La Rosa Holdings Corp. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. La Rosa is a technology-integrated real estate services company operating residential and commercial brokerage, franchising, coaching, and property management businesses. Results are unaudited.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $6.79 million | $6.13 million | $20.32 million | $20.21 million |
| Gross profit | $575,499 | $549,229 | $1.87 million | $2.21 million |
| Gross margin | 8.5% | 9.0% | 9.2% | 10.9% |
| Operating loss | $(417,453) | $(636,815) | $(1.12) million | $(1.28) million |
| Net loss | $(343,839) | $(692,366) | $(1.74) million | $(1.32) million |
| Basic and diluted loss per share | $(0.06) | $(0.12) | $(0.29) | $(0.22) |
- Q3 revenue rose 11%; nine-month revenue was nearly flat, up 1%. Q3 residential brokerage and property management revenue increased, while nine-month residential brokerage, franchising, and coaching revenue declined.
- Property management revenue increased 22% for the first nine months, partly reflecting more properties under management. Residential transaction volume was down 14% year to date; management attributed pressure to higher interest rates and fewer transactions.
- Nine-month gross profit fell 15%, with gross margin down 1.7 percentage points. Franchising gross profit declined amid software costs classified as cost of revenue.
- Operating expenses decreased 14% for the nine months. Nine-month other expense was $612,467, including substantial financing-fee amortization; Q3 other income included an IRS employee retention credit, net of legal costs.
Cash, debt, and liquidity
- At September 30, cash was $350,276 and restricted cash was $1.55 million; restricted cash relates to rents and security deposits held for owners/tenants. Working capital was negative $866,384.
- Nine-month operating cash use was $450,785, compared with $644,958 in 2022. Financing provided $818,314, principally from Series A preferred stock proceeds, partly offset by offering costs and debt/advance repayments.
- Total liabilities were $5.05 million, including $323,750 of derivative liabilities. Debt included a $101,991 bank line balance, $607,740 of notes payable (including $357,740 of EIDL debt), and $334,722 net balance on a merchant cash advance. The advance carried weekly payments and was expected to be repaid by January 2024.
- After quarter-end, the October 12 IPO raised $5.0 million gross and $4.36 million net. The company reported using proceeds to repay approximately $375,000 of debt and accrued interest, $150,000 of related-party debt, and $1.0 million of accounts payable, and to fund $550,000 of cash consideration for two acquisitions. The $3.53 million of deferred offering costs was reclassified to equity upon the IPO.
- Management said post-IPO cash and access to financing should fund operations and debt requirements for the next 12 months. It also expects operating losses in the foreseeable future and cautioned that additional capital may not be available on acceptable terms.
Material developments, outlook, and risks
- The company completed its IPO after quarter-end, and its 3,436 Series A preferred shares automatically converted into 981,676 common shares. It also completed acquisitions of 51% interests in La Rosa Realty Lake Nona and Horeb Kissimmee in October for stated total consideration of approximately $4.74 million, largely in restricted stock.
- Other post-quarter equity issuances disclosed include 391,972 immediately vested RSU shares to employees and agents, 1,143,450 shares to service providers, 60,000 shares to the CEO under a debt agreement, and 594,000 shares under later consulting agreements. These issuances may materially affect share count and dilution.
- The company increased agent and service fees effective September 1, 2023. It reported agent count growth of just under 4% year over year, to 2,471 at September 30. Management intends to pursue further acquisitions and develop proprietary technology; no quantified earnings or revenue guidance is provided.
- Management cited high mortgage rates, weakening housing demand, reduced transaction activity, competition, dependence on agents and key personnel, execution of its growth strategy, and potential changes to real-estate commission practices as risks. Cybersecurity, privacy, and third-party technology risks are also discussed.
- Two lawsuits remained pending: a former COO’s claim seeking alleged severance of $249,000 and a former contractor’s unspecified commission claim. The company said it considers the claims without merit and not expected to have a material adverse effect, but outcomes are uncertain.
- The filing flags possible violation of Exchange Act Section 13(k) relating to $45,413 of advances to an entity controlled by the CEO. After the IPO, the compensation committee determined the receivable would be charged against the CEO’s annual bonus; the company warned sanctions could adversely affect it.
- Management concluded disclosure controls and procedures were ineffective at September 30, citing limited finance resources and procedures still being established. The filing reports no material change in internal control over financial reporting during the quarter.
Most important facts to verify
- Available operating liquidity after excluding restricted cash, and the actual remaining IPO proceeds after debt, payables, and acquisition payments.
- Post-IPO fully diluted share count, including acquired-company consideration, RSUs, consultant/service-provider shares, options, warrants, and any further awards.
- Whether the two acquisitions deliver expected revenue and profitability, and the final purchase accounting and acquired liabilities.
- Progress in improving gross margins and controlling financing costs, alongside transaction volume and agent growth.
- Resolution and financial exposure from the pending lawsuits and the Section 13(k) related-party advance issue.
- Remediation of ineffective disclosure controls and finance-function capacity as a newly public company.