Notes to Consolidated Financial Statements
(unaudited)
March 31, 2020
|
1.
|
ORGANIZATION AND DESCRIPTION OF BUSINESS
|
Business —Celsius
Holdings, Inc. (the “Company” or “Celsius Holdings”) was incorporated under the laws of the
State of Nevada on April 26, 2005. On January 24, 2007, the Company entered into a merger agreement and plan of reorganization
with Elite FX, Inc., a Florida corporation. Under the terms of the Merger Agreement, Elite FX, Inc. was merged into the Company’s
subsidiary, Celsius, Inc. and became a wholly-owned subsidiary of the Company on January 26, 2007. In addition, on March 28, 2007
the Company established Celsius Netshipments, Inc. a Florida corporation as a subsidiary of the Company.
On February 7, 2018, the Company
established Celsius Asia Holdings Limited a Hong Kong corporation as a wholly-owned subsidiary of the Company. On February 7, 2018
Celsius China Holdings Limited a Hong Kong corporation became a wholly-owned subsidiary of Celsius Asia Holdings Limited and on
May 9, 2018, Celsius Asia Holdings Limited established Celsius (Beijing) Beverage Limited, a China corporation as a wholly-owned
subsidiary of Celsius Asia Holdings Limited.
On October 25, 2019, the Company
acquired 100% of Func Food Group, Oyj (“Func Food). The Acquisition was structured as a purchase of all of Func Food’s
equity shares and a restructuring of Func Food’s pre-existing debt. Func Food was the Nordic distributor for the Company
since 2015. Func Food is a marketer and distributor of nutritional supplements, health food products, and beverages (see Note 10).
The Company is engaged in the
development, marketing, sale and distribution of “functional” calorie-burning fitness beverages under the Celsius®
brand name.
|
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 Article 8-03 of Regulation S-X. Accordingly, the consolidated financial
statements do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion
of management, all adjustments considered necessary for a fair presentation have been included and such adjustments are of a normal
recurring nature. These unaudited consolidated financial statements and the accompanying notes should be read in conjunction with
the 10K filed for December 31, 2019. The consolidated financial statements of the Company include the Company and its wholly owned
subsidiaries. All material inter-company balances and transactions have been eliminated.
Significant Estimates
— The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities,
revenue and expenses and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results
could differ from those estimates. Significant estimates include the allowance for doubtful accounts, allowance for inventory obsolescence,
the useful lives and values of property, fixtures and equipment, valuation of stock-based compensation, and deferred tax asset
valuation allowance.
Reclassification of Prior
Year Presentation – Certain prior year amounts in the consolidated statements of cash flows have been reclassified for
consistency with the current year presentation. An adjustment has been made to present certain changes in operating assets and
liabilities related to the China Settlement as part of the total net changes in operating assets and liabilities, rather than as
separately presented items. Additionally, modifications have been made to present the effects of depreciation & amortization,
bad debt allowance and inventory excess and obsolescence allowance as adjustments to reconcile net income/(loss) to net cash flows
from operating activities, rather than as part of changes in operating assets and liabilities. These reclassifications had no effect
on previously reported cash flows from operating, investing, or financing activities.
Segment Reporting —
Although the Company has a number of operating divisions, separate segment data has not been presented, as they meet the criteria
for aggregation as permitted by ASC Topic 280, Segment Reporting, (formerly Statement of Financial Accounting Standards (SFAS)
No. 131, Disclosed About Segments of an Enterprise and Related Information.)
Celsius Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
March 31, 2020
|
2.
|
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
Our chief operating decision-maker
is considered to be our Chief Executive Officer (CEO). The CEO reviews financial information presented on a consolidated basis
for purposes of making operating decisions and assessing financial performance. The financial information reviewed by the CEO is
identical to the information presented in the accompanying consolidated statement of operations. Therefore, the Company has determined
that it operates in a single operating segment. For the three months ended March 31, 2020 and 2019 all material assets and revenues
of the Company were in the United States except as disclosed in Note 3.
Concentrations of Risk
— Substantially all of the Company’s revenue derives from the sale of Celsius ® beverages.
The Company uses single supplier
relationships for its raw materials purchases and filling capacity, which potentially subjects the Company to a concentration of
business risk. If these suppliers had operational problems or ceased making product available to the Company, operations could
be adversely affected.
Financial instruments that potentially
subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The
Company places its cash and cash equivalents with high-quality financial institutions. At times, balances in the Company’s
cash accounts may exceed the Federal Deposit Insurance Corporation limit. At March 31, 2020, the Company had approximately $18.8
million in excess of the Federal Deposit Insurance Corporation limit.
For the three months ended March
31, 2020 and 2019, the Company had the following 10 percent or greater concentrations of revenue with its customers:
|
|
2020
|
|
|
2019
|
|
A*
|
|
|
23.1
|
%
|
|
|
11.9
|
%
|
B*
|
|
|
-
|
|
|
|
17.9
|
%
|
All other
|
|
|
76.9
|
%
|
|
|
70.2
|
%
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Revenues from customer A are
derived from a customer located in the United States. Revenues from all other customers were mainly derived in the United States.
At March 31, 2020 and December
31, 2019, the Company had the following 10 percent or greater concentrations of accounts receivable with its customers:
|
|
2020
|
|
|
2019
|
|
A**
|
|
|
28.8
|
%
|
|
|
14.1
|
%
|
B**
|
|
|
-
|
|
|
|
41.1
|
%
|
All other
|
|
|
71.2
|
%
|
|
|
44.8
|
%
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
*
|
Revenues from customer A are derived from a customer located in the United States.
Revenues from customer B were derived from a customer located in Sweden which was acquired on October 25, 2019. Please refer to
note 10, further details. All other revenues customers were mainly derived from the United States.
|
**
|
Receivables from customer A are obtained from a customer located in the United States. Receivables from customer B were derived
from a customer located in Sweden which was acquired on October 25, 2019. Please refer to note 10, further details.
|
Cash Equivalents —
The Company considers all highly liquid instruments with maturities of three months or less when purchased to be cash equivalents.
At March 31, 2020 and 2019, the Company did not have any investments with maturities of three months or less.
Celsius Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
March 31, 2020
|
2.
|
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
Accounts Receivable —
Accounts receivable are reported at net realizable value. The Company establishes an allowance for doubtful accounts based upon
factors pertaining to the credit risk of specific customers, historical trends, and other information. Delinquent accounts are
written-off when it is determined that the amounts are uncollectible. At March 31, 2020 and December 31, 2019, there was an allowance
for doubtful accounts of $514,000 and $292,400, respectively.
Inventories — Inventories
include only the purchase cost and are stated at the lower of cost and net realizable value. Cost is determined using the FIFO
method. Inventories consist of raw materials and finished products. The Company establishes an inventory allowance to reduce the
value of the inventory during the period in which such materials and products are no longer usable or marketable. Specifically,
the Company reviews inventory utilization during the past twelve months and also customer orders for subsequent months. If there
has been no utilization during the last 12 months and there are no orders in-place in future months which will require the use
of inventory item, then inventory item will be included as part of the allowance during the period being evaluated. Management
will then specifically evaluate whether these items may be utilized within a reasonable time frame (e.g., 3 to 6 months). At March
31, 2020 and December 31, 2019, the Company recorded an allowance of $595,000 and $865,000 respectively. The changes in the allowance
are included in cost of revenue.
Property and Equipment
— Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation of property and
equipment is calculated using the straight-line method over the estimated useful life of the asset generally ranging from three
to seven years.
Impairment of Long-Lived
Assets — In accordance with ASC Topics 350 “Goodwill and Other Intangibles” and 360, “Property,
Plant, and Equipment” the Company reviews the carrying value of intangibles and other long-lived assets for impairment at
least annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of long-lived assets is measured by comparison of its carrying amount to the undiscounted cash flows that the asset
or asset group is expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured
by the amount by which the carrying amount of the property, if any, exceeds its fair value.
Goodwill — The
Company records goodwill when the consideration paid for an acquisition exceeds the fair value of net tangible and intangible assets
acquired, including related tax effects. Goodwill is not amortized; instead goodwill is tested for impairment on an annual basis,
or more frequently if the Company believes indicators of impairment exist. The Company first assesses qualitative factors to determine
whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying value. If the Company determines
that the fair value is less than the carrying value, the Company will recognize an impairment charge based on the excess of a reporting
unit’s carrying value over its fair value. At March 31, 2020, there were no indicators of impairment.
Revenue Recognition —
As of January 1, 2018, the Company adopted Revenue from Contracts with Customers (Topic 606) (“ASC 606”). The new guidance
sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and
is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in U.S.
GAAP. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the
transfer of promised goods or services to customers in an amount that reflects what it expects to receive in exchange for the goods
or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not
addressed completely in the prior accounting guidance. The Company adopted the standard using the modified retrospective method
and the adoption did not have a material impact on its consolidated financial statements.
Celsius Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
March 31, 2020
|
2.
|
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
Revenue is derived from the
sale of beverages. The Company recognizes revenue when obligations under the terms of a contract with the customer are satisfied.
Product sales occur once control is transferred upon delivery to the customer. Revenue is measured as the amount of consideration
the Company expects to receive in exchange for transferring goods. The amount of consideration the Company receives and revenue
the Company recognizes varies with changes in customer incentives the Company offers to its customers and their customers. Any
discounts, slotting fees, sales incentives or similar arrangements with the customer are estimated at time of sale and deducted
from revenue. Sales taxes and other similar taxes are excluded from revenue.
Customer Advances —
From time to time the Company requires prepayments for deposits in advance of delivery of products and/or production runs. Such
amounts are initially recorded as customer deposits. The Company recognizes such revenue as it is earned in accordance with revenue
recognition policies. As of March 31, 2020, these amounts were immaterial.
Advertising Costs —
Advertising costs are expensed as incurred. The Company uses mainly radio, local sampling events, sponsorships, endorsements, and
digital advertising. The Company incurred advertising expense of approximately $2.7 million and $1.2 million, during three months
ending March 31, 2020 and 2019, respectively.
Research and Development
— Research and development costs are charged to general and administrative expenses as incurred and consist primarily
of consulting fees, raw material usage and test productions of beverages. The Company incurred expenses of $123,000 and $103,000
during the three months ending March 31, 2020 and 2019, respectively.
Foreign Currency Translation
— 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 U.S. dollar results that arise from such translation, as well
as unrealized exchange gains and losses on intercompany balances of long-term investment nature, are included in Comprehensive
Income. The Company incurred foreign currency translation losses during the three months ended March 31, 2020 of approximately
$115,000 and a gain of approximately $261,000 during the three months ended March 31, 2019. Our operations in different countries
required that we transact in the following currencies:
Chinese-Yuan
Norwegian-Krone
Swedish-Krona
Finland-Euro
Celsius Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
March 31, 2020
|
2.
|
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
Fair Value of Financial Instruments
— The carrying value of cash and cash equivalents, accounts receivable, intangible assets, accounts payable, accrued expenses,
and notes payable approximates fair value due to their relative short-term maturity and market interest rates.
Fair Value Measurements -
ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize
the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:
|
Level 1:
|
Observable inputs such as quoted market prices in active markets for identical assets or liabilities.
|
|
|
|
|
Level 2:
|
Observable market-based inputs or unobservable inputs that are corroborated by market data.
|
|
|
|
|
Level 3:
|
Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions.
|
Other than these noted previously,
the Company did not have any other assets or liabilities measured at fair value at March 31, 2020 and December 31, 2019.
Income Taxes — The
Company accounts for income taxes pursuant to the provisions of ASC 740-10, “Accounting for Income Taxes,” which requires,
among other things, an asset and liability approach to calculating deferred income taxes. The asset and liability approach require
the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between
the carrying amounts and the tax bases of assets and liabilities. A valuation allowance is provided to offset any net deferred
tax assets for which management believes it is more likely than not that the net deferred asset will not be realized. The Company
follows the provisions of the ASC 740 -10 related to, Accounting for Uncertain Income Tax Positions. When tax returns are
filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others
are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained.
In accordance with the guidance of ASC 740-10, the benefit of a tax position is recognized in the financial statements in the period
during which, based on all available evidence, management believes it is more likely than not that the position will be sustained
upon examination, including the resolution of appeals or litigation processes, if any.
Tax positions taken are not
offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured
as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable
taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described
above should be reflected as a liability for uncertain tax benefits in the accompanying balance sheet along with any associated
interest and penalties that would be payable to the taxing authorities upon examination. The Company believes its tax positions
are all highly certain of being upheld upon examination. As such, the Company has not recorded a liability for uncertain tax benefits.
The Company has adopted ASC
740-10-25 Definition of Settlement, which provides guidance on how an entity should determine whether a tax position is
effectively settled for the purpose of recognizing previously unrecognized tax benefits and provides that a tax position can be
effectively settled upon the completion of an examination by a taxing authority without being legally extinguished. For tax positions
considered effectively settled, an entity would recognize the full amount of tax benefit, even if the tax position is not considered
more likely than not to be sustained based solely on the basis of its technical merits and the statute of limitations remains open.
The Company’s tax returns for tax years in 2017 through 2019 remain subject to potential examination by the taxing authorities.
Celsius Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
March 31, 2020
|
2.
|
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
Earnings per Share —
Basic earnings per share are calculated by dividing net income (loss) available to stockholders by the weighted-average number
of common shares outstanding during each period. Diluted earnings per share are computed using the weighted average number of common
and dilutive common share equivalents outstanding during the period. Under ASC 260-10-45-16, the calculation of diluted earnings
per share, the numerator should be adjusted to add back any convertible dividends and the after-tax amount of interest recognized
in the period associated with any convertible debt. The denominator should include the number of additional common shares that
would have been outstanding if the dilutive potential common shares had been issued. Please refer to the below table for additional
details:
|
|
For the three months
ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Net income (loss)
|
|
$
|
546,051
|
|
|
|
11,656,594
|
|
Adjustments for diluted earnings:
|
|
|
|
|
|
|
|
|
Income (Loss) per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.01
|
|
|
|
0.20
|
|
Diluted
|
|
$
|
0.01
|
|
|
|
0.19
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
69,284,307
|
|
|
|
57,155,445
|
|
Diluted
|
|
|
70,339,416
|
|
|
|
61,687,409
|
|
Share-Based Payments —
The Company follows the provisions of ASC Topic 718 “Compensation — Stock Compensation” and related interpretations.
As such, compensation cost is measured on the date of grant at the fair value of the share-based payments. Such compensation amounts,
if any, are amortized over the respective vesting periods of the grants. On April 30, 2015, the Company adopted the 2015 Stock
Incentive Plan. This plan is intended to provide incentives which will attract and retain highly competent persons at all levels
as employees of the Company, as well as independent contractors providing consulting or advisory services to the Company, by providing
them opportunities to acquire the Company’s common stock or to receive monetary payments based on the value of such shares
pursuant to Awards issued. The 2015 Plan permits the grant of options and shares for up to 5,000,000 shares. In addition, there
is a provision for an annual increase of 15% to the shares included under the plan, with the shares to be added on the first day
of each calendar year, beginning on January 1, 2017. As of March 31, 2020, total shares available are 1,013,075.
Cost of Sales —
Cost of sales consists of the cost of concentrates and or beverage bases, the costs of raw materials utilized in the manufacture
of products, co-packing fees, repacking fees, in-bound & out-bound freight charges, as well as certain internal transfer costs,
warehouse expenses incurred prior to the manufacture of the Company’s finished products, inventory allowance for excess &
obsolete products and certain quality control costs. Raw materials account for the largest portion of the cost of sales. Raw materials
include cans, bottles, other containers, flavors, ingredients and packaging materials.
Operating Expenses —
Operating expenses include selling expenses such as warehousing expenses after manufacture, as well as expenses for advertising,
samplings and in-store demonstrations costs, costs for merchandise displays, point-of-sale materials and premium items, sponsorship
expenses, other marketing expenses and design expenses. Operating expenses also include such costs as payroll costs, travel costs,
professional service fees (including legal fees), depreciation and other general and administrative costs.
Shipping and Handling Costs
— Shipping and handling costs for freight expense on goods shipped are included in cost of sales. Freight expense on
goods shipped for three months ended March 31, 2020 and 2019 was $2.1 million and $1.3 million, respectively.
Celsius Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
March 31, 2020
|
2.
|
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
Recent Accounting Pronouncements
The Company adopts all applicable,
new accounting pronouncements as of the specified effective dates.
In June 2016, the FASB issued
ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326) (“ASU 2016-13”), which requires the immediate
recognition of management’s estimates of current and expected credit losses. In November 2018, the FASB issued ASU 2018-19,
which makes certain improvements to Topic 326. In April and May 2019, the FASB issued ASUs 2019-04 and 2019-05, respectively, which
adds codification improvements and transition relief for Topic 326. In November 2019, the FASB issued ASU 2019-10, which delays
the effective date of Topic 326 for Smaller Reporting Companies to interim and annual periods beginning after December 15, 2022,
with early adoption permitted. In November 2019, the FASB issued ASU 2019-11, which makes improvements to certain areas of Topic
326. In February 2020, the FASB issued ASU 2020-02, which adds an SEC paragraph, pursuant to the issuance of SEC Staff Accounting
Bulletin No. 119, to Topic 326. Topic 326 is effective for the Company for fiscal years and interim reporting periods within those
years beginning after December 15, 2022. Early adoption is permitted for interim and annual periods beginning December 15, 2019.
The Company is currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.
On January 1, 2020, the Company
adopted ASU No. 2017-04, “Intangibles and Other (Topic 350): Simplifying the Test for Goodwill Impairment”, which eliminates
the requirement to calculate the implied fair value of goodwill, but rather requires an entity to record an impairment charge based
on the excess of a reporting unit’s carrying value over its fair value. Adoption of this ASU did not have a material effect
on our consolidated financial statements.
On January 1, 2020, the Company
adopted ASU No. 2018-13, Fair Value Measurements (Topic 820): Disclosure Framework Changes to the Disclosure Requirements for Fair
Value Measurement. The amendments in this update modify the disclosure requirements on fair value measurements in Topic 820. Adoption
of this ASU did not have a material effect on our consolidated financial statements.
All new accounting pronouncements
issued but not yet effective are not expected to have a material impact on our results of operations, cash flows or financial position
with the exception of the updated previously disclosed above, there have been no new accounting pronouncements not yet effective
that have significance to our consolidated financial statements.
Liquidity — These financial
statements have been prepared assuming the Company will be able to continue as a going concern. At March 31, 2020, the Company
had an accumulated deficit of $62,863,380 which includes a net income of $546,051 for the three months ended March 31, 2020. During
the three months ending March 31, 2020 the Company net cash used in operating activities of $3,817,544.
If our sales volumes do not
meet our projections, expenses exceed our expectations, our plans change, we may be unable to generate enough cash flow from operations
to cover our working capital requirements. In such case, we may be required to adjust our business plan, by reducing marketing,
lower our working capital requirements and reduce other expenses or seek additional financing. Furthermore, our business and results
of operations may be adversely affected by changes in the global macro-economic environment related to the pandemic and public
health crises related to the COVID-19 outbreak. Please refer to the Item 1.A. Risk Factors, for further details regarding this
situation.
Celsius Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
March 31, 2020
The Company recognizes revenue
when obligations under the terms of a contract with the customer are satisfied. Product sales occur once control is transferred
upon delivery to the customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for
transferring goods. The amount of consideration the Company receives and revenue the Company recognizes varies with changes in
customer incentives the Company offers to its customers and their customers. Sales taxes and other similar taxes are excluded from
revenue.
Information about the Company’s net sales by
geographical location for the three months ended March 31, 2020 and 2019 are as follows:
|
|
For the three months ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
North America
|
|
$
|
19,359,169
|
|
|
$
|
11,397,862
|
|
Europe
|
|
|
8,500,852
|
|
|
|
2,999,664
|
|
Asia
|
|
|
268,292
|
|
|
|
52,764
|
|
Other
|
|
|
56,576
|
|
|
|
35,360
|
|
Net sales
|
|
$
|
28,184,889
|
|
|
$
|
14,485,650
|
|
License Agreement
In January 2019, the Company
entered into a license and repayment of investment agreement with Qifeng Food Technology (Beijing) Co., Ltd (“Qifeng”).
Under the agreement, Qifeng was granted the exclusive license rights to manufacture, market and commercialize Celsius branded products
in China. The term of the agreement is 50 years, with annual royalty fees due from Qifeng after the end of each calendar year.
The royalty fees are based on a percentage of Qifeng’s sales of Celsius branded products; however, the fees are fixed for
the first five years of the agreement, totaling approximately $6.9 million, and then are subject to annual guaranteed minimums
over the remaining term of the agreement.
Under the agreement, the Company
grants Qifeng exclusive license rights and provides ongoing support in product development, brand promotion and technical expertise.
The ongoing support is integral to the exclusive license rights and, as such, both of these represent a combined, single performance
obligation. The transaction price consists of the guaranteed minimums and the variable royalty fees, all of which are allocated
to the single performance obligation.
The Company recognizes revenue
from the agreement over time because the customer simultaneously receives and consumes the benefits from the services. The Company
uses the passage of time to measure progress towards satisfying its performance obligation because its efforts in providing the
exclusive license rights and ongoing support occur on a generally even basis throughout the year. Total revenue recognized under
the agreement was approximately $190,000 for the three months ended March 31, 2020 and is reflected in the Company’s Asia
reporting segment which was determined by the minimum royalties due during first year, as per the licensing agreement.
Celsius Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
March 31, 2020
Inventories consist of the following at:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Finished goods
|
|
$
|
18,166,171
|
|
|
$
|
12,990,044
|
|
Raw Materials
|
|
|
3,467,034
|
|
|
|
3,167,853
|
|
Less: Inventory allowance for excess and obsolete products
|
|
|
(594,838
|
)
|
|
|
(865,548
|
)
|
Inventories
|
|
$
|
21,038,367
|
|
|
$
|
15,292,349
|
|
|
5.
|
PREPAID EXPENSES AND OTHER CURRENT ASSETS
|
Prepaid expenses and other current
assets total $4.7 million and $4.2 million at March 31, 2020 and December 31, 2019, respectively, consist mainly of prepaid advertising,
prepaid insurance, prepaid slotting fees and net deposits on purchases.
Note receivable consists of the following at:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Note Receivable-current
|
|
$
|
1,157,754
|
|
|
$
|
1,181,116
|
|
Note Receivable-non-current
|
|
|
10,416,120
|
|
|
|
10,630,041
|
|
Total Note Receivable
|
|
$
|
11,573,874
|
|
|
$
|
11,811,157
|
|
On January 1, 2019, the Company
entered into a license and repayment of investment agreement with Qifeng Food Technology (Beijing) Co., Ltd (“Qifeng”).
Under the agreement, Qifeng will repay the market investment Celsius has made into China to date, over a five-year period, under
an unsecured, interest-bearing note receivable (“Note”). The initial outstanding principal under the Note was approximately
$12.2 million which is denominated in Chinese Renminbi (CNY) and was recorded as Other Income on the Consolidated Statements of
Operations. The amount recognized considered the net of the balances of the accounts receivable, accounts payable and accrued expenses,
as well as the marketing investments that were performed in the China market.
Scheduled principal payments
plus accrued interest are due annually on March 31 of each year starting in 2020. The Note is recorded at amortized cost basis
and accrues interest at a rate per annum equal to the weighted average of 5% of the outstanding principal up to $5 million and
2% of the outstanding principal above $5 million. For the three months ended March 31, 2020, the weighted average interest rate
was 3.32% and interest income was $97,500.
Celsius Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
March 31, 2020
|
6.
|
NOTE RECEIVABLE (Continued)
|
The Company assesses the Note
for impairment periodically by evaluating whether it is probable that the Company will be unable to collect all the contractual
interest and principal payments as scheduled in the Note agreement, based on historical experience about Qifeng’s ability
to pay, the current economic environment and other factors. If the Note is determined to be impaired, the impairment is measured
based on the present value of the expected future cash flows under the Note, discounted at the Note’s effective interest
rate. At March 31, 2020, the Note was not deemed to be impaired.
The first installment of the
note in the amount of RMB 13,253,093 was due on March 31, 2020. We were requested to provide a 3-month consideration to delay payment
until June 30, 2020, due to the impact of the health crisis in China. For this consideration, a guarantee was obtained for the
full amount of the first-installment and offers as collateral stock certificates in Celsius Holdings, Inc., which amount to 570,412
shares. The consideration was provided and therefore payment in full of the first installment is expected to be provided on June
30, 2020.
The Company’s leasing
activities include an operating lease of its corporate office space from a related party (see Note 14) and several other operating
and finance leases of vehicles and office space for the Company’s European operations.
At the inception of a contract,
the Company assesses whether the contract is, or contains, a lease. The Company’s assessment is based on: (1) whether the
contract involves the use of a distinct identified asset, (2) whether the Company obtains the right to substantially all the economic
benefit from the use of the asset throughout the term, and (3) whether the Company has the right to direct the use of the asset.
The Company allocates the consideration in the contract to each lease and non-lease component based on the component’s relative
stand-alone price to determine the lease payments. Lease and non-lease components are accounted for separately.
Leases are classified as either
finance leases or operating leases based on criteria in Topic 842. The Company’s operating leases are generally comprised
of real estate and vehicles, and the Company’s finance leases are generally comprised of vehicles.
At lease commencement, the Company
records a lease liability equal to the present value of the remaining lease payments, discounted using the rate implicit in the
lease or, if that rate cannot be readily determined, the Company’s incremental borrowing rate. A corresponding right-of-use
asset (“ROU asset”) is recorded, measured based on the initial measurement of the lease liability. ROU assets also
include any lease payments made and exclude lease incentives. Lease terms may include options to extend or terminate the lease
when it is reasonably certain that the Company will exercise that option.
Lease expense for operating leases, consisting of
lease payments, is recognized on a straight-line basis over the lease term. Included in lease expense are any variable lease payments
incurred in the period that were not included in the initial lease liability. Lease expense for finance leases consists of the
amortization of the ROU asset on a straight-line basis over the shorter of the useful life of the asset or the lease term, and
interest expense is calculated using the effective interest rate method.
The following is a summary of lease cost recognized
in the Company’s consolidated statements of operations:
|
|
Three months ended
|
|
|
Three months ended
|
|
|
|
March 31, 2020
|
|
|
March 31, 2019
|
|
|
|
Operating
|
|
|
Finance
|
|
|
Operating
|
|
|
Finance
|
|
|
|
Leases
|
|
|
Leases
|
|
|
Leases
|
|
|
Leases
|
|
Lease cost in general and administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease expense
|
|
$
|
95,904
|
|
|
$
|
-
|
|
|
$
|
40,000
|
|
|
$
|
-
|
|
Amortization of finance lease ROU assets
|
|
|
|
|
|
|
137,165
|
|
|
|
-
|
|
|
|
-
|
|
Total lease cost in general and administrative expenses
|
|
|
95,904
|
|
|
|
137,165
|
|
|
|
40,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease cost in other expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on finance lease liabilities
|
|
|
-
|
|
|
|
3,596
|
|
|
|
-
|
|
|
|
-
|
|
Total lease cost in other expense
|
|
|
-
|
|
|
|
3,596
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total lease cost
|
|
$
|
95,904
|
|
|
$
|
140,761
|
|
|
$
|
40,000
|
|
|
|
-
|
|
Celsius Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
March 31, 2020
The following is a summary of
the impact of the Company’s leases on the consolidated statements of cash flows:
|
|
Three months ended
|
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Leasing activity in cash flows from operating activities:
|
|
|
|
|
|
|
Operating leases
|
|
|
(96,084
|
)
|
|
|
37,357
|
|
Interest payments on finance lease liabilities
|
|
|
3,596
|
|
|
|
-
|
|
Total leasing activity in cash flows from operating activities
|
|
|
99,680
|
|
|
|
37,357
|
|
|
|
|
|
|
|
|
|
|
Leasing activity in cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Principal payments on finance lease liabilities
|
|
|
64,082
|
|
|
|
-
|
|
Total leasing activity in cash flows from financing activities:
|
|
|
64,082
|
|
|
|
-
|
|
The future annual minimum lease payments required
under the Company’s leases as of March 31, 2020 are as follows:
|
|
Three months ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Weighted average remaining lease term (years) - operating leases
|
|
|
1.3
|
|
|
|
1.6
|
|
Weighted average remaining lease term (years) - finance leases
|
|
|
1.0
|
|
|
|
-
|
|
Weighted average discount rate - operating leases
|
|
|
4.95
|
%
|
|
|
5.00
|
%
|
Weighted average discount rate - finance leases
|
|
|
3.45
|
%
|
|
|
-
|
%
|
|
|
Operating
|
|
|
Finance
|
|
|
|
|
Future minimum lease payments
|
|
Leases
|
|
|
Leases
|
|
|
Total
|
|
2020
|
|
$
|
243,295
|
|
|
$
|
238,257
|
|
|
$
|
481,552
|
|
2021
|
|
|
133,309
|
|
|
|
122,858
|
|
|
|
256,167
|
|
2022
|
|
|
9,577
|
|
|
|
49,191
|
|
|
|
58,768
|
|
Total future minimum lease payments
|
|
|
386,181
|
|
|
|
410,306
|
|
|
|
796,487
|
|
Less: Amount representing interest
|
|
|
(11,003
|
)
|
|
|
(9,005
|
)
|
|
|
(20,008
|
)
|
Present value of lease liabilities
|
|
|
375,178
|
|
|
|
401,301
|
|
|
|
776,479
|
|
Less: current portion
|
|
|
(310,935
|
)
|
|
|
(276,755
|
)
|
|
|
(587,690
|
)
|
Long-term portion
|
|
$
|
64,243
|
|
|
$
|
124,546
|
|
|
$
|
188,789
|
|
|
8.
|
PROPERTY AND EQUIPMENT
|
Property and equipment consist of the following at:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Furniture and equipment
|
|
$
|
532,575
|
|
|
$
|
529,550
|
|
Less: accumulated depreciation
|
|
|
(417,251
|
)
|
|
|
(396,661
|
)
|
Total
|
|
$
|
115,324
|
|
|
$
|
132,889
|
|
Depreciation expense amounted to $124,939 and $18,761
for the three months ended March 31, 2020 and 2019, respectively.
Celsius Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
March 31, 2020
|
9.
|
GOODWILL AND INTANGIBLES
|
Goodwill consists of approximately
$10,023,806 resulting from the excess of the consideration paid and the fair value of net tangible and intangible assets acquired
from the Func Food Acquisition (see Note 10). There was no activity related to goodwill during the three months ended March 31,
2020 or 2019.
Intangible assets consist of
acquired customer relationships and brands from the Func Food Acquisition. The gross carrying amount and accumulated amortization
of intangible assets were as follows as of March 31, 2020 and 2019:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Intangible assets subject to amortization
|
|
|
|
|
|
|
Customer relationships gross carrying amount
|
|
$
|
14,006,244
|
|
|
$
|
14,006,244
|
|
Less: accumulated amortization
|
|
|
(143,528
|
)
|
|
|
-
|
|
Total
|
|
$
|
13,862,716
|
|
|
$
|
14,006,244
|
|
|
|
|
|
|
|
|
|
|
Intangible assets not subject to amortization
|
|
|
|
|
|
|
|
|
Brands total carrying amount
|
|
$
|
3,166,756
|
|
|
$
|
3,166,756
|
|
Total Intangibles
|
|
$
|
17,029,472
|
|
|
$
|
17,173,000
|
|
Customer relationships are amortized
over an estimated useful life of 25 years and brands have an indefinite life. Amortization expense for the three months ended March
31, 2020 was $143,528. There was no amortization expense related to intangible assets for the three months ended March 31, 2019.
Other fluctuations in the amounts
of intangible assets are due to currency translation adjustments.
The following is the future
estimated amortization expense related to customer relationships:
As of March 31, 2020:
|
|
|
|
2020
|
|
$
|
430,584
|
|
2021
|
|
|
574,112
|
|
2022
|
|
|
574,112
|
|
2023
|
|
|
574,112
|
|
2024
|
|
|
574,112
|
|
Thereafter
|
|
|
11,135,684
|
|
|
|
$
|
13,862,716
|
|
Celsius Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
March 31, 2020
|
10.
|
ACQUISITION-EUROPEAN
OPERATIONS
|
The Company acquired 100% of
Func Food Group, Oyj (“Func Food”) on October 25, 2019 (the “Acquisition”). The Acquisition
was structured as a purchase of all of Func Food’s equity shares and a restructuring of Func Food’s pre-existing debt.
Total consideration was $27,060,701, which consisted of approximately $14,188,000 in cash, $8,357,000 of newly issued bonds (see
Note 13) and $4,516,000 related to the settlement of a pre-existing debt. In addition to the aforementioned bond issuance, the
Company financed the acquisition by issuing new common shares.
Func Food is a marketer and
distributor of nutritional supplements, health food products, and beverages that support sport activities and healthy living and
lifestyles in Finland, Sweden, and Norway. Func Food has been the Nordic distributor of Celsius products since 2015 and, as a result
of the acquisition, the Company expects to further increase its Nordic market share by leveraging collaborations, revamping its
marketing strategy and focusing on core products. It also expects to reduce costs through economies of scale.
The Company recorded the acquisition
in accordance with ASC-805, pertaining to business combinations. The following table summarizes the consideration paid for Func
Food and the amounts of the assets acquired at fair market value and liabilities assumed recognized at the Acquisition date.
Acquisition consideration
|
|
|
|
Cash
|
|
$
|
14,188,056
|
|
Bonds payable
|
|
|
8,356,958
|
|
Settlement of pre-existing debt
|
|
|
4,515,687
|
|
Total consideration transferred
|
|
|
27,060,701
|
|
|
|
|
|
|
Assets acquired and liabilities assumed
|
|
|
|
|
Accounts receivable
|
|
$
|
1,300,468
|
|
Inventories
|
|
|
2,161,067
|
|
Prepaid expenses and other current assets
|
|
|
331,774
|
|
Property and equipment
|
|
|
616
|
|
Right of use asset
|
|
|
806,572
|
|
Other long-term assets
|
|
|
101,413
|
|
Intangible assets-Customer relationships
|
|
|
14,050,000
|
|
Intangible assets-Brands
|
|
|
3,123,000
|
|
Accounts payable and accrued expenses
|
|
|
(3,489,080
|
)
|
Lease liability Obligations
|
|
|
(817,041
|
)
|
Other current liabilities
|
|
|
(532,088
|
)
|
Total identifiable net assets
|
|
$
|
17,036,701
|
|
Goodwill
|
|
$
|
10,024,000
|
|
The amounts of revenue and earnings of
Func Food included in the Company’s consolidated income statement for the three months ended March 31, 2020 are $8,500,000
million and $0 million, respectively.
On a pro forma basis, if the acquisition
had occurred on January 1, 2019, the Company’s total consolidated revenue and earnings for the twelve months ended December
31, 2019 would have been $21.5 million and $8.7, respectively. Pro forma earnings include adjustments to reflect the additional
amortization that would have been charged for the intangible assets recognized in the acquisition.
Pro forma earnings also include approximately
$2.2 million of historical, non-recurring charges of Func Food that are not expected to have an ongoing effect after the Acquisition.
These non-recurring charges consist of $0.7 million of inventory impairment charges, $0.1 million of restructuring charges, and
$1.4 million of incremental interest expense on Func Food’s historical debt that was restructured as part of the Acquisition.
Consequently, pro forma earnings for the three months ended March 31, 2019 earnings would have amounted to $10.9 million had these
non-recurring expenses not been incurred.
Celsius Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
March 31, 2020
|
11.
|
ACCOUNTS PAYABLE AND ACCRUED
EXPENSES
|
Accounts payable and accrued expenses consist of
the following at:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
11,169,316
|
|
|
$
|
10,159,900
|
|
Accrued expenses
|
|
|
8,715,866
|
|
|
|
7,132,747
|
|
Total
|
|
$
|
19,885,182
|
|
|
$
|
17,292,647
|
|
Other current liabilities consist of the following
at:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Other Liabilities-State Beverage Container Deposit
|
|
$
|
160,646
|
|
|
$
|
107,399
|
|
Total
|
|
$
|
160,646
|
|
|
$
|
107,399
|
|
13. BONDS PAYABLE
Bonds payable consists of the following as of:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Bonds issued as part of the purchase consideration to acquire Func Food (see Note 10). The Bonds are Euro-denominated, unregistered, and were issued on October 25, 2019 at an initial nominal amount of approximately $9.1 million, less discount and issuance costs of approximately $0.7 million. The Bonds accrue interest at a stated interest rate of 6.00% per annum, due semi-annually in arrears, with the first interest payment due on April 30, 2020. The maturity date of the Bonds is October 30, 2020. The Bonds are carried at the nominal amount, less any unamortized discount and issuance costs. The discount is amortized using the effective interest rate method. As of March 31, 2020, the unamortized balance of the discount is approximately $261,000. Amortization of the discount was approximately $109,000 for the three months ended March 31, 2020. The bond issuance costs amounted to $229,250. The issuance costs are being amortized over a straight-line basis, given the short-term nature and that it does not result in a material difference from applying the effective interest rate method. Amortization of the bond issuance costs for the three months ended March 31, 2020 was $57,000. Fluctuations in currency resulted in a translation gain of $200,598, for the three months ended March 31, 2020 and a translation loss of $398,000 from inception to December 31, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upon maturity of the Bonds, the Company may, at its own election, convert up to 50% of the outstanding nominal amount of the Bonds into shares of common stock of the Company, at a conversion price relative to the 30-day weighted-average trading price of the Company’s common shares prior to the Acquisition.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At the Company’s election, the Bonds are callable at 103% at any time. Additionally, mandatory prepayments would be required in the event of either i) a capital raise consummated by the Company or ii) the sale of a certain product line of Func Food. To the fullest extent possible, the net proceeds derived from either event must first be applied towards prepayment of the bonds at 103%, plus any accrued but unpaid interest on the repaid amount.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Bonds are unsubordinated and are guaranteed by Func Food and its direct and indirect subsidiaries. The Bonds are secured by substantially all the assets of Func Food. The Bonds contain certain financial covenants that are specific to Func Food, mainly related to minimum cash requirements at the end of each quarter. As of March 31, 2020, Func Food is in compliance with these covenants.
|
|
$
|
8,599,750
|
|
|
$
|
8,634,279
|
|
Total Bonds Payable
|
|
$
|
8,599,750
|
|
|
$
|
8,634,279
|
|
Celsius Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
March 31, 2020
|
14.
|
RELATED PARTY TRANSACTIONS
|
The Company’s office is
rented from a company affiliated with CD Financial, LLC which is controlled by one of our major shareholders. Currently, the lease
expires on October 2020 with monthly rent of $12,826. The rental fee is commensurate with other properties available in the market.
Issuance of common stock pursuant to exercise
of stock options
During the three months ended
March 31, 2020, the Company issued an aggregate of 337,949 shares of its common stock pursuant to the exercise of stock options
granted under the Company’s 2015 Stock Incentive Plan. The Company received aggregate proceeds of $215,347 for 133,921 options
exercised for cash, with the balance of the options having been exercised on a “cashless” basis.
During the three months ended
March 31, 2019, the Company issued an aggregate of 195,857 shares of its common stock pursuant to the exercise of stock options
granted under the Company’s 2015 Stock Incentive Plan. The Company received aggregate proceeds of $24,760 for 80,750 options
exercised for cash, with the balance of the options having been exercised on a “cashless” basis.
Issuance of common stock
pursuant to public placement
On March 16, 2019 the Company
issued 7,986,110 in a public placement and obtained gross proceeds of $28,749,996 and paid $1,585,000 in commissions & fees
and incurred in $209,559 of expenses related to the capital raise thereby resulting in net-proceeds in the amount of $26,955,437.
Conversion of Notes Payable
into common stock
On March 16, 2019, the company
had three Notes Payable outstanding with related parties for a total principal value of $10 million. As per the terms of the agreements,
the principal values of notes payable and any accrued but unpaid interest are convertible into common stock of the Company. Moreover,
also as per the terms of the agreements, in the event of financing greater than $25.0 million, the principal value of the notes
and any accrued but unpaid interest are automatically converted into the company’s common stock. As result of the public
financing which raised $27,063,779, the principal balance of the notes payable and the accrued but unpaid interest were converted
resulting in the issuance of 3,196,460, shares of common stock. The shares were issued at the contractual conversion prices per
the loan agreements.
|
16.
|
STOCK-BASED COMPENSATION
|
The Company adopted an Incentive
Stock Plan on January 18, 2007. This plan is intended to provide incentives which will attract and retain highly competent persons
at all levels as employees of the Company, as well as independent contractors providing consulting or advisory services to the
Company, by providing them opportunities to acquire the Company’s common stock or to receive monetary payments based on the
value of such shares pursuant to Awards issued. While the plan terminates 10 years after the adoption date, issued options have
their own schedule of termination. During 2013, the majority of the shareholders approved to increase the total available shares
in the plan from 2.5 million to 3.5 million shares of common stock. During May 2014, the majority of the shareholders approved
to increase the total available shares in the plan from 3.5 million to 4.25 million shares of common stock, during February 2015,
the majority of the shareholders approved to increase the total available shares in the plan from 4.25 million to 4.6 million shares
of common stock and during April 2015, the majority of the shareholders approved to increase the total available shares in the
plan from 4.6 million to 5.1 million shares of common stock. Upon exercise, shares of new common stock are issued by the Company.
The Company adopted the 2015
Stock Incentive Plan on April 30, 2015. This plan is intended to provide incentives which will attract and retain highly competent
persons at all levels as employees of the Company, as well as independent contractors providing consulting or advisory services
to the Company, by providing them opportunities to acquire the Company’s common stock or to receive monetary payments based
on the value of such shares pursuant to Awards issued. The 2015 Plan permits the grant of options and shares for up to 5,000,000
shares. In addition, there is a provision for an annual increase of 15% to the shares included under the plan, with the shares to be added on the
first day of each calendar year, beginning on January 1, 2017. As of March 31, 2020, 1,013,075 shares are available.
Celsius Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
March 31, 2020
16.
|
STOCK-BASED COMPENSATION (Continued)
|
Under the 2015 Stock Option
Plan the Company has issued options to purchase approximately 6.36 million shares at an average price of $3.83 per share with a
fair value of $2.94 million. For the three months ended March 31, 2020 and 2019, the Company issued options to purchase 285,000
and 1.27 million shares. For the three months ended March 31, 2020 and 2019, the Company recognized an expense of approximately
$1,400,000 and $1,359,000 respectively, of non-cash compensation expense (included in General and Administrative expense in the
accompanying Consolidated Statement of Operations) determined by application of a Black Scholes option pricing model with the following
inputs: exercise price, dividend yields, risk-free interest rate, and expected annual volatility. As of March 31, 2020, the Company
had approximately $4,400,000 of unrecognized pre-tax non-cash compensation expense, which the Company expects to recognize, based
on a weighted-average period of 3 years. The Company used straight-line amortization of compensation expense over the two to three-year
requisite service or vesting period of the grant. There are options to purchase approximately 2.86 million shares that are vested
as of March 31, 2020.
The Company uses the Black-Scholes
option-pricing model to estimate the fair value of its stock option awards and warrant issuances. The calculation of the fair value
of the awards using the Black - Scholes option-pricing model is affected by the Company’s stock price on the date of grant
as well as assumptions regarding the following:
|
|
Three months ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Expected volatility
|
|
|
69.18%-81.11
|
%
|
|
|
71%-121
|
%
|
Expected term
|
|
|
4.84-5.00 Years
|
|
|
|
4.02-4.64 Years
|
|
Risk-free interest rate
|
|
|
1.35% - 1.39
|
%
|
|
|
2.55% - 2.72
|
%
|
Forfeiture Rate
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
The expected volatility was
determined with reference to the historical volatility of the Company’s stock. The Company uses historical data to estimate
option exercise and employee termination within the valuation model. The expected term of options granted represents the period
of time that options granted are expected to be outstanding. The risk-free interest rate for periods within the contractual life
of the option is based on the U.S. Treasury rate in effect at the time of grant.
A summary of the status of the
Company’s outstanding stock options as of March 31, 2020 and changes during the period ending on that date is as follows:
|
|
|
|
|
Weighted
Average
|
|
|
Aggregate
Intrinsic
|
|
|
Average
|
|
|
|
Shares
|
|
|
Exercise
|
|
|
Value
|
|
|
Remaining
|
|
|
|
(000’s)
|
|
|
Price
|
|
|
(000’s)
|
|
|
Term (Yrs)
|
|
Options
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019
|
|
|
6,528
|
|
|
$
|
3.58
|
|
|
$
|
8,978
|
|
|
|
6.58
|
|
Granted
|
|
|
285
|
|
|
$
|
5.59
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(319
|
)
|
|
$
|
1.10
|
|
|
|
|
|
|
|
|
|
Forfeiture and cancelled
|
|
|
(129
|
)
|
|
$
|
3.46
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2020
|
|
|
6,364
|
|
|
$
|
3.83
|
|
|
$
|
4,751
|
|
|
|
6.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2020
|
|
|
3,640
|
|
|
$
|
3.61
|
|
|
|
|
|
|
|
|
|
Celsius Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
March 31, 2020
|
16.
|
STOCK-BASED COMPENSATION
(Continued)
|
The following table summarizes information about
employee stock options outstanding at March 31, 2020:
|
|
Outstanding Options
|
|
|
Vested Options
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
|
|
|
|
|
Exercisable
|
|
|
|
|
|
|
|
|
|
at
|
|
|
Weighted
|
|
|
Weighted
|
|
|
at
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
March 31,
|
|
|
Average
|
|
|
Average
|
|
|
March 31,
|
|
|
Average
|
|
|
Average
|
|
Range of
|
|
2020
|
|
|
Remaining
|
|
|
Exercise
|
|
|
2019
|
|
|
Exercise
|
|
|
Remaining
|
|
Exercise Price
|
|
(000’s)
|
|
|
Term
|
|
|
Price
|
|
|
(000’s)
|
|
|
Price
|
|
|
Term
|
|
$0.20 - $0.53
|
|
|
259
|
|
|
|
3.30
|
|
|
$
|
0.30
|
|
|
|
259
|
|
|
$
|
0.30
|
|
|
|
3.30
|
|
$0.65 - $1.80
|
|
|
77
|
|
|
|
4.91
|
|
|
$
|
1.05
|
|
|
|
77
|
|
|
$
|
1.05
|
|
|
|
4.91
|
|
$1.83 - $2.84
|
|
|
520
|
|
|
|
2.44
|
|
|
$
|
2.04
|
|
|
|
520
|
|
|
$
|
2.04
|
|
|
|
2.44
|
|
$3.20 - $6.20
|
|
|
5,508
|
|
|
|
7.47
|
|
|
$
|
4.45
|
|
|
|
2,002
|
|
|
|
4.45
|
|
|
|
5.73
|
|
$7.20 - $22.00
|
|
|
0
|
|
|
|
0
|
|
|
$
|
0
|
|
|
|
0
|
|
|
$
|
0
|
|
|
|
0
|
|
Outstanding options
|
|
|
6,364
|
|
|
|
6.86
|
|
|
$
|
3.54
|
|
|
|
2,857
|
|
|
$
|
3.54
|
|
|
|
4.89
|
|
Restricted Stock Awards
Restricted stock awards are
awards of common stock that are subject to restrictions on transfer and to a risk of forfeiture if the holder leaves the Company
before the restrictions lapse. The holder of a restricted stock award is generally entitled at all times on and after the date
of issuance of the restricted shares to exercise the rights of a shareholder of the Company, including the right to vote the shares.
The value of stock awards that vest over time was established by the market price on the date of its grant. A summary of the Company’s
restricted stock activity for the three months ended March 31, 2020 and 2019 is presented in the following table:
|
|
For the Three Months ended
|
|
|
|
March 31, 2020
|
|
|
March 31, 2019
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
(000’s)
|
|
|
Grant Date
|
|
|
(000’s)
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Shares
|
|
|
Fair Value
|
|
Unvested at beginning of period
|
|
|
123,334
|
|
|
$
|
3.34
|
|
|
|
38,889
|
|
|
$
|
—
|
|
Granted
|
|
|
3,916
|
|
|
|
5.59
|
|
|
|
—
|
|
|
|
3.64
|
|
Vested
|
|
|
(3,916
|
)
|
|
|
5.59
|
|
|
|
8,333
|
|
|
|
—
|
|
Unvested at end of period
|
|
|
123,334
|
|
|
$
|
3.34
|
|
|
|
30,556
|
|
|
$
|
3.64
|
|
Unrecognized compensation expense
related to outstanding restricted stock awards to employees and directors as of March 31, 2020 was $0.00.
Celsius Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
March 31, 2020
|
17.
|
COMMITMENTS AND CONTINGENCIES
|
On April 8, 2019, Daniel Prescod
filed suit against Celsius Holdings, Inc., Case No. 19STCV09321, pending in Superior Court for the State of California, County
of Los Angeles (the “Prescod Litigation”). Daniel Prescod asserts that the Company’s use of citric acid in its
products while simultaneously claiming “no preservatives” violates California Consumer Legal Remedies Act, California
Business and Professions Code Section 17200, et seq., and California Business and Professions Code Section 17500, et seq., because
citric acid acts as a preservative. The Company does not use citric acid as a preservative in its products, but rather as a flavoring,
and therefore it believes that its “no preservatives” claim is fair and not deceptive. The Company intends to contest
the claims vigorously. Since this matter is still in its initial stages, the Company is unable to predict the outcome at this time.
On January 24, 2020, Evlution
Nutrition, LLC filed suit against Celsius Holdings, Inc., Case No. 0:20-cv-60159-BB, pending in federal court for the Southern
District of Florida, for trademark infringement (the “Evlution Litigation”). Evlution asserts that Celsius’ BCAA
dietary supplement product’s use of BCAA + ENERGY infringes upon Evlution’s registered trademarks. The Company believes
that Evlution’s trademarks are invalid, merely descriptive, and unenforceable and Celsius has filed a cancellation proceeding
regarding those trademarks with the Trademark Trial and Appeal Board, which has been stayed, but Celsius reasserted these claims
in counterclaims filed in the Evlution Litigation. The Company intends to defend against Evlution’s claims vigorously. Since
this matter is still in its initial stages, the Company is unable to predict the outcome at this time.
In addition to the foregoing,
from time to time, we may become party to litigation or other legal proceedings that we consider to be a part of the ordinary course
of our business.
The Company has entered into distribution
agreements with liquidated damages in case the Company cancels the distribution agreements without cause. Cause has been defined
in various ways. It is management’s belief that no such agreement has created any liability as of March 31, 2020.
Additionally, our business and
results of operations may be adversely affected by the pandemic and public health crises related to the COVID-19 outbreak which
is affecting the macro-economic environment. Please refer to Item 1.A. Risk Factors for further details.
In February 2020, the Company’s
board of directors and majority shareholders authorized an increase in the number of shares of common stock which the Company
is authorized to issue from 75 million shares to 100 million shares. Following compliance with Securities and Exchange Commission
shareholder disclosure requirements, the amendment to the Company’s articles of incorporation to increase its authorized
common stock was effective on May 5, 2020.