Thank you for standing by and welcome to the Mohawk Group Holdings Inc. Quarter Four Earnings Report Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] I'd now like to hand the conference over to your speaker today, Mr. Ilya Grozovsky, Director of Investor Relations. Please go ahead.

Thank you for joining us today to discuss Mohawk's fourth quarter 2020 earnings results. On today's call are Yaniv Sarig, Co-Founder and CEO and Fabrice Hamaide, our Outgoing Chief Financial Officer and Arturo Rodriguez, our Incoming Chief Financial Officer. A copy of today's press release is available on the Investor Relations section of Mohawk's website at mohawkgp.com. I would like to remind you that certain statements we will make in this presentation are forward-looking statements and these forward-looking statements reflect Mohawk's judgment and analysis only as of today and actual results may differ materially from current expectations based on a number of factors affecting Mohawk's business. Accordingly, you should not place undue reliance on these forward-looking statements. For a more thorough discussion of these risks and uncertainties associated with the forward-looking statements to be made in this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements that is included in our fourth quarter earnings release as well as our filings with the SEC. We do not undertake any obligation to update or alter any forward-looking statements whether as a result of new information, future events or otherwise. In addition, the company may refer to certain non-GAAP metrics on this call. Explanation of these metrics can be found in the earnings release filed earlier today. With that, I will turn the call over to Yaniv.

Thanks Ilya and good afternoon, everyone. I'd like to start this call by taking a minute to acknowledge our team's perseverance through a very challenging year. 2020 was our first full year of the company and it was marked of course by the strategy of the global COVID-19 pandemic. While the pandemic led to a strong year for eCommerce, it was not without significant challenges. Despite the difficulties with the pandemic resurgence, the need for a more work and severe supply chain disruption, we grew our net revenue 62% year-over-year. We also achieved the adjusted EBITDA profitability earlier than we had expected and for the first time, we were profitable on a full year basis, this despite our investment in long term growth. We've accelerated our M&A strategy and acquired five leading eCommerce brands. We also refined our setting there and regained our international expansion. Finally, we launched a record 37 new products and expanded our total skew count to over 300 as of December 31, 2020. We now have over 3,000 skews, thanks to our M&A strategy. In my last few communications with the investment community, I've made it clear that one of our strongest assets of the company, the cultural of our stability. As I discussed vis-à-vis, the online CPG industry is continuing to experience an accelerate consolidation effort. We've seen over $3 billion of fresh capital injected into early stage companies looking to build a CPG platform for the future, consolidate the 500 ecosystem of online brand through M&A. The market is really well positioned to take the leading role in this fastest industry consolidation, given the events that we've made in team as well as the technology and our supply chain platform. Looking back at our last few M&A transactions, I am very happy with our…

Thanks Yaniv and good afternoon, everyone. Here are the operational performance details of our fourth quarter. For the fourth quarter of 2020, net revenue increased 61.9% to $41.5 million from $25.6 million in the year ago quarter. The strong gain was primarily attributable to direct sales volume of new products launched in the second half of 2019, net of vertical expansions just as we launched competing products to our own sustained products. This increase net revenue by $4.8 million. Wholesale revenue of PPE products which contributed $0.7 million and historical products plus recently acquired products. We suffered from inventory shortages in the quarter, which we estimate to be an impact of approximately $6 million against our normal sales levels. Gross margin for the fourth quarter increased to 45.2% from 35.4% in the year ago quarter and decreased from 47.8% in Q3 2020. The year-over-year improvement in gross margin was due to both favorable product mix, including new products acquired pursuant to M&A, pricing from vendors and higher product pricing while being partially offset by wholesale PPE sales, which carry much lower gross margin. The quarter-over-quarter decrease in gross margin was driven by mix in our sustained portfolio as well as a higher percentage of liquidated sales as we cleaned up some of our inventory balance. Additionally, sales and distribution was negatively impacted by ship again impact, which drove higher cost in last mile fulfillment given the carrier tightness in the quarter. Our overall Q4 2020 contribution margin was 11.2% a result of the previously mentioned factors, which improved compared to the prior year, which was negative 6.6%. This year-over-year improvement was driven by significantly improved product mix coming from mix unit economics coming from mix and pricing related to inventory shorts of our sustained products which had a CM of…

Thank you. Fabrice. Mohawk today announced that its signed a binding term sheet to acquire Photo Paper Direct specialized in the printing supply category. Based in UK, it marks our first of many international acquisitions to come in the future. The unaudited trailing 12-month revenue and adjusted EBITDA as of December 31, 2020, are $15 million and $4 million respectively. The transaction is expected to close by mid April. We also announced today our intend to refinance all of our current debt outstanding, which includes December 2020 16-year secured note and existing February 2021 15-year secured note totaling $53.9 million as of today and our $30 million revolving credit facility with a 110 million senior secured note to an additional lender. The senior secured note has an 80% annual interest rate payable in cash from quarterly basis with a three-year maturity. In connection with the senior secured note, the company will issue to the institutional lender warrants to be determined at the closing of the refinancing and we expect this refinancing to close in the first half of April. The full-year 2020 revenue guidance, the company now expects net revenue to be in the range of $350 million to $380 million up from $340 million to $370 million reflecting the addition of Photo Paper Direct. For the full-year 2021, adjusted EBITDA guidance, the company now expects adjusted EBITDA to be in the range of $30 million to $34 million up from $28 million to $32 million. Finally, I want to mention with the vesting scheduled employee stocks, we are anticipating that certain members of the executive management team will need some of their Mohawk stock primarily assessed by tax liabilities associated with the vested shares. This will be done primarily as part of 10b5-1 plan and we've implemented and will be fully disclosing SEC filings of the sales made. With that, I'll turn it back to the operator to open the call for questions.

[Operator instructions] Your first question comes from the line of Brian [ph] from Oppenheimer. Please ask your question.

Good afternoon. Nice quarter, nice year. Congratulations to all the new appointments in the organization. So I've a few questions I thought I'd run through here, first off with regard to the potential acquisition targets you called out in the press release that $522 million, within that are there any LOI signed at this point?

The answer is yes, although they are not binding and obviously this pipeline is all subject to the diligence and all the efforts that we got to put get to those finish line, but there are some nonbinding NOIs already in place as part of the due diligence to office.

Got it and the second question I have, this with regard to the guidance and it looks like it's particularly on the top line. So the 350, the updated guidance of 350 to 380 today implies substantial growth of the year of the so you did this you. Can you help us just understand maybe where are the key assumptions behind that? Also I want to make sure I am clear that within that 350, 380, you're not assuming further acquisitions correct?

I'll let Artie answer that one?

The guidance that includes there, obviously we closed Smash at the end of December and we closed CME Solution at the end of February. So those items are included in December. The only update that we have from acquisition is the Photo Direct, which we said on an annual basis we do about $15 million in net revenue and $4 million in adjusted EBITDA.

So Artie, yeah I guess the first part of my question was just what have goods have been besides that and what are some of the real key assumptions there or the key drivers of the expected revenue growth here in 2021?

Brian, I think really if I can jump in here, the main drivers are just again the launch of new products that we are looking to continue to put out there with our core business model as well as the sustained growth of the products that we either launched through our own brands or acquired. Those are currently the driving forces of that guidance and there are no, it doesn’t include any additional M&A that is in the pipeline or anything like that, if that makes sense.

Them I am just going to ask one more and I'll turn it over, but with regard to the contribution margin, Fabrice you talked about this in your prepared comments that I think I heard you say there is some pressure there from it sounds like transportation costs, but you look at the contribution margin particularly in the stain category in the fourth quarter, you're still up nicely year-on-year but the rate of increase in Q4 diminished somewhat net of Q3 and Q2. How should we think value, I guess I want to make sure, couple of questions, one I want to makes sure that transportation cost that weighed upon that and then how should we think about that dynamic as we push into '21?

Yes, I mean it's all in Q4 you always have an increase in the shipping rates that actually happened every year right, it's the seasonal increase because of the Christmas shipping season which applies to all of the local carriers, productions and so on right as well as Amazon actually on FPSI right. So this is always the case if you're going to have a sequential drop in Q4 versus Q2, Q3 and it's also linked to the fact that the product mix changes and we have more products on Amazon than we have on FBM from that perspective. On FBM we have a shipping advantage, cost advantage, which we do not have on the Amazon site. So you'll have that all the time. The ship again, maybe Artie you can pick up that question on a go-forward basis?

Yes thanks Fabrice, yeah there will be a little bit of pressure in Q1 and Q2. I think it's the pressure that everyone is feeling right, the global phenomenon and it's not just a Mohawk thing, but that's been factored in our guidance and our updated guidance there. We think as we get into the summer months, we'll see that kind of go away and continue to -- we'll see that away and less pressure there on profitability.

Your next question comes from the line from the line of Matt Koranda from ROTH Capital Partners. Your line is now open.

Just on the pipeline that you guys delineated, I know you partially answered the question on just a bit of go, but wanted to be sure what percentage of the pipeline is under LOI versus sort of just earlier stage kicking the tires? Maybe you could just bracket it out for us so we can o understand how early stage some of the pipeline is versus late stage?

At this point, we just wanted to give a sense of how much looking at, but as I mentioned, we'll leave it at that for now. Yeah, we're just working on a lot of the deals in parallel but we don’t do necessarily go into too many details on how many of them are already NOI.

Okay I guess the gist of the question though was basically just to understand, what's the threshold under what you’ve put in into that pipeline? I guess maybe that's more of a fair question because I know it's hard to answer the NOI part?

That's a great question. The way the diligence process works is we have several layers of the diligence and the first layer is one where we see it can even make it to the pipeline. This is where we use Amy very quickly to understand the core metrics that he literally without even getting the internal data of that company right, before we even get that company under LOI and NDA and ask them to give us all the data. We use our analytics and what Amy tells us about the market to see if it's even hitting the threshold by which it would get into the pipeline and that's really what that means right. So what we described in the pipeline is a lead from an external perspective that we have on the sales on the modes and another aspect is good enough for us to have a deeper look.

Okay. So it's already clear to the hurdle be well to get into the pipeline there okay. And then just maybe attacking the 2021 guidance from a little bit of a different angle, the acquisition that you're doing Photo Paper, I understand it's probably not going to be obviously it's definitely going to be a fully year contributions in terms of revenue and EBITDA, but if I do the math just at the midpoint of the guidance raise, it seems like it implies that maybe we're not fully factoring that in or maybe we're just sort of we're thinking having them in the core business, so we're fully factoring the acquisition, but seeing some headwind. Maybe just talk about the assumptions embedded there, so we can understand exactly why we're raising the guidance by $10 million on revenue and $2 million on EBITDA.

Yeah let me take a first stab at it and maybe Artie wants to add more to it, but usually we look at this as a capital factor. That you mentioned we're not going to be in benefit from the full year of the business that's one. Second, we're giving a wide range scale because the world is still not entirely stable on supply chain right. So we're still observing very closely everything that's happening with COVID and like downward effect of the pandemic on supply chain. So we're giving some room there right for the unknown. And then finally, we're looking to reinvest a lot of the contribution margin that these assets that we're acquiring or bringing in. I was recalling a very large company with a global footprint and that investment right now is pouring right now especially as we continue to make for and getting into Europe and beyond that our ambition is to become as I said, a global enterprise right. So we always factor that in as well into our plan.

And then just last one I'll just sneak one more in here, could you maybe just speak to the performance of some of the brands that you talked in over the last six to eight months or so. I'm curious maybe anything qualitative you can share on the performance or maybe quantitative just in terms of sales rankings? How have some of the ASMs have performed relative to your expectations? Have you been able to improve some of the M&A, I am just curious about the tracker there?

Great question. Look in general, we don’t want to break down on a product level, but we're very happier with the performance of the acquisition so far. Those acquisitions also suffer here and there from supply chain pressure and stock outs but those are as we said global events that are pretty much out of our control and we're doing our best to mitigate them. So some of that has happened, but if you exclude that, we're very happy with the performance and we're extremely happy with the speed at which we're able to basically ingest those assets. That's to me one of the most powerful things and a result of many of the work to see how quickly we were able to put 3,000 SKUs on Amy from the time we closed that deal was exceptional and it gives me enormous -- looking forward it gives me a lot of comfort with the pace of which we're going to execute those right. So again overall happy with the performance, happy with our ability to bring those assets into our platform and overall experience again those supply chain issues we're really happy with the performance of these assets.

[Operator instructions] Your next question comes from the line of Brian Kinstlinger of Alliance Global Partners. Please ask your question.

And Fabrice, hopefully it won't be strange to continue to have our conversation. Give there is so many profitable companies that are FDA not just what you have determined are in your immediate pipeline, can you talk about outside of anything that fits in your platform? What are the determining factors outside of willingness when you're comparing targets of who your priorities are to buy versus others?

Sure, it's a really good question by the way and so it connects back to the question Matt brought before, but I'll give a little more color there right. So as I mentioned, the diligence we put the work Amy on the first kind of like part when we looked at these assets, we look at them from the point of view of the data we have Amy and see that they meet the minimum threshold which includes weekly typically currently from a strategic perspective we look for assets that have and in shelf life. So as long as possible we believe these products are going to be through the data that we have relevant to consumers because they're not in categories that have fashionable easily disruptable right. So as long shelf life is one, a mode in terms of ranking, appearance and searches and also obviously social proof and customer satisfaction that is cloud in terms of just typically years of great action and no hiccups there. Those I'd say are kind of like the baseline by which we would even get the products in the pipeline. The second stage as we dig into the data that we cannot have right, for example, what are the real margins of the products. We won't know that until we raise an NDA and get the data, the data we will run the cost of growth, who the turning factors are, are those money factors meeting our criteria, that's when a lot of other dig in comes in to really understand the full profitability profile and sustainability profile of the business right. It's important to emphasize one more time that right now at this point in time, given the incredible momentum that is happening in this consolidation of the industry, our focus is mainly on category leading assets that already have the modes that already ranking well and the main event is that we're gaining is operating leverage where we don’t have to take the entire fixed cost typically where we do the fixed cost where we dramatically. Once we put the assets on board, we would of course try and find and keep some of the people who want to stay if they're talented and fit the culture of our team, but in general most of the advantage comes from the fixed cost and the creation of operating leverage and the focus strategically is on the highest level of quality assets right. Over time, if I could shift to more nascent companies that maybe have great quality, but don't have for example the best marketing and the ranking and these other things that we know how to do, but just right now because of the competition that's happening the focus is more mature high-quality assets. Does that answer your question?

Yes, great, thank you and it's not the same question you just guided, it's a little bit different. So I'm not sure if it's too early given the shortages you just discussed, but can you talk about how you think Amy has impacted the ranking in sales of the companies you’ve acquired that have a couple of quarters and anecdotally to one of those four acquisition at the same time, but have you been able to see evidence of any changes in market share or any change in the business or is that too early?

To the previous one, right my previous answer because we actually select only the assets that we think already have a mode the power is not necessarily in the ranking, it's actually again in reducing the operating leverage and maintaining the success of those products without having to add a significant amount of people and the growth that happens at up-running time where there is already category leaders and smaller. If you look for example the Smash acquisition, which specifically acquired product that we selected one by one, the products that we thought meant those criteria right. So in general can Amy achieve better marketing for other assets, yes, but again our selection processes for currently for products that already have a great show mode right. So it's more about this conserving that mode and continuing to run perhaps possible performance in the long run without taking necessarily the people that -- all the people that are needed to run the business. Does that make sense?

Perfect. Thank you and then you become a much bigger business quickly through M&A and organic growth, how do I think about product launches for the year? Are you going to start to accelerate that or is '20 a quarter really where you're going to be and you'll augment that with M&A?

Our goal is obviously to continue to do this as a core and super important competency of our company right. There is a lot of other aggregators out there who do not have the capability and all they do is buy existing businesses right. We're very proud of our capability around launching products. We already have pretty much for every acquisition we made except Hearing Solution because that's too early. For all the other acquisitions, we have products in the pipeline that are coming to augment the acquisition we already made really driven again by the data where we see typically their consumers are, buying this particular anchored product with other products from other brands and other data points like that will be obviously of use in pointing on right. So it's an important factor to our business and we'll continue to invest in that and accelerate over time our ability to do that, to launch more products.

Great. Lastly can you give any more details around the Special Shareholder Meeting you highlighted in the press release? Thanks for your time.

Yes. So what we're doing with Shareholder Meeting is we're asking our shareholders to approve share issuances in accordance with NASDAQ listing rules. This is in regard with the aggregation and dilution rules on acquisitions and related financing. So there will be more information in the proxy statement that will be filed.

Your next question comes from the line of Thomas Forte from D.A. Davidson. Your line is now open.

So first off congrats to Fabrice and congrats to Artie. So I had a high-level question for you Yaniv, near term I think investors are bullish on the company including Mohawk Group and a lot of private companies that are buying FDA businesses and in an argument that you made the situation where rising tide is lifting off. So I was hoping Yaniv if you could talk about long-term Mohawk's competitive advantages including your ability to determine when the buyer build a product just on the marketplace maximizing marketing advertising spending ROI and then maximizing logistics efficiencies, minimizing logistics costs and ensuring products are prime eligible. When I see if your long-term attainable competitive advantage that may be the market by making a distinction on. Thank you.

And I'm sure if you ask now the other aggregators, they'll all tell you that they have a difference in special company, but make no mistake this aggregators momentum that is happening right now, we are by far the best to execute on that and beyond that we're by far the best statute to build the CPG platform that all others are dreaming about right. We're looking a lot of other companies out there raising capital without really having much expertise, without having build the type of platform that we build and so we're extremely confident that as we're participating in this consolidation movement, the long-term valuable position of what we're doing is our platform play right. Our ability to manage not only mature assets, but also to acquire up and coming assets and drive them further to growth where the fixed cost ration to revenue that is in my opinion is going to be over time the best in the industry, that's really the core valuable position and an advantage that we have over all the other players in this field and I'm excited to see that both the private and public markets are realizing what massive opportunity lies ahead but I again more than ever looking at the last few months and what we've been able to achieve and what is ahead of us, I'm betting very heavily on us to be one of the top players in this space and I think again beyond acquiring companies our ability to launch new products to acquire up and coming brands and drive them to growth and manage again a very large amount of products across many different channels in the most effective way, I think we're the best suited to do that.

[Operator instructions] Your next question comes from the line of Matthew Galinko of Sidoti. Your line is now open.

I know it has been very long side your last acquisition, but we do talk about maybe be some opportunities for driving better or improved operations, the bottling level but maybe just generally executing in that deal post close, I am just curious early first steps after completing the acquisition, how that's going particularly in light of having this large M&A pipeline that you're also pursuing? Do you feel that you have the capacity and house to both execute on an asset like that and go against the M&A pipeline and do the organic growth or do we expect to maybe fixed costs growing a little bit as we move over the next few quarters?

We are in the process and thanks for remembering us from the last call right, we are in the process of optimizing the supply chain healing solution with the help of the existing team and we've made some really exciting progress there although I don't want to commit to anything yet, but we're getting some good options there that I think will further improve that businesses and acquisitions for us and create even more value out of that deal. In general, one will see -- look we're really build to create an incredible ration between fixed cost and revenue and contrition margin but of course there will be some fixed cost increase right. Is this going to be a step function but again when I compare the hiring than seeing without their aggregators, we're scrambling to manage the amount of products that they're acquiring. Nothing like that I think is going to happen here. We're just taking the right measures to make sure that we again become an international company and that we have opportunities across many channels where holistic marketing capabilities. We're becoming again a force to reckon within the CPG line industry right and we're doing that I think in a really smart way based on tons of experience over time and again a constant eye on that ratio between fixed costs revenue and contribution margin.

Got it. I'll ask you a question I don’t think you'll answer but I am going to give it a shot anyway. You’ve touched on wanted to become an international company, you're looking at this UK acquisition. I think you mentioned will close in mid April. If you look out in two, three, four years, how significant do you expect international business to be for you, how quickly you expect that to move? Obviously I think you probably have a sizable US M&A pipeline and that will have an impact, but how significant the effect to international be in the coming years?

Great question. It all depends on how far you're looking right. E-commerce is a around the world been accelerated in terms of its penetration of the consumer demand given the pandemic and that's not going to turn back in our opinion. There is opportunity around the globe to continue in the model that we have both in the M&A and then the launch of product. I think for us it's always going to be about how fast can we move without tripping over right and where is the best way to put our resources that we are capitalizing on the capabilities that are out there. One of the main things that I think I mentioned last time on the call was for example the fact that Amazon had churned its entire platform and especially the rating platform to be international, that is by itself a huge advantage for us and other companies that are operating in that area right and it's almost like a must do for us and we're as I said focused very heavily in Europe this year, but again overtime as we continue to scale, we'd like to be seeing that expansion into India, into Japan, into China as well, we're talking about the biggest e-commerce market in the world. So again scratching just the surface here and so it's all about gauging all the different opportunities and making the best decisions for the long-term to make sure that we are capitalizing on the momentum but not going so fast in terms of international expansion that where causing issues with our execution.

Got it. So maybe one quick final question for me just on shares out, I think between the acquisitions and you being pretty early stage, it's still a tightly held share base right now but a lot of it internally I think may be some locked up from the acquisitions, but just curious how management thinks about holding shared versus selling shares personally and just broadly on some of the bigger holders that have come in through M&A? How we should think about those shares coming on to the market or you sort of expect those to stay put for a while?

Needless to say management is except for what is already mentioned earlier in the call right, there is some 10b5-1 that have been put in place for tax purposes by the way, management at it through the still early stage play right and so we're not anticipating much of that, at least that's from the side of the management, well I can't speak for other shareholders that we have no control over right, but I kept what I already mentioned on 10b5-1 not expecting much otherwise.

[Operator instructions] We don't have any questions over the phone. Mr. Ilya Grozovsky, please continue.

Thank you. In terms of the upcoming calendar, Mohawk management will be participating in the DA Davidson Consumer Conference on March 11, the Roth Conference on March 15 to 17 and the Fidelity Investor Conference on March 24 and 25. Thank you for joining us on the call today. We look forward to speaking with you on future calls. This ends our call.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.