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Item 8. Financial Statements and Supplementary Data

2024-02-22 compared with 2023-02-27 · 170 added, 131 removed, 659 unchanged (31% of the section changed)

43 unchanged sentences

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Commissions and Agency Fees and Franchise Revenues – New and Renewal Commissions and New and Renewal Royalty Fees — Refer to Note 3 to the financial statements

Commissions and Agency Fees and Franchise Revenues – Renewal and New Business Commissions and Renewal and New Business Royalty Fees — Refer to Notes 2 and 3 to the financial statements

Critical Audit Matter Description

Commissions revenue consists of commissions earned from insurance carriers for services performed on behalf of the insured in the placement of insurance policies both for the initial placement of the policies and the subsequent renewals of those policies.

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

Franchise revenues consist of royalty fees earned by the Company for providing initial training, onboarding, ongoing support and use of the Company’s business operations over the period of the franchise agreement based on a percentage of commissions earned by franchisees from insurance carriers.

Royalty fees revenue is recognized over time under the sales- and usage-based exception on the effective date of policies placed by franchisees.

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 placed, policy changes, and cancellations, net of a constraint.

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

For the year ended December 31, 2022, commissions and agency fees was $100.3 million, of which $81.7 million relates to new and renewal commissions.

For the year ended

December 31, 2022, franchise revenue was $107.7 million, of which $95.6 million relates to new and renewal royalty fees.

We identified commissions and royalty fees revenue as a critical audit matter because of the judgments necessary for management to estimate policy changes and cancellations and for management to estimate constraints for renewal commissions and renewal royalty fees.

This required extensive audit effort due to the volume of commissions contracts and required a high degree of auditor judgment when performing audit procedures to audit management’s estimates of policy changes, policy cancellations, and constraints and evaluating the results of those procedures.

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

This estimate includes fixed consideration due based on the contractual terms of the current policy, 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, and constraint of the variable consideration to the extent that it is probable there will not be a significant reversal of revenue.

For the year ended December 31, 2023, commissions and agency fees was $116.1 million, of which $70.7 million relates to renewal commissions and $23.4 million relates to new business commissions.

For the year ended December 31, 2023, franchise revenue was $143.8 million, of which $107.5 million relates to renewal royalty fees and $23.2 million relates to new business royalty fees.

We identified renewal and new business commissions and renewal and new business royalty fees revenue as a critical audit matter because of the judgments necessary for management to estimate the variable consideration to be received for the current policy term.

This required extensive audit effort due to the volume of commissions

contracts and required a high degree of auditor judgment when performing audit procedures to audit management’s estimates of variable consideration and evaluating the results of those procedures.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to management’s estimates of premiums placed, policy changes, policy cancellations, and constraints and adjustments to its estimates based on cash collections used to recognize revenue for commissions and royalty fees revenue included the following, among others:

• We developed an independent expectation of current year constrained commissions and royalty fees revenue and compared to management’s recorded amount.

• We evaluated management's revenue estimates for commissions and royalty fees revenue made at year end based on cash collections during the terms of the policies by performing the following:

• Compared the adjustments of revenue based on cash collections used by management to historical cash collection rates for portfolios of policies with the same remaining policy term.

• Tested the accuracy and completeness of historical cash collection data used in the calculation of historical cash collection rates.

• We evaluated management’s estimate of the constraints applied to renewal commissions and renewal royalty fees revenue by comparing the constraints to historical adjustments of commissions and royalty fees revenue.

Our audit procedures related to management’s estimates of the variable consideration in recognizing revenue for renewal and new business commissions and renewal and new business royalty fees revenue included the following, among others:

• We tested the operating effectiveness of controls over commissions and royalty fees revenue, including management’s controls over its estimates of the variable consideration.

• For a sample of commissions and royalty fees revenue transactions, we tested the recording of cash receipts by agreeing the amounts recognized to source documents.

• We developed an independent expectation of the variable consideration estimates for commissions and royalty fees revenue based on historical policy and commissions data.

• We evaluated management's variable consideration estimates for commissions and royalty fees revenue made at year end by performing the following:

◦ Tested the mathematical accuracy of management’s calculation of the variable consideration estimates.

◦ Tested the accuracy and completeness of underlying data, including historical policy and commissions data, used in management’s calculation of the variable consideration estimates.

• We performed retrospective reviews of management’s variable consideration estimates to identify potential bias in the determination of commissions and royalty fees revenue.

• We evaluated whether publicly available information contradicted management’s assumptions.

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Consolidated balance sheets

(In thousands, except share and par value amounts)

(In thousands, except par value amounts)

Current Assets:

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Goosehead Insurance, Inc.

Consolidated statement of stockholders’ equity

Consolidated statements of stockholders’ equity

(In thousands)

1 unchanged sentence

Balance January 1, 2021 18,304 18,447 $ 183 $ 184 $ 29,371 $ ( 34,614 ) $ ( 4,876 ) $ ( 33,528 ) $ ( 38,404 )

Distributions — — — — — — ( 2,697 ) ( 2,697 )

Dividends declared — — — — — ( 31,657 ) ( 31,657 ) ( 28,343 ) ( 60,000 )

9 unchanged sentences

Balance January 1, 2022 20,198 16,909 $ 200 $ 170 $ 46,281 $ ( 60,671 ) $ ( 14,020 ) $ ( 55,168 ) $ ( 69,188 )

Dividends declared — — — — — ( 31,657 ) ( 31,657 ) ( 28,343 ) ( 60,000 )

Net income — — — — — 565 565 2,065 2,630

8 unchanged sentences

Balance January 1, 2023 23,034 14,470 $ 228 $ 146 $ 70,866 $ ( 60,570 ) $ 10,670 $ ( 44,294 ) $ ( 33,624 )

Distributions — — — — — — — ( 10,939 ) ( 10,939 )

Net income — — — — — 14,140 14,140 9,556 23,696

16 unchanged sentences

Depreciation and amortization 9,469 7,109 5,117

Impairment expense 3,628 — —

Bad debt expense 4,361 6,198 2,999

3 unchanged sentences

Noncash lease expense ( 748 ) 1,998 5,949

Cloud computing arrangement implementation costs ( 85 ) — —

Changes in operating assets and liabilities:

4 unchanged sentences

Accounts payable and accrued expenses ( 109 ) 2,513 4,004

Deferred rent — — ( 7,365 )

Contract liabilities ( 19,454 ) ( 2,055 ) 14,407

Premiums payable ( 75 ) ( 309 ) 629

Payments pursuant to the tax receivable agreement — ( 1,921 ) ( 9 )

Net cash provided by operating activities 50,758 35,724 35,444

2 unchanged sentences

Purchase of software ( 7,705 ) ( 2,484 ) ( 2,669 )

Cash consideration paid for asset acquisitions ( 6,895 ) — —

Purchase of property and equipment ( 4,452 ) ( 10,130 ) ( 12,738 )

7 unchanged sentences

Proceeds from the issuance of Class A common stock 9,898 6,130 4,590

Member distributions and dividends to stockholders — ( 60,000 ) ( 44,697 )

Member distributions ( 10,939 ) — —

Dividends to stockholders — — ( 60,000 )

Net cash used for financing activities ( 17,916 ) ( 23,245 ) ( 15,826 )

5 unchanged sentences

Cash paid for income taxes 701 484 272

Cash paid pursuant to TRA Agreement 421 — 1,921

See Notes to the Consolidated Financial Statements

6 unchanged sentences

The operations of GF represent the predecessor to GSHD prior to the Offering, and the consolidated entities of GF are described in more detail below.

Information for any periods prior to May 1, 2018 relates to GF and its subsidiaries and affiliates.

GSHD (collectively with its consolidated subsidiaries, the “Company”) provides personal and commercial property and casualty insurance brokerage services for its clients through a network of corporate-owned agencies and franchise units across the nation.

The operations of the corporate-owned units are recorded in Texas Wasatch Insurance Services, L.P.

The operations of the corporate-owned offices are recorded in Texas Wasatch Insurance Services, L.P.

(“TWIS”)—a Texas limited partnership headquartered in Westlake, TX and operating since 2003.

TWIS is a wholly owned subsidiary of GF.

The Company had 12 corporate-owned locations in operation at December 31, 2022, 15 at December 31, 2021, and 9 at December 31, 2020.

TWIS is a wholly-owned Goosehead Insurance Holdings ("GIH"), which is a wholly-owned subsidiary of GF.

The Company had 14 corporate-owned offices in operation at December 31, 2023, 12 at December 31, 2022, and 15 at December 31, 2021.

The operations of the franchise units are recorded in Goosehead Insurance Agency, LLC (“GIA”)—a Delaware limited liability company headquartered in Westlake, TX and operating since 2011.

GIA is 100 % owned by Goosehead Insurance Holdings ("GIH"), which is 100 % owned by GF.

GIA is 100 % owned by GIH, which is 100 % owned by GF.

Franchisees are provided access to insurance Carrier Appointments, product training, technology infrastructure, client service centers and back office services.

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Commissions and agency fees receivable

Upon issuance of a new policy, the Company typically collects the first premium payment from the insured, and then will remit the full premium amount to the insurance carriers.

Upon issuance of a new policy, the Company typically collects the first premium payment from the insured and then remits the full premium amount to the insurance carriers.

The insurance carriers collect the remaining premiums directly from the insureds and remit the applicable commissions to the Company.

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contract effective date and generally are based on a percentage of premiums for insurance coverage.

During 2022, the Company wrote with approximately 150 insurance carriers, of which 58 provided national coverage.

During 2023, the Company wrote with over 150 insurance carriers, of which 60 provided national coverage.

In 2023, two carriers represented more than 10% of total revenue at 16 % and 12 %.

In 2022, two carriers represented more than 10% of total revenue at 14 % and 12 %.

In 2020, three carriers represented more than 10% of total revenue at 20 %, 13 %, and 12 %.

In 2021, two carriers represented more than 10% of total revenue at 17 % and 11 %.

In select states, agents have the option to charge an agency fee for the placement of the insurance policy.

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

Goosehead provides personal and commercial property and casualty insurance brokerage services for its clients through a network of corporate-owned locations 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 Company estimates revenue and constrains the estimates such that it is probable there will not be a significant reversal of revenue.

The Company adjusts its estimate of revenue recognized based on cash collections.

The Company also recognizes revenue for initial franchise fees generated from a contract between the Company and a franchisee.

Initial franchise fees are recognized as revenue over the 10-year life of the franchise contract, beginning on the start date of the contract.

Certain costs to obtain or fulfill a contract are capitalized.

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

The Company capitalizes the commission payments paid to obtain new 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.

See Note 3 Revenues for further explanation of the Company's revenue recognition policy.

Property & equipment

The Company carries fixed assets at cost, less accumulated depreciation, as stated in the accompanying consolidated balance sheets.

Depreciation of property and equipment is calculated using the straight-line method over the estimated useful life of five years for furniture, fixtures and equipment and three years for computer

Depreciation of property and equipment is calculated using the straight-line method over the estimated useful life of five years for furniture, fixtures and equipment and three years for computer equipment.

Leasehold improvements are also amortized using the straight-line method and are amortized over the shorter of the remaining term of the lease or the useful life of the improvement.

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Intangible assets

Intangible assets are stated at cost less accumulated amortization and reflect amounts paid for the Company’s web domain and computer software costs.

The web domain is amortized over a useful life of fifteen years and software costs are amortized over a useful life of three years .

Intangible assets are stated at cost less accumulated amortization and reflect amounts paid for the Company’s web domain, computer software costs, and books of business.

The web domain is amortized over a useful life of fifteen years , software costs are amortized over a useful life of three to ten years , and books of business (customer accounts) are amortized over a useful life of eight years .

In May 2023, the Company entered into an agreement to purchase Vivint Smart Home's insurance book of business, for which the Company paid $ 5.8 million in cash consideration.

Total purchases of books of business during the year ended December 31, 2023 was $ 6.9 million.

No books of business were purchased during the year ended December 31, 2022.

Asset Impairment

The Company reviews all of its identifiable assets for impairment periodically and whenever events or changes in business circumstances indicate that the carrying value of the assets may not be recoverable.

In reviewing identifiable assets, if the undiscounted future cash flows were less than the carrying amount of the respective assets, an indicator of impairment would exist, and further analysis would be required to determine whether or not a loss would need to be charged against current period earnings as a component of general and administrative expenses.

Based on a review of intangible assets during the year ended December 31, 2023, the Company identified a group of internally-developed software assets that had not been placed into service and would not be completed.

As a result, the Company determined the assets had no fair value and recorded an impairment expense of $ 1.1 million related to the asset group.

Based on a review of tangible assets during the year ended December 31, 2023, the Company identified two office leases that will be subleased and completed a recoverability assessment for assets at those locations.

Based on the results of the recoverability assessment, the Company determined that the undiscounted cash flows of the assets were below their carrying values.

As a result, the Company compared the fair values of the assets to their carrying values and recorded an impairment expense of $ 1.4 million of property and equipment and $ 1.1 million of right-of-use asset for the amount the carrying values exceeded the fair values.

The Company determined the fair values by estimating sublease cash flows based on market rates for similar properties and discounted them using the Company's internal borrowing rate.

No additional impairment was identified during the year ended December 31, 2023, 2022, and 2021.

Premiums payable

6 unchanged sentences

For leases with an original term longer than one year, lease liabilities are initially recognized on the lease commencement date based on the present value of the future minimum lease payments over the lease term, including non-lease components such as fixed common area maintenance costs and other fixed costs for generally all leases.

A corresponding right of use ("ROU") asset is initially recognized equal to the lease liability adjusted for any lease prepayments, initial direct costs and lease incentives and amortized into rent expense, which is mapped to general and administrative expenses in the consolidated statements of operations.

A corresponding right of use ("ROU") asset is initially recognized equal to the lease liability adjusted for any lease prepayments, initial direct costs and lease

incentives and amortized into rent expense, which is mapped to general and administrative expenses in the consolidated statements of operations.

The discount rates used in determining the present value of leases represent our collateralized borrowing rate considering each lease's term.

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In 2019, the Financial Accounting Standards Board issued ASU 2019-12 to simplify the accounting for income taxes.

The guidance primarily addresses how to (1) recognize a deferred tax liability after we transition to or from the equity method of accounting, (2) evaluate if a step-up in the tax basis of goodwill is related to a business combination or is a separate transaction, (3) recognize all of the effects of a change in tax law in the period of enactment, including adjusting the estimated annual tax rate, and

(4) include the amount of tax based on income in the income tax provision and any incremental amount as a tax not based on income for hybrid tax regimes.

We adopted the guidance in the first quarter of 2021.

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Our debt agreement contains a provision to move to the Secured Overnight Financing Rate ("SOFR") if or when LIBOR is phased out.

On April 26, 2023, the Company entered into an Amendment No.1 to the Second Amended and Restated Credit Agreement executing the provision to move to SOFR from LIBOR.

Under the allowable expedients, a modification of a debt contract that is only a replacement of the reference rate is accounted for as a non-substantial modification.

Accounting Pronouncements Not Yet Adopted

In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures (Topic 740).

This standard requires the Company to provide further disaggregated income tax disclosures for specific categories on the effective tax rate reconciliation, as well as additional information about federal, state/local and foreign income taxes.

The standard also requires the Company to annually disclose its income taxes paid (net of refunds received), disaggregated by jurisdiction.

This guidance is effective for fiscal years beginning after December 15, 2024, with early adoption permitted.

The standard is to be applied on a prospective basis, although optional retrospective application is permitted.

The Company is currently evaluating the impact this guidance will have on its financial statement disclosures.

Commissions and agency fees

The Company earns new and renewal commissions paid by insurance Carriers and fees paid by its clients for the binding of insurance coverage.

The transaction price is set as the estimated commissions to be received over the term of the policy based on an estimate of premiums placed, policy changes and cancellations, net of a constraint.

These commissions and fees are earned at a point in time upon the effective date of bound insurance coverage, as no performance obligation exists after coverage is bound.

C ommissions from insurance carriers, net of estimated policy changes and cancellations, are recognized as revenue at the effective date of the policy.

Significant factors in determining our estimates of policy changes and cancellations include forecasted commissions revenue, which is estimated based on historical experience and assumptions concerning future customer behavior and market conditions.

Subsequent adjustments to estimated policy changes and cancellations are possible as facts and circumstances change over time.

The Company earns commissions, which are paid as a percentage of the policy premiums placed by the Company, by performing its obligation to identify, place, and make effective insurance coverage on behalf of its customer, the insured.

The Company defines the term of the policy as the contractual period the policy provides insurance coverage to the insured, which is typically 1 year or less.

Commissions earned for the placement of the initial policy term for a given insurance product are recorded as New Business Commissions.

New Business Commissions are earned at a point in time on the effective date of the policy, which is when the customer’s unilateral right to cancel the policy without consideration expires, as the Company has no further performance obligations for the initial term once the policy is placed and made effective.

After the initial policy term for a given insurance product, the Company earns Renewal Commissions by assisting the customer to make effective a renewal policy that satisfies the customer’s current insurance coverage needs.

The Company performs this obligation by monitoring the customer’s policy to ensure a renewal is offered by the carrier and that the client promptly pays the premium.

Alternatively, based on the needs of the customer, the Company may assist the customer to adjust coverage terms to satisfy its current insurance coverage needs or the Company may assist the customer to re-shop the insurance coverage to identify, place, and make effective a policy that better meets those needs.

Renewal Commissions are earned at a point in time upon the effective date of the renewal policy term or upon the effective date of the replacement policy identified, placed, and made effective for the customer, which is when the customer’s unilateral right to non-renew the policy expires, as the Company has no further performance obligations for that renewal policy term.

The transaction price for commissions revenue 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.

For Agency Fees, the Company enters into a contract with the insured, in which the Company's performance obligation is to place an insurance policy.

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Contingent commissions represent a form of variable consideration associated with the placement and profitability of coverage, for which we earn commissions.

In connection with Topic 606, contingent commissions are estimated with a constraint applied and accrued relative to the recognition of the corresponding core commissions for the period over which the contract applies.

In connection with Topic 606, contingent commissions are estimated with a constraint applied and accrued relative to the recognition of the corresponding commissions for the period over which the contract applies.

The resulting effect on the timing of recognizing contingent commissions closely follows a similar pattern as our commissions and fees with any adjustments recognized when payments are received or as additional information that affects the estimate becomes available.

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Revenue from New and Renewal Royalty Fees is recorded by applying the sales- and usage-based royalties exception.

Under the sales- and usage-based exception, the Company estimates the anticipated amount of the royalties to be received over the term of the policy based on an estimate of premiums placed by the franchisee, policy changes, and cancellations, net of a constraint.

Revenue from Royalty Fees is recognized over time as the underlying policies are placed, which is on the effective date of the policies.

Recognition of royalty fees generally takes place earlier under Topic 606.

Under the sales- and usage-based exception, the Company recognizes revenue over time as a franchise places and makes effective a policy for an insured.

The transaction price for the royalty fee for each policy made

effective is set as the contractual royalty rate multiplied by an estimate of the commissions to be received by the franchise for the current term of the policy.

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

Contract Costs

Additionally, the Company has evaluated ASC Topic 340 - Other Assets and Deferred Cost (“ASC 340”) which requires companies to defer certain incremental cost to obtain customer contracts, and certain costs to fulfill customer contracts.

Incremental cost to obtain - The Company defers certain costs to obtain customer contracts primarily as they relate to commission-based compensation plans for Franchisees, in which the Company pays an incremental amount of compensation on new franchise agreements.

Incremental cost to obtain - The Company defers certain costs to obtain customer contracts primarily as they relate to commission-based compensation plans for selling new franchise agreements.

These incremental costs are deferred and amortized over a 10-year period, which is consistent with the term of the contract.

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New deferrals (1)

Write offs (2)

( 12,311 ) ( 12,902 )

Contract liability at end of period $ 27,099 $ 46,553

(1) Initial franchise fees where the consideration is received from the customer for services which are to be transferred to the franchisee over the term of the franchise agreement

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

Anticipated Future Recognition of Deferred Initial Franchise Fees

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Computer software & web domain $ 13,509 $ 5,970 9.01

Books of business 6,895 — 7.36

Less accumulated amortization ( 3,138 ) ( 1,483 )

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The $ 50.0 million revolving credit facility accrues interest on amounts drawn at an initial interest rate of LIBOR plus 2.50 %, then at an interest rate determined by the Company's leverage ratio for the preceding period.

On April 26, 2023, the Company entered into Amendment No.1 of the Second Amended and Restated Credit Agreement, providing for the replacement of LIBOR with SOFR.

At December 31, 2023, the Company had not drawn against the revolver.

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Interest payments on the revolving credit facility totaled $ 0.1 million, $ 0.7 million, and $ 0.4 million for the years ended December 31, 2023, 2022, and 2021, respectively.

The $ 100.0 million term note accrues interest at an initial interest rate of LIBOR plus 2.25 %, then at an interest rate determined by the Company's leverage ratio for the preceding period.

As of December 31, 2022, the Company was in the greater than 2.50 x leverage ratio tranche, accruing interest of LIBOR plus 2.25 %.

The aggregate principal amount of the term note as of December 31, 2022 is $ 94.4 million, payable in quarterly installments of $ 0.6 million for the first twelve months, $ 1.3 million for the next twelve months, $ 1.9 million for the next twelve months, and $ 2.5 million for the last twelve months, with a balloon payment on June 21, 2026.The term note is collateralized by substantially all the Company’s assets, which includes rights to future commissions.

The $ 100.0 million term note initially accrued interest at an interest rate of LIBOR plus 2.25 %, then at an interest rate determined by the Company's leverage ratio for the preceding period.

As of December 31, 2023, the Company was in the less than 1.50 x leverage ratio tranche, accruing interest of SOFR plus 1.75 %.

The aggregate principal amount of the term note as of December 31, 2023 is $ 77.5 million, payable in quarterly installments of $ 0.6 million for the first twelve months, $ 1.3 million for the next twelve months, $ 1.9 million for the next twelve months, and $ 2.5

million for the last twelve months, with a balloon payment of $ 65.6 million on June 21, 2026.

On May 31, 2023, the Company paid an additional $ 10.0 million toward the term note (with no prepayment penalty), reducing the final balloon payment to $ 55.6 million.

The term note is collateralized by substantially all the Company’s assets, which includes rights to future commissions.

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

Leverage Ratio Interest Rate

LIBOR + 175 bps

LIBOR + 200 bps

LIBOR + 225 bps

LIBOR + 250 bps

SOFR + 175 bps

SOFR + 200 bps

SOFR + 225 bps

SOFR + 250 bps

Maturities of the term note payable for the next five calendar years as of December 31, 2023 are as follows (in thousands) :

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Permanent Provision to Return ( 53 ) 43 —

State income tax, net of federal benefit 2,268 1,553 524

State income tax expense (benefit), net of federal benefit ( 329 ) 2,268 1,553

Other reconciling items:

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Net deferred tax asset $ 181,209 $ 155,318

GSHD has income tax net operating loss carryforwards for federal and state purposes of $ 60.5 million and $ 0.6 million (post apportionment pre-tax), respectively.

GSHD has deferred tax assets resulting from tax basis adjustments to the assets of GF arising from redemptions of LLC Units and corresponding exchanges of Class B common stock for shares of Class A common stock.

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

See Tax Receivable Agreement subsection below for additional details.

GSHD also has income tax net operating loss carryforwards for federal and state purposes of $ 72.5 million and $ 0.7 million (post apportionment pre-tax), respectively.

The federal net operating loss carryforwards are carried forward indefinitely and the state net operating loss carryforwards begin to expire in 2040.

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GF 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 and corresponding Class B common stock for shares of Class A common stock occurs.

Prior redemptions and exchanges have resulted, and future redemptions or exchanges are expected to result in tax basis adjustments to the assets of GF that will be allocated to the Company and thus produce favorable tax attributes.

Prior redemptions and exchanges have resulted, and future taxable redemptions or exchanges are expected to result in tax basis adjustments to the assets of GF that will be allocated to the Company and thus produce favorable tax attributes.

These tax attributes would not be available to us in the absence of those transactions.

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The following table sets forth the calculation of basic earnings per share ("EPS") based on net income attributable to GSHD for the year ended December 31, 2023, 2022, and 2021, divided by the basic weighted average number of Class A common stock as of December 31, 2023 and 2022 (in thousands, except per share amounts ).

Diluted earnings per share of Class A common stock is computed by dividing net income attributable to GSHD by the weighted average number of shares of Class A common stock outstanding adjusted to give effect to potentially dilutive securities.

The Company has not included the effects of conversion of Class B shares to Class A shares in the diluted EPS calculation using the "if-converted" method, because doing so has no impact on diluted EPS (in thousands) :

Diluted EPS of Class A common stock is computed by dividing net income attributable to GSHD by the weighted average number of shares of Class A common stock outstanding adjusted to give effect to potentially dilutive securities.

Shares of the Company’s Class B common stock do not share in the earnings or losses attributable to Goosehead Insurance, Inc.

and are therefore not participating securities.

As such, separate presentation of basic and diluted earnings per share of Class B common stock under the two-class method has not been presented.

Shares of the Company’s Class B common stock are, however, considered potentially dilutive shares of Class A common stock because shares of Class B common stock, together with the related LLC Units, are exchangeable into shares of Class A common stock on a one -for-one basis.

The Company calculates the effects of the conversion of Class B shares to Class A shares using the "if-converted" method and includes such effects in the calculation of diluted EPS if the effects are dilutive.

The following table summarizes the calculation of EPS for the years ended December 31, 2023, 2022, and 2021 (in thousands) :

Year Ended December 31,

2023 2022 2021

Income before taxes

$ 5,129 $ 6,004 $ 17,720

income before taxes attributable to non-controlling interests

2,065 2,893 9,468

Income before taxes attributable to GSHD

Net income attributable to GSHD - Basic

$ 14,140 $ 565 $ 5,403

income tax expense (benefit) attributable to GSHD

net income attributable to non-controlling interests (1)

income tax effect on income attributable to non-controlling interests assuming conversion of Class B common shares (1)

( 2,524 ) — —

Net income attributable to GSHD

Net income available to GSHD - Diluted

$ 21,172 $ 565 $ 5,403

Weighted average shares of Class A common stock outstanding - basic 20,995 19,181 16,785

Weighted average outstanding Class A common shares - Basic 23,929 20,995 19,181

Earnings per share of Class A common stock - Basic $ 0.59 $ 0.03 $ 0.28

Weighted average outstanding Class A common shares - Basic 23,929 20,995 19,181

Effect of dilutive securities:

Weighted average outstanding Class B common shares (if-converted) (1)

Stock options (2)

Weighted average shares of Class A common stock outstanding - diluted 21,773 20,813 18,383

Earnings per share of Class A common stock - basic $ 0.03 $ 0.28 $ 0.55

657 778 1,632

Weighted average outstanding Class A common shares - Diluted 38,356 21,773 20,813

Earnings per share of Class A common stock - Diluted $ 0.55 $ 0.03 $ 0.26

(1) For the year ended December 31, 2023, the impact of the conversion of Class B common shares to Class A common shares calculated under the if-converted method was dilutive, and as such, (a) 13,769 common shares (assuming the conversion of all outstanding class B common stock) were included in the Weighted average outstanding Class A common shares - Diluted and (b) $ 7.0 million of non-controlling interest net income (after incremental tax effect from assuming conversion of all outstanding class B common stock), was added back to Net income available to GSHD - Diluted.

For the years 2022 and 2021, the impact of the conversion of Class B common shares to Class A common shares is excluded from the calculation of Diluted EPS because inclusion of such shares would be anti-dilutive.

(2) Dilutive stock options is computed using the treasury stock method, which are not participating securities

Non-controlling interest

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GSHD reports a non-controlling interest representing the economic interest in GF held by the other members of GF.

GF makes distributions to the LLC Unit holders on a pro rata basis.

For the years ended December 31, 2022 and 2021, GF made no distributions.

Under the amended and restated Goosehead Financial, LLC Agreement, the Pre-IPO LLC Members have the right, from and after the completion of the Offering (subject to the terms of the amended and restated Goosehead Financial, LLC Agreement), to require GSHD to redeem all or a portion of their LLC Units for, at GSHD's election, newly-issued shares of Class A common stock on a one -for-one basis or a cash payment equal to the volume weighted average market price of one share of GSHD's Class A common stock for each LLC Unit redeemed (subject to customary adjustments, including for stock splits, stock dividends and reclassifications) in accordance with the terms of the amended and restated Goosehead Financial, LLC Agreement.

GF makes distributions to the LLC Unit holders on a pro rata basis to facilitate the LLC Unit holder's quarterly tax payments.

For the years ended December 31, 2023 and 2022, GF made distributions of $ 28.1 million and $ 0.0 million , of which $ 10.9 million and $ 0.0 million was made to Pre-IPO LLC Members.

The remaining $ 17.1 million and $ 0.0 million was made to GSHD and was eliminated in consolidation.

Under the amended and restated Goosehead Financial, LLC Agreement ("GF LLC Agreement"), the Pre-IPO LLC Members have the right, from and after the completion of the Offering (subject to the terms of the amended and restated Goosehead Financial, LLC Agreement), to require GSHD to redeem all or a portion of their LLC Units for, at GSHD's election, newly-issued shares of Class A common stock on a one -for-one basis or a cash payment equal to the volume weighted average market price of one share of GSHD's Class A common stock for each LLC Unit redeemed (subject to customary adjustments, including for stock splits, stock dividends and reclassifications) in accordance with the terms of the amended and restated Goosehead Financial, LLC Agreement.

Additionally, in the event of a redemption request by a Pre-IPO LLC Member, GSHD may, at its option, effect a direct exchange of cash or Class A common stock for LLC Units in lieu of such a redemption.

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During 2023 and 2022, an aggregate of 1.5 million and 2.4 million LLC Units, respectively, were redeemed by the non-controlling interest holders.

Pursuant to the GF LLC Agreement, we issued 2.4 million and 1.5 million shares of Class A common stock in connection with these redemptions and received 2.4 million and 1.5 million LLC Interests, increasing our ownership interest in GF LLC.

Pursuant to the GF LLC Agreement, we issued 1.5 million and 2.4 million shares of Class A common stock in connection with these redemptions and received 1.5 million and 2.4 million LLC Interests, increasing our ownership interest in GF.

Simultaneously, and in connection with these redemptions, 1.5 million and 2.4 million shares of Class B common stock were surrendered and canceled.

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All net income prior to the Offering is attributed to non-controlling interest holders.

The following table summarizes the effects of changes in ownership in GF on the equity of GSHD for the years ended December 31, 2022, 2021, and 2020 is as follows (in thousands) :

Year Ended December 31,

2022 2021 2020

Net Income attributable to Goosehead Insurance Inc.

$ 565 $ 5,403 $ 9,287

Transfers (to) from non-controlling interests:

Decrease in additional paid-in capital as a result of the redemption of LLC interests ( 7,598 ) ( 3,728 ) ( 3,525 )

Increase in additional paid-in capital as a result of activity under employee stock purchase plan 699 796 542

Total effect of changes in ownership interest on equity attributable to Goosehead Insurance Inc.

$ ( 6,334 ) $ 2,471 $ 6,304

Equity-based compensation

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The Company granted additional stock options of 904,000 , 1,482,000 , and 153,500 to its Board of Directors and Managing Directors in 2023, 2022, and 2021, respectively.

The weighted average grant date fair value was determined using the Black-Scholes valuation model using the following weighted average assumptions:

Board of Directors stock option awards have a three -year service period and vest in 12 equal quarterly installments over the service period.

Managing Director stock options awards granted in 2021 have a four -year service period and vest in three equal annual installments, beginning at the end of the second year of service.

Employee awards granted beginning in 2022 have a three -year service period and vest in equal annual installments beginning at the end of the first year of service.

Both Board of Director and Managing Director stock option awards have a maximum contract term of ten years from the grant date.

Upon exercise of an option, the Company issues a new share of stock.

The Company determines the grant date fair value of its stock option awards using the Black-Scholes valuation model and has elected to recognize forfeitures as they occur.

A summary of the weighted average assumptions used for valuing stock options granted in the periods 2023, 2022, and 2021 are as follows:

Year Ended December 31,

2023 2022 2021

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1.19 % - 4.26 %

A summary of stock option activity for the years ended December 31, 2022, 2021 and 2020 is as follows ( in thousands except per share amounts ):

A summary of stock option activity for the year ended December 31, 2023 is as follows ( in thousands except per-share amounts ):

Stock Options Weighted-average Exercise Price Aggregate Intrinsic Value Weighted-average Remaining Contractual Life (Years)

Outstanding as January 1, 2020

1,730 $ 11.13 $ 5,969

Granted 1,010 41.24 16,322

Exercised ( 450 ) 10.00 1,390

Forfeited — — —

Expired — — —

Outstanding as of December 31, 2022

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2,946 $ 61.87 $ 83,971 7.54

Granted 1,482 97.49 61,808

Exercised ( 381 ) 14.25 1,886

Forfeited ( 468 ) 82.82 15,584

Expired ( 13 ) 40.88 219

Outstanding as of December 31, 2022

2,689 $ 63.84 $ 70,744 7.63

Options vested and exercisable as of December 31, 2023

1,174 $ 58.94 $ 37,693 6.33

Options expected to vest as of December 31, 2022

Options unvested as of December 31, 2023

1,772 $ 63.81 $ 46,278 8.34

As of December 31, 2022, total unrecognized compensation expense related to unvested stock options was $ 41.5 million, which is expected to be recognized over a weighted average period of 2.02 years.

Cash received from stock option exercises during the year ended December 31, 2022 was $ 6.1 million.

A summary of stock option activity for the years ended December 31, 2023, 2022 and 2021 is as follows ( in thousands except per-share amounts ):

Year Ended December 31,

2023 2022 2021

Weighted-average grant-date fair value of options granted $ 19.08 41.71 47.43

Total intrinsic value of options exercised $ 16,424 $ 14,373 $ 42,663

Total fair value of shares vested during the year $ 23,269 $ 8,876 $ 2,568

A summary of unvested stock option activity for the years ended December 31, 2023, 2022 and 2021 is as follows ( in thousands except per-share amounts ):

Stock Options Weighted Average Grant Date Fair Value

Unvested as January 1, 2020 1,517 $ 3.15

Vested ( 550 ) 3.12

Granted 1,010 16.16

Forfeited — —

Unvested as of December 31, 2022 1,783 $ 34.75

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Unvested as of December 31, 2023 1,772 $ 28.11

Vested ( 834 ) 10.64

Granted 1,482 41.71

Forfeited ( 468 ) 33.33

Unvested as of December 31, 2022 1,783 $ 34.73

The total fair value of stock options vested during the years ended December 31, 2022, 2021 and 2020 was $ 8.9 million, $ 2.6 million and $ 1.7 million, respectively.

On July 30, 2020, GF approved an extraordinary dividend in the aggregate amount of $ 42 million payable to holders of LLC Units, including GSHD.

The board of directors of the Company subsequently declared an extraordinary dividend of $ 1.15 (rounded) to all holders of Class A common stock of GSHD with a record date of August 10, 2020, which was paid on August 24, 2020.

A summary of the total amounts declared by GF is as follows (in thousands) :

LLC Units held as of August 10, 2020 Dividends Declared

Class A common stockholders 17,263 $ 19,843

Class B common stockholders via LLC Units held 19,276 22,157

Total 36,539 $ 42,000

As of December 31, 2023, total unrecognized compensation expense related to unvested stock options was $ 28.6 million, which is expected to be recognized over a weighted average period of 1.49 years.

Cash received from stock option exercises during the year ended December 31, 2023 was $ 9.9 million.

On July 28, 2021 GF approved an extraordinary dividend in the aggregate amount of $ 60 million payable to holders of LLC Units, including GSHD.

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the Company's financial condition and operating results, the Company's available cash and current and anticipated cash needs, the Company's capital requirements, any contractual, legal, tax and regulatory restrictions, general economic and business conditions, and such other factors or conditions as the board of directors deems relevant.

The Company did not approve or pay any dividends during the year ended December 31, 2022.

The Company did not approve or pay any dividends during the years ended December 31, 2023 and 2022.

At December 31, 2023, Goosehead was obligated under a number of operating leases, exclusively leases for premises and equipment used for business purposes.

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None of these lease agreements impose restrictions on the Company’s ability to pay dividends, engage in debt or equity financing transactions or enter into further lease agreements.

Certain of these leases contain escalation clauses that will increase rent payments based on maintenance, utility and tax increases, which are non-lease components and variable in nature.

Certain of these leases contain escalation clauses that will increase rent payments based on maintenance, utility and tax increases, which are non-lease components and

variable in nature.

The Company elected not to separate lease and non-lease components of a contract for its real estate and equipment leases.

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Weighted average incremental borrowing rate

The following is a schedule showing the components of lease cost for the year ended December 31, 2022 and 2021 (in thousands):

The following schedule shows the components of lease cost for the years ended December 31, 2023 and 2022 (in thousands):

December 31, 2023 December 31, 2022

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Sublease income

( 319 ) ( 27 )

Net lease cost

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The following is a schedule of future maturity of lease liability as of December 31, 2023 (in thousands):

2024 $ 11,292

Total lease payments 75,264

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Management views the Company’s operations and manages its business as one operating segment.

the Company determined that it operates in a single reportable segment.

Accordingly, the Company determined that it operates in a single reportable segment.

All of the Company’s long-lived assets are located in the United States.

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Since the Company operates in one operating segment, all required financial segment information can be found in the consolidated financial statements.

From time to time, the Company may be involved in various legal proceedings, lawsuits and claims incidental to the conduct of our business.

The amount of any loss from the ultimate outcomes is not probable or reasonably estimable.

It is the opinion of management that the resolution of outstanding claims will not have a material adverse effect on the financial position or results of operations of the Company.

From time to time, GSHD may be involved in various legal proceedings, lawsuits and claims incidental to the conduct of the Company's business.

The Company records accruals for legal contingencies to the extent that it has concluded that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated.

When a material loss contingency is reasonably possible but not probable, the Company does not record a liability, but instead discloses the nature and the amount of the claim, and an estimate of the loss or range of loss, if such an estimate can be made.

In the opinion of the Company's management, the likely results of any ongoing legal matters are not expected, either individually or in the aggregate, to have a material adverse effect on the Company's financial position, results of operations or cash flows.

On November 10, 2022, a verified stockholder class action complaint for declaratory relief, captioned Mickey Dollens v.

Goosehead Insurance, Inc., C.A.

2022-1018-JTL, was filed in the Court of Chancery of the State of Delaware (the “Dollens Action”), alleging certain corporate governance documents adopted by the Company were invalid under Delaware law.

On August 8, 2023, the parties entered into a proposed settlement providing for certain non-monetary benefits to the class ( i.e., revisions to the Company's Stockholder Agreement).

A hearing is set for February 22, 2024 to, among other things, consider whether to grant final approval of the proposed settlement.

Additionally, the plaintiff has petitioned the Court for attorneys’ fees and litigation expenses.

While there can be no assurance regarding the ultimate outcome of the petition, the Company believes a potential loss, if any, would not be material.

Changes in and disagreements with accountants on accounting and financial statement disclosure

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 8. Financial Statements and Supplementary Data