Fathom Holdings Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; comparisons are with the same 2021 periods unless stated otherwise. Amounts are in U.S. dollars; financial statement amounts below are rounded to millions. Fathom operates a technology-enabled real estate platform spanning brokerage, mortgage, title, insurance and software services.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $111.3m | $100.9m | $329.5m | $234.8m |
| Operating loss | $(5.9)m | $(3.7)m | $(16.7)m | $(11.9)m |
| Net loss | $(6.0)m | $(3.4)m | $(17.7)m | $(8.9)m |
| Adjusted EBITDA (non-GAAP) | $(2.3)m | $(1.8)m | $(6.3)m | $(6.1)m |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(6.5)m | $(6.6)m |
- Q3 revenue rose 10%; nine-month revenue rose 40%. Gross commission income increased 10% in Q3 and 38% year to date. Other service revenue increased 11% and 83%, respectively.
- Q3 operating and net loss margins were approximately 5.3% and 5.4% of revenue, compared with 3.7% and 3.3% in Q3 2021. Nine-month operating and net loss margins were approximately 5.1% and 5.4%, versus 5.1% and 3.8% in 2021.
- Nine-month investing cash outflow was $5.9m, including $2.5m for acquisitions, $1.0m for property and equipment, and $2.5m for intangible assets. Financing cash outflow was $10.8m, including $6.0m of share repurchases and net reductions in warehouse borrowing.
- Cash and cash equivalents were $14.5m at September 30, down from $37.8m at December 31, 2021. Including restricted cash, cash declined $23.2m to $14.7m. Working capital was $12.1m, down from $33.4m; current assets were $32.8m and current liabilities $20.7m.
- Total liabilities were $26.4m. Warehouse lines totaled $8.5m; other debt was $0.8m, including $0.5m current. Lease liabilities totaled $7.0m. Encompass had three warehouse facilities with stated combined limits of $55.0m; outstanding balances are included in warehouse lines.
- Stockholders’ equity was $68.6m, down from $80.2m at year-end. Accumulated deficit was $37.7m. Shares outstanding were 17,074,582 at September 30; the filing reports 17,074,582 as of November 8.
Material changes and management commentary
- Quarterly transaction volume increased 5% to about 12,077, while average revenue per transaction rose 5% to $8,692. Nine-month transactions increased 25% to about 35,464. The agent count rose 33% year over year to 9,991.
- Management attributed growth to agent expansion, acquisitions and higher home prices. Other-service growth reflected acquisitions and growth in insurance and LiveBy sales. The company acquired Cornerstone Financial and iPro in early 2022, expanding mortgage operations around Washington, D.C., and brokerage in Utah.
- Operating expenses grew 12% in Q3 and 40% year to date, matching or exceeding revenue growth. Management cited higher transaction-related commissions, acquisitions, stock compensation, technology investment and marketing. It said G&A excluding non-cash stock compensation was expected to decline in absolute dollars due to cost-cutting measures.
- Management stated that cash, planned spending and expected operating cash flows should fund operations for at least 12 months from issuance of the statements. The company also noted that additional funding could be needed if market conditions deteriorate; equity or debt financing might be unavailable or unfavorable.
Outlook, risks and unusual items
- No quantified revenue, earnings or transaction guidance is provided. Management’s liquidity assessment assumes planned spending, moderate agent and transaction growth, increased transaction fees and improved cross-selling among business lines.
- Management identified inflation, rising interest rates, economic uncertainty and weaker housing demand as risks. It said the effects of COVID-19 and the Russia-Ukraine conflict were uncertain and could adversely affect housing activity, liquidity and results.
- One mortgage warehouse facility had an earnings-covenant breach at September 30; the company reported receiving a waiver from the bank. The other two facilities were reported in covenant compliance. Encompass reported $3.7m of adjusted net worth and $4.3m of liquid assets against stated regulatory requirements.
- The company reported no material litigation as of September 30. It disclosed ordinary-course litigation and regulatory examination risks, including potential employment classification, brokerage, consumer and mortgage matters.
- The board authorized up to $10m of repurchases. The company repurchased 686,097 shares for about $6.0m during the first nine months; none were repurchased in Q3, and about $4.0m remained authorized. Acquisitions involved cash and stock consideration; purchase-price valuations remained subject to finalization.
- Stock-based compensation was $2.1m in Q3 and $6.5m year to date. Adjusted EBITDA excludes stock compensation, acquisition costs and other items; it is a non-GAAP measure and should not be viewed as a substitute for GAAP results.
Most important facts for investors to verify
- Whether cash burn and working-capital declines continue, and whether operating cash flow improves enough to support management’s 12-month liquidity assessment.
- Whether the warehouse covenant waiver remains effective and whether mortgage warehouse facilities renew or change terms in 2023.
- How higher rates and housing-market contraction affect transactions, revenue per transaction, mortgage activity and the company’s loss trajectory.
- Whether management’s stated cost reductions materialize while acquisitions, agent growth and technology investment continue.
- The eventual finalized purchase accounting for Cornerstone and iPro, and the impact of acquisition-related goodwill and intangible-asset amortization.
- The sustainability and investor impact of share repurchases alongside operating losses and reduced cash balances.