Better Home & Finance Holding Company — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. The company provides mortgage lending and related homeownership services in the U.S. and is expanding in the U.K. The August 22, 2023 business combination with Aurora was accounted for as a reverse recapitalization; comparative results reflect Better’s prior operations.
Financial performance and liquidity
- Q3 revenue: $16.4 million, down 43% from $28.7 million. Excluding the prior-year cash-offer program revenue, revenue declined 13%. Mortgage platform revenue was $14.2 million; other platform revenue was $1.3 million; net interest income was $0.9 million.
- Q3 results: Operating loss was $91.6 million versus $177.3 million; net loss was $340.0 million versus $226.6 million. Basic and diluted loss per share was $0.68 versus $0.77. The quarter’s net loss included a $237.7 million noncash loss from remeasurement of an embedded derivative that became valueless when the pre-closing bridge notes converted or were exchanged at the business-combination closing.
- Nine-month results: Revenue was $67.6 million, down 82% from $376.4 million; excluding cash-offer revenue, revenue declined 55%. Operating loss was $224.4 million versus $733.2 million, and net loss was $475.4 million versus $625.9 million. The prior-year comparison included substantial cash-offer activity and bridge-note interest and fair-value items.
- Mortgage activity and margin: Funded loan volume was $731 million in Q3, down 36%, and $2.49 billion year to date, down 77%. Gain-on-sale margin rose to 1.94% from 0.98% in Q3 and to 2.21% from 0.99% year to date, reflecting pricing changes and market volatility, despite much lower volume.
- Cash flow: For the first nine months, operating cash flow was negative $76.2 million, investing cash flow was negative $42.0 million, and financing cash flow was positive $327.7 million. Cash, cash equivalents and restricted cash increased $208.5 million to $554.6 million.
- Balance sheet and debt at September 30: Cash and cash equivalents were $526.8 million, restricted cash $27.8 million, and short-term investments $29.8 million. Warehouse borrowings were $73.5 million against $424 million of stated facility capacity. SoftBank-affiliated post-closing convertible notes had a $513.0 million carrying value, bear 1% annual interest and mature in August 2028. Stockholders’ equity was $157.2 million, versus a $610.1 million deficit at year-end 2022.
- The company repaid its $144.4 million corporate line of credit in August, incurring a $4.5 million make-whole payment and writing off $5.1 million of remaining debt issuance costs. The former $750 million bridge notes were converted or exchanged for common shares.
Material changes and management commentary
- Management attributed sharply lower year-to-date revenue primarily to reduced mortgage volume and the winding down of the Better Cash Offer program. The company completed no cash-offer transactions in Q3, compared with 15 a year earlier, and says it is not actively seeking such customers.
- Management says higher interest rates and challenging housing conditions have reduced refinance and purchase activity. It is prioritizing more profitable originations, and reported market share of 0.2% for the first nine months, down from 0.6%.
- The company continued cost reductions, including headcount and real-estate footprint reductions, and decided in Q2 to wind down its in-house real-estate agent business. Q3 general and administrative expense rose 27% to $59.2 million, partly due to business-combination-related compensation and stock-based compensation; total Q3 stock-based compensation was $25.0 million.
- Management reported that the business combination proceeds and convertible-note funding alleviate the conditions that had raised substantial doubt about going concern, and believes available resources are sufficient for at least 12 months from issuance of the financial statements. It cautioned that losses may continue and additional financing may be needed if cash and operating resources prove insufficient. No numerical operating guidance was provided.
Risks, contingencies and unusual items
- Funding and liquidity: Mortgage origination depends on short-term warehouse facilities, which have collateral, liquidity and financial covenants, and may be subject to margin calls or nonrenewal. The company says it was compliant with warehouse covenants at September 30, but may need amendments, forbearance or waivers in 2024. One facility that matured October 31 was extended only to November 30, 2023.
- FNMA requirements: FNMA notified the company in March and May 2023 that it failed certain profitability and net-worth requirements. Forbearance and additional requirements remain subject to FNMA’s administrative process. A July security agreement requires at least $5 million of cash collateral through year-end 2023, with future amounts determined quarterly under the agreement.
- Nasdaq listing: The company received an October 12 notice for failure to meet the $1 minimum bid-price requirement. It had 180 days to regain compliance, with a possible additional period subject to Nasdaq conditions. Delisting could reduce liquidity and, under the convertible-note indenture, trigger a requirement to redeem the notes before maturity.
- Controls: Management concluded disclosure controls were ineffective at September 30 because material weaknesses in internal control over financial reporting were not fully remediated. Identified issues include tone at the top, limited accounting staffing and a material error in a prior 409A valuation. Remediation is in progress.
- Legal and regulatory matters: The company reported an $8.4 million accrued liability for an employee overtime dispute and a $9.3 million estimate for potential consumer refunds related to TRID disclosure defects. A former executive’s litigation continues in part after the court dismissed several claims. The SEC informed the company in August that it had concluded its investigation and did not intend to recommend enforcement action.
- Other matters: The loan repurchase reserve was $21.8 million. Three purchasers accounted for 56%, 22% and 11% of Q3 loans sold, creating purchaser concentration. The filing also describes related-party transactions and executive loan forgiveness associated with the business-combination closing.
Important facts for investors to verify
- Whether cash burn, loan volume and gain-on-sale margins support management’s stated 12-month liquidity assessment.
- Current warehouse capacity, facility maturities and covenant status, as well as any new FNMA collateral or forbearance requirements.
- Progress toward Nasdaq bid-price compliance and any potential reverse stock split or note-redemption consequences.
- Remediation of material weaknesses and updates to the TRID accrual, labor litigation and loan repurchase exposure.
- The terms, conversion economics and dilution implications of the $528.6 million SoftBank-affiliated convertible notes, alongside related-party governance disclosures.