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)
(
(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 |
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 ☐ | ||
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 August 5, 2022, the registrant had
FATHOM HOLDINGS INC.
FORM 10-Q
For the Quarterly Period Ended June 30, 2022
TABLE OF CONTENTS
2
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements.
FATHOM HOLDINGS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share data)
| June 30, 2022 |
| December 31, 2021 | |||
ASSETS | (Unaudited) | |||||
Current assets: |
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Cash and cash equivalents | $ | | $ | |||
Restricted cash | | | ||||
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 | $ | | $ | | ||
Accrued and other current 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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Lease liability, net of current portion |
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Long-term debt, net of current portion |
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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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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)
(in thousands, except share data)
Three months ended June 30, | Six months ended June 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Revenue | ||||||||||||
Gross commission income | $ | | $ | | $ | | $ | | ||||
Other service revenue | | | | | ||||||||
Total revenue | | | | | ||||||||
Operating expenses |
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Commission and other agent-related costs | | | | | ||||||||
Operations and support | | | | | ||||||||
Technology and development | | | | | ||||||||
General and administrative |
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Marketing |
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Depreciation and amortization | | | | | ||||||||
Total operating expenses |
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Loss from operations |
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Other expense (income), net |
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Gain on extinguishment of debt | | — | — | ( | ||||||||
Interest expense (income), net |
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Other nonoperating expense (income), net |
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Other expense (income), net |
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Loss before income taxes |
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Income tax expense (benefit) |
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Net loss | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Net loss per share |
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Basic | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Diluted | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Weighted average common shares outstanding |
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Basic |
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Diluted |
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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)
(in thousands, except share data)
Common Stock | ||||||||||||||
| Number of |
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Outstanding | Par | Paid in | Accumulated | |||||||||||
Shares | Value | Capital | deficit | Total | ||||||||||
Balance at March 31, 2022 | | $ | | $ | | $ | ( | $ | | |||||
Issuance of common stock for purchase of business | | | | | | |||||||||
Repurchase of common stock | ( | | ( | | ( | |||||||||
Stock-based compensation, net of forfeitures | | | | | | |||||||||
Net loss | | | | ( | ( | |||||||||
Balance at June 30, 2022 |
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| $ | | $ | ( | $ | |
Common Stock | ||||||||||||||
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Outstanding | Par | Paid in | Accumulated | |||||||||||
Shares | Value | Capital | deficit | Total | ||||||||||
Balance at March 31, 2021 |
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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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Stock-based compensation, net of forfeitures |
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Net loss | — | — | — | ( | ||||||||||
Balance at June 30, 2021 | | $ | — | $ | | $ | ( | $ | |
Common Stock |
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Number of | Additional | |||||||||||||
Outstanding | Par | Paid in | Accumulated | |||||||||||
| Shares |
| Value |
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| deficit |
| Total | |||||
Balance at December 31, 2021 |
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| $ | | $ | ( | $ | | |||
Issuance of common stock for purchase of businesses |
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Repurchase of common stock |
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Stock-based compensation, net of forfeitures |
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Net loss |
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Balance at June 30, 2022 |
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| $ | | $ | ( | $ | |
Common Stock |
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Number of | Additional | |||||||||||||
Outstanding | Par | Paid in | Accumulated | |||||||||||
| Shares |
| Value |
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| deficit |
| Total | |||||
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 | | — | | — | | |||||||||
Stock-based compensation, net of forfeitures | | — | | — | | |||||||||
Net loss |
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Balance at June 30, 2021 |
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| $ | | $ | ( | $ | |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
5
FATHOM HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Six months ended June 30, | ||||||
| 2022 |
| 2021 | |||
CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net loss | $ | ( | $ | ( | ||
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |
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Depreciation and amortization |
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Non-cash lease expense | | — | ||||
Gain on extinguishment of debt | | ( | ||||
Gain on sale of mortgages | ( | ( | ||||
Stock-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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Derivative assets |
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Prepaid and other current assets | ( | | ||||
Other assets | | ( | ||||
Accounts payable | | | ||||
Accrued and other current liabilities | ( | | ||||
Derivative liabilities | | ( | ||||
Operating lease liabilities | ( | | ||||
Mortgage loans held for sale | ( | ( | ||||
Proceeds from sale and principal payments on mortgage loans held for sale | | | ||||
Net cash provided by (used in) 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 issuance of common stock | | | ||||
Net borrowings on warehouse lines of credit | ( | | ||||
Repurchase of common stock | ( | — | ||||
Net cash (used in) provided by financing activities |
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Net decrease 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 | $ | | $ | | ||
Supplemental disclosure of cash and non-cash transactions: |
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Cash paid for interest | $ | | $ | | ||
Income taxes paid | | — | ||||
Amounts due to sellers | | | ||||
Capitalized stock-based compensation | | — | ||||
Right of use assets obtained in exchange for new lease liabilities | | | ||||
Issuance of common stock for 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 | $ | | $ | | ||
Restricted cash | | | ||||
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.
6
Note 1. Organization, Consolidation and Presentation of Financial Statements
Fathom Holdings Inc. (“Fathom”, “Fathom Holdings,” or 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, is expected to 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 and six months ended June 30, 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.
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 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
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 (“COVID-19”) and the risks to the international community as the virus spreads globally. In March 2020, the WHO classified COVID-19 as a pandemic, based on the rapid increase in exposure globally. COVID-19 remains a pandemic as variants develop and spread.
7
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; (iii) deteriorating economic conditions, such as increased unemployment rates, recessionary conditions, lower yields on individual investment portfolios, and more stringent mortgage financing conditions; and (iv) global supply chain stresses, which have led to inflation, which had caused the Federal Reserve to increase interest rates.
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 six months ended June 30, 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 appears to have and could continue to cause an adverse impact on U.S. economy and financial markets, including the inflationary impact of exacerbated supply chains, 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.
Note 4. 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.
Acquisition of Naberly
On March 1, 2021 the Company acquired substantially all of the assets of Naberly for cash consideration of $
8
acquisition. The total acquisition cost, including transaction costs of approximately $
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 (amounts in thousands): |
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Cash |
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Accounts Receivable |
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Mortgage loans held for sale |
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Derivative assets |
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Prepaid and other current assets |
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Property & Equipment |
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Intangible assets |
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Lease right of use assets |
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Other long-term assets |
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Total identifiable assets acquired |
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Accounts payable and accrued liabilities |
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Escrow liabilities |
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Derivative liabilities |
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Warehouse lines of credit |
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Notes payable |
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Lease liability, current portion |
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Lease liability, net of current portion |
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Deferred tax liabilities |
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Total liabilities assumed |
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Total identifiable net assets |
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Goodwill |
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Net assets acquired |
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The Company recognized approximately $
Goodwill of approximately $
9
The fair value associated with identifiable intangible assets was $
The Company finalized the fair value estimates used in the purchase price allocation related to the E4:9 acquisitions during the quarter ended June 30, 2022, resulting in a $
The Company’s condensed consolidated financial statements for the three and six months ended June 30, 2022 and June 30, 2021 include the results of operations of E4:9 since the closing on April 16, 2021. During the three month periods ended June 30, 2022 and 2021 E4:9 contributed $4.3 million and $
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 (amounts in thousands): |
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Cash |
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Accounts receivable |
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intangible assets |
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Prepaid and other current assets |
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Total identifiable assets acquired |
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Deferred tax liabilities |
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Accounts payable and accrued liabilities |
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Total liabilities assumed |
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Total identifiable net assets |
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Goodwill |
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Net assets acquired |
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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.
The Company’s condensed consolidated financial statements for the three and six months ended June 30, 2022 and June 30, 2021 include the results of operations of LiveBy since the closing on April 20, 2021, During the three month periods ended June 30, 2022 and 2021 LiveBy contributed $
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.
10
Supplemental Pro Forma Financial Information
On an unaudited pro forma basis in thousands, 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 | ||
Revenue | $ | | |
Net loss | ( | ||
Net loss per share (basic) |
| ( |
The Company completed
The Company updated the fair value estimates used in the purchase price allocation related to the Cornerstone and iPro acquisitions during the quarter ended June 30, 2022, resulting in an increase of $0,4 million in the fair value of assumed finite lived intangible assets, an increase of $0,3 million in other assets, and a $0.7 million decrease in goodwill.o 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 2022, and in any case, no later than one year from the acquisition date in accordance with GAAP.
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 operations of these businesses do not have a material effect on the Company’s consolidated results of operations. Acquisition related costs incurred during the three and six months ended June 30, 2022, were $
Note 5. Intangible Assets, Net
Intangible assets, net consisted of the following (amounts in thousands):
| June 30, 2022 | ||||||||
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Gross Carrying | Accumulated | Net Carrying | |||||||
Amount | Amortization | Value | |||||||
Trade names | $ | | $ | ( | $ | | |||
Software development |
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Customer relationships | | ( | | ||||||
Agent relationships |
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Know-how | | ( | | ||||||
$ | | $ | ( | $ | |
11
| December 31, 2021 | ||||||||
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Gross Carrying | Accumulated | Net Carrying | |||||||
Amount | Amortization | Value | |||||||
Trade names | $ | | $ | ( | $ | | |||
Software development |
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| ( |
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Customer relationships | | ( | | ||||||
Agent relationships | | ( | | ||||||
Know-how |
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| ( |
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$ | | $ | ( | $ | |
Estimated future amortization intangible assets as of June 30, 2022 was as follows (amounts in thousands):
Years Ending December 31, |
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2022 (remaining) | $ | | |
2023 |
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2024 |
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2025 |
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2026 |
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Thereafter | | ||
Total | $ |
During the three months ended June 30, 2022 and 2021, aggregate amortization expense for intangible assets was $
Note 6. Goodwill
The changes in the carrying value of goodwill by segment as of June 30, 2022 are as noted in the table below (amounts in thousands):
Real Estate | |||||||||||||||
| Brokerage |
| Mortgage |
| Technology |
| Other (a) |
| Total | ||||||
Balance at December 31, 2021 | $ | | $ | | $ | | $ | | $ | | |||||
Goodwill acquired during the period | | | | | | ||||||||||
Fair value measurement adjustment (see Note 4) | | — | | | |||||||||||
Balance at June 30, 2022 | $ | | $ | | $ | $ | | $ | |
There were
Note 7. Accrued and Other Current Liabilities
Accrued and other current liabilities consisted of the following (amounts in thousands):
| June 30, 2022 |
| December 31, 2021 | |||
Deferred annual fee | $ | | $ | | ||
Due to sellers | | | ||||
Accrued compensation | | | ||||
Other accrued liabilities |
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Total accrued and other current liabilities | $ | | $ | |
12
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 June 30, 2022, under two credit facilities Encompass was not in compliance with certain of these debt covenants related to earnings, however, based on communications with these banks, Encompass has received one waiver and expects to receive the second bank waiver on these covenants. If the Company is unable to obtain the bank waiver, the bank may terminate the credit facility.
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
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
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 greater of to the daily LIBOR rate plus
Note 9. Debt
Long-term debt consisted of the following (amounts in thousands):
| June 30, 2022 |
| December 31, 2021 | |||
$ | | $ | | |||
Notes payable: | ||||||
Non-interest-bearing promissory note due July 1, 2022 | | | ||||
— | | |||||
| | |||||
Total debt | | | ||||
Less current portion of the Small Business Administration Loan | ( | ( | ||||
Less current portion of notes payable | ( | ( | ||||
Long-term debt, net of current portion | $ | | $ | |
During the six month period ended June 30, 2022 approximately $
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
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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.
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 |
● | Closing prices at June 30, 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 June 30, 2022 (amounts in thousands):
| Level 1 |
| Level 2 |
| Level 3 |
| Total | |||||
Mortgage loans held for sale | $ | — | $ | | $ | — | $ | | ||||
Derivative assets |
| — |
| — |
| |
| | ||||
$ | — | $ | | $ | | $ | |
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):
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| Level 1 |
| Level 2 |
| Level 3 |
| Total | |||||
Mortgage loans held for sale | $ | — | $ | | $ | — | $ | | ||||
Derivative assets |
| — |
| — |
| |
| | ||||
$ | — | $ | | $ | | $ | |
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 economically 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
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
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):