Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion in conjunction with the audited financial statements and the corresponding notes, the unaudited financial statements and the corresponding notes included elsewhere in this information statement. This Item 7 contains forward-looking statements. The matters discussed in these forward-looking statements are subject to risk, uncertainties, and other factors that could cause actual results to differ materially from those made, projected or implied in the forward-looking statements. Please refer to “Item 1A. Risk Factors” for a discussion of the uncertainties, risks and assumptions associated with these statements.
Results of Operations
Year ended December 31, 2021 compared to year ended December 31, 2020
Revenue
For the year ended December 31, 2021, revenue was approximately $314.3 million, an increase of $183.5 million or 140% from $130.7 million for the year ended December 31, 2020. Approximately 97% of this growth was as a result of increased revenues from North America where 2021 revenues were $273.0 million, an increase of $177.5 million or 186% from 2020. The balance of the increase was largely attributable to a 13% growth in European revenues to $38.1 million in 2021 from $33.7 million in 2020. Asian revenues (which primarily consist of royalty revenues from our China licensee) for the year ended December 31, 2021 were $2.5 million, an increase of $1.4 million from $1.1 million for the year ended December 31, 2020. Other international markets generated $0.6 million in revenues during the year ended December 31, 2021, an increase of approximately 48.5% from $0.4 million for the year ended December 31, 2020.
The total increase in revenue from 2020 to 2021 was largely attributable to increases in sales volume, as opposed to increases in product pricing. The primary factors behind the increase in North American sales volume were related to continued strong triple-digit growth in traditional distribution channels, combined with an increase in and optimization of our products’ presence in world class retailers. Additionally, the continued expansion of DSD network resulted in significant growth of our distributor revenues when compared to the prior year period. Furthermore, our fitness and vending channels also reflected triple digit growth of incremental revenue when compared to the prior year period, during which many fitness facilities were closed due to the COVID-19 pandemic.
Additionally, e-commerce results also contributed to the increase in revenues for the year ended December 31, 2021. Furthermore, the favorable currency fluctuations accounted for approximately 29% of the increase in European revenue in the 2021 period, when compared to the 2020 period.
The following table sets forth the amount of revenues by category and changes therein for the years ended December 31, 2021 and December 31, 2020:
Year Ending December 31,
Gross profit
For the year ended December 31, 2021, gross profit increased by approximately $67.2 million or 110% to $128.2 million, from $61.0 million for the year ended December 31, 2020. Gross profit margins decreased to 40.8% for the year ended December 31, 2021 from 46.6% for the year ended December 31, 2020. The increase in gross profit dollars is related to increases in sales volumes, while the decrease in gross profit margins from the 2020 period to the 2021 period is mainly related to increases in raw material costs (primarily aluminum cans), ocean freight costs, distribution costs, repackaging costs and processing costs. These incremental costs are directly related to added complexities in the supply chain as a result of the COVID-19 pandemic. The increase in gross profit dollars of approximately $67.2 million from the year ended December 31, 2020 to the year ended December 31, 2021, includes approximately $85.0 million related to volume increases, as well as a favorable currency impact of $1.3 million, which was offset in part by unfavorable increases in costs of approximately $18.3 million.
Sales and marketing expenses
Sales and marketing expenses for the year ended December 31, 2021 were approximately $74.7 million, an increase of approximately $39.9 million or 114% from approximately $34.9 million for the year ended December 31, 2020. This increase was largely a result of incremental marketing investment activities of approximately $22.5 million from the 2020 period. Additionally, employee costs increased by approximately $5.6 million from the year ago period as we continued to invest in this area in order to have the proper infrastructure to support our growth and incurred additional travel and business expenses now that we are able to resume in-person marketing events and selling activities. Similarly, we experienced increases in other sales expense in the amount of approximately $1.3 million mainly related to trade-marketing activities to support our continued expansion of our DSD network. Lastly, storage and distribution as well as broker costs accounted for the remainder of the increase in this area in the amount of $10.4 million when compared to the prior year period, mainly related to the increase in business volume.
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General and administrative expenses
General and administrative expenses for the year ended December 31, 2021 were approximately $57.5 million, an increase of $39.3 million or 216% from $18.2 million for the year ended December 31, 2020. This increase was primarily attributable to stock option expense which amounted to $36.5 million for the year ended December 31, 2021, an increase from $6.3 million in the prior year period. This increase in stock option expense when compared to the prior year, was mainly attributable the revaluation of certain share-based payment awards that were modified during 2021. Management deems it very important to motivate employees by providing them ownership in the business in order to promote over performance which translates into the continued success of our business based on key performance attributes. Additionally, employee costs for the year ended December 31, 2021 reflect an increase of $3.1 million or 68.9%, as investments in this area were also required to properly support our higher business volume and the commercial and operational areas of the business, as well as travel expenses are now being incurred. Administrative expenses amounted to $11.0 million or an increase of $5.4 million or 96.4%, when compared to the prior year period. This variance is mainly related to an increase in bad debt reserve of $1.5 million and increases in audit costs, legal expenses, insurance costs and office rent account for the majority of the remaining fluctuation of $3.9 million. Depreciation and amortization had an increase of approximately $0.2 million when compared to the prior year due to investments in operational equipment (e.g., coolers). All other administrative expenses which were mainly composed of research, development and quality control testing, increased by approximately $0.5 million from the 2020 period.
Other Income/(expense)
Total net other income for the year ended December 31, 2021 was $31,069 which reflects a decrease of $697,957 when compared to net total other income of $0.7 million for the year ended December 31, 2020. The variance of $0.7 million is mainly related to a decrease in foreign currency exchange fluctuation of $1.6 million, and a decrease in interest income of $39,000 related to the note receivable from our China licensee, which are offset by the reductions of bond amortization and net interest expense, as well as other all other non-operational charges which provided a total net increase of $0.9 million.
Income tax benefit/(expense)
An income tax benefit of approximately $8.0 million was obtained during the 2021 year, mainly related to the release of our US valuation allowance and windfall benefits on stock-based compensation awards. In 2020 our Sweden subsidiary incurred approximately $116,000 of income tax expense due to the inability to fully utilize the NOLs generated from prior periods.
Net Income/Loss
Net income for the year ended December 31, 2021, was $3.9 million or $0.05 per share based on a weighted average of 73,781,130 shares outstanding and dilutive earnings per share of $0.05 based on a fully-dilutive weighted average of 77,688,501 shares outstanding, which includes the dilutive impact of outstanding stock options to purchase 3,907,371 shares. In comparison, for the year ended December 31, 2020 the Company had net income of $8.5 million or $0.12 per share based on a weighted average of 70,195,085 shares outstanding, and a dilutive earnings per share of $0.11 based on a weighted average of 74,443,601 shares outstanding.
Liquidity and Capital Resources
General
As of December 31, 2021, and December 31, 2020, we had cash of approximately $16.3 million and $43.2 million, respectively, and working capital of approximately $169.2 million and $66.8 million, respectively.
In addition to cash flow from operations, our primary sources of working capital have been private placements and public offerings of our securities, including an underwritten public offering of 1,133,953 shares at an offering price of $62.50 per share completed on June 14, 2021 and a private placement of 1,437,909 shares at a price of $15.30 completed on August 25, 2020.
Our current operating plan for the next twelve (12) months reflects sufficient financial resources, notwithstanding the potential effects of the COVID-19 pandemic.
Cash flows (used in) provided by operating activities
Cash flows used in operating activities totaled $96.6 million in 2021, which compares to $3.4 million net cash provided by operating activities for the year ended December 31, 2020. The use of cash was primarily driven by higher inventory levels in order to properly service the demand for our products and to mitigate the current inefficiencies of the supply chain. Additionally, the significant increase in business volume or revenue resulted in an increase in our accounts receivable based on the credit terms offered to our clients. Pre-payments or deposits to procure inventory reflected a reduction and therefore were a source of cash. We also leveraged the use of our accounts payable to partially offset the increase in working capital by efficiently utilizing the terms offered by our vendors as it relates to the commitments and disbursements for the goods and services that are needed for our operations.
Cash flows provided by (used in) investing activities
Cash flows used in investing activities totaled $1.3 million in 2021, which compares to cash provided by investing activities of $0.8 million for the year ended December 31, 2020. The change in the cash used in investing activities when compared to the 2020 period was primarily due to the investment of approximately $3.1 million mainly pertaining to operational equipment which was partially offset by note receivable payments from our China licensee of approximately $1.9 million.
Cash flows (used in) provided by financing activities
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Cash flows provided by financing activities totaled $71.4 million for 2021, representing a $55.8 million increase from $15.6 million in 2020. The increase of cash provided by financing activities is mainly related to the net proceeds of $67.8 million from our June 2021 public offering and proceeds from stock option exercises of $3.7 million, which was offset in part by payments of approximately $94,000 pertaining to financial leases.
Off Balance Sheet Arrangements
As of December 31, 2021 and 2020, we had no off-balance sheet arrangements.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with U.S. GAAP. In connection with the preparation of our consolidated financial statements, we are required to make judgments and estimates that significantly affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. Our estimates are based on historical experience, current trends and various other assumptions we believe to be relevant under the circumstances. We review the underlying factors used in our estimates regularly, including reviewing the significant accounting policies impacting the estimates, to ensure compliance with U.S. GAAP. However, due to the uncertainty inherent in our estimates, actual results may be materially different. We have identified the accounting estimates below as critical to understanding and evaluating the financial results reported in our consolidated financial statements.
For a complete description of our significant accounting policies, see Item 8 Financial Statements and Supplementary Data, Note 2, "Basis of Presentation and Summary of Significant Accounting Policies".
Valuation Allowances for Deferred Tax Assets
Deferred tax assets arise when we recognize expenses in our financial statements that will be allowed as income tax deductions in future periods. Deferred tax assets also include unused tax net operating losses that we are allowed to carry forward to future years. Accounting rules permit us to carry deferred tax assets on the balance sheet at full value as long as it is “more likely than not” that the deductions, losses or credits will be used in the future. A valuation allowance must be recorded against a deferred tax asset if this test cannot be met. Our determination of valuation allowances is based upon a number of assumptions, judgments and estimates, including forecasted earnings, future taxable income and the relative proportions of revenue and income before taxes in the various jurisdictions in which we operate. Concluding that a valuation allowance is not required is difficult when there is significant negative evidence that is objective and verifiable, such as cumulative losses in recent years.
We have deferred tax assets related to foreign net operating losses, primarily in China, Hong Kong, Sweden, Finland and Norway, against which we have recorded valuation allowances as it is currently not more likely than not that the foreign net operating losses will be realized in the future.
We have deferred tax assets related to US Federal and state net operating losses on which we retained a full valuation allowance through September 30, 2021. During the fourth quarter of 2021, we concluded that it is more likely than not that the US deferred tax assets would be realized. This conclusion was based on US profitability and NOL utilization in 2021 and 2020 as well as future forecasts of US profitability. This positive evidence supported the release of the Federal and State valuation allowance. For the year ended December 31, 2021, the Company reported a release of its US valuation allowance for deferred tax assets of approximately $6.0 million
Goodwill and Intangible Assets Valuation
We evaluate the carrying value of our goodwill and indefinite-lived intangible assets for impairment at least annually or when an interim triggering event occurs that would indicate impairment may have taken place. We evaluate our other definite-lived intangible assets for impairment when evidence exists that certain events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Judgments and assumptions are required in such impairment evaluations. Our annual impairment test of indefinite-lived intangible assets was performed as of October 1, the first day of our last fiscal quarter. Our annual impairment test of indefinite-lived intangible assets was performed as of October 1, the first day of the last fiscal quarter.
Our annual impairment evaluation of goodwill involves both qualitative and quantitative aspects, including comparing our single reporting unit's fair value to its respective carrying value. Some of the qualitative aspects evaluated included macro-economic conditions, industry and market considerations, cost factors regarding our raw materials and operations and overall financial performance of our business. If the fair value exceeds carrying value, then we conclude that no goodwill impairment has occurred. If the reporting unit's carrying value exceeds its fair value, we would recognize an impairment loss in an amount equal to the excess up to the total amount of goodwill.
We use the income approach to determine the fair value of our definite-lived customer relationships intangible asset. Our projections used in the income approach to determine the fair value of our definite-lived customer relationships intangible asset include assumptions for growth rates of sales, costs, and profits, which are based on various long-range financial and operational plans. Additionally, discount rates used in the definite-lived intangible analysis are based on a weighted-average cost of capital, driven by the prevailing interest rates in the geographies where the company operates, as well as credit ratings, financing abilities and opportunities, among other factors. Discount rates may differ slightly to adjust for country or market specific risk, among other factors.
Changes in economic and operating conditions impacting these assumptions could result in goodwill and intangible assets being impaired in future periods. Additionally, disruptions to our business such as prolonged recessionary periods or unexpected significant declines in operating results could result in impairment of goodwill and other intangible assets in future periods.
Changes in the factors used in our fair value estimates, including the impacts of the COVID-19 pandemic, cost inflation or other margin erosion, and discount rates used, could have a significant impact on the fair values of the reporting unit and indefinite-lived intangible assets.
21
Item 7. Quantitative and Qualitative Disclosures about Market Risk.
While the Company is a newly designated “large accelerated” filer as of the fiscal year ended December 31, 2021, it is not required to satisfy the larger reporting company disclosure requirements until the first quarter after the fiscal year in which this determination is made. As such, the Company may continue to apply the scaled disclosure requirements described in Item 305(e) of Regulation S-K, which permits a “smaller reporting company” to omit Quantitative and Qualitative Disclosures about Market Risk.
Item 8. Financial Statements and Supplementary Data
The information required by this Item 8 is set forth following the signature page to this Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
22
Item 9A. Controls and Procedures.
Disclosure controls and procedures
Background
Subsequent to filing the Company’s Quarterly Reports on Form 10-Q for the periods ended June 30, 2021, and September 30, 2021, the Company determined that the calculation of expense of share based compensation related to grants of stock options and restricted stock units (“RSUs”) issued to former employees and retired directors was materially understated during the three-and six-month periods ended June 30, 2021 and three- and nine-month periods ended September 30, 2021 (the “Affected Periods”), based on the application of U.S. generally accepted accounting principles. During the Affected Periods, the stock options and RSUs were modified and the expense should have been calculated and recognized using the fair market value of the awards as of the date of modification and recognized over the remaining service period. In order to properly account for the modifications, the Company has withdrawn reliance on previously reported unaudited consolidated financial statements for the three- and six- months ended June 30, 2021 and three- and nine-months ended September 30, 2021 and has restated the unaudited consolidated financial statements for those periods in this Annual Report on Form 10-K. See the Company's Current Report on Form 8-K filed on March 1, 2022 and "Unaudited Supplementary Information" included in "Item 8. Financial Statements and Supplementary Data" of this Report.
The conclusions that management reached in its evaluations of the effectiveness of our disclosure controls and procedures and internal control over financial reporting as of December 31, 2021, are described below in detail.
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms adopted by the SEC, including to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to the Company’s management, including our President and Chief Executive Officer (our principal executive officer) and our Chief Financial Officer (our principal financial and accounting officer), or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Our President and Chief Executive Officer as well as our Chief Financial Officer, have evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this Report. Based on that evaluation, our President and Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this annual report because of the material weaknesses in internal control over financial reporting described below.
Notwithstanding the conclusion by our President and Chief Executive Officer and our Chief Financial Officer that our disclosure controls and procedures as of December 31, 2021 were not effective, and notwithstanding the material weaknesses in our internal control over financial reporting described below, management believes that the consolidated financial statements and related financial information included in this Annual Report on Form 10-K fairly present in all material respects our financial condition, results of operations and cash flows as of the dates presented, and for the periods ended on such dates, in conformity with U.S. GAAP.
Management’s report on internal control over financial reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Internal control over financial reporting is a process designed by, or under the supervision of, the Company’s principal executive and financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
•
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
•
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
•
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our President and Chief Executive Officer and our Chief Financial Officer conducted an evaluation of the effectiveness of internal control over financial reporting as of December 31, 2021 based on the criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013) (the “COSO Framework”).
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.
23
As of December 31, 2021, management has identified the following material weaknesses in internal controls:
a)
Management failed to design effective controls related to the application of U.S. GAAP guidance in their evaluation of modifications to share-based payment arrangements, resulting in the correction of errors in previously issued interim financial statements relating to the recognition of compensation expense described above;
b)
For a substantial portion of the year, management did not design and maintain effective controls over information technology general controls (ITGCs) for information systems and applications that are relevant to the preparation of the consolidated financial statements. Specifically, management did not design and maintain: sufficient user access controls to ensure appropriate segregation of duties and adequately restrict user and privileged access to financial applications, programs and data to appropriate Company personnel; program change management controls to ensure that information technology (IT) program and data changes affecting financial information technology applications and underlying accounting records are authorized, tested, and implemented appropriately. As a result, business process controls (automated and it-dependent manual controls) that are dependent on the ineffective ITGCs, or that use data produced from systems impacted by the ineffective ITGCs were deemed ineffective at December 31 2021; and
c)
Management did not have an adequate process in place to monitor and provide oversight over the completion of its testing and assessment of the design and operating effectiveness of internal control over financial reporting in a timely manner. As such, we determined that management failed to fully implement components of the COSO framework, including elements of the control environment, information and communication, control activities and monitoring activities components, relating to: (i) providing sufficient and timely management oversight and ownership over the internal control evaluation process; (ii) hiring and training sufficient personnel to timely support the Company’s internal control objectives; (iii) performing timely monitoring and oversight to ascertain whether the components of internal control are present and functioning effectively.
As a result of the material weaknesses described above, the Company’s management has concluded that, as of December 31, 2021, our internal control over financial reporting was ineffective.
Remediation Plan
As of the date of this Annual Report on Form 10-K, management is re-assessing the design of controls and modifying processes designed to improve our internal control over financial reporting and remediate the control deficiencies that led to the material weaknesses, including but not limited to, (a) enhancing monitoring and oversight controls in the application of U.S. GAAP guidance pertaining to modifications of share-based payments, (b) hiring additional accounting and IT personnel with appropriate technical skillsets, (c) improving consistency in change management supported by standard operating procedures to govern the authorization, testing and approval of changes to information technology systems supporting all of the Company’s internal control processes, (d) enhancing design and implementation of our control environment, including the expansion of formal accounting and IT policies and procedures and financial reporting controls, and (e) implementing appropriate timely review and oversight responsibilities within the accounting and financial reporting functions.
Changes in Internal Controls Over Financial Reporting
Except for the determination by management of the material weaknesses in internal controls over financial reporting described above, there have been no other changes in our internal controls over financial reporting that occurred during the fourth quarter of the year ended December 31, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Attestation Report of the Registered Public Accounting Firm
Effective with the filing of this Report, with respect to the Company's fiscal year ended December 31, 2021, the Company is deemed to be a “large-accelerated filer” as defined in Rule 12b-2 under the Exchange Act. Accordingly, for only the fiscal year ended December 31, 2021 we have included the Report of Independent Registered Public Accounting Firm on the Company’s internal control over financial reporting in accordance with Item 308 (b) of Regulation S-K.
With respect to the Company's fiscal year ended December 31, 2020, the Company was deemed to be a “non-accelerated filer” as defined in Rule 12b-2 under the Exchange Act. Accordingly, this Report is not required to include an attestation report of the Company's registered public accounting firm on the Company’s internal control over financial reporting for the year ended December 31, 2020.
Item 9B. Other Information.
None.
24
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this item regarding our directors is included under the caption “Proposal One – Election of Directors” in our Proxy Statement for our 2022 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2021 (the “2022 Proxy Statement”) and is incorporated herein by reference.
Information concerning compliance with Section 16(a) of the Exchange Act is included under the caption “Delinquent Section 16(a) Reports” in our 2022 Proxy Statement and is incorporated herein by reference. Information concerning the Audit Committee and the Audit Committee Financial Expert is reported under the caption “Audit Committee; Report of the Audit Committee; Duties and Responsibilities” in our 2022 Proxy Statement and is incorporated herein by reference.
Code of Business Conduct and Ethics
We have adopted a Code of Business Conduct and Ethics that applies to all our directors, officers (including our principal executive officer and principal financial officer) and employees. The Code of Business Conduct and Ethics and any amendment thereto, as well as any waivers that are required to be disclosed by the rules of the SEC or NASDAQ, may be obtained at no cost to you by writing or telephoning us at the following address or telephone number:
Celsius Holdings, Inc.
2424 North Federal Hwy., Suite 208
Boca Raton FL 33431
(561) 276-2239
Item 11. Executive Compensation
Information concerning the compensation of our directors and executive officers and Compensation Committee Interlocks and Insider Participation is reported under the captions “Compensation Discussion and Analysis” and “Compensation Committee,” respectively, in our 2022 Proxy Statement and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The disclosure set forth in “Item 5. “Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Repurchases of Equity Securities - Securities Authorized for Issuance under Equity Compensation Plans” of this Report is incorporated herein.
Information concerning the beneficial ownership of the Company’s common stock by (a) those persons known to the Company to be the beneficial owners of more than 5% of the Company’s common stock; (b) each of the Company’s directors and nominees for director; and (c) the Company’s executive officers and all of the Company’s current directors and executive officers as a group is reported under the caption “Principal Stockholders and Security Ownership of Management” in our 2022 Proxy Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions and Director Independence.
Information concerning certain relationships and related transactions will be reported under the caption “Certain Relationships and Related Transactions and Director Independence” in our 2022 Proxy Statement and is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services.
Information concerning our accountant fees and our audit committee’s pre-approval of audit and permissible non-audit services of our independent registered public accounting firm is reported under the captions “Principal Accountant Fees” and “Pre-Approval of Audit and Non-Audit Services,” respectively, in our 2022 Proxy Statement and is incorporated herein by reference.
Item 15. Financial Statements and Exhibits
(a)
The following documents are filed as part of this Report:
(1)
Financial Statements. The following consolidated financial statements and the report of our independent registered public accounting firm, are filed as “Item 8. Financial Statements and Supplementary Data” of this Report:
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets as of December 31, 2021 and 2020
Consolidated Statements of Operations and Comprehensive Income for the years ended December 31, 2021 and 2020
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2021 and 2020
25
Consolidated Statements of Cash Flows for the years ended December 31, 2021 and 2020
Notes to Consolidated Financial Statements
(2)
Financial Statement Schedules.
Financial Statement Schedules are omitted because the information required is not applicable or the required information is shown in the financial statements or notes thereto.
(3)
Exhibits.
Item 16. Form 10-K Summary
None
26
Exhibit No. Description
3.1 Articles of Incorporation, as amended*
3.2 Bylaws, as amended**
10.3 Amended 2006 Incentive Stock Plan**+
10.5 Code of Ethics**
10.6 Audit Committee Charter**
10.7 Compensation Committee Charter**
10.8 Nominating and Corporate Governance Committee Charter**
21.1 Subsidiaries of Registrant*****
23.1 Consent of Independent Registered Public Accounting Firm*******
31.1 Section 302 Certification by Chief Executive Officer*******
31.2 Section 302 Certification by Chief Financial Officer*******
32.1 Section 906 Certification by Chief Executive Officer*******
32.2 Section 906 Certification by Chief Financial Officer*******
+ Management compensation plan or arrangement.
******* Filed herewith.
Item 16. Form 10-K Summary
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: March 16, 2022 CELSIUS HOLDINGS, INC.
By: /s/ John Fieldly
John Fieldly, Chief Executive Officer (Principal executive officer)
By: /s/ Edwin Negron-Carballo
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signatures Title(s) Date
/s/ John Fieldly President, Chief Executive Officer and Director March 16, 2022
John Fieldly (Principal executive officer)
/s/ Edwin F. Negron-Carballo Chief Financial Officer March 16, 2022
Edwin F. Negron-Carballo (Principal financial and accounting officer)
/s/ Cheryl S. Miller Director March 16, 2022
Cheryl S. Miller
/s/ Hal Kravitz Director March 16, 2022
Hal Kravitz
/s/ Joyce Russell Director March 16, 2022
Joyce Russell
/s/ Damon DeSantis Director March 16, 2022
Damon DeSantis
/s/ Nicholas Castaldo Director March 16, 2022
Nicholas Castaldo
/s/ Caroline Levy Director March 16, 2022
Caroline Levy
/s/ Alexandre Ruberti Director March 16, 2022
Alexandre Ruberti
28
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Consolidated Balance Sheets as of December 31, 2021 and 2020 F-7
Notes to Consolidated Financial Statements F-11
Unaudited Supplementary Information F-11
F-1
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Celsius Holdings, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Celsius Holdings, Inc.’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework)(the COSO criteria). In our opinion, because of the effect of the material weaknesses described below on the achievement of the objectives of the control criteria, Celsius Holdings, Inc. (the Company) has not maintained effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment. Management has identified material weaknesses related to a) the Company’s failure to design effective controls related to the Company’s evaluation of modifications to share-based payment arrangements; b) ineffectively designed and operating information technology general controls (ITGCs) throughout a substantial portion of the year ended December 31, 2021, which resulted in ineffective business process controls (automated and IT-dependent manual controls); and c) the Company’s failure to fully implement components of the COSO framework, including elements of the control environment, information and communication, control activities and monitoring activities components, relating to: (i) providing sufficient and timely management oversight and ownership over the internal control evaluation process; (ii) hiring and training sufficient personnel to timely support the Company’s internal control objectives; (iii) performing timely monitoring and oversight to ascertain whether the components of internal control are present and functioning effectively.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the 2021 consolidated financial statements of the Company. The material weaknesses were considered in determining the nature, timing and extent of audit tests applied in our audit of the 2021 consolidated financial statements, and this report does not affect our report dated March 16, 2022, which expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/Ernst & Young LLP
We have served as the Company’s auditor since 2021.
Boca Raton, Florida March 16, 2022
F-2
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Celsius Holdings, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Celsius Holdings, Inc. (the Company) as of December 31, 2021, the related consolidated statements of operations and comprehensive income, changes in stockholders’ equity, and cash flows for the year ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021, and the results of its operations and its cash flows for the year ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 16, 2022 expressed an adverse opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
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Valuation of indefinite-lived intangible assets
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2021.
Boca Raton, Florida
March 16, 2022
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Celsius Holdings, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Celsius Holdings, Inc. (the Company) as of December 31, 2020, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the year ended December 31, 2020, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and the results of its operations and its cash flows for the year ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Collectability of Note Receivable
Description of the Matter
Effective January 1, 2019, the Company entered into a separate economic agreement for the repayment of its marketing investment in China with Qifeng. Under the repayment agreement, Qifeng agreed to refund the Company over a five-year period. The repayment was formalized via a Note Receivable (“Note”) from Qifeng. The initial outstanding principal under the Note was approximately $12.2 million and was denominated in the Chinese Renminbi (CNY). Installment payments under the Note are due on March 31 each year and the first installment payment on the Note was due March 31, 2020. This payment was delayed and paid in September 2020 due to the COVID 19 pandemic. The next installment payment due March 31, 2021 will be paid via a release of 62,000 shares of Celsius common stock owned by Qifeng. This release will provide sufficient funds to pay the full amount that is due under the second installment payment. Under a separate guarantee agreement the Company will maintain control over 275,079 Celsius common shares which serves as collateral for the payment on the remaining amounts that will become due over the next three-years.
We determined based on the fact pattern noted above the long term collectability of the remaining Note balance was as a critical audit matter. The Note is collateralized by the Company’s shares, however we noted that there is volatility relating to the value of the collateral which is based on the share price of the Company’s stock.
How We Addressed the Matter in Our Audit
The primary procedures we performed to address this critical audit matter included the following: 1. Obtaining and testing for reasonableness of management’s analysis to support the collectability of the remaining Note balance. 2. Obtained, a confirmation from Qifeng of the remaining balance due under the Note as of December 31, 2020 as well as confirming their intent and ability to pay the next installment keeping them current with the agreement. 3. Reviewed a signed guarantee letter from Qifeng over the Company shares that are being used as collateral associated with the remainder of the Note. 4. Obtained the Qifeng account
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statement from the Company’s transfer agent verifying the number of shares owned by Qifeng. The value of the collateral shares at December 31, 2020 was in excess of the total note receivable balance as of December 31, 2020. Based on the procedures performed and evidence obtained we concluded that no allowance for collectability was required related to the Note as of December 31, 2020.
/s/ Assurance Dimensions
We have served as the Company’s auditor from 2017 to 2021
F-6
Celsius Holdings, Inc.
Consolidated Balance Sheets
ASSETS
Current assets:
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Lease liability obligation-operating leases (note 7) 511,764 321,283
Lease liability obligation-financial leases (note 7) 157,046 205,824
Long-term liabilities:
Lease liability obligation-operating leases (note 7) 657,935 514,948
Lease liability obligation-financial leases (note 7) 45,408 82,290
Stockholders’ Equity:
Accumulated other comprehensive income (loss) 613,651 (202,142 )
The accompanying notes are an integral part of these consolidated financial statements
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Celsius Holdings, Inc.
Consolidated Statements of Operations and Comprehensive Income
For the year
ended December 31,
Other Income/(Expense):
Interest expense on bonds — (431,813 )
Interest on other obligations (7,505 ) (16,004 )
Amortization of discount on bonds payable — (576,415 )
Other miscellaneous expense — (49,100 )
Gain on lease cancellations — 152,112
European deferred tax (note 14) — (81,500 )
Other comprehensive income:
Income per share:
Weighted average shares outstanding:
(1)
Refer to Earnings per Share section in Note 2 for further details.
The accompanying notes are an integral part of these consolidated financial statements
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Celsius Holdings, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
For the Years Ended December 31, 2021 and 2020
Common Stock AdditionalPaid-In AccumulatedOther-Comprehensive Accumulated
Shares Amount Capital Income (Loss) Deficit Total
The accompanying notes are an integral part of these consolidated financial statements
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Celsius Holdings, Inc.
Consolidated Statements of Cash Flows
For the year ended
Cash flows from operating activities:
Deferred tax asset-net (9,019,241 ) —
Un-realized exchange gain 879,846 —
Gain on China transaction — (322,936 )
Changes in operating assets and liabilities:
Deferred tax liability-net (182,156 ) —
Deposits and other current liabilities 373,744 (96,281 )
Change in right of use and lease obligation-net 28,910 150,547
Cash flows from investing activities:
Net cash provided/(used) in investing activities (1,264,646 ) 757,260
Cash flows from financing activities:
Payments on bonds payable — (9,601,531 )
Principal payments on financial lease obligations (94,102 ) (280,208 )
Cash paid on taxes on restricted stock awards — (656,680 )
Net proceeds from collection of section 16b short swing profit — 90,800
Effect on exchange rate changes on cash and cash equivalents (537,769 ) 433,507
Supplemental disclosures:
Cash paid during period for:
European Acquisition Adjustment:
Other liabilities $ — $ (395,515 )
The accompanying notes are an integral part of these consolidated financial statements
F-10
1.
ORGANIZATION AND DESCRIPTION OF BUSINESS
Business —Celsius Holdings, Inc. (the “Company” or “Celsius Holdings”) was incorporated under the laws of the State of Nevada on April 26, 2005. On January 24, 2007, the Company entered into a merger agreement and plan of reorganization with Elite FX, Inc., a Florida corporation. Under the terms of the Merger Agreement, Elite FX, Inc. was merged into the Company’s subsidiary, Celsius, Inc. and became a wholly-owned subsidiary of the Company on January 26, 2007. In addition, on March 28, 2007 the Company established Celsius Netshipments, Inc. a Florida corporation as a subsidiary of the Company.
On February 7, 2018, the Company established Celsius Asia Holdings Limited a Hong Kong corporation as a wholly-owned subsidiary of the Company. On February 7, 2018 Celsius China Holdings Limited a Hong Kong corporation became a wholly-owned subsidiary of Celsius Asia Holdings Limited and on May 9, 2018, Celsius Asia Holdings Limited established Celsius (Beijing) Beverage Limited, a China corporation as a wholly-owned subsidiary of Celsius Asia Holdings Limited.
On October 25, 2019, the Company acquired 100% of Func Food Group, Oyj (“Func Food”). The Acquisition was structured as a purchase of all of Func Food’s equity shares and a restructuring of Func Food’s pre-existing debt. Func Food was the Nordic distributor for the Company since 2015. Func Food is a marketer and distributor of nutritional supplements, health food products, and beverages.
The Company is engaged in the development, marketing, sale and distribution of “functional” calorie-burning functional energy drinks and liquid supplements under the Celsius® brand name.
2.
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and the rules and regulations of the SEC.
Consolidation Policy — The accompanying consolidated financial statements include the accounts of Celsius Holdings, Inc. and its subsidiaries. All inter-company balances and transactions have been eliminated in consolidation.
Significant Estimates — The preparation of consolidated financial statements and accompanying disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and disclosure of contingent assets and liabilities at the date of the financial statements. Although these estimates are based on management's best knowledge of current events and actions that the Company may undertake in the future, actual results may differ from those estimates. Significant estimates include the allowance for doubtful accounts, allowance for inventory obsolescence, the useful lives of property, fixtures and equipment, impairment of intangible assets & goodwill, valuation of stock-based compensation, and deferred tax asset valuation allowance.
Segment Reporting — Operating segments are defined as components of an enterprise that engage in business activities, have discrete financial information, and whose operating results are regularly reviewed by the chief operating decision maker (CODM) to make decisions about allocating resources and to assess performance. Even though we have operations in several geographies, we operate as a single enterprise. Our operations and strategies are centrally designed and executed given that our geographical components are very similar. Our CODM, the CEO, reviews operating results primarily from a consolidated perspective, and makes decisions and allocates resources based on that review. The reason our CODM focuses on consolidated results in making decisions and allocating resources is because of the significant economic interdependencies between our geographical operations and the Company’s U.S. entity.
Concentrations of Risk — Substantially all of the Company’s revenue derives from the sale of Celsius ® functional energy drinks and liquid supplements.
The Company uses single supplier relationships for its raw materials purchases and filling capacity, which potentially subjects the Company to a concentration of business risk. If a supplier had operational problems or ceased making product available to the Company, operations could be adversely affected.
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company places its cash and cash equivalents with high-quality financial institutions. At times, balances in the Company’s cash accounts may exceed the Federal Deposit Insurance Corporation limit. At December 31, 2021 and 2020, the Company had approximately $16.3 million and $43.2 million, respectively, in excess of the Federal Deposit Insurance Corporation limit.
For the years ended December 31, 2021 and 2020, the Company had the following 10 percent or greater concentrations of revenue with its customers. Specifically, there are two customers that have accounted for approximately 12.7% and 10.1% of our revenue, for the year ended December 31, 2021. Those two customers accounted for approximately 2.9% and 15.1% of our revenue for the year ended December 31, 2020. The below table reflects this customer’s evolution as a percentage of our total revenue.
At December 31, 2021 and 2020, the Company had the following 10 percent or greater concentrations of accounts receivable with its customers:
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Cash Equivalents — The Company considers all highly liquid instruments with an original maturity of three months or less when purchased to be cash equivalents. At December 31, 2021 and 2020, the Company did not have any investments with original maturities of three months or less.
Accounts Receivable — Accounts receivable are reported at net realizable value. The Company establishes an allowance for doubtful accounts based upon factors pertaining to the credit risk of specific customers, historical trends, and other information. Delinquent accounts are written-off when it is determined that the amounts are uncollectible. At December 31, 2021 and 2020, there was an allowance for doubtful accounts of approximately $0.8 million and $0.5 million, respectively.
Inventories — Inventories include only the purchase cost and are stated at the lower of cost or net realizable value. Cost is determined using the FIFO method. Inventories consist of raw materials and finished products. The Company establishes an inventory reserve to reduce the value of the inventory during the period in which such materials and products are no longer usable or marketable. Specifically, the Company reviews inventory utilization during the past twelve months and also customer orders for subsequent months. If there has been no utilization during the last 12 months and there are no orders in-place in future months which will require the use of inventory item, then inventory item will be included as part of the reserve during the period being evaluated. Management will then specifically evaluate whether these items may be utilized within a reasonable time frame (e.g., 3 to 6 months). At December 31, 2021 and December 31, 2020, the Company recorded an allowance of approximately $2.6 million and $1.6 million respectively. The changes in the allowance are included in cost of revenue.
Property and Equipment — Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation of property and equipment is calculated using the straight-line method over the estimated useful life of the asset generally ranging from three to seven years.
Impairment of Long-Lived Assets — In accordance with ASC Topic 360, “Property, Plant, and Equipment” the Company reviews the carrying value of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss is determined regarding a long-lived asset if its carrying amount is not recoverable and exceeds its fair value. The carrying amount is not recoverable when it exceeds the sum of the undiscounted cash flows expected to result from use of the asset over its remaining useful life and final disposition. The Company did not record any impairments during the years ended December 31, 2021 and December 31, 2020.
Long-lived Asset Geographic Data
The following table sets forth long-lived asset information which includes property and equipment and lease right of use assets and excludes goodwill and intangibles, where individual countries represent a material portion of the total:
December 31, December 31,
Goodwill — The Company records goodwill when the consideration paid for an acquisition exceeds the fair value of net tangible and intangible assets acquired, including related tax effects. Goodwill is not amortized; instead, goodwill is tested for impairment on an annual basis, or more frequently if the Company believes indicators of impairment exist. The Company first assesses qualitative factors such as macro-economic conditions, industry and market conditions, cost factors as well as other relevant events, to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying value. If the Company determines that the fair value is less than the carrying value, the Company will recognize an impairment charge based on the excess of a reporting unit’s carrying value over its fair value.
During the fourth quarter of 2021, we changed the date of our annual impairment test for goodwill and indefinite-lived intangible assets from December 31st to October 1st. This voluntary change was made to better align the timing of the assessment with the Company’s planning and forecasting process and to give the Company, which is a newly designated large accelerated SEC filer as of December 31, 2021, additional time to complete the annual assessment in advance of year-end reporting. We believe this change in accounting principle measurement date is preferable under the circumstances. This change in assessment date was applied prospectively and did not delay, accelerate, or avoid a potential impairment charge. As of October 1, 2021, there were no indicators of impairment.
Intangible assets – Intangible assets are comprised of customer relationships and brands acquired in a business combination. The Company amortizes intangible assets with a definitive life over their respective useful lives. Assets with indefinite lives are tested for impairment on an annual basis, or more frequently if the Company believes indicators of impairment exist. We utilize both qualitative and quantitative aspects to evaluate the impairment of our intangible assets. The Company measured the fair value of these indefinite-lived intangible assets using a relief from royalty method. The fair value was estimated by projections to determine the present value of future cash flows that the asset is expected to generate over its lifetime. Our projections used in the valuation included assumptions regarding future growth rates of sales, which are based on various long-range financial and operational plans, the royalty
F-12
rate, and the discount rate. Discount rates used in the indefinite-lived intangible analysis are based on a weighted-average cost of capital, driven by the prevailing interest rates in the geographies where the company operates, as well as credit ratings, financing abilities and opportunities, among other factors. Discount rates may differ slightly to adjust for country or market specific risk, among other factors. We believe our evaluations are consistent with those a market participant would utilize.
Revenue Recognition — The Company recognizes revenue in accordance with ASC Topic 606 “Revenue from Contracts with Customers.” The Company recognizes revenue when performance obligations under the terms of a contract with the customer are satisfied. Product sales occur once control or title is transferred based on the commercial terms. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods. Product sales are recorded net of variable consideration, such as provisions for returns, discounts and allowances. Such provisions are calculated using historical averages and adjusted for any expected changes due to current business conditions. Consideration given to customers for cooperative advertising is recognized as a reduction of revenue except to the extent that there is a distinct good or service, in which case the expense is classified as selling or marketing expense. Provisions for customer volume rebates are based on achieving a certain level of purchases and other performance criteria that are established on a situation basis. These rebates are estimated based on the expected amount to be provided to the customers and are recognized as a reduction of revenue. The amount of consideration the Company receives and revenue the Company recognizes varies with changes in customer incentives the Company offers to its customers and their customers. Additionally, for any agreements which are 1 year or less, the practical expedient under ASC 340-40-25-4 is applied to expense costs when incurred if the amortization period of the contract asset would have otherwise been recognized in one year or less. Sales taxes and other similar taxes are excluded from revenue.
Customer Advances — From time to time the Company requires deposits in advance of delivery of products and/or production runs. Such amounts are initially recorded as customer advances liability within other current liabilities. The Company recognizes such revenue as it is earned in accordance with revenue recognition policies. As of December 31, 2021 and 2020, the Company did not have any customer advances.
Advertising Costs — Advertising costs are expensed as incurred. The Company uses mainly radio, local sampling events, sponsorships, endorsements, and digital advertising. The Company incurred advertising expenses of approximately $36.7million and $14.2 million, during years ending December 31, 2021 and 2020, respectively.
Research and Development — Research and development costs are charged to general and administrative expenses as incurred and consist primarily of consulting fees, raw material usage and test productions of functional energy drinks and liquid supplements. The Company incurred expenses of approximately $1.0 million and $0.5 million during years ending December 31, 2021 and 2020, respectively.
Foreign Currency Gain/Losses — Foreign subsidiaries’ functional currency is the local currency of operations and the net assets of foreign operations are translated into U.S. dollars using current exchange rates. The foreign subsidiaries perform re-measurements of their assets and liabilities denominated in non-functional currencies on a periodic basis and the gain or losses from these adjustments are included in the Statement of Operations as foreign exchange gains or losses. For the year ended December 31, 2021 exchange losses have amounted to approximately $0.3 million while during the year ended December 31, 2020, we recognized foreign currency gains of approximately $1.4 million mainly related to fluctuations in exchange rates. Translation gain and losses that arise from the translation of net assets, as well as exchange gains and losses on intercompany balances of long-term investment nature, are included in other comprehensive income. The Company incurred foreign currency translation net gain during the year ended December 31, 2021 of approximately $0.8 million and a gain of approximately $0.6 million during the year ended December 31, 2020. Our operations in different countries required that we transact in the following currencies:
Chinese-Yuan
Norwegian-Krone
Swedish-Krona
Finland-Euro
Fair Value of Financial Instruments — The carrying value of cash, accounts receivable, accounts payable, accrued expenses and other current liabilities approximate fair value due to their relative short-term maturity and market interest rates.
Fair Value Measurements - ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:
Level 1: Observable inputs such as quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions.
Other than these noted previously, the Company did not have any other assets or liabilities measured at fair value at December 31, 2021 and 2020.
Income Taxes — The Company accounts for income taxes pursuant to the provisions of ASC 740-10, “Accounting for Income Taxes,” which requires, among other things, an asset and liability approach to calculating deferred income taxes. The asset and liability approach require the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. A valuation allowance is provided to offset any net deferred tax assets for which management believes it is more likely than not that the net deferred asset will not be realized. The Company follows the provisions of the ASC 740 -10 related to, Accounting for Uncertain Income Tax Positions. When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. In accordance with the guidance
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of ASC 740-10, the benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any.
Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above should be reflected as a liability for uncertain tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
The Company has adopted ASC 740-10-25 Definition of Settlement, which provides guidance on how an entity should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits and provides that a tax position can be effectively settled upon the completion of an examination by a taxing authority without being legally extinguished. For tax positions considered effectively settled, an entity would recognize the full amount of tax benefit, even if the tax position is not considered more likely than not to be sustained based solely on the basis of its technical merits and the statute of limitations remains open.
The Company’s tax returns for tax years in 2018 through 2020 remain subject to potential examination by the taxing authorities.
Earnings per Share — Basic earnings per share are calculated by dividing net income available to stockholders by the weighted-average number of common shares outstanding during each period. Diluted earnings per share are computed using the weighted average number of common and dilutive common share equivalents outstanding during the period. Please refer to the below table for additional details:
For the years ended December 31,
Income per share:
Weighted average shares outstanding:
Share-Based Payments —The Company follows the provisions of ASC Topic 718 “Compensation — Stock Compensation” and related interpretations. As such, compensation cost is measured on the date of grant at the fair value of the share-based payments. Such compensation amounts, if any, are amortized over the respective vesting periods of the grants. On April 30, 2015, the Company adopted the 2015 Stock Incentive Plan. This plan is intended to provide incentives which will attract and retain highly competent persons at all levels as employees of the Company, as well as independent contractors providing consulting or advisory services to the Company, by providing them opportunities to acquire the Company’s common stock. The 2015 Plan permits the grant of options and shares for up to 5,000,000 shares. In addition, there is a provision for an annual increase of 15% to the shares included under the plan, with the shares to be added on the first day of each calendar year, beginning on January 1, 2017 (note 15). As of December 31, 2021, and 2020, total shares available are 4.3 million and 2.0 million, respectively.
Cost of Sales — Cost of sales consists of the cost of concentrates and or liquid bases, the costs of raw materials utilized in the manufacture of products, co-packing fees, repacking fees, in-bound & out-bound freight charges, as well as certain internal transfer costs, warehouse expenses incurred prior to the manufacture of the Company’s finished products, inventory allowance for excess and obsolete products, and certain quality control costs. Raw materials account for the largest portion of the cost of sales. Raw materials include cans, bottles, other containers, flavors, ingredients and packaging materials.
Operating Expenses — Operating expenses include selling expenses such as warehousing expenses after manufacture, as well as expenses for advertising, samplings and in-store demonstrations costs, costs for merchandise displays, point-of-sale materials and premium items, sponsorship expenses, other marketing expenses and design expenses. Operating expenses also include such costs as payroll costs, travel costs, professional service fees (including legal fees), depreciation and other general and administrative costs.
Shipping and Handling Costs — Shipping and handling costs for freight expense on goods shipped are included in cost of sales. Freight expense on goods shipped for the years ended December 31, 2021 and 2020 was approximately $26.9 million and $9.5 million, respectively.
Recent Accounting Pronouncements
The Company adopts all applicable, new accounting pronouncements as of the specified effective dates.
In September 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326) (“ASU 2016-13”), which requires the immediate recognition of management’s estimates of current and expected credit losses. In November 2018, the FASB issued ASU 2018-19, which makes certain improvements to Topic 326. In April and May 2019, the FASB issued ASUs 2019-04 and 2019-05, respectively, which adds codification improvements and transition relief for Topic 326. In November 2019, the FASB issued ASU 2019-10, which delays the effective date of Topic 326 for Smaller Reporting Companies to interim and annual periods beginning after December 15, 2022, with early adoption permitted. We have elected the relief provided. In November 2019, the FASB issued ASU 2019-11, which makes improvements to certain areas of Topic 326. In February 2020, the FASB issued ASU 2020-02, which adds an SEC paragraph, pursuant to the issuance of SEC Staff Accounting Bulletin No. 119, to Topic 326. Topic 326 is effective for the Company for fiscal years and interim reporting periods within those years beginning after December 15, 2022.
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All new accounting pronouncements issued but not yet effective are not expected to have a material impact on our results of operations, cash flows or financial position except for the previously disclosed above, there have been no new accounting pronouncements not yet effective that have significance to our consolidated financial statements.
Liquidity — These financial statements have been prepared assuming the Company will be able to continue as a going concern. At December 31, 2021, the Company had an accumulated deficit of approximately $51.5 million which includes a net income available to common stockholders of approximately $3.9 million for year ended December 31, 2021. During the year ending December 31, 2021 the Company’s net cash used in operating activities totaled approximately $96.6 million. As of December 31, 2020, the Company had an accumulated deficit of $55.4 million which includes a net income available to common stockholders of $8.5 million for year ended December 31, 2020. During the year ending December 31, 2020 the Company’s net cash provided by operating activities totaled approximately $3.4 million.
If our sales volumes do not meet our projections, expenses exceed our expectations, our plans change, we may be unable to generate enough cash flow from operations to cover our working capital requirements. In such case, we may be required to adjust our business plan, by reducing marketing, lower our working capital requirements and reduce other expenses or seek additional financing. Furthermore, our business and results of operations may be adversely affected by changes in the global macro-economic environment related to the pandemic and public health crises related to the COVID-19 outbreak.
Correction of Immaterial Errors — The company performed immaterial corrections to the previously reported consolidated financial statements related to the Func Foods acquisition in 2019. During the third quarter of 2021, goodwill increased by $3.7 million and deferred tax liabilities increased by $3.5 million attributable to tax implications of acquired intangible assets that had not been recorded in the purchase accounting treatment acquisition. The impact on the consolidated statements of operations and comprehensive income for the year ended December 31, 2021, resulted in a $0.2 million deferred tax benefit.
Correction of previously issued financial statements — Subsequent to filing the Company’s Quarterly Reports on Form 10-Q for the periods ended June 30, 2021, and September 30, 2021, the Company determined that the calculation of expense of share based compensation related to grants of stock options and restricted stock units (“RSUs”) issued to former employees and retired directors was materially understated during the three-and six-month periods ended June 30, 2021 and three- and nine-month periods ended September 30, 2021 (the “Affected Periods”), based on the application of U.S. generally accepted accounting principles. During the Affected Periods, the stock options and RSUs were modified and the expense should have been calculated and recognized using the fair market value of the awards as of the date of modification and recognized over the remaining service period.
In accordance with Staff Accounting Bulletin ("SAB") No. 99, Materiality, and SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, the Company evaluated the misstatements and based on an analysis of quantitative and qualitative factors determined that the impact of the misstatement to its interim reporting periods ending June 30, 2021, and September 30, 2021, was material. Accordingly, the Company has restated its interim consolidated financial statements for the three- and six-months ended June 30, 2021, and three- and nine- months ended September 30, 2021, respectively, and included that restated financial information within this annual report.
See unaudited Selected Quarterly Financial Results for restatements to the Company's previously reported unaudited interim consolidated financial statements that were impacted by this misstatement.
3.
REVENUE
The Company recognizes revenue in accordance with ASC Topic 606 “Revenue from Contracts with Customers.” The Company recognizes revenue when performance obligations under the terms of a contract with the customer are satisfied. Product sales occur once control is transferred, , based on the commercial terms. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods. Product sales are recorded net of variable consideration, such as provisions for returns, discounts and allowances. Such provisions are calculated using historical averages and adjusted for any expected changes due to current business conditions. Consideration given to customers for cooperative advertising is recognized as a reduction of revenue except to the extent that there is a distinct good or service, in which case the expense is classified as selling or marketing expense. Provisions for customer volume rebates are based on achieving a certain level of purchases and other performance criteria that are established on a situation basis. These rebates are estimated based on the expected amount to be provided to the customers and are recognized as a reduction of revenue. The amount of consideration the Company receives and revenue the Company recognizes varies with changes in customer incentives the Company offers to its customers and their customers. Additionally, for any agreements which are 1 year or less, the practical expedient under ASC 340-40-25-4 is applied to expense costs when incurred if the amortization period of the contract asset would have otherwise been recognized in one year or less.
Information about the Company’s net sales by geographical location for the years ended December 31, 2021 and 2020 is as follows:
For the years ended
December 31, December 31,
All of the Company’s North America revenue is derived from the United States, which is the Company’s country of domicile. Of the Company’s total foreign revenues of approximately $41.3 million and $35.2 million for the years ended December 31, 2021 and 2020, respectively, Sweden represented the largest foreign portion of total consolidated revenue of approximately $26.9 million and $23.1 million for the years ended December 31, 2021 and 2020, respectively.
F-15
License Agreement
In January 2019, the Company entered into a license and repayment of investment agreement with Qifeng Food Technology (Beijing) Co., Ltd (“Qifeng”). Under the agreement, Qifeng was granted the exclusive license rights to manufacture, market and commercialize Celsius branded products in China. The term of the agreement is 50 years, with annual royalty fees due from Qifeng after the end of each calendar year. The royalty fees are based on a percentage of Qifeng’s sales of Celsius branded products; however, the fees are fixed for the first five years of the agreement, totaling approximately $6.9 million, and then are subject to annual guaranteed minimums over the remaining term of the agreement.
Under the agreement, the Company grants Qifeng exclusive license rights and provides ongoing support in product development, brand promotion and technical expertise. The ongoing support is integral to the exclusive license rights and, as such, both of these represent a combined, single performance obligation. The transaction price consists of the guaranteed minimums and the variable royalty fees, all of which are allocated to the single performance obligation.
The Company recognizes revenue from the agreement over time because the customer simultaneously receives and consumes the benefits from the services. The Company uses the passage of time to measure progress towards satisfying its performance obligation because of its ongoing efforts in providing the exclusive license rights including providing continuous access, updates and support. Total revenue recognized under the agreement was approximately $1.6 million for the year ended December 31, 2021 and approximately $0.8 million for the year ended December 31, 2020, which is reflected in the revenues from Asia.
4.
INVENTORIES
Inventories consist of the following at:
December 31, December 31,
5.
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets total approximately $13.6 million and $14.6 million, at December 31, 2021 and 2020, respectively, and consist mainly of prepaid advances to co-packers related to inventory production, advertising, prepaid insurance, prepaid slotting fees, value added tax payments and deposits on purchases.
6.
NOTE RECEIVABLE
Note receivable consists of the following at:
December 31, December 31,
Effective January 1, 2019, we restructured our China distribution efforts by entering into two separate economic agreements as it relates to the commercialization of our Celsius products (i.e., license agreement) and a repayment of investment agreement with Qifeng. Under the license agreement, Qifeng was granted the exclusive license rights to manufacture, market and commercialize Celsius® brand products in China. Qifeng will pay a minimum royalty fee of approximately $6.9 million for the five years of the term of the agreement, transitioning to a volume-based royalty fee, thereafter. Under a separate economic agreement, Qifeng Food will repay the marketing investments made by Celsius into the China market through 2018, over the same five-year period. The repayment, which was formalized via a Note Receivable from Qifeng, will need to be serviced even if the licensing agreement is cancelled or terminated. The note receivable is denominated in Chinese-Yuan.
Scheduled principal payments plus accrued interest are due annually on March 31 of each year starting in 2020. The note receivable is recorded at amortized cost and accrues interest at a rate per annum equal to the weighted average of 5% of the outstanding principal up to $5 million and 2% of the outstanding principal above $5 million. On June 12, 2020, it was agreed to fix the interest rate at 3.21% which reflected the weighted average interest rate for the 5-year period of the Note. For the year ended December 31, 2021 and 2020, interest income was approximately $0.3 million and $0.4 million, respectively.
The Company assesses the note receivable for impairment at each reporting period, by evaluating whether it is probable that the Company will be unable to collect all the contractual principal and interest payments as scheduled in the Note agreement, based on historical experience of Qifeng’s ability to pay, the current economic environment and other factors. If the Note is determined to be impaired, the impairment is measured based on the present value of the expected future cash flows under the Note, discounted at the Note’s effective interest rate. At December 31, 2021, the Note was not deemed to be impaired. As of December 31, 2021, Qifeng is current on all amounts due under the Note and the license agreement.
As collateral for the Note, a stock certificate in Celsius Holdings, Inc., which amounts to 122,830 of shares owned by an affiliate under common control with Qifeng is being held at a brokerage account. These shares were originally issued on April 20, 2015 via a private transaction which involved Risejoy Services
F-16
Limited an affiliate under the common control of Qifeng, our Chinese licensee. Payment in-full was received timely pertaining to the amounts due on March 31, 2021. Furthermore, a letter of guarantee was executed with several restrictions regarding these shares. In particular, it was agreed that the stock would not be sold or transferred without the prior written consent from Celsius Holdings, Inc. There are other restrictions and agreements, which include that a Statement of Account will be provided to Celsius on a Quarterly basis to confirm and validate the existence of the shares. These shares serve only as collateral and is a component of management’s consideration when evaluating impairment indicators.
7.
LEASES
The Company’s leasing activities include an operating lease of its corporate office space from a related party (see Note 12) and several other operating and finance leases of vehicles and office space for the Company’s European operations.
At the inception of a contract, the Company assesses whether the contract is, or contains, a lease. The Company’s assessment is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether the Company obtains the right to substantially all the economic benefit from the use of the asset throughout the term, and (3) whether the Company has the right to direct the use of the asset. The Company allocates the consideration in the contract to each lease and non-lease component based on the component’s relative stand-alone price to determine the lease payments. Lease and non-lease components are accounted for separately.
Leases are classified as either finance leases or operating leases based on criteria in ASC Topic 842, “Leases”. The Company’s operating leases are generally comprised of real estate and vehicles, and the Company’s finance leases are generally comprised of vehicles.
At lease commencement, the Company records a lease liability equal to the present value of the remaining lease payments, discounted using the rate implicit in the lease or, if that rate cannot be readily determined, the Company’s incremental borrowing rate. A corresponding right-of-use asset (“ROU asset”) is recorded, measured based on the initial measurement of the lease liability. ROU assets also include any lease payments made and exclude lease incentives. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.
Lease expense for operating leases, consisting of lease payments, is recognized on a straight-line basis over the lease term. Included in lease expense are any variable lease payments incurred in the period that were not included in the initial lease liability. Lease expense for finance leases consists of the amortization of the ROU asset on a straight-line basis over the shorter of the useful life of the asset or the lease term, and interest expense is calculated using the effective interest rate method.
The following is a summary of lease cost recognized in the Company’s consolidated statements of operations and comprehensive income:
Year ended Year ended
Operating Finance Operating Finance
Leases Leases Leases Leases
Lease cost in general and administrative expenses:
Lease cost in other expense:
Interest on finance lease liabilities — 7,504 — 16,004
Total lease cost in other expense — 7,504 — 16,004
The following is a summary of the impact of the Company’s leases on the consolidated statements of cash flows:
Years ended
December 31,
Leasing activity in cash flows from operating activities:
Interest payments on finance lease liabilities (7,431 ) (16,004 )
Leasing activity in cash flows from financing activities:
Principal payments on finance lease liabilities (94,102 ) (280,208 )
The weighted-average remaining lease terms and weighted-average discount rates for operating and finance leases at December 31, 2021 and December 31, 2020 were as follows:
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December 31, December 31,
Weighted average remaining lease term (years) - operating leases 2.3 2.6
Weighted average remaining lease term (years) - finance leases 0.7 1.1
Weighted average discount rate - operating leases 5.78 % 6.52 %
Weighted average discount rate - finance leases 3.01 % 3.95 %
The future annual minimum lease payments required under the Company’s leases as of December 31, 2021 are as follows:
Operating Finance
Future minimum lease payments Leases Leases Total
8.
PROPERTY AND EQUIPMENT
Property and equipment consist of the following at:
December 31, December 31,
Depreciation expense amounted to approximately $0.5 million and $0.1 million during years ended December 31, 2021 and 2020, respectively.
9.
GOODWILL AND INTANGIBLES
Goodwill consists of approximately $14.5 million resulting from the excess of the consideration paid and the fair value of net tangible and intangible assets acquired from the Func Food Acquisition, including an immaterial correction further detailed in Note 2 above.
Intangible assets consist of acquired customer relationships and brands from the Func Food Acquisition. The gross carrying amount and accumulated amortization of intangible assets were as follows as of December 31, 2021 and December 31, 2020:
December 31, December 31,
Definite-lived intangible assets
Indefinite-lived intangible assets
Customer relationships are amortized over an estimated useful life of 25 years and brands have an indefinite life. Amortization expense for the year ended December 31, 2021 and 2020 was approximately $0.6 million and $0.6 million, respectively and is reflected in general and administrative expenses.
Other fluctuations in the amounts of intangible assets are due to currency translation adjustments.
The following is the future estimated amortization expense related to customer relationships as of December 31, 2021:
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Year ending December 31,
10. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at:
December 31, December 31,
11. OTHER LIABILITIES
Other current liabilities consist of the following at:
December 31, December 31,
Other Liabilities-State Beverage Container Deposit $ 976,072 $ 425,232
12. RELATED PARTY TRANSACTIONS
The Company’s office is rented from a company affiliated with CD Financial, LLC which is controlled by one of our major stockholders. The current lease expires on January 2024 with monthly rent of $24,494.
13. STOCKHOLDERS’ EQUITY
Issuance of common stock pursuant to incentive stock plan exercises
During the year ended December 31, 2021, the Company issued an aggregate of 1,512,063 shares of its common stock pursuant to the exercise of stock options granted under the Company’s 2015 Stock Incentive Plan. The Company received aggregate proceeds of approximately $3.7 million for 972,491 options exercised for cash, with the balance of the options having been exercised on a "cashless” basis.
During the year ended December 31, 2020, the Company issued an aggregate of 1,883,609 shares of its common stock pursuant to the exercise of grants under the Company’s Stock Incentive Plans. The Company received aggregate proceeds of $4,126,791 for 1,316,050 cash exercises, with the balance of the grants having been exercised on a “cashless” basis.
June 2021 Public Offering
On June 9, 2021, the Company and certain selling stockholders (the "Selling Stockholders”) entered into an underwriting agreement (the "Underwriting Agreement”) with UBS Securities LLC and Jefferies LLC, as representatives (the "Representatives”) of the several underwriters (the "Underwriters”), relating to the sale of 6,518,267 shares of common stock, par value $0.001 per share, of the Company at a public offering price of $62.50 per share less underwriting discounts and commissions in a registered public offering (the "Offering”). The Company and certain Selling Stockholders also granted the Underwriters an option, exercisable for 30 days, to purchase up to an additional 977,740 shares of its Common Stock. The Underwriters partially exercised their option to purchase 873,141 shares of the Company’s Common Stock on June 11, 2021; 1,133,953 of which were sold by the Company and 739,188 of which were sold by certain of the Selling Stockholders. The Offering closed on June 14, 2021. The Company issued and sold 1,133,953 shares of Common Stock, and the Selling Stockholders sold 6,257,455 shares, in the aggregate, of Common Stock in the Offering. The Offering generated net proceeds for the Company of $67,769,386 and net proceeds for the Selling Stockholders of $375,447,300. The Company intends to use the proceeds for general corporate purposes. The Company did not receive any proceeds from the sale of shares by the Selling Stockholders.
The Underwriting Agreement contains customary representations and warranties of the parties, and indemnification and contribution provisions under which the Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act”). Pursuant to the Underwriting Agreement, the Company has agreed, subject to certain exceptions, not to sell or transfer any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock for 90 days after June 9, 2021 without first obtaining the written consent of the Representatives.
F-19
Issuance of common stock pursuant to private placement
On August 25, 2020 the Company issued 1,437,909 shares of its common stock and obtained approximately $22,000,000 of cash as part of a private placement.
Cash paid for taxes on restricted stock awards
On October 29, 2020, the CEO and CFO elected to have a portion of their vested restricted stock awards withheld by the Company, in order to cover their personal income taxes. This election was permitted by the underlying restricted stock award agreements that were provided to both the CEO and CFO. The total cash paid by the Company was $656,680, corresponding to the applicable statutory tax amounts required to be withheld. The payment was recorded as a reduction to stockholders’ equity, in accordance with ASC-505-30, Equity-Treasury Stock. On the consolidated statements of cash flows, the payment is presented as a cash outflow from financing activities.
14. INCOME TAXES
The domestic and foreign components of the Company's income before provision for income taxes are as follows:
Income (loss) before provision for income taxes $ (4,058,447 ) $ 8,640,026
The provision (benefit) for income taxes consists of the following:
Domestic $ — $ —
(1) $81,500 of expense in 2020 was recorded in Other expenses
Deferred
The reconciliation of the U.S. federal statutory rate to the Company's effective rate on income before provision (benefit) for income taxes is as follows:
U.S. Statutory federal rate 21.0 % 21.0 %
State taxes, net of federal benefit (12.5 )% 4.4 %
Stock based compensation 50.4 % 6.7 %
Change in valuation allowance 219.8 % (29.8 )%
Change in deferred balances (80.6 )% —
Effective tax rate 197.2 % 2.3 %
The Tax Cuts and Jobs Act introduced a provision to tax global intangible low-taxed income ("GILTI") of foreign subsidiaries and a measure to tax certain intercompany payments under the base erosion anti-abuse tax "BEAT" regime. For the years ended December 31, 2021 and 2020, the Company did not generate intercompany transactions that met the BEAT threshold but does have to include GILTI relating to the Company's foreign subsidiaries. The Company elected to account for GILTI as a current period cost.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts for income tax purposes. Deferred tax assets and liabilities consisted of the following:
F-20
Charitable Contributions 17,339 —
Right of Use Liability 134,102 —
Right of Use Asset (121,895 ) —
At December 31, 2021, the Company has approximately $9.6 million of Federal net operating loss carryforwards and $14.9 million of state net operating loss carryforwards, which will begin to expire in 2031. The Federal and State NOLs are subject to limitation under Section 382 due to a December 2008 ownership change of greater than 50% over a three-year testing period. The ownership change resulted in approximately $4.5 million of NOLs that will not be utilized prior to expiration. The $4.5 million has been removed from the available NOL carryforward and US NOL deferred tax asset. The Company had foreign NOL carryforwards of approximately $22.4 million, some of which will begin to expire in 2023.
At December 31, 2021, undistributed earnings, as well as outside basis differences, of our foreign subsidiaries was determined to be immaterial and such earnings are considered to be indefinitely reinvested. Accordingly, no taxes have been provided thereon. Determination of the amount of unrecognized deferred tax liability is not practicable due to the complexities associated with this hypothetical calculation.
As required by the authoritative guidance on accounting for income taxes. the Company evaluates the realizability of deferred tax assets on a jurisdictional basis at each reporting date. Accounting for income taxes requires that a valuation allowance be established when it is more likely than not that all or a portion of the deferred taxes will not be realized. In circumstances where there is sufficient negative evidence indicating that the deferred tax assets are not more likely than not realizable, the Company establishes a valuation allowance. Through the year ended December 31, 2020, the Company has maintained a full valuation allowance on its worldwide net deferred tax assets. During the fourth quarter of 2021, the Company concluded that it is more likely than not that its US deferred tax assets would be realized. This conclusion was based on the US profitability and NOL utilization in 2021 and 2020 as well as future forecasts of US profitability. For the year ended December 31, 2021, the Company released its US valuation allowance for deferred tax assets of approximately $6.0 million. The Company continues to maintain a valuation allowance on its foreign net operating losses as it is not more likely than not that the losses in those specific jurisdictions will be realized.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:
Gross unrecognized tax benefit, beginning of period $ 81,500 $ —
Additions based on tax positions related to the current year — 81,500
Additions based on tax positions related to the prior years 998,691 —
Reductions due to lapse in statute of limitations and settlements — —
Gross unrecognized tax benefit, end of period $ 1,080,191 $ 81,500
The Company recognizes only those tax positions that meet the more-likely-than-not recognition threshold and establishes tax reserves for uncertain tax positions that do not meet this threshold. To the extent these unrecognized tax benefits are ultimately recognized, approximately $1.1 million will impact the Company's effective tax rate in future periods. Unrecognized tax benefits are likely to decrease by approximately $0.8 million, inclusive of interest and penalties, within the next twelve months as a result of the Company's intention to remediate certain income tax positions via voluntary disclosure. Interest and penalties associated with income tax matters are included in the provision for income taxes. As of December 31, 2021, the Company had uncertain tax positions of approximately $1.3 million, inclusive of $0.2 million of interest and penalties.
The Company files U.S., state, and foreign income tax returns in jurisdictions with various statutes of limitations. Below is a summary of the filing jurisdictions and open tax years:
Open Years
15. STOCK-BASED COMPENSATION
F-21
The Company adopted an Incentive Stock Plan on January 18, 2007. This plan is intended to provide incentives which will attract and retain highly competent persons at all levels as employees of the Company, as well as independent contractors providing consulting or advisory services to the Company, by providing them opportunities to acquire the Company’s common stock. While the plan terminates 10 years after the adoption date, issued options have their own schedule of termination. During 2013, the majority of the stockholders approved to increase the total available shares in the plan from 2.5 million to 3.5 million shares of common stock. During May 2014, the majority of the stockholders approved to increase the total available shares in the plan from 3.5 million to 4.25 million shares of common stock, during February 2015, the majority of the stockholders approved to increase the total available shares in the plan from 4.25 million to 4.6 million shares of common stock and during April 2015, the majority of the stockholders approved to increase the total available shares in the plan from 4.6 million to 5.1 million shares of common stock. Upon exercise, shares of new common stock are issued by the Company.
The Company adopted the 2015 Stock Incentive Plan on April 30, 2015. This plan is intended to provide incentives which will attract and retain highly competent persons at all levels as employees of the Company, as well as independent contractors providing consulting or advisory services to the Company, by providing them opportunities to acquire the Company’s common stock or to receive monetary payments based on the value of such shares pursuant to Awards issued. The 2015 Plan permits the grant of options and shares for up to 5,000,000 shares. In addition, there is a provision for an annual increase of 15% of the shares pertaining to the 2015 plan that are outstanding as of the last day of the prior year. As of December 31, 2021, approximately 4.3 million shares are available.
Under the 2015 Stock Incentive Plan, the Company has issued options to purchase approximately 3.6 million shares at an average price of $7.56 with a fair value of $241.5 million. For the years ended December 31, 2021 and 2020, the Company issued options to purchase 304,750 and 620,535 shares, respectively. Upon exercise, shares of new common stock are issued by the Company.
For the years ended December 31, 2021 and 2020, the Company recognized an expense of approximately $36.5 million and $6.3 million, respectively, of non-cash compensation expense (included in General and Administrative expense in the accompanying Consolidated Statement of Operations) determined by application of a Black-Scholes option pricing model with the following inputs: exercise price, dividend yields, risk-free interest rate, and expected annual volatility. As of December 31, 2021, the Company had approximately $7.7 million of unrecognized pre-tax non-cash compensation expense related to options to purchase shares, which the Company expects to recognize, based on a weighted-average period of 1.9 years. The Company used straight-line amortization of compensation expense over the two to three-year requisite service or vesting period of the grant. The maximum contractual term of the Company's stock options is 10 years. The Company recognizes forfeitures as they occur. There are options to purchase approximately 2.31 million shares that have vested as of December 31, 2021.
The Company uses the Black-Scholes option-pricing model to estimate the fair value of its stock option awards and warrant issuances. The calculation of the fair value of the awards using the Black-Scholes option-pricing model is affected by the Company’s stock price on the date of grant as well as assumptions regarding the following:
Year ended December 31,
Expected term 4.5 - 5.0 Years 4.8-5.0 Years
Risk-free interest rate 0.3% - 1.4% 0.2% - 1.4%
Forfeiture Rate 0.0% 0.0%
The expected volatility was determined with reference to the historical volatility of the Company’s stock. The Company uses historical data to estimate option exercise and employee termination within the valuation model. The expected term of options granted represents the period of time that options granted are expected to be outstanding. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury rate in effect at the time of grant.
A summary of the status of the Company’s outstanding stock options as of December 31, 2021 and 2020 and changes during the periods ending on that date is as follows:
Weighted Average Aggregate Weighted
Shares Exercise Grant DateFair IntrinsicValue AverageRemaining
(000’s) Price Value (000’s) Term (Yrs)
Options
Forfeiture and cancelled (99 ) 3.93
Forfeiture and cancelled (443 ) 5.01
The following table summarizes information about employee stock options outstanding at December 31, 2021:
F-22
Outstanding Options Vested Options
Number Number
Outstanding Weighted Weighted Exercisable Weighted Weighted
at Averaged Averaged at Averaged Averaged
December 31, Remaining Exercise December 31, Exercise Remaining
Range of Exercise Price 2021 (000’s) Life Price 2021 (000’s) Price Life
As of December 31, 2021, the Company had approximately $7.7 million of unrecognized pre-tax non-cash compensation expense related to options to purchase shares, which the Company expects to recognize, based on a weighted-average period of 1.9 years.
Restricted Stock Awards
Restricted stock awards are awards of common stock that are subject to restrictions on transfer and to a risk of forfeiture if the holder leaves the Company before the restrictions lapse. The holders of a restricted stock award are generally entitled after the release to transact and obtain the same rights as rights of a stockholder of the Company, including the right to vote the shares. The holders of unvested restricted stock awards do not have the same rights as stockholders including but not limited to any dividends which may be declared by the Company, and do not have the right to vote. The value of restricted stock awards that vest over time is established by the market price on the date of its grant and generally vests over a period of 3 years. A summary of the Company’s restricted stock activity for the years ended December 31, 2021 and 2020 is presented in the following table:
For the twelve months ended
Weighted Weighted
Average Average
Grant Date Grant Date
Shares Fair Value Shares Fair Value
Transfers to restricted stock units (45,871 ) 34.02 — —
The total fair value of shares vested during the year ended December 31, 2021 and 2020 was approximately $1.3 million and $2.9 million, respectively. Unrecognized compensation expense related to outstanding restricted stock awards to employees and directors as of December 31, 2021 was approximately $1,096 and is expected to be expensed over the next 0.6 years. Unrecognized compensation expense related to outstanding restricted stock awards to employees and directors as of December 31, 2020 was $0.2 million.
Restricted Stock Units
Restricted stock units are awards that give the holder the right to receive one share of common stock for each restricted stock unit upon meeting service-based vesting conditions (typically annual vesting in three equal annual installments, with a requirement that the holder remains in the continuous employment of the Company). The holders of unvested units do not have the same rights as stockholders including but not limited to any dividends which may be declared by the Company, and do not have the right to vote. The value of restricted stock units that vest over time is established by the market price on the date of its grant. A summary of the Company’s restricted stock unit activity for the year ended December 31, 2021 and 2020 is presented in the following table:
For the twelve months ended
Weighted Weighted
Average Average
Grant Date Grant Date
Shares Fair Value Shares Fair Value
Unvested at beginning of period — $ — — $ —
Transfers to restricted stock awards 45,871 34.02 — —
F-23
The total fair value of shares vested during the year ended December 31, 2021 was approximately $1.4 million. Unrecognized compensation expense related to outstanding restricted stock units to employees and directors as of December 31, 2021 was approximately $19.8 million and is expected to be expensed over the next 2.4 years.
Stock-based Awards Issued to Non-employee Consultants
The Company issues stock-based awards to third-party consultants for providing marketing, sales, and general business development services related to Celsius products. The stock-based awards are in the form of restricted stock units with performance vesting conditions (“performance stock units” or “PSUs”). The holders of unvested PSUs do not have the same rights as stockholders including but not limited to any dividends which may be declared by the Company, and do not have the right to vote. The PSU performance vesting conditions are linked to the consultants obtaining specified incremental earnings for the Company in a given year over the performance vesting period, typically five years. The fair value of PSUs is based on the market price of the underlying stock on the grant date. The Company recognizes compensation cost for performance stock awards issued to non-employees in the same manner and periods as though cash had been paid for services received. A summary of the Company’s PSU activity for the years ended December 31, 2021 and 2020 is presented in the following table:
For the twelve months ended
Weighted Weighted
Average Average
Grant Date Grant Date
Shares Fair Value Shares Fair Value
Unvested at beginning of period — $ — — $ —
Vested — — — —
Forfeited and cancelled — — — —
Unvested at end of period 15,468 $ 64.65 $ — $ —
Unrecognized compensation expense related to outstanding PSUs issued to non-employee consultants as of December 31, 2021 was approximately $0.9 million and is expected to be expensed over the next 4.6 years.
Modifications
There were certain Board of Directors members and employees whose service was terminated during the year. In connection with their terminations, the vesting conditions of the previously granted awards were modified to accelerate the vesting of specified un-vested awards pursuant to Board resolutions or severance agreements. Pursuant ASC 718, these were Type III modifications requiring re-valuation of un-vested awards to modification date fair value with recognition of compensation expense over the remaining service period. The Company modified awards for nine grantees resulting in approximately $19.3 million in incremental compensation cost during the year ended December 31, 2021. See Note 2 and Unaudited Supplementary Information for the impact of these modifications on the previously reported unaudited 2021 quarterly consolidated statements of operations and comprehensive income (loss) for the periods ending June 30, 2021 and September 30, 2021.
16. COMMITMENTS AND CONTINGENCIES
In November of 2020, McGovern Capital, Inc. and Kevin McGovern (collectively "McGovern”) filed a claim in arbitration related to its Representative Agreement with Celsius Holdings, Inc. as amended by the first amendment dated August 6, 2016. Pursuant to the Representative Agreement, McGovern is entitled to receive a fee of three percent (3%) of "Net Revenues” received by the Company from sales of the Company’s Products in the People’s Republic of China for a period of four years from Initial Commercial Sale (which was September 1, 2017). "Net Revenues” are defined in the Representative Agreement as "the Company’s revenues net of actual discounts applied, credits and returns.” Effective January 1, 2019, the Company restructured its China operations from a distribution arrangement with Qifeng Food Technology (Beijing) Co. Ltd. ("Qifeng”), to a license and royalty arrangement and a note, pursuant to which Qifeng will market and distribute the Company’s products in China, and Celsius will receive an annual royalty payment. The Company intends to pay McGovern its percentage of the annual royalty payment, but McGovern has objected claiming that McGovern is entitled to be paid commissions on the entire royalty payment and the amount of the loan to Qifeng. The Company intends to defend against McGovern’s claims vigorously and has filed a counterclaim related to McGovern’s failure to comply with the covenant of good faith and fair dealing in the Representative Agreement. At this stage in the matter, the Company has fully participated in the producing all documents as required by the discovery process and continues to defend itself vigorously. Based on the current status the Company is unable to predict the outcome at this time.
In March of 2019, Daniel Prescod filed a putative class action lawsuit against the Company in the Superior Court for the State of California, County of Los Angeles, Case Number 19STCV09321, filed on March 19, 2019, (the "Prescod Litigation”). Daniel Prescod asserts that the Company’s use of citric acid in its products while simultaneously claiming "no preservatives” violates California Consumer Legal Remedies Act, California Business and Professions Code Section 17200, et seq., and California Business and Professions Code Section 17500, et seq., because citric acid acts as a preservative. The Company does not use citric acid as a preservative in its products, but rather as a flavoring, and therefore it believes that its "no preservatives” claim is fair and not deceptive. A motion to certify the case as a class action was filed and on August 2, 2021, that motion was granted. However, the Company also has a motion for summary adjudication pending and that motion would be dispositive of plaintiff’s claims if granted. No fact discovery has been conducted on the merits and this matter is still in its initial stages. The Company intends to contest the claims vigorously on the merits. Since merits discovery is still in its initial stages, we are unable to predict the outcome at this time.
On November 23, 2021, a case related to the Prescod Litigation, Amit Heli and Joseph Nina v. Celsius Holdings, was filed in the United States District Court for the Southern District of New York, Case No. 1:21-cv-09892. Like the Prescod Litigation, the plaintiffs in this case allege that the Company’s use of citric
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acid in its products while simultaneously claiming “no preservatives” constitutes false advertising and unfair or deceptive trade practices. Unlike the Prescod Litigation, in this case the violations alleged are of New York’s General Business Law. Celsius answered the complaint on February 11, 2022. As with the Prescod Litigation, the Company does not use citric acid as a preservative in its products, but rather as a flavoring, and therefore it believes that its “no preservatives” claim is fair and not deceptive. No discovery has been conducted. and this matter is still in its initial stages. The Company intends to contest the claims vigorously on the merits. As a result, we are unable to predict the outcome at this time.
On January 8, 2021, we received a letter from the SEC Division of Enforcement seeking the production of documents in connection with a non-public fact-finding inquiry by the SEC to determine whether violations of the federal securities laws have occurred. On August 20, 2021, the SEC issued a subpoena for production of documents in connection with the matter. Neither the January 8, 2021 SEC letter nor the August 20, 2021 subpoena means that the SEC has concluded that the Company or anyone else has violated the federal securities laws. We have cooperated and will continue to cooperate with the SEC staff in its investigation. At this time, however, we cannot predict the length, scope, or results of the investigation or the impact, if any, of the investigation on our results of operations.
In addition to the foregoing, from time to time, we may become party to litigation or other legal proceedings that we consider to be a part of the ordinary course of our business.
The Company has entered into distribution agreements with liquidated damages in case the Company cancels the distribution agreements without Cause. Cause has been defined in various ways. It is management’s belief that no such agreement has created any liability as of December 31, 2021.
Additionally, our business and results of operations may be adversely affected by the pandemic and public health crises related to the COVID-19 outbreak which is affecting the macro-economic environment.
17. SUBSEQUENT EVENTS
None
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Celsius Holdings, Inc.
UNAUDITED SUPPLEMENTARY INFORMATION