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, 2023

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

For the transition period from to

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 May 1, 2023, the registrant had 18,071,111 shares common stock outstanding.

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PART I FINANCIAL INFORMATION

ITEM 1. Financial Statements.

FATHOM HOLDINGS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)


	March 31, 2023		December 31, 2022
ASSETS	(Unaudited)
Current assets:
Cash and cash equivalents	$	6,723	$	8,320
Restricted cash		78		60
Accounts receivable		3,410		3,074
Mortgage loans held for sale, at fair value		4,619		3,694
Prepaid and other current assets		3,466		3,668
Total current assets		18,296		18,816
Property and equipment, net		2,828		2,945
Lease right of use assets		5,175		5,508
Intangible assets, net		26,608		27,259
Goodwill		25,607		25,607
Other assets		55		52
Total assets	$	78,569	$	80,187
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	3,987	$	3,343
Accrued and other current liabilities		3,814		3,403
Warehouse lines of credit		4,477		3,580
Lease liability - current portion		1,636		1,609
Long-term debt - current portion		269		564
Total current liabilities		14,183		12,499
Lease liability, net of current portion		4,843		5,241
Long-term debt, net of current portion		106		129
Other long-term liabilities		297		297
Total liabilities		19,429		18,166
Commitments and contingencies (Note 18)
Stockholders’ equity:
Common stock (no par value, shares authorized, 100,000,000; shares issued and outstanding, 18,071,111 and 17,468,562 as of March 31, 2023 and December 31, 2022, respectively)		—		—
Additional paid-in capital		112,446		109,626
Accumulated deficit		(53,306)		(47,605)
Total stockholders’ equity		59,140		62,021
Total liabilities and stockholders’ equity	$	78,569	$	80,187

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 OPERATIONS

(UNAUDITED)

(in thousands, except share data)


	Three Months Ended March 31,
	2023		2022
Revenue
Gross commission income	$	73,170	$	84,044
Other service revenue		4,371		6,038
Total revenue		77,541		90,082
Operating expenses
Commission and other agent-related costs		69,172		79,479
Operations and support		1,614		2,175
Technology and development		1,290		1,474
General and administrative		9,601		10,854
Marketing		715		1,163
Depreciation and amortization		695		572
Total operating expenses		83,087		95,717
Loss from operations		(5,546)		(5,635)
Other expense (income), net
Interest expense (income), net		(16)		1
Other nonoperating expense (income), net		159		336
Other expense (income), net		143		337
Loss before income taxes		(5,689)		(5,972)
Income tax expense (benefit)		12		25
Net loss	$	(5,701)	$	(5,997)
Net loss per share:
Basic	$	(0.36)	$	(0.37)
Diluted	$	(0.36)	$	(0.37)
Weighted average common shares outstanding:
Basic		16,011,068		16,323,157
Diluted		16,011,068		16,323,157

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 December 31, 2022	17,468,562	$	—	$	109,626	$	(47,605)	$	62,021
Stock-based compensation, net of forfeitures	602,549		—		2,820		—		2,820
Net loss	—		—		—		(5,701)		(5,701)
Balance at March 31, 2023	18,071,111	$	—	$	112,446	$	(53,306)	$	59,140


	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

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 CASH FLOWS

(UNAUDITED)

(in thousands)


	Three Months Ended March 31,
	2023		2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(5,701)	$	(5,997)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization		1,357		1,061
Non-cash lease expense		337		271
Gain on sale of mortgages		(831)		(1,181)
Stock-based compensation		2,820		2,407
Change in operating assets and liabilities:
Accounts receivable		(336)		(154)
Prepaid and other current assets		202		(371)
Other assets		(3)		80
Accounts payable		644		(410)
Accrued and other current liabilities		411		(65)
Operating lease liabilities		(374)		(225)
Mortgage loans held for sale		(37,179)		(61,488)
Proceeds from sale and principal payments on mortgage loans held for sale		37,083		67,713
Net cash (used in) provided by operating activities		(1,570)		1,641

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(9)		(317)
Amounts paid for business and asset acquisitions, net of cash acquired		—		(1,572)
Purchase of intangible assets		(579)		(763)
Net cash used in investing activities		(588)		(2,652)

CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt		(318)		(467)
Net borrowings on warehouse lines of credit		897		(4,852)
Repurchase of common stock		—		(989)
Net cash (used in) provided by financing activities		579		(6,308)

Net decrease in cash, cash equivalents, and restricted cash		(1,579)		(7,319)
Cash, cash equivalents, and restricted cash at beginning of period		8,380		37,921
Cash, cash equivalents, and restricted cash at end of period	$	6,801	$	30,602

Supplemental disclosure of cash and non-cash transactions:
Cash paid for interest	$	11	$	—
Income taxes paid		—		—
Amounts due to sellers		—		700
Capitalized stock-based compensation		—		51
Right of use assets obtained in exchange for new lease liabilities		4		—
Issuance of common stock for purchase of business		—		5,905
Reconciliation of cash and restricted cash:
Cash and cash equivalents	$	6,723	$	30,524
Restricted cash		78		78
Total cash, cash equivalents, and restricted cash shown in statement of cash flows	$	6,801	$	30,602

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

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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, 2022 included in the Company’s Annual Report on Form 10-K filed with the Security and Exchange Commission (“SEC”) on March 30, 2023 (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.

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.

The Company has evaluated the impact of events that have occurred subsequent to March 31, 2023, through the date the consolidated financial statements were filed with the SEC. Based on this evaluation, other than as recorded or disclosed (see Note 19) within these consolidated financial statements and related notes, the Company has determined that there are no material subsequent events that would require recognition 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.

Liquidity — The Company has a history of negative cash flows from operations and operating losses. The Company generated net losses of approximately $5.7 million and $6.0 million for the three months ended March 31, 2023 and 2022, 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 $6.7 million and $8.3 million as of March 31, 2023 and December 31, 2022, respectively. Management believes that existing cash along with its planned budget, which includes an increase in agent fees implemented in January 2023, growth from increasing attach rates across the Company’s businesses from internal referrals, reduction of certain expenses given initiatives implemented in early 2023, 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 these consolidated financial statements.

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FATHOM HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

COVID-19 Risks, Impacts and Uncertainties — In December 2019, a novel strain of coronavirus, COVID-19, was identified in Wuhan, China. This new coronavirus caused a global health emergency and was declared a pandemic by the World Health Organization (WHO) in March 2020 (“COVID-19’’ or the “Pandemic”). In May 2023, the WHO declared that COVID-19 was no longer a global health emergency.

For the quarter ended March 31, 2023 and the year ended December 31, 2022, due in part to the widespread availability of multiple COVID-19 vaccines, the effects of COVID-19 on business worldwide lessened. However, any lingering impact from COVID-19, as well as the recent increases in interest rates and inflationary pressure in the U.S. and world economies, is not fully known and cannot be estimated as the U.S. and global economies continue to react.

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

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 adopted the standard on January 1, 2023, and the impact of the new standard on its consolidated financial statements was immaterial.

In August 2020, the FASB issued ASU No. 2020-06 Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40). The objective of the amendments in this ASU is to address issues identified as a result of the complexity associated with applying GAAP for certain financial instruments with characteristics of liabilities and equity. The amendments in this ASU reduce the number of accounting models for convertible debt instruments and redeemable convertible preference shares. For convertible instruments with conversion features that are not required to be accounted for as derivatives under Topic 815, Derivatives and Hedging, or that do not result in substantial premiums accounted for as paid-in capital, the embedded conversion features no longer are separated from the host contract. The amendments in the ASU are effective for fiscal years beginning after December 15, 2023, including interim periods therein. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is currently evaluating the impact to our consolidated financial statements.

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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):


	March 31, 2023
	Gross Carrying			Accumulated	Net Carrying
	Amount		Amortization		Value
Trade names	$	7,956	$	(1,461)	$	6,495
Software development		12,927		(3,616)		9,311
Customer relationships		8,180		(2,364)		5,816
Agent relationships		5,856		(1,133)		4,724
Know-how		430		(168)		262
	$	35,349	$	(8,742)	$	26,608


	December 31, 2022
	Gross Carrying		Accumulated		Net Carrying
	Amount		Amortization		Value
Trade names	$	7,956	$	(1,262)	$	6,694
Software development		12,348		(3,029)		9,319
Customer relationships		8,180		(2,085)		6,095
Agent relationships		5,856		(988)		4,868
Know-how		430		(147)		283
	$	34,770	$	(7,511)	$	27,259

Estimated future amortization of intangible assets as of March 31, 2023 was as follows (amounts in thousands):


Years Ending December 31,
2023 (Remaining)	$	4,003
2024		5,175
2025		4,937
2026		4,301
2027		3,301
2028		2,197
Thereafter		2,694
Total	$	26,608

The aggregate amortization expense for intangible assets was $1.2 million and $1.0 million, of which $0.7 million and $0.5 million was included in technology and development expense for the three months ended March 31, 2023 and 2022, respectively.

Note 6. Goodwill

The carrying amount of goodwill by reportable segment as of March 31, 2023 and December 31, 2022 were as follows (amounts in thousands):


	Real Estate
	Brokerage		Mortgage		Technology		Other (a)		Total
Balance at March 31, 2023 and December 31, 2022	$	2,690	$	10,428	$	4,168	$	8,321	$	25,607

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

The Company has a risk of future impairment to the extent that individual reporting unit performance does not meet projections. Additionally, if current assumptions and estimates, including projected revenues and income growth rates, terminal growth rates, competitive and consumer trends, market-based discount rates, and other market factors, are not met, or if valuation factors outside of

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FATHOM HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

the Company’s control change unfavorably, the estimated fair value of goodwill could be adversely affected, leading to a potential impairment in the future. For the three months ended March 31, 2023, no events occurred that indicated it was more likely than not that goodwill was impaired.

Note 7. Accrued and Other Current Liabilities

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


	March 31, 2023		December 31, 2022
Deferred annual fee	$	891	$	1,100
Due to sellers		857		857
Accrued compensation and other employer related costs		1,081		884
Other accrued liabilities		985		562
Total accrued and other current liabilities	$	3,814	$	3,403

Note 8. Warehouse Lines of Credit

Encompass Lending Group (“Encompass”), a 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 5.00%. The agreement expires in July 2023. The maximum funding available under these loans at March 31, 2023 was $7.5 million and December 31, 2022 was $15.0 million. At March 31, 2023 and December 21, 2022, the outstanding balance on this warehouse line was approximately $0.8 million and $1.7 million, respectively. As of March 31, 2023, 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 1 month Term SOFR Reference Rate (SOFR) Rate plus 2.11% or 3.61%. The agreement expires in July 2023.The maximum funding available under these loans at March 31, 2023 was $7.5 million and December 31, 2022 was $25.0 million. At March 31, 2023 and December 31, 2022, the outstanding balance on this warehouse line was approximately $2.1 million and $0.8 million, respectively. As of March 31, 2023, Encompass was in compliance with the debt covenants under this facility.

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 March 31, 2023 was 6.91% and as of December 31, 2022 was 6.36%. The maximum funding available under these loans at March 31, 2023 was $7.5 million and December 31, 2022 was $15.0 million. At March 31, 2023 and December 31, 2022, the outstanding balance on this warehouse line was approximately $1.6 million and $1.0 million, respectively. As of March 31, 2023, 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):


	March 31, 2023		December 31, 2022
3.75% Small Business Administration installment loan due May 2050	$	128	$	151
Notes payable:
6.0% director and officer insurance policy promissory note due July 31, 2023		62		246
9.0 % executive and officer insurance policy promissory note due August 1, 2023		185		296
Total debt		375		693
Long-term debt, current portion		(269)		(564)
Long-term debt, net of current portion	$	106	$	129

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.

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”);

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FATHOM HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

●

Trading prices for derivative instruments; and

●

Closing prices at March 31, 2023 and December 31, 2022 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, 2023 (amounts in thousands):


	March 31, 2023
	Level 1		Level 2		Level 3		Total
Mortgage loans held for sale	$	—	$	4,619	$	—	$	4,619
Derivative assets (included in prepaids and other current assets)		—		—		34		34
Derivative liabilities (included in accrued and other current liabilties)		—		—		(61)		(61)
	$	—	$	4,619	$	(27)	$	4,592

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


	December 31, 2022
	Level 1		Level 2		Level 3		Total
Mortgage loans held for sale	$	—	$	3,694	$	—	$	3,694
Derivative assets (included in prepaids and other current assets)		—		—		7		7
	$	—	$	3,694	$	7	$	3,701

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.

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.

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FATHOM HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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


	March 31, 2023		December 31, 2022
Weighted average remaining lease term (in years) - operating leases	4.5		4.7
Weighted average discount rate - operating leases	6.19	%	6.19	%


	Three Months Ended March 31,
	2023		2022
Operating lease expense	$	460	$	332
Short-term lease expense		161		112
Total lease cost	$	621	$	444

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


	Operating
Years Ended December 31,	Leases
2023	$	1,508
2024		1,714
2025		1,429
2026		1,083
2027		969
2028 and thereafter		709
Total minimum lease payments		7,412
Less effects of discounting		(933)
Present value of future minimum lease payments	$	6,479

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 year ended December 31, 2022, the Company reacquired 686,097 shares for approximately $6.0 million. As of March 31, 2023, the Company had approximately $4.0 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 through August 4, 2025. As of March 31, 2023, 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

The Company’s 2019 Omnibus Stock Incentive Plan (the “2019 Plan”) provides for granting stock options, restricted stock awards, and restricted stock units to employees, directors, contractors and consultants of the Company. As of March 31, 2023, there were approximately 159,000 shares available for future grants under the 2019 Plan.

Restricted Stock Awards

Following is the restricted stock award activity for the three months ended March 31, 2023:


		Weighted Average
		Grant Date
	Shares	Fair Value
Nonvested at December 31, 2022	1,375,145	$	14.23
Granted	651,618		4.32
Released	(2,866)		—
Forfeited	(49,069)		12.77
Nonvested at March 31, 2023	1,974,828		10.98

Restricted Stock Unit Awards

During 2022, the Company commenced granting restricted stock units to employees and agents.

Following is the restricted stock unit award activity for the three months ended March 31, 2023:


		Weighted Average
		Grant Date
	Shares	Fair Value
Nonvested at December 31, 2022	392,564	$	6.58
Granted	894,891		4.28
Released	—		—
Forfeited	(12,852)		6.05
Nonvested at March 31, 2023	1,274,603	$	4.97

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FATHOM HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Stock Option Awards

There were no stock option awards granted during the three month period ended March 31, 2023.

Stock-based Compensation expense

Stock-based compensation expense related to all awards issued under the Company’s stock compensation plans for the three months ended March 31, 2023 and 2022 was as follows (amounts in thousands):


	Three Months
	March 31,
	2022		2021
Commission and other agent-related cost	$	998		832
Operations and support		202		71
Technology and development		22		2
General and administrative		1,507		1,457
Marketing		91		45
Total stock-based compensation	$	2,820	$	2,407

The Company capitalized $0 and $51,000 of stock-based compensation expense associated with the cost of developing software for internal use during the three months ended March 31, 2023 and 2022, respectively.

At March 31, 2023, the total unrecognized compensation cost related to non-vested restricted stock awards was $11.0 million, which is expected to be recognized over a period of approximately 1.2 years.

At March 31, 2023, the total unrecognized compensation related to unvested restricted stock units was $4.9 million which the Company expects to recognize over a period of approximately 1.6 years.

At March 31, 2023, the total unrecognized compensation related to unvested stock option awards granted was $0.2 million which the Company expects to recognize over a period of approximately three months.

Note 14. Related Party Transactions

We lease office space from entities affiliated with certain of our employees. We paid $0.1 million in total rent expense under these leases for both of the three months ended March 31, 2023 and 2022, respectively.

Marketing expense for both of the three months ended March 31, 2023 and 2022 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.

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FATHOM HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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
	March 31,
	2023		2022
Numerator:
Net loss attributable to common stock—basic and diluted	$	(5,701)	$	(5,997)
Denominator:
Weighted-average basic and diluted shares outstanding		16,011,068		16,323,157

Net loss per share attributable to common stock—basic and diluted	$	(0.36)	$	(0.37)

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
	March 31,
	2023	2022
Stock options	147,707	43,996
Non-vested restricted stock awards	1,974,828	693,717
Non-vested restricted stock units	1,274,603	—
Common stock warrants	240,100	240,100

Note 16. Income Taxes

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 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 income tax expense of approximately $12,000 and $25,000 for the three months ended March 31, 2023 and March 31, 2022 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, but records a net deferred tax liability when reversals of deferred tax liabilities that relate to indefinite-live intangible assets may not be used in realizing deferred tax assets.

The Company applies the standards on uncertainty in income taxes contained in ASC Topic 740, Accounting for Income Taxes. The application 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, 2023 and the year ended December 31, 2022. Currently, the statute of limitations remains open subsequent to and including the year ended December 31, 2019.

Note 17. Segment Reporting

The Company identifies an operating segment as a component: (i) that engages in business activities from which it may earn revenues and incur expenses; (ii) that has available discrete financial information; and (iii) whose operating results are regularly reviewed by the Chief Operating Decision Maker (“CODM”) to allocate resources and to assess the operating results and financial performance of each operating segment.

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FATHOM HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

residential loan origination and underwriting services. Through its Technology segment, the Company provides SaaS solutions and data mining for third party customers and continues to develop its intelliAgent platform for current use by the Company’s real estate agents.

Revenue and Adjusted EBITDA are the primary measures used by the 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 us as net income (loss), excluding other income and expense, costs related to acquisitions, income taxes, 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 our operations and provides better transparency into our results of operations. The Company’s presentation of Adjusted EBITDA might not be comparable to similar measures used by other companies.

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.

Key operating data for the reportable segments for the three months ended March 31, 2023 and 2022 are set forth in the tables below (amounts in thousands).


		Revenue
		Three Months
		March 31,
	2023		2022
Real Estate Brokerage	$	73,170	$	84,044
Mortgage		1,464		2,864
Technology		756		645
Corporate and other services (a)		2,151		2,529
Total revenue	$	77,541	$	90,082


	Adjusted EBITDA
	Three Months
	March 31,
	2023		2022
Real Estate Brokerage	$	1,298	$	945
Mortgage		(567)		(490)
Technology		(212)		(395)
Total Segment Adjusted EBITDA		519		60
Corporate and other services (a)		(1,888)		(2,176)
Total Company Adjusted EBITDA		(1,369)		(2,116)
Depreciation and amortization		(1,357)		(1,061)
Other (expense) income, net		(143)		(337)
Income tax (expense) benefit		(12)		(25)
Stock based compensation		(2,820)		(2,407)
Transaction-related costs		—		(51)
Net loss	$	(5,701)	$	(5,997)

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

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FATHOM HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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, 2023, 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 $2.0 million and $1.8 million at March 31, 2023 and December 31, 2022, respectively.

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, 2023, Encompass had adjusted net worth of approximately $3.5 million and liquid assets of $3.9 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 is typically 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.

Note 19. Subsequent Events

On April 13, 2023, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with an accredited investor (the “Holder”) and issued a Senior Secured Convertible Promissory Note in principal amount of $3,500,000 (the “Note”), in a private placement (the “Offering”). The Company paid a placement agent fee in the amount of $175,000 in connection with the Offering. The cash proceeds disbursed to the Company from the issuance of the Note were $3,300,000, after deducting the placement agent fee and purchaser expenses.

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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 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.

Overview

Fathom Holdings Inc. (the “Company”, “Corporate”, “Our”, “We”), headquartered in Cary, North Carolina, is a national, technology-driven, end to end real estate services company integrating residential brokerage, mortgage, title, insurance and SaaS offerings for brokers and agents. The Company’s brands include Fathom Realty, Dagley Insurance, Encompass Lending, intelliAgent, LiveBy, Real Results, Verus Title and Cornerstone. Our primary operation, Fathom Realty (as defined below), operates as a real estate brokerage company, working with real estate agents to help individuals purchase and sell residential and commercial properties, primarily in the South, Atlantic, Southwest, and Western parts of the United States, with the intention of expanding into all states.

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 39 subsidiaries, each an LLC representing the state in which the entity operates (e.g. Fathom Realty NJ, LLC).

Corporate Developments During 2022

In January 2022, the Company completed its acquisition of Cornerstone Financial (“Cornerstone”). The acquisition of Cornerstone, a real estate mortgage business, has helped us to expand our reach in the DC and surrounding markets.

In February 2022, the Company completed its acquisition of iPro Realty Network (“iPro”). The acquisition of iPro, a real estate brokerage business, has helped us to expand our reach in the Utah real estate market.

Rising Interest Rates, 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. These are the trends we are currently facing. 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 pandemics, such as COVID-19, geopolitical instability, that impact economic conditions and financial markets, including interest rates, can adversely impact the housing market.

Beginning in the second quarter of 2022, several economic factors began to adversely impact the residential real estate market, including higher mortgage interest rates, lower consumer sentiment, increased inflation, and declining financial market conditions. This shift in the macroeconomic backdrop had an adverse impact on consumer demand for our services, as consumers weighed the financial implications of selling or purchasing a home and taking out a mortgage. As previously reported, our growth slowed beginning in the third quarter of 2022. Our mortgage business also experienced significant declines in loan volumes beginning in the second quarter of 2022, particularly from refinancing prior mortgages.

In response to these macroeconomic and consumer demand developments, we took action to adjust our operations and manage our business towards longer-term profitability despite these adverse macroeconomic factors. Looking ahead, we remain focused on reaching total company Adjusted EBITDA breakeven in the second quarter of 2023 and generating positive cash flow in the third quarter of 2023,

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even in today’s market environment. We continue to identify opportunities to streamline our overhead and, as of December 31, 2022, had already reduced expenses by approximately $3.0 million per quarter which we see the full benefit of in the first quarter of 2023. Importantly, we believe these cost reductions were made without sacrificing our ability to continue to grow. This is well ahead of our initial plan to reduce expenses by $1.5 million per quarter. We believe that these cost reduction initiatives, combined with the increase in agent transaction fees that became effective in January 2023, have positioned our business for profitable growth and we remain on track to reach Adjusted EBITDA breakeven in the second quarter of 2023.

For the three months ended March 31, 2023 and the year ended December 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, as well as the recent increases in interest rates and inflationary pressure in the U.S. and world economies , is not fully known and cannot be estimated as the U.S. and global economies continue to react.

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.

Fathom’s real estate agent network grew 18% to approximately 10,628 agent licenses at March 31, 2023 compared to 9,006 agent licenses at March 31, 2022.

Reportable Segments

Our Chief Operating Decision Maker makes operating decisions and assesses performance based on the services of identified operating segments and has identified three reportable segments: 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 and continues to develop its intelliAgent platform for current use by the Company’s real estate agents.

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 one-time fee revenues earned for transferring the risk and rewards of ownership of servicing rights to third parties.

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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.

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 subscription and services related to the use of the LiveBy platform. The SaaS contracts are generally annual contracts paid monthly in advance of service and cancellable upon 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, share-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 share 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.

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General and administrative

General and administrative expenses consist primarily of personnel costs, including base pay, bonuses, benefits, and share 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. 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 recently 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.

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 estimated useful lives of five years for computer hardware, 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. Purchased software and capitalized software development costs 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. Generally Accepted Accounting Principles (“GAAP”), we do not amortize goodwill.

Income Taxes

U.S. federal and state income tax benefits for a portion of historical net losses has been recognized in the period ended December 31, 2022. Previously the tax benefits had not been recognized due to our uncertainty of realizing a benefit from those items. As a result of certain acquisitions in prior years, we realized a portion of the pre-existing deferred tax assets due to the reversal of taxable temporary differences. As of December 31, 2022, we had federal net operating loss carryforwards of approximately $40.8 million and state net operating loss carryforwards of approximately $20.8 million. We have not recorded any U.S. federal or state tax benefits for the net losses incurred during the three months ended March 31, 2023 due to our uncertainty of realizing a benefit from those items. The federal net operating losses carry forward indefinitely. State net operating 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, 2023 and 2022 (dollar amounts in thousands)

Revenue


	Three Months Ended
	March 31,				Change
	2023		2022		Dollars		Percentage
Gross commission income	$	73,170		84,044	$	(10,874)	(13)	%
Other service revenue		4,371		6,038		(1,667)	(28)	%
Total revenue	$	77,541	$	90,082	$	(12,541)	(14)	%

For the three months ended March 31, 2023, gross commission income decreased by approximately $10.9 million or 13%, as compared with the three months ended March 31, 2022. This decrease was primarily attributable to a 15.4% decrease in transaction volume; 8,532 real estate transactions during the three months ended March 31, 2023 compared to 10,087 transactions during the three months ended March 31, 2022. Our transaction volume decreased primarily due to rising interest rates. However, the negative impact

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of rising interest rates on transaction volume was lessened due to the 18% expansion in our agent base attributable to organic growth in the number of agents contracted with us and agents acquired through our acquisition of iPro in the first quarter of 2022. During the three months ended March 31, 2023, average revenue per transaction was $8,576, a 2.9% increase compared to $8,332 during the three months ended March 31, 2022.

For the three months ended March 31, 2023, other service revenue decreased by approximately $1.7 million or 28%, as compared with the three months ended March 31, 2022. This decrease was primarily attributable to a decrease in mortgage loans and title service transaction volume which was primarily attributable to to rising interest rates.

Operating Expenses


	Three Months Ended
	March 31,				Change
	2023		2022		Dollars		Percentage
Commission and other agent-related costs	$	69,172		79,479	$	(10,307)	(13)	%
Operations and support		1,614		2,175		(561)	(26)	%
Technology and development		1,290		1,474		(184)	(12)	%
General and administrative		9,601		10,854		(1,253)	(12)	%
Marketing		715		1,163		(448)	(39)	%
Depreciation and amortization		695		572		123	22	%
Total operating expenses	$	83,087	$	95,717	$	(12,630)	(13)	%

For the three months ended March 31, 2023, commission and other agent-related costs decreased by approximately $10.3 million, or 13%, as compared with the three months ended March 31, 2022. 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 decrease in commission and other agent-related costs compared to the same period in 2022 was primarily attributable to a decrease in agent commissions paid due to lower transaction volume mainly due to rising interest rates.

For the three months ended March 31, 2023, operations and support expenses were $1.6 million, a decrease of approximately $0.6 million, or 26%, as compared with the three months ended March 31, 2022. This decrease was primarily attributable to strategic decreases in headcount in our mortgage, insurance and title businesses.

For the three months ended March 31, 2023, technology and development expenses decreased by approximately $0.2 million, or 12%, as compared with the year ended March 31, 2022. The decrease was attributable to our cost cutting measures, partially offset by our ongoing investment in the intelliAgent platform and our LiveBy business.

For three months ended March 31, 2023, general and administrative expenses decreased by approximately $1.3 million, or 12%, as compared with the three months ended March 31, 2022. This decrease was primarily attributable to strategic decreases in headcount throughout our businesses and to salary reductions at the business unit and corporate executive management levels.

For the three months ended March 31, 2023, marketing expenses decreased by approximately $0.4 million, or 39%, as compared with the three months ended March 31, 2022. The decrease in marketing expenses is primarily related to leveraging internal resources and optimizing advertising expenditures.

For the three months ended March 31, 2023, depreciation and amortization expenses increased by approximately $0.1 million, or 22%, as compared with the three months ended March 31, 2022. 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 Cornerstone and iPro in the first quarter of 2022.

Income Taxes

The Company recorded income tax expense of $12,000 and of $25,000 for the three months ended March 31, 2023 and 2022, respectively. This tax expense 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
	2023		2022		Dollars		Percentage
Current assets	$	18,296	$	18,816	$	(520)	(3)	%
Current liabilities		14,183		12,499		1,684	13	%
Net working capital	$	4,114	$	6,317	$	(2,203)	(35)	%

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, 2023, our cash and cash equivalents totaled approximately $6.7 million, which represented a decrease of approximately $1.6 million compared to December 31, 2022. As of March 31, 2023, we had net working capital of approximately $4.1 million, which represented a decrease of $2.2 million compared to December 31, 2022.

On April 13, 2023, we entered into a securities purchase agreement (the “Purchase Agreement”) with an accredited investor (the “Holder”) and issued a Senior Secured Convertible Promissory Note in principal amount of $3,500,000 (the “Note”), in a private placement (the “Offering”). The cash proceeds disbursed to the Company from the issuance of the Note were $3,300,000, after deducting the placement agent fee and purchaser expenses.

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 national and other world events, such as the U.S. debt limit deliberations, the crisis in Ukraine, and COVID-19, 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, 2023 and 2022 (dollar amounts in thousands)


	Three Months Ended March 31,				Change
	2023		2022		Dollars		Percentage
Net cash (used in) provided by operating activities	$	(1,570)	$	1,641	$	(3,211)	(196)	%
Net cash used in investing activities	$	(588)	$	(2,652)	$	2,064	78	%
Net cash provided by (used in) financing activities	$	579	$	(6,308)	$	6,887	109	%

Cash Flows from Operating Activities

Net cash used in operating activities for the three months ended March 31, 2023 consisted of a net loss of $5.7 million, non-cash charges of $3.7 million, including $2.8 million of stock-based compensation expense and $1.4 million of depreciation and amortization, offset by $0.8 million in gains on the sales of mortgages. Changes in assets and liabilities were primarily driven by a $1.1 million increase in accounts payable and accrued and other current liabilities, partially offset by a $0.3 million increase in accounts receivable and a $0.4 million decrease in operating lease liabilities.

Net cash provided by operating activities for the three months ended March 31, 2022 consisted of a net loss of $6.0 million, non-cash charges of $2.3 million, including $2.4 million of stock-based compensation expense and $1.1 million of depreciation and amortization, offset by $1.2 million in gains on the sales of mortgages. Changes in assets and liabilities were primarily driven by a $61.5 million change in mortgage loans held for sale; partially offset by a $67.7 million increase in proceeds from the sales and principal payments on mortgage loans held for sale.

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Cash Flows from Investing Activities

Net cash used in investing activities for the three months ended March 31, 2023 primarily consisted of $0.6 million for purchases of intangible assets related to technology development and to $0.09 million for purchases of property and equipment.

Net cash used in investing activities for the three months ended March 31, 2022 consisted of $1.6 million for business acquisitions, net of cash acquired, $0.3 million for purchases of property and equipment and $0.8 million for purchases of intangible assets.

Cash Flows from Financing Activities

Net cash used in financing activities for the three months ended March 31, 2023 consisted primarily of the change of $0.9 million on our warehouse lines of credit, net of the effect of $0.3 million in principal payments on notes payable.

Net cash used in financing activities for the three months ended March 31, 2022 consisted primarily of the change of $4.9 million on our warehouse lines of credit, net of the effect of the Cornerstone acquisition, $1.0 million in repurchase of common stock and $0.5 million in principal payments on notes payable.

NON-GAAP FINANCIAL MEASURE

To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we use Adjusted EBITDA, a non-GAAP financial measure, to understand and evaluate our core operating performance. This non-GAAP financial measure, which may be different than similarly titled measures used by other companies, is presented to enhance investors’ overall understanding of our financial performance and should not be considered a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP.

We define the non-GAAP financial measure of Adjusted EBITDA as net income (loss), excluding other expense, income tax benefit, depreciation and amortization, stock-based compensation expense, and transaction-related cost.

We believe that Adjusted EBITDA provides useful information about our financial performance, enhances the overall understanding of our past performance and future prospects, and allows for greater transparency with respect to a key metric used by our management for financial and operational decision-making. We believe that Adjusted EBITDA helps identify underlying trends in our business that otherwise could be masked by the effect of the expenses that we exclude in Adjusted EBITDA. In particular, we believe the exclusion of share-based compensation expense related to restricted stock awards and stock options and transaction-related costs associated with our acquisition activity provides a useful supplemental measure in evaluating the performance of our operations and provides better transparency into our results of operations. Adjusted EBITDA also excludes other income and expense, net which primarily includes nonrecurring items, such as, gain on debt extinguishment and severance costs, if applicable.

We are presenting the non-GAAP measure of Adjusted EBITDA to assist investors in seeing our financial performance through the eyes of management, and because we believe this measure provides an additional tool for investors to use in comparing our core financial performance over multiple periods with other companies in our industry.

Adjusted EBITDA should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. There are a number of limitations related to the use of Adjusted EBITDA compared to net income (loss), the closest comparable GAAP measure. Some of these limitations are that:

●

Adjusted EBITDA excludes stock-based compensation expense related to restricted stock awards and stock options, which have been, and will continue to be for the foreseeable future, significant recurring expenses in our business and an important part of our compensation strategy;

●

Adjusted EBITDA excludes transaction-related costs primarily consisting of professional fees and any other costs incurred directly related to acquisition activity, which is an ongoing part of our growth strategy and therefore likely to occur; and

●

Adjusted EBITDA excludes certain recurring, non-cash charges such as depreciation and amortization of property and equipment and capitalized software costs, however, the assets being depreciated and amortized may have to be replaced in the future.

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The following table presents a reconciliation of Adjusted EBITDA to net income (loss), the most comparable GAAP financial measure, for each of the periods presented (amount in thousands):


	Three Months
	March 31,
	2023		2022
Net loss	$	(5,701)		(5,997)
Other expense (income), net		143		337
Income tax expense (benefit)		12		25
Depreciation and amortization		1,357		1,061
Transaction-related cost		—		51
Stock based compensation		2,820		2,407
Adjusted EBITDA	$	(1,369)	$	(2,116)

Critical Accounting Policies and Estimates

The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2022, which provides a description of our critical accounting policies. There were no changes to critical accounting policies or estimates as reflected in our 2022 Annual Report. For additional information regarding our critical accounting policies and estimates, see the Critical Accounting Policies and Estimates section of MD&A included in our 2022 Annual Report.

Recent Accounting Standards

For information on recent accounting standards, see Note 3 to our consolidated financial statements above.

JOBS Act Transition Period

In April 2012, the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) was enacted. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933 (the “Securities Act”) for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.

Subject to certain conditions, as an emerging growth company, we may rely on certain other exemptions and reduced reporting requirements under the JOBS Act. Certain of these exemptions are, including without limitation, from the requirements of (i) providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act; and (ii) complying with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis. We will remain an emerging growth company until the earlier to occur of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of our IPO in 2020, (b) in which we have total annual gross revenues of at least $1.07 billion, or (c) in which we are deemed to be a “large accelerated filer” under the rules of the U.S. Securities and Exchange Commission, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

As a smaller reporting company, we are not required to provide the information required by this Item.

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Item 4. Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer, and our President and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report. In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2023, our disclosure controls and procedures were effective at the reasonable assurance level in ensuring that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.

(b) Changes in Internal Control Over Financial Reporting

Under the supervision and with the participation of our management, including our Chief Executive Officer, and our President and Chief Financial Officer, we conducted an evaluation of any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during our most recently completed fiscal quarter.

We are in the process of implementing new accounting systems. We have updated and continue to update our processes related to internal control over financial reporting, as necessary, to accommodate applicable changes in our business processes resulting from the implementation of the new accounting systems.

There were no changes, other than described above, in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

We are not involved in any litigation that we believe could have a material adverse effect on our financial position or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of our executive officers, threatened against or affecting our Company or our officers or directors in their capacities as such.

Item 1A. Risk Factors.

There have been no material changes to the risk factors that we have previously disclosed in our most recent Annual Report on Form 10-K, as filed with the SEC on March 30, 2023. The risks described in our Annual Report are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, or future results of operations and the trading price of our common stock.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Sales of Unregistered Sales

None.

Issuer Repurchases of Equity Securities

On March 10, 2022, the Company’s board of directors authorized an expenditure of up to $10.0 million for the repurchase of shares of the Company’s common stock in open market transactions effected through a broker-dealer at prevailing market prices, in block trades, or in privately negotiated transactions. The Company may also repurchase shares of its common stock pursuant to a trading plan meeting the requirements of Rule 10b5-1 under the Exchange Act which would permit shares of the Company’s common stock to be

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Item 6. Exhibits.

Exhibit Number		Description
4.1		Form of Senior Secured Convertible Pormissory Note (incorporated by reference to Exhibit 4.1 in the Form 8-K filed on April 14, 2023).

10.1		Form of Securites Purchase Agreement (incorporated by reference to Exhibit 10.1 in the Form 8-K filed on April 14, 2023).

10.2		Form of Security Agreement (incorporated by reference to Exhibit 10.2 in the Form 8-K filed on April 14, 2023).

10.3		Form of Subsidiary Guarantee (incorporated by reference to Exhibit 10.3 in the Form 8-K filed on April 14, 2023).

31.1+		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2+		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1+†		Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101**		Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022; (ii) Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2023 and 2022; (iii) Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2023 and 2022; (iv) Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the Three Months Ended March 31, 2023 and 2022; and (v) Notes to Unaudited Financial Statements.

104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

+Filed herewith.

†This certification is being furnished solely to accompany this Quarterly Report pursuant to 18 U.S.C. Section 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

**In accordance with Rule 406T of Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10 Q is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act, is deemed not filed for purposes of section 18 of the Exchange Act, and otherwise is not subject to liability under these sections.

	FATHOM HOLDINGS INC.

Date: May 11, 2023	By:	/s/ Marco Fregenal
		Marco Fregenal
		President and Chief Financial Officer (Principal Financial and Accounting Officer)

		Page
PART I - FINANCIAL INFORMATION
ITEM 1.	Financial Statements
	Consolidated Balance Sheets as of March 31, 2023 (Unaudited) and December 31, 2022	3
	Unaudited Consolidated Statements of Operations for the three months ended March 31, 2023 and 2022	4
	Unaudited Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the three months ended March 31, 2023 and 2022	5
	Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and 2022	6
	Notes to Unaudited 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	29
ITEM 4.	Controls and Procedures	30
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	32
SIGNATURES		33