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FORM 10-Q

(Mark One)
☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023

(Exact name of registrant as specified in its charter)

(Registrant's telephone number, including area code)

(Former name or former address, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class			Trading Symbol(s)			Name of Each Exchange on Which Registered
Class A Common Stock, par value $.01 per share			GSHD			NASDAQ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   þ Yes o No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

þ Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

☑

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☑ No

As of October 31, 2023, there were 24,449,883 shares of Class A common stock outstanding and 13,415,165 shares of Class B common stock outstanding.

 

As used in this Quarterly Report on Form 10-Q ("Form 10-Q"), unless the context indicates or otherwise requires, the following terms have the following meanings:

•Ancillary Revenue: Revenue that is supplemental to our Core Revenue and Cost Recovery Revenue, Ancillary Revenue is unpredictable and often outside of the Company's control. Included in Ancillary Revenue are Contingent Commissions and other income.

•Agency Fees: Fees separate from commissions charged directly to clients for efforts performed in the issuance of new insurance policies.

•Annual Report on Form 10-K: The Company's annual report on Form 10-K for the fiscal year ended December 31, 2022.

•Carrier: An insurance company.

•Carrier Appointment: A contractual relationship with a Carrier.

•Client Retention: 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.

•Contingent Commission: Revenue in the form of contractual payments from Carriers contingent upon several factors, including growth and profitability of the business placed with the Carrier.

•Core Revenue: The most predictable revenue stream for the Company, these revenues consist of New Business Revenue and Renewal Revenue. New Business Revenue is lower-margin, but fairly predictable. Renewal Revenue is higher-margin and very predictable.

•Cost Recovery Revenue: Revenue received by the Company associated with cost recovery efforts associated with selling and financing franchises. Included in Cost Recovery Revenue are Initial Franchise Fees and Interest Income.

•Franchise Agreement: Agreements governing our relationships with Franchisees.

•Franchisee: An individual or entity who has entered into a Franchise Agreement with us.

•GF: Goosehead Financial, LLC.

•Initial Franchise Fee: Contracted fees paid by Franchisees to compensate Goosehead for the training, onboarding and ongoing support of new franchise locations.

•LLC Unit: a limited liability company unit of Goosehead Financial, LLC.

•New Business Commission: Commissions received from Carriers relating to policies in their first term.

•New Business Revenue: New Business Commissions, Agency Fees, and New Business Royalty Fees.

•New Business Royalty Fees: Royalty Fees received from Franchisees relating to policies in their first term

•NPS: Net Promoter Score is calculated based on a single question: “How likely are you to refer Goosehead Insurance to a friend, family member or colleague?” Clients that respond with a 6 or below are Detractors, a score of 7 or 8 are called Passives, and a 9 or 10 are Promoters. NPS is calculated by subtracting the percentage of Detractors from the percentage of Promoters.

•Policies in Force: As of any reported date, the total count of current (non-cancelled) policies placed by us with our Carriers.

•Policy Term: The contractual period the policy provides insurance coverage to the insured.

•Pre-IPO LLC Members: owners of LLC Units of GF prior to the Offering.

•Renewal Commission: Commissions received from Carriers relating to a policy in a renewal term.

•Renewal Revenue: Renewal Commissions and Renewal Royalty Fees.

•Renewal Royalty Fees: Royalty Fees received from Franchisees relating to a policy in a renewal term.

•Royalty Fees: Fees paid by Franchisees to the Company that are tied to the gross commissions paid by the Carriers related to policies sold or renewed by a franchisee.

•The Offering: The initial public offering completed by Goosehead Insurance, Inc. on May 1, 2018.

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

We have made statements in this Form 10-Q that are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “may,” “might,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” the negative of these terms and other comparable terminology. These forward-looking statements, which are subject to risks, uncertainties and assumptions about us, may include projections of our future financial performance, our anticipated growth strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements, including those factors discussed under the caption entitled “Item 1A. Risk factors” in the Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

The forward-looking statements included in this Form 10-Q are made only as of the date hereof. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. We are under no duty to update any of these forward-looking statements after the date of this Form 10-Q to conform our prior statements to actual results or revised expectations.

Net income						—						—						—						—						—						342						342						2,047						2,389
Exercise of stock options						94						—						1						—						1,007						—						1,008						—						1,008
Equity-based compensation						—						—						—						—						5,173						—						5,173						—						5,173
Activity under employee stock purchase plan						4						—						—						—						177						—						177						—						177
Redemption of LLC Units						115						(115)						1						(1)						(377)						—						(377)						377						—
Deferred tax adjustments related to Tax Receivable Agreement						—						—						—						—						373						—						373						30						403
Reallocation of Non-controlling interest						—						—						—						—						—						(226)						(226)						226						—
Balance June 30, 2022						20,534						16,693						$	203					$	168					$	58,942					$	(63,290)					$	(3,977)					$	(54,770)					$	(58,747)

Net income						—						—						—						—						—						1,979						1,979						1,061						3,040
Exercise of stock options						171						—						2						—						3,004						—						3,006						—						3,006
Equity-based compensation						—						—						—						—						5,395						—						5,395						—						5,395
Activity under employee stock purchase plan						5						—						—						—						165						—						165						—						165
Redemption of LLC Units						492						(492)						5						(5)						(1,579)						—						(1,579)						1,579						—
Deferred tax adjustments related to Tax Receivable Agreement						—						—						—						—						1,311						—						1,311						165						1,476
Reallocation of Non-controlling interest						—						—						—						—						—						29						29						(29)						—
Balance September 30, 2022						21,202						16,201						210						163						67,238						(61,282)						6,329						(51,994)						(45,665)

Goosehead Insurance, Inc. (“GSHD”) is the sole managing member of Goosehead Financial, LLC (“GF”) and 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 condensed consolidated financial statements.

GF was organized on January 1, 2016 as a Delaware Limited Liability Company and is headquartered in Westlake, TX.

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

The Company had 13 and 12 corporate-owned locations in operation at September 30, 2023 and 2022, respectively. Franchisees are provided access to Carrier Appointments, product training, technology infrastructure, client service centers and back office services. During the three months ended September 30, 2023 and 2022, the Company onboarded 30 and 144 franchise locations, respectively, and had 1,285 and 1,403 operating franchise locations as of September 30, 2023 and 2022, respectively. No franchises were purchased during the three and nine months ended September 30, 2023 and 2022.

All intercompany accounts and transactions have been eliminated in consolidation.

The accompanying condensed consolidated financial statements of the Company have been prepared in accordance with the instructions to Form 10-Q. Therefore, they do not include all of the annual disclosures required by accounting principles generally accepted in the United States of America ("GAAP"). However, in the opinion of management, these statements include all adjustments, consisting of normal recurring adjustments, which are necessary for a fair presentation of the condensed consolidated financial positions at September 30, 2023 and December 31, 2022, the condensed consolidated results of operations, stockholders' equity and statements of cash flows for the three and nine months ended September 30, 2023 and 2022. The interim period condensed consolidated financial statements should be read in conjunction with the Consolidated Financial Statements that are included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

The results of operations for the three and nine months ended September 30, 2023 are not necessarily indicative of the results that can be expected for the entire year. The Company experiences seasonal fluctuations of its revenue due to the timing of contingent commission revenue recognition and trends in housing market activity.

Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period financial statements.

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.

Intangible assets are stated at cost less accumulated amortization and reflect amounts paid for the Company’s web domain, computer software costs, and purchased books of business (customer accounts). The web domain is amortized over a useful life of fifteen years, computer software costs are amortized over a useful life of three years, and books of business (customer accounts) are amortized over a useful life of eight years. During the three and nine months ended September 30, 2023, the Company purchased books of business (customer accounts) totaling $0.0 million and $6.5 million, respectively.

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 three months ended June 30, 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 three months ended June 30, 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 three months ended September 30, 2023.

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.

The Company holds premiums received from the insured, but not yet remitted to the Carrier, in a fiduciary capacity. Premiums received but not yet remitted included in restricted cash were $1.9 million and $2.3 million as of September 30, 2023 and 2022, respectively.

The following is a reconciliation of our cash and restricted cash balances as presented in the condensed consolidated statements of cash flows for the nine months ended September 30, 2023 and 2022 (in thousands):

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 is effective from 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 condensed 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.

The Company earns new and renewal commissions paid by insurance carriers, royalty fees from new and renewal commissions earned by franchisees, and fees paid by clients for the identification and placement of insurance coverage. These commissions, fees and royalties are earned at a point in time upon the effective date of the insurance policy, as no performance obligation exists after coverage is bound and the unilateral enforceable right to terminate expires. The transaction price for the commissions and fees is set as the estimated amount to be received for the current policy, including the initial commission earned for the current policy term, adjusted and constrained for an estimate of changes to the commission that may arise due to (1) changes to the policy premium during the current policy term and/or (2) cancellation of the policy before the end of the current term. 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.

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 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 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.

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.

Revenue from new and renewal royalty fees is recorded by applying the sales- and usage-based royalties exception. Under the sales- and usage-based exception, the Company estimates the amount of royalties to be received for the current policy, including the initial commission earned for the current policy term, adjusted and constrained for an estimate of changes to the commission that may arise due to (1) changes to the policy premium during the current policy term and/or (2) cancellation of the policy before the end of the current term. Revenue from royalty fees is recognized over time as the placement of the underlying policies occur.

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 adoption of ASC 340 resulted in the Company deferring certain costs to obtain customer contracts primarily as they relate to commission-based compensation plans for the franchise sales team, in which the Company pays an incremental amount of compensation on new Franchise Agreements. These incremental costs are deferred and amortized over a 10-year period, which is consistent with the term of the contract.

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.

The following table disaggregates revenue by source (in thousands):

The following table provides information about receivables, cost to obtain, and contract liabilities from contracts with customers (in thousands):

			September 30, 2023						December 31, 2022						Increase/(decrease)
Cost to obtain franchise contracts(1)			$	2,616					$	3,255					$	(639)
Commissions and agency fees receivable, net(2)			12,327						14,440						(2,113)
Receivable from franchisees(2)			21,558						28,767						(7,209)
Contract liabilities(2)(3)			31,959						46,553						(14,594)

(1) Cost to obtain franchise contracts is included in Other assets on the condensed 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.

The Company records Franchise Fees as contract liabilities on the Condensed Consolidated Balance Sheets when the agreement is executed. Contract liabilities are reduced as fees are recognized in revenue over the expected life of the franchise license. As the term of the franchise license is typically ten years, substantially all of the franchise fee revenue recognized in the period ended September 30, 2023 was included in the contract liabilities balance as of December 31, 2022.

The weighted average remaining amortization period for contract liabilities related to open franchises is 7.2 years.

Significant changes in contract liabilities are as follows (in thousands):

(1) Initial Franchise Fees where the consideration is received from the franchisee for services which are to be transferred to the Franchisee over the expected life of the Franchise Agreement.

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

The balance of Franchise fees receivable included in Receivable from franchisees consisted of the following (in thousands):

						September 30, 2023						December 31, 2022
Franchise fees receivable(1)						$	19,861					$	35,606
Less: Unamortized discount(1)						(5,734)						(9,896)
Less: Allowance for uncollectible franchise fees(1)						(285)						(487)
Net franchise fees receivable(1)						$	13,842					$	25,223

(1) Includes both the current and long term portion of this balance.

Activity in the allowance for uncollectible franchise fees was as follows (in thousands):

Balance at December 31, 2022						$	487
Charges to bad debts						963
Write offs						(1,165)
Balance at September 30, 2023						$	285
Balance at December 31, 2021						$	303
Charges to bad debts						3,099
Write offs						(2,840)
Balance at September 30, 2022						$	562

Activity in the allowance for uncollectible agency fees was as follows (in thousands):

Balance at December 31, 2022						$	450
Charges to bad debts						1,174
Write offs						(1,004)
Balance at September 30, 2023						$	620
Balance at December 31, 2021						$	489
Charges to bad debts						1,663
Write offs						(1,658)
Balance at September 30, 2022						$	494

Property and equipment consisted of the following (in thousands):

						September 30, 2023						December 31, 2022
Furniture & fixtures						$	11,276					$	9,772
Computer equipment						4,071						4,041
Network equipment						436						423
Phone system						326						326
Leasehold improvements						36,228						36,009
Total						52,337						50,571
Less accumulated depreciation						(20,630)						(15,224)
Property and equipment, net						$	31,707					$	35,347

Depreciation expense was $5.7 million and $4.5 million for nine months ended September 30, 2023 and 2022, respectively.

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 also has the right, subject to approval by the administrative agent and each issuing bank, to increase the commitments under the credit facilities by an additional $25.0 million.

On April 26, 2023, the Company entered into Amendment No.1 ("Amendment") of the Second Amended and Restated Credit Agreement, which provided that LIBOR should be replaced with SOFR.

The $50.0 million revolving credit facility accrues interest on amounts drawn at an initial interest rate of LIBOR plus 250 basis points, then at an interest rate determined by the Company's leverage ratio for the preceding period. At September 30, 2023 the Company was accruing interest at SOFR plus 200 basis points. At September 30, 2023, the Company had nothing drawn against the revolving credit facility and had a letter of credit of $0.2 million applied against the maximum borrowing availability, payable on July 21, 2026. 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 and royalties.

The term note is payable in quarterly installments of $0.6 million the first twelve months, $1.3 million the next twelve months, $1.9 million the next twelve months, and $2.5 million the last twenty-four months, with a balloon payment of $65.6 million on July 21, 2026. On May 31, 2023, the Company paid an additional $10.0 million toward the term note, reducing the final balloon payment to $55.6 million. The note is collateralized by substantially all of the Company’s assets, which includes rights to future commissions and royalties. Interest is calculated initially at LIBOR plus 225 basis points, then at an interest rate based on the Company's leverage ratio for the preceding period. At September 30, 2023 the Company was accruing interest at SOFR plus 200 basis points.

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

Maturities of the term note payable for the next five years are as follows (in thousands):

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. As of September 30, 2023, the Company's maximum allowable trailing twelve months debt-to-EBITDA ratio, as defined by the credit agreement, was 4x. 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 September 30, 2023, the Company was in compliance with these covenants.

Because of both instruments’ variable interest rate, the note payable balance at September 30, 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.

GSHD is 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.

Provision expense (benefit) from income taxes for the three and nine months ended September 30, 2023 was $0.7 million and $2.9 million compared to $(0.7) million and $(0.1) million for the three and nine months ended September 30, 2022. The effective tax rate was 6% and 14% for the three and nine months ended September 30, 2023 and (28)% and 179% for the three and nine months ended September 30, 2022. The increase in the effective tax rate for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 was primarily due to an increase in pre-tax income between periods. The decrease in the effective tax rate for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 was primarily due to an increase in pre-tax income between periods from net loss to net income and an increase in taxes from a tax benefit to tax expense.

Deferred tax assets at September 30, 2023 were $170.8 million compared to $155.3 million at December 31, 2022. The primary contributing factor to the increase in deferred tax assets is additional redemptions of LLC Units of GF for shares of Class A common stock of GSHD during the nine months ended September 30, 2023.

GF intends to make 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. 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 GSHD in the absence of those transactions. The anticipated tax basis adjustments 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 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 tax receivable agreement.

During the three and nine months ended September 30, 2023, an aggregate of 380,001 and 1,055,458 LLC Units were redeemed by the Pre-IPO LLC Members for newly issued shares of Class A common stock. In connection with these redemptions, GSHD received 380,001 and 1,055,458 LLC Units, which resulted in an increase in the tax basis of its investment in GF subject to the provisions of the tax receivable agreement. The Company recognized a liability for the TRA Payments due to the Pre-IPO LLC Members, representing 85% of the aggregate tax benefits the Company expects 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 its estimates of future taxable income. As of September 30, 2023, the total amount of TRA Payments due to the Pre-IPO LLC Members under the tax receivable agreement was $140.3 million, of which $0.4 million was current and included in Accounts payables and accrued expenses on the Condensed Consolidated Balance Sheet. Future exchanges of LLC Units for Class A common stock will result in additional TRA payments.

GSHD has determined there are no material uncertain tax positions as of September 30, 2023.

GSHD has a total of 24,446 thousand shares of its Class A common stock outstanding at September 30, 2023. 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.

GSHD has a total of 13,415 thousand shares of its Class B common stock outstanding at September 30, 2023. 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 shareholders for their vote or approval, except as otherwise required by applicable law, by agreement, or by GSHD's certificate of incorporation.

The following table sets forth the calculation of basic earnings per share ("EPS") based on net income attributable to GSHD for the three and nine months ended September 30, 2023 and 2022, divided by the basic weighted average number of Class A common stock as of September 30, 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. Diluted EPS was computed using the treasury stock method for stock options.

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 EPS 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.

(1) 1,055 and 1,800 stock options were excluded from the computation of diluted earnings per share of Class A common stock for the three and nine months ended September 30, 2023 because the effect would have been anti-dilutive. 2,388 and 1,947 stock options were excluded from the computation of diluted earnings per share of Class A common stock for the three and nine months ended September 30, 2022 because the effect would have been anti-dilutive.

GSHD is 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 three and nine months ended September 30, 2023, GF made distributions of $8.7 million and $21.4 million, of which $3.3 million and $8.5 million was made to Pre-IPO LLC Members. The remaining $5.5 million and $12.9 million was made to GSHD and was eliminated in consolidation.

Under the amended and restated Goosehead Financial, LLC Agreement, the Pre-IPO LLC Members have the right, from and after the completion of the Offering (subject to the terms of the amended and restated Goosehead Financial, LLC Agreement), to require GSHD to redeem all or a portion of their LLC Units for, at GSHD's election, newly-issued shares of Class A common stock on a one-for-one basis or a cash payment equal to the volume weighted average market price of one share of GSHD's Class A common stock for each LLC Unit redeemed (subject to customary adjustments, including for stock splits, stock dividends and reclassifications) in accordance with the terms of the amended and restated Goosehead Financial, LLC Agreement. 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 cancelled 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 the three and nine months ended September 30, 2023, an aggregate of 380 thousand and 1,055 thousand LLC Units were redeemed by the non-controlling interest holders. Pursuant to the GF LLC Agreement, GSHD issued 380 thousand and 1,055 thousand shares of Class A common stock in connection with these redemptions and received 380 thousand and 1,055 thousand LLC Interests, increasing GSHD's ownership interest in GF. Simultaneously, and in connection with these redemptions, 380 thousand and 1,055 thousand shares of Class B common stock were surrendered and cancelled.

The following table summarizes the ownership interest in GF as of September 30, 2023 (in thousands):

			September 30, 2023
			LLC Units			Ownership %
Number of LLC Units held by GSHD			24,446			64.6%
Number of LLC Units held by non-controlling interest holders			13,415			35.4%
Number of LLC Units outstanding			37,861			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 percentages for the three and nine months ended September 30, 2023 were 36.1% and 37.1%, respectively.

The following table summarizes the effects of changes in ownership in GF on the equity of GSHD for the three and nine months ended September 30, 2023 and 2022 as follows (in thousands):

												Three Months Ended September 30,												Nine Months Ended September 30,
																		2023						2022						2023						2022
Net income attributable to Goosehead Insurance, Inc.																		$	6,934					$	1,979					$	10,519					$	64
Transfers (to) from non-controlling interests:
Decrease in additional paid-in capital as a result of the redemption of LLC interests																		(1,154)						(1,579)						(3,256)						(2,300)
Increase in additional paid-in capital as a result of activity under employee stock purchase plan																		135						165						479						556
Total effect of changes in ownership interest on equity attributable to Goosehead Insurance, Inc.																		$	5,915					$	565					$	7,742					$	(1,680)

Stock option expense was $6.5 million and $19.0 million for the three and nine months ended September 30, 2023. Stock option expense was $5.4 million and $16.4 million for the three and nine months ended September 30, 2022.

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 16, 2024 to, among other things, consider whether to grant final approval of the proposed settlement. Additionally, the plaintiffs intends to petition 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.

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 to consumers a superior insurance experience. Our management team continues to own approximately 36% of the company, representing our commitment to the long-term success of the Company.

•Total revenue increased 23% from the third quarter of 2022 to $71.0 million

•Core Revenue* increased by 22% from the third quarter of 2022 to $63.1 million

•Total Written Premiums placed increased 30% from the prior-year period to $802.9 million

•Net income increased by $8.2 million from the third quarter of 2022 to $11.3 million, or 16% of total revenues

•Adjusted EBITDA* increased 104% from the third quarter of 2022 to $22.4 million, or 32% of total revenues

•Basic and diluted earnings per share were $0.29 and $0.28, respectively, and Adjusted EPS* was $0.46 per share for the three months ended September 30, 2023

•Policies in Force increased 18% from September 30, 2022 to 1,456,000 at September 30, 2023

•Corporate sales headcount decreased 23% from September 30, 2022 to 316 at September 30, 2023

◦As of September 30, 2023, 132 of these Corporate sales agents had less than one year of tenure and 184 had greater than one year of tenure

•Total franchises decreased 31% compared to the prior-year period to 1,584; total operating franchises decreased 8% from September 30, 2022 to 1,285 at September 30, 2023

◦In Texas as of September 30, 2023, 48 operating Franchisees had less than one year of tenure and 259 operating Franchisees had greater than one year of tenure

◦Outside of Texas as of September 30, 2023, 206 operating Franchisees had less than one year of tenure and 772 had greater than one year of tenure

*Core Revenue, Adjusted EBITDA and Adjusted EPS are non-GAAP measures. Reconciliation of 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 under "Key performance indicators".

For the three months ended September 30, 2023, revenue increased by 23% to $71.0 million from $57.7 million for the three months ended September 30, 2022. For the nine months ended September 30, 2023, revenue increased by 30% to $198.3 million from $152.0 million for the nine months ended September 30, 2022. Total Written Premium, which we believe is the best leading indicator of future revenue, increased 30% to $803 million for the three months ended September 30, 2023 from $616 million for the three months ended September 30, 2022. Total Written Premium increased 35% for the nine months ended September 30, 2023 to $2,208 million from $1,632 million for the nine months ended September 30, 2022. Total Written Premiums drive our current and future Core Revenue and give 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 measure presented in accordance with GAAP, are set forth under "Key performance indicators".

•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.

•Initial Franchise Fees - one-time Cost Recovery Revenue stream per franchise unit that covers the Company's costs to recruit, train, onboard, and support the franchise for the first year. These fees are fully earned and non-refundable when a franchise attends our initial training.

•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.

•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 Franchise Revenues - 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: