UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the Quarterly Period Ended
Commission File Number
(Exact name of Registrant as specified in its Charter)
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(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices) (Zip Code)
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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of Each Class |
| Trading Symbol(s) |
| Name of Each Exchange on Which Registered |
The |
Securities registered pursuant to Section 12 (g) of the Exchange Act: None
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer ☐ | |
Smaller reporting company | ||
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of August 6, 2021, the registrant had
FATHOM HOLDINGS INC.
FORM 10-Q
For the Quarterly Period Ended June 30, 2021
TABLE OF CONTENTS
2
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements.
FATHOM HOLDINGS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| June 30, 2021 |
| December 31, 2020 | |||
ASSETS | ||||||
Current assets: |
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Cash and cash equivalents | $ | | $ | |||
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Accounts receivable |
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Derivative assets |
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Mortgage loans held for sale, at fair value | | — | ||||
Prepaid and other current assets |
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Total current assets |
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Property and equipment, net |
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Lease right of use assets |
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Intangible assets, net | | | ||||
Goodwill | | | ||||
Other assets | | | ||||
Total assets | $ | | $ | | ||
LIABILITIES AND STOCKHOLDERS' EQUITY |
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Current liabilities: |
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Accounts payable | $ | | $ | | ||
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Escrow liabilities | | | ||||
Derivative liabilities | | — | ||||
Warehouse lines of credit | | — | ||||
Long-term debt - current portion | | | ||||
Lease liability - current portion |
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Total current liabilities |
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Long-term debt, net of current portion |
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Lease liability, net of current portion |
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Deferred tax liabilities | | — | ||||
Total liabilities |
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Commitments and contingencies (Note 18) |
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Stockholders' equity: |
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Common stock, |
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Treasury Stock, at cost, |
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Additional paid-in capital |
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Accumulated deficit |
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Total stockholders' equity |
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Total liabilities and stockholders' equity | $ | | $ | |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
3
FATHOM HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended June 30, | Six months ended June 30, | |||||||||||
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Revenue | ||||||||||||
Gross commission income | $ | | $ | | $ | | $ | | ||||
Other service revenue | | — | | — | ||||||||
Total revenue | | | | | ||||||||
Operating expenses |
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Operations and support | | — | | — | ||||||||
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Marketing |
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Total operating expenses |
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(Loss) income from operations |
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Other (income) expense, net |
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Gain on the extinguishment of debt | — | — | ( | — | ||||||||
Interest (income) expense, net |
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Other income, net |
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Other (income) expense, net |
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(Loss) income from operations before income taxes |
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Income tax benefit (expense) |
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Net (loss) income | $ | ( | $ | | $ | ( | $ | | ||||
Net (loss) income per share |
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Basic | $ | ( | $ | | $ | ( | $ | | ||||
Diluted | $ | ( | $ | | $ | ( | $ | | ||||
Weighted average common shares outstanding |
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The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
4
FATHOM HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
(UNAUDITED)
Common Stock | Treasury Stock | ||||||||||||||||||
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Shares | Value | Shares | Amount | Capital | deficit | Total | |||||||||||||
Balance at March 31, 2021 | | $ | — | | $ | ( | $ | | $ | ( | $ | | |||||||
Issuance of common stock for purchase of businesses | | — | — | — | | — | | ||||||||||||
Issuance of common stock pursuant to exercise of stock options | | — | — | — | | — | | ||||||||||||
Share-based compensation, net of forfeitures | ( | — | — | — | | — | | ||||||||||||
Net loss | — | — | — | — | — | ( | ( | ||||||||||||
Balance at June 30, 2021 |
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Common Stock | Treasury Stock | ||||||||||||||||||
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Balance at March 31, 2020 |
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Purchase of treasury stock |
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Share-based compensation, net of forfeitures |
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Net loss | — | — | — | — | — | | | ||||||||||||
Balance at June 30, 2020 | | $ | — | | $ | ( | $ | | $ | ( | $ | ( |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
5
Common Stock |
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Balance at December 31, 2020 |
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Issuance of common stock for purchase of business |
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Issuance of common stock pursuant to exercise of stock options |
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Share-based compensation, net of forfeitures |
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Net loss |
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Balance at June 30, 2021 |
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Balance at December 31, 2019 |
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Issuance of common stock |
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Purchase of treasury stock |
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Share-based compensation, net of forfeitures |
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Net loss |
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Balance at June 30, 2020 |
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The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
6
FATHOM HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six months ended June 30, | ||||||
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net (loss) income | $ | ( | $ | | ||
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: |
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Depreciation and amortization |
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Gain on the extinguishment of debt | ( | — | ||||
Gain on sale of mortgages | ( | — | ||||
Share-based compensation |
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Deferred income taxes | ( | — | ||||
Bad debt expense |
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Other non-cash | | — | ||||
Change in operating assets and liabilities: |
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Accounts receivable |
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Proceeds from sale and principal payments on mortgage loans held for sale | | — | ||||
Originations and purchases of mortgage loans held for sale | ( | — | ||||
Derivative assets |
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Prepaid and other assets |
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Accounts payable |
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Accrued liabilities | | | ||||
Escrow liabilities | | — | ||||
Derivative liabilities |
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Operating lease liabilities |
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Other assets | ( | | ||||
Net cash (used in) provided by operating activities |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Purchase of property and equipment |
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Amounts paid for business and asset acquisitions, net of cash acquired | ( | — | ||||
Purchase of intangible assets |
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Net cash used in investing activities |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Principal payments on long-term debt |
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Proceeds from the issuance of common stock | | | ||||
Purchase of treasury stock | — | ( | ||||
Net borrowings on warehouse lines of credit | | — | ||||
Proceeds from note payable | — | | ||||
Net cash provided by financing activities |
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Net (decrease) increase in cash, cash equivalents, and restricted cash |
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Cash, cash equivalents, and restricted cash at beginning of period |
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Cash, cash equivalents, and restricted cash at end of period | $ | | $ | | ||
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Supplemental disclosure of cash and non-cash transactions: |
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Cash paid for interest | $ | | $ | | ||
Income taxes paid | $ | — | $ | | ||
Amounts due to sellers | $ | | $ | — | ||
Right of use assets obtained in exchange for lease liabilities | $ | | $ | — | ||
Issuance of common stock for the purchase of business | $ | | $ | — | ||
Extinguishment of Paycheck Protection Program Loan | $ | | $ | — | ||
Loan receivable forgiven and used as purchase consideration | $ | | $ | — | ||
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Reconciliation of cash and restricted cash |
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Cash and cash equivalents | $ | | $ | | ||
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Total cash, cash equivalents, and restricted cash shown in statement of cash flows | $ | | $ | |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
7
Note 1. Description of Business and Nature of Operations
Fathom Holdings Inc. (“Fathom”, “Fathom Holdings,” and collectively with its consolidated subsidiaries and affiliates, the “Company”) is a national, technology-driven, real estate services platform integrating residential brokerage, mortgage, title, insurance and software as a service (“SaaS”) offerings to brokerages and agents leveraging our proprietary cloud-based software called intelliAgent.
During the six months ended June 30, 2021, Fathom significantly grew its agent network, expanded its technology offerings, and entered into the residential mortgage lending and home and other insurance businesses via completing four business combinations and an asset acquisition.
On March 1, 2021, the Company acquired the real estate brokerage business of Red Barn Real Estate, LLC (“Red Barn”), a growing Atlanta metro area brokerage with approximately
Also, on March 1, 2021 the Company acquired the technology platform of Naberly Inc. (“Naberly”) to reduce the Company’s reliance on third-party technology providers and offer more robust technology to agents to help them grow their businesses. On April 20, 2021, the Company acquired LiveBy, Inc. (“LiveBy”), a SaaS business with a technology platform that offers competitive, hyper-local tools for real estate professionals.
On April 16, 2021, the Company acquired E4:9 Holdings, Inc. (“E4:9”), a holding company with three operating subsidiaries, Encompass Lending Group (“Encompass”) (mortgage), Dagley Insurance Agency (home and other insurance) and Real Results (lead generation). These companies are expected to provide agents and associates with new opportunities to grow their businesses, while giving consumers a one-stop-shop for all of their housing needs.
The Company’s brands include Fathom Realty, Dagley Insurance, Encompass Lending, intelliAgent, Real Results, and Verus Title.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation — The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) as determined by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the unaudited interim consolidated financial statements reflect all adjustments, which include only normal recurring adjustments necessary for the fair statement of the balances and results of operations for the periods presented. These financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2020 included in the Company’s Annual Report on Form 10-K filed with the Security and Exchange Commission (“SEC”) on March 24, 2021. The results of operations for any interim periods are not necessarily indicative of the results that may be expected for the entire fiscal year or any other interim period.
The unaudited interim consolidated financial statements include the accounts of Fathom Holdings’ wholly owned subsidiaries. All transactions and accounts between and among its subsidiaries have been eliminated. All adjustments and disclosures necessary for a fair presentation of these unaudited interim consolidated financial statements have been included.
Certain Significant Risks and Business Uncertainties — The Company is subject to the risks and challenges associated with companies at a similar stage of development. These include dependence on key individuals, successful development and marketing of its offerings, and competition with larger companies with greater financial, technical, and marketing resources. Furthermore, during the period required to achieve substantially higher revenue in order to become consistently profitable, the Company may require additional funds that might not be readily available or might not be on terms that are acceptable to the Company. See “COVID-19 Risks, Impacts and Uncertainties” below, and “Risk Factors” in Part II, Item 1A of this report for further detail regarding the risks the Company faces.
8
Liquidity — The Company has a history of negative cash flows from operations and operating losses. The Company generated a net loss of approximately
COVID-19 Risks, Impacts and Uncertainties — On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (“COVID-19”) and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified COVID-19 as a pandemic, based on the rapid increase in exposure globally.
We are subject to the risks arising from COVID-19 including its social and economic impacts on the residential real estate industry in the United States. Our management believes that these social and economic impacts, which to date have included but not been limited to the following, could have a significant impact on the Company’s future financial condition, liquidity, and results of operations: (i) restrictions on in-person activities associated with residential real estate transactions arising from shelter-in-place, or similar isolation orders; (ii) decline in consumer demand for in-person interactions and physical home tours; and (iii) deteriorating economic conditions, such as increased unemployment rates, recessionary conditions, lower yields on individual investment portfolios, and more stringent mortgage financing conditions.
Given the daily evolution of COVID-19 and the global responses to curb its spread, the Company is not able to estimate the effects of COVID-19, including specifically the Delta variant and/or other variants, on its results of operations, financial condition, or liquidity for the year ending December 31, 2021 or beyond. If COVID-19 continues, it may have a material adverse effect on the Company’s financial condition, liquidity, and future results of operations.
Use of Estimates — The preparation of the unaudited interim consolidated financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company regularly evaluates estimates and assumptions related to income taxes, deferred tax asset valuation allowances, share-based compensation, goodwill, estimated lives of intangible assets, and intangible asset impairment. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company might differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.
Business Combinations — The Company accounts for its business combinations under the provisions of ASC Topic 805-10, Business Combinations (“ASC 805-10”), which requires that the acquisition method of accounting be used for all business combinations. Assets acquired and liabilities assumed are recorded at the date of acquisition at their respective fair values. For transactions that are business combinations, the Company evaluates the existence of goodwill. Goodwill represents the excess purchase price over the fair value of the tangible net assets and intangible assets acquired in a business combination. ASC 805-10 also specifies criteria that intangible assets acquired in a business combination must meet to be recognized and reported apart from goodwill. Acquisition-related expenses are recognized separately from the business combinations and are expensed as incurred.
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The estimated fair value of net assets acquired, including the allocation of the fair value to identifiable assets and liabilities, is determined using established valuation techniques. A fair value measurement is determined as the price received to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date. In the context of acquisition accounting, the determination of fair value often involves significant judgments and estimates by management, including the selection of valuation methodologies, estimates of future revenues, costs and cash flows, discount rates, and selection of comparable companies. The estimated fair values reflected in the acquisition accounting rely on management’s judgment and the expertise of a third-party valuation firm engaged to assist in concluding on the fair value measurements. For the business combinations completed during the six-month period ended June 30, 2021, the estimated fair value of identifiable intangible assets, primarily consisting of agent relationships, tradenames, customer relationships, know-how and technology, was determined using the relief-from royalty and multi-period excess earnings methods. The most significant assumptions include the estimated remaining useful life, expected future revenue, annual agent revenue attrition, costs to develop new agents, charges for contributory assets, tax rate, discount rate and tax amortization benefit. The most significant variables in these valuations are discount rates and the number of years on which to base the cash flow projections, as well as other assumptions and estimates used to determine the cash inflows and outflows. Management determines discount rates based on the risk inherent in the acquired assets, specific risks, industry beta and capital structure of guideline companies. Management has developed these assumptions on the basis of historical knowledge of the business and projected financial information of the Company. These assumptions may vary based on future events, perceptions of different market participants and other factors outside the control of Management, and such variations may be significant to estimated values.
The Company includes the results of operations from the acquisition date in the financial statements for all businesses acquired.
Asset Acquisitions — The Company follows the guidance in ASC 805-10 for determining the appropriate accounting treatment for asset acquisitions. ASU No. 2017-01, Clarifying the Definition of a Business, provides an initial fair value screen to determine if substantially all of the fair value of the assets acquired is concentrated in a single asset or group of similar assets. If the initial screening test is not met, the set is considered a business based on whether there are inputs and substantive processes in place. Based on the results of this analysis and conclusion on an acquisition’s classification of a business combination or an asset acquisition, the accounting treatment is derived.
If the acquisition is deemed to be a business, the acquisition method of accounting is applied. Identifiable assets acquired and liabilities assumed at the acquisition date are recorded at fair value. If the transaction is deemed to be an asset acquisition, the cost accumulation and allocation model is used whereby the assets and liabilities are recorded based on the purchase price and allocated to the individual assets and liabilities based on relative fair values.
Mortgage Loans Held for Sale —Mortgage loans held for sale are carried at fair value under the fair value option with changes in fair value recorded in other service revenue on the statements of operations. The fair value of mortgage loans held for sale is typically calculated using observable market information including pricing from actual market transactions, purchaser commitment prices, or broker quotations. The fair value of mortgage loans held for sale covered by purchaser commitments is generally based on commitment prices. The fair value of mortgage loans held for sale not committed to an purchaser is generally based on current delivery pricing using best execution pricing.
Intangible Assets, Net — Intangible Assets, net is comprised of definite-lived intangibles and capitalized internal use software.
Definitive-lived intangibles: The Company’s definite-lived intangible assets primarily consist of trade names, agent relationships, customer relationships, know-how and technology acquired as part of the Company’s business acquisitions. For definite-lived intangible assets,whenever impairment indicators are present, the Company performs a review for impairment. The Company calculates the undiscounted value of the projected cash flows associated with the asset, or asset group, and compares this estimated amount to the carrying amount. If the carrying amount is found to be greater, the Company will record an impairment loss for the excess of book value over the fair value. In addition, in all cases of an impairment review, the Company will reevaluate the remaining useful lives of the assets and modify them, as appropriate. Currently, trade names, agent relationships, customer relationships, know-how and software development have a useful life estimated at
10
Capitalized internal use software: The Company’s capitalized internal use software consists of internally developed software and developed software acquired pursuant to acquisitions. Costs incurred in the preliminary stages of website and software development are expensed as incurred. Once an application has reached the development stage, direct internal and external costs relating to upgrades or enhancements that meet the capitalization criteria are capitalized in intangible assets, net and amortized on a straight-line basis over their estimated useful lives. Maintenance and enhancement costs (including those costs in the post-implementation stages) are typically expensed as incurred, unless such costs relate to substantial upgrades and enhancements to the websites (or software) that result in added functionality, in which case the costs are capitalized as well.
Capitalized software costs are amortized over the expected useful lives of the applicable software. Currently, capitalized software for internal use has a useful life estimated between
Estimated useful lives of website and software development activities are reviewed annually or whenever events or changes in circumstances indicate that intangible assets may be impaired and adjusted as appropriate to reflect upcoming development activities that may include significant upgrades or enhancements to the existing functionality.
Goodwill - Goodwill, which represents the excess of purchase price over the fair value of net assets acquired, is carried at cost. Goodwill is not amortized; rather, it is subject to a periodic assessment for impairment by applying a fair value-based test. The Company is organized in
Revenue Recognition — We apply the provisions of FASB ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”), and all related appropriate guidance. The Company recognizes revenue under the core principle to depict the transfer of control to the Company’s customers in an amount reflecting the consideration to which the Company expects to be entitled. In order to achieve that core principle, the Company applies the following five-step approach: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when a performance obligation is satisfied.
The Company has utilized the practical expedient in ASC 606 and elected not to capitalize contract costs for contracts with customers with durations less than
The Company generates revenue from real estate brokerage services which consists of commissions generated from real estate transactions, which the Company classifies as gross commission income.The Company also generates revenues through mortgage lending, SaaS solutions, as well as title and insurance services, which the Company classifies as other service revenue.
11
Revenues from real estate brokerage services
The Company’s real estate brokerage services revenue substantially consists of commissions generated from real estate brokerage services. The Company is contractually obligated to provide for the fulfillment of transfers of real estate between buyers and sellers. The Company provides these services itself and controls the services of its agents necessary to legally transfer the real estate. Correspondingly, the Company is defined as the principal. The Company, as principal, satisfies its obligation upon the closing of a real estate transaction. The Company has concluded that agents are not employees of the Company, rather deemed to be independent contractors. Upon satisfaction of its obligation, the Company recognizes revenue in the gross amount of consideration it is entitled to receive. The transaction price is calculated by applying the Company’s portion of the agreed-upon commission rate to the property’s selling price. The Company may provide services to the buyer, seller, or both parties to a transaction. When the Company provides services to the seller in a transaction, it recognizes revenue for its portion of the commission, which is calculated as the sales price multiplied by the commission rate less the commission separately distributed to the buyer’s agent, or the “sell” side portion of the commission. When the Company provides services to the buyer in a transaction, the Company recognizes revenue in an amount equal to the sales price for the property multiplied by the commission rate for the “buy” side of the transaction. In instances in which the Company represents both the buyer and the seller in a transaction, it recognizes the full commission on the transaction. Commissions revenue contains a single performance obligation that is satisfied upon the closing of a real estate transaction, at which point the entire transaction price is earned. The Company’s customers remit payment for the Company’s services to the title company or attorney closing the sale of property at the time of closing. The Company receives payment upon close of property or within days of the closing of a transaction. The Company is not entitled to any commission until the performance obligation is satisfied and is not owed any commission for unsuccessful transactions, even if services have been provided.
Revenues from mortgage lending services
The revenue streams for the Company’s mortgage lending services business are primarily comprised of gains and losses from loans sold, and origination and other fees. The majority of these revenue streams are exempted from ASC 606. Origination and other fees are not specifically separable from actual mortgage loans.
The gain on sale of mortgage loans represents the difference between the net sales proceeds and the carrying value of the mortgage loans sold, including the servicing rights release premiums and is recorded in the statement of operations in other service revenue. Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before maturity.
Servicing rights release premiums represent revenues earned when the risk and rewards of ownership of servicing rights are transferred to third parties. Mortgage servicing rights (“MSRs”) represent the obligations to administer, collect the payments for the reduction of principal and application of interest, pay taxes and insurance, remit collected payments, provide foreclosure services, provide full escrow administration and any other obligations required by an owner of the mortgage loans, together with the right to receive the servicing fee income and any ancillary income arising from or connected to the mortgage loans.
Retail origination fees are principally revenues earned from loan originations. Direct loan origination costs and expenses associated with the loans are charged to expenses when the loans are sold. Interest income is interest earned on originated loans prior to the sale of the asset.
Revenues from SaaS solutions
The Company generates revenue from subscription and services related to the use of the LiveBy platform. The SaaS contracts are generally annual contracts paid monthly in advance of service and cancellable upon
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Revenues from insurance agency services
The revenue streams for the Company’s insurance agency services business are primarily comprised of new and renewal commissions paid by insurance carriers. The transaction price is set as the estimated commissions to be received over the term of the policy based upon an estimate of premiums placed, policy changes and cancellations, net of restraint. The commissions are earned at the effective date of the associated policies when control of the policy transfers to the client.
The Company is also eligible for certain contingent commissions from insurers based on the attainment of specific metrics (i.e., volume growth, loss ratios) related to underlying polices placed. Revenue for contingent commissions is estimated based on historical and current evidence of achievement towards each insurer’s annual respective metrics and is recorded as the underlying policies that contribute to the achievement are placed. Due to the uncertainty of the amount of contingent consideration that will be received, the estimated revenue is constrained to an amount that is probable to not have a significant negative adjustment. Contingent consideration is generally received in the first quarter of the subsequent year.
Revenues from title services
The Company’s title services revenue includes fees charged for title search and examination, property settlement and title insurance services provided in association with property acquisitions and refinance transactions. The Company provides the title search and property settlement services ourselves and controls the services before they are transferred to our customers since the Company is primarily responsible for fulfilling the promise and also has full discretion in establishing the price for the settlement services (except in states where fees are set statutorily). As such, the Company is defined as the principal. As principal, the Company satisfies our obligation upon the closing of a real estate transaction. Upon satisfaction of our obligation, the Company recognizes revenue in the gross amount of consideration the Company is entitled to receive. The transaction price for title and property settlement services is determined by the fixed fees the Company charges for our services. The Company provides services to the buyers and sellers involved in the purchase transaction, as well as to the borrower in a refinance transaction. Title and property settlement revenue contains a single performance obligation that is satisfied upon the closing of a real estate transaction, at which point the entire transaction price is earned. The Company is not entitled to any title and property settlement revenue until the performance obligation is satisfied and is not owed any consideration for unsuccessful transactions, even if services have been provided.
For title insurance services, we work in conjunction with insurance underwriters to perform these services, obtain the insurance policy premiums associated with title insurance on behalf of customers and remit the policy premium to the insurance underwriters. Since the insurance underwriter is ultimately providing the insurance policy to the borrower, the Company is not responsible for fulfilling the promise to provide the insurance. Additionally, the Company does not have discretion in dictating the price for the insurance policy, which is set by each jurisdiction and is either filed by insurance underwriters or set by the state insurance commissioners. Therefore, the Company does not control the specified service provided by the insurance underwriter. As such, in these circumstances, the Company acts as an agent. As the agent, the Company satisfies our obligation upon the closing of a real estate transaction. Upon satisfaction of our obligation, the Company recognizes revenue in the net amount of consideration the Company is entitled to receive, which is our fee for brokering the insurance policy less any consideration paid to the insurance underwriters. The transaction price for title insurance services is fixed, based on statutory rates depending on the jurisdiction. The Company negotiates with insurance underwriters the percentage they receive, and the rest is recognized as revenue. Title insurance revenue contains a single performance obligation that is satisfied upon the closing of a real estate transaction, at which point the entire transaction price is earned. The Company is not entitled to any title insurance revenue until the performance obligation is satisfied and is not owed any consideration for unsuccessful transactions, even if services have been provided.
Derivative financial instruments — The Company enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (“interest rate lock commitments”). Interest rate lock commitments on loans that are intended to be sold are considered to be derivatives. Accordingly, such commitments, along with any related fees from potential borrowers, are recorded at fair value in derivative assets and liabilities, with changes in fair value recorded in the statement of operations in other service revenue. Fair value is based upon changes in the fair value of the underlying mortgages, estimated to be realized upon sale into the secondary market. Fair value estimates take into account interest rate lock commitments not expected to be exercised by customers, commonly referred to as fall out.
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The Company manages the interest rate risk associated with its outstanding interest rate lock commitments and loans held for sale by entering into derivative loan instruments such as forward loan commitments, mandatory delivery commitments, options and future contracts, whereby the Company maintains the right to deliver residential loans to purchasers in the future at a specified yield. Fair value is based upon estimated amounts that the Company would receive or pay to terminate the commitment at the reporting date. The Company takes into account various factors and strategies in determining the portion of the mortgage pipeline it wants to economically hedge. Management expects the derivatives used to manage interest rate risk will experience changes in fair value opposite to changes in the fair value of the derivative loan commitments and loans held for sale, thereby reducing earnings volatility.
Reclassifications — Certain amounts in the prior year consolidated financial statements have been reclassified to conform to the current year presentation with no effect on the previously reported net (loss) income or stockholders’ equity. Subsequent to the acquisitions of LiveBy and E4:9, the Company made a change to its segment reporting structure as more fully described in Note 17. This resulted in new line items on the consolidated statement of operations for the following:
● | Gross commission income is comprised of revenues from the Real Estate Brokerage segment which were previously recorded in revenue |
● | Other service revenue is comprised of revenues not included in the Real Estate Brokerage segment which were previously recorded in revenue |
● | Commission and other agent-related costs is comprised of the direct costs to fulfill the services from the Real Estate Brokerage segment which were previously recorded in cost of revenue |
● | Operations and support are comprised of the direct costs to fulfill the services not included in the Real Estate Brokerage segment which were previously recorded in cost of revenue |
● | Depreciation and amortization represent the depreciation charged on the Company’s fixed assets and intangible assets which were previously recorded in general and administrative expenses. |
Recently Implemented Accounting Pronouncements
In December 2019, the FASB issued ASU No. 2019-12, “Simplifying the Accounting for Income Taxes”. The provisions of ASU 2019-12 include eliminating certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The guidance is effective for the reporting period beginning after December 15, 2020, and the interim periods therein. The Company adopted this standard effective January 1, 2021 and the application of ASU 2019-12 did not have a material impact on the Company's condensed consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, that changes the impairment model for most financial assets and certain other instruments. For receivables, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowance for losses. In addition, an entity will have to disclose significantly more information about allowances and credit quality indicators. The new standard is effective for the Company for fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact of the pending adoption of the new standard on its consolidated financial statements and intends to adopt the standard on January 1, 2023.
Note 3. Acquisitions
Acquisition of Red Barn
On March 1, 2021, the Company completed the acquisition of Red Barn, in a transaction deemed immaterial to the Company. The Red Barn acquisition was accounted for as a business combination using the acquisition method of accounting. Due to the timing of the acquisition, the valuation of net assets acquired has not been finalized and is expected to be completed by the end of September 2021, and in any case, no later than one year from the acquisition date in accordance with GAAP.
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Acquisition of Naberly
On March 1, 2021 the Company acquired substantially all of the assets of Naberly for cash consideration of $
During the year ended December 31, 2020, in connection with, and in advance of the closing under the asset purchase agreement to acquire the assets of Naberly, the Company issued to Naberly, an unsecured loan (the “Loan”) in the principal amount of up to $
Acquisition of E4:9
On April 16, 2021 the Company purchased
The total purchase consideration and the fair values of the assets and liabilities at the acquisition date were as follows:
Recognized amounts of identifiable assets acquired and liabilities assumed |
|
| |
Cash | $ | | |
Accounts receivable |
| | |
Mortgage loans held for sale |
| | |
Derivative assets |
| | |
Prepaid and other current assets |
| | |
Property & equipment |
| | |
Intangible assets |
| | |
Lease right of use assets |
| | |
Other long-term assets |
| | |
Total identifiable assets acquired |
| | |
Accounts payable and accrued liabilities | | ||
Escrow liabilities |
| | |
Derivative liabilities |
| | |
Warehouse lines of credit |
| | |
Notes payable |
| | |
Lease liability, current portion |
| | |
Lease liability, net of current portion |
| | |
Deferred tax liabilities |
| | |
Total liabilities assumed |
| | |
Total identifiable net assets |
| | |
Goodwill |
| | |
Net assets acquired | $ | |
The Company recognized approximately $
Goodwill of approximately $
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The fair value associated with identifiable intangible assets was $
Due to the timing of the acquisition, the valuation of net assets acquired has not been finalized and is expected to be completed by the end of December 2021, and in any case, no later than one year from the acquisition date in accordance with GAAP.
The Company’s condensed consolidated financial statements for the three and six months ended June 30, 2021 include the results of operations of E4:9 since the closing on April 16, 2021 during which period E4:9 contributed approximately $
Acquisition of LiveBy
On April 20, 2021 the Company purchased
The total purchase consideration and the fair values of the assets and liabilities at the acquisition date were as follows:
Recognized amounts of identifiable assets acquired and liabilities assumed |
|
| |
Cash | $ | | |
Accounts receivable |
| | |
Intangible assets | 4,920,000 | ||
Prepaid and other current assets |
| | |
Total identifiable assets acquired |
| | |
Deferred tax liabilities | 620,879 | ||
Accounts payable and accrued liabilities |
| | |
Total liabilities assumed |
| | |
Total identifiable net assets |
| | |
Goodwill |
| | |
Net assets acquired | $ | |
The Company recognized approximately $
Goodwill was assigned to the technology reporting unit and is attributable primarily to our assembled workforce and the anticipated future economic benefits to the Company’s agents through technology product offerings. None of the goodwill is expected to be deductible for income tax purposes.
Due to the timing of the acquisition, the valuation of net assets acquired has not been finalized and is expected to be completed by the end of December 2021, and in any case, no later than one year from the acquisition date in accordance with GAAP.
The Company’s consolidated financial statements for the three and six months ended June 30, 2021 include the results of operations of LiveBy since the closing on April 20, 2021 during which period LiveBy contributed approximately $
Acquisition of Epic Realty
On June 30, 2021, the Company completed the acquisition of Epic Realty (“Epic”) in a transaction deemed immaterial to the Company. The Epic acquisition was accounted for as a business combination using the acquisition method of accounting. Due to the timing of the acquisition, the valuation of net assets acquired has not been finalized and is expected to be completed by the end of December 2021, and in any case, no later than one year from the acquisition date in accordance with GAAP.
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Supplemental Pro Forma Financial Information
On an unaudited pro forma basis, the revenues and net loss of the Company assuming the acquisitions of E4:9 and LiveBy occurred on January 1, 2020, are shown below. The unaudited pro forma information does not purport to present what the Company’s actual results would have been had the acquisition happened on January 1, 2020, nor is the financial information indicative of the results of future operations. The pro forma financial information includes the estimated amortization expense based on the fair value and estimated useful lives of intangible assets as part of the acquisitions of E4:9 and LiveBy.
| Six months ended June 30, | |||||
| 2021 |
| 2020 | |||
Revenue | $ | | $ | | ||
Net loss | $ | ( | $ | ( | ||
Net loss per share (basic) | $ | ( | $ | ( |
Note 4. Property and Equipment, Net
Property and equipment, net consisted of the following at the dates indicated:
| June 30, 2021 |
| December 31, 2020 | |||
Vehicles | $ | — | $ | | ||
Computers and equipment |
| |
| | ||
Furniture and fixtures |
| |
| | ||
Leasehold improvements | | | ||||
Total property and equipment |
| |
| | ||
Accumulated depreciation |
| ( |
| ( | ||
Total property and equipment, net | $ | | $ | |
Depreciation expense for property and equipment was approximately $
Note 5. Intangible Assets, Net
Intangible assets, net consisted of the following at the dates indicated:
| June 30, 2021 | ||||||||
| Gross |
|
| ||||||
Carrying | Accumulated | Net Carrying | |||||||
Amount | Amortization | Value | |||||||
Trade names | $ | | $ | ( | $ | | |||
Software development |
| |
| ( |
| | |||
Customer relationships | | ( | | ||||||
Agent relationships |
| |
| ( |
| | |||
Know-how | | ( | | ||||||
$ | | $ | ( | $ | |
| December 31, 2020 | ||||||||
| Gross |
|
| ||||||
Carrying | Accumulated | Net Carrying | |||||||
Amount | Amortization | Value | |||||||
Trade names | $ | | $ | ( | $ | | |||
Software development |
| |
| ( |
| | |||
$ | | $ | ( | $ | |
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As of June 30, 2021, the estimated future amortization expense for definite-lived intangible assets was:
Years Ended December 31, |
|
| |
2021 (remaining) | $ | | |
2022 |
| | |
2023 |
| | |
2024 |
| | |
2025 |
| | |
Thereafter | | ||
Total | $ | |
Amortization expense was approximately $
Note 6. Goodwill
The Company recorded goodwill in connection with the acquisition of Verus which closed in November 2020 and in connection with the acquisitions of Red Barn, E4:9, LiveBy and Epic which closed in 2021. These acquisitions have been accounted for using the acquisition method of accounting. Under the acquisition method of accounting, the Company allocated the total purchase price to the tangible and identifiable intangible assets acquired, and assumed liabilities based on their estimated fair values as of the acquisition date, as determined by management. The excess of the purchase price over the aggregate fair values of the identifiable assets was recorded as goodwill.
The changes in the carrying value of goodwill by segment as of June 30, 2021 are as noted in the table below:
Real Estate | |||||||||||||||
| Brokerage |
| Mortgage |
| Technology |
| Other (a) |
| Total | ||||||
Balance at December 31, 2020 | $ | | $ | — | $ | — | $ | | $ | | |||||
Goodwill acquired during the period | | | | ||||||||||||
Balance at June 30, 2021 | $ | | $ | $ | $ | | $ | |
(a)– Other comprises goodwill not assigned to a reportable segment.
There are
Note 7. Accrued Liabilities
Accrued liabilities consisted of the following at the dates indicated:
| June 30, 2021 |
| December 31, 2020 | |||
Deferred annual fee | $ | | $ | | ||
Due to sellers | | — | ||||
Other accrued liabilities |
| |
| | ||
Total accrued liabilities | $ | | $ | |
Note 8. Warehouse Lines of Credit
As a means of financing mortgage loans held for sale, the Company utilizes line of credit agreements for the purpose of temporarily warehousing mortgage loans pending the sale of the loans.
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