# Fathom Holdings Inc.: Form 10-Q for the period ended Sep 30, 2023

- Company: [Fathom Holdings Inc.](/companies/fthm.md) (CIK 1753162)
- Form: 10-Q
- Filed: 2023-11-09
- Accepted by EDGAR: Nov 9, 2023, 17:25 ET
- Period: 2023-09-30
- Accession: 0001628280-23-038349
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1753162/000162828023038349/fthm-20230930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1753162/000162828023038349/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-30 | $93.5m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2023-01-01 to 2023-09-30 | $271.2m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Selling, general and administrative | 3 months, 2023-07-01 to 2023-09-30 | $100.0k | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2023-01-01 to 2023-09-30 | $300.0k | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-07-01 to 2023-09-30 | −$5.4m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-01-01 to 2023-09-30 | −$15.2m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | $18.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | $55.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | −$5.5m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | −$15.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | −$0.34 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | −$0.97 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | −$0.34 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | −$0.97 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 16,074,225 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 16,036,656 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | −$6.2m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $21.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 9 months, 2023-01-01 to 2023-09-30 | $0 | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-09-30 | $6.6m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-09-30 | $21.6m | us-gaap:AssetsCurrent |
| Total assets | at 2023-09-30 | $78.8m | us-gaap:Assets |
| Current liabilities | at 2023-09-30 | $15.1m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-09-30 | $23.0m | us-gaap:Liabilities |
| Current portion of debt | at 2023-09-30 | $290.0k | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2023-09-30 | $55.8m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 41,185 characters.

*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 and 2023

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, industry litigation, and 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. We achieved our goal of reaching total company Adjusted EBITDA breakeven in the second quarter of 2023 although it turned marginally negative again in the third quarter of 2023. Looking ahead, we remain focused on generating positive operating cash flow 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. During the third quarter, we continued to see the benefits from the cost-reduction measures we’ve already implemented. We will continue to further right-size the Company's expenses, including implementing management salary reductions for a combined expected savings of approximately $1.2 million per quarter going forward. 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 in the future.

For the nine months ended September 30, 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.

On October 31, 2023, a federal jury in Missouri found that The National Association of Realtors (“NAR”) and certain companies conspired to artificially inflate brokerage commissions, which is in violation of federal antitrust law. The judgement was appealed on October 31, 2023, while the plaintiffs have now sued a number of other companies, although not us yet. Due to this litigation, there may be rule changes for the NAR, such as increased disclosure of commission offers from sellers’ agents to buyers’ agents, but the direct and indirect effects, if any, of the judgement upon the real estate industry are not yet entirely clear. There could also be further changes in real estate industry practices. All of this has prompted discussion of changes to rules established by local or state real estate boards or multiple listing services. All of this may require changes to many brokers’ business models, including changes in agent and broker compensation. For example, many of our competitors may need to develop mechanisms and a plan that enables buyers and sellers to negotiate commissions. In contrast, our flat fee per real estate transaction model has always enabled our agents to negotiate their own fees. We have never interfered with our agents' ability to negotiate commissions and have no direct incentive to do so , because their commission have no impact on our operating net income. Our flat fee per real estate transaction model enables our agents to freely settle their transaction commissions at their own discretion. The Company will continue to monitor ongoing and similar antitrust litigation against our competitors, however, as our agent compensation model fully supports commission negotiation, we do not expect the need to have to change our compensation model in a manner that would adversely affect our financial condition and results of operations. However, the litigation and its ramifications could cause unforeseen turmoil in our industry, the impacts of which could have a negative effect on us as an industry participant.

### 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.

As of September 30, 2023 and September 30, 2022, we had approximately 11,333 and 9,991 agent licenses, respectively. These figures represent growth of approximately 13.4% year-over-year.

### 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.

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 over the longer term 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 over the longer term 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.

### 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. 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 nine months ended September 30, 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 September 30, 2023 and 2022 (dollar amounts in thousands)

#### Revenue

|  | Three Months Ended September 30, 2023 | 2022 | Change Dollars | Percentage |
| --- | ---: | ---: | ---: | ---: |
| Gross commission income | $88,247 | $104,977 | $(16,730) | (16)% |
| Other service revenue | 5,277 | 6,287 | (1,010) | (16)% |
| Total revenue | $93,524 | $111,264 | $(17,740) | (16)% |

For the three months ended September 30, 2023, gross commission income decreased by approximately $16.7 million, or 16%, as compared with the three months ended September 30, 2022. This decrease was primarily attributable to a 14.7% decrease in transaction volume; 10,303 real estate transactions during the three months ended September 30, 2023 compared to 12,077 transactions during the three months ended September 30, 2022. Our transaction volume decreased primarily due to rising interest rates. However, the negative impact of rising interest rates on transaction volume was lessened due to the 13.4% expansion in our agent base. During the three months ended September 30, 2023, average revenue per transaction was $8,565, a 1.5% decrease compared to $8,692 during the three months ended September 30, 2022 primarily attributable to an approximate 1.7% decrease in the average price of the homes we sold.

For the three months ended September 30, 2023, other service revenue decreased by approximately $1.0 million or 16%, as compared with the three months ended September 30, 2022. This decrease was primarily attributable to a decrease in mortgage loans and title service transaction volume, which was primarily attributable to rising interest rates.

#### Operating Expenses

|  | Three Months Ended September 30, 2023 | 2022 | Change Dollars | Percentage |
| --- | ---: | ---: | ---: | ---: |
| Commission and other agent-related costs | $83,770 | $99,448 | $(15,678) | (16)% |
| Operations and support | 1,886 | 2,420 | (534) | (22)% |
| Technology and development | 1,760 | 1,456 | 304 | 21% |
| General and administrative | 9,793 | 11,528 | (1,735) | (15)% |
| Marketing | 796 | 1,457 | (661) | (45)% |
| Depreciation and amortization | 891 | 852 | 39 | 5% |
| Total operating expenses | $98,896 | $117,161 | $(18,265) | (16)% |

For the three months ended September 30, 2023, commission and other agent-related costs decreased by approximately $15.9 million, or 16%, as compared with the three months ended September 30, 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. The lift expected from our increasing the fees we charged to agents thereby lowering our payout in commission costs starting in January 2023, was partially offset by an increase in non-cash stock compensation costs paid to agents.

For the three months ended September 30, 2023, operations and support expenses were $1.9 million, a decrease of approximately $0.5 million, 22%, as compared with the three months ended September 30, 2022. This decrease was primarily attributable to strategic decreases in headcount in our mortgage, insurance and title businesses.

For the three months ended September 30, 2023, technology and development expenses increased by approximately $0.3 million, or 21%, as compared with the three months ending September 30, 2022. The increase was attributable to our ongoing investment in the intelliAgent platform and our LiveBy business, and to an higher amortization related to capitalized technology development costs.

For the three months ended September 30, 2023, general and administrative expenses decreased by approximately $1.7 million, or 15%, as compared with the three months ended September 30, 2022. This decrease was primarily attributable to strategic decreases in headcount throughout our businesses.

For the three months ended September 30, 2023, marketing expenses decreased by approximately $0.7 million, or 45%, as compared with the three months ended September 30, 2022. The decrease in marketing expenses is primarily related to leveraging internal resources and optimizing advertising expenditure.

For the three months ended September 30, 2023, depreciation and amortization expenses remained relatively constant.

#### Income Taxes

The Company recorded income tax expense of approximately $0.02 million and of $0 for the three months ended September 30, 2023 and 2022, respectively. This tax expense is primarily the result of current state income tax liabilities and deferred tax expense related to deferred tax liabilities that can not be fully offset by deferred tax assets.

### Comparison of the Nine Months Ended September 30, 2023 and 2022 (dollar amounts in thousands)

#### Revenue

|  | Nine Months Ended September 30, 2023 | 2022 | Change Dollars | Percentage |
| --- | ---: | ---: | ---: | ---: |
| Gross commission income | $256,050 | $311,074 | $(55,024) | (18)% |
| Other service revenue | 15,104 | 18,452 | (3,348) | (18)% |
| Total revenue | $271,154 | $329,526 | $(58,372) | (18)% |

For the nine months ended September 30, 2023, gross commission income decreased by approximately $55.0 million or 18%, as compared with the nine months ended September 30, 2022. This decrease was primarily attributable to a 15.8% decrease in transaction volume; approximately 29,835 real estate transactions occurred during the nine months ended September 30, 2023 compared to approximately 35,464 transactions during the nine months ended September 30, 2022. Our transaction volume decreased primarily due to rising interest rates. However, the negative impact of rising interest rates on transaction volume was lessened due to the 13.4% expansion in our agent base. During the nine months ended September 30, 2023, average revenue per transaction was $8,582, a 2.3% decrease compared to $8,771 during the nine months ended September 30, 2022, primarily attributable to an approximate 3.51% decrease in the average price of the homes we sold.

For the nine months ended September 30, 2023, other service revenue decreased by approximately $3.3 million or 18%, as compared with the nine months ended September 30, 2022. This decrease was primarily attributable to a decrease in mortgage loans and title service transaction volume, which was primarily attributable to rising interest rates.

#### Operating Expenses

|  | Nine Months Ended September 30, 2023 | 2022 | Change Dollars | Percentage |
| --- | ---: | ---: | ---: | ---: |
| Commission and other agent-related costs | 241,834 | $295,237 | $(53,403) | (18)% |
| Operations and support | 5,404 | 6,192 | (788) | (13)% |
| Technology and development | 4,674 | 3,931 | 743 | 19% |
| General and administrative | 29,552 | 34,669 | (5,117) | (15)% |
| Marketing | 2,439 | 3,948 | (1,509) | (38)% |
| Depreciation and amortization | 2,406 | 2,238 | 168 | 8% |
| Total operating expenses | $286,309 | $346,215 | $(59,906) | (17)% |

27

For the nine months ended September 30, 2023, commission and other agent-related costs decreased by approximately $53.6 million, or 18%, as compared with the nine months ended September 30, 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. The lift expected from our increasing the fees we charged to agents thereby lowering our payout in commission costs starting in January 2023, was partially offset by an increase in non-cash stock compensation costs paid to agents.

For the nine months ended September 30, 2023, operations and support expenses were $5.4 million, a decrease of approximately $0.8 million, or 13%, as compared with the nine months ended September 30, 2022. This decrease was primarily attributable to strategic decreases in headcount in our mortgage, insurance and title businesses in the first three months of this year.

For the nine months ended September 30, 2023, technology and development expenses increased by approximately $0.7 million, or 19%, as compared with the nine months ending September 30, 2022. The increase was attributable to our ongoing investment in the intelliAgent platform and our LiveBy business.

For the nine months ended September 30, 2023, general and administrative expenses decreased by approximately $5.1 million, or 15%, as compared with the nine months ended September 30, 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 nine months ended September 30, 2023, marketing expenses decreased by approximately $1.5 million, or 38%, as compared with the nine months ended September 30, 2022. The decrease in marketing expenses is primarily related to leveraging internal resources and optimizing advertising expenditures.

For the nine months ended September 30, 2023, depreciation and amortization expenses increased by approximately $0.2 million, or 8%, as compared with the nine months ended September 30, 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 approximately $0.06 million and $0.2 million for the nine months ended September 30, 2023 and 2022, respectively. This tax expense is primarily the result of current state income tax liabilities and deferred tax expense related to deferred tax liabilities that can not be fully offset by deferred tax assets.

### Liquidity and Capital Resources (dollar amounts in thousands)

#### Capital Resources

|  | September 30, 2023 | December 31, 2022 Dollars | Change Percentage |  |
| --- | ---: | ---: | ---: | ---: |
| Current assets | $21,642 | $18,816 | $2,826 | 15% |
| Current liabilities | 15,125 | 12,499 | 2,626 | 21% |
| Net working capital | $6,517 | $6,317 | $200 | 3% |

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 September 30, 2023, our cash and cash equivalents totaled approximately $6.7 million, which represented a decrease of approximately $1.7 million compared to December 31, 2022. As of September 30, 2023, we had net working capital of approximately $6.5 million, which represented an increase of $0.2 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, litigation, 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 crisis in Ukraine, 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 Nine Months Ended September 30, 2023 and 2022 (dollar amounts in thousands)

|  | Nine Months Ended September 30, 2023 | 2022 | Change Dollars | Percentage |
| --- | ---: | ---: | ---: | ---: |
| Net cash (used in) provided by operating activities | $(6,206) | $(6,470) | $264 | 4% |
| Net cash used in investing activities | $(1,358) | $(5,933) | $4,575 | 77% |
| Net cash provided by (used in) financing activities | $5,946 | $(10,836) | $16,782 | 155% |

#### Cash Flows from Operating Activities

Net cash used in operating activities for the nine months ended September 30, 2023 consisted of a net loss of $15.5 million, non-cash charges excluding lease related expenses of $11.3 million, including $9.3 million of stock-based compensation expense and $4.5 million of depreciation and amortization, partially offset by $2.8 million in gains on the sales of mortgages. Changes in assets and liabilities were primarily driven by $111.7 million in mortgage loan originations; partially offset by $111.0 million in proceeds from the sales and principal payments on mortgage loans held for sale, as well as, a $1.1 million increase in accounts receivable

Net cash used in operating activities for the nine months ended September 30, 2022 consisted of a net loss of $17.7 million, non-cash charges of $11.9 million, including $6.5 million of stock-based compensation expense and $3.8 million of depreciation and amortization, and $1.6 million in lease expense, partially offset by $3.8 million in gains on the sales of mortgages. Changes in assets and liabilities were primarily driven by a $8.0 million net decrease in proceeds from the sales and principal payments on mortgage loans held for sale, partially offset by a $2.1 million increase in prepaids and other current assets, $0.7 million increase in accounts receivable and a $2.2 million combined decrease in operating lease liabilities, accounts payable, accrued and other current liabilities.

#### Cash Flows from Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2023 primarily consisted of $1.3 million for purchases of intangible assets related to technology development.

Net cash used in investing activities for the nine months ended September 30, 2022 consisted of $2.5 million for the business acquisitions, net of cash acquired, $1.0 million for purchases of property and equipment, and $2.5 million for purchases of intangible assets.

#### Cash Flows from Financing Activities

Net cash provided by financing activities for the nine months ended September 30, 2023 consisted primarily of the change of $3.3 million on our warehouse lines of credit and the $3.8 million in the debt proceeds, net of $0.6 million in principal payments on debt, $0.4 million in deferred acquisition consideration payments, and $0.2 million in debt issuance costs.

Net cash used in financing activities for the nine months ended September 30, 2022 consisted primarily of the change of $5.5 million on our warehouse lines of credit, net of the effect of the Cornerstone acquisition, $6.0 million in repurchase of common stock, and $0.8 million in principal payments on debt.

### 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 other non-cash items and transaction costs.

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 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 typically nonrecurring expense items, such as, minor legal settlement claims, severance costs, professional fees related to investigating potential financing opportunities, if applicable, and other non-cash items representing reserves on certain agent fee collections.

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, restricted stock units, 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.

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 Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Net loss | $(5,496) | $(6,012) | $(15,542) | $(17,678) |
| Other expense (income), net | 106 | 115 | 332 | 804 |
| Income tax expense | 18 | — | 55 | 185 |
| Depreciation and amortization | 1,599 | 1,436 | 4,466 | 3,839 |
| Other non-cash items and transaction costs | 200 | 13 | 200 | 73 |
| Stock based compensation | 3,320 | 2,123 | 9,325 | 6,470 |
| Adjusted EBITDA | $(253) | $(2,325) | $(1,164) | $(6,307) |

### 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.

## Controls and procedures

As filed, 2,297 characters.

### (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 September 30, 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.

## Risk factors

As filed, 4,032 characters.

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors and other cautionary statements described in Part I. Item 1A. Risk Factors included in our most recent Annual Report on Form 10-K, as filed with the SEC on March 30, 2023 (“2022 10-K”), which could materially affect our businesses, financial condition, or future results. 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. Except for such additional information and the updated risk factor set forth below, we believe there have been no other material changes in our risk factors from those disclosed in our 2022 10-K.

***Adverse outcomes in litigation and regulatory actions against other companies and agents in our industry could adversely impact our financial results.***

Adverse outcomes in legal and regulatory actions against other companies, brokers, and agents in the residential and commercial real estate industry may adversely impact the financial condition of the Company and our real estate brokers and agents when those matters relate to business practices shared by the Company, our real estate brokers and agents, or our industry at large. Such matters may include, without limitation, RESPA, Telephone Consumer Protection Act of 1991 and state consumer protection law, antitrust and anticompetition, and worker classification claims. Additionally, if plaintiffs or regulatory bodies are successful in such actions, this may increase the likelihood that similar claims are made against the Company and/or our real estate brokers and agents which claims could result in significant liability and be adverse to our financial results if we or our brokers and agents are unable to distinguish or defend our business practices.

As an example, in the matter of Burnett v. National Association of Realtors (U.S. District Court for the Western District of Missouri), a federal jury found that NAR and certain other remaining brokerage defendants liable for $1.8 billion in damages on claims that these companies conspired to artificially inflate brokerage commissions, which is in violation of federal antitrust law (the “Burnett Ruling”). The verdict was appealed on October 31, 2023. Additionally, certain other brokerage defendants settled with the plaintiffs, including both monetary and non-monetary settlement terms. That same day, NAR, EXP World Holdings, Inc., Compass, Inc., Redfin Corporation, Weichert Realtors, United Real Estate, Howard Hann Real Estate Services, and Douglas Elliman, Inc. were named as defendants in Gibson v. National Association of Realtors (U.S. District Court for the Western District of Missouri), alleging a similar fact pattern and antitrust violations.

Due to the Burnett Ruling, there may be rule changes for the NAR, such as increased disclosure of commission offers from sellers’ agents to buyers’ agents, but the direct and indirect effects, if any, of the settlement upon the real estate industry are not yet entirely clear. There could also be further changes in real estate industry practices. All of this has prompted discussion of regulatory changes to rules established by local or state real estate boards or multiple listing services and may require changes to brokers’ business models, including changes in agent and broker compensation.

Although, our flat fee per real estate transaction model has always enabled our agents to negotiate their own fees, and we have never interfered with our agents' ability to negotiate commissions as doing so would have no impact on our operating net income in any meaningful changes in industry operations or structure, as a result of any of the foregoing could have an effect on our agent retention or recruitment, or home sale volumes in general, which would have a material adverse effect on our operations, revenues, earnings and financial results.

Filed Nov 9, 2023.
Source: SEC EDGAR, the filing index for accession 0001628280-23-038349. Last ingested by Listed: Nov 3, 2026, 18:59 ET. No prices; not investment advice.