Celsius Holdings, Inc. (CELH) FY 2021 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion in conjunction with the audited financial statements and the corresponding notes, the unaudited financial statements and the corresponding notes included elsewhere in this information statement. This Item 7 contains forward-looking statements. The matters discussed in these forward-looking statements are subject to risk, uncertainties, and other factors that could cause actual results to differ materially from those made, projected or implied in the forward-looking statements. Please refer to “Item 1A. Risk Factors” for a discussion of the uncertainties, risks and assumptions associated with these statements.

Results of Operations

Year ended December 31, 2021 compared to year ended December 31, 2020

Revenue

For the year ended December 31, 2021, revenue was approximately $314.3 million, an increase of $183.5 million or 140% from $130.7 million for the year ended December 31, 2020. Approximately 97% of this growth was as a result of increased revenues from North America where 2021 revenues were $273.0 million, an increase of $177.5 million or 186% from 2020. The balance of the increase was largely attributable to a 13% growth in European revenues to $38.1 million in 2021 from $33.7 million in 2020. Asian revenues (which primarily consist of royalty revenues from our China licensee) for the year ended December 31, 2021 were $2.5 million, an increase of $1.4 million from $1.1 million for the year ended December 31, 2020. Other international markets generated $0.6 million in revenues during the year ended December 31, 2021, an increase of approximately 48.5% from $0.4 million for the year ended December 31, 2020.

The total increase in revenue from 2020 to 2021 was largely attributable to increases in sales volume, as opposed to increases in product pricing. The primary factors behind the increase in North American sales volume were related to continued strong triple-digit growth in traditional distribution channels, combined with an increase in and optimization of our products’ presence in world class retailers. Additionally, the continued expansion of DSD network resulted in significant growth of our distributor revenues when compared to the prior year period. Furthermore, our fitness and vending channels also reflected triple digit growth of incremental revenue when compared to the prior year period, during which many fitness facilities were closed due to the COVID-19 pandemic.

Additionally, e-commerce results also contributed to the increase in revenues for the year ended December 31, 2021. Furthermore, the favorable currency fluctuations accounted for approximately 29% of the increase in European revenue in the 2021 period, when compared to the 2020 period.

The following table sets forth the amount of revenues by category and changes therein for the years ended December 31, 2021 and December 31, 2020:

Gross profit

For the year ended December 31, 2021, gross profit increased by approximately $67.2 million or 110% to $128.2 million, from $61.0 million for the year ended December 31, 2020. Gross profit margins decreased to 40.8% for the year ended December 31, 2021 from 46.6% for the year ended December 31, 2020. The increase in gross profit dollars is related to increases in sales volumes, while the decrease in gross profit margins from the 2020 period to the 2021 period is mainly related to increases in raw material costs (primarily aluminum cans), ocean freight costs, distribution costs, repackaging costs and processing costs. These incremental costs are directly related to added complexities in the supply chain as a result of the COVID-19 pandemic. The increase in gross profit dollars of approximately $67.2 million from the year ended December 31, 2020 to the year ended December 31, 2021, includes approximately $85.0 million related to volume increases, as well as a favorable currency impact of $1.3 million, which was offset in part by unfavorable increases in costs of approximately $18.3 million.

Sales and marketing expenses

Sales and marketing expenses for the year ended December 31, 2021 were approximately $74.7 million, an increase of approximately $39.9 million or 114% from approximately $34.9 million for the year ended December 31, 2020. This increase was largely a result of incremental marketing investment activities of approximately $22.5 million from the 2020 period. Additionally, employee costs increased by approximately $5.6 million from the year ago period as we continued to invest in this area in order to have the proper infrastructure to support our growth and incurred additional travel and business expenses now that we are able to resume in-person marketing events and selling activities. Similarly, we experienced increases in other sales expense in the amount of approximately $1.3 million mainly related to trade-marketing activities to support our continued expansion of our DSD network. Lastly, storage and distribution as well as broker costs accounted for the remainder of the increase in this area in the amount of $10.4 million when compared to the prior year period, mainly related to the increase in business volume.

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General and administrative expenses

General and administrative expenses for the year ended December 31, 2021 were approximately $57.5 million, an increase of $39.3 million or 216% from $18.2 million for the year ended December 31, 2020. This increase was primarily attributable to stock option expense which amounted to $36.5 million for the year ended December 31, 2021, an increase from $6.3 million in the prior year period. This increase in stock option expense when compared to the prior year, was mainly attributable the revaluation of certain share-based payment awards that were modified during 2021. Management deems it very important to motivate employees by providing them ownership in the business in order to promote over performance which translates into the continued success of our business based on key performance attributes. Additionally, employee costs for the year ended December 31, 2021 reflect an increase of $3.1 million or 68.9%, as investments in this area were also required to properly support our higher business volume and the commercial and operational areas of the business, as well as travel expenses are now being incurred. Administrative expenses amounted to $11.0 million or an increase of $5.4 million or 96.4%, when compared to the prior year period. This variance is mainly related to an increase in bad debt reserve of $1.5 million and increases in audit costs, legal expenses, insurance costs and office rent account for the majority of the remaining fluctuation of $3.9 million. Depreciation and amortization had an increase of approximately $0.2 million when compared to the prior year due to investments in operational equipment (e.g., coolers). All other administrative expenses which were mainly composed of research, development and quality control testing, increased by approximately $0.5 million from the 2020 period.

Other Income/(expense)

Total net other income for the year ended December 31, 2021 was $31,069 which reflects a decrease of $697,957 when compared to net total other income of $0.7 million for the year ended December 31, 2020. The variance of $0.7 million is mainly related to a decrease in foreign currency exchange fluctuation of $1.6 million, and a decrease in interest income of $39,000 related to the note receivable from our China licensee, which are offset by the reductions of bond amortization and net interest expense, as well as other all other non-operational charges which provided a total net increase of $0.9 million.

Income tax benefit/(expense)

An income tax benefit of approximately $8.0 million was obtained during the 2021 year, mainly related to the release of our US valuation allowance and windfall benefits on stock-based compensation awards. In 2020 our Sweden subsidiary incurred approximately $116,000 of income tax expense due to the inability to fully utilize the NOLs generated from prior periods.

Net Income/Loss

Net income for the year ended December 31, 2021, was $3.9 million or $0.05 per share based on a weighted average of 73,781,130 shares outstanding and dilutive earnings per share of $0.05 based on a fully-dilutive weighted average of 77,688,501 shares outstanding, which includes the dilutive impact of outstanding stock options to purchase 3,907,371 shares. In comparison, for the year ended December 31, 2020 the Company had net income of $8.5 million or $0.12 per share based on a weighted average of 70,195,085 shares outstanding, and a dilutive earnings per share of $0.11 based on a weighted average of 74,443,601 shares outstanding.

Liquidity and Capital Resources

General

As of December 31, 2021, and December 31, 2020, we had cash of approximately $16.3 million and $43.2 million, respectively, and working capital of approximately $169.2 million and $66.8 million, respectively.

In addition to cash flow from operations, our primary sources of working capital have been private placements and public offerings of our securities, including an underwritten public offering of 1,133,953 shares at an offering price of $62.50 per share completed on June 14, 2021 and a private placement of 1,437,909 shares at a price of $15.30 completed on August 25, 2020.

Our current operating plan for the next twelve (12) months reflects sufficient financial resources, notwithstanding the potential effects of the COVID-19 pandemic.

Cash flows (used in) provided by operating activities

Cash flows used in operating activities totaled $96.6 million in 2021, which compares to $3.4 million net cash provided by operating activities for the year ended December 31, 2020. The use of cash was primarily driven by higher inventory levels in order to properly service the demand for our products and to mitigate the current inefficiencies of the supply chain. Additionally, the significant increase in business volume or revenue resulted in an increase in our accounts receivable based on the credit terms offered to our clients. Pre-payments or deposits to procure inventory reflected a reduction and therefore were a source of cash. We also leveraged the use of our accounts payable to partially offset the increase in working capital by efficiently utilizing the terms offered by our vendors as it relates to the commitments and disbursements for the goods and services that are needed for our operations.

Cash flows provided by (used in) investing activities

Cash flows used in investing activities totaled $1.3 million in 2021, which compares to cash provided by investing activities of $0.8 million for the year ended December 31, 2020. The change in the cash used in investing activities when compared to the 2020 period was primarily due to the investment of approximately $3.1 million mainly pertaining to operational equipment which was partially offset by note receivable payments from our China licensee of approximately $1.9 million.

Cash flows (used in) provided by financing activities

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Cash flows provided by financing activities totaled $71.4 million for 2021, representing a $55.8 million increase from $15.6 million in 2020. The increase of cash provided by financing activities is mainly related to the net proceeds of $67.8 million from our June 2021 public offering and proceeds from stock option exercises of $3.7 million, which was offset in part by payments of approximately $94,000 pertaining to financial leases.

Off Balance Sheet Arrangements

As of December 31, 2021 and 2020, we had no off-balance sheet arrangements.

Critical Accounting Estimates

Our consolidated financial statements are prepared in accordance with U.S. GAAP. In connection with the preparation of our consolidated financial statements, we are required to make judgments and estimates that significantly affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. Our estimates are based on historical experience, current trends and various other assumptions we believe to be relevant under the circumstances. We review the underlying factors used in our estimates regularly, including reviewing the significant accounting policies impacting the estimates, to ensure compliance with U.S. GAAP. However, due to the uncertainty inherent in our estimates, actual results may be materially different. We have identified the accounting estimates below as critical to understanding and evaluating the financial results reported in our consolidated financial statements.

For a complete description of our significant accounting policies, see Item 8 Financial Statements and Supplementary Data, Note 2, "Basis of Presentation and Summary of Significant Accounting Policies".

Valuation Allowances for Deferred Tax Assets

Deferred tax assets arise when we recognize expenses in our financial statements that will be allowed as income tax deductions in future periods. Deferred tax assets also include unused tax net operating losses that we are allowed to carry forward to future years. Accounting rules permit us to carry deferred tax assets on the balance sheet at full value as long as it is “more likely than not” that the deductions, losses or credits will be used in the future. A valuation allowance must be recorded against a deferred tax asset if this test cannot be met. Our determination of valuation allowances is based upon a number of assumptions, judgments and estimates, including forecasted earnings, future taxable income and the relative proportions of revenue and income before taxes in the various jurisdictions in which we operate. Concluding that a valuation allowance is not required is difficult when there is significant negative evidence that is objective and verifiable, such as cumulative losses in recent years.

We have deferred tax assets related to foreign net operating losses, primarily in China, Hong Kong, Sweden, Finland and Norway, against which we have recorded valuation allowances as it is currently not more likely than not that the foreign net operating losses will be realized in the future.

We have deferred tax assets related to US Federal and state net operating losses on which we retained a full valuation allowance through September 30, 2021. During the fourth quarter of 2021, we concluded that it is more likely than not that the US deferred tax assets would be realized. This conclusion was based on US profitability and NOL utilization in 2021 and 2020 as well as future forecasts of US profitability. This positive evidence supported the release of the Federal and State valuation allowance. For the year ended December 31, 2021, the Company reported a release of its US valuation allowance for deferred tax assets of approximately $6.0 million

Goodwill and Intangible Assets Valuation

We evaluate the carrying value of our goodwill and indefinite-lived intangible assets for impairment at least annually or when an interim triggering event occurs that would indicate impairment may have taken place. We evaluate our other definite-lived intangible assets for impairment when evidence exists that certain events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Judgments and assumptions are required in such impairment evaluations. Our annual impairment test of indefinite-lived intangible assets was performed as of October 1, the first day of our last fiscal quarter. Our annual impairment test of indefinite-lived intangible assets was performed as of October 1, the first day of the last fiscal quarter.

Our annual impairment evaluation of goodwill involves both qualitative and quantitative aspects, including comparing our single reporting unit's fair value to its respective carrying value. Some of the qualitative aspects evaluated included macro-economic conditions, industry and market considerations, cost factors regarding our raw materials and operations and overall financial performance of our business. If the fair value exceeds carrying value, then we conclude that no goodwill impairment has occurred. If the reporting unit's carrying value exceeds its fair value, we would recognize an impairment loss in an amount equal to the excess up to the total amount of goodwill.

We use the income approach to determine the fair value of our definite-lived customer relationships intangible asset. Our projections used in the income approach to determine the fair value of our definite-lived customer relationships intangible asset include assumptions for growth rates of sales, costs, and profits, which are based on various long-range financial and operational plans. Additionally, discount rates used in the definite-lived intangible analysis are based on a weighted-average cost of capital, driven by the prevailing interest rates in the geographies where the company operates, as well as credit ratings, financing abilities and opportunities, among other factors. Discount rates may differ slightly to adjust for country or market specific risk, among other factors.

Changes in economic and operating conditions impacting these assumptions could result in goodwill and intangible assets being impaired in future periods. Additionally, disruptions to our business such as prolonged recessionary periods or unexpected significant declines in operating results could result in impairment of goodwill and other intangible assets in future periods.

Changes in the factors used in our fair value estimates, including the impacts of the COVID-19 pandemic, cost inflation or other margin erosion, and discount rates used, could have a significant impact on the fair values of the reporting unit and indefinite-lived intangible assets.

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Item 7. Quantitative and Qualitative Disclosures about Market Risk.

While the Company is a newly designated “large accelerated” filer as of the fiscal year ended December 31, 2021, it is not required to satisfy the larger reporting company disclosure requirements until the first quarter after the fiscal year in which this determination is made. As such, the Company may continue to apply the scaled disclosure requirements described in Item 305(e) of Regulation S-K, which permits a “smaller reporting company” to omit Quantitative and Qualitative Disclosures about Market Risk.