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 September 30, 2020

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 October 29, 2020, there were 17,651,069 shares of Class A common stock outstanding and 19,006,089 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	32
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	52
Item 4.	Controls and Procedures	52
Part II
Item 1.	Legal Proceedings	53
Item 1A.	Risk Factors	53
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53
Item 3.	Defaults Upon Senior Securities	53
Item 4.	Mine Safety Disclosures	53
Item 5.	Other Information	53
Item 6.	Exhibits	54
SIGNATURES		54

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:

•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 year ended December 31, 2019.

•ASC 605: Legacy revenue recognition standard ASC 605, Revenue Recognition. This legacy revenue recognition was used for periods prior to the fourth quarter of 2019.

•ASC 606 ("Topic 606"): ASU 2014-09 - Revenue from Contracts with Customers.

•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.

•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.

•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.

•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.

•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

3

•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.

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

•Renewal Revenue: Renewal Commissions and Renewal Royalty Fees.

•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.

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 the potential impact of COVID-19 on the Company's business, 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.

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 Statements of Income		6
Condensed Consolidated Balance Sheets		7
Condensed Consolidated Statements of Stockholders' Equity		8
Condensed Consolidated Statements of Cash Flows		11
Notes to the Condensed Consolidated Financial Statements		12
Note 1	Organization	12
Note 2	Summary of significant accounting policies	12
Note 3	Revenues	16
Note 4	Franchise fees receivable	20
Note 5	Allowance for uncollectible agency fees	20
Note 6	Property and equipment	21
Note 7	Debt	21
Note 8	Commitments and contingencies	22
Note 9	Income taxes	23
Note 10	Stockholder's equity	24
Note 11	Non-controlling interest	25
Note 12	Equity-based compensation	26
Note 13	Dividends	27
Note 14	Segment information	27
Note 15	Litigation	31

5

Goosehead Insurance, Inc.

Condensed Consolidated Statements of Income

(Unaudited)

(In thousands, except per share amounts)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020 1		2019 2		2020 1		2019 2
Revenues:
Commissions and agency fees	$	19,385	$	11,739	$	49,444	$	38,672
Franchise revenues	12,418		9,261		32,347		24,564
Interest income	212		169		573		452
Total revenues	32,015		21,169		82,364		63,688
Operating Expenses:
Employee compensation and benefits	17,901		11,412		47,308		30,981
General and administrative expenses	5,872		5,169		17,108		13,800
Bad debts	376		399		1,004		1,282
Depreciation and amortization	900		516		2,152		1,391
Total operating expenses	25,049		17,496		67,572		47,454
Income from operations	6,966		3,673		14,792		16,234
Other Income (Expense):
Other income	10		—		76		—
Interest expense	(582)		(609)		(1,665)		(1,861)
Income before taxes	6,394		3,064		13,203		14,373
Tax expense (benefit)	(331)		301		(612)		1,475
Net income	6,725		2,763		13,815		12,898
Less: net income attributable to non-controlling interests	3,458		1,765		7,325		8,525
Net income attributable to Goosehead Insurance, Inc.	$	3,267	$	998	$	6,490	$	4,373
Earnings per share:
Basic	$	0.19	$	0.07	$	0.39	$	0.30
Diluted	$	0.17	$	0.06	$	0.36	$	0.27
Weighted average shares of Class A common stock outstanding
Basic	17,376		15,140		16,466		14,746
Diluted	18,915		16,451		17,926		15,936
Dividends declared per share	$	1.15	$	—	$	1.15	$	0.41

(1) - The three and nine months ended September 30, 2020 are reported under ASC 606

(2) - The three and nine months ended September 30, 2019 are reported under ASC 605

See Notes to the Condensed Consolidated Financial Statements

6

Goosehead Insurance, Inc.

Condensed Consolidated Balance Sheets

(Unaudited) 

(In thousands, except per share amounts)

	September 30,		December 31,
	2020		2019
Assets
Current Assets:
Cash and cash equivalents	$	19,957	$	14,337
Restricted cash	1,378		923
Commissions and agency fees receivable, net	11,793		6,884
Receivable from franchisees, net	2,414		2,602
Prepaid expenses	3,903		1,987
Total current assets	39,445		26,733
Receivable from franchisees, net of current portion	15,023		11,014
Property and equipment, net of accumulated depreciation	12,365		9,542
Intangible assets, net of accumulated amortization	554		445
Deferred income taxes, net	48,777		15,537
Other assets	3,790		1,357
Total assets	$	119,954	$	64,628
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable and accrued expenses	$	5,210	$	5,033
Premiums payable	1,378		923
Deferred rent	881		683
Contract liabilities	3,729		2,771
Note payable	3,000		4,000
Total current liabilities	14,198		13,410
Deferred rent, net of current portion	7,507		6,681
Note payable, net of current portion	80,332		42,161
Contract liabilities, net of current portion	25,855		20,024
Liabilities under tax receivable agreement, net of current portion	41,494		13,359
Total liabilities	169,386		95,635
Commitments and contingencies (see note 8)
Class A common stock, $0.01 par value per share - 300,000 shares authorized, 17,499 shares issued and outstanding as of September 30, 2020, 15,238 shares issued and outstanding as of December 31, 2019	175		152
Class B common stock, $0.01 par value per share - 50,000 shares authorized, 19,158 issued and outstanding as of September 30, 2020, 21,055 shares issued and outstanding as of December 31, 2019	191		210
Additional paid in capital	24,601		14,442
Accumulated deficit	(37,102)		(23,811)
Total stockholders' equity	(12,135)		(9,007)
Non-controlling interests	(37,297)		(22,000)
Total equity	(49,432)		(31,007)
Total liabilities and equity	$	119,954	$	64,628

See Notes to the Condensed Consolidated Financial Statements

7

Goosehead Insurance, Inc.

Condensed Consolidated Statements of Stockholders' Equity

(Unaudited)

(In thousands)

8

	Issued shares of Class A common stock	Issued shares of Class B common stock	Class A Common stock	Class B Common Stock	Additional paid in capital	Accumulated deficit	Total stockholders' equity	Non-controlling interest	Total equity
Balance, January 1, 2020	15,238	21,055	152	210	14,442	(23,811)	(9,007)	(22,000)	(31,007)
Distributions	—	—	—	—	—	—	—	(1,003)	(1,003)
Net loss	—	—	—	—	—	(156)	(156)	(140)	(296)
Equity-based compensation	—	—	—	—	498	—	498	—	498
Activity under employee stock purchase plan	3	—	—	—	116	—	116	—	116
Redemption of LLC Units	791	(791)	8	(8)	(869)	—	(869)	869	—
Deferred tax adjustments related to Tax Receivable Agreement	—	—	—	—	1,704	—	1,704	—	1,704
Balance March 31, 2020	16,032	20,264	160	202	15,891	(23,967)	(7,714)	(22,274)	(29,988)
Distributions	—	—	—	—	—	—	—	(859)	(859)
Net income	—	—	—	—	—	3,379	3,379	4,007	7,386
Exercise of stock options	241	—	3	—	2,404	—	2,407	—	2,407
Equity-based compensation	—	—	—	—	1,416	—	1,416	—	1,416
Activity under employee stock purchase plan	2	—	—	—	138	—	138	—	138
Redemption of LLC Units	809	(809)	8	(8)	(762)	—	(762)	762	—
Deferred tax adjustments related to Tax Receivable Agreement	—	—	—	—	2,261	—	2,261	53	2,314
Reallocation of Non-controlling interest	—	—	—		—	63	63	(63)	—
Balance June 30, 2020	17,084	19,455	171	194	21,348	(20,525)	1,188	(18,374)	(17,186)
Distributions	—	—	—	—	—	—	—	(835)	(835)
Dividends declared	—	—	—	—	—	(19,895)	(19,895)	(22,105)	(42,000)
Net income	—	—	—	—	—	3,267	3,267	3,458	6,725
Exercise of stock options	116	—	1	—	1,160	—	1,161	—	1,161
Equity-based compensation	—	—	—	—	1,416	—	1,416	—	1,416
Activity under employee stock purchase plan	2	—	—	—	142	—	142	—	142
Redemption of LLC Units	297	(297)	3	(3)	(577)		(577)	577	—
Deferred tax adjustments related to Tax Receivable Agreement	—	—	—	—	1,112	—	1,112	33	1,145
Reallocation of Non-controlling interest	—	—	—	—	—	51	51	(51)	—
Balance September 30, 2020	17,499	19,158	175	191	24,601	(37,102)	(12,135)	(37,297)	(49,432)

9

	Issued shares of Class A common stock	Issued shares of Class B common stock	Class A Common stock	Class B Common Stock	Additional paid in capital	Accumulated deficit	Total stockholders' equity	Non-controlling interest	Total equity
Balance, January 1, 2019	13,799	22,486	138	224	11,899	(20,761)	(8,500)	(16,703)	(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)	(679)	—	(679)	679	—
Deferred tax adjustments related to Tax Receivable Agreement	—	—	—	—	911	—	911	—	911
Balance March 31, 2019	14,522	21,763	145	217	12,499	(24,251)	(11,390)	(20,461)	(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)	(477)	—	(477)	477	—
Deferred tax adjustments related to Tax Receivable Agreement	—	—	—	—	684	—	684	—	684
Balance June 30, 2019	15,013	21,275	150	212	13,216	(23,348)	(9,770)	(20,778)	(30,548)
Distributions	—	—	—	—	—	—	—	(786)	(786)
Net income	—	—	—	—	—	998	998	1,765	2,763
Equity-based compensation	—	—	—	—	396	—	396	—	396
Redemption of LLC Units	160	(160)	2	(2)	(145)	—	(145)	145	—
Deferred tax adjustments related to Tax Receivable Agreement	—	—	—	—	325	—	325	—	325
Balance September 30, 2019	15,173	21,115	152	210	13,792	(22,350)	(8,196)	(19,654)	(27,850)

See Notes to the Condensed Consolidated Financial Statements

10

Goosehead Insurance, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

	Nine Months Ended September 30,
	2020		2019
Cash flows from operating activities:
Net income	$	13,815	$	12,898
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	2,499		1,551
Bad debt expense	1,004		1,282
Equity-based compensation	3,330		1,132
Impacts of Tax Receivable Agreement	28,815		10,967
Deferred income taxes	(28,077)		(10,625)
Changes in operating assets and liabilities:
Receivable from franchisees	(4,029)		(1,698)
Commissions and agency fees receivable	(5,731)		(961)
Prepaid expenses	(1,916)		(720)
Other assets	(2,432)		(97)
Accounts payable and accrued expenses	(495)		244
Deferred rent	1,023		2,368
Contract liabilities	6,789		—
Premiums payable	455		352
Unearned revenue	—		(200)
Payments pursuant to the tax receivable agreement	(9)		—
Net cash provided by operating activities	15,041		16,493
Cash flows from investing activities:
Proceeds from notes receivable	26		16
Purchase of software	(318)		(340)
Purchase of property and equipment	(4,765)		(3,285)
Net cash used for investing activities	(5,057)		(3,609)
Cash flows from financing activities:
Debt issuance costs	(677)		—
Repayment of note payable	(27,321)		(1,750)
Proceeds from notes payable	64,821		—
Proceeds from the issuance of Class A common stock	3,965		142
Member distributions and dividends	(44,697)		(18,739)
Net cash provided by (used for) financing activities	(3,909)		(20,347)
Net increase (decrease) in cash and restricted cash	6,075		(7,463)
Cash and cash equivalents, and restricted cash, beginning of period	15,260		19,011
Cash and cash equivalents, and restricted cash, end of period	$	21,335	$	11,548
Supplemental disclosures of cash flow data:
Cash paid during the year for interest	1,318		1,861
Cash paid for income taxes	270		1,175

See Notes to the Condensed Consolidated Financial Statements

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 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 nine and seven corporate-owned locations in operation at September 30, 2020 and 2019, respectively. Franchisees are provided access to insurance Carrier Appointments, product training, technology infrastructure, client service centers and back office services. During the three months ended September 30, 2020 and 2019, the Company onboarded 110 and 72 franchise locations, respectively, and had 823 and 583 operating franchise locations as of September 30, 2020 and 2019, respectively. No franchises were purchased by the Company during the three and nine months ended September 30, 2020 or 2019.

All intercompany accounts and transactions have been eliminated in consolidation.

As of December 31, 2020, the Company will be deemed a large accelerated filer, because the market value of our

common stock that is held by non-affiliates exceeded $700 million as of the last business day of our most recently

completed second fiscal quarter (June 30, 2020). Furthermore, the Company will no longer be considered an

emerging growth company.

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 September 30, 2020, the condensed consolidated results of operations, stockholders' equity and statements of cash flows for the three and nine months ended September 30, 2020 and 2019. 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.

The results of operations for the three and nine months ended September 30, 2020 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.

Impact of the coronavirus (“COVID-19”) pandemic

The extent to which the COVID-19 pandemic and the related economic impact may affect our financial condition or results of operations is uncertain. The extent of the impact on our operational and financial performance will depend on various factors, including the duration and spread of the outbreak and its impact on home sales and consumer spending. To date, the pandemic has not increased our costs of or access to capital under our term note and revolving credit facility and we do not believe it is reasonably likely to in the future. In addition, we do not believe that the pandemic will affect our ongoing ability to meet the covenants in our debt instruments, including under our term note and revolving credit facility. To date, the pandemic has not impacted the collectability of receivables or

12

Goosehead Insurance, Inc.

Notes to the Condensed Consolidated Financial Statements
(Unaudited)

adversely affected our ability to generate new business, add new franchises, or retain existing franchises or policies. Due to the nature of our business, the effect of the COVID-19 pandemic may not be fully reflected in our results of operations until future periods. Changes in consumer behavior linked to the COVID-19 pandemic may have contributed to reduced loss ratios through the nine months ended September 30, 2020, increasing the amount of revenue from Contingent Commissions the Company expects to receive.

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.

We are not presently aware of any events or circumstances arising from the COVID-19 pandemic, outside of those described above, that would require us to update our estimates, judgments or revise the carrying value of our assets or liabilities. Our estimates may change, however, as new events occur and additional information is obtained, any such changes will be recognized in the condensed consolidated financial statements. Accordingly, actual results could differ from those estimates as more information becomes known.

Income Taxes

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.

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 $1.4 million and $0.7 million as of September 30, 2020 and 2019, 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, 2020 and 2019 (in thousands):

	September 30,
	2020		2019
Cash and cash equivalents	$	19,957	$	10,820
Restricted cash	1,378		728
Cash and cash equivalents, and restricted cash	$	21,335	$	11,548

Recently Issued Accounting Pronouncements

Leases (ASU 2016-02): In February 2016, the FASB issued ASU 2016-02 to increase transparency and comparability of information regarding an entity’s leasing activities by providing additional information to users of financial statements. ASU 2016-02 requires lessees to recognize most leases on their balance sheet by recording a liability for its lease obligation and an asset for its right to use the underlying asset as of the lease commencement date and recognizing expenses on the income statement in a similar manner to the current guidance in ASC Topic 840, Leases (“ASC 840”). Lessor accounting will remain largely unchanged, other than certain targeted improvements intended to align lessor accounting with the lessee accounting model and with the updated revenue recognition guidance.

Upon adoption of ASU 2016-02, as amended, leases will be classified as either finance or operating, with classification affecting the geography of expense recognition in the income statement. Additionally, enhanced quantitative and qualitative disclosures regarding leases are required.

As permitted by the amended guidance, we intend to elect to retain the original lease classification and historical accounting for existing or expired contracts, so that we will not be required to reassess whether such contracts

13

Goosehead Insurance, Inc.

Notes to the Condensed Consolidated Financial Statements
(Unaudited)

contain leases, the lease classification, or the initial direct costs. Additionally, we intend to elect an accounting policy by class of underlying asset to combine lease and non-lease components.

The standard became effective for the Company January 1, 2020, 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, 2020.

We have implemented leasing software solutions to account for the leases where we are the lessee and are continuing to identify changes to our business processes, systems and controls to support adoption of the new standard. We expect the adoption of ASU 2016-02 will have a material effect on our balance sheets as a result of recognizing a lease obligation and right-of-use asset for our operating leases, primarily those related to leases of real estate and other assets of approximately $18 million. We do not expect the adoption of ASU 2016-02 to have a material effect on our Income Statements or Cash Flows.

Credit Losses (ASU 2016-13): Under the new guidance an entity is required to measure all credit losses on certain financial instruments, including trade receivables and various off-balance sheet credit exposures, using an expected credit loss model. This model incorporates past experience, current conditions and reasonable and supportable forecasts affecting collectability of these instruments. This standard became effective for the Company beginning January 1, 2020, 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, 2020, at which point the company will become a large accelerated filer. The Company does not expect the adoption of this amendment will have a material impact on the Company's consolidated financial statements.

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 became effective on March 12, 2020 and may be applied prospectively through December 31, 2022. A substantial portion of our indebtedness bears interest at variable interest rates, primarily based on USD-LIBOR. The adoption of ASU 2020-04 is not expected to have a material impact on our consolidated financial statements as the standard will ease, if warranted, the administrative requirements for accounting for the future effects of the rate reform. We continue to monitor the impact the discontinuance of LIBOR or another reference rate will have on our contracts and other transactions.

Recently adopted accounting pronouncements

Revenue from Contracts with Customers (ASU 2014-09) (“Topic 606”): 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 for 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. Additionally, the guidance requires improved disclosure to help users of financial statements better understand the nature, amount, timing and uncertainty of revenue that is recognized. 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. According to the superseding standard ASU 2015-14 that deferred the effective dates of the preceding, and because the Company is filing as an emerging growth company, the standard became effective for the Company on January 1, 2019, but the Company was not required to present the impacts of the standard until the Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

The Company adopted this standard by recognizing the cumulative effect as an adjustment to opening accumulated deficit and non-controlling interests at January 1, 2019, under the modified retrospective method for contracts not completed as of the day of adoption. Under the modified retrospective method, the Company was not required to restate comparative financial information prior to the adoption of these standards and, therefore, such information presented prior to the filing of the Annual Report on Form 10-K for the fiscal year ended December 31, 2019 will continue to be reported under the Company’s previous accounting policies.

14

Goosehead Insurance, Inc.

Notes to the Condensed Consolidated Financial Statements
(Unaudited)

Impact on Financial Statements

The following tables summarize the impacts of adopting the revenue recognition standard on the Company’s condensed consolidated statement of income:

(in thousands)	Legacy GAAP	Adjustments due to Topic 606	As Reported
Consolidated Statement of Income
Three Months Ended September 30, 2020
Revenues:
Commissions and agency fees	15,430	3,955	19,385
Franchise revenues	14,408	(1,990)	12,418
Expenses:
Employee compensation and benefits	18,055	(154)	17,901
Bad debts	681	(305)	376
Tax expense (benefit)	(689)	358	(331)
Net income	4,659	2,066	6,725
Earnings per share:
Basic	0.15	0.04	0.19
Diluted	0.14	0.03	0.17