Goosehead Insurance, Inc. 10-K

Item 8. Financial statements and supplementary data Index to consolidated financial statements Page Goosehead Insurance, Inc. Annual consolidated financial statements Report of Independent Registered Public Accounting Firm ( Deloitte & Touche LLP , Dallas, Texas , PCAOB ID No. 34 ) 66 Consolidated statements of operations for each of the three years in the period ended December 31, 2023. 68 Consolidated balance sheets as of December 31, 2023 and December 31, 2022 69 Consolidated statements of stockholders' equity for each of the three years in the period ended December 31, 2023. 70 Consolidated statements of cash flows for each of the three years in the period ended December 31, 2023. 72 Notes to the consolidated financial statements 73 1. Organization 73 2. Summary of significant accounting policies 74 3. Revenues 78 4. Franchise fees receivable 80 5. Allowance for uncollectible agency fees 81 6. Property and equipment 81 7. Intangible assets 82 8. Employee benefit obligation 82 9. Debt 82 10. Income taxes 84 11. Stockholder's equity 85 12. Non-controlling interest 87 13. Equity-based compensation 88 14. Dividends 89 15. Leases 89 16. Segment information 91 17. Litigation 91 65 Report of Independent Registered Public Accounting Firm To the stockholders and the Board of Directors of Goosehead Insurance, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Goosehead Insurance, Inc. and subsidiaries (the "Company") as of December 31, 2023 and 2022, the related consolidated statements of operations, stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 21, 2024, expressed an unqualified opinion on the Company's internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. 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 – 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 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 66 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 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. /s/ Deloitte & Touche LLP Dallas, Texas February 21, 2024 We have served as the Company's auditor since 2017. 67 Goosehead Insurance, Inc. Consolidated statements of operations (In thousands, except per share amounts) Year Ended December 31, 2023 2022 2021 Revenues: Commissions and agency fees $ 116,061 $ 100,265 $ 82,651 Franchise revenues 143,772 107,722 67,508 Interest income 1,443 1,403 1,153 Total revenues 261,276 209,390 151,312 Operating Expenses: Employee compensation and benefits 152,604 133,293 94,978 General and administrative expenses 62,111 52,887 39,789 Bad debts 4,361 6,198 2,999 Depreciation and amortization 9,244 6,884 4,873 Total operating expenses 228,320 199,262 142,639 Income from operations 32,956 10,128 8,673 Other Income: Other income — — 185 Interest expense ( 6,568 ) ( 4,999 ) ( 2,854 ) Income before taxes 26,388 5,129 6,004 Tax expense (benefit) 2,692 2,499 ( 2,292 ) Net Income 23,696 2,630 8,296 Less: net income attributable to non-controlling interests 9,556 2,065 2,893 Net Income attributable to Goosehead Insurance, Inc. $ 14,140 $ 565 $ 5,403 Earnings per share: Basic $ 0.59 $ 0.03 $ 0.28 Diluted $ 0.55 $ 0.03 $ 0.26 Weighted average shares of Class A common stock outstanding: Basic 23,929 20,995 19,181 Diluted 38,356 21,773 20,813 See Notes to the Consolidated Financial Statements 68 Goosehead Insurance, Inc. Consolidated balance sheets (In thousands, except par value amounts) December 31, 2023 2022 Assets Current Assets: Cash and cash equivalents $ 41,956 $ 28,743 Restricted cash 2,091 1,644 Commissions and agency fees receivable, net 12,903 14,440 Receivable from franchisees, net 9,720 4,932 Prepaid expenses 7,889 4,334 Total current assets 74,559 54,093 Receivable from franchisees, net of current portion 9,269 23,835 Property and equipment, net of accumulated depreciation 30,316 35,347 Right-of use asset 38,406 44,080 Intangible assets, net of accumulated amortization 17,266 4,487 Deferred income taxes, net 181,209 155,318 Other assets 3,867 4,193 Total assets $ 354,892 $ 321,353 Liabilities and Stockholders’ Equity Current Liabilities: Accounts payable and accrued expenses $ 16,398 $ 15,958 Premiums payable 2,091 1,644 Lease liability 8,897 6,627 Contract liabilities 4,129 6,031 Note payable 9,375 6,875 Total current liabilities 40,890 37,135 Lease liability, net of current portion 57,382 64,947 Note payable, net of current portion 67,562 86,711 Contract liabilities, net of current portion 22,970 40,522 Liabilities under tax receivable agreement, net of current portion 149,302 125,662 Total liabilities 338,106 354,977 Commitments and contingencies (see notes 9, 15, and 17) Class A common stock, $ 0.01 par value per share 300,000 shares authorized, 24,966 shares issued and outstanding as of December 31, 2023, 23,034 issued and outstanding as of December 31, 2022 250 228 Class B common stock, $ 0.01 par value per share - 50,000 shares authorized, 12,954 issued and outstanding as of December 31, 2023, 14,471 issued and outstanding as of December 31, 2022 130 146 Additional paid in capital 103,228 70,866 Accumulated deficit ( 47,056 ) ( 60,570 ) Total stockholders' equity and members' deficit 56,552 10,670 Non-controlling interests ( 39,766 ) ( 44,294 ) Total equity 16,786 ( 33,624 ) Total liabilities and equity $ 354,892 $ 321,353 See Notes to the Consolidated Financial Statements 69 Goosehead Insurance, Inc. Consolidated statements of stockholders’ equity (In thousands) Issued shares of Class A common stock Issued shares of Class B common stock Class A Common stock Class B Common Stock Additional paid in capital Accumulated deficit Total stockholders' equity Non-controlling interest Total equity Balance January 1, 2021 18,304 18,447 $ 183 $ 184 $ 29,371 $ ( 34,614 ) $ ( 4,876 ) $ ( 33,528 ) $ ( 38,404 ) Dividends declared — — — — — ( 31,657 ) ( 31,657 ) ( 28,343 ) ( 60,000 ) Net income — — — — — 5,403 5,403 2,893 8,296 Exercise of stock options 349 — 3 — 3,792 — 3,795 — 3,795 Equity-based compensation — — — — 7,292 — 7,292 — 7,292 Activity under employee stock purchase plan 7 — — — 796 — 796 — 796 Redemption of LLC Units 1,538 ( 1,538 ) 14 ( 14 ) ( 3,728 ) — ( 3,728 ) 3,728 — Deferred tax adjustments related to Tax Receivable Agreement — — — — 8,758 — 8,758 279 9,037 Reallocation of Non-controlling interest — — — — — 197 197 ( 197 ) — Balance December 31, 2021 20,198 16,909 $ 200 $ 170 $ 46,281 $ ( 60,671 ) $ ( 14,020 ) $ ( 55,168 ) $ ( 69,188 ) Issued shares of Class A common stock Issued shares of Class B common stock Class A Common stock Class B Common Stock Additional paid in capital Accumulated deficit Total stockholders' equity Non-controlling interest Total equity Balance January 1, 2022 20,198 16,909 $ 200 $ 170 $ 46,281 $ ( 60,671 ) $ ( 14,020 ) $ ( 55,168 ) $ ( 69,188 ) Net income — — — — — 565 565 2,065 2,630 Exercise of stock options 381 — 4 — 5,427 — 5,431 — 5,431 Equity-based compensation — — — — 19,642 — 19,642 — 19,642 Activity under employee stock purchase plan 16 — — — 699 — 699 — 699 Redemption of LLC Units 2,439 ( 2,439 ) 24 ( 24 ) ( 7,598 ) — ( 7,598 ) 7,598 — Deferred tax adjustments related to Tax Receivable Agreement — — — — 6,415 — 6,415 747 7,162 Reallocation of Non-controlling interest — — — — — ( 464 ) ( 464 ) 464 — Balance December 31, 2022 23,034 14,470 $ 228 $ 146 $ 70,866 $ ( 60,570 ) $ 10,670 $ ( 44,294 ) $ ( 33,624 ) 70 Issued shares of Class A common stock Issued shares of Class B common stock Class A Common stock Class B Common Stock Additional paid in capital Accumulated deficit Total stockholders' equity Non-controlling interest Total equity 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 Exercise of stock options 409 — 4 — 9,286 — 9,290 — 9,290 Equity-based compensation — — — — 23,989 — 23,989 — 23,989 Activity under employee stock purchase plan 6 — 1 — 605 — 607 — 607 Redemption of LLC Units 1,517 ( 1,517 ) 15 ( 15 ) ( 4,677 ) — ( 4,677 ) 4,677 — Deferred tax adjustments related to Tax Receivable Agreement — — — — 3,159 — 3,159 608 3,767 Reallocation of Non-controlling interest — — — — — ( 626 ) ( 626 ) 626 — Balance December 31, 2023 24,966 12,954 $ 250 $ 130 $ 103,228 $ ( 47,056 ) $ 56,552 $ ( 39,766 ) $ 16,786 See Notes to the Consolidated Financial Statements 71 Goosehead Insurance, Inc. Consolidated statements of cash flows (In thousands) Year Ended December 31, 2023 2022 2021 Cash flows from operating activities: Net income $ 23,696 $ 2,630 $ 8,296 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 9,469 7,109 5,117 Impairment expense 3,628 — — Bad debt expense 4,361 6,198 2,999 Equity-based compensation 23,989 19,642 7,292 Impact of tax receivable agreement 23,640 24,703 38,838 Deferred income taxes ( 22,123 ) ( 22,478 ) ( 43,277 ) Noncash lease expense ( 748 ) 1,998 5,949 Cloud computing arrangement implementation costs ( 85 ) — — Changes in operating assets and liabilities: Receivable from franchisees 7,666 ( 722 ) ( 11,647 ) Commissions and agency fees receivable ( 28 ) ( 4,504 ) 4,722 Prepaid expenses ( 3,555 ) 451 ( 1,080 ) Other assets 486 548 ( 805 ) Accounts payable and accrued expenses ( 109 ) 2,513 4,004 Contract liabilities ( 19,454 ) ( 2,055 ) 14,407 Premiums payable ( 75 ) ( 309 ) 629 Net cash provided by operating activities 50,758 35,724 35,444 Cash flows from investing activities: Proceeds from notes receivable ( 130 ) 43 32 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 ) Net cash used for investing activities ( 19,182 ) ( 12,571 ) ( 15,375 ) Cash flows from financing activities: Debt issuance cost — — ( 666 ) Repayment of revolving credit facility — ( 50,000 ) — Repayment of term note payable ( 16,875 ) ( 4,375 ) ( 4,369 ) Proceeds from revolving credit facility — 25,000 20,000 Proceeds from term note payable — — 24,619 Proceeds from the issuance of Class A common stock 9,898 6,130 4,590 Member distributions ( 10,939 ) — — Dividends to stockholders — — ( 60,000 ) Net cash used for financing activities ( 17,916 ) ( 23,245 ) ( 15,826 ) Net increase (decrease) in cash and cash equivalents, and restricted cash 13,660 ( 92 ) 4,243 Cash and cash equivalents, and restricted cash, beginning of period 30,387 30,479 26,236 Cash and cash equivalents, and restricted cash, end of period $ 44,047 $ 30,387 $ 30,479 Supplemental disclosure of cash flow data: Cash paid during the year for interest $ 6,369 $ 4,774 $ 2,351 Cash paid for income taxes 701 484 272 Cash paid pursuant to TRA Agreement 421 — 1,921 See Notes to the Consolidated Financial Statements 72 Goosehead Insurance, Inc. Notes to consolidated financial statements 1. Organization On May 1, 2018 Goosehead Insurance, Inc. ("GSHD") completed the Offering of 9,810 thousand shares of Class A common stock at a price of $ 10.00 per share, which included 1,280 thousand shares issued pursuant to the underwriter's over-allotment option. GSHD became the sole managing member of Goosehead Financial, LLC (“GF”). GF was organized on January 1, 2016 as a Delaware Limited Liability Company and is headquartered in Westlake, TX. 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. 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 offices and franchise units across the nation. 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 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 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. During years ended December 31, 2023, 2022, and 2021, the Company onboarded 209 , 496 , and 405 franchise locations, respectively and had 1,226 , 1,413 , and 1,198 operating franchise locations as of December 31, 2023, 2022 and 2021 respectively. No franchises were purchased by the Company during the years ended December 31, 2023, 2022, and 2021. In connection with the Offering, both Goosehead Management, LLC (“GM”) and Texas Wasatch Insurance Holdings Group LLC (“TWIHG”) became wholly owned indirect subsidiaries of GF. Both GM and TWIHG are non-operating holding companies created to receive management fees from the operating entities TWIS and GIA. Reorganization Transactions In connection with the Offering, the Company completed the following transactions (the "Reorganization Transactions"): • The GF limited liability company agreement was amended to, among other things, i) appoint GSHD as the sole managing member of GF and ii) modify the capital structure of GF by reclassifying the interests previously held by Pre-IPO LLC Members into a single new class of non-voting LLC Units. • GSHD was authorized to issue two classes of common stock. 9,810 thousand shares of Class A common stock were issued pursuant to the Offering, including the underwriters' over-allotment option. 22,747 thousand shares of Class B common stock were issued to the Pre-IPO LLC Members in an amount equal to the number of LLC Units held by each such Pre-IPO LLC Member in exchange for certain management rights of GF. Each share of Class A common stock and Class B common stock entitles its holder to one vote per share on all matters submitted to a vote of GSHD's stockholders. Each share of Class B common stock can be exchanged for one share of Class A common stock or, at GSHD's discretion, a cash payment equal to the volume weighted average market price of one share of Class A common stock, thus canceling the share of Class B common stock on a one -for-one basis. • The Goosehead Management Holders and Texas Wasatch Holders indirectly transferred their ownership interests in GM and TWIHG, respectively, to GSHD in exchange for the Goosehead Management Note and Texas Wasatch Note. The aggregate principal amount of the Goosehead Management Note and the Texas Wasatch Note was approximately $ 114 million. Because the net proceeds from the Offering were insufficient to repay the aggregate principal amount of the notes, 3,724 thousand shares of Class A common stock were issued to the Goosehead Management Holders and the Texas Wasatch Holders for the difference. GSHD contributed direct and indirect ownership interests in each of TWIHG and GM to GF. 73 Following completion of the Reorganization Transactions and the Offering, GSHD owned 37.3 % of GF and the Pre-IPO LLC Members owned the remaining 62.7 %. GSHD is the sole managing member of GF and, although GSHD holds a minority economic interest in GF, GSHD has the sole voting power and control of management of GF. Accordingly, GSHD consolidates the financial results of GF and reports non-controlling interest in GSHD's consolidated financial statements. 2. Basis of presentation and significant accounting policies Basis of Presentation The accompanying audited consolidated financial statements of GSHD and our subsidiaries are presented in accordance with the rules and regulations of the SEC for annual reports on Form 10-K and are prepared in accordance with U.S. GAAP. All intercompany accounts and transactions have been eliminated in consolidation. Reclassification Certain amounts previously reported in the 2021 financial statements have been reclassified for comparative purposes to conform to the current period's presentation. We reclassified amounts between "Employee compensation and benefits" and "General and administrative expenses" in the Consolidated Statement of Operations. We reclassified amounts between "Receivables from franchisees, net" and "Accounts payable and accrued expenses" in the Consolidated Balance Sheet that also impacted balances in the Consolidated Statement of Cash Flows. We disaggregated the proceeds and payments of the term notes payable and revolving credit facility on the Consolidated Statements of Cash Flows. Significant accounting policies Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported period. Accordingly, actual results could differ from those estimates as more information becomes known. Cash and cash equivalents The Company maintains its cash in bank deposit accounts that, at times, may exceed federally insured limits; however, the Company has not historically experienced any losses in these accounts. The Company believes it is not exposed to any significant credit risk. The Company currently holds no financial instruments that would be considered cash equivalents. Restricted cash The Company holds premiums received from the insured, but not yet remitted to the insurance carrier in a fiduciary capacity. Premiums received but not yet remitted included in restricted cash were $ 2.1 million and $ 1.6 million as of December 31, 2023 and 2022, respectively. The following is a reconciliation of our cash and restricted cash balances as presented in the consolidated statement of cash flows for the years ended December 31, 2023, 2022, and 2021 ( in thousands ): December 31, 2023 2022 2021 Cash and cash equivalents $ 41,956 $ 28,743 $ 28,526 Restricted cash 2,091 1,644 1,953 Cash and cash equivalents, and restricted cash $ 44,047 $ 30,387 $ 30,479 Commissions and agency fees receivable 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. Accordingly, as reported in the accompanying consolidated balance sheets, commissions are receivables from the insurance carriers. These direct-bill arrangements consist of a high volume of transactions with small premium amounts, with the billing controlled by the insurance carriers. The income statement and balance sheet effects of the commissions are recorded at the 74 contract effective date and generally are based on a percentage of premiums for insurance 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 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. These non-refundable fees are recorded as receivable on the date the policy is effective with the insurance carrier. Allowance for uncollectible agency fees The Company records agency fees receivable net of an allowance for estimated uncollectible accounts to reflect any loss anticipated for the related agency fees receivable balances and charge to bad debts. The agency fees receivable balance consists of numerous small-balance, homogeneous accounts. The Company calculates the allowance based on collection history and writes off all uncollected agency fee balances outstanding over ninety days. Receivable from franchisees Receivable from franchisees consists of franchise fees receivable, net of allowance for uncollectible franchise fees and unamortized discount on franchise fees, royalty fees receivable, and notes receivable from franchisees. Franchise fees receivable At the start date of the franc hise agreement, an entry to franchise fees receivable is recorded along with an entry for a contract liability, to be amortized to franchise fees within Franchise revenues over the 10-year life of the franchise contract. Franchis ees have the option to pay the full amount of franchise fees up front or to pay a deposit up front and the remaining balance by payment plan over time. The franchisees that elect to pay the initial franchise fee over a term extending greater than one year pay in total an amount that exceeds the amount due had they paid the full amount up front. As such, the payment plan option is treated as a zero-interest rate note, which creates an imputation of interest. The imputed interest is recorded as a discount on the franchise fee receivable and amortized using the effective interest rate method over the life of the payment plan. The amount of interest recorded in 2023, 2022, and 2021 related to franchise fees on a payment plan was $ 1.4 million, $ 1.4 million, and $ 1.1 million, respectively, and is included in Interest income. Allowance for uncollectible franchise fees receivable The Company records franchise fees receivable net of an allowance for estimated uncollectible accounts to reflect any loss anticipated related to the franchise fees receivable balances and charged to bad debts. The franchise fees receivable balance consists of numerous small-balance, homogeneous accounts. The Company calculates the allowance based on our history of write offs for all franchise accounts. Franchise fees receivable and the related allowance is charged off to bad debts if the franchisee owing the balance terminates. Royalty fees receivable Royalty fees are recorded at the point in time when the policy becomes effective with the insurance carrier. The royalty fees are secured by the commissions of the franchisee with no historical losses incurred for uncollectible royalty fees. As such, there is no allowance for doubtful accounts relating to royalty fees. Revenue recognition 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 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. 75 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 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. Expenditures for improvements are capitalized, and expenditures for maintenance and repairs are expensed as incurred. Upon sale or retirement, the cost and related accumulated depreciation and amortization is removed from the related accounts, and the resulting gain or loss, if any, is reflected in income. Intangible assets 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 Premiums payable represent premium payments that have been received from insureds, but not yet remitted to the insurance carriers. Deferred financing costs Deferred financing costs incurred in connection with the issuance of debt are capitalized and amortized to interest expense in accordance with the related debt agreements. Deferred financing costs are included as a reduction in notes payable on the accompanying consolidated balance sheets. Lease Accounting The primary leased asset class of the Company is real estate. 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 76 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. The lease term includes options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Certain leases have renewal options that can be exercised at the discretion of the Company. Rent expense is generally recognized on a straight-line basis over the lease term and included in General and administrative expenses in the Consolidated Statement of Operations. See Note 15 for further information. Income Taxes Prior to the Offering, GF was treated as a partnership for U.S. federal and applicable state and local income tax purposes. As a partnership, GF's taxable income or loss was included in the taxable income of its members. Accordingly, no income tax expense was recorded for federal and state and local jurisdictions for periods prior to the Offering. In connection with the Offering completed on May 1, 2018, the Company became a taxable entity. The Company accounts for income taxes pursuant to the asset and liability method which requires the recognition of deferred income tax assets and liabilities related to the expected future tax consequences arising from temporary differences between the carrying amounts and tax bases of assets and liabilities based on enacted statutory tax rates applicable to the periods in which the temporary differences are expected to reverse. Any effects of changes in income tax rates or laws are included in income tax expense in the period of enactment. Advertising The Company expenses advertising costs as they are incurred. Advertising expense for the years ended December 31, 2023, 2022, and 2021 was $ 0.9 million, $ 1.0 million, and $ 1.3 million. Recently adopted accounting pronouncements Simplifying the Accounting for Income Taxes (ASU 2019-12) : 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. The adoption did not have a material impact on our consolidated financial statements or related disclosures. Reference Rate Reform (ASU 2020-04) : In March 2020, the Financial Accounting Standards Board issued ASU 2020-04: Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying U.S. GAAP if certain criteria are met to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued. ASU 2020-04 was initially effective as of March 12, 2020 through December 31, 2022. In December 2022, ASU 2022-06 extended the effective period through December 31, 2024. A substantial portion of our indebtedness bears interest at variable interest rates, primarily based on USD-LIBOR. The adoption of ASU 2020-04 did not have a material impact on our consolidated financial statements. The standard will ease, if warranted, the administrative requirements for accounting for the future effects of the rate reform. 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. 77 3. Revenues Commissions and agency fees 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. The transaction price of the agency fee is set at the time the sale is agreed upon, and is included in the contract. Agency Fee revenue is recognized at a point in time, which is the effective date of the policy. Contingent commission revenue is generated from contracts between the Company and insurance carriers, for which the Company is compensated for certain growth, profitability, or other performance-based metrics. The performance obligations for contingent commissions will vary by contract, but generally include the Company increasing profitable written premium with the insurance carrier. 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, net of a constraint. The Company must estimate the amount of consideration that will be received such that a significant reversal of revenue is not probable. 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 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. Franchise revenues Franchise revenues include initial franchise fees and ongoing new and renewal royalty fees from franchisees. Revenue from Initial Franchise Fees is generated from a contract between the Company and a franchisee. The Company's performance obligation is to provide initial training, onboarding, ongoing support and use of the Company's business operations over the period of the franchise agreement. The transaction price is set by the franchise agreement and revenue is recognized over time as the Company completes its performance obligations. Initial franchise fees are recognized as revenue over the 10-year life of the franchise contract, beginning on the start date of the contract. 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 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 78 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 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. 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 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. The balance of cost to obtain is included with Other assets on the Consolidated balance sheets. Costs to fulfill - The Company has evaluated the need to capitalize costs to fulfill customer contracts and has determined that there are no costs that meet the definition for capitalization under ASC 340. Disaggregation of Revenue The following tables disaggregates revenue by source (in thousands) : Year Ended December 31, 2023 2022 2021 Type of revenue stream: Commissions and agency fees Renewal commissions $ 70,730 $ 57,543 $ 39,111 New business commissions 23,411 24,126 22,108 Agency fees 8,174 10,912 11,506 Contingent commissions 13,746 7,684 9,926 Franchise revenues Renewal royalty fees 107,524 77,346 46,079 New business royalty fees 23,168 18,244 14,616 Initial franchise fees 11,238 10,853 6,516 Other franchise revenues 1,843 1,279 297 Interest income 1,443 1,403 1,153 Total revenues $ 261,276 $ 209,390 $ 151,312 Timing of revenue recognition: Transferred at a point in time $ 102,315 $ 92,581 $ 72,725 Transferred over time 158,961 116,809 78,587 Total revenues $ 261,276 $ 209,390 $ 151,312 79 Contract Balances The following table provides information about receivables, cost to obtain, and contract liabilities from contracts with customers (in thousands) : December 31, 2023 December 31, 2022 Increase/(decrease) Cost to obtain franchise contracts (1) $ 2,309 $ 3,255 $ ( 946 ) Commissions and agency fees receivable, net (2) 12,903 14,440 ( 1,537 ) Receivable from franchisees, net (2) 18,989 28,767 ( 9,778 ) Contract liabilities (2)(3) 27,099 46,553 ( 19,454 ) (1) Cost to obtain franchise contracts is included in Other assets on the consolidated balance sheets. (2) Includes both the current and long term portion of this balance. (3) Initial Franchise Fees to be recognized over the life of the contract Significant changes in contract liabilities are as follows (in thousands) : December 31, 2023 December 31, 2022 Contract liability at beginning of period $ 46,553 $ 48,608 Revenue recognized during the period ( 11,238 ) ( 10,853 ) New deferrals (1) 4,095 21,700 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 The following table reflects the estimated initial franchise fees (contract liability) to be recognized in the future related to performance obligations that are unsatisfied at the end of the period (in thousands) : Estimate for the year ended December 31: 2024 $ 4,129 2025 3,896 2026 3,773 2027 3,584 2028 3,278 Thereafter 8,439 $ 27,099 4. Franchise fees receivable The balance of Franchise fees receivable included in receivable from franchisees in the consolidated balance sheets consisted of the following (in thousands) : December 31, 2023 2022 Franchise fees receivable $ 15,096 $ 35,606 Less: Unamortized discount ( 4,388 ) ( 9,896 ) Less: Allowance for uncollectible franchise fees ( 223 ) ( 487 ) Total franchise fees receivable $ 10,485 $ 25,223 80 Activity in the allowance for uncollectible franchise fees was as follows (in thousands) : Balance at December 31, 2021 $ 303 Charges to bad debts 4,078 Write offs ( 3,894 ) Balance at December 31, 2022 487 Charges to bad debts 1,319 Write offs ( 1,583 ) Balance at December 31, 2023 $ 223 5. Allowance for uncollectible agency fees Activity in the allowance for uncollectible agency fees was as follows (in thousands) : Balance at December 31, 2021 $ 489 Charges to bad debts 2,120 Write offs ( 2,159 ) Balance at December 31, 2022 $ 450 Charges to bad debts 1,480 Write offs ( 1,421 ) Balance at December 31, 2023 $ 508 6. Property and equipment Property and equipment consisted of the following at (in thousands) : December 31, 2023 2022 Furniture & fixtures $ 11,306 $ 9,772 Computer equipment 4,482 4,041 Network equipment 436 423 Phone system 326 326 Leasehold improvements 36,285 36,009 Total 52,834 50,571 Less accumulated depreciation ( 22,518 ) ( 15,224 ) Property and equipment, net $ 30,316 $ 35,347 Depreciation expense was $ 7.6 million, $ 6.1 million, and $ 4.5 million for the years ended December 31, 2023, 2022, and 2021, respectively. 81 7. Intangible assets Intangible assets consisted of the following (in thousands) : December 31, Weighted average amortization period (years) 2023 2022 Computer software & web domain $ 13,509 $ 5,970 9.01 Books of business 6,895 — 7.36 Less accumulated amortization ( 3,138 ) ( 1,483 ) Intangible assets, net $ 17,266 $ 4,487 Amortization expense was $ 1.7 million, $ 0.8 million, and $ 0.4 million for the years ended December 31, 2023, 2022, and 2021, respectively. Expected amortization for the next five calendar years as of December 31, 2023 are as follows (in thousands) : 2024 $ 2,645 2025 2,215 2026 1,858 2027 1,844 2028 and thereafter 8,704 Total $ 17,266 8. Employee benefit obligation The Company has adopted a qualified deferred compensation plan under section 401(k) of the Internal Revenue Code. Full-time employees over the age of 21 with six months of service are eligible to participate. Under the plan, the Company’s contribution is based on a discretionary matching of 100 % of salary deferral elected by each eligible employee up to a maximum of 3 % of compensation. The Company’s matching portion vests over a four-year period, after which time the employee becomes fully vested and all future contributions will vest immediately. Matching contributions may be changed at the discretion of the Company. Company contributions totaled $ 1.5 million, $ 1.0 million, and $ 1.0 million for the years ended December 31, 2023, 2022, and 2021. 9. Debt On July 21, 2021, the Company refinanced its $ 25.0 million revolving credit facility and $ 80.0 million term note payable to a $ 50.0 million revolving credit facility and $ 100.0 million term note payable in order to obtain a more favorable interest rate on the outstanding debt. The Company has the right, subject to approval by the administrative agent and each issuing bank, to increase the commitments under the credit facilities an additional $ 25.0 million. 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. At December 31, 2023, the Company had a letter of credit of $ 0.2 million applied against the maximum borrowing availability, thus amounts available to draw totaled $ 49.8 million. The revolving credit facility is collateralized by substantially all the Company’s assets, which includes rights to future commissions. 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 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 82 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 < 1.50 x SOFR + 175 bps > 1.50 x SOFR + 200 bps > 2.50 x SOFR + 225 bps > 3.50 x 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) : Amount 2024 $ 9,375 2025 10,000 2026 58,125 2027 — 2028 — Total $ 77,500 There is nothing drawn against the revolver which is coterminous with the term loan and is due in full on June 21, 2026. Loan origination fees of $ 0.6 million at December 31, 2023 are reflected as a reduction to the note balance and are amortized through interest expense. The Company’s note payable agreement contains certain restrictions and covenants. Under these restrictions, the Company is limited in the amount of debt incurred and distributions payable. In addition, the credit agreement contains certain change of control provisions that, if broken, would trigger a default. Finally, the Company must maintain certain financial ratios. As of December 31, 2023, the Company was in compliance with these covenants. Because of both instruments’ origination date and variable interest rate, the note payable balance at December 31, 2023 and December 31, 2022, approximates fair value using Level 2 inputs, described below. The framework for measuring fair value provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are described as follows: • Level 1—Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets. • Level 2—Significant other observable inputs other than Level 1 prices such as quoted prices in markets that are not active, quoted prices for similar assets or other inputs that are observable, either directly or indirectly, for substantially the full term of the asset. • Level 3—Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. The asset or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. 83 10. Income taxes As a result of the Reorganization Transactions and the Offering, GSHD became the sole managing member of GF, which is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, GF is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by GF is passed through to and included in the taxable income or loss of its members, including GSHD, on a pro rata basis. GSHD is subject to U.S. federal income taxes, in addition to state and local income taxes, with respect to GSHD's allocable share of income of GF. Income tax expense The components of income tax expense are as follows (in thousands) : Year Ended December 31, 2023 2022 2021 Current income taxes Federal $ — $ — $ — State and local 755 271 226 Total current income taxes 755 271 226 Deferred income taxes Federal 3,169 ( 340 ) ( 4,316 ) State and local ( 1,232 ) 2,568 1,798 Total deferred income taxes 1,937 2,228 ( 2,518 ) Income tax expense (benefit) $ 2,692 $ 2,499 $ ( 2,292 ) A reconciliation of income tax expense computed at the U.S. federal statutory income tax rate to the income tax expense recognized is as follows (in thousands) : Year Ended December 31, 2023 2022 2021 Income before taxes $ 26,388 $ 5,129 $ 6,004 Income taxes at U.S. federal statutory rate 5,541 1,076 1,261 Tax on income not subject to entity level federal income tax ( 2,034 ) ( 483 ) ( 617 ) Permanent Differences: Non-deductible stock compensation costs ( 1,760 ) ( 1,478 ) ( 4,530 ) Non-deductible excess compensation 70 15 — Non-deductible employee moving expenses — — 6 Meals & entertainment 152 101 25 Permanent Provision to Return ( 53 ) 43 — State income tax expense (benefit), net of federal benefit ( 329 ) 2,268 1,553 Other reconciling items: Section 162(m) DTA Write-off 1,085 935 — Other 20 22 10 Income tax expense (benefit) $ 2,692 $ 2,499 $ ( 2,292 ) 84 Deferred tax assets and liabilities The components of deferred tax assets are as follows ( in thousands ): December 31, 2023 December 31, 2022 Net operating loss carryforwards $ 15,906 $ 13,172 Investment in flow-through entity 165,303 142,146 Net deferred tax asset $ 181,209 $ 155,318 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. Uncertain tax positions GSHD has determined there are no material uncertain tax positions as of December 31, 2023. Tax Receivable Agreement 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 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. 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. GSHD entered into a tax receivable agreement ("TRA") with the Pre-IPO LLC Members on May 1, 2018 that provides for the payment by GSHD 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 GSHD actually realizes as a result of (i) any increase in tax basis in GSHD's assets and (ii) tax benefits related to imputed interest deemed arising as a result of payments made under the TRA. During the years ended December 31, 2023, 2022 and 2021, an aggregate of 1.5 million, 2.4 million and 1.5 million LLC Units, respectively, were redeemed by the Pre-IPO LLC Members for newly-issued shares of Class A common stock. In connection with these redemptions, we received 1.5 million, 2.4 million and 1.5 million LLC Units, which resulted in an increase in the tax basis of our investment in GF subject to the provisions of the TRA. We recognized a liability for the TRA Payments due to the Pre-IPO LLC Members, representing 85 % of the aggregate tax benefits we expect to realize from the tax basis increases related to the redemptions of LLC Units, after concluding it was probable that such TRA Payments would be paid based on our estimates of future taxable income. As of December 31, 2023 and 2022, the total amount of TRA Payments due to the Pre-IPO LLC Members under the TRA was $ 149.3 million and $ 125.7 million, respectively, of which $ 0.0 million and $ 0.0 million , respectively, was current and included in Accounts payables and accrued expenses on the Consolidated balance sheets. 11. Stockholder's equity Class A Common Stock GSHD has a total of 24,966 thousand and 23,034 thousand shares of its Class A common stock outstanding at December 31, 2023 and 2022, respectively. Each share of Class A common stock holds economic rights and entitles its holder to one vote per share on all matters submitted to a vote of the stockholders of GSHD. 85 Class B Common Stock GSHD has a total of 12,954 thousand and 14,471 thousand shares of its Class B common stock outstanding at December 31, 2023 and 2022, respectively. Each share of Class B common stock has no economic rights but entitles its holder to one vote per share on all matters submitted to a vote of the stockholders of GSHD. Holders of Class A common stock and Class B common stock vote together as a single class on all matters presented to GSHD's stockholders for their vote or approval, except as otherwise required by applicable law, by agreement, or by GSHD's certificate of incorporation. Earnings Per Share 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 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 Numerator: Net income attributable to GSHD - Basic $ 14,140 $ 565 $ 5,403 Add: net income attributable to non-controlling interests (1) 9,556 — — Less: income tax effect on income attributable to non-controlling interests assuming conversion of Class B common shares (1) ( 2,524 ) — — Net income available to GSHD - Diluted $ 21,172 $ 565 $ 5,403 Denominator: Basic EPS 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 Diluted EPS 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) 13,769 — — Stock options (2) 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 86 12. Non-controlling interest Non-Controlling Interests Following the Offering, GSHD became the sole managing member of GF and, as a result, it consolidates the financial results of GF. 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 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. Shares of Class B common stock will be canceled on a one -for-one basis if GSHD, at the election of a Pre-IPO LLC Member, redeems or exchanges LLC Units of such Pre-IPO LLC Member pursuant to the terms of the amended and restated Goosehead Financial, LLC Agreement. Except for transfers to GSHD pursuant to the amended and restated Goosehead Financial, LLC Agreement or to certain permitted transferees, the Pre-IPO LLC Members are not permitted to sell, transfer or otherwise dispose of any LLC Units or shares of Class B common stock. 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 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. The following table summarizes the ownership interest in GF as of December 31, 2023 and 2022 (in thousands): December 31, 2023 December 31, 2022 LLC Units Ownership % LLC Units Ownership % Number of LLC Units held by GSHD 24,966 65.8 % 23,034 61.4 % Number of LLC Units held by non-controlling interest holders 12,954 34.2 % 14,471 38.6 % Number of LLC Units outstanding 37,920 100.0 % 37,505 100.0 % The weighted average ownership percentages for the applicable reporting periods are used to attribute net income to GSHD and the non-controlling interest holders. The non-controlling interest holders' weighted average ownership percentage for the years ended December 31, 2023 and 2022 was 36.5 % and 43.6 %, respectively. All net income prior to the Offering is attributed to non-controlling interest holders. 87 13. Equity-based compensation A summary of equity-based compensation expense during the years ended December 31, 2023, 2022, and 2021 is as follows (in thousands) : Year Ended December 31, 2023 2022 2021 Stock options $ 23,989 $ 19,642 $ 7,292 Equity-based compensation expense $ 23,989 $ 19,642 $ 7,292 Stock options: 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. 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 Expected volatility 60 % - 65 % 55 % - 65 % 45 % Expected dividend yield — % — % — % Expected term (in years) 2.75 - 4.75 3.25 - 4.00 4.25 Risk-free interest rate 3.44 %- 4.06 % 1.19 % - 4.26 % 0.29 % 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 of December 31, 2022 2,689 $ 63.84 Granted 904 38.89 Exercised ( 409 ) 22.88 Forfeited ( 208 ) 64.19 Expired ( 30 ) 58.47 Outstanding as of December 31, 2023 2,946 $ 61.87 $ 83,971 7.54 Options vested and exercisable as of December 31, 2023 1,174 $ 58.94 $ 37,693 6.33 Options unvested as of December 31, 2023 1,772 $ 63.81 $ 46,278 8.34 88 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 of December 31, 2022 1,783 $ 34.75 Vested ( 707 ) 32.92 Granted 904 19.08 Forfeited ( 208 ) 29.47 Unvested as of December 31, 2023 1,772 $ 28.11 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. 14. Dividends On July 28, 2021 GF approved an extraordinary dividend in the aggregate amount of $ 60 million payable to holders of LLC Units, including GSHD. The board of directors of the Company subsequently declared an extraordinary dividend of $ 1.63 (rounded) to all holders of Class A common stock of GSHD with a record date of August 9, 2021, which was paid on August 23, 2021. A summary of the total amounts declared and paid by GF is as follows (in thousands): LLC Units held as of August 9, 2021 Dividend Paid Class A common stockholders 19,429 $ 31,657 Class B common stockholders via LLC Units held 17,401 28,343 Total 36,830 $ 60,000 Any future extraordinary dividends will be declared at the sole discretion of GF's managing members, with respect to GF, and the Company's board of directors, with respect to GSHD. In determining whether a future extraordinary dividend will be declared by the Company, the board of directors may, at its sole discretion, consider the following: 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 years ended December 31, 2023 and 2022. 15. Leases At December 31, 2023, Goosehead was obligated under a number of operating leases, exclusively leases for premises and equipment used for business purposes. These leases generally have terms of 8 years or less, determined based on the contractual maturity of the lease, and include periods covered by options to extend or terminate the lease when the Company is reasonably certain that it will exercise those options. 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 89 variable in nature. The Company elected not to separate lease and non-lease components of a contract for its real estate and equipment leases. As such, real estate lease payments represent payments on both lease and non-lease components. Operating lease liabilities and ROU assets are recognized at the lease commencement date based on the present value of the future minimum lease payments over the lease term. The future lease payments are discounted at a rate that represents the Company’s collateralized borrowing rate for financing instruments of a similar term. We estimate this for our portfolio of leases using information obtained from our bankers. The ROU asset also includes any lease prepayments made, plus initial direct costs incurred, less any lease incentives received. Rent expense associated with operating leases is recognized on a straight-line basis over the lease term, and generally included in occupancy expense within General and administrative expenses in the Consolidated statements of operations. The following table provides information related to the Company’s leases as of December 31, 2023 and 2022 (in thousands) : December 31, 2023 December 31, 2022 Right-of-use assets $ 38,406 $ 44,080 Short term lease liabilities 8,897 6,627 Long term lease liabilities 57,382 64,947 Total lease liabilities 66,279 71,574 Weighted average remaining lease term (in years) 6.51 7.45 Weighted average incremental borrowing rate 4.0 % 3.9 % 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 Gross operating lease cost $ 8,016 $ 7,034 Sublease income ( 319 ) ( 27 ) Net lease cost $ 7,697 $ 7,007 The following is a schedule of supplemental cash flow information related to leases for the year ended December 31, 2023 and 2022 (in thousands): December 31, 2023 December 31, 2022 Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $ ( 9,344 ) $ ( 5,615 ) Right of use assets obtained in exchange for lease obligation Operating leases $ 927 $ 15,907 90 The following is a schedule of future maturity of lease liability as of December 31, 2023 (in thousands): 2024 $ 11,292 2025 11,511 2026 11,733 2027 11,474 2028 10,678 Thereafter 18,576 Total lease payments 75,264 Less: imputed interest ( 8,986 ) Future maturity of lease liability $ 66,279 As of December 31, 2023, the Company did not have any additional future operating lease commitments that were signed but had not yet commenced. 16. Segment information The Company’s Chief Operating Decision Maker, its Chief Executive Officer (“CEO”), reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. Management views the Company’s operations and manages its business as one operating 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. As a result, beginning with the first quarter of 2022, GSHD has modified the presentation of its segment financial information with retrospective application to all prior periods presented. Since the Company operates in one operating segment, all required financial segment information can be found in the consolidated financial statements. 17. Litigation 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. No. 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. 91 Item 9. Changes in and disagreements with accountants on accounting and financial statement disclosure None.