Fathom Holdings Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Unaudited results. Fathom operates a technology-enabled real estate platform spanning brokerage, mortgage, title, insurance, and SaaS services.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $84.2 million | $38.7 million | $133.8 million | $67.5 million |
| Operating income (loss) | $(4.7) million | $0.2 million | $(8.2) million | $0.2 million |
| Net income (loss) | $(2.1) million | $0.2 million | $(5.5) million | $0.1 million |
| Adjusted EBITDA, non-GAAP | $(2.3) million | $0.3 million | $(4.3) million | $0.5 million |
| Basic and diluted EPS | $(0.15) | $0.02 | $(0.40) | $0.01 |
Q2 operating margin was approximately -5.6% and net margin approximately -2.5%; the comparable 2020 quarter was marginally profitable. For the first half, operating margin was approximately -6.1% and net margin approximately -4.1%. Brokerage commissions remained the dominant revenue source. Q2 commission and agent-related costs were $76.7 million, about 91% of revenue.
- Growth drivers: Q2 gross commission income rose 107% year over year. Transactions increased 74% to approximately 10,100, while average revenue per transaction rose 19% to $7,969. The agent network grew 53% to 6,950 at June 30.
- Other services: Q2 other service revenue was $3.9 million, primarily associated with acquired businesses; the prior-year quarter had none. Mortgage, technology, title, and insurance operations broadened the revenue mix.
- Expense growth: Q2 general and administrative expense increased 378% to $9.4 million, reflecting business growth, public-company costs, acquisitions, payroll, share-based compensation, and transaction costs. Depreciation and amortization also increased substantially following acquisitions.
Cash, debt, and liquidity
- At June 30, cash and cash equivalents were $12.8 million, down from $28.6 million at December 31, 2020; restricted cash was $3.5 million. The cash-flow statement reports combined cash, cash equivalents, and restricted cash of $16.4 million.
- First-half operating cash flow was a use of $2.7 million, investing cash flow was a use of $12.0 million, and financing cash flow provided $1.5 million. Combined cash and restricted cash declined $13.2 million.
- Current assets were $31.1 million and current liabilities $24.5 million, leaving working capital of $6.6 million, down from $27.9 million at year-end 2020.
- Long-term debt was $1.0 million in total, including $0.6 million current and $0.4 million noncurrent. Warehouse-line borrowings were $9.4 million; mortgage loans held for sale were $9.6 million. Two warehouse agreements require minimum liquid assets of $0.5 million and $1.0 million, respectively.
- Management stated that existing cash and expected operating cash flows were expected to fund operations for at least 12 months from issuance. It also noted a history of operating losses and negative operating cash flows, acquisition-integration spending, and the possibility that additional financing could be needed.
Material changes, outlook, and risks
- Acquisitions and expansion: During the first half, Fathom acquired Red Barn and Epic Realty brokerages, Naberly technology assets, E4:9 (mortgage, insurance, and lead generation businesses), and LiveBy (SaaS). E4:9 and LiveBy contributed $3.3 million of revenue and $1.3 million of net loss from their respective acquisition dates through June 30. Acquisitions materially increased goodwill, intangible assets, leases, and operating costs; purchase-price valuations remained preliminary for several transactions.
- Taxes and unusual items: The company recorded a $2.6 million income-tax benefit, principally from releasing a valuation allowance after acquisition-related deferred tax liabilities supported realization of certain deferred tax assets. It expects to maintain a valuation allowance on remaining net deferred tax assets by year-end, citing its loss history. A previously assumed $50,600 PPP loan was forgiven, producing a $50,936 debt-extinguishment gain in the first half.
- Outlook: No quantified revenue, earnings, or margin guidance was provided. Management anticipated continued growth in agents and transactions, increased near-term general and administrative and marketing spending, and further acquisition-integration costs. Management cautioned that historical growth may not continue and that profitability is not assured.
- Market and business risks: Results depend on housing activity, home prices, mortgage availability and rates, and seasonal transaction patterns. COVID-19 and variants remained difficult to forecast. Other cited risks include acquisition integration and execution, competition, mortgage-loan sale and warehouse-funding exposure, regulatory compliance across new service lines, and potential need for additional capital.
- Controls and contingencies: Management concluded disclosure controls were ineffective at June 30 because of previously identified material weaknesses involving insufficient accounting and reporting personnel and revenue reconciliation and recording. Remediation was underway; controls at acquired businesses were still being integrated. The filing reported no material litigation as of June 30, while noting ordinary-course disputes and regulatory examinations.
Important facts for investors to verify
- Whether agent and transaction growth converts to sustainable operating leverage and profitability, given rising overhead and acquisition-related expenses.
- Integration progress and realized results from E4:9, LiveBy, and the other acquisitions, including final purchase-price allocations and goodwill or intangible-asset assumptions.
- Cash burn, working-capital trends, warehouse-line availability and covenants, and the timing or need for additional financing.
- Progress in remediating the material weaknesses and maintaining reliable financial reporting as the business expands.
- Exposure to housing-market, mortgage-rate, COVID-19, regulatory, and mortgage-loan sale risks, as well as the basis for the tax benefit and future valuation allowance.