Dillon Heslin: Hi. This is Dillon on for Darren. Thanks for taking our questions. I wanted to sort of start with the commentary about guidance and not giving guidance. So just sort of walk us through how you get to your other outlook of cash from operations being positive as early as 2Q of next year and a return to adjusted EBITDA in 1Q when sort of seasonally Q1 transactions are typically lower than they are in 4Q? Just sort of where the puts and takes, I know you talked about the $1.2 million in cost savings.
Marco Fregenal: Yes. Okay. So let’s talk Q1. If you recall, Q1, our adjusted EBITDA for Q1 of 2023 is approximately negative $1.4 million, okay? And so that’s number one. Second, we are implementing cost cuttings of $1.2 million per quarter, okay? And so when you look at the negative $1.4 million, combined with the cost cutting of $1.2 million, combined to — and keep in mind that Q1 of this year already had seen a reduction in transactions, right? And now that we added agents throughout 2023, we should see an increase in revenue in 2024. So the combination of adjusted EBITDA at negative $1.4 million for Q1 of this year, combined with a reduction in expenses of $1.2 million, combined with the improvement in our mortgage business and our insurance business and title business and the increase in agents, that gives us confidence that we will hit adjusted EBITDA positive in Q1 of 2023.
And then if you continue that progress down to Q2 and then you look at in Q2 of 2023, our adjusted EBITDA was $462,000, right, and then you implement $1.2 million, then that gives us this — the certainty to hit operational cash flow breakeven. Now having said all that, this is how we feel today. The market is still somewhat uncertain. We have seen some progress in the last week or so in interest rates. The Fed — the — if you look at futures, the bond market in futures, I think they’re projecting cuts in April, May of next year. Our mortgage business that we said are beginning to see par rates, which is a big indication of that compared to the increase in our mortgage business. So we put all this together, the increase in our business, what we’ve done in Q1, the cuts, when you put it all together, we feel fairly confident that we can achieve the goals of adjusted EBITDA breakeven in Q1 and cash flow breakeven — operational cash flow breakeven in Q2.
Dillon Heslin: Thank you. And as a second question, obviously, the transaction number is down sequentially, but could you provide any color on sort of attach rates or take rates, however you want to define them on some of your ancillary services? Are you at least being able to see more interest from consumers being talked into using some of your services from agents where those are live?
Marco Fregenal: Sure. Sure. Look, there’s no question that, especially at the end of September, we had a bump in interest rates that went all the way to over 8%, a variety of buyers got stuck and had to terminate transactions, it’s now — they start again in October. The mortgage business is tough on the attach rate right now because buyers are shopping every possible [0.125] (ph). So there’s no question that attach rate in the mortgage business has become more difficult as we’ve seen the increase in the interest rate. So 0.125 actually can be the deciding factor, whether someone can close the house or not. We continue to see a decent attach rate for Verus and certainly for DIA. If you look at DIA, our mortgage business, they’ve been able to increase profit, adjusted EBITDA by 50% while keeping the revenues the same.
So it’s operational. And what happens is because we’re getting more business from Fathom, we don’t have to spend additional dollars in lead generation, right? And so the attach rate in our insurance business has really benefited from that. So I would say a very good attach rate on insurance, a good attach rate on DIA — I’m sorry, on Verus, but mortgage is tough. It’s very tough right now on the attach rate because everyone is shopping around 0.125. And it’s just a reality of 8% mortgages. Once interest rates can decline to the six’s, I think that would — will help us in terms of attach rate.
Dillon Heslin: Got it. Thank you. That’s it from me. I’ll pass it on.
Operator: [Operator Instructions] The next question is from Raj Sharma of B. Riley. Please go ahead.
Raj Sharma: Hi. Thank you for taking my questions. How are you guys doing?
Joshua Harley: Good, Raj. How are you?
Marco Fregenal: We’re doing great. Hope you’re doing well as well.
Raj Sharma: Yes. I am. I had a couple of questions, which have already been answered. And then on the referral rates, can you talk about your referral programs and how well they’re doing and how you’re kind of measuring them? And what percentage of the 17% agent growth can be attributed to referrals? And also, can you comment on churn?
Joshua Harley: Yes. Well, let me — I will touch on the kind of the program itself. I’ll let Marco, I’m not sure how much we’re — I know it’s something we haven’t shared publicly as far as what the actual — what percentage, what — rather what the numbers are of the referrals. But I’m not sure if Marco is willing to go into that detail or if he has that detail in front of him. The program, as you know, is designed to encourage our agents to refer more agents to the company, right? We got the first three agents that they refer, they get $250 in stock grants. And then from there, once they get to that fourth agent, as long as all four agents, when they came to the company close at least two transactions, they become CAP4Life.
So their transaction fees go down from $550 per transaction down to $150 per transaction. Now they still have to pay their annual fee and they’ve got any other fees that may come up as well, commercial and the rest. But once they get to eight transactions — I’m sorry, eight referrals, again, each one closing at least two transactions before they joined in a year, then they go to FREE4Life. Now that’s no fees whatsoever. The idea was we want to encourage more agents to try, right? We have a big group of agents that were already referring at least one agent per year. We thought, okay, if we roll a program like this, how many will actually achieve the CAP4Life and the FREE4Life compared to how many will at least try. How many will go from one to two or from one to three that may never have referred more than one, or how many people will — would have never referred anyone before and now at least try to get to CAP4Life and will add one, two, right?
So the idea was that for every one person that actually achieves CAP4Life, we may have 100 more people who actually will have referred someone who would have never referred someone before, and may never actually end up achieving CAP4Life, I want them to, I encourage them to because again, it’s a win for them and a win for us. But unfortunately, human nature is they get excited about the program. Some will refer one, two and then give up and others will push through and end up getting to CAP4Life. We’ve got quite a few agents who achieved CAP4Life, a few who have achieved FREE4Life, but not that many. But if you look at the number of referrals that have happened, it’s gone up dramatically. I don’t know the exact number is. I don’t have that top of my head.
I know Marco has shared with me not too long ago, but I’m not sure if Marco has that to share. So I’ll turn that over to Marco to speak more to it.
Marco Fregenal: Yes. Prior to implementing the program, we were getting between 30% and 33% referral rate, and after implementing the program, we’re over 40% referral rate. So we have seen a significant increase in recruiting due to the — due to implementing the program late last year. But yes…
Joshua Harley: I think what I saw was — yes, an increase about 25% to 35% higher than what we were seeing before. So it’s been effective. I’d love to see it be more effective, but I think we’re very pleased with the effective chat so far. It’s definitely been well worth the squeeze as they say.
Raj Sharma: Great. And then the churn number, is that sequentially lower, higher, same?
Joshua Harley: I just realized we didn’t actually hit that in this script, did we?
