Fathom Holdings Inc. quarterly report, Q3 FY2020

Fathom Holdings Inc. — Q3 2020 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2020. The company operates a cloud-based residential real estate brokerage platform, earning commissions when transactions close. Results are unaudited.

Financial performance

Q3 revenue grew 74%; management attributed the increase to approximately 8,100 transactions versus 5,200 a year earlier and higher revenue per transaction, primarily from rising home prices. For the nine-month period, transactions rose to approximately 18,200 from 12,800. Agents increased 38% year over year to 5,026 at September 30. Cost of revenue grew in line with revenue. Q3 operating expenses rose 57%, including higher public-company, personnel, professional-services, insurance, share-based compensation, and advertising costs. Nine-month operating expenses were nearly flat; lower share-based compensation offset increased marketing and other costs.

Cash, liquidity and debt

• Cash and cash equivalents were $30.99 million at September 30, 2020, versus $0.58 million at December 31, 2019. Working capital was $29.65 million, compared with a $1.28 million deficit.
• Nine-month operating cash use was $0.33 million and investing cash use was $0.37 million. Financing provided $31.11 million, principally from the August IPO.
• The IPO issued 3.43 million shares at $10 per share and generated $31.1 million net proceeds. The balance sheet showed $0.49 million of notes payable and $0.04 million of automobile debt, in addition to $0.25 million of lease liabilities.
• Management said cash, planned spending, and expected operating cash flows should fund operations for at least 12 months, assuming continued growth and sufficient transaction volumes. This is a forward-looking assessment, not a guarantee.

Changes, outlook and risks

• The nine-month net loss narrowed substantially year over year, and operating results were near break-even, while gross margins declined modestly.
• Management expects general and administrative and marketing expense to rise in absolute dollars in the near term as the business expands and meets public-company requirements. It expects these costs as a share of revenue to decline over time if revenue grows. The filing gives no specific numerical earnings or revenue guidance.
• COVID-19 effects remained uncertain. Risks cited include restrictions on in-person activity, reduced demand for home tours, unemployment and recessionary pressures, and tighter mortgage availability. The company took cost-saving measures early in the pandemic; temporary executive and senior-employee salary reductions ended in May.
• The company disclosed a history of operating losses and negative operating cash flow. Management’s liquidity outlook depends on planned growth and sales volumes; additional financing may be needed and could be unavailable or dilute shareholders.
• Disclosure controls and procedures were deemed ineffective at September 30 because of material weaknesses, including insufficient accounting expertise, inadequate reconciliation between revenue tracking and general-ledger systems, and deficient system access and change controls. Remediation was underway.
• The company repaid a $500,000 related-party note in August. It had $303,681 of PPP borrowing and a $149,900 SBA disaster loan outstanding; PPP forgiveness was uncertain. A $10,000 SBA grant was recorded as other income.
• Subsequent to quarter-end, the company agreed to acquire Verus Title for approximately $0.7 million cash and $1.0 million in company shares. It also issued 124,666 stock grants on October 19. The underwriter received warrants for 240,100 shares at $11 per share.
• No material litigation was reported as of September 30, and the filing reported no material changes to previously disclosed risk factors.

Important facts for investors to verify

1. Whether transaction growth, agent additions, and revenue per transaction are sustainable, and how brokerage commission economics affect the thin gross margin.
2. Whether the company achieves positive operating cash flow and meets its liquidity plan under adverse housing-market or COVID-19 conditions.
3. Whether the PPP loan qualifies for forgiveness and what repayment obligations remain.
4. Progress and effectiveness of remediation for the disclosed control weaknesses, especially revenue reconciliation and system controls.
5. The completed terms, integration, and financial contribution of the Verus Title acquisition, along with dilution from stock awards and warrants.