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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 September 30, 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 November 8, 2022, the registrant had 17,074,582 shares common stock outstanding.

Table of Contents

FATHOM HOLDINGS INC.

FORM 10-Q

For the Quarterly Period Ended September 30, 2022

TABLE OF CONTENTS

Page

PART I - FINANCIAL INFORMATION

ITEM 1.

Financial Statements

Unaudited Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021

3

Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2022 and 2021

4

Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the three and nine months ended September 30, 2022 and 2021

5

Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021

6

Notes to Unaudited Condensed Consolidated Financial Statements

7

ITEM 2.

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

22

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

32

ITEM 4.

Controls and Procedures

32

PART II - OTHER INFORMATION

34

ITEM 1.

Legal Proceedings

34

ITEM 1A.

Risk Factors

34

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

34

ITEM 6.

Exhibits

35

SIGNATURES

36

2

Table of Contents

PART I FINANCIAL INFORMATION

ITEM 1. Financial Statements.

FATHOM HOLDINGS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in thousands, except share data)

    

September 30, 2022

    

December 31, 2021

ASSETS

(Unaudited)

Current assets:

 

  

 

  

Cash and cash equivalents

$

14,543

$

37,830

Restricted cash

139

91

Accounts receivable

 

4,232

 

3,981

Derivative assets

 

294

 

53

Mortgage loans held for sale, at fair value

8,815

9,862

Prepaid and other current assets

 

4,799

 

2,633

Total current assets

 

32,822

 

54,450

Property and equipment, net

 

3,114

 

1,250

Lease right of use assets

 

5,586

 

4,353

Intangible assets, net

27,947

24,243

Goodwill

25,472

20,541

Other assets

52

93

Total assets

$

94,993

$

104,930

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

  

Current liabilities:

 

 

  

Accounts payable

$

4,920

$

5,303

Accrued and other current liabilities

5,182

4,491

Warehouse lines of credit

8,516

9,577

Long-term debt - current portion

514

831

Lease liability - current portion

 

1,549

 

870

Total current liabilities

 

20,681

 

21,072

Lease liability, net of current portion

 

5,416

 

3,562

Long-term debt, net of current portion

 

270

 

146

Total liabilities

 

26,367

 

24,780

Commitments and contingencies (Note 18)

 

 

Stockholders’ equity:

 

 

Common stock (no par value, shares authorized, 100,000,000; shares issued and outstanding, 17,074,582 and 16,751,606 as of September 30, 2022 and December 31, 2021, respectively)

 

 

Additional paid-in capital

 

106,283

 

100,129

Accumulated deficit

 

(37,657)

 

(19,979)

Total stockholders’ equity

 

68,626

 

80,150

Total liabilities and stockholders’ equity

$

94,993

$

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 September 30, 

Nine Months Ended September 30, 

    

2022

    

2021

    

2022

    

2021

Revenue

Gross commission income

$

104,977

$

95,300

$

311,074

$

224,703

Other service revenue

6,287

5,640

18,452

10,066

Total revenue

111,264

100,940

329,526

234,769

Operating expenses

 

 

 

 

Commission and other agent-related costs

99,448

91,263

295,237

214,392

Operations and support

2,420

2,029

6,192

3,781

Technology and development

1,456

571

3,931

1,912

General and administrative

 

11,528

 

9,582

 

34,669

 

24,139

Marketing

 

1,457

 

591

 

3,948

 

1,371

Depreciation and amortization

852

589

2,238

1,049

Total operating expenses

 

117,161

 

104,625

 

346,215

 

246,644

Loss from operations

 

(5,897)

 

(3,685)

 

(16,689)

 

(11,875)

Other expense (income), net

 

 

 

 

Gain on extinguishment of debt

(76)

(127)

Interest expense (income), net

 

(11)

 

2

 

4

 

3

Other nonoperating expense (income), net

 

126

 

(28)

 

800

 

(66)

Other expense (income), net

 

115

 

(102)

 

804

 

(190)

Loss before income taxes

 

(6,012)

 

(3,583)

 

(17,493)

 

(11,685)

Income tax expense (benefit)

 

 

(210)

 

185

 

(2,820)

Net loss

$

(6,012)

$

(3,373)

$

(17,678)

$

(8,865)

Net loss per share:

 

 

Basic

$

(0.38)

$

(0.24)

$

(1.10)

$

(0.64)

Diluted

$

(0.38)

$

(0.24)

$

(1.10)

$

(0.64)

Weighted average common shares outstanding:

 

 

 

 

Basic

 

15,804,644

 

14,312,675

 

16,054,025

 

13,948,862

Diluted

 

15,804,644

 

14,312,675

 

16,054,025

 

13,948,862

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

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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 June 30, 2022

17,052,263

$

$

104,391

$

(31,645)

$

72,746

Issuance of common stock for purchase of business

Repurchase of common stock

Stock-based compensation, net of forfeitures

22,319

1,892

1,892

Net loss

(6,012)

(6,012)

Balance at September 30, 2022

 

17,074,582

$

$

106,283

$

(37,657)

$

68,626

Common Stock

    

Number of

    

    

Additional

    

    

Outstanding

Par

Paid-in

Accumulated

Shares

 Value

Capital

Deficit

Total

Balance at June 30, 2021

 

14,744,539

$

$

64,594

$

(12,980)

$

51,614

Issuance of common stock for purchase of business

Issuance of common stock pursuant to exercise of stock options

Stock-based compensation, net of forfeitures

 

51,668

1,353

1,353

Net loss

(3,373)

(3,373)

Balance at September 30, 2021

14,796,207

$

$

65,947

$

(16,353)

$

49,594

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

 

470,982

 

 

 

6,168

 

 

6,168

Repurchase of common stock

 

(686,097)

 

 

 

(6,045)

 

 

(6,045)

Stock-based compensation, net of forfeitures

 

538,091

 

 

 

6,031

 

 

6,031

Net loss

 

 

 

 

 

(17,678)

 

(17,678)

Balance at September 30, 2022

 

17,074,582

$

 

$

106,283

$

(37,657)

$

68,626

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

 

777,380

 

 

 

25,312

 

 

25,312

Issuance of common stock pursuant to exercise of stock options

16,972

80

80

Stock-based compensation, net of forfeitures

171,504

3,416

3,416

Net loss

 

 

 

 

 

(8,865)

 

(8,865)

Balance at September 30, 2021

 

14,796,207

$

 

$

65,947

$

(16,353)

$

49,594

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)

Nine Months Ended September 30, 

    

2022

    

2021

CASH FLOWS FROM OPERATING ACTIVITIES:

 

  

 

  

Net loss

$

(17,678)

$

(8,865)

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

 

 

Depreciation and amortization

 

3,785

 

1,778

Non-cash lease expense

1,565

Gain on extinguishment of debt

(127)

Gain on sale of mortgages

(3,443)

(3,264)

Stock-based compensation

 

6,470

 

2,833

Deferred income taxes

(2,865)

Bad debt expense

 

 

248

Other non-cash

44

Change in operating assets and liabilities:

 

 

Accounts receivable

 

(672)

 

(908)

Derivative assets

 

(241)

 

Prepaid and other current assets

(2,128)

(761)

Other assets

43

9

Accounts payable

(382)

387

Accrued and other current liabilities

(284)

4,121

Operating lease liabilities

(1,540)

63

Mortgage loans held for sale

(205,137)

(108,562)

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

213,172

109,299

Net cash used in operating activities

 

(6,470)

 

(6,570)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

  

 

  

Purchase of property and equipment

 

(981)

 

(576)

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

(2,479)

(10,969)

Purchase of intangible assets

 

(2,473)

 

(2,017)

Net cash used in investing activities

 

(5,933)

 

(13,562)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

  

 

  

Principal payments on long-term debt

 

(846)

 

(399)

Proceeds from issuance of common stock

80

Net borrowings on warehouse lines of credit

(4,499)

2,347

Repurchase of common stock

(6,045)

Proceeds from note payable

554

865

Net cash (used in) provided by financing activities

 

(10,836)

 

2,893

Net decrease in cash, cash equivalents, and restricted cash

 

(23,239)

 

(17,239)

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

 

37,921

 

29,562

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

$

14,682

$

12,323

Supplemental disclosure of cash and non-cash transactions:

 

 

Cash paid for interest

$

23

$

Income taxes paid

111

Amounts due to sellers

1,100

1,477

Right of use assets obtained in exchange for new lease liabilities

2,219

1,839

Issuance of common stock for purchase of business

6,168

25,312

Extinguishment of Paycheck Protection Program Loan

127

Loan receivable forgiven and used as purchase consideration

165

Reconciliation of cash and restricted cash:

Cash and cash equivalents

$

14,543

$

8,753

Restricted cash

139

3,570

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

$

14,682

$

12,323

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”, 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 is expected to 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 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 the risks associated with economic uncertainties like inflation and rising interest rates on the housing market, 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 $17.7 million and $8.9 million for the nine months ended September 30, 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 $14.5 million and $37.8 million as of September 30, 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 moderate growth rates, along with increases in transaction fees charged to agents, 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.

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.

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FATHOM HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 nine months ended September 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.

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FATHOM HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Acquisition of Naberly

On March 1, 2021 the Company acquired substantially all of the assets of Naberly for cash consideration of $2.7 million. Based on the Company’s preliminary estimation of the fair value of the assets acquired, the Naberly acquisition was accounted for as an asset acquisition. The total acquisition cost, including transaction costs of approximately $0.1 million was $2.8 million and was recorded as software intangible assets.

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 $0.2 million with an interest rate of two percent (2%) per annum, compounded annually, and a maturity date of February 28, 2021. The outstanding principal balance of the Loan was forgiven in connection with the closing of the acquisition and was accounted for as part of the purchase consideration transferred to Naberly.

Acquisition of E4:9

On April 16, 2021 the Company purchased 100% of outstanding capital stock of E4:9. The Company accounted for the E4:9 acquisition as a business combination. The purchase price consisted of $9.8 million cash consideration and $16.6 million common stock consideration for a total purchase price of $26.5 million. The aggregate purchase price exceeded the fair value of the net tangible and intangible assets acquired, and accordingly the Company recorded goodwill of approximately $14.9 million, including a $0.4 million subsequent fair value adjustment discussed below.

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):

    

  

Cash

 

$

2,843

Accounts Receivable

 

516

Mortgage loans held for sale

 

8,147

Derivative assets

 

90

Prepaid and other current assets

 

122

Property & Equipment

 

356

Intangible assets

 

11,780

Lease right of use assets

 

1,498

Other long-term assets

 

7

Total identifiable assets acquired

 

25,359

Accounts payable and accrued liabilities

 

938

Escrow liabilities

 

75

Derivative liabilities

 

120

Warehouse lines of credit

 

7,958

Notes payable

 

486

Lease liability, current portion

 

337

Lease liability, net of current portion

 

1,160

Deferred tax liabilities

 

2,687

Total liabilities assumed

 

13,761

Total identifiable net assets

 

11,598

Goodwill

 

14,882

Net assets acquired

 

$

26,480

The Company recognized approximately $0.3 million of acquisition related costs that were expensed in the nine months ended September 30, 2021 and are included in general and administrative expenses.

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FATHOM HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Goodwill of approximately $7.4 million and $7.0 million was assigned to the Company’s Mortgage and Other services reporting units, respectively, and is attributable primarily to its assembled workforce and the anticipated future economic benefits of the vertical integration of E4:9’s mortgage lending and insurance product offerings available to our real estate agents. None of the goodwill is expected to be deductible for income tax purposes.

The fair value associated with identifiable intangible assets was $11.8 million, comprised of customer relationships of $6.2 million, tradenames of $5.2 million and know-how of $0.4 million. Customer relationships is being amortized on an accelerated basis over a useful life of 8 years. Tradenames and know-how are amortized on a straight-line basis over 10 years and 5 years, respectively.

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 $0.4 million adjustment to lower the fair value of accounts receivable assumed to be $0.5 million with an offsetting increase to goodwill in our Corporate and other services reporting unit.

The Company’s condensed consolidated financial statements include the results of operations of E4:9 since the closing on April 16, 2021. During the three-month periods ended September 30, 2022 and 2021 E4:9 contributed $4.6 million and $4.0 million in revenues and $1.2 million and $1.0 million in net loss, respectively. During the nine-month period ended September 30, 2022 and from the acquisition closing on April 16, 2021 through September 30, 2021, E4:9 contributed $13.2 million and $6.9 million in revenues and $5.1 million and $2.6 million in net loss, respectively.

Acquisition of LiveBy

On April 20, 2021 the Company purchased 100% of the outstanding capital stock of LiveBy Inc. The Company accounted for the LiveBy acquisition as a business combination. The purchase price consisted of $3.4 million cash consideration and $5.6 million common stock consideration for a total purchase price of $9.0 million. The aggregate purchase price exceeded the fair value of the net tangible and intangible assets acquired, and accordingly the Company recorded goodwill of approximately $4.2 million.

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):

Cash

    

$

516

Accounts receivable

 

138

intangible assets

 

4,920

Prepaid and other current assets

 

2

Total identifiable assets acquired

 

5,576

Deferred tax liabilities

 

621

Accounts payable and accrued liabilities

 

167

Total liabilities assumed

 

788

Total identifiable net assets

 

4,788

Goodwill

 

4,193

Net assets acquired

 

$

8,981

The Company recognized approximately $0.2 million acquisition related costs that were expensed in the nine months ended September 30, 2021 and are included in general and administrative expenses.

Goodwill was assigned to the technology reporting unit and is attributable primarily to its assembled workforce and the anticipated future economic benefits to the Company’s agents through technology product offerings. None of the goodwill is expected to be deductible for income tax purposes.

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Table of Contents

FATHOM HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company’s condensed consolidated financial statements include the results of operations of LiveBy since the closing on April 20, 2021. During the three month periods ended September 30, 2022 and 2021 LiveBy contributed $0.7 million and $0.6 million in revenues and $0.4 million and $0.1 million in net loss, respectively. During the nine-month period ended September 30, 2022 and from the acquisition closing on April 20, 2021 through September 30, 2021, LiveBy contributed $2.0 million and $1.0 million in revenues and $0.3 million and less than $0.1 million in net loss, respectively.

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.

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.

    

Nine Months Ended

    

September 30, 2021

Revenue

$

240,282

Net loss

(15,709)

Net loss per share (basic)

$

(1.07)

Acquisitions of Cornerstone Financial and iPro Realty Network

The Company completed two acquisitions in the nine months ended September 30, 2022, both accounted for as business combinations. On January 24, 2022, the Company acquired Cornerstone Financial, 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 Realty Network, 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, prior to the updates to fair values noted below. None of the goodwill relating to the Cornerstone Financial acquisition is expected to be deductible for income tax purposes. Goodwill in the amount of approximately $1.4 million relating to the iPro Realty Network acquisition is expected to be deductible for income tax purposes.

The Company updated the fair value estimates used in the purchase price allocation related to the Cornerstone and iPro acquisitions during the nine-month period ended September 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 $0.2 million increase in goodwill. 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 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 nine months ended September 30, 2022, were $8,000 and $60,000, respectively and are included in general and administrative expense.

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FATHOM HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 5. Intangible Assets, Net

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

    

September 30, 2022

Gross Carrying

Accumulated

Net Carrying

    

Amount

    

Amortization

    

Value

Trade names

$

7,915

(1,023)

$

6,892

Software development

 

11,662

 

(2,472)

 

9,190

Customer relationships

8,180

(1,781)

6,399

Agent relationships

 

5,856

 

(695)

 

5,161

Know-how

430

(125)

304,578

$

34,043

$

(6,096)

$

27,947

    

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

Estimated future amortization intangible assets as of September 30, 2022 was as follows (amounts in thousands):

Years Ending December 31,

    

    

2022 (remaining)

$

1,425

2023

 

5,093

2024

 

4,965

2025

 

4,687

2026

 

3,931

Thereafter

7,846

Total

$

27,947

During the three months ended September 30, 2022 and 2021, aggregate amortization expense for intangible assets was $1.2 million and $0.9 million, respectively, of which $0.5 million and $0.3 million, respectively, was included in technology and development expense. During the nine months ended September 30, 2022 and 2021, aggregate amortization expense for intangible assets was $3.4 million and $1.7 million, respectively, of which $1.6 million and $0.7 million, respectively, was included in technology and development expense.

Note 6. Goodwill

The changes in the carrying value of goodwill by segment as of September 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

$

1,099

$

7,399

$

4,168

$

7,875

$

20,541

Goodwill acquired during the period

1,461

2,876

4,337

Fair value measurement adjustment (see Note 4)

130

18

446

594

Balance at September 30, 2022

$

2,690

$

10,293

$

4,168

$

8,321

$

25,472

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

12

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FATHOM HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

There were no accumulated impairment charges as of September 30, 2022 and December 31, 2021.

Note 7. Accrued and Other Current Liabilities

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

    

September 30, 2022

    

December 31, 2021

Deferred annual fee

$

1,209

$

546

Due to sellers

1,413

1,400

Accrued compensation

1,053

1,033

Other accrued liabilities

 

1,507

 

1,512

Total accrued and other current liabilities

$

5,182

$

4,491

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.

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 30-Day Secured Overnight Financing Rate (SOFR) rate plus 2.625% or 3.50%. The agreement expires in July 2023. The maximum funding available under these loans at September 30, 2022 and December 31, 2021 was $15.0 million. At September 30, 2022 and December 31, 2021, the outstanding balance on this warehouse line was approximately $2.1 million and $4.3 million, respectively. As of September 30, 2022, Encompass was in compliance with the debt covenants under this facility.

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 London Inter-Bank Offered Rate (Libor) Rate plus 2.00% or 3.5%. The agreement expires in April 2023.The maximum funding available under these loans at September 30, 2022 and December 31, 2021 was $25.0 million. At September 30, 2022 and December 31, 2021, the outstanding balance on this warehouse line was approximately $3.3 million and $3.1 million, respectively. As of September 30, 2022, Encompass was not in compliance with certain of these debt covenants related to earnings, however, based on communications with the bank, Encompass has received a waiver on these covenants.

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 the daily adjusting Bloomberg Short-Term Bank Yield (BSBY) rate plus 2.00% or 3.5% per annum. The agreement expires in September 2023. The daily adjusting BSBY rate plus 2.00% as of September 30, 2022 was 5.10% and the daily adjusting LIBOR plus 2.00% as of December 31, 2021 was 2.09%. The maximum funding available under these loans at September 30, 2022 and December 31, 2021 was $15.0 million. At September 30, 2022 and December 31, 2021, the outstanding balance on this warehouse line was approximately $3.1 million and $2.2 million, respectively. As of September 30, 2022, Encompass was in compliance with the debt covenants under this facility.

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FATHOM HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 9. Debt

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

    

September 30, 2022

    

December 31, 2021

3.75% Small Business Administration installment loan due May 2050

$

159

$

170

Notes payable:

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

493

210

% director and officer insurance policy promissory note due July 31, 2023

385

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

132

211

Total debt

784

976

Less current portion of the Small Business Administration Loan

(21)

(25)

Less current portion of notes payable

(493)

(806)

Long-term debt, net of current portion

$

270

$

145

During the nine-month period ended September 30, 2022, approximately $0.1 million of short-term debt associated with our January iPro acquisition was paid.

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.

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.

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FATHOM HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 September 30, 2022 and December 31, 2021 for derivative instruments

The following are major categories of assets and liabilities measured at fair value on a recurring basis (amounts in thousands):

September 30, 2022

    

Level 1

    

Level 2

    

Level 3

    

Total

Mortgage loans held for sale

$

$

8,815

$

$

8,815

Derivative assets

 

 

 

294

 

294

$

$

8,815

$

294

$

9,109

December 31, 2021

    

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 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 one year to nine years, subject to certain renewal