Good afternoon ladies and gentlemen and welcome to the Mohawk Group Holdings Inc. third quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. I would now like to turn the conference over to your host, Director of Investor Relations, Mr. Ilya Grozovsky. The floor is yours.

Thank you for joining us today to discuss Mohawk's third quarter 2020 earnings results. On the call are Yaniv Sarig, Co-Founder and CEO, and Fabrice Hamaide, 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 on this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements that is included on our third 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. It's exciting to see Mohawk continuing to grow rapidly as we focus on our vision to build a consumer product platform of the future. This quarter's results reflect the progress and efforts delivered by our team and are highlighted by our net revenue of $58.8 million and adjusted EBITDA of $5.1 million. I owe a thank you to everyone at Mohawk for continuing to operate at the highest level despite the challenges the world is facing in their personal lives due to the COVID-19 pandemic. I am very proud to be working alongside a team that is as determined and focused as ours. For those of you who are joining us for the first time, I thought it would make sense to take a minute to talk about our company's mission and purpose. We started the Mohawk Group six years ago because we believed that the online retail model pioneered by tech companies like Amazon and Alibaba would permanently and significantly disrupt the traditional consumer product model. We set out on a mission to build the world's most efficient consumer product platform for CPG brands. We believe that just like technology has reinvented retail, it will also play a major role for CPG companies who will seek to predict market trends, drive efficiency in their supply chain, and automate marketing efforts. In the last six years, we have invested in building a proprietary software platform called AIMEE, which analyzes a terabyte of shopping trends data every day for our team to efficiently automate various tasks such as product selection, forecasting, pricing, and media buying decisions in real-time. We have launched through our platform seven different brands and over 250 consumer products across various categories. We sell those products and brands predominantly through online retail marketplaces in the U.S. such as Amazon and Walmart. We believe that agile and data-driven online brands will eventually replace the traditional brands that we grew accustomed to seeing on the shelves of every brick-and-mortar retailer. The third quarter of 2020 was an important stepping stone on the path towards this vision. On our last earnings call, I mentioned that Mohawk has achieved profitability at the adjusted EBITDA level a quarter earlier than expected. While the acceleration of e-commerce adoption due to COVID-19 played a role in this earlier than anticipated success, our Q3 result illustrates to us that we have matured as a company, and our underlying unit economic metrics are strong. This last quarter also included a very important step to our strategy going forward with the acquisition of Truweo, a wellness brand. Following the completion of the transaction, we were able to efficiently integrate Truweo's business in less than 48 hours. In addition, we are already in production for several products designed to further develop the Truweo brand in the wellness and ergonomics category. We expect this product to launch in Q1 2021. The strategy of acquiring and consolidating third-party Amazon brands continues to attract significant private investment. In the last six months, three private equity VC-backed companies have reportedly raised over $4 million collectively to execute on M&A strategies similar to ours. We believe that Mohawk is better positioned to consolidate and operate small and digital-native brands than any competing company today, thanks to its scalable platform, and we intend to aggressively pursue this path. Based on our last round of financing in August, we also believe that investors not only understand this part of our strategy but also see significant value in it just as we do. Looking at Mohawk's position on a macro level, we continue to be very excited about the rapid adoption of e-commerce and the evolution of the trends we identified six years ago. In an interesting report that was published by McKinsey on July 30 earlier this year, digital ubiquity, value price sensitivity, the explosion of small brands, and the meteoric rise of marketplaces were mentioned as some of the most disruptive trends for traditional CPG. Those trends are at the core of Mohawk's strategy, and we believe they will continue to benefit us while forcing traditional brands to reinvent themselves or be left behind. The report also mentioned the importance of managing data and proprietary insight; in particular, it mentions that CPG manufacturers and brands must become experts in retail marketplace data trends in order to keep their seat at the table. They must demonstrate expertise in big data analytics, insight generation, ROI tracking of investment, and other functions. We couldn't agree more and believe that the gap between tech-enabled consumer product companies and those who fail to build such capabilities will become more accentuated as e-commerce accelerates. To give some great examples, a McKinsey analyst pointed out the complexity and time-consuming efforts brand owners face when managing online marketplace products. The analyst mentioned that brand owners are required to manage over 700 different attributes for each SKU in their portfolio. The article states that it takes a team of three to five people per channel approximately four weeks to aggregate and analyze the data for each SKU. At Mohawk, again, we anticipated those issues many years ago and realized that our ambition to manage effectively thousands of products across dozens of channels cannot scale without adopting the latest automation and machine learning technologies. Today, our incredible team is supported by algorithms that create forecasts daily for all our products, aggregate data from all our SKUs across channels in real-time, and adjust our marketing strategies on the fly. We still have much more to accomplish but I am very proud of the strong foundation we have created and the results of Q3 2020 reflect our progress. With that, I will turn it over to Fabrice for more details on the third quarter.

Thanks Yaniv and good afternoon everyone. Here are the operational performance details of our third quarter. In the third quarter of 2020, net revenue increased 45% to $58.8 million from $40.6 million in the year-ago period. The strong gain was primarily attributable to increased direct sales volume of new products launched since the second half of 2019, net of vertical expansions where we launched competing products to our own sustain products. This contributed $7.5 million in net revenues. Historical products, of course, keep on growing, and wholesale revenue of PPE products contributed $8.9 million. We did suffer from inventory shortages in the quarter as previously indicated in our Q2 call, which we estimate to be an impact of approximately $7 million to $8 million in the quarter. Gross margin for the third quarter increased to 47.8%, up from 43.2% in the year-ago quarter and 46.2% in the second quarter of 2020. The solid sequential and year-over-year improvement in gross margin was due to both favorable product mix and higher product pricing while being partially offset by wholesale PPE sales which carry much lower gross margin. Our overall Q3 2020 contribution margin was 19.1% as a result of the previously mentioned factors which improved compared to the prior year’s 8% and the second quarter 2020's 16.8%. This year-over-year sequential improvement was driven significantly by improved product unit economics coming from mix and pricing related to inventory shortages of our sustain products which had a CM of 23.7%. Fixed costs, which we continue to focus on, were down 7.5% at $6.2 million in Q3 2020 compared to $6.7 million in the second quarter of 2020. As a percentage of net revenue, fixed operating costs excluding stock-based compensation decreased to 10.5% from 14.6% in the year-ago period. Adjusted EBITDA, which excludes stock-based compensation, for the seasonally strong third quarter of 2020 improved to a record $5.1 million from a loss of $2.7 million in the third quarter of 2019 and also saw sequential improvement from $3.4 million in the second quarter of 2020. I would highlight that our adjusted EBITDA profitability is a result of the growth in our business from both our existing and new product launches combined with our fixed operating expense leverage which benefits from the automation in our business model and continued improvements in our unit economics. During the quarter, Mohawk purchased the assets of Truweo, a leading e-commerce brand in the health and personal wellness category for approximately $16.4 million, with approximately $13.9 million in cash at closing and approximately $2.5 million in the form of an unsecured promissory note. This transaction reflects an approximately 2.5 multiple on Truweo's trailing 12-month operating income measured as of July 31, 2020. Truweo's trailing 12-month revenue and operating income ending as of July 31, 2020 were approximately $14 million and $6.5 million respectively. Turning to the balance sheet. At September 30, 2020, we had cash of $37.4 million compared with $17.2 million at the end of June 2020. This sequential increase in cash comes primarily from $5.1 million from adjusted EBITDA, $12.9 million from working capital, and approximately $10 million of net proceeds from the Truweo acquisition, after the acquisitions and approximately $7.5 million in debt repayments and cash interest payments. The cash provided from working capital comes from a mix of seasonality as well as inventory turns above 4x. In terms of outlook for new products in the fourth quarter of 2020, we expect to launch approximately seven to 10 new products. To conclude, the key takeaways of the quarter are revenues are growing, profitability continues to improve, both from unit economics and operational leverage, and we are generating cash. For the full year 2020, the company continues to expect net revenue to be in the range of $175 million to $185 million driven primarily by the continued growth of its existing product portfolio, new products launched in 2020, and the positive contribution from wholesale personal protective equipment. The company continues to expect to generate positive adjusted EBITDA in the fourth quarter of 2020 and for the full year 2020. With that, I will turn it back to the operator to open the call for your questions.

Your first question will come from Thomas Forte at D.A. Davidson. Your line is now live. Please go ahead.

Great. Thank you. So Yaniv, I was hoping that as a student of e-commerce and deep understanding marketplaces, with today's news of a potential vaccine that may be effective, I wanted to know your thoughts on what may be the short-term benefits to e-commerce from COVID and what you see as the long-term structural ones that would not go away even with an effective vaccine? Thank you.

Thanks Tom. Well, just like everyone else, I think we were really happy to hear this great news about the advances that Pfizer has been making on the vaccine, and I think other companies are behind it. I am not an expert at all, and I have not had the chance to study today what is the expected timeline to actually productize and get the vaccine to market. I hope it obviously goes as quickly as possible so that everyone can benefit from it. I think that when it comes to what that means for e-commerce, we have spent a lot of time looking at data ourselves and what I think other experts in the field say. Although everyone believes that, of course, the acceleration that happened through COVID-19 is fundamentally driven by the lack of access to traditional retail, there's a very strong belief overall that, as Fabrice mentioned earlier, once the toothpaste is out of the tube, it's not easy to put it back in. So we believe that, in general, we will see a strong adoption of e-commerce continuing to be around for at least as long as it takes to deploy the vaccine in a meaningful way but also way beyond that. I think that what happened here with COVID has been incredible for e-commerce in general and has brought a lot of people who were probably on the sidelines in terms of their shopping behavior to adopt e-commerce. What the exact number is, it's hard to tell. But we definitely believe that acceleration is here to stay. I think it's anyone’s guess as to what percentage of e-commerce is going to be the new normal now that retailers are going to be online. We will have to wait and see but we believe very strongly that acceleration is not going to significantly reverse.

Great. And then as a quick follow-up. Now that you have made the key acquisition of Truweo, how do you think about your ability for future acquisitions? Has it changed your decision tree as far as building or buying new products?

Yes. So I think, first of all, as we mentioned, we were very pleased overall with the acquisition of Truweo, specifically with our ability to integrate the business very rapidly and without taking on additional fixed costs. At a macro level view, I think that anyone who understands this business well, anyone who understands the intricacies of actually acquiring these types of companies will, in my opinion, tell you that it’s a very unique situation. I am not aware of any other business or industry where there is so much revenue to consolidate that can happen in a way that is overall not too complex compared to other M&A transactions that might be out there. For us specifically, with all the efforts and infrastructure we have built in the last five, six years, we believe that we are extremely well-positioned operationally to execute on these deals. When you look at the multiple that came, there is no doubt that this is a very important part of our strategy. Everything starts and ends with data, where we look at the markets obsessively and constantly look at opportunities and prioritize make versus buy depending on many different factors or trends. So it's not like there is particularly a strategy that takes the upper hand. I think these two will continue to go hand in hand going forward, and they depend extremely on changes in the market or changes in the data, or how we consider the priority of deploying capital in a most effective way. The exciting thing is that there are a lot of opportunities out there. Again, there are over 2.5 million active sellers on Amazon and Amazon is adding more than 3,000 every day. We expect that pipeline of deals to continue to be strong and allow us to pick and choose the next best ways to deploy capital across these two strategies with, again, a very unique situation around our ability to integrate and efficiently manage going forward these acquisitions as asset deals where we don't take on any additional fixed costs or personnel. So we are excited about both.

Great. Thanks for taking my questions.

Thank you. Your next question will come from the line of Maria Ripps from Canaccord. Your line is now live. Go ahead, please.

Great. Thanks for the questions. You had very strong profitability through this quarter. I just wanted to ask you what drove that cost leverage and this year-over-year decline in fixed expenses? And I guess how sustainable is that going forward?

Fabrice, you want to take that one?

Sure, yes. We had indicated that we were rationalizing our operating COO organization, where we had a bi-step form of organization with the CEO based in the U.S. and a number of folks based in the U.S. as well as a strong general manager on the China side. We ended up actually deciding back in early Q2 to consolidate that organization in Asia, which makes it much more efficient. So that was one of the key drivers of the operating fixed costs reduction, as well as G&A reductions, in particular when it comes to D&O insurance. For example, one year after IPOs, you can actually start realizing some savings on that front, and those are permanent and will stay going forward.

Thank you. That's very helpful. And can you maybe update us on how the timing of your product funnel is working as your platform becomes more mature and more effective? How big is the funnel of potential product ideas that you are generating? What percentage of those are making it to launch or sustain? And what does the timeline look like now? Are you getting faster?

Maybe I will start, Fabrice, and then probably you want to add some things, right. So thanks a lot for the question, Maria. In general, obviously what's interesting is the market keeps changing all the time and we adapt our technology, and that opens up new opportunities. The most important thing for us is culturally and technologically to always be in tune with what is happening in the market and how we can best transform data that we are seeing into opportunities that we can capitalize on very quickly. In general, our pipeline is always way ahead of our ability to operationally launch products. There is always a lot more opportunities than we can actually bring to market. Typically, and I think we mentioned that, our goal next year is to reach 10 new products a month, which we think is exciting and ambitious, and we are very much looking forward to it. From a pipeline perspective, the challenges are not going to be in the data or the identification of the product; it's going to be more in the agile scaling of the sourcing, doing the quality control, and maintaining that high-quality product ratio and high rate of success moving forward. This is key. Again, as Fabrice mentioned, we are really proud of our new COO out of Shenzhen, Pramod, who is building up that team in preparation for this task. Overall feeling very excited about our ability to go after that scale that we are looking for operationally. So in short, I think the challenge on the data is obviously there, but the bottlenecks are probably always going to be even as we scale further above 10 products a month and as we scale internationally, right. The challenge is always going to be more operational than on data. The data is always going to be about prioritization of opportunities versus what the market shows us. Fabrice, I don't know if you want to add anything?

I was just going to add one piece of data since Maria was asking about our success ratio. We are still at an 80%-plus success ratio over the trailing 12-months on the launch to sustain rate, right. And there is no reason for that to change. I mean it can fluctuate every quarter, but year-to-date including Q3, we are still at above an 80% success ratio.

Got it. Thank you so much for the color.

Yes.

Thank you. Presenters, your next question will come from the line of Brian Kinstlinger from Alliance Global Partners. Your line is now live. Go ahead, please.

Great. Thanks so much. First, one numbers question, and maybe I missed it. It’s only a short time, but what was Truweo's contribution to revenue?

So like you know, we don't provide Truweo as one product, and we don't provide numbers on a per-part basis, right. But remember that we concluded the acquisition late August. So the contribution to revenue in Q3 was minimal obviously, especially in this strong quarter where this is now where your core environmental appliances are so key.

Okay. And then recently, in recent calls, you talked about the difficulty in this environment for AIMEE to forecast demand for new products specifically and predict the uncertainty of purchasing patterns. So has that changed at all? Does that give you more confidence in your ability to introduce SKUs?

Thanks for the question, Brian. The challenge we face is not in spotting new trends or opportunities, but in quantifying the market size, which can be difficult. As we mentioned, we have taken a cautious approach with product launches this year and plan to significantly enhance our capabilities next year. We believe the current data gives us a solid insight into the market. Additionally, with operational changes and optimized inventory levels, we are confident that we have the right information to make informed product decisions for the upcoming year. This confidence is why we are increasing the number of launches. We maintain an agile approach due to the nature of our business, allowing us to adapt pricing and marketing strategies in real-time. We can adjust sales if needed, which offers a significant advantage in managing uncertain volumes next year as we allocate inventory monthly. If we can anticipate changes, we can modify our marketing and pricing accordingly to closely align with our forecasts. A traditional consumer product company without the level of automation and real-time responsiveness that we possess would encounter more challenges. To sum up, with the current data and our focus on products for next year, we feel well-prepared to make the right decisions.

And as a follow-up to that, Yaniv, I think you mentioned to one of the other questions, you would hope you get to 10 products per month next year. Is that achievable in the first half of the year? Or is that more likely in the second half of the year that you get to that goal?

So again, putting aside any kind of unknowns, we are still in a COVID world. A vaccine was announced today. But I don't know about it. Putting those unknowns aside, right, any kind of last-minute event that we can't foresee which we don't see why we would have one but you never know. If you put those aside, we believe it's very feasible, yes.

Great. And last question I have, when you complete more acquisitions, does deploying capital to acquire a company at all impact the number of products you can release through the direct model to the manufacturers?

Sorry. Can you repeat the question? I didn't hear it.

Yes. I'm just wondering if you do two or three acquisitions, per se, in a given year which requires capital, does that impact the number of new SKUs you can introduce without acquisition?

Sure. So in principle, no. I mean remember that we are profitable and cash flow positive today already and are launching eight products in the quarter. As we increase our profitability, that allows us to self-fund all of that growth of new products that we would launch organically. And all acquisitions would, at the multiples that we can buy, the new cash flow that it brings can pay for a very significant portion of the financing that we would actually contract in order to do those acquisitions. At this stage, as Yaniv said in answering Tom's question, it’s not like we are making a trade-off from the capital spending perspective of launching more products versus doing more acquisitions because the limiting factor is less capital than it is operationally QA, QC, sourcing, those elements that are actually more of the limiting factor and do take our step functions and take a little bit more time to implement anyway. So in principle, the answer is no.

Okay. Thanks so much.

Yes.

Thank you. Presenters, your next question will come from the line of Matt Koranda from ROTH Capital Partners. Your line is now live. Go ahead, please.

Hi guys. It's Scott stepping in for Matt. I just want to talk about the implied revenue guidance for Q4. It sits between $31 million and $41 million. Can you kind of help us understand what would swing you to $41 million versus about $31 million? And I mean, we have six, seven weeks left in the quarter. Why not just give us a bit of a tighter range there?

I'm sorry. It was very difficult to hear you. So I'm not exactly sure of the nature of the question. Maybe Ilya or Yaniv, if you heard it correctly, did you?

No. I had a hard time too. Can you try asking again, please?

It's okay. I got it. Can you hear?

We can hear you now. Yes, it's better.

Sorry about that. I just want to talk about the Q4 guidance. It sits between $31 million and $41 million. I want to understand what swings to $41 million versus $31 million, especially with only a few weeks left in the quarter?

Yes, sure. So, in this particular case, there are substantial macroeconomic uncertainties, right, in the near term. We are being conservative as a result. Many economists are predicting growth concerns due to high levels of unemployment, elevated savings, and the resurgence of COVID cases which, thanks to the news from Pfizer this morning, hopefully will be the last elevation or wave that we see. But whatever wave we have now and for the foreseeable future, between now and the end of the quarter, the vaccine will not change anything in that regard. So all of those elements are creating a significant level of uncertainty in overall spending patterns from consumers. Second, Q4 is, by definition, heavily backend loaded. It’s not the October numbers that will dictate your Q4, because most of your Q4 sales will occur in mid-November through December, depending on shipping constraints. That's the reason why we are not changing the guidance at this stage, and we will see how all of those factors pan out.

Super helpful. Thank you, Fabrice. On that note, moving with the inventory positioning. You guys have gone through a healthy figure this quarter. How are you feeling going into 2021?

On inventory levels or on inventory shorts?

Yes, on inventory shorts, sorry.

The manufacturing is still tight on the inventory side, on the manufacturing side, and it’s going to stay there until Chinese New Year. So we will probably suffer from a little bit of inventory shorts in Q4. Obviously, you can't quantify it until the demand has actually shown versus the level of inventory that we have. But for sure, it's going to still be a part of our numbers in Q4.

Okay. Helpful. Thank you, Fabrice. Lastly, on the PPE, I mean I saw it was at $8.9 million. What is the sustainability of that revenue stream going forward once we move past COVID? Do you anticipate that it will go away, or do we keep leaning into it? Just more color on that.

It's a great question. We are not counting on that, right. We are happy to be able to help and do the right thing and obviously at the same time generate business for us. But it's not something we are necessarily counting on. We have built, I think overall, a good reputation and we are getting interest in additional opportunities so far, right. But again, it's hard to quantify. It's not something as predictable, of course, as our core business. So we are basically continuing to benefit from it as it arrives, but we are not counting on it specifically, if that makes sense.

Thanks, guys.

Thank you. Presenters, your next question will come from the line of Allen Klee from National Securities. Your line is now live. Go ahead, please.

Hello. Your launch segment was up 81% year-over-year. Can you talk about, I mean, was that due to PPE? Or was there something else going on there?

Sorry, you mean our success rate on launches? Is that what you meant?

No. Just the dollar amount of revenue from the launch segment.

Which is at $5 million-plus in the quarter. So what is the question on that? I mean it's reasonably low in many ways, right, I would say. But the reason it's low is because, remember we slowed down product launches since Q1. So you actually therefore have less launch revenue in the Q3 period. In Q1 and Q2, we launched a lower number of products in Q3 as well. That’s the reason why you have lower launch revenue in the Q3 period. You can expect the same in some ways in Q4. And then as Yaniv mentioned, next year when we start accelerating again on the number of new products, the launch portion of your revenue goal will go up again.

Okay. My other two questions are, one is, are you going to have to pay holiday surcharges to your third-party logistics network in the fourth quarter? And second, what's been your experience with competition from Amazon private label?

Well, I will take the first question, Yaniv, maybe and you can take the second one. Our third-party logistics partners, first, I mean there's a volume question because everybody is anticipating or has been lots of talk of massive volumes of e-commerce and should go home in Q4. The key for us is that, of course, our third-party logistics providers are set up well to handle any significant increase in shipping in December, at least on our FBM products where we use our fulfillment network. But it's likely going to come at a slightly higher cost. The surcharges that you are mentioning, right on the FBA side of things, we are obviously subject to Amazon's ability to cope with the volume. The prices there will not change because they would have announced that earlier on and the pricing that we have, of course, is higher but were already factored in, in particular on warehousing costs. There’s a seasonal surcharge always on FBA every year and it's going to stay the same this quarter.

Yes. And then, Allen, when it comes to Amazon competition, again I think it's something that we are tracking very closely. But in general, I think throughout the year that marks being around, if we do our job well and a product to sustain, really, I would say our biggest enemy is not Amazon or any brand; it’s us. I think that what has been proven to me as we are looking at our product time after time is if we have done our job well and if we take a certain amount of market share and if we manage inventory levels correctly so we don't run out, we don’t have to open the door for someone else to catch up to us. Typically it doesn’t really matter if it's Amazon or any other brand, as long as we execute well on our strategy. The marketplaces and the way consumers shop operate in a meritocracy. Everything we do is about identifying opportunities and timing it very well, coming into the market with a good product that differentiates and takes market share. Then we aim to maintain our market share for as long as possible. The places where we have lost market share here or there have been more because of us than because of anyone coming in and disrupting us in a way that we can’t fix. Specifically, we are going back to what you said on Amazon; we follow everything that Amazon does very closely, but we are not alarmed by them entering categories we are in as long as we execute well on what we set out to do. So far, that’s been the case.

Okay. Thank you.

Presenters, your next question will come from the line of Randy Slifka from Slifka Asset Management. Your line is now live. Go ahead, please.

Yes. Good evening and congratulations on a good quarter. I was wondering if you could talk a little bit about, in your prepared remarks you talked about being happy with your unit economics. I was wondering if you could sort of drill into that a little bit and also address some vision regarding the categories that new products might be coming into?

Fabrice, do you want to take the first part, and I will do the second one?

Yes. It sounds like a regular practice. Yes, I was saying that mentioning when we look at our unit economics, our contribution margin overall is at almost 19% for the quarter. So that's net out before any fixed costs, but it's including absolutely every cost from warehousing to shipping to marketing spending, and of course, cost of goods sold and international shipping as well. So it's a testament of a couple of things. The first one is that we do have a little bit of pricing effect in the quarter. When you have inventory shortages, you slow down demand a bit by increasing the price. That's one way, or slowing down your marketing spend. But that was also the case in Q2. You still see a sequential increase. The reason why you see a gradual increase is because of the strength of our fulfillment platform where we actually have done significant efforts late last year and early this year increasing our footprint of partner warehouses, getting our products closer to demand. When you do that, your zone averages only go down; therefore your shipping cost and last-mile fulfillment cost goes down. We are now on average at zone three. Over 65% of all the orders that we ship are actually shipped in one day. Those actions not only provide better quality of service to our consumers but also drive the cost of fulfillment down. That's what you see in Q3 because a very vast majority of our sales are fulfilled through our fulfillment network and not through FBA. Therefore, we benefit from the cost savings and footprints that we have implemented. That will stay for next year and so on. Of course, we benefit a little less of that in Q4 and Q1 because people buy fewer humidifiers or products that are fulfilled or categorized as oversized and fulfilled through our own network and not through Amazon. That's the reason why we are mentioning the strong unit economics and the improvements there.

Thank you, Randy. To add to this, when you think at a macro level about what we are doing, it's all about continuous efficiency. At the end of the day, the consumer products space is competitive and dramatically changed by e-commerce. We strongly believe that efficiency, the ability to automate your supply chain, and to keep your fixed costs as effective as possible versus the strong unit economics of your product is what it's all about. For us, there will be some winners on a massive scale here in the consumer products space. They are going to be the companies that can best identify what consumers are looking for, react to it quickly with an agile supply chain, and bring the right product to market focused on best quality and price. Last-mile shipping efficiency and the effectiveness of marketing, the ability to price the product correctly in real-time—these are the factors that we believe are going to drive the market winners. That’s why we are investing significantly in technology to manage all aspects because we believe that’s the only way to build a big company operating with a smaller team. When it comes to the categories we are going after, again, what's fascinating is the data. It’s fluid and changes, and the better we get at absorbing it and learning from it, the more interesting it becomes. The ability to pick specific products without focusing on one particular category is extremely efficient. A lot of companies target specific categories, but we believe that's very limiting. When you have an overview of the market data and trends, you discover that in certain categories you might not operate in before; there's an opportunity that needs to be capitalized on. We will not continue to make more air appliances just because we are doing well in that. If there’s another interesting category showing up on our radar ripe for disruption that we have not been into, that’s the whole point here—to be very precise and pick and choose at the product level as opposed to the category level.

So thank you. Just a couple of follow-ups. From what I understand, there are now 28 different FBA roll-ups out there, between Thrasio and Perch and Boosted and Dragonfly, Heroes, I mean blah, blah, blah. You guys clearly have a competitive advantage in AIMEE on one hand. On the other hand, you are planning on licensing, I believe, that technology out. Can you talk a little bit about, if you would be so kind, the competitive advantage you have today and whether you are going to be fully licensing out AIMEE? Or whether there are pieces of it that are proprietary algorithms or other competitive advantages that will allow you to provide that as a service or provide it to third parties but also maintain your competitive advantage?

Sure. It’s a great question. The way you think about it is again, if you take a step back and think about what the purpose and mission of the company is, we believe that as retail moves to online, the complexity of managing consumer products in retail channels of the future is exponential for brands. Traditional brands used to brick-and-mortar retail are likely not going to keep up with it. That’s why we are building and investing in technology because we think that's where the advantage is going to come from. We have proven that in the last few years as we scale and become EBITDA profitable despite interesting growth on the other end. When it comes to licensing the software, we are predominantly focused on those companies that are going to need to change. Those companies that are going to need to move from a B2B business to a B2C business. So those are not the type of companies that are in that list you mentioned out there acquiring B2C brands. These companies are a large majority of CPG and are facing many challenges operationally, technologically, and culturally to adapt. That’s also part of the reason why we are not going all-in on this, because it’s unclear what percentage of them will actually adapt. We are building a platform and leveraging it by building brands, servicing brands that want to move into this model through the same platform we use. Lastly, like these other companies you mentioned, acquiring and adding to our portfolio accretive acquisitions that are a good fit for us. When it comes to offering the platform as a service, it’s not like our competitors who are rolling up other brands are going to go out there and use it. We are selective and offering a platform where we think it’s a good fit. In terms of competitive advantage versus the other roll-up strategies, there is no doubt that Thrasio has paved the way here, to what we believe is a great opportunity. The challenge for a lot of these companies will be managing so much revenue and managing all these acquisitions as they add them to their portfolio becomes extremely complex and typically without a platform like we have, will result in an increase in fixed costs. A lot of these players are trying to build a platform. They are, I think, investing in things that we have built many years ahead of them on top on the entire supply chain, logistics, the ability to launch new products with many existing brands. I believe that operationally, technologically, and culturally, we are way ahead of them. There’s no doubt a lot of them have benefited from this new trend and raised a lot of capital, but I think again that we have seen a lot of companies raise capital that doesn't actually mean they are successful. We are going to continue to do what we do best, and we believe we are well-positioned to capitalize on this trend significantly.

Sure. So just one last follow-up. You mentioned Thrasio specifically. Obviously, they have made something like 80 acquisitions in the last two years. The most recent rumor mill is that their valuation is approaching $3 billion. I was wondering, two questions. One, what are you guys going to do to get the story out? Obviously, the company is ramping up and is facing a fair amount of success recently. Can you talk a little bit about that? And secondarily, can you talk a little bit about the pipeline in terms of, are there other acquisitions that you guys think are likely in the next quarter or two? And thank you.

Yes. Sure. First of all, when it comes to valuation, obviously private and public markets exist. For anyone who knows the full story, Mohawk had a challenging start in the public market. There were a lot of questions around our ability to be profitable at the EBITDA level and things we have proven very recently—just a quarter ago. Pair that with the fact that yes, we need to invest more into getting our story out there. Those are two things that are on the top of our mind and high priority for us, to go out there and continue to talk about what we are doing about the strategy, about the size of the opportunity, and the results which now I think should take away a lot of the doubts off the table. Those are very recent so we haven’t capitalized on them yet but quite honestly, it is absolutely top of mind for me to go out there in a more meaningful way and convey that story. When it comes to the pipeline, there are millions of sellers out there. There are a lot of exciting opportunities we are always keeping an eye on. We are evaluating deals very carefully all the time, as we mentioned in previous earnings calls. That’s all I can say right now. But we are constantly evaluating opportunities and deals. That is a significant part of our strategy, and we are out there looking at things all the time.

No. I think you addressed the question right. I mean, as you said, I think the ability to be cash flow positive and have raised enough cash during the IPO meant the market took a wait-and-see approach. As we delivered now, after the last quarter and this quarter, the cash balance is extremely strong. I think when you take a look at the evolution of our stock price over the last few months, the market essentially is turning the corner and saying, okay, those guys actually delivered and the team delivered on profitability, cash positions, and so on. Therefore, we should get a bit more credit going forward. That's actually your belief.

Thank you. Presenters, I am showing no further questions at this time. I would like to turn the conference back to Mr. Grozovsky for any closing remarks.

Thank you Laura. In terms of the upcoming calendar, Mohawk management will be participating in the ROTH Virtual Technology Conference on November 11 and 12, the ROTH Virtual Consumer Conference on December 9 to 11, the Needham Growth Conference on January 11 to 15, and the ICR Conference on January 11 to 13. Thank you for joining us on the call today. We look forward to speaking with you on future calls. This ends our third quarter results call.

Thank you sir. Thank you so much, presenters. And again, thank you everyone for participating. This concludes today's conference. You may now disconnect. Stay safe and have a lovely day.