Description

Obligatory small fund / PA disclaimer. MWK is a microcap and borrow is limited. The thesis is simple and the window is likely limited. MWK is up over 100% in the past three trading days as a result of an article 3 “Strong Buy” Penny Stocks With Massive Upside Potential. LIVX, recently written up on VIC, was also mentioned and is up ~80%.

Three sentence story

• Mohawk Group masquerades as a tech-enabled next-gen consumer products company, but in reality is just an Amazon reseller of low-quality imported Chinese products.
• MWK has a history of faking amazon reviews, has material weakness in internal controls, and its co-founder was recently in jail for bank and wire fraud. The company is at the mercy of Amazon’s terms of service and is also dangerously exposed to the ongoing tariff war with China.
• Mohawk Group has an unsustainable business model, burns cash, and has no path to profitability. Target price is zero.

About Mohawk

Please visit the company’s investor relations page and review the recent presentation to learn about Mohawk’s trillion dollar addressable market, platform business model and artificial intelligence advantage. To see what Mohawk really is, you can visit their four Amazon stores: hOmeLabs, Vremi, Xtava and RIF6. Three of these brands have a C ratings on Fakespot.com (hOmeLabs   Vremi , Xtava) and RIF6 has a D rating.

IPO bust

MWK slid into the public markets in June 2019 when next-gen online retailers such as Revolve were the latest hot topic. Mohawk initially planned to sell 3.3mm shares at a price of $14-16, but instead was only able to price 3.6mm at $10. The deal price immediately broke, the revenue growth story never gained traction, and the company was on its proper path to insolvency until just three days ago.

I stumbled upon Mohawk’s roadshow presentation last year and was so confused I had to review the prospectus. It did not disappoint. The first risk was going concern language and said the company would go broke without an IPO. Mohawk also disclosed material weakness in internal controls. Not surprisingly, MWK recently announced they will be restating 2Q and 3Q 2019. The prospectus also warned of increased costs which would negatively affect future operating results and the ability of Mohawk to achieve and sustain profitability. More points for honesty. Mohawk also said their Amazon reviews have been purged for not being authentic and that almost all of their products are made in China and subject to the 25% import tariff. It’s no surprise the company couldn’t get financing elsewhere. Mohawk also disclosed that a former employee and co-founder (and owner of 10+% of the company) was recently in jail for bank and wire fraud.

Mohawk’s Business Model

Mohawk aims to identify products in customer demand, replace or improve upon existing products, and then import and sell through Amazon. According to industry contacts that play in the FBA (fulfillment by Amazon) industry, this is a low-margin hyper competitive industry that requires very low overhead to survive. With offices in the heart of NYC, MWK is the opposite of low cost. The industry comes with the constant challenge of inventory impairment and recall risk, both of which have plagued Mohawk in the past. There is also significant risk to Amazon changes; increased advertising costs or being cut out completely if Amazon decides they want to own a product category.  Mohawk has a weak reputation in the industry according to a members-only facebook group of Amazon sellers. 

MWK says their products go through three phases; 1) Launch phase, which requires aggressive marketing and margins could be as low as -35%, 2) Sustain phase, where product hopefully hit a 10% margin, and 3) the Milk phase, where a product achieves a category leader status and remains sustainably profitable. That sounds great but “as of the date of this prospectus, none of our products have achieved the milk phase.”

Results to date

Despite strong revenue growth, Mohawk’s numbers suggest the company is buying growth and that the model does not scale. EBIT has worsened and operating cash flow burn has not improved. Adjusted EBITDA has improved, but this is largely a function of the company shifting compensation to stock comp which is backed out. The company saw the improvements in sales growth and EBITDA losses in 2Q19 and 3Q19, but this appears conveniently timed with their IPO and 4Q19 results rolled back over. 4Q19 sales growth decelerated to 30% vs 86% in 2Q19 and 3Q19, and adjusted EBITDA declined YoY after improving in the prior two quarters. 

Mohawk has significantly underperformed consensus expectations since going public. Of note, consensus is Roth, National Securities Corp, DA Davidson and Alliance Global Partners - the four bankers that took MWK public. 2020 consensus sales estimates have already fallen from $260M to $170M in under one year, and EBITDA estimates have fallen from +$5mm to - $13mm. These estimates are likely to decline even further. 

MWK received $31mm in cash from its 2Q19 IPO, but was already back to a $4.7mm net debt position by 12/31/19 - $30.7mm of cash and $35.3mm of debt. I estimate the company burned ~$12mm in 1Q20 which would leave MWK with ~$17mm of net debt as of 3/31/20, and likely worse today. This is dangerously close to the $20mm of net debt MWK had prior to going public where auditors warned of going concern. 

On April 9th, Mohawk pre-announced 1Q20 sales of $25-26mm and highlighted strong Amazon customer demand. $25.5mm of sales was slightly above consensus of $25mm, but well below the $28mm consensus estimate from one month earlier. Over the next week, I was surprised to see this press release promoted on both my Facebook news feed and even as a Gmail Ad.

Channel Check Comments

Let's review some ex-employee comments from Tegus. 

A former manager: 

• So, there's definitely, definitely companies that are doing what they're doing, and some companies are doing way better. An example of a company that essentially is what Mohawk is founded on, is Anker.
• But the truth is, they would find any product and they would just put it up. And then if it didn't work, they would use reviews, like get people to write reviews. I don't know if that was too much information, but that's just the truth.
• Let me put it a little disclaimer there. I know that the company has shifted since I was there. So, they're trying to be more legitimate now, and they're really building up, from what I hear, their AI stuff, which at the time when I was there was total bullshit.
• Again, in theory, this sounds all so great. When it was executed, it was not so glorious. They would have the same thing with pots. But they would have something with a pot or like a blender, or something, and then whatever the item may be, it would just start to fall apart because they're using cheap suppliers in China.
• I just met with one of the executive team members and she was telling me about what was happening internally. So, I have a very good grip on what's happening, but I'm not going to speak on something that I don't know about.  [Are you a believer or skeptical?] I am on the skeptical side.
• My experience with dealing with them has been a lot of smoke and mirrors, where there's a lot of showmanship involved and there's a lot of telling you what the reality should be like or will be like, but it's actually not, and almost never gets executed properly. I would really dig into the numbers and the like where they're getting all this information from; their profit and loss, their margins even.

Former CTO: 

• The technology itself is not anything out of this world. If I was to give someone the task to build it again, knowing the requirements, I think anybody could do it.
• So the reality is, when I was there, it was not, even though it was called an AI engine, it was not.

Mohawk has put out three press releases alone this year regarding their Proprietary AIMEE Software Platform, but it appears no one cares about the product. It has zero reviews in the Microsoft Appstore and they are now giving it away free on Amazon. 

Recent 8-K spells trouble

This past Wednesday, MWK filed an 8-K that added a covid risk factor to their 10K. Some highlights: 

• Given the nature of the pandemic, it is possible that any and every aspect of our value chain could be disrupted, and such impact could have a material adverse impact on our business, financial condition, operating results and prospects. For example, we may be unable to launch new products, to replenish inventory for existing products, to ship into, or receive inventory in, our third-party warehouses, or to ship or sell products to customers, in each case on a timely basis or at all.
• 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.
• In light of the uncertainty as to the severity and duration of the pandemic, we may be unable to remain in compliance with the terms of our existing credit facilities and may be unable to secure a waiver which could have an adverse impact on our business, prospects and financial condition and we may seek additional financing options. We expect that any financing, if successful, will be expensive and/or dilutive. We also may be unable to forecast demand for our products during the pendency of this pandemic and we may experience a substantial decrease in the demand for our products most of which are considered not essential.

The stock had already jumped 50% on Wednesday ($2.20 to $3.30) but this 8-K suggests the company is teetering on the brink of insolvency. MWK climbed to $4.50 over the next two days. 

Everyone loves a good Robinhood chart these days. 

Conclusion

Mohawk is a stock promote with an unsustainable business model that has been teed up as a result of a penny stock pump piece. MWK is in need of new capital and should resume its path to zero shortly.

Catalyst

Weak 1Q20 profitability and 2020 Guidance

Failed or dilutive capital raise