Mohawk Group Holdings, Inc. and subsidiaries (“Mohawk” or the “Company”) is a rapidly growing technology-enabled consumer products company that uses machine learning, and data analytics to design, develop, market and sell products. Mohawk predominately operates through online retail channels such as Amazon, eBay, and Walmart.

Headquartered in New York, Mohawk’s offices can be found in China, Philippines, Israel, Poland, and the United States.

Subsequent to the issuance of the Company's June 30, 2019 condensed consolidated financial statements, management of the Company concluded the recognition method used to recognize stock-based compensation expense for the restricted shares issued under the Company’s 2019 Equity Plan during the six months ended June 30, 2019, as disclosed in Note 7, was inconsistent with the recognition criteria prescribed by Accounting Standards Codification (ASC) 718. In this regard, management concluded that the corresponding stock-based compensation expense associated with these equity awards is required to be recognized in a manner that is reflective of the substance of the awards (i.e., as though the restricted shares are multiple awards with more than one requisite service period commencing at the grant date, with a cumulative charge for services rendered between grant and IPO date), rather than on a straight-line basis. As a result, the amount previously recognized by the Company as stock-based compensation expense for restricted shares during the three and six months ended June 30, 2019 of approximately $1.2 million and $1.2 million, respectively was understated for the three and six months ended June 30, 2019 by approximately $9.2 million and $9.2 million, respectively. While management believes the effect of this error is immaterial to the Company’s previously issued Condensed Consolidated Financial Statements, the accompanying Condensed Consolidated Financial Statements as of June 30, 2019 and for the three and six months ended (and related notes hereto) have been restated to correct the previously reported amounts.

The effect of the correction of this error on the Company’s previously issued Condensed Consolidated Statement of Operations and Condensed Consolidated Statement of Comprehensive Loss for the Three and Six Months Ended June 30, 2019 is, as follows (in 000’s):

	Three Months Ended June 30, 2019
	As Previously Reported			Correction			As Restated
NET REVENUE	$	30,368		$	—		$	30,368
COST OF GOODS SOLD		18,608			—			18,608
GROSS PROFIT		11,760			—			11,760
OPERATING EXPENSES:
Sales and distribution		11,828			1,881			13,709
Research and development		1,860			1,482			3,342
General and administrative		4,414			5,891			10,305
TOTAL OPERATING EXPENSES:		18,102			9,254			27,356
OPERATING LOSS		(6,342	)		(9,254	)		(15,596	)
INTEREST EXPENSE—net		1,281			—			1,281
OTHER EXPENSE (INCOME)—net		(13	)		—			(13	)
LOSS BEFORE INCOME TAXES		(7,610	)		(9,254	)		(16,864	)
PROVISION FOR INCOME TAXES		15			—			15
NET LOSS	$	(7,625	)	$	(9,254	)	$	(16,879	)
Net loss per share, basic and diluted	$	(0.62	)	$	(0.76	)	$	(1.38	)
Comprehensive loss	$	(7,637	)	$	(9,254	)	$	(16,891	)

	Six Months Ended June 30, 2019
	As Previously Reported			Correction			As Restated
NET REVENUE	$	48,213		$	—		$	48,213
COST OF GOODS SOLD		29,783			—			29,783
GROSS PROFIT		18,430			—			18,430
OPERATING EXPENSES:
Sales and distribution		21,101			1,881			22,982
Research and development		3,023			1,482			4,505
General and administrative		7,780			5,891			13,671
TOTAL OPERATING EXPENSES:		31,904			9,254			41,158
OPERATING LOSS		(13,474	)		(9,254	)		(22,728	)
INTEREST EXPENSE—net		2,494			—			2,494
OTHER EXPENSE (INCOME)—net		31			—			31
LOSS BEFORE INCOME TAXES		(15,999	)		(9,254	)		(25,253	)
PROVISION FOR INCOME TAXES		15			—			15
NET LOSS	$	(16,014	)	$	(9,254	)	$	(25,268	)
Net loss per share, basic and diluted	$	(1.35	)	$	(0.78	)	$	(2.13	)
Comprehensive loss	$	(16,001	)	$	(9,254	)	$	(25,255	)

The correction of this error had no effect on the Company’s provision for income taxes due to the Company’s net taxable loss position and full valuation reserve. In addition, the accompanying Condensed Consolidated Balance Sheet as of June 30, 2019, the Condensed Consolidated Statement of Stockholders’ Equity for the three and six months ended June 30, 2019, the Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2019, and the financial information disclosed in Notes 7 and 8 for the three and six months ended June 30, 2019, have been restated for the corresponding effect of the correction of this error on previously reported amounts as of and for the three and six months ended June 30, 2019.

Merger—On September 4, 2018, pursuant to an Agreement and Plan of Merger and Reorganization among the Company, MGH Merger Sub, Inc. and Mohawk Group, Inc. (“MGI”), as amended by Amendment No. 1 dated as of April 1, 2018 (the “Merger Agreement”), MGI merged with Merger Sub, Inc., with MGI remaining as the surviving entity and becoming a wholly-owned operating subsidiary of the Company (the “Merger”). The Merger was a reverse recapitalization for financial reporting purposes. The Merger is reflected in the financial statements and financial disclosures as if the merger was effective on January 1, 2017. Operations prior to the Merger are the historical operations of MGI.

Under the Merger Agreement, all outstanding common shares, preferred shares and warrants, excluding MGI’s Series C preferred stock (“Series C”) and warrants for Series C, converted to new common shares of the Company at a ratio of 1 to 0.3131 (“the Conversion”). All outstanding Series C, including any warrants for Series C converted on a one to 0.2564 basis to new common shares of the Company. At the time of the merger, the Company had 0.9 million shares outstanding held by certain Series C holders.

Initial Public Offering—On June 14, 2019, the Company completed its initial public offering (“IPO”), selling 3,600,000 shares of common stock at a public offering price of $10.00 per share. Net proceeds to the Company from the offering were approximately $29.6 million, after deducting legal, underwriting and other offering expenses.

Liquidity, Going Concern and Initial Public Offering—The Company is an early-stage growth company. As a result, the Company is investing in launching new products, advancing its software, and its sales and distribution infrastructure to accelerate revenue growth and scale operations to support such growth. To fund this investment, the Company has incurred losses with the expectation that it will generate profitable revenue streams in the future. While management and the Company’s board of directors believes that the Company will eventually reach a scale where the growth of its product revenues will offset the continued investments required in launching new products, completing the development of its software, and managing its sales and distribution operations, they believe that the size and nascent stage of the Company’s target market justify continuing to invest in growth at the expense of short-term profitability.

In pursuit of the foregoing growth strategy, the Company incurred operating losses of $22.6 million and $29.4 million for the years ended December 31, 2017 and 2018, respectively, primarily due to the impact from its continued investment in launching new products, advancing its AIMEE software platform and building out its sales and distribution infrastructure. In addition, at December 31, 2017 and 2018, the Company had an accumulated deficit of $39.2 million and $71.0 million , respectively, cash on hand amounted to $5.3 million and $20.0 million, respectively, total outstanding borrowings from lenders amounted to $10.3 million and $27.5 million, respectively, and total available capacity on borrowings amounted to $5.6 million and $1.4 million at December 31, 2017 and 2018, respectively. Moreover, the Company has not had a sufficient track record of improvement of its operating cash outflows. As such, in the event that the Company was unsuccessful in its ability to continue to reduce its cash outflows or obtain additional financing if such reduction in cash outflows was not achieved, the Company would have been unable to meet its obligations as they became due within one year from the date these condensed consolidated financial statements were issued. These negative financial conditions raised substantial doubt about the Company’s ability to continue as a going concern.

Management plans to continue pursuing its growth strategy. In the past, the Company has successfully funded its losses to-date through equity financings, beginning in July 2014. As of December 31, 2018, the Company has raised over $72.6 million in equity financing to fund its operations since inception. Further, in October 2017, the Company improved its working capital flexibility by securing an up to $30.0 million credit facility and a $7.0 million term loan with MidCap Financial Trust (“MidCap”) and in November 2018, the Company exited the original credit facility with MidCap and entered into a new three-year, $25.0 million revolving credit facility with MidCap, which can be increased, subject to certain conditions, to $50.0 million. Furthermore, on December 31, 2018, the Company entered into a new term loan agreement with Horizon Technology Finance Corporation (“Horizon”) obtaining a five-year, $15.0 million term loan and repaying the outstanding amount of MidCap’s term loan of approximately $4.9 million. While there was no assurance that future investments in the Company’s equity or issuances of debt will occur, management believes its success in obtaining funding since inception will continue in the foreseeable future.

During the Company’s December 31, 2018 audit of its consolidated financial statements, the Company’s financial forecast for the next 12 months included revenue growth, margin expansion, a reduction of certain fixed costs, an improvement in inventory management, and reduction in operating cash deficit. In addition, management anticipated that the Company would not breach its financial covenants associated with its existing credit facility or term loan for the next twelve months. However, there was no assurance that management’s forecast would be attained to maintain its liquidity to fund operations and/or maintain compliance with its covenants without future investments in the Company’s equity or issuance of debt from outside sources. In the event of a breach of the Company’s financial covenants under the credit facility and/or its term loan, outstanding borrowings would become due on demand absent a waiver from the lenders.

These condensed consolidated financial statements have been prepared on the basis that the Company will continue to operate as a going concern and as such, include no adjustments that might be necessary in the event that the Company was unable to operate on this basis.

For the three and six months ended June 30, 2019, the Company incurred operating losses of $15.6 million and $22.7 million, respectively. As of June 30, 2019, the Company had accumulated deficit of $96.3 million, cash on hand of $39.5 million, and total outstanding borrowing from lenders of $31.9 million with a total available capacity on borrowings of $1.1 million. On June 14, 2019, the Company completed its IPO, raising approximately $29.6 million after deducting legal, underwriting and other offering expenses. As of June 30, 2019, the Company has raised over $102.3 million in equity financing to fund its operations since inception, including the net proceeds from the IPO.

The Company believes that, based on its current sales and expense level projections, the credit facility with MidCap (see Note 6), and the proceeds from the IPO, the Company will satisfy its estimated liquidity needs for the twelve months from the condensed consolidated financial statements issuance date. As such, the substantial doubt raised by the Company’s historical operating results has been mitigated.