Mohawk Group Holdings (MWK) in a bit of a tough spot. Deloitte issued a going concern qualification, indicating high risk in regards to potential bankruptcy with an asymmetric expected reward.
Mohawk is a Google-backed technology-driven consumer products company that is industry recognized for creativity and company. Insider ownership is 55%, indicating that management's interests align with shareholders.
According to my analysis, this opportunity represents consistent high double-digit top-line growth selling for an enterprise value to sales ratio of 0.37. Trailing 12-month gross profit was 45.04 million versus compared to the prior year amount of 25.98 million.
Revenues increased 56% to $114.50 million in fiscal 2019 from $73 million for the prior year. Product launch for 2020 is set to double. Coupled with the SaaS offering, I believe we could see 50% in top-line growth as demnad for these products increases. For 2020, management is projecting revenue of $160 million to $170 million and expects a positive adjusted Ebida in its third quarter of fiscal 2020.
Mohawk is backed by Google, and the company leverages its proprietary AI research to automate eCommerce tasks such as discovering new market opportunities, introducing new brands and managing the fast-evolving complexity of marketing. It also sells home appliances, kitchenware, dehumidifiers, air conditioners and consumer electronics under the hOmeLabs, Vremi, Xtava and RIF6 brands.
Mohawk Group was recently listed on the Inc. 5000 2019 Fastest Growing Companies list. Before Mohawk's IPO in June 2019, it was one of the fastest-growing private consumer companies, recording more than 100% revenue growth per year since its founding in April 2014.
Mowhawk's proprietary technology is called 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.
"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," said CEO Yaniv Sarig in a statement.
AIMEE, which is short for 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.
Source: Slides are taken from January 2020 Investor presentation prepared by Mohawk.
For the fiscal year ended Dec. 31, 2019, revenues increased 56% to $114.50 million from $73 million for the prior year. The company introduced 32 new products versus 11 for the previous year. Revenue increased by 26.6 million, or 30% compared to the prior year's fourth quarter.
The fixed costs for 2019 came in at 19.3% of revenue, or $22.1 million, versus 28.70% ($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 of $19.5 million from a loss of $28.6 million loss in 2018.
The year 2019 year-end cash balance was $30.4 million versus $35.7 million at the end of 2018. Meanwhile, debt was split between $37.9 million from a revolving credit facility and a $50 million term loan. At the end of the previous quarter, the company had only $30.1 million in debt. The increase reflects planned inventory increases.
Regarding the potential for SaaS earnings, Yaniv commented the following:
"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."
Conclusion
Despite the speculative nature of an investment on Mohawk Group, I am bullish on the stock. I expect that they will push through concern about their liquidity, though this is still a risky bet. The company has proven growth capabilities and a unique automated approach. I also have confidence in their industry-proven management team.
Note: The April 29, 8k published after article.
“FURTHER, WE ARE CURRENTLY SEEKING TO PRESERVE OUR LIQUIDITY AND CAPITAL RESOURCES THROUGH VARIOUS ACTIONS WHICH MAY INCLUDE NEGOTIATING THE DELAY OF PAYMENTS TO CERTAIN VENDORS THE EFFECT OF WHICH COULD HAVE AN ADVERSE IMPACT ON OUR BUSINESS, INCLUDING OUR RELATIONSHIPS WITH THESE VENDORS.”
This significantly raises the risk of holding or buying the stock!
Long: Mohawk Group
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