Fathom Holdings Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Unaudited results; amounts below are in millions unless stated otherwise. Fathom operates a technology-enabled real estate services platform spanning residential brokerage, mortgage, title, insurance and SaaS.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $100.9 | $55.8 | $234.8 | $123.4 |
| Operating loss | $(3.7) | $(0.1) | $(11.9) | Income of $0.04 |
| Net loss | $(3.4) | $(0.2) | $(8.9) | $(0.07) |
| Adjusted EBITDA (non-GAAP) | $(1.8) | $0.006 | $(6.1) | $0.5 |
Q3 revenue increased 81%; nine-month revenue increased 90%. Gross commission income rose 71% in Q3 and 82% year to date. Management attributed growth to higher transaction volume and home prices: transactions increased 42% in Q3 and 56% for the nine months, while average revenue per transaction increased 20% and 17%, respectively. The company reported 7,536 agents at September 30, up 50% year over year.
Commission and agent-related costs grew broadly with revenue. General and administrative expense rose to $9.8 million in Q3 from $2.9 million, reflecting acquisitions, increased staffing and public-company costs, among other items. Calculated operating margin was approximately negative 3.7% in Q3 and negative 5.1% for the nine months. Adjusted EBITDA is a company-defined non-GAAP measure; it excludes items including share-based compensation and transaction costs.
Cash, debt and liquidity
- At September 30, cash and cash equivalents were $8.8 million; restricted cash was $3.6 million. Cash, cash equivalents and restricted cash totaled $12.3 million.
- Working capital was $3.1 million, down from $27.9 million at December 31, 2020. Current assets were $28.8 million and current liabilities $25.8 million.
- Nine-month operating cash flow was negative $6.6 million; investing cash flow was negative $13.6 million, including $11.0 million for acquisitions and assets; financing cash flow was positive $2.9 million. Combined cash and restricted cash fell $17.2 million from the start of the period.
- Warehouse lines totaled $10.3 million outstanding at quarter-end, secured by mortgage loans held for sale. Other debt totaled $1.4 million, including $1.2 million current. Lease liabilities totaled $4.6 million.
Material changes and unusual items
Fathom completed acquisitions of Red Barn, Naberly, E4:9, LiveBy and Epic during the first nine months. These expanded its brokerage footprint and added mortgage, insurance and technology services. Acquired businesses contributed to new other-service revenue, which was $5.6 million in Q3 and $10.1 million year to date. Acquisition-related goodwill and intangible assets increased substantially; goodwill was $20.3 million at quarter-end.
A $2.8 million nine-month income tax benefit primarily reflected release of a valuation allowance after acquisition-related deferred tax liabilities supported recognition of certain deferred tax assets. The company recorded a $0.1 million gain on debt extinguishment during the nine months.
Outlook, risks and contingencies
- No specific revenue, earnings or other numeric guidance was provided. Management said existing cash, its planned budget and expected sales volumes should fund operations for at least 12 months from issuance of the statements. It also noted potential need for additional financing, which may not be available on acceptable terms.
- The company was not in compliance with an income covenant on one warehouse facility during Q3 and obtained a lender waiver through December 31, 2021. The facility had approximately $6.2 million outstanding at September 30.
- Management cited real estate market and interest-rate sensitivity, COVID-19 uncertainty, and risks from integration and growth. The filing says the company could not estimate the impact of COVID-19, including variants.
- Disclosure controls and procedures were concluded to be ineffective at September 30 because of previously identified material weaknesses, including insufficient accounting and reporting personnel and ineffective revenue reconciliation and recording controls. Remediation was ongoing; acquired-company controls were also being integrated.
- The company reported no material litigation as of the filing and no material changes to previously disclosed risk factors, while noting potential rate increases and signs of possible softness in the real estate market.
Key facts for investors to verify
- Whether the warehouse covenant waiver was extended or the company returned to compliance after December 31, 2021.
- Cash consumption, working-capital needs and the basis for management’s 12-month liquidity assessment, especially as acquisitions are integrated.
- Organic growth versus acquisition-driven revenue, transaction volumes and agent retention, and profitability of the newer mortgage, technology and insurance offerings.
- Progress addressing material weaknesses and integrating acquired entities’ internal controls.
- Final purchase-accounting valuations for acquisitions, and the sustainability of the tax benefit and remaining deferred tax asset valuation allowance.