Fathom Holdings Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Unless noted otherwise, financial amounts below are in U.S. dollars and millions. Fathom operates a technology-enabled real estate platform spanning brokerage, mortgage, title, insurance and software services.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $90.1 | $49.6 | +81% |
| Operating loss | $(5.6) | $(3.4) | Loss increased |
| Net loss | $(6.0) | $(3.4) | Loss increased |
| Net loss per share, diluted | $(0.37) | $(0.25) | — |
| Adjusted EBITDA (non-GAAP) | $(2.1) | $(2.0) | Loss increased slightly |
| Cash from operating activities | $1.6 | $(1.0) | Improved |
Gross commission income was $84.0 million, up 71%; other service revenue was $6.0 million versus $0.5 million. Management attributed brokerage growth to higher transaction volume and average revenue per transaction. Operating expenses rose 80% to $95.7 million. Commission and agent-related costs were $79.5 million; general and administrative expense was $10.9 million. The filing does not present a consolidated gross-profit or gross-margin measure.
Cash and cash equivalents were $30.5 million at March 31, down from $37.8 million at year-end 2021; net working capital was $26.0 million, down from $33.4 million. Investing cash outflow was $2.7 million, including acquisitions, equipment and intangible-asset purchases. Financing cash outflow was $6.3 million, including a net $4.9 million reduction in warehouse-line borrowings, $1.0 million of share repurchases and $0.5 million of debt principal payments. Operating cash flow included substantial mortgage-loan originations and sale proceeds, so it reflects mortgage working-capital movements as well as operating results.
Total liabilities were $24.0 million. Warehouse-line borrowings were $8.2 million, secured by mortgage loans; other debt totaled $0.6 million, of which $0.5 million was current. Current assets were $46.2 million and current liabilities were $20.2 million. Mortgage subsidiary Encompass reported $3.3 million of adjusted net worth and $4.2 million of liquid assets, above its stated regulatory minimums.
Material changes and business developments
- Real estate transactions increased 47% to 10,087 from 6,874; average revenue per transaction rose 24% to $8,931. Agent count grew 49% to 9,006 from 6,045.
- Q1 acquisitions: Cornerstone Financial, a mortgage business, and iPro Realty Network, a brokerage business. Aggregate consideration was approximately $8.9 million, including cash and 435,294 shares; purchase-price allocations remained provisional. The acquisitions added approximately $4.9 million of goodwill and $3.6 million of finite-lived intangibles. Their operating results were not material to the quarter.
- Other service revenue and operations/support costs reflect the company’s expanded mortgage, title, insurance and technology businesses, including prior acquisitions. Intangible amortization and stock-based compensation also increased materially.
- The board authorized up to $10 million in share repurchases in March. The company repurchased 83,811 shares for approximately $1.0 million in Q1; it reported a further 226,233 shares purchased for approximately $1.93 million in April.
Outlook, risks and unusual items
- No specific revenue, earnings or cash-flow guidance was provided. Management expects cash on hand and anticipated operating cash flows to fund operations for at least 12 months from issuance of the statements. It expects continued investment and expense growth, particularly from acquisitions, scaling and business integration; it anticipates G&A as a share of revenue may decline over the longer term if revenue grows.
- The company has a history of operating losses and negative operating cash flow and may need additional financing if growth, acquisitions or market conditions require it. Additional funding may not be available on acceptable terms and could dilute shareholders.
- Housing demand and results are exposed to interest rates, mortgage availability, economic conditions, consumer confidence and home-sale activity. Management said COVID-19’s impact had been minimal through Q1 but could not estimate future effects; inflation, rising interest rates and the Russia-Ukraine conflict were also cited as uncertainties.
- The $2.4 million of stock-based compensation and $1.1 million of depreciation and amortization were significant. Adjusted EBITDA excludes stock-based compensation, acquisition costs and other items; the company cautions that this non-GAAP measure is not a substitute for GAAP results.
- Warehouse facilities carry financial and other covenants; Encompass was compliant at quarter-end. One facility with approximately $2.4 million outstanding was due to expire in July 2022. The filing reports no material litigation at March 31, 2022, while noting ordinary-course disputes and regulatory examinations are possible.
Important facts for investors to verify
- Whether transaction and agent growth can be sustained and translated into improved GAAP profitability, given the widening net loss.
- The sustainability and composition of positive operating cash flow, including mortgage-loan originations, sales and warehouse-line movements.
- Final purchase accounting for Cornerstone and iPro, acquisition integration costs, and the returns generated by the acquired businesses.
- Cash use for acquisitions, repurchases and operating investment, and management’s 12-month liquidity assessment under weaker housing or financing conditions.
- Renewal or replacement of the July 2022 warehouse facility and continued compliance with mortgage-lending covenants and regulatory net-worth requirements.