CELH 10-Q
Celsius Holdings, Inc. (CELH)
10-Q
2023-11-07
For: 2023-09-30
View Original
Added on
April 05, 2026
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2023
[
Commission File Number: 001-34611
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| (Address of principal executive offices) | (Zip Code) | |||||||
(561 ) 276-2239
(Registrant’s telephone number, including area code)
__________________________________________________________________
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
| x | Accelerated filer | o | |||||||||
| Non-accelerated filer | o | Smaller reporting company | |||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of shares outstanding of the registrant’s common stock, $0.001 par value, as of October 31, 2023 was 77,225,007 shares.
TABLE OF CONTENTS
| Page | ||||||||
i
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
Celsius Holdings, Inc.
Consolidated Balance Sheets
(In thousands, except par value and share amounts) (Unaudited)
| September 30, 2023 | December 31, 2022 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Accounts receivable-net | |||||||||||
| Note receivable-current-net | |||||||||||
| Inventories-net | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Deferred other costs-current | |||||||||||
| Total current assets | |||||||||||
| Note receivable-non-current | |||||||||||
| Property and equipment-net | |||||||||||
| Deferred tax assets | |||||||||||
| Right of use assets-operating leases | |||||||||||
| Right of use assets-finance leases | |||||||||||
| Other long-term assets | |||||||||||
| Deferred other costs-non-current | |||||||||||
| Intangibles-net | |||||||||||
| Goodwill | |||||||||||
| Total Assets | $ | $ | |||||||||
| LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable and accrued expenses | $ | $ | |||||||||
| Income taxes payable | |||||||||||
| Accrued distributor termination fees | |||||||||||
| Accrued promotional allowance | |||||||||||
| Lease liability obligation-operating leases | |||||||||||
| Lease liability obligation-finance leases | |||||||||||
| Deferred revenue-current | |||||||||||
| Other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Long-term liabilities: | |||||||||||
| Lease liability obligation-operating leases | |||||||||||
| Lease liability obligation-finance leases | |||||||||||
| Deferred tax liability | |||||||||||
| Deferred revenue-non-current | |||||||||||
| Total Liabilities | |||||||||||
Commitments and contingencies (Note 19) | |||||||||||
| Mezzanine Equity: | |||||||||||
Series A convertible preferred shares, $ | |||||||||||
| Stockholders’ Equity: | |||||||||||
Common stock, $ issued and outstanding at September 30, 2023 and December 31, 2022, respectively | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total Stockholders’ Equity | |||||||||||
| Total Liabilities, Mezzanine Equity and Stockholders’ Equity | $ | $ | |||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements
1
Celsius Holdings, Inc.
Consolidated Statements of Operations and Comprehensive Income (Loss)
(In thousands, except per share amounts)
(Unaudited)
| For The Three Months Ended September 30, | For The Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Revenue | $ | $ | $ | $ | |||||||||||||||||||
| Cost of revenue | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||
| Income (loss) from operations | ( | ( | |||||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Interest income on note receivable | |||||||||||||||||||||||
| Interest income, net | |||||||||||||||||||||||
| Foreign exchange loss | ( | ( | ( | ( | |||||||||||||||||||
| Total other income | |||||||||||||||||||||||
| Net income (loss) before income taxes | ( | ( | |||||||||||||||||||||
| Income tax expense | ( | ( | ( | ( | |||||||||||||||||||
| Net income (loss) | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Dividends on Series A convertible preferred shares | ( | ( | ( | ( | |||||||||||||||||||
| Income allocated to participating preferred shares | ( | ( | |||||||||||||||||||||
| Net income (loss) attributable to common stockholders | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
Foreign currency translation loss, net of income tax | ( | ( | ( | ( | |||||||||||||||||||
| Comprehensive income (loss) | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Earnings per share: | |||||||||||||||||||||||
| Basic | $ | $ | ( | $ | $ | ( | |||||||||||||||||
Diluted | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Weighted average shares outstanding: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
Diluted | |||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements
2
Celsius Holdings, Inc.
Consolidated Statements of Changes in Stockholders’ Equity and Mezzanine Equity
(In thousands)
(Unaudited)
| Stockholders' Equity | |||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Mezzanine Equity | ||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Total Stockholders' Equity | Preferred Shares | Amount | ||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Adoption of accounting standard | — | — | — | — | ( | ( | — | — | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock pursuant to exercise of stock options and vested restricted stock units - Cashless | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock pursuant to exercise of stock options - Cash | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Dividends paid to Series A convertible preferred shares | — | — | ( | — | ( | — | |||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock pursuant to exercise of stock options and vested restricted stock units - Cashless | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock pursuant to exercise of stock options - Cash | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Dividends paid to Series A convertible preferred shares | — | — | ( | — | — | ( | — | — | |||||||||||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | ( | — | ( | — | — | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock pursuant to exercise of stock options and vested restricted stock units - Cashless | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock pursuant to exercise of stock options - Cash | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Dividends paid to Series A convertible preferred shares | — | — | ( | — | — | ( | — | — | |||||||||||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | ( | — | ( | — | — | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements
3
Celsius Holdings, Inc.
Consolidated Statements of Changes in Stockholders’ Equity and Mezzanine Equity
(In thousands)
(Unaudited)
| Stockholders' Equity | |||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Mezzanine Equity | ||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Total Stockholders' Equity | Preferred Shares | Amount | ||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | ( | $ | — | $ | — | ||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock pursuant to exercise of stock options - Cashless | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock pursuant to exercise of stock options - Cash | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | ( | — | ( | — | — | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | $ | ( | $ | — | $ | — | ||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock pursuant to exercise of stock options - Cashless | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock pursuant to exercise of stock options - Cash | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | ( | — | ( | — | — | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | ( | $ | ( | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock pursuant to exercise of stock options - Cashless | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock pursuant to exercise of stock options - Cash | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of Series A convertible preferred shares - net of issuance costs | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Dividends paid to Series A convertible preferred shares | — | — | ( | — | — | ( | — | — | |||||||||||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | ( | — | ( | — | — | |||||||||||||||||||||||||||||||||||||||
Net income (loss) | — | — | — | — | ( | ( | — | — | |||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements
4
Celsius Holdings, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
| For The Nine Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Cash flows from operating activities: | |||||||||||
Net income (loss) | $ | $ | ( | ||||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||||
| Depreciation | |||||||||||
| Amortization | |||||||||||
| Impairment of intangible assets | |||||||||||
| Allowance for credit losses | |||||||||||
| Amortization of deferred other costs | |||||||||||
| Inventory excess and obsolescence | |||||||||||
| Loss on disposal of property and equipment | |||||||||||
| Stock-based compensation expense | |||||||||||
| Deferred income taxes-net | ( | ||||||||||
| Foreign exchange loss | |||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable-net | ( | ( | |||||||||
| Inventories-net | ( | ||||||||||
| Prepaid expenses and other current assets | ( | ||||||||||
| Accounts payable and accrued expenses | ( | ||||||||||
| Income taxes payable | |||||||||||
| Accrued promotional allowance | |||||||||||
| Accrued distributor termination fees | ( | ||||||||||
| Other current liabilities | |||||||||||
| Change in right of use and lease obligation-net | ( | ( | |||||||||
| Deferred revenue | ( | ||||||||||
| Other assets | ( | ||||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Collections from note receivable | |||||||||||
| Purchase of property and equipment | ( | ( | |||||||||
| Net cash (used in) investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Principal payments on finance lease obligations | ( | ( | |||||||||
| Proceeds from exercise of stock options | |||||||||||
| Proceeds from issuance of Series A preferred shares, net of issuance costs | |||||||||||
| Dividends paid on preferred shares | ( | ( | |||||||||
| Net cash (used in) provided by financing activities | ( | ||||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ||||||||||
| Net increase in cash and cash equivalents | |||||||||||
| Cash and cash equivalents at beginning of the period | |||||||||||
| Cash and cash equivalents at end of the period | $ | $ | |||||||||
| Supplemental disclosures: | |||||||||||
| Cash paid for: | |||||||||||
| Taxes | $ | $ | |||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements
5
Celsius Holdings, Inc.
Notes to Consolidated Financial Statements (unaudited)
September 30, 2023
(Tabular dollars in thousands, except per share amounts)
1.ORGANIZATION AND DESCRIPTION OF BUSINESS
Business — Celsius Holdings, Inc. (the “Company,” “Celsius Holdings” or "Celsius") 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, pursuant to which, on January 26, 2007, Elite FX, Inc. merged into the Company’s wholly-owned subsidiary, Celsius, Inc., which survived the merger.
The Company is engaged in the development, marketing, sale and distribution of “functional” calorie-burning energy drinks and liquid supplements under the Celsius® brand name.
On August 1, 2022, the Company and PepsiCo Inc. ("Pepsi"), entered into multiple agreements, including a Securities Purchase Agreement (“Purchase Agreement”), Lock-Up Agreements, a Registration Rights Agreement, a Distribution Agreement (“Distribution Agreement”), and a Channel Transition Agreement ("Transition Agreement"). The Purchase Agreement, Lock-Up Agreements and Registration Rights Agreement pertain to the Company’s issuance of approximately 1.5 million shares of the Company's Series A Convertible Preferred Stock (“Series A” or “Series A Convertible Preferred Stock”) in exchange for cash proceeds of $550 million, excluding transaction costs. The Transition Agreement specifies payments to be made by Pepsi to Celsius in exchange for Celsius transitioning certain existing distribution rights to Pepsi. The Distribution Agreement resulted in Pepsi becoming the Company’s primary distribution supplier for the Company's products in the United States. See Note 4. Revenue, Note 13. Related Party Transactions, and Note 14. Mezzanine Equity for more information.
In connection with the Distribution Agreement and Transition Agreement, the Company terminated supply agreements with existing suppliers to transition certain territory rights to Pepsi. These termination expenses were recognized by the Company upon delivery of termination notices to the other distributors, in accordance with ASC Topic 420 Exit or Disposal Cost Obligations. During the nine months ended September 30, 2023, the Company refunded to Pepsi the difference between projected termination payments to distributors and the related payments received from Pepsi, resulting in no refund liability due to Pepsi as of September 30, 2023. See Note 13. Related Party Transactions for more information.
2.BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation — The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the consolidated financial statements do not include all of the information and notes required by US GAAP for annual audited consolidated financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. The results for the three and nine months ended September 30, 2023 are not necessarily indicative of the results expected for any future period or the full year. These unaudited consolidated financial statements have been prepared on a basis that is substantially consistent with the accounting principles applied in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022 and the Amendment No. 1 to the Annual Report on Form 10-K/A, as filed by the Company with the Securities and Exchange Commission (collectively the "2022 Annual Report"). These unaudited consolidated financial statements and the accompanying notes should be read in conjunction with the 2022 Annual Report. The consolidated financial statements of the Company include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated.
Certain prior period amounts have been reclassified to conform with current period presentation in the consolidated financial statements and notes thereto. Accrued promotional allowance and income tax payable were reallocated from within Accounts payable and accrued expenses and are now reflected as standalone line items in the consolidated balance sheets and consolidated statements of cash flows, respectively.
6
Celsius Holdings, Inc.
Notes to Consolidated Financial Statements (unaudited)
September 30, 2023
(Tabular dollars in thousands, except per share amounts)
In 2023, the Company experienced significant growth and scaling of its business as a result of the Distribution Agreement with Pepsi discussed in Note 1. Organization and Description of Business. This growth is evident in the number of locations that product is available, the SKUs available per location, and improved placement within each location. The expansion of availability of the Company's products has improved the success rate of promotional activities. During the quarter ended September 30, 2023, the Company received updated information related to promotional activity during the first half of 2023, including final invoicing for the prior periods, and evaluated this data in conjunction with recent trends and activity which resulted in a change in the accounting estimate of the accrued promotional allowance for certain customers. This update resulted in a reduction to the accrual in the consolidated balance sheets and an increase to revenue in the consolidated statements of operations and comprehensive income (loss) for the current period. This increase was offset by various promotional-related adjustments from different customers, aside from the customers that triggered the change in estimate.
This change in accounting estimate increased net income by $9.5 0.11
Segment Reporting — Operating segments are defined as components of an enterprise that engage in business activities, maintain discrete financial information, and undergo regular review by the chief operating decision maker ("CODM"), who in this case, is the Chief Executive Officer. This review is performed to assess performance and allocate resources.
Despite the Company's presence in several geographical regions, it operates as a single entity. The Company's operations and strategies are centrally designed and executed due to the substantial similarities among the geographical components. The CODM evaluates operating results and allocates resources primarily on a consolidated basis due to the significant economic interdependencies between the Company's geographical operations. As a result, the Company reports as a single operating segment.
Concentrations of Risk — Substantially all of the Company’s revenue is derived from the sale of Celsius® functional energy drinks and liquid supplements.
Revenue from customers accounting for more than 10% of total revenue for the three and nine months ended September 30, 2023 and 2022 were as follows:
| For The Three Months Ended September 30, | For The Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Pepsi | % | % | % | % | |||||||||||||||||||
| Costco | % | % | % | % | |||||||||||||||||||
| All others | % | % | % | % | |||||||||||||||||||
| Total | % | % | % | % | |||||||||||||||||||
Accounts receivable from customers accounting for more than 10% of total accounts receivable for the nine months ended September 30, 2023 and the year ended December 31, 2022 were as follows:
| 2023 | 2022 | ||||||||||
| Pepsi | % | % | |||||||||
| Amazon | % | % | |||||||||
| All others | % | % | |||||||||
| Total | % | % | |||||||||
Financial instruments that potentially subject the Company to concentrations of credit risk primarily include cash and cash equivalents, accounts receivable and note 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 ("FDIC") limit. At September 30, 2023 and December 31, 2022, the Company had approximately $759.5 million and $652.4 million in excess of the FDIC limit.
7
Celsius Holdings, Inc.
Notes to Consolidated Financial Statements (unaudited)
September 30, 2023
(Tabular dollars in thousands, except per share amounts)
Accounts Receivable and Current Expected Credit Losses — The Company is exposed to potential credit risks associated with its product sales and related accounts receivable, as it generally does not require collateral. The Company’s expected loss allowance methodology for accounts receivable is developed using historical collection experience, current and future economic and market conditions, a review of the current status of customers’ trade accounts receivables, and where available, a review of the financial strength and credit ratings of larger customers. Customers are pooled based on sharing specific risk factors and the Company reassesses these customer pools on a periodic basis. The receivables allowance is based on aging of the accounts receivable balances and forward-looking information. The Company uses the probability of default and forward-looking information to assess credit risk and estimate expected credit losses for its note receivable related to Qifeng Food Technology (Beijing) Co. Ltd ("Qifeng"). See Note 7. Note Receivable for more information on Qifeng and the note receivable.
The Company determines expected credit losses using information such as its customers' credit history, financial condition, industry, credit reports, and current and future economic and market conditions. Allowances can be affected by changes in the industry, customer credit issues or customer bankruptcies when such events are reasonable and supportable. Historical information is used in addition to reasonable and supportable forecast periods, where applicable.
| Allowance for Expected Credit Losses | |||||
| Balance as of December 31, 2022 | $ | ||||
| Current period change for expected credit losses | |||||
| Balance as of September 30, 2023 | $ | ||||
8
Celsius Holdings, Inc.
Notes to Consolidated Financial Statements (unaudited)
September 30, 2023
(Tabular dollars in thousands, except per share amounts)
Long-Lived Asset Geographic Data — The following table sets forth long-lived asset information, which includes property and equipment-net, right-of-use assets, and definite-lived intangibles-net and excludes goodwill and indefinite-lived intangibles, where individual countries represent a significant portion of the total:
| September 30, 2023 | December 31, 2022 | ||||||||||
| United States | $ | $ | |||||||||
| Finland | |||||||||||
| Sweden | |||||||||||
| Other | |||||||||||
| Long-lived assets related to foreign operations | |||||||||||
| Total long-lived assets-net | $ | $ | |||||||||
Intangible Assets — Intangible assets are comprised of customer relationships and brands acquired in a business combination. In accordance with ASC Topic 350, Intangibles - Goodwill, and Other, the Company amortizes intangible assets with a definitive life over their respective useful lives. The Company tests intangible long-lived assets for impairment when events suggest that the carrying amount may not be recoverable. The test involves comparing the asset's carrying amount to its estimated undiscounted future cash flows. If the carrying amount exceeds these cash flows, an impairment loss, equal to the difference between the carrying amount and the fair value, is recognized. Assets with indefinite lives are tested for impairment on an annual basis as of October 1st or more frequently if the Company believes that impairment indicators exist.
The addition of the Pepsi distribution network in the prior year shifted the Company's focus to the U.S. market, and as a result it was determined that impairment indicators for the Func Foods Brands indefinite intangible asset were present. The Company doesn't anticipate focusing on the expansion of Func Food branded products and the Company plans to focus on Celsius branded products. As a result of the strategic shift, which the Company considered a triggering event, the Company quantitatively tested the Func Foods brand name for impairment utilizing the relief from royalty method to determine its fair value. As a result of the quantitative assessment, the Company recorded an impairment charge of $2.4 million during the three months ended September 30, 2022, which is presented within selling, general and administrative expenses. At September 30, 2023, there were no further indicators of intangible asset impairment.
9
Celsius Holdings, Inc.
Notes to Consolidated Financial Statements (unaudited)
September 30, 2023
(Tabular dollars in thousands, except per share amounts)
As of September 30, 2023, the Company had approximately $178.9 million in deferred revenue, of which $169.4 million is classified as deferred revenue-non-current and $9.5 million is classified as deferred revenue-current, and as of December 31, 2022, the Company had approximately $189.5 million in deferred revenue, of which $179.8 million is classified as deferred revenue-non-current and $9.7 million is classified as deferred revenue-current in the consolidated balance sheets and are contract liabilities related to Pepsi which are recognized ratably over the -year agreement with Pepsi. Refer to Note 13. Related Party Transactions for more information.
Foreign Currency Gain/Loss — 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 remeasurements of their assets and liabilities denominated in non-functional currencies on a periodic basis and the gain or losses from these adjustments related to fluctuations in foreign exchange rates versus the U.S. dollar are included in the consolidated statement of operations and comprehensive income (loss) as foreign exchange gains or losses. For the three months ended September 30, 2023 exchange loss was approximately $0.2 million versus foreign exchange loss of approximately $0.3 million for the three months ended September 30, 2022. For the nine months ended September 30, 2023, the foreign exchange loss was approximately $1.2 million versus foreign exchange loss of approximately $0.9 million for the nine months ended September 30, 2022.
China - Yuan,
Hong Kong - Hong Kong Dollar,
Norway - Krone,
Sweden - Krona,
Finland - Euro, and
United Kingdom - Pound Sterling
10
Celsius Holdings, Inc.
Notes to Consolidated Financial Statements (unaudited)
September 30, 2023
(Tabular dollars in thousands, except per share amounts)
Income Taxes — The Company accounts for income taxes pursuant to the provisions of ASC Topic 740-10, Accounting for Income Taxes ("ASC 740-10"). This approach requires, among other things, an asset and liability approach to calculating deferred income taxes, recognizing deferred tax assets and liabilities for expected future tax consequences stemming from temporary differences between asset and liability carrying amounts and their tax bases.
A valuation allowance is established 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.
Stock-Based Compensation — 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 stock-based compensation. 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 (the "2015 Plan"). The 2015 Plan is intended to attract, retain and motivate highly competent individuals in various roles within the Company, as well as independent contractors providing consulting or advisory services. The 2015 Plan permits the grant of options and other stock-based awards for up to 5 million shares. In addition, there is a provision for an annual increase of 15 % to the shares included under the plan. This increase occurs on the first day of each calendar year as a way to account for the Company's growth strategies. See Note 18. Stock-Based Compensation for more information.
Recent Accounting Pronouncements
The Company adopts all applicable, new accounting pronouncements as of the specified effective dates.
Effective January 1, 2023, the Company adopted ASU 2016-13 Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("CECL"), using a modified retrospective approach. ASU 2016-13 replaces the incurred loss impairment model with an expected credit loss impairment model for financial instruments, including trade receivables. The guidance requires entities to consider forward-looking information to estimate expected credit losses, resulting in earlier recognition of losses for receivables that are current or not yet due. Upon adoption of the ASU on January 1, 2023, the cumulative effect was recorded directly to accumulated deficit. The amounts recorded were not material.
11
Celsius Holdings, Inc.
Notes to Consolidated Financial Statements (unaudited)
September 30, 2023
(Tabular dollars in thousands, except per share amounts)
3.EARNINGS PER SHARE
Basic earnings per common share is computed by dividing income or loss attributable to common stockholders by the weighted average number of shares of basic common stock outstanding. The Company’s Series A Convertible Preferred Stock is classified as a participating security in accordance with ASC 260. Net income allocated to the holders of Series A Convertible Preferred Stock is based on the Series A stockholders’ proportionate share of weighted average shares of common stock outstanding on an if-converted basis.
For purposes of determining diluted earnings per common share, basic earnings per common share was adjusted to include the effect of potential dilutive common shares outstanding. These potential dilutive shares include unvested restricted stock and performance-based stock units. The more dilutive of the two-class method or the treasury stock method is used for this adjustment. Additionally, Series A Convertible Preferred Stock is included using the if-converted method.
Under the two-class method, net income is reallocated to common stock, the Series A Convertible Preferred Stock, and all dilutive securities based on the contractual participating rights of the respective securities to share in the current earnings as if all of the earnings for the period had been distributed.
| For The Three Months Ended September 30, | For The Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Numerator: | ||||||||||||||||||||||||||
| Net income (loss) | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||
| Less: dividends paid to Series A convertible preferred stockholders | ( | ( | ( | ( | ||||||||||||||||||||||
Undistributed income (loss) | ( | ( | ||||||||||||||||||||||||
| Income allocated to participating preferred shares | ( | ( | ||||||||||||||||||||||||
| Net income (loss) attributable to common stockholders | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||
| Denominator: | ||||||||||||||||||||||||||
| Weighted average basic common shares outstanding | ||||||||||||||||||||||||||
| Dilutive effect of common shares | ||||||||||||||||||||||||||
Weighted average diluted common shares outstanding | ||||||||||||||||||||||||||
| Earnings per share: | ||||||||||||||||||||||||||
| Basic | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||
| Dilutive | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||
For both the three and nine months ended September 30, 2023, 7.3
4.REVENUE
12
Celsius Holdings, Inc.
Notes to Consolidated Financial Statements (unaudited)
September 30, 2023
(Tabular dollars in thousands, except per share amounts)
Promotional (Billback) Allowance
The Company’s billback allowance programs with its distributors or retailers are executed through separate agreements in the ordinary course of business. These agreements generally provide for one or more of the arrangements described below and are of varying durations, typically ranging from one week to one year. The Company’s billbacks are calculated based on various programs with distributors and retail customers, and accruals are established for the Company’s anticipated liabilities. These accruals are based on agreed upon terms as well as the Company’s historical experience with similar programs and require management’s judgment with respect to estimating consumer participation and/or distributor and retail customer performance levels. Differences between such estimated expenses and actual expenses for promotional and other allowance are recognized in earnings in the period such differences are determined.
Billbacks (variable consideration) recorded as a reduction to net sales primarily include consideration given to the Company’s distributors or retail customers including, but not limited to the following:
•discounts granted off list prices to support price promotions to end-consumers by retailers;
•reimbursements given to the Company’s distributors for agreed portions of their promotional spend with retailers, including slotting, shelf space allowances and other fees for both new and existing products;
•the Company’s agreed share of fees given to distributors and/or directly to retailers for advertising, in-store marketing and promotional activities;
•the Company’s agreed share of slotting, shelf space allowances and other fees given directly to retailers, club stores and/or wholesalers;
•incentives given to the Company’s distributors and/or retailers for achieving or exceeding certain predetermined volume goals;
•discounted products;
•contractual fees given to the Company’s distributors related to sales made directly by the Company to certain customers that fall within the distributors’ sales territories; and
•contractual fees given to distributors for items sold below defined pricing targets.
For the three months ended September 30, 2023 and 2022, promotional allowance included as a reduction of revenue were $88.6 million and $43.9 million, respectively. For the nine months ended September 30, 2023 and 2022, promotional allowance included as a reduction of revenue were $240.6 million and $117.2 million, respectively.
Accrued promotional allowances were $136.6 million and $36.0 million as of September 30, 2023 and December 31, 2022, respectively.
Information about the Company’s net sales by geographical location for the three and nine months ended September 30, 2023 and 2022 is as follows:
| For The Three Months Ended September 30, | For The Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| North America | $ | $ | $ | $ | |||||||||||||||||||
| Europe | |||||||||||||||||||||||
| Asia-Pacific | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | |||||||||||||||||||
All of the Company’s North America revenue is derived from the United States, which is the Company’s country of domicile.
Sweden represented the largest foreign portion of total consolidated revenue accounting for approximately $7.4 million and $5.3 million for the three months ended September 30, 2023 and 2022, respectively.
13
Celsius Holdings, Inc.
Notes to Consolidated Financial Statements (unaudited)
September 30, 2023
(Tabular dollars in thousands, except per share amounts)
Sweden represented the largest foreign portion of total consolidated revenue accounting for approximately $20.8 million and $16.2 million for the nine months ended September 30, 2023 and 2022, respectively.
Agreements with Pepsi
The Company executed multiple agreements with Pepsi on August 1, 2022, including a Distribution Agreement relating to the sale and distribution of certain of the Company’s beverage products in existing channels and distribution methods in the United States, excluding certain existing customer accounts, sales channels, Puerto Rico and the U.S. Virgin Islands (the “Territory”). Under the Distribution Agreement, the Company has granted Pepsi the right to sell and distribute its existing beverage products in existing channels and distribution methods and future beverage products that are added from time to time as licensed products under the Distribution Agreement (collectively, the "Products") in defined territories. The Distribution Agreement represents a master service agreement and can be cancelled by either party without cause in the th year of the term (i.e., 2041), the twenty-ninth year of the term (i.e., 2051) and each 10 year period thereafter (i.e., 2061, 2071, etc.) by providing 12 months’ written notice to the other party on August 1st of any such year. Except for a termination by the Company “with cause” or a termination by Pepsi “without cause,” the Company is required to pay Pepsi certain compensation upon a termination as specified in the Distribution Agreement.
The Company agreed to provide Pepsi a right of first offer in the event the Company intends to (i) manufacture, distribute or sell products in certain additional countries as specified in the Distribution Agreement or (ii) distribute or sell products in any future channels and distribution methods during the term of the Distribution Agreement. Additionally, pursuant to the Distribution Agreement, the Company and Pepsi agreed to use commercially reasonable efforts to negotiate and execute with Pepsi a distribution agreement reasonably consistent with the Distribution Agreement for the sale and distribution of the Products in Canada, and Pepsi agreed to meet and confer in good faith with the Company regarding the terms and conditions upon which Pepsi may be willing to sell or distribute the Products, either directly or through local sub-distributors in certain other additional countries. The Distribution Agreement includes other customary provisions, including non-competition covenants in favor of the Company, representations and warranties, indemnification provisions, insurance provisions and confidentiality provisions.
The Company and Pepsi also executed the Transition Agreement, providing for the Company’s transition of certain existing distribution rights in the Territory to Pepsi. Under the terms of the Transition Agreement, Pepsi agreed to pay the Company up to $250 million in multiple tranches to facilitate the Company’s transition of certain distribution rights to Pepsi. Amounts received from Pepsi were contractually restricted to only be used to pay termination fees due to other distributors; any excess cash received over amounts due to other distributors is to be refunded back to Pepsi.
Accounting for the Agreements Executed with Pepsi.
The Company evaluated the Securities Purchase Agreement, Transition Agreement, Distribution Agreement, and other agreements executed with Pepsi on August 1, 2022, as one combined contract because the agreements were executed on the same day, with the same counterparty, in contemplation of one another and contractual terms are defined and referenced across the agreements. These agreements are referred to collectively as the “Pepsi Arrangement”. Management concluded that the Pepsi Arrangement was partially in the scope of ASC 606 and partially in the scope of ASC 505, Equity (“ASC 505") and ASC 480, Distinguishing liabilities from equity ("ASC 480"). The Company first applied the measurement and classification criteria in ASC 505 and ASC 480 with respect to the Company’s issuance of approximately 1.5 million shares of Series A Convertible Preferred Stock, as the substance of the issuance of the Series A Convertible Preferred Stock was determined to be a financing transaction. See Note 14. Mezzanine Equity for more information.
After application of the measurement and classification principles in ASC 505, and ASC 480, the Company accounted for the residual revenue elements of the Pepsi Arrangement under ASC 606. The revenue elements of the Pepsi Arrangement consisted of (i) a $227.8 million upfront payment under the Transition agreement and (ii) a $282.5 million implicit payment made to Pepsi by Celsius, representing the excess fair value over issuance proceeds received for the Series A Convertible Preferred Stock. See Note 13 . Related Party Transactions for more information on the upfront payment and implicit payment related to the excess in fair value over issuance proceeds.
The $282.5 million excess fair value over issuance proceeds of the Series A Convertible Preferred Stock represented an implicit payment made to a customer. The Company concluded that this implicit payment met the definition of an asset and has recorded such implicit payment as a deferred other cost in the consolidated balance sheets, with a portion included as current representing current year amortization in the Company's consolidated balance sheets. The Company will amortize the asset balance as contra-revenues ratably over a -year period consistent with the term of the Distribution Agreement. The Company assesses the deferred other cost asset for impairment at each reporting period.
14
Celsius Holdings, Inc.
Notes to Consolidated Financial Statements (unaudited)
September 30, 2023
(Tabular dollars in thousands, except per share amounts)
For product sales under the Distribution Agreement, the Company recognizes revenues when control of the underlying goods are transferred to Pepsi based on the contractual terms of noncancellable purchase orders issued by Pepsi. The Company’s customary revenue recognition policy as described above is applied with respect to billbacks.
License Agreement
In January 2019, the Company entered into a license and repayment of investment agreement with 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 granted 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 Qifeng 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 this agreement was approximately $0.5 million, for each of the three months ended September 30, 2023 and 2022, and approximately $1.6 million and $1.5 million, for the nine months ended September 30, 2023 and 2022, respectively, which is reflected in revenues from Asia-Pacific.
5.INVENTORIES
Inventories-net consists of the following:
| September 30, 2023 | December 31, 2022 | ||||||||||
| Finished goods | $ | $ | |||||||||
| Raw materials | |||||||||||
| Less: Inventory reserve | ( | ( | |||||||||
| Inventories-net | $ | $ | |||||||||
6.PREPAID EXPENSES AND OTHER CURRENT ASSETS
7.NOTE RECEIVABLE
Note receivable, net consists of the following:
| September 30, 2023 | December 31, 2022 | ||||||||||
| Note receivable-current | $ | $ | |||||||||
Current period change for expected credit losses(1) | ( | — | |||||||||
| Note receivable-non-current | |||||||||||
| Total | $ | $ | |||||||||
(1) Upon adoption of CECL on January 1, 2023, the Company recorded a reserve for estimated expected credit losses associated with the note receivable.
15
Celsius Holdings, Inc.
Notes to Consolidated Financial Statements (unaudited)
September 30, 2023
(Tabular dollars in thousands, except per share amounts)
Effective January 1, 2019, the Company restructured its China distribution efforts by entering into two separate economic agreements as they relate to the commercialization of Celsius products (i.e., the license agreement and repayment of investment agreement with Qifeng). See Note 4. Revenue for information regarding the license agreement with Qifeng. Under a separate economic agreement, Qifeng has agreed to repay the marketing investments made by Celsius into the China market through 2018, over a five-year period. The repayment, which was formalized via a note receivable from Qifeng (the "Note"), will need to be serviced even if the licensing agreement is cancelled or terminated. The Note is denominated in Chinese Yuan.
The Note requires annual principal payments due on March 31 of each year, with the final payment scheduled for 2024. The note receivable is recorded at amortized cost. Interest income generated from the Note has been immaterial.
The Company assesses the note receivable for impairment at each reporting period. This evaluation considers the probability that the Company will collect all scheduled contractual principal and interest payments, based on historical experience of Qifeng’s ability to pay, the current economic environment, forward-looking information, 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 September 30, 2023 and December 31, 2022, the Note was not deemed to be impaired outside of the allowance for expected credit losses. Payment in-full was received for the amounts due on March 31, 2023.
8.LEASES
The Company’s leasing activities include operating leases for its corporate office space from a related party (see Note 13. Related Party Transactions) and other operating and finance leases of vehicles and office space for the Company’s European operations.
The future annual minimum lease payments required under the Company’s operating and finance lease liabilities as of September 30, 2023 are as follows:
| Future minimum lease payments | Operating Leases | Finance Leases | Total | |||||||||||||||||
| 2023 | $ | $ | $ | |||||||||||||||||
| 2024 | ||||||||||||||||||||
| 2025 | ||||||||||||||||||||
| 2026 | ||||||||||||||||||||
| 2027 | ||||||||||||||||||||
| Total future minimum lease payments | ||||||||||||||||||||
| Less: Amount representing interest | ( | ( | ( | |||||||||||||||||
| Present value of lease liabilities | ||||||||||||||||||||
| Less: current portion | ( | ( | ( | |||||||||||||||||
| Long-term portion | $ | $ | $ | |||||||||||||||||
9.PROPERTY AND EQUIPMENT
Property and equipment-net consists of the following:
| Estimated Useful Life in Years | September 30, 2023 | December 31, 2022 | |||||||||||||||
| Merchandising equipment - coolers | $ | $ | |||||||||||||||
| Office equipment | |||||||||||||||||
| Vehicles | |||||||||||||||||
| Less: accumulated depreciation | ( | ( | |||||||||||||||
| Total | $ | $ | |||||||||||||||
16
Celsius Holdings, Inc.
Notes to Consolidated Financial Statements (unaudited)
September 30, 2023
(Tabular dollars in thousands, except per share amounts)
10.GOODWILL AND INTANGIBLES
At September 30, 2023 and December 31, 2022, goodwill consisted of approximately $13.6 million and $13.7 million, respectively.
The carrying amount and accumulated amortization of intangible assets as of September 30, 2023 and December 31, 2022, respectively, were as follows:
| September 30, 2023 | December 31, 2022 | ||||||||||
| Definite-lived intangible assets | |||||||||||
| Customer relationships | $ | $ | |||||||||
| Less: accumulated amortization | ( | ( | |||||||||
| Definite-lived intangible assets, net | $ | $ | |||||||||
| Indefinite-lived intangible assets | |||||||||||
| Brands | $ | $ | |||||||||
| Less: impairment | ( | ||||||||||
| Effect of exchange rate changes | ( | ||||||||||
| Indefinite-lived intangible assets, net | $ | $ | |||||||||
| Intangibles-net | $ | $ | |||||||||
Customer relationships are amortized over an estimated useful life of 25 years and brands have an indefinite life. Amortization expense for each of the three months ended September 30, 2023 and 2022 was approximately $0.1 0.4
The following is the future estimated annualized amortization expense related to customer relationships:
| 2023 | $ | ||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| Thereafter | |||||
| Total | $ | ||||
17
Celsius Holdings, Inc.
Notes to Consolidated Financial Statements (unaudited)
September 30, 2023
(Tabular dollars in thousands, except per share amounts)
11.ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
| September 30, 2023 | December 31, 2022 | ||||||||||
| Accounts payable | $ | $ | |||||||||
Due to Pepsi(1) | |||||||||||
| Accrued freight | |||||||||||
| Accrued expenses | |||||||||||
| Accrued legal | |||||||||||
| Unbilled purchases | |||||||||||
| Total | $ | $ | |||||||||
12.OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
| September 30, 2023 | December 31, 2022 | ||||||||||
| VAT payable | $ | $ | |||||||||
| State Beverage Container Deposit | |||||||||||
| Total | $ | $ | |||||||||
13.RELATED PARTY TRANSACTIONS
Transactions with Pepsi
As further described in Note 14. Mezzanine Equity, on August 1, 2022, the Company issued approximately 1.5 million shares non-voting Series A to Pepsi. The shares accounted for approximately 8.5 % of the Company’s outstanding common stock on the date of issuance, on an as-converted method. The Purchase Agreement granted Pepsi the right to designate a nominee for election to the Company’s nine -member board of directors, provided Pepsi meets certain ownership requirements. During the year ended 2022, a Pepsi executive was nominated by Pepsi and elected to the Company’s board of directors.
Based on Pepsi’s contractual representation rights for a seat on the Company’s Board of Directors, the Company concluded that Pepsi represents a related party to the Company. The following transactions were recognized in the Company’s financial statements:
•Net sales to Pepsi amounted to $248.6 million and $590.0 million, respectively, for the three and nine months ended September 30, 2023 and $58.8
•Estimated accrued promotional allowance related to Pepsi was $82.5 million and $13.9 million at September 30, 2023 and December 31, 2022, respectively, and is included in accrued promotional allowance in the Company's consolidated balance sheets.
•During the three and nine months ended September 30, 2023, the Company purchased company-branded coolers from Grayhawk Leasing, LLC ("Grayhawk"), a wholly-owned subsidiary of Pepsi, amounting to $3.3 million and $7.5 million, respectively. The Company did not transact with Grayhawk during the three and nine months ended September 30, 2022.
•Accounts receivable due from Pepsi on September 30, 2023 and December 31, 2022, were $160.9 million and $31.6 million, respectively, and are included in accounts receivable, net on the Company’s consolidated balance sheets.
18
Celsius Holdings, Inc.
Notes to Consolidated Financial Statements (unaudited)
September 30, 2023
(Tabular dollars in thousands, except per share amounts)
•Pepsi paid the Company $227.8 million in cash under the Transition Agreement during the year ended December 31, 2022. This amount was used for settling termination fees with former distributors; any excess cash was contractually restricted and due back to Pepsi. As of September 30, 2023, the Company recorded deferred revenues (a contract liability) of $178.9 million, net of the $2.4 million and $7.1 million, for the three and nine months ended September 30, 2023, respectively, in the consolidated statements of operations. As of December 31, 2022, the Company recorded deferred revenues of $189.5 million, net of $4.2 million of revenue recognized. The deferred revenues will be recognized by Celsius ratably over the twenty-year agreement term.
•Amounts due to Pepsi of $34.8 million as of December 31, 2022, representing refund liabilities owed to Pepsi under the Transition Agreement, were recorded to accounts payable and accrued expenses on the accompanying consolidated balance sheets. As of September 30, 2023, payments due to Pepsi had been fully refunded, and the Company did not have a refund liability.
•The Company issued Series A Convertible Preferred Stock with a fair value of $832.5 million for an issuance price of $550 million on August 1, 2022. The excess of the fair value over the issuance proceeds, amounting to $282.5 million, has been recorded as deferred other costs in the accompanying consolidated balance sheets. See Note 14. Mezzanine Equity for more information. As of September 30, 2023 unamortized deferred other costs of $14.1 million and $251.9 million, were recorded in deferred other costs-current and deferred other costs-non-current, respectively in the consolidated balance sheets. As of December 31, 2022 unamortized deferred other costs of $14.1 million and $262.5 million were recorded as deferred other costs-current and deferred other costs-non-current, respectively in the consolidated balance sheets. Amortization of deferred other costs for the three and nine months ended September 30, 2023, was $3.5 million and $10.6 million, respectively. This was recorded as an offset to revenue.
See Notes 1. Organization and Description of Business, 2. Basis of Presentation and Summary of Significant Accounting Policies, 4. Revenue, 11. Accounts Payable and Accrued Expenses, and 14. Mezzanine Equity for more information.
Related Party Lease
The Company’s office is leased from a company affiliated with CD Financial, LLC. The lease extends until December 2024 with a monthly rent of $35 thousand.
Additionally, on May 17, 2023, the Company and CD Financial, LLC entered into an amendment to the lease that expanded the leased space, effective on July 1, 2023. The expansion space extends until December 2024 with a monthly rent of $8 thousand.
14.MEZZANINE EQUITY
Series A Convertible Preferred Stock
As of September 30, 2023 and December 31, 2022, the Company had designated and authorized approximately 1.5 0.001 375 550 million, excluding issuance costs. This issuance of the Series A was executed in accordance with the Distribution Agreement and the Transition Agreement. The Company determined that the fair value of the Series A on the issuance date was $832.5 million, or approximately $568 per share. The Series A Convertible Preferred Stock was recorded at fair value, net of issuance costs of $8.0 million, in the Company’s consolidated balance sheets.
Mezzanine Classification
The Series A Convertible Preferred Stock is redeemable in the event of a change in control as defined in the Series A Certificate. According to the SEC's Accounting Series Release No. 268 ("ASR 268"), preferred securities must be classified outside of permanent equity if they are redeemable for cash or other assets. This includes redemption (i) at a fixed or determinable price on a fixed or determinable date, (ii) at the option of the holder, or (iii) due to an event not solely controlled by the issuer.
19
Celsius Holdings, Inc.
Notes to Consolidated Financial Statements (unaudited)
September 30, 2023
(Tabular dollars in thousands, except per share amounts)
The Series A is not considered mandatorily redeemable because its redemption is contingent upon a change in control, an event not solely controlled by the Company. In compliance with ASR 268, the Company classified the Series A as mezzanine equity in the consolidated balance sheets and statements of changes in stockholders' equity for the periods ended September 30, 2023 and December 31, 2022, respectively.
Pursuant to the Purchase Agreement, Pepsi, together with its affiliates, have certain rights and restrictions with respect to their percentage ownership of the Company’s outstanding common shares on an as-converted basis, which includes both open-market purchases and the accumulation of PIK Dividends. Additionally, the Purchase Agreement grants Pepsi the right to designate one nominee for election to the Company’s board of directors, so long as Pepsi (together with its affiliates) beneficially owns at least approximately 3.7 million shares of the Company’s outstanding common stock on an as-converted basis. In August 2022, the Company expanded the number of seats from eight to nine in connection with the election of a Pepsi representative to the Company’s board of directors.
Liquidation Preference
The Series A ranks, with respect to distribution rights and rights on liquidation, winding-up and dissolution, (i) senior and in priority of payment to the Company’s common stock, (ii) on parity with any class or series of capital stock of the Company expressly designated as ranking on parity with the Series A, and (iii) junior to any class or series of capital stock of the Company expressly designated as ranking senior to the Series A. The aggregate liquidation preference of the Series A was $550
Voting
The Series A confers no voting rights, except as otherwise required by applicable law, and with respect to matters that adversely change the powers, preferences, privileges, rights or restrictions given to the Series A or provided for its benefit, or would result in securities that would be senior to or pari passu with the Series A. As described above, Pepsi has a contractual right to representation on the Company’s Board of Directors, subject to certain shareholding thresholds.
Dividends
The Series A entitles the holder to cumulative dividends, which are payable quarterly in arrears either in cash, in-kind, or a combination thereof, at the Company’s election (“Regular Dividends”). Regular Dividends accrue on each share of Series A at the rate of 5.00 % per annum, subject to adjustment as set forth in the Series A Certificate. In addition to such quarterly Regular Dividends, shares of Series A also entitle the holder to participate in any dividends paid on the Company’s common stock on an as-converted basis. The Company declared and paid $6.9 million and $20.5 million in Regular Dividends on the Series A, which amounted to $4.69 and $13.98 per share of Series A for the three and nine months ended September 30, 2023, respectively. There were no cumulative undeclared dividends on the Series A at September 30, 2023. In addition, there were no dividends issued to common shareholders for either the nine months ended September 30, 2023 or 2022.
Redemption
Pursuant to certain conditions set forth in the Series A Certificate, Series A may be redeemed at a price per share of Series A equal to the sum of (i) the stated value of such share of Series A as of the applicable redemption date, plus (ii) without duplication, all accrued and unpaid dividends previously added to the stated value of such share of Series A, and all accrued and unpaid dividends per share of Series A through such redemption date (the “Redemption Price”).
Company’s Optional Redemption
At any time from and after the earlier of (i) August 1, 2029, if the ten-day volume weighted average price of the Company’s common stock (the “Ten-Day VWAP”) does not exceed the conversion price on the date immediately prior to the date the Company delivers a redemption notice to the holders, and (ii) the cancellation of the Distribution Agreement by the Company, the Company has the right to redeem all (and not less than all) of the then-outstanding shares of Series A at the Redemption Price. In the event of the Company's optional redemption, the Company shall affect such redemption by paying the entire Redemption Price on or before the date that is thirty days after the delivery of the Company’s redemption notice and by redeeming all the shares of Series A on such date.
20
Celsius Holdings, Inc.
Notes to Consolidated Financial Statements (unaudited)
September 30, 2023
(Tabular dollars in thousands, except per share amounts)
Change in Control Redemption
In the event of a change in control, as defined by the following scenarios, the Company (or its successor) shall redeem all (and not less than all) of the then-issued and outstanding shares of Series A: (i) a sale or transfer, directly or indirectly, of all or substantially all of the assets of the Company in any transaction or series of related transactions (other than sales in the ordinary course of business); (ii) any merger, consolidation or reorganization of the Company with or into any other entity or entities as a result of which the holders of the Company’s outstanding capital stock (on a fully-diluted basis) immediately prior to the merger, consolidation or reorganization no longer represent at least a majority of the voting power of the surviving or resulting Company or other entity; or (iii) any sale or series of sales, directly or indirectly, beneficially or of record, of shares of the Company’s capital stock by the holders thereof which results in any person or group of affiliated persons owning capital stock holding more than 50 % of the Company's voting power.
Upon a change in control and redemption, each Series A holder will receive, an amount equal to the greater of (A) the Redemption Price in cash, and (B) the cash and/or other assets (including securities) such holder would have received if each share of Series A were converted into a number of shares of common stock equal to the then-applicable conversion ratio and participated in such transaction resulting in such change of control as of the close of business on the business day immediately prior to the effective date of such transaction.
If the Company or its successor shall not have sufficient funds legally available under the Nevada law governing distributions to stockholders to redeem all outstanding shares of Series A, then the Company shall (A) redeem, pro rata among the holders, a number of shares of Series A equal to the number of shares of Series A that can be redeemed with the maximum amount legally available for the redemption, and (B) redeem all remaining shares of Series A not redeemed because of the foregoing limitations at the applicable change of control redemption price as soon as practicable after the Company (or its successor) is able to make such redemption out of assets legally available for the purchase of such shares of Series A. The inability of the Company (or its successor) to make a redemption payment for any reason shall not relieve the Company (or its successor) from its obligation to affect any required redemption when, as and if permitted by applicable law.
Holder Right to Request Redemption
On each of August 1, 2029, August 1, 2032, and August 1, 2035, the majority holders of the Series A have the right, upon no less than six months prior written notice to the Company, to request that the Company redeem all (and not less than all) of the then-outstanding shares of Series A, at the Redemption Price.
In the event of a holder-optional redemption, the Redemption Price will be payable, and the Company shall redeem the shares in three equal installments. These installments would commence on August 1, 2029, August 1, 2032, or August 1, 2035, as applicable, and in each case on the fifteenth- and thirtieth-month anniversary thereafter. On each redemption date for a holder-optional redemption, the Company will redeem shares of Series A on a pro rata basis according to the number of shares owned by each holder. The number of outstanding shares will be determined by dividing (i) the total number of Series A shares outstanding immediately prior to such redemption date by (ii) the number of remaining redemption dates (including the redemption date to which such calculation applies).
If, on any redemption date, legal constraints under the Nevada law governing distributions to stockholders or the terms of any indebtedness of the Company to financial institutions prevents the Company from redeeming all shares of Series A, the Company will ratably redeem the maximum number of shares that it may legally redeem, and will redeem the remaining shares as soon as it may lawfully do so.
Should any shares of Series A scheduled for redemption on a redemption date remain unredeemed for any reason on such redemption date, the following will occur: from the redemption date to the fifteen-month anniversary of such redemption date, the dividend rate with respect to such unredeemed share will automatically increase to 8 % per annum. From such fifteenth-month anniversary to the thirtieth-month anniversary of such redemption date, the dividend rate with respect to such unredeemed share will automatically increase to 10 % per annum. After such thirtieth-month anniversary of such redemption date, the dividend rate with respect to any such unredeemed share will automatically increase to 12 % per annum, in each case until such share is duly redeemed or converted.
Conversion
The shares of Series A may be converted into shares of the Company’s common stock pursuant to the Series A Certificate either at the option of the Company or subject to an automatic conversion as discussed below. The Series A was issued with a conversion price of $75 which is potentially subject to adjustment pursuant to the Series A Certificate. The conversion ratio is
21
Celsius Holdings, Inc.
Notes to Consolidated Financial Statements (unaudited)
September 30, 2023
(Tabular dollars in thousands, except per share amounts)
calculated as the quotient of (a) the sum of (x) the stated value of such share of Series A as of the applicable conversion date, plus (y) all accrued and unpaid dividends previously added to the stated value of such share of Series A, and without duplication, all accrued and unpaid dividends per share of Series A through the applicable conversion date; divided by (b) the conversion price as of the conversion date. As of September 30, 2023, the conversion ratio of the Series A into common was 1 to 5 . At September 30, 2023, approximately 7.3 million shares of the Company’s common stock are issuable upon conversion of the Series A Convertible Preferred Stock.
As of September 30, 2023, the Series A was not probable of becoming redeemable, as the most likely method of settlement is through conversion which is likely to occur before the holder's right to request redemption becomes exercisable.
Company Optional Conversion
At any time from and after August 1, 2029, provided the Ten-Day VWAP immediately prior to the date the Company delivers a conversion notice to the holders of Series A exceeds the Conversion Price, the Company may elect to convert all, but not less than all, of the outstanding shares of Series A into shares of the Company’s common stock.
Automatic Conversion
The Series A will convert automatically into shares of the Company’s common stock upon the occurrence of any of the following, each an “Automatic Conversion Event”:
•Any date from and after the valid termination of the Distribution Agreement by the Company or Pepsi, if the Ten-Day VWAP immediately preceding such date exceeds the Conversion Price of such share as of such date.
•Any date from and after August 1, 2028, on which (x) the Company’s products meet a market share requirement during a specified period (as defined in the Distribution Agreement) and (y) the Ten-Day VWAP immediately prior to such date exceeds the conversion price of such share as of such date. In the case of an Automatic Conversion Event, each share of Series A then outstanding shall be converted into the number of shares of common stock equal to the conversion ratio of such share in effect as of the automatic conversion date. The occurrence of an Automatic Conversion Event will terminate any right of the holder to receive a redemption at their request even if such request has already been submitted, provided that the Series A shares have not already been redeemed.
Other Accounting Matters
The Company has adopted Accounting Standards Update 2020-06 (“ASU 2020-06”), effective January 1, 2022. The provisions of ASU 2020-06 prohibit the recognition of a beneficial conversion feature on preferred shares issued after the adoption of the ASU. The Company adopted ASU 2020-06 for the Series A for the year ended December 31, 2022.
FASB ASC 815 generally requires an analysis of embedded terms and features that have characteristics of derivatives to be evaluated for bifurcation and separate accounting in instances where their economic risks and characteristics are not clearly and closely related to the risks of the host contract. The Company performed an evaluation and determined the Series A and the host instrument is more akin to equity. The Company identified certain embedded redemption and conversion features which it evaluated for bifurcation and determined no bifurcation of these embedded or conversion features was required.
15.STOCKHOLDERS’ EQUITY
Issuance of common stock pursuant to exercise of stock options and other awards
During the nine months ended September 30, 2023, the Company issued an aggregate of 0.8 million shares of its common stock under the 2015 Plan. The Company received aggregate proceeds of approximately $1.6 million for 0.5 million options exercised for cash, with the remaining balance of the options having been exercised on a “cashless” basis.
During the nine months ended September 30, 2022, the Company issued an aggregate of 1.3 million shares of its common stock under the 2015 Plan. The Company received aggregate proceeds of approximately $3.1 million for 0.9 million options exercised for cash, with the remaining balance of the options having been exercised on a “cashless” basis.
22
Celsius Holdings, Inc.
Notes to Consolidated Financial Statements (unaudited)
September 30, 2023
(Tabular dollars in thousands, except per share amounts)
16.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. | ||||
The Company engaged a third-party valuation firm to assist in determining the fair value of the approximately 1.5 million shares of Series A Convertible Preferred Stock issued on August 1, 2022. The Series A Convertible Preferred Stock is classified in mezzanine equity, see Note 14. Mezzanine Equity for more information. The valuation of the Series A Convertible Preferred Stock represents a non-recurring fair value measurement. The Company used a Monte Carlo simulation model to determine the fair value of the Series A Convertible Preferred Stock on August 1, 2022. The Monte Carlo simulation utilized multiple level 2 input variables to determine the value of the Series A Convertible Preferred Stock including a volatility rate of 45 %, risk free interest rate of 2.69 %, 5.0 % dividend rate, the closing price of the Company’s common stock on the issuance date of $98.87 , a debt discount rate of 12.5 % and a discount for lack of marketability attributed to the registration period of the underlying stock. The selected historical volatility was based on Celsius and a certain peer group. The risk-free interest rate was based on the U.S. STRIPS Rate with a corresponding term as of issuance date. The 5.0 % dividend rate is consistent with the provisions of the Series A Convertible Preferred Stock and with the Company’s past payments or such dividends made in cash. The debt discount rate was based on estimated credit analysis and corresponding market yields as of the issuance date. The Company applied a nominal discount for lack of marketability with respect to the assumed registration period of the underlying shares.
17.INCOME TAXES
In general, the Company uses an estimated annual effective tax rate, which is based on expected annual income and statutory tax rates in the various jurisdictions in which the Company operates, to determine its quarterly provision for income taxes. Certain significant or unusual items are separately recognized in the quarter in which they occur and can be a source of variability on the effective tax rates from quarter to quarter. The Company’s effective tax rate may change from period to period based on recurring and non-recurring factors including the geographical mix of earnings, enacted tax legislation, and state and local income taxes.
The effective income tax rate for the three months ended September 30, 2023 was 19.9 % and differed from the statutory federal income tax rate of 21.0% primarily due to net benefits on stock-based compensation awards, disallowed stock-based compensation expense and state income taxes.
The effective income tax rate for the nine months ended September 30, 2023 was 21.1 % and differed from the statutory federal income tax rate of 21.0% primarily due to windfall benefits on stock-based compensation awards, disallowed stock-based compensation expense and state income taxes.
The effective income tax rate for the three and nine months ended September 30, 2022, was (24.2 %) and (33.5 %), respectively. Both rates differed from the statutory federal income tax rate of 21.0% primarily due to the tax impact of the $282.5 million Series A Convertible Preferred Stock fair value adjustment. This adjustment is recorded as Deferred Other Costs in the consolidated balance sheets and will be amortized over twenty years for book purposes. As this expense is non-deductible for tax purposes, the Company recorded a $71.4 million deferred tax liability in the third quarter of 2022 as a discrete item of deferred tax expense. Additional factors impacting the effective income tax rates included disallowed stock-based compensation expense and state and local income taxes. For the nine-month period, the rate was further affected by the release of certain state income tax reserves. The Company is subject to U.S. federal income tax as well as income tax in multiple state and foreign jurisdictions.
The Company’s tax returns for tax years 2020 through 2022 remain subject to potential examination by the taxing authorities.
23
Celsius Holdings, Inc.
Notes to Consolidated Financial Statements (unaudited)
September 30, 2023
(Tabular dollars in thousands, except per share amounts)
18.STOCK-BASED COMPENSATION
The Company adopted the 2006 Incentive Stock Plan on January 18, 2007. This plan was intended to provide incentives to 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 terminated 10 years after the adoption date, certain awards issued under such plan have not yet been terminated. The Company is no longer granting awards under this plan and there are no unvested awards as of September 30, 2023.
The Company adopted the 2015 Plan on April 30, 2015. The 2015 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 million shares. In addition, there is a provision in the 2015 Plan for an annual increase to the maximum number of shares authorized under the 2015 Plan. The increase shall be added on the first day of the calendar year beginning January 1, 2016, equal to 15 % of the number of shares outstanding as of such date. As of September 30, 2023, approximately 5.9 million shares were available for issuance under the 2015 Plan. See Note 15 Stockholders' Equity for more information.
For the three months ended September 30, 2023 and 2022, the Company recognized stock-based compensation expense of approximately $5.0 million and $6.3 million, respectively. For the nine months ended September 30, 2023 and 2022, the Company recognized stock-based compensation expense of approximately $16.2 million and $14.8 million, respectively. Stock-based compensation expense is included in selling, general and administrative expense.
Stock Options
The Company used straight-line amortization of compensation expense over the 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 were options to purchase approximately 1.6 million and 1.9 million shares that have vested as of September 30, 2023 and December 31, 2022, respectively. No
The Company uses the Black-Scholes option-pricing model to estimate the fair value of its stock option awards and warrant issuances and recognizes forfeitures as they occur.
| Weighted Average | Aggregate Intrinsic Value (000’s) | Weighted Average Remaining Term (Yrs) | |||||||||||||||||||||||||||
| Shares (000’s) | Exercise Price | Grant Date Fair Value | |||||||||||||||||||||||||||
| At December 31, 2022 | $ | $ | |||||||||||||||||||||||||||
| Exercised | ( | ||||||||||||||||||||||||||||
| Forfeiture and cancelled | ( | ||||||||||||||||||||||||||||
| At September 30, 2023 | $ | $ | |||||||||||||||||||||||||||
| Exercisable at September 30, 2023 | $ | $ | |||||||||||||||||||||||||||
24
Celsius Holdings, Inc.
Notes to Consolidated Financial Statements (unaudited)
September 30, 2023
(Tabular dollars in thousands, except per share amounts)
The following table summarizes information about employee stock options outstanding at September 30, 2023:
| Outstanding Options | Vested Options | |||||||||||||||||||||||||||||||||||||
| Range of Exercise Price | Number Outstanding at September 30, 2023 (000's) | Weighted Average Remaining Life | Weighted Average Exercise Price | Number Exercisable at September 30, 2023 (000's) | Weighted Average Exercise Price | Weighted Average Remaining Life | ||||||||||||||||||||||||||||||||
$ | $ | $ | ||||||||||||||||||||||||||||||||||||
$ | ||||||||||||||||||||||||||||||||||||||
$ | ||||||||||||||||||||||||||||||||||||||
$ | ||||||||||||||||||||||||||||||||||||||
$ | ||||||||||||||||||||||||||||||||||||||
$ | ||||||||||||||||||||||||||||||||||||||
| Outstanding options | $ | $ | ||||||||||||||||||||||||||||||||||||
As of September 30, 2023, the Company had approximately $0.8 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 0.3 years.
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 Company determines the fair value of restricted stock-based awards based on the market price of the common stock on the date of grant. The holders of unvested units do not have the same rights as stockholders and do not have the right to receive any dividends or right to vote. The value of restricted stock units that vest over time is established by the market price or the date of its grant. A summary of the Company’s restricted stock unit activity for the nine months ended September 30, 2023 and 2022 is presented in the following table:
| Nine Months Ended | |||||||||||||||||||||||
| September 30, 2023 | September 30, 2022 | ||||||||||||||||||||||
| Shares (000's) | Weighted Average Grant Date Fair Value | Shares (000's) | Weighted Average Grant Date Fair Value | ||||||||||||||||||||
| Unvested at beginning of period | $ | $ | |||||||||||||||||||||
| Granted | |||||||||||||||||||||||
| Vested | ( | ( | |||||||||||||||||||||
| Forfeited and cancelled | ( | ( | |||||||||||||||||||||
| Unvested at end of period | $ | $ | |||||||||||||||||||||
The total fair value of shares vested during the nine months ended September 30, 2023 and 2022 was approximately $22.1 million and $9.7 million, respectively. Unrecognized compensation expense related to outstanding restricted stock units to employees and directors as of September 30, 2023 and 2022 was $20.0 million and $29.3 million, respectively, and is expected to be expensed over the next 1.9 years.
25
Celsius Holdings, Inc.
Notes to Consolidated Financial Statements (unaudited)
September 30, 2023
(Tabular dollars in thousands, except per share amounts)
Performance-based Stock Awards
The Company issued 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. Some of 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 ) and some of the awards are linked to employees of the Company and have specific performance-based metrics to be met in year one and year two of the issuance. 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.
In the third quarter of 2022, the Human Resources and Compensation Committee of the Board of Directors approved the issuance of PSUs to certain employees. The aggregate grant date fair value of $7.5 million included an immediate vesting of 20 % of the shares as well as specific performance-based metrics to be met in year one and year two of the issuance. The Company believes the performance-based metrics are probable of being achieved and will recognize expense for each tranche of the awards separately using the accelerated attribution method according to ASC 718.
A summary of the Company’s PSU activity for the nine months ended September 30, 2023 and 2022 is presented in the following table:
| Nine Months Ended | |||||||||||||||||||||||
| September 30, 2023 | September 30, 2022 | ||||||||||||||||||||||
| Shares (000's) | Weighted Average Grant Date Fair Value | Shares (000's) | Weighted Average Grant Date Fair Value | ||||||||||||||||||||
| Unvested at beginning of period | $ | $ | |||||||||||||||||||||
| Granted | |||||||||||||||||||||||
| Vested | ( | ( | |||||||||||||||||||||
| Forfeited and cancelled | ( | ||||||||||||||||||||||
| Unvested at end of period | $ | $ | |||||||||||||||||||||
19.COMMITMENTS AND CONTINGENCIES
Legal
On January 8, 2021, the Company 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 had occurred. The Company has subsequently received subpoenas for the production of documents in connection with this matter. The investigation and requests from the SEC do not represent that the SEC has concluded that the Company or anyone else has violated the federal securities laws. The Company has cooperated and will continue to cooperate with the SEC staff in its investigation and requests. At this time, however, the Company cannot predict the length, scope, or results of the investigation or the impact, if any, of the investigation on the Company's results of operations.
On March 16, 2022, a putative securities class action lawsuit was filed against the Company and certain officers in the U.S. District Court for the Southern District of Florida, styled City of Atlanta Police Officers’ Pension Plan and City of Atlanta Firefighters’ Pension Plan v. Celsius Holdings, Inc., et al. On July 8, 2022, the lead plaintiffs filed an amended complaint alleging violations of the Securities Exchange Act of 1934. The allegations pertain to purported false and misleading statements or omissions made between August 12, 2021, and March 1, 2022, which allegedly affected the Company’s stock prices.
26
Celsius Holdings, Inc.
Notes to Consolidated Financial Statements (unaudited)
September 30, 2023
(Tabular dollars in thousands, except per share amounts)
In response, the Company and the individual defendants filed a motion to dismiss on August 5, 2022, which was partially granted by the Court on March 22, 2023. To mitigate litigation uncertainties, the Company agreed in principle to a nationwide class settlement on July 17, 2023, entailing a one-time cash payment of $7.9 million for a release of all claims related to allegations in the amended complaint, subject to final documentation, judicial endorsement, and other conditions. The $7.9 million was paid on September 7, 2023, and is included in selling, general and administrative expenses for the three and nine months ended September 30, 2023. The final fairness hearing is set for January 31, 2024.
On January 11, 2023, a stockholder derivative complaint (the “Lampert Complaint”) was filed against certain Company directors, a former officer, and nominally against the Company, in the U.S. District Court of the District of Nevada. The complaint alleges (i) breach of fiduciary duty, (ii) unjust enrichment, and (iii) violations of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder. On April 14, 2023, the Court approved a joint stipulation regarding Stay of Litigation, postponing the defendants' time to respond. Plaintiff Lampert asserts that the same allegations giving rise to the City of Atlanta putative class action lawsuit discussed in the preceding paragraphs also supported claims for breach of fiduciary duty against the directors and former officer, among other claims.
Subsequent similar complaints were filed: the “Hammond Complaint” on May 19, 2023, in the U.S. District Court for the Southern District of Florida; the “Ingrao Complaint” on July 10, 2023, in the Clark County District Court for the State of Nevada; and the “Hepworth Complaint” on July 12, 2023, in the U.S. District Court for the Southern District of Florida. All these complaints make substantially similar allegations to the Lampert Complaint. For each of these complaints, the Court has entered an Order granting, in part, a stay of litigation, postponing the defendants’ time to respond. The foregoing stays are pending resolution of the City of Atlanta putative class action claim described above; however, the court overseeing the Hepworth Complaint and the Hammond complaints has required the parties to file a joint status report no later than December 29, 2023.
On May 4, 2021, Plaintiffs Strong Arm Productions USA, Inc., Tramar Dillard p/k/a Flo Rida, and D3M Licensing Group, LLC filed a lawsuit against the Company in the Circuit Court of the 17th Judicial Circuit in and for Broward County, Florida. Plaintiffs asserted that the Company breached two endorsement and licensing agreements that were entered into, between Plaintiffs and the Company in 2014 and 2016. Plaintiffs alleged the Company had reached certain revenue and sales benchmarks set forth in the 2014 agreement that entitled them to receive 750,000 shares of the Company's common stock. In addition, Plaintiffs claimed they were entitled to receive unspecified royalties under the 2016 agreement.
A jury trial commenced on this matter on January 10, 2023. On January 18, 2023, the jury rendered a verdict against the Company for $82.6 million in compensatory damages. On April 27, 2023, the court denied the Company’s post-trial motions which sought (i) dismissal of the case notwithstanding the verdict based on the plain language of the contracts at issue; (ii) in the alternative, granting a new trial; or (iii) in the alternative, reducing the award of damages to $2.1 million, which reflects the Company’s stock price on the date that the jury found the relevant revenue and sales benchmarks at issue were met. The judgment will accrue post-judgement interest at 5.52 % per year commencing February 13, 2023.
The Company believes that the jury verdict is not supported by the facts of the case or applicable law, is the result of significant trial error, and there are strong grounds for appeal. The Company filed a notice of appeal to the Fourth District Court of Appeal for the State of Florida on February 21, 2023, which is currently proceeding. The Company intends to vigorously challenge the judgment through the appeal processes, and filed its initial brief on October 6, 2023.
The Company currently believes that the likelihood that the full amount of the judgment will be affirmed is not probable. The Company has taken into consideration the events that have occurred after the reporting period and before the financial statements were issued. The Company currently estimates a range of possible outcomes between $2.1 million and $82.6 million plus interest, and the Company has accrued a liability as of September 30, 2023 and December 31, 2022, reflected in accounts payable and accrued expenses in the consolidated balance sheets, at the low end of that range. The ultimate amount of the original judgement that the Company may be required to pay could be materially different than the amount the Company has accrued. The Company cannot predict or estimate the duration or ultimate outcome of this matter.
In the ordinary course of business, the Company is from time to time party to various disputes, litigation claims and legal proceedings, including without limitation, those concerning employment matters, intellectual property, false advertising, product liability and breach of contract. The Company vigorously defends all matters in which the Company or its subsidiaries are named, and the Company maintains insurance intended to protect it against adverse judgments, settlements and assessments; however, the Company cannot predict with certainty the adequacy of existing insurance coverage or the outcome of any particular claim. Based on currently available information, the Company does not believe that the ultimate outcome associated with any known ordinary course claims or litigation will have a material adverse effect on the Company's financial condition or results of operations.
27
Celsius Holdings, Inc.
Notes to Consolidated Financial Statements (unaudited)
September 30, 2023
(Tabular dollars in thousands, except per share amounts)
Commitments
The Company has entered into distribution agreements that provide for the payment of liquidated damages in the event that the Company terminates the distribution agreements without cause. Cause has been defined in various ways. If management makes the decision to terminate an agreement without cause, an estimate of expected damages is accrued, and an expense is recorded within selling, general and administrative expenses for the period in which termination was initiated.
As of September 30, 2023 and December 31, 2022, the Company had purchase commitments to third parties of $98.1 million and $30.7 million, respectively. The Company's guarantees are primarily related to third party suppliers and have arisen through the normal course of business. The purchase commitments may have various terms, and none are individually significant.
The Company had long term contractual obligations aggregating to approximately $20.8 million at September 30, 2023, which related primarily to sponsorships and other marketing activities.
20.SUBSEQUENT EVENTS
On November 2, 2023, the Company announced that its Board of Directors unanimously approved a three -for-one forward stock split of the Company’s issued and outstanding shares of common stock (the “Forward Stock Split”). The Forward Stock Split will become effective at 11:59 p.m. Eastern Time on November 13, 2023 (the “Effective Time”). At the Effective Time, each shareholder of record will receive two additional newly issued shares of common stock for each share of common stock of the Company held at such time. The par value of each share of common stock will remain unchanged. The common stock is expected to begin trading on a split-adjusted basis at market open of Nasdaq on November 15, 2023. The Company's common stock will continue trading on the Nasdaq Capital Market under the same symbol “CELH” and the CUSIP number will remain unchanged. No adjustments have been made to the historical financial statements, as the forward split has not been completed.
Concurrently with the effectiveness of the Certificate of Change, the number of authorized shares of common stock will increase from 100,000,000 to 300,000,000 , which is proportional to the ratio of the Forward Stock Split. Neither the Certificate of Change nor the Forward Stock Split affects any stockholder’s ownership percentage of the common stock, alters the par value of the common stock or modifies any voting rights or other terms of the common stock.
This Forward Stock Split will trigger adjustments to the share-based ratios across various clauses outlined in the Purchase Agreement related to the Company's issuance of Preferred Shares, including those outlined in Note 1. Organization and Description of Business and Note 14. Mezzanine Equity.
The Company evaluates subsequent events and transactions that occur after the balance sheet date up to the date the consolidated financial statements are issued. Except for the matters discussed in this section and those discussed in Note 19. Commitments and Contingencies, there were no other subsequent events that would have required adjustment or disclosure in the consolidated financial statements.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
When used in this report, unless otherwise indicated, the terms “the Company,” “Celsius,” “we,” “us,” and “our” refer to Celsius Holdings, Inc. and its subsidiaries.
Note Regarding Forward-Looking Statements
This report contains forward-looking statements that reflect our current views about future events. We use the words “anticipate,” “assume,” “believe,” “estimate,” “expect,” “will,” “intend,” “may,” “plan,” “project,” “should,” “could,” “seek,” “designed,” “potential,” “forecast,” “target,” “objective,” “goal,” or the negatives of such terms or other similar expressions. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.
Our forward-looking statements may include, but are not limited to, statements about:
•our expectations relating to expansion into additional geographic markets and product lines;
•our expectations relating to revenue, operating costs and profitability;
•our expectations regarding our strategy and investments;
•our expectations regarding our business, including market opportunity, consumer demand and our competitive advantage;
•our expectations regarding supply chains and distribution networks;
•the impact of future and existing food and drug laws and regulations on our business;
•our expectations regarding cost and availability of materials and ingredients;
•our expectations regarding our future growth prospects and our ability manage our growth and hire capable personnel to support our growth;
•expected competition from the functional energy drink and supplement industries and other sources;
•our expectations relating to marketing and advertising expense;
•the timing of our receipt and recognition of revenues and other payments;
•our expectations about our trademarks and trade secrets;
•general economic and business conditions in particular industries, markets or geographic regions, as well the potential for a significant economic slowdown, stagflation or economic recession;
•political unrest and military actions in foreign countries, particularly the armed conflict in Ukraine, as well as the impact on world markets and energy supplies resulting therefrom;
•our critical accounting policies and related estimates or changes in accounting practices;
•our liquidity and capital needs;
•political, legislative, regulatory and legal challenges;
•the merits or potential impact of any lawsuits filed against us or disputes we may be party to;
•our recently announced Forward Stock Split; and
•other statements regarding our future operations, financial condition, prospects and business strategies.
These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including but not limited to: our ability to successfully make and integrate acquisitions; the impact on our operations from public health crises; and the performance, reliability and availability of our e-commerce platform and underlying network infrastructure.
Business Overview
Celsius is a fast-growing company in the functional energy drink and liquid supplement categories in the United States and internationally. We engage in the development, processing, marketing, sale, and distribution of functional drinks and liquid supplements to a broad range of consumers. We believe that we provide differentiated products that offer clinically proven and innovative formulas meant to change the lives of our consumers for the better. We also believe that our brand is attractive to a broad range of customers including fitness enthusiasts.
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Our flagship asset, Celsius, is a fitness supplement drink which, with exercise, accelerates metabolism and burns calories and body fat while providing energy. This product line comes in two versions, a ready-to-drink supplement format and an on-the-go powder form. Our products are currently offered in major retail channels in the US including conventional grocery, natural, convenience, fitness, mass market, vitamin specialty and e-commerce.
An integral part of our value proposition is our focus on the functional energy drink and liquid supplement category, ensuring our products have clear and proven benefits. This is why we invest in research and development from the start and utilize our proprietary MetaPlus formulation in our portfolio, a blend of ginger root, guarana seed extract, chromium, vitamins, and green tea extract.
Results of Operations
Three months ended September 30, 2023 compared to three months ended September 30, 2022
Revenue
For the three months ended September 30, 2023, revenue was approximately $384.8 million, an increase of $196.6 million or 104% from $188.2 million for the three months ended September 30, 2022. The total increase in revenue was largely driven by continued gains in distribution points and Club Channel growth. This growth was the result of increased revenues from North America, where third quarter 2023 revenues were $371.2 million, an increase of $191.6 million or 107% from the same period in 2022. North America was driven by increases in total distribution points, and higher SKUs per location.
European revenues for the three months ended September 30, 2023 were $11.0 million, which increased by $3.5 million or 46% from the same period in 2022. Asia-Pacific revenues (which primarily consist of royalty revenues from our China licensee) contributed an additional $1.2 million, an increase of $0.3 million or 29% for the same period in 2022. Other international markets generated approximately $1.3 million in revenues during the three months ended September 30, 2023, an increase from $0.2 million for the same period in 2022. International revenues increased in large part by successful innovation launches, increased velocity, and increased brand awareness.
The following table sets forth the amount of revenues by geographical location for the three months ended September 30, 2023 and 2022:
| For The Three Months Ended September 30, | ||||||||||||||
| Revenue Source | 2023 | 2022 | ||||||||||||
| Total revenue | $ | 384,757 | $ | 188,233 | ||||||||||
| North America revenue | $ | 371,178 | $ | 179,541 | ||||||||||
| Europe revenue | $ | 11,038 | $ | 7,546 | ||||||||||
| Asia-Pacific revenue | $ | 1,247 | $ | 964 | ||||||||||
| Other revenue | $ | 1,294 | $ | 182 | ||||||||||
Gross Profit
For the three months ended September 30, 2023, gross profit increased by approximately $115.4 million or 147% to $194.1 million, from approximately $78.7 million for the three months ended September 30, 2022. Gross profit margins reflected an increase to 50% for the three months ended September 30, 2023 from 42% for the same period in 2022. Gross profit improvements are attributed to continued savings in packaging and raw material cost, decreased product waste/scrap, improved freight lane efficiency, and benefits from improved leverage across promotional allowances.
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Selling, General and Administrative Expenses
For the quarter ended September 30, 2023, Selling, General and Administrative (SG&A) expenses totaled $96.4 million, down 57% or $129.8 million from $226.2 million in the same quarter of 2022. The breakdown of changes within SG&A is comprised of a $149.5 million decrease primarily due to termination fees paid to distributors in 2022, offset by increases to depreciation and amortization, research and development, use and excise taxes, and other selling expenses. The remaining changes include a $21.2 million increase in marketing investments, a $2.2 million increase in storage and distribution costs due to growing organic sales volume, a $3.9 million increase in employee costs reflecting our ongoing investments to support growth, and a $6.3 million, or approximately 56%, decrease in administrative expenses to $11.3 million mainly due to a litigation settlement in the amount of $7.8 million. Stock-based compensation decreased by $1.3 million to $5.0 million, a change driven by forfeited awards. However, this was offset in part by new awards issued to our expanding workforce, which aligns with our strategy to encourage employee ownership and promote exceptional performance, contributing to our continued business success based on key performance attributes.
Other Income
Total other income for the three months ended September 30, 2023 and 2022 is mainly related to interest income on cash and cash equivalents and foreign currency exchange loss.
Net Income (Loss) Attributable to Common Stockholders
Net income attributable to common stockholders for the three months ended September 30, 2023 was $70.5 million, or $0.92 per share based on a weighted average of approximately 77.0 million shares outstanding. In comparison, for the three months ended September 30, 2022, the Company had a net loss attributable to common stockholders of approximately $(186.5) million, or $(2.46) per share based on a weighted average of 75.8 million shares outstanding. Diluted earnings (loss) per share was $0.89 and $(2.46), respectively, for the three months ended September 30, 2023 and 2022.
Nine months ended September 30, 2023 compared to nine months ended September 30, 2022
Revenue
For the nine months ended September 30, 2023, revenue was approximately $970.6 million, an increase of $495.0 million or 104% from $475.6 million for the nine months ended September 30, 2022. The total increase in revenue was largely driven by continued gains in distribution points and Club Channel growth. This growth was the result of increased revenues from North America, where 2023 revenues were $930.5 million, an increase of $482.4 million or 108% from the same period in 2022. North America revenue was driven by continued gains in distribution points and SKUs per location.
European revenues for the nine months ended September 30, 2023 were $31.6 million, which increased by $8.1 million or 34% from the same period in 2022. Asia-Pacific revenues (which primarily consist of royalty revenues from our China licensee) contributed an additional $4.1 million, an increase of $1.3 million or 44% for the same period in 2022. Other international markets generated approximately $4.3 million in revenues during the nine months ended September 30, 2023, an increase from $1.1 million for the same period in 2022.
The following table sets forth the amount of revenues by geographical location for the nine months ended September 30, 2023 and 2022:
| For The Nine Months Ended September 30, | ||||||||||||||
| Revenue Source | 2023 | 2022 | ||||||||||||
| Total revenue | $ | 970,579 | $ | 475,640 | ||||||||||
| North America revenue | 930,545 | 448,141 | ||||||||||||
| Europe revenue | 31,599 | 23,540 | ||||||||||||
| Asia-Pacific revenue | 4,111 | 2,857 | ||||||||||||
| Other revenue | 4,324 | 1,102 | ||||||||||||
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Gross Profit
For the nine months ended September 30, 2023, gross profit increased by approximately $275.0 million or 143% to $466.9 million, from approximately $191.9 million for the nine months ended September 30, 2022. Gross profit margins reflected an increase to 48% for the nine months ended September 30, 2023 from 40% for the same period in 2022. Gross profit improvements are attributed to lower packaging and raw material unit cost, decreased product waste/scrap, and improved freight lane efficiency.
Selling, General and Administrative Expenses
For the nine months ended September 30, 2023, SG&A expenses totaled $259.5 million, down from $316.9 million in the same period of 2022, a decrease of $57.4 million. The breakdown of changes within SG&A is comprised of a $141.6 million decrease primarily due to termination fees paid to distributors in 2022, offset by increases to depreciation and amortization, research and development, use and excise taxes, storage and distribution, and other selling expenses. The remaining expenses include a $59.3 million increase in marketing investments, a $9.3 million increase in employee costs reflecting our ongoing investments to support growth, and a $14.1 million, or approximately 33%, increase in administrative expenses to $43.2 million mainly due to higher audit, consulting, insurance, and office rent costs. Stock-based compensation increased by$1.4 million to $16.2 million, driven by new awards to our expanding workforce, in line with our strategy to encourage employee ownership and promote exceptional performance, contributing to our continued business success based on key performance attributes.
Other Income
Total other income for the nine months ended September 30, 2023 and 2022 is mainly related to interest income on cash and cash equivalents and foreign currency exchange loss.
Net Income (Loss) Attributable to Common Stockholders
Net income attributable to common stockholders for the nine months ended September 30, 2023 was $142.9 million or $1.86 per share based on a weighted average of approximately 76.8 million shares outstanding. In comparison, for the nine months ended September 30, 2022, the Company had a net loss attributable to common stockholders of approximately $(170.7) million or $(2.26) per share, based on a weighted average of 75.6 million shares outstanding. Diluted earnings (loss) per share was $1.81 and $(2.26), respectively, for the nine months ended September 30, 2023 and 2022.
Liquidity and Capital Resources
As of September 30, 2023 and December 31, 2022, we had cash of approximately $760.0 million and $652.9 million (including restricted cash of $38.8 million at December 31, 2022), respectively, and working capital of approximately $879.6 million and $756.7 million, respectively.
We believe that cash available from operations will be sufficient for our working capital needs, including purchase commitments for raw materials and inventory, increases in accounts receivable and other assets, and purchases of capital assets and equipment for the next twelve (12) months with respect to our current operating plan. Please refer to "Risk Factors" in Part 1, Item 1A, in our 2022 Annual Report for these and other factors that may have a material impact on our operations. Our primary sources of cash included cash from operations and proceeds from the issuance of Series A convertible preferred shares. These sources of cash are available to fund cash outflows that have both a short and long-term component.
Purchases of inventories, other assets, property and equipment (including coolers), advances for our co-packers, payments of accounts payable, and income taxes payable are expected to remain our principal recurring uses of cash.
Our current operating plan for the next twelve (12) months reflects sufficient financial resources.
Cash flows provided by operating activities
Cash flows provided by operating activities totaled approximately $136.0 million for the nine months ended September 30, 2023, which compares to $171.0 million cash provided by operating activities for the nine months ended September 30, 2022. The approximate $35.0 million decrease in cash generation is primarily due to increased working capital spend in 2023 as a result of significant growth and timing benefits associated with the Pepsi distribution and share purchase activities in 2022.
Cash flows (used in) investing activities
Cash flows used in investing activities totaled approximately $9.5 million for the nine months ended September 30, 2023, which compares to cash used in investing activities of $0.9 million for the nine months ended September 30, 2022. The increase in cash used in investing activities when compared to the 2022 period was primarily due to increased cash expenditures for property and equipment in the current year.
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Cash flows (used in) provided by financing activities
Cash flows used in financing activities totaled approximately $18.9 million for the nine months ended September 30, 2023, which compares to cash provided by financing activities of $540.5 million for the nine months ended September 30, 2022. The decrease in the cash provided by financing activities was mainly related to the one-time net proceeds of $542.0 million from the issuance of the Series A convertible preferred shares related to Pepsi in the 2022 period as well as three quarters of dividends paid to Pepsi in 2023 versus a partial quarter in 2022.
Off Balance Sheet Arrangements
As of September 30, 2023 and December 31, 2022, we had no off balance sheet arrangements.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America, which requires us to make estimates and assumptions that affect the reported amounts in our consolidated financial statements. Critical accounting estimates are those that management believes are the most important to the portrayal of our financial condition and results and require the most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and that have had, or are reasonably likely to have, a material impact on our financial condition or results of operations. Judgments and uncertainties may result in materially different amounts being reported under different conditions or using different assumptions. There have been no material changes to our critical accounting policies or estimates, aside from the change in estimate disclosed in the accompanying footnotes and from the information provided in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II, Item 8, "Financial Statements and Supplementary Data" (Note 2), included in our 2022 Annual Report for the fiscal year ended December 31, 2022.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
In the normal course of business, our financial position is routinely subject to a variety of risks. The principal market risks (i.e., the risk of loss arising from adverse changes in market rates and prices) to which we are exposed are fluctuations in commodity and other input prices affecting the costs of our raw materials (including, but not limited to, increases in the costs of the price of aluminum cans, sucralose and other sweeteners, as well as other raw materials contained within our products). We generally do not use hedging agreements or alternative instruments to manage the risks associated with securing sufficient ingredients or raw materials. We are also subject to market risks with respect to the cost of commodities and other inputs because our ability to recover increased costs through higher pricing is limited by the competitive environment in which we operate.
We do not use derivative financial instruments to protect ourselves from fluctuations in interest rates and generally do not hedge against fluctuations in commodity prices.
Item 4. Controls and Procedures.
Management’s Report on Disclosure Controls and Procedures
Our Chief Executive Officer (our principal executive officer) and our Chief Financial Officer (our principal financial and accounting officer), conducted an evaluation of 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 September 30, 2023, 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 our management, including our Chief Executive Officer and our Chief Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
Our Chief Executive Officer and our Chief Financial Officer do not expect that our disclosure controls or internal controls will prevent all error and all fraud. Although our disclosure controls and procedures were designed to provide reasonable assurance of achieving their objectives and our Chief Executive Officer and our Chief Financial Officer evaluated whether our disclosure controls and procedures are effective at doing so, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented if there exists in an individual a desire to do so. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
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We identified material weaknesses as of December 31, 2022 in our internal controls over financial reporting, which were not fully remedied as of September 30, 2023. 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 our annual or interim financial statements will not be prevented or detected and corrected on a timely basis. As a result of these material weaknesses, we concluded that internal controls over the following areas were not effective as of December 31, 2022 and were not fully remedied as of September 30, 2023.
a)Management did not design effective information technology general controls (ITGCs) relating to appropriate segregation of duties over program change management for certain applications impacting the Company’s business processes that are relevant to the Company’s internal control over financial reporting; and
b)Management did not design and implement components of the COSO Framework to address all relevant risks of material misstatement, including elements of the control environment, information and communication, control activities and monitoring activities components, relating to the identification, design, implementation, and monitoring of sufficient business process controls related to the Company’s financial statement accounts to ascertain whether the components of internal control are present and functioning effectively.
Remediation Plan
As of the date of this Quarterly Report on Form 10-Q, management has reassessed the design of controls and modified 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) 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, (b) enhancing design and implementation of our control environment, including the expansion of formal accounting and IT policies and procedures and financial reporting controls, (c) continuing to identify, design and implement effective review and approval controls, and (d) implementing appropriate timely review and oversight responsibilities within the accounting and financial reporting functions.
Changes in Internal Controls Over Financial Reporting
During the nine months ended September 30, 2023, we have been implementing and will aggressively continue to implement changes that are both organizational and process-focused to improve the control environment. We anticipate the actions to be taken, and resulting process improvements, to generally strengthen our internal controls over financial reporting and ITGCs which will address the material weaknesses noted as of December 31, 2022. These remedial measures were considered changes to our internal control environment which had a material effect on internal control over financial reporting. We will not be able to conclude whether the material weaknesses have been remediated until the completion of our Annual Report on Form 10-K for the year ended December 31, 2023.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The information required by this Item is incorporated herein by reference to Note 19. Commitments and Contingencies in the consolidated financial statements in Part I, Item 1, of this Quarterly Report on Form 10-Q.
Item 1A. Risk Factors.
We face a variety of risks that are inherent in our business and our industry, including operational, legal, regulatory and product risks. Such risks could cause our actual results to differ materially from our forward-looking statements, expectations and historical trends. Information about our most recent risk factors is disclosed in Part I, Item 1A “Risk Factors” in our 2022 Annual Report for the year ended December 31, 2022. At September 30, 2023, there have been no material changes to the information.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None, except as previously disclosed in filings with the SEC.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
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Item 5. Other Information.
From time to time, certain of our executive officers and directors have, and we expect they will in the future, enter into, amend and terminate written trading arrangements pursuant to Rule 10b5-1 of the Securities and Exchange Act of 1934 or otherwise. During the three months ended September 30, 2023, none of the Company’s directors or officers adopted terminated
Item 6. Exhibits.
| 101.INS | Inline XBRL Instance Document | |||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| 104 | The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, formatted in Inline iXBRL and contained in Exhibit 101 | |||||||
*Filed herewith
**Furnished herewith
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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.
| CELSIUS HOLDINGS, INC. | ||||||||
Date: November 6, 2023 | By: | /s/ John Fieldly | ||||||
| John Fieldly, Chief Executive Officer (Principal Executive Officer) | ||||||||
Date: November 6, 2023 | By: | /s/ Jarrod Langhans | ||||||
| Jarrod Langhans, Chief Financial Officer (Principal Financial and Accounting Officer) | ||||||||
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