Thanks, Yaniv, and good afternoon, everyone.
Let me first start with a potential accounting update relating to the timing of our non-cash stock-based compensation expense recognition. We received the communication this morning from our outside auditors, Deloitte. Though reviewed by Deloitte in our 2019 Q2 and Q3 filings and despite no change of rules, it appears that we may need to refile our financial statements for these two periods.
In particular, we reported stock-based compensation expense relating to our 2019 Equity Plan beginning as of the IPO date in June 2020, over the future service period, which was two years of vesting. Deloitte has just informed us that it believes the company should have taken a charge at the IPO date for stock-based compensation for the period between the grant date and IPO date for certain grants. And further, Deloitte believes that a portion of the expense should have been front-loaded as opposed to straight line over the service period.
As a result, you may need to refile our financials for Q2 and Q3 of 2019.
And so we expect to do this quickly, given the minor nature of this change, the changes to our full-year 2019 results would only be for the operating income and net income levels, and will be reflected in our Form 10-K for 2019 to be filed with the SEC.
I would like to note that this change would have no – would not have an impact on our reporting figures for 2019 with respect to net revenue, gross margin, contribution margin, adjusted EBITDA or cash, all of which we believe reflect the company’s core operational performance. This change and the corresponding acceleration of non-cash stock-based compensation expense recognized in 2019 also means that our future quarterly non-cash stock-based compensation expense would be correspondingly reduced.
As previously indicated, we’re still evaluating this matter and discussing it in real-time with our outside auditors and we’ll make a determination to refile our financial statements for Q2 and Q3 of 2019, who will notify investors promptly after the determination is made and in accordance with our SEC reporting obligations.
Now moving to reviewing the operational performance details of our fourth quarter and full-year 2019.
For the fourth quarter of 2019, net revenue increased 30.1% to $25.6 million from $19.7 million in the year ago period. The increase was primarily attributable to increased direct sales volume of $5.6 million, or 28.7% from growth of existing products, as well as new products launched in 2019 and late 2018.
Gross margin for the fourth quarter decreased from a year ago to 35.4% and was down 773 basis points on a sequential basis.
Our margins were impacted by a number of growth factors, including a higher percentage of revenue in launch phase in the fourth quarter versus the third quarter, as we launched 18 products during the fourth quarter.
In fact, approximately $0.8 million of write-off of expired inventory products, primarily supplements, and the third quarter gross margin includes accrual reversals associated with our recall program that is materially complete, a governmental agency penalty associated with certain non-core products and a charge due to the liquidation of certain older products that we had discontinued, which positively impacted Q3 gross margin by 800,000.
Excluding the write-off of expired inventory products, our gross margin for the fourth quarter would have been 38.6% versus the gross margin in the third quarter of 41.2%, excluding the 800,000 mentioned above.
As Yaniv mentioned, going forward, we’ll be reporting our net revenue by phases of launch, sustain, SaaS, liquidation and other. We defined the launch phase, with which on average, last approximately three months as the period of time where we are investing aggressively in marketing spend being pricing, coupons, brand rebates or advertising have a negative contribution margin on the product in order to gain a foothold in the marketplace.
As defined, contribution margin is revenue minus all of our variable costs.
After the launch phase, products are expected to enter the sustain phase. We target that these products will have a positive contribution margin of 10% or more.
Our target contribution margin can be impacted by charges related to excess inventory, exceptional logistics charges related to Amazon and FedEx relationship, and all prime status to name a few.
Finally, the other category include SaaS and liquidation and other.
For our fourth quarter 2019, our sustain revenue was approximately $20.3 million versus our Q3 sustain revenue of $36.2 million.
For our Q4 2019, our launch revenue was approximately $3 million versus our Q3 launch revenue of $2.8 million.
In Q4 2019, we launched 18 products, though the majority in late December versus all the three in Q3 2019.
Our Q4 2019 SaaS revenue was approximately $0.3 million versus our Q3 SaaS revenue of $0.3 million.
Finally, for Q4 2019, liquidation and other revenue was approximately $2 million versus our Q3 liquidation and other revenue of $1.4 million.
Our overall Q4 2019 contribution margin was 6.6% versus our Q3 2019 contribution margin of 8%. Q4 carries more legacy products, which carry a lower contribution margin than our target. It was also negatively impacted by additional cost of fulfillment as we used express instead of standard ground to compensate for the FedEx/Amazon issue and maintain our prime status.
Also, our Q3 2019 contains the $1.4 million reversal of the recall reserve, which is included in contribution margin.
You can find more information by phases in the financial tables of the press release.
Fixed cost for Q4 2019 was $5.9 million, or 23.1% as a percentage of net revenue, as compared to $6.6 million, or 33.5% in the year ago period. The improvement in fixed cost highlights our ability to launch new products and grow revenue, while keeping fixed costs essentially flat, thanks to the high degree of automation of our business model.
The adjusted EBITDA for the fourth quarter of 2019 decreased to a loss of $7.6 million from $2.7 million in the third quarter of 2019, which is the direct impact of lower revenue due to seasonality. Q4 carries more legacy products in sustain, which carry a lower contribution margin than our target, an impact of approximately $0.8 million of write-off of expired inventory products in liquidation and other and while maintaining essentially flat fixed costs.
Third quarter 2019 adjusted EBITDA contains a net positive impact in liquidation and other of 800,000, probably driven by the recall, reserve, reversal and other items described earlier.
Turning to our full-year results.
For 2019, net revenue increased 56.2% to $114.5 million from $73.2 million in the year ago period. The increase was primarily attributable to increased direct sales volume of $42.3 million, or 61.3% from growth of existing products, as well as new products launched in 2019 and late 2018.
Gross margin in 2019 increased from a year ago to 39.4%.
For 2019, our sustain revenue was approximately $97.2 million, our launch revenue was approximately $9.8 million, and our SaaS revenue was approximately $1.7 million.
Finally for 2019, our liquidation and other revenue was approximately $5.7 million.
Our overall 2019 full-year contribution margin improved to 2.2% versus our 2018 contribution margin of negative 10.6%, reflecting both the increased revenue of sustain and improved unit economics.
Fixed cost for 2019 was $22.1 million, or 19.3% as a percentage of net revenue, as compared to $21 million, or 28.7% in 2018. The improvement in our fixed costs as a percentage of net revenue, again, highlights our ability to launch new products and grow revenue, while keeping fixed costs essentially flat. Thanks to the high degree of automation in our business model.
As this breakout shows, we believe that our pathway to profitability is a function of more products being launched and reaching the sustain phase, margin expansion of our sustain products and continuing to keep our fixed costs stable.
As a reminder, approximately 80% of our products launched over the past year have entered sustain.
2019 full-year EBITDA improved to a loss of minus $19.5 million from minus $28.6 million loss in 2018. The continued improvement in adjusted EBITDA is attributable to growth in our business from our existing products and new product launches, our continued improvements in our operating expense leverage as we continue to grow our revenue and maintaining our fixed costs essentially flat, thanks to the high degree of automation in our business model.
Turning to the balance sheet.
As of December 2019, we had cash of $30.4 million, compared with $35.7 million at the end of the September 2019 and $20 million as of December 31, 2018.
Cash used in operating activities for the fourth quarter was $12.1 million, compared to cash provided by operating activities of $3.1 million in the third quarter of 2019, which was impacted by increased cash operating loss and increased cash usage in working capital, as we increased our inventory on hand for the traditional seasonal impact of Chinese New Year, and because of the threat of additional tariffs previously announced in the third quarter of 2019.
Overall cash burn was $5.3 million, compared to $2.4 million in the third quarter of 2019.
Our total debt as of December 31, 2019 were $37.9 million, consisting of borrowings under our revolving credit facility and our $50 million term loan, as compared to total debt of $30.1 million at the end of the third quarter 2019. It’s increasing, that is a direct reflection of our planned increased inventory.
Moving to the coronavirus. With regard to the coronavirus, first and foremost, our thoughts are with everyone affected by this global health emergency, in particular, our team based in Shenzhen.
In terms of its impact on our supply chain, it is still too early to tell it will experience any meaningful disruption.
Going into the Chinese New Year and anticipating potential new tariffs, we built up our inventory as part of our normal course of business. The various has impacted the manufacturers that we work with in various ways.
Some factories are up and running and close to full capacity, some are still ramping up capacity as workers slowly return, and others are idle as they wait for their workforce to make it back. These delays may materially impact the schedule of product launches for Mohawk starting in Q2.
We continue to believe that we will be able to launch up to 20 new products during the first quarter. We’ll also continue to believe that in 2020, we’ll be able to double the amount of products that we launched in 2019. But the timing of those launches may be delayed.
As it relates to potential impacts from the coronavirus and access to replenishment inventory, and thanks to our long inventory position. We do not expect any significant impact in the first-half of 2020. But should the manufacturing capacity not resume to normal – more normal course of business by the end of April, we may experience inventory shortages in a more meaningful way starting in Q3, which would have some impact on our second-half revenues and adjusted EBITDA. We’ll continue to monitor the situation very closely, obviously.
Guidance for 2020.
For 2020, we currently expect net revenue to be in the range of $160 million to $170 million, driven primarily by continued growth of our existing product portfolio and the positive contribution from new products launched in 2020 and late 2019. This outlook incorporates potential inventory constraints for existing products and potential delays in new product launches primarily in the second-half of the year, due to the impact from the COVID-19, the company expects positive adjusted EBITDA in the third quarter of 2020 still.
With that, I’ll turn it back to the operator to open the call for your questions.