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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2022

 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-39412

FATHOM HOLDINGS INC.

(Exact name of Registrant as specified in its Charter)

North Carolina

    

82-1518164

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

2000 Regency Parkway Drive, Suite 300, Cary, North Carolina 27518

(Address of principal executive offices) (Zip Code)

(888) 455-6040

(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

Common Stock, No Par Value

FTHM

The NASDAQ Capital Market

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.  Yes  No

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).  Yes  No

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                   

Non-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 April 30, 2022, the registrant had 17,433,253 shares common stock outstanding.

Table of Contents

FATHOM HOLDINGS INC.

FORM 10-Q

For the Quarterly Period Ended March 31, 2022

TABLE OF CONTENTS

Page

PART I - FINANCIAL INFORMATION

ITEM 1.

Financial Statements

Consolidated Balance Sheets as of March 31, 2022 (Unaudited) and December 31, 2021

3

Unaudited Consolidated Statements of Operations for the three months ended March 31, 2022 and 2021

4

Unaudited Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the three months ended March 31, 2022 and 2021

5

Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and 2021

6

Notes to Unaudited Consolidated Financial Statements

7

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

28

ITEM 4.

Controls and Procedures

28

PART II - OTHER INFORMATION

30

ITEM 1.

Legal Proceedings

30

ITEM 1A.

Risk Factors

30

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

30

ITEM 6.

Exhibits

31

SIGNATURES

32

2

Table of Contents

PART I FINANCIAL INFORMATION

ITEM 1. Financial Statements.

FATHOM HOLDINGS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

    

March 31, 2022

    

December 31, 2021

ASSETS

(Unaudited)

Current assets:

 

  

 

  

Cash and cash equivalents

$

30,524

$

37,830

Restricted cash

78

91

Accounts receivable

 

4,155

 

3,981

Derivative assets

 

395

 

53

Mortgage loans held for sale, at fair value

8,364

9,862

Prepaid and other current assets

 

2,700

 

2,633

Total current assets

 

46,216

 

54,450

Property and equipment, net

 

1,537

 

1,250

Lease right of use assets

 

4,662

 

4,353

Intangible assets, net

27,678

24,243

Goodwill

25,412

20,541

Other assets

50

93

Total assets

$

105,555

$

104,930

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

4,893

$

5,303

Accrued and other current liabilities

5,575

4,491

Warehouse lines of credit

8,162

9,577

Long-term debt - current portion

459

831

Lease liability - current portion

 

1,099

 

870

Total current liabilities

 

20,188

 

21,072

Long-term debt, net of current portion

 

151

 

146

Lease liability, net of current portion

 

3,688

 

3,562

Total liabilities

 

24,027

 

24,780

Commitments and contingencies (Note 18)

 

 

Stockholders’ equity:

 

 

Common stock (no par value, shares authorized, 100,000,000; shares issued and outstanding, 17,110,909 and 16,751,606 as of March 31, 2022 and December 31, 2021, respectively)

 

 

Additional paid-in capital

 

107,504

 

100,129

Accumulated deficit

 

(25,976)

 

(19,979)

Total stockholders’ equity

 

81,528

 

80,150

Total liabilities and stockholders’ equity

$

105,555

$

104,930

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

3

Table of Contents

FATHOM HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(in thousands, except share data)

Three months ended March 31, 

    

2022

    

2021

    

Revenue

Gross commission income

$

84,044

$

49,156

Other revenue

6,038

490

Total revenue

90,082

49,646

Operating expenses

 

 

Commission and other agent-related costs

79,479

46,400

Operations and support

2,175

68

Technology and development

1,474

385

General and administrative

 

10,854

 

5,819

Marketing

 

1,163

 

402

Depreciation and amortization

572

21

Total operating expenses

 

95,717

 

53,095

Loss income from operations

 

(5,635)

 

(3,449)

Other expense (income), net

 

 

Gain on the extinguishment of debt

(51)

Interest expense, net

 

1

 

2

Other expense (income), net

 

336

 

(5)

Other expense (income), net

 

337

 

(54)

Loss before income taxes

 

(5,972)

 

(3,395)

Income tax expense

 

25

 

5

Net loss

$

(5,997)

$

(3,400)

Net loss per share

Basic

$

(0.37)

$

(0.25)

Diluted

$

(0.37)

$

(0.25)

Weighted average common shares outstanding

 

 

Basic

 

16,323,157

 

13,450,111

Diluted

 

16,323,157

 

13,450,111

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

4

Table of Contents

FATHOM HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

(UNAUDITED)

(in thousands, except share data)

Common Stock

    

Number of

    

    

Additional

    

    

Outstanding

Par

Paid in

Accumulated

Shares

 Value

Capital

deficit

Total

Balance at December 31, 2021

16,751,606

$

$

100,129

$

(19,979)

$

80,150

Issuance of common stock for purchase of businesses

435,294

5,905

5,905

Repurchase of common stock

(83,811)

(988)

(988)

Stock-based compensation, net of forfeitures

7,820

2,458

2,458

Net loss

(5,997)

(5,997)

Balance at March 31, 2022

 

17,110,909

$

$

107,504

$

(25,976)

$

81,528

Common Stock

    

Number of

    

    

Additional

    

    

Outstanding

Par

Paid in

Accumulated

Shares

 Value

Capital

deficit

Total

Balance at December 31, 2020

 

13,830,351

$

$

37,139

$

(7,488)

$

29,651

Issuance of common stock for purchase of business

26,644

1,172

1,172

Stock-based compensation, net of forfeitures

 

122,561

870

870

Net loss

(3,400)

(3,400)

Balance at March 31, 2021

13,979,556

$

$

39,181

$

(10,888)

$

28,293

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

5

Table of Contents

FATHOM HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)

Three months ended March 31, 

    

2022

    

2021

CASH FLOWS FROM OPERATING ACTIVITIES:

 

  

 

  

Net loss

$

(5,997)

$

(3,400)

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

 

 

Depreciation and amortization

 

1,061

 

102

Non-cash lease expense

271

29

Gain on extinguishment of debt

(51)

Gain on sale of mortgages

(1,181)

Stock-based compensation

 

2,407

 

870

Bad debt expense

 

 

77

Change in operating assets and liabilities:

 

 

Accounts receivable

 

(154)

 

2

Prepaid and current other assets

(29)

386

Other assets

80

(1)

Accounts payable

(410)

571

Accrued and other current liabilities

(65)

461

Operating lease liabilities

(225)

(27)

Derivative assets

(342)

Mortgage loans held for sale

(61,488)

Proceeds from sale and principal payments on mortgage loans held for sale

67,713

Net cash provided by (used in) operating activities

 

1,641

 

(981)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

  

 

  

Purchase of property and equipment

 

(317)

 

(402)

Amounts paid for business and asset acquisitions; net of cash acquired

(1,572)

(2,115)

Purchase of intangible assets

 

(763)

 

(149)

Net cash used in investing activities

 

(2,652)

 

(2,666)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

  

 

  

Principal payments on long-term debt

 

(467)

 

(4)

Change in borrowings on warehouse lines of credit (net of effect of acquisition)

(4,852)

Repurchase of common stock

(989)

Net cash used in financing activities

 

(6,308)

 

(4)

Net decrease in cash, cash equivalents, and restricted cash

 

(7,319)

 

(3,651)

Cash, cash equivalents, and restricted cash at beginning of period

 

37,921

 

29,561

Cash, cash equivalents, and restricted cash at end of period

$

30,602

$

25,910

Supplemental disclosure of cash and non-cash transactions:

 

 

Cash paid for interest

$

$

4

Income taxes paid

Amounts due to sellers

700

Capitalized stock-based compensation

51

Right of use assets obtained in exchange for lease liabilities

1,786

Issuance of common stock for purchase of business

5,905

1,172

Extinguishment of Paycheck Protection Program Loan

51

Loan receivable forgiven and used as purchase consideration

165

Reconciliation of cash and restricted cash

Cash and cash equivalents

$

30,524

$

24,918

Restricted cash

78

992

Total cash, cash equivalents, and restricted cash shown in statement of cash flows

$

30,602

$

25,910

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

6

Table of Contents

FATHOM HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Organization, Consolidation and Presentation of Financial Statements

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 services and supporting software called intelliAgent. The Company’s brands include Fathom Realty, Dagley Insurance, Encompass Lending, intelliAgent, LiveBy, Real Results, Verus Title and Cornerstone.

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.

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, 2021 included in the Company’s Annual Report on Form 10-K filed with the Security and Exchange Commission (“SEC”) on March 9, 2022 (the “Form 10-K”). 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. In January and February 2022, the Company acquired Cornerstone Financial (“Cornerstone”) and iPro realty Network (“iPro”), respectively, in separate transactions accounted for as business combinations. Cornerstone is a real estate mortgage business that will help expand the Company’s reach in the Washington DC and surrounding markets. The acquisition of iPro, a real estate brokerage business, will help expand the Company’s reach in the Utah real estate market.

As previously disclosed in the Form 10-K, certain prior period amounts for the three months ended March 31, 2021 have been revised to conform to the current presentation. These changes have no impact on our previously reported consolidated balance sheets or statements of operations.

The Company has reviewed events occurring through the date the financial statements were available to be issued and no subsequent events occurred requiring accrual or disclosure.

Note 2. Risks and Uncertainties

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 I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021 (the "Form 10-K") for further detail regarding the risks the Company faces.

Liquidity — The Company has a history of negative cash flows from operations and operating losses. The Company generated net losses of approximately $6.0 million and $3.4 million for the three months ended March 31, 2022 and 2021, respectively. Additionally, the Company anticipates further expenditures associated with the process of expanding its business organically and via acquisitions. The Company had cash and cash equivalents of $30.5 million and $37.8 million as of March 31, 2022 and December 31, 2021, respectively. Management believes that existing cash from its 2021 common stock offering along with its planned budget, which includes continued increases in the number of its agents and transactions at rates consistent with historical growth, plus growth from increasing attach rates across the Company’s businesses from internal referrals and the expected ability to achieve sales volumes necessary to cover forecasted expenses, provide sufficient funding to continue as a going concern for a period of at least one year from the date of the issuance of the unaudited interim consolidated financial statements.

7

Table of Contents

FATHOM HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

The Company is 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 continuing 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 any currently known and future variant, on its results of operations, financial condition, or liquidity for the year ending December 31, 2022 and beyond. While the development and availability of multiple COVID-19 vaccines lessened the impact of COVID-19 in 2021 and the quarter ended March 31, 2022, if COVID-19 continues, it may have a material adverse effect on the Company’s financial condition, liquidity, and future results of operations.

Russia and Ukraine Conflict — In February 2022, Russia invaded Ukraine resulting in the United States, Canada, the European Union and other countries imposing economic sanctions on Russia. While this conflict has not impacted the Company directly, the full impact on the United States and other economies is unknown and cannot be predicted.  This conflict could cause an adverse impact on U.S. economy and financial markets which could adversely affect the housing industry and home purchases and sales, which in turn could have a material impact on the Company's financial condition or 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 doubtful accounts, legal contingencies, income taxes, deferred tax asset valuation allowances, stock-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.

Note 3. Recent Accounting Pronouncements

Recently Issued Accounting Pronouncements Not Yet Adopted — In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which 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.

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FATHOM HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 4. Acquisitions

The Company completed two acquisitions in the three months ended March 31, 2022, both accounted for as business combinations (the “2022 Acquisitions”). On January 24, 2022, the Company acquired Cornerstone, a real estate mortgage business in the Washington DC and surrounding markets, for approximately $4.7 million. The purchase price was comprised of $1.1 million in cash consideration and 267,470 shares of common stock with an acquisition date fair value of $3.6 million. Approximately $0.6 million of the cash consideration is due within one year of the acquisition date. On February 8, 2022, the Company acquired iPro, a real estate brokerage business in the Utah real estate market, for total consideration of approximately $4.2 million. The purchase price included cash consideration of approximately $1.8 million and 167,824 shares of common stock with an acquisition date fair value of $2.3 million. Approximately $0.1 million of the cash consideration is due within one year of the acquisition date. Assets acquired and liabilities assumed in the individual acquisitions were recorded on the Company’s condensed consolidated balance sheet at their estimated fair values as of the respective dates of acquisition, including mortgage loans held for sale of approximately $3.5 million, lease right of use assets and lease liabilities of approximately $0.6 million, accrued liabilities of approximately $0.4 million and warehouse lines of credit of approximately $3.4 million. The Company recorded finite-lived intangible assets of approximately $3.6 million and goodwill of approximately $4.9 million. Due to the timing of these acquisitions, the valuation of net assets acquired has not been finalized and is expected to be completed no later than one year from the acquisition date in accordance with U.S. generally accepted accounting principles (“GAAP”). Acquisition related costs incurred during the three months ended March 31, 2022 were $51,000 and are included in general and administrative expense. Pro forma information has not been included as it is impracticable to obtain the information due to the lack of availability of historical U.S. GAAP financial data. The results of the operations of these businesses do not have a material effect on the Company’s consolidated results of operations.

During the three months ended March 31, 2021, the Company completed two acquisitions. On March 1, 2021, the Company acquired substantially all of the assets of Naberly for cash consideration of approximately $2.7 million in a transaction accounted for as an asset acquisition. The total acquisition cost, including transaction costs of approximately $0.1 million, was approximately $2.8 million and was recorded as software intangible assets. 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.

Note 5. Intangible Assets, Net

Intangible assets, net consisted of the following (amounts in thousands):

    

March 31, 2022

    

    

    

Gross Carrying

Accumulated

Net Carrying

Amount

Amortization

Value

Trade names

$

7,393

$

(613)

$

6,780

Software development

 

9,831

 

(1,508)

 

8,323

Customer relationships

8,180

(1,200)

6,980

Agent relationships

 

5,576

 

(328)

 

5,248

Know-how

430

(83)

347

$

31,410

$

(3,732)

$

27,678

    

December 31, 2021

    

    

    

Gross Carrying

Accumulated

Net Carrying

Amount

Amortization

Value

Trade names

$

6,326

$

(454)

$

5,872

Software development

 

9,017

 

(1,095)

 

7,922

Customer relationships

8,180

(897)

7,283

Agent relationships

3,030

(233)

2,797

Know-how

 

430

 

(61)

 

369

$

26,983

$

(2,740)

$

24,243

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FATHOM HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Estimated future amortization intangible assets as of March 31, 2022 was as follows (amounts in thousands):

Years Ending December 31,

    

    

2022 (remaining)

$

6,763

2023

 

4,083

2024

 

3,969

2025

 

3,734

2026

 

3,188

Thereafter

5,941

Total

$

27,678

The aggregate amortization expense for intangible assets was $1.0 million and $0.1 million, of which $0.5 million and $0.1 million was included in technology and development expense for the three months ended March 31, 2022 and 2021, respectively.

Note 6. Goodwill

The changes in the carrying amount of goodwill by reportable segment as of March 31, 2022 were as follows (amounts in thousands):

Real Estate

    

Brokerage

    

Mortgage

    

Technology

    

Other (a)

    

Total

Balance at December 31, 2021

$

1,099

$

7,399

$

4,168

$

7,875

$

20,541

Goodwill acquired during the period

1,432

3,439

4,871

Balance at March 31, 2022

$

2,531

$

10,838

$

4,168

$

7,875

$

25,412

(a)Other comprises goodwill not assigned to a reportable segment.

Note 7. Accrued and Other Current Liabilities

Accrued and other current liabilities consisted of the following (amounts in thousands):

    

March 31, 2022

    

December 31, 2021

Deferred annual fee

$

883

$

546

Due to sellers

2,100

1,400

Accrued compensation

884

1,033

Other accrued liabilities

 

1,708

 

1,422

Total accrued and other current liabilities

$

5,575

$

4,401

Note 8. Warehouse Lines of Credit

Encompass Lending Group (“Encompass”), an indirect wholly owned subsidiary of the Company, utilizes line of credit facilities as a means of temporarily financing mortgage loans pending their sale.  The underlying warehouse lines of credit agreements, as described below, contain financial and other debt covenants. As of March 31, 2022, Encompass was in compliance with these debt covenants.

Encompass maintains a master loan warehouse agreement with a bank whereby Encompass borrows funds to finance the origination or purchase of eligible loans. Interest on funds borrowed is equal to the greater of the mortgage interest rate of the underlying loan or 3.625%. The agreement expires in July 2022. The maximum funding of these loans at March 31, 2022 and December 31, 2021 was $15.0 million. At March 31, 2022 and December 31, 2021, the outstanding balance on this warehouse line was approximately $2.4 million and $4.3 million, respectively.

Encompass maintains a mortgage participation purchase agreement with a bank whereby Encompass borrows funds to finance the origination or purchase of eligible loans. Interest on funds borrowed is equal to the greater of the mortgage interest rate of the underlying loan or 3.5%. The agreement expires in April 2023.The maximum funding of these loans at March 31, 2022 and December 31, 2021 was $25.0 million. At March 31, 2022 and December 31, 2021, the outstanding balance on this warehouse line was approximately $3.5 million and $3.1 million, respectively.

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FATHOM HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Encompass maintains a warehousing credit and security agreement with a bank whereby Encompass borrows funds to finance the origination of eligible mortgage loans. Interest on funds borrowed is equal to the daily LIBOR rate plus 2.00% or 3.5% per annum. The agreement expires in April 2023. The Daily Adjusting LIBOR rate plus 2.00% as of March 31, 2022 and December 31, 2021 was 2.33% and 2.09, respectively%. The maximum funding limit of these loans at March 31, 2022 and December 31, 2021 was $15.0 million. At March 31, 2022 and December 31, 2021, the outstanding balance on this warehouse line was approximately $2.3 million and $2.2 million, respectively.

Note 9. Debt

Long-term debt consisted of the following (amounts in thousands):

    

March 31, 2022

    

December 31, 2021

3.75% Small Business Administration installment loan due May 2050

$

172

$

171

Notes payable:

Non-interest-bearing promissory note due July 1, 2022

210

210

2.5% director and officer insurance policy promissory note due July 31, 2022

96

385

6.0 % executive and officer insurance policy promissory note due October 9, 2022

132

211

Total debt

610

977

Less current portion of the Small Business Administration Loan

(21)

(25)

Less current portion of notes payable

(438)

(806)

Long-term debt, net of current portion

$

151

$

146

Note 10. Fair Value Measurements

FASB ASC 820, Fair Value Measurement (“ASC 820”), defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The methodology establishes consistency and comparability by providing a fair value hierarchy that prioritizes the inputs to valuation techniques into three broad levels, which are described below:

Level 1 inputs are quoted market prices in active markets for identical assets or liabilities (these are observable market inputs).
Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability (includes quoted market prices for similar assets or identical or similar assets in markets in which there are few transactions, prices that are not current or prices that vary substantially).
Level 3 inputs are unobservable inputs that reflect the entity’s own assumptions in pricing the asset or liability (used when little or no market data is available).

A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

In general, fair value is based upon quoted market prices, where evaluated. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure the financial instruments are recorded at fair value.

While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Mortgage loans held for sale – The fair value of mortgage loans held for sale is determined, when possible, using quoted secondary-market prices or purchaser commitments. If no such quoted price exists, the fair value of a loan is determined using quoted prices for a similar asset or assets, adjusted for the specific attributes of that loan, which would be used by other market participants. The loans are considered Level 2 on the fair value hierarchy.

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FATHOM HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Derivative financial instruments – Derivative financial instruments are reported at fair value. Fair value is determined using a pricing model with inputs that are unobservable in the market or cannot be derived principally from or corroborated by observable market data. These instruments are Level 3 on the fair value hierarchy.

The fair value determination of each derivative financial instrument categorized as Level 3 required one or more of the following unobservable inputs:

Agreed prices from Interest Rate Lock Commitments (“IRLC”);
Trading prices for derivative instruments; and
Closing prices at March 31, 2022 and December 31, 2021 for derivative instruments.

The following are the major categories of assets and liabilities measured at fair value on a recurring basis as of March 31, 2022 (amounts in thousands):

    

Level 1

    

Level 2

    

Level 3

    

Total

Mortgage loans held for sale

$

$

8,364

$

$

8,364

Derivative assets

 

 

 

395

 

395

$

$

8,364

$

395

$

8,759

The following are the major categories of assets and liabilities measured at fair value on a recurring basis as of December 31, 2021 (amounts in thousands):

    

Level 1

    

Level 2

    

Level 3

    

Total

Mortgage loans held for sale

$

$

9,862

$

$

9,862

Derivative assets

 

 

 

53

 

53

$

$

9,862

$

53

$

9,915

The Company enters into IRLCs to originate residential mortgage loans held for sale, at specified interest rates and within a specific period of time (generally between 30 and 90 days), with customers who have applied for a loan and meet certain credit and underwriting criteria. These IRLCs meet the definition of a derivative and are reflected on the consolidated balance sheets at fair value with changes in fair value recognized in other service revenue on the consolidated statements of operations. Unrealized gains and losses on the IRLCs, reflected as derivative assets and derivative liabilities, respectively, are measured based on the fair value of the underlying mortgage loan, quoted agency mortgage-backed security (“MBS”) prices, estimates of the fair value of the mortgage servicing rights and the probability that the mortgage loan will fund within the terms of the IRLC, net of commission expense and broker fees. The fair value of the forward loan sales commitment and mandatory delivery commitments being used to hedge the IRLCs and mortgage loans held for sale not committed to purchasers are based on quoted agency MBS prices.

Note 11. Leases

Operating Leases

The Company has operating leases primarily consisting of office space with remaining lease terms of less than one year to six years, subject to certain renewal options as applicable.

Leases with an initial term of twelve months or less are not recorded on the balance sheet, and the Company does not separate lease and non-lease components of contracts. There are no material residual guarantees associated with any of the Company’s leases, and there are no significant restrictions or covenants included in the Company’s lease agreements. Certain leases include variable payments related to common area maintenance and property taxes, which are billed by the landlord, as is customary with these types of charges for office space.

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FATHOM HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Our lease agreements generally do not provide an implicit borrowing rate. Therefore, the Company used a benchmark approach to derive an appropriate imputed discount rate. The Company benchmarked itself against other companies of similar credit ratings and comparable quality and derived an imputed rate, which was used in a portfolio approach to discount its real estate lease liabilities. The Company used estimated incremental borrowing rates for all active leases.

The table below presents certain information related to lease costs for the Company’s operating leases (amounts in thousands):

Three months ended March 31, 

2022

    

2021

Operating lease expense

$

332

    

$

48

Short-term lease expense

 

112

 

28

Total lease cost

$

444

$

76

The following table presents the weighted average remaining lease term and the weighted average discount rate related to operating leases.

    

March 31, 2022

    

December 31, 2021

Weighted average remaining lease term (in years) - operating leases

4.48

4.98

Weighted average discount rate - operating leases

 

6.15

%

5.91

%

The following table presents the maturities of lease liabilities (amounts in thousands):

    

Operating

Years Ended December 31,

Leases

2022 (remaining)

1,043

2023

 

1,311

2024

 

1,083

2025

 

847

2026

 

507

2027 and thereafter

623

Total minimum lease payments

5,414

Less effects of discounting

 

(627)

Present value of future minimum lease payments

$

4,787

Note 12. Shareholders’ Equity

On March 10, 2022, the Company’s Board of Directors authorized an expenditure of up to $10 million for the repurchase of shares of the Company’s common stock. The share repurchase program does not have a fixed expiration. Under the program, repurchases can be made from time-to-time using a variety of methods, including open market transactions, privately negotiated transactions or by other means, including through the use of trading plans intended to qualify under Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The actual timing and amount of future repurchases are subject to business and market conditions, corporate and regulatory requirements, stock price, acquisition opportunities and other factors. The repurchase program does not obligate the Company to acquire any particular number of shares and may be suspended or discontinued at any time at the Company’s discretion. During the three months ended March 31, 2022, the Company reacquired 83,811 shares for approximately $1.0 million. As of March 31, 2022, the Company had approximately $9.0 million remaining under the share repurchase authorization.

During the three months ended March 31, 2022, the Company issued shares of common stock as part of the purchase consideration in connection with the acquisitions of iPro and Cornerstone. Refer to Note 4 for additional information about these acquisitions and the shares of common stock issued.

The Company has an outstanding equity-classified warrant issued to an underwriter in August 2020 (the “Underwriter Warrant”) to purchase 240,100 shares of common stock. The Underwriter Warrant is exercisable at a per share exercise price of $11.00 and is exercisable at any time from and after January 31, 2021 through August 4, 2025. As of March 31, 2022, no portion of the Underwriter Warrant has been exercised or expired.

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FATHOM HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 13. Stock-based Compensation

Stock-based compensation expense related to awards issued under the Company’s stock compensation plans for the three months ended March 31, 2022 and 2021 was as follows (amounts in thousands):

Three months ended March 31, 

    

2022

    

2021

Commission and other agent-related cost

$

832

$

41

Operations and support

71

Technology and development

 

2

 

General and administrative

1,457

Marketing

45

Total stock-based compensation

$

2,407

$

41

The Company capitalized $51,000 of stock-based compensation expense associated with the cost of developing software for internal use during the three months ended March 31, 2022.

At March 31, 2022, the total unrecognized compensation cost related to non-vested restricted stock awards was $9.8 million, which is expected to be recognized over a period of approximately 1.67 years. There was no  unrecognized compensation cost related to stock options, as all outstanding stock options were vested at March 31, 2022. There were no grants of stock options during the three months ended March 31, 2022.

Note 14. Related Party Transactions

Marketing expense for both the three months ended March 31, 2022 and 2021 includes approximately $0.1 million from related parties in exchange for the Company receiving marketing services.

Note 15. Net Loss per Share Attributable to Common Stock

Basic loss per share of common stock is computed by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted loss per share is calculated by adjusting the weighted-average number of shares outstanding for the dilutive effect of common stock equivalents outstanding for the period, determined using the treasury-stock method. Diluted loss per share excludes, when applicable, the potential impact of stock options, unvested shares of restricted stock awards, and common stock warrants because their effect would be anti-dilutive due to net loss.

The calculation of basic and diluted net loss per share attributable to common stock was as follows (amounts in thousands except share data):

    

Three months ended March 31, 

    

2022

    

2021

Numerator:

Net loss attributable to common stock—basic and diluted

$

(5,997)

$

(3,400)

Denominator:

Weighted- average basic and diluted shares outstanding

16,323,157

13,450,111

Net loss per share attributable to common stock—basic and diluted

$

(0.37)

$

(0.25)

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FATHOM HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following outstanding shares of common stock equivalents were excluded from the computation of the diluted net loss per share attributable to common stock for the periods presented because their effect would have been anti-dilutive.

    

Three months ended March 31, 

    

2022

    

2021

Stock options

43,996

60,970

Non-vested restricted stock awards

693,717

508,784

Common stock warrants

240,100

240,100

Note 16. Income Taxes

As of December 31, 2021, the Company had federal net operating loss carryforwards of approximately $24.3 million and state net operating loss carryforwards of approximately $12.8 million, respectively. Losses will begin to expire, if not utilized, in 2032. Utilization of the net operating loss carryforwards may be subject to an annual limitation according to Section 382 of the Internal Revenue Code of 1986 as amended, and similar provisions.

The Company applies the standards on uncertainty in income taxes contained in ASC Topic 740, Accounting for Income Taxes. The adoption of this interpretation did not have any impact on the Company’s consolidated financial statements, as the Company did not have any significant unrecognized tax benefits during the three months ended March 31, 2022 or the year ended December 31, 2021. In general the statute of limitations remains open subsequent to and including the year ended December 31, 2019 however, due to (and to the extent of) certain acquired losses the statute of limitations remains open for periods subsequent to and including the year ended December 31, 2015.

In determining the quarterly provision for income taxes, the Company used the annual effective tax rate applied to year-to-date income. The Company’s annual estimated effective tax rate differs from the statutory rate primarily as a result of state taxes, permanent differences, and changes in the Company’s valuation allowance. The income tax effects of unusual or infrequent items, including a change in the valuation allowance as a result of a change in judgment regarding the realizability of deferred tax assets are excluded from the estimated annual effective tax rate and are required to be discretely recognized in the interim period in which they occur.

The Company has historically maintained a valuation allowance against deferred tax assets and reported only minimal current state tax expense. The Company recorded an income tax expense of approximately $25,000 and income tax expense of $5,000 for the three months ended March 31, 2022 and 2021 respectively. The Company expects to maintain a valuation allowance on current year remaining net deferred tax assets by year-end due to historical operating losses.

Note 17. Segment Reporting

The Company’s three reportable segments are Real Estate Brokerage, Mortgage and Technology. Through its Real Estate Brokerage segment, the Company provides real estate brokerage services. Through its Mortgage segment, the Company provides residential loan origination and underwriting services. Through its Technology segment, the Company provides SaaS solutions and data mining for third party customers to develop its intelliAgent platform for current use by the Company’s real estate agents. In reporting periods prior to the Company’s acquisitions of LiveBy and E:49, which were completed in the three months ended June 30, 2021, the Company aggregated its identified operating segments into one reportable segment. Certain prior period amounts for the three months ended March 31, 2021 have been revised to conform to the current presentation. These changes have no impact on our previously reported consolidated balance sheets or statements of operations.

Revenue and Adjusted EBITDA are the primary measures used by the Chief Operating Decision Maker (“CODM”) to evaluate financial performance of the reportable segments and to allocate resources. Adjusted EBITDA represents the revenues of the operating segment less operating expenses directly attributable to the respective operating segment. Adjusted EBITDA is defined by the Company as net income (loss), excluding other expense, costs related to acquisitions, income tax benefit, depreciation and amortization, and stock-based compensation expense. In particular, the Company believes the exclusion of non-cash stock-based compensation expense related to restricted stock awards and stock options and transaction-related costs provides a useful supplemental measure in evaluating the performance of the Company’s operations and provides better transparency into its results of operations. The Company’s presentation of Adjusted EBITDA might not be comparable to similar measures used by other companies.

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FATHOM HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company does not allocate assets to its reportable segments as they are not included in the review performed by the CODM for purposes of assessing segment performance and allocating resources. The balance sheet is managed on a consolidated basis and is not used in the context of segment reporting. The Company has included the results of the acquisitions during the reported period from the acquisition date of the respective acquisition.

Key operating data for the reportable segments for the three months ended March 31, 2022 and 2021 are set forth in the tables below (amounts in thousands).

Three months ended

March 31, 

Revenue

    

2022

    

2021

Real Estate Brokerage

$

84,044

$

49,156

Mortgage

2,864

Technology

645

Corporate and other services (a)

2,529

490

Total revenue

$

90,082

$

49,646

Three months ended

March 31, 

Adjusted EBITDA

    

2022

    

2021

Real Estate Brokerage

$

945

$

(506)

Mortgage

(490)

 

Technology

(395)

 

(315)

Total Segment Adjusted EBITDA

60

 

(821)

Corporate and other services (a)

(2,176)

 

(1,222)

Total Company Adjusted EBITDA

(2,116)

(2,043)

Depreciation and amortization

(1,061)

(102)

Other (expense) income, net

(337)

 

54

Income tax (expense)

(25)

 

(5)

Stock-based compensation

(2,407)

 

(870)

Transaction-related costs

(51)

 

(434)

Net loss

$

(5,997)

$

(3,400)

(a)Transactions between segments are eliminated in consolidation. Such amounts are eliminated through the Corporate and other services line.

Note 18. Commitments and Contingencies

From time to time the Company is involved in litigation, claims, and other proceedings arising in the ordinary course of business. Such litigation and other proceedings may include, but are not limited to, actions relating to employment law and misclassification of employees versus independent contractors, intellectual property, commercial or contractual claims, brokerage or real estate disputes, or other consumer protection statutes, ordinary-course brokerage disputes like the failure to disclose property defects, commission disputes, and various liabilities based upon conduct of individuals or entities outside of the Company’s control, including agents and third party contractor agents. Litigation and other disputes are inherently unpredictable and subject to substantial uncertainties and unfavorable resolutions could occur. As of March 31, 2022, there was no material litigation against the Company.

In conducting its operations, the Company routinely holds customers’ assets in escrow, pending completion of real estate transactions, and is responsible for the proper disposition of these balances for its customers. Certain of these amounts are maintained in segregated bank accounts and have not been included in the accompanying consolidated balance sheets, consistent with GAAP and industry practice. The balances amounted to $5.8 million and $2.3 million at March 31, 2022 and December 31, 2021, respectively.

16

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FATHOM HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Encompass Net Worth Requirements

In order to maintain approval from the U.S. Department of Housing and Urban Development to operate as a Title II non-supervised mortgagee, our indirect subsidiary Encompass is required to maintain adjusted net worth of $1,000,000 and must maintain liquid assets (cash, cash equivalents, or readily convertible instruments) of 20% of the required net worth. As of March 31, 2022, Encompass had adjusted net worth of approximately $3.3 million and liquid assets of $4.2 million.

Commitments to Extend Credit

Encompass enters into IRLCs with borrowers who have applied for residential mortgage loans and have met certain credit and underwriting criteria. These commitments expose Encompass to market risk if interest rates change and the underlying loan is not economically hedged or committed to a purchaser. Encompass is also exposed to credit loss if the loan is originated and not sold to a purchaser and the mortgagor does not perform. The collateral upon extension of credit typically includes a first deed of trust in the mortgagor’s residential property. Commitments to originate loans do not necessarily reflect future cash requirements as commitments are expected to expire without being drawn upon.

Regulatory Commitments

Encompass is subject to periodic audits and examinations, both formal and informal in nature, from various federal and state agencies, including those made as part of the regulatory oversight of mortgage origination, servicing and financing activities. Such audits and examinations could result in additional actions, penalties or fines by state or federal government bodies, regulators or the courts.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

The Company’s consolidated operating results are affected by a wide variety of factors that could materially and adversely affect revenues and profitability, including the risk factors described in our most recent Annual Report on Form 10-K, as amended (the “Form 10-K”), and the risk factors described in this quarterly report. As a result of these and other factors, the Company may experience material fluctuations in future operating results on a quarterly or annual basis, which could materially and adversely affect its business, consolidated financial condition, liquidity, operating results, and common stock prices. Furthermore, this quarterly report, the Form 10-K and other documents filed by the Company with the Securities and Exchange Commission (“SEC”) contain certain forward-looking statements under the Private Securities Litigation Reform Act of 1995 (“Forward-Looking Statements”) with respect to the business of the Company. Forward-Looking Statements are necessarily subject to risks and uncertainties, many of which are outside our control, that could cause actual results to differ materially from these statements.  Forward-Looking Statements can be identified by such words as “anticipate,” “believe,” “goals,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue,” “forecast” and similar references to future periods. All statements other than statements of historical facts included in this report regarding our strategies, prospects, financial condition, operations, costs, plans and objectives and regarding the anticipated impact of COVID-19 are Forward-Looking Statements. These Forward-Looking Statements are subject to certain risks and uncertainties, including those detailed in the Form 10-K and in the risk factors described in this quarterly report, which could cause actual results to differ materially from these Forward-Looking Statements. Except as required by law, the Company undertakes no obligation to publicly release the results of any revisions to these Forward-Looking Statements which may be necessary to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Any Forward-Looking Statement made by the Company is based only on information currently available to us and speaks only as of the date on which it is made.

The terms the “Company,” “Fathom,” “we,” “us,” and “our” as used in this report refer to Fathom Holdings Inc. and its consolidated subsidiaries unless otherwise specified.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The information in this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the Company’s consolidated financial statements and the related notes set forth in Item 1 of Part I of this Quarterly Report on Form 10-Q, our MD&A set forth in the Form 10-K, and our audited consolidated financial statements and related notes set forth in the Form 10-K. See Part II, Item 1A, “Risk Factors,” below, and “Special Note Regarding Forward-Looking Information,” above, and the information referenced therein, for a description of risks that we face and important factors that we believe could cause actual results to differ materially from those in our forward-looking statements. All statements herein regarding the likely impact of COVID-19 and other potential risks constitute forward-looking statements. When we cross-reference to a “Note,” we are referring to our “Notes to Unaudited Condensed Consolidated Financial Statements,” unless the context indicates otherwise. All amounts noted within the tables are in thousands except per share amounts or where otherwise noted and percentages are approximate due to rounding.

Given the volatility of the global environment as a result of the ongoing COVID-19 pandemic, the effect of COVID-19 will not be fully reflected in our results of operations and financial performance until future periods.

Overview

Fathom Realty LLC was originally founded in January of 2010 and later incorporated as Fathom Holdings Inc. in the state of North Carolina on May 5, 2017. We are 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 by leveraging our proprietary cloud-based software, intelliAgent. The Company’s brands include Fathom Realty, Dagley Insurance, Encompass Lending, intelliAgent, LiveBy, Real Results, and Verus Title.

Fathom Realty Holdings, LLC, a Texas limited liability company (“Fathom Realty”), is a wholly owned subsidiary of Fathom Holdings Inc. Fathom Realty owns 100% of 35 subsidiaries, each an LLC representing the state in which the entity operates (e.g., Fathom Realty NJ, LLC).

Corporate Developments During 2022 and 2021

In January 2022, the Company acquired Cornerstone, a real estate mortgage business that is expected to help expand the Company’s reach in the Washington DC and surrounding markets.

In February 2022, the Company acquired iPro, a real estate brokerage business that is expected to help expand the Company’s reach in the Utah real estate market.

In March 2021, the Company completed its acquisitions of Red Barn Real Estate, LLC (“Red Barn”) and Naberly Inc. (“Naberly”). The acquisition of Red Barn, a real estate brokerage business, is expected to help us to expand our reach in the Atlanta region real estate market. The acquisition of Naberly is facilitating our further development of our proprietary intelliAgent platform to enhance offerings and improve operational efficiency.

In April 2021, the Company completed its acquisition of E4:9 Holdings, Inc. (“E4:9”). The acquisition of E4:9 is part of our vision to build a vertically integrated, end-to-end real estate operation by offering mortgage and insurance services to our agents to further serve our customers.

Also in April 2021, the Company completed its acquisition of LiveBy, Inc. (“LiveBy”). We believe the acquisition of LiveBy and its hyperlocal data and technology platform builds credibility for our real estate agents in their respective geographic areas by showcasing their local expertise and helping customers discover the best locations in which to live.

In June 2021, the Company completed its acquisition of Epic Realty (“Epic”). The acquisition of Epic, a real estate brokerage business, should help us to expand our reach in the Idaho real estate market. We further augmented our realty presence in Idaho with the addition of Woodhouse Group Realty (“Woodhouse”) in November 2021.

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In November 2021, the Company completed an offering of common stock, which resulted in the issuance and sale by the Company of 1,750,000 shares of common stock, at a public offering price of $25.00 per share, generating gross proceeds of approximately $35 million, of which the Company received approximately $32.5 million, after deducting underwriting discounts and other offering costs (the “2021 Equity Offering”).

COVID-19 and Other Risks

Our business is dependent on the economic conditions within the markets in which we operate. Changes in these conditions can have a positive or negative impact on our business. The economic conditions influencing the housing markets primarily include economic growth, interest rates, unemployment, consumer confidence, mortgage availability, and supply and demand.

In periods of economic growth, demand typically increases resulting in increasing home sales transactions and home sales prices. Similarly, a decline in economic growth, increasing interest rates and declining consumer confidence generally decreases demand. Additionally, regulations imposed by local, state, and federal government agencies can also negatively impact the housing markets in which we operate.  Finally, national and global events, including geopolitical instability, that impact economic conditions and financial markets, including interest rates, can adversely impact the housing market.

In December 2019, a novel strain of coronavirus, COVID-19, was identified in Wuhan, China. This new coronavirus has caused a global health emergency and was declared a pandemic by the World Health Organization in March 2020 (“COVID-19’’ or the “Pandemic”). In an effort to contain and slow the spread of COVID-19, governments implemented various measures, such as, ordering non-essential businesses to close, issuing travel advisories, cancelling large scale public events, ordering residents to shelter in place, and requiring the public to practice social distancing. In most states, real estate has been considered an essential business. The spread of the Delta and Omicron variants of COVID-19 or other more transmissible variants may extend the impact of COVID-19 on our business.

We are continually monitoring the affects COVID-19 could have on our business. We believe that in the states and regions in which we operate the social and economic impacts, which include, but are not limited to, the following, could have a significant bearing on our 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. In response to COVID-19, the Company implemented cost-saving measures early on to include the elimination of non-essential travel and in-person training activities, and deferral of certain planned expenditures.

For the year ended December 31, 2021, and the quarter ended March 31, 2022, due in part to the widespread availability of multiple COVID-19 vaccines, the effects of the COVID-19 on business worldwide lessened. However, the continuing impact from COVID-19, including inflationary pressure in the U.S. and world economies due to supply chain and other issues, including recent increases in interest rates, is not fully known and cannot be estimated as the U.S. and global economies continue to react.

The impact of COVID-19 to the Company for the year ended December 31, 2021, and for the three months ended March 31, 2022, has been minimal. Despite the ongoing Pandemic, the Company’s transactions and base of agents increased during 2021 and the first quarter of March 31, 2022. However, while the Company believes it is well positioned in times of economic uncertainty, it is not able to estimate the effects of COVID 19 on its results of operations, financial condition, or liquidity for the year ending December 31, 2022 and beyond. If the Pandemic continues, it might have a material adverse effect on the Company’s financial condition, liquidity, and future results of operations, as would the economic policies enacted in the U.S. and other countries in response to the Pandemic, world conditions resulting from the Pandemic.

Real Estate Agents

Due to our low-overhead business model, which leverages our proprietary technology, we can offer our agents the ability to keep significantly more of their commissions compared to traditional real estate brokerage firms. We believe we offer our agents some of the best technology, training, and support available in the industry. We believe our business model and our focus on treating our agents well will attract more agents and higher-producing agents.

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We had the following number of agents as of:

March 31,

 

    

2022

    

2021

    

Change

 

Agents

 

9,006

 

6,045

 

49

%

Reportable Segments

Our reportable segments are Real Estate Brokerage, Mortgage and Technology. In reporting periods prior to the Company’s acquisitions of LiveBy and E:49, which were competed in the second quarter of 2021, the Company aggregated its identified operating segments into one reportable segment. Certain prior period amounts for the three months ended March 31, 2021 have been revised to conform to the current presentation. These changes have no impact on our previously reported consolidated balance sheets or statements of operations

Components of Our Results of Operations

Revenue

Our revenue primarily consists of commissions generated from real estate brokerage services. We also have other service revenue, including mortgage lending, title insurance, home and other insurance, and SaaS revenues.

Gross commission income

We recognize commission-based revenue on the closing of a transaction, less the amount of any closing-cost reductions. Revenue is affected by the number of real estate transactions we close, the mix of transactions, home sale prices, and commission rates.

Other Services Revenue

Mortgage Lending

We recognize revenue streams for our mortgage lending services business which are primarily comprised of loans sold, origination and other fees.

The gain on sale of mortgage loans represents the difference between the net sales proceeds and the carrying value of the mortgage loans sold and includes the servicing rights release premiums.

Servicing rights release premiums represent revenues earned when the risks and rewards of ownership of servicing rights are transferred to third parties.

Retail origination fees are principally revenues earned from loan originations and recorded in the statement of operations in other service revenue. 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.

Insurance Agency Service Revenues

The revenue streams for the Company’s home and other 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 point in time upon 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.

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Title Service Revenues

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.

SaaS Revenues

The Company generates revenue from subscriptions 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 30 days’ notice after the first year. The Company’s subscription arrangements do not provide customers with the right to take possession of the software supporting the platform. Subscription revenue, which includes support, is recognized on a straight-line basis over the non-cancellable contractual term of the arrangement, generally beginning on the date that the Company’s service is made available to the customer and is recorded as other service revenue in the statement of operations.

Operating Expenses

Commission and other agent-related costs

Commission and other agent-related costs consists primarily of agent commissions, less fees paid to us by our agents, order fulfillment, stock-based compensation for agents, title searches, and direct cost to fulfill the services provided. We expect commission and other agent-related costs to continue to rise in proportion to the expected growth in our operations.

Operations and support

Operations and support consist primarily of direct cost to fulfill the services from our mortgage lending, title services, insurance services and other services provided. We expect operations and support to continue to rise in proportion to the expected growth in our operations.

Technology and development

Technology and development expenses primarily include personnel costs, including base pay, bonuses, benefits, and stock based compensation, related to ongoing development and maintenance of our proprietary software for use by our agents, customers, and support staff. Technology and development expenses also include amortization of capitalized software and development costs, data licenses, other software, and equipment costs, as well as infrastructure and operational expenses, such as, for data centers, communication, and hosted services.

General and administrative

General and administrative expenses consist primarily of personnel costs, including base pay, bonuses, benefits, and stock-based compensation, and fees for professional services. Professional services principally consist of external legal, audit, and tax services. In the short term, we expect general and administrative expenses to increase in absolute dollars due to the anticipated growth of our business and to meet the increased compliance requirements associated with our operation as a public company. However, in the long term, we anticipate general and administrative expenses as a percentage of revenue to decrease over time, if and as we are able to increase revenue.

Marketing

Marketing expenses consist primarily of expenses for online and traditional advertising, as well as costs for marketing and promotional materials. Advertising costs are expensed as they are incurred. We expect marketing expenses to increase in absolute dollars as we continue to expand our advertising programs, including promotion of our newly acquired business lines and we anticipate marketing expenses as a percentage of revenue to decrease over time, if and as we are able to increase revenue.

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Depreciation and amortization

Depreciation and amortization represent the depreciation charged on our fixed assets and intangible assets other than capitalized software. Depreciation expense is recorded on a straight-line method, based on an estimated useful life of five years for computer hardware and software, seven years for furniture and equipment and seven years for vehicles. Leasehold improvements are depreciated over the lesser of the life of the lease term or the useful life of the improvements. Amortization expense consists of amortization recorded on acquisition-related intangible assets, excluding purchased software. Customer relationships are amortized on an accelerated basis, which coincides with the period of economic benefit we expect to receive. All other finite-lived intangibles are amortized on a straight-line basis over the term of the expected benefit and the respective amortization expense is included in technology and development expense. In accordance with U.S. GAAP, we do not amortize goodwill.

Income Taxes

We have not recorded any U.S. federal or state tax benefits for the net losses incurred during the period ended March 31, 2022 due to our uncertainty of realizing a benefit from those items.  As of December 31, 2021, we had federal net operating loss carryforwards of approximately $24.3 million and state net operating loss carryforwards of approximately $12.8 million. Losses will begin to expire, if not utilized, in 2032. Utilization of the net operating loss carryforwards may be subject to an annual limitation according to Section 382 of the Internal Revenue Code of 1986 as amended, and similar state law provisions.

Results of Operations

Comparison of the Three Months Ended March 31, 2022 and 2021 (dollar amounts in thousands)

Revenue

Three Months Ended 

 

March 31,

Change

    

2022

    

2021

    

Dollars

    

Percentage

 

Gross commission income

$

84,044

$

49,156

$

34,888

71

%

Other service revenue

6,038

490

5,548

 

1,132

%

Total revenue

$

90,082

$

49,646

$

40,436

81

%

For the three months ended March 31, 2022, gross commission income increased by approximately $34.9 million or 71%, as compared with the three months ended March 31, 2021. This increase was primarily attributable to an increase in transaction volume and to an increase in average revenue per transaction due to rising home prices. During the three months ended March 31, 2022, transaction volume increased by 47%. During the three months ended March 31, 2022, there were 10,087 real estate transactions compared to 6,874 transactions for the three months ended March 31, 2021. Our transaction volume increased primarily due to the organic growth in the number of agents contracted with us and agents acquired through the acquisitions of Red Barn, Epic and iPro. During the three months ended March 31, 2022, average revenue per transaction increased by 24% to $8,931 from $6,874 during the three months ended March 31, 2021.

For the three months ended March 31, 2022, other service revenue was approximately $6.0 million and was attributable to the Company’s acquisitions of Verus, E4:9 and LiveBy.

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Operating Expenses

Three Months Ended 

 

March 31,

Change

    

2022

    

2021

    

Dollars

    

Percentage

 

Commission and other agent-related costs

$

79,479

$

46,400

$

33,079

 

71

%

Operations and support

2,175

68

2,107

3,099

%

Technology and development

1,474

385

1,089

283

%

General and administrative

10,854

5,819

5,035

87

%

Marketing

1,163

402

761

189

%

Depreciation and amortization

572

21

551

2,624

%

Total operating expenses

$

95,717

$

53,095

$

42,622

80

%

For the three months ended March 31, 2022, commission and other agent-related costs increased by approximately $33.1 million, or 71%, as compared with the three months ended March 31, 2021. Commission and other agent-related costs primarily includes costs related to agent commissions, net of fees paid to us by our agents. These costs generally correlate with recognized revenues. As such, the increase in commission and other agent-related costs compared to the same period in 2021 was primarily attributable to an increase in agent commissions paid due to higher transaction volume and rising home prices.

For the three months ended March 31, 2022, operations and support expenses were approximately $2.2 million and were attributable to the Company’s acquisitions of Verus and E4:9.

For the three months ended March 31, 2022, technology and development expenses increased by approximately $1.1 million, or 283%, as compared with the year ended March 31, 2021. The increase was primarily attributable to our ongoing investment in the intelliAgent platform and our newly acquired LiveBy business.

For three months ended March 31, 2022, general and administrative expenses increased by approximately $5.0 million, or 87%, as compared with the three months ended March 31, 2021. The increase in G&A was primarily attributable to recently completed acquisitions and to increases in non-cash stock compensation expense. It is anticipated that G&A expense will increase on an absolute dollar basis going forward, driven by acquisitions and costs related to scaling and integrating the Company’s business lines. G&A as a percentage of revenue is expected to decline over the long-term as revenue increases.

For the three months ended March 31, 2022, marketing expenses increased by approximately $0.8 million, or 189%, as compared with the three months ended March 31, 2021. The increase was attributable to an increase in direct advertising costs primarily related to the Company’s expansion in new regions and markets and to promoting its newly acquired businesses.

For the three months ended March 31, 2022, depreciation and amortization expenses increased by approximately $0.6 million, or 2,624%, as compared with the three months ended March 31, 2021. The increase in depreciation and amortization expense is due to the amortization of the intangible assets (other than capitalized and purchased software for which amortization is included in technology and development expense) acquired in connection with the acquisition of Red Barn, E4:9, and Epic as well as an increase in depreciation expense due to an increase in our depreciable asset base.

Income Taxes

The Company recorded income tax expense of $25,000 and of $5,000 for the three months ended March 31, 2022 and 2021, respectively. The tax expense for the three months ended March 31, 2022 is primarily the result of current state income tax liabilities.

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Liquidity and Capital Resources (dollar amounts in thousands)

Capital Resources

March 31,

December 31,

Change

 

    

2022

    

2021

    

Dollars

    

Percentage

 

Current assets

$

46,216

$

54,450

 

$

(8,234)

 

(15)

%

Current liabilities

 

20,188

 

21,072

 

(884)

 

(4)

%

Net working capital

$

26,028

$

33,378

 

$

(7,350)

 

(22)

%

To date, our principal sources of liquidity have been the net proceeds we received through public offerings and private sales of our common stock, as well as proceeds from loans. As of March 31, 2022, our cash totaled approximately $30.5 million, which represented a decrease of $7.3 million compared to December 31, 2021. As of March 31, 2022, we had net working capital of approximately $26.0 million, which represented a decrease of $7.4 million compared to December 31, 2021. We anticipate that our existing balances of cash and cash equivalents and future expected cash flows generated from our operations will be sufficient to satisfy our operating requirements for at least the next twelve months from the date of the issuance of the unaudited interim consolidated financial statements.

Our future capital requirements depend on many factors, including any future acquisitions, our level of investment in technology, and our rate of growth into new markets. Our capital requirements might also be affected by factors which we cannot control such as the residential real estate market, interest rates, and other monetary and fiscal policy changes, any of which could adversely affect the manner in which we currently operate. Additionally, as the impact of COVID-19 and other world events, such as the recent crisis in Ukraine, on the economy and our operations evolves, we will continuously assess our liquidity needs. In the event of a sustained market deterioration, we may need or seek advantageously to obtain additional funding through equity or debt financing, which might not be available on favorable terms or at all and could hinder our business and dilute our existing shareholders.

Cash Flows

Comparison of the Three Months Ended March 31, 2022 and 2021 (dollar amounts in thousands)