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Item 7. Management’s Discussion and Analysis

2024-02-22 compared with 2023-02-27 · 86 added, 88 removed, 435 unchanged (29% of the section changed)

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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’).

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

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• Total revenue increased 25% from 2022 to $261.3 million;

Core Revenues* of $188.2 million increased 41% over 2021

Core Revenues*, a non-GAAP measure, of $233.0 million increased 24% over 2022

• Total Written Premiums Placed increased 34% from 2022 to $3.0 billion

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

• Net income increased by $21.1 million from 2022 to $23.7 million, or 9% of total revenues

• Adjusted EBITDA*, a non-GAAP measure, increased by 90% from 2022 to $69.8 million, or 27% of total revenues

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◦ As of December 31, 2023, 135 of these corporate sales agents had less than one year of tenure and 165 had greater than one year of tenure.

• Operating franchises increased 18% from December 31, 2021 to 1,413 at December 31, 2022.

◦ In Texas as of December 31, 2022, 71 operating franchises had less than one year of tenure and 236 operating franchisees had greater than one year of tenure.

◦ Outside of Texas as of December 31, 2022, 401 operating franchises had less than one year of tenure and 705 had greater than one year of tenure.

• Operating franchises decreased 13% from December 31, 2022 to 1,226 at December 31, 2023.

◦ As of December 31, 2023, 183 operating franchises had less than one year of tenure and 1,043 operating franchisees had greater than one year of tenure.

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

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.

Reconciliation of Total Core Revenue to Total Revenue, Adjusted EBITDA to net income and Adjusted EPS to EPS, the most directly comparable financial measures presented in accordance with GAAP, are set forth in "Key performance indicators" below.

Factors affecting our results of operations

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• 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.

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

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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.

If interest rates were to increase, as they have increased recently, 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.

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Certain relationships and related transactions, and director independence".

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.

“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

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Cost Recovery Revenue:

• Initial Franchise Fees - one-time Cost Recovery Revenue stream per franchise unit that covers the Company's costs to recruit, train, onboard, and support the franchise for the first year.

These fees are fully earned and non-refundable when a franchise attends our initial training.

• Initial Franchise Fees - Cost Recovery Revenue stream charged one time per franchise unit that covers the Company's costs to recruit, train, onboard, and support the franchise for the first year.

These fees are fully

earned and non-refundable when a franchise attends our initial training and are recognized in revenue over the life of the franchise agreement.

• Interest Income - like Initial Franchise Fees, interest income is a Cost Recovery Revenue stream that reimburses the Company for those franchises on a payment plan.

Interest income is recognized over the term of the franchise fee payment plan.

Ancillary Revenue:

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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 through franchise sales, 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 86%.

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.

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 commissions and servicing costs.

For all policies that renew related to franchise sales, we receive as Renewal Royalty Fees 50% of the commissions received from the Carrier, creating a mechanical increase in revenue of 129% if we renew at historical rates.

Renewal Royalty Fees are higher margin compared to New Business Royalty Fees due to lower servicing costs on higher revenue.

Because of the lower royalty fees on New Business Commissions as compared to Renewal Commissions, 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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Ancillary Revenue:

With certain Carriers, the Company has the opportunity to earn additional revenue in the form of Contingent Commissions, typically based on the growth and loss ratio of the business placed with the select Carriers.

The Contingent Commissions are extremely difficult to predict in any given period.

With certain Carriers, the Company has the opportunity to earn additional revenue in the form of Contingent Commissions, typically based on the volume, growth, and loss ratio of the business placed with the select Carriers.

The Contingent Commissions are extremely difficult to predict in any given period and can vary greatly from year to year.

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

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

For the year ended December 31, 2022, $7.7 million of Contingent Commissions were earned (below our historical average as a percentage of premium), of which $7.4 million was still receivable at December 31, 2022.

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

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.

For the year ended December 31, 2023, $13.7 million of Contingent Commissions were earned (below our historical average as a percentage of premium), of which $6.9 million was still receivable at December 31, 2023.

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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Total Written Premium $ 2,963,985 100 % $ 2,217,023 100 % $ 1,559,858 100 %

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

Due to our 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 operations.

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Total Written Premium

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

Total Written Premium represents the total amount of current (non-cancelled) gross premium that is placed with Goosehead’s portfolio of Carriers for a reporting period.

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.

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Policies in Force

Policies in Force means as of any reported date, the total count of current (non-cancelled) policies placed with Goosehead’s portfolio of Carriers.

Policies in Force means the total count of current (non-cancelled) policies placed with Goosehead’s portfolio of Carriers as of a reported date.

We believe that Policies in Force is an appropriate measure of operating performance because it reflects growth of our business relative to other insurance agencies.

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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, with a 7 or 8 are Passives, and with a 9 or 10 are Promoters.

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

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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 decreased modestly to 90 as of December 31, 2022 from 91 at December 31, 2021, primarily driven by the service team’s continued focus on delivering highly differentiated service levels.

NPS has increased modestly to 92 as of December 31, 2023 from 90 at December 31, 2022, 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 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.

In 2023, we retained 101% of the premiums we distributed in 2022, an increase from premium retention in 2022 of 100% primarily due to 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, 2023, New Business Revenue grew 3% to $54.8 million, from $53.3 million for the year ended December 31, 2022.

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

Growth in New Business Revenue is primarily attributable to an increase in agent productivity and rising premium rates.

Renewal Revenue

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Growth in Renewal Revenue was driven primarily by Client Retention of 86% at December 31, 2023, 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.

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

Non-GAAP Financial Measures

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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 $44.8 million, or 24%, to $233.0 million for the year ended December 31, 2023 from $188.2 million for the year ended December 31, 2022.

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.

The primary drivers of the increase are increased agent productivity, growth in premiums, high levels of client and premium retention, and the number of policies in the renewal term from December 31, 2022 to December 31, 2023.

Cost Recovery Revenue

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Cost Recovery Revenue increased by $0.4 million, or 3%, to $12.7 million for the year ended December 31, 2023 from $12.3 million for the year ended December 31, 2022.

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

The primary driver of the increase was an increase in terminations of franchises, which accelerates recognition of initial franchise fee revenue.

Ancillary 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 decreased by $1.3 million, or 12%, to $9.0 million for the year ended December 31, 2022 from $10.2 million for the year ended December 31, 2021.

The primary driver of the decrease from December 31, 2021 to December 31, 2022 was unfavorable loss ratios with our carriers.

Ancillary Revenue increased by $6.6 million, or 74%, to $15.6 million for the year ended December 31, 2023 from $9.0 million for the year ended December 31, 2022.

The primary drivers of the increase from December 31, 2022 to December 31, 2023 were improved loss ratios as well as growth in Total Written Premiums.

Adjusted EBITDA

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We believe that Adjusted EBITDA is an appropriate measure of operating performance because it eliminates the impact of items that do not relate to underlying business performance.

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

Adjusted EBITDA increased by $33.2 million, or 90%, to $69.8 million for the year ended December 31, 2023, from $36.7 million for the year ended December 31, 2022, driven by a significant increase in core revenue and slower growth in both employee compensation and benefits and general and administrative expenses.

Adjusted EBITDA Margin

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For the year ended December 31, 2023, Adjusted EBITDA Margin was 27% compared to 18% for the year ended December 31, 2022.

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.

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

Adjusted EPS is a useful measure to management because it eliminates the impact of items that do not relate to business performance and helps compare companies that may not have a dual-share class structure.

Adjusted EPS increased by $0.78 to $1.33 for the year ended December 31, 2023, from $0.55 for the year ended December 31, 2022, driven by a significant increase in Core Revenue and slower growth in both employee compensation and benefits and general and administrative expenses.

GAAP to Non-GAAP Reconciliations

The following table shows a reconciliation of total revenues to other non-GAAP measures of revenue for the years ended December 31, 2023, 2022, and 2021 (in thousands) :

Year ended December 31,

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

The following table shows a reconciliation from net income to Adjusted EBITDA for the years ended December 31, 2023, 2022, and 2021 (in thousands) :

Year ended December 31,

2023 2022 2021

Net income (loss) $ 2,630 $ 8,296 $ 18,755

Net income $ 23,696 $ 2,630 $ 8,296

Interest expense 6,568 4,999 2,854

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Equity-based compensation 23,989 19,642 7,292

Other income (expense, including state franchise tax) — (185) (90)

Impairment expense 3,628 — —

Other (income) expense — — (185)

Adjusted EBITDA $ 69,817 $ 36,654 $ 20,838

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2023 2022 2021

Earnings (loss) per share - basic (GAAP) $ 0.03 $ 0.28 $ 0.55

Earnings per share - basic (GAAP) $ 0.59 $ 0.03 $ 0.28

equity-based compensation (1)

0.64 0.52 0.20

impairment expense (2)

Adjusted EPS (non-GAAP) $ 1.33 $ 0.55 $ 0.48

(1) Calculated as equity-based compensation divided by the weighted average of Class A and Class B shares outstanding during the period 2022 - [$19.6 million / ( 21.0 million + 16.2 million )] 2021 - [ $7.3 million / ( 19.2 million + 17.7 million )] 2020 - [ $4.7 million / ( 16.8 million + 19.7 million )]

(1) Calculated as equity-based compensation divided by the sum of the weighted average number of shares of Class A common stock and Class B common stock outstanding during the period 2023 - [$24.0 million / ( 23.9 million + 13.8 million )] 2022 - [ $19.6 million / ( 21.0 million + 16.2 million )] 2021 - [ $7.3 million / ( 19.2 million + 17.7 million )]

(2) Calculated as impairment expense divided by the sum of the weighted average number of shares of Class A common stock and Class B common stock [ $3.6 million / (23.9 million + 13.8 million )] for the year ended December 31, 2023.

No impairment was recorded for the years ended December 31, 2022 and December 31, 2021.

Consolidated results of operations

The following is a discussion of our consolidated results of operations for each of the years ended December 31, 2022, December 31, 2021, and December 31, 2020.

The following is a discussion of our consolidated results of operations for each of the years ended December 31, 2023, 2022, and 2021.

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

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Renewal Commissions increased by $13.2 million, or 23%, to $70.7 million for the year ended December 31, 2023 from $57.5 million for the year ended December 31, 2022.

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.

This increase is primarily attributable to strong premium retention and more policies in the renewal term, offset by a slight decline in client retention to 86% at December 31, 2023 from 88% at December 31, 2022.

New Business Commissions decreased by $0.7 million, or 3%, to $23.4 million for the year ended December 31, 2023 from $24.1 million for the year ended December 31, 2022.

Revenue from Agency Fees decreased by $2.7 million, or 25%, to $8.2 million for the year ended December 31, 2023 from $10.9 million for the year ended December 31, 2022.

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.

The decrease is primarily attributable to the increase in loss ratios in our book of business with the Carriers that offer contingency programs.

This decrease in New Business Commissions and Agency Fees was primarily attributable to a decrease in total sales agent head count to 300 at December 31, 2023, from 320 at December 31, 2022, a 6% decrease.

Revenue from Contingent Commissions increased by $6.1 million, or 79%, to $13.7 million for the year ended December 31, 2023, from $7.7 million for the year ended December 31, 2022.

The increase is primarily attributable to growth in total written premiums as well as receiving and qualifying for additional contingent commissions.

Franchise Revenues

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Franchise revenues $ 143,772 100 % $ 107,722 100 % $ 67,508 100 %

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 premium retention rate, and the higher Royalty Fee rate on renewal business compared to new business (50% vs.

20%, respectively).

Revenue from Renewal Royalty Fees increased by $30.2 million, or 39%, to $107.5 million, for the year ended December 31, 2023 from $77.3 million for the year ended December 31, 2022.

The increase in revenue from Renewal Royalty Fees was primarily attributable to strong premium retention rate and more policies in the renewal term, offset by a slight decline in client retention to 86% at December 31, 2023 from 88% at December 31, 2022.

Revenue from New Business Royalty Fees increased by $4.9 million, or 27%, to $23.2 million for the year ended December 31, 2023 from $18.2 million for the year ended December 31, 2022.

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, 2022 compared to December 31, 2021.

The increase in revenue from New Business Royalty Fees was driven primarily by an increase in agency productivity and rising premium rates.

Initial Franchise Fee revenue increased approximately $0.4 million, or 4%, to $11.2 million for the year ended December 31, 2023 from $10.9 million for the year ended December 31, 2022.

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.

The primary driver of the increase in Initial Franchise Fees was the acceleration of Initial Franchise Fee revenue from terminations of existing agencies.

Interest Income

Interest Income increased $0.3 million, or 22% to $1.4 million for 2022 from $1.2 million for 2021 .

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

Interest Income remained stable at $1.4 million for 2023 compared to $1.4 million for 2022, driven by a similar number of franchises on a payment plan in both periods.

Employee compensation and benefits

Employee compensation and benefits expenses increased by $19.3 million, or 14%, to $152.6 million for 2023 from $133.3 million for 2022.

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

This was primarily attributable to the hiring of more experienced team members, particularly at the leadership level, and an increase in equity-based compensation of 22% related to additional stock options granted during 2023.

General and administrative expenses

General and administrative expenses increased by $9.2 million, or 17%, to $62.1 million for 2023 from $52.9 million for 2022.

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 terminations of signed but not launched franchises.

This increase was primarily attributable to $3.6 million asset impairment charges related to internally developed software and impairment of two office locations the Company determined to sublease, increased spend on rent-related costs due to expansion of our corporate office space, and increased spending on software and professional services

Bad debts decreased by $1.8 million, or 30%, to $4.4 million for 2023 from $6.2 million for 2022.

This decrease was primarily attributable to an increase in average cash collections relative to revenue recognized for terminated franchises on the payment plan.

Depreciation and amortization

Depreciation and amortization increased by $2.4 million, or 34%, to $9.2 million for 2023 from $6.9 million for 2022.

This increase was primarily attributable to the increase in fixed assets during the same period, including a full year of depreciation on the fixed assets put in place in connection with the additional hiring and lease space taken during the year.

Other income (expense)

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

This increase was primarily attributable to the increase in fixed assets due to the expansion of office space, additional investments in software development, and purchases of books of business.

Interest expense

Interest expenses increased by $1.6 million, or 31%, to $6.6 million for 2023 from $5.0 million for 2022.

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

This increase is attributable to a rising interest rate environment during the year, partially offset by a decrease in total borrowings outstanding.

Tax expenses increased by $0.2 million, or 8%, to $2.7 million for 2023 from $2.5 million for 2022.

This increase is attributable to an increase in income before taxes offset by a decrease in state and local deferred taxes.

Liquidity and capital resources

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Net cash provided by operating activities was $50.8 million for 2023 as compared to net cash provided by operating activities of $35.7 million for 2022.

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.

This increase in net cash provided by operating activities was primarily attributable to a $21.1 million increase in net income, an $8.4 million increase in cash provided by receivables from franchisees, a $4.5 million increase in cash provided by commissions and agency fees, and a $4.3 million increase in stock compensation expense offset by a $17.4 million decrease in cash provided by contract liabilities and a $4.0 million increase in prepaid expenses.

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 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.

Net cash used for business investment activities was $19.2 million for 2023 as compared to net cash used for business investment activities of $12.6 million for 2022.

This increase in net cash used in business investment activities was primarily attributable to $6.9 million for purchases of books of business in 2023 and a $5.2 million increase in cash paid for software development offset by $5.7 million decrease in the purchase of property and equipment.

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 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.

Net cash used for financing activities was $17.9 million for 2023 as compared to net cash used for financing activities of $23.2 million for 2022.

This decrease in net cash used for financing activities is due to the net repayment of $25.0 million of the revolving credit facility in 2022 and a $3.8 million increase in cash received from stock options exercises, offset by a $12.5 million increase in principal payments on notes payable, due primarily to an additional $10.0 million principal payment made in 2023, and a $10.9 million increase in member distributions paid during 2023.

Future sources and uses of liquidity

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Revenue recognition

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.

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.

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

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

The transaction price for commissions revenue and royalty fees is set as an estimate of the variable consideration to be received for the current policy term.

This estimate includes the fixed consideration due based on the contractual terms of the current policy and adjustments for estimates of modifications of the contractual terms of the current policy and/or termination of the policy before the end of the current term.

This variable consideration is constrained to the extent that it is probable there will not be a significant reversal of revenue.

The Company adjusts its estimate of revenue recognized for commissions and royalty fees based on cash collections during the term of the policy.

Commissions revenue is earned at a point in time on the effective date of the policy.

Royalty fees are earned over time as the underlying policies are placed.

The transaction price for contingent commissions is estimated based on all available information and constrained such that it is probable there will not be a significant reversal of revenue.

Contingent commissions revenue is recognized over time as the Company completes its performance obligations as the underlying policies are placed and other contractual obligations are met.

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.

The Company capitalizes the incremental costs to obtain franchise contracts.

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, 2023.

Liabilities under Tax Receivable Agreement

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.

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.

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

federal, state and local income tax or franchise tax that we actually realize as a result of (i) any increase in tax basis in Goosehead 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.

1 unchanged sentence

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What changed 10-K

Item 7. Management’s Discussion and Analysis