fthm-20230930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

for the quarterly period ended September 30, 2023

o 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. x Yes o 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). x Yes o 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. x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of November 3, 2023, the registrant had 18,174,964 shares common stock outstanding.

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FATHOM HOLDINGS INC.

FORM 10-Q

For the Quarterly Period Ended September 30, 2023

TABLE OF CONTENTS


		Page
PART I - FINANCIAL INFORMATION
ITEM 1.	Financial Statements
	Consolidated Balance Sheets as of September 30, 2023 (Unaudited) and December 31, 2022	3
	Unaudited Consolidated Statements of Operations for the three and nine months ended September 30, 2023 and 2022	4
	Unaudited Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the three and nine months ended September 30, 2023 and 2022	5
	Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 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	32
PART II - OTHER INFORMATION		33
ITEM 1.	Legal Proceedings	33
ITEM 1A.	Risk Factors	33
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33
ITEM 6.	Exhibits	35
SIGNATURES		36

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PART I FINANCIAL INFORMATION

ITEM 1. Financial Statements.

FATHOM HOLDINGS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)


	September 30, 2023		December 31, 2022
ASSETS	(Unaudited)
Current assets:
Cash and cash equivalents	$	6,616	$	8,320
Restricted cash	146		60
Accounts receivable	4,124		3,074
Mortgage loans held for sale, at fair value	7,152		3,694
Prepaid and other current assets	3,604		3,668
Total current assets	21,642		18,816
Property and equipment, net	2,460		2,945
Lease right of use assets	4,392		5,508
Intangible assets, net	24,637		27,259
Goodwill	25,607		25,607
Other assets	59		52
Total assets	$	78,797	$	80,187
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	3,402	$	3,343
Accrued and other current liabilities	3,034		3,403
Warehouse lines of credit	6,890		3,580
Lease liability - current portion	1,509		1,609
Long-term debt - current portion	290		564
Total current liabilities	15,125		12,499
Lease liability, net of current portion	4,105		5,241
Long-term debt, net of current portion	3,451		129
Other long-term liabilities	312		297
Total liabilities	22,993		18,166
Commitments and contingencies (Note 18)
Stockholders’ equity:
Common stock (no par value, shares authorized, 100,000,000; shares issued and outstanding, 18,174,473 and 17,468,562 as of September 30, 2023 and December 31, 2022, respectively)	—		—
Additional paid-in capital	118,951		109,626
Accumulated deficit	(63,147)		(47,605)
Total stockholders’ equity	55,804		62,021
Total liabilities and stockholders’ equity	$	78,797	$	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 September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Revenue
Gross commission income	$	88,247	$	104,977	$	256,050	$	311,074
Other service revenue	5,277		6,287		15,104		18,452
Total revenue	93,524		111,264		271,154		329,526
Operating expenses
Commission and other agent-related costs	83,770		99,448		241,834		295,237
Operations and support	1,886		2,420		5,404		6,192
Technology and development	1,760		1,456		4,674		3,931
General and administrative	9,793		11,528		29,552		34,669
Marketing	796		1,457		2,439		3,948
Depreciation and amortization	891		852		2,406		2,238
Total operating expenses	98,896		117,161		286,309		346,215
Loss from operations	(5,372)		(5,897)		(15,155)		(16,689)
Other expense (income), net
Interest expense (income), net	88		(11)		151		4
Other nonoperating expense	18		126		181		800
Other expense (income), net	106		115		332		804
Loss before income taxes	(5,478)		(6,012)		(15,487)		(17,493)
Income tax expense	18		—		55		185
Net loss	$	(5,496)	$	(6,012)	$	(15,542)	$	(17,678)
Net loss per share:
Basic	$	(0.34)	$	(0.38)	$	(0.97)	$	(1.10)
Diluted	$	(0.34)	$	(0.38)	$	(0.97)	$	(1.10)
Weighted average common shares outstanding:
Basic	16,074,225		15,804,644		16,036,656		16,054,025
Diluted	16,074,225		15,804,644		16,036,656		16,054,025

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 Outstanding Shares	Par Value		Additional Paid-in Capital		Accumulated Deficit		Total
Balance at June 30, 2023	18,121,402	$	—	$	115,631	$	(57,651)	$	57,980
Stock-based compensation, net of forfeitures	53,071	—		3,320		—		3,320
Net loss	—	—		—		(5,496)		(5,496)
Balance at September 30, 2023	18,174,473	$	—	$	118,951	$	(63,147)	$	55,804


	Common Stock
	Number of Outstanding Shares	Par Value		Additional Paid-in Capital		Accumulated Deficit		Total
Balance at June 30, 2022	17,052,263	$	—	$	104,391	$	(31,645)	$	72,746
Stock-based compensation, net of forfeitures	22,319	—		1,892		—		1,892
Net loss	—	—		—		(6,012)		(6,012)
Balance at September 30, 2022	17,074,582	$	—	$	106,283	$	(37,657)	$	68,626


	Common Stock
	Number of Outstanding Shares	Par Value		Additional Paid-in Capital		Accumulated Deficit		Total
Balance at December 31, 2022	17,468,562	$	—	$	109,626	$	(47,605)	$	62,021
Stock-based compensation, net of forfeitures	705,911	—		9,325		—		9,325
Net loss	—	—				(15,542)		(15,542)
Balance at September 30, 2023	18,174,473	$	—	$	118,951	$	(63,147)	$	55,804


	Common Stock
	Number of Outstanding Shares	Par Value		Additional Paid-in Capital		Accumulated 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	538,091	—		6,031		—		6,031
Net loss	—	—		—		(17,678)		(17,678)
Balance at September 30, 2022	17,074,582	$	—	$	106,283	$	(37,657)	$	68,626

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)


	Nine Months Ended September 30,
	2023		2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(15,542)	$	(17,678)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	4,466		3,785
Non-cash lease expense	1,291		1,565
Deferred financing costs amortization	46		—
Other non-cash	200		—
Gain on sale of mortgages	(2,778)		(3,443)
Stock-based compensation	9,325		6,470
Deferred income taxes	14		—
Change in operating assets and liabilities:
Accounts receivable	(1,050)		(672)
Derivative assets	—		(241)
Prepaid and other current assets	(136)		(2,128)
Other assets	(7)		43
Accounts payable	59		(382)
Accrued and other current liabilities	(3)		(284)
Operating lease liabilities	(1,412)		(1,540)
Mortgage loans held for sale originations	(111,722)		(205,137)
Proceeds from sale and principal payments on mortgage loans held for sale	111,043		213,172
Net cash used in operating activities	(6,206)		(6,470)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment	(21)		(981)
Amounts paid for business and asset acquisitions, net of cash acquired	—		(2,479)
Purchase of intangible assets	(1,337)		(2,473)
Net cash used in investing activities	(1,358)		(5,933)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt	3,768		554
Principal payments on debt	(566)		(846)
Cash paid for debt issuance costs	(200)		—
Borrowings from warehouse lines of credit	108,398		177,581
Repayment on warehouse lines of credit	(105,088)		(182,080)
Deferred acquisition consideration payments	(366)		—
Repurchase of common stock	—		(6,045)
Net cash provided by (used in) financing activities	5,946		(10,836)
Net decrease in cash, cash equivalents, and restricted cash	(1,618)		(23,239)
Cash, cash equivalents, and restricted cash at beginning of period	8,380		37,921
Cash, cash equivalents, and restricted cash at end of period	$	6,762	$	14,682

Supplemental disclosure of cash and non-cash transactions:
Cash paid for interest	$	188	$	23
Income taxes paid	50		111
Amounts due to sellers	—		1,100
Capitalized stock-based compensation	—		—
Right of use assets obtained in exchange for new lease liabilities	175		2,219
Issuance of common stock for purchase of business	—		6,168
Reconciliation of cash and restricted cash:
Cash and cash equivalents	$	6,616	$	14,543
Restricted cash	146		139
Total cash, cash equivalents, and restricted cash shown in statement of cash flows	$	6,762	$	14,682

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 has helped expand in the Washington DC and surrounding markets. The acquisition of iPro, a real estate brokerage business, has helped 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 September 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 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 $15.5 million and $17.7 million for the nine months ended September 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 $6.6 million and $8.3 million as of September 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 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 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, including those 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.

Note 4. Acquisitions

The Company completed two acquisitions in the nine months ended September 30, 2022, both accounted for as business combinations. On January 24, 2022, the Company acquired Cornerstone, 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 was due within one year of the acquisition date. The Company has since renegotiated the timing of these payments. As of September 30, 2023, approximately $270,000 remained due to this seller which will be paid in monthly increments of $26,666 through August 30, 2024. 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

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FATHOM HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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. There were no acquisition related costs incurred during the nine months ended September 30, 2023 and there were $60,000 of such costs during the nine months ended September 30, 2022 included in general and administrative expense.

Note 5. Intangible Assets, Net

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


	September 30, 2023
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Value
Trade names	$	7,956	$	(1,859)	$	6,097
Software development	13,686		(4,864)		8,822
Customer relationships	8,180		(2,921)		5,259
Agent relationships	5,856		(1,616)		4,240
Know-how	430		(211)		219
	$	36,108	$	(11,471)	$	24,637


	December 31, 2022
	Gross Carrying Amount		Accumulated Amortization		Net Carrying 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

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FATHOM HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Estimated future amortization of intangible assets as of September 30, 2023 was as follows (amounts in thousands):


Years Ending December 31,
2023 (remaining)	$	1,361
2024	5,329
2025	5,077
2026	4,441
2027	3,441
Thereafter	4,988
Total	$	24,637

The aggregate amortization expense for intangible assets was $1.3 million and $1.2 million, of which $0.7 million and $0.5 million was included in technology and development expense for the three months ended September 30, 2023 and 2022, respectively.

The aggregate amortization expense for intangible assets was $4.0 million and $3.4 million, of which $2.1 million and $1.6 million was included in technology and development expense for the nine months ended September 30, 2023 and 2022, respectively.

Note 6. Goodwill

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


	Real Estate Brokerage		Mortgage		Technology		Other (a)		Total
Balance at September 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 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 nine months ended September 30, 2023, no events occurred that indicated it was more likely than not that goodwill was impaired. The Company plans to conduct an annual goodwill impairment test in the fourth quarter of 2023.

Note 7. Accrued and Other Current Liabilities

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


	September 30, 2023		December 31, 2022
Deferred annual fee	$	1,217	$	1,100
Due to sellers	491		857
Accrued compensation	825		884
Other accrued liabilities	501		562
Total accrued and other current liabilities	$	3,034	$	3,403

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FATHOM HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 5.00% or the 30-Day Secured Overnight Financing Rate (SOFR) plus 2.625%. The agreement expires in July 2024. The maximum funding available under these loans at September 30, 2023 was $7.5 million and December 31, 2022 was $15.0 million. At September 30, 2023 and December 31, 2022, the outstanding balance on this warehouse line was approximately $4.5 million and $1.7 million, respectively. As of September 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 3.61% or the 1-month Term SOFR plus 2.11%. The agreement expires in December 2023.The maximum funding available under these loans at September 30, 2023 was $7.5 million and December 31, 2022 was $25.0 million. At September 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 September 30, 2023, Encompass was not in compliance with certain of these debt covenants under this facility related to earnings, but it has received a waiver.

Encompass also had a warehousing credit and security agreement with a bank whereby Encompass borrowed funds to finance the origination of eligible mortgage loans. The agreement expired in September 2023 for the facility in the amount of $7.5 million and there was no outstanding balance as of September 30, 2023. Encompass was in compliance at the time of expiration of the agreement.

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 5.75% or the 1-month CME Term SOFR plus 2.00%. The agreement expires in August 2024. The maximum funding available under these loans at September 30, 2023 was $10 million. At September 30, 2023, there was no outstanding balance on this warehouse line. As of September 30, 2023, Encompass was in compliance with debt covenants under this facility.

Note 9. Debt

Total debt consisted of the following (amounts in thousands):


	September 30, 2023		December 31, 2022
3.75% Small Business Administration installment loan due May 2050	$	127	$	151
Notes payable:
Convertible note payable, less unamortized costs of $154	3,346		—
Director and officer (D&O) insurance policy promissory note 1	268		246
Executive and officer (E&O) insurance policy promissory note	—		296
Total debt	3,741		693
Long-term debt, current portion	290		564
Long-term debt, net of current portion	$	3,451	$	129

(1) The September 2023 D&O note carries a 6.85% interest rate and is payable quarterly with the last quarterly payment due in July 2024. The December 2022 D&O note carried a 6.0% interest rate and final payment was made in April 2023.

. 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 the principal amount of $3,500,000 (the “Note”), in a private placement (the “Offering”). The Company paid a placement agent fee in the amount

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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).

•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

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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 September 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 September 30, 2023 and December 31, 2022 (amounts in thousands):


	September 30, 2023
	Level 1		Level 2		Level 3		Total
Mortgage loans held for sale	$	—	$	7,152	$	—	$	7,152
Derivative assets (included in prepaids and other current assets)	—		—		87		87
	$	—	$	7,152	$	87	$	7,239


	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
	$	—

SEC Form 10-Q filed by Fathom Holdings Inc.