Fathom Holdings Inc. — Q1 2024 Form 10-Q
Business and period: Unaudited results for the three months ended March 31, 2024, compared with Q1 2023. Fathom operates a technology-enabled real estate platform spanning brokerage, mortgage, title, insurance, and software services.
Financial performance
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Total revenue | $70.5 million | $77.5 million | Down 9% |
| Gross commission income | $65.4 million | $73.2 million | Down 11% |
| Other service revenue | $5.1 million | $4.4 million | Up 17% |
| Operating expenses | $76.2 million | $83.1 million | Down 8% |
| Operating loss | $(5.7) million | $(5.5) million | Loss widened $0.1 million |
| Net loss | $(5.9) million | $(5.7) million | Loss widened $0.2 million |
| Adjusted EBITDA, non-GAAP | $(1.5) million | $(1.4) million | Loss widened $0.2 million |
| Net loss per share | $(0.31) | $(0.36) | Improved $0.05 |
Real estate transactions fell 9.7% to 7,703, primarily amid higher interest rates; agent licenses grew 12.8% year over year to approximately 11,986. Average revenue per transaction declined 1.0% to $8,488. Mortgage activity supported the increase in other service revenue. Brokerage segment revenue was $65.4 million and segment Adjusted EBITDA was $0.8 million; Mortgage revenue was $2.3 million with a $0.5 million Adjusted EBITDA loss; Technology revenue was $1.1 million with a negligible Adjusted EBITDA loss.
Cash flow and liquidity: Operating cash use was $0.9 million, versus $1.6 million in Q1 2023; investing cash use was $0.5 million; financing cash use was $0.1 million. Cash and cash equivalents were $5.7 million at March 31, down from $7.4 million at year-end. Net working capital was $4.5 million, down from $6.8 million. Management said existing cash, expected operating cash flows, and other planned measures are expected to fund operations for at least 12 months from issuance of the statements.
Debt and obligations: Warehouse line borrowings were $8.5 million, against $22.5 million of total stated capacity; the two facilities mature in July and August 2024. Other debt totaled $3.7 million, including a $3.4 million carrying value for a senior secured convertible note due April 2025, bearing interest at the monthly average SOFR plus 5%, subject to an 8% floor. The note is secured by company assets and is convertible at an initial $6.00 per share. Lease liabilities totaled $6.1 million.
Changes, outlook, and risks
- Revenue fell mainly because of lower brokerage transaction volume, partially offset by agent growth and higher service revenue. Agent-related costs declined 12%, broadly tracking lower brokerage revenue; operations and support rose 31% and technology and development rose 23%.
- Beginning in January 2024, Fathom increased its annual agent fee from $600 to $700 and introduced additional fees for certain higher-priced property sales. Management cited these changes and cost initiatives as supporting future profitability, while continuing to focus on positive operating cash flow. No specific numerical revenue or earnings guidance was provided.
- On May 3, 2024, after quarter-end, Fathom sold Dagley Insurance Agency for $15.0 million, subject to purchase price adjustments: $8.0 million at closing, $4.0 million on the first anniversary, and $3.0 million on the second. Management expects limited insurance revenue in Q2 2024 and none thereafter.
- Management noted persistent housing-market pressure from elevated mortgage rates and subdued consumer demand. The company has a history of operating losses and negative operating cash flow; it warns that additional financing may be needed if markets deteriorate, and may not be available on acceptable terms.
- Fathom faces Texas antitrust class actions concerning broker commissions and was named in a South Carolina class action filed in April 2024. The company says it intends to defend the cases but cannot predict costs or outcomes; additional lawsuits are possible. The company cites its flat-fee model, while acknowledging broader industry changes could create adverse effects.
- Warehouse facilities contain covenants and were in compliance at March 31. Their near-term maturities and the secured convertible note are relevant liquidity and financing considerations. The filing also identifies goodwill impairment, mortgage market, regulatory, and litigation risks.
Important facts for investors to verify
- Whether transaction volumes, agent growth, and the new fee structure improve brokerage revenue and operating performance.
- Cash generation and liquidity after the Dagley sale, including the timing and receipt of its deferred $7.0 million consideration.
- Renewal or replacement of warehouse lines maturing in July and August 2024, and compliance with related covenants.
- Terms, interest cost, and potential dilution from the secured convertible note, as well as any other financing needs.
- Developments, defense costs, insurance coverage, and possible exposure from the real estate commission litigation.
- Effects of the insurance business sale on future revenue, earnings, and the company’s business mix.