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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 June 30, 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 August 8, 2023, the registrant had 18,121,402 shares common stock outstanding.

Table of Contents

FATHOM HOLDINGS INC.

FORM 10-Q

For the Quarterly Period Ended June 30, 2023

TABLE OF CONTENTS

Page

PART I - FINANCIAL INFORMATION

ITEM 1.

Financial Statements

Consolidated Balance Sheets as of June 30, 2023 (Unaudited) and December 31, 2022

3

Unaudited Consolidated Statements of Operations for the three and six months ended June 30, 2023 and 2022

4

Unaudited Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the three and six months ended June 30, 2023 and 2022

5

Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 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

31

ITEM 4.

Controls and Procedures

31

PART II - OTHER INFORMATION

32

ITEM 1.

Legal Proceedings

32

ITEM 1A.

Risk Factors

32

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

32

ITEM 6.

Exhibits

33

SIGNATURES

34

2

Table of Contents

PART I FINANCIAL INFORMATION

ITEM 1. Financial Statements.

FATHOM HOLDINGS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

    

June 30, 

    

December 31, 

2023

2022

ASSETS

(Unaudited)

Current assets:

 

  

 

  

Cash and cash equivalents

$

9,099

$

8,320

Restricted cash

72

60

Accounts receivable

 

4,326

 

3,074

Mortgage loans held for sale, at fair value

7,787

3,694

Prepaid and other current assets

 

3,557

 

3,668

Total current assets

 

24,841

 

18,816

Property and equipment, net

 

2,707

 

2,945

Lease right of use assets

 

4,932

 

5,508

Intangible assets, net

25,539

27,259

Goodwill

25,607

25,607

Other assets

58

52

Total assets

$

83,684

$

80,187

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

  

Current liabilities:

 

 

  

Accounts payable

$

4,702

$

3,343

Accrued and other current liabilities

3,488

3,403

Warehouse lines of credit

7,492

3,580

Lease liability - current portion

1,625

1,609

Long-term debt - current portion

 

96

 

564

Total current liabilities

 

17,403

 

12,499

Lease liability, net of current portion

 

4,569

 

5,241

Long-term debt, net of current portion

 

3,427

 

129

Other long-term liabilities

305

297

Total liabilities

 

25,704

 

18,166

Commitments and contingencies (Note 18)

 

 

Stockholders’ equity:

 

 

Common stock (no par value, shares authorized, 100,000,000; shares issued and outstanding, 18,121,402 and 17,468,562 as of June 30, 2023 and December 31, 2022, respectively)

 

 

Additional paid-in capital

 

115,631

 

109,626

Accumulated deficit

 

(57,651)

 

(47,605)

Total stockholders’ equity

 

57,980

 

62,021

Total liabilities and stockholders’ equity

$

83,684

$

80,187

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 June 30, 

Six Months Ended June 30, 

    

2023

    

2022

    

2023

    

2022

Revenue

Gross commission income

$

94,633

$

122,053

$

167,803

$

206,097

Other service revenue

5,456

6,126

9,827

12,164

Total revenue

100,089

128,179

177,630

218,261

Operating expenses

 

 

 

 

Commission and other agent-related costs

88,892

116,309

158,064

195,788

Operations and support

1,904

1,597

3,518

3,772

Technology and development

1,624

1,048

2,914

2,523

General and administrative

 

10,159

 

12,358

 

19,759

 

23,211

Marketing

 

927

 

1,329

 

1,643

 

2,492

Depreciation and amortization

820

813

1,515

1,385

Total operating expenses

 

104,326

 

133,454

 

187,413

 

229,171

Loss from operations

 

(4,237)

 

(5,275)

 

(9,783)

 

(10,910)

Other expense (income), net

 

 

 

 

Interest expense (income), net

 

79

 

6

 

63

 

7

Other nonoperating expense (income), net

 

4

 

228

 

163

 

564

Other expense (income), net

 

83

 

234

 

226

 

571

Loss before income taxes

 

(4,320)

 

(5,509)

 

(10,009)

 

(11,481)

Income tax expense (benefit)

 

25

 

160

 

37

 

185

Net loss

$

(4,345)

$

(5,669)

$

(10,046)

$

(11,666)

Net loss per share:

 

 

Basic

$

(0.27)

$

(0.35)

$

(0.63)

$

(0.72)

Diluted

$

(0.27)

$

(0.35)

$

(0.63)

$

(0.72)

Weighted average common shares outstanding:

 

 

 

 

Basic

 

16,023,981

 

16,039,971

 

16,017,560

 

16,180,782

Diluted

 

16,023,981

 

16,039,971

 

16,017,560

 

16,180,782

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

4

Table of Contents

FATHOM HOLDINGS INC.

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

(UNAUDITED)

(in thousands, except share data)

Common Stock

    

  

    

  

    

  

Number of

Additional

Outstanding

Par

Paid-in

Accumulated

    

Shares

    

Value

    

Capital

    

Deficit

    

Total

Balance at March 31, 2023

 

18,071,111

$

 

$

112,446

$

(53,306)

$

59,140

Stock-based compensation, net of forfeitures

 

50,291

 

 

 

3,185

 

 

3,185

Net loss

 

 

 

 

 

(4,345)

 

(4,345)

Balance at June 30, 2023

 

18,121,402

$

 

$

115,631

$

(57,651)

$

57,980

Common Stock

    

  

    

  

    

  

Number of

Additional

Outstanding

Par

Paid-in

Accumulated

    

Shares

    

Value

    

Capital

    

Deficit

    

Total

Balance at March 31, 2022

 

17,110,909

$

 

$

107,504

$

(25,976)

$

81,528

Issuance of common stock for purchase of business

 

35,688

 

 

 

263

 

 

263

Repurchase of common stock

(602,286)

(5,057)

(5,057)

Stock-based compensation, net of forfeitures

507,952

1,681

1,681

Net loss

 

 

 

 

 

(5,669)

 

(5,669)

Balance at June 30, 2022

 

17,052,263

$

 

$

104,391

$

(31,645)

$

72,746

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

652,840

6,005

6,005

Net loss

(10,046)

(10,046)

Balance at June 30, 2023

 

18,121,402

$

$

115,631

$

(57,651)

$

57,980

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 business

470,982

6,168

6,168

Repurchase of common stock

(686,097)

(6,045)

(6,045)

Stock-based compensation, net of forfeitures

 

515,772

4,139

4,139

Net loss

(11,666)

(11,666)

Balance at June 30, 2022

17,052,263

$

$

104,391

$

(31,645)

$

72,746

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)

Six Months Ended June 30, 

    

2023

    

2022

CASH FLOWS FROM OPERATING ACTIVITIES:

 

  

 

  

Net loss

$

(10,046)

$

(11,666)

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

 

 

Depreciation and amortization

 

2,867

 

2,405

Non-cash lease expense

720

1,098

Deferred financing cost amortization

21

Gain on sale of mortgages

(1,882)

(1,935)

Stock-based compensation

 

6,005

 

4,348

Deferred income taxes

8

1

Change in operating assets and liabilities:

 

 

Accounts receivable

 

(1,252)

 

(1,461)

Prepaid and other current assets

111

(152)

Other assets

(6)

80

Accounts payable

1,359

787

Accrued and other current liabilities

369

(1,092)

Operating lease liabilities

(800)

(1,074)

Mortgage loans held for sale

(85,461)

(131,177)

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

83,250

140,206

Net cash (used in) provided by operating activities

 

(4,737)

 

368

CASH FLOWS FROM INVESTING ACTIVITIES:

 

  

 

  

Purchase of property and equipment

 

(10)

 

(732)

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

(2,479)

Purchase of intangible assets

(899)

(1,959)

Net cash used in investing activities

 

(909)

 

(5,170)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

  

 

  

Principal payments on long-term debt

 

(491)

 

(566)

Deferred acquisition consideration payments

(284)

Net borrowings on warehouse lines of credit

3,912

(6,886)

Repurchase of common stock

(6,045)

Proceeds from note payable, net $200 in loan costs

3,300

Net cash provided by (used in) financing activities

 

6,437

 

(13,497)

Net increase (decrease) in cash, cash equivalents, and restricted cash

 

791

 

(18,299)

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

 

8,380

 

37,921

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

$

9,171

$

19,622

Supplemental disclosure of cash and non-cash transactions:

 

 

Cash paid for interest

$

21

$

8

Income taxes paid

111

Amounts due to sellers

1,100

Capitalized stock-based compensation

125

Right of use assets obtained in exchange for new lease liabilities

144

1,804

Issuance of common stock for purchase of business

6,168

Reconciliation of cash and restricted cash:

Cash and cash equivalents

$

9,099

$

19,512

Restricted cash

72

110

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

$

9,171

$

19,622

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 June 30, 2023, through the date the consolidated financial statements were filed with the SEC. Based on this evaluation 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 $10.0 million and $11.7 million for the six months ended June 30, 2023 and 2022, respectively. Additionally, the Company anticipates further expenditures associated with the process of expanding its business organically and via acquisitions. The Company received net proceeds of $3.3 million in April 2023 from the issuance of convertible notes. The Company had cash and cash equivalents of $9.1 million and $8.3 million as of June 30, 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 six months ended June 30, 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 enhanced disclosure requirements 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 adopted the standard during the quarter ended June 30, 2023, and the impact of the new standard on its consolidated financial statements was immaterial.

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FATHOM HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 4. Acquisitions

The Company completed two acquisitions in the six months ended June 30, 2022, both accounted for as business combinations. On January 24, 2022, the Company acquired Cornerstone, a real estate mortgage business in the Washington DC and surrounding markets, for approximately $4.7 million. The purchase price was comprised of $1.1 million in cash consideration and 267,470 shares of common stock with an acquisition date fair value of $3.6 million. Approximately $0.6 million of the cash consideration is due within one year of the acquisition date. The Company is currently in discussions with the seller regarding extending the due date of this payment. On February 8, 2022, the Company acquired iPro, a real estate brokerage business in the Utah real estate market, for total consideration of approximately $4.2 million. The purchase price included cash consideration of approximately $1.8 million and 167,824 shares of common stock with an acquisition date fair value of $2.3 million. Approximately $0.1 million of the cash consideration was due within one year of the acquisition date and was paid by the Company in April 2023. 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 acquisition is deductible for income tax purposes. Goodwill in the amount of approximately $1.4 million relating to the iPro acquisition is 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 period from acquisition through December 31, 2022, resulting in an increase of $0.5 million in the fair value of assumed finite lived intangible assets, an increase of $0.3 million in other assets, a $0.5 million decrease in goodwill, and a $0.1 increase in deferred tax liabilities.

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 six months ended June 30, 2022, were $51,000 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):

    

June 30, 2023

Gross Carrying

Accumulated

Net Carrying

    

Amount

    

Amortization

    

Value

Trade names

$

7,956

(1,660)

$

6,296

Software development

 

13,247

 

(4,231)

 

9,016

Customer relationships

8,180

(2,642)

5,538

Agent relationships

 

5,856

 

(1,407)

 

4,449

Know-how

430

(190)

240

$

35,669

$

(10,130)

$

25,539

    

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 June 30, 2023 was as follows (amounts in thousands):

Years Ending December 31,

    

    

2023 (remaining)

$

2,678

2024

 

5,241

2025

 

4,989

2026

 

4,353

2027

 

3,353

Thereafter

4,925

Total

$

25,539

The aggregate amortization expense for intangible assets was $1.4 million and $1.2 million, of which $0.7 million and $1.0 million was included in technology and development expense for the three months ended June 30, 2023 and 2022, respectively.

The aggregate amortization expense for intangible assets was $2.6 million and $2.1 million, of which $1.4 million and $1.5 million was included in technology and development expense for the six months ended June 30, 2023 and 2022, respectively.

Note 6. Goodwill

The carrying amount of goodwill by reportable segment as of June 30, 2023 and December 31, 2022 were as follows (amounts in thousands):

Real Estate

    

Brokerage

    

Mortgage

    

Technology

    

Other (a)

    

Total

Balance at June 30, 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 six months ended June 30, 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):

    

June 30, 

    

December 31, 

2023

2022

Deferred annual fee

$

1,191

$

1,100

Due to sellers

573

857

Accrued compensation

1,158

884

Other accrued liabilities

 

566

 

562

Total accrued and other current liabilities

$

3,488

$

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 September 2023. The maximum funding available under these loans at June 30, 2023 was $7.5 million and December 31, 2022 was $15.0 million. At June 30, 2023 and December 31, 2022, the outstanding balance on this warehouse line was approximately $2.6 million and $1.7 million, respectively. As of June 30, 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 December 2023.The maximum funding available under these loans at June 30, 2023 was $7.5 million and December 31, 2022 was $25.0 million. At June 30, 2023 and December 31, 2022, the outstanding balance on this warehouse line was approximately $2.4 million and $0.8 million, respectively. As of June 30, 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 June 30, 2023 was 7.22% and as of December 31, 2022 was 6.36%. The maximum funding available under these loans at June 30, 2023 was $7.5 million and December 31, 2022 was $15.0 million. At June 30, 2023 and December 31, 2022, the outstanding balance on this warehouse line was approximately $2.5 million and $1.0 million, respectively. As of June 30, 2023, Encompass was not in compliance with the debt covenant under this facility related to earnings, but the lender has waived the non-compliance.

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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):

    

June 30, 2023

    

December 31, 2022

3.75% Small Business Administration installment loan due May 2050

$

128

$

151

Notes payable:

Convertible note payable, less unamortized costs of $179

3,321

6.0% director and officer insurance policy promissory note due April 30, 2023

246

9.0 % executive and officer insurance policy promissory note due August 1, 2023

74

296

Total debt

3,523

693

Long-term debt, current portion

(96)

(564)

Long-term debt, net of current portion

$

3,427

$

129

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 approximately $25,000 in purchaser expenses.

The Company shall pay interest to the Holder quarterly in cash on the principal amount of this Note at a rate which fluctuates every calendar month, and is equal to (i) the monthly average Secured Overnight Financing Rate (SOFR) plus (ii) 5%, per annum (which interest rate may be increased as provided by the Purchase Agreement); provided, however, that in no event will the rate of interest for any month be less than 8% per annum. Interest shall be due and payable on the last calendar day of each quarter and on the maturity date, April 12, 2025 (the “Fixed Interest Payment Date”); provided, however, notwithstanding anything to the contrary provided in the Purchase Agreement or the Note, interest accrued but not yet paid will be due and payable upon any conversion, prepayment, and/or acceleration whether as a result of an Event of Default, as defined, or otherwise with respect to the principal amount being so converted, prepaid and/or accelerated.

In connection with the Offering, the Company also entered into a Security Agreement pursuant to which the Note is secured by all the Company’s existing and future assets.

All or any portion of the principal amount of the Note, plus accrued and unpaid interest and any late charges thereon, is convertible at any time, in whole or in part, at the Investor’s option, into shares of the Company’s common stock at an initial fixed conversion price of $6.00 per share, subject to certain customary adjustments. The Note imposes penalties on the Company for any failure to timely deliver any shares of the Company’s common stock issuable upon conversion. The Note may not be converted by the Investor into shares of common stock if such conversion would result in the Investor and its affiliates owning an aggregate of in excess of 4.99% of the then-outstanding shares of the Company’s common stock, provided that upon 61 days’ notice, such ownership limitation may be adjusted by the Investor, but in any case, to no greater than 9.99%.

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).

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FATHOM HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Level 3 inputs are unobservable inputs that reflect the entity’s own assumptions in pricing the asset or liability (used when little or no market data is available).

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

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

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

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

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

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

Agreed prices from Interest Rate Lock Commitments (“IRLC”);
Trading prices for derivative instruments; and
Closing prices at June 30, 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 June 30, 2023 and December 31, 2022 (amounts in thousands):

June 30, 2023

    

Level 1

    

Level 2

    

Level 3

    

Total

Mortgage loans held for sale

$

$

7,787

$

$

7,787

Derivative assets (included in prepaids and other current assets)

 

 

 

37

37

$

$

7,787

$

37

$

7,824

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

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FATHOM HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

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

Three Months Ended June 30, 

Six Months Ended June 30, 

    

2023

    

2022

    

2023

    

2022

Operating lease expense

$

446

$

377

$

906

    

$

709

Short-term lease expense

 

141

115

 

302

 

227

Total lease cost

$

587

$

492

$

1,208

$

936

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

    

June 30, 2023

    

December 31, 2022

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

4.3

4.7

Weighted average discount rate - operating leases

 

6.24

%  

6.19

%

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

    

Operating

Years Ended December 31,

Leases

2023 (remaining)

$

1,019

2024

 

1,767

2025

 

1,484

2026

 

1,101

2027

 

969

2028 and thereafter

 

710

Total minimum lease payments

7,050

Less effects of discounting

(856)

Present value of future minimum lease payments

$

6,194

14

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FATHOM HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 12. Shareholders’ Equity

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. 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 June, 2023, the Company had approximately $4.0 million remaining under the share repurchase authorization.

During the six months ended June 30, 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 June 30, 2023, no portion of the Underwriter Warrant has been exercised or expired.

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 June 30, 2023, there were approximately 65,400 shares available for future grants under the 2019 Plan.

Restricted Stock Awards

Following is the restricted stock award activity for the three and six months ended June 30, 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)

 

6.55

Forfeited

 

(49,069)

 

12.77

Nonvested at March 31, 2023

1,974,828

10.98

Granted

61,514

4.51

Released

(27,464)

6.06

Forfeited

(29,300)

14.36

Nonvested at June 30, 2023

 

1,979,578

10.83

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 and six months ended June 30, 2023:

15

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FATHOM HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

    

    

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

Granted

88,481

4.53

Released

(17,080)

7.84

Forfeited

(45,510)

5.45

Nonvested at June 30, 2023

 

1,300,494

$

5.07

Stock Option Awards

There were no stock option awards granted during the six month period ended June 30, 2023.

Stock-based Compensation expense

Stock-based compensation expense related to all awards issued under the Company’s stock compensation plans for the three and six months ended June 30, 2023 and 2022 was as follows (amounts in thousands):

Three Months Ended

    

Six Months Ended

June 30, 

June 30, 

    

2023

    

2022

    

2023

    

2022

Commission and other agent-related cost

$

1,070

$

795

$

2,068

$

1,627

Operations and support

283

369

485

440

Technology and development

 

50

76

 

72

 

78

General and administrative

1,645

621

3,152