Mohawk Grp (MWK) - The Renaissance Technologies of CPG E-commerce

Mohawk Group Holdings (MWK) is SPECULATIVE!  Deloitte issued a going concern qualification raising substantial doubt regarding MWK’s ability to continue the following year.

Description:
Mohawk (MWK) is a Google-backed technology-driven consumer products company. The company leverages its proprietary AI research to automate eCommerce tasks – discovering new market opportunities, introducing new brands, and managing the fast-evolving complexity of marketing. MWK sells home appliances, kitchenware, dehumidifiers, air conditioners, related products, and consumer electronics. Products sold under the hOmeLabs, Vremi, Xtava, and RIF6 brands. Online consumers buy through Amazon and other e-commerce platforms, coupled with their websites.

Mohawk Group listed on the Inc. 5000 2019 Fastest Growing Companies. Before Mohawk’s IPO in June 2019, Mohawk was one of the fastest-growing private consumer companies recording +100% year or year revenue growth since founding in April 2014.

April 14, 2020 MWK ranked number 114 out of 500 in The Financial Times.
The rankings include North and South America that prove exceptional innovation and creativity. “Our proprietary AIMEE software ideation platform allows us to bring research-driven products directly to consumers quickly and we have a significant opportunity to continue scaling our portfolio and SaaS offerings as consumer online spending habits continue to shift.” CEO Y Sarig

MWK develops proprietary technology, AIMEE™.  AIMEE leverages millions of data points during the customers’ decision-making and buying process. Artificial intelligence from AIMEE discovers new products and creates an optimal selling process.

AIMEE™ (AI Mohawk E-commerce Engine) is an E-commerce platform that grows Mohawk’s owned and operated consumer product brands. Mohawk began selling AIMEE™ as a SAAS offering. A rigorous data-first approach, coupled with their proven technology and collective experience, generates actionable executable opportunities. Google Ventures’s investment and interest in Mohawk is not an eCommerce consumer product vendor. The more in-depth story is their proven technology.

Slides are taken from January 2020 Investor presentation prepared by Mohawk.

Operating results discussed on the March 10, 2020, year-end conference call.

For the fiscal year ended, 12/31/2019 revenues increased 56% to $114.50 million from $73 million for the prior year. Thirty-two new products versus eleven for the previous year. Eighteen new products launched in the fourth quarter of 2019. Revenue increasing by 26.6 million or 30% compared to the prior year’s fourth quarter. In Q4 2019, 18 new products, though the majority in late December versus three for Q3 2019.

The fixed cost for 2019 was 19.3% as a percentage of revenue or $22.1 million versus 28.70% or $21 million in 2018. The automated business model led to improvement as a percentage of revenue. EBITDA for the fiscal year 2019 improved to a LOSS $19.5 million from minus $28.6 million loss in 2018.

The year 2019-year end cash balance was $30.4 million versus December 31, 2018, a balance of $35.7 million. Operation cash affected by inventory increase from Chinese New Year and potential tariffs. The debt was $37.9 million from a revolving credit facility and a $50 million term loan as of December 31, 2019. Compared to the debt of $30.1 million at the end of the third quarter of 2019. The expected increase reflects planned increased inventory.

A separate SaaS revenue line item reported in future periods. CEO Yaniv comments on their SaaS opportunity.

“very,very excited about the SaaS opportunity, it is – and it’s very much of high priority for us
We’re having active conversation and negotiations with approximately 46 different companies across a variety of product categories that include large – larger brands and some digital native brands.We already signed a couple of contracts in the first two months of the year. And we really are going to continue to invest in the side of the business and expect to see the base picking up in Q2 and beyond. So very much a priority. We’re investing in edge. We’ve made again a few changes to our product and offering and on the conversations,  we’re having so far is exciting.”

Management expects 20 new products in the first quarter of 2020. And double the products launched in 2019. For 2020, management is projecting revenue to $160 million to $170 million, expects a positive adjusted EBITDA in the third quarter of 2020.

Conclusion:

I’m long and bullish on a speculative Mohawk Group holding. I expect they push through the auditors going concern opinion. But no guarantee. MWK has proven growth and a unique automated approach. My speculation is with an industry-proven management team.

I expect future dilution from securing management talent and finance growth. The stock’s expected value is positive. Although,  risky upside. MWK’s success is also contingent on the uncertain corona impact. Manufacturing and new product launches can delay. Hence, the short term 2020 goal. MWK reaches positive EBITDA and cash flow to service the debt.

Long: MWK