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Goosehead Insurance, Inc. - Quarter Report: 2020 September (Form 10-Q)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ______
Commission file number: 001-38466

GOOSEHEAD INSURANCE, INC.
(Exact name of registrant as specified in its charter)

Delaware82-3886022
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
1500 Solana Blvd, Building 4, Suite 4500
Westlake
Texas76262
(Address of principal executive offices)(Zip Code)

(469) 480-3669
(Registrant's telephone number, including area code)

Not applicable
(Former name or former address, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading Symbol(s)Name of Each Exchange on Which Registered
Class A Common Stock, par value $.01 per shareGSHDNASDAQ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   þ Yes o No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
þ Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer Accelerated filer
Non-accelerated filer  Smaller reporting company
   Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No

As of October 29, 2020, there were 17,651,069 shares of Class A common stock outstanding and 19,006,089 shares of Class B common stock outstanding.



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

2


Commonly used defined terms
As used in this Quarterly Report on Form 10-Q ("Form 10-Q"), unless the context indicates or otherwise requires, the following terms have the following meanings:
 
Ancillary Revenue: Revenue that is supplemental to our Core Revenue and Cost Recovery Revenue, Ancillary Revenue is unpredictable and often outside of the Company's control. Included in Ancillary Revenue are Contingent Commissions and other income.
Agency Fees: Fees separate from commissions charged directly to clients for efforts performed in the issuance of new insurance policies.
Annual Report on Form 10-K: The Company's annual report on Form 10-K for the year ended December 31, 2019.
ASC 605: Legacy revenue recognition standard ASC 605, Revenue Recognition. This legacy revenue recognition was used for periods prior to the fourth quarter of 2019.
ASC 606 ("Topic 606"): ASU 2014-09 - Revenue from Contracts with Customers.
Carrier: An insurance company.
Carrier Appointment: A contractual relationship with a Carrier.
Client Retention: Calculated by comparing the number of all clients that had at least one policy in force twelve months prior to the date of measurement and still have at least one policy in force at the date of measurement.
Contingent Commission: Revenue in the form of contractual payments from Carriers contingent upon several factors, including growth and profitability of the business placed with the Carrier.
Core Revenue: The most predictable revenue stream for the Company, these revenues consist of New Business Revenue and Renewal Revenue. New Business Revenue is lower-margin, but fairly predictable. Renewal Revenue is higher-margin and very predictable.
Corporate Channel: The Corporate Channel distributes insurance through a network of company-owned and financed operations with employees that are hired, trained and managed by Goosehead.
Corporate Channel Adjusted EBITDA: Segment earnings before interest, income taxes, depreciation and amortization allocable to the Corporate Channel.
Cost Recovery Revenue: Revenue received by the Company associated with cost recovery efforts associated with selling and financing franchises. Included in Cost Recovery Revenue are Initial Franchise Fees and Interest Income.
Franchise Agreement: Agreements governing our relationships with Franchisees.
Franchise Channel: The Franchise Channel network consists of Franchisee operations that are owned and managed by Franchisees. These business owners have a contractual relationship with Goosehead to use our processes, training, implementation, systems and back-office support team to place insurance. In exchange, Goosehead is entitled to an Initial Franchise Fee and Royalty Fees.
Franchise Channel Adjusted EBITDA: Segment earnings before interest, income taxes, depreciation and amortization, adjusted to exclude other non-operating items allocable to the Franchise Channel.
Franchisee: An individual or entity who has entered into a Franchise Agreement with us.
GF: Goosehead Financial, LLC.
Initial Franchise Fee: Contracted fees paid by Franchisees to compensate Goosehead for the training, onboarding and ongoing support of new franchise locations.
LLC Unit: a limited liability company unit of Goosehead Financial, LLC.
New Business Commission: Commissions received from Carriers relating to policies in their first term.
New Business Revenue: New Business Commissions, Agency Fees, and New Business Royalty Fees.
New Business Royalty Fees: Royalty Fees received from Franchisees relating to policies in their first term
3


NPS: Net Promoter Score is calculated based on a single question: “How likely are you to refer Goosehead Insurance to a friend, family member or colleague?” Clients that respond with a 6 or below are Detractors, a score of 7 or 8 are called Passives, and a 9 or 10 are Promoters. NPS is calculated by subtracting the percentage of Detractors from the percentage of Promoters.
Policies in Force: As of any reported date, the total count of current (non-cancelled) policies placed by us with our Carriers.
Pre-IPO LLC Members: owners of LLC Units of GF prior to the Offering.
Renewal Revenue: Renewal Commissions and Renewal Royalty Fees.
Royalty Fees: Fees paid by Franchisees to the Company that are tied to the gross commissions paid by the Carriers related to policies sold or renewed in the Franchise Channel.
Segment: One of the two Goosehead sales distribution channels, the Corporate Channel or the Franchise Channel.
Segment Adjusted EBITDA: Either Corporate Channel Adjusted EBITDA or Franchise Channel Adjusted EBITDA.
The Offering: The initial public offering completed by Goosehead Insurance, Inc. on May 1, 2018.
Total Written Premium: As of any reported date, the total amount of current (non-cancelled) gross premium that is placed with Goosehead’s portfolio of Carriers.

Special note regarding forward-looking statements
We have made statements in this Form 10-Q that are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “may,” “might,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” the negative of these terms and other comparable terminology. These forward-looking statements, which are subject to risks, uncertainties and assumptions about us, may include the potential impact of COVID-19 on the Company's business, projections of our future financial performance, our anticipated growth strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements, including those factors discussed under the caption entitled “Item 1A. Risk factors” in the Annual Report on Form 10-K.
The forward-looking statements included in this Form 10-Q are made only as of the date hereof. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. We are under no duty to update any of these forward-looking statements after the date of this Form 10-Q to conform our prior statements to actual results or revised expectations.
4


PART I

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



5


Goosehead Insurance, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except per share amounts)
  Three Months Ended September 30,Nine Months Ended September 30,
  
2020 1
2019 2
2020 1
2019 2
Revenues:
Commissions and agency fees$19,385 $11,739 $49,444 $38,672 
Franchise revenues12,418 9,261 32,347 24,564 
Interest income212 169 573 452 
Total revenues32,015 21,169 82,364 63,688 
Operating Expenses:
Employee compensation and benefits17,901 11,412 47,308 30,981 
General and administrative expenses5,872 5,169 17,108 13,800 
Bad debts376 399 1,004 1,282 
Depreciation and amortization900 516 2,152 1,391 
Total operating expenses25,049 17,496 67,572 47,454 
Income from operations6,966 3,673 14,792 16,234 
Other Income (Expense):
Other income10 — 76 — 
Interest expense(582)(609)(1,665)(1,861)
Income before taxes6,394 3,064 13,203 14,373 
Tax expense (benefit)(331)301 (612)1,475 
Net income6,725 2,763 13,815 12,898 
Less: net income attributable to non-controlling interests3,458 1,765 7,325 8,525 
Net income attributable to Goosehead Insurance, Inc.$3,267 $998 $6,490 $4,373 
Earnings per share:
Basic$0.19 $0.07 $0.39 $0.30 
Diluted$0.17 $0.06 $0.36 $0.27 
Weighted average shares of Class A common stock outstanding
Basic17,376 15,140 16,466 14,746 
Diluted18,915 16,451 17,926 15,936 
Dividends declared per share$1.15 $— $1.15 $0.41 

(1) - The three and nine months ended September 30, 2020 are reported under ASC 606
(2) - The three and nine months ended September 30, 2019 are reported under ASC 605

See Notes to the Condensed Consolidated Financial Statements
6



Goosehead Insurance, Inc.
Condensed Consolidated Balance Sheets
(Unaudited) 
(In thousands, except per share amounts)
  September 30,December 31,
  20202019
Assets
Current Assets:
Cash and cash equivalents$19,957 $14,337 
Restricted cash1,378 923 
Commissions and agency fees receivable, net11,793 6,884 
Receivable from franchisees, net2,414 2,602 
Prepaid expenses3,903 1,987 
Total current assets39,445 26,733 
Receivable from franchisees, net of current portion15,023 11,014 
Property and equipment, net of accumulated depreciation12,365 9,542 
Intangible assets, net of accumulated amortization554 445 
Deferred income taxes, net48,777 15,537 
Other assets3,790 1,357 
Total assets$119,954 $64,628 
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable and accrued expenses$5,210 $5,033 
Premiums payable1,378 923 
Deferred rent881 683 
Contract liabilities3,729 2,771 
Note payable3,000 4,000 
Total current liabilities14,198 13,410 
Deferred rent, net of current portion7,507 6,681 
Note payable, net of current portion80,332 42,161 
Contract liabilities, net of current portion25,855 20,024 
Liabilities under tax receivable agreement, net of current portion41,494 13,359 
Total liabilities169,386 95,635 
Commitments and contingencies (see note 8)
Class A common stock, $0.01 par value per share - 300,000 shares authorized, 17,499 shares issued and outstanding as of September 30, 2020, 15,238 shares issued and outstanding as of December 31, 2019
175 152 
Class B common stock, $0.01 par value per share - 50,000 shares authorized, 19,158 issued and outstanding as of September 30, 2020, 21,055 shares issued and outstanding as of December 31, 2019
191 210 
Additional paid in capital24,601 14,442 
Accumulated deficit(37,102)(23,811)
Total stockholders' equity(12,135)(9,007)
Non-controlling interests(37,297)(22,000)
Total equity(49,432)(31,007)
Total liabilities and equity$119,954 $64,628 

See Notes to the Condensed Consolidated Financial Statements
7


Goosehead Insurance, Inc.
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited)
(In thousands)


8


Issued shares of Class A common stockIssued shares of Class B common stockClass A Common stockClass B Common StockAdditional paid in capitalAccumulated deficitTotal stockholders' equityNon-controlling interestTotal equity
Balance, January 1, 202015,238 21,055 152 210 14,442 (23,811)(9,007)(22,000)(31,007)
Distributions— — — — — — — (1,003)(1,003)
Net loss— — — — — (156)(156)(140)(296)
Equity-based compensation— — — — 498 — 498 — 498 
Activity under employee stock purchase plan— — — 116 — 116 — 116 
Redemption of LLC Units791 (791)(8)(869)— (869)869 — 
Deferred tax adjustments related to Tax Receivable Agreement— — — — 1,704 — 1,704 — 1,704 
Balance March 31, 202016,032 20,264 160 202 15,891 (23,967)(7,714)(22,274)(29,988)
Distributions— — — — — — — (859)(859)
Net income— — — — — 3,379 3,379 4,007 7,386 
Exercise of stock options241 — — 2,404 — 2,407 — 2,407 
Equity-based compensation— — — — 1,416 — 1,416 — 1,416 
Activity under employee stock purchase plan— — — 138 — 138 — 138 
Redemption of LLC Units809 (809)(8)(762)— (762)762 — 
Deferred tax adjustments related to Tax Receivable Agreement— — — — 2,261 — 2,261 53 2,314 
Reallocation of Non-controlling interest— — — — 63 63 (63)— 
Balance June 30, 202017,084 19,455 171 194 21,348 (20,525)1,188 (18,374)(17,186)
Distributions— — — — — — — (835)(835)
Dividends declared— — — — — (19,895)(19,895)(22,105)(42,000)
Net income— — — — — 3,267 3,267 3,458 6,725 
Exercise of stock options116 — — 1,160 — 1,161 — 1,161 
Equity-based compensation— — — — 1,416 — 1,416 — 1,416 
Activity under employee stock purchase plan— — — 142 — 142 — 142 
Redemption of LLC Units297 (297)(3)(577)(577)577 — 
Deferred tax adjustments related to Tax Receivable Agreement— — — — 1,112 — 1,112 33 1,145 
Reallocation of Non-controlling interest— — — — — 51 51 (51)— 
Balance September 30, 202017,499 19,158 175 191 24,601 (37,102)(12,135)(37,297)(49,432)
9


Issued shares of Class A common stockIssued shares of Class B common stockClass A Common stockClass B Common StockAdditional paid in capitalAccumulated deficitTotal stockholders' equityNon-controlling interestTotal equity
Balance, January 1, 201913,799 22,486 138 224 11,899 (20,761)(8,500)(16,703)(25,203)
Distributions— — — — — — — (245)(245)
Dividends declared— — — — — (5,962)(5,962)(9,038)(15,000)
Net income— — — — — 2,472 2,472 4,846 7,318 
Equity-based compensation— — — — 368 — 368 — 368 
Redemption of LLC Units723 (723)(7)(679)— (679)679 — 
Deferred tax adjustments related to Tax Receivable Agreement— — — — 911 — 911 — 911 
Balance March 31, 201914,522 21,763 145 217 12,499 (24,251)(11,390)(20,461)(31,851)
Distributions— — — — — — — (2,708)(2,708)
Net income— — — — — 903 903 1,914 2,817 
Equity-based compensation— — — — 368 — 368 — 368 
Activity under employee stock purchase plan— — — 142 — 142 — 142 
Redemption of LLC Units488 (488)(5)(477)— (477)477 — 
Deferred tax adjustments related to Tax Receivable Agreement— — — — 684 — 684 — 684 
Balance June 30, 201915,013 21,275 150 212 13,216 (23,348)(9,770)(20,778)(30,548)
Distributions— — — — — — — (786)(786)
Net income— — — — — 998 998 1,765 2,763 
Equity-based compensation— — — — 396 — 396 — 396 
Redemption of LLC Units160 (160)(2)(145)— (145)145 — 
Deferred tax adjustments related to Tax Receivable Agreement— — — — 325 — 325 — 325 
Balance September 30, 201915,173 21,115 152 210 13,792 (22,350)(8,196)(19,654)(27,850)


See Notes to the Condensed Consolidated Financial Statements
10


Goosehead Insurance, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
  Nine Months Ended September 30,
  20202019
Cash flows from operating activities:
Net income$13,815 $12,898 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization2,499 1,551 
Bad debt expense1,004 1,282 
Equity-based compensation3,330 1,132 
Impacts of Tax Receivable Agreement28,815 10,967 
Deferred income taxes(28,077)(10,625)
Changes in operating assets and liabilities:
Receivable from franchisees(4,029)(1,698)
Commissions and agency fees receivable(5,731)(961)
Prepaid expenses(1,916)(720)
Other assets(2,432)(97)
Accounts payable and accrued expenses(495)244 
Deferred rent1,023 2,368 
Contract liabilities6,789 — 
Premiums payable455 352 
Unearned revenue— (200)
Payments pursuant to the tax receivable agreement(9)— 
Net cash provided by operating activities15,041 16,493 
Cash flows from investing activities:
Proceeds from notes receivable26 16 
Purchase of software(318)(340)
Purchase of property and equipment(4,765)(3,285)
Net cash used for investing activities(5,057)(3,609)
Cash flows from financing activities:
Debt issuance costs(677)— 
Repayment of note payable(27,321)(1,750)
Proceeds from notes payable64,821 — 
Proceeds from the issuance of Class A common stock3,965 142 
Member distributions and dividends(44,697)(18,739)
Net cash provided by (used for) financing activities(3,909)(20,347)
Net increase (decrease) in cash and restricted cash6,075 (7,463)
Cash and cash equivalents, and restricted cash, beginning of period15,260 19,011 
Cash and cash equivalents, and restricted cash, end of period$21,335 $11,548 
Supplemental disclosures of cash flow data:
Cash paid during the year for interest1,318 1,861 
Cash paid for income taxes270 1,175 
See Notes to the Condensed Consolidated Financial Statements
11

Goosehead Insurance, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

1. Organization
On May 1, 2018 Goosehead Insurance, Inc. ("GSHD") completed an initial public offering (the “Offering”) of 9,810 thousand shares of Class A common stock at a price of $10.00 per share, which included 1,280 thousand shares issued pursuant to the underwriter's over-allotment option. Following completion of the Offering, GSHD owned 37.3% of Goosehead Financial, LLC (“GF”) and the Pre-IPO LLC Members owned the remaining 62.7%. GSHD is the sole managing member of GF and, although GSHD holds a minority economic interest in GF, GSHD has the sole voting power and control of management of GF. Accordingly, GSHD consolidates the financial results of GF and reports non-controlling interest in GSHD's condensed consolidated financial statements.
GF was organized on January 1, 2016 as a Delaware Limited Liability Company and is headquartered in Westlake, TX.
GSHD (collectively with its consolidated subsidiaries, the “Company”) provides personal and commercial property and casualty insurance brokerage services for its clients through a network of corporate-owned agencies and franchise units across the nation.
The Company had nine and seven corporate-owned locations in operation at September 30, 2020 and 2019, respectively. Franchisees are provided access to insurance Carrier Appointments, product training, technology infrastructure, client service centers and back office services. During the three months ended September 30, 2020 and 2019, the Company onboarded 110 and 72 franchise locations, respectively, and had 823 and 583 operating franchise locations as of September 30, 2020 and 2019, respectively. No franchises were purchased by the Company during the three and nine months ended September 30, 2020 or 2019.
All intercompany accounts and transactions have been eliminated in consolidation.
As of December 31, 2020, the Company will be deemed a large accelerated filer, because the market value of our
common stock that is held by non-affiliates exceeded $700 million as of the last business day of our most recently
completed second fiscal quarter (June 30, 2020). Furthermore, the Company will no longer be considered an
emerging growth company.

2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial statements of the Company have been prepared in accordance with the instructions to Form 10-Q. Therefore, they do not include all of the annual disclosures required by accounting principles generally accepted in the United States of America ("GAAP"). However, in the opinion of management, these statements include all adjustments, consisting of normal recurring adjustments, which are necessary for a fair presentation of the condensed consolidated financial positions at September 30, 2020, the condensed consolidated results of operations, stockholders' equity and statements of cash flows for the three and nine months ended September 30, 2020 and 2019. The interim period condensed consolidated financial statements should be read in conjunction with the Consolidated Financial Statements that are included in the Annual Report on Form 10-K.
The results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that can be expected for the entire year. The Company experiences seasonal fluctuations of its revenue due to the timing of contingent commission revenue recognition and trends in housing market activity.
Impact of the coronavirus (“COVID-19”) pandemic
The extent to which the COVID-19 pandemic and the related economic impact may affect our financial condition or results of operations is uncertain. The extent of the impact on our operational and financial performance will depend on various factors, including the duration and spread of the outbreak and its impact on home sales and consumer spending. To date, the pandemic has not increased our costs of or access to capital under our term note and revolving credit facility and we do not believe it is reasonably likely to in the future. In addition, we do not believe that the pandemic will affect our ongoing ability to meet the covenants in our debt instruments, including under our term note and revolving credit facility. To date, the pandemic has not impacted the collectability of receivables or
12

Goosehead Insurance, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
adversely affected our ability to generate new business, add new franchises, or retain existing franchises or policies. Due to the nature of our business, the effect of the COVID-19 pandemic may not be fully reflected in our results of operations until future periods. Changes in consumer behavior linked to the COVID-19 pandemic may have contributed to reduced loss ratios through the nine months ended September 30, 2020, increasing the amount of revenue from Contingent Commissions the Company expects to receive.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported period.
We are not presently aware of any events or circumstances arising from the COVID-19 pandemic, outside of those described above, that would require us to update our estimates, judgments or revise the carrying value of our assets or liabilities. Our estimates may change, however, as new events occur and additional information is obtained, any such changes will be recognized in the condensed consolidated financial statements. Accordingly, actual results could differ from those estimates as more information becomes known.
Income Taxes
The Company accounts for income taxes pursuant to the asset and liability method which requires the recognition of deferred income tax assets and liabilities related to the expected future tax consequences arising from temporary differences between the carrying amounts and tax bases of assets and liabilities based on enacted statutory tax rates applicable to the periods in which the temporary differences are expected to reverse. Any effects of changes in income tax rates or laws are included in income tax expense in the period of enactment.
Restricted Cash
The Company holds premiums received from the insured, but not yet remitted to the insurance Carrier in a fiduciary capacity. Premiums received but not yet remitted included in restricted cash were $1.4 million and $0.7 million as of September 30, 2020 and 2019, respectively.
The following is a reconciliation of our cash and restricted cash balances as presented in the condensed consolidated statements of cash flows for the nine months ended September 30, 2020 and 2019 (in thousands):
September 30,
20202019
Cash and cash equivalents$19,957 $10,820 
Restricted cash1,378 728 
Cash and cash equivalents, and restricted cash$21,335 $11,548 

Recently Issued Accounting Pronouncements
Leases (ASU 2016-02): In February 2016, the FASB issued ASU 2016-02 to increase transparency and comparability of information regarding an entity’s leasing activities by providing additional information to users of financial statements. ASU 2016-02 requires lessees to recognize most leases on their balance sheet by recording a liability for its lease obligation and an asset for its right to use the underlying asset as of the lease commencement date and recognizing expenses on the income statement in a similar manner to the current guidance in ASC Topic 840, Leases (“ASC 840”). Lessor accounting will remain largely unchanged, other than certain targeted improvements intended to align lessor accounting with the lessee accounting model and with the updated revenue recognition guidance.
Upon adoption of ASU 2016-02, as amended, leases will be classified as either finance or operating, with classification affecting the geography of expense recognition in the income statement. Additionally, enhanced quantitative and qualitative disclosures regarding leases are required.
As permitted by the amended guidance, we intend to elect to retain the original lease classification and historical accounting for existing or expired contracts, so that we will not be required to reassess whether such contracts
13

Goosehead Insurance, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
contain leases, the lease classification, or the initial direct costs. Additionally, we intend to elect an accounting policy by class of underlying asset to combine lease and non-lease components.
The standard became effective for the Company January 1, 2020, but the Company is not required to present the impacts of the standard until it files its Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
We have implemented leasing software solutions to account for the leases where we are the lessee and are continuing to identify changes to our business processes, systems and controls to support adoption of the new standard. We expect the adoption of ASU 2016-02 will have a material effect on our balance sheets as a result of recognizing a lease obligation and right-of-use asset for our operating leases, primarily those related to leases of real estate and other assets of approximately $18 million. We do not expect the adoption of ASU 2016-02 to have a material effect on our Income Statements or Cash Flows.
Credit Losses (ASU 2016-13): Under the new guidance an entity is required to measure all credit losses on certain financial instruments, including trade receivables and various off-balance sheet credit exposures, using an expected credit loss model. This model incorporates past experience, current conditions and reasonable and supportable forecasts affecting collectability of these instruments. This standard became effective for the Company beginning January 1, 2020, but the Company is not required to present the impacts of the standard until it files its Annual Report on Form 10-K for the fiscal year ended December 31, 2020, at which point the company will become a large accelerated filer. The Company does not expect the adoption of this amendment will have a material impact on the Company's consolidated financial statements.
Reference Rate Reform (ASU 2020-04): In March 2020, the Financial Accounting Standards Board issued ASU 2020-04. Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying U.S. GAAP if certain criteria are met to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued. ASU 2020-04 became effective on March 12, 2020 and may be applied prospectively through December 31, 2022. A substantial portion of our indebtedness bears interest at variable interest rates, primarily based on USD-LIBOR. The adoption of ASU 2020-04 is not expected to have a material impact on our consolidated financial statements as the standard will ease, if warranted, the administrative requirements for accounting for the future effects of the rate reform. We continue to monitor the impact the discontinuance of LIBOR or another reference rate will have on our contracts and other transactions.


Recently adopted accounting pronouncements
Revenue from Contracts with Customers (ASU 2014-09) (“Topic 606”): This standard supersedes the existing revenue recognition guidance and provides a new framework for recognizing revenue. The core principle of the standard is that an entity should recognize revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. Additionally, the guidance requires improved disclosure to help users of financial statements better understand the nature, amount, timing and uncertainty of revenue that is recognized. Guidance subsequent to ASU 2014-09 has been issued to clarify various provisions in the standard, including principal versus agent considerations, identifying performance obligations, licensing transactions, as well as various technical corrections and improvements. According to the superseding standard ASU 2015-14 that deferred the effective dates of the preceding, and because the Company is filing as an emerging growth company, the standard became effective for the Company on January 1, 2019, but the Company was not required to present the impacts of the standard until the Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

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

14

Goosehead Insurance, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Impact on Financial Statements

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


(in thousands)Legacy GAAPAdjustments due to Topic 606As Reported
Consolidated Statement of Income
Three Months Ended September 30, 2020
Revenues:
Commissions and agency fees15,430 3,955 19,385 
Franchise revenues14,408 (1,990)12,418 
Expenses:
Employee compensation and benefits18,055 (154)17,901 
Bad debts681 (305)376 
Tax expense (benefit)(689)358 (331)
Net income4,659 2,066 6,725 
Earnings per share:
Basic0.15 0.04 0.19 
Diluted0.14 0.03 0.17 

(in thousands)Legacy GAAPAdjustments due to Topic 606As Reported
Consolidated Statement of Income
Nine Months Ended September 30, 2020
Revenues:
Commissions and agency fees45,183 4,261 49,444 
Franchise revenues36,744 (4,397)32,347 
Expenses:
Employee compensation and benefits47,612 (304)47,308 
Bad Debts1,606 (602)1,004 
Tax expense (benefit)(784)172 (612)
Net income13,217 598 13,815 
Earnings per share:
Basic0.38 0.01 0.39 
Diluted0.36 — 0.36 
15

Goosehead Insurance, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

(in thousands)Legacy GAAPAdjustments due to Topic 606As Reported
Consolidated Balance Sheet
September 30, 2020
Assets:
Commissions and agency fees receivable, net(1)
3,005 8,788 11,793 
Receivable from franchisees, net(1)
3,898 13,539 17,437 
Deferred income taxes, net48,457 320 48,777 
Other assets2,133 1,657 3,790 
Liabilities:
Accounts payable and accrued expenses4,977 233 5,210 
Contract liabilities(1)
— 29,584 29,584 
Liabilities under tax receivable agreement41,471 23 41,494 
Stockholders' Equity:
Accumulated Deficit(34,051)(3,051)(37,102)
Non-controlling interests(34,251)(3,046)(37,297)
Total equity(43,335)(6,097)(49,432)
(1) - Includes both the current and long term portion of this balance.


(in thousands)Legacy GAAPAdjustments due to Topic 606As Reported
Consolidated Statement of Cash Flows
Nine Months Ended September 30, 2020
Operating Cash Flows:
Net Income13,217 598 13,815 
Bad debt expense1,606 (602)1,004 
Receivable from franchisees(472)(3,557)(4,029)
Commissions and agency fees receivables(1,827)(3,904)(5,731)
Other assets(3,465)1,033 (2,432)
Accounts payable and accrued expenses(150)(345)(495)
Contract liabilities— 6,789 6,789 
Unearned revenue(490)490 — 
Net cash provided by operating activities15,041 — 15,041 

3. Revenue

Commissions and fees
The Company earns new and renewal commissions paid by insurance Carriers and fees paid by its clients for the binding of insurance coverage. The transactions price is set as the estimated commissions to be received over the term of the policy based on an estimate of premiums placed, policy changes and cancellations, net of a constraint.
16

Goosehead Insurance, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
These commissions and fees are earned at a point in time upon the effective date of bound insurance coverage, as no performance obligation exists after coverage is bound.
For Agency Fees, the Company enters into a contract with the insured, in which the Company's performance obligation is to place an insurance policy. The transaction price of the agency fee is set at the time the sale is agreed upon, and is included in the contract. Agency Fee revenue is recognized at a point in time, which is the effective date of the policy.
Contingent Commission revenue is generated from contracts between the Company and insurance Carriers, for which the Company is compensated for certain growth, profitability, and other performance-based metrics. The performance obligations for Contingent Commissions will vary by contract, but generally include the Company increasing profitable written premium with the insurance Carrier. The transaction price for Contingent Commissions is estimated based on all available information and is recognized over time as the Company completes its performance obligations, as the underlying policies are placed, net of a constraint.
Franchise revenues
Franchise revenues include initial franchise fees and ongoing new and renewal royalty fees from franchisees.
Revenue from Initial Franchise Fees is generated from a contract between the Company and a Franchisee. The Company's performance obligation is to provide initial training, onboarding, ongoing support and use of the Company's business operations over the period of the Franchise Agreement. The transaction price is set by the Franchise Agreement and revenue is recognized over time as the Company completes its performance obligations.
Revenue from New and Renewal Royalty Fees is recorded by applying the sales- and usage-based royalties exception. Under the sales- and usage-based exception, the Company estimates the anticipated amount of the royalties to be received over the term of the policy based on an estimate of premiums placed by the franchisee, policy changes, and cancellations, net of a constraint. Revenue from Royalty Fees is recognized over time as the placement of the underlying policies occur.
Contract Costs
Additionally, the Company has evaluated ASC Topic 340 - Other Assets and Deferred Cost (“ASC 340”) which requires companies to defer certain incremental cost to obtain customer contracts, and certain costs to fulfill customer contracts.
Incremental cost to obtain - The adoption of ASC 340 resulted in the Company deferring certain costs to obtain customer contracts primarily as they relate to commission-based compensation plans in the Franchise Channel, in which the Company pays an incremental amount of compensation on new Franchise Agreements. These incremental costs are deferred and amortized over a 10-year period, which is consistent with the term of the contract.
Costs to fulfill - The Company has evaluated the need to capitalize costs to fulfill customer contracts and has determined that there are no costs that meet the definition for capitalization under ASC 340.

17

Goosehead Insurance, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Disaggregation of Revenue
The following table disaggregates revenue by Segment and source (in thousands):

Three Months Ended September 30, 2020:Franchise ChannelCorporate ChannelTotal
Type of revenue stream:
Commissions and agency fees
Renewal Commissions$— $7,931 $7,931 
New Business Commissions— 4,790 4,790 
Agency Fees— 2,491 2,491 
Contingent Commissions2,662 1,511 4,173 
Franchise revenues
Renewal Royalty Fees8,117 — 8,117 
New Business Royalty Fees3,090 — 3,090 
Initial Franchise Fees1,152 — 1,152 
Other Franchise Revenues59 — 59 
Interest Income212 — 212 
Total Revenues$15,292 $16,723 $32,015 
Timing of revenue recognition:
Transferred at a point in time$— $15,212 $15,212 
Transferred over time15,292 1,511 16,803 
Total Revenues$15,292 $16,723 $32,015 
18

Goosehead Insurance, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

Nine Months Ended September 30, 2020:Franchise ChannelCorporate ChannelTotal
Type of revenue stream:
Commissions and agency fees
Renewal Commissions$— $21,382 $21,382 
New Business Commissions— 12,452 12,452 
Agency Fees— 6,362 6,362 
Contingent Commissions6,130 3,118 9,248 
Franchise revenues
Renewal Royalty Fees21,406 — 21,406 
New Business Royalty Fees7,737 — 7,737 
Initial Franchise Fees3,031 — 3,031 
Other Franchise Revenues173 — 173 
Interest Income573 — 573 
Total Revenues$39,050 $43,314 $82,364 
Timing of revenue recognition:
Transferred at a point in time$— $40,196 $40,196 
Transferred over time39,050 3,118 42,168 
Total Revenues$39,050 $43,314 $82,364 

Contract Balances

The following table provides information about receivables, cost to obtain, and contract liabilities from contracts with customers (in thousands):

September 30, 2020December 31, 2019Increase/(decrease)
Cost to obtain franchise contracts(1)
1,309 $1,004 $305 
Commissions and agency fees receivable, net(2)
11,793 6,884 4,909 
Receivable from franchisees(2)
17,437 13,616 3,821 
Contract liability(3)
29,584 22,795 6,789 
(1) Cost to obtain franchise contracts is included in Other assets on the condensed consolidated balance sheets.
(2) Includes both the current and long term portion of this balance.
(3) Initial Franchise Fees to be recognized over the life of the contract

Significant changes in contract liabilities are as follows (in thousands):
Contract liability at December 31, 2019
$22,795 
Revenue recognized during the period(3,031)
New deferrals(1)
9,820 
Contract liability at September 30, 2020
29,584 
(1) Initial Franchise Fees where the consideration is received from the customer for services which are to be transferred to the Franchisee over the term of the Franchise Agreement
19

Goosehead Insurance, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

4. Franchise Fees Receivable
The balance of Franchise fees receivable included in Receivable from franchisees consisted of the following (in thousands):
  
September 30, 2020December 31, 2019
Franchise fees receivable(1)
$21,236 $15,314 
Less: Unamortized discount(1)
(5,519)(3,771)
Less: Allowance for uncollectible franchise fees(1)
(107)(52)
Net franchise fees receivable(1)
$15,610 $11,491 
(1) Includes both the current and long term portion of this balance
Activity in the allowance for uncollectible franchise fees was as follows (in thousands):
Balance at December 31, 2019$52 
Charges to bad debts182 
Write offs(127)
Balance at September 30, 2020$107 
Balance at December 31, 2018$455 
Charges to bad debts486 
Write offs(376)
Balance at September 30, 2019$565 

5. Allowance for Uncollectible Agency Fees
Activity in the allowance for uncollectible Agency Fees was as follows (in thousands):
Balance at December 31, 2019$178 
Charges to bad debts822 
Write offs(541)
Balance at September 30, 2020$459 
Balance at December 31, 2018$242 
Charges to bad debts796 
Write offs(730)
Balance at September 30, 2019$308 

20

Goosehead Insurance, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
6. Property and equipment
Property and equipment consisted of the following (in thousands):
September 30, 2020December 31, 2019
Furniture & fixtures$4,256 $3,012 
Computer equipment2,429 1,480 
Network equipment350 268 
Phone system937 885 
Leasehold improvements11,509 9,073 
Total19,481 14,718 
Less accumulated depreciation(7,116)(5,176)
Property and equipment, net$12,365 $9,542 

7. Debt
On March 6, 2020, the Company refinanced its $13.0 million revolving credit facility and $40.0 million term note payable to a $25.0 million revolving credit facility and $80.0 million term note payable to finance general corporate purposes. The Company also has the right, subject to approval by the administrative agent and each issuing bank, to increase the commitments under the credit facilities an additional $50.0 million. As part of the refinancing, $0.2 million of debt issuance costs from previous debt were immediately recognized as interest expense.
The $25.0 million revolving credit facility accrues interest on amounts drawn at an initial interest rate of LIBOR plus 2.50%, then at an interest rate determined by the Company's leverage ratio for the preceding period. At September 30, 2020 the Company was accruing interest at LIBOR plus 200 basis points. At September 30, 2020, the Company had $5.0 million drawn against the revolver and had a letter of credit of $0.3 million applied against the maximum borrowing availability, payable on March 6, 2023. Thus, amounts available to draw totaled $19.7 million. The revolving credit facility is collateralized by substantially all the Company’s assets, which includes rights to future commissions.
The term note is payable in quarterly installments of $0.5 million the first twelve months, $1.0 million the next twelve months and $2.0 million the last twelve months, with a balloon payment on March 6, 2023. The note is collateralized by substantially all of the Company’s assets, which includes rights to future commissions. Interest is calculated initially at LIBOR plus 2.50%, then at an interest rate based on the Company's leverage ratio for the preceding period. At September 30, 2020 the Company was accruing interest at LIBOR plus 200 basis points. On June 24, 2020 the Company drew down the remaining $37.9 million of the term loan. As of September 30, 2020, the Company had $79.0 million of the term note drawn.
The interest rate for each leverage ratio tier are as follows:

Leverage RatioInterest Rate
< 1.50x
LIBOR + 175 bps
> 1.50x
LIBOR + 200 bps
> 2.50x
LIBOR + 225 bps
> 3.50x
LIBOR + 250 bps

21

Goosehead Insurance, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Maturities of the term note payable for the next four years are as follows (in thousands):

Amount
2020$500 
20213,500 
20227,000 
202368,000 
Total$79,000 

The Company’s note payable agreement contains certain restrictions and covenants. Under these restrictions, the Company is limited in the amount of debt incurred and distributions payable. In addition, the credit agreement contains certain change of control provisions that, if broken, would trigger a default. Finally, the Company must maintain certain financial ratios. As of September 30, 2020, the Company was in compliance with these covenants.
Because of both instruments’ variable interest rate, the note payable balance at September 30, 2020 and December 31, 2019, approximates fair value using Level 2 inputs, described below.
The framework for measuring fair value provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are described as follows:
 
Level 1—Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets.
Level 2—Significant other observable inputs other than Level 1 prices such as quoted prices in markets that are not active, quoted prices for similar assets or other inputs that are observable, either directly or indirectly, for substantially the full term of the asset.
Level 3—Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The asset or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.

8. Commitments and Contingencies
The Company leases its facilities under non-cancelable operating leases, expiring in various years through 2029. In addition to monthly lease payments, the lease agreements require the Company to reimburse the lessors for its portion of operating costs each year. Rent expense was $0.7 million and $1.9 million for the three and nine months ended September 30, 2020 and $0.5 million and $1.4 million for three and nine months ended September 30, 2019.
22

Goosehead Insurance, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
The following is a schedule of future minimum lease payments as of September 30, 2020 (in thousands):

Amount
2020$707 
20212,793 
20222,762 
20232,578 
20242,394 
Thereafter9,231 
Total$20,465 

9. Income Taxes
As a result of the Reorganization Transactions and the Offering, GSHD became the sole managing member of GF, which is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, GF is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by GF is passed through to and included in the taxable income or loss of its members, including GSHD, on a pro rata basis. GSHD is subject to U.S. federal income taxes, in addition to state and local income taxes, with respect to GSHD's allocable share of income of GF.
Income tax expense (benefit)
Provision for/(benefit from) income taxes for the three and nine months ended September 30, 2020 was $(331) thousand and $(612) thousand compared to $301 thousand and $1.5 million for the three and nine months ended September 30, 2019. The effective tax rate was (5)% and (5)% for the three and nine months ended September 30, 2020 and 10% and 10% for the three and nine months ended September 30, 2019. The decrease in the effective tax rate for the period ended September 30, 2020 compared to the period ended September 30, 2019 was primarily due to exercises of employee stock options resulting in excess tax deductible expenses.
Deferred taxes
Deferred tax assets at September 30, 2020 were $48.8 million compared to $15.5 million at December 31, 2019. The primary contributing factor to the increase in deferred tax assets is additional redemptions of LLC Units of GF for shares of Class A common stock of GSHD during the three and nine months ended September 30, 2020.
Tax Receivable Agreement
GF intends to make an election under Section 754 of the Internal Revenue Code of 1986, as amended, and the regulations thereunder (the “Code”) effective for each taxable year in which a redemption or exchange of LLC Units and corresponding Class B common stock for shares of Class A common stock occurs. Future taxable redemptions or exchanges are expected to result in tax basis adjustments to the assets of GF that will be allocated to the Company and thus produce favorable tax attributes. These tax attributes would not be available to GSHD in the absence of those transactions. The anticipated tax basis adjustments are expected to reduce the amount of tax that GSHD would otherwise be required to pay in the future.
GSHD entered into a tax receivable agreement with the Pre-IPO LLC Members on May 1, 2018 that provides for the payment by GSHD to the Pre-IPO LLC Members of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that GSHD actually realizes as a result of (i) any increase in tax basis in GSHD's assets and (ii) tax benefits related to imputed interest deemed arising as a result of payments made under the tax receivable agreement.
During the three and nine months ended September 30, 2020, an aggregate of 0.3 million and 1.9 million LLC Units, respectively, were redeemed by the Pre-IPO LLC Members for newly issued shares of Class A common stock. In connection with these redemptions, GSHD received 0.3 million and 1.9 million LLC Units, which resulted in an increase in the tax basis of its investment in GF subject to the provisions of the tax receivable agreement. The Company recognized a liability for the TRA Payments due to the Pre-IPO LLC Members, representing 85% of the
23

Goosehead Insurance, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
aggregate tax benefits the Company expects to realize from the tax basis increases related to the redemptions of LLC Units, after concluding it was probable that such TRA Payments would be paid based on its estimates of future taxable income. As of September 30, 2020, the total amount of TRA Payments due to the Pre-IPO LLC Members under the tax receivable agreement was $42.2 million, of which $0.7 million was current and included in Accounts payables and accrued expenses on the Consolidated Balance Sheet. Future exchanges of LLC Units for Class A common stock will result in additional TRA payments.
Uncertain tax positions
GSHD has determined there are no material uncertain tax positions as of September 30, 2020.
10. Stockholders' Equity
Class A Common Stock
GSHD has a total of 17,499 thousand shares of its Class A common stock outstanding at September 30, 2020. Each share of Class A common stock holds economic rights and entitles its holder to one vote per share on all matters submitted to a vote of the stockholders of GSHD.
Class B Common Stock
GSHD has a total of 19,158 thousand shares of its Class B common stock outstanding at September 30, 2020. Each share of Class B common stock has no economic rights but entitles its holder to one vote per share on all matters submitted to a vote of the stockholders of GSHD.
Holders of Class A common stock and Class B common stock vote together as a single class on all matters presented to GSHD's shareholders for their vote or approval, except as otherwise required by applicable law, by agreement, or by GSHD's certificate of incorporation.

Earnings Per Share
The following table sets forth the calculation of basic earnings per share ("EPS") based on net income attributable to GSHD for the three and nine months ended September 30, 2020 and 2019, divided by the basic weighted average number of Class A common stock as of September 30, 2020 and September 30, 2019 (in thousands, except per share amounts). Diluted earnings per share of Class A common stock is computed by dividing net income attributable to GSHD by the weighted average number of shares of Class A common stock outstanding adjusted to give effect to potentially dilutive securities (in thousands, except per share amounts). The Company has not included the effects of conversion of Class B shares to Class A shares in the diluted EPS calculation using the "if-converted" method, because doing so has no impact on diluted EPS.
24

Goosehead Insurance, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Numerator:
Income before taxes$6,394 $3,064 $13,203 $14,373 
Less: income before taxes attributable to non-controlling interests3,458 1,801 7,325 8,662 
Income before taxes attributable to GSHD2,936 1,263 5,878 5,711 
Less: income tax expense (benefit) attributable to GSHD(331)265 (612)1,338 
Net income attributable to GSHD$3,267 $998 $6,490 $4,373 
Denominator:
Weighted average shares of Class A common stock outstanding - basic17,376 15,140 16,466 14,746 
Effect of dilutive securities:
Stock options1,539 1,311 1,460 1,190 
Weighted average shares of Class A common stock outstanding - diluted18,915 16,451 17,926 15,936 
Earnings per share of Class A common stock - basic$0.19 $0.07 $0.39 $0.30 
Earnings per share of Class A common stock - diluted$0.17 $0.06 $0.36 $0.27 


11. Non-controlling interest
Following the Offering, GSHD became the sole managing member of GF and, as a result, it consolidates the financial results of GF. GSHD reports a non-controlling interest representing the economic interest in GF held by the other members of GF.
On a quarterly basis, GF makes distributions to the LLC Unit holders on a pro rata basis to facilitate the LLC Unit holder's quarterly tax payments. For the three and nine months ended September 30, 2020, GF made distributions of $1.6 million and $4.8 million, of which $0.8 million and $2.7 million where made to Pre-IPO LLC Members. The remaining $0.7 million and $2.2 million were made to GSHD and were eliminated in consolidation. For the three and nine months ended September 30, 2019, GF made distributions of $1.4 million and $6.3 million, of which $0.8 million and $3.7 million were made to Pre-IPO LLC Members. The remaining $0.6 million and $2.6 million were made to GSHD and were eliminated in consolidation.
Under the amended and restated Goosehead Financial, LLC Agreement, the Pre-IPO LLC Members have the right, from and after the completion of the Offering (subject to the terms of the amended and restated Goosehead Financial, LLC Agreement), to require GSHD to redeem all or a portion of their LLC Units for, at GSHD's election, newly-issued shares of Class A common stock on a one-for-one basis or a cash payment equal to the volume weighted average market price of one share of GSHD's Class A common stock for each LLC Unit redeemed (subject to customary adjustments, including for stock splits, stock dividends and reclassifications) in accordance with the terms of the amended and restated Goosehead Financial, LLC Agreement. Additionally, in the event of a redemption request by a Pre-IPO LLC Member, GSHD may, at its option, effect a direct exchange of cash or Class A common stock for LLC Units in lieu of such a redemption. Shares of Class B common stock will be cancelled on a one-for-one basis if GSHD, at the election of a Pre-IPO LLC Member, redeems or exchanges LLC Units of such Pre-IPO LLC Member pursuant to the terms of the amended and restated Goosehead Financial, LLC Agreement. Except for transfers to GSHD pursuant to the amended and restated Goosehead Financial, LLC Agreement or to certain permitted transferees, the Pre-IPO LLC Members are not permitted to sell, transfer or otherwise dispose of any LLC Units or shares of Class B common stock.
25

Goosehead Insurance, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
During the three and nine months ended September 30, 2020, an aggregate of 297 thousand and 1,897 thousand LLC Units were redeemed by the non-controlling interest holders. Pursuant to the GF LLC Agreement, GSHD issued $297 thousand and $1,897 thousand shares of Class A common stock in connection with these redemptions and received $297 thousand and $1,897 thousand LLC Interests, increasing GSHD's ownership interest in GF. Simultaneously, and in connection with these redemptions, 297 thousand and 1,897 thousand shares of Class B common stock were surrendered and cancelled.
The following table summarizes the ownership interest in GF as of September 30, 2020 (in thousands):
September 30, 2020
LLC UnitsOwnership %
Number of LLC Units held by GSHD17,49947.7%
Number of LLC Units held by non-controlling interest holders19,15852.3%
Number of LLC Units outstanding36,657100.0%

The weighted average ownership percentages for the applicable reporting periods are used to attribute net income to GSHD and the non-controlling interest holders. The non-controlling interest holders' weighted average ownership percentage for the three and nine months ended September 30, 2020 was 52.5% and 55.1%, respectively.
The following table summarizes the effects of changes in ownership in GF on the equity of GSHD for the three and nine months ended September 30, 2020 and 2019 as follows (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Net Income attributable to Goosehead Insurance Inc.$3,267 $998 $6,490 $4,373 
Transfers (to) from non-controlling interests:
Decrease in additional paid-in capital as a result of the redemption of LLC interests(577)(145)(2,208)(1,301)
Increase in additional paid-in capital as a result of activity under employee stock purchase plan142 — 396 142 
Total effect of changes in ownership interest on equity attributable to Goosehead Insurance Inc.$2,832 $853 $4,678 $3,214 

12. Equity-Based Compensation
Stock option expense was $1.4 million and $3.3 million for the three and nine months ended September 30, 2020, respectively. Stock option expense was $0.4 million and $1.1 million for the three and nine months ended September 30, 2019, respectively.
On April 1, 2020, the Company granted an additional 900,000 stock options to its Managing Directors at an exercise price equal to $40.88 per share. The grant date fair value of $16.31 per option was determined using the Black-Scholes valuation model using the following assumptions:

Expected volatility40 %
Expected dividend yield— %
Expected term (in years)6.5
Risk-free interest rate0.47 %

26

Goosehead Insurance, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
13. Dividends
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. A summary of the total amounts declared by GF is as follows (in thousands):
LLC Units held as of March 18, 2019Dividends declared
Class A common stockholders14,421 $5,962 
Class B common stockholders via LLC Units held21,864 9,038 
Total36,285 $15,000 

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. A summary of the total amounts declared by GF is as follows (in thousands):
LLC Units held as of August 10, 2020Dividends declared
Class A common stockholders17,308 $19,895 
Class B common stockholders via LLC Units held19,230 22,105 
Total36,538 $42,000 
Any future extraordinary dividends will be declared at the sole discretion of GF's managing members with respect to GF and the Company's board of directors with respect to GSHD.  In determining whether a future extraordinary dividend will be declared by the Company, the board of directors may, at its sole discretion, consider the following: the Company's financial condition and operating results, the Company's available cash and current and anticipated cash needs, the Company's capital requirements, any contractual, legal, tax and regulatory restrictions, general economic and business conditions, and such other factors or conditions as the board of directors deems relevant.

14. Segment Information
The Company has two reportable Segments: Corporate Channel and Franchise Channel. The Corporate Channel consists of company-owned and financed operations with employees who are hired, trained, and managed by Goosehead. The Franchise Channel network consists of Franchisee operations that are owned and managed by individual business owners. These business owners have a contractual relationship with Goosehead to use the Company's processes, systems, and back-office support team to sell insurance and manage their business. In exchange, Goosehead is entitled to an Initial Franchise Fee and ongoing royalty fees. Allocations of contingent commissions and certain operating expenses are based on reasonable assumptions and estimates primarily using revenue, headcount and other information. The Company’s chief operating decision maker uses net income before interest, income taxes, depreciation and amortization, adjusted to exclude equity-based compensation and other non-operating items, including, among other things, certain non-cash charges and certain non-recurring or non-operating gains or losses (“Adjusted EBITDA”) as a performance measure to manage resources and make decisions about the business. Summarized financial information concerning the Company’s reportable Segments is shown in the following tables (in thousands). There are no intersegment sales, only interest income and interest expense related to an intersegment line of credit, all of which eliminate in consolidation. The “Other” column includes any income and expenses not allocated to reportable Segments and corporate-related items, including equity-based compensation, certain legal expenses and interest related to the note payable.


27

Goosehead Insurance, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Franchise ChannelCorporate ChannelOtherTotal
Three months ended September 30, 2020
Revenues:
Commissions and agency fees
Renewal Commissions$— $7,931 $— $7,931 
Agency Fees— 2,491 — 2,491 
New Business Commissions— 4,790 — 4,790 
Contingent Commissions2,662 1,511 — 4,173 
Total Commissions and Agency Fees2,662 16,723 — 19,385 
Franchise revenue
Renewal Royalty Fees8,117 — — 8,117 
New Business Royalty Fees3,090 — — 3,090 
Initial Franchise Fees1,152 — — 1,152 
Other Income59 — — 59 
Total Franchise Revenues12,418 — — 12,418 
Interest income
Interest Income212 — — 212 
Total Interest Income212 — — 212 
Total Revenues15,292 16,723 — 32,015 
Operating expenses:
Employee compensation and benefits, excluding equity based compensation6,552 9,933 — 16,485 
General and administrative expenses2,329 2,781 762 5,872 
Bad debts45 331 — 376 
Total Operating Expenses8,926 13,045 762 22,733 
Adjusted EBITDA6,366 3,678 (762)9,282 
Other income (expense)10 — — 10 
Equity based compensation— — (1,416)(1,416)
Interest expense— — (582)(582)
Depreciation and amortization(473)(427)— (900)
Income tax benefit— — 331 331 
Net income$5,903 $3,251 $(2,429)$6,725 
September 30, 2020:
Total Assets$40,578 $24,977 $54,399 $119,954 


28

Goosehead Insurance, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Franchise
Channel
Corporate
Channel
OtherTotal
Three months ended September 30, 2019:
Revenues:
Commissions and agency fees
Renewal Commissions$— $6,056 $— $6,056 
Agency Fees— 1,782 — 1,782 
New Business Commissions— 3,294 — 3,294 
Contingent Commissions413 194 — 607 
Total Commissions and Agency Fees413 11,326 — 11,739 
Franchise revenue
Renewal Royalty Fees5,295 — — 5,295 
New Business Royalty Fees1,994 — — 1,994 
Initial Franchise Fees1,935 — — 1,935 
Other Income37 — — 37 
Total Franchise Revenues9,261 — — 9,261 
Interest income
Interest Income169 — — 169 
Total Interest Income169 — — 169 
Total Revenues9,843 11,326 — 21,169 
Operating expenses:
Employee compensation and benefits, excluding equity based compensation4,531 6,485 — 11,016 
General and administrative expenses2,325 2,281 563 5,169 
Bad debts119 280 — 399 
Total Operating Expenses6,975 9,046 563 16,584 
Adjusted EBITDA2,868 2,280 (563)4,585 
Equity based compensation— — (396)(396)
Interest expense— — (609)(609)
Depreciation and amortization(266)(250)— (516)
Taxes— — (301)(301)
Net income$2,602 $2,030 $(1,869)$2,763 
September 30, 2019:
Total Assets$14,103 $7,150 $23,168 $44,421 

29

Goosehead Insurance, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Franchise
Channel
Corporate
Channel
OtherTotal
Nine months ended September 30, 2020
Revenues:
Commissions and agency fees
Renewal Commissions$— $21,382 $— $21,382 
Agency Fees— 6,362 — 6,362 
New Business Commissions— 12,452 — 12,452 
Contingent Commissions6,130 3,118 — 9,248 
Total Commissions and Agency Fees6,130 43,314 — 49,444 
Franchise revenue
Renewal Royalty Fees21,406 — — 21,406 
New Business Royalty Fees7,737 — — 7,737 
Initial Franchise Fees3,031 — — 3,031 
Other Income173 — — 173 
Total Franchise Revenues32,347 — — 32,347 
Interest income
Interest Income573 — — 573 
Total Interest Income573 — — 573 
Total Revenues39,050 43,314 — 82,364 
Operating expenses:
Employee compensation and benefits, excluding equity based compensation18,413 25,565 — 43,978 
General and administrative expenses6,488 8,111 2,509 17,108 
Bad debts182 822 — 1,004 
Total Operating Expenses25,083 34,498 2,509 62,090 
Adjusted EBITDA13,967 8,816 (2,509)20,274 
Other income (expense)76 — — 76 
Equity based compensation— — (3,330)(3,330)
Interest expense— — (1,665)(1,665)
Depreciation and amortization(1,182)(970)— (2,152)
Income tax benefit— — 612 612 
Net income$12,861 $7,846 $(6,892)$13,815 
September 30, 2020:
Total Assets$40,578 $24,977 $54,399 $119,954 

30

Goosehead Insurance, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Franchise ChannelCorporate ChannelOtherTotal
Nine months ended September 30, 2019:
Revenues:
Commissions and agency fees
Renewal Commissions$— $16,744 $— $16,744 
Agency Fees— 4,959 — 4,959 
New Business Commissions— 8,766 — 8,766 
Contingent Commissions4,719 3,484 — 8,203 
Total Commissions and Agency Fees4,719 33,953 — 38,672 
Franchise revenue
Renewal Royalty Fees14,120 — — 14,120 
New Business Royalty Fees5,213 — — 5,213 
Initial Franchise Fees5,160 — — 5,160 
Other Income71 — — 71 
Total Franchise Revenues24,564 — — 24,564 
Interest income
Interest Income452 — — 452 
Total Interest Income452 — — 452 
Total Revenues29,735 33,953 — 63,688 
Operating expenses:
Employee compensation and benefits, excluding equity based compensation12,326 17,524 — 29,850 
General and administrative expenses5,487 6,261 2,052 13,800 
Bad debts486 796 — 1,282 
Total Operating Expenses18,299 24,581 2,052 44,932 
Adjusted EBITDA11,436 9,372 (2,052)18,756 
Equity based compensation— — (1,131)(1,131)
Interest expense— — (1,861)(1,861)
Depreciation and amortization(668)(723)— (1,391)
Income tax benefit— — (1,475)(1,475)
Net income$10,768 $8,649 $(6,519)$12,898 
September 30, 2019:
Total Assets$14,103 $7,150 $23,168 $44,421 

15. Litigation
From time to time, GSHD may be involved in various legal proceedings, lawsuits and claims incidental to the conduct of the Company's business. The amount of any loss from the ultimate outcomes is not probable or reasonably estimable. It is the opinion of management that the resolution of outstanding claims will not have a material adverse effect on the financial position or results of operations of the Company.
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Item 2: Management’s discussion and analysis of financial condition and results of operations

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


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


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)
$7,93125 %$8,04427 %$6,05629 %
Renewal Royalty Fees(2)
8,11725 %8,23027 %5,29525 %
New Business Commissions(1)
4,79015 %4,84916 %3,29416 %
New Business Royalty Fees(2)
3,09010 %3,07410 %1,994%
Agency Fees(1)
2,491%2,535%1,782%
Total Core Revenue26,41983 %26,73289 %18,42187 %
Cost Recovery Revenue:
Initial Franchise Fees(2)
1,152%3,04510 %1,935%
Interest Income212%212%169%
Total Cost Recovery Revenue1,364%3,25711 %2,10410 %
Ancillary Revenue:
Contingent Commissions(1)
4,17313 %2— %607%
Other Income(2)
59— %59— %37— %
Total Ancillary Revenue4,23213 %61— %644%
Total Revenues$32,015100 %$30,050100 %$21,169100 %

(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.
34


(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)
$21,38226 %$21,90027 %$16,74426 %
Renewal Royalty Fees(2)
21,40626 %21,79926 %14,12022 %
New Business Commissions(1)
12,45215 %12,58315 %8,76614 %
New Business Royalty Fees(2)
7,737%7,812%5,213%
Agency Fees(1)
6,362%6,874%4,959%
Total Core Revenue69,33984 %70,96886 %49,80278 %
Cost Recovery Revenue:
Initial Franchise Fees(2)
3,031%6,960%5,160%
Interest Income573%573%452%
Total Cost Recovery Revenue3,604%7,533%5,612%
Ancillary Revenue:
Contingent Commissions(1)
9,24811 %3,826%8,20313 %
Other Income(2)
173— %173— %71— %
Total Ancillary Revenue9,42111 %3,999%8,27413 %
Total Revenues$82,364100 %$82,500100 %$63,688100 %

(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.
35


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 605Impact of AdoptionASC 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 Revenue26,732 (313)26,419 
Cost Recovery Revenue:
Initial Franchise Fees(2)
3,045 (1,893)1,152 
Interest Income212 — 212 
Total Cost Recovery Revenue3,257 (1,893)1,364 
Ancillary Revenue:
Contingent Commissions(1)
4,171 4,173 
Other Income(2)
59 — 59 
Total Ancillary Revenue61 4,171 4,232 
Total Revenues30,050 1,965 32,015 
Operating Expenses:
Employee compensation and benefits, excluding equity-based compensation16,639 (154)16,485 
General and administrative expenses5,872 — 5,872 
Bad debts681 (305)376 
Total23,192 (459)22,733 
Adjusted EBITDA6,858 2,424 9,282 
Adjusted EBITDA Margin23 %%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 Income4,659 2,066 6,725 
Less: net income attributable to non-controlling interests2,084 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



Nine Months Ended September 30, 2020
(in thousands)ASC 605Impact of AdoptionASC 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 Revenue70,968 (1,629)69,339 
Cost Recovery Revenue:
Initial Franchise Fees(2)
6,960 (3,929)3,031 
Interest Income573 — 573 
Total Cost Recovery Revenue7,533 (3,929)3,604 
Ancillary Revenue:
Contingent Commissions(1)
3,826 5,422 9,248 
Other Income(2)
173 — 173 
Total Ancillary Revenue3,999 5,422 9,421 
Total Revenues82,500 (136)82,364 
Operating Expenses:
Employee compensation and benefits, excluding equity-based compensation44,282 (304)43,978 
General and administrative expenses17,108 — 17,108 
Bad debts1,606 (602)1,004 
Total62,996 (906)62,090 
Adjusted EBITDA19,504 770 20,274 
Adjusted EBITDA Margin24 %%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 Income13,217 598 13,815 
Less: net income attributable to non-controlling interests6,866 459 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.
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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 revenues12,418 39 %14,408 48 %9,261 44 %
Interest income212 %212 %169 %
Total revenues32,015 100 %30,050 100 %21,169 100 %
Operating Expenses:
Employee compensation and benefits17,901 71 %18,055 71 %11,412 65 %
General and administrative expenses5,872 23 %5,872 23 %5,169 30 %
Bad debts376 %681 %399 %
Depreciation and amortization900 %900 %516 %
Total operating expenses25,049 100 %25,508 100 %17,496 100 %
Income from operations6,966 4,542 3,673 
Other Income (Expense):
Other income10 10 — 
Interest expense(582)(582)(609)
Income before taxes6,394 3,970 3,064 
Tax expense (benefit)(331)(689)301 
Net income6,725 4,659 2,763 
Less: net income attributable to non-controlling interests3,458 2,084 1,765 
Net income attributable to Goosehead Insurance Inc.$3,267 $2,575 $998 
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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 revenues32,347 39 %36,744 45 %24,564 39 %
Interest income573 %573 %452 %
Total revenues82,364 100 %82,500 100 %63,688 100 %
Operating Expenses:
Employee compensation and benefits47,308 70 %47,612 70 %30,981 65 %
General and administrative expenses17,108 25 %17,108 25 %13,800 30 %
Bad debts1,004 %1,606 %1,282 %
Depreciation and amortization2,152 %2,152 %1,391 %
Total operating expenses67,572 100 %68,478 100 %47,454 100 %
Income from operations14,792 14,022 16,234 
Other Income (Expense):
Other income76 76 — 
Interest expense(1,665)(1,665)(1,861)
Income before taxes13,203 12,433 14,373 
Tax expense (benefit)(612)(784)1,475 
Net income13,815 13,217 12,898 
Less: net income attributable to non-controlling interests7,325 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 Commissions7,931 41 %8,044 53 %6,056 52 %
New Business Commissions4,790 25 %4,849 31 %3,294 28 %
Agency Fees2,491 13 %2,535 16 %1,782 15 %
Total Core Revenue:15,212 78 %15,428 100 %11,132 95 %
Ancillary Revenue:
Contingent Commissions4,173 22 %— %607 %
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 Commissions21,382 43 %21,900 48 %16,744 43 %
New Business Commissions12,452 25 %12,583 28 %8,766 23 %
Agency Fees6,362 13 %6,874 15 %4,959 13 %
Total Core Revenue:40,196 81 %41,357 92 %30,469 79 %
Ancillary Revenue:
Contingent Commissions9,248 19 %3,826 %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 Fees8,117 65 %8,230 57 %5,295 57 %
New Business Royalty Fees3,090 25 %3,074 21 %1,994 22 %
Total Core Revenues:11,207 90 %11,304 78 %7,289 79 %
Cost Recovery Revenues:
Initial Franchise Fees1,152 %3,045 21 %1,935 21 %
Ancillary Revenues:
Other Franchise Revenues59 — %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 Fees21,406 66 %21,799 59 %14,120 152 %
New Business Royalty Fees7,737 24 %7,812 21 %5,213 56 %
Total Core Revenues:29,143 90 %29,611 81 %19,333 209 %
Cost Recovery Revenues:
Initial Franchise Fees3,031 %6,960 19 %5,160 56 %
Ancillary Revenues:
Other Franchise Revenues173 %173 — %71 %
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
  20202019
Corporate Channel Total Written Premium$88,517 $66,475 33 %
Franchise Channel Total Written Premium212,520 135,607 57 %
Total Written Premium$301,037 $202,082 49 %

  Nine Months Ended September 30,% Change
  20202019
Corporate Channel Total Written Premium$237,317 $181,309 31 %
Franchise Channel Total Written Premium551,550 361,675 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 Revenue26,419 26,732 18,421 
Cost Recovery Revenue:
Initial Franchise Fees(2)
1,152 3,045 1,935 
Interest Income212 212 169 
Total Cost Recovery Revenue1,364 3,257 2,104 
Ancillary Revenue:
Contingent Commissions(1)
4,173 607 
Other Income(2)
59 59 37 
Total Ancillary Revenue4,232 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 Revenue69,339 70,968 49,802 
Cost Recovery Revenue:
Initial Franchise Fees(2)
3,031 6,960 5,160 
Interest Income573 573 452 
Total Cost Recovery Revenue3,604 7,533 5,612 
Ancillary Revenue:
Contingent Commissions(1)
9,248 3,826 8,203 
Other Income(2)
173 173 71 
Total Ancillary Revenue9,421 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 expense582 582 609 
Depreciation and amortization900 900 516 
Tax (benefit) expense(331)(689)301 
Equity-based compensation1,416 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 expense1,665 1,665 1,861 
Depreciation and amortization2,152 2,152 1,391 
Tax (benefit) expense(612)(784)1,475 
Equity-based compensation3,330 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,
20202019Change
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 equivalents6,075 (7,463)13,538 
Cash and cash equivalents, and restricted cash, beginning of period15,260 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.
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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.

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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).
 
  
Contractual obligations, commitments and contingencies
(in thousands)TotalLess than
1 year
1-3 years3-5 yearsMore than
5 years
Operating leases(1)
$20,465 $2,834 $5,403 $4,693 $7,535 
Debt obligations payable(2)
84,000 3,000 81,000 — — 
Interest expense(3)
5,144 1,693 3,451 — — 
Liabilities under the tax receivable agreement(4)
42,175 681 5,007 5,624 30,863 
Total$151,784 $8,208 $94,861 $10,317 $38,398 

(1)The Company leases its facilities under non-cancelable operating leases. In addition to monthly lease payments, the lease agreements require the Company to reimburse the lessors for its portion of operating costs each year. Rent expense was $711 thousand and $541 thousand for the three months ended September 30, 2020 and 2019. Rent expense was $1.9 million and $1.4 million for the nine months ended September 30, 2020 and 2019.
(2)The Company refinanced its credit facilities on March 6, 2020 in the form of a $80 million term loan, and $25 million revolving credit facility, of which $5.0 million was drawn as of September 30, 2020.
(3)Interest expense includes interest payments on our outstanding debt obligations under our credit agreement. Our debt obligations have variable interest rates. We have calculated future interest obligations based on the interest rate for our debt obligations as of September 30, 2020.
(4)See "Item 2. Management's discussion and analysis of financial condition and results of operation - Tax receivable agreement."

Off-balance sheet arrangements
We do not invest in any off-balance sheet vehicles that provide liquidity, capital resources, market or credit risk support, or engage in any activities that expose us to any liability that is not reflected in our condensed consolidated financial statements except for those described under “Contractual obligations, commitments and contingencies” above.

Critical accounting policies
Our discussion and analysis of our consolidated financial condition and results of operations is based upon the accompanying condensed consolidated financial statements and notes thereto, which have been prepared in accordance with GAAP. The preparation of the condensed consolidated financial statements requires us to make estimates, judgments and assumptions, which we believe to be reasonable, based on the information available. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. Variances in the estimates or assumptions used to actual experience could yield materially different accounting results. On an ongoing basis, we evaluate the continued appropriateness of our accounting policies and resulting estimates to make adjustments we consider appropriate under the facts and circumstances. There have been no significant changes to our critical accounting policies as disclosed in the Annual Report on Form 10-K.

Recent accounting pronouncements
See "Note 2: Summary of Significant Accounting Policies—Recently Issued Accounting Pronouncements” under Part I, Item 1 of this Form 10-Q.

Emerging growth company
Pursuant to the JOBS Act, an emerging growth company is provided the option to adopt new or revised accounting standards that may be issued by FASB or the SEC either (i) within the same periods as those otherwise applicable to non-emerging growth companies or (ii) within the same time periods as private companies. We intend to take advantage of the exemption for complying with new or revised accounting standards within the same time periods
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as private companies. Accordingly, the information contained herein may be different than the information you receive from other public companies.
We also intend to take advantage of some of the reduced regulatory and reporting requirements of emerging growth companies pursuant to the JOBS Act so long as we qualify as an emerging growth company, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation, and exemptions from the requirements of holding non-binding advisory votes on executive compensation and golden parachute payments.
The Company will lose its emerging growth company status as of the filing of the Annual Report on Form 10-K for the year ended December 31, 2020. As such, the Company will be required to comply with the requirements of Section 404(b) of Sarbanes-Oxley Act, have full disclosure obligations requiring executive compensation, and lose exemptions from the requirements of holding non-binding advisory votes on executive compensation.

Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to our exposure to market risks as described in "Item 7A. Quantitative and qualitative disclosure of market risks" in the Annual Report on Form 10-K.

Item 4. Controls and Procedures
Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of September 30, 2020. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
There were no changes to our internal control over financial reporting that occurred during the quarter ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We have not experienced any material impact to our internal controls over financial reporting despite the fact that most of our employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the COVID-19 situation as it relates to our internal controls to minimize the impact on their design and operating effectiveness.


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PART II

Item 1. Legal Proceedings
The information required by this Item is incorporated by reference to "Part I, Item I, Note 13. Litigation" in the condensed consolidated financial statements included herein.

Item 1A. Risk Factors
For a discussion of our potential risks and uncertainties, see the information set forth under Part I, Item 1A “Risk Factors” in the Annual Report on Form 10-K.
The global outbreak of the coronavirus disease ("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 December 2019, a novel strain of coronavirus was reported to have surfaced in Wuhan, China, which has and is continuing to spread throughout the world. On January 30, 2020, the WHO declared the outbreak of COVID-19 a ‘‘Public Health Emergency of International Concern.’’ On March 11, 2020 the WHO characterized the outbreak as a ‘‘pandemic’’. This outbreak of COVID-19 has resulted in a widespread health crisis that has and may continue to adversely affect the economies and financial markets worldwide.

The COVID-19 pandemic could materially adversely impact our business, results of operations and financial results, depending on numerous evolving factors that we may not be able to accurately predict, including: the duration and severity of the pandemic; business and individuals’ actions that have been and continue to be taken in response to the pandemic; and the impact of COVID-19 on economic activity and governmental actions taken in response. As the COVID-19 outbreak and any associated protective or preventative measures continue to spread in the United States, we may experience disruptions to our business, including but not limited to: (a) our clients choosing to limit purchases of insurance due to declining business conditions, which would inhibit our ability to generate commission revenue and other revenue based on premiums placed; (b) decrease in home closing transactions which would imply a decrease in the purchase of new home insurance policies; (c) our clients defaulting on mortgages, which would affect the client’s ability to pay their home insurance premiums and affect the renewal of policies; (d) travel restrictions and quarantines leading to a lack of in-person meetings, which could hinder our ability to manage our sales successfully and to establish relationships or originate new business and; (e) alternative working arrangements, including employees and Franchisees working and being trained remotely, which could negatively impact our business should such arrangements remain for an extended period of time.

The extent of the impact of the COVID-19 pandemic on our operational and financial performance, will depend on future developments. To the extent that the COVID-19 pandemic adversely impacts our business, results of operations, liquidity or financial condition, it may also have the effect of increasing many of the other risks and uncertainties enumerated in the Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.

Item 5. Other Information
None.
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Item 6. Exhibits

101.INSXBRL Instance Document
101.SCHXBRL Schema Document
101.CALXBRL Calculation Linkbase Document
101.DEFXBRL Definition Linkbase Document
101.LABXBRL Label Linkbase Document
101.PREXBRL Presentation Linkbase

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, we have duly caused this report to be signed on our behalf by the undersigned thereunto duly authorized.

 GOOSEHEAD INSURANCE, INC.
 
Date:October 29, 2020By: /s/ Mark E. Jones
   Mark E. Jones
   Chairman and Chief Executive Officer
   (Principal Executive Officer)
 
Date:October 29, 2020By: /s/ Mark S. Colby
   Mark S. Colby
   Chief Financial Officer
   (Principal Financial Officer and Principal Accounting Officer)

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