Goosehead Insurance
Annual Report 2018

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-Kxx ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2018¨¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to Commission file number 001-38466GOOSEHEAD INSURANCE, INC.(Exact name of registrant as specified in its charter) DELAWARE 82-3886022(State or other jurisdiction ofincorporation or organization) (I.R.S. EmployerIdentification Number) 1500 Solana Blvd, Building 4, Suite 4500 Westlake, TX 76262(Address of principal executive offices) (Zip Code)(214) 838-5500Registrant’s telephone number, including area code Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchangeon which registeredClass A Common Stock, par value $.01 per share NASDAQClass B Common Stock, par value $.01 per share NASDAQSecurities registered pursuant to Section 12(g) of the Act:NoneIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No þ.Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ.Note: Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.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 12months (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. Yes þ No ¨.Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and postedpursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨.Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “largeaccelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company þ Emerging growth company þIf 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 financialaccounting 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 Exchange Act). Yes ¨ No þ.The aggregate market value of the voting common equity held by non-affiliates of the registrant, computed by reference to the last reported price at which the registrant’s commonequity was sold on June 29, 2018 (the last day of the registrant’s most recently completed second quarter) was $131,109,813, computed using a closing price on that day of $24.96.As of March 14, 2019, there were 14,421,363 shares of Class A common stock outstanding and 21,864,014 shares of Class B common stock outstandingDocuments incorporated by reference:Portions of the registrant's definitive Proxy Statement for its 2019 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission within 120 daysof December 31, 2018, are incorporated by reference into Part III, Items 10-14 of this Annual Report on Form 10-K.Table of contents PagePART I Item 1. Business5Item 1A. Risk Factors19Item 1B. Unresolved staff comments38Item 2. Properties38Item 3. Legal proceedings38Item 4. Mine safety disclosures38PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities38Item 6. Selected financial data40Item 7. Management’s discussion and analysis of financial condition and results of operations41Item 7A. Quantitative and qualitative disclosure of market risks57Item 8. Financial statements and supplementary data57Item 9. Changes in and disagreements with accountants on accounting and financial statement disclosure81Item 9A. Controls and procedures81Item 9B. Other information82PART III Item 10. Directors, executive officers, and corporate governance82Item 11. Executive compensation82Item 12. Security ownership of certain beneficial owners and management and related stockholder matters82Item 13. Certain relationships and related transactions, and director independence83Item 14. Principal accountant fees and services83PART IV Item 15. Exhibits and financial statement schedules84Signatures85 In this annual report on Form 10-K (“Annual Report”), “Goosehead,” the “Company,” “GSHD,” “we,” “us” and “our” refer to Goosehead Insurance,Inc. and its consolidated subsidiaries, including Goosehead Financial, LLC, together.Commonly used defined termsAs used in this Annual Report, 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.•Book of Business: Insurance policies bound by us with our Carriers on behalf of our clients.•Best Practices Study: The industry group metrics are based on the latest date for which complete financial data are publicly available such asa 2018 Best Practices Study containing 2017 industry data conducted by Reagan Consulting and the Independent Insurance Agents & Brokersof America, Inc.•Captive Agent: An insurance agent who only sells insurance policies for one Carrier.•Carrier: An insurance company.•Carrier Appointment: A contractual relationship with a Carrier.1•Client Retention: Calculated by comparing the number of all clients that had at least one policy in force twelve months prior to the date ofmeasurement 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 andprofitability of the business placed with the Carrier.•Corporate Channel: The Corporate Channel distributes insurance through a network of company-owned and financed operations withemployees that are hired, trained and managed by Goosehead.•Corporate Channel Adjusted EBITDA: Segment earnings before interest, income taxes, depreciation and amortization allocable to theCorporate Channel, adjusted to exclude Class B share 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. Thesebusiness owners have a contractual relationship with Goosehead to use our processes, training, implementation, systems and back-officesupport 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 excludeother 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.•GF: Goosehead Financial, LLC.•GM: Goosehead Management, LLC.•Initial Franchise Fee: Contracted fees paid by Franchisees to compensate Goosehead for the training and onboarding of new franchiselocations.•LLC Unit: a limited liability company unit of Goosehead Financial, LLC.•New Business Production per Agent (Corporate): The New Business Revenue (Corporate) collected, divided by the average number of full-timeCorporate Channel sales agents for the same period. This calculation excludes interns, part-time sales agents and partial full-time equivalentsales managers.•New Business Production per Agent (Franchise): The gross commissions paid by Carriers and agency fees received related to policies in theirfirst term sold in the Franchise Channel divided by the average number of sales agents in the Franchise Channel for the same period prior topaying Royalty Fees to the Company. This calculation excludes part-time agents and production related to the Book of Business that was soldin 2017 related to a Franchisee termination.•New Business Production per Agency: The gross commissions paid by Carriers and agency fees received related to policies in their first termsold in the Franchise Channel divided by the average number of franchises in the Franchise Channel for the same period prior to payingRoyalty Fees to the Company.•New Business Revenue: Commissions received from Carriers, Agency Fees received from clients, and Royalty Fees received fromFranchisees 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 firstterm 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, familymember 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 arePromoters. NPS is calculated by subtracting the percentage of Detractors from the percentage of Promoters.•P&C: Property and casualty insurance.•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.•Referral Partner: An individual or entity with whom a sales agent establishes a referral relationship.•Renewal Revenue: Commissions received from Carriers and Royalty Fees received from Franchisees after the first term of policies.2•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 orrenewed 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 1st, 2018.•Total Written Premium: As of any reported date, the total amount of current (non-cancelled) gross premium that is placed with Goosehead’sportfolio of Carriers.•TWIHG: Texas Wasatch Insurance Holdings Group, LLC.•Unvalidated Producers: A metric used by Reagan Consulting describing agents whose production does not yet cover their wages under theiragency’s commission formula.3Special note regarding forward-looking statementsWe have made statements under the captions “Item 1. Business,” “Item 1A. Risk factors,” “Item 7. Management’s discussion and analysis offinancial condition and results of operations” and in other sections of this Annual Report that are forward-looking statements. In some cases, youcan 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 anticipatedgrowth strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projectionsabout future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differmaterially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements, including thosefactors discussed under “Item 1A. Risk factors.” You should specifically consider the numerous risks outlined under “Item 1A. Risk factors.”Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level ofactivity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness ofany of these forward-looking statements. We are under no duty to update any of these forward-looking statements after the date of this AnnualReport to conform our prior statements to actual results or revised expectations.4PART IItem 1. BusinessCompany overviewWe are a leading independent personal lines insurance agency, based on personal lines revenue, reinventing the traditional approach to distributingpersonal lines products and services throughout the United States. We were founded with one vision in mind—to provide consumers with superiorinsurance coverage at the best available price and in a timely manner. By leveraging our differentiated business model and innovative technologyplatform, we are able to deliver to consumers a superior insurance experience. Our business model, in contrast to the traditional insurance agencymodel, separates the sales function from the service function, thus enabling agents to focus on selling, and service personnel to focus ondelivering superior client service. In addition, our technology platform empowers our agents with tools to better manage their sales initiatives andprovides our service personnel with real-time 360-degree visibility of client accounts. As a result, we have achieved best-in-class net promoterscores for client service, nearly 2.1x the 2017 P&C industry average.We represent over 85 insurance companies that underwrite personal lines and small commercial lines risks, which typically enables us to providebroader insurance coverage at a lower price point than competing agents who represent only a few carriers, carriers with captive agents or carriersthat distribute directly to consumers.Our business has grown substantially since our founding in 2003. Today we are a rapidly-growing independent insurance agency and franchisor inthe United States. Our operations now include a network of seven corporate sales offices and 646 franchise locations (inclusive of 189 franchiseswhich are under contract but yet to be opened as of December 31, 2018). In addition, we have service center operations at our headquarters and inHenderson, Nevada. Our growth is reflected in our financial performance. Revenue grew period over period by 41% and 36% for the years endedDecember 31, 2018 and 2017, respectively. This growth has been driven by our recruiting team’s ability to recruit talented agents to our platform,our agents’ leveraging of Goosehead's sales blueprint and proprietary technology leading to higher levels of productivity in winning new businessand our service centers’ ability to retain renewal business. All of our growth has been organic; we have not relied on mergers or acquisitions.Furthermore, we are profitable. For the year ended December 31, 2018 the Company had $8.7 million of net loss due to IPO-related equitycompensation, but generated $14.8 million of Adjusted EBITDA, a $4.0 million increase over 2017. Adjusted EBITDA is a non-GAAP Measure.See "Item 7. Management's discussions and analysis of financial condition and results of operations - Key performance indicators" for additionalinformation and a reconciliation to the most directly comparable GAAP financial measure.Our insurance product offerings primarily consist of homeowner’s insurance; auto insurance; other personal lines products, including flood, windand earthquake insurance; excess liability or umbrella insurance; specialty lines insurance (motorcycle, recreational vehicle and other insurance);commercial lines insurance (general liability, property and auto insurance for small businesses); and life insurance. We do not take any insuranceunderwriting risk in the operation of our business.We enter into Carrier Appointments that set the terms of engagement, define legal ownership of client accounts and client data, and determinecompensation. Our 2018 average commission rate on new business premium was 15% and on renewal business premium was 14%. Commissionrates can vary across Carriers, states and lines of business, and typically range from 10% to 20%. Because we represent a broad set of Carriersthat all have unique risk appetites and underwriting strategies, we can usually provide our clients with broader insurance coverage at a lower pricepoint than competing agents who represent only one Carrier exclusively, or Carriers that distribute directly to insurance buyers.We have two Segments that work together to drive our growth: the Corporate Channel and Franchise Channel. The Corporate Channel consists ofcompany-owned and financed operations with employees who are hired, trained and managed by us. The Corporate Channel also serves as aresearch and development department, where we develop best practices and beta test new technology before implementing system-wide. TheFranchise Channel consists of Franchisee operations that are owned and managed by Franchisees. These Franchisees have a contractualrelationship with us to use our processes, systems, and back-office support team to sell insurance and manage their business. In exchange, weare entitled to an Initial Franchise Fee and ongoing Royalty Fees. We manage our two Segments from our headquarters in Westlake, Texas. Inaddition to managing our Segments, our headquarters is responsible for overseeing our client service centers, our network of Referral Partners, ourrecruiting team and our technology functions which tie all aspects of our business together. Our headquarters also provides various riskmanagement, quality control, accounting, legal and finance functions.5In the Corporate Channel, we generate revenue in the form of New Business Revenue (Corporate), Renewal Revenue (Corporate), and non-refundable Agency Fees charged directly to clients for efforts performed in the issuance of new insurance policies. We also generate revenue inthe form of Contingent Commissions from Carriers related to the overall performance of the Book of Business we have placed with them. TheCorporate Channel is comprised of sales agents that are our employees located in six sales offices in Texas and one in Illinois. We haveexperienced rapid growth in sales agents and revenue in this Segment. During 2018, our Corporate Channel sales agent headcount increased by50% and our Corporate Channel premiums placed grew by 33%, in each case, versus the prior year. Corporate Channel premium growth trailedheadcount growth due to the large renewal mix of our premiums placed and the ongoing ramp up of recently hired producers. As of December 31,2018, we had corporate sales offices operating in the following locations: Westlake, Texas; Irving, Texas; Fort Worth, Texas; Houston, Texas; TheWoodlands, Texas; Austin, Texas; and Rosemont, Illinois.In the Franchise Channel, we generate revenue in the form of Royalty Fees paid by Franchisees that are tied to New Business Revenue andRenewal Revenue generated by the franchise location, Initial Franchise Fees related to the training and onboarding of new franchise locations andContingent Commissions. Royalty Fees are set in the Franchise Agreements at 20% of New Business Revenue and 50% of Renewal Revenue.We charge a non-refundable Initial Franchise Fee to new Franchisees which compensates us for the training and onboarding efforts to launch anew franchise location. The Franchise Channel is comprised of Franchisees and sales agents that they hire in their franchised businesses. OurFranchise Agreement has a ten-year term, dictates the Initial Franchise Fee, Royalty Fees and other costs a Franchisee pays, and governs theterms under which we operate together. Franchisees have contractual rights to revenue related to the Book of Business during the term of theiragreement.We started franchising in 2012 and have grown rapidly in the Franchise Channel. Premiums in the Franchise Channel grew 60% during 2018. As ofDecember 31, 2018, we have 457 franchise locations operating, a 57% increase over year-end operating agencies in 2017, and 189 signedFranchise Agreements that are in the implementation process. We have franchise locations either operating or signed in the following states:Geographic footprintOperating or signed agenciesStateDecember 31, 2018Texas226California72Illinois48Florida46Pennsylvania40Michigan35North Carolina26Louisiana19New York19New Jersey15Virginia15Colorado13Maryland13South Carolina13Other46Total(1)646(1)Number of franchise locations include 189 franchises which are under contract but yet to be opened as of December 31, 2018.Our business model allows our sales agents in both Segments to concentrate on sales and marketing activities related to acquiring new clientsand issuing new policies, thus growing New Business Revenue and Renewal Revenue. Their primary marketing efforts are focused on establishingreferral relationships with other financial services providers in their communities using our marketing strategy. The nature of Referral Partner leadsallows us to realize higher close rates and lower client acquisition costs than what we believe to be standard in the industry. Furthermore, ouragents are typically dealing with homeowners who own other assets, such as automobiles and therefore tend to be better insurance risks from aCarrier’s perspective. Such clients often purchase additional policies, such as auto insurance, which allows us to capture additional revenue andincreases the likelihood of retaining the client in the future. Importantly, we do not compensate Referral Partners for leads, but rather rely on ourservicing capabilities to generate repeat business.6We have significant room to expand our market share across the country. Our biggest presence is in Texas where we have been operating thelongest. By leveraging our Referral Partners, we placed approximately 35 thousand policies related to mortgage originations in 2018. Thisrepresents 10.2% of the approximately 344 thousand Texas mortgage originations 2018, according to the Texas A&M Real Estate Center.Our model, which allows agents to focus on New Business Revenue, is highly differentiated from the traditional insurance agency model. In thetraditional agency model, agents are responsible for both new business and ongoing service. The burden of providing ongoing service distractsfrom the ability to acquire new clients, and ultimately limits the opportunity for growth. Our agents are not only freed from the burden of ongoingservice, but also given technology tools that create efficiency. As a result, agents in both Segments are substantially more productive than topperformers in our industry as it relates to new sales. Compared to the 2018 Best Practices Study, which uses 2017 industry data, CorporateChannel agents with more than three years of tenure averaged 3.4x as much New Business Production per Agent as the industry best practiceduring 2017. Franchise Channel agents with more than three years of tenure averaged 1.5x as much New Business Production per Agent(Franchise) as the industry best practice during 2017.Source: Internal data; Carrier provided information; Reagan Consulting(1)Represents industry best practice per Reagan Consulting; does not include Unvalidated Producers; most industry agents have tenures significantly longer than 2 to 3years.We believe our agent productivity compares even more favorably to the industry than the Best Practices Study would imply because the BestPractices Study excludes Unvalidated Producers. If the Best Practices Study included Unvalidated Producers, our New Business Production perAgent outperformance would be even larger.In the Corporate Channel, New Business Production per Agent was $70 thousand and $127 thousand for agents with less than 1 year of tenure andgreater than one year of tenure, respectively, during 2018. Including all producers in the Franchise Channel, New Business Production per Agencywas $43 thousand and $87 thousand for agencies with less than 1 year of tenure and greater than one year of tenure in Texas, respectively, during2018. Outside of Texas, New Business Production per Agency was $40 thousand and $59 thousand for agencies with less than 1 year of tenureand greater than one year of tenure, respectively, during 2018.Both the Corporate Channel and the Franchise Channel are supported by our client service centers. Our service centers are staffed by fullylicensed property and casualty service agents who provide fulfillment and quality control services for newly issued insurance policies, accountingservices and ongoing support services for clients. Ongoing support services for clients include: handling client inquiries, facilitating the claimsprocess with Carriers, accepting premium payments and processing policy changes and renewals. Our service agents are also focused on sellingadditional policy coverage to clients which accounts for additional New Business Revenue. Our two separate service centers provide us with theability to cover the U.S. time zones more broadly, and the ability to better manage business continuity risks. We manage our service centers withthe goal that clients reach an agent in less than 60 seconds and are able to have fully bound insurance policies in under an hour. Thisdifferentiated level of service has enabled us to earn an NPS of 89 in 2018 and 86 in 2017—greater than highly regarded brands like Ritz Carltonand Nordstrom and 2.1x the 2017 industry average, according to Satmetrix. Our high degree of client7satisfaction drove our 88% Client Retention rate during 2018, which we believe to be among the highest in the industry. Our retention rate is evenstronger on a premium basis. In 2018, we retained 94% of the premiums we distributed in 2017. Our premium retention rate is higher than ourClient Retention rate as a result of both premiums increasing year over year and additional coverages sold by our service team. By maintainingthis strong level of Client Retention, we are able to generate revenue that is both highly visible and recurring in nature.The combination of expanding headcount in the Corporate Channel, expanding franchise count in the Franchise Channel, leveraging technologyand maintaining our commitment to service led to revenue growth of 41% and Total Written Premium growth of 49% in 2018. This level of TotalWritten Premium growth is consistent with our historical experience of accelerated growth. As of December 31, 2018, our 10-year Total WrittenPremium CAGR was 35% and our 5-year premium CAGR was 45%. Total Written Premium by channel Total Written Premium by business type Source: Carrier provided informationIn addition to strong revenue and Total Written Premium growth, we have also experienced Franchise Channel Adjusted EBITDA marginexpansion, which was 33% in 2018, up from 27% in 2017. Corporate Channel Adjusted EBITDA margin decreased modestly in 2018 to 22% from25% due to our Corporate Channel sales agent headcount growth of 50%.20182017CorporateChannelFranchiseChannelCorporateChannelFranchiseChannel($000s) Revenue$34,287$25,861$25,521$17,190Segment Adjusted EBITDA7,5368,6156,3674,693Segment Adjusted EBITDA margin22%33%25%27% 2018 CorporateChannel FranchiseChannelRevenue growth over 201734% 50%Segment Adjusted EBITDA growth over 201718% 84%Industry trendsWe primarily compete in the United States personal lines insurance distribution industry. Personal lines products typically include home, auto,umbrella, motorcycle, flood and recreational insurance. We compete for business on the basis of reputation, client service, product offerings andthe ability to tailor our products to the specific needs of a client. There are principally three types of businesses that sell personal lines products:8•Independent agencies (35% personal lines market share in 2017 according to the Independent Insurance Agents & Brokers of America, Inc.).Independent agencies are “independent” of any one Carrier and can offer insurance products from multiple Carriers to their clients. There areapproximately 36,500 independent insurance agencies in the United States, according to the 2018 Future One Agency Universe Case Study.Many of the largest insurance agencies, such as Aon plc, Arthur J. Gallagher & Co., Brown & Brown Inc., Marsh & McLennan Companies,Inc. and Willis Towers Watson plc, focus primarily on commercial lines. We believe that we are one of the largest independent insuranceagencies focused primarily on personal lines.•Captive Agencies (47% personal lines market share in 2017 according to the Independent Insurance Agents & Brokers of America, Inc.).Captive Agencies sell products for only one Carrier. The Carrier compensates the Captive Agency through sales commissions based onpremiums placed on behalf of clients. The Carrier also provides the Captive Agency with operational support including advertising and certainback office functions. The largest Captive Agencies in the United States include Allstate Corporation, State Farm Mutual AutomobileInsurance Company and Farmers Group, Inc.•Direct distribution (18% personal lines market share in 2017 according to the Independent Insurance Agents & Brokers of America, Inc.).Certain Carriers market their products directly to clients. Historically, this strategy has been most effective for targeting clients who requireauto insurance only, with clients seeking bundled solutions relying on advice from independent and captive agents. The largest Carriers thatsell directly to clients include Berkshire Hathaway Inc. (via GEICO Corp.) and Progressive Corporation.Personal lines insurance agents generate revenues through commissions, which are calculated as a percentage of the total insurance premiumplaced on behalf of clients, and through fees for other related services. Premiums in the personal lines insurance market have grown consistentlywith underlying insured values and the overall economy.Personal lines products Personal lines premium trendsAuto premiums Homeowners premiums Source: S&P Global Market Intelligence and A.M. BestPremium pricing within the P&C insurance industry has historically been cyclical, based on the underwriting capacity of the insurance industry andeconomic conditions. External events, such as terrorist attacks, and man-made and natural disasters, can also have significant impacts on theinsurance market. We use the terms ‘‘soft market’’ and ‘‘hard market’’ to describe the business cycles experienced by the industry. A soft marketis an insurance market characterized by a period of declining premium rates, which can negatively affect commissions earned by insuranceagents. A hard market is an insurance market characterized by a period of rising premium rates, which, absent other changes, can positivelyaffect commissions earned by insurance agents.In recent years, auto insurance premium pricing has been in a hard market as accident costs have risensignificantly. Between 2014 and 2016, bodily injury costs rose 11.7% and auto property damage costs rose 15.1%,according to the Insurance Information Institute. Conversely, homeowners insurance premium pricing has recentlybeen in a soft market according to the Counsel of Independent Agents and Brokers. However, the 2017 AtlanticHurricane season was one of the most active in recent history. Dowling & Partners Securities, LLC estimatesthat Hurricanes Harvey, Irma and Maria will result in insured losses ranging from $70 billion to more than $100 billion and insured losses from therecent California wildfires to be $15 billion; similar levels of industry losses in thepast have resulted in a hardening of the insurance market.Our segments9Our Segments are geared to leverage the strengths of two different talent pools to maximize productivity. The Corporate Channel recruits youngagents who are typically new to insurance distribution; the Franchise Channel primarily recruits agents with industry experience. The combinationof our two Segments enables us to prudently expand our business model while providing differentiated service to our clients.Corporate Channel (57% of 2018 total revenue)The Corporate Channel primarily targets young agents, particularly recent college graduates who typically do not have experience in the insuranceindustry. The majority of candidates are sourced through a combination of on-campus recruiting, employee referrals and highly targeted internetrecruiting campaigns. Our recruitment team seeks candidates who display a high aptitude for learning new skills, are motivated by professionaland financial incentives and display the ability to succeed in a team-oriented environment. After the recruitment team has selected candidates,they are placed into a training class that lasts approximately two weeks. Corporate Channel agents are required to become fully licensed P&Cagents prior to training. During the training class, Corporate Channel agents acquire a wide variety of skills including:•knowledge of all available personal lines products and the trade-offs between pricing and coverage;•the ability to fit their clients to the best insurance products at the right price point;•the ability to leverage our well-established network of Referral Partners to win new business;•the ability to leverage our service centers to service policies and handle renewal activities; and•the ability to leverage our technology tools to increase productivity.The combination of hiring highly motivated and talented individuals, giving them proper tools and training and removing the burden of ongoing clientservice allows our Corporate Channel agents to become significantly more productive than average personal lines agents. Compared to the 2018Best Practices Study, Corporate Channel agents with more than two years of tenure averaged 3.4x as much New Business Production per Agent(Corporate) as the industry best practice. Corporate Channel agents with less than two years of tenure averaged 2.0x as much New BusinessProduction per Agent (Corporate) as the industry best practice.Franchise Channel (43% of 2018 total revenue)The Franchise Channel primarily recruits agents with industry experience. Our Franchise Channel has a unique value proposition to experiencedagents who understand the limits and pain points of the traditional agency model:•Franchise Channel agents gain access to products from multiple carriers in their markets, allowing Franchise Channel agents to better servetheir clients and provide choice. Captive Agents typically can only sell products from one Carrier.•Franchise Channel agents can leverage our service centers to handle service requests and process renewals. Most traditional agenciesrequire their agents to handle client service and renewals which diminishes the time they can devote to winning additional new business andgrowing their agencies. Traditional agencies can become the victims of their own success as their increasing service burden crowds out timeto sell new business.•Franchise Channel agents use our well-established sales processes to win new business. Franchise Channel agents are trained side by sidewith Corporate Channel agents to leverage our training program, to acquire product and Carrier knowledge and to utilize our technology andback office support.•Franchise Channel agents benefit from lean startup costs as they do not require multiple employees or a retail location to run their agencies.Captive Agents are often required to immediately hire two to three additional employees as support staff, lease a storefront location, andcontribute a specific percentage of revenue toward an advertising budget. Further, most fixed costs in a traditional agency (e.g., administrativecosts, technology fees, training expenses and service costs) are diminished in our Franchise Channel due to Goosehead’s scale, and weexpect that they will continue to decrease as the Franchise Channel grows.•Franchise Channel agents own an economic interest in their Books of Business.Our franchise sales team is responsible for recruiting the Franchisee applicants that are ultimately approved to operate within the FranchiseChannel. The franchise sales team seeks applicants who have demonstrated a strong capacity to win new business and a desire to own their ownbusiness. Our recruiting efforts have helped us create a franchise pool which is significantly more productive than average personal lines agents.Compared to the 2018 Best Practices Study, Franchise Channel agents with more than three years of tenure averaged 1.5x as much New10Business Production per Agent (Franchise) as the industry best practice. Franchise Channel agents with less than two years of tenure maintainedequally as much New Business Production per Agent (Franchise) as the industry best practice.Our competitive strengthsWe believe that our competitive strengths include the following:•Young and highly motivated producers in the Corporate Channel. The agents in the Corporate Channel are fundamentally different than thetypical agents in the personal lines industry. Substantially all of our agents are recent college graduates (average age of 27), whereas 64% ofpersonal lines agents in the industry are over 50 years old, according to the 2018 Future One Agency Universe Case Study. This gives us asignificant advantage both in the short- and long-term. In the short-term, our agents have proven to be especially adept at learning newtechniques and mastering new technologies. This has enabled our agents to generate approximately 3.4x as much new business as topperforming personal lines agents after three years, according to the 2018 Best Practices Study. Over the long-term, we believe our youth willenable us to avoid the shrinking workforce challenges that many of our competitors face and win an even larger market share from otheragencies. According to Independent Insurance Agents & Brokers of America, Inc., 42% of independent agencies anticipate a change ofcontrol within the next five years. We believe an aging industry workforce will create significant disruption in the personal lines distributionindustry, and we will be in a position to win displaced clients.•Franchise Channel solves the inherent flaws in the traditional agency model. We believe that the traditional agency model is flawed for severalreasons, including: (1) Captive Agents can only offer clients products from one Carrier, limiting the agents’ ability to best serve their clients,(2) agents are typically responsible for handling their own client service and renewals, diminishing the time they can devote to winning newbusiness and growing their overall Book of Business and (3) some Captive Agents do not own their Book of Business, giving them lessincentive to win new business. Given the size of the traditional agency market and its inability to adapt to these challenges without introducingsignificant channel conflict, we believe there is a meaningful opportunity to disrupt the traditional agency marketplace. Our Franchise Channelseeks to solve the inherent problems in the traditional agency model. Agents in the Franchise Channel are able to focus on new business,provide clients with choice by offering products from multiple Carriers, and own an economic interest in their Book of Business. Furthermore,by removing the service burden which takes a significant amount of time and energy, we believe our platform provides Franchise Channelagents with the ability to manage larger Books of Business than agents working in a traditional agency model. As a result, the Gooseheadmodel has proven to be attractive to high-performing agents who wish to achieve greater professional and financial success. •Single technology platform with end-to-end business process management. Our operations utilize an innovative cloud-based technologysolution which is built on the Salesforce.com platform with significant proprietary investment to customize it to suit our needs. Our technologyprovides our agents with tools to better manage their sales and marketing activities, and our service center operations with real-time 360-degree visibility of client accounts. Additionally, our technology provides agents with data and analytics which allow them to make smarterbusiness decisions. We believe our single, sales-oriented technology platform is differentiated relative to most insurance agency ITenvironments that utilize disparate accounting-driven agency management vendors and legacy mainframe systems across their operations.Our technology platform has been a key enabler of our growth while also driving efficiencies. One of these efficiencies is service expenses.Our 2017 service expenses as a percentage of gross commissions were 4.0x lower than the industry best practice according to the 2018 BestPractices Study, which uses 2017 data. Despite our reduced service expense load, we are able to maintain best in class NPS scores andtypically deliver policy binders in under an hour.•Service centers drive both new and renewal business. Our service centers handle all of our client service and renewals and have achieved ahighly differentiated level of service as indicated by our NPS scores of 89 in 2018 and 86 in 2017—higher than many global service leaderssuch as Ritz Carlton and Nordstrom and 2.1x the P&C industry average, according to Satmetrix. Having such a skilled service team providesthree tangible benefits to our business: (1) allowing our agents to focus virtually all of their time on winning new business (instead of preservingexisting business), (2) generating strong Client Retention which provides a stable source of highly visible and recurring revenue and(3) providing opportunities to earn additional revenue as our service agents are highly trained in cross-selling and generating referral business.Our service agents typically originate significant amounts of New Business Revenue through cross-sale and referral generation. We believethat our service centers will continue to drive a competitive advantage by supporting our industry-leading productivity and our recruiting efforts.We continue to make the necessary technology, staffing and real estate investments11in our service centers to support our planned agent hiring which we believe will allow us to readily scale and increase market share.•Unique value proposition to Referral Partners. We have highly standardized processes across our entire organization due to the strong qualitycontrols instituted in our service centers. Both new business and renewal business move through our systems in a tightly choreographedmanner which enables both strong quality controls and quick delivery of services. We have found that the ability to quickly and accurately bindan insurance policy is attractive to both individuals buying insurance and third parties, such as Referral Partners, who can drive new businessto us. Referral Partners include financial services providers who depend on us to timely place insurance policies and to provide the flexibility tofacilitate necessary changes rapidly, including at the time of home closings. This allows our Referral Partners to close transactions on timeand ultimately become more productive in their business. We do not compensate our Referral Partners for sending us new business.•Proven and experienced senior management team. Our senior management team has a long history of cohesively operating together andimplementing our business model. Our Chairman and Chief Executive Officer, Mark E. Jones, co-founded Goosehead in 2003. Prior to co-founding Goosehead, Mr. Jones was a Senior Partner and Director at Bain & Company, a global management consulting firm, where he alsoserved for many years as Global Head of Recruiting. Many of our management, sales and recruiting practices were developed and refined byMr. Jones during his time at Bain and instituted at Goosehead. Mr. Jones has received a wide variety of accolades for his leadershipaccomplishments, including being recognized as one of the Top Rated CEOs from among more than 7,000 companies with less than 1,000employees on Glassdoor’s “Employee’s Choice Award” in 2017. In 2006, Mr. Jones recruited Michael Colby to join Goosehead as Controller.Over the last 12 years, Mr. Colby has worked closely with Mr. Jones in all aspects of the business, taking on increasing responsibility;becoming Chief Financial Officer in 2010, Chief Operating Officer of our Franchise Channel in 2011, Chief Operating Officer of Goosehead in2014, and President and Chief Operating Officer of Goosehead in 2016.Key elements of our growth strategyOur goal is to achieve long-term returns for our stockholders by establishing ourselves as the premier national distributor of personal linesinsurance products. To accomplish this goal, we intend to focus on the following key areas:•Continue to expand recruiting in the Corporate Channel. We strive to prudently grow our business by expanding our agent count in theCorporate Channel. We have a highly developed process for recruiting new agents which we have continually refined over the last decade andhas resulted in higher success rates for our Corporate Channel agents. As demonstrated in the chart below, our compensation package forsales agents is very competitive in comparison to other professional services and offers attractive long-term compensation opportunities.Given our success recruiting agents, we plan to expand our recruiting to additional college campuses and engage in highly targeted internetrecruiting campaigns.12•National rollout of the Franchise Channel. Prior to 2018, we had franchises in ten states (Texas, California, Florida, Virginia, Illinois,Pennsylvania, Michigan, North Carolina, Louisiana and Oklahoma). In 2018, we targeted expansion into Colorado, Connecticut, Indiana,Maryland, Missouri, New Jersey, New York, Ohio, South Carolina, Washington and Wisconsin. As of December 31, 2018, we have signedFranchise Agreements in each of these states. The success of the national rollout of the Franchise Channel is only starting to emerge in ourfinancial performance. As of December 31, 2018, 61% of our Franchisees had less than one year of tenure.(1)Number of franchise locations include 189 franchises which are under contract but yet to be opened as of December 31, 2018.Given the anticipated New Business productivity uplift that comes with more years of experience, and the elevated Royalty Fees on renewalbusiness, we believe our Franchise Channel is positioned for strong growth and margin expansion. This growth will be further enhanced by theapproximately 65,000 potential franchise candidates in our current pipeline. The number of potential franchise candidates is updated daily toreflect any new franchise candidates on our Salesforce.com platform. We identify our franchise candidates according to the following criteria:(1) work experience, including sales, entrepreneurial or insurance experience; (2) license status; and (3) geographic location. Of our totalcurrent pipeline, we estimate approximately 10% of the candidates would qualify over time as Franchisees under our exacting standards.Although the candidates that meet our franchise standards are not guaranteed to enter into Franchise Agreements, we believe our pipeline willallow us to execute a national build-out of our model. The pace of our national build-out will be aided by the regulatory approvals, productoffering approvals and carrier relationships we have already obtained across the continental United States.•Continue to develop innovative ways to drive productivity. We believe that our agents are already among the most efficient personal linesagents in the industry. Compared to the 2018 Best Practices Study, Corporate Channel agents with more than three years of tenure averaged3.4x as much New Business Production per Agent (Corporate) as the industry best practice; Franchise Channel agents with more than threeyears of tenure averaged 1.5x as much New Business Production per Agent (Franchise) as the industry best practice. We believe there is anopportunity to further expand productivity, particularly in the Franchise Channel. We have historically deployed the intellectual capitalaccumulated in the Corporate Channel (including sales practices, client relationship management practices, recruiting practices andtechnology) into the Franchise Channel to optimize new business production. We will continue to innovate going forward in an effort to bothbetter serve our clients and expand our platform.13•Maximize our effectiveness in managing renewal business. Renewal business mechanically increases revenue and mechanically decreasesexpenses. On the revenue side, we earn significantly larger Royalty Fees from our Franchisees for renewal business. On the expense side,many of our largest expenses are significantly lower for renewal business such as compensation costs, risk management costs and clientdevelopment costs. Critical to converting new business into renewal business is strong Client Retention. Our Client Retention effort is led byour service centers which had a 2018 NPS score of 89, leading to an 88% Client Retention rate and 94% premium retention rate in 2018. Keyto maintaining these NPS scores and Client Retention rates is the consistency of personnel in our service centers. Our consistency in servicepersonnel is due to a combination of the respect we have for our service team and the competitive wages we offer; average compensation forservice team employees was over $46,000 in 2018. Our Client Retention rates are further enhanced by Mr. Jones’ experience at Bain, where hewas one of the leaders in developing Bain’s approach to managing client loyalty in the insurance industry. We actively employ the insightsMr. Jones gleaned during his time at Bain to successfully convert new business into higher-margin renewal business.TechnologyWe have invested heavily in our technology platform to not only support our business, but to drive growth and productivity. Our operations utilizean innovative cloud-based technology solution which is built on the Salesforce.com platform with significant proprietary investment to customize itto suit our needs:•In 2009, we rolled out Salesforce.com across our entire platform. Our customized agency management system provided us with transparencyinto client lifecycle, a sophisticated commission accounting application and enhanced analytic capabilities.•In 2010, we integrated DocuSign into our Salesforce.com platform, improving client experience and Carrier compliance.•In 2011, we added Franchise Channel capabilities which enabled efficient management of Franchisees. We also created the infrastructurenecessary to protect sensitive Franchisee information including Client lists. We also rolled-out our email engine which provides marketingautomation for cross-selling.•In 2013, we created our Carrier knowledge database (a reference library of Carrier underwriting guidelines) and our Referral Partner platform(creates precision and coordination in Referral Partner marketing).•In 2015, we established our learning management system which enables efficient compliance training, initial training, and continuing education.•In 2016, we invested in InGenius which enhanced customer service capabilities with CTI (computer telephony integration), omni-channel andSMS texting capabilities.•2018 was a watershed year for GSHD's technology innovation as we further enhanced our technology platform and strengthened our barriers toentry. The year was highlighted by the following developments:◦GSHD's integrated comparative rater was rolled out that eliminated 75% of the required input fields, saving the majority of our agentsapproximately 15 minutes per quote.◦A proprietary mortgage database was made available to our agents providing them a marketing tool with sophistication and precisiondown to the micro-targeted level to improve client prospecting.◦A unified, cloud-based voice solution was implemented system-wide, using AI driven speech analytics to evaluate agent performanceand customer sentiment.◦We further enhanced our cyber-security protection via Salesforce Shield, continuing education using our proprietary learningmanagement system, and additional email filtering tools.Markets & marketingWe primarily compete in the approximately $329 billion U.S. personal lines P&C industry, according to A.M. Best. As a distributor, we compete forbusiness on the basis of reputation, client service, product offerings and the ability to efficiently tailor our products to the specific needs of aclient.Agents in both the Corporate Channel and the Franchise Channel are primarily responsible for acquiring new clients. Agents are encouraged toprocure new clients through both relationships with Referral Partners and traditional channels (friends, family, client referrals, inbound inquiries andoutbound inquiries). Referral Partners are typically professionals in the home buying process who rely on us to quickly bind accurate homeinsurance policies.14While traditional channels are an important source of new business, Referral Partners typically provide us with a high-quality source of ongoingbusiness leads. Clients sourced through Referral Partners are generally in the process of either buying or refinancing a house. These clientsfrequently purchase additional policies such as auto insurance. By leveraging our Referral Partner network, we have been able to quickly gainscale in the personal lines property and casualty industry without incurring other significant direct client acquisition costs, such as advertising orpurchasing internet leads.The Company represents over 85 Carriers, of which 30 provide national coverage. In 2018, two carriers represented more than 10% of totalrevenue at 17% and 11%. In 2017, three carriers represented more than 10% of total revenue at 18%, 15% and 11%.Franchise agreementsOur Franchise Channel operates under a franchising model and each franchise is governed by a Franchise Agreement. The Franchise Agreementsfor all existing franchises are nearly identical. We have taken the position that we do not negotiate the terms of our Franchise Agreements in orderto maintain uniformity within the system.Each Franchise Agreement contains one ten-year term with two optional five-year renewal terms. The Franchise Agreement may be terminatedearly if the Franchisee is violating a term of the contract, operating contrary to state law, or violating Goosehead procedures required by theoperations manual.Franchisees are required to pay an Initial Franchise Fee that varies depending on the state in which the franchise will be located. Franchisees arealso required to pay a monthly Royalty Fee, which entitles the Franchisee to continue to operate in our Franchise Channel. The Royalty Fee isderived from a percentage of gross revenues on insurance policies in their initial (20%) and renewal terms (50%). Franchise owners are not entitledto an exclusive territory and may solicit sales from any location within the state in which they operate, subject to certain internal restrictions.Franchisees who sign a Franchise Agreement after January 1, 2018, are required to pay a minimum monthly Royalty Fee if the Royalty Feederived from the gross revenues on insurance policies does not exceed a specific amount.Franchises operating in the Franchise Channel increased by 57% to 457 in 2018 from 292 in 2017 and increased by 54% to 292 in 2017 from 190in 2016.CompetitionThe insurance brokerage business is highly competitive, and numerous firms actively compete with us for customers and insurance markets.Competition in the insurance business is largely based upon innovation, knowledge, terms and condition of coverage, quality of service and price.A number of firms and banks with substantially greater resources and market presence compete with us.Our brokerage operations compete with firms, which operate globally or nationally or are strong in a particular region or locality and may have, inthat region or locality, an office with revenues as large as or larger than those of our corresponding local office. We believe that the primary factorsdetermining our competitive position with other organizations in our industry are the quality of the services we render, the technology we use, thediversity of products we offer, and the overall costs to our clients.A number of Carriers directly sell insurance, primarily to individuals, and do not pay commissions to third-party agents and brokers. In addition, theInternet continues to be a source for direct placement of personal lines insurance business. While it is difficult to quantify the impact on ourbusiness from individuals purchasing insurance over the Internet, we believe this risk would generally be isolated to personal lines customers withsingle-line auto insurance coverage, which represent a small portion of our overall business.Intellectual propertyWe have registered “Goosehead,” “Goosehead Insurance,” and our logo as trademarks in the U.S. We also have filed other trademark applicationsin the U.S. and will pursue additional trademark registrations and other intellectual property protection to the extent we believe it would bebeneficial and cost effective. We also are the registered holder of a variety of domain names that include “Goosehead” and similar variations.Regulatory matters15Franchise regulation. Offers and sales of franchises (so-called “pre-sale” franchise activities) are regulated in the United States by the FTC aswell as certain states. The FTC (through its “Franchise Rule”) requires franchisors to provide certain disclosures, in the form of a franchisedisclosure document (an “FDD”) to prospective Franchisees. One of the disclosure requirements is to include in the FDD audited financialstatements of the franchisor (Goosehead Insurance Agency, LLC) or, if not the franchisor, an affiliate or parent of the franchisor who guaranteesthe franchisor’s obligations to its franchisees. In order to include our consolidated financial statements in the FDD, we are required to guaranteeGoosehead Insurance Agency, LLC’s current and future obligations to its franchisees. The Franchise Rule does not require a franchisor to registeror file an FDD with the FTC before offering franchises. Approximately twenty states also have pre-sale franchise or “business opportunity” lawsand regulations that require franchisors to register with the state in some manner before that franchisor may offer or sell a franchise in that state,and in some cases to also provide prospective Franchisees with certain additional disclosures as part of the FDD. Approximately twenty-fourstates also have “franchise relationship laws” that address post-sale aspects of the franchisor-franchisee relationship, such as prohibitingenforcement of certain franchise agreement provisions, requiring a certain notice or cure period before termination of a franchise agreement, andalso defining what constitutes “good cause” for terminating the franchise agreement or denying a transfer or renewal of the agreement. Although webelieve that our Franchise Agreements and our relationships with Franchisees generally have complied with franchise relationship laws, a failure tocomply with those laws could result in civil liability or the company’s inability to enforce a Franchise Agreement, among other things. In addition,while historically our franchising operations have not been materially adversely affected by such laws or regulations, we cannot predict the effectof any future federal or state franchise laws or regulations.Licensing. We and/or our designated employees must be licensed to act as brokers, intermediaries or third-party administrators by stateregulatory authorities in the locations in which we conduct business. Regulations and licensing laws vary by individual state and are oftencomplex.The applicable licensing laws and regulations in all states are subject to amendment or reinterpretation by regulatory authorities, and suchauthorities are vested in most cases with relatively broad discretion as to the granting, revocation, suspension and renewal of licenses. It is ourbelief that we are in compliance with the applicable licensing laws and regulations of all states in which we currently operate. However, thepossibility still exists that we and/or our employees could be excluded or temporarily suspended from carrying on some or all of our activities in, orcould otherwise be subjected to penalties by, a particular jurisdiction.Agent and broker compensation. Some states, such as Texas, permit insurance agents to charge agency fees, while other states prohibit thispractice. In recent years, several states considered new legislation or regulations regarding the compensation of brokers by Carriers. Theproposals ranged in nature from new disclosure requirements to new duties on insurance agents and brokers in dealing with customers.Rate regulation. Nearly all states have insurance laws requiring personal property and casualty insurers to file rating plans, policy or coverageforms, and other information with the state’s regulatory authority. In many cases, such rating plans, policy or coverage forms, or both must beapproved prior to use.The speed with which an insurer can change rates in response to competition or in response to increasing costs depends, in part, on whether therating laws are (i) prior approval, (ii) file-and-use, or (iii) use-and-file laws. In states having prior approval laws, the regulator must approve a ratebefore the insurer may use it. In states having file-and-use laws, the insurer does not have to wait for the regulator’s approval to use a rate, but therate must be filed with the regulatory authority prior to being used. A use-and-file law requires an insurer to file rates within a certain period of timeafter the insurer begins using them. Eighteen states, including California and New York, have prior approval laws. Under all three types of ratinglaws, the regulator has the authority to disapprove a rate filing.While we are not an insurer, and thus not required to comply with state laws and regulations regarding insurance rates, our commissions arederived from a percentage of the premium rates set by insurers in conjunction with state law.Privacy regulation. Federal law and the laws of many states require financial institutions to protect the security and confidentiality of customerinformation and to notify customers about their policies and practices relating to collection and disclosure of customer information and theirpolicies relating to protecting the security and confidentiality of that information. Federal law and the laws of many states also regulate disclosuresand disposal of customer information. Congress, state legislatures, and regulatory authorities are expected to consider additional regulation relatingto privacy and other aspects of customer information.Employees16As of December 31, 2018, we had approximately 389 full-time and 14 part-time employees. Our Franchisees are independent businesses and theiremployees and independent contractor sales associates are therefore not included in our employee count. None of our employees are representedby a union. We have a good relationship with our employees.Corporate Channel sales agent headcount increased by 50% to 167 in 2018 from 111 in 2017 and increased by 61% to 111 in 2017 from 69 in2016.Initial Public Offering and Organizational TransactionsOn May 1, 2018 Goosehead Insurance, Inc. completed an initial public offering (the “Offering”) of 10 million shares of Class A common stock at aprice of $10.00 per share, which included 1 million shares issued pursuant to the underwriter's over-allotment option. GSHD became the solemanaging member of Goosehead Financial, LLC. GF was organized on January 1, 2016 as a Delaware Limited Liability Company and isheadquartered in Westlake, TX. The operations of GF represent the predecessor to GSHD prior to the Offering, and the consolidated and combinedentities of GF are described in more detail below. Information for any periods prior to May 1, 2018 relates to GF and its subsidiaries and affiliates.In connection with the Offering, the company completed the following transactions (the "Reorganization Transactions"):•The GF limited liability company agreement was amended to, among other things, i) appoint GSHD as the sole managing member of GFand ii) modify the capital structure of GF by reclassifying the interests previously held by Pre-IPO LLC Members into a single new class ofnon-voting LLC Units.•GSHD was authorized to issue two classes of common stock. 10 million shares of Class A common stock were issued pursuant to theOffering, including the underwriters' over-allotment option. 23 million shares of Class B common stock were issued to the Pre-IPO LLCMembers in an amount equal to the number of LLC Units held by each such Pre-IPO LLC Member in exchange for certain managementrights of GF. Each share of Class A common stock and Class B common stock entitles its holder to one vote per share on all matterssubmitted to a vote of GSHD's stockholders. Each share of Class B common stock can be exchanged for one share of Class A commonstock or, at GSHD's discretion, a cash payment equal to the volume weighted average market price of one share of Class A commonstock, thus canceling the share of Class B common stock on a one-for-one basis.•The Goosehead Management Holders and Texas Wasatch Holders indirectly transferred their ownership interests in GM and TWIHG,respectively, to GSHD in exchange for the Goosehead Management Note and Texas Wasatch Note. The aggregate principal amount ofthe Goosehead Management Note and the Texas Wasatch Note was approximately $114 million. Because the net proceeds from theOffering were insufficient to repay the aggregate principal amount of the notes, 4 million shares of Class A common stock were issued tothe Goosehead Management Holders and the Texas Wasatch Holders for the difference. GSHD contributed direct and indirect ownershipinterests in each of TWIHG and GM to GF.Following completion of the Reorganization Transactions and the Offering, GSHD owned 37.3% of GF and the Pre-IPO LLC Members owned theremaining 62.7%. GSHD is the sole managing member of GF and, although GSHD holds a minority economic interest in GF, GSHD has the solevoting power and control of management of GF. Accordingly, GSHD consolidates the financial results of GF and reports non-controlling interest inGSHD's consolidated financial statements.As of December 31, 2018, Goosehead Insurance, Inc. owned 38.0% of Goosehead Financial, LLC and the non-controlling interest holders ownedthe remaining 62.0% of Goosehead Financial, LLC.Available InformationOur Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant toSections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are filed with the Securities and ExchangeCommission (the “SEC”). We are subject to the informational requirements of the Exchange Act and file or furnish reports, proxy statements andother information with the SEC. Such reports and other information filed by us with the SEC are available free of charge on our website atir.gooseheadinsurance.com when such reports are made available on the SEC’s website. The SEC maintains an Internet site that contains reports,proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov. The contents ofthese websites are not incorporated into this filing. Further, our references to the URLs for these websites are intended to be inactive17textual references only.18Item 1A. Risk factorsAn investment in our Class A common stock involves a high degree of risk. You should carefully consider the following risks, as well as the otherinformation contained in this Annual Report on Form 10-K, before making an investment in our Class A common stock. If any of the following risksactually occur, our business, financial condition and results of operations may be materially adversely affected. In such an event, the trading priceof our Class A common stock could decline, and you could lose part or all of your investment.Risks relating to our businessAn overall decline in economic activity could have a material adverse effect on the financial condition and results of operations of ourbusiness.Factors, such as business revenue, economic conditions, the volatility and strength of the capital markets and inflation can affect the businessand economic environment. The demand for property and casualty insurance generally rises as the overall level of household income increasesand generally falls as household income decreases, affecting both the commissions and fees generated by our business. The majority of our newaccounts are sourced by referral sources tied to home closing transactions, and major slowdowns in the various housing markets Gooseheadserves could impact our ability to generate new business. The economic activity that impacts property and casualty insurance is most closelycorrelated with employment levels, corporate revenue and asset values. In addition, an increase in consumer preference for car- and ride-sharingservices, as opposed to automobile ownership, may result in a long-term reduction in the number of vehicles per capita, and consequently theautomobile insurance industry. Downward fluctuations in the year-over-year insurance premium charged by insurers to protect against the samerisk, referred to in the industry as softening of the insurance market, could adversely affect our business as a significant portion of the earningsare determined as a percentage of premium charged to our clients. Insolvencies and consolidations associated with an economic downturn,especially insolvencies in the insurance industry, could adversely affect our brokerage business through the loss of clients by hampering ourability to place insurance business. Our clients may have less need for insurance coverage, cancel existing insurance policies, modify theircoverage or not renew the policies they hold with us. Also, error and omission claims against us, which we refer to as E&O claims, may increasein economic downturns, also adversely affecting our brokerage business. A decline in economic activity could have a material adverse effect onour business, financial condition and results of operations.Volatility or declines in premiums or other adverse trends in the insurance industry may seriously undermine our profitability.We derive most of our revenue from commissions and fees for our brokerage services. We do not determine the insurance premiums on which ourcommissions are generally based. Moreover, insurance premiums are cyclical in nature and may vary widely based on market conditions.Because of market cycles for insurance product pricing, which we cannot predict or control, our brokerage revenues and profitability can be volatileor remain depressed for significant periods of time. In addition, there have been and may continue to be various trends in the insurance industrytoward alternative insurance markets including, among other things, greater levels of self-insurance, captives, rent-a-captives, risk retention groupsand non-insurance capital markets-based solutions to traditional insurance.As traditional risk-bearing Carriers continue to outsource the production of premium revenue to non-affiliated brokers or agents such as us, thoseCarriers may seek to further minimize their expenses by reducing the commission rates payable to insurance agents or brokers. The reduction ofthese commission rates, along with general volatility and/or declines in premiums, may significantly affect our profitability. Because we do notdetermine the timing or extent of premium pricing changes, it is difficult to precisely forecast our commission revenues, including whether they willsignificantly decline. As a result, we may have to adjust our budgets for future acquisitions, capital expenditures, dividend payments, loanrepayments and other expenditures to account for unexpected changes in revenues, and any decreases in premium rates may adversely affect ourbusiness, financial condition and results of operations.Because the revenue we earn on the sale of certain insurance products is based on premiums and commission rates set by insurers, anydecreases in these premiums or commission rates, or actions by Carriers seeking repayment of commissions, could result in revenuedecreases or expenses to us.We derive revenue from commissions on the sale of insurance products that are paid by the Carriers from whom our clients purchase insurance.Because payments for the sale of insurance products are processed internally by Carriers, we may not receive a payment that is otherwiseexpected in any particular period until after the end of that19period, which can adversely affect our ability to budget for significant future expenditures. Additionally, Carriers or their affiliates may under certaincircumstances seek the chargeback or repayment of commissions as a result of policy lapse, surrender, cancellation, rescission, default, or uponother specified circumstances. As a result of the chargeback or repayment of commissions, we may incur an expense in a particular period relatedto revenue previously recognized in a prior period and reflected in our financial statements. Such an expense could have a material adverse effecton our results of operations and financial condition, particularly if the expense is greater than the amount of related revenue retained by us.The commission rates are set by Carriers and are based on the premiums that the Carriers charge. The potential for changes in premium rates issignificant, due to pricing cyclicality in the insurance market. In addition, the insurance industry has been characterized by periods of intense pricecompetition due to excessive underwriting capacity and periods of favorable premium levels due to shortages of capacity. Capacity could also bereduced by Carriers failing or withdrawing from writing certain coverages that we offer our customers. Commission rates and premiums can changebased on prevailing legislative, economic and competitive factors that affect Carriers. These factors, which are not within our control, include thecapacity of Carriers to place new business, underwriting and non-underwriting profits of Carriers, consumer demand for insurance products, theavailability of comparable products from other Carriers at a lower cost and the availability of alternative insurance products, such as governmentbenefits and self-insurance products, to consumers. We cannot predict the timing or extent of future changes in commission rates or premiums orthe effect any of these changes will have on our business, financial condition and results of operations.Contingent Commissions we receive from Carriers are less predictable than standard commissions, and any decrease in the amount ofthese kinds of commissions we receive could adversely affect our results of operations.A portion of our revenues consists of Contingent Commissions we receive from Carriers. Contingent Commissions are paid by Carriers based uponthe profitability, volume and/or growth of the business placed with such companies during the prior year. If, due to the current economicenvironment or for any other reason, we are unable to meet Carriers’ profitability, volume or growth thresholds, or Carriers increase their estimateof loss reserves (over which we have no control), actual Contingent Commissions we receive could be less than anticipated, which couldadversely affect our business, financial condition and results of operations.Our business is subject to risks related to legal proceedings and governmental inquiries.We are subject to litigation, regulatory investigations and claims arising in the normal course of our business operations. The risks associated withthese matters often may be difficult to assess or quantify and the existence and magnitude of potential claims often remain unknown forsubstantial periods of time. While we have insurance coverage for some of these potential claims, others may not be covered by insurance,insurers may dispute coverage, or any ultimate liabilities may exceed our coverage.We may be subject to actions and claims relating to the sale of insurance, including the suitability of such products and services. Actions andclaims may result in the rescission of such sales; consequently, Carriers may seek to recoup commissions paid to us, which may lead to legalaction against us. The outcome of such actions cannot be predicted, and such claims or actions could have a material adverse effect on ourbusiness, financial condition and results of operations.We are subject to laws and regulations, as well as regulatory investigations. The insurance industry has been subject to a significant level ofscrutiny by various regulatory bodies, including state attorneys general and insurance departments, concerning certain practices within theinsurance industry. These practices include, without limitation, the receipt of Contingent Commissions by insurance brokers and agents fromCarriers and the extent to which such compensation has been disclosed, the collection of Agency Fees, bid rigging and related matters. From timeto time, our subsidiaries received informational requests from governmental authorities. We have cooperated and will continue to cooperate fullywith all governmental agencies.There have been a number of revisions to existing, or proposals to modify or enact new, laws and regulations regarding insurance agents andbrokers. These actions have imposed or could impose additional obligations on us with respect to our products sold. Some Carriers have agreedwith regulatory authorities to end the payment of Contingent Commissions on insurance products, which could impact our commissions that arebased on the volume, consistency and profitability of business generated by us.We cannot predict the impact that any new laws, rules or regulations may have on our business and financial results. Given the current regulatoryenvironment and the number of our subsidiaries operating in local markets throughout the country, it is possible that we will become subject tofurther governmental inquiries and subpoenas20and have lawsuits filed against us. Regulators may raise issues during investigations, examinations or audits that could, if determined adversely,have a material impact on us. The interpretations of regulations by regulators may change and statutes may be enacted with retroactive impact.We could also be materially adversely affected by any new industry-wide regulations or practices that may result from these proceedings.Our involvement in any investigations and lawsuits would cause us to incur additional legal and other costs and, if we were found to have violatedany laws, we could be required to pay fines, damages and other costs, perhaps in material amounts. Regardless of final costs, these matterscould have a material adverse effect on us by exposing us to negative publicity, reputational damage, harm to client relationships, or diversion ofpersonnel and management resources.Conditions impacting Carriers or other parties that we do business with may impact us.We have a significant amount of accounts receivable from Carriers with which we place insurance. If those Carriers were to experience liquidityproblems or other financial difficulties, we could encounter delays or defaults in payments owed to us, which could have a significant adverseimpact on our financial condition and results of operations. The potential for an insurer to cease writing insurance we offer our clients couldnegatively impact overall capacity in the industry, which in turn could have the effect of reduced placement of certain lines and types of insuranceand reduced revenue and profitability for us. Questions about a Carrier’s perceived stability or financial strength may contribute to such insurers’strategic decisions to focus on certain lines of insurance to the detriment of others.Regulations affecting Carriers with which we place business affect how we conduct our operations.Insurers are also regulated by state insurance departments for solvency issues and are subject to reserve requirements. We cannot guarantee thatall Carriers with which we do business comply with regulations instituted by state insurance departments. We may need to expend resources toaddress questions or concerns regarding our relationships with these insurers, diverting management resources away from operating our business.Competition in our industry is intense and, if we are unable to compete effectively, we may lose clients and our financial results may benegatively affected.The business of providing insurance products and services is highly competitive and we expect competition to intensify. We compete for clientson the basis of reputation, client service, program and product offerings and our ability to tailor products and services to meet the specific needs ofa client.We actively compete with numerous integrated financial services organizations as well as Carriers and brokers, producer groups, individualinsurance agents, investment management firms, independent financial planners and broker-dealers. Competition may reduce the fees that we canobtain for services provided, which would have an adverse effect on revenue and margins. Many of our competitors have greater financial andmarketing resources than we do and may be able to offer products and services that we do not currently offer and may not offer in the future. Tothe extent that banks, securities firms and Carrier affiliates, the financial services industry may experience further consolidation, and we thereforemay experience increased competition from Carriers and the financial services industry, as a growing number of larger financial institutionsincreasingly, and aggressively, offer a wider variety of financial services, including insurance intermediary services. In addition, a number ofCarriers are engaged in the direct sale of insurance, primarily to individuals, and do not pay commissions to brokers.In addition, new competitors, alliances among competitors or mergers of competitors could emerge and gain significant market share, and some ofour competitors may have or may develop a lower cost structure, adopt more aggressive pricing policies or provide services that gain greatermarket acceptance than the services that we offer or develop. Competitors may be able to respond to the need for technological changes andinnovate faster, or price their services more aggressively. They may also compete for skilled professionals, finance acquisitions, fund internalgrowth and compete for market share more effectively than we do. To respond to increased competition and pricing pressure, we may have tolower the cost of our services or decrease the level of service provided to clients, which could have an adverse effect on our business, financialcondition and results of operations.Some of our competitors may be able to sustain the costs of litigation more effectively than we can because they have substantially greaterresources. In the event any of such competitors initiate litigation against us, such litigation, even if without merit, could be time-consuming andcostly to defend and may divert management’s attention and resources away from our business and adversely affect our business, financialcondition and results of operations.Similarly, any increase in competition due to new legislative or industry developments could adversely affect us. These developments include:21•Increased capital-raising by Carriers, which could result in new capital in the industry, which in turn may lead to lower insurance premiums andcommissions;•Carriers selling insurance directly to insureds without the involvement of a broker or other intermediary;•Changes in our business compensation model as a result of regulatory developments;•Federal and state governments establishing programs to provide property insurance in catastrophe-prone areas or other alternative markettypes of coverage, that compete with, or completely replace, insurance products offered by Carriers; and•Increased competition from new market participants such as banks, accounting firms, consulting firms and Internet or other technology firmsoffering risk management or insurance brokerage services, or new distribution channels for insurance such as payroll firms.New competition as a result of these or other competitive or industry developments could cause the demand for our products and services todecrease, which could in turn adversely affect our business, financial condition and results of operations.Our business, financial condition and results of operations may be negatively affected by E&O claims.We have significant insurance agency and brokerage operations and are subject to claims and litigation in the ordinary course of business resultingfrom alleged and actual errors and omissions in placing insurance and rendering coverage advice. These activities involve substantial amounts ofmoney. Since E&O claims against us may allege our liability for all or part of the amounts in question, claimants may seek large damage awards.These claims can involve significant defense costs. Errors and omissions could include failure, whether negligently or intentionally, to placecoverage on behalf of clients, to provide Carriers with complete and accurate information relating to the risks being insured, or to appropriatelyapply funds that we hold on a fiduciary basis. It is not always possible to prevent or detect errors and omissions, and the precautions we take maynot be effective in all cases.We have errors and omissions insurance coverage to protect against the risk of liability resulting from our alleged and actual errors and omissions.Prices for this insurance and the scope and limits of the coverage terms available are dependent on our claims history as well as marketconditions that are outside of our control. While we endeavor to purchase coverage that is appropriate to our assessment of our risk, we are unableto predict with certainty the frequency, nature or magnitude of claims for direct or consequential damages or whether our errors and omissionsinsurance will cover such claims.In establishing liabilities for E&O claims, we utilize case level reviews by inside and outside counsel and an internal analysis to estimate potentiallosses. The liability is reviewed annually and adjusted as developments warrant. Given the unpredictability of E&O claims and of litigation thatcould flow from them, it is possible that an adverse outcome in a particular matter could have a material adverse effect on our results ofoperations, financial condition or cash flow in a given quarterly or annual period.Our business is dependent upon information processing systems. Security or data breaches may hurt our business.Our ability to provide insurance services to clients and to create and maintain comprehensive tracking and reporting of client accounts depends onour capacity to store, retrieve and process data, manage significant databases and expand and periodically upgrade our information processingcapabilities. As our operations evolve, we will need to continue to make investments in new and enhanced information systems. As ourinformation system providers revise and upgrade their hardware, software and equipment technology, we may encounter difficulties in integratingthese new technologies into our business. Interruption or loss of our information processing capabilities or adverse consequences fromimplementing new or enhanced systems could have a material adverse effect on our business, financial condition and results of operations.In the course of providing financial services, we may electronically store or transmit personally identifiable information, such as social securitynumbers or credit card or bank information, of clients or employees of clients. Breaches in data security or infiltration by unauthorized persons ofour network security could cause interruptions in operations and damage to our reputation. While we maintain policies, procedures andtechnological safeguards designed to protect the security and privacy of this information, we cannot entirely eliminate the risk of improper accessto or disclosure of personally identifiable information nor the related costs we incur to mitigate the consequences from such events. Privacy lawsand regulations are matters of growing public concern and are continuously changing in the states in which we operate. The failure to adhere to orsuccessfully implement procedures to respond to these regulations could result in legal liability or impairment to our reputation.22Further, despite security measures taken, our systems may be vulnerable to physical break-ins, unauthorized access, viruses or other disruptiveproblems. If our systems or facilities were infiltrated or damaged, our clients could experience data loss, financial loss and significant businessinterruption leading to a material adverse effect on our business, financial condition and results of operations. We may be required to expendsignificant additional resources to modify protective measures, to investigate and remediate vulnerabilities or other exposures or to make requirednotifications.We rely on the availability and performance of information technology services provided by third parties.While we maintain some of our critical information technology systems, we are also dependent on third party service providers, includingSalesforce.com, to provide important information technology services relating to, among other things, agency management services, sales andservice support, electronic communications and certain finance functions. If the service providers to which we outsource these functions do notperform effectively, we may not be able to achieve the expected cost savings and may have to incur additional costs to correct errors made bysuch service providers. Depending on the function involved, such errors may also lead to business disruption, processing inefficiencies, the lossof or damage to intellectual property through security breach, the loss of sensitive data through security breach, or otherwise. While we or anythird-party service provider have not experienced any significant disruption, failure or breach impacting our information technology systems, anysuch disruption, failure or breach could adversely affect our business, financial condition and results of operations.Our inability to successfully recover should we experience a disaster or other business continuity problem could cause materialfinancial loss, loss of human capital, regulatory actions, reputational harm or legal liability.Should we experience a local or regional disaster or other business continuity problem, such as an earthquake, hurricane, terrorist attack,pandemic, security breach, power loss, telecommunications failure or other natural or man-made disaster, our continued success will depend, inpart, on the availability of personnel, office facilities, and the proper functioning of computer, telecommunication and other related systems andoperations. We could potentially lose client data or experience material adverse interruptions to our operations or delivery of services to clients in adisaster recovery scenario.If we are unable to apply technology effectively in driving value for our clients through technology-based solutions or gain internalefficiencies and effective internal controls through the application of technology and related tools, our operating results, clientrelationships, growth and compliance programs could be adversely affected.Our future success depends, in part, on our ability to anticipate and respond effectively to the threat of digital disruption and other technologychange. We must also develop and implement technology solutions and technical expertise among our employees that anticipate and keep pacewith rapid and continuing changes in technology, industry standards, client preferences and internal control standards. We may not be successfulin anticipating or responding to these developments on a timely and cost-effective basis, and our ideas may not be accepted in the marketplace.Additionally, the effort to gain technological expertise and develop new technologies in our business requires us to incur significant expenses. Ifwe cannot offer new technologies as quickly as our competitors, or if our competitors develop more cost-effective technologies or productofferings, we could experience a material adverse effect on our operating results, client relationships, growth and compliance programs.In some cases, we depend on key vendors and partners to provide technology and other support for our strategic initiatives, such as theSalesforce.com platform. If these third parties fail to perform their obligations or cease to work with us, our ability to execute on our strategicinitiatives could be adversely affected.Damage to our reputation could have a material adverse effect on our business.Our reputation is one of our key assets. We advise our clients on and provide services related to a wide range of subjects and our ability to attractand retain clients is highly dependent upon the external perceptions of our level of service, trustworthiness, business practices, financial conditionand other subjective qualities. Negative perceptions or publicity regarding these or other matters, including our association with clients or businesspartners who themselves have a damaged reputation, or from actual or alleged conduct by us or our employees, could damage our reputation. Anyresulting erosion of trust and confidence among existing and potential clients, regulators and other parties important to the success of ourbusiness could make it difficult for us to attract new clients and maintain existing ones, which could have a material adverse effect on ourbusiness, financial condition and results of operations.Our inability to retain or hire qualified employees, as well as the loss of any of our executive officers, could negatively impact our abilityto retain existing business and generate new business.23Our success depends on our ability to attract and retain skilled and experienced personnel. There is significant competition from within theinsurance industry and from businesses outside the industry for exceptional employees, especially in key positions. If we are not able tosuccessfully attract, retain and motivate our employees, our business, financial condition, results of operations and reputation could be materiallyand adversely affected.If any of our key professionals were to join an existing competitor or form a competing company, some of our customers could choose to use theservices of that competitor instead of our services. Our key personnel are prohibited by contract from soliciting our employees and customers andfrom competing in our industry in the vicinity of the Company office at which such key personnel member was employed for a period of two yearsfollowing separation from employment with us. However, there can be no assurance that we will be successful in enforcing these contracts.In addition, we could be adversely affected if we fail to adequately plan for the succession of our senior leaders, including our founders and keyexecutives. In particular, our future success is substantially dependent on the continued service our co-founder, chairman and CEO, Mark Jones.Although we operate with a decentralized management system, the loss of our senior managers or other key personnel, or our inability to continueto identify, recruit and retain such personnel, could materially and adversely affect our business, financial condition and results of operation.The occurrence of natural or man-made disasters could result in declines in business and increases in claims that could adversely affectour financial condition, results of operations and cash flows.We are exposed to various risks arising out of natural disasters, including earthquakes, hurricanes, fires, floods, landslides, tornadoes, typhoons,tsunamis, hailstorms, explosions, climate events or weather patterns and pandemic health events, as well as man-made disasters, including actsof terrorism, military actions, cyber-terrorism, explosions and biological, chemical or radiological events. The continued threat of terrorism andongoing military actions may cause significant volatility in global financial markets, and a natural or man-made disaster could trigger an economicdownturn in the areas directly or indirectly affected by the disaster. These consequences could, among other things, result in a decline in businessand increased claims from those areas. They could also result in reduced underwriting capacity of our Carriers, making it more difficult for ouragents to place business. Disasters also could disrupt public and private infrastructure, including communications and financial services, whichcould disrupt our normal business operations. Any increases in loss ratios due to natural or man-made disasters could impact our ContingentCommissions, which are primarily driven by both growth and profitability metrics.A natural or man-made disaster also could disrupt the operations of our counterparties or result in increased prices for the products and servicesthey provide to us. Finally, a natural or man-made disaster could increase the incidence or severity of E&O claims against us.Non-compliance with or changes in laws, regulations or licensing requirements applicable to us could restrict our ability to conduct ourbusiness.The industry in which we operate is subject to extensive regulation. We are subject to regulation and supervision both federally and in eachapplicable local jurisdiction. In general, these regulations are designed to protect clients, policyholders and insureds and to protect the integrity ofthe financial markets, rather than to protect stockholders or creditors. Our ability to conduct business in these jurisdictions depends on ourcompliance with the rules and regulations promulgated by federal regulatory bodies and other regulatory authorities. Failure to comply withregulatory requirements, or changes in regulatory requirements or interpretations, could result in actions by regulators, potentially leading to finesand penalties, adverse publicity and damage to our reputation in the marketplace. There can be no assurance that we will be able to adapteffectively to any changes in law. In extreme cases, revocation of a subsidiary’s authority to do business in one or more jurisdictions could resultfrom failure to comply with regulatory requirements. In addition, we could face lawsuits by clients, insureds and other parties for alleged violationsof certain of these laws and regulations. It is difficult to predict whether changes resulting from new laws and regulations will affect the industry orour business and, if so, to what degree.Employees and principals who engage in the solicitation, negotiation or sale of insurance, or provide certain other insurance services, generally arerequired to be licensed individually. Insurance and laws and regulations govern whether licensees may share commissions with unlicensed entitiesand individuals. We believe that any payments we make to third parties are in compliance with applicable laws. However, should any regulatoryagency take a contrary position and prevail, we will be required to change the manner in which we pay fees to such employees or principals orrequire entities receiving such payments to become registered or licensed.State insurance laws grant supervisory agencies, including state insurance departments, broad administrative authority. State insurance regulatorsand the National Association of Insurance Commissioners continually review existing laws and regulations, some of which affect our business.These supervisory agencies regulate many24aspects of the insurance business, including, the licensing of insurance brokers and agents and other insurance intermediaries, the handling ofthird-party funds held in a fiduciary capacity, and trade practices, such as marketing, advertising and compensation arrangements entered into byinsurance brokers and agents.Federal, state and other regulatory authorities have focused on, and continue to devote substantial attention to, the insurance industry as well asto the sale of products or services to seniors. Regulatory review or the issuance of interpretations of existing laws and regulations may result inthe enactment of new laws and regulations that could adversely affect our operations or our ability to conduct business profitably. We are unable topredict whether any such laws or regulations will be enacted and to what extent such laws and regulations would affect our business.In connection with the implementation of our corporate strategies, we face risks associated with the acquisition or disposition ofbusinesses, the entry into new lines of business, the integration of acquired businesses and the growth and development of thesebusinesses.In pursuing our corporate strategy, we may acquire other businesses or dispose of or exit businesses we currently own. The success of thisstrategy is dependent upon our ability to identify appropriate acquisition and disposition targets, negotiate transactions on favorable terms,complete transactions and, in the case of acquisitions, successfully integrate them into our existing businesses. If a proposed transaction is notconsummated, the time and resources spent in researching it could adversely result in missed opportunities to locate and acquire otherbusinesses. If acquisitions are made, there can be no assurance that we will realize the anticipated benefits of such acquisitions, including, butnot limited to, revenue growth, operational efficiencies or expected synergies. If we dispose of or otherwise exit certain businesses, there can beno assurance that we will not incur certain disposition related charges, or that we will be able to reduce overhead related to the divested assets.From time to time, either through acquisitions or internal development, we may enter new lines of business or offer new products and serviceswithin existing lines of business. These new lines of business or new products and services may present additional risks, particularly in instanceswhere the markets are not fully developed. Such risks include the investment of significant time and resources; the possibility that these effortswill be not be successful; the possibility that marketplace does not accept our products or services, or that we are unable to retain clients thatadopt our new products or services; and the risk of additional liabilities associated with these efforts. In addition, many of the businesses that weacquire and develop will likely have significantly smaller scales of operations prior to the implementation of our growth strategy. If we are not ableto manage the growing complexity of these businesses, including improving, refining or revising our systems and operational practices, andenlarging the scale and scope of the businesses, our business may be adversely affected. Other risks include developing knowledge of andexperience in the new business, integrating the acquired business into our systems and culture, recruiting professionals and developing andcapitalizing on new relationships with experienced market participants. External factors, such as compliance with new or revised regulations,competitive alternatives and shifting market preferences may also impact the successful implementation of a new line of business. Failure tomanage these risks in the acquisition or development of new businesses could materially and adversely affect our business, financial conditionand results of operations.We have debt outstanding that could adversely affect our financial flexibility and subjects us to restrictions and limitations that couldsignificantly impact our ability to operate our business.As of December 31, 2018, we had total consolidated debt outstanding of approximately $48.4 million, collateralized by substantially all of theCompany’s assets, including rights to future commissions. In the year ending December 31, 2018, we had debt servicing costs of $53.8 million,inclusive of $49.4 million in principal payments related to payoff of the original Credit Agreement (see "Item 7. Management’s discussion andanalysis of financial condition and results of operations") and $3.2 million of which was attributable to interest. In the year ending December 31,2017, we had debt servicing costs of $2.7 million, of which $2.3 million was attributable to interest. The level of debt we have outstanding duringany period could adversely affect our financial flexibility. We also bear risk at the time debt matures. Our ability to make interest and principalpayments, to refinance our debt obligations and to fund our planned capital expenditures will depend on our ability to generate cash fromoperations. Our ability to generate cash from operations is, to a certain extent, subject to general economic, financial, competitive, legislative,regulatory and other factors that are beyond our control, such as an environment of rising interest rates. The need to service our indebtedness willalso reduce our ability to use cash for other purposes, including working capital, dividends to stockholders, acquisitions, capital expenditures,share repurchases, and general corporate purposes. If we cannot service our indebtedness, we may have to take actions such as selling assets,seeking additional equity or reducing or delaying capital expenditures, strategic acquisitions, and investments, any of which could impede theimplementation of our business strategy or prevent us from entering into transactions that would otherwise benefit our business. Additionally, wemay not be able to effect such actions, if necessary, on favorable terms, or at all. We may not be able to refinance any of our indebtedness onfavorable terms, or at all.25The Credit Agreement (as defined below) governing our debt contains covenants that, among other things, restrict our ability to make certainrestricted payments, incur additional debt, engage in certain asset sales, mergers, acquisitions or similar transactions, create liens on assets,engage in certain transactions with affiliates, change our business or make investments and require us to comply with certain financial covenants.The restrictions in the Credit Agreement governing our debt may prevent us from taking actions that we believe would be in the best interest of ourbusiness and our stockholders and may make it difficult for us to execute our business strategy successfully or effectively compete withcompanies that are not similarly restricted. We may also incur future debt obligations that might subject us to additional or more restrictivecovenants that could affect our financial and operational flexibility, including our ability to pay dividends. We cannot make any assurances that wewill be able to refinance our debt or obtain additional financing on terms acceptable to us, or at all. A failure to comply with the restrictions underthe Credit Agreement could result in a default under the financing obligations or could require us to obtain waivers from our lenders for failure tocomply with these restrictions. The occurrence of a default that remains uncured or the inability to secure a necessary consent or waiver couldcause our obligations with respect to our debt to be accelerated and have a material adverse effect on our business, financial condition and resultsof operations.Changes to reference rates could materially adversely affect our earningsAs a result of recent regulatory and other legal proceedings, actions by regulators or law enforcement agencies may result in changes to themanner in which the London interbank offered rate (LIBOR) is determined, its discontinuance or the establishment of alternative reference rates. Atthis time, it is not possible to predict the effect that these developments, any discontinuance, modification or other reforms to LIBOR or any otherreference rate, the establishment of alternative reference rates, or the impact of any such events on contractual mechanisms may have on themarkets, us or our floating rate debt. Uncertainty as to the nature of such potential discontinuance, modification, alternative reference rates orother reforms may negatively impact our access to funding. Furthermore, the use of alternative reference rates or other reforms could cause theinterest payable on our outstanding floating rate debt to be materially different, and potentially higher, than expected.Because our business is highly concentrated in Texas, California, Florida and Illinois, adverse economic conditions, natural disasters,or regulatory changes in these states could adversely affect our financial condition.A significant portion of our business is concentrated in Texas, California, Florida and Illinois. The insurance business is primarily a state-regulatedindustry, and therefore, state legislatures may enact laws that adversely affect the insurance industry. Because our business is concentrated inthe states identified above, we face greater exposure to unfavorable changes in regulatory conditions in those states than insurance intermediarieswhose operations are more diversified through a greater number of states. In addition, the occurrence of adverse economic conditions, natural orother disasters, or other circumstances specific to or otherwise significantly impacting these states could adversely affect our financial condition,results of operations and cash flows. We are susceptible to losses and interruptions caused by hurricanes (particularly in Texas, where ourheadquarters and several offices are located), earthquakes, power shortages, telecommunications failures, water shortages, floods, fire, extremeweather conditions, geopolitical events such as terrorist acts and other natural or man-made disasters. Our insurance coverage with respect tonatural disasters is limited and is subject to deductibles and coverage limits. Such coverage may not be adequate or may not continue to beavailable at commercially reasonable rates and terms.Changes in tax laws as a result of the enactment of recent tax legislation could impact our operations and profitability.Legislation commonly known as the Tax Cuts and Jobs Act (the “Tax Reform Act”) was signed into law on December 22, 2017. The Tax ReformAct will make significant changes to the U.S. federal income tax rules for taxation of individuals and corporations, generally effective for taxableyears beginning after December 31, 2017. In the case of individuals, the tax brackets will be adjusted, the top federal income rate will be reducedto 37%, special rules will reduce taxation of certain income earned through pass-through entities and various deductions will be eliminated orlimited, including limiting the deduction for state and local taxes to $10,000 per year, decreasing the mortgage interest deduction on new homes to$750,000 and eliminating the home equity line of credit interest deduction for loans that are not considered home acquisition debt.Changes in these deductions may affect taxpayers in states with high residential home prices and high state and local taxes, such as Californiaand New York, and may also negatively impact the housing market. Our homeowner and dwelling property lines of business comprised 53% of ourpremiums in 2018 and a majority of our new accounts are sourced by referral sources tied to home closing transactions. As we expand ourfranchise pipeline into new26geographies that are located in high tax jurisdictions, we cannot guarantee our ability to grow our client base at the same pace as our existinggeographies and generate new business if there is lower demand in the housing market as a consequence of the Tax Reform Act.We derive a significant portion of our commission revenues from a limited number of Carriers, the loss of which would result inadditional expense and loss of market share.During 2018 we had two Carriers who that represented 10% or more of our total revenue, these Carriers represented 17% and 11% of our totalrevenue. During 2017 we had three Carriers that represented 10% or more of our total revenue, these Carriers represented 18%, 15% and 11% ofour total revenue. Should any of these Carriers seek to terminate its arrangements with us, we could be forced to move our business to anotherCarrier and some additional expense and loss of market share could possibly result.Our business may be harmed if we lose our relationships with Carriers, fail to maintain good relationships with Carriers, becomedependent upon a limited number of Carriers or fail to develop new Carrier relationships.Our business typically enters into contractual agency relationships with Carriers that are sometimes unique to Goosehead, but non-exclusive andterminable on short notice by either party for any reason. In many cases, Carriers also have the ability to amend the terms of our agreementsunilaterally on short notice. Carriers may be unwilling to allow us to sell their existing or new insurance products or may amend our agreementswith them, for a variety of reasons, including for competitive or regulatory reasons or because of a reluctance to distribute their products throughour platform. Carriers may decide to rely on their own internal distribution channels, choose to exclude us from their most profitable or popularproducts, or decide not to distribute insurance products in individual markets in certain geographies or altogether. The termination or amendment ofour relationship with a Carrier could reduce the variety of insurance products we offer. We also could lose a source of, or be paid reducedcommissions for, future sales and could lose Renewal Revenue for past sales. Our business could also be harmed if we fail to develop new Carrierrelationships.In the future, it may become necessary for us to offer insurance products from a reduced number of Carriers or to derive a greater portion of ourrevenues from a more concentrated number of Carriers as our business and the insurance industry evolve. Should our dependence on a smallernumber of Carriers increase, whether as a result of the termination of Carrier relationships, Carrier consolidation or otherwise, we may becomemore vulnerable to adverse changes in our relationships with our Carriers, particularly in states where we offer insurance products from a relativelysmall number of Carriers or where a small number of Carriers dominate the market. The termination, amendment or consolidation of ourrelationship with our Carriers could harm our business, financial condition and results of operations.The failure by Mark Jones and Robyn Jones to maintain either a minimum voting interest in us or the ability to elect or designate forelection at least a majority of our board of directors could trigger a change of control default under our Credit Agreement.Pursuant to the Credit Agreement, a change of control default will be triggered when any person or group other than Mark Jones and Robyn Jonesbecomes the beneficial owner of more than 50% of the voting power represented by our outstanding equity interests, unless Mark and RobynJones have the ability to elect or designate for election at least a majority of our board of directors. Such a default could result in the accelerationof repayment of our and our subsidiaries’ indebtedness, including borrowings under the Revolving Credit Facility (as defined below) if not waived bythe lenders under the Credit Agreement. Mark Jones and Robyn Jones may choose to dispose of part or all of their stakes in us and/or may ceaseto exercise the current level of control they have over the appointment and removal of members of our board of directors. Any such changes maytrigger a change of control event that could result in us being forced to repay the outstanding sums owed under our Credit Agreement. If any suchevent occurs, this may negatively affect our financial condition and operating results. In addition, we may not have sufficient funds to financerepayment of any of such indebtedness upon any such change of control.Risks relating to our franchise businessThe failure to attract and retain highly qualified Franchisees could compromise our ability to expand the Goosehead network.Our most important asset is the people in our network, and the success of Goosehead depends largely on our ability to attract and retain highquality franchise agents. If we fail to attract and retain franchise agents, our Franchisees may fail to generate the revenue necessary to pay thecontractual fees owed to us.27The nature of franchise relationships can give rise to conflict. For example, Franchisees or agents may become dissatisfied with the amount ofcontractual fees owed under franchise or other applicable arrangements, particularly in the event that we decide to increase fees further. They maydisagree with certain network-wide policies and procedures, including policies such as those dictating brand standards or affecting their marketingefforts. They may also be disappointed with any marketing campaigns designed to develop our brand. There are a variety of reasons why ourfranchisor-franchisee relationship can give rise to conflict. If we experience any conflicts with our Franchisees on a large scale, our Franchiseesmay decide not to renew their Franchise Agreements upon expiration or may file lawsuits against us or they may seek to disaffiliate with us, whichcould also result in litigation. These events may, in turn, materially and adversely affect our business, financial condition and results of operations.Our financial results are affected directly by the operating results of Franchisees and agents, over whom we do not have direct control.Our franchises generate revenue in the form of Agency Fees and commissions. Accordingly, our financial results depend upon the operational andfinancial success of our Franchisees and their agents. If industry trends or economic conditions are not sustained or do not continue to improve,our Franchisees’ financial results may worsen, and our revenue may decline. We may also have to terminate Franchisees due to non-reporting andnon-payment. Further, if Franchisees fail to renew their Franchise Agreements, or if we decide to restructure Franchise Agreements in order toinduce Franchisees to renew these agreements, then our revenues may decrease, and profitability from new Franchisees may be lower than in thepast due to reduced ongoing fees and other non-standard incentives we may need to provide.We rely in part on our Franchisees and the manner in which they operate their locations to develop and promote our business. Although we havedeveloped criteria to evaluate and screen prospective Franchisees, we cannot be certain that our Franchisees will have the business acumen orfinancial resources necessary to operate successful franchises in their franchise areas and state franchise laws may limit our ability to terminateor modify these Franchise Agreements. Moreover, despite our training, support and monitoring, Franchisees may not successfully operate in amanner consistent with our standards and requirements or may not hire and train qualified personnel. The failure of our Franchisees to operate theirfranchises successfully could have a material adverse effect on us, our reputation, our brand and our ability to attract prospective Franchisees andcould materially adversely affect our business, financial condition or results of operations.Our Franchisees and agents could take actions that could harm our business.Our Franchisees are independent businesses and the agents who work within these brokerages are independent contractors and, as such, are notour employees, and we do not exercise control over their day-to-day operations. Our Franchisees may not operate their insurance brokeragebusinesses in a manner consistent with industry standards or may not attract and retain qualified independent contractor agents. If Franchiseeswere to provide diminished quality of service to customers, engage in fraud, defalcation, misconduct or negligence or otherwise violate the law orrealtor codes of ethics, our image and reputation may suffer materially, and we may become subject to liability claims based upon such actions ofour Franchisees and agents. Any such incidence could adversely affect our results of operations.Brand value can be severely damaged even by isolated incidents, particularly if the incidents receive considerable negative publicity or result inlitigation. Some of these incidents may relate to the way we manage our relationship with our Franchisees, our growth strategies or the ordinarycourse of our business or our Franchisees’ business. Other incidents may arise from events that are or may be beyond our control and maydamage our brand, such as actions taken (or not taken) by one or more Franchisees or their agents relating to health, safety, welfare or othermatters; litigation and claims; failure to maintain high ethical and social standards for all of our operations and activities; failure to comply withlocal laws and regulations; and illegal activity targeted at us or others. Our brand value could diminish significantly if any such incidents or othermatters erode consumer confidence in us, which may result in a decrease in our total agent count and, ultimately, lower continuing franchise fees,which in turn would materially and adversely affect our business, financial condition and results of operations.We are subject to a variety of additional risks associated with our Franchisees.Our franchise system subjects us to a number of risks, any one of which may harm the reputation associated with our brand, and/or maymaterially and adversely impact our business and results of operations.Franchisee insurance. The Franchise Agreements require each Franchisee to maintain certain insurance types and levels. Certain extraordinaryhazards, however, may not be covered, and insurance may not be available (or may be available only at prohibitively expensive rates) with respectto many other risks. Moreover, any loss incurred28could exceed policy limits or the Franchisee could lack the required insurance at the time the claim arises, in breach of the insurance requirement,and policy payments made to Franchisees may not be made on a timely basis. Any such loss or delay in payment could have a material andadverse effect on a Franchisee’s ability to satisfy its obligations under its Franchise Agreement, including its ability to make payments forcontractual fees or to indemnify us.Franchise nonrenewal. Each Franchise Agreement has an expiration date. Upon the expiration of the Franchise Agreement, we or the Franchiseemay or may not elect to renew the Franchise Agreement. If the Franchise Agreement is renewed, such renewal is generally contingent on theFranchisee’s execution of the then-current form of Franchise Agreement (which may include terms the Franchisee deems to be more onerous thanthe prior Franchise Agreement), the satisfaction of certain conditions and the payment of a renewal fee. If a Franchisee is unable or unwilling tosatisfy any of the foregoing conditions, the expiring Franchise Agreement will terminate upon expiration of the term of the Franchise Agreement. IfFranchisees choose not to renew their Franchise Agreements, then this could have a material impact on our financial condition.Failure to support our expanding franchise system could have a material adverse effect on our business, financial condition or results ofoperations.Our growth strategy depends in part on expanding our franchise network, which will require the implementation of enhanced business supportsystems, management information systems, financial controls and other systems and procedures as well as additional management, franchisesupport and financial resources. We may not be able to manage our expanding franchise system effectively. Failure to provide our Franchiseeswith adequate support and resources could materially adversely affect both our new and existing Franchisees as well as cause disputes betweenus and our Franchisees and potentially lead to material liabilities. Any of the foregoing could materially adversely affect our business, financialcondition and results of operations.Our franchising activities are subject to a variety of state and federal laws and regulations regarding franchises, and any failure tocomply with such existing or future laws and regulations could adversely affect our business.The sale of franchises is regulated by various state laws as well as by the Federal Trade Commission (“FTC”). The FTC requires that franchisorsmake extensive disclosure to prospective Franchisees but does not require registration. A number of states require registration and/or disclosure inconnection with franchise offers and sales. In addition, several states have “franchise relationship laws” or “business opportunity laws” that limitthe ability of franchisors to terminate Franchise Agreements or to withhold consent to the renewal or transfer of these agreements. We believe thatour franchising procedures, as well as any applicable state-specific procedures, comply in all material respects with both the FTC guidelines andall applicable state laws regulating franchising in those states in which we offer new Franchise Agreements. However, noncompliance could reduceanticipated revenue, which in turn may materially and adversely affect our business, financial condition and results of operations.We are subject to certain risks related to litigation filed by or against us, and adverse results may harm our business and financialcondition.We cannot predict with certainty the costs of defense, the costs of prosecution, insurance coverage or the ultimate outcome of litigation and otherproceedings filed by or against us, including remedies or damage awards, and adverse results in such litigation and other proceedings may harmour business and financial condition.Such litigation and other proceedings may include, but are not limited to, complaints from or litigation by Franchisees, usually related to allegedbreaches of contract or wrongful termination under the Franchise Agreements, actions relating to intellectual property, commercial arrangementsand franchising arrangements.In addition, litigation against a Franchisee or its affiliated sales agents by third parties, whether in the ordinary course of business or otherwise,may also include claims against us for liability by virtue of the franchise relationship. As our market share increases, competitors may pursuelitigation to require us to change our business practices or offerings and limit our ability to compete effectively. Even claims without merit can betime-consuming and costly to defend and may divert management’s attention and resources away from our business and adversely affect ourbusiness, financial condition and results of operations. Franchisees may fail to obtain insurance naming Goosehead Insurance, Inc. as anadditional insured on such claims. In addition to increasing Franchisees’ costs and limiting the funds available to pay us contractual fees andreducing the execution of new Franchise Agreements, claims against us (including vicarious liability claims) divert our management resources andcould cause adverse publicity, which may materially and adversely affect us and our brand, regardless of whether such allegations are valid orwhether we are liable. A substantial unsatisfied judgment against us or one of our29subsidiaries could result in bankruptcy, which would materially and adversely affect our business, financial condition and results of operations.We may not be able to manage growth successfully.In order to successfully expand our business, we must effectively recruit, develop and motivate new Franchisees, and we must maintain thebeneficial aspects of our corporate culture. We may not be able to hire new employees with the expertise necessary to manage our growth quicklyenough to meet our needs. If we fail to effectively manage our hiring needs and successfully develop our Franchisees, our Franchisee andemployee morale, productivity and retention could suffer, and our brand and results of operations could be harmed. Effectively managing ourpotential growth could require significant capital expenditures and place increasing demands on our management. We may not be successful inmanaging or expanding our operations or in maintaining adequate financial and operating systems and controls. If we do not successfully managethese processes, our brand and results of operations could be adversely affected.Risks relating to intellectual property and cybersecurityOur business depends on a strong brand, and any failure to maintain, protect and enhance our brand would hurt our ability to grow ourbusiness, particularly in new markets where we have limited brand recognition.We have developed a strong brand that we believe has contributed significantly to the success of our business. Maintaining, protecting andenhancing the “Goosehead Insurance” brand is critical to growing our business, particularly in new markets where we have limited brandrecognition. If we do not successfully build and maintain a strong brand, our business could be materially harmed. Maintaining and enhancing thequality of our brand may require us to make substantial investments in areas such as marketing, community relations, outreach and employeetraining. We actively engage in advertisements, targeted promotional mailings and email communications, and engage on a regular basis in publicrelations and sponsorship activities. These investments may be substantial and may fail to encompass the optimal range of traditional, online andsocial advertising media to achieve maximum exposure and benefit to the brand.Infringement, misappropriation or dilution of our intellectual property could harm our business.We believe our Goosehead Insurance trademark has significant value and that this and other intellectual property are valuable assets that arecritical to our success. Unauthorized uses or other infringement of our trademarks or service marks could diminish the value of our brand and mayadversely affect our business. Effective intellectual property protection may not be available in every market. Failure to adequately protect ourintellectual property rights could damage our brand and impair our ability to compete effectively. Even where we have effectively secured statutoryprotection for our trademarks and other intellectual property, our competitors and other third parties may misappropriate our intellectual property,and in the course of litigation, such competitors and other third parties occasionally attempt to challenge the breadth of our ability to prevent othersfrom using similar marks or designs. If such challenges were to be successful, less ability to prevent others from using similar marks or designsmay ultimately result in a reduced distinctiveness of our brand in the minds of consumers. Defending or enforcing our trademark rights, brandingpractices and other intellectual property could result in the expenditure of significant resources and divert the attention of management, which inturn may materially and adversely affect our business and operating results, even if such defense or enforcement is ultimately successful. Eventhough competitors occasionally may attempt to challenge our ability to prevent infringers from using our marks, we are not aware of anychallenges to our right to use, and to authorize our Franchisees to use, any of our brand names or trademarks.Failure to protect or enforce our intellectual property rights, or allegations that we have infringed on the intellectual property rights ofothers, could harm our reputation, ability to compete effectively, financial condition and business.To protect our intellectual property rights, we rely on a combination of trademark laws, copyright laws, trade secret protection, confidentialityagreements and other contractual arrangements with our affiliates, employees, clients, strategic partners and others. However, the protectivesteps that we take may be inadequate to deter misappropriation of our proprietary information or infringement of our intellectual property. Inaddition, we may be unable to detect the unauthorized use of our intellectual property rights. Failure to protect our intellectual property adequatelycould harm our reputation and affect our ability to compete effectively. In addition, even if we initiate litigation against third parties such asinfringement suits, we may not prevail.Meanwhile, third parties may assert intellectual property rights claims against us, which may be costly to defend, could require the payment ofdamages and could limit our ability to use or offer certain technologies, products or30other intellectual property. Any intellectual property claims, with or without merit, could be expensive, take significant time and divertmanagement’s attention from other business concerns. Successful challenges against us could require us to modify or discontinue our use oftechnology or business processes where such use is found to infringe or violate the rights of others, or require us to purchase licenses from thirdparties, any of which could adversely affect our business, financial condition and results of operations.Improper disclosure of confidential, personal or proprietary data, whether due to human error, misuse of information by employees orvendors, or as a result of cyberattacks, could result in regulatory scrutiny, legal liability or reputational harm, and could have an adverseeffect on our business or operations.We maintain confidential, personal and proprietary information relating to our company, our employees and our clients. This information includespersonally identifiable information, protected health information and financial information. We are subject to laws and regulations relating to thecollection, use, retention, security and transfer of this information. These laws apply to transfers of information among our affiliates, as well as totransactions we enter into with third party vendors.Cybersecurity breaches, such as computer viruses, unauthorized parties gaining access to our information technology systems and similarincidents could disrupt the security of our internal systems and business applications, impair our ability to provide services to our clients andprotect the privacy of their data, compromise confidential business information, result in intellectual property or other confidential or proprietaryinformation being lost or stolen, including client, employee or company data, which could harm our competitive position or otherwise adverselyaffect our business. Cyber threats are constantly evolving, which makes it more difficult to detect cybersecurity incidents, assess their severity orimpact in a timely manner, and successfully defend against them.We maintain policies, procedures and technical safeguards designed to protect the security and privacy of confidential, personal and proprietaryinformation. Nonetheless, we cannot eliminate the risk of human error or guarantee our safeguards against employee, vendor or third-partymalfeasance. It is possible that the steps we follow, including our security controls over personal data and training of employees on data security,may not prevent improper access to, disclosure of, or misuse of confidential, personal or proprietary information. This could cause harm to ourreputation, create legal exposure, or subject us to liability under laws that protect personal data, resulting in increased costs or loss of revenue.Data privacy is subject to frequently changing laws, rules and regulations in the various jurisdictions in which we operate. For example, legislatorsin the U.S. are proposing new and more robust cybersecurity legislation in light of the recent broad-based cyberattacks at a number of companies.These and similar initiatives around the country could increase the cost of developing, implementing or securing our servers and require us toallocate more resources to improved technologies, adding to our IT and compliance costs. Our failure to adhere to, or successfully implementprocesses in response to, changing legal or regulatory requirements in this area could result in legal liability or damage to our reputation in themarketplace.Risks relating to our organizational structureWe are a holding company and our principal asset is our 40% ownership interest in Goosehead Financial, LLC, and we are accordinglydependent upon distributions from Goosehead Financial, LLC to pay dividends, if any, taxes, make payments under the tax receivableagreement and pay other expenses.We are a holding company and our principal asset is our direct or indirect ownership of 40% of the outstanding LLC Units. We have no independentmeans of generating revenue. As the sole managing member of Goosehead Financial, LLC, we intend to cause Goosehead Financial, LLC to makedistributions to the Pre-IPO LLC Members and us, in amounts sufficient to cover all applicable taxes payable by us and the Pre-IPO LLC membersand any payments we are obligated to make under the tax receivable agreement we intend to enter into as part of the reorganization transactionsand to fund dividends to our stockholders in accordance with our dividend policy, to the extent our board of directors declares such dividends.Deterioration in the financial conditions, earnings or cash flow of Goosehead Financial, LLC and its subsidiaries for any reason could limit or impairtheir ability to pay such distributions. Additionally, to the extent that we need funds and Goosehead Financial, LLC is restricted from making suchdistributions to us under applicable law or regulation, as a result of covenants in our Credit Agreement or otherwise, we may not be able to obtainsuch funds on terms acceptable to us or at all and as a result could suffer a material adverse effect on our liquidity and financial condition.31In certain circumstances, Goosehead Financial, LLC will be required to make distributions to us and the other holders of LLC Units, andthe distributions that Goosehead Financial, LLC will be required to make may be substantial.Under the amended and restated Goosehead Financial, LLC agreement, Goosehead Financial, LLC will generally be required from time to time tomake pro rata distributions in cash to us and the other holders of LLC Units in amounts that are intended to be sufficient to cover the taxes on ourand the other LLC Units holders’ respective allocable shares of the taxable income of Goosehead Financial, LLC. As a result of (i) potentialdifferences in the amount of net taxable income allocable to us and the other LLC Unit holders, (ii) the lower tax rate applicable to corporationsthan individuals and (iii) the favorable tax benefits that we anticipate receiving from (a) acquisitions of interests in Goosehead Financial, LLC inconnection with future taxable redemptions or exchanges of LLC Units for shares of our Class A common stock and (b) payments under the taxreceivable agreement, we expect that these tax distributions will be in amounts that exceed our tax liabilities and obligations to make paymentsunder the tax receivable agreement. Our board of directors will determine the appropriate uses for any excess cash so accumulated, which mayinclude, among other uses, dividends, the payment of obligations under the tax receivable agreement and the payment of other expenses. We willhave no obligation to distribute such cash (or other available cash other than any declared dividend) to our stockholders. No adjustments to theredemption or exchange ratio of LLC Units for shares of Class A common stock will be made as a result of either (i) any cash distribution by us or(ii) any cash that we retain and do not distribute to our stockholders. To the extent that we do not distribute such excess cash as dividends on ourClass A common stock and instead, for example, hold such cash balances or lend them to Goosehead Financial, LLC, the Pre-IPO LLC Memberswould benefit from any value attributable to such cash balances as a result of their ownership of Class A common stock following a redemption orexchange of their LLC Units. See "Item 13. Certain relationships and related transactions, and director independence".We are controlled by the Pre-IPO LLC Members whose interests in our business may be different than yours, and certain statutoryprovisions afforded to stockholders are not applicable to us.The Pre-IPO LLC Members control approximately 70% of the combined voting power of our common stock. Further, pursuant to a stockholdersagreement we and the Pre-IPO LLC Members entered into (the “Stockholders Agreement”), the Pre-IPO LLC Members may approve or disapprovesubstantially all transactions and other matters requiring approval by our stockholders, such as a merger, consolidation, dissolution or sale of all orsubstantially all of our assets, the issuance or redemption of certain additional equity interests in an amount exceeding $50 million, any change inthe size of the board of directors and amendments to our certificate of incorporation or bylaws. In addition, the Stockholders Agreement providesthat approval by the Pre-IPO LLC Members is required for any changes to the strategic direction or scope of Goosehead Insurance, Inc. andGoosehead Financial, LLC’s business, any acquisition or disposition of any asset or business having consideration in excess of 15% of our totalassets and the hiring and termination of our Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, General Counsel or Controller(including terms of compensation). Furthermore, the Stockholders Agreement will provide that, until the Substantial Ownership Requirement is nolonger met, the Pre-IPO LLC Members may designate a majority of the nominees for election to our board of directors, including the nominee forelection to serve as Chairman of our board of directors.This concentration of ownership and voting power may also delay, defer or even prevent an acquisition by a third party or other change of controlof our company which could deprive you of an opportunity to receive a premium for your shares of Class A common stock and may make sometransactions more difficult or impossible without the support of the Pre-IPO LLC Members, even if such events are in the best interests of minoritystockholders. Furthermore, this concentration of voting power with the Pre-IPO LLC Members may have a negative impact on the price of ourClass A common stock. In addition, because the Pre-IPO LLC Members, will have the ability to designate a majority of the nominees for electionto our board of directors, including the nominee for election to serve as Chairman of our board of directors until the Substantial OwnershipRequirement is no longer met, the Pre-IPO LLC Members will be able to control us as long as they hold at least 10% of the aggregate number ofoutstanding shares of our common stock. The Pre-IPO LLC Members may not be inclined to permit us to issue additional shares of Class Acommon stock, including for the facilitation of acquisitions, if it would dilute their holdings below the 10% threshold.We cannot predict whether our dual class structure, combined with the concentrated control of the Pre-IPO LLC Members, will result in a lower ormore volatile market price of our Class A common stock or in adverse publicity or other adverse consequences. For example, certain indexproviders have announced restrictions on including companies with multiple-class share structures in certain of their indexes. In July 2017, FTSERussell announced that it plans to require new constituents of its indexes to have greater than 5% of the company’s voting rights in the32hands of public stockholders, and S&P Dow Jones announced that it will no longer admit companies with multiple-class share structures to certainof its indexes. Because of our dual class structure, we will likely be excluded from these indexes and, in the event we are included in one of suchindexes, we may be subsequently removed. In addition, we cannot assure you that other stock indexes will not take similar actions. Given thesustained flow of investment funds into passive strategies that seek to track certain indexes, exclusion or removal from stock indexes would likelypreclude investment by many of these funds and could make our Class A common stock less attractive to other investors. As a result, the marketprice of our Class A common stock could be adversely affected.The Pre-IPO LLC Members’ interests may not be fully aligned with yours, which could lead to actions that are not in your best interests. Becausethe Pre-IPO LLC Members hold a majority of their economic interests in our business through Goosehead Financial, LLC rather than through thepublic company, they may have conflicting interests with holders of shares of our Class A common stock. For example, the Pre-IPO LLCMembers may have a different tax position from us, which could influence their decisions regarding whether and when we should dispose of assetsor incur new or refinance existing indebtedness, especially in light of the existence of the tax receivable agreement, and whether and when weshould undergo certain changes of control within the meaning of the tax receivable agreement or terminate the tax receivable agreement. Inaddition, the structuring of future transactions may take into consideration these tax or other considerations even where no similar benefit wouldaccrue to us. See "Item 13. Certain relationships and related transactions, and director independence". In addition, the Pre-IPO LLC Members’significant ownership in us and resulting ability to effectively control us may discourage someone from making a significant equity investment inus, or could discourage transactions involving a change in control, including transactions in which you as a holder of shares of our Class Acommon stock might otherwise receive a premium for your shares over the then-current market price.We have opted out of Section 203 of the General Corporation Law of the State of Delaware (the “DGCL”), which prohibits a publicly held Delawarecorporation from engaging in a business combination transaction with an interested stockholder for a period of three years after the interestedstockholder became such unless the transaction fits within an applicable exemption, such as board approval of the business combination or thetransaction which resulted in such stockholder becoming an interested stockholder. Therefore, the Pre-IPO LLC Members are able to transfercontrol of us to a third party by transferring their shares of our common stock (subject to certain restrictions and limitations), which would notrequire the approval of our board of directors or our other stockholders.Our certificate of incorporation and Stockholders Agreement will provide that, to the fullest extent permitted by law, the doctrine of “corporateopportunity” under Delaware law will only apply against our directors and officers and their respective affiliates for competing activities related toinsurance brokerage activities. This doctrine will not apply to any business activity other than insurance brokerage activities. See "Item 13. Certainrelationships and related transactions, and director independence". Furthermore, the Pre-IPO LLC Members have business relationships outside ofour business.We are a “controlled company” within the meaning of the Nasdaq rules and, as a result, qualify for, and will rely on, exemptions fromcertain corporate governance requirements that provide protection to the stockholders of companies that are subject to such corporategovernance requirements.Mark E. Jones, our chief executive officer and Chairman of the Board, and Robyn Jones, Vice Chairman of the Board, beneficially own more than50% of the voting power for the election of members of our board of directors. As a result, we will be a “controlled company” within the meaning ofthe corporate governance standards of the Nasdaq rules. Under these rules, a listed company of which more than 50% of the voting power is heldby an individual, group or another company is a “controlled company” and may elect not to comply with certain of Nasdaq’s corporate governancerequirements.As a controlled company, we rely on certain exemptions from the Nasdaq standards that may enable us not to comply with certain Nasdaqcorporate governance requirements. Accordingly, we have opted not to implement a stand-alone nominating and corporate governance committeeand our compensation committee will not be fully independent. As a consequence of our reliance on certain exemptions from the Nasdaqstandards provided to “controlled companies,” you will not have the same protections afforded to stockholders of companies that are subject to allof the corporate governance requirements of the Nasdaq Global Market.We will be required to pay the Pre-IPO LLC Members for certain tax benefits we may claim, and the amounts we may pay could besignificant.As described under “Organizational structure,” future taxable redemptions or exchanges by the Pre-IPO LLC Members of LLC Units for shares ofour Class A common stock are expected to result in tax basis adjustments to the assets of Goosehead Financial, LLC that will be allocated to usand thus produce favorable tax attributes.33These tax attributes would not be available to us in the absence of those transactions. The anticipated tax basis adjustments are expected toreduce the amount of tax that we would otherwise be required to pay in the future.We entered into a tax receivable agreement with the Pre-IPO LLC Members that will provide for the payment by us to the Pre-IPO LLC Members of85% of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that we actually realize as a result of (i) anyincrease in tax basis in Goosehead Insurance, Inc.’s assets resulting from (a) the purchase of LLC Units from any of the Pre-IPO LLC Membersusing the net proceeds from any future offering, (b) redemptions or exchanges by the Pre-IPO LLC Members of LLC Units for shares of ourClass A common stock or (c) payments under the tax receivable agreement and (ii) tax benefits related to imputed interest deemed arising as aresult of payments made under the tax receivable agreement. This is a payment of obligation of us and not Goosehead Financial, LLC.The actual increase in tax basis, as well as the amount and timing of any payments under the tax receivable agreement, will vary depending on anumber of factors, including, but not limited to, the timing of any future redemptions, exchanges or purchases of the LLC Units held by Pre-IPOLLC Members, the price of our Class A common stock at the time of the purchase, redemption or exchange, the extent to which redemptions orexchanges are taxable, the amount and timing of the taxable income that we generate in the future, the tax rates then applicable and the portion ofour payments under the tax receivable agreement constituting imputed interest. We expect that, as a result of the increases in the tax basis of thetangible and intangible assets of Goosehead Financial, LLC attributable to the redeemed or exchanged LLC Units, the payments that we maymake to the existing Pre-IPO LLC Members could be substantial. Payments under the tax receivable agreement are not conditioned on the Pre-IPO LLC Members’ continued ownership of us. There may be a material negative effect on our liquidity if, as described below, the payments underthe tax receivable agreement exceed the actual benefits we receive in respect of the tax attributes subject to the tax receivable agreement and/ordistributions to us by Goosehead Financial, LLC are not sufficient to permit us to make payments under the tax receivable agreement.In addition, although we are not aware of any issue that would cause the Internal Revenue Service (“IRS”) to challenge the tax basis increases orother benefits arising under the tax receivable agreement, the Pre-IPO LLC Members will not reimburse us for any payments previously made ifsuch tax basis increases or other tax benefits are subsequently disallowed, except that any excess payments made to the Pre-IPO LLC Memberswill be netted against future payments otherwise to be made under the tax receivable agreement, if any, after our determination of such excess.As a result, in such circumstances we could make payments to the Pre-IPO LLC Members under the tax receivable agreement that are greaterthan our actual cash tax savings and may not be able to recoup those payments, which could negatively impact our liquidity.In addition, the tax receivable agreement provides that, upon certain mergers, asset sales or other forms of business combination, or certain otherchanges of control, our or our successor’s obligations with respect to tax benefits would be based on certain assumptions, including that we or oursuccessor would have sufficient taxable income to fully utilize the increased tax deductions and tax basis and other benefits covered by the taxreceivable agreement. As a result, upon a change of control, we could be required to make payments under the tax receivable agreement that aregreater than the specified percentage of our actual cash tax savings, which could negatively impact our liquidity.This provision of the tax receivable agreement may result in situations where the Pre-IPO LLC Members have interests that differ from or are inaddition to those of our other stockholders. In addition, we could be required to make payments under the tax receivable agreement that aresubstantial and in excess of our, or a potential acquirer’s, actual cash savings in income tax.Finally, because we are a holding company with no operations of our own, our ability to make payments under the tax receivable agreement isdependent on the ability of Goosehead Financial, LLC to make distributions to us. Our Credit Agreement restricts the ability of GooseheadFinancial, LLC to make distributions to us, which could affect our ability to make payments under the tax receivable agreement. To the extent thatwe are unable to make payments under the tax receivable agreement for any reason, such payments will be deferred and will accrue interest untilpaid, which could negatively impact our results of operations and could also affect our liquidity in periods in which such payments are made.Risks relating to ownership of our Class A common stockSome provisions of Delaware law and our certificate of incorporation and by-laws may deter third parties from acquiring us and diminishthe value of our Class A common stock.Our certificate of incorporation and by-laws provide for, among other things:34•Until the Substantial Ownership Requirement is no longer met, the Pre-IPO LLC Members may designate a majority of the nominees forelection to our board of directors, including the nominee for election to serve as Chairman of our board of directors;•at any time after the Substantial Ownership Requirement is no longer met, there will be:•restrictions on the ability of our stockholders to call a special meeting and the business that can be conducted at such meeting or toact by written consent;•supermajority approval requirements for amending or repealing provisions in the certificate of incorporation and by-laws;•a division of the board of directors into three classes of directors, with each class as equal in number as possible, serving staggeredthree-year terms, and such directors may only be removed for cause and by the affirmative vote of holders of 75% of the total votingpower of our outstanding shares of common stock, voting together as a single class;•our ability to issue additional shares of Class A common stock and to issue preferred stock with terms that the board of directors maydetermine, in each case without stockholder approval (other than as specified in our certificate of incorporation);•the absence of cumulative voting in the election of directors; and•advance notice requirements for stockholder proposals and nominations.These provisions in our certificate of incorporation and by-laws may discourage, delay or prevent a transaction involving a change in control of ourcompany that is in the best interest of our minority stockholders. Even in the absence of a takeover attempt, the existence of these provisionsmay adversely affect the prevailing market price of our Class A common stock if they are viewed as discouraging future takeover attempts. Theseprovisions could also make it more difficult for stockholders to nominate directors for election to our board of directors and take other corporateactions.Future sales, or the possibility of future sales, of a substantial number of our shares of Class A common stock could adversely affect theprice of our shares of Class A common stock.Future sales of a substantial number of our shares of Class A common stock, or the perception that such sales will occur, could cause a declinein the market price of our shares of Class A common stock. Approximately 25.6 million shares of our Class A common stock and LLC Units(which may be redeemed or exchanged for a corresponding number of shares of Class A common stock) are held by the Pre-IPO LLC Members,the Goosehead Management Holders and Texas Wasatch Holders. If these stockholders sell substantial amounts of shares of Class A commonstock in the public market (including any shares of Class A common stock issued upon redemption or exchange of LLC Units), or the marketperceives that such sales may occur, the market price of our shares of Class A common stock could be adversely affected. We have also enteredinto the Registration Rights Agreement (as defined below) pursuant to which we have agreed under certain circumstances to file a registrationstatement to register the resale of shares of our Class A commons stock held by the Pre-IPO LLC Members, the Goosehead Management Holdersand Texas Wasatch Holders, as well as to cooperate in certain public offerings of such shares. We have also filed registration statements toregister all shares of Class A common stock and other equity securities that we have issued, or may issue under the Omnibus Incentive Plan andEmployee Stock Purchase Plan. These shares of Class A common stock may be freely sold in the public market upon issuance, subject tocertain limitations applicable to affiliates. If a large number of our shares of Class A common stock are sold in the public market, the sales couldreduce the trading price of shares of Class A common stock.We may not be able to successfully maintain effective internal controls over financial reporting.We identified and previously reported material weaknesses for the years ended December 31, 2016 and 2017 regarding the lack of adequate (i)executive management review of our GAAP financial statements, (ii) review of our accounting policies, including recent accountingpronouncements and significant transactions for the periods presented and (iii) information technology general controls in the areas of user accessand program change management for certain information technology systems.Using third party consultants along with internal resources, we implemented certain measures to remediate these material weaknesses during theyear ended December 31, 2018.While the previously identified material weaknesses have been remediated, we may suffer from other material weaknesses in the future. If we failto maintain effective internal control over financial reporting in the future, such failure could result in a material misstatement of our annual orquarterly financial statements that would not be35prevented or detected on a timely basis and which could cause investors and other users to lose confidence in our financial statements, limit ourability to raise capital and have a negative effect on the trading price of our common stock. Additionally, failure to maintain effective internalcontrol over financial reporting may also negatively impact our operating results and financial condition, impair our ability to timely file our periodicand other reports with the Securities and Exchange Commission (the “SEC”), subject us to additional litigation and regulatory actions and cause usto incur substantial additional costs in future periods relating to the implementation of remedial measures.We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growthcompanies will make our common stock less attractive to investors.We are an “emerging growth company,” as defined in the JOBS Act, and we intend to take advantage of certain exemptions from various reportingrequirements that are applicable to public companies that are not “emerging growth companies” including, but not limited to, not being required tocomply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executivecompensation, and exemptions from the requirements of holding non-binding advisory votes on executive compensation and golden parachutepayments for so long as we remain an emerging growth company. We also intend to take advantage of an exemption that will permit us to complywith new or revised accounting standards within the same time periods as private companies. We cannot predict if investors will find our commonstock less attractive if we rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a lessactive trading market for our common stock and our stock price may be more volatile.We expect that our stock price will be volatile, which could cause the value of your investment to decline, and you may not be able toresell your shares at or above the initial public offering price.Securities markets worldwide have experienced, and are likely to continue to experience, significant price and volume fluctuations. This marketvolatility, as well as general economic, market or political conditions, could reduce the market price of our Class A common stock regardless ofour results of operations. The trading price of our Class A common stock is likely to be volatile and subject to wide price fluctuations in responseto various factors, including:•market conditions in the broader stock market in general, or in our industry in particular;•actual or anticipated fluctuations in our quarterly financial and operating results;•introduction of new products and services by us or our competitors;•issuance of new or changed securities analysts’ reports or recommendations;•investor perceptions of us and the industries in which we or our clients operate;•sales, or anticipated sales, of large blocks of our stock, including those by our existing investors;•additions or departures of key personnel;•regulatory or political developments;•litigation and governmental investigations; and•changing economic and political conditions.These and other factors may cause the market price and demand for shares of our Class A common stock to fluctuate substantially, which maylimit or prevent investors from readily selling their shares of Class A common stock and may otherwise negatively affect the liquidity of ourClass A common stock. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have sometimesinstituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, wecould incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management from our business,which could significantly harm our profitability and reputation.Our ability to pay dividends to our stockholders may be limited by our holding company structure, contractual restrictions andregulatory requirements.We are a holding company and have no material assets other than our ownership of LLC Units in Goosehead Financial, LLC and we will not haveany independent means of generating revenue. We intend to cause Goosehead Financial, LLC to make pro rata distributions to the Pre-IPO LLCMembers and us in an amount at least sufficient to allow us and the Pre-IPO LLC Members to pay all applicable taxes, to make payments underthe tax receivable agreement we will enter into with the Pre-IPO LLC Members and to pay our corporate and other overhead expenses. GooseheadFinancial, LLC is a distinct legal entity and may be subject to legal or contractual restrictions36that, under certain circumstances, may limit our ability to obtain cash from them. If Goosehead Financial, LLC is unable to make distributions, wemay not receive adequate distributions, which could materially and adversely affect our dividends and financial position and our ability to fund anydividends.Our board of directors will periodically review the cash generated from our business and the capital expenditures required to finance our globalgrowth plans and determine whether to declare periodic dividends to our stockholders. Our board of directors will take into account generaleconomic and business conditions, including our financial condition and results of operations, capital requirements, contractual restrictions,including restrictions and covenants contained in our debt agreements, business prospects and other factors that our board of directors considersrelevant. In addition, our Credit Agreement limits the amount of distributions that Goosehead Financial, LLC can make to us and the purposes forwhich distributions could be made. Accordingly, we may not be able to pay dividends even if our board of directors would otherwise deem itappropriate. See "Item 7. Management’s discussion and analysis of financial condition and results of operations — Liquidity and capital resources— Dividend Policy".If securities analysts do not publish research or reports about our business or if they publish negative evaluations of our Class Acommon stock, the price of our Class A common stock could decline.The trading market for our Class A common stock will rely in part on the research and reports that industry or securities analysts publish about usor our business. We currently have research coverage by industry and securities analysts. If no or few analysts continue coverage of us, thetrading price of our Class A common stock would likely decrease. If one or more of the analysts covering our business downgrade theirevaluations of our stock, the price of our Class A common stock could decline. If one or more of these analysts cease to cover our Class Acommon stock, we could lose visibility in the market for our stock, which in turn could cause our Class A common stock price to decline.37Item 1B. Unresolved staff commentsNone.Item 2. PropertiesOur headquarters is located in leased offices in Westlake, Texas. The lease consists of approximately 108,000 square feet and expires in January2029. As of December 31, 2018, our company-owned insurance brokerage business leases approximately 103,978 square feet of office space inTexas, Nevada, and Illinois under approximately eight leases. These offices are typically located in small office parks, generally with lease termsof five to ten years. We believe that all of our properties and facilities are well maintained.Item 3. Legal proceedingsFrom time to time, we may be involved in various legal proceedings, lawsuits and claims incidental to the conduct of our business. Ourbusinesses are also subject to extensive regulation, which may result in regulatory proceedings against us. We are not currently party to anymaterial legal proceedings.Item 4. Mine safety disclosuresNot applicable.PART IIItem 5. Market for Registrant’s Common Equity, Related StockholderMatters and Issuer Purchases of Equity SecuritiesMarket InformationOur Class A Common Stock is traded on NASDAQ under the symbol “GSHD.”Our Class B Common Stock is not listed nor traded on any stock exchange.Holders of RecordAs of March 14, 2019, there were 13 shareholders of record of our Class A common stock. The number of record holders does not include personswho held shares of our Class A common stock in nominee or "street name" accounts through brokers. As of March 14, 2019, there were 44shareholders of record of our Class B common stock.Dividend PolicySubject to funds being legally available, we intend to cause Goosehead Financial, LLC to make pro rata distributions to the Pre-IPO LLC Membersand us in an amount at least sufficient to allow us and the Pre-IPO LLC Members to pay all applicable taxes, to make payments under the taxreceivable agreement we entered into with the Pre-IPO LLC Members and to pay our corporate and other overhead expenses. The declaration andpayment of any dividends by Goosehead Insurance, Inc. will be at the sole discretion of our board of directors, which may change our dividendpolicy at any time. Our board of directors will take into account:•general economic and business conditions;•our financial condition and operating results;•our available cash and current and anticipated cash needs;•our capital requirements;•contractual, legal, tax and regulatory restrictions and implications on the payment of dividends by us to our stockholders or by our subsidiaries(including Goosehead Financial, LLC) to us; and38•such other factors as our board of directors may deem relevant.Goosehead Insurance, Inc. will be a holding company and will have no material assets other than its ownership of LLC Units in GooseheadFinancial, LLC, and as a consequence, our ability to declare and pay dividends to the holders of our Class A common stock will be subject to theability of Goosehead Financial, LLC to provide distributions to us. If Goosehead Financial, LLC makes such distributions, the Pre-IPO LLCMembers will be entitled to receive equivalent distributions from Goosehead Financial, LLC. However, because we must pay taxes, makepayments under the tax receivable agreement and pay our expenses, amounts ultimately distributed as dividends to holders of our Class Acommon stock are expected to be less than the amounts distributed by Goosehead Financial, LLC to the Pre-IPO LLC Members on a per sharebasis. See "Item 13. Certain relationships and related transactions, and director independence."Assuming Goosehead Financial, LLC makes distributions to its members in any given year, the determination to pay dividends, if any, to ourClass A common stockholders out of the portion, if any, of such distributions remaining after our payment of taxes, tax receivable agreementpayments and expenses (any such portion, an “excess distribution”) will be made by our board of directors. Because our board of directors maydetermine to pay or not pay dividends to our Class A common stockholders, our Class A common stockholders may not necessarily receivedividend distributions relating to excess distributions, even if Goosehead Financial, LLC makes such distributions to us.Securities Authorized for Issuance Under Equity Incentive PlansThe following table provides information about our compensation plans under which our Class A Common Stock is authorized for issuance, asof December 31, 2018:Number of securities to be issued upon exercise of outstanding options (in thousands)1,650Weighted-average exercise price of outstanding options10.00Number of securities remaining available for future issuances under equity compensation plans (in thousands)—Number of securities issued in connection with the Employee Stock Purchase Plan5Number of securities remaining available for future issuance in connection with the Employee Stock Purchase Plan15Issuer Purchases of Equity SecuritiesNone.Use of ProceedsOn April 26, 2018, our Registration Statement on Form S-1 (Registration No. 333-224080) was declared effective by the SEC in connection withthe Offering pursuant to which we sold an aggregate of $9.8 million shares of our Class A common stock (including $1.3 million shares soldpursuant to the underwriters' over-allotment option) at a price of $10.00 per share. J.P. Morgan Securities LLC and Merrill Lynch, Pierce Fenner &Smith Incorporated acted as joint book-running managers in the Offering. Keefe, Bruyette & Woods, Inc. and William Blair & Company, L.L.C.acted as co-managers in the Offering. The Offering resulted in net proceeds of approximately $87 million after deducting underwriters' discountsand commissions of $7 million and other offering expenses of $4.3 million.We used the net proceeds to us from the base portion of the Offering (approximately $77 million) to effect partial repayment of notes issued by theCompany in exchange for the transfer of certain ownership interests in Goosehead Management, LLC and Texas Wasatch Insurance HoldingsGroup, LLC held by their historical owners, which include certain members of the Company’s management and board of directors, including certainpersons owning 10% or more of our common stock. We used the net proceeds to us from the exercise of the underwriters’ over-allotment option topurchase from Goosehead Financial, LLC a number of LLC units equal to the number of shares of Class A common stock issued pursuant to theexercise of the underwriters’ over-allotment option. In turn, we intend to cause Goosehead Financial, LLC to use the proceeds it receives forgeneral corporate purposes, which may include the repayment of debt. Between the effective date of the Registration Statement and March 14,2019, Goosehead Financial, LLC has designated approximately $10 million of the net proceeds from the exercise of the underwriters’ over-allotment option to fund a dividend. Besides the aforementioned dividend, none of the net proceeds from the exercise of the underwriters’ over-allotment option were used to make payments, directly or indirectly, to (i) any of our directors, officers or their associates, (ii) any persons owning10% or more of our common shares or (iii) any of our affiliates. The intended use of the remaining net proceeds has not changed from theinformation mentioned in the final prospectus for the Offering.39Item 6. Selected financial dataThe following selected consolidated historical financial data of GSHD and should be read in conjunction with, and are qualified by reference to,"Item 1A. Risk factors," "Item 7. Management’s discussion and analysis of financial condition and results of operations” and our audited financialstatements and notes thereto included in "Item 8. Financial statements and supplementary data." The results indicated below and elsewhere inthis Annual Report are not necessarily indicative of our future performance. 2018 2017 2016Selected statements of income data (in thousands): Commissions and agency fees36,704 27,030 21,283Franchise revenues23,022 15,438 10,101Employee compensation and benefits58,256 24,544 19,469General and administrative expenses13,060 8,597 5,732Income (loss) from operations(13,930) 7,611 5,136Net income (loss)(18,667) 8,678 4,723Net income (loss) attributable to Goosehead Insurance, Inc.(8,903) — — Per share data: Earnings per share - basic(1)(0.66) n/a n/aEarnings per share - diluted(1)(0.66) n/a n/a Selected balance sheets data (at period end, in thousands): Cash and cash equivalents18,635 4,948 3,778Total current assets22,839 7,719 6,098Total assets34,798 16,706 8,695Total current liabilities7,812 5,767 3,476Total debt48,447 48,656 29,373Total liabilities60,001 57,839 32,935Total equity(25,203) (41,133) (24,240) Selected cash flow data (in thousands): Net cash provided by operating activities10,275 13,542 4,402Net cash used for investing activities(2,180) (6,135) (696)Net cash provided by financing activities5,592 (6,237) (965) Selected operating data: Adjusted EBITDA (in thousands)(2)14,752 10,718 8,112Adjusted EBITDA margin(2)25% 25% 26%Total written premium (in thousands)509,012 342,330 240,994Corporate sales agents (at period end)167 111 69Operating franchises (at period end)457 292 190(1) Basic and diluted earnings per share for the years ended December 31, 2017 and 2016 are not shown, as there were zero shares of Class A or Class B common stockoutstanding as of December 31, 2017 and 2016.(2) Adjusted EBITDA and Adjusted EBITDA margin are Non-GAAP Measures. See Item 7 "Management's discussion and analysis of financial condition and results of operation"for additional information and a reconciliation to the most directly comparable GAAP financial measure. 40Item 7. Management’s discussion and analysis of financial condition andresults of operationsOverviewThe following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Item 6. Selectedfinancial data” and our financial statements and the related notes and other financial information included elsewhere in this Annual Report. Inaddition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks,uncertainties, and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under “Risk factors” and elsewhere in this Annual Report.The following discussion contains references to periods prior to The Offering, including January through April 2018 and calendar year 2017, whichrepresents the consolidated and combined financial results of our predecessor Goosehead Financial, LLC and its subsidiaries Texas WasatchInsurance Services, LP, Goosehead Insurance Agency, LLC and its affiliates Goosehead Management, LLC and Texas Wasatch InsuranceHoldings Group, LLC.We are a rapidly growing personal lines independent insurance agency, reinventing the traditional approach to distributing personal lines productsand services throughout the United States. We were founded with one vision in mind—to provide consumers with superior insurance coverage atthe best available price and in a timely manner. By leveraging our differentiated business model and innovative technology platform, we are able todeliver to consumers a superior insurance experience.The following discussion contains references to the years ended December 31, 2018 and December 31, 2017.Financial Highlights for 2018:•Total revenue increased 41% from 2017 to $60.1 million•Commissions and Agency fee revenues increased 36% from 2017 to $36.7 million•Franchise revenues increased 49% from 2017 to $23.0 million•Net income decreased by 315% from 2017 to a loss of $18.7 million•Adjusted EBITDA*, a non-GAAP measure, increased 38% from 2017 to $14.8 million, or 25% of total revenues•Corporate Channel Adjusted EBITDA increased 18% from 2017 to $7.5 million, or 22% of Corporate Channel revenues•Franchise Channel Adjusted EBITDA increased 84% from 2017 to $8.6 million, or 33% of Franchise channel revenues•Basic earnings per share was $(0.66) and Adjusted EPS*, a non-GAAP measure, was $0.20 for the year ended December 31, 2018•Policies in Force increased 47% from December 31, 2017 to 334 thousand at December 31, 2018•Corporate sales headcount increased 50% from December 31, 2017 to 167 at December 31, 2018◦As of December 31, 2018, 90 of these Corporate sales agents had less than one year of tenure and 77 had greater than one yearof tenure•Operating franchises increased 57% from December 31, 2017 to 457 at December 31, 2018◦In Texas as of December 31, 2018, 36 operating franchisees had less than one year of tenure and 166 operating franchisees hadgreater than one year of tenure.◦Outside of Texas as of December 31, 2018, 168 operating franchisees had less than one year of tenure and 87 had greater thanone year of tenure.*Adjusted EBITDA and Adjusted EPS are non-GAAP measures. Reconciliation of Adjusted EBITDA to net income (loss) and Adjusted EPS toEPS, the most directly comparable financial measures presented in accordance with41GAAP, are set forth in the "Key performance indicators" section of Management’s discussion and analysis of financial condition and results ofoperations of this Form 10-K.Factors affecting our results of operationsWe believe that the most significant factors affecting our results of operations include:•Investment in growth. We continue to invest in expanding our national footprint, increasing our revenue producing headcount, and increasingthe level of support provided to our salespeople. Our ability to attract and retain top Corporate Channel sales agents and franchise owners,ramp up new agent productivity, and retain existing and future Policies in Force are key to continued profitable growth.•Investment in technology. We continue to develop and invest in our technology platform to drive scalability, adaptability, and efficiency inboth the Corporate Channel and Franchise Channel. We believe our significant proprietary investment in our technology is a key competitiveadvantage that supports our growth rate and operating margins.•Continued expansion of Franchise Channel into new markets. We will be expanding our franchise marketing efforts to 9 new states in2019, representing an approximate 20% increase in the population where we are actively marketing our franchise offering. We will continue tomarket actively for new franchises in our established markets and these new markets. We are now licensed with the necessary statedepartments of commerce and insurance and registered as a franchisor in all of the lower 48 states in the U.S. Making our franchise offeringavailable to more agents across the U.S. will allow us to continue to recruit an increasing number of talented agents into our system.•Continued retention of existing Book of Business. We have made significant progress in recent years in Client Retention metrics, andmaintaining these high levels of Client Retention is key to future profitability. A key lever in driving Client Retention is selling multiple lines ofbusiness to clients at the point of initial sale. In our Corporate Channel, we have made significant progress in recent years in this area. Weexpect to continue to maintain our high levels of cross-selling in the Corporate Channel, and we expect to see improvement in our FranchiseChannel as we bring best demonstrated practices to our field of Franchisees.•Increase in margins as business shifts from new to renewal. Because we are entitled to a higher percentage of revenue after the first termof a policy and the higher level of back-office support needed during the first term of an insurance policy, the Company begins to see higherlevels of profitability on Renewal Revenue. We will focus simultaneously on converting New Business Revenue to Renewal Revenue throughour retention efforts, and on continuing to grow New Business Revenue that will convert and allow us to expand our margins in future periods.•Strength of the insurance market or particular lines of business. We generate the majority of our revenues through commissions, whichare calculated as a percentage of the total insurance policy premium. A softening of the insurance market or the particular lines of businessthat are our focus, characterized by a period of declining premium rates, could negatively impact our profitability.•Seasonality and cyclicality of housing market conditions. The majority of our new accounts are sourced by referral sources tied to homeclosing transactions. Major slowdowns in the various housing markets Goosehead serves could impact our ability to generate new business.We experience seasonality and revenue related to the sale of insurance policies throughout the course of a calendar year that is tied to theseasonality of new home sales. Revenue from home insurance leads is higher from April to August and lower from October through January.While this can impact month-to-month or quarter-to-quarter results, we expect productivity to increase year-over-year.•Effect of natural or man-made disasters. Any increases in loss ratios due to natural or man-made disasters could impact our ContingentCommissions, which are primarily driven by both growth and profitability metrics.•Cost of being a public company. To operate as a public company, we will be required to continue to implement changes in certain aspectsof our business and develop, manage, and train management level and other employees to comply with on-going public companyrequirements. We will also incur new expenses as a public company, including public reporting obligations, proxy statements, stockholdermeetings, stock exchange fees and transfer agent fees.42Effects of the reorganization on our corporate structureGoosehead Insurance, Inc. was formed for the purpose of the Offering and has engaged to date only in activities related to Goosehead Financial,LLC. Goosehead Insurance, Inc. is a holding company and its sole material asset is a controlling ownership and profits interest in GooseheadFinancial, LLC. All of our business is conducted through Goosehead Financial, LLC and its consolidated subsidiaries and affiliates, and thefinancial results of Goosehead Financial, LLC and its consolidated subsidiaries are included in the consolidated financial statements of GooseheadInsurance, Inc. Goosehead Financial, LLC is currently taxed as a partnership for federal income tax purposes and, as a result, its members,including Goosehead Insurance, Inc., pay taxes with respect to their allocable shares of its net taxable income.We expect that redemptions and exchanges of LLC Units will result in increases in the tax basis in our share of the tangible and intangible assetsof Goosehead Financial, LLC that otherwise would not have been available. These increases in tax basis may reduce the amount of tax that wewould otherwise be required to pay in the future. The tax receivable agreement requires Goosehead Insurance, Inc. to pay 85% of the amount ofcash savings, if any, in U.S. federal, state and local income tax or franchise tax that we actually realize to the Pre-IPO LLC Members.Furthermore, payments under the tax receivable agreement give rise to additional tax benefits and therefore additional payments under the taxreceivable agreement itself. See "Item 13. Certain relationships and related transactions, and director independence".Certain income statement line itemsRevenuesIn 2018, revenue increased by 41% to $60.1 million from $42.7 million in 2017. We discuss below the breakdown of our revenue by stream and lineof business.Corporate Channel RevenuesIn the Corporate Channel, we generate revenue in the form of New Business Revenue (Corporate), Renewal Revenue (Corporate), Agency Fees,and Contingent Commissions.The following table sets forth our revenues in the Corporate Channel type by amount and as a percentage of our revenues for the periods indicated(in thousands): Years ended December 31, 2018 2017 New Business Revenue (Corporate) $9,347 27% $5,765 23%Renewal Revenue (Corporate) 18,357 54% 15,162 59%Agency Fees 5,169 15% 3,444 13%Contingent Commissions 1,414 4% 1,150 5%Revenues $34,287 100% $25,521 100%Franchise Channel RevenuesIn the Franchise Channel, we generate revenue from Royalty Fees, Initial Franchise Fees, Contingent Commissions, and interest income.The Initial Franchise Fee is determined by the state of the Franchise location and the payment terms, as follows:43Initial franchise feesPayment termsTX/LA/OKOtherPay-in full:$40,000$25,000Payment plan:Down payment$10,000$10,000Paid over 5 years50,00030,000Total Paid$60,000$40,000The following table sets forth our revenues in the Franchise Channel type by amount and as a percentage of our revenues for the periodsindicated: Years ended December 31, 2018 2017 New Business Royalty Fees $4,873 19% $3,364 20%Renewal Royalty Fees 12,104 47% 7,704 45%Initial Franchise Fees 6,045 23% 4,370 25%Contingent Commissions 2,417 9% 1,509 9%Interest Income 422 2% 243 1%Revenues $25,861 100% $17,190 100%ExpensesEmployee compensation and benefits. Employee compensation and benefits is our largest expense and consists of (a) base compensationcomprising salary, bonuses and benefits paid and payable to employees and (b) equity-based compensation associated with the grants ofrestricted interest awards to senior employees. We expect to continue to experience a general rise in compensation and benefits expensecommensurate with expected growth in headcount and with the need to maintain competitive compensation levels as we expand geographicallyand create new products and services.Our compensation arrangements with our employees contain a significant bonus component driven by the results of our operations. Therefore, asour revenues, profitability and the amount of incentive fees earned by our customized separate accounts and specialized funds increase, ourcompensation costs rise.General and administrative expenses. General and administrative expenses include travel, accounting, legal and other professional fees,commissions, placement fees, office expenses, depreciation and other costs associated with our operations. Our occupancy-related costs andprofessional services expenses, in particular, generally increase or decrease in relative proportion to the number of our employees and the overallsize and scale of our business operations. Expenses allocated to the Segments related to our service centers and other overhead are applied tothe appropriate Segment using a transfer pricing methodology that seeks to maximize the scale efficiencies of our business by sharing certainexpenses across the two Segments. These shared expenses are then allocated between the two Segments based on certain cost drivers relatedto each expense. Examples of specific expenses and their cost drivers include, but are not limited to: service team compensation costs areallocated based on the number of cases processed for each Segment, our rent expense by location is allocated based on the full time equivalentcount and Segment, and our Salesforce.com charges are allocated based on the number of individual licenses used by each Segment.Premium by line of businessWe are a distributor of insurance policies in a range of lines of business including homeowner’s insurance, automotive, dwelling property insurance,flood, wind and earthquake insurance, excess liability or umbrella insurance, specialty lines insurance (motorcycle, recreational vehicle, and otherinsurance), commercial lines insurance (general liability, property and auto insurance for small businesses) and life insurance. The following tablesets forth our Total Written Premium placed by line of business by amount and as a percentage of our Total Written Premium for the periodsindicated (in thousands):44Year Ended December 3120182017Line of businessHomeowner$270,47953%$188,570 55%Automotive225,59144%144,884 42%Commercial8,5072%5,818 2%Other4,4351%3,058 1%Total Written Premium$509,012100%$342,330 100%Key performance indicatorsOur key operating metrics are discussed below:Total Written PremiumTotal Written Premium represents for any reported period, the total amount of current (non-cancelled) gross premium that is placed withGoosehead’s portfolio of Carriers. We believe that Total Written Premium is an appropriate measure of operating performance because it reflectsgrowth of our business relative to other insurance agencies.For the year ended December 31, 2018, we had $509.0 million in Total Written Premium, representing a 49% increase, compared to $342.3 millionfor the year ended December 31, 2017. The following table shows Total Written Premium by channel for the years ended 2018 and 2017 (inthousands). Year Ended December 31% Change 2018 2017 Corporate Channel Total Written Premium $191,750 $143,87933%Franchise Channel Total Written Premium 317,262 198,45160%Total Written Premium $509,012 $342,33049%Policies in ForcePolicies in Force means as of any reported date, the total count of current (non-cancelled) policies placed with Goosehead’s portfolio of Carriers.We believe that Policies in Force is an appropriate measure of operating performance because it reflects growth of our business relative to otherinsurance agencies.As of December 31, 2018, we had 334 thousand in Policies in Force compared to 228 thousand as of December 31, 2017, representing a 47%increase.NPSNet Promoter Score (NPS) is calculated based on a single question: “How likely are you to refer Goosehead Insurance to a friend, family memberor colleague?” Clients that respond with a 6 or below are Detractors, ascore of 7 or 8 are called Passives, and a 9 or 10 are Promoters. NPS is calculated by subtracting the percentage of Detractors from thepercentage of Promoters. For example, if 50% of respondents were Promoters and 10% were Detractors, NPS is a 40. NPS is a useful gauge ofthe loyalty of client relationships and can be compared across companies and industries.NPS has increased to 89 as of December 31, 2018 from 86 as of December 31, 2017, primarily driven by the service team’s continued focus ondelivering highly differentiated service levels.Client RetentionClient Retention is calculated by comparing the number of all clients that had at least one policy in force twelve months prior to the date ofmeasurement and still have at least one policy in force at the date of measurement. We believe Client Retention is useful as a measure of howwell Goosehead retains clients year-over-year and minimizes defections.45Client Retention has remained steady at 88% at December 31, 2018 when compared to December 31, 2017, again driven by the service team’scontinued focus on delivering highly differentiated service levels. Our premium retention rate is higher than our Client Retention rate as a result ofboth premiums increasing year over year and additional coverages sold by our sales and service teams.New Business RevenueNew Business Revenue is commissions received from the Carrier, Agency Fees received from clients, and Royalty Fees relating to policies intheir first term.For the year ended December 31, 2018, New Business Revenue grew 54% to $19.4 million, from $12.6 million for the year ended December 31,2017. Growth in New Business Revenue is driven by an increase in Corporate Channel sales agent headcount of 50% and growth in franchises inthe Franchise Channel of 57%.Renewal RevenueRenewal Revenue is commissions received from the Carrier and Royalty Fees after the first term of a policy.For the year ended December 31, 2018, Renewal Revenue grew 33% to $30.5 million, from $22.9 million for the year ended December 31, 2017.Growth in Renewal Revenue was driven by Client Retention of 88% at December 31, 2018. As our agent force matures on both the CorporateChannel and the Franchise Channel, the policies they wrote in prior years begins to convert from New Business Revenue to more profitableRenewal Revenue.Non-GAAP Financial MeasuresAdjusted EBITDA, Adjusted EBITDA Margin, and Adjusted EPS are not measures of financial performance under GAAP and should not beconsidered substitutes for net income or earnings per share, which we consider to be the most directly comparable GAAP measure. We refer tothese measures as "non-GAAP financial measures." We consider these non-GAAP financial measures to be useful metrics for management andinvestors to facilitate operating performance comparisons from period to period by excluding potential differences caused by variations in capitalstructures, tax position, depreciation, amortization and certain other items that we believe are not representative of our core business. AdjustedEBITDA, Adjusted EBITDA Margin, and Adjusted EPS have limitations as analytical tools, and when assessing our operating performance, youshould not consider Adjusted EBITDA, Adjusted EBITDA Margin, or Adjusted EPS in isolation or as substitutes for net income, earnings per shareor other consolidated income statement data prepared in accordance with GAAP. Other companies may calculate Adjusted EBITDA, AdjustedEBITDA Margin, and Adjusted EPS differently than we do, limiting their usefulness as comparative measures.Adjusted EBITDAAdjusted EBITDA is a supplemental measure of our performance. We believe that Adjusted EBITDA is an appropriate measure of operatingperformance because it eliminates the impact of items that do not relate to business performance. Adjusted EBITDA is defined as net income (themost directly comparable GAAP measure) before interest, income taxes, depreciation and amortization, adjusted to exclude equity-basedcompensation and other non-operating items, including, among other things, certain non-cash charges and certain non-recurring or non-operatinggains or losses.Adjusted EBITDA increased by $4.1 million, or 38%, to $14.8 million for the year ended December 31, 2018, from $10.7 million for the year endedDecember 31, 2017, driven by Franchise Channel Adjusted EBITDA growth of $3.9 million and by Corporate Channel Adjusted EBITDA growth of$1.2 million.Adjusted EBITDA MarginAdjusted EBITDA Margin is Adjusted EBITDA as defined above, divided by total revenue excluding other non-operating items. Adjusted EBITDAMargin is helpful in measuring profitability of operations on a consolidated level.For the year ended December 31, 2018, Adjusted EBITDA Margin was 25% compared to 25% for the year ended December 31, 2017, primarilydriven by Corporate Channel Adjusted EBITDA Margin compression, offset by Franchise Channel Adjusted EBITDA Margin expansion. CorporateChannel Adjusted EBITDA Margin compression can be attributed to increased expenses driven by a 50% increase in Corporate Channel salesagent headcount and investments in technology. As these new sales agents ramp-up production and begin to receive Renewal Revenue(Corporate), we expect them to contribute to future Corporate Channel Adjusted EBITDA Margin46expansion. Franchise Channel Adjusted EBITDA Margin expansion is attributed to growth in more profitable Renewal Revenue as a percentage oftotal revenue and the increase in Contingent Commissions, offset by higher employee compensation and benefits and general and administrativeexpenses from investments in hiring and technology.Adjusted EPSAdjusted EPS is a supplemental measure of our performance, defined as earnings per share (the most directly comparable GAAP measure) beforenon-recurring or non-operating income and expenses, adjusted to assume a single class of stock (Class A) and assuming non-controlling interestdoes not exist. Adjusted EPS is a useful measure to management because it eliminates the impact of items that do not relate to businessperformance and helps compare companies that may not have a dual-share class structure.GAAP to Non-GAAP ReconciliationsThe following tables show a reconciliation from net income to Adjusted EBITDA for the year ended December 31, 2018 and 2017 (in thousands):Year ended December 31,20182017Net income (loss)$(18,667)$8,678Interest expense4,2662,474Depreciation and amortization1,464876Tax expense449—Equity-based compensation27,0832,231Other income (expense, including statefranchise tax)157(3,541)Adjusted EBITDA$14,752$10,718Adjusted EBITDA Margin(1)25%25%(1) Adjusted EBITDA Margin is calculated as Adjusted EBITDA divided by Total Revenue ($14,752/$60,148) and ($10,718/$42,711) for the year endedDecember 31, 2018 and 2017.47The following tables show a reconciliation from basic earnings per share to Adjusted EPS for the year ended December 31, 2018. Note that totalsmay not sum due to rounding:Year Ended December 31, 2018 Earnings (loss) per share - basic (GAAP) $(0.66)Add: income prior to the Reorganization Transactions(1) 0.12Less: estimated controlling interest taxes on income prior to Reorganization Transactions(2) (0.03)Add: origination fees from previous debt immediately recognized upon refinance(3) 0.02Add: equity-based compensation(4) 0.75Less: Estimated taxes assuming Class B shares were fully converted to Class A(5) (0.01)Adjusted EPS (non-GAAP) $0.20(1) Calculated as the income prior to the Reorganization Transactions divided by the sum of Class A and Class B shares at the time of IPO [ $4.4 million / ( 13.5 million + 22.7million ). See "Item 8. Financial statements and supplementary data."(2) Calculated as the income prior to the Reorganization Transactions, times the controlling interest percentage at the time of IPO, times the assumed effective tax rate of 25%,divided by the count of Class A shares at the time of the IPO [ $4.4 million * 37.3% * 25% / 13.5 million ]. Income taxes attributable to non-controlling interests are included in (5)below.(3) Calculated as the origination fees of previous debt immediately recognized upon refinance divided by sum of Class A and Class B shares at the time of the refinance [$871.0 thousand / ( 13.5 million + 22.7 million )](4) Calculated as equity-based compensation divided by the weighted average of Class A and Class B shares outstanding during the period [ $27.1 million / ( 13.6 million + 22.7million )](5) Calculated as net loss attributable to non-controlling interests, excluding taxes directly attributable to non-controlling interest, times the effective tax rate of controllinginterests, divided by the weighted average Class B shares for the period [( $(9.7) million * (2.0)% ) / 22.7 million ]. Not included in calculation are the effects of the conversionper the Tax Receivable Agreement or pre-IPO taxes attributable to non-controlling interests.Consolidated results of operationsThe following is a discussion of our consolidated results of operations for each of the years ended December 31, 2018 and December 31, 2017.This information is derived from our accompanying consolidated financial statements prepared in accordance with GAAP.48Year ended December 31, 2018 compared to year ended December 31, 2017The following table summarizes our results of operations for the years ended December 31, 2018 and 2017:Year Ended December 312018 2017Revenues: Commissions and agency fees$36,704 61% $27,030 63%Franchise revenues23,022 38% 15,438 36%Interest income422 1% 243 1%Total revenues60,148 100% 42,711 100%Operating Expenses: Employee compensation and benefits (including Class B unitcompensation of $26,134 and $2,231 for the years endedDecember 31, 2018 and 2017, respectively)58,256 79% 24,544 70%General and administrative expenses13,060 18% 8,597 24%Bad debts1,298 2% 1,083 3%Depreciation and amortization1,464 2% 876 2%Total operating expenses74,078 100% 35,100 100%Income (loss) from operations(13,930) 7,611 Other Income (Expense): Other income (expense)(22) 3,541 Interest expense(4,266) (2,474) Income (loss) before taxes(18,218) 8,678 Tax expense449 — Net income (loss)(18,667) 8,678 Less: net income (loss) attributable to non-controllinginterests(9,764) 8,678 Net income (loss) attributable to GooseheadInsurance, Inc.$(8,903) $— RevenuesIn 2018, revenue increased by 41% to $60.1 million from $42.7 million in 2017.Commissions and agency feesCommissions and agency fees consist of new business commissions, renewal commissions, agency fees, and contingent commissionsgenerated from the corporate channel, as well as contingent commissions generated from the franchise channel.The following table sets forth our commissions and agency fees by amount and as a percentage of our revenues for the periods indicated (inthousands):Year Ended December 3120182017New Business Revenue (Corporate)$9,34725%$5,76521%Renewal Revenue (Corporate)18,35750%15,16256%Agency Fees5,16914%3,44413%Contingent Commissions (Corporate)1,4144%1,1504%Contingent Commissions (Franchise)2,4177%1,5096%Commissions and agency fees$36,704 100%$27,030100%49New Business Revenue (Corporate) increased by $3.6 million, or 62%, to $9.3 million for the year ended December 31, 2018 from $5.8 million forthe year ended December 31, 2017. Revenue from Agency Fees increased by $1.7 million, or 50%, to $5.2 million for the year ended December31, 2018 from $3.4 million for the year ended December 31, 2017. These increases were primarily attributable to an increase in total sales agenthead count to 167 at December 31, 2018, from 111 at December 31, 2017, a 50% increase.Renewal Revenue (Corporate) increased by $3.2 million, or 21%, to $18.4 million for the year ended December 31, 2018 from $15.2 million for theyear ended December 31, 2017. These increases are primarily attributable to an increase in the number of policies in the renewal term atDecember 31, 2018 compared to December 31, 2017.Revenue from Contingent Commissions in the Corporate Channel increased by $0.3 million, or 23%, to $1.4 million for the year ended December31, 2018, from $1.2 million for the year ended December 31, 2017. The increase is primarily attributable to the increase in Total Written Premiumfor year ended December 31, 2018 compared to the year ended December 31, 2017.Revenue from Contingent Commissions in the Franchise Channel increased $0.9 million, or 60%, to $2.4 million for the year ended December 31,2018 from $1.5 million for the year ended December 31, 2017. The increase is primarily attributable to the increase in Total Written Premium foryear ended December 31, 2018 compared to the year ended December 31, 2017.Franchise RevenuesFranchise Revenues consist of Royalty Fees, Initial Franchise Fees, and interest income.The following table sets forth our franchise revenues by amount and as a percentage of our revenues for the periods indicated (in thousands): Year Ended December 31 2018 2017New Business Royalty Fees$4,873 21% $3,364 22%Renewal Royalty Fees12,104 53% 7,704 50%Initial Franchise Fees6,045 26% 4,370 28%Franchise revenues$23,022 100% $15,438 100%Revenue from New Business Royalty Fees increased by $1.5 million, or 45%, to $4.9 million for the year ended December 31, 2018 from $3.4million for the year ended December 31, 2017. The increase in revenue from New Business Royalty Fees was primarily attributable to an increasein the total number of operating franchises at December 31, 2018 compared to December 31, 2017.Revenue from Renewal Royalty Fees increase by $4.4 million, or 57%, to $12.1 million, for the year ended December 31, 2018 from $7.7 million forthe year ended December 31, 2017. The increase in revenue from Renewal Royalty Fees was primarily attributable to an increase in the number ofpolicies in the renewal term, and the higher Royalty Fee rate on renewal business compared to new business (50% vs. 20%, respectively).Revenues from Initial Franchise Fees increased by $1.7 million, or 38%, to $6.0 million for the year ended December 31, 2018 from $4.4 million forthe year ended December 31, 2017. The increase in revenue from Initial Franchise Fees was attributable to an increase in the total number offranchises that attended training for the year ended December 31, 2018 compared to the year ended December 31, 2017.Interest IncomeInterest Income increased $179 thousand, or 74% to $422 thousand for 2018 from $243 thousand for 2017. This increase was primarily attributableto additional Franchise Agreements signed under the payment plan option.ExpensesEmployee compensation and benefitsEmployee compensation and benefits expenses increased by $33.7 million, or 137%, to $58.3 million for 2018 from $24.5 million for 2017. Thiswas primarily attributable to a $23.9 million increase in Class B unit compensation (of which $19.8 million was non-cash vesting of certain Pre-IPOLLC members' equity), a $949 thousand increase in non-cash stock option expense and an increase in total headcount from 2017 to 2018.50General and administrative expensesGeneral and administrative expenses increased by $4.5 million, or 52%, to $13.1 million for 2018 from $8.6 million for 2017. This increase wasattributable to $1.4 million of expenses related to operating as a public company, an increase of $832 thousand in occupancy costs related to ourfirst full year at the Company's new headquarters in Westlake, Texas. The remainder of the increase is attributable to higher costs associated withan increase in operating franchises and employees.Bad debtsBad debts increased by $215 thousand, or 20%, to $1.3 million for 2018 from $1.1 million for 2017. This increase was primarily attributable toincreases in Agency Fees and Initial Franchise Fees sold by the company.Depreciation and amortizationDepreciation and amortization increased by $588 thousand, or 67%, to $1.5 million for 2018 from $0.9 million for 2017. This increase was primarilyattributable to the increase in fixed assets during the same period, including a full year of depreciation on the fixed assets put in place inconnection with the opening of the Company's corporate headquarters in Westlake, Texas. Additionally, fixed assets increased with continuedexpansion in the Company's Chicago, Illinois and Henderson, Nevada offices.Other income (expense)During 2018 the Company incurred expenses of $22 thousand related to the disposal of fixed assets located in the previous headquarters,compared to other income of $3.5 million in 2017. The 2017 other income was attributable to a buyout agreement executed with a Franchisee onJune 1, 2017 per the terms of a Franchise Agreement from 2014. As part of the buyout, the departing Franchisee purchased Goosehead’seconomic interests in future Royalty Fees. Goosehead recognized a $3.5 million gain on the transaction in June 2017.Interest expenseInterest expenses increased by $1.8 million, or 72%, to $4.3 million for 2018 from $2.5 million for 2017. This increase was attributable to anincrease in the average note payable amount outstanding throughout year, as well as $871 thousand of origination fees from previous debtimmediately recognized upon refinance on August 3, 2018, partially offset by the Company refinancing the existing term loan with a lower interestrate.Segment adjusted EBITDACorporate Channel Adjusted EBITDA is segment earnings before interest, income taxes, depreciation and amortization allocable to the CorporateChannel.Corporate Channel Adjusted EBITDA increased by $1.2 million, or 18%, to $7.5 million for 2018 from $6.4 million for 2017, primarily attributablehigher New Business Revenue (Corporate) from increased hiring and agent ramp-up, plus an increase in more profitable Renewal Revenue(Corporate), offset by employee compensation and benefits from increased hiring.Franchise Channel Adjusted EBITDA is segment earnings before interest, income taxes, depreciation and amortization, adjusted to exclude othernon-operating items.Franchise Channel Adjusted EBITDA increased by $3.9 million, or 84%, to $8.6 million for 2018 from $4.7 million for 2017, primarily attributable toan increase in Initial Franchise Fees, New Business Revenue and Contingent Commissions (Franchise) from an increase in operating agenciesand Total Written Premium, plus an increase in more profitable Renewal Revenue.Neither of Franchise Channel Adjusted EBITDA or Corporate Channel Adjusted EBITDA includes Class B share compensation, which is recordedat the consolidated level.Liquidity and capital resourcesHistorical liquidity and capital resourcesWe have managed our historical liquidity and capital requirements primarily through the receipt of revenues from our Corporate Channel and ourFranchise Channel. Our primary cash flow activities involve: (1) generating cash51flow from Corporate Channel operations, which largely includes Renewal Revenue (Corporate) and New Business Revenue (Corporate);(2) generating cash flow from Franchise Channel operations, which largely includes Royalty Fees and Initial Franchise Fees; (3) makingdistributions to the Goosehead Management Holders and Texas Wasatch Holders; and (4) borrowings, interest payments and repayments underour Credit Agreement. As of December 31, 2018, our cash and cash equivalents was $18.6 million. We have used cash flow from operationsprimarily to pay compensation and related expenses, general, administrative and other expenses, debt service and distributions to our owners.Credit agreementOn October 27, 2016, Goosehead Insurance Holdings, LLC, as borrower representative, entered into a credit agreement (as subsequentlyamended, the “Credit Agreement”) with Madison Capital Funding LLC, as agent, and the lenders party thereto, consisting of a $3.0 million revolvingcredit facility (the “Revolving Credit Facility”) and $30.0 million term loan (the “Initial Term Loan”) used to pay off existing debt and fund adistribution to members. On July 14, 2017, Goosehead Insurance Holdings, LLC and the other loan parties entered into the first amendment to theCredit Agreement pursuant to which Goosehead Insurance Holdings, LLC borrowed an additional $10.0 million term loan (the “First Additional TermLoan”) used to fund a distribution to members. On December 20, 2017, the Company executed the second amendment to the Credit Agreement toborrow an additional $10.0 million term loan (together with the Initial Term Loan and the First Additional Term Loan, the “Term Loans”) for paymentof a dividend to stockholders and to extend the maturity date of the Term Loans by one year. On April 4, 2018, Goosehead Insurance Holdings,LLC and the other loan parties amended and restated the Credit Agreement to permit the reorganization transactions in connection with theOffering.On August 3, 2018, Goosehead Insurance Holdings, LLC, as borrower, entered into a credit agreement (the “NewCredit Agreement”) with JPMorgan Chase Bank, N.A., as agent, and the lenders party thereto, consisting of a$13.0 million revolving credit facility (the “New Revolving Credit Facility”) and $40.0 million term loan (the “NewTerm Loan”) used to refinance the Credit Agreement, working capital needs and general corporate purposes. The Company has the right, subject toapproval by the administrative agent and each issuing bank, to increase the commitments under the credit facilities an additional $50.0 million.Interest on amounts drawn under the New Revolving Credit Facility accrues interest on amounts drawn at an initial interest rate of LIBOR plus2.50%, then at an interest rate determined by the Company's leverage ratio for the preceding period. At December 31, 2018, the Company had$10.0 million drawn against the revolver. At December 31, 2018, the Company had a letter of credit of $417 thousand applied against the maximumborrowing availability, thus amounts available to draw totaled $2.6 million. The revolving credit facility is collateralized by substantially all theCompany’s assets, which includes rights to future commissions.Interest on the New Term Loan is calculated initially at LIBOR plus 2.50%, then at an interest rate determined by the Company’s leverage ratio forthe preceding period. The aggregate principal amount of the New Term Loan as of December 31, 2018 is $39.0 million, payable in quarterlyinstallments of (x) $500 thousand from the fiscal quarter ending March 31, 2019 through the fiscal quarter ending June 30, 2019, (y) $750 thousandfrom the fiscal quarter ending September 30, 2019 through the fiscal quarter ending June 30, 2020, and (z) $1,250 thousand from the fiscal quarterending September 30, 2020 through the fiscal quarter ending June 30, 2021, with a balloon payment of the entire unpaid principal amount of theterm note on August 3, 2021.The New Term Loan is collateralized by substantially all the Company’s assets, which includes rights to futurecommissions.The interest rate for each leverage ratio tier are as follows:Leverage RatioInterest Rate< 1.50xLIBOR + 175.0 bps> 1.50xLIBOR + 200.0 bps> 2.50xLIBOR + 225.0 bps> 3.50xLIBOR + 250.0 bps52Maturities of note payable for the next three calendar years as of December 31, 2018 are as follows (in thousands): Amount2019$2,50020204,000202132,500 $39,000The $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 $553 thousand at December 31, 2018 are reflected as a reduction to the note balance and will be amortized throughinterest expense over three years (the term of the note payable). As part of the refinancing, $871 thousand of origination fees from previous debtwere immediately recognized as interest expense.The New Credit Agreement contains covenants that, among other things, restrict our ability to make certain restricted payments (including acovenant that restricts Goosehead Financial, LLC’s ability to make dividends or other distributions to Goosehead Insurance, Inc.), incur additionaldebt, engage in certain asset sales, mergers, acquisitions or similar transactions, create liens on assets, engage in certain transactions withaffiliates, change our business or make investments. We may voluntarily prepay in whole or in part the outstanding principal under our New TermLoans at any time prior to the maturity date. In addition, the New Credit Agreement contains financial covenants requiring us to maintain our fixedcharge coverage ratio at or above 1.20 to 1.00 and total debt to EBITDA (as defined in the New Credit Agreement) ratio at or below 4.50 to 1.0(with a step down to 4.00 to 1.00 with respect to any fiscal quarter ending on or after September 30, 2019). Pursuant to the New Credit Agreement,a change of control default will be triggered when (x) any person or group other than Mark Jones and Robyn Jones or their controlled investmentaffiliates becomes the beneficial owner, directly or indirectly, of more than 50% of the aggregate ordinary voting power represented by ouroutstanding equity interests, unless Mark Jones and Robyn Jones or their controlled investment affiliates have the ability to elect or designate forelection at least a majority of our board of directors or (y) Goosehead Insurance, Inc. ceases to directly own at least 35% of Goosehead Financial,LLC or Goosehead Insurance, Inc. ceases to be the managing member of Goosehead Financial, LLC. Such a default could result in theacceleration of repayment of our and our subsidiaries’ indebtedness, including borrowings under the New Revolving Credit Facility if not waived bythe lenders under the New Credit Agreement. The failure by Mark Jones and Robyn Jones to maintain either a minimum voting interest in us or theability to elect or designate for election at least a majority of our board of directors could trigger a change of control default under our New CreditAgreement.As of December 31, 2018, the Company was in compliance with these covenants.Comparative cash flowsThe following table summarizes our cash flows from operational, investing and financing activities for the periods indicated:Year Ended December 312018 2017Net cash provided by operating activities$10,275 $13,542Net cash used for investing activities(2,180) (6,135)Net cash provided by financing activities5,592 (6,237)Net increase in cash and cash equivalents13,687 1,170Cash, beginning of period4,948 3,778Cash, end of period$18,635 $4,948Operational activitiesNet cash provided by operational activities was $10.3 million for 2018 as compared to net cash provided by operational activities of $13.5million for 2017. This decrease in net cash provided by operational activities was primarily attributable to a $3.2 million decrease in the year overyear change in deferred rent balance driven by53tenant reimbursements at the Westlake, Texas headquarters during 2017, a $0.7 million change in commissions and agency fees receivable, anda $0.1 million change in accounts payable and accrued expenses balance.Business investment activitiesNet cash used in business investment activities was $2.2 million for 2018 as compared to net cash used in business investment activities of $6.1million for 2017. This decrease in net cash used in business investment activities was primarily attributable to fixed asset growth directly related toheadcount increases, additional office space buildout in Chicago, Austin, and The Woodlands, and the buildout of the new headquarters inWestlake, Texas during the 2017.Financing activitiesNet cash provided by financing activities was $5.6 million for 2018 as compared to net cash used in financing activities of $6.2 million for 2017.This increase in net cash provided by financing activities is due to activity related to the Offering, during which $86.8 million was received asproceeds net of offering costs. This increase in net cash provided by financing activities is offset by an increase in distributions of $54.5 million.The remaining increase is attributable to the refinancing of the existing term loan and revolving credit facility, leading to an increase in repaymentsof notes payable of $50.3 million, offset by an increase in proceeds received from notes payable of $30.0 million.Future sources and uses of liquidityOur initial sources of liquidity will be (1) cash on hand, (2) net working capital, (3) cash flows from operations and (4) our Revolving Credit Facility.Based on our current expectations, we believe that these sources of liquidity will be sufficient to fund our working capital requirements and to meetour commitments in the foreseeable future.We expect that our primary liquidity needs will comprise cash to (1) provide capital to facilitate the organic growth of our business, (2) payoperating expenses, including cash compensation to our employees, (3) make payments under the tax receivable agreement, (4) pay interest andprincipal due on borrowings under our Credit Agreement and (5) pay income taxes.Dividend policyAssuming Goosehead Financial, LLC makes distributions to its members in any given year, the determination to pay dividends, if any, to ourClass A common stockholders out of the portion, if any, of such distributions remaining after our payment of taxes, tax receivable agreementpayments and expenses (any such portion, an “excess distribution”) will be made at the sole discretion of our board of directors. Our board ofdirectors may change our dividend policy at any time. See “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters andIssuer Purchases of Equity Securities — Dividend policy".Tax receivable agreementWe entered into a tax receivable agreement with the Pre-IPO LLC Members on May 1, 2018 that provides for the payment by us to the Pre-IPOLLC Members of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that we actually realize asa result of (i) any increase in tax basis in Goosehead Insurance, Inc.’s assets and (ii) tax benefits related to imputed interest deemed arising as aresult of payments made under the tax receivable agreement. See "Item 13. Certain relationships and related transactions, and directorindependence".Holders of Goosehead Financial, LLC Units (other than Goosehead Insurance, Inc.) may, subject to certain conditions and transfer restrictionsdescribed above, redeem or exchange their LLC Units for shares of Class A common stock of Goosehead Insurance, Inc. on a one-for-one basis.Goosehead Financial, LLC intends to make an election under Section 754 of the Internal Revenue Code of 1986, as amended, and the regulationsthereunder (the “Code”) effective for each taxable year in which a redemption or exchange of LLC Units for shares of Class A common stockoccurs, which is expected to result in increases to the tax basis of the assets of Goosehead Financial, LLC at the time of a redemption orexchange of LLC Units. The redemptions or exchanges are expected to result in increases in the tax basis of the tangible and intangible assets ofGoosehead Financial, LLC. These increases in tax basis may reduce the amount of tax that Goosehead Insurance, Inc. would otherwise berequired to pay in the future. We have entered into a tax receivable agreement with the Pre-IPO LLC Members that provides for the payment by usto 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 weactually realize as a result of (i) any increase in tax basis in54Goosehead Insurance, Inc.’s assets resulting from (a) the purchase of LLC Units from any of the Pre-IPO LLC Members using the net proceedsfrom any future offering, (b) redemptions or exchanges by the Pre-IPO LLC Members of LLC Units for shares of our Class A common stock or(c) payments under the tax receivable agreement and (ii) tax benefits related to imputed interest deemed arising as a result of payments madeunder the tax receivable agreement. This payment obligation is an obligation of Goosehead Insurance, Inc. and not of Goosehead Financial, LLC.For purposes of the tax receivable agreement, the cash tax savings in income tax will be computed by comparing the actual income tax liability ofGoosehead Insurance, Inc. (calculated with certain assumptions) to the amount of such taxes that Goosehead Insurance, Inc. would have beenrequired to pay had there been no increase to the tax basis of the assets of Goosehead Financial, LLC as a result of the redemptions orexchanges and had Goosehead Insurance, Inc. not entered into the tax receivable agreement. Estimating the amount of payments that may bemade under the tax receivable agreement is by its nature imprecise, insofar as the calculation of amounts payable depends on a variety of factors.While the actual increase in tax basis, as well as the amount and timing of any payments under the tax receivable agreement, will vary dependingupon a number of factors, including the timing of redemptions or exchanges, the price of shares of our Class A common stock at the time of theredemption or exchange, the extent to which such redemptions or exchanges are taxable and the amount and timing of our income. See "Item 13.Certain relationships and related transactions, and director independence". We anticipate that we will account for the effects of these increases intax basis and associated payments under the tax receivable agreement arising from future redemptions or exchanges as follows:•we will record an increase in deferred tax assets for the estimated income tax effects of the increases in tax basis based on enacted federaland state tax rates at the date of the redemption or exchange;•to the extent we estimate that we will not realize the full benefit represented by the deferred tax asset, based on an analysis that will consider,among other things, our expectation of future earnings, we will reduce the deferred tax asset with a valuation allowance; and•we will record 85% of the estimated realizable tax benefit (which is the recorded deferred tax asset less any recorded valuation allowance) asan increase to the liability due under the tax receivable agreement and the remaining 15% of the estimated realizable tax benefit as anincrease to additional paid-in capital.All of the effects of changes in any of our estimates after the date of the redemption or exchange will be included in net income. Similarly, theeffect of subsequent changes in the enacted tax rates will be included in net income.Contractual obligations, commitments and contingenciesThe following table represents our contractual obligations as of December 31, 2018, aggregated by type. Contractual obligations, commitments and contingencies (in thousands)Total Less than 1year 1-3 years 3-5 years More than 5yearsOperating leases(1)24,022 1,688 5,368 5,340 11,626Debt obligations payable(2)49,000 2,500 46,500 — —Interest expense(3)5,986 2,319 3,667 — —Liabilities under tax receivable agreement(4)1,702 8 185 192 1,317Total80,710 6,515 55,720 5,532 12,943(1)The Company leases its facilities under non-cancelable operating leases. In addition to monthly lease payments, the lease agreements require the Company to reimbursethe lessors for its portion of operating costs each year. Rent expense was $1.6 million for year ending December 31, 2018 and $1.0 million for the year ending December31, 2017.(2)The Company refinanced its credit facilities on August 3, 2018 in the form of a $40.0 million term loan and $13.0 million revolving credit facility, of which $10.0 million wasdrawn as of December 31, 2018. The refinancing decreased the Company's borrowing costs by a minimum of 300 bps and shortened the term loan maturity to 3 years.(3)Interest payments on our outstanding debt obligations under our credit agreement. Our debt obligations have variable interest rates. We have calculated future interestobligations based on the interest rate for our debt obligations as of December 31, 2018.(4)See "Item 7. Management's discussion and analysis of financial condition and results of operation - Tax receivable agreement."Off-balance sheet arrangementsWe do not invest in any off-balance sheet vehicles that provide liquidity, capital resources, market or credit risk support, or engage in anyactivities that expose us to any liability that is not reflected in our consolidated financial statements except for those described under “—Contractual obligations, commitments and contingencies” above.55Critical accounting policiesWe prepare our consolidated financial statements in accordance with GAAP. In applying many of these accounting principles, we need to makeassumptions, estimates or judgments that affect the reported amounts of assets, liabilities, revenues and expenses in our consolidated financialstatements. We base our estimates and judgments on historical experience and other assumptions that we believe are reasonable under thecircumstances. These assumptions, estimates or judgments, however, are both subjective and subject to change, and actual results may differfrom our assumptions and estimates. If actual amounts are ultimately different from our estimates, the revisions are included in our results ofoperations for the period in which the actual amounts become known. We believe the following critical accounting policies could potentially producematerially different results if we were to change underlying assumptions, estimates or judgments. See “Item 8. Financial statements andsupplementary data - Summary of significant accounting policies” for a summary of our significant accounting policies, and discussion of recentaccounting pronouncements.Revenue recognitionCommissions and feesCommissions, fees and Contingent Commissions from Carriers, net of estimated cancellations, are recognized as revenue when the datanecessary to reasonably determine such amounts is made available to the Company.Because billing is controlled by the Carriers, these types of revenue cannot be reasonably determined until the cash or the related policy detail isreceived by the Company from the Carrier. Subsequent commission adjustments, such as endorsements and policy changes, are recognizedwhen the adjustments become known. Agency Fees are recognized as revenue on the date coverage is agreed to with the client.Franchise revenuesFranchise revenues include Initial Franchise Fees and ongoing Royalty Fees from Franchisees. Initial Franchise Fees are contracted fees paid byFranchisees to compensate Goosehead for direct training and onboarding costs, plus a markup for overhead and profit, as part of the initial launchof the franchise unit. The Initial Franchise Fee can either be paid up front at or before the Franchisee comes to training, or for a higher InitialFranchise Fee, paid over a term not to exceed five years.Royalty Fees are a set percentage of commissions received from Franchisees for consideration of their use of such business processes, tradesecrets, know-how, trade names, trademarks, service marks, logos, emblems, trade dress, intellectual property, and back office support functionsprovided by Goosehead. For policies in their first term, the Company receives 20% of the initial commission and Agency Fees collected; forrenewal policies, the Company receives 50% of the Renewal Revenue collected.Liabilities under Tax Receivable AgreementIn connection with the Offering we entered into a tax receivable agreement with the Pre-IPO LLC Members that will provide for the payment by usto 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 weactually realize as a result of (i) any increase in tax basis in Goosehead Financial, LLC’s assets resulting from (a) the acquisition of LLC Unitsusing the net proceeds from any future offering, (b) redemptions or exchanges by the Pre-IPO LLC Members of LLC Units and the correspondingnumber of shares of Class B common stock for shares of our Class A common stock or (c) payments under the tax receivable agreement, and(ii) tax benefits related to imputed interest deemed arising as a result of payments made under the tax receivable agreement.The actual increase in tax basis, as well as the amount and timing of any payments under the tax receivable agreement, will vary depending on anumber of factors, including, but not limited to, the timing of any future redemptions, exchanges or purchases of the LLC Units held by Pre-IPOLLC Members, the price of our Class A common stock at the time of the purchase, redemption or exchange, the extent to which redemptions orexchanges are taxable, the amount and timing of the taxable income that we generate in the future, the tax rates then applicable and the portion ofour payments under the tax receivable agreement constituting imputed interest.During the 2018, as a result of the redemption of LLC Units, we recognized liabilities totaling $1.7 million relating to our obligations under the TaxReceivable Agreement.56Emerging growth companyPursuant to the JOBS Act, an emerging growth company is provided the option to adopt new or revised accounting standards that may be issuedby FASB or the SEC either (i) within the same periods as those otherwise applicable to non-emerging growth companies or (ii) within the sametime periods as private companies. We intend to continue to take advantage of the exemption for complying with new or revised accountingstandards within the same time periods as private companies. Accordingly, the information contained herein may be different than the informationyou receive from other public companies.We also intend to continue to take advantage of some of the reduced regulatory and reporting requirements of emerging growth companiespursuant to the JOBS Act so long as we qualify as an emerging growth company, including, but not limited to, not being required to comply withthe auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executivecompensation, and exemptions from the requirements of holding non-binding advisory votes on executive compensation and golden parachutepayments.Item 7A. Quantitative and qualitative disclosure of market risksMarket risk is the potential loss arising from adverse changes in market rates and prices, such as premium amounts, interest rates, and equityprices. We are exposed to market risk through our Book of Business and borrowings under our Credit Agreement.Insurance premium pricing within the P&C insurance industry has historically been cyclical, based on the underwriting capacity of the insuranceindustry and economic conditions. External events, such as terrorist attacks, man-made and natural disasters, can also have significant impactson the insurance market. We use the terms ‘‘soft market’’ and ‘‘hard market’’ to describe the business cycles experienced by the industry. A softmarket is an insurance market characterized by a period of declining premium rates, which can negatively affect commissions earned byinsurance agents. A hard market is an insurance market characterized by a period of rising premium rates, which, absent other changes, canpositively affect commissions earned by insurance agents.As of December 31, 2018, we had $49.0 million of borrowings outstanding under our Credit Agreement which bears interest on a floating basis tiedto the London Interbank Offered Rate (LIBOR) and therefore subject to changes in the associated interest expense. The effect of an immediatehypothetical 10% change in interest rates would not have a material effect on our consolidated financial statements.Item 8. Financial statements and supplementary dataIndex to consolidated financial statements PageGoosehead Insurance, Inc. Annual consolidated financial statements Report of Independent Registered Public Accounting Firm58Consolidated balance sheets as of December 31, 2018 and December 31, 201759Consolidated statements of income for the years ended December 31, 2018 and December 31, 201760Consolidated statement of stockholders' equity for the years ended December 31, 2018 and December 31, 201761Consolidated statement of cash flows for the years ended December 31, 2018 and December 31, 201762Notes to the consolidated financial statements6457Report of Independent Registered Public Accounting FirmTo the stockholders and the Board of Directors of Goosehead Insurance, Inc.Opinion on the Financial StatementsWe have audited the accompanying consolidated balance sheets of Goosehead Insurance, Inc. and subsidiaries (the "Company") as of December31, 2018 and 2017, the related consolidated statements of income, stockholders’ equity, and cash flows, for each of the two years in the periodended December 31, 2018, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statementspresent fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operationsand its cash flows for each of the two years in the period ended December 31, 2018, in conformity with accounting principles generally accepted inthe United States of America.Basis for OpinionThese financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company'sfinancial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (UnitedStates) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and theapplicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is notrequired to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required toobtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we express no such opinion.Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud,and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts anddisclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis forour opinion./s/ Deloitte & Touche LLPDallas, TexasMarch 14, 2019We have served as the Company’s auditor since 2017.58Goosehead Insurance, Inc.Consolidated balance sheets(In thousands, except per share amounts) December 31 2018 2017Assets Current Assets: Cash and cash equivalents $18,635 $4,948Restricted cash 376 418Commissions and agency fees receivable, net 2,016 1,268Receivable from franchisees, net 703 564Prepaid expenses 1,109 521Total current assets 22,839 7,719Receivable from franchisees, net of current portion 2,048 1,361Property and equipment, net of accumulated depreciation 7,575 6,845Intangible assets, net of accumulated amortization 248 216Deferred income taxes, net 1,958 —Other assets 130 565Total assets $34,798 $16,706Liabilities and Stockholders’ Equity Current Liabilities: Accounts payable and accrued expenses $3,978 $2,759Premiums payable 376 418Unearned revenue 530 1,062Dividends payable — 550Deferred rent 428 478Note payable 2,500 500Total current liabilities 7,812 5,767Deferred rent, net of current portion 4,548 3,916Note payable, net of current portion 45,947 48,156Liabilities under tax receivable agreement, net of current portion 1,694 —Total liabilities 60,001 57,839Commitments and contingencies (see note 9) Members’ deficit — (41,133)Class A common stock, $.01 par value per share - 300,000 shares authorized, 13,800 shares issuedand outstanding as of December 31, 2018, zero issued and outstanding as of December 31, 2017 138 —Class B common stock, $.01 par value per share - 50,000 shares authorized, 22,486 issued andoutstanding as of December 31, 2018, zero issued and outstanding as of December 31, 2017 224 —Additional paid in capital 88,811 —Accumulated deficit (6,578) —Total stockholders' equity and members' deficit 82,595 (41,133)Non-controlling interests (107,798) —Total equity (25,203) (41,133)Total liabilities and equity $34,798 $16,706See Notes to the Consolidated Financial Statements59Goosehead Insurance, Inc.Consolidated statements of income(In thousands, except per share amounts) Year Ended December 31 2018 2017Revenues: Commissions and agency fees $36,704 $27,030Franchise revenues 23,022 15,438Interest income 422 243Total revenues 60,148 42,711Operating Expenses: Employee compensation and benefits (including Class B unit compensation of $26,134 and $2,231 for theyears ended December 31, 2018 and 2017, respectively) 58,256 24,544General and administrative expenses 13,060 8,597Bad debts 1,298 1,083Depreciation and amortization 1,464 876Total operating expenses 74,078 35,100Income (loss) from operations (13,930) 7,611Other Income (Expense): Other income (expense) (22) 3,541Interest expense (4,266) (2,474)Income (loss) before taxes (18,218) 8,678Tax expense 449 —Net Income (loss) (18,667) 8,678Less: net income (loss) attributable to non-controlling interests (9,764) 8,678Net Income (loss) attributable to Goosehead Insurance Inc. $(8,903) $— Earnings per share: Basic $(0.66) n/aDiluted $(0.66) n/aWeighted average shares of Class A common stock outstanding Basic 13,554 n/aDiluted 13,554 n/a Unaudited Pro forma income before taxes attributable to Goosehead Insurance, Inc. n/a $3,242Unaudited Pro forma income tax expense n/a (811)Unaudited Pro forma net income attributable to Goosehead Insurance, Inc. n/a $2,431 Unaudited Pro forma earnings per share basic n/a $0.18Unaudited Pro forma earnings per share diluted n/a $0.17 Unaudited Pro Forma Weighted average shares of Class A common stock outstanding Basic n/a 13,554Diluted n/a 14,573See Notes to the Consolidated Financial Statements60Goosehead Insurance, Inc.Consolidated statement of stockholders’ equity(In thousands) Members'deficit Issuedshares ofClass Acommonstock Issuedsharesof ClassBcommonstock Class ACommonstock Class BCommonStock Additionalpaid incapital Accumulateddeficit Totalstockholders'equity Non-controllinginterest TotalequityBalance, December 31, 2016$(24,241) — — $— $— $— $— $— $— $(24,241)Net income8,678 — — — — — — — — 8,678Capital withdrawn(25,570) — — — — — — — — (25,570)Balance, December 31, 2017(41,133) — — — — — — — — (41,133)Net income prior to theReorganization Transactions4,389 — — — — — — — — 4,389Distributions prior to theReorganization Transactions(1,278) — — — — — — — — (1,278)Balance prior to the ReorganizationTransactions(38,022) — — — — — — — — (38,022)Effects of the ReorganizationTransactions38,022 — 22,747 — 227 (132,202) (7,379) (139,354) (12,402) (113,734)Initial non-controlling interestallocation— — — — — 97,071 — 97,071 (97,071) —Issuance of Class A commonstock sold in initial public offering,net of offering costs— 13,533 — 135 — 123,875 — 124,010 — 124,010Distributions subsequent to initialpublic offering— — — — — — — — (1,735) (1,735)Net income subsequent to initialpublic offering— — — — — — 801 801 2,159 2,960Equity-based compensationsubsequent to initial public offering— — — — — 949 — 949 — 949Activity under employee stockpurchase plan— 5 — — — 143 — 143 — 143Redemption of LLC Units— 261 (261) 3 (3) (1,251) — (1,251) 1,251 —Deferred tax adjustments related toTax Receivable Agreement— — — — — 315 — 315 — 315Deferred tax adjustments— — — — — (89) — (89) — (89)Balance December 31, 2018$— 13,799 22,486 $138 $224 $88,811 $(6,578) $82,595 $(107,798) $(25,203)See Notes to the Consolidated Financial Statements61Goosehead Insurance, Inc.Consolidated statements of cash flows(In thousands)62 Year Ended December 31 2018 2017Cash flows from operating activities: Net income (loss) $(18,667) $8,678Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,522 876Loss on disposal of fixed assets 22 —Bad debt expense 1,298 1,083Equity based compensation 26,960 —Tax receivable agreement liability 1,702 —Deferred income taxes (1,732) —Changes in operating assets and liabilities: Commissions and agency fees receivable (1,637) (907)Receivable from franchisees (1,258) (1,077)Prepaid expenses (588) (212)Other assets 435 (471)Accounts payable and accrued expenses 1,210 1,330Deferred rent 582 3,817Premiums payable (42) 118Unearned revenue (532) 307Net cash provided by operating activities 10,275 13,542Cash flows from investing activities: Changes in restricted cash 42 (117)Proceeds from member note receivable — 135Proceeds from notes receivable 22 299Purchase of software (148) (236)Purchase of property and equipment (2,096) (6,216)Net cash used for investing activities (2,180) (6,135)Cash flows from financing activities: Loan origination fees (639) (342)Repayment of note payable (50,625) (375)Proceeds from notes payable 50,000 20,000Proceeds from the issuance of Class A common stock, net of underwriting discounts and offeringcosts 86,915 —Member distributions (80,059) (25,520)Net cash provided by financing activities 5,592 (6,237)Net increase in cash and cash equivalents 13,687 1,170Cash, beginning of period 4,948 3,778Cash, end of period $18,635 $4,948 Supplemental disclosure of cash flow data: Non-cash management fee note repayment 37,237 —Cash paid during the year for interest 3,207 2,001Cash paid for income taxes 300 —See Notes to the Consolidated Financial Statements63Index to the notes to consolidated financial statements PageGoosehead Insurance, Inc. Notes to the consolidated financial statements Note 1. Organization64Note 2. Summary of significant accounting policies65Note 3. Franchise fees receivable70Note 4. Allowance for uncollectible agency fees70Note 5. Property and equipment70Note 6. Intangible assets71Note 7. Employee benefit obligation71Note 8. Note payable72Note 9. Commitments and contingencies73Note 10. Income taxes73Note 11. Stockholder's equity75Note 12. Equity-based compensation77Note 13. Other income78Note 14. Segment information78Note 15. Litigation80Note 16. Subsequent events80Note 17. Selected quarterly financial data (unaudited)81 1. OrganizationOn May 1, 2018 Goosehead Insurance, Inc. ("GSHD") completed the Offering of 9,810 thousand shares of Class A common stock at a price of$10.00 per share, which included 1,280 thousand shares issued pursuant to the underwriter's over-allotment option. GSHD became the solemanaging member of Goosehead Financial, LLC (“GF”). GF was organized on January 1, 2016 as a Delaware Limited Liability Company and isheadquartered in Westlake, TX. The operations of GF represent the predecessor to GSHD prior to the Offering, and the consolidated entities of GFare described in more detail below. Information for any periods prior to May 1, 2018 relates to GF and its subsidiaries and affiliates.GSHD (collectively with its consolidated subsidiaries, the “Company”) provides personal and commercial property and casualty insurancebrokerage services for its clients through a network of corporate-owned agencies and franchise units across the nation.The operations of the corporate-owned units are recorded in Texas Wasatch Insurance Services, L.P. (“TWIS”)—a Texas limited partnershipheadquartered in Westlake, TX and operating since 2003. TWIS is a wholly owned subsidiary of GF. The Company had seven corporate-ownedlocations in operation at December 31, 2018 and 2017.The operations of the franchise units are recorded in Goosehead Insurance Agency, LLC (“GIA”)—a Delaware limited liability companyheadquartered in Westlake, TX and operating since 2011. GIA is 100% owned by Goosehead Insurance Holdings ("GIH"). Franchisees areprovided access to insurance Carrier Appointments, product training, technology infrastructure, client service centers and back office services.During years ended December 31, 2018 and 2017, the Company sold 214 and 140 franchise locations, respectively and had 457 and 292 operatingfranchise locations as of December 31, 2018 and 2017, respectively. No franchises were purchased by the Company during the years endedDecember 31, 2018 and 2017.64In connection with the Offering, both Goosehead Management, LLC (“GM”) and Texas Wasatch Insurance Holdings Group LLC (“TWIHG”) becamewholly owned indirect subsidiaries of GF. Both GM and TWIHG are non-operating holding companies created to receive management fees from theoperating entities TWIS and GIA.All intercompany accounts and transactions have been eliminated in consolidation.Reorganization TransactionsIn connection with the Offering, the Company completed the following transactions (the "Reorganization Transactions"):•The GF limited liability company agreement was amended to, among other things, i) appoint GSHD as the sole managing member of GFand ii) modify the capital structure of GF by reclassifying the interests previously held by Pre-IPO LLC Members into a single new class ofnon-voting LLC Units.•GSHD was authorized to issue two classes of common stock. 9,810 thousand shares of Class A common stock were issued pursuant tothe Offering, including the underwriters' over-allotment option. 22,747 thousand shares of Class B common stock were issued to the Pre-IPO LLC Members in an amount equal to the number of LLC Units held by each such Pre-IPO LLC Member in exchange for certainmanagement rights of GF. Each share of Class A common stock and Class B common stock entitles its holder to one vote per share onall matters submitted to a vote of GSHD's stockholders. Each share of Class B common stock can be exchanged for one share of ClassA common stock or, at GSHD's discretion, a cash payment equal to the volume weighted average market price of one share of Class Acommon stock, thus canceling the share of Class B common stock on a one-for-one basis.•The Goosehead Management Holders and Texas Wasatch Holders indirectly transferred their ownership interests in GM and TWIHG,respectively, to GSHD in exchange for the Goosehead Management Note and Texas Wasatch Note. The aggregate principal amount ofthe Goosehead Management Note and the Texas Wasatch Note was approximately $114 million. Because the net proceeds from theOffering were insufficient to repay the aggregate principal amount of the notes, 3,724 thousand shares of Class A common stock wereissued to the Goosehead Management Holders and the Texas Wasatch Holders for the difference. GSHD contributed direct and indirectownership interests in each of TWIHG and GM to GF.Following completion of the Reorganization Transactions and the Offering, GSHD owned 37.3% of GF and the Pre-IPO LLC Members owned theremaining 62.7%. GSHD is the sole managing member of GF and, although GSHD holds a minority economic interest in GF, GSHD has the solevoting power and control of management of GF. Accordingly, GSHD consolidates the financial results of GF and reports non-controlling interest inGSHD's consolidated financial statements. 2. Summary of significant accounting policiesUse of EstimatesThe preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities, disclosure of contingent liabilities at the date of the financial statements, and the reported amounts ofrevenues and expenses during the reported period. Accordingly, actual results could differ from those estimates as more information becomesknown.Cash and cash equivalentsThe Company maintains its cash in bank deposit accounts that, at times, may exceed federally insured limits; however, the Company has nothistorically experienced any losses in these accounts. The Company believes it is not exposed to any significant credit risk. The Companycurrently holds no financial instruments that would be considered cash equivalents.Restricted cash65In the capacity as an insurance broker, the Company will typically collect the first premium payment from the insured and will then remit thepremiums to insurance carriers. The Company holds unremitted insurance premiums in a fiduciary capacity until they are disbursed.Commissions and agency fees receivableUpon issuance of a new policy, the Company typically collects the first premium payment from the insured, and then will remit the full premiumamount to the insurance carriers. The insurance carriers collect the remaining premiums directly from the insureds and remit the applicablecommissions to the Company. Accordingly, as reported in the accompanying consolidated balance sheet, “commissions” are receivables from theinsurance carriers. These direct-bill arrangements consist of a high volume of transactions with small premium amounts, with the billing controlledby the insurance carriers. The income statement and balance sheet effects of the commissions are recorded when collectability can be reasonablyassured and determined from the commission statement and the commission payment received from the insurance carriers. The payment andcommission statements are generally received within 30 days of the effective date of the policy. During 2018, the Company wrote with 85insurance carriers, of which 30 provided national coverage. In 2018, two carriers represented more than 10% of total revenue at 17% and 11%. In2017, three carriers represented more than 10% of total revenue at 18%, 15% and 11%.In select states, agents have the option to charge an agency fee for the placement of the insurance policy. The income statement and balancesheet effect of these non-refundable fees are recorded on the date the policy is placed with the insurance carrier.Reserve for Policy CancellationsManagement establishes the policy cancellation reserve based on historical and current data on cancellations and records commissions andagency fees receivable net of the cancellations reserve. The reserve was $386 thousand and $337 thousand at December 31, 2018 and 2017,respectively. Allowance for uncollectible agency feesThe Company records agency fees receivable net of an allowance for estimated uncollectible accounts to reflect any loss anticipated for therelated agency fees receivable balances and charge to bad debts. The agency fees receivable balance consists of numerous small-balance,homogenous accounts. The Company calculates the allowance based on collection history and writes off all uncollected agency fee balancesoutstanding over ninety days.Receivable from franchiseesReceivable from franchisees consists of franchise fees receivable, net of allowance for uncollectible franchise fees and unamortized discount onfranchise fees, royalty fees receivable, and notes receivable from franchisees.Franchise fees receivableWhen a franchisee concludes training and all material services and conditions related to the fee have been substantially performed, revenue isrecorded as franchise fees within Franchise revenues, and a corresponding entry to Franchise fees receivable is recorded. Franchisees have theoption to pay the full amount of franchise fees up front or to pay a deposit up front and the remaining balance by payment plan over time. Thefranchisees that elect to pay the initial franchise fee over a term extending greater than one year, pay in total an amount that exceeds the amountdue had they paid the full amount up front. As such, the payment plan option is treated as a zero-interest rate note, which creates an imputation ofinterest. The imputed interest is recorded as a discount on the franchise fee receivable and amortized using the interest rate method over the lifeof the payment plan. The amount of interest recorded in 2018 and 2017 related to franchise fees on a payment plan was $418 thousand and $231thousand, respectively, and is included in Interest income.Allowance for uncollectible franchise fees receivable66The Company records franchise fees receivable net of an allowance for estimated uncollectible accounts to reflect any loss anticipated related tothe franchise fees receivable balances and charged to bad debts. The franchise fees receivable balance consists of numerous small-balance,homogenous accounts. The Company calculates the allowance based on our history of write offs for all franchise accounts. Franchise feesreceivable and the related allowance is written off once the franchisee owing the balance terminates.Royalty fees receivableThe Company collects and reconciles commissions and agency fees on behalf of the franchisees, then calculates the Company’s royalty fees.Royalty fees are recorded monthly when the amounts can be determined from the carrier commission statements reconciled by the Company. Theroyalty fees are secured by the commissions of the franchisee with no historical losses incurred for uncollectible royalty fees. As such, there is noallowance for doubtful accounts relating to royalty fees. Property & equipmentThe Company carries fixed assets at cost, less accumulated depreciation, as stated in the accompanying consolidated balance sheets.Depreciation of property and equipment is calculated using the straight-line method over the estimated useful life of five years for furniture, fixturesand equipment and three years for computer equipment. Leasehold improvements are also amortized using the straight-line method and areamortized over the shorter of the remaining term of the lease or the useful life of the improvement. Expenditures for improvements are capitalized,and expenditures for maintenance and repairs are expensed as incurred. Upon sale or retirement, the cost and related accumulated depreciationand amortization is removed from the related accounts, and the resulting gain or loss, if any, is reflected in income.Intangible assetsIntangible assets are stated at cost less accumulated amortization and reflect amounts paid for the Company’s web domain and computersoftware costs. The web domain is amortized over a useful life of fifteen years and software costs are amortized over a useful life of three years.Capitalized IPO Related CostsIn connection with the Offering, the Company incurred costs which were recorded in other assets on the consolidated balance sheets. Uponcompletion of the Offering, these deferred costs were charged against the proceeds from the Offering with a corresponding reduction toadditional paid-in capital. There were $0 and $170 thousand of IPO related costs included in other assets at December 31, 2018 and 2017,respectively.Premiums payablePremiums payable represent premium payments that have been received from insureds, but not yet remitted to the insurance carriers.Unearned revenueWhen the Company collects initial franchise fees prior to the franchisee being trained and fully on boarded, the amount collected is recognized asunearned revenue until the Company fulfills its performance obligation and is able to recognize the revenue.Deferred financing costsDeferred financing costs incurred in connection with the issuance of notes payable are capitalized and amortized to interest expense inaccordance with the related debt agreements. Deferred financing costs are included as a reduction in notes payable on the accompanyingconsolidated balance sheets.67Deferred rentDeferred rent consists of rent abatement affecting the timing of cash rent payments related to the Company’s corporate office leases, as well aslease incentives such as construction allowances. Deferred rent is record as a liability and is amortized over the lease term as a reduction to rentexpense.Revenue recognitionCommissions and feesCommissions and contingent commissions from insurance carriers, net of estimated cancellations, are recognized as revenue when the datanecessary to reasonably determine such amounts is made available to the Company. Billing is controlled by the insurance carriers, therefore thesetypes of revenue cannot be reasonably determined until the cash or the related policy detail is received by the Company from the insurance carrier.Subsequent commission adjustments, such as endorsements and policy changes, are recognized when the adjustments become known. AgencyFees are recognized as revenue on the date coverage is agreed upon with the client and placed with the Carrier.Franchise revenuesFranchise revenues include initial franchise fees and ongoing royalty fees from franchisees. Initial franchise fees are contracted fees paid byfranchisees to compensate Goosehead for direct training and onboarding costs, plus a markup for overhead and profit, as part of the initial launchof the franchise unit. The initial franchise fee can either be paid up front, at or before the franchisee comes to training, or for a higher initialfranchise fee, paid over a term not to exceed five years. Initial franchise fees are recognized as revenue in the month the agency owner or initialagency representative attends training, which is the time in which Goosehead’s performance obligations are substantially complete. Initialfranchise fee revenue was $6.0 million and $4.4 million for the years ended December 31, 2018 and 2017, respectively.Royalty fees are a set percentage of commissions received from franchisees for consideration of their use of such business processes, tradesecrets, know-how, trade names, trademarks, service marks, logos, emblems, trade dress, intellectual property, and back office support functionsprovided by Goosehead. For policies in their first term, the Company receives 20% of the initial commission and agency fees collected; forrenewal policies, the Company receives 50% of the renewal commission collected. Royalty fees are recognized as revenue as earned and as theamounts become determinable by the Company. Royalty fee revenue was $17.0 million and $11.1 million for the years ended December 31, 2018and 2017, respectively. Employees who also own franchises paid $498 thousand in royalty fees in 2018 comprising approximately 3% of totalroyalty revenue.Income TaxesPrior 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'staxable income or loss was included in the taxable income of its members. Accordingly, no income tax expense was recorded for federal and stateand 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 assetsand liabilities related to the expected future tax consequences arising from temporary differences between the carrying amounts and tax bases ofassets 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.Advertising68The Company expenses advertising costs as they are incurred. Advertising expense for the years ended December 31, 2018 and 2017 was $521thousand and $270 thousand.Recently issued accounting pronouncementsStatement of Cash Flows (ASU 2016-18): This standard requires that the Statement of Cash Flows explain the changes during the period of cashand cash equivalents inclusive of amounts categorized as Restricted Cash. As such, upon adoption, the Company’s consolidated statement ofcash flows will show the sources and uses of cash that explain the movement in the balance of cash and cash equivalents, inclusive of restrictedcash, over the period presented. As an emerging growth company (“EGC”), the standard will become effective for the Company January 1, 2019.The Company does not expect that this standard will have a material impact on the Company's Statement of Cash Flows.Statement of Cash Flows (ASU 2016-15): This standard addresses eight specific cash flow issues with the objective of reducing the existingdiversity in practice in how certain cash receipts and cash payments are presented and classified and applies to all entities, including bothbusiness entities and not-for-profit entities that are required to present a statement of cash flows under Topic 230. The standard will becomeeffective for the Company on January 1, 2019. The Company has evaluated the impact of ASU 2016-15 and has determined the impact to beimmaterial. 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 newframework for recognizing revenue. The core principle of the standard is that an entity should recognize revenue to depict the transfer of promisedgoods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goodsand services. The new standard also requires significantly more comprehensive disclosures than the existing standard. Guidance subsequent toASU 2014-09 has been issued to clarify various provisions in the standard, including principal versus agent considerations, identifying performanceobligations, licensing transactions, as well as various technical corrections and improvements. This standard may be adopted using either aretrospective or modified retrospective method. According to the superseding standard ASU 2015-14 that deferred the effective dates of thepreceding, and because the Company is filing as an emerging growth company, 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 endedDecember 31, 2019. The Company will continue to refine throughout 2019 the impact this standard is will have on the consolidated financialstatements and expects to adopt the modified retrospective method. The primary anticipated impacts of the new standard to the Company'srevenues 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 acceleratesome revenues. Currently, commissions from insurance carriers, net of estimated cancellations, are recognized as revenue when the datanecessary to reasonably determine such amounts is made available to the Company. For contingent commissions, the Company anticipatesrevenues will be estimated and recorded throughout the year as the underlying business is placed with the insurance carriers as opposed to theCompany's historical recognition when the Company received cash, the related policy detail, or other carrier specific information from the insurancecarrier, typically in the first quarter of the following year. The effect of this change will result in revenue being recognized more evenly throughoutthe year.Franchise revenues, including franchise fees are also likely to change under the new guidance. Currently, initial franchise fees are recognized asrevenue in the month the agency owner or initial agency representative attends training. Under the new guidance, the Company anticipates theserevenues 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 isconsistent with the transfer of the 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 liabilitiesfor those leases classified as operating leases under previous GAAP. It should be applied using a modified retrospective approach, with the optionto elect various practical expedients. Early69adoption is permitted. The standard will become effective for the Company January 1, 2020. The Company is currently evaluating the impact thisstandard will have on the Company's consolidated financial statements. However we expect the impact of this guidance on our consolidatedfinancial statements could be significant, as our future minimum operating lease commitments totaled $24.0 million as of December 31, 2018.3. Franchise fees receivableThe balance of Franchise fees receivable included in Receivable from franchisees in the consolidated balance sheets consisted of the following (inthousands): December 31 2018 2017Franchise fees receivable$3,906 $2,501Less: Unamortized discount(1,381) (823)Less: Allowance for uncollectible franchise fees(455) (335)$2,070 $1,343Activity in the allowance for uncollectible franchise fees was as follows (in thousands):Allowance for Uncollectible Franchise Fees: Balance at January 1, 2017$193Charges to bad debts434Write offs(292)Balance at December 31, 2017$335Charges to bad debts409Write offs(289)Balance at December 31, 2018$455 4. Allowance for uncollectible agency feesActivity in the allowance for uncollectible agency fees was as follows:Allowance for Uncollectible Agency Fees: Balance at January 1, 2017$167Charges to bad debts649Write offs(634)Balance at December 31, 2017$182Charges to bad debts889Write offs(829)Balance at December 31, 2018$2425. Property and equipmentProperty and equipment consisted of the following at:70 December 31 2018 2017Furniture & fixtures$2,233 $1,977Computer equipment1,023 662Network equipment252 242Phone system824 710Leasehold improvements6,692 5,788Total11,024 9,379Less accumulated depreciation(3,449) (2,534)Property and equipment, net$7,575 $6,845Depreciation expense was $1.3 million and $810 thousand for the years ended December 31, 2018 and 2017, respectively.6. Intangible assetsIntangible assets consisted of the following: December 31 Weighted averageamortization period(years) 2018 2017 Computer software & web domain$679 $530 3.18Less accumulated amortization(431) (314) Intangible assets, net$248 $216 Amortization expense was $117 thousand and $66 thousand for the years ended December 31, 2018 and 2017, respectively.Expected amortization over the next five years is as follows: AmountYear Ending December 31, 2019$132202092202121202222023 and thereafter1Total$2487. Employee benefit obligationThe Company has adopted a qualified deferred compensation plan under section 401(k) of the Internal Revenue Code. Full-time employees overthe age of 21 with six months of service are eligible to participate. Under the plan, the Company’s contribution is based on a discretionarymatching of 100% of salary deferral elected by each eligible employee up to a maximum of 3% of compensation. The Company’s matching portionvests over a four-year period, after which time the employee becomes fully vested and all future contributions will vest immediately. Matching contributions may be changed at the discretion of the Company. Company contributions totaled $529 thousand and $373 thousand forthe years ended years ended December 31, 2018 and 2017.718. Note payableOn 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 revolvingcredit facility and $40.0 million term note payable in order to obtain a more favorable interest rate on the outstanding debt. The Company has theright, 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 Company treated the refinancing as an extinguishment of the existing debt.The $13.0 million revolving credit facility accrues interest on amounts drawn at an initial interest rate of LIBOR plus 2.5%, then at an interest ratedetermined by the Company's leverage ratio for the preceding period. At December 31, 2018, the Company had $10.0 million drawn against therevolver. At December 31, 2018, the Company had a letter of credit of $417 thousand applied against the maximum borrowing availability, thusamounts available to draw totaled $2.6 million. The revolving credit facility is collateralized by substantially all the Company’s assets, whichincludes rights to future commissions. Interest payment on the revolving credit facility totaled $198 thousand for the year ended December 31,2018.The $40.0 million term note accrues interest at an initial interest rate of LIBOR plus 2.50%, then at an interest rate determined by the Company'sleverage ratio for the preceding period. As of December 31, 2018, the Company was in the greater than 2.50x leverage ratio tranche, accruinginterest of LIBOR plus 2.25%. The aggregate principal amount of the term note as of December 31, 2018 is $39.0 million, payable in quarterlyinstallments of (x) $500 thousand from the fiscal quarter ending March 31, 2019 through the fiscal quarter ending June 30, 2019, (y) $750 thousandfrom the fiscal quarter ending September 30, 2019 through the fiscal quarter ending June 30, 2020, and (z) $1.3 million from the fiscal quarterending September 30, 2020 through the fiscal quarter ending June 30, 2021, with a balloon payment of the entire unpaid principal amount of theterm note on August 3, 2021.The term note is collateralized by substantially all the Company’s assets, which includes rights to futurecommissions.The interest rate for each leverage ratio tier are as follows:Leverage RatioInterest Rate< 1.50xLIBOR + 175.0 bps> 1.50xLIBOR + 200.0 bps> 2.50xLIBOR + 225.0 bps> 3.50xLIBOR + 250.0 bpsMaturities of the term note payable for the next three calendar years as of December 31, 2018 are as follows (in thousands): Amount20192,50020204,000202132,500 $39,000The $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 $553 thousand at December 31, 2018 are reflected as a reduction to the note balance and will be amortized throughinterest expense over three years (the term of the note payable). As part of the refinancing, $871 thousand of origination fees from previous debtwere immediately recognized as interest expense.The Company’s note payable agreement contains certain restrictions and covenants. Under these restrictions, the Company is limited in theamount of debt incurred and distributions payable. In addition, the credit agreement contains certain change of control provisions that, if broken,would trigger a default. Finally, the Company must maintain certain financial ratios. As of December 31, 2018, the Company was in compliancewith these covenants.72Because of both instruments’ origination date and variable interest rate, the note payable balance at December 31, 2018 and December 31, 2017,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 fairvalue. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are described asfollows: •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 forsimilar 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 participantswould 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 thefair value measurement. The valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservableinputs.9. Commitments and contingenciesThe Company leases its facilities under non-cancelable operating leases. In addition to monthly lease payments, the lease agreements require theCompany to reimburse the lessors for its portion of operating costs each year. Rent expense was $1.6 million and $1.0 million for the years endedDecember 31, 2018 and 2017.The following is a schedule of future minimum lease payments as of December 31, 2018: AmountYear ending December 31: 2019$1,68820202,57520212,79320222,76220232,5782024-202911,626 $24,02210. Income taxesAs a result of the Reorganization Transactions and the Offering, GSHD became the sole managing member of GF, which is treated as apartnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, GF is not subject to U.S. federal andcertain state and local income taxes. Any taxable income or loss generated by GF is passed through to and included in the taxable income or lossof 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 expenseA 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):73 Year Ended December 31 20182017Income (loss) before taxes $(18,218)$8,678Less: (income) prior to the Reorganization Transactions (4,389)(8,678)Income (loss) before taxes $(22,607)$— Income taxes at U.S. federal statutory rate $(4,747)—Tax on income not subject to entity level federal incometax (544)—Permanent Differences: Non-controlling interest 3,536—Non-deductible stock compensation costs 2,038—Non-deductible excess compensation 27—Meals & Entertainment 38—State income tax, net of federal benefit 99—Other Reconciling items: Other 2—Income tax expense $449$—Deferred tax assets and liabilitiesThe components of deferred tax assets are as follows (in thousands): December 31, 2018December 31, 2017Investment in flow-through entity$1,958—Net deferred tax asset$1,958$—Uncertain tax positionsGSHD has determined there are no material uncertain tax positions as of December 31, 2018.Tax Receivable AgreementGF 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 Acommon stock occurs. Future taxable redemptions or exchanges are expected to result in tax basis adjustments to the assets of GF that will beallocated to the Company and thus produce favorable tax attributes. These tax attributes would not be available to us in the absence of thosetransactions. The anticipated tax basis adjustments are expected to reduce the amount of tax that GSHD would otherwise be required to pay in thefuture.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 actuallyrealizes 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 ofpayments made under the tax receivable agreement.During the year ended December 31, 2018, an aggregate of 261 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, we received 261 thousand LLC Units, which resulted in anincrease in the tax basis of our investment in GF subject to the provisions of the Tax Receivable Agreement. We recognized a liability for the TRAPayments due to the Pre-IPO LLC Members, representing 85% of the aggregate tax benefits we expect to realize from the tax basis increasesrelated to the redemptions of LLC Units, after concluding it was probable that such TRA Payments would be paid74based on our estimates of future taxable income. As of December 31, 2018, the total amount of TRA Payments due to the Pre-IPO LLC Membersunder the Tax Receivable Agreement was $1.7 million, of which $9 thousand was current and included in Accounts payables and accruedexpenses on the Consolidated Balance Sheet.11. Stockholders' equityClass A Common StockGSHD has a total of 13,800 thousand shares of its Class A common stock outstanding at December 31, 2018. Each share of Class A commonstock 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 StockGSHD has a total of 22,486 thousand shares of its Class B common stock outstanding at December 31, 2018. Each share of Class B commonstock 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 stockholdersfor their vote or approval, except as otherwise required by applicable law, by agreement, or by GSHD's certificate of incorporation.Non-Controlling InterestsFollowing the Offering, GSHD became the sole managing member of GF and, as a result, it consolidates the financial results of GF. GSHD reportsa 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. For the year ended December 31, 2018, GF madedistributions of $3.9 million, of which $3.0 million were made to Pre-IPO LLC Members. The remaining $0.9 million was made to GSHD and waseliminated in consolidation.Under the amended and restated Goosehead Financial, LLC Agreement, the Pre-IPO LLC Members have the right, from and after the completionof the Offering (subject to the terms of the amended and restated Goosehead Financial, LLC Agreement), to require GSHD to redeem all or aportion 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 equalto the volume weighted average market price of one share of GSHD's Class A common stock for each LLC Unit redeemed (subject to customaryadjustments, including for stock splits, stock dividends and reclassifications) in accordance with the terms of the amended and restatedGoosehead 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 becancelled 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 LLCMember pursuant to the terms of the amended and restated Goosehead Financial, LLC Agreement. Except for transfers to GSHD pursuant to theamended and restated Goosehead Financial, LLC Agreement or to certain permitted transferees, the Pre-IPO LLC Members are not permitted tosell, transfer or otherwise dispose of any LLC Units or shares of Class B common stock.During 2018, an aggregate of 261 thousand LLC Units were redeemed by the non-controlling interest holders. Pursuant to the GF LLC Agreement,we issued 261 thousand shares of Class A common stock in connection with these redemptions and received 261 thousand LLC Interests,increasing our ownership interest in GF LLC. Simultaneously, and in connection with these redemptions, 261 thousand shares of Class B commonstock were surrendered and cancelled.The following table summarizes the ownership interest in GF as of December 31, 2018 (in thousands).75 December 31, 2018 LLC UnitsOwnership %Number of LLC Units held by GSHD13,80038.0%Number of LLC Units held by non-controlling interest holders22,48662.0%Number of LLC Units outstanding36,286100.0%The weighted average ownership percentages for the applicable reporting periods are used to attribute net income to GSHD and the non-controllinginterest holders. The non-controlling interest holders' weighted average ownership percentage for the year ended December 31, 2018 was 62.6%.All net income prior to the Offering is attributed to non-controlling interest holders.Earnings Per ShareThe following table sets forth the calculation of basic earnings per share ("EPS") based on net income attributable to GSHD for the year endedDecember 31, 2018, divided by the basic weighted average number of Class A common stock as of December 31, 2018 (in thousands, except pershare amounts). Diluted earnings per share of Class A common stock is computed by dividing net income attributable to GSHD by the weightedaverage number of shares of Class A common stock outstanding adjusted to give effect to potentially dilutive securities. The Company has notincluded the effects of conversion of Class B shares to Class A shares in the diluted EPS calculation using the "if-converted" method, becausedoing so has no impact on diluted EPS. December 31, 2018Numerator: Income (loss) before taxes $(18,218)Less: income (loss) before taxes attributable to non-controlling interests (9,702)Income (loss) before taxes attributable to GSHD (8,516)Less: income tax expense attributable to GSHD 387Net income (loss) attributable to GSHD(1) $(8,903)Denominator: Weighted average shares of Class A common stock outstanding - basic 13,554Effect of dilutive securities: Stock options(2) —Weighted average shares of Class A common stock outstanding - diluted $13,554 Earnings per share of Class A common stock - basic $(0.66)Earnings per share of Class A common stock - diluted $(0.66)(1) Net income attributable to GSHD 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 for the year ended December 31, 2018 becausethe effect would have been anti-dilutive, as GSHD recorded a net loss for the period.The following table sets forth the calculation of unaudited pro forma basic EPS based on unaudited pro forma net income attributable to GSHD forthe year ended December 31, 2017, divided by the unaudited pro forma basic weighted average number of Class A common stock as of December31, 2017 (in thousands, except per share amounts). Unaudited pro forma diluted earnings per share of Class A common stock is computed bydividing unaudited pro forma net income attributable to GSHD by the unaudited pro forma weighted average number of shares of Class A commonstock outstanding adjusted to give effect to unaudited pro forma potentially dilutive securities.76 December 31, 2017Numerator: Net income $8,678Less: unaudited pro forma net income attributable to non-controlling interests 5,436Unaudited pro forma income before taxes attributable to GSHD 3,242Less: Unaudited pro forma income tax expense 811Unaudited pro forma net income attributable to GSHD $2,431Denominator: Unaudited pro forma weighted average shares of Class A common stock outstanding - basic 13,554Unaudited pro forma effect of dilutive securities: Unaudited pro forma stock options 1,019Unaudited pro forma weighted average shares of Class A common stock outstanding - diluted 14,573 Unaudited pro forma earnings per share of Class A common stock - basic $0.18Unaudited pro forma earnings per share of Class A common stock - diluted $0.1712. Equity-based compensationA summary of equity-based compensation expense during the years ended December 31, 2018 and 2017 is as follows (in thousands): Year Ended December 31 20182017Class B unit compensation $26,134$2,231Stock options 949—Equity-based compensation expense $27,083$2,231Class B unit compensation:Prior to the Offering, certain Pre-IPO LLC Members held non-vesting and non-voting Class B units. In accordance with accounting guidance, anydividends paid to Class B unit holders are recognized as compensation expense when declared, as the Class B non-vesting units are consideredto be a non-substantive class of equity. Dividends paid to Class B unit holders prior to the Offering, included in employee compensation andbenefits, totaled $0.1 million and $2.2 million for the years ended December 31, 2018 and 2017, respectively.In connection with the Reorganization Transactions, immediately prior to the Offering, historical Class B interests in TWIHG and GM vested byconverting to the Texas Wasatch Note and Goosehead Management Note, respectively, paid with a combination of proceeds from the Offering andshares of Class A common stock. This conversion changed the nature of the Class B interests from a profit sharing arrangement to a substantiveclass of equity and were expensed under the guidance of ASC 718. At the Offering price of $10.00 per share, GSHD incurred total compensationexpense of $6.2 million in connection with the conversion, recognized in the second quarter of 2018.Class B interests in GF were also deemed vested by converting, along with all pre-offering Class A equity, on a one-to-one basis with the numberof LLC units previously owned, to both LLC Units and shares of Class B common stock. This conversion changed the nature of the Class Binterests from a profit sharing arrangement to a substantive class of equity and were expensed under the guidance of ASC 718. At the initial publicoffering price of$10.00 per share, the Company issued a total of 2.0 million LLC Units and shares of Class B common stock and incurred totalcompensation expense of $19.8 million as part of the conversion, recognized in the second quarter of 2018.77Stock options:In connection with the IPO, GSHD granted 1,650 thousand options to directors and certain employees. The stock options were granted with astrike price of $10.00 per share (the initial public offering price). The 365 thousand director stock options vest quarterly over a three-year period,and the 1,285 thousand employee stock options vest annually from 2020 to 2022. The grant date fair value was determined using the Black-Scholes valuation model using the following assumptions:Expected volatility25%Expected dividend yield—Expected term (in years)5.95Risk-free interest rate2.59%GSHD will recognize the total compensation expense of $5.2 million related to such option grants on a straight-line basis over the requisite serviceperiod of the award recipient (three years for directors and four years for certain employees).In April 2018, GSHD adopted the Omnibus Incentive Plan, which reserved 1.5 million shares of Class A Common Stock for delivery to directors,officers, and managing directors in connection with future awards granted under the plan. GSHD also adopted an Employee Stock Purchase Plan,which reserved 20 thousand shares of Class A Common Stock for delivery to employees. There were 5 thousand shares outstanding related to theEmployee Stock Purchase Plan at December 31, 2018.13. Other incomeOn June 1, 2017, the Company executed a buyout agreement with a franchisee per the terms of a franchise agreement from 2014. As part of thebuyout, the departing franchisee purchased Goosehead’s economic interests in future royalty fees. Goosehead recognized a $3.5 million gain onthe transaction in June 2017 which is included in Other income on the consolidated statement of income. The franchisee also paid off anoutstanding note to Goosehead in the amount of $242 thousand.14. Segment informationThe Company has two reportable segments: Corporate Channel and Franchise Channel. The Corporate Channel consists of company-owned andfinanced operations with employees who are hired, trained, and managed by Goosehead. The Franchise Channel network consists of franchiseeoperations that are owned and managed by individual business owners. These business owners have a contractual relationship with Goosehead touse the Company's processes, systems, and back-office support team to sell insurance and manage their business. In exchange, Goosehead isentitled to an initial franchise fee and ongoing royalty fees. Allocations of contingent commissions and certain operating expenses are based onreasonable assumptions and estimates primarily using revenue, headcount and other information. The Company’s chief operating decision makeruses net income before interest, income taxes, depreciation and amortization, adjusted to exclude equity-based compensation and other non-operating items, including, among other things, certain non-cash charges and certain non-recurring or non-operating gains or losses (“AdjustedEBITDA”) as a performance measure to manage resources and make decisions about the business. Summarized financial information concerningthe Company’s reportable segments is shown in the following tables (in thousands). There are no intersegment sales, only interest income andinterest expense related to an intersegment line of credit, all of which eliminate in consolidation. The “Other” column includes any income andexpenses not allocated to reportable segments and corporate-related items, including equity-based compensation, certain legal expenses andinterest related to the note payable.78 CorporateChannel FranchiseChannel Other TotalYear ended December 31, 2018: Revenues: Commissions and agency fees$34,287 $2,417 $— $36,704Franchise revenues— 23,022 — 23,022Interest income— 422 — 422Total34,287 25,861 — 60,148Operating expenses: Employee compensation and benefits, excludingequity-based compensation18,662 12,511 — 31,173General and administrative expenses, excluding statefranchise tax(1)7,200 4,326 1,399 12,925Bad debts889 409 — 1,298Total26,751 17,246 1,399 45,396Adjusted EBITDA7,536 8,615 (1,399) 14,752Other income (expense, including state franchise tax)(22) — (135) (157)Equity based compensation— — (27,083) (27,083)Interest expense— — (4,266) (4,266)Depreciation and amortization(945) (519) — (1,464)Taxes— — (449) (449)Net income$6,569 $8,096 $(33,332) $(18,667)At December 31, 2018: Total Assets$6,862 $8,572 $19,364 $34,798(1) Excluded from general and administrative expenses is $135 thousand of state franchise tax that is not calculated based on income.79 CorporateChannel FranchiseChannel Other TotalYear Ended December 31, 2017: Revenues: Commissions and agency fees$25,521 $1,509 $— $27,030Franchise revenues— 15,438 — 15,438Interest income— 243 — 243Total25,521 17,190 — 42,711Operating expenses: Employee compensation and benefits, excludingequity-based compensation13,469 8,844 — 22,313General and administrative expenses5,036 3,219 342 8,597Bad debts649 434 — 1,083Total19,154 12,497 342 31,993Adjusted EBITDA6,367 4,693 (342) 10,718Other income (expense)— 3,541 — 3,541Equity based compensation— — (2,231) (2,231)Interest expense— — (2,474) (2,474)Depreciation and amortization(657) (219) — (876)Net income$5,710 $8,015 $(5,047) $8,678At December 31, 2017: Total Assets$7,855 $6,945 $1,906 $16,70615. LitigationFrom time to time, the Company may be involved in various legal proceedings, lawsuits and claims incidental to the conduct of our business. Theamount of any loss from the ultimate outcomes is not probable or reasonably estimable. It is the opinion of management that the resolution ofoutstanding claims will not have a material adverse effect on the financial position or results of operations of the Company.16. Subsequent eventsOn March 7, 2019, GF approved a $15 million extraordinary dividend to all holders of LLC Units, including GSHD. The board of directors of theCompany then declared an extraordinary dividend of $0.41 to all holders of Class A common stock of GSHD with a record date of March 18, 2019,to be paid on or before April 1, 2019. A summary of the total estimated amounts to be paid by GF is as follows (in thousands): LLC Units held as ofMarch 14, 2019Estimated dividend to bepaidClass A common stockholders 14,421$5,962Class B common stockholders via LLC Units held 21,8649,038Total 36,285$15,000Any future extraordinary dividends will be declared at the sole discretion of GF's managing members with respect to GF and the Company's boardof directors with respect to GSHD. In determining whether a future extraordinary dividend will be declared by the Company, the board of directorsmay, at its sole discretion, consider the following: the Company's financial condition and operating results, the Company's available cash andcurrent and anticipated80cash needs, the Company's capital requirements, any contractual, legal, tax and regulatory restrictions, general economic and businessconditions, and such other factors or conditions as the board of directors deems relevant.17. Selected quarterly financial data (unaudited)The following tables sets forth certain unaudited quarterly results of operations for the years ended December 31, 2018 and 2017 (in thousands,except per share data). The sum of the four quarters may differ from the annual amount due to rounding: 2018 First Quarter Second Quarter Third Quarter Fourth QuarterTotal revenue$14,589 $14,788 $16,054 $14,717Income from operations4,763 (22,749) 2,653 1,403Net income3,768 (23,875) 836 605Earnings per share(1)(2) Basic0.08 (0.68) 0.02 0.01Diluted0.08 (0.68) 0.02 0.01 2017First Quarter Second Quarter Third Quarter Fourth QuarterTotal revenue$9,891 $10,879 $10,807 $11,134Income from operations2,800 2,811 883 1,116Net income2,267 5,824 209 376Earnings per share(1)(2) Basic0.05 0.12 — 0.01Diluted0.05 0.12 — 0.01(1) Basic and diluted earnings per share are computed independently for each of the quarters presented. Therefore, the sum of quarterly basic and diluted earnings per shareamounts may not equal annual basic and diluted earnings per share amounts.(2) Basic and diluted earnings per share for the first quarter of 2018 and year ended December 31, 2017 are shown on a pro-forma basis, as there was no Class A or Class Bcommon stock outstanding as of March 31, 2018 or December 31, 2017, respectively.Item 9. Changes in and disagreements with accountants on accountingand financial statement disclosureNone.Item 9A. Controls and proceduresEvaluation of Disclosure Controls and ProceduresUnder the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, we conductedan evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under theExchange Act) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officerhave concluded that our disclosure controls and procedures were effective as of December 31, 2018.Changes in Internal Controls Over Financial Reporting81We previously identified and reported material weaknesses regarding the lack of adequate (i) executive management review of our GAAP financialstatements, (ii) review of our accounting policies, including recent accounting pronouncements and significant transactions for the periodspresented and (iii) information technology general controls in the areas of user access and program change management for certain informationtechnology systems.Using third party consultants along with internal resources, we continued to implement certain measures to remediate them during the year endedDecember 31, 2018. For example, we implemented policies requiring our executive management to review our financial statements presented on aGAAP basis. Additionally, we have implemented policies requiring our Chief Financial Officer, controller and assistant controller (who was recentlyhired to assist with financial reporting requirements) to systematically review and document all accounting policies and procedures aroundsignificant transactions to ensure compliance with the most recent GAAP pronouncements, review and document quarterly GAAP and SECdisclosure checklists, and review and document monthly and quarterly financial statement close process checklists. As a result of the aboveactions, these material weaknesses have been remediated as of December 31, 2018.Additionally, to address the information technology general control material weakness described above in (iii), we have updated certain users'access to ensure that financial data is adequately restricted to appropriate personnel. We have also implemented program change managementcontrols to ensure that any system changes are adequately reviewed and deployed through the appropriate personnel. As a result of the aboveactions, this material weakness has been remediated as of December 31, 2018.No material costs were incurred during the year ended December 31, 2018 relating to remediation efforts discussed aboveManagement's Report on Internal Controls over Financial ReportingThis Annual Report on Form 10-K does not include a report of management's assessment regarding internal control over financial reporting due toa transition period established by the SEC for newly public companies.In addition, because we are an "emerging growth company" under the JOBS Act, our independent registered public accounting firm will not berequired to attest to the effectiveness of our internal control over financial reporting for so long as we are an emerging growth company.Item 9B. Other informationNot applicable.PART IIIItem 10. Directors, executive officers, and corporate governanceThe information required by this item is incorporated by reference to the Company's Proxy Statement for its 2019 Annual Meeting of Stockholdersto be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2018.Item 11. Executive compensationThe information required by this item is incorporated by reference to the Company's Proxy Statement for its 2019 Annual Meeting of Stockholdersto be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2018.Item 12. Security ownership of certain beneficial owners and managementand related stockholder matters82The information required by this item with respect to securities authorized for issuance under equity compensation plans is set forth under “Item 5.Securities Authorized for Issuance under Equity Compensation Plans.”The information required by Item 403 of Regulation S-K is incorporated by reference to the Company's Proxy Statement for its 2019 AnnualMeeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2018.Item 13. Certain relationships and related transactions, and directorindependenceThe information required by this item is incorporated by reference to the Company's Proxy Statement for its 2019 Annual Meeting of Stockholdersto be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2018.Item 14. Principal accountant fees and servicesThe information required by this item is incorporated by reference to the Company's Proxy Statement for its 2019 Annual Meeting of Stockholdersto be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2018.PART IV83Item 15. Exhibits and financial statement schedulesThe following documents are filed as part of this Annual Report:Exhibit NumberDescription3.1Amended and Restated Certificate of Incorporation of Goosehead Insurance, Inc. (incorporated by reference to exhibit 3.1 toGoosehead Insurance Inc.'s Current Report on Form 8-K filed with the Commission on May 2, 2018)3.2By-Laws of Goosehead Insurance, Inc. (incorporated by reference to exhibit 3.2 to Goosehead Insurance Inc.'s registrationstatement on Form S-1 (Registration No. 333-224080))10.1Amended and Restated Limited Liability Company Agreement of Goosehead Financial, LLC, dated as of May 1, 2018, by andamong Goosehead Financial, LLC and its members (incorporated by reference to exhibit 10.2 to Goosehead Insurance Inc.'sCurrent Report on Form 8-K filed with the Commission on May 2, 2018)10.2Registration Rights Agreement, dated as of May 1, 2018, by and among Goosehead Insurance, Inc. and the other persons andentities party thereto (incorporated by reference to exhibit 10.4 to Goosehead Insurance Inc.'s Current Report on Form 8-K filed withthe Commission on May 2, 2018)10.3Reorganization Agreement, dated as of April 26, 2018, by and among Goosehead Insurance, Inc., Goosehead Financial, LLC, andeach of the other persons and entities party thereto (incorporated by reference to exhibit 10.1 to Goosehead Insurance Inc.'sCurrent Report on Form 8-K filed with the Commission on May 2, 2018)10.4Tax Receivable Agreement, dated as of May 1, 2018, by and among Goosehead Insurance, Inc., Goosehead Financial, LLC, andeach of the other persons and entities party thereto (incorporated by reference to exhibit 10.3 to Goosehead Insurance Inc.'sCurrent Report on Form 8-K filed with the Commission on May 2, 2018)10.5Stockholders Agreement, dated as of May 1, 2018, by and among Goosehead Insurance, Inc., Goosehead Financial, LLC and theother persons and entities party thereto10.6Form of Franchise Agreement (incorporated by reference to exhibit 10.6 to Goosehead Insurance Inc.'s registration statement onForm S-1 (Registration No. 333-224080))10.7Goosehead Insurance, Inc. Omnibus Incentive Plan (incorporated by reference to exhibit 99 to Goosehead Insurance Inc.'sregistration statement on Form S-8 (Registration No. 333-224468))10.8Form of Goosehead Insurance, Inc. Omnibus Incentive Plan Stock Option Award Agreement (Employees) (incorporated byreference to exhibit 10.8 to Goosehead Insurance Inc.'s registration statement on Form S-1 (Registration No. 333-224080))10.9Form of Goosehead Insurance, Inc. Omnibus Incentive Plan Stock Option Award Agreement (Directors) (incorporated by referenceto exhibit 10.9 to Goosehead Insurance Inc.'s registration statement on Form S-1 (Registration No. 333-224080))10.10Goosehead Insurance, Inc. Employee Stock Purchase Plan (incorporated by reference to exhibit 99 to Goosehead Insurance Inc.'sregistration statement on Form S-8 (Registration No. 333-224470))10.11Form of Director Indemnification Agreement (incorporated by reference to exhibit 10.10 to Goosehead Insurance Inc.'s registrationstatement on Form S-1 (Registration No. 333-224080))21Subsidiaries of the Registrant23.1Consent of Deloitte & Touche LLP31.1Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2Certifications of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002101.INSXBRL Instance Document101.SCHXBRL Schema Document101.CALXBRL Calculation Linkbase Document101.DEFXBRL Definition Linkbase Document101.LABXBRL Label Linkbase Document101.PREXBRL Presentation Linkbase84SignaturesPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized. GOOSEHEAD INSURANCE, INC. Date:March 14, 2019By: /s/ Mark E. Jones Mark E. Jones Chairman and Chief Executive Officer (Principal Executive Officer) Date:March 14, 2019By: /s/ Mark S. Colby Mark S. Colby Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf ofthe registrant and in the capacities and on the dates indicated.SignatureTitleDate/s/ Mark E. JonesChairman, Director and Chief Executive Officer (Principal Executive Officer)March 14, 2019Mark E. Jones /s/ Robyn JonesVice Chairman and DirectorMarch 14, 2019Robyn Jones /s/ Peter LaneDirectorMarch 14, 2019Peter Lane /s/ Mark MillerDirectorMarch 14, 2019Mark Miller /s/ James ReidDirectorMarch 14, 2019James Reid /s/ Mark S. ColbyChief Financial Officer(Principal Financial Officer and Principal AccountingOfficer)March 14, 2019Mark S. Colby 85STOCKHOLDERS AGREEMENTAGREEMENT, dated as of May 1, 2018 among Mark E. Jones, Robyn Jones, Michael C. Colby, Jeffrey Saunders, The Markand Robyn Jones Descendants Trust 2014, The Lanni Elaine Romney Family Trust 2014, The Lindy Jean Langston Family Trust2014, The Camille LaVaun Peterson Family Trust 2014, The Desiree Robyn Coleman Family Trust 2014, The Adrienne MorganJones Family Trust 2014, The Mark Evan Jones, Jr. Family Trust 2014, Serena Jones, Lanni Romney, Lindy Langston, CamillePeterson, Desiree Coleman, Adrienne Jones, Mark E. Jones, Jr., The Colby 2014 Family Trust, The Preston Michael Colby 2014Trust, The Lyla Kate Colby 2014 Trust and Texas Wasatch Insurance Partners, L.P. (each, together with his, her or its permittedtransferees pursuant to Section 8.02(c) of the Amended and Restated Limited Liability Company Agreement of Goosehead Financial,LLC, a “Holder,” and together, the “Holders”) and Goosehead Insurance, Inc. (“Pubco”).WHEREAS, Pubco intends to consummate an initial public offering (the “IPO”) of its Class A Common Stock, par value$0.01 per share (“Class A Common Stock”);WHEREAS, in connection with the IPO, Pubco will become the managing member of Goosehead Financial, LLC (the“Company”) and, pursuant to a reorganization agreement, immediately prior to the IPO, the Holders and the other holders of equity inthe Company will receive new units (the “LLC Units”) in the Company, with the exception of Pubco and its wholly-ownedsubsidiaries, and an equivalent number of shares of Class B Common Stock, par value $0.01 per share, of Pubco (the “Class BCommon Stock,” and together with the Class A Common Stock, the “Common Stock”); andWHEREAS, the Holders desire to effect an agreement that during any period following the completion of the IPO where theHolders meet the Substantial Ownership Requirement (as defined below), approval by the Holders will be required for certaincorporate actions and the Holders will have certain designation rights with respect to nominees to the Board of Directors (as definedbelow).NOW, THEREFORE, the parties hereto agree as follows:Article 1 STOCKHOLDER RIGHTS AND RESTRICTIONSSection 1.01 . Approval for Certain Corporate Actions. Until the Substantial Ownership Requirement is no longer met, Pubcoshall not permit the occurrence of the following matters relating to Pubco without first receiving the approval of the Holders holding amajority of the shares of Class B CommonStock held by the Holders as evidenced by a written resolution or consent in lieu thereof:(a) any transaction or series of related transactions resulting in the merger, consolidation or sale of all, or substantially all, ofthe assets of the Company and its subsidiaries, or any acquisition or disposition of any asset for consideration in excess of 15% of theTotal Assets (as defined below) of Pubco and its subsidiaries;(b) any issuance of equity securities, or any other ownership interests, of Pubco or any of its subsidiaries, other than underany equity incentive plan that has received the prior approval of the Board of Directors, for consideration exceeding $50 million;(c) any amendments to the certificate of incorporation or bylaws of Pubco;(d) entering into any material new line of business (other than natural extensions of the business of Pubco and itssubsidiaries) or making any material modification to the scope of Pubco’s business;(e) any change in the size of the Board of Directors;(f) any hiring, termination, replacement, compensation, benefits or other significant decisions relating to the Chief ExecutiveOfficer, Chief Financial Officer, Chief Operating Officer, General Counsel or Controller, including entering into new employmentagreements or modifying existing employment agreements, adopting or modifying any plans relating to any incentive securities oremployee benefit plans or granting incentive securities or benefits to any such individuals under any existing plans; or(g) any agreement or commitment with respect to any of the foregoing.Section 1.02 . Composition of the Board. Until the Substantial Ownership Requirement is no longer met, the Holders holdinga majority of the shares of Class B Common Stock held by the Holders may, by means of a written resolution or consent in lieuthereof, designate the nominees for a majority of the members of the Board of Directors, including the Chair of the Board of Directors.Section 1.03 . Transfers. No Holder shall sell, transfer or otherwise dispose of Class B Common Stock, except for transfers (i)pursuant to a Disposition Event (as such term is defined in the certificate of incorporation of Pubco) pursuant to Section 8.02(a) of theAmended and Restated Limited Liability Company Agreement of the Company; (ii) as approved in writing pursuant to Section 8.02(b)of the Amended and Restated Limited Liability Company Agreement of the Company or (iii) to a permitted transferee pursuant to2Section 8.02(c) of the Amended and Restated Limited Liability Company Agreement of the Company.ARTICLE 2 REPRESENTATIONS AND WARRANTIES OF THE HOLDERSSection 2.01 . Corporation Authorization. Each Holder that is not a natural person represents and warrants to each of the otherHolders and Pubco that such Holder is validly organized and existing under the laws of its state of organization and has all requisitepower and authority to execute and deliver this Agreement, to perform fully its obligations hereunder and to consummate thetransactions contemplated hereby, and that this Agreement constitutes the valid and binding agreement of such Holder.Section 2.02 . Non-Contravention. Each Holder represents and warrants to each of the other Holders and Pubco that theexecution, delivery and performance by such Holder of this Agreement and the consummation of the transactions contemplated herebydo not and will not (i) if such Holder is not a natural person, contravene or conflict with, or constitute a violation of, any organizationaldocuments of such Holder; (ii) contravene or conflict with, or constitute a violation of, any material applicable law or any materialagreement or order binding on such Holder; or (iii) result in the imposition of any Lien (as defined below) on any asset of such Holder.Section 2.03 . Ownership of Shares of Common Stock. Each Holder represents and warrants to each of the other Holders andPubco that such Holder is the record and beneficial owner of all of the shares of Common Stock owned by them on the date hereof,and that the shares of Common Stock owned by them on the date hereof are owned free of any and all liens, charges, security interests,options, claims, mortgages, pledges, proxies, voting trusts or agreements, obligations, understandings or arrangements or otherrestrictions on title or transfer of any nature whatsoever (collectively, “Liens”) and any other limitation or restriction (including anyrestriction on the right to vote or otherwise dispose of the shares of Common Stock), other than transfer restrictions under applicablesecurities laws. None of the shares of Common Stock is subject to any voting trust or other agreement or arrangement with respect tothe voting of such shares of Common Stock.ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF PUBCOPubco represents and warrants to each Holder that:Section 3.01 . Corporation Authorization. Pubco has been duly incorporated and is validly existing under the laws of its stateof incorporation and3has all requisite corporate power and authority to execute and deliver this Agreement, to perform fully its obligations hereunder and toconsummate the transactions contemplated hereby. This Agreement constitutes the valid and binding agreement of Pubco.Section 3.02 . Non-Contravention. The execution, delivery and performance by Pubco of this Agreement and theconsummation of the transactions contemplated hereby do not and will not (i) contravene or conflict with, or constitute a violation of,the organizational documents of Pubco; (ii) contravene or conflict with, or constitute a violation of, any material applicable law or anymaterial agreement or order binding on Pubco; or (iii) result in the imposition of any Lien on any asset of Pubco.ARTICLE 4 MISCELLANEOUSSection 4.01 . Other Definitional and Interpretative Provisions. Unless specified otherwise, in this Agreement the obligationsof any party consisting of more than one person are joint and several. The words “hereof”, “herein” and “hereunder” and words of likeimport used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. Thecaptions herein are included for convenience of reference only and shall be ignored in the construction or interpretation hereof.References to Articles, Sections, Exhibits and Schedules are to Articles, Sections, Exhibits and Schedules of this Agreement unlessotherwise specified. All Exhibits and Schedules annexed hereto or referred to herein are hereby incorporated in and made a part of thisAgreement as if set forth in full herein. Any capitalized terms used in any Exhibit or Schedule but not otherwise defined therein, shallhave the meaning as defined in this Agreement. Any singular term in this Agreement shall be deemed to include the plural, and anyplural term the singular. Whenever the words “include”, “includes” or “including” are used in this Agreement, they shall be deemed tobe followed by the words “without limitation”, whether or not they are in fact followed by those words or words of like import.“Writing”, “written” and comparable terms refer to printing, typing and other means of reproducing words (including electronic media)in a visible form. References to any agreement or contract are to that agreement or contract as amended, modified or supplementedfrom time to time in accordance with the terms hereof and thereof. References to any Person (as defined below) include the successorsand permitted assigns of that Person. References from or through any date mean, unless otherwise specified, from and including orthrough and including, respectively.Section 4.02 . Additional Definitions.(a) “Board of Directors” means the Board of Directors of Pubco.4(b) “Organization” means any corporation, partnership, joint venture or enterprise, limited liability company,unincorporated association, trust, estate, governmental entity or other entity or organization, and shall include the successor (by mergeror otherwise) of any entity or organization.(c) “Person” means any natural person or Organization.(d) “Substantial Ownership Requirement” means the beneficial ownership (as such term is defined in Rule 13d-3 andRule 13d-5 under the Exchange Act) by the Holders collectively, of shares of Common Stock representing at least ten percent (10%)of the issued and outstanding shares of Common Stock.(e) “Total Assets” of any Person means the consolidated total assets of such Person and its subsidiaries, as determined inaccordance with U.S. generally accepted accounting principles, as shown on such Person’s most recent balance sheet.Section 4.03 . Further Assurances. Each party to this Agreement, at any time and from time to time upon the reasonablerequest of another party to this Agreement, shall promptly execute and deliver, or cause to be executed and delivered, all such furtherinstruments and take all such further actions as may be reasonably necessary or appropriate to confirm or carry out the purposes andintent of this Agreement.Section 4.04 . Expenses. All costs and expenses incurred in connection with this Agreement shall be paid by the partyincurring such cost or expense.Section 4.05 . Assignment. The provisions of this Agreement shall be binding upon and inure to the benefit of the partieshereto and their respective successors and assigns; provided that no party may assign, delegate or otherwise transfer any of its rights orobligations under this Agreement without the consent of the other parties hereto, other than a transfer to (i) in the case of any Holderthat is not a natural person, any Person that is an affiliate of such Holder, and (ii) in the case of any Holder that is a natural person, (A)any Person to whom Class B Common Stock are Transferred from such Holder (1) by will or the laws of descent and distribution or(2) by gift without consideration of any kind; provided that, in the case of clause (2), such transferee is the spouse, the linealdescendant, sibling, parent, heir, executor, administrator, testamentary trustee, legatee or beneficiary of such Holder, (B) a trust that isfor the exclusive benefit of such Holder or its permitted transferees under (A) above or (C) any institution qualified as tax-exemptunder Section 501(c)(3) of the Code.Section 4.06 . Governing Law. This Agreement shall be governed by, construed and enforced in accordance with the law ofthe State of Delaware, without regard to the conflicts of law rules of such state.5Section 4.07 . Consent to Jurisdiction. The parties hereto agree that any suit, action or proceeding seeking to enforce anyprovision of, or based on any matter arising out of or in connection with, this Agreement or the transactions contemplated hereby shallbe brought in the Delaware Chancery Court, and that any cause of action arising out of this Agreement shall be deemed to have arisenfrom a transaction of business in the State of Delaware, and each of the parties hereby irrevocably consents to the jurisdiction of suchcourts (and of the appropriate appellate courts therefrom) in any such suit, action or proceeding and irrevocably waives, to the fullestextent permitted by law, any objection that it may now or hereafter have to the laying of the venue of any such suit, action orproceeding in any such court or that any such suit, action or proceeding brought in any such court has been brought in an inconvenientforum. Process in any such suit, action or proceeding may be served on any party anywhere in the world, whether within or withoutthe jurisdiction of any such court.Section 4.08 . WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVESANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATED TO THISAGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.Section 4.09 . Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceabilityof any provision shall not affect the validity or enforceability of the other provisions hereof. If any provision of this Agreement, or theapplication thereof to any person or entity or any circumstance, is found to be invalid or unenforceable in any jurisdiction, (a) a suitableand equitable provision shall be substituted therefor in order to carry out, so far as may be valid and enforceable, the intent and purposeof such invalid or unenforceable provision and (a) the remainder of this Agreement and the application of such provision to otherpersons, entities or circumstances shall not be affected by such invalidity or unenforceability, nor shall such invalidity orunenforceability affect the validity or enforceability of such provision, or the application thereof, in any other jurisdiction.Section 4.10 . Counterparts. This Agreement may be executed (including by facsimile transmission) with counterpart pages orin one or more counterparts, each of which shall be deemed an original and all of which shall, taken together, be considered one andthe same agreement, it being understood that both parties need not sign the same counterpart.Section 4.11 . Entire Agreement. This Agreement constitutes the entire agreement and understanding among the parties heretoand supersedes all prior and contemporaneous agreements and understanding, both oral and written, among the parties hereto withrespect to the subject matter hereof6Section 4.12 . Amendments; Waiver Any provision of this Agreement may be amended or waived if, but only if, suchamendment or waiver is in writing and is signed, in the case of an amendment, by each party to this Agreement or in the case of awaiver, by the party against whom the waiver is to be effective.Section 4.13 . Specific Performance. The parties hereto agree that irreparable damage would occur in the event any provisionof this Agreement is not performed in accordance with the terms hereof and that the parties shall be entitled to specific performance ofthe terms hereof in addition to any other remedy to which they are entitled at law or in equity.Section 4.14 . IPO Closing; Termination. This Agreement will automatically terminate and be of no force and effect if theclosing of the IPO does not occur on or before May 1, 2018. This agreement will automatically terminate and be of no force and effectwhen the Substantial Ownership Requirement is no longer met.7IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year firstabove written.GOOSEHEAD INSURANCE, INC.By:/s/ P. Ryan Langston Name:P. Ryan Langston Title:Authorized OfficerMARK E. JONESBy:/s/ Mark E. JonesROBYN JONESBy:/s/ Robyn JonesMICHAEL C. COLBYBy:/s/ Michael C. ColbyJEFFREY SAUNDERSBy:/s/ Jeffrey Saunders[Signature Page to the Stockholders Agreement]THE MARK AND ROBYN JONESDESCENDANTS TRUST 2014By:/s/ Mark E. Jones Name:Mark E. Jones Title:TrusteeLANNI ELAINE ROMNEY FAMILYTRUST 2014By:/s/ Mark E. Jones Name:Mark E. Jones Title:TrusteeLINDY JEAN LANGSTON FAMILYTRUST 2014By:/s/ Mark E. Jones Name:Mark E. Jones Title:TrusteeCAMILLE LAVAUN PETERSON FAMILYTRUST 2014By:/s/ Mark E. Jones Name:Mark E. Jones Title:TrusteeDESIREE ROBYN COLEMAN FAMILYTRUST 2014By:/s/ Mark E. Jones Name:Mark E. Jones Title:Trustee[Signature Page to the Stockholders Agreement]ADRIENNE MORGAN JONES FAMILYTRUST 2014By:/s/ Mark E. Jones Name:Mark E. Jones Title:TrusteeMARK EVAN JONES, JR. FAMILY TRUST2014By:/s/ Mark E. Jones Name:Mark E. Jones Title:TrusteeSERENA JONESBy:/s/ Serena JonesLANNI ROMNEYBy:/s/ Lanny RomneyLINDY LANGSTONBy:/s/ Lindy LangstonCAMILLE PETERSONBy:/s/ Camille Peterson[Signature Page to the Stockholders Agreement]DESIREE COLEMANBy:/s/ Desiree ColemanADRIENNE JONESBy:/s/ Adrienne JonesMARK E. JONES, JR.By:/s/ Mark E. Jones, JR.COLBY 2014 FAMILY TRUSTBy:/s/ Michael C. Colby Name:Michael C. Colby Title:TrusteePRESTON MICHAEL COLBY 2014 TRUSTBy:/s/ Michael C. Colby Name:Michael C. Colby Title:Trustee[Signature Page to the Stockholders Agreement]LYLA KATE COLBY 2014 TRUSTBy:/s/ Michael C. Colby Name:Michael C. Colby Title:TrusteeTEXAS WASATCH INSURANCEPARTNERS, L.P.By Texas Wasatch Insurance Holdings Group,LLC, its General PartnerBy:/s/ Mark E. Jones Name:Mark E. Jones Title:Authorized Signatory, TexasWasatch Insurance HoldingGroup, LLC[Signature Page to the Stockholders Agreement]Exhibit 21Legal NameState of IncorporationGoosehead Financial, LLCDelawareGHM Holdings, LLCDelawareTWIHG Holdings, LLCDelawareGoosehead Management, LLCDelawareTexas Wasatch Insurance Holdings Group, LLCTexasGoosehead Insurance Holdings, LLCDelawareGoosehead Insurance Agency, LLCDelawareTexas Wasatch Insurance Services, L.P.TexasCONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe consent to the incorporation by reference in Registration Statement Nos. 333-224468 and 333-224470 on Form S-8 of ourreport dated March 14, 2019, relating to the financial statements of Goosehead Insurance, Inc. appearing in this Annual Report onForm 10-K of Goosehead Insurance, Inc. for the year ended December 31, 2018./s/ Deloitte & Touche LLPDallas, TexasMarch 14, 2019Exhibit 31.1Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adoptedpursuant to Section 302 of Sarbanes-Oxley Act of 2002I, Mark E. Jones, certify that:1.I have reviewed this Annual Report on Form 10‑K for the year ended December 31, 2018 of Goosehead Insurance, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading withrespect to the period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly presentin all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented inthis report;4.The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a‑15(e) and 15d‑15(e)) for the company and have:a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to bedesigned under our supervision, to ensure that material information relating to the company, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularly during the period in which this report is beingprepared;b.[Reserved];c.Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this reportour conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by thisreport based on such evaluation; andd.Disclosed in this report any change in the company’s internal control over financial reporting that occurredduring the company’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that hasmaterially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and5.The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal controlover financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing theequivalent functions):a.All significant deficiencies and material weaknesses in the design or operation of internal control over financialreporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financialinformation; andb.Any fraud, whether or not material, that involves management or other employees who have a significant role inthe registrant’s internal control over financial reporting.Date: March 14, 2019/s/ Mark E. Jones_______________________Mark E. JonesChief Executive OfficerExhibit 31.2Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adoptedpursuant to Section 302 of Sarbanes-Oxley Act of 2002I, Mark S. Colby, certify that:1.I have reviewed this Annual Report on Form 10‑K for the year ended December 31, 2018 of Goosehead Insurance, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading withrespect to the period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly presentin all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented inthis report;4.The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a‑15(e) and 15d‑15(e)) for the company and have:a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to bedesigned under our supervision, to ensure that material information relating to the company, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularly during the period in which this report is beingprepared;b.[Reserved];c.Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this reportour conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by thisreport based on such evaluation; andd.Disclosed in this report any change in the company’s internal control over financial reporting that occurredduring the company’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that hasmaterially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and5.The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal controlover financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing theequivalent functions):a.All significant deficiencies and material weaknesses in the design or operation of internal control over financialreporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financialinformation; andb.Any fraud, whether or not material, that involves management or other employees who have a significant role inthe registrant’s internal control over financial reporting.Date: March 14, 2019/s/ Mark S. Colby_______________________Mark S. ColbyChief Financial OfficerExhibit 32CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THESARBANES-OXLEY ACT OF 2002The certification set forth below is being submitted in connection with Goosehead Insurance, Inc.’s Annual Report on Form 10-K for theyear December 31, 2018 (the “Report”) for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934(the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code.Mark E. Jones, the Chief Executive Officer and Mark S. Colby, the Chief Financial Officer of Goosehead Insurance, Inc., each certifiesthat, to the best of his knowledge:1.the Report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations ofGoosehead Insurance, Inc.Date: March 14, 2019/s/ Mark E. Jones_______________________Mark E. JonesChief Executive OfficerDate: March 14, 2019/s/ Mark S. Colby_______________________Mark S. ColbyChief Financial Officer

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