UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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 June 30, 2019

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to ______

Commission file number: 001-38466

GOOSEHEAD INSURANCE, INC.

(Exact name of registrant as specified in its charter)

Delaware	82-3886022
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
1500 Solana Blvd, Building 4, Suite 4500
Westlake
Texas	76262
(Address of principal executive offices)	(Zip Code)

(469) 480-3669

(Registrant's telephone number, including area code)

Not applicable

(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 August 2, 2019, there were 15,122,323 shares of Class A common stock outstanding and 21,166,168 shares of Class B common stock outstanding.

Table of contents

		Page
Part I
Item 1.	Condensed Consolidated Financial Statements (Unaudited)	5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39
Item 4.	Controls and Procedures	39
Part II
Item 1.	Legal Matters	40
Item 1A.	Risk Factors	40
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40
Item 3.	Defaults Upon Senior Securities	40
Item 4.	Mine Safety	40
Item 5.	Other Information	40
Item 6.	Exhibits	41
SIGNATURES		41

2

Commonly used defined terms

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:

• 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 year ended December 31, 2018.

• 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.

• Corporate Channel: The Corporate Channel distributes insurance through a network of company-owned and financed operations with employees that are hired, trained and managed by Goosehead.

• Corporate Channel Adjusted EBITDA: Segment earnings before interest, income taxes, depreciation and amortization allocable to the Corporate Channel, adjusted to exclude equity-based compensation.

• Franchise Agreement: Agreements governing our relationships with Franchisees.

• Franchise Channel: The Franchise Channel network consists of Franchisee operations that are owned and managed by Franchisees. These business owners have a contractual relationship with Goosehead to use our processes, training, implementation, systems and back-office support team to place insurance. In exchange, Goosehead is entitled to an Initial Franchise Fee and Royalty Fees.

• Franchise Channel Adjusted EBITDA: Segment earnings before interest, income taxes, depreciation and amortization, adjusted to exclude other non-operating items allocable to the Franchise Channel and equity-based compensation.

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

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

• GF: Goosehead Financial, LLC.

• GM: Goosehead Management, LLC.

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

• New Business Revenue: Commissions received from Carriers, Agency Fees received from clients, and Royalty Fees received from Franchisees relating to policies in their first term.

• New Business Revenue (Corporate): Commissions received from Carriers and Agency Fees charged to clients relating to policies in their first term sold in the Corporate Channel.

• 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?” Customers 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.

• Pre-IPO LLC Members: The members of Goosehead Financial, LLC prior to the closing of the initial public offering of Goosehead Insurance, Inc., which primarily consist of members of management.

• Renewal Revenue: Commissions received from Carriers and Royalty Fees received from Franchisees after the first term of policies.

• Renewal Revenue (Corporate): Commissions received from Carriers after the first term of policies originally sold in the Corporate Channel.

• 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 in the Franchise Channel.

• Segment: One of the two Goosehead sales distribution channels, the Corporate Channel or the Franchise Channel.

• Segment Adjusted EBITDA: Either Corporate Channel Adjusted EBITDA or Franchise Channel Adjusted EBITDA.

• 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.

• TWIHG: Texas Wasatch Insurance Holdings Group, LLC.

3

Special note regarding forward-looking statements

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 our Annual Report on Form 10-K.

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.

4

PART I

Item 1. Condensed Consolidated Financial Statements (Unaudited)

		Page
Condensed Consolidated Balance Sheets		6
Condensed Consolidated Statements of Income		7
Condensed Consolidated Statements of Stockholders' Equity		8
Condensed Consolidated Statements of Cash Flows		10
Notes to the Condensed Consolidated Financial Statements		11
Note 1	Organization	12
Note 2	Summary of Significant Accounting Policies	12
Note 3	Franchise Fees Receivable	14
Note 4	Allowance for Uncollectible Agency Fees	15
Note 5	Property and equipment	15
Note 6	Note Payable	15
Note 7	Commitments and Contingencies	16
Note 8	Income Taxes	17
Note 9	Stockholders' Equity	19
Note 10	Equity-Based Compensation	21
Note 10	Dividends	21
Note 12	Segment Information	22
Note 13	Litigation	25

5

Goosehead Insurance, Inc.

Condensed Consolidated Balance Sheets

(Unaudited) 

(In thousands, except per share amounts)

	June 30,			December 31,
	2019			2018
Assets
Current Assets:
Cash and cash equivalents	$	8,427		$	18,635
Restricted cash	579			376
Commissions and agency fees receivable, net	2,392			2,016
Receivable from franchisees, net	1,429			703
Prepaid expenses	1,221			1,109
Total current assets	14,048			22,839
Receivable from franchisees, net of current portion	2,517			2,048
Property and equipment, net of accumulated depreciation	8,417			7,575
Intangible assets, net of accumulated amortization	413			248
Deferred income taxes, net	12,498			1,958
Other assets	199			130
Total assets	$	38,092		$	34,798
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable and accrued expenses	$	3,177		$	3,978
Premiums payable	579			376
Unearned revenue	495			530
Deferred rent	502			428
Note payable	3,000			2,500
Total current liabilities	7,753			7,812
Deferred rent, net of current portion	5,516			4,548
Note payable, net of current portion	44,554			45,947
Liabilities under tax receivable agreement, net of current portion	10,817			1,694
Total liabilities	68,640			60,001
Commitments and contingencies (see note 7)
Class A common stock, $.01 par value per share - 300,000 shares authorized, 15,013 shares issued and outstanding as of June 30, 2019, 13,800 shares issued and outstanding as of December 31, 2018	150			138
Class B common stock, $.01 par value per share - 50,000 shares authorized, 21,275 issued and outstanding as of June 30, 2019, 22,486 shares issued and outstanding as of December 31, 2018	212			224
Additional paid in capital	85,221			88,811
Accumulated deficit	(9,165		)	(6,578		)
Total stockholders' equity	76,418			82,595
Non-controlling interests	(106,966		)	(107,798		)
Total equity	(30,548		)	(25,203		)
Total liabilities and stockholders' equity	$	38,092		$	34,798

See Notes to the Condensed Consolidated Financial Statements

6

Goosehead Insurance, Inc.

Condensed Consolidated Statements of Income

(Unaudited)

(In thousands, except per share amounts)

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Revenues:
Commissions and agency fees	$	10,763		$	8,716		$	26,933		$	18,312
Franchise revenues	8,475			5,969			15,303			10,880
Interest income	148			102			283			185
Total revenues	19,386			14,787			42,519			29,377
Operating Expenses:
Employee compensation and benefits (including Class B unit compensation of $0 for the three and six months ended June 30, 2019 and $26,134 for the three and six months ended June 30, 2018)	10,378			33,855			19,569			40,690
General and administrative expenses	4,201			3,025			8,631			5,399
Bad debts	482			306			883			586
Depreciation and amortization	452			350			875			687
Total operating expenses	15,513			37,536			29,958			47,362
Income (loss) from operations	3,873			(22,749		)	12,561			(17,985		)
Other Income (Expense):
Interest expense	(626		)	(972		)	(1,252		)	(1,968		)
Income (loss) before taxes	3,247			(23,721		)	11,309			(19,953		)
Tax expense	430			154			1,174			154
Net income (loss)	2,817			(23,875		)	10,135			(20,107		)
Less: net income (loss) attributable to non-controlling interests	1,914			(14,641		)	6,760			(10,873		)
Net income (loss) attributable to Goosehead Insurance, Inc.	$	903		$	(9,234	)	$	3,375		$	(9,234	)
Earnings (loss) per share:
Basic	$	0.06		$	(0.68	)	$	0.23		$	(0.68	)
Diluted	$	0.06		$	(0.68	)	$	0.22		$	(0.68	)
Weighted average shares of Class A common stock outstanding
Basic	14,876			13,533			14,545			13,533
Diluted	16,065			13,533			15,685			13,533
Dividends declared per share	$	—		$	—		$	0.41		$	—

See Notes to the Condensed Consolidated Financial Statements

7

Goosehead Insurance, Inc.

Condensed Consolidated Statement of Stockholders' Equity

(Unaudited)

(In thousands)

	Issued shares of Class A common stock	Issued shares of Class B common stock		Class A Common stock	Class B Common Stock		Additional paid in capital		Accumulated deficit		Total stockholders' equity		Non-controlling interest		Total equity
Balance, December 31, 2018	13,799	22,486		138	224		88,811		(6,578	)	82,595		(107,798	)	(25,203	)
Distributions	—	—		—	—		—		—		—		(245	)	(245	)
Dividends declared	—	—		—	—		—		(5,962	)	(5,962	)	(9,038	)	(15,000	)
Net income	—	—		—	—		—		2,472		2,472		4,846		7,318
Equity-based compensation	—	—		—	—		368		—		368		—		368
Redemption of LLC Units	723	(723	)	7	(7	)	(3,607	)	—		(3,607	)	3,607		—
Deferred tax adjustments related to Tax Receivable Agreement	—	—		—	—		911		—		911		—		911
Balance March 31, 2019	14,522	21,763		145	217		86,483		(10,068	)	76,777		(108,628	)	(31,851	)
Distributions	—	—		—	—		—		—		—		(2,708	)	(2,708	)
Net income	—	—		—	—		—		903		903		1,914		2,817
Equity-based compensation	—	—		—	—		368		—		368		—		368
Activity under employee stock purchase plan	3	—		—	—		142		—		142		—		142
Redemption of LLC Units	488	(488	)	5	(5	)	(2,456	)	—		(2,456	)	2,456		—
Deferred tax adjustments related to Tax Receivable Agreement	—	—		—	—		684		—		684		—		684
Balance June 30, 2019	15,013	21,275		150	212		85,221		(9,165	)	76,418		(106,966	)	(30,548	)

8

	Members' deficit		Issued shares of Class A common stock	Issued shares of Class B common stock	Class A Common stock	Class B Common Stock	Additional paid in capital		Accumulated deficit		Total stockholders' equity		Non-controlling interest		Total equity
Balance at December 31, 2017	(41,133	)	—	—	—	—	—		—		—		—		(41,133	)
Net Income	3,768		—	—	—	—	—		—		—		—		3,768
Capital withdrawn	—		—	—	—	—	—		—		—		—		—
Balance March 31, 2018	(37,365	)	—	—	—	—	—		—		—		—		(37,365	)
Net income prior to the Reorganization Transactions	621		—	—	—	—	—		—		—		—		621
Distributions prior to the Reorganization Transactions	(1,278	)	—	—	—	—	—		—		—		—		(1,278	)
Balance prior to the Reorganization Transactions	(38,022	)	—	—	—	—	—		—		—		—		(38,022	)
Effects of the Reorganization Transactions	38,022		—	22,747	—	227	(132,202	)	(7,379	)	(139,354	)	(12,402	)	(113,734	)
Initial non-controlling interest allocation	—		—	—	—	—	97,071		—		97,071		(97,071	)	—
Issuance of Class A common stock sold in initial public offering, net of offering costs	—		13,533	—	135	—	123,994		—		124,129		—		124,129
Distributions subsequent to initial public offering	—		—	—	—	—	—		—		—		(745	)	(745	)
Net income subsequent to initial public offering	—		—	—	—	—	—		566		566		951		1,517
Equity-based compensation subsequent to initial public offering	—		—	—	—	—	260		—		260		—		260
Deferred tax adjustments	—		—	—	—	—	(89	)	—		(89	)	—		(89	)
Balance June 30, 2018	—		13,533	22,747	135	227	89,034		(6,813	)	82,583		(109,267	)	(26,684	)

See Notes to the Condensed Consolidated Financial Statements

9

Goosehead Insurance, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

	Six Months Ended June 30,
	2019			2018
Cash flows from operating activities:
Net income (loss)	$	10,135		$	(20,107	)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	982			687
Bad debt expense	883			586
Equity-based compensation	736			26,272
Adjustments to tax receivable agreement liability	9,126			—
Deferred income taxes	(8,945		)	2
Changes in operating assets and liabilities:
Commissions and agency fees receivable	(892		)	(1,114		)
Receivable from franchisees	(1,438		)	(487		)
Prepaid expenses	(111		)	(416		)
Other assets	(69		)	415
Accounts payable and accrued expenses	(935		)	1,546
Deferred rent	1,042			278
Premiums payable	203			198
Unearned revenue	(35		)	(552		)
Net cash provided by operating activities	10,682			7,308
Cash flows from investing activities:
Proceeds from notes receivable	11			11
Purchase of software	(251		)	(79		)
Purchase of property and equipment	(1,636		)	(724		)
Net cash used for investing activities	(1,876		)	(792		)
Cash flows from financing activities:
Loan origination fees	—			99
Repayment of note payable	(1,000		)	(250		)
Proceeds from the issuance of Class A common stock	142			86,892
Member distributions and dividends	(17,953		)	(79,069		)
Net cash provided by (used for) financing activities	(18,811		)	7,672
Net increase in cash and restricted cash	(10,005		)	14,188
Cash and cash equivalents, and restricted cash, beginning of period	19,011			5,366
Cash and cash equivalents, and restricted cash, end of period	$	9,006		$	19,554
Supplemental disclosures of cash flow data:
Cash paid during the year for interest	1,252			1,869
Cash paid for income taxes	875			—
Management fee note repayment through issuance of Class A common stock	—			37,238

See Notes to the Condensed Consolidated Financial Statements

10

Goosehead Insurance, Inc.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

Goosehead Insurance, Inc.
Notes to the consolidated financial statements	Page
Note 1. Organization	12
Note 2. Summary of significant accounting policies	12
Note 3. Franchise fees receivable	14
Note 4. Allowance for uncollectible agency fees	15
Note 5. Property and equipment	15
Note 6. Note payable	15
Note 7. Commitments and contingencies	16
Note 8. Income taxes	17
Note 9. Stockholder's equity	19
Note 10. Equity-based compensation	21
Note 11. Dividends	21
Note 12. Segment information	22
Note 13. Litigation	25

11

Goosehead Insurance, Inc.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

1. Organization

On May 1, 2018 Goosehead Insurance, Inc. ("GSHD") completed an initial public offering (the “Offering”) of 9,810 thousand shares of Class A common stock at a price of $10.00 per share, which included 1,280 thousand shares issued pursuant to the underwriter's over-allotment option. Following completion of the Offering, GSHD owned 37.3% of Goosehead Financial, LLC (“GF”) and the Pre-IPO LLC Members owned the remaining 62.7%. GSHD is the sole managing member of GF and, although GSHD holds a minority economic interest in GF, GSHD has the sole voting power and control of management of GF. Accordingly, GSHD consolidates the financial results of GF and reports non-controlling interest in GSHD's consolidated financial statements.

GF was organized on January 1, 2016 as a Delaware Limited Liability Company and is headquartered in Westlake, TX. The operations of GF represent the predecessor to GSHD prior to the Offering. Operations for any periods prior to May 1, 2018 are the condensed, consolidated and combined operations of GF and its subsidiaries and affiliates.

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

The Company had seven corporate-owned locations in operation at June 30, 2019 and 2018. Franchisees are provided access to insurance Carrier Appointments, product training, technology infrastructure, client service centers and back office services. During the three months ended June 30, 2019 and 2018, the Company sold 57 and 55 franchise locations, respectively and had 535 and 385 operating franchise locations as of June 30, 2019 and 2018, respectively. No franchises were purchased by the Company during the three and six months ended June 30, 2019 or 2018.

All intercompany accounts and transactions have been eliminated in consolidation.

2. Summary of Significant Accounting Policies

Basis of Presentation

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 June 30, 2019, the condensed consolidated results of operations and stockholders' equity for the three and six months ended June 30, 2019 and 2018, and the condensed consolidated statements of cash flows for the six months ended June 30, 2019 and 2018. 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.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported period. Accordingly, actual results could differ from those estimates as more information becomes known.

Income Taxes

Prior to the Offering, GF was treated as a partnership for U.S. federal and applicable state and local income tax purposes. As a partnership, GF's taxable income or loss was included in the taxable income of its members. Accordingly, no income tax expense was recorded for federal and state and local jurisdictions for periods prior to the Offering.

In connection with the Offering completed on May 1, 2018, the Company became a taxable entity.

The Company accounts for income taxes pursuant to the asset and liability method which requires the recognition of deferred income tax assets and liabilities related to the expected future tax consequences arising from temporary differences between the carrying amounts and tax bases of assets and liabilities based on enacted statutory tax

12

Goosehead Insurance, Inc.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

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.

Restricted Cash

The Company holds premiums received from the insured, but not yet remitted to the insurance carrier in a fiduciary capacity. Premiums received but not yet remitted included in restricted cash were $579 thousand and $616 thousand as of June 30, 2019 and 2018, respectively.

The following is a reconciliation of our cash and restricted cash balances as presented in the condensed consolidated statement of cash flows for the six months ended June 30, 2019 and 2018 (in thousands):

	June 30
	2019		2018
Cash and cash equivalents	$	8,427	$	18,938
Restricted cash	579		616
Cash and cash equivalents, and restricted cash	$	9,006	$	19,554

Recently Issued Accounting Pronouncements

Statement of Cash Flows (ASU 2016-18): This standard requires that the Statement of Cash Flows explain the changes during the period of cash and cash equivalents inclusive of amounts categorized as Restricted Cash. As such, the Company’s condensed consolidated statement of cash flows shows the sources and uses of cash that explain the movement in the balance of cash and cash equivalents, inclusive of restricted cash, over the period presented. As an emerging growth company (“EGC”), the standard became effective for the Company January 1, 2019. As shown in the reconciliation above, restricted cash of $616 thousand, which was previously shown as an investing activity has been reclassified and is now included together with cash and cash equivalents to conform to the current period presentation in the condensed consolidated statement of cash flows for the six months ended June 30, 2018 as a result of the adoption of ASU 2016-18.

Statement of Cash Flows (ASU 2016-15): This standard addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified and applies to all entities, including both business entities and not-for-profit entities that are required to present a statement of cash flows under Topic 230. The standard became effective for the Company on January 1, 2019. The Company has evaluated the impact of ASU 2016-15 and has determined the impact to be immaterial. The Company does not, at this time, engage in the activities being addressed by the standard.

Revenue from Contracts with Customers (ASU 2014-09): This standard supersedes the existing revenue recognition guidance and provides a new framework for recognizing revenue. The core principle of the standard is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The new standard also requires significantly more comprehensive disclosures than the existing standard. Guidance subsequent to ASU 2014-09 has been issued to clarify various provisions in the standard, including principal versus agent considerations, identifying performance obligations, licensing transactions, as well as various technical corrections and improvements. This standard may be adopted using either a retrospective or modified retrospective method. According to the superseding standard ASU 2015-14 that deferred the effective dates of the preceding, and because the Company is filing as an EGC, the standard became effective for the Company January 1, 2019, but the Company is not required to present the impacts of the standard until it files its Annual Report on Form 10-K for the fiscal year ended December 31, 2019. The Company is continuing to evaluate the impact this standard is expected to have on the consolidated financial statements and expects to adopt the modified retrospective method. The primary anticipated impacts of the new standard to the Company's revenues and expenses are as follows:

Under the new guidance, the Company expects commission revenues will be recognized at the effective date of the policy, which will accelerate some revenues. Currently, commissions from insurance carriers, net of estimated cancellations, are recognized as revenue when the data necessary to reasonably determine such amounts is made

13

Goosehead Insurance, Inc.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

available to the Company. For contingent commissions, the Company anticipates revenues will be estimated and recorded throughout the year as the underlying business is placed with the insurance carriers as opposed to the Company's historical recognition when the Company received cash, the related policy detail, or other carrier specific information from the insurance carrier, typically in the first quarter of the following year. The effect of this change will result in revenue being recognized more evenly throughout the year.

Franchise revenues, including franchise fees, are also likely to change under the new guidance. Currently, initial franchise fees are recognized as revenue in the month the agency owner or initial agency representative attends training. Under the new guidance, the Company anticipates these revenues will likely be recognized over the contract term, typically 10 years.

The Company also expects to recognize an asset for the costs to obtain and/or fulfill a contract and to amortize on a systematic basis that is consistent with the transfer of services to which the asset relates.

Leases (ASU 2016-02): This standard establishes a new lease accounting model, which introduces the recognition of lease assets and liabilities for those leases classified as operating leases under previous GAAP. It should be applied using a modified retrospective approach, with the option to elect various practical expedients. Early adoption is permitted. The standard will become effective for the Company January 1, 2020. The Company is currently evaluating the impact this standard will have on the Company's consolidated financial statements. However, the Company expects the impact of this guidance on its consolidated financial statements could be significant, as its future minimum operating lease commitments totaled $23.3 million as of June 30, 2019.

3. Franchise Fees Receivable

The balance of Franchise fees receivable included in Receivable from franchisees consisted of the following at June 30, 2019 and December 31, 2018 (in thousands):

	June 30			December 31
	2019			2018
Franchise fees receivable	$	4,595		$	3,906
Less: Unamortized discount	(1,635		)	(1,381		)
Less: Allowance for uncollectible franchise fees	(533		)	(455		)
Total franchise fees receivable	$	2,427		$	2,070

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

Balance at December 31, 2018	$	455
Charges to bad debts	367
Write offs	(289		)
Balance at June 30, 2019	$	533
Balance at December 31, 2017	$	336
Charges to bad debts	163
Write offs	(45		)
Balance at June 30, 2018	$	454

14

Goosehead Insurance, Inc.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

4. Allowance for Uncollectible Agency Fees

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

Balance at December 31, 2018	$	242
Charges to bad debts	516
Write offs	(472		)
Balance at June 30, 2019	$	286
Balance at December 31, 2017	$	183
Charges to bad debts	423
Write offs	(383		)
Balance at June 30, 2018	$	223

5. Property and equipment

Property and equipment consisted of the following at:

	June 30,			December 31,
	2019			2018
Furniture & fixtures	$	2,605		$	2,233
Computer equipment	1,209			1,023
Network equipment	252			252
Phone system	857			824
Leasehold improvements	7,735			6,692
Total	12,658			11,024
Less accumulated depreciation	(4,241		)	(3,449		)
Property and equipment, net	$	8,417		$	7,575

6. Note Payable

On August 3, 2018, the Company refinanced its $3.0 million revolving credit facility and $50.0 million term note payable to a $13.0 million revolving credit facility and $40.0 million term note payable in order to obtain a more favorable interest rate on the outstanding debt. The Company has the right, subject to approval by the administrative agent and each issuing bank, to increase the commitments under the credit facilities an additional $50.0 million.

The $13.0 million revolving credit facility accrues interest on amounts drawn at an initial interest rate of LIBOR plus 2.50%, then at an interest rate determined by the Company's leverage ratio for the preceding period. As of June 30, 2019, the Company was in the greater than 1.50x leverage ratio tranche, accruing interest of LIBOR plus 2.00%. At June 30, 2019, the Company had $10.0 million drawn against the revolver. At June 30, 2019, the Company had a letter of credit of $417 thousand applied against the maximum borrowing availability, thus amounts available to draw totaled $2.6 million. The revolving credit facility is collateralized by substantially all the Company’s assets, which includes rights to future commissions. Interest paid on the revolving credit facility totaled $117 thousand and $239 thousand for the three and six months ended June 30, 2019.

The $40.0 million term note accrues interest at an initial interest rate of LIBOR plus 2.5%, then at an interest rate determined by the Company's leverage ratio for the preceding period. As of June 30, 2019, the Company was in the greater than 1.50x leverage ratio tranche, accruing interest of LIBOR plus 2.00%. The aggregate principal amount of the term note as of June 30, 2019 was $38.0 million, payable in quarterly installments of (x) $750,000 from the fiscal quarter ending September 30, 2019 through the fiscal quarter ending June 30, 2020, and (y) $1,250,000 from the fiscal quarter ending September 30, 2020 through the fiscal quarter ending June 30, 2021, with a balloon

15

Goosehead Insurance, Inc.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

payment of the entire unpaid principal amount of the term note on August 3, 2021. The term note is collateralized by substantially all the Company’s assets, which includes rights to future commissions.

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

Leverage Ratio	Interest Rate
< 1.50x	LIBOR + 175.0 bps
> 1.50x	LIBOR + 200.0 bps
> 2.50x	LIBOR + 225.0 bps
> 3.50x	LIBOR + 250.0 bps

Maturities of the term note payable for the next three calendar years as of June 30, 2019 are as follows (in thousands):

	Amount
2019	$	1,500
2020	4,000
2021	32,500
Total	$	38,000

The $10.0 million drawn against the revolver is coterminous with the term loan and is due in full on August 3, 2021.

Loan origination fees of $446 thousand at June 30, 2019 are reflected as a reduction to the note balance and will be amortized through interest expense over three years (the term of the note payable).

The Company’s note payable agreement contains certain restrictions and covenants. Under these restrictions, the Company is limited in the amount of debt incurred and distributions payable. In addition, the credit agreement contains certain change of control provisions that, if broken, would trigger a default. Finally, the Company must maintain certain financial ratios. As of June 30, 2019, the Company was in compliance with these covenants.

Because of both instruments’ variable interest rate, the note payable balance at June 30, 2019 and December 31, 2018, 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.

7. Commitments and Contingencies

The Company leases its facilities under non-cancelable operating leases, expiring in various years through 2029. 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 $447 thousand and $405 thousand for the three months

16

Goosehead Insurance, Inc.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

ended June 30, 2019 and 2018. Rent expense was $893 thousand and $810 thousand for the six months ended June 30, 2019 and 2018.

The following is a schedule of future minimum lease payments as of June 30, 2019 (in thousands):

	Amount
2019	$	917
2020	2,575
2021	2,793
2022	2,762
2023	2,578
2024-2029	11,626
Total	$	23,251

8. Income Taxes

As a result of the Reorganization Transactions and the Offering, GSHD became the sole managing member of GF, which is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, GF is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by GF is passed through to and included in the taxable income or loss of its members, including GSHD, on a pro rata basis. GSHD is subject to U.S. federal income taxes, in addition to state and local income taxes, with respect to GSHD's allocable share of income of GF.

Income tax expense

A reconciliation of income tax expense computed at the U.S. federal statutory income tax rate to the income tax expense recognized is as follows (in thousands):

	Three Months Ended June 30, 2019			Six Months Ended June 30, 2019
Income before taxes	$	3,247		$	11,309
Income taxes at U.S. federal statutory rate	$	681		$	2,374
Tax on income not subject to entity level federal income tax	(365		)	(1,423		)
Permanent Differences:
Meals & Entertainment	17			25
Non-deductible stock compensation costs	11			11
Non-deductible excess compensation	21			21
State income tax, net of federal benefit	64			167
Other Reconciling items:
Other	1			(1		)
Income tax expense	$	430		$	1,174

17

Goosehead Insurance, Inc.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

	Three Months Ended June 30, 2018			Six Months Ended June 30, 2018
(Loss) Income before taxes	$	(23,721	)	$	(19,953	)
Less: income prior to the Reorganization Transactions	(621		)	(4,389		)
Less: income attributable to non-controlling interests	15,262			15,262
(Loss) Income attributable to Goosehead Insurance, Inc. before taxes	$	(9,080	)	$	(9,080	)
Income taxes at U.S. federal statutory rate	(1,908		)	(1,908		)
State and local income taxes, net of federal benefit	11			11
Permanent differences	2,051			2,051
Income tax expense	$	154		$	154

Deferred tax assets and liabilities

The components of deferred tax assets and liabilities are as follows:

	June 30, 2019		December 31, 2018
Investment in flow-through entity	12,498		1,958
Net deferred tax asset (liability)	$	12,498	$	1,958

Uncertain tax positions

GSHD has determined there are no material uncertain tax positions as of June 30, 2019.

Tax Receivable Agreement

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 six months ended June 30, 2019, an aggregate of 488 thousand and 1,211 thousand 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 488 thousand and 1,211 thousand 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 June 30, 2019, the total amount of TRA Payments due to the Pre-IPO LLC Members under the tax receivable agreement was $10.8 million, of which $11 thousand was current and included in Accounts payables and accrued expenses on the Consolidated Balance Sheet.

18

Goosehead Insurance, Inc.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

9. Stockholders' Equity

Class A Common Stock

GSHD has a total of 15,013 thousand shares of its Class A common stock outstanding at June 30, 2019. 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.

Class B Common Stock

GSHD has a total of 21,275 thousand shares of its Class B common stock outstanding at June 30, 2019. 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.

Non-Controlling Interests

Following the Offering, GSHD became the sole managing member of GF and, as a result, it consolidates the financial results of GF. GSHD reports a non-controlling interest representing the economic interest in GF held by the other members of GF.

On a quarterly basis, 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 six months ended June 30, 2019, GF made distributions of $4.5 million and $4.9 million, of which $2.7 million and $3.0 million where made to Pre-IPO LLC Members. The remaining $1.8 million and $2.0 million were made to GSHD and were eliminated in consolidation. For the three and six months ended June 30, 2018, GF made distributions of $2.4 million, of which $2.0 million where made to Pre-IPO LLC Members. The remaining $340 thousand were made to GSHD and were 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 six months ended June 30, 2019, an aggregate of 488 thousand and 1,211 thousand LLC Units were redeemed by the non-controlling interest holders. Pursuant to the GF LLC Agreement, GSHD issued 488 thousand and 1,211 thousand shares of Class A common stock in connection with these redemptions and received 488 thousand and 1,211 thousand LLC Interests, increasing GSHD's ownership interest in GF. Simultaneously, and in connection with these redemptions, 488 thousand and 1,211 thousand shares of Class B common stock were surrendered and cancelled.

The following table summarizes the ownership interest in GF as of June 30, 2019 (in thousands).

19

Goosehead Insurance, Inc.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

	June 30, 2019
	LLC Units	Ownership %
Number of LLC Units held by GSHD	15,013	41.4%
Number of LLC Units held by non-controlling interest holders	21,275	58.6%
Number of LLC Units outstanding	36,288	100.0%

The weighted average ownership percentages for the applicable reporting periods are used to attribute net income to GSHD and the non-controlling interest holders. The non-controlling interest holders' weighted average ownership percentage for the three and six months ended June 30, 2019 was 59.0% and 59.9%. All net income prior to the Offering is attributed to non-controlling interest holders.

During the third quarter of 2018, the Company corrected a misclassification of $745 thousand of distributions from accumulated deficit to non-controlling interest to properly reflect the distributions made to Pre-IPO LLC Members during the second quarter of 2018. These amounts were previously shown as a change to accumulated deficit on the Company's quarterly report on Form 10-Q for the period ended June 30, 2018.

Earnings Per Share

The following table sets forth the calculation of basic earnings per share ("EPS") based on net income attributable to GSHD for the three and six months ended June 30, 2019, divided by the basic weighted average number of Class A common stock as of June 30, 2019 (in thousands, except per share amounts). Diluted earnings per share of Class A common stock is computed by dividing net income attributable to GSHD by the weighted average number of shares of Class A common stock outstanding adjusted to give effect to potentially dilutive securities (in thousands, except per share amounts). The Company has not included the effects of conversion of Class B shares to Class A shares in the diluted EPS calculation using the "if-converted" method, because doing so has no impact on diluted EPS.

	Three Months Ended June 30, 2019		Six Months Ended June 30, 2019
Numerator:
Income before taxes	$	3,247	$	11,309
Less: income before taxes attributable to non-controlling interests	1,952		6,861
Income before taxes attributable to GSHD	1,295		4,448
Less: income tax expense attributable to GSHD	392		1,073
Net income attributable to GSHD	$	903	$	3,375
Denominator:
Weighted average shares of Class A common stock outstanding - basic	14,876		14,545
Effect of dilutive securities:
Stock options	1,189		1,140
Weighted average shares of Class A common stock outstanding - diluted	16,065		15,685
Earnings per share of Class A common stock - basic	$	0.06	$	0.23
Earnings per share of Class A common stock - diluted	$	0.06	$	0.22

The following table sets forth the calculation of basic EPS based on net income attributable to GSHD for the three and six months ended June 30, 2018, divided by the basic weighted average number of Class A common stock as of June 30, 2018 (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

20

Goosehead Insurance, Inc.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

outstanding adjusted to give effect to potentially dilutive securities (in thousands, except per share amounts). The Company has not included the effects of conversion of Class B shares to Class A shares in the diluted EPS calculation using the "if-converted" method, because doing so has no impact on diluted EPS.

	Three Months Ended June 30, 2018			Six Months Ended June 30, 2018
Numerator:
Net loss before taxes	$	(23,721	)	$	(19,953	)
Less: net loss attributable to non-controlling interests	(14,641		)	(10,873		)
Loss before taxes attributable to Goosehead Insurance, Inc.	(9,080		)	(9,080		)
Less: income tax expense	154			154
Net loss attributable to Goosehead Insurance, Inc.(1)	$	(9,234	)	$	(9,234	)
Denominator:
Weighted average shares of Class A common stock outstanding	13,533			13,533
Effect of dilutive securities:
Stock options(2)	—			—
Weighted average shares of Class A common stock outstanding - diluted	13,533			13,533
Earnings per share of Class A common stock - basic	$	(0.68	)	$	(0.68	)
Earnings per share of Class A common stock - diluted	$	(0.68	)	$	(0.68	)

(1) Net income attributable to Goosehead Insurance, Inc. excludes all net income prior to the Offering.

(2) 1,650 thousand stock options were excluded from the computation of diluted earnings per share of Class A common stock because the effect would have been anti-dilutive, as we recorded a net loss for the three and six months ended June 30, 2018.

10. Equity-Based Compensation

A summary of equity-based compensation expense during the three and six months ended June 30, 2019 and June 30, 2018 is as follows (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Class B unit compensation	$	—	$	26,134	$	—