Fathom Holdings Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Unaudited consolidated financial statements; amounts below are in U.S. dollars unless noted. Fathom operates a technology-enabled real estate platform spanning brokerage, mortgage, technology, title and insurance services.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $128.2 million | $84.2 million | $218.3 million | $133.8 million |
| Operating loss | $5.3 million | $4.7 million | $10.9 million | $8.2 million |
| Net loss | $5.7 million | $2.1 million | $11.7 million | $5.5 million |
| Adjusted EBITDA (non-GAAP) | $(2.0) million | $(2.3) million | $(4.1) million | $(4.3) million |
| Loss per share, basic and diluted | $(0.35) | $(0.15) | $(0.72) | $(0.40) |
- Q2 revenue increased 52%; gross commission income rose 52% to $122.1 million and other service revenue rose 56% to $6.1 million. Management attributed growth mainly to higher transaction volume and home prices, plus acquired businesses.
- Q2 operating expenses increased 50% to $133.5 million. Commission and agent-related costs rose 52% with revenue; general and administrative expense rose 41% to $12.4 million, marketing rose 252% to $1.3 million, and depreciation and amortization rose 86% to $0.8 million.
- Q2 operating loss was approximately 4.1% of revenue and net loss approximately 4.4%. The filing does not present a conventional gross margin measure.
- For the six-month period, operating cash flow was $0.4 million, compared with cash used of $2.7 million in 2021. The cash flow statement reports positive operating cash flow; the MD&A text inconsistently describes it as cash used. Investing activities used $5.2 million and financing activities used $13.5 million. Cash, cash equivalents and restricted cash declined $18.3 million to $19.6 million.
- At June 30, cash and cash equivalents were $19.5 million, current assets $33.8 million, current liabilities $17.8 million and working capital $16.1 million (down from $33.4 million at December 31, 2021). Total assets were $96.4 million and total liabilities $23.7 million.
- Warehouse-line borrowings were $6.1 million, down from $9.6 million at year-end. Other debt totaled $0.5 million; lease liabilities totaled $7.0 million. Mortgage warehouse facilities primarily fund loans pending sale and should be distinguished from general corporate debt.
Material changes and developments
- Agent count increased 38% year over year to 9,560 at June 30. Q2 transactions increased 31% to approximately 13,215; average revenue per transaction increased 15.9% to $9,236. Six-month transactions increased 36% to approximately 23,000.
- Fathom acquired Cornerstone Financial in January and iPro Realty Network in February 2022, expanding mortgage operations in the Washington, D.C. area and brokerage reach in Utah. Purchase accounting remained subject to final valuation at June 30.
- The board authorized up to $10 million in share repurchases in March. The company repurchased 686,097 shares for approximately $6.0 million in the first half, leaving approximately $4.0 million authorized at June 30.
- Brokerage segment Adjusted EBITDA was $1.8 million for Q2, versus $0.5 million in 2021. Mortgage and Technology segments recorded Q2 Adjusted EBITDA losses of $0.9 million and $0.3 million, respectively; corporate and other services had a $2.6 million loss.
- The 2021 comparison includes an approximately $2.6 million income-tax benefit from releasing a valuation allowance; 2022 recorded tax expense. This contributed to the larger year-over-year net loss despite improved Adjusted EBITDA.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided. Management expects cash balances and anticipated operating cash flows to fund requirements for at least 12 months from issuance of the statements, while noting that additional funding could be needed if markets deteriorate; equity or debt funding may not be available on favorable terms.
- Management expects general and administrative and marketing expenses to rise in absolute dollars as the company expands and integrates acquisitions, while anticipating those expenses to decline as a percentage of revenue over the longer term if revenue grows.
- As of June 30, Encompass was not compliant with earnings covenants under two warehouse facilities. It had received one waiver and expected the second; failure to obtain the remaining waiver could allow a lender to terminate a facility. One warehouse line was due to expire in September 2022.
- Management identifies housing-market and interest-rate changes, inflation, recessionary conditions, mortgage availability, COVID-19 effects and the Russia-Ukraine conflict as risks to transactions, liquidity and results. The company says COVID-19’s impact to date had been minimal but future effects could not be estimated.
- The company reported no material litigation as of June 30. Encompass reported adjusted net worth of approximately $3.1 million and liquid assets of $4.1 million against stated regulatory minimums of $1.0 million net worth and $0.2 million liquid assets.
- Disclosure controls were deemed effective at a reasonable-assurance level. The company was implementing new accounting systems and updating related internal processes; management reported no other material control changes during the quarter.
Investor verification priorities
- Confirm the status and terms of the outstanding warehouse covenant waiver and the September 2022 facility expiration, including any renewal or replacement financing.
- Assess the sustainability of revenue growth as transaction volume, home prices and interest rates change, and track the contribution of acquired businesses.
- Reconcile reported operating cash flow with the MD&A’s inconsistent description, and assess cash usage, mortgage-loan funding needs and remaining liquidity.
- Monitor whether operating expenses, especially general and administrative and marketing costs, scale more slowly than revenue and whether Adjusted EBITDA moves toward breakeven.
- Review final purchase-price allocations for Cornerstone and iPro, the effect of acquisition-related goodwill and intangibles, and remaining share-repurchase activity.