Business context and reporting period
Mohawk Group Holdings, Inc. (the registrant in this filing) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2019. The company describes itself as a technology-enabled consumer-products business using its AIMEE software platform to select, market and sell products, predominantly through online marketplaces. Substantially all sales were through Amazon’s U.S. marketplace.
Financial performance and liquidity
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2018 | Q3 2019 | Nine months 2018 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $24.7 | $40.6 | $53.6 | $88.8 |
| Gross profit / gross margin | $10.4 / 42.2% | $17.5 / 43.2% | $17.7 / 33.0% | $36.0 / 40.5% |
| Operating loss / operating margin | $(4.7) / (19.1)% | $(10.4) / (25.6)% | $(21.8) / (40.6)% | $(23.9) / (27.0)% |
| Net loss | $(5.1) | $(11.3) | $(23.2) | $(27.3) |
| Net loss per share, basic and diluted | $(0.49) | $(0.75) | $(2.40) | $(2.11) |
| Adjusted EBITDA (non-GAAP) | $(4.5) | $(2.7) | $(21.1) | $(11.9) |
- Q3 revenue grew 64.6% year over year; nine-month revenue grew 65.8%. Direct sales drove the increase, while nine-month wholesale revenue declined. Managed SaaS revenue was $0.3 million in Q3 and $1.2 million for nine months.
- Q3 gross margin improved by 1.0 percentage point, but operating and net losses widened. The nine-month gross and operating margins improved substantially versus 2018.
- Adjusted EBITDA is a company-defined non-GAAP measure; its improvement should be considered alongside GAAP losses. Nine-month 2019 stock-based compensation was $11.8 million, including $7.7 million in Q3.
- Cash and cash equivalents were $35.7 million at September 30, 2019, compared with $20.0 million at December 31, 2018. Nine-month operating cash use was $13.1 million; investing cash use was $1.1 million; financing provided $29.7 million.
- Current assets were $71.5 million and current liabilities $40.0 million at quarter-end. Inventory was $25.9 million, down from $30.6 million at year-end.
- Debt principal outstanding comprised $15.1 million under the MidCap revolving facility and $15.0 million under the Horizon term loan. The balance sheet reports $27.0 million of debt net of discounts and issuance costs. MidCap availability was approximately $0.8 million; the company reported covenant compliance.
Material changes and notable items
- The June 2019 IPO raised $36.0 million gross and approximately $29.6 million net. Common shares outstanding rose from 11.5 million at December 31, 2018 to 17.7 million at September 30, 2019.
- Revenue growth reflected existing products and launches; environmental appliances remained the largest product category. Cosmetics, skincare and supplements added $2.6 million of Q3 revenue. The company also reduced selected cookware and other product lines.
- Management attributed improved gross margin and lower sales-and-distribution expense as a share of revenue partly to a higher direct-sales mix, fulfillment-cost improvements and advertising automation. Higher R&D and G&A included increased stock compensation and public-company costs.
- On September 10, 2019, the company acquired personal-wellness assets for approximately $1.3 million, including $1.1 million cash and a $0.2 million note, plus a $0.1 million working-capital payment. Preliminary allocation included $0.7 million goodwill and $0.3 million of intangible assets.
- The company reversed $1.4 million of its hair-dryer recall reserve after the program was deemed materially complete; $0.1 million remained accrued. Q3 cost of goods sold also included a $0.3 million accrual for governmental-agency penalties and a $0.3 million charge for liquidating discontinued products.
Outlook, risks and contingencies
- No specific revenue, earnings or margin guidance was provided. Management said IPO proceeds, projected sales and expenses, and available credit were expected to meet liquidity needs for the twelve months following issuance of the statements; it considered prior substantial doubt about going concern mitigated. The company remained loss-making and had limited borrowing availability.
- Management expects continued investment in product launches, AIMEE, R&D and sales infrastructure, and stated that R&D and interest expense may increase. It expects potential sales-and-distribution efficiencies, but cautioned that results vary with seasonality and product mix. Environmental appliances are seasonal, and fourth-quarter holiday demand can affect small appliances.
- Regulatory matters include a DOE test notice concerning a dehumidifier model and an EPA/industry testing dispute over ENERGY STAR requirements. The affected products were not being marketed or sold pending resolution. Potential DOE penalties could be material; amounts could not be reasonably estimated. A California Energy Commission matter was also pending, with the company negotiating a penalty it did not believe material.
- The company cited China sourcing and tariff exposure, dependence on Amazon and third-party data/platforms, inventory and product-safety risks, and the possibility of continued losses or additional financing needs. It temporarily lost Prime delivery certification for certain products in Q3 2019.
- Disclosure controls were assessed as ineffective at September 30, 2019 because previously identified material weaknesses remained, including limited finance staffing, insufficient segregation of duties and weaknesses in review of complex accounting. Remediation was ongoing.
- The filing reported no material legal proceedings, but cautioned that ordinary-course claims and regulatory matters could entail costs or penalties. The company stated it was in compliance with debt covenants at quarter-end.
Important facts for investors to verify
- Whether revenue growth can translate into sustained GAAP profitability and positive operating cash flow, given continued losses and substantial stock-based compensation.
- Actual liquidity and covenant headroom, including the approximately $0.8 million of MidCap availability, debt service and the effect of any inventory or cash-flow shortfall.
- Outcomes and financial exposure from the DOE, EPA and California energy-compliance matters, including any product restrictions, redesign costs or penalties.
- Amazon sales concentration, Prime eligibility and the company’s ability to maintain marketplace access, product reviews and fulfillment performance.
- Progress remediating internal-control material weaknesses and the eventual contribution and integration costs of the acquired wellness assets.