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

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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.

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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.

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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 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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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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●

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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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

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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:

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		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