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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Goosehead Insurance, Inc    GSHD

GOOSEHEAD INSURANCE, INC

(GSHD)
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GOOSEHEAD INSURANCE, INC. : Management's discussion and analysis of financial condition and results of operations (form 10-Q)

10/30/2020 | 05:08am EST

OVERVIEW

The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our condensed consolidated
financial statements and the related notes and other financial information
included elsewhere in this Form 10-Q. In addition to historical financial
information, the following discussion and analysis contains forward-looking
statements that involve risks, uncertainties, and assumptions. Our actual
results and timing of selected events may differ materially from those
anticipated in these forward-looking statements as a result of many factors,
including those discussed under "Risk factors" and elsewhere in this report and
in the Annual Report on Form 10-K.
We are a rapidly growing personal lines independent insurance agency,
reinventing the traditional approach to distributing personal lines products and
services throughout the United States. We were founded with one vision in
mind-to provide consumers with superior insurance coverage at the best available
price and in a timely manner. By leveraging our differentiated business model
and innovative technology platform, we are able to deliver to consumers a
superior insurance experience. Our management team continues to own
approximately 55% of the company, representing our commitment to the long-term
success of the Company.
Financial Highlights for the Third Quarter of 2020:
•Total revenue increased 51% from the third quarter of 2019 to $32.0 million; on
a comparable ASC 605 accounting basis, revenue increased $8.9 million or 42%
•Core Revenue* increased by 43% from third quarter of 2019 to $26.4 million; on
a comparable ASC 605 accounting basis, Core Revenue increased $8.3 million or
45%
•Total Written Premiums placed increased 49% from the prior-year period to $301
million
•Net income increased by $4.0 million from the third quarter of 2019 to $6.7
million, or 21% of total revenues; on a comparable ASC 605 accounting basis, net
income increased by $1.9 million
•Adjusted EBITDA* increased 102% from the third quarter of 2019 to $9.3 million,
or 29% of total revenues. On a comparable ASC 605 accounting basis, Adjusted
EBITDA increased by $2.3 million.
•Basic and diluted earnings per share were $0.19 and $0.17, respectively, and
Adjusted EPS*, a non-GAAP measure, was $0.23 for the three months ended
September 30, 2020
•Policies in Force increased 47% from September 30, 2019 to 657,000 at September
30, 2020
•Corporate sales headcount increased 60% from September 30, 2019 to 371 at
September 30, 2020
•As of September 30, 2020, 222 of these Corporate sales agents had less than one
year of tenure and 149 had greater than one year of tenure
•Total franchises increased 52% compared to the prior year period to 1,261;
total operating franchises increased 41% from September 30, 2019 to 823 at
September 30, 2020
•In Texas as of September 30, 2020, 36 operating Franchisees had less than one
year of tenure and 183 operating Franchisees had greater than one year of
tenure.
•Outside of Texas as of September 30, 2020, 266 operating Franchisees had less
than one year of tenure and 338 had greater than one year of tenure.
*Core Revenue, Adjusted EBITDA and Adjusted EPS are non-GAAP measures.
Reconciliation of Core Revenue to total revenue, Adjusted EBITDA to net income
and Adjusted EPS to EPS, the most directly comparable financial measures
presented in accordance with GAAP, are set forth under "Key performance
indicators".

Novel coronavirus ("COVID-19")
An outbreak of a novel strain of the coronavirus, COVID-19, was identified in
China and has subsequently been recognized as a pandemic by the World Health
Organization. This COVID-19 outbreak has severely restricted the level of
economic activity around the world. In response to this outbreak, the
governments of many countries, states, cities and other geographic regions,
including in the United States, have taken preventative or protective
                                       32
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actions, such as imposing restrictions on travel and business operations and
advising or requiring individuals to limit or forego their time outside of their
homes. In the United States, temporary closures of businesses have been ordered
and numerous other businesses have temporarily closed voluntarily.
During the first quarter, the Company reduced workforce density at all corporate
offices by requiring employees to work from home. Additionally, the Company
indefinitely suspended all corporate travel, field support visits, in-person
marketing efforts and in-person team meetings. Leveraging the Company's cloud
based technology, video conferencing technology and importantly the Company's
mortgage activity database to continue marketing efforts allowed operations to
be largely uninterrupted. During the third quarter, the Company began bringing
employees back to the office on a reduced and rotational basis. The Company will
continue to follow all local government and CDC guidelines in reopening
corporate offices. Changes in consumer behavior linked to the COVID-19 pandemic,
may have resulted in reduced loss ratios through the nine months ended September
30, 2020, increasing the amount of revenue from Contingent Commissions the
Company expects to receive.
During the first quarter, we took steps to strengthen our liquidity, including
amending our credit agreement on March 6, 2020 to increase the term loan
available borrowing to $80.0 million and to increase the amount available under
our revolving credit facility to $25.0 million. Because of the continued
strength and resiliency of our business and our outlook for the remainder of
2020, we declared a special dividend which was distributed during the third
quarter. See "Liquidity and capital resources".
Given the uncertainty regarding the spread and severity of COVID-19 and the
adverse effects on the national and global economy, the related financial impact
on our business cannot be accurately predicted at this time. We continue to
monitor the rapidly evolving situation and guidance from the authorities,
including federal, state and local public health officials and as a result may
take additional actions. While we intend to continue to execute on our strategic
plans and operational initiatives during the outbreak, in these circumstances,
there may be developments outside our control requiring us to adjust our
operating plan. See Part II, Item 1A. "Risk Factors-The global outbreak of the
coronavirus disease (COVID-19) may negatively impact the global economy in a
significant manner for an extended period of time, and could also materially
adversely affect our business and operating results."
Certain income statement line items
Revenues
Effective with the filing of the Annual Report on Form 10-K, the Company adopted
new accounting guidance, ASU 2014-09 - Revenue from Contracts with Customers
("Topic 606"), related to revenue from contracts with customers. The Company
adopted Topic 606 using the modified retrospective method, which applies the new
guidance prospectively, beginning as of 2019, the year of adoption. Accordingly,
the adoption of Topic 606 using the modified retrospective method does not
impact prior years' financial statements.
For the three months ended September 30, 2020, revenue increased by 51% to $32.0
million from $21.2 million for the three months ended September 30, 2019. For
the nine months ended September 30, 2020, revenue increased by 29% to $82.4
million from $63.7 million for the nine months ended September 30, 2019. For the
three and nine months ended September 30, 2020, if results were reported under
ASC 605, total revenue would have grown 42% to $30.1 million and 30% to $82.5
million, respectively. Total Written Premium growth, which is the best leading
indicator of future revenue growth, was 49% to $301 million for the three months
ended September 30, 2020 from $202 million for the three months ended September
30, 2019 and 45% to $789 million for the nine months ended September 30, 2020
from $543 million for the nine months ended September 30, 2019. Total Written
Premiums drive our current and future Core Revenue and gives us potential
opportunities to earn Ancillary Revenue in the form of Contingent Commissions.
Our various revenue streams do not equally contribute to the long-term value of
Goosehead. For instance, Renewal Revenue and Renewal Royalty Fees are more
predictable and have higher margin profiles, thus are higher quality revenue
streams for the Company. Alternatively, Contingent Commissions, while high
margin, are unpredictable and dependent on insurance company underwriting and
forces of nature and thus are lower quality revenue for the Company. Our revenue
streams can be viewed in three distinct categories: Core Revenue, Cost Recovery
Revenue, and Ancillary Revenue, which are non-GAAP measures. A reconciliation of
Core Revenue, Cost Recovery Revenue, and Ancillary Revenue to total revenue, the
most directly comparable financial measures presented in accordance with GAAP,
are set forth under "Key performance indicators".
Core Revenue:
•Renewal Commissions - highly predictable, higher-margin revenue stream, which
is managed by our service team.
                                       33
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•Renewal Royalty Fees - highly predictable, higher-margin revenue stream, which
is managed by our service team. For policies in their first renewal term, we see
an increase in our share of royalties from 20% to 50% on the commission paid by
the Carriers.
•New Business Commissions - predictable based on agent headcount and consistent
ramp-up of agents, but lower margin than Renewal Commissions because of higher
commissions paid to agents and higher back-office costs associated with policies
in their first term. This revenue stream has predictably converted into
higher-margin Renewal Commissions historically, and we expect this to continue
moving forward.
•New Business Royalty Fees - predictable based on franchise count and consistent
ramp-up of franchises, but lower margin than Renewal Royalty Fees because the
Company only receives a royalty fee of 20% on the commissions paid by the
Carrier in the first term of every policy and higher back-office costs
associated with policies in their first term. This revenue stream has
predictably converted into higher-margin Renewal Royalty Fees historically, and
we expect this to continue moving forward.
•Agency Fees - although predictable based on agent count, Agency Fees do not
renew like New Business Commissions and Renewal Commissions.

Cost Recovery Revenue:
•Initial Franchise Fees - one-time Cost Recovery Revenue stream per franchise
unit that covers the Company's costs to recruit, train, onboard, and support the
franchise for the first year. These fees are fully earned and non-refundable
when a franchise attends our initial training.
•Interest Income - like Initial Franchise Fees, interest income is a Cost
Recovery Revenue stream that reimburses the Company for those franchises on a
payment plan.

Ancillary Revenue:
•Contingent Commissions - although high margin, Contingent Commissions are
unpredictable and susceptible to weather events and Carrier underwriting
results. Management does not rely on Contingent Commissions for operating cash
flow or budget planning.
•Other Income - book transfer fees, marketing investments from Carriers and
other items that are unpredictable and supplemental to other revenue streams.

We discuss below the breakdown of our revenue by stream:


                                                                                          Three Months Ended September 30,
(in thousands)                                              2020 (ASC 606)                         2020 (ASC 605)                         2019 (ASC 605)
Core Revenue:
Renewal Commissions(1)                                      $7,931            25  %                $8,044            27  %                $6,056            29  %
Renewal Royalty Fees(2)                                      8,117            25  %                 8,230            27  %                 5,295            25  %
New Business Commissions(1)                                  4,790            15  %                 4,849            16  %                 3,294            16  %
New Business Royalty Fees(2)                                 3,090            10  %                 3,074            10  %                 1,994             9  %
Agency Fees(1)                                               2,491             8  %                 2,535             8  %                 1,782             8  %
Total Core Revenue                                          26,419            83  %                26,732            89  %                18,421            87  %
Cost Recovery Revenue:
Initial Franchise Fees(2)                                    1,152             4  %                 3,045            10  %                 1,935             9  %
Interest Income                                                212             1  %                   212             1  %                   169             1  %
Total Cost Recovery Revenue                                  1,364             4  %                 3,257            11  %                 2,104            10  %
Ancillary Revenue:
Contingent Commissions(1)                                    4,173            13  %                     2             -  %                   607             3  %
Other Income(2)                                                 59             -  %                    59             -  %                    37             -  %
Total Ancillary Revenue                                      4,232            13  %                    61             -  %                   644             3  %
Total Revenues                                             $32,015           100  %               $30,050           100  %               $21,169           100  %



(1) Renewal Commissions, New Business Commissions, Agency Fees, and Contingent
Commissions are in "Commissions and agency fees" as shown on the Consolidated
statements of income.
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(2) Renewal Royalty Fees, New Business Royalty Fees, Initial Franchise Fees, and
Other Income are included in "Franchise revenues" as shown on the Consolidated
statements of income.

                                                                                          Nine Months Ended September 30,
(in thousands)                                              2020 (ASC 606)                         2020 (ASC 605)                         2019 (ASC 605)
Core Revenue:
Renewal Commissions(1)                                     $21,382            26  %               $21,900            27  %               $16,744            26  %
Renewal Royalty Fees(2)                                     21,406            26  %                21,799            26  %                14,120            22  %
New Business Commissions(1)                                 12,452            15  %                12,583            15  %                 8,766            14  %
New Business Royalty Fees(2)                                 7,737             9  %                 7,812             9  %                 5,213             8  %
Agency Fees(1)                                               6,362             8  %                 6,874             8  %                 4,959             8  %
Total Core Revenue                                          69,339            84  %                70,968            86  %                49,802            78  %
Cost Recovery Revenue:
Initial Franchise Fees(2)                                    3,031             4  %                 6,960             8  %                 5,160             8  %
Interest Income                                                573             1  %                   573             1  %                   452             1  %
Total Cost Recovery Revenue                                  3,604             4  %                 7,533             9  %                 5,612             9  %
Ancillary Revenue:
Contingent Commissions(1)                                    9,248            11  %                 3,826             5  %                 8,203            13  %
Other Income(2)                                                173             -  %                   173             -  %                    71             -  %
Total Ancillary Revenue                                      9,421            11  %                 3,999             5  %                 8,274            13  %
Total Revenues                                             $82,364           100  %               $82,500           100  %               $63,688           100  %



(1) Renewal Commissions, New Business Commissions, Agency Fees, and Contingent
Commissions are included in "Commissions and agency fees" as shown on the
Consolidated statements of income.
(2) Renewal Royalty Fees, New Business Royalty Fees, Initial Franchise Fees, and
Other Income are included in "Franchise revenues" as shown on the Consolidated
statements of income.
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Effects of Topic 606
The below illustrates the impact of Topic 606 on the Company's income statement
line items for the three and nine months ended September 30, 2020
                                                                  Three Months Ended September 30, 2020
(in thousands)                                           ASC 605             Impact of Adoption            ASC 606
Core Revenue:
Renewal Commissions(1)                                      8,044                       (113)           $     7,931
Renewal Royalty Fees(2)                                     8,230                       (113)                 8,117
New Business Commissions(1)                                 4,849                        (59)                 4,790
New Business Royalty Fees(2)                                3,074                         16                  3,090
Agency Fees(1)                                              2,535                        (44)                 2,491
Total Core Revenue                                         26,732                       (313)                26,419
Cost Recovery Revenue:
Initial Franchise Fees(2)                                   3,045                     (1,893)                 1,152
Interest Income                                               212                          -                    212
Total Cost Recovery Revenue                                 3,257                     (1,893)                 1,364
Ancillary Revenue:
Contingent Commissions(1)                                       2                      4,171                  4,173
Other Income(2)                                                59                          -                     59
Total Ancillary Revenue                                        61                      4,171                  4,232
Total Revenues                                             30,050                      1,965                 32,015
Operating Expenses:
Employee compensation and benefits, excluding
equity-based compensation                                  16,639                       (154)                16,485
General and administrative expenses                         5,872                          -                  5,872
Bad debts                                                     681                       (305)                   376
Total                                                      23,192                       (459)                22,733
Adjusted EBITDA                                             6,858                      2,424                  9,282
Adjusted EBITDA Margin                                         23   %                      6    %                29  %
Other income (expense)                                         10                          -                     10
Equity-based compensation                                  (1,416)                         -                 (1,416)
Interest expense                                             (582)                         -                   (582)
Depreciation and amortization                                (900)                         -                   (900)
Tax benefit (expense)                                         689                       (358)                   331
Net Income                                                  4,659                      2,066                  6,725
Less: net income attributable to
non-controlling interests                                   2,084                      1,374                  3,458
Net Income attributable to Goosehead
Insurance Inc.                                      $       2,575           $            692            $     3,267

Earnings per share:
Basic                                               $        0.15                            0.04       $      0.19
Diluted                                             $        0.14                            0.03       $      0.17


(1) Renewal Commissions, New Business Commissions, Agency Fees, and Contingent
Commissions are included in "Commissions and agency fees" as shown on the
Consolidated statements of income.
(2) Renewal Royalty Fees, New Business Royalty Fees, Initial Franchise Fees, and
Other Income are included in "Franchise revenues" as shown on the Consolidated
statements of income.
                                       36
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                                                                 Nine Months Ended September 30, 2020
(in thousands)                                         ASC 605             Impact of Adoption            ASC 606
Core Revenue:
Renewal Commissions(1)                                   21,900                       (518)           $    21,382
Renewal Royalty Fees(2)                                  21,799                       (393)                21,406
New Business Commissions(1)                              12,583                       (131)                12,452
New Business Royalty Fees(2)                              7,812                        (75)                 7,737
Agency Fees(1)                                            6,874                       (512)                 6,362
Total Core Revenue                                       70,968                     (1,629)                69,339
Cost Recovery Revenue:
Initial Franchise Fees(2)                                 6,960                     (3,929)                 3,031
Interest Income                                             573                          -                    573
Total Cost Recovery Revenue                               7,533                     (3,929)                 3,604
Ancillary Revenue:
Contingent Commissions(1)                                 3,826                      5,422                  9,248
Other Income(2)                                             173                          -                    173
Total Ancillary Revenue                                   3,999                      5,422                  9,421
Total Revenues                                           82,500                       (136)                82,364
Operating Expenses:
Employee compensation and benefits,
excluding equity-based compensation                      44,282                       (304)                43,978
General and administrative expenses                      17,108                          -                 17,108
Bad debts                                                 1,606                       (602)                 1,004
Total                                                    62,996                       (906)                62,090
Adjusted EBITDA                                          19,504                        770                 20,274
Adjusted EBITDA Margin                                       24   %                      1    %                25  %
Other income (expense)                                       76                          -                     76
Equity-based compensation                                (3,330)                         -                 (3,330)
Interest expense                                         (1,665)                         -                 (1,665)
Depreciation and amortization                            (2,152)                         -                 (2,152)
Tax benefit (expense)                                       784                       (172)                   612
Net Income                                               13,217                        598                 13,815
Less: net income attributable to
non-controlling interests                                 6,866                        459                  7,325
Net Income attributable to Goosehead
Insurance Inc.                                     $      6,351           $            139            $     6,490

Earnings per share:
Basic                                              $       0.38           $           0.01            $      0.39
Diluted                                            $       0.36           $              -            $      0.36


(1) Renewal Commissions, New Business Commissions, Agency Fees, and Contingent
Commissions are included in "Commissions and agency fees" as shown on the
Consolidated statements of income.
(2) Renewal Royalty Fees, New Business Royalty Fees, Initial Franchise Fees, and
Other Income are included in "Franchise revenues" as shown on the Consolidated
statements of income.
                                       37
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Consolidated results of operations
The following is a discussion of our consolidated results of operations for each
of the three and nine months ended September 30, 2020 and September 30, 2019.
This information is derived from our accompanying condensed consolidated
financial statements prepared in accordance with GAAP.
The following table summarizes our results of operations for the three months
ended September 30, 2020 and 2019 (in thousands):
                                                                            

Three Months Ended September 30,

                                                  2020 (ASC 606)                      2020 (ASC 605)                    2019 (ASC 605)

Revenues:

Commissions and agency fees                $    19,385             61  %       $      15,430          51  %       $      11,739         55  %
Franchise revenues                              12,418             39  %              14,408          48  %               9,261         44  %
Interest income                                    212              1  %                 212           1  %                 169          1  %
Total revenues                                  32,015            100  %              30,050         100  %              21,169        100  %
Operating Expenses:
Employee compensation and benefits              17,901             71  %              18,055          71  %              11,412         65  %
General and administrative expenses              5,872             23  %               5,872          23  %               5,169         30  %
Bad debts                                          376              2  %                 681           3  %                 399          2  %
Depreciation and amortization                      900              4  %                 900           4  %                 516          3  %
Total operating expenses                        25,049            100  %              25,508         100  %              17,496        100  %
Income from operations                           6,966                                 4,542                              3,673
Other Income (Expense):
Other income                                        10                                    10                                  -
Interest expense                                  (582)                                 (582)                              (609)
Income before taxes                              6,394                                 3,970                              3,064
Tax expense (benefit)                             (331)                                 (689)                               301
Net income                                       6,725                                 4,659                              2,763
Less: net income attributable to
non-controlling interests                        3,458                                 2,084                              1,765
Net income attributable to Goosehead
Insurance Inc.                             $     3,267$       2,575                      $         998


                                       38
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The following table summarizes our results of operations for the nine months ended September 30, 2020 and 2019 (in thousands):

Nine Months Ended September 30,

                                                  2020 (ASC 606)                     2020 (ASC 605)                    2019 (ASC 605)

Revenues:

Commissions and agency fees                $    49,444            60  %       $      45,183          55  %       $      38,672         61  %
Franchise revenues                              32,347            39  %              36,744          45  %              24,564         39  %
Interest income                                    573             1  %                 573           1  %                 452          1  %
Total revenues                                  82,364           100  %              82,500         100  %              63,688        100  %
Operating Expenses:
Employee compensation and benefits              47,308            70  %              47,612          70  %              30,981         65  %
General and administrative expenses             17,108            25  %              17,108          25  %              13,800         30  %
Bad debts                                        1,004             1  %               1,606           2  %               1,282          3  %
Depreciation and amortization                    2,152             3  %               2,152           3  %               1,391          3  %
Total operating expenses                        67,572           100  %              68,478         100  %              47,454        100  %
Income from operations                          14,792                               14,022                             16,234
Other Income (Expense):
Other income                                        76                                   76                                  -
Interest expense                                (1,665)                              (1,665)                            (1,861)
Income before taxes                             13,203                               12,433                             14,373
Tax expense (benefit)                             (612)                                (784)                             1,475
Net income                                      13,815                               13,217                             12,898
Less: net income attributable to
non-controlling interests                        7,325                                6,866                              8,525
Net income attributable to Goosehead
Insurance Inc.                             $     6,490$       6,351$       4,373



Revenues
For the three months ended September 30, 2020, revenue increased by 51% to $32.0
million from $21.2 million for the three months ended September 30, 2019. For
the nine months ended September 30, 2020, revenue increased by 29% to $82.4
million from $63.7 million nine months ended September 30, 2019. On a comparable
ASC 605 accounting basis, revenue increased $8.9 million or 42% for the three
months ended September 30, 2020 and increased $18.8 million or 30% for the nine
months ended September 30, 2020.
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Commissions and agency fees
Commissions and agency fees consist of new business commissions, renewal
commissions, agency fees, and contingent commissions.
The following table sets forth our commissions and agency fees by amount and as
a percentage of our revenues for the periods indicated (in thousands):
                                                                            

Three Months Ended September 30,

                                                    2020 (ASC 606)                            2020 (ASC 605)                          2019 (ASC 605)
Core Revenue:
Renewal Commissions                             7,931                   41  %               8,044                53  %               6,056              52  %
New Business Commissions                        4,790                   25  %               4,849                31  %               3,294              28  %
Agency Fees                                     2,491                   13  %               2,535                16  %               1,782              15  %
Total Core Revenue:                            15,212                   78  %              15,428               100  %              11,132              95  %
Ancillary Revenue:
Contingent Commissions                          4,173                   22  %                   2                 -  %                 607               5  %
Commissions and agency fees               $    19,385                  100  %       $      15,430               100  %       $      11,739             100  %



                                                                                   Nine Months Ended September 30,
                                                    2020 (ASC 606)                           2020 (ASC 605)                          2019 (ASC 605)
Core Revenue:
Renewal Commissions                            21,382                  43  %              21,900                48  %              16,744              43  %
New Business Commissions                       12,452                  25  %              12,583                28  %               8,766              23  %
Agency Fees                                     6,362                  13  %               6,874                15  %               4,959              13  %
Total Core Revenue:                            40,196                  81  %              41,357                92  %              30,469              79  %
Ancillary Revenue:
Contingent Commissions                          9,248                  19  %               3,826                 8  %               8,203              21  %
Commissions and agency fees               $    49,444                 100  %       $      45,183               100  %       $      38,672             100  %



Renewal Commissions increased by $1.9 million or 31%, to $7.9 million for the
three months ended September 30, 2020 from $6.1 million for the three months
ended September 30, 2019. Renewal Commissions increased by $4.6 million or 28%,
to $21.4 million for the nine months ended September 30, 2020 from $16.7 million
for the nine months ended September 30, 2019. These increases were primarily
attributable to an increase in the number of policies in the renewal term from
September 30, 2019 to September 30, 2020.
New Business Commissions increased by $1.5 million, or 45%, to $4.8 million for
the three months ended September 30, 2020 from $3.3 million for the three months
ended September 30, 2019. Revenue from Agency Fees increased by $709 thousand,
or 40%, to $2.5 million for the three months ended September 30, 2020 from $1.8
million for the three months ended September 30, 2019. New Business Commissions
increased by $3.7 million or 42% for the nine months ended September 30, 2020
from $8.8 million for the nine months ended September 30, 2019. Revenue from
Agency Fees increased by $1.4 million, or 28%, to $6.4 million for the nine
months ended September 30, 2020 from $5.0 million for the nine months ended
September 30, 2019. These increases were primarily attributable to a 60%
increase in total sales agent head count to 371 at September 30, 2020, from 232
at September 30, 2019.
Revenue from Contingent Commissions increased by $3.6 million, to $4.2 million
for the three months ended September 30, 2020 from $0.6 million for the three
months ended September 30, 2019. Revenue from Contingent Commissions increased
by $1.0 million, or 13%, to $9.2 million for the nine months ended September 30,
2020 from $8.2 million for the nine months ended September 30, 2019.The primary
reason for the change in both the three
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and six month periods is the adoption of ASC 606. If the three months ended
September 30, 2020 were reported under ASC 605, revenue from Contingent
Commissions would have decreased $0.6 million due to the timing of receipt of
contingent commission in the 2020 compared to 2019. If the nine months ended
September 30, 2020 were reported under ASC 605 revenue from Contingent
Commissions would have decreased $4.4 million, or 53%, due to higher loss ratios
with certain Carriers during 2019.
Franchise revenues
Franchise Revenues consist of Royalty Fees, Initial Franchise Fees, and Other
Franchise Revenues.
The following table sets forth our franchise revenues by amount and as a
percentage of our revenues for the periods indicated (in thousands):
                                                                            

Three Months Ended September 30,

                                                   2020 (ASC 606)                             2020 (ASC 605)                           2019 (ASC 605)
Core Revenues:
Renewal Royalty Fees                          8,117                     65  %               8,230                57  %               5,295                57  %
New Business Royalty Fees                     3,090                     25  %               3,074                21  %               1,994                22  %
Total Core Revenues:                         11,207                     90  %              11,304                78  %               7,289                79  %
Cost Recovery Revenues:
Initial Franchise Fees                        1,152                      9  %               3,045                21  %               1,935                21  %
Ancillary Revenues:
Other Franchise Revenues                         59                      -  %                  59                 -  %                  37                 -  %
Franchise revenues                      $    12,418                    100  %       $      14,408               100  %       $       9,261               100  %



                                                                                   Nine Months Ended September 30,
                                                  2020 (ASC 606)                            2020 (ASC 605)                           2019 (ASC 605)
Core Revenues:
Renewal Royalty Fees                         21,406                   66  %              21,799                59  %              14,120               152  %
New Business Royalty Fees                     7,737                   24  %               7,812                21  %               5,213                56  %
Total Core Revenues:                         29,143                   90  %              29,611                81  %              19,333               209  %
Cost Recovery Revenues:
Initial Franchise Fees                        3,031                    9  %               6,960                19  %               5,160                56  %
Ancillary Revenues:
Other Franchise Revenues                        173                    1  %                 173                 -  %                  71                 1  %
Franchise revenues                      $    32,347                  100  %       $      36,744               100  %       $      24,564               265  %



Revenue from Renewal Royalty Fees increased by $2.8 million, or 53%, to $8.1
million, for the three months ended September 30, 2020 from $5.3 million for the
three months ended September 30, 2019. Revenue from Renewal Royalty Fees
increased by $7.3 million, or 52%, to $21.4 million for the nine months ended
September 30, 2020 from $14.1 million for the nine months ended September 30,
2019. The increase in revenue from Renewal Royalty Fees was primarily
attributable to an increase in the number of policies in the renewal term.
Revenue from New Business Royalty Fees increased by $1.1 million, or 55%, to
$3.1 million for the three months ended September 30, 2020 from $2.0 million for
the three months ended September 30, 2019. Revenue from New Business Royalty
Fees increased by $2.5 million, or 48%, to $7.7 million for the nine months
ended September 30, 2020 from $5.2 million for the nine months ended September
30, 2019. The increase in revenue from New Business Royalty Fees was primarily
attributable to an increase in the total number of operating franchises from
September 30, 2019 to 2020.
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Revenues from Initial Franchise Fees decreased by $0.8 million or 40% to $1.2
million for the three months ended September 30, 2020 from $1.9 million during
the three months ended September 30, 2019. Revenues from Initial Franchise Fees
decreased by $2.1 million, or 41%, to $3.0 million for the nine months ended
September 30, 2020 from $5.2 million for the nine months ended September 30,
2019. The primary reason for this decrease is the change in accounting principle
from the three and nine months ended September 30, 2019 to the three and nine
months ended September 30, 2020. If the three and nine months ended September
30, 2020 were reported under ASC 605, revenue from Initial Franchise Fees would
have increased $1.1 million and $1.8 million, respectively.
Interest income
Interest income increased by $43 thousand, or 25%, to $212 thousand for the
three months ended September 30, 2020 from $169 thousand for the three months
ended September 30, 2019. Interest income increased $121 thousand, or 27%, to
$573 thousand for the nine months ended September 30, 2020 from $452 thousand
for the nine months ended September 30, 2019. This increase was primarily
attributable to additional Franchise Agreements signed under the payment plan
option.
Expenses
Employee compensation and benefits
Employee compensation and benefits expenses increased by $6.5 million, or 57%,
to $17.9 million for the three months ended September 30, 2020 from $11.4
million for the three months ended September 30, 2019. Employee compensation and
benefits expenses increased by $16.3 million, or 53%, to $47.3 million for the
nine months ended September 30, 2020 from $31.0 million for the nine months
ended September 30, 2019.The increase is caused by a 35% increase in total
headcount from 2019 to 2020 and an increase in stock based compensation
resulting from the issuance of stock options during 2020.
General and administrative expenses
General and administrative expenses increased by $0.7 million, or 14%, to $5.9
million for the three months ended September 30, 2020 from $5.2 million for the
three months ended September 30, 2019. General and administrative expenses
increased by $3.3 million, or 24%, to $17.1 million for the nine months ended
September 30, 2020 from $13.8 million for the nine months ended September 30,
2019. This increase was primarily attributable to higher costs associated with
an increase in operating franchises and employees, investments made in
technology, and the opening of two additional corporate sales offices during the
year.
Bad debts
Bad debts decreased by $23 thousand for the three months ended September 30,
2020 to $376 thousand from $399 thousand for the three months ended September
30, 2019. Bad debts decreased by $278 thousand, or 22%, to $1,004 thousand for
the nine months ended September 30, 2020 from $1,282 thousand for the nine
months ended September 30, 2019. The change in both the three and six month
periods is driven by the adoption of ASC 606, partially offset by an increase in
write offs associated to higher revenues from Agency Fees.
Depreciation and amortization
Depreciation and amortization increased by $0.4 million, or 74%, to $0.9 million
for the three months ended September 30, 2020 from $0.5 million for the three
months ended September 30, 2019. Depreciation and amortization increased by $0.8
million, or 55%, to $2.2 million for the nine months ended September 30, 2020
from $1.4 million for the nine months ended September 30, 2019. This increase
was primarily attributable to the increase in fixed assets during the year,
including the opening of two additional corporate sales offices, expansion of
existing corporate offices and hardware for additional employees hired.
Interest expense
Interest expenses decreased by $27 thousand, or 4%, to $582 thousand for the
three months ended September 30, 2020 from $609 thousand for the three months
ended September 30, 2019. Interest expense decreased by $196 thousand, or 11%,
to $1.7 million for the nine months ended September 30, 2020 from $1.9 million
for the nine months ended September 30, 2019. This decrease was primarily
attributable to the Company refinancing the existing term loan leading to more
favorable interest rates, offset by additional borrowing during the year.
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Segment Adjusted EBITDA
Corporate Channel Adjusted EBITDA is Segment earnings before interest, income
taxes, depreciation and amortization allocable to the Corporate Channel.
Corporate Channel Adjusted EBITDA increased by $1.4 million, or 61%, to $3.7
million for the three months ended September 30, 2020 from $2.3 million for the
three months ended September 30, 2019. The primary reason for this increase is
the change in accounting principle from the three months ended September 30,
2019 to the three months ended September 30, 2020. If the three months ended
September 30, 2020 were reported under ASC 605, Corporate Channel Adjusted
EBITDA would have remained flat. Corporate Channel Adjusted EBITDA decreased by
$0.6 million, or 6%, to $8.8 million for the nine months ended September 30,
2020 from $9.4 million for the nine months ended September 30, 2019. The primary
reason for this decrease is the decrease in Contingent Commissions from the nine
months ended September 30, 2019 to the nine months ended September 30, 2020. If
the nine months ended September 30, 2020 were reported under ASC 605, Corporate
Channel adjusted EBITDA would have decreased by $1.4 million, driven by the
decrease in Contingent Commissions received.
Franchise Channel Adjusted EBITDA is Segment earnings before interest, income
taxes, depreciation and amortization, adjusted to exclude other non-operating
items.
Franchise Channel Adjusted EBITDA increased by $3.5 million, or 122%, to $6.4
million for the three months ended September 30, 2020 from $2.9 million for the
three months ended September 30, 2019.The primary reason for this increase is
the change in accounting principle from the three months ended September 30,
2019 to the three months ended September 30, 2020. If the three months ended
September 30, 2020 were reported under ASC 605, Franchise Channel Adjusted
EBITDA would have increased $1.5 million or 52%, driven by an increase in
Renewal and New Business Royalty Fees received. Franchise Channel Adjusted
EBITDA increased by $2.5 million, or 22%, to $14.0 million for the nine months
ended September 30, 2020 from $11.4 million for the nine months ended September
30, 2019.The primary reason for this increase is the change in accounting
principle from the nine months ended September 30, 2019 to the nine months ended
September 30, 2020. If the nine months ended September 30, 2020 were reported
under ASC 605, Franchise Channel Adjusted EBITDA would have increased $1.7
million or 15%, driven by the increase in Contingent Commissions received.
Neither of Franchise Channel Adjusted EBITDA or Corporate Channel Adjusted
EBITDA includes equity-based compensation, which is recorded at the consolidated
level and excluded from the EBITDA calculation.

Key performance indicators
Our key operating metrics are discussed below:
Total Written Premium
Total Written Premium represents for any reported period, the total amount of
current (non-cancelled) gross premium that is placed with Goosehead's portfolio
of Carriers. Total Written Premium placed is an appropriate measure of operating
performance because it reflects growth of our business relative to other
insurance agencies.
The following tables show Total Written Premium placed by channel for the three
and nine months ended and 2020 and 2019 (in thousands).
                                                         Three Months Ended September 30,                  % Change
                                                            2020            

2019

Corporate Channel Total Written Premium             $          88,517          $      66,475                        33  %
Franchise Channel Total Written Premium                       212,520                135,607                        57  %
Total Written Premium                               $         301,037          $     202,082                        49  %



                                                         Nine Months Ended September 30,                  % Change
                                                           2020                     2019
Corporate Channel Total Written Premium             $        237,317$     181,309                        31  %
Franchise Channel Total Written Premium                      551,550                361,675                        52  %
Total Written Premium                               $        788,867$     542,984                        45  %


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Policies in Force
Policies 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 other
insurance agencies.
As of September 30, 2020, we had 657,000 in Policies in Force compared to
482,000 as of December 31, 2019 and 448,000 as of September 30, 2019,
representing a 36% and 47% increase, respectively.
NPS
Net Promoter Score (NPS) is calculated based on a single question: "How likely
are you to refer Goosehead Insurance to a friend, family member or colleague?"
Clients that respond with a 6 or below are Detractors, a
score of 7 or 8 are called Passives, and a 9 or 10 are Promoters. NPS is
calculated by subtracting the percentage of Detractors from the percentage of
Promoters. For example, if 50% of respondents were Promoters and 10% were
Detractors, NPS is a 40. NPS is a useful gauge of the loyalty of client
relationships and can be compared across companies and industries.
NPS has increased to 91 as of September 30, 2020 from 89 as of December 31, 2019
due to the service team's continued focus on delivering highly differentiated
service levels.
Client retention
Client Retention is calculated by comparing the number of all clients that had
at least one policy in force twelve months prior to the date of measurement and
still have at least one policy in force at the date of measurement. We believe
Client Retention is useful as a measure of how well Goosehead retains clients
year-over-year and minimizes defections.
Client Retention has remained steady at 88% at September 30, 2020 from December
31, 2019, again driven by the service team's continued focus on delivering
highly differentiated service levels. For the trailing twelve months ended
September 30, 2020, we retained 90% of the premiums we distributed in the
trailing twelve months ended September 30, 2019, which decreased modestly from
the 91% premium retention at December 31, 2019. Our premium retention rate is
higher than our Client Retention rate as a result of both premiums increasing
year over year and additional coverages sold by our sales and service teams.
New Business Revenue
New Business Revenue is commissions received from the Carrier, Agency Fees
received from clients, and New Business Royalty Fees relating to policies in
their first term.
For the three months ended September 30, 2020, New Business Revenue grew 47% to
$10.4 million, from $7.1 million for the three months ended September 30, 2019.
For the nine months ended September 30, 2020, New Business Revenue grew 40% to
$26.6 million, from $18.9 million for the nine months ended September 30, 2019.
Growth in New Business Revenue is driven by an increase in Corporate Channel
sales agent headcount of 60% and growth in operating franchises in the Franchise
Channel of 41%.
Renewal Revenue
Renewal Revenue is commissions received from the Carrier and Renewal Royalty
Fees received after the first term of a policy.
For the three months ended September 30, 2020, Renewal Revenue grew 41% to $16.0
million, from $11.4 million for the three months ended September 30, 2019. For
the nine months ended September 30, 2020, Renewal Revenue grew 39% to $42.8
million, from $30.9 million for the nine months ended September 30, 2019. Growth
in Renewal Revenue was driven by Client Retention of 88% at September 30, 2020.
As our agent force matures on both the Corporate Channel and the Franchise
Channel, the policies they wrote in prior years begins to convert from New
Business Revenue to more profitable Renewal Revenue.
Non-GAAP Measures
Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted EPS are not measures of
financial performance under GAAP and should not be considered substitutes for
net income or earnings per share, which we consider to be the most directly
comparable GAAP measures. We refer to these measures as "non-GAAP financial
measures." We
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consider these non-GAAP financial measures to be useful metrics for management
and investors to facilitate operating performance comparisons from period to
period by excluding potential differences caused by variations in capital
structures, tax position, depreciation, amortization and certain other items
that we believe are not representative of our core business. Adjusted EBITDA,
Adjusted EBITDA Margin, and Adjusted EPS have limitations as analytical tools,
and when assessing our operating performance, you should not consider Adjusted
EBITDA, Adjusted EBITDA Margin, or Adjusted EPS in isolation or as substitutes
for net income, earnings per share or other consolidated income statement data
prepared in accordance with GAAP. Other companies may calculate Adjusted EBITDA,
Adjusted EBITDA Margin, and Adjusted EPS differently than we do, limiting their
usefulness as comparative measures.
Core Revenue
Core Revenue is a supplemental measure of our performance and includes Renewal
Commissions, Renewal Royalty Fees, New Business Commissions, New Business
Royalty Fees, and Agency Fees. We believe that Core Revenue is an appropriate
measure of operating performance because it summarizes all of our revenues from
sales of individual insurance policies.
Core Revenue increased by $8.0 million, or 43%, to $26.4 million for the three
months ended September 30, 2020 from $18.4 million for the three months ended
September 30, 2019. Core Revenue increased by $19.5 million, or 39%, for the
nine months ended September 30, 2020 to $69.3 million from $49.8 million for the
nine months ended September 30, 2019. The primary driver of the increase is
increases in operating franchises, corporate agent sales headcount, and number
of policies in the renewal term from September 30, 2019 to September 30, 2020.
If the three and nine months ended September 30, 2020 were reported under ASC
605, Core Revenue would have increased $8.3 million and $21.2 million,
respectively.
Cost Recovery Revenue
Cost Recovery Revenue is a supplemental measure of our performance and includes
Initial Franchise Fees and Interest Income. We believe that Cost Recovery
Revenue is an appropriate measure of operating performance because it summarizes
revenues that are viewed by management as cost recovery mechanisms.
Cost Recovery Revenue decreased by $0.7 million, or 35%, to $1.4 million for the
three months ended September 30, 2020 from $2.1 million for the three months
ended September 30, 2019. Cost Recovery Revenue decreased by $2.0 million, or
36%, to $3.6 million for the nine months ended September 30, 2020 from $5.6
million for the nine months ended September 30, 2019. The primary driver of the
decrease is the adoption of ASC 606. If the three and nine months ended
September 30, 2020 were reported under ASC 605, Cost Recovery Revenue would have
increased $1.2 million and $1.9 million, respectively.
Ancillary Revenue
Ancillary Revenue is a supplemental measure of our performance and includes
Contingent Commissions and Other Income. We believe that Ancillary Revenue is an
appropriate measure of operating performance because it summarizes revenues that
are ancillary to our core business.
Ancillary Revenue increased by $3.6 million to $4.2 million for the three months
ended September 30, 2020 from $0.6 million for the three months ended September
30, 2019 primarily due to the adoption of ASC 606 resulting in acceleration of
when we record Contingent Commissions. Ancillary Revenue decreased by $1.1
million, or 14%, to $9.4 million for the nine months ended September 30, 2020
from $8.3 million for the nine months ended September 30, 2019. The primary
driver of the decrease is the adoption of ASC 606 changing the timing of when
Contingent Commissions are recorded. If the three and nine months ended
September 30, 2020 were reported under ASC 605, Ancillary Revenue would have
decreased $0.6 million and $4.3 million, respectively.
Adjusted EBITDA
Adjusted EBITDA is a supplemental measure of our performance. We believe that
Adjusted EBITDA is an appropriate measure of operating performance because it
eliminates the impact of items that do not relate to business performance.
Adjusted EBITDA is defined as net income (the most directly comparable GAAP
measure) before interest, income taxes, depreciation and amortization, adjusted
to exclude equity-based compensation and other non-operating items, including,
among other things, certain non-cash charges and certain non-recurring or
non-operating gains or losses.

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Adjusted EBITDA increased by $4.7 million, or 102%, to $9.3 million for the
three months ended September 30, 2020 from $4.6 million for the three months
ended September 30, 2019. The primary driver of the decrease is the adoption of
ASC 606. If the three months ended September 30, 2020 were reported under ASC
605, Adjusted EBITDA would have increased by $2.3 million, driven by increased
Core Revenues, offset by additional employee compensation and benefits from
additional hiring. Adjusted EBITDA increased by $1.5 million, or 8%, to $20.3
million for the nine months ended September 30, 2020 from $18.8 million for the
nine months ended September 30, 2019. The primary driver of the decrease is
higher Contingent Commissions received during the nine months ended September
30, 2019. If the nine months ended September 30, 2020 were reported under ASC
605, Adjusted EBITDA would have increased by $0.7 million.
Adjusted EBITDA Margin
Adjusted EBITDA Margin is Adjusted EBITDA as defined above, divided by total
revenue excluding other non-operating items. Adjusted EBITDA Margin is helpful
in measuring profitability of operations on a consolidated level.
For the three months ended September 30, 2020, Adjusted EBITDA Margin was 29%
compared to 22% for the three months ended September 30, 2019. The primary
driver of the expansion is the adoption of ASC 606, resulting in acceleration of
the recognition of Contingent Commission revenue. If the three months ended
September 30, 2020 were reported under ASC 605, Adjusted EBITDA Margin would
have been 23%. Adjusted EBITDA Margin for the nine months ended September 30,
2020 was 25% compared to 29% for the nine months ended September 30, 2019. The
primary driver of the compression is the decrease in Contingent Commissions
received. If the nine months ended September 30, 2020 had been reported under
ASC 605, Adjusted EBITDA Margin would have been 24% driven by a decrease in
Contingent Commissions received.
Adjusted EPS
Adjusted EPS is a supplemental measure of our performance, defined as earnings
per share (the most directly comparable GAAP measure) before non-recurring or
non-operating income and expenses. Adjusted EPS is a useful measure to
management because it eliminates the impact of items that do not relate to
business performance.
GAAP to Non-GAAP Reconciliations

                                                Three Months Ended September 30,
                                        2020 (ASC 606)       2020 (ASC 605)     2019 (ASC 605)
 Total Revenues                 $     32,015$        30,050$        21,169

 Core Revenue:
 Renewal Commissions(1)         $      7,931              $         8,044      $         6,056
 Renewal Royalty Fees(2)               8,117                        8,230                5,295
 New Business Commissions(1)           4,790                        4,849                3,294
 New Business Royalty Fees(2)          3,090                        3,074                1,994
 Agency Fees(1)                        2,491                        2,535                1,782
 Total Core Revenue                   26,419                       26,732               18,421
 Cost Recovery Revenue:
 Initial Franchise Fees(2)             1,152                        3,045                1,935
 Interest Income                         212                          212                  169
 Total Cost Recovery Revenue           1,364                        3,257                2,104
 Ancillary Revenue:
 Contingent Commissions(1)             4,173                            2                  607
 Other Income(2)                          59                           59                   37
 Total Ancillary Revenue               4,232                           61                  644
 Total Revenues                 $     32,015$        30,050$        21,169

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

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

                                                Nine Months Ended September 30,
                                       2020 (ASC 606)       2020 (ASC 605)     2019 (ASC 605)
 Total Revenues                 $     82,364$        82,500$        63,688

 Core Revenue:
 Renewal Commissions(1)         $     21,382$        21,900$        16,744
 Renewal Royalty Fees(2)              21,406                      21,799               14,120
 New Business Commissions(1)          12,452                      12,583                8,766
 New Business Royalty Fees(2)          7,737                       7,812                5,213
 Agency Fees(1)                        6,362                       6,874                4,959
 Total Core Revenue                   69,339                      70,968               49,802
 Cost Recovery Revenue:
 Initial Franchise Fees(2)             3,031                       6,960                5,160
 Interest Income                         573                         573                  452
 Total Cost Recovery Revenue           3,604                       7,533                5,612
 Ancillary Revenue:
 Contingent Commissions(1)             9,248                       3,826                8,203
 Other Income(2)                         173                         173                   71
 Total Ancillary Revenue               9,421                       3,999                8,274
 Total Revenues                 $     82,364$        82,500$        63,688



(1) Renewal Commissions, New Business Commissions, Agency Fees, and Contingent
Commissions are included in "Commissions and agency fees" as shown on the
Consolidated statements of income.
(2) Renewal Royalty Fees, New Business Royalty Fees, Initial Franchise Fees, and
Other Income are included in "Franchise revenues" as shown on the Consolidated
statements of income.
The following tables show a reconciliation from net income to Adjusted EBITDA
and Adjusted EBITDA margin for the three and nine months ended September 30,
2020 and 2019 (in thousands):
                                                                   Three 

Months Ended September 30,

                                                     2020 (ASC 606)          2020 (ASC 605)         2019 (ASC 605)
Net income                                          $       6,725$       4,659$       2,763
Interest expense                                              582                     582                    609
Depreciation and amortization                                 900                     900                    516
Tax (benefit) expense                                        (331)                   (689)                   301
Equity-based compensation                                   1,416                   1,416                    396
Other (income) expense                                        (10)                    (10)                     -
Adjusted EBITDA                                     $       9,282$       6,858$       4,585
Adjusted EBITDA Margin(1)                                      29   %                  23  %                  22  %


(1) Adjusted EBITDA Margin is calculated as Adjusted EBITDA divided by Total
Revenue ($9,282/$32,015), ($6,858/$30,050) and ($4,585/$21,169) for the three
months ended September 30, 2020 (ASC 606 and 605, respectively) and 2019.

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                                                    Nine Months Ended September 30,
                                         2020 (ASC 606)      2020 (ASC 605)      2019 (ASC 605)
    Net income                          $     13,815$      13,215$      12,898
    Interest expense                           1,665                1,665               1,861
    Depreciation and amortization              2,152                2,152               1,391
    Tax (benefit) expense                       (612)                (784)              1,475
    Equity-based compensation                  3,330                3,330               1,131
    Other (income) expense                       (76)                 (76)                  -
    Adjusted EBITDA                     $     20,274$      19,502$      18,756
    Adjusted EBITDA Margin(1)                     25   %               24  %               29  %


(1) Adjusted EBITDA Margin is calculated as Adjusted EBITDA divided by Total
Revenue ($20,274/$82,364), ($19,503/$82,499) and ($18,756/$63,688) for the nine
months ended September 30, 2020 (ASC 606 and 605, respectively) and 2019.

The following tables show a reconciliation from basic earnings per share to
Adjusted EPS (non-GAAP basis) for the three and nine months ended September 30,
2020 (in thousands, except per share amounts). Note that totals may not sum due
to rounding:
                                                                   Three Months Ended September 30,
                                                   2020 (ASC 606)          2020 (ASC 605)           2019 (ASC 605)
Earnings per share - basic (GAAP)                 $        0.19          $          0.15          $           0.07
Add: equity-based compensation(1)                          0.04                     0.04                      0.01
Adjusted EPS (non-GAAP)                           $        0.23          $          0.19          $           0.08


(1) Calculated as equity-based compensation divided by sum of weighted average
Class A and Class B shares [ $1.4 million / ( 17.4 million + 19.2 million )] for
the three months ended September 30, 2020 and [ $396 thousand / ( 15.1 million +
21.1 million )] for the three months ended September 30, 2019.
                                                                    Nine 

Months Ended September 30,

                                                   2020 (ASC 606)          2020 (ASC 605)           2019 (ASC 605)
Earnings per share - basic (GAAP)                 $        0.39          $          0.38          $           0.30
Add: equity-based compensation(1)                          0.09                     0.09                      0.03
Adjusted EPS (non-GAAP)                           $        0.48          $          0.47          $           0.33


(1) Calculated as equity-based compensation divided by sum of Class A and Class
B shares [ $3.3 million / ( 16.4 million + 20.1 million )] for the nine months
ended September 30, 2020 and [ $1.1 million / ( $14.7 million + $21.5 million )]
for the three months ended September 30, 2019.

Liquidity and capital resources
Liquidity and capital resources
We have managed our historical liquidity and capital requirements primarily
through the receipt of revenues from our Corporate Channel and our Franchise
Channel. Our primary cash flow activities involve: (1) generating cash flow from
Corporate Channel operations, which largely includes New Business Revenue
(Corporate) and Renewal Revenue (Corporate); (2) generating cash flow from
Franchise Channel operations, which largely includes Initial Franchise Fees and
Royalty Fees; (3) borrowings, interest payments and repayments under our credit
agreement; and (4) issuing shares of Class A common stock. As of September 30,
2020, our cash and cash equivalents balance was $20.0 million. We have used cash
flow from operations primarily to pay compensation and related expenses,
general, administrative and other expenses, debt service and distributions to
our owners.
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Credit agreement
See "Note 7. Debt" in the condensed consolidated financial statements included
herein for a discussion of the Company's credit facilities.

Comparative cash flows The following table summarizes our cash flows from operating, investing and financing activities for the periods indicated (in thousands):


                                                            Nine Months 

Ended September 30,

                                                                2020                2019             Change
Net cash provided by operating activities                   $   15,041$  16,493$ (1,452)
Net cash used for investing activities                          (5,057)            (3,609)           (1,448)
Net cash used for financing activities                          (3,909)           (20,347)           16,438
Net increase (decrease) in cash and cash equivalents             6,075             (7,463)           13,538
Cash and cash equivalents, and restricted cash,
beginning of period                                             15,260             19,011            (3,751)
Cash and cash equivalents, and restricted cash, end
of period                                                   $   21,335$  11,548$  9,787


Operating activities
Net cash provided by operating activities was $15.0 million for the nine months
ended September 30, 2020 as compared to net cash provided by operating
activities of $16.5 million for the nine months ended September 30, 2019. This
decrease in net cash provided by operating activities was attributable to a
decrease in commissions and agency fees receivables of $4.8 million, a decrease
in receivables from franchisees of $2.3 million, and a decrease in cash used for
prepaid expenses of $1.2 million. This was offset by a $6.8 million increase
related to changes in contract liabilities as a result of adding additional
franchise during the the nine months ended September 30, 2020.
Investing activities
Net cash used for investing activities was $5.1 million for the nine months
ended September 30, 2020, compared to net cash used in investing activities of
$3.6 million for the nine months ended September 30, 2019. This increase was
driven by continued expansion of corporate offices to support increased hiring
and $0.9 million used for computer equipment to accommodate remote working.
Financing activities
Net cash used for financing activities was $3.9 million for the nine months
ended September 30, 2020 as compared to net cash used for financing activities
of $20.3 million for the nine months ended September 30, 2019. This decrease in
net cash used for financing activities was attributable to the Company's draw
down of $37.9 million of the remaining term loan, offset by the payment of a
$42.0 million dividend.
Future sources and uses of liquidity
Our sources of liquidity are (1) cash on hand, (2) net working capital, (3) cash
flows from operations and (4) our revolving credit facility. Based on our
current expectations, we believe that these sources of liquidity will be
sufficient to fund our working capital requirements and to meet our commitments
in the foreseeable future.
We expect that our primary liquidity needs will comprise cash to (1) provide
capital to facilitate the organic growth of our business, (2) pay operating
expenses, including cash compensation to our employees, (3) make payments under
the tax receivable agreement, (4) pay interest and principal due on borrowings
under our Credit Agreement (5) pay income taxes, and (6) when deemed advisable
by our board of directors, pay dividends.
Dividend policy
On March 7, 2019, GF approved a $15.0 million extraordinary dividend to all
holders of LLC Units, including GSHD. The board of directors of the Company then
declared an extraordinary dividend of $0.41 (rounded) to all holders of Class A
common stock of GSHD with a record date of March 18, 2019, which was paid on
April 1, 2019. See "Note 11. Dividends" in the condensed consolidated financial
statements included herein.
                                       49
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On July 30, 2020, GF approved an extraordinary dividend in the aggregate amount
of $42.0 million payable to holders of LLC Units, including GSHD. The board of
directors of the Company subsequently declared an extraordinary dividend of
$1.15 (rounded) to all holders of Class A common stock of GSHD with a record
date of August 10, 2020, which was paid on August 24, 2020.
There have been no material changes to our dividend policy as described in the
Annual Report on Form 10-K.
Tax receivable agreement
We entered into a tax receivable agreement with the Pre-IPO LLC Members on May
1, 2018 that provides for the payment by us to the Pre-IPO LLC Members of 85% of
the amount of cash savings, if any, in U.S. federal, state and local income tax
or franchise tax that we actually realize as a result of (i) any increase in tax
basis in Goosehead Insurance, Inc.'s assets and (ii) tax benefits related to
imputed interest deemed arising as a result of payments made under the tax
receivable agreement. See "Item 13. Certain relationships and related
transactions, and director independence" of the Annual Report on Form 10-K.
Holders of Goosehead Financial, LLC Units (other than Goosehead Insurance, Inc.)
may, subject to certain conditions and transfer restrictions described above,
redeem or exchange their LLC Units for shares of Class A common stock of
Goosehead Insurance, Inc. on a one-for-one basis. Goosehead Financial, LLC
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 for shares of Class
A common stock occurs, which is expected to result in increases to the tax basis
of the assets of Goosehead Financial, LLC at the time of a redemption or
exchange of LLC Units. The redemptions or exchanges are expected to result in
increases in the tax basis of the tangible and intangible assets of Goosehead
Financial, LLC. These increases in tax basis may reduce the amount of tax that
Goosehead Insurance, Inc. would otherwise be required to pay in the future. We
have entered into a tax receivable agreement with the Pre-IPO LLC Members that
provides for the payment by us to the Pre-IPO LLC Members of 85% of the amount
of cash savings, if any, in U.S. federal, state and local income tax or
franchise tax that we actually realize as a result of (i) any increase in tax
basis in Goosehead Insurance, Inc.'s assets resulting from (a) the purchase of
LLC Units from any of the Pre-IPO LLC Members using the net proceeds from any
future offering, (b) redemptions or exchanges by the Pre-IPO LLC Members of LLC
Units for shares of our Class A common stock or (c) payments under the tax
receivable agreement and (ii) tax benefits related to imputed interest deemed
arising as a result of payments made under the tax receivable agreement. This
payment obligation is an obligation of Goosehead Insurance, Inc. and not of
Goosehead Financial, LLC. For purposes of the tax receivable agreement, the cash
tax savings in income tax will be computed by comparing the actual income tax
liability of Goosehead Insurance, Inc. (calculated with certain assumptions) to
the amount of such taxes that Goosehead Insurance, Inc. would have been required
to pay had there been no increase to the tax basis of the assets of Goosehead
Financial, LLC as a result of the redemptions or exchanges and had Goosehead
Insurance, Inc. not entered into the tax receivable agreement. Estimating the
amount of payments that may be made under the tax receivable agreement is by its
nature imprecise, insofar as the calculation of amounts payable depends on a
variety of factors. While the actual increase in tax basis, as well as the
amount and timing of any payments under the tax receivable agreement, will vary
depending upon a number of factors, including the timing of redemptions or
exchanges, the price of shares of our Class A common stock at the time of the
redemption or exchange, the extent to which such redemptions or exchanges are
taxable and the amount and timing of our income. See "Item 13. Certain
relationships and related transactions, and director independence" of the Annual
Report on Form 10-K. We anticipate that we will account for the effects of these
increases in tax 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 federal and state tax
rates at the date of the redemption or exchange;
•to the extent we estimate that we will not realize the full benefit represented
by the deferred tax asset, based on an analysis that will consider, among other
things, our expectation of future earnings, we will reduce the deferred tax
asset with a valuation allowance; and
•we will record 85% of the estimated realizable tax benefit (which is the
recorded deferred tax asset less any recorded valuation allowance) as an
increase to the liability due under the tax receivable agreement and the
remaining 15% of the estimated realizable tax benefit as an increase to
additional paid-in capital.
All of the effects of changes in any of our estimates after the date of the
redemption or exchange will be included in net income. Similarly, the effect of
subsequent changes in the enacted tax rates will be included in net income.

                                       50
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Contractual obligations, commitments and contingencies The following table represents our contractual obligations as of September 30, 2020, aggregated by type (in thousands).

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