Fathom Holdings Inc. — Q3 2023 Form 10-Q
Business context and reporting period. Fathom is a technology-enabled real estate services company spanning residential brokerage, mortgage, title, insurance and software. This unaudited filing covers the quarter and nine months ended September 30, 2023; comparisons are with the corresponding 2022 periods. Amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $93.5 | $111.3 | $271.2 | $329.5 |
| Operating loss | $(5.4) | $(5.9) | $(15.2) | $(16.7) |
| Net loss | $(5.5) | $(6.0) | $(15.5) | $(17.7) |
| Adjusted EBITDA, non-GAAP | $(0.3) | $(2.3) | $(1.2) | $(6.3) |
| Net loss per share | $(0.34) | $(0.38) | $(0.97) | $(1.10) |
Q3 operating and net loss margins were approximately 5.7% and 5.9%, respectively; nine-month margins were approximately 5.6% and 5.7%. Adjusted EBITDA is a company-defined non-GAAP measure and excludes, among other items, stock-based compensation and depreciation and amortization.
Revenue drivers and costs. Q3 revenue fell 16%; gross commission income declined 16% and other service revenue declined 16%. Brokerage transactions were 10,303, down 14.7%, while agents grew 13.4% year over year to approximately 11,333. Average revenue per transaction fell 1.5% to $8,565. Management attributed lower activity chiefly to higher interest rates; mortgage and title volumes also weakened. Operating expenses declined 16% in Q3, with lower agent-related costs, general and administrative expense, and marketing partly offset by higher technology and development spending. For the nine months, revenue declined 18% and total operating expenses declined 17%.
Cash flow and liquidity. Operating cash use was $6.2 million for the nine months, versus $6.5 million in 2022; investing cash use was $1.4 million versus $5.9 million; financing provided $5.9 million versus using $10.8 million. Cash and restricted cash totaled $6.8 million at September 30, including $6.6 million unrestricted cash, compared with $8.4 million combined at year-end 2022. Working capital was $6.5 million. Total assets were $78.8 million and total liabilities $23.0 million.
Balance-sheet debt was $3.7 million, including a $3.5 million principal senior secured convertible note, net of issuance costs; warehouse line borrowings were an additional $6.9 million. The convertible note bears monthly SOFR plus 5%, subject to an 8% minimum, matures April 2025, is secured by company assets, and has an initial conversion price of $6.00 per share. One warehouse facility had an earnings-covenant noncompliance, for which the lender granted a waiver; the company reported compliance with its other active facilities.
Material changes, outlook and risks
- Losses narrowed year over year and Adjusted EBITDA improved, but the company remained loss-making and used operating cash.
- Management said it had achieved company Adjusted EBITDA breakeven in Q2 2023, but Q3 returned to slightly negative Adjusted EBITDA. It is focused on positive operating cash flow and further expense reductions, including management salary reductions expected to save approximately $1.2 million per quarter. Agent transaction fees were increased in January 2023.
- Management believes available cash, planned spending and expected operating cash flows are sufficient for at least one year from issuance of the statements. The filing also cites a history of operating losses and negative operating cash flows and says additional financing may be needed if conditions deteriorate; funding may not be available on acceptable terms.
- On October 31, 2023, after quarter-end, a federal jury found NAR and other brokerages liable for $1.8 billion in an antitrust commission case; the verdict was appealed. Fathom said it was not then a defendant in that case and emphasized its flat-fee model, but warned that industry disruption, rule changes, litigation or changes in agent retention, recruitment or transaction volumes could adversely affect results.
- Other key exposures include housing-market weakness, elevated interest rates and inflation, mortgage regulatory oversight, possible litigation or agent-classification claims, and potential goodwill impairment. No material litigation against Fathom with a reasonable possibility of loss was reported at September 30. Management said disclosure controls were effective; accounting-system implementation was ongoing.
Important facts for investors to verify
- Whether transaction activity, revenue per transaction and mortgage/title volumes stabilize as interest rates and housing conditions change.
- Whether cost reductions and agent-fee changes translate into sustained positive Adjusted EBITDA and operating cash flow; compare non-GAAP results with GAAP losses and stock-based compensation.
- Cash runway and financing needs, including the convertible note’s interest, security and potential dilution, and warehouse facility renewals and covenant status.
- Developments in NAR-related antitrust litigation and any resulting changes to commission practices, agent economics or Fathom’s business.
- Execution of the expense plan, including the stated management salary savings, and the outcome of the planned fourth-quarter 2023 goodwill impairment test.