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 throughoutthe 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 48% of the company, representing our commitment to the long-term success of the Company. Financial Highlights for the Third Quarter of 2021: •Total revenue increased 30% from the third quarter of 2020 to$41.7 million •Core Revenue* increased by 41% from third quarter of 2020 to$37.2 million •Total Written Premiums placed increased 44% from the prior-year period to$435 million •Net income decreased by$1.4 million from the third quarter of 2020 to$5.4 million , or 13% of total revenues •Adjusted EBITDA* decreased 29% from the third quarter of 2020 to$6.6 million , or 16% of total revenues. •Basic and diluted earnings per share were$0.21 and$0.19 , respectively, and Adjusted EPS*, a non-GAAP measure, was$0.26 for the three months endedSeptember 30, 2021 •Policies in Force increased 44% fromSeptember 30, 2020 to 948,000 atSeptember 30, 2021 •Corporate sales headcount increased 35% fromSeptember 30, 2020 to 502 atSeptember 30, 2021 •As ofSeptember 30, 2021 , 301 of these Corporate sales agents had less than one year of tenure and 201 had greater than one year of tenure •Total franchises increased 55% compared to the prior year period to 1,958; total operating franchises increased 38% fromSeptember 30, 2020 to 1,139 atSeptember 30, 2021 •In Texas as ofSeptember 30, 2021 , 56 operating Franchisees had less than one year of tenure and 206 operating Franchisees had greater than one year of tenure. •Outside ofTexas as ofSeptember 30, 2021 , 335 operating Franchisees had less than one year of tenure and 542 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") The extent to which the COVID-19 pandemic and the related economic impact may affect our financial condition or results of operations is uncertain. The extent of the impact on our operational and financial performance will depend on various factors, including the availability, effectiveness and utilization of vaccines for COVID-19 and its variant strains, the duration, severity and spread of the outbreak, including as a result of new variants, and its impact on home sales and consumer spending. 29 -------------------------------------------------------------------------------- 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 will 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 "Item 1A. Risk factors-Risks relating to our business-The ongoing global outbreak of the COVID-19 has negatively impacted the global economy in a significant manner and may continue to do so for an extended period of time, and could also materially adversely affect our business and operating results" in the Annual Report on Form 10-K for more information. Certain income statement line items Revenues For the three months endedSeptember 30, 2021 , revenue increased by 30% to$41.7 million from$32.0 million for the three months endedSeptember 30, 2020 . For the nine months endedSeptember 30, 2021 , revenue increased by 35% to$111.1 million from$82.4 million for the nine months endedSeptember 30, 2020 . Total Written Premium growth, which is the best leading indicator of future revenue growth, was 44% for the three months endedSeptember 30, 2021 . Total Written Premium increased to$435 million for the three months endedSeptember 30, 2021 from$301 million for the three months endedSeptember 30, 2020 and grew 46% to$1,153 million for the nine months endedSeptember 30, 2021 from$789 million for the nine months endedSeptember 30, 2020 . 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. •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. 30 -------------------------------------------------------------------------------- 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, Nine Months Ended September 30, (in thousands) 2021 2020 2021 2020 Core Revenue: Renewal Commissions(1)$10,969 26 %$7,931 25 %$29,036 26 %$21,382 26 % Renewal Royalty Fees(2) 13,206 32 % 8,117 25 % 33,622 30 % 21,406 26 % New Business Commissions(1) 6,013 14 % 4,790 15 % 16,573 15 % 12,452 15 % New Business Royalty Fees(2) 4,003 10 % 3,090 10 % 10,840 10 % 7,737 9 % Agency Fees(1) 3,050 7 % 2,491 8 % 8,579 8 % 6,362 8 % Total Core Revenue 37,241 89 % 26,419 83 % 98,650 89 % 69,339 84 % Cost Recovery Revenue: Initial Franchise Fees(2) 1,680 4 % 1,152 4 % 4,570 4 % 3,031 4 % Interest Income 301 1 % 212 1 % 841 1 % 573 1 % Total Cost Recovery Revenue 1,981 5 % 1,364 4 % 5,411 5 % 3,604 4 % Ancillary Revenue: Contingent Commissions(1) 2,388 6 % 4,173 13 % 6,819 6 % 9,248 11 % Other Income(2) 71 - % 59 - % 202 - % 173 - % Total Ancillary Revenue 2,459 6 % 4,232 13 % 7,021 6 % 9,421 11 % Total Revenues$41,681 100 %$32,015 100 %$111,082 100 %$82,364 100 % (1) Renewal Commissions, New Business Commissions, Agency Fees, and Contingent Commissions are included in "Commissions and agency fees" as shown on the Consolidated statements of operations. (2) Renewal Royalty Fees, New Business Royalty Fees, Initial Franchise Fees, and Other Income are included in "Franchise revenues" as shown on the Consolidated statements of operations. 31
-------------------------------------------------------------------------------- Consolidated results of operations The following is a discussion of our consolidated results of operations for each of the three and nine months endedSeptember 30, 2021 and 2020. This information is derived from our accompanying condensed consolidated financial statements prepared in accordance with GAAP. The following table summarizes our results of operations for the three and nine months endedSeptember 30, 2021 and 2020 (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Revenues: Commissions and agency fees$ 22,420 54 %$ 19,385 61 %$ 61,007 55 %$ 49,444 60 % Franchise revenues 18,960 45 % 12,418 39 % 49,234 44 % 32,347 39 % Interest income 301 1 % 212 1 % 841 1 % 573 1 % Total revenues 41,681 100 % 32,015 100 % 111,082 100 % 82,364 100 % Operating Expenses: Employee compensation and benefits 26,078 68 % 17,901 71 % 69,862 67 % 47,308 70 % General and administrative expenses 10,141 27 % 5,872 23 % 29,549 28 % 17,108 26 % Bad debts 732 2 % 376 2 % 1,825 2 % 1,004 1 % Depreciation and amortization 1,188 3 % 900 4 % 3,320 3 % 2,152 3 % Total operating expenses 38,139 100 % 25,049 100 % 104,556 100 % 67,572 100 % Income from operations 3,542 6,966 6,526 14,792 Other Income (Expense): Other income 7 10 146 76 Interest expense (756) (582) (1,903) (1,665) Income before taxes 2,793 6,394 4,769 13,203 Tax expense (benefit) (2,575) (331) (2,646) (612) Net Income 5,368 6,725 7,415 13,815 Less: net income attributable to non-controlling interests 1,332 3,458 2,288 7,325 Net income attributable to Goosehead Insurance Inc.$ 4,036 $ 3,267 $ 5,127 $ 6,490 Revenues For the three months endedSeptember 30, 2021 , revenue increased by 30% to$41.7 million from$32.0 million for the three months endedSeptember 30, 2020 . For the nine months endedSeptember 30, 2021 revenue increased 35% to$111.1 million from$82.4 million for the nine months endedSeptember 30, 2020 . 32 -------------------------------------------------------------------------------- Commissions and agency fees Commissions and agency fees consist of new business commissions, renewal commissions, agency fees, and contingent commissions. The following table sets forth our commissions and agency fees by amount and as a percentage of our revenues for the periods indicated (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Core Revenue: Renewal Commissions 10,969 48 % 7,931 41 % 29,036 48 % 21,382 43 % New Business Commissions 6,013 27 % 4,790 25 % 16,573 27 % 12,452 25 % Agency Fees 3,050 14 % 2,491 13 % 8,579 14 % 6,362 13 % Total Core Revenue: 20,032 89 % 15,212 78 % 54,188 89 % 40,196 81 % Ancillary Revenue: Contingent Commissions 2,388 11 % 4,173 22 % 6,819 11 % 9,248 19 % Commissions and agency fees$ 22,420 100 %$ 19,385 100 %$ 61,007 100 %$ 49,444 100 % Renewal Commissions increased by$3.0 million or 38%, to$11.0 million for the three months endedSeptember 30, 2021 from$7.9 million for the three months endedSeptember 30, 2020 . Renewal Commissions increased by$7.7 million or 36%, to$29.0 million for the nine months endedSeptember 30, 2021 from$21.4 million for the nine months endedSeptember 30, 2020 . These increases were primarily attributable to an increase in the number of policies in the renewal term fromSeptember 30, 2020 toSeptember 30, 2021 plus an increase in client retention to 89% as ofSeptember 30, 2021 from 88% as ofSeptember 30, 2020 . New Business Commissions increased by$1.2 million , or 26%, to$6.0 million for the three months endedSeptember 30, 2021 from$4.8 million for the three months endedSeptember 30, 2020 . Revenue from Agency Fees increased by$559 thousand , or 22%, to$3.1 million for the three months endedSeptember 30, 2021 from$2.5 million for the three months endedSeptember 30, 2020 .New Business Commission increased by$4.1 million or 33%, to$16.6 million for the nine months endedSeptember 30, 2021 from$12.5 million for the nine months endedSeptember 30, 2020 . Revenue from Agency Fees increased by$2.2 million or 35%, to$8.6 million for the nine months endedSeptember 30, 2021 from$6.4 million for the nine months endedSeptember 30, 2020 . These increases were primarily attributable to a 35% increase in total sales agent head count to 502 atSeptember 30, 2021 , from 371 atSeptember 30, 2020 . Revenue from Contingent Commissions decreased by$1.8 million , to$2.4 million for the three months endedSeptember 30, 2021 from$4.2 million for the three months endedSeptember 30, 2020 . Revenue from Contingent Commissions decreased by$2.4 million , to$6.8 million for the nine months endedSeptember 30, 2021 from$9.2 million for the nine months endedSeptember 30, 2020 . This change in Revenue from Contingent Commissions was primarily attributable to increases in loss ratio related to specific contingent commission programs coming off a historically low loss ratio year in 2020. Franchise revenues Franchise Revenues consist of Royalty Fees, Initial Franchise Fees, and Other Franchise Revenues. 33 --------------------------------------------------------------------------------
The following table sets forth our franchise revenues by amount and as a percentage of our revenues for the periods indicated (in thousands):
Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Core Revenues: Renewal Royalty Fees 13,206 70 % 8,117 65 % 33,622 68 % 21,406 66 % New Business Royalty Fees 4,003 21 % 3,090 25 % 10,840 22 % 7,737 24 % Total Core Revenues: 17,209 91 % 11,207 90 % 44,462 90 % 29,143 90 % Cost Recovery Revenues: Initial Franchise Fees 1,680 9 % 1,152 9 % 4,570 9 % 3,031 9 % Ancillary Revenues: Other Franchise Revenues 71 - % 59 - % 202 1 % 173 1 % Franchise revenues$ 18,960 100 %$ 12,418 100 %$ 49,234 100 %$ 32,347 100 % Revenue from Renewal Royalty Fees increased by$5.1 million , or 63%, to$13.2 million , for the three months endedSeptember 30, 2021 from$8.1 million for the three months endedSeptember 30, 2020 . Revenue from Renewal Royalty Fees increased by$12.2 million , or 57%, to$33.6 million for the nine months endedSeptember 30, 2021 from$21.4 million for the nine months endedSeptember 30, 2020 . The increase in revenue from Renewal Royalty Fees was primarily attributable to an increase in the number of policies in the renewal term and an increase in client retention to 89% as ofSeptember 30, 2021 from 88% as ofSeptember 30, 2020 . Revenue from New Business Royalty Fees increased by$0.9 million , or 30%, to$4.0 million for the three months endedSeptember 30, 2021 from$3.1 million for the three months endedSeptember 30, 2020 . Revenue from New Business Royalty Fees increased by$3.1 million , or 40%, to$10.8 million for the nine months endedSeptember 30, 2021 from$7.7 million for the nine months endedSeptember 30, 2020 . The increase in revenue from New Business Royalty Fees was primarily attributable to a 38% increase in the total number of operating franchises to 1,139 atSeptember 30, 2021 , from 823 atSeptember 30, 2020 . Revenues from Initial Franchise Fees increased by$0.5 million or 46% to$1.7 million for the three months endedSeptember 30, 2021 from$1.2 million during the three months endedSeptember 30, 2020 . Revenue from Initial Franchise Fees increased by$1.5 million , or 51%, to$4.6 million for the nine months endedSeptember 30, 2021 from$3.0 million for the nine months endedSeptember 30, 2020 . The primary reason for this increase is an increase of 55% in total franchises to 1,958 atSeptember 30, 2021 , from 1,261 atSeptember 30, 2020 . Interest income Interest income increased by$89 thousand , or 42%, to$301 thousand for the three months endedSeptember 30, 2021 from$212 thousand for the three months endedSeptember 30, 2020 . Interest income increased by$268 thousand , or 47%, to$841 thousand for the nine months endedSeptember 30, 2021 from$573 thousand for the nine months endedSeptember 30, 2020 . 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$8.2 million , or 46%, to$26.1 million for the three months endedSeptember 30, 2021 from$17.9 million for the three months endedSeptember 30, 2020 . Employee compensation and benefits expenses increased by$22.6 million , or 48%, to$69.9 million for the nine months endedSeptember 30, 2021 from$47.3 million for the nine months endedSeptember 30, 2020 . The increase is caused by a 41% increase in total headcount from 2020 to 2021. General and administrative expenses General and administrative expenses increased by$4.3 million , or 73%, to$10.1 million for the three months endedSeptember 30, 2021 from$5.9 million for the three months endedSeptember 30, 2020 . General and administrative expenses increased by$12.4 million , or 73%, to$29.5 million for the nine months endedSeptember 30, 2021 from 34 --------------------------------------------------------------------------------$17.1 million for the nine months endedSeptember 30, 2020 . This increase was primarily attributable to higher costs associated with an increase in operating franchises, total employees, opening of three new corporate office locations, and investments made in technology. Additionally, during 2020, general and administrative expenses were significantly lower than what we had expended historically or expect to expend in the future due to COVID-related limitations on travel, meals, entertainment, and other related expenses. Bad debts Bad debts increased by$356 thousand for the three months endedSeptember 30, 2021 to$732 thousand from$376 thousand for the three months endedSeptember 30, 2020 . Bad debts increased by$821 thousand , or 82%, to$1.8 million for the nine months endedSeptember 30, 2021 from$1.0 million for the nine months endedSeptember 30, 2020 . The increase in bad debts is attributable to an increase in total franchises and an increase in revenue from Agency fees during the three and nine months endedSeptember 30, 2021 from the three and nine months endedSeptember 30, 2020 . Depreciation and amortization Depreciation and amortization increased by$0.3 million , or 32%, to$1.2 million for the three months endedSeptember 30, 2021 from$0.9 million for the three months endedSeptember 30, 2020 . Depreciation and amortization increased by$1.2 million , or 54%, to$3.3 million for the nine months endedSeptember 30, 2021 from$2.2 million for the nine months endedSeptember 30, 2020 . This increase was primarily attributable to the increase in fixed assets sinceSeptember 30, 2020 , including the opening of three additional corporate sales offices, expansion of existing corporate offices and hardware for additional employees hired. Interest expense Interest expenses increased by$0.2 million for the three months endedSeptember 30, 2021 , to$0.8 million from$0.6 million for the three months endedSeptember 30, 2020 . Interest expenses increased by$0.2 million for the nine months endedSeptember 30, 2021 , to$1.9 million from$1.7 million for the nine months endedSeptember 30, 2020 . The primary driver of the increase in interest expense is the increase in total borrowing outstanding. 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 2021 and 2020 (in thousands). Three Months Ended September 30, % Change 2021
2020
Corporate Channel Total Written Premium $ 116,605$ 88,517 32 % Franchise Channel Total Written Premium 318,147 212,520 50 % Total Written Premium $ 434,752$ 301,037 44 % Nine Months Ended September 30, % Change 2021 2020 Corporate Channel Total Written Premium $ 318,008$ 237,317 34 % Franchise Channel Total Written Premium 834,559 551,550 51 % Total Written Premium$ 1,152,567 $ 788,867 46 % Policies in Force 35
-------------------------------------------------------------------------------- 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 ofSeptember 30, 2021 , we had 948,000 in Policies in Force compared to 713,000 as ofDecember 31, 2020 and 657,000 as ofSeptember 30, 2020 , representing a 33% and 44% increase, respectively. NPS Net Promoter Score (NPS) is calculated based on a single question: "How likely are you to referGoosehead 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 remained steady at 92 as ofSeptember 30, 2021 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 increased to 89% atSeptember 30, 2021 from 88% as ofDecember 31, 2020 , again driven by the service team's continued focus on delivering highly differentiated service levels. For the trailing twelve months endedSeptember 30, 2021 , we retained 92% of the premiums we distributed in the trailing twelve months endedSeptember 30, 2020 , which increased modestly from the 89% premium retention atDecember 31, 2020 . 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 endedSeptember 30, 2021 , New Business Revenue grew 26% to$13.1 million , from$10.4 million for the three months endedSeptember 30, 2020 . For the nine months endedSeptember 30, 2021 , New Business Revenue grew 36% to$36.0 million , from$26.6 million for the nine months endedSeptember 30, 2020 . Growth in New Business Revenue is driven by an increase in Corporate Channel sales agent headcount of 35% and growth in operating franchises in the Franchise Channel of 38%. 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 endedSeptember 30, 2021 , Renewal Revenue grew 51% to$24.2 million , from$16.0 million for the three months endedSeptember 30, 2020 . For the nine months endedSeptember 30, 2021 , Renewal Revenue grew 46% to$62.7 million , from$42.8 million for the nine months endedSeptember 30, 2020 . Growth in Renewal Revenue was driven by Client Retention of 89% atSeptember 30, 2021 . 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 Core Revenue, Cost Recovery Revenue, Ancillary Revenue, Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted EPS are not measures of financial performance under GAAP and should not be considered substitutes for total revenue (with respect to Core Revenue, Cost Recovery Revenue and Ancillary Revenue), net income (with respect to Adjusted EBITDA and Adjusted EBITDA Margin) or earnings per share (with respect to Adjusted EPS), which we consider to be the most directly comparable GAAP measures. We refer to these measures as "non-GAAP financial measures." We consider these non-GAAP financial measures to be useful metrics for management and 36 -------------------------------------------------------------------------------- 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. Core Revenue, Cost Recovery Revenue, Ancillary Revenue, Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted EPS have limitations as analytical tools, and when assessing our operating performance, you should not consider Core Revenue, Cost Recovery Revenue, Ancillary Revenue, Adjusted EBITDA, Adjusted EBITDA Margin, or Adjusted EPS in isolation or as substitutes for total revenue, net income, earnings per share, as applicable, or other consolidated income statement data prepared in accordance with GAAP. Other companies may calculate Core Revenue, Cost Recovery Revenue, Ancillary Revenue, 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$10.8 million , or 41%, to$37.2 million for the three months endedSeptember 30, 2021 from$26.4 million for the three months endedSeptember 30, 2020 . Core Revenue increased by$29.3 million , or 42%, to$98.7 million for the nine months endedSeptember 30, 2021 from$69.3 million for the nine months endedSeptember 30, 2020 . The primary drivers of the increase are increases in operating franchises, corporate agent sales headcount, the number of policies in the renewal term fromSeptember 30, 2020 toSeptember 30, 2021 , plus an increase in client retention to 89% as ofSeptember 30, 2021 from 88% as ofSeptember 30, 2020 . 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 increased by$0.6 million , or 45%, to$2.0 million for the three months endedSeptember 30, 2021 from$1.4 million for the three months endedSeptember 30, 2020 . Cost Recovery Revenue increased by$1.8 million , or 50%, to$5.4 million for the nine months endedSeptember 30, 2021 from$3.6 million for the nine months endedSeptember 30, 2020 . The primary driver of the increase is an increase in total franchises fromSeptember 30, 2020 toSeptember 30, 2021 . 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 decreased by$1.8 million to$2.5 million for the three months endedSeptember 30, 2021 from$4.2 million for the three months endedSeptember 30, 2020 . Ancillary Revenue decreased by$2.4 million to$7.0 million for the nine months endedSeptember 30, 2021 from$9.4 million for the nine months endedSeptember 30, 2020 . The decrease in Ancillary Revenue is primarily due to increases in loss ratio related to specific contingent commission programs coming off historically low loss ratios in 2020. 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. Adjusted EBITDA decreased by$2.7 million , or 29%, to$6.6 million for the three months endedSeptember 30, 2021 from$9.3 million for the three months endedSeptember 30, 2020 . Adjusted EBITDA decreased by$4.8 million , or 24%, to$15.5 million for the nine months endedSeptember 30, 2021 from$20.3 million for the nine months endedSeptember 30, 2020 . The primary drivers of the decreases in Adjusted EBITDA are decreases in 37 -------------------------------------------------------------------------------- revenue from Contingent Commissions and increases in General and Administrative expenses driven by increases in corporate agent headcount, operating franchises, and investments in technology. 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 endedSeptember 30, 2021 , Adjusted EBITDA Margin was 16% compared to 29% for the three months endedSeptember 30, 2020 . For the nine months endedSeptember 30, 2021 , Adjusted EBITDA Margin was 14% compared to 25% for the nine months endedSeptember 30, 2020 . The primary drivers of the decreases in Adjusted EBITDA Margin are decreases in revenue from Contingent Commissions and increases in General and Administrative expenses driven by increases in corporate agent headcount, operating franchises, and investments in technology. 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, Nine Months Ended September 30, 2021 2020 2021 2020 Total Revenues $ 41,681$ 32,015 $ 111,082$ 82,364 Core Revenue: Renewal Commissions(1) $ 10,969$ 7,931 $ 29,036$ 21,382 Renewal Royalty Fees(2) 13,206 8,117 33,622 21,406 New Business Commissions(1) 6,013 4,790 16,573 12,452 New Business Royalty Fees(2) 4,003 3,090 10,840 7,737 Agency Fees(1) 3,050 2,491 8,579 6,362 Total Core Revenue 37,241 26,419 98,650 69,339 Cost Recovery Revenue: Initial Franchise Fees(2) 1,680 1,152 4,570 3,031 Interest Income 301 212 841 573 Total Cost Recovery Revenue 1,981 1,364 5,411 3,604 Ancillary Revenue: Contingent Commissions(1) 2,388 4,173 6,819 9,248 Other Income(2) 71 59 202 173 Total Ancillary Revenue 2,459 4,232 7,021 9,421 Total Revenues $ 41,681$ 32,015 $ 111,082$ 82,364 (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 operations. (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 operations. The following tables show a reconciliation from net income to Adjusted EBITDA and Adjusted EBITDA margin for the three and nine months endedSeptember 30, 2021 and 2020 (in thousands): 38 --------------------------------------------------------------------------------
Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Net Income$ 5,368 $ 6,725 $ 7,415$ 13,815 Interest expense 756 582 1,903 1,665 Depreciation and amortization 1,188 900 3,320 2,152 Tax (benefit) expense (2,575) (331) (2,646) (612) Equity-based compensation 1,851 1,416 5,644 3,330 Other (income) expense (7) (10) (146) (76) Adjusted EBITDA$ 6,581 $ 9,282 $ 15,490 $ 20,274 Adjusted EBITDA Margin(1) 16 % 29 % 14 % 25 % (1) Adjusted EBITDA Margin is calculated as Adjusted EBITDA divided by Total Revenue ($6,581 /$41,681 ), and ($9,282 /$32,015 ) for the three months endedSeptember 30, 2021 and 2020, respectively. Adjusted EBITDA Margin is calculated as Adjusted EBITDA divided by Total Revenue ($15,490 /$111,082 ), and ($20,274 /$82,364 ) for the nine months endedSeptember 30, 2021 and 2020, respectively. The following tables show a reconciliation from basic earnings per share to Adjusted EPS (non-GAAP basis) for the three and nine months endedSeptember 30, 2021 (in thousands, except per share amounts). Note that totals may not sum due to rounding: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Earnings per share - basic (GAAP) $ 0.21$ 0.19 $ 0.27$ 0.39 Add: equity-based compensation(1) 0.05 0.04 0.15 0.09 Adjusted EPS (non-GAAP) $ 0.26$ 0.23 $ 0.42$ 0.48 (1) Calculated as equity-based compensation divided by sum of weighted average Class A and Class B shares [$1.9 million / ( 19.6 million + 17.3 million )] and [$5.6 million /($18.9 million +$17.9 million )] for the three and nine months endedSeptember 30, 2021 and [$1.4 million / ( 16.5 million + 20.0 million )] and [$3.3 million / ($16.0 million +$20.4 million )] for the three and nine months endedSeptember 30, 2020 . 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 ofSeptember 30, 2021 , our cash and cash equivalents balance was$25.5 million . We have used cash flow from operations primarily to pay compensation and related expenses, general, administrative and other expenses, debt service, special dividends and distributions to our owners. Credit agreement See "Note 7. Debt" in the condensed consolidated financial statements included herein for a discussion of the Company's credit facilities. 39 --------------------------------------------------------------------------------
Comparative cash flows The following table summarizes our cash flows from operating, investing and financing activities for the periods indicated (in thousands):
Nine Months
Ended
2021 2020 Change Net cash provided by operating activities$ 26,803 $ 15,041 $ 11,762 Net cash used for investing activities (10,146) (5,057) (5,089) Net cash used for financing activities (16,202) (3,909) (12,293) Net increase in cash and cash equivalents 455 6,075 (5,620) Cash and cash equivalents, and restricted cash, beginning of period 26,236 15,260 10,976 Cash and cash equivalents, and restricted cash, end of period$ 26,691 $ 21,335 $ 5,356 Operating activities Net cash provided by operating activities was$26.8 million for the nine months endedSeptember 30, 2021 as compared to net cash provided by operating activities of$15.0 million for the nine months endedSeptember 30, 2020 . This increase in net cash provided by operating activities was attributable to a decrease in commissions and agency fees receivables of$14.7 million as a result of the receipts of contingent commissions during the period, offset by an increase if$2.8 million in receivables from franchisees. Investing activities Net cash used for investing activities was$10.1 million for the nine months endedSeptember 30, 2021 , compared to net cash used in investing activities of$5.1 million for the nine months endedSeptember 30, 2020 . This increase was driven by continued expansion of corporate offices to support increased hiring. Financing activities Net cash used for financing activities was$16.2 million for the nine months endedSeptember 30, 2021 as compared to net cash used for financing activities of$3.9 million for the nine months endedSeptember 30, 2020 . This increase in net cash used for financing activities was attributable to the Company's 2021 extraordinary dividend payment. 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 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 onMay 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, inU.S. federal, state and local income tax or franchise tax that we actually realize as a result of (i) any increase in tax basis inGoosehead 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 thanGoosehead Insurance, Inc. ) may, subject to certain conditions and transfer restrictions described above, redeem or exchange their LLC Units for shares of Class A 40 -------------------------------------------------------------------------------- common stock ofGoosehead 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 ofGoosehead 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 ofGoosehead Financial, LLC . These increases in tax basis may reduce the amount of tax thatGoosehead 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, inU.S. federal, state and local income tax or franchise tax that we actually realize as a result of (i) any increase in tax basis inGoosehead 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 ofGoosehead Insurance, Inc. and not ofGoosehead 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 thatGoosehead Insurance, Inc. would have been required to pay had there been no increase to the tax basis of the assets ofGoosehead Financial, LLC as a result of the redemptions or exchanges and hadGoosehead 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.
Contractual obligations, commitments and contingencies
The following table represents our contractual obligations as of
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