Fathom Holdings Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. The unaudited filing covers Fathom’s cloud-based residential real estate brokerage platform, which earns primarily transaction-based commissions. The company operates as one reporting segment.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $38.69 million | $27.79 million | $67.53 million | $45.93 million |
| Gross profit (gross margin) | $2.33 million (6.0%) | $1.77 million (6.4%) | $4.48 million (6.6%) | $3.05 million (6.6%) |
| Operating income (loss) | $184,457 | ($1.02 million) | $175,524 | ($2.46 million) |
| Net income (loss) | $160,798 | ($1.04 million) | $118,027 | ($2.51 million) |
| Adjusted EBITDA (non-GAAP) | $329,446 | ($361,054) | $464,509 | ($882,793) |
- Revenue increased 39% in Q2 and 47% in the first half. Management attributed growth to higher transaction volume and revenue per transaction, primarily from rising home prices. Transactions rose from approximately 4,500 to 5,800 in Q2 and from 7,600 to 10,100 in the first half. Agent count increased 39% year over year, to 4,554 at June 30.
- Cost of revenue grew 40% in Q2 and 47% in the first half, broadly tracking revenue growth. Q2 gross margin was lower year over year; first-half gross margin was approximately unchanged.
- Operating expenses declined 23% in Q2 and 22% in the first half. General and administrative expense fell 27%, largely due to lower share-based compensation and professional fees. Marketing expense increased substantially, from a low prior-year base.
- Cash from operations was $649,547 for the first half, versus cash used of $449,369 in 2019. The 2020 result included a $1.54 million increase in accounts payable and accrued liabilities, partly offset by increases in accounts receivable and agent-fee receivables. Investing used $236,769; financing provided $498,084. Cash rose to $1.49 million from $579,416 at year-end.
- At June 30, current assets were $3.86 million and current liabilities $4.59 million, leaving a $722,764 working-capital deficit. Total liabilities were $5.58 million. Notes payable totaled $953,581, including PPP and SBA loans; the automobile loan was $43,677. Lease liabilities totaled $216,581.
Changes, outlook, and risks
- IPO after quarter-end: On August 4, 2020, the company completed an IPO of 3.43 million shares at $10 per share, receiving net proceeds of $31.3 million. Management said the proceeds, together with its operating plan, alleviated the substantial doubt about going concern raised by negative working capital, stockholders’ deficit, historical operating losses, and cash-flow history. The IPO proceeds were not reflected in June 30 cash.
- COVID-19: Management said the pandemic’s effects on housing activity and the company’s financial condition, liquidity, and results could be material, but could not estimate the impact for 2020 or beyond. Cost-saving steps included deferring planned spending, ending non-essential travel and in-person training, and temporary voluntary executive salary reductions in March and April; full salaries resumed in May.
- Funding and debt: The company received a $303,681 PPP loan and a $149,900 SBA EIDL loan during the period. PPP forgiveness is conditional, and the company gave no assurance that any portion would be forgiven. The SBA loan carries 3.75% interest and a 30-year term; a related $10,000 grant was recorded as other income.
- Management outlook: The company expected cash and future operating cash flows to cover at least the next 12 months, assuming continued agent and transaction growth and sales sufficient to cover forecast expenses. It noted that future capital needs depend on growth, technology investment, housing conditions, and the evolving pandemic. No specific revenue or earnings guidance was provided.
- Controls and proceedings: Management concluded disclosure controls were ineffective at June 30 because of material weaknesses. Identified issues included insufficient accounting/reporting expertise, inadequate reconciliation between revenue-tracking and general-ledger systems (which led to material revenue adjustments in 2018 and 2019), and weaknesses in system access and program-change controls. Remediation was underway. The filing reported no material litigation and no material changes to previously disclosed risk factors.
- Other unusual items: The company approved a 4.71352-for-one reverse stock split on July 10; share and per-share figures in the filing were retroactively adjusted. The underwriter also received warrants to purchase 240,100 shares at $11 per share, exercisable beginning January 2021.
Most important facts for investors to verify
- Whether post-IPO cash proceeds and subsequent operating performance support liquidity and the company’s stated going-concern outlook.
- Whether transaction growth and higher revenue per transaction continue, and whether the low gross margin can be sustained or improved.
- How much of operating cash flow reflects durable earnings versus payment timing and higher accrued liabilities.
- Whether PPP loan forgiveness is obtained and how the company services its remaining debt and lease obligations.
- Progress in remediating material weaknesses, particularly revenue reconciliation and information-system controls.
- Actual COVID-19 effects on transaction activity, agent growth, home prices, and financing conditions; management said these effects could not yet be reliably estimated.
- Interpret non-GAAP Adjusted EBITDA alongside GAAP results: it excludes share-based compensation and depreciation and amortization, among other items.