Fathom Holdings Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Amounts below are in U.S. dollars; financial statement figures are rounded to millions unless noted. The filing presents unaudited consolidated results.
Business context
Fathom is a technology-driven real estate services platform with brokerage, mortgage, title, insurance and software businesses. Its brokerage operation is the largest revenue source. The company reported approximately 10,930 agent licenses at June 30, up 14.3% year over year.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $100.1m | $128.2m | $177.6m | $218.3m |
| Operating loss | $(4.2)m | $(5.3)m | $(9.8)m | $(10.9)m |
| Net loss | $(4.3)m | $(5.7)m | $(10.0)m | $(11.7)m |
| Adjusted EBITDA (non-GAAP) | $0.5m | $(2.0)m | $(0.9)m | $(4.1)m |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $(4.7)m | $0.4m |
Q2 gross commission income fell 22% to $94.6m; other service revenue declined 11% to $5.5m. The filing attributes the revenue decline primarily to lower transaction volume and average home prices amid higher interest rates. Q2 transactions declined 16.7% year over year, while average revenue per transaction fell 7.0% to $8,593.
Q2 operating expenses decreased 22% to $104.3m. General and administrative expense fell 18% and marketing expense fell 30%, partly offset by higher technology and development expense, up 55%. Commission and agent-related costs declined 24%, broadly tracking lower revenue and reflecting increased agent fees. Q2 gross profit after commission and agent-related costs was approximately $11.2m, or 11.2% of revenue, compared with $11.9m, or 9.3%, a year earlier. Net loss per share was $0.27, versus $0.35.
Management reported that total-company Adjusted EBITDA reached breakeven in Q2, with $0.5m reported. This non-GAAP measure excludes, among other items, stock-based compensation and depreciation and amortization; it is not equivalent to GAAP profitability. Q2 stock-based compensation was $3.2m.
Liquidity, cash flow and debt
At June 30, cash and cash equivalents were $9.1m, versus $8.3m at year-end 2022. Net working capital was $7.4m, up from $6.3m; current assets were $24.8m and current liabilities $17.4m. Six-month operating cash flow was negative $4.7m, compared with positive $0.4m in 2022. Investing cash outflow was $0.9m; financing provided $6.4m, including net proceeds from new borrowing. Cash, cash equivalents and restricted cash totaled $9.2m at period end.
Total debt, including warehouse lines, was approximately $11.0m: $7.5m drawn on mortgage warehouse lines and $3.5m of other debt, including a new convertible note. In April, Fathom issued a $3.5m senior secured convertible note and received $3.3m net proceeds. The note bears interest at monthly average SOFR plus 5%, with an 8% annual minimum, matures April 12, 2025, is secured by company assets, and is convertible initially at $6 per share, subject to adjustments and ownership limits.
Mortgage warehouse facilities expire in September 2023, December 2023 and September 2023. Fathom was in compliance with two facilities’ covenants at June 30; it was out of compliance with an earnings covenant on the third, but the lender waived the noncompliance.
Changes, outlook and risks
For the first half, revenue decreased 19% year over year as real estate transaction volume fell 15.2%; average revenue per transaction declined 4.0%. Management cited higher interest rates, reduced consumer sentiment and inflationary pressure as headwinds. Cost reductions and higher agent transaction fees helped reduce losses, while the company continued investing in its intelliAgent platform and LiveBy business.
Management expects available cash, planned budgets and anticipated operating cash flows to fund operations for at least one year from issuance of the statements. It says it remains focused on positive cash flow and profitable growth; the filing provides no specific revenue or earnings guidance. Management also noted that additional financing could be needed if market conditions deteriorate, and that debt or equity funding may not be available on acceptable terms. The company had a history of operating losses and negative operating cash flow.
Key risks include a prolonged housing-market slowdown, interest-rate and inflation changes, dependence on transaction volumes, competition, need for future funding, potential dilution from convertible debt, warehouse facility renewals and covenant compliance, and possible goodwill impairment if business performance or valuation assumptions weaken. The filing reported no material litigation with a reasonable possibility of loss and no material subsequent events. Disclosure controls were assessed as effective; the company is implementing new accounting systems and updating related processes.
Important facts for investors to verify
- Whether Q2 Adjusted EBITDA breakeven translates into sustained positive operating cash flow and GAAP profitability.
- Cash use, liquidity runway and any need for additional financing, especially if housing transactions remain weak.
- Renewal or replacement of warehouse facilities that expired or were due to expire in September and December 2023, and the status of the waived covenant breach.
- Interest costs, collateral implications and potential share dilution under the secured convertible note.
- Whether agent growth, increased fees and cost reductions can offset lower transactions and average home prices without impairing retention or growth.
- Performance of mortgage, title and technology operations, including ongoing investment needs and goodwill valuation assumptions.