Goosehead Insurance, Inc. (GSHD) FY 2023 MD&A

Item 7. Management’s discussion and analysis of financial condition and results of operations

Overview

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes and other financial information included elsewhere in this Annual Report. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under “Risk factors” and elsewhere in this Annual Report.

This discussion includes references to non-GAAP financial measures as defined in the rules of the Securities and Exchange Commission ("the SEC"). We present such non-GAAP financial measures, specifically, Core Revenue, Adjusted EBITDA and Adjusted EPS non-GAAP financial measures, as we believe such information is of interest to the investment community because it provides additional meaningful methods of evaluating certain aspects of the Company’s operating performance from period to period on a basis that may not be otherwise apparent under U.S. GAAP, and these provide a measure against which our businesses may be assessed in the future.

Our methods of calculating these measures may differ from those used by other companies and therefore comparability may be limited. These financial measures should be viewed in addition to, not in lieu of, the consolidated financial statements for the year ended December 31, 2023. See "Non-GAAP Financial Measures" below for further discussion of our Core Revenue, Adjusted EBITDA and Adjusted EPS non-GAAP financial measures

We are a rapidly growing personal lines independent insurance agency, reinventing the traditional approach to distributing personal lines products and services throughout the United States. We were founded with one vision in mind—to provide consumers with superior insurance coverage at the best available price and in a timely manner. By leveraging our differentiated business model and innovative technology platform, we are able to deliver a superior insurance experience to our clients.

The following discussion contains references to the years ended December 31, 2023, December 31, 2022, and December 31, 2021. See Goosehead’s Annual Report on Form 10-K for the year ended December 31, 2022 for a discussion of the changes from year ended December 31, 2021 to the year ended December 31, 2022.

Financial Highlights for 2023:

•Total revenue increased 25% from 2022 to $261.3 million; Core Revenues*, a non-GAAP measure, of $233.0 million increased 24% over 2022

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

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

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

•Basic earnings per share was $0.59 and Adjusted EPS*, a non-GAAP measure, was $1.33 for the year ended December 31, 2023.

•Policies in Force increased 16% from December 31, 2022 to 1,486,000 at December 31, 2023.

•Corporate sales headcount decreased 6% from December 31, 2022 to 300 at December 31, 2023.

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

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

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

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

Factors affecting our results of operations

We believe that the most significant factors affecting our results of operations include:

•Investment in growth. We continue to invest in expanding our national footprint, increasing our revenue-producing headcount, and increasing the level of support provided to our salespeople. Our ability to attract and retain top corporate sales agents and franchise owners, ramp up new agent productivity, and retain existing and future Policies in Force are key to continued profitable growth.

•Investment in technology. We continue to develop and invest in our technology platform to drive scalability, adaptability, and efficiency. We believe our significant investment in proprietary technology is a key competitive advantage that supports, and will continue to support our growth and operating margins.

•Continued penetration of Franchisees into existing markets. We will continue to market actively for new franchises in our established markets, which represent over 99% of the U.S. population. We are now licensed with the necessary state departments of commerce and insurance and registered as a franchisor in all 50 states in the U.S.

•Continued retention of existing Book of Business. We have made significant progress in recent years in Client Retention metrics, and maintaining these high levels of Client Retention is key to future profitability.

•Increase in margins as business shifts from new to renewal. Because we are entitled to a higher percentage of Royalty Fees after the first term of a policy and the higher level of back-office support needed during the first term of an insurance policy, the Company begins to see higher levels of profitability on Renewal Revenue. We will focus simultaneously on converting New Business Revenue to Renewal Revenue through our retention efforts, and on continuing to grow New Business Revenue that will convert and allow us to expand our margins in future periods.

•Strength of the insurance market or particular lines of business. We generate the majority of our revenues through commissions, which are calculated as a percentage of the total insurance policy premium. A softening of the insurance market or the particular lines of business that are our focus, characterized by a period of declining premium rates, could negatively impact our profitability.

•Seasonality and cyclicality of housing market conditions. The majority of our new accounts are sourced by referral sources tied to home closing transactions. Major slowdowns in the various housing markets Goosehead serves, including as a result of changes in prevailing interest rates or U.S. monetary policies that affect interest rates, could impact our ability to generate new business. We experience seasonality and revenue related to the sale of insurance policies throughout the course of a calendar year that is tied to the seasonality of new home sales. Revenue from home insurance leads is higher from April to August and lower from October through January. While this can impact month-to-month or quarter-to-quarter results, we expect productivity to normalize year-over-year.

•Increases in interest rates. Our variable rate debt, including our Credit Agreement, exposes us to interest rate risk. If interest rates were to increase, as they have increased recently, our debt service obligations on our variable rate indebtedness would increase even if the amount borrowed remained the same. To the extent that interest rate risk materializes and is not fully mitigated, the resulting increase in interest expense could have a material adverse effect on our results of operations.

•Effect of natural or man-made disasters. Any increases in loss ratios due to natural or man-made disasters could impact our Contingent Commissions, which are primarily driven by both growth and loss ratio metrics.

•Cost of being a public company. To operate as a public company, we are required to continue to implement changes in certain aspects of our business and develop, manage, and train management level and other employees to comply with on-going public company requirements. We also incur expenses as a public company, including public reporting obligations, proxy statements, stockholder meetings, stock exchange fees and transfer agent fees.

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Effects of the reorganization on our corporate structure

Goosehead Insurance, Inc. was formed for the purpose of the Offering and has engaged to date only in activities related to Goosehead Financial, LLC. Goosehead Insurance, Inc. is a holding company and its sole material asset is a controlling ownership and profits interest in Goosehead Financial, LLC. All of our business is conducted through Goosehead Financial, LLC and its consolidated subsidiaries, and the financial results of Goosehead Financial, LLC and its consolidated subsidiaries are included in the consolidated financial statements of Goosehead Insurance, Inc. Goosehead Financial, LLC is currently taxed as a partnership for federal income tax purposes and, as a result, its members, including Goosehead Insurance, Inc., pay taxes with respect to their allocable shares of its net taxable income.

Prior redemptions and exchanges of LLC Units have resulted, and we expect future redemptions and exchanges will result in increases in the tax basis in our share of the tangible and intangible assets of Goosehead Financial, LLC that otherwise would not have been available. These increases in tax basis have reduced the amount of tax we are required to pay, and may reduce the amount of tax that we would otherwise be required to pay in the future. The tax receivable agreement requires Goosehead Insurance, Inc. to pay 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that we actually realize to the Pre-IPO LLC Members. Furthermore, payments under the tax receivable agreement give rise to additional tax benefits and therefore additional payments under the tax receivable agreement itself. See "Item 13. Certain relationships and related transactions, and director independence".

Certain income statement line items

Revenues

In 2023, revenue increased by 25% to $261.3 million from $209.4 million in 2022. Total Written Premium growth, which is the best indicator of future revenue growth, increased 34% to $3.0 billion in 2023 from $2.2 billion in 2022. Total Written Premiums Placed drive our current and future Core Revenue and gives us potential opportunities to earn Ancillary Revenue in the form of Contingent Commissions. Our various revenue streams do not equally contribute to the long-term value of Goosehead. For instance, Renewal Revenue and Renewal Royalty Fees are more predictable and have higher margin profiles, thus are higher quality revenue streams for the Company. Alternatively, Contingent Commissions, while high margin, are unpredictable and dependent on insurance company underwriting and forces of nature and thus are lower quality revenue for the Company. Our revenue streams can be viewed in three distinct categories: Core Revenue, Cost Recovery Revenue, and Ancillary Revenue, which are non-GAAP measures. A reconciliation of Core Revenue, Cost Recovery Revenue, and Ancillary Revenue to total revenue, the most directly comparable financial measures presented in accordance with GAAP, are set forth in the "Key performance indicators" section of Management’s discussion and analysis of financial condition and results of operations of this Form 10-K.

Core Revenue:

•Renewal Commissions - highly predictable, higher-margin revenue stream, which is managed by our service team.

•Renewal Royalty Fees - highly predictable, higher-margin revenue stream, which is managed by our service team. For policies in their first renewal term, we see an increase in our share of royalties from 20% to 50% on the commission paid by the Carriers.

•New Business Commissions - predictable based on agent headcount and consistent ramp-up of agents, but lower margin than Renewal Commissions because of higher commissions paid to agents and higher back-office costs associated with policies in their first term. This revenue stream has predictably converted into higher-margin Renewal Commissions historically, and we expect this to continue moving forward.

•New Business Royalty Fees - predictable based on franchise count and consistent ramp-up of franchises, but lower margin than Renewal Royalty Fees because the Company only receives a royalty fee of 20% on the commissions paid by the Carrier in the first term of every policy and higher back-office costs associated with policies in their first term. This revenue stream has predictably converted into higher-margin Renewal Royalty Fees historically, and we expect this to continue moving forward.

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

Cost Recovery Revenue:

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

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

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

Ancillary Revenue:

•Contingent Commissions - although high margin, Contingent Commissions are unpredictable and susceptible to weather events and Carrier underwriting results. Management does not rely on Contingent Commissions for operating cash flow or budget planning.

•Other Income - book transfer fees, marketing investments from Carriers and other items that are unpredictable and supplemental to other revenue streams.

We discuss below the breakdown of our revenue by stream:

(1) Renewal Commissions, New Business Commissions, Agency Fees, and Contingent Commissions are included in "Commissions and agency fees" as shown on the Consolidated statements of operations.

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

Core Revenue:

The Company's primary source of revenue is through the placement of insurance policies. We are paid a percentage of the premium from the Carriers in the form of New Business Commissions and, in states which allow it, we charge Agency Fees for the placement of the policy. For policies placed through franchise sales, we receive 20% of the commissions and fees received as New Business Royalties during the first term of the policy. All clients are serviced by our world-class service centers, allowing for predictable retention of our Book of Business, which has historically been 86%. All commissions received in corporate sales after the first term of the policy are recognized as Renewal Commissions, which are higher margin due to lower commissions and servicing costs. For all policies that renew related to franchise sales, we receive as Renewal Royalty Fees 50% of the commissions received from the Carrier, creating a mechanical increase in revenue of 129% if we renew at historical rates. Renewal Royalty Fees are higher margin compared to New Business Royalty Fees due to lower servicing costs on higher revenue. Because of the lower royalty fees on New Business Commissions as compared to Renewal Commissions, and because we are placing an increasing percentage of Total Written Premium in franchise sales, Core Revenue growth will lag that of Total Written Premium.

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Cost Recovery Revenue:

The Company charges every franchise an Initial Franchise Fee, which, on a cash flow basis, covers our costs to recruit, train, onboard, and support the franchise for the first year. The Initial Franchise Fee is determined by the state of the Franchise location and the payment terms. The Company recognizes revenue over the 10-year life of the contract. If the franchise elects the payment plan, the difference between the pay-in-full and the payment plan amounts is recognized as Interest Income using the interest rate method over the 5-year term of the payment plan.

Ancillary Revenue:

With certain Carriers, the Company has the opportunity to earn additional revenue in the form of Contingent Commissions, typically based on the volume, growth, and loss ratio of the business placed with the select Carriers. The Contingent Commissions are extremely difficult to predict in any given period and can vary greatly from year to year. Although the Company can control the amount of business placed with the Carriers, loss ratios depend on many factors that are outside of our control, such as weather events and Carrier underwriting accuracy. The Company estimates the amount to be received during the period over which the Contingent Commissions are earned.

Below is a summary showing the historical Contingent Commissions as a percentage of Total Written Premiums Placed for the period in which the Contingent Commissions were earned (in thousands).

Contingent Commissions can vary significantly from year-to-year and should be viewed over several years. Since 2021, revenue from Contingent Commissions have historically represented approximately 0.48% of Total Written Premium at year-end. Most of our Contingent Commissions are earned in the year prior to when they are received. For the year ended December 31, 2021, $9.9 million of Contingent Commissions were earned (above our historical average as a percentage of premium), of which $7.4 million was still receivable at December 31, 2021. For the year ended December 31, 2022, $7.7 million of Contingent Commissions were earned (below our historical average as a percentage of premium), of which $7.4 million was still receivable at December 31, 2022. For the year ended December 31, 2023, $13.7 million of Contingent Commissions were earned (below our historical average as a percentage of premium), of which $6.9 million was still receivable at December 31, 2023.

Premium by line of business

We are a distributor of insurance policies in a range of primarily personal lines of business including homeowner’s insurance, automotive, dwelling property insurance, flood, wind and earthquake insurance, excess liability or umbrella insurance, specialty lines insurance (motorcycle, recreational vehicle, and other insurance), commercial lines insurance (general liability, property and auto insurance for small businesses) and life insurance. The following table sets forth our Total Written Premium placed by line of business by amount and as a percentage of our Total Written Premium for the periods indicated (in thousands):

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Expenses

Due to our organic-focused growth strategy, virtually all of our investments in future growth are in people and certain technologies. Therefore, the majority of our investments are not capitalizable and are recognized immediately on our statement of operations.

Employee compensation and benefits. Employee compensation and benefits is our largest expense and consists of (a) base compensation comprising salary, bonuses and benefits paid and payable to employees, and (b) stock option awards for our senior employees. We expect to continue to experience a general rise in compensation and benefits expense commensurate with expected growth in headcount and with the need to maintain competitive compensation levels as we expand geographically and create new products and services.

General and administrative expenses. General and administrative expenses include technology, travel, accounting, legal and other professional fees, commissions, placement fees, office expenses, depreciation and other costs associated with our operations. Our occupancy-related costs and professional services expenses, in particular, generally increase or decrease in relative proportion to the number of our employees and the overall size and scale of our business operations.

Key performance indicators

Our key operating metrics are discussed below:

Total Written Premium

Total Written Premium represents the total amount of current (non-cancelled) gross premium that is placed with Goosehead’s portfolio of Carriers for a reporting period. We believe that Total Written Premium is an appropriate measure of operating performance because it reflects growth of our business relative to other insurance agencies.

For the year ended December 31, 2023, we had $3.0 billion in Total Written Premium, representing a 34% increase, compared to $2.2 billion for the year ended December 31, 2022. The following table shows Total Written Premium by channel for the years ended 2023 and 2022 (in thousands).

Policies in Force

Policies in Force means the total count of current (non-cancelled) policies placed with Goosehead’s portfolio of Carriers as of a reported date. We believe that Policies in Force is an appropriate measure of operating performance because it reflects growth of our business relative to other insurance agencies.

As of December 31, 2023, we had 1,486,000 Policies in Force compared to 1,284,000 as of December 31, 2022, representing a 16% increase.

NPS

Net Promoter Score (NPS) is calculated based on a single question: “How likely are you to refer Goosehead Insurance to a friend, family member or colleague?” Clients that respond with a 6 or below are Detractors, with a 7 or 8 are Passives, and with a 9 or 10 are Promoters. NPS is calculated by subtracting the percentage of Detractors from the percentage of Promoters. For example, if 50% of respondents were Promoters and 10% were Detractors, NPS is a 40. NPS is a useful gauge of the loyalty of client relationships and can be compared across companies and industries.

NPS has increased modestly to 92 as of December 31, 2023 from 90 at December 31, 2022, primarily driven by the service team’s continued focus on delivering highly differentiated service levels.

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Client Retention

Client Retention is calculated by comparing the number of all clients that had at least one policy in force twelve months prior to the date of measurement and still have at least one policy in force at the date of measurement. We believe Client Retention is useful as a measure of how well Goosehead retains clients year-over-year and minimizes defections.

Client Retention decreased modestly to 86% at December 31, 2023 when compared to 88% at December 31, 2022, again driven by the service team’s continued focus on delivering highly differentiated service levels. Our retention rate is even stronger on a premium basis. In 2023, we retained 101% of the premiums we distributed in 2022, an increase from premium retention in 2022 of 100% primarily due to premium increases from our Carriers during the year. Our premium retention rate is higher than our Client Retention rate as a result of both premiums increasing year over year and additional coverages sold by our sales and service teams.

New Business Revenue

New Business Revenue is commissions received from the Carrier, Agency Fees received from clients, and Royalty Fees relating to policies in their first term.

For the year ended December 31, 2023, New Business Revenue grew 3% to $54.8 million, from $53.3 million for the year ended December 31, 2022. Growth in New Business Revenue is primarily attributable to an increase in agent productivity and rising premium rates.

Renewal Revenue

Renewal Revenue is commissions received from the Carrier and Royalty Fees after the first term of a policy.

For the year ended December 31, 2023, Renewal Revenue grew 32% to $178.3 million, from $134.9 million for the year ended December 31, 2022. Growth in Renewal Revenue was driven primarily by Client Retention of 86% at December 31, 2023, and premium rate increases over the prior year. As our agent force matures, the policies they wrote in prior years begin to convert from New Business Revenue to more profitable Renewal Revenue.

Non-GAAP Financial Measures

Core Revenue, Cost Recovery Revenue, Ancillary Revenue, Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted EPS are not measures of financial performance under GAAP and should not be considered substitutes for total revenue, net income, net income margin or earnings per share, which we consider to be the most directly comparable GAAP measure. We refer to these measures as "non-GAAP financial measures." We consider these non-GAAP financial measures to be useful metrics for management and investors to facilitate operating performance comparisons from period to period by excluding potential differences caused by variations in capital structures, tax position, depreciation, amortization and certain other items that we believe are not representative of our core business. Core Revenue, Cost Recovery Revenue, Ancillary Revenue, Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted EPS have limitations as analytical tools, and when assessing our operating performance, you should not consider Core Revenue, Cost Recovery Revenue, Ancillary Revenue, Adjusted EBITDA, Adjusted EBITDA Margin, or Adjusted EPS in isolation or as substitutes for net income, earnings per share or other consolidated income statement data prepared in accordance with GAAP. Other companies may calculate Core Revenue, Cost Recovery Revenue, Ancillary Revenue, Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted EPS differently than we do, limiting their usefulness as comparative measures.

Core Revenue

Core Revenue is a supplemental measure of our performance and includes Renewal Commissions, Renewal Royalty Fees, New Business Commissions, New Business Royalty Fees, and Agency Fees. We believe that Core Revenue is an appropriate measure of operating performance because it summarizes all of our revenues from sales of individual insurance policies.

Core Revenue increased by $44.8 million, or 24%, to $233.0 million for the year ended December 31, 2023 from $188.2 million for the year ended December 31, 2022. The primary drivers of the increase are increased agent productivity, growth in premiums, high levels of client and premium retention, and the number of policies in the renewal term from December 31, 2022 to December 31, 2023.

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Cost Recovery Revenue

Cost Recovery Revenue is a supplemental measure of our performance and includes Initial Franchise Fees and Interest Income. We believe that Cost Recovery Revenue is an appropriate measure of operating performance because it summarizes revenues that are viewed by management as cost recovery mechanisms.

Cost Recovery Revenue increased by $0.4 million, or 3%, to $12.7 million for the year ended December 31, 2023 from $12.3 million for the year ended December 31, 2022. The primary driver of the increase was an increase in terminations of franchises, which accelerates recognition of initial franchise fee revenue.

Ancillary Revenue

Ancillary Revenue is a supplemental measure of our performance and includes Contingent Commissions and Other Income. We believe that Ancillary Revenue is an appropriate measure of operating performance because it summarizes revenues that are ancillary to our core business.

Ancillary Revenue increased by $6.6 million, or 74%, to $15.6 million for the year ended December 31, 2023 from $9.0 million for the year ended December 31, 2022. The primary drivers of the increase from December 31, 2022 to December 31, 2023 were improved loss ratios as well as growth in Total Written Premiums.

Adjusted EBITDA

Adjusted EBITDA is a supplemental measure of our performance. We believe that Adjusted EBITDA is an appropriate measure of operating performance because it eliminates the impact of items that do not relate to underlying business performance. Adjusted EBITDA is defined as net income (the most directly comparable GAAP measure) before interest, income taxes, depreciation and amortization, adjusted to exclude equity-based compensation, impairment expense, and other non-operating items, including, among other things, certain non-cash charges and certain non-recurring or non-operating gains or losses.

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

Adjusted EBITDA Margin

Adjusted EBITDA Margin is Adjusted EBITDA as defined above, divided by total revenue excluding other non-operating items. Adjusted EBITDA Margin is helpful in measuring profitability of operations on a consolidated level.

For the year ended December 31, 2023, Adjusted EBITDA Margin was 27% compared to 18% for the year ended December 31, 2022. The Adjusted EBITDA margin increase came from a significant increase in Core Revenue and slower growth in both employee compensation and benefits and general and administrative expenses.

Adjusted EPS

Adjusted EPS is a supplemental measure of our performance, defined as earnings per share (the most directly comparable GAAP measure) before non-recurring or non-operating income and expenses, adjusted to assume a single class of stock (Class A) and assuming non-controlling interest does not exist. Adjusted EPS is a useful measure to management because it eliminates the impact of items that do not relate to business performance and helps compare companies that may not have a dual-share class structure.

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

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GAAP to Non-GAAP Reconciliations

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

(1) Renewal Commissions, New Business Commissions, Agency Fees, and Contingent Commissions are included in "Commissions and agency fees" as shown on the Consolidated statements of operations.

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

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

(1) Net Income Margin is calculated as Net Income divided by Total Revenue ($23,696 / $261,276), ($2,630 / $209,390), and ($8,296 / $151,312) for the years ended December 31, 2023, 2022, and 2021.

(2) Adjusted EBITDA Margin is calculated as Adjusted EBITDA divided by Total Revenue excluding other non-operating items ($69,818 / $261,276) for the year ended December 31, 2023, ($36,654 / $209,390) for the year ended December 31, 2022, and ($20,838 /$151,312) for the year ended December 31, 2021.

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The following tables show a reconciliation from basic earnings per share to Adjusted EPS for the years ended December 31, 2023, 2022, and 2021. Note that totals may not sum due to rounding:

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

(2) Calculated as impairment expense divided by the sum of the weighted average number of shares of Class A common stock and Class B common stock [ $3.6 million / (23.9 million + 13.8 million )] for the year ended December 31, 2023. No impairment was recorded for the years ended December 31, 2022 and December 31, 2021.

Consolidated results of operations

The following is a discussion of our consolidated results of operations for each of the years ended December 31, 2023, 2022, and 2021. This information is derived from our accompanying consolidated financial statements prepared in accordance with GAAP. For further discussion regarding our consolidated results of operations for the year ended December 31, 2022 as compared to the year ended December 31, 2021, refer to "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

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

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Revenues

In 2023, revenue increased by 25% to $261.3 million from $209.4 million in 2022.

Commissions and agency fees

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

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

Renewal Commissions increased by $13.2 million, or 23%, to $70.7 million for the year ended December 31, 2023 from $57.5 million for the year ended December 31, 2022. This increase is primarily attributable to strong premium retention and more policies in the renewal term, offset by a slight decline in client retention to 86% at December 31, 2023 from 88% at December 31, 2022.

New Business Commissions decreased by $0.7 million, or 3%, to $23.4 million for the year ended December 31, 2023 from $24.1 million for the year ended December 31, 2022. Revenue from Agency Fees decreased by $2.7 million, or 25%, to $8.2 million for the year ended December 31, 2023 from $10.9 million for the year ended December 31, 2022. This decrease in New Business Commissions and Agency Fees was primarily attributable to a decrease in total sales agent head count to 300 at December 31, 2023, from 320 at December 31, 2022, a 6% decrease.

Revenue from Contingent Commissions increased by $6.1 million, or 79%, to $13.7 million for the year ended December 31, 2023, from $7.7 million for the year ended December 31, 2022. The increase is primarily attributable to growth in total written premiums as well as receiving and qualifying for additional contingent commissions.

Franchise Revenues

Franchise Revenues consist of Core Revenues from Royalty Fees, Cost Recovery Revenues from Initial Franchise Fees, and Ancillary Revenues from Interest Income.

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

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Revenue from Renewal Royalty Fees increased by $30.2 million, or 39%, to $107.5 million, for the year ended December 31, 2023 from $77.3 million for the year ended December 31, 2022. The increase in revenue from Renewal Royalty Fees was primarily attributable to strong premium retention rate and more policies in the renewal term, offset by a slight decline in client retention to 86% at December 31, 2023 from 88% at December 31, 2022.

Revenue from New Business Royalty Fees increased by $4.9 million, or 27%, to $23.2 million for the year ended December 31, 2023 from $18.2 million for the year ended December 31, 2022. The increase in revenue from New Business Royalty Fees was driven primarily by an increase in agency productivity and rising premium rates.

Initial Franchise Fee revenue increased approximately $0.4 million, or 4%, to $11.2 million for the year ended December 31, 2023 from $10.9 million for the year ended December 31, 2022. The primary driver of the increase in Initial Franchise Fees was the acceleration of Initial Franchise Fee revenue from terminations of existing agencies.

Interest Income

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

Expenses

Employee compensation and benefits

Employee compensation and benefits expenses increased by $19.3 million, or 14%, to $152.6 million for 2023 from $133.3 million for 2022. This was primarily attributable to the hiring of more experienced team members, particularly at the leadership level, and an increase in equity-based compensation of 22% related to additional stock options granted during 2023.

General and administrative expenses

General and administrative expenses increased by $9.2 million, or 17%, to $62.1 million for 2023 from $52.9 million for 2022. This increase was primarily attributable to $3.6 million asset impairment charges related to internally developed software and impairment of two office locations the Company determined to sublease, increased spend on rent-related costs due to expansion of our corporate office space, and increased spending on software and professional services

Bad debts

Bad debts decreased by $1.8 million, or 30%, to $4.4 million for 2023 from $6.2 million for 2022. This decrease was primarily attributable to an increase in average cash collections relative to revenue recognized for terminated franchises on the payment plan.

Depreciation and amortization

Depreciation and amortization increased by $2.4 million, or 34%, to $9.2 million for 2023 from $6.9 million for 2022. This increase was primarily attributable to the increase in fixed assets due to the expansion of office space, additional investments in software development, and purchases of books of business.

Interest expense

Interest expenses increased by $1.6 million, or 31%, to $6.6 million for 2023 from $5.0 million for 2022. This increase is attributable to a rising interest rate environment during the year, partially offset by a decrease in total borrowings outstanding.

Tax expense

Tax expenses increased by $0.2 million, or 8%, to $2.7 million for 2023 from $2.5 million for 2022. This increase is attributable to an increase in income before taxes offset by a decrease in state and local deferred taxes.

Liquidity and capital resources

Historical liquidity and capital resources

We have managed our historical liquidity and capital requirements primarily through the receipt of revenues from our corporate and franchise sales. Our primary cash flow activities involve: (1) generating cash flow from corporate sales, which largely includes Renewal Revenue (Corporate) and New Business Revenue (Corporate); (2) generating cash flow from franchise sales, which largely includes Royalty Fees and Initial Franchise Fees;

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(3) making distributions to the Goosehead Management Holders and Texas Wasatch Holders; and (4) borrowings, interest payments and repayments under our Credit Agreement. As of December 31, 2023, our unrestricted cash and cash equivalents, and restricted cash was $44.0 million. We have used cash flow from operations primarily to pay compensation and related expenses, general, administrative and other expenses, and debt service.

Credit agreement

See "Note 9. Debt" in the consolidated financial statements included herein for a discussion of the Company's credit facilities.

Comparative cash flows

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

Operating activities

Net cash provided by operating activities was $50.8 million for 2023 as compared to net cash provided by operating activities of $35.7 million for 2022. This increase in net cash provided by operating activities was primarily attributable to a $21.1 million increase in net income, an $8.4 million increase in cash provided by receivables from franchisees, a $4.5 million increase in cash provided by commissions and agency fees, and a $4.3 million increase in stock compensation expense offset by a $17.4 million decrease in cash provided by contract liabilities and a $4.0 million increase in prepaid expenses.

Investing activities

Net cash used for business investment activities was $19.2 million for 2023 as compared to net cash used for business investment activities of $12.6 million for 2022. This increase in net cash used in business investment activities was primarily attributable to $6.9 million for purchases of books of business in 2023 and a $5.2 million increase in cash paid for software development offset by $5.7 million decrease in the purchase of property and equipment.

Financing activities

Net cash used for financing activities was $17.9 million for 2023 as compared to net cash used for financing activities of $23.2 million for 2022. This decrease in net cash used for financing activities is due to the net repayment of $25.0 million of the revolving credit facility in 2022 and a $3.8 million increase in cash received from stock options exercises, offset by a $12.5 million increase in principal payments on notes payable, due primarily to an additional $10.0 million principal payment made in 2023, and a $10.9 million increase in member distributions paid during 2023.

Future sources and uses of liquidity

Our sources of liquidity are (1) cash on hand, (2) net working capital, (3) cash flows from operations and (4) our Revolving Credit Facility or other sources of debt financing. Based on our current expectations, we believe that these sources of liquidity will be sufficient to fund our working capital requirements and to meet our commitments in the foreseeable future.

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

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Dividend policy

Assuming Goosehead Financial, LLC makes distributions to its members in any given year, the determination to pay dividends, if any, to our Class A common stockholders out of the portion, if any, of such distributions remaining after our payment of taxes, tax receivable agreement payments and expenses (any such portion, an “excess distribution”) will be made at the sole discretion of our board of directors. Our board of directors may change our dividend policy at any time. See “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and

Issuer Purchases of Equity Securities — Dividend policy".

Tax receivable agreement

We entered into a tax receivable agreement with the Pre-IPO LLC Members on May 1, 2018 that provides for the payment by us to the Pre-IPO LLC Members of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that we actually realize as a result of (i) any increase in tax basis in Goosehead Insurance, Inc.’s assets and (ii) tax benefits related to imputed interest deemed arising as a result of payments made under the tax receivable agreement. See "Item 13. Certain relationships and related transactions, and director independence".

Holders of Goosehead Financial, LLC Units (other than Goosehead Insurance, Inc.) may, subject to certain conditions and transfer restrictions described above, redeem or exchange their LLC Units for shares of Class A common stock of Goosehead Insurance, Inc. on a one-for-one basis. Goosehead Financial, LLC has made an election under Section 754 of the Internal Revenue Code of 1986, as amended, and the regulations thereunder (the “Code”) effective for each taxable year in which a redemption or exchange of LLC Units for shares of Class A common stock occurs, which has resulted and is expected to result in increases to the tax basis of the assets of Goosehead Financial, LLC at the time of a redemption or exchange of LLC Units. Prior redemptions and exchanges have resulted, and we expect future redemptions and exchanges will result in increases in the tax basis of the tangible and intangible assets of Goosehead Financial, LLC. These increases in tax basis have reduced the amount of tax we are required to pay, and may reduce the amount of tax that Goosehead Insurance, Inc. would otherwise be required to pay in the future. We have entered into a tax receivable agreement with the Pre-IPO LLC Members that provides for the payment by us to the Pre-IPO LLC Members of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that we actually realize as a result of (i) any increase in tax basis in Goosehead Insurance, Inc.’s assets resulting from (a) the purchase of LLC Units from any of the Pre-IPO LLC Members using the net proceeds from any future offering, (b) redemptions or exchanges by the Pre-IPO LLC Members of LLC Units for shares of our Class A common stock or (c) payments under the tax receivable agreement and (ii) tax benefits related to imputed interest deemed arising as a result of payments made under the tax receivable agreement. This payment obligation is an obligation of Goosehead Insurance, Inc. and not of Goosehead Financial, LLC. For purposes of the tax receivable agreement, the cash tax savings in income tax will be computed by comparing the actual income tax liability of Goosehead Insurance, Inc. (calculated with certain assumptions) to the amount of such taxes that Goosehead Insurance, Inc. would have been required to pay had there been no increase to the tax basis of the assets of Goosehead Financial, LLC as a result of the redemptions or exchanges and had Goosehead Insurance, Inc. not entered into the tax receivable agreement. Estimating the amount of payments that may be made under the tax receivable agreement is by its nature imprecise, insofar as the calculation of amounts payable depends on a variety of factors. While the actual increase in tax basis from future purchases, redemptions or exchanges, as well as the amount and timing of any payments under the tax receivable agreement, will vary depending upon a number of factors, including the timing of redemptions or exchanges, the price of shares of our Class A common stock at the time of the redemption or exchange, the extent to which such redemptions or exchanges are taxable and the amount and timing of our income. See "Item 13. Certain relationships and related transactions, and director independence". We historically accounted, and anticipate that we will continue to account for the effects of these increases in tax basis and associated payments under the tax receivable agreement arising from redemptions or exchanges as follows:

•we will record an increase in deferred tax assets for the estimated income tax effects of the increases in tax basis based on enacted federal and state tax rates at the date of the redemption or exchange;

•to the extent we estimate that we will not realize the full benefit represented by the deferred tax asset, based on an analysis that will consider, among other things, our expectation of future earnings, we will reduce the deferred tax asset with a valuation allowance; and

•we will record 85% of the estimated realizable tax benefit (which is the recorded deferred tax asset less any recorded valuation allowance) as an increase to the liability due under the tax receivable agreement and the remaining 15% of the estimated realizable tax benefit as an increase to additional paid-in capital.

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All of the effects of changes in any of our estimates after the date of the redemption or exchange will be included in net income. Similarly, the effect of subsequent changes in the enacted tax rates will be included in net income.

Contractual obligations, commitments and contingencies

The following table represents our contractual obligations as of December 31, 2023, aggregated by type.

(1)The Company leases its facilities under non-cancelable operating leases. In addition to monthly lease payments, the lease agreements require the Company to reimburse the lessors for its portion of operating costs each year. Rent expense was $7.8 million, $7.0 million, and $4.8 million for year ending December 31, 2023, 2022, and 2021.

(2)The Company refinanced its credit facilities on July 21, 2021 in the form of a $100 million term loan and $50 million revolving credit facility, of which nothing was drawn on the revolving credit facility as of December 31, 2023.

(3)Interest payments on our outstanding debt obligations under our Credit Agreement. Our debt obligations have variable interest rates. We have calculated future interest obligations based on the interest rate for our debt obligations as of December 31, 2023.

(4)See "Item 7. Management's discussion and analysis of financial condition and results of operation - Tax receivable agreement."

Critical accounting policies and estimates

We prepare our consolidated financial statements in accordance with GAAP. In applying many of these accounting principles, we need to make assumptions, estimates or judgments that affect the reported amounts of assets, liabilities, revenues and expenses in our consolidated financial statements. We base our estimates and judgments on historical experience and other assumptions that we believe are reasonable under the circumstances. These assumptions, estimates or judgments, however, are both subjective and subject to change, and actual results may differ from our assumptions and estimates. If actual amounts are ultimately different from our estimates, the revisions are included in our results of operations for the period in which the actual amounts become known. We believe the following critical accounting policies could potentially produce materially different results if we were to change underlying assumptions, estimates or judgments. See “Item 8. Financial statements and supplementary data - Summary of significant accounting policies” for a summary of our significant accounting policies, and discussion of recent accounting pronouncements.

Revenue recognition

Goosehead provides personal and commercial property and casualty insurance brokerage services for its clients through a network of corporate-owned offices and franchise units. Goosehead is compensated for the insurance brokerage services that it provides for clients in the form of commission revenue, agency fees, royalty fees, and contingent commissions.

The transaction price for commissions revenue and royalty fees is set as an estimate of the variable consideration to be received for the current policy term. This estimate includes the fixed consideration due based on the contractual terms of the current policy and adjustments for estimates of modifications of the contractual terms of the current policy and/or termination of the policy before the end of the current term. This variable consideration is constrained to the extent that it is probable there will not be a significant reversal of revenue. The Company adjusts its estimate of revenue recognized for commissions and royalty fees based on cash collections during the term of the policy. Commissions revenue is earned at a point in time on the effective date of the policy. Royalty fees are earned over time as the underlying policies are placed.

The transaction price for contingent commissions is estimated based on all available information and constrained such that it is probable there will not be a significant reversal of revenue. Contingent commissions revenue is recognized over time as the Company completes its performance obligations as the underlying policies are placed and other contractual obligations are met.

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Certain costs to obtain or fulfill a contract are capitalized. The Company capitalizes the incremental costs to obtain franchise contracts. These deferred costs are amortized over the expected life of the underlying franchise fee and are included in Other assets in the Company's consolidated balance sheet as of December 31, 2023.

Liabilities under Tax Receivable Agreement

In connection with the Offering we entered into a tax receivable agreement with the Pre-IPO LLC Members that provides for the payment by us to the Pre-IPO LLC Members of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that we actually realize as a result of (i) any increase in tax basis in Goosehead Financial, LLC’s assets resulting from (a) the acquisition of LLC Units using the net proceeds from any future offering, (b) redemptions or exchanges by the Pre-IPO LLC Members of LLC Units and the corresponding number of shares of Class B common stock for shares of our Class A common stock or (c) payments under the tax receivable agreement, and (ii) tax benefits related to imputed interest deemed arising as a result of payments made under the tax receivable agreement.

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

As of December 31, 2023, as a result of the prior redemptions of LLC Units, we recognized liabilities totaling $149.3 million relating to our obligations under the Tax Receivable Agreement.