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Celsius Holdings, Inc. - Quarter Report: 2010 June (Form 10-Q)

f10q0610_celsius.htm


 
 
UNITED STATES
 
SECURITIES AND EXCHANGE COMMISSION
 
Washington, D.C. 20549
 
FORM 10-Q
 
 
|X|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2010
 
OR
 
|_|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
CELSIUS HOLDINGS, INC.
 
 
(Exact name of registrant as specified in its charter)
 

NEVADA
001-34611
20-2745790
(State or other jurisdiction of  incorporation)
(Commission File Number)
(IRS Employer Identification No.)

Securities registered under Section 12(g) of the Exchange Act:  None
 
140 NE 4th Avenue, Suite C
Delray Beach, FL 33483
(Address of principal executive offices) (Zip Code)
 
(561) 276-2239
(Registrant’s telephone number, including area code)
 
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_|
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes |X| No |_|

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934.
     
Large accelerated filer  
  
Accelerated filer  
Non-accelerated filer  
  
Smaller reporting company  X
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).    Yes      No  X
 
The number of shares of common stock outstanding as of August 10, 2010 was 18,420,063.
 
 
 
 

 
 
 
 
   CELSIUS HOLDINGS, INC.    
   Table of contents    
     Page Number
 PART  I.   FINANCIAL INFORMATION    
       
    Item 1.
 Condensed Consolidated Balance Sheets at June 30, 2010 (unaudited)
    and December 31, 2009 
 3  
       
 
 Condensed Consolidated Statements of Operations for
    three and six months ended June 30, 2010 and 2009 (unaudited) 
 4  
       
 
 Condensed Consolidated Statements of Cash Flows for
    three and six months ended June 30, 2010 and 2009 (unaudited)  
 5  
       
   Notes to Condensed Consolidated Financial Statements (unaudited)   6-11  
       
   Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations   12-16  
       
   Item 3.  Quantitative and Qualitative Discussion about Market Risk   17  
       
   Item 4T.   Controls and Procedures   17  
       
 PART  II.   OTHER INFORMATION    
       
   Item 6.   Exhibits 17  
       
 Signatures    18  
       
 
 
 
2

 
 
 
 
Celsius Holdings, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
 
               
ASSETS
 
June 30, 2010
        December 31, 2009  
   
(unaudited)
           
Current assets:
               
Cash and cash equivalents
  $ 6,476,915       $ 606,737  
Accounts receivable, net of allowance of $127,075 and $74,296, respectively
    2,099,559           2,124,788  
Inventories, net of reserve of $83,458 and $43,548, respectively
    2,712,997           1,650,337  
Other current assets
    798,768           893,202  
Total current assets
    12,088,239           5,275,064  
 
                 
Property, fixtures and equipment, net of accumulated depreciation of $66,784 and $97,750, respectively
    138,760           179,832  
Other long-term assets
    17,177           18,840  
Total Assets
  $ 12,244,176       $   18,840  
 
                 
                   
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
                 
                   
Current liabilities:
                 
Accounts payable and accrued expenses
  $ 3,371,383       $
1,722,031
 
Short term portion of other liabilities
    -        
23,074
 
Due to related parties, short-term portion
    95,108        
1,110,000
 
Total current liabilities
    3,466,491        
2,855,105
 
 
                 
Convertible note payable, net of debt discount
    -         34,519  
Convertible note payable, net of debt discount, related party
    2,000,000         5,620,052  
Due to related parties, long-term portion
    -         61,034  
Other liabilities
    -         55,183  
Total Liabilities
    5,466,491         8,625,893  
 
                 
Stockholders’ Equity (Deficit):
                 
Preferred stock, $0.001 par value; 2,500,000 shares authorized,
                 
   no shares and 165 shares issued and outstanding, respectively
    -            
Common stock, $0.001 par value: 50,000,000 shares
                 
   authorized, 18.4 million and 12.0 million shares
    18,420         12,030  
Additional paid-in capital
    34,779,430         15,977,210  
Accumulated deficit
    (28,020,165 )       (19,141,397 )
Total Stockholders’ Equity (Deficit)
    6,777,685         (3,152,157
Total Liabilities and Stockholders’ Equity (Deficit)
  $ 12,244,176       $ 5,473,736  
                   
                   
1 Derived from audited financial statements.
                 
                   
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
 
 
 
3

 
 

Celsius Holdings, Inc. and Subsidiaries
 
Condensed Consolidated Statements of Operations
 
(unaudited)
 
   
For the Three Months
Ended June 30,
   
For the Six Months
Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Net revenue
  $ 4,103,426     $ 1,166,062     $ 6,440,310     $ 2,137,473  
Cost of revenue
    2,241,365       676,312       3,741,928       1,220,836  
                                 
Gross profit
    1,862,061       489,750       2,698,382       916,637  
                                 
Selling and marketing expenses
    3,920,811       1,454,235       8,676,263       2,675,280  
General and administrative expenses
    936,152       448,965       2,290,330       803,740  
                                 
Loss from operations
    (2,994,902 )     (1,413,450 )     (8,268,211 )     (2,562,383 )
                                 
Other expense:
                               
Loss on extinguishment of debt , related party
    -       -       322,356       -  
Interest (income) expense, related party
    39,114       6,071       300,970       13,481  
Other interest expense, net
    (7,732 )     20,473       (12,769 )     42,060  
                                 
Total other expense
    31,382       26,544       610,557       55,541  
                                 
Net loss
  $ (3,026,284 )   $ (1,439,994 )   $ (8,878,768 )   $ (2,617,924 )
                                 
Basic and diluted:
                               
  Weighted average shares outstanding
    18,406,432       7,480,662       16,561,223       7,461,896  
   Loss per share
  $ (0.16 )   $ (0.19 )   $ (0.54 )   $ (0.35 )
                                 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
 
 
 
4

 
 
 

Celsius Holdings, Inc. and Subsidiaries
 
Condensed Consolidated Statements of Cash Flows
 
(unaudited)
 
    For the Six Months Ended June 30
   
2010
   
2009
 
Cash flows from operating activities:
           
Net loss
  $ (8,878,768 )   $ (2,617,924 )
Adjustments to reconcile net loss to net cash
               
      used in operating activities:
               
   Depreciation and amortization
    26,912       25,902  
   Loss on disposal of assets
    30,043       -  
   Adjustment to allowance for doubtful accounts
    52,779       (31,246 )
   Adjustment to reserve for inventory obsolescence
    39,910       (113,773 )
   Issuance of stock options
    556,310       90,443  
   Amortization of debt discount
    174,073       23,316  
   Loss on extinguishment of debt
    322,356       -  
   Issuance of shares as compensation
    -       20,124  
Changes in operating assets and liabilities:
               
   Accounts receivable
    (27,550 )     (241,768 )
   Inventories
    (1,102,570 )     (277,713 )
   Prepaid expenses and other current assets
    102,464       (244,734 )
   Accounts payable and accrued expenses
    1,649,352       454,040  
Net cash used in operating activities
    (7,054,689 )     (2,913,333 )
                 
Cash flows from investing activities:
               
   Purchases of property, fixtures and equipment
    (45,345 )     (14,765 )
   Proceeds from sale of equipment
    22,836       -  
Net cash provided by (used in) investing activities
    22,509       (14,765 )
                 
Cash flows from financing activities:
               
   Proceeds from sale of common stock
               
      and exercise of stock options
    13,101,301       312  
   Proceeds from sale of preferred stock
    -       2,000,000  
   Repayment of loans payable
    (78,257 )     (63,062 )
   Proceeds from note receivable
    258       -  
   Proceeds from debt to related parties
    1,000,000       300,000  
   Repayment of debt to related parties
    (1,075,926 )     (38,753 )
Net cash provided by financing activities
    12,947,376       2,198,497  
                 
Increase (decrease) in cash
    5,870,178       (729,601 )
                 
Cash, beginning of period
    606,737       1,040,633  
Cash, end of period
  $ 6,476,915     $ 311,032  
                 
Supplemental disclosures of cash flow information:
               
     Cash paid during the year for interest
  $ 77,345     $ 43,757  
     Cash paid during the year for taxes
  $ -     $ -  
                 
Non-Cash Investing and Financing Activities:
               
Issuance of shares for note payable
  $ 5,151,000     $ 105,000  
   

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
 
 
 
5

 
 
 
CELSIUS HOLDINGS, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

1.  
ORGANIZATION AND DESCRIPTION OF BUSINESS
 
Celsius Holdings, Inc. (the “Company”) was incorporated under the laws of the State of Nevada on April 26, 2005. On January 26, 2007, the Company acquired Elite FX, Inc., a Florida corporation by merger with a wholly owned subsidiary of the Company.
 
Since the merger, the Company has been engaged in the business of Elite FX, Inc., the development, marketing, sale and distribution of “functional” calorie-burning beverages under the Celsius® brand name.
 

2.  
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
The unaudited condensed consolidated financial statements included herein have been prepared by us, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, (the “SEC”). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the interim consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the statement of the results for the interim periods presented. A complete summary of significant accounting policies, some of which are discussed below, can be found in our form 10-K dated December 31, 2009, filed with the SEC on March 10, 2010.
 
Earnings per Share — Basic earnings per share are calculated by dividing income available to stockholders by the weighted-average number of common shares outstanding during each period. Diluted earnings per share are computed using the weighted average number of common and dilutive common share equivalents outstanding during the period. Dilutive common share equivalents consist of shares issuable upon conversion of preferred shares, exercise of stock options and warrants (calculated using the reverse treasury stock method). As of June 30, 2010 there were warrants and options outstanding to purchase 3.0 million shares, which exercise price averaged $4.56. The dilutive common shares equivalents, including convertible notes, preferred stock and warrants, of 213,062 shares were not included in the computation of diluted earnings per share, because the inclusion would be anti-dilutive.
 
 Dilutive common shares equivalent table  Shares   USD  Dilutive shares
 Warrants (in the money) .............................................  0    0
 Stock options (in the money) .....................................  411,068    213,662
 Total dilutive common shares ....................................       213,062
 
If all dilutive instruments were exercised using the reverse treasury stock method, then the total number of shares outstanding would be 18.6 million shares.
 
Recent Accounting Pronouncements
 
All new accounting pronouncements issued but not yet effective have been deemed to not be applicable; hence the adoption of these new standards is not expected to have a material impact on our results of operations, cash flows or financial position.
 
Liquidity
 
As of June 30, 2010, we had cash and cash equivalents of approximately $6.5 million and working capital of $8.7 million. Cash used in operations during the six months ended June 30, 2010 totaled $7.1 million. We incurred a net loss of $8.9 million during the six months ended June 30, 2010, and our accumulated deficit increased to $28.0 million as of June 30, 2010.
 
Our current operating plan for the balance of 2010 and the first half of 2011does not contemplate obtaining additional financing. However, if our sales volumes do not meet our projections or expenses exceed our expectations, 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 and other expenses or seeking additional financing. There can be no assurance that such financing, if required, will be available on commercially reasonable terms if at all.
 
Our financial statements for the period ended June 30, 2010 were prepared assuming we would continue as a going concern, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that could result should we be unable to continue as a going concern.
 
 
 
6

 
 
CELSIUS HOLDINGS, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 

3.  
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
 
Accounts payable and accrued expenses consist of the following at:                        
 
      June 30,       December 31,  
       2010          2009    
                 
Accounts payable
  $ 2,513,911     $ 1,112,424  
Accrued expenses
    857,472       609,607  
Total
  $ 3,371,383     $ 1,722,031  

 
4.  
DUE TO RELATED PARTIES
 
Due to related parties consists of the following as of:
 
             
   
June 30,
   
December 31,
 
   
   2010
   
2009
 
In December 2008, the Company entered into a $1 million revolving line of credit with CD Financial, LLC (“CD”) and it carries interest of Libor plus three percentage points. The Company has pledged all of its assets as security for the line of credit. The line was paid in full and terminated in February, 2010.
  $ -     $ 950,000  
                 
In December 2009, the Company entered into an agreement to accelerate the conversion of its Series B preferred shares to common stock and recognized a liability.
    -       100,000  
                 
The Company’s CEO loaned the Company $50,000 in February 2006. Moreover, the Company accrued salary for the CEO from March of 2006 through May 2008 for a total of $171,000. In August 2009, the total debt was refinanced, has no collateral and accrues interest at 3%; monthly payments of $5,000 are due with a balloon payment of $64,000 in January 2011.
    95,108       121,034  
    $ 95,108     $ 1,171,034  
Less: Short-term portion
  $ (95,108 )   $ (1,110,000 )
Long-term portion
  $ -     $ 61,034  
                 
Convertible note payable
 
June 30,
   
December 31 ,
 
     2010      2009  
Convertible note payable, related party see Note 13
    2,000,000       5,170,419  
Convertible note payable, related party see Note 13
    -       449,633  
Convertible note payable, long term
  $ 2,000,000     $ 5,620,052  
                 
 
Also, see Note 5 — Convertible Note payable, related parties, and Note 7 — Related party transactions.
 
 
 
7

 
 
CELSIUS HOLDINGS, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 

5.  
CONVERTIBLE NOTE PAYABLE, RELATED PARTIES
 
The Company entered into a loan agreement for up to $6.5 million in September 2009 and issued a convertible note to one of its shareholders. The note originally carried interest of one month LIBOR plus 3%, payable the first time on the anniversary of the agreement, thereafter quarterly. The loan matures on September 9, 2012. The outstanding balance can be immediately converted into the Company’s common stock at a conversion price. The conversion price was originally based on a price of $8.00 per share, or a market price calculation at the date of conversion. In order to comply with the listing requirements for the Nasdaq Stock Market, in January 2010, the parties amended the convertible loan agreement to set the conversion price to $10.20, which was the consolidated closing bid price of the common stock on the OTC Bulletin Board on the business day prior to the date the loan agreement was entered into. At the same time the interest rate was increased to one month LIBOR plus 7%. The Company recorded a debt discount totaling $362,500 with a credit to additional paid in capital for the intrinsic value of the beneficial conversion feature of the conversion option at the time of each draw on the loan. The Company recorded $32,919 and $7,225 as interest expense amortizing the debt discount during 2009 and 2010, respectively, and the remaining balance, $322,356, was recorded as a loss on extinguishment of debt when the loan was materially modified in January 2010. The Company considered requirements by the Derivatives and Hedging Topic of the ASC and other guidance and concluded that the conversion option should not be bifurcated from the host contract and the conversion option is recorded as equity and not a liability. In January 2010, the Company borrowed $1.0 million and then owed $6.5 million. In March 2010, the shareholder converted $4.5 million of the note to 441,176 shares of the Company’s common stock, (a conversion price of $10.20 per share). The net outstanding balance as of June 30, 2010 was $2,000,000.
 
The Company entered into a refinance agreement for $615,000 in September, 2009 and issued a convertible note to one of its shareholders. The Company restructured an already existing note issued to the shareholder. The outstanding balance can be immediately converted into the Company’s common stock at a conversion price from September 8, 2009 through and including September 8, 2012, equal to the lesser of (i) $8.00 per share, or (ii) the average of the ten daily VWAPs for the 10 Trading Days immediately preceding the date on which a conversion notice is received (defined in the note as the “Market Price”); or (B) after December 31, 2011 the greater of (i) $8.00 per share, or (ii) the Market Price; provided that, the conversion price shall never be less than $2.00 (two dollars) regardless of the Market Price on the conversion date. The Company recorded a debt discount totaling $184,500 with a credit to additional paid in capital for the intrinsic value of the beneficial conversion feature of the conversion option at the time of issuance. The shareholder converted the entire debt in March 2010 to 176,659 shares of the Company’s common stock (a conversion price of $3.48 per share). The Company recorded $10,592 and $19,133 as interest expense amortizing the debt discount during 2010 and 2009, respectively, and the remaining balance of $154,775 was recorded upon conversion as interest expense. The Company considered requirements by the Derivatives and Hedging Topic of the ASC and other guidance and concluded that the conversion option should not be bifurcated from the host contract and the conversion option is recorded as equity and not a liability.
 

6.  
PREFERRED STOCK
 
On August 8, 2009, the Company entered into a securities purchase agreement (“SPA1”) with CDS Ventures of South Florida, LLC (“CDS”), an affiliate of CD Financial, LLC (“CD”). Pursuant to SPA1, the Company issued 100 Series A preferred shares (“Preferred A Shares”), as well as a warrant to purchase an additional 50 Preferred A Shares, for a cash payment of $1.5 million and the cancellation of two notes in aggregate amount of $500,000 issued to CD. The Preferred A Shares can be converted into Company common stock at any time. SPA1 was amended on December 12, 2008 to provide that until December 31, 2010 the conversion price is $1.60, after which the conversion price is the greater of $1.60 or 90% of the volume weighted average price of the common stock for the prior 10 trading days. Pursuant to SPA1, the Company also entered into a registration rights agreement, pursuant to which the Company filed a registration statement for the common stock issuable upon conversion of the initially purchased Preferred A Shares. The registration statement filed in connection with the Preferred A Shares was declared effective on May 14, 2009. The Preferred A Shares accrue a ten percent annual cumulative dividend, payable in additional Preferred A Shares. In March and December of 2009, the Company issued 15.05 Preferred A Shares in dividends for the years 2008 and 2009.
 
On November 16, 2009, CDS exercised its right to purchase additional 50 Preferred A Shares in exchange for a note owed to them. In March 2010, CDS converted all its Preferred A Shares, including accrued dividends for 2010, to 2,103,446 shares of common stock (a conversion price of $1.60 per share).
 
 
 
8

 
 
CELSIUS HOLDINGS, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

7.  
RELATED PARTY TRANSACTIONS
 
The CEO has guaranteed the lease agreement for the Company’s offices. The CEO has not received any compensation for the guarantees.
 
The Company rented in October, 2009, an office from a company affiliated with CD Financial LLC. Currently the lease is on a month-to-month basis with a monthly rent of $6,921. The rental fee is commensurate with other properties available in the market.
 
Also, see Note 4 — Due to related parties and Note 13 — Subsequent events.
 
8.  
STOCKHOLDERS’ EQUITY
 
On February 16, 2010, the Company sold 900,000 units resulting in aggregate gross proceeds of $14.5 million. Each unit consisted of four shares of common stock and one warrant to purchase one share of common stock. The warrants are exercisable at a price of $5.32 per share at any time through February 8, 2013. The net proceeds of the offering after deducting underwriting discount and offering expenses were approximately $13.1 million.
 
In June, 2010, the Company converted the $36,000 remaining outstanding balance of the convertible note payable to Golden Gate Investors, Inc. to 19,382 shares of common stock, at a conversion price of $1.86.
 
Also, see Note 4 — Convertible Note Payable, other, Note 6 — Convertible Note Payable, related party and Note 7 — Preferred Stock.
 
9.  
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. Until 2017, options to acquire up to 2.5 million shares of common stock may be granted at no less than fair market value on the date of grant. Upon exercise, shares of new common stock are issued by the Company.
 
The Company has issued approximately 1.6 million options to purchase shares at an average price of $3.97 with a fair value of $3.6 million. For the six month period ended June 30, 2010 and 2009, the Company recognized $556,311 and $90,443, respectively, of non-cash compensation expense (included in General and Administrative expense in the accompanying Consolidated Statement of Operations). As of June 30, 2010 and 2009, respectively, the Company had approximately $2.2 million and $295,000, respectively, of unrecognized pre-tax non-cash compensation expense which the Company expects to recognize, based on a weighted-average period of 1.2 years. The Company used the Black-Scholes option-pricing model and 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 655,000 shares that have vested, and 172,000 shares were exercised as of June 30, 2010. The following is a summary of the assumptions used:
 
Risk-free interest rate
 
1.3% - 4.9%
Expected dividend yield
 
Expected term
 
3 – 5 years
Expected annual volatility
 
70% - 90%
 
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:
 
·  
Estimated volatility is a measure of the amount by which the Company’s stock price is expected to fluctuate each year during the expected life of the award. The Company’s estimated volatility is an average of the historical volatility of peer entities whose stock prices were publicly available. The Company’s calculation of estimated volatility is based on historical stock prices of these peer entities over a period equal to the expected life of the awards, which ranges from 3 to 4 years. The Company uses the historical volatility of peer entities due to the lack of sufficient historical data of its stock price in the market in which its shares trade which can be expected to repeat itself in the future. This is due to among other things that in the past the Company’s stock has traded on the OTC Bulletin Board and will now trade on the NASDAQ National Market;
 
·  
The expected term represents the period of time that awards granted are expected to be outstanding .With the passage of time, actual behavioral patterns surrounding the expected term will replace the current methodology;
 
·  
The expected dividend yield is 0, based on the  Company’s policy not to issue cash dividends; and
 
·  
The risk-free interest rate is based on the yield curve of a zero-coupon U.S. Treasury bond on the date the stock option award is granted with a maturity equal to the expected term of the stock option award.
 
During 2009, the Company issued a total of 14,801 shares as compensation to a consultant and a distributor at a fair value of $36,125 and no shares have been issued in 2010.
 
 
 
9

 
 
CELSIUS HOLDINGS, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
10.  
WARRANTS
 
An investment banking firm received, as placement agent for the Fusion Capital financing, a warrant to purchase 3,750 shares at a price of $26.20 per share. If unexercised, the warrant expires on June 22, 2012.
 
In March, 2008 the Company issued a total of 500,000 unregistered shares of common stock in a private placement, for an aggregate consideration of $500,100. In addition, the investor received a warrant to purchase 350,000 unregistered shares of common stock at an exercise price of $2.60 per share. If unexercised, the warrant expires on March 28, 2011.
 
In February 2010 as part of the secondary offering, the company issued warrants to purchase 900,000 shares of the Company’s common stock at an exercise price of $5.32. The warrants expire on February 8, 2013. The company also issued a warrant to the underwriter to purchase 18,000 units at $16.125 per unit, each unit consisting of four shares and a warrant to purchase one additional share at an exercise price of $5.32.
 
In April, 2010 the Company issued a warrant to purchase a total of 200,000 shares of the company’s common stock at an exercise price of $3.27, in connection to a consulting agreement. The warrants expire in April 2015 or earlier depending on achievement of milestones.
 
 
Period Ended June 30, 2010
Year Ended December 31, 2009
 
Shares
Weighted Average
Shares
Weighted Average
 
in (‘000s)
Exercise Price
in (‘000s)
Exercise Price
Balance at the beginning of year
404
$3.61
2,979
$1.35
Granted
1,190
4.90
50
9.00
Exercised
(2,625)
1.14
Expired
Balance at the end of year
1,594
$4.57
404
$3.61
         
Warrants exercisable at end of period
1,394
$4.76
404
$3.61
Weighted average fair value of the
       
   warrants granted during the period
 
$1.58
 
$7.63

 
The weighted average remaining contractual life and weighted average exercise price of warrants outstanding and exercisable at June 30, 2010, for selected exercise price ranges, is as follows:
 
Exercise
Price
  
Number
Outstanding at
June 30,
2010 (000s)
Weighted
Average
Remaining Life
  
Weighted
Average
Exercise
Price
  
$2.60 – 4.03
  
622
2.2
$2.98
  
$5.32
  
918
2.6
$5.32
  
$9.00
  
50
2.4
$9.00
  
$26.20
  
4
2.1
$26.20
  
   
1,594
2.4
$4.57
 
 
 
 
10

 
 
CELSIUS HOLDINGS, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
11.  
COMMITMENTS AND CONTINGENCIES
 
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
 
There is one agreement that also has liquidated damages, but instead of a monetary damage, the potential liability is to have to issue shares to the distributor at a purchase price of $1.20. The quantity of shares depends on this distributor’s purchases from the Company as compared to the Company’s total revenue. It is the management’s belief that no such agreement has created any liability as of June 30, 2010.
 

12.  
BUSINESS AND CREDIT CONCENTRATION
 
Substantially all of the Company’s revenue derives from the sale of the Celsius beverage.
 
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. No vendor accounted for more than 10% of total payments.
 
During the six months ended June 30, 2010, the Company recorded revenue from two customers totaling 59.7% of the Company’s total revenue for the quarter.
 

13.  
SUBSEQUENT EVENTS
 
On July 12, 2010, Celsius Holdings, Inc. entered into an agreement with CD Financial, LLC, a company controlled by Carl DeSantis, a principal shareholder, to provide up to $3.0 million in line of credit financing to be used exclusively for incremental targeted advertising and marketing of Celsius’ products. The line of credit requires monthly payments of interest only at the rate of 5% per annum until maturity in July 2012.  The line of credit is secured by a pledge of substantially all of Celsius’ assets.
 
We have evaluated events and transactions that occurred through the date the financial statements were available to be issued, for potential recognition or disclosure in the accompanying financial statements.  Other than the disclosures shown, we did not identify any events or transactions that should be recognized or disclosed in the accompanying financial statements.
 
 
 
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ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
As used throughout this report, the terms “we,” “us,” ”our” and “our company” refer to Celsius Holdings, Inc., and all of its subsidiaries. Unless otherwise noted, all share and per share data in this report gives effect to 1-for-20 reverse stock split of our common stock implemented on December 23, 2009.
 
General information about our company can be found at www.celsius.com. We make our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 (the “Securities Exchange Act”) available free of charge on our website, as soon as reasonably practicable after they are electronically filed with the Security and Exchange Commission (the “SEC”).
 
FORWARD-LOOKING STATEMENTS
 
Information included in this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act. This information involves known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from the future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “may”, “should”, “expect”, “anticipate”, “estimate”, “believe”, “intend” or “project” or the negative of these words or other variations on these words or comparable terminology.
 
The forward-looking statements in this report include statements regarding, among other things, (a) our projected sales and profitability, (b) our growth strategies, (c) anticipated trends in our industry, (d) our future financing plans and (e) our anticipated needs for working capital. These statements may be found in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as elsewhere in this report. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined and matters described in this report generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this report will in fact occur.
 
OVERVIEW
 
 
The following discussion should be read in conjunction with the accompanying unaudited condensed consolidated financial statements including the notes to those financial statements. Dollar amounts of $1.0 million or more are rounded to the nearest one tenth of a million; all other dollar amounts are rounded to the nearest one thousand dollars and all percentages are stated to the nearest one tenth of one percent.
 
Our Business
 
We are engaged in the development, marketing, sale and distribution of “functional” calorie-burning beverages under the Celsius® brand name. According to multiple clinical studies we funded, a single serving (12 ounce can) of Celsius® burns up to 100 calories by increasing a consumer’s metabolism an average of 12% and providing sustained energy for up to a three-hour period.
 
We seek to combine nutritional science with mainstream beverages by using our proprietary thermogenic (calorie-burning) MetaPlus® 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® has no artificial preservatives, aspartame or high fructose corn syrup and is very low in sodium. Celsius® uses good-for-you ingredients and supplements such as green tea (EGCG), ginger, calcium, chromium, B vitamins and vitamin C. Celsius is sweetened with sucralose, a sugar-derived sweetener that is found in Splenda®, 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 recently launched nationwide marketing campaign focused on television, radio, on-line and magazine advertising. We also undertake various promotions at the retail level such as coupons and other discounts. We have engaged Mario Lopez, a well-known television personality, to be our national celebrity spokesperson.
 
 
 
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Until the first quarter of 2009, we mainly sold and distributed our products through a network of independent regional distributors and wholesalers.  In order to achieve more national market penetration, in April 2009, we began to implement a direct-to-retail marketing strategy by retooling our sales force, working with national food and beverage brokers and supporting these efforts through an integrated national marketing campaign, which we launched in September 2009.
 
As a result, Celsius® products are now available in most retail trade channels including grocery, convenience, drug and nutrition stores, as well as mass merchants and club retailers.  Our beverages are also available in military PXs, health clubs and online at many health and nutrition oriented c-commerce sites.  Our shift in marketing emphasis has led to broader geographic distribution and increased brand awareness and is expected to continue to be our marketing focus.
 
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.
 
Corporate History and Information
 
We were incorporated in Nevada on April 26, 2005 under the name “Vector Ventures, Inc.”  In December 2006 we changed our name to Celsius Holdings, Inc. On January 26, 2007, we acquired the Celsius® beverage business of Elite FX, Inc., a Florida corporation engaged in the development of functional beverages since 2004, in a reverse merger.
 
Our principal executive offices are located at 140 N.E. 4th Avenue, Delray Beach, Florida 33483.  Our telephone number is (561) 276-2239 and our website is www.celsius.com.  The information accessible through our website does not constitute part of this report.
 
Critical Accounting Policies and Estimates
 
Critical Accounting Policies
 
The unaudited condensed consolidated financial statements included herein have been prepared by us, without audit, pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the interim consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the statement of the results for the interim periods presented. A complete summary of significant accounting policies, some of which are discussed below, can be found in our annual report on form 10-K for the year ended December 31, 2009, filed with the SEC on March 10, 2010.
 
Recent Accounting Pronouncements
 
Information regarding newly issued accounting pronouncements is contained in Note 2 to the Consolidated Financial Statements in this form 10-Q.
 

RESULTS OF OPERATIONS
 
Three Months Ended June 30, 2010 Compared to Three Months Ended June 30, 2009
 
Revenue
 
Net revenue for the three months ended June 30, 2010 and 2009 was approximately $4.1 million and $1.2 million, respectively. The increase of 251.9 % was mainly due to sales to new or recently added retail customers. We experienced a large charge to revenue due to discounts and promotions of $904,000 in the 2010 quarter as compared to $164,000 during 2009 quarter. This increase in discounts and promotions, consisting of coupons, temporary price reductions, co-op advertising and slotting fees, is part of our strategic marketing plan. Our case volume for the three months ended June 30, 2010 was approximately 450% the volume for the same period last year.
 
Gross profit
 
Gross Profit was 45.4 % in the second quarter of 2010 as compared to 42.0 % for the same period in 2009. The increase in gross profit is due to improved cost of our products partially offset by the increased promotional activity as described above and an increase in freight cost due to smaller shipments to our retailers’ distribution centers.
 
 
 
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Operating Expenses
 
Sales and marketing expenses increased substantially to $3.9 million for the second quarter of 2010 from $1.5 million for the same three-month period in 2009, or an increase of $2.4 million. This was mainly due to increases in direct advertising expenses of $1.1 million, product samplings of $700,000, internet campaign expenses of $235,000 and co-op retailer advertising of $195,000. We have substantially increased our efforts in radio and television advertising and in product samplings. We continue to participate in many trade shows, sports and exercise events across the country. General and administrative expenses increased from $449,000 for the three-month period in 2009 to $936,000 for the same period in 2010, an increase of $487,000. This was mainly due to increased expense for granting options of $215,000, increased professional fees of $111,000, and increased employee related expenses of $71,000.
 
Other expense
 
Total other expense increased from $27,000 for the three-month period in 2009 to $31,000, during the second quarter in 2010, or an increase of $4,000.
 
Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009
 
Revenue
 
Net revenue for the six months ended June 30, 2010 and 2009 were $6.4 million and $2.1 million, respectively. The increase of 201.3 % was mainly due to sales to new or recently added retail customers. We experienced a large charge to revenue due to discounts and promotions of $1.7 million in 2010 as compared to $287,000 during the same period last year. This increase in discounts and promotions, consisting of coupons, temporary price reductions, co-op advertising and slotting fees, are part of our strategic marketing plan. Our case volume for the six months ended June 30, 2010 was approximately four times the volume for the same period last year.
 
Gross profit
 
Gross Profit was 41.9 % in the six months ended June 30, 2010 as compared to 42.9 % for the same period in 2009. The decrease is due to the increased promotional activity as described above and an increase in freight cost due to smaller shipments to our retailers’ distribution centers, partially offset improved cost of our products.
 
Operating Expenses
 
Sales and marketing expenses increased substantially to $8.7 million for the six month period ended June 30, 2010 from $2.7 million for the same three-month period in 2009, or an increase of $6.0 million. This was mainly due to increases in direct advertising expenses of $3.3 million, product samplings of $1.4 million, internet campaign expenses of $262,000, co-op retailer advertising of $357,000, and retailer broker fees of $240,000. We have substantially increased our efforts in radio and television advertising and in product samplings. We continue to participate in many trade shows, sports and exercise events across the country. General and administrative expenses increased from $804,000 for the six-month period in 2009 to $2.3 million for the same period in 2010, an increase of $1.5 million. This was mainly due to increased employee related expenses of $568,000, increased expense for granting options of $419,000, increased professional fees of $177,000 and increased expense for bad debts of $110,000.
 
Other expense
 
Total other expense increased from $56,000 for the six-month period in 2009 to $611,000 during the same period in 2010, or an increase of $555,000. This increase is mainly due to the loss on extinguishment of debt of $322,000, increase of debt discount amortization of $151,000 and increase of interest on loans of $84,000.
 

 
LIQUIDITY AND CAPITAL RESOURCES
 
As of June 30, 2010, we had cash and cash equivalents of approximately $6.5 million and working capital of $8.7 million. Cash used in operations during the six months ended June 30, 2010 totaled $7.1 million. We incurred a net loss of $8.9 million during the six months ended June 30, 2010, and our accumulated deficit increased to $28.0 million as of June 30, 2010.
 
 
 
14

 
 
 
Our current operating plan for the balance of 2010 and the first half of 2011does not contemplate obtaining additional financing. However, if our sales volumes do not meet our projections or expenses exceed our expectations, 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 and other expenses or seeking additional financing. There can be no assurance that such financing, if required, will be available on commercially reasonable terms if at all.
 
Our financial statements for the period ended June 30, 2010 were prepared assuming we would continue as a going concern, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that could result should we be unable to continue as a going concern.
 
We borrowed $50,000 from the CEO of the Company in February 2006. We also owed the CEO $171,000 for accrued salaries from 2006 and 2007. The two debts were restructured in to one note accruing 3% interest, monthly payments of $5,000 and with a balloon payment of $64,000 in January 2011. The outstanding balance under the note as of June 30, 2010 was $95,000.
 
In September 2009, we entered into a $6.5 million loan agreement with CDS Ventures of South Florida, LLC. The loan is due in September 2012. Interest was set at 300 basis points over the one-month LIBOR rate. The first interest payment is due in September 2010 and quarterly thereafter at 700 basis points over one (1) month LIBOR. On March 10, 2010, CDS converted $4.5 million of the convertible note into common stock.
 
Our Securities Purchase Agreement with Golden Gate Investors, Inc.
 
On December 19, 2007, we entered into a securities purchase agreement with Golden Gate Investors, Inc (GGI). The purchase agreement included four tranches of $1,500,000 each. The first tranche consisted of our 7.75% convertible debenture issued in exchange for $250,000 in cash and a promissory note for $1,250,000 issued by GGI which was to mature on February 1, 2012. The promissory note contained a prepayment provision which required GGI to make prepayments of interest and principal of $250,000 monthly upon satisfaction of certain conditions. One of the conditions to prepayment was that GGI may immediately sell all of the common stock issued upon Conversion (as defined in the debenture) pursuant to Rule 144 of the Securities Act of 1933. We were under no contractual obligation to ensure that GGI may immediately sell all of the common stock Issued at Conversion (as defined in the debenture) pursuant to Rule 144 under the Securities Act of 1934. In the event that GGI may not immediately sell all of the common stock Issued at Conversion pursuant to Rule 144, GGI would be under no obligation to prepay the promissory note and likewise under no obligation to exercise its conversion rights under the debenture. If GGI did not fully convert the debenture by its maturity on December 19, 2011, the balance of the debenture was to be offset by any balance due to us under the promissory note. The balance of the debenture could be converted at any time with a conversion price as the lower of (i) $20.00, or (ii) 80% of the average of the three lowest daily volume weighted average price during the 20 trading days prior to GGI’s election to convert. We were not required to issue the shares unless a corresponding payment had been made on the promissory note.
 
On September 8, 2009, the Company entered into an addendum to the agreement with GGI. The balance of the note receivable, $250,000 was netted against the balance of the debenture. All future tranches were cancelled and terminated without penalty to either party. GGI converted $1.1 million of its convertible debenture through June 2010 receiving 972,078 shares of common stock, the balance of the note was offset against the note receivable and cash payments of $65,000. There is no outstanding balance of the debenture as of June 30, 2010.
 
Our Convertible Loan Agreement with CDS Ventures of South Florida, LLC
 
On September 8, 2009, we entered into a convertible loan agreement with CDS Ventures of South Florida, LLC. Under the loan agreement, CDS Ventures of South Florida, LLC will lend us up to $6,500,000. The loan is due on September 8, 2012 and carries a variable interest rate equal to 300 basis points over the one (1) month LIBOR. In January 2010, we agreed to increase the interest rate to 700 basis points over the one (1) month LIBOR. Commencing on September 8, 2010 and continuing each three month period hereafter, we will make payments of all accrued but unpaid interest only on the unpaid principal amount. The loan can at any time be converted to shares of our common stock at the Conversion Price. The “Conversion Price” was originally based on a price at $8.00 per share of a market price calculation at the date of conversion. In order to comply with the listing requirements for the Nasdaq Stock Market, in January 2010 the parties amended the convertible loan agreement to set the Conversion Price at $10.20 per share, which was the consolidated closing bid price of the common stock on the OTC Bulletin Board on the business day prior to the date the agreement was entered into. In January 2010 we borrowed $1.0 million on the loan and at that point the full $6.5 million was outstanding.
 
In March 2010, CDS Ventures of South Florida, LLC gave notice of their election to convert $4.5 million of the convertible into 441,176 shares of common stock. The outstanding balance on the loan as of June 30, 2010 was $2,000,000.
 
 
 
15

 
 
 
Other Related Party Transactions
 
We have accrued $171,000 for Stephen Haley’s salary from March 2006 through May 30, 2007. Mr. Haley, our CEO, also lent us $50,000 in February 2006. The two debts were restructured in to one note accruing 3% interest, monthly payments of $5,000 and with a balloon payment of $64,000 in January 2011. The outstanding balance as of June 30, 2010 was $95,000.
 
The Company rented in October, 2009, an office from a company affiliated with CD Financial LLC. Currently the lease is on a month-to-month basis with a monthly rent of $6,921. The rental fee is commensurate with other properties available in the market.
 
On July 12, 2010, Celsius Holdings, Inc. entered into an agreement with CD Financial, LLC, a company controlled by Carl DeSantis, a principal shareholder, to provide up to $3.0 million in line of credit financing to be used exclusively for incremental targeted advertising and marketing of Celsius’ products. The line of credit requires monthly payments of interest only at the rate of 5% per annum until maturity in July 2012.  The line of credit is secured by a pledge of substantially all of Celsius’ assets.
 
 
Secondary Public Offering
 
On February 16, 2010, the Company sold 900,000 units resulting in aggregate gross proceeds of $14.5 million. Each unit consists of four shares of common stock and one warrant to purchase one share of common stock. The warrants are exercisable at a price of $5.32 per share at any time through February 8, 2013. The net proceeds of the offering after deducting the underwriting discount and offering expenses were approximately $13.1 million.
 
 
 
16

 


ITEM 3.                   QUANTITATIVE AND QUALITATIVE DISCUSSION ABOUT MARKET RISK
 
Not applicable
 
 
ITEM 4T.                   CONTROLS AND PROCEEDURES 
 
Evaluation of disclosure controls and procedures

Our Chief Executive Officer and Chief Financial Officer (collectively the “Certifying Officers”) maintain a system of disclosure controls and procedures that is designed to provide reasonable assurance that information, which is required to be disclosed, is accumulated and communicated to management timely. The Certifying Officers have concluded that the disclosure controls and procedures are effective at the “reasonable assurance” level. Under the supervision and with the participation of management, as of the end of the period covered by this report, the Certifying Officers evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act). Furthermore, the Certifying Officers concluded that our disclosure controls and procedures in place are designed to ensure that information required to be disclosed by us, including our consolidated subsidiaries, in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported on a timely basis in accordance with applicable Commission rules and regulations; and (ii) accumulated and communicated to our management, including our Certifying Officers and other persons that perform similar functions, if any, to allow us to make timely decisions regarding required disclosure in our periodic filings.
 
Changes in internal controls
 
We have made no changes to our internal controls during the second quarter of 2010 that have materially affected, or are reasonable likely to materially affect our internal control over financial reporting. Our management does not expect that our disclosure or internal controls will prevent all errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefit of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.

PART II — OTHER INFORMATION
 
 Item 6.Exhibits     
     
        31.1    Section 302 Certification of Chief Executive Officer
        31.2     Section 302 Certification of Chief Financial Officer
        32.1     Section 906 Certification of Chief Executive Officer
        32.2    Section 906 Certification of Chief Financial Officer
 
 
 
17

 
 
 
 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
Date:           August 12, 2010
CELSIUS HOLDINGS, INC.
   
 
By: /s/ Geary W. Cotton             
 
Name: Geary W. Cotton
 
Title:   Chief Financial Officer and Chief Accounting Officer
 
 
 
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