employee compensation and benefits expenses increased by $38.3 million, or 40%, to $133.3 million for 2022 from $95.0 million for 2021.

This was attributable to an increase in total headcount from 2020 to 2021, as well as additional stock options granted during 2021.

This was primarily attributable to an increase in total headcount from 2021 to 2022, as well as additional stock options granted during 2022.

General and administrative expenses

General and administrative expenses increased by $13.1 million, or 33%, to $52.9 million for 2022 from $39.8 million for 2021.

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.

This increase was primarily attributable to additional investment in the continued development of technology.

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

Bad debts increased by $3.2 million, or 107%, to $6.2 million for 2022 from $3.0 million for 2021.

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

This increase was primarily attributable to increases in terminations of signed but not launched franchises.

Depreciation and amortization

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Other income (expense)

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

During 2022 the Company had no other income, compared to $0.2 million in 2021.

Interest expense

Interest expenses increased by $2.2 million, or 75%, to $5.0 million for 2022 from $2.9 million for 2021.

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

This increase is attributable to a rising interest rate environment during the year.

Liquidity and capital resources

Historical liquidity and capital resources

We have managed our historical liquidity and capital requirements primarily through the receipt of revenues from our Corporate Channel and our Franchise Channel.

We have managed our historical liquidity and capital requirements primarily through the receipt of revenues from our corporate and franchise sales.

Our primary cash flow activities involve:

(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;

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

(2) generating cash flow from franchise sales, 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.

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.

As of December 31, 2022, our unrestricted cash and cash equivalents, and restricted cash was $30.4 million.

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

Credit agreement

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Comparative cash flows

The following table summarizes our cash flows from operational, investing and financing activities for the periods indicated:

The following table summarizes our cash flows from operating, investing and financing activities for the periods indicated:

Year Ended December 31

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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 $17.6 million increase in cash provided by commissions and fees receivable, offset by a $10.5 million decrease in net income.

Net cash provided by operating activities was $35.7 million for 2022 as compared to net cash provided by operating activities of $35.4 million for 2021.

This increase in net cash provided by operating activities was primarily attributable to a $5.7 million decrease in net income offset by a $12.4 million increase in stock compensation expense and a $16.5 million decrease in cash provided by contract liabilities offset by a $10.9 million increase in cash provided by receivables from franchisees.

Investing activities

Net cash used in business investment activities was $12.6 million for 2022 as compared to net cash used in business investment activities of $15.4 million for 2021.

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.

This decrease in net cash used in business investment activities was primarily attributable to a decrease in cash paid for fixed assets due to a decrease in additional office space built out during 2022 as compared to 2021.

Financing activities

Net cash used in financing activities was $23.2 million for 2022 as compared to net cash used by financing activities of $15.8 million for 2021.

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.

This increase in net cash used in financing activities is due to the $24.6 million decrease in proceeds received from notes payable during 2022, a $50.0 million increase in repayments made on the revolving credit facility and a $60.0 million decrease in distributions and dividends paid during 2022.

Future sources and uses of liquidity

Our initial sources of liquidity will be (1) cash on hand, (2) net working capital, (3) cash flows from operations and (4) our Revolving Credit Facility.

Our sources of liquidity are (1) cash on hand, (2) net working capital, (3) cash flows from operations and (4) our Revolving Credit Facility or other sources of debt financing.

Based on our current expectations, we believe that these sources of liquidity will be sufficient to fund our working capital requirements and to meet our commitments in the foreseeable future.

We expect that our primary liquidity needs will comprise cash to (1) provide capital to facilitate the organic growth of our business, (2) pay operating expenses, including cash compensation to our employees, (3) make payments under the tax receivable agreement, (4) pay interest and principal due on borrowings under our Credit Agreement and (5) pay income taxes.

Our primary liquidity needs comprise cash to (1) provide capital to facilitate the organic growth of our business, (2) pay operating expenses, including cash compensation to our employees, (3) make payments under the tax receivable agreement, (4) pay interest and principal due on borrowings under our Credit Agreement and (5) pay income taxes.

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.

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

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Rent expense was $7.0 million, $4.8 million, and $1.9 million for year ending December 31, 2022, 2021, and 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.

(2) The Company refinanced its credit facilities on July 21, 2021 in the form of a $100 million term loan and $50 million revolving credit facility, of which nothing was drawn on the revolving credit facility as of December 31, 2022.

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

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Revenue recognition

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 were previously recognized when the Company received notification from the insurance carrier, now require significant judgments and estimates.

Goosehead provides personal and commercial property and casualty insurance brokerage services for its clients through a network of corporate-owned and franchise units.

Goosehead is compensated for the insurance brokerage services that it provides for clients in the form of commission revenue, royalty fees, and contingent commissions.

The Company estimates the amount of commissions and royalty fees revenue to recognize on the effective date a policy is placed into service based on estimates of premiums, policy changes and cancellations.

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.

The Company capitalizes the incremental costs to obtain contracts primarily related to commission payments.

The transaction price for contingent commissions is estimated based on all available information and is recognized over time as the Company completes its performance obligations as the underlying policies are placed.

Certain costs to obtain or fulfill a contract are capitalized.

The Company capitalizes the incremental costs to obtain contracts primarily related to initial franchise fees.

These deferred costs are amortized over the expected life of the underlying franchise fee and are included in Other assets in the Company's consolidated balance sheet as of December 31, 2022.

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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.

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.

1 unchanged sentence

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