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May 12, 2020, 10:52 a.m. EDT

10-Q: CELSIUS HOLDINGS, INC.

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(EDGAR Online via COMTEX) -- 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.

Business Overview

We are engaged in the development, marketing, sale and distribution of "functional" calorie-burning fitness beverages under the Celsius(R) brand name. According to multiple clinical studies we funded, a single serving of Celsius(R) burns 100 to 140 calories by increasing a consumer's resting metabolism an average of 12% and providing sustained energy for up to a three-hour period. Our exercise focused studies show Celsius delivers additional benefits when consumed prior to exercise. The studies show benefits such as increase in fat burn, increase in lean muscle mass and increased endurance.

We seek to combine nutritional science with mainstream beverages by using our proprietary thermogenic (calorie-burning) MetaPlus(R) formulation, while fostering the goal of healthier everyday refreshment by being as natural as possible without the artificial preservatives often found in many energy drinks and sodas. Celsius(R) has no artificial preservatives, aspartame or high fructose corn syrup and is very low in sodium. Celsius(R) uses good-for-you ingredients and supplements such as green tea (EGCG), ginger, calcium, chromium, B vitamins and vitamin C. The main Celsius line of products are sweetened with sucralose, a sugar-derived sweetener that is found in Splenda(R), which makes our beverages low-calorie and suitable for consumers whose sugar intake is restricted.

We have undertaken significant marketing efforts aimed at building brand awareness, including a wide variety of marketing vehicles such as television, radio, digital, social media, sponsorships, and magazine advertising. We also undertake various promotions at the retail level such as coupons and other discounts in addition to in-store sampling.

We do not directly manufacture our beverages, but instead outsource the manufacturing process to established third-party co-packers. We do, however, provide our co-packers with flavors, ingredient blends, cans and other raw materials for our beverages purchased by us from various suppliers.

Potential Effects of the Coronavirus Pandemic on the Company's Business

See "Part II - Item 1.A. Risk Factors" for disclosure with respect to the potential effects of the Coronavirus pandemic on the Company's business and additional risk factors with respect thereto.

Results of Operations

Three months ended March 31, 2020 compared to three months ended March 31, 2019

Revenue

For the three months ended March 31, 2020, revenue was approximately $28.2 million, an increase of $13.7 million or 95% from $14.5 million for the first quarter in 2019. The revenue increase of 95% was attributable to continued strong growth of 70% in North American revenues, reflecting double digit growth from both existing accounts and new distribution expansion and expansion at world class retailers. European revenue growth was 183%, from the three months ended March 31, 2019, to the 2020 quarter reflecting the full financial impact of consolidation of the results of operations of Func Food Group, Oyj ("Func Food"), our European distribution partner whom we acquired in October 2019. Asian revenues also grew of $215,500 from the comparable quarter in 2019. Asian results for the first quarters of 2020 and 2019 are now comparable as both periods give effect to the change in our China business model to a royalty and license fee arrangement, effective January 1, 2019. The total increase in revenue from the 2019 quarter to the 2020 quarter was primarily attributable to an increase in sales volume, as opposed to increases in product pricing.

The following table sets forth the amount of revenues by segment and changes therein for the three months ended March 31, 2020 and 2019:







                                        Three months ended March 31,
        Revenue Source               2020             2019          Change
        Total Revenue            $ 28,184,889     $ 14,485,650           95 %
        North American Revenue   $ 19,359,169     $ 11,397,862           70 %
        European Revenue         $  8,500,852     $  2,999,664          183 %
        Asian Revenue            $    268,292     $     52,764          408 %
        Other                    $     56,576     $     35,360           60 %
        


Gross profit

For the three months ended March 31, 2020, gross profit increased by approximately $7.3 million or 127% to $13.0 million, from $5.7 million for the same quarter in 2019. Gross profit margins for the three months ended March 31, 2020, were 46.1% which compared favorably to gross profit margins of 39.5%. for the first quarter of 2019. The increase in gross profit in the 2020 quarter, from the 2019 quarter reflects the impact of the consolidation of the operating results of Func Food and is primarily attributable to increases in sales volume from the 2019 quarter to the 2020 quarter, as opposed to increases in product pricing.

Sales and marketing expenses

Sales and marketing expenses for the three months ended March 31, 2020 were approximately $7.5 million, an increase of approximately $3.9 million or 108% from approximately $3.6 million in the same period in 2019. This increase reflects the impact of the consolidation of the operating results of Func Food following its October 2019 acquisition by the Company. Consequently, our marketing investments reflected a 132% or $1.6 million increase. Similarly, all other sales and marketing expenses give effect to increases related to the consolidation of Func Food operations. Specifically, employee costs increased of $1.5 million or 114% from the 2019 quarter to the 2020 quarter, and also reflect investments in human resources to properly service our markets. Moreover, due to the increase in business volume from the 2019 quarter to the 2020 quarter, our support to distributors and investments in trade activities increased by $353,000 and our storage and distribution costs increased by $486,000.

General and administrative expenses

General and administrative expenses for the three months ended March 31, 2020 were approximately $4.2 million, an increase of approximately $1.6 million or 62%, from $2.6 million for the three months ended March 31, 2019. This increase similarly reflects the impact of the consolidation of Func Food's operations which were not present in the results for the 2019 quarter. As such, administrative expenses reflected an increase of $1.1 million, which included an addition of $221,000 to our bad debt reserve, in order to cover potential collectability risks associated with the Covid-19 situation. Employee costs for the three months ended March 31, 2020, reflected an increase of $302,000 or 47%, not only attributable to the consolidation of Func Food operations, but also giving effect to investments in resources in order to properly support our higher business volume. All other increases for general and administrative expenses were $232,200 from the 2019 quarter to the 2020 quarter. These increases mostly resulted from higher depreciation and amortization of $110,000, stock option expense of $41,500 and research and development costs of $20,000.

Other income/(expense)

Total other expenses for the three months ended on March 31, 2020 were $0.7 million, which reflects an increase of $12.9 million as the prior year results included a gain of $12.2 million mainly related to the recognition of a note receivable from our Chinese licensee. The note receivable arose in connection with the change in our China business model to a royalty and license fee arrangement effective January 1, 2019, whereby our Chinese Licensee agreed to repay the market investment Celsius made into China over a five-year period, under an unsecured, interest-bearing promissory note. Furthermore, the results for the 2020 quarter include amortization expenses of $309,600, interest expense on bonds payable and financial lease obligations of $273,200, realized foreign exchange losses of $78,000 and all other items amount to a net expense of $41,500.

Net Income/(Loss)

As a result of the above, for the three months ended March 31, 2020, net income was $546,100 or $0.01 per share based on a weighted average of 69,284,307 shares outstanding and dilutive earnings per share of $0.01 based on a fully-dilutive weighted average of 70,339,416 shares outstanding, which includes the dilutive impact of outstanding stock options to purchase 1,055,109 shares. In comparison, for the three months ended March 31, 2019, the Company had net income of approximately $11.7 million or $0.20 per share, based on a weighted average of 57,155,445 shares outstanding and dilutive earnings per share of $0.19 based on a fully-dilutive weighted average of 61.687.409 shares outstanding, which includes the dilutive impact of convertible debt and outstanding stock options to purchase 4,531,964 shares.

Liquidity and Capital Resources

As of March 31, 2020, and December 31, 2019, we had cash of approximately $19.1 million and $23.1 million, respectively, and working capital of approximately $27.4 million and $24.8 million, respectively. Cash used in operations during the three months ended March 31, 2020 and March 31, 2019, totaled approximately $3.8 million and $6.8 million, respectively, mainly reflecting investments in inventory, pre-payments & deposits and increase in accounts receivable.

In addition to cash flow from operations, our primary sources of working capital have been private placements and public offerings of our securities (including an underwritten public offering of 7,986,110 shares at an offering price of $3.60 per share completed on September 16, 2019) and our credit facility with CD Financial, LLC ("CD Financial"), an affiliate of a principal shareholder of the Company.

Our current operating plan for the next twelve (12) months reflects sufficient financial resources, notwithstanding the potential effects of the Covid-19 pandemic and we do not contemplate obtaining additional financing.

Off Balance Sheet Arrangements

As of March 31, 2020, and December 31, 2019, we had no off-balance sheet arrangements.

May 12, 2020

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