Celsius Holdings, Inc. (CELH) Q4 2021 Earnings Report, Transcript and Summary

Greetings, and welcome to Celsius Holdings Fourth Quarter and Full Year 2021 Financial Results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Cameron Donahue, Investor Relations for Celsius Holdings. Thank you. You may begin.

Thank you, and good afternoon, everyone. We appreciate you joining us today for Celsius Holdings' fourth quarter and full year 2021 earnings conference call. Joining me on the call today are John Fieldly, President and Chief Executive Officer; and Edwin Negron, Chief Financial Officer. Following prepared remarks, we'll open the call to your questions, and instructions will be given at that time. The Company released its earnings press release upon market close this afternoon with the preliminary unaudited financial results for the fourth quarter and full year ended December 31, 2021, and all materials are available on the Company's website, celsiusholdingsinc.com, under the Investor Relations section. As a reminder, before turning the call over to John, an audio replay will be available on the Company's website later today. Preliminary conditions, financial guidance and growth disclosures have been prepared by management based on information available to it as of the date hereof, and should not be viewed as a substitute for full financial statements prepared in accordance with GAAP. Estimated preliminary results are subject to completion of our customary quarterly and annual financial closing, audits and review procedures and are not comprehensive statements of financial results for the three months ended and fiscal year ended December 31, 2021, and subject to adjustments as a result of such procedures. Reconciliations of all non-GAAP financial measures can be found in our earnings press release supplement and on our website, celsiusholdingsinc.com. Please also be aware that this call may contain forward-looking statements within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, which are based on forecasts, expectations and other information available to management as of today, March 1, 2021. In some cases, you can identify forward-looking statements by the words such as anticipate, expect, intend, plan, potentially, seek, believe, project, estimate, strategy, future, likely, may, should, will and similar references to future periods. These statements involve numerous risks and uncertainties, including many that are beyond the Company's control. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following: economic and business conditions, our business strategy for expanding our presence in our industry, anticipated trends in our financial condition and results of operations, the impact of competition and technology change, existing and future regulations affecting our business, the Company's ability to satisfy in a timely manner all Securities and Exchange Commission required filings, the requirements of Section 404 for the Sarbanes-Oxley Act of 2002 and the rules and regulations adopted under that section as well as other risks and uncertainties discussed in our reports Celsius Holdings has filed previously with the Securities and Exchange Commission. Except as to the extend required by law, Celsius Holdings undertakes no obligation and disclaims any duty to publicly update or revise any of these forward-looking statements, written or oral, whether as a result of new information, future developments or otherwise. We encourage you to review in full our safe harbor statements contained in today's press release and our SEC filings for additional information. With that, I'd like to turn the call over to President and Chief Executive Officer, John Fieldly, for his prepared remarks. John?

Thank you, Cameron. Good afternoon, everyone, and thank you for joining us today. Our record fourth quarter and full year 2021 financial results mirror our industry-leading growth metrics from third-party data providers, indicating that Celsius is grabbing more market share at an accelerated pace across all channels. For the first time in the Company history, we delivered over $100 million in sales, and we did this in the fourth quarter. In addition, annual revenues exceeded over $300 million for the first time, which is truly an exciting accomplishment for the team. This is exemplified by our initial material penetration in the convenience channel, where we grew our store locations by over 95% to over 29,000 locations during 2021, now totaling just under 60,000 doors, while at the same time, driving the club channel revenue, and we grew Amazon revenue to new records for the Company. This material expansion in historical underrepresented channels in the convenience channel and club channel has not impacted growth in other channels. Our growth is exemplified not only in sales, but also in our customer demographics. We further diversified our industry-leading consumer base over the past year, historically in the 24 to 44 age range, with our fastest-growing segment in the 18 to 24 age bracket, driving new female energy drink consumers into the category as we maintained our historical 50-50 male-female split. This is in conjunction with driving 20% of our sales from both male and female consumers new to the energy drink category. Our market share over the past year has been historic, even with the top two revenue customers, Amazon and Costco, not incorporated into tracked metrics as well as our fitness channel and vending channel. In third-party tracked channels, our share reached 2.1% share of the total energy drink category, growing 163% in the prior 52 weeks ending January 23, 2022, per IRI, MULO plus convenience data, total U.S. This is in our first full year of leveraging our national DSD network. Our future opportunity can be best exemplified by our market share on Amazon, where we are on an even playing field in terms of distribution. As of February 1, 2022, Celsius is the number two brand with over a 20% share of the energy category. These metrics further validate Celsius as a player in the energy category. And looking at the last four weeks' data, scan data, as of January 23, 2022, per IRI total energy U.S., Celsius' share in the energy category increased to a 3.2% share in the category, further demonstrating the momentum behind the portfolio. With this growth in revenue, we have also transitioned from a microcap company to a current market cap of over $4 billion over the past 18 months. Our investments in building out our world-class team and operational infrastructure during this time, has been just as important as our sales growth. In conjunction with our internal team, we have also made significant investments expanding our Board of Directors as well as engaging Ernst & Young as our new auditor, which we announced in the second quarter of 2021. Over the last several quarters, we have accelerated this transition by implementing best practices recommended and brought on by BDO as our internal auditor consultants to assist with this transition. This process has been all encompassing, and unfortunately, we have multiple weeks in January and early February, where a majority of our finance team was out with COVID. In addition, we have had multiple open positions, and we have been vigorously recruiting top talent into the Company's finance area to support our operations and our strong growth in our business, which was impacted by our ability to finalize the Ernst & Young first full year audit. We filed for an extension on our Form 10-K with the SEC earlier this evening and expect to file our 10-K during the 15 calendar day extension period as of the final audit and internal control procedure work are performed and completed. We have been able to finalize the majority of the pending items prior to our call today, including as reported today in an 8-K filing, a prior period error correction has been made to the non-cash stock expense in our second and third quarter financial results for 2021 totaling approximately $2.7 million and $12.6 million in additional non-cash stock expense for those periods, which was the results of prior stock grants that were awarded to foundational individuals, which were modified to allow for continual vesting past their contracted service dates. This was an error of interpretation of a Class III modification rule, technical rule, which resulted in an immediate mark-to-market adjustments for the prior periods' stock grants as a non-cash expense. We highlighted this financial impact in our full year updated totals on our flash results table at the beginning of our earnings supplement as well as the financial statements on the earnings supplement included in the 8-K filing today, which outlines the prior period of changes reflected in the non-cash stock expense for those periods. In addition, in light of this error, our management has then concluded that a material weakness existed in the Company's internal controls of our financial reporting for the Company's disclosure controls and procedures, which were not effected as of December 31, 2021, which was disclosed in our 8-K filing earlier today and which will be further discussed in our upcoming filing. To close these non-operational updates in regards to our previously disclosed SEC investigation, the matter is ongoing, and we are continuing to cooperate with the SEC staff. There has been no material developments in the investigation since the last disclosure. Now moving to the financial highlights for the fourth quarter. As stated, sales hit another quarterly record, and this was our first quarter to total over $100 million, which is a major accomplishment for the Company. Revenue growth was driven by continued new store count additions, SKU expansion, cold placements, DSD coverage expansion as well as the continual transition of existing accounts to DSD as well as the unrepresented channel growth in the convenience, club and vending. Total sales for the quarter of $104.3 million, up 192% from $35.7 million in the fourth quarter of 2020. Our domestic sales increased 238% to a record $95.9 million, up from $28.4 million in the fourth quarter of 2020. With both of these percentage growth rates the highest in our history, we continue to see our two hardest-hit channels from COVID in 2020, our fitness and vending channel, not only rebound but drive growth in sales. Fitness was up 91% for the year, and vending was up 186%, which when combined, contributed approximately $14.7 million of incremental revenue for the full year. International sales grew 15% to $8.3 million for the quarter and 17% for the year, with record annual revenues from the Nordics. Our gross profit margins continue to be impacted, as we previously addressed in our third quarter results. We made a strategic decision in late 2020 and early 2021 to import cans to fulfill our demand, sacrificing some efficiencies on the margin side. As a result, we are seeing the impacts of these onetime short-term impacts as we run through these higher cost sourced cans. We anticipate margins will continue to be impacted through the third quarter of 2022 as we process through these sourced cans. As we move forward, we are confident that U.S.-sourced cans making up the majority of our production will be normalized our can input cost going forward. In addition, we are experiencing inflationary costs in our operations, which is further impacting our business from increased cost of freight and raw materials. We have implemented promotional pricing strategies to mitigate some of these immediate changes in our business environment, which will start to realize in the coming months. In addition, we further optimized our warehouse supply chain to reduce miles on cases to better service our customers and reduce costs. We anticipate when cycling through the imported cans, our margin will normalize to full year 2020 levels based on current volume run rates. To conclude our margin analysis, as we recognize revenue growth rates more than double in North America to over 200%, we made a conscious decision to ensure that we had operational infrastructure to support our revenue growth and take full advantage of the opportunity to take share at an increasing pace. As such, we accelerated initiatives on several operational improvements to position us for future growth, which would impact our margins in the short term. Additional incremental near-term margin and benefit will be realized through pricing and promotional strategies, operational efficiency gains through our supply chain and a move to locally sourced cans on a go-forward basis. The Company continued to improve our order fill rates toward normalized levels through the fourth quarter from an 80% fill rate at the end of Q1 to the end of this year at a 97% fill rate in the fourth quarter and expect to maintain normalized levels even with accelerated growth rates due to the improvements in our warehousing expansion to a six-orbit infrastructure model where -- will be put in place into the third quarter and expansion in our inventory, which is key as we enter the spring resets and anticipate material new placements as well as further expansion into the club channel. Some additional highlights for the fourth quarter. Our domestic revenues of approximately $96 million was driven by accelerated triple-digit growth in traditional channels of trade, expansion with worldwide retailers and further activation and growth from our distribution partners. Direct-store-delivery, DSD, network delivered over 400% growth rate versus prior year in our distribution revenues. We secured additional distribution agreements during the quarter, expanding availability into new regions as Celsius continues to build out its network, now totaling over 276 regional direct-store-delivery service centers, covering approximately 98% of the U.S. population. And we began 2021 with only 150 DS partners and 80% coverage. We made substantial improvements throughout the year. Our vending channel grew over 210% in the fourth quarter. We added over 1,200 vending machines in micro markets in '21, increasing the number of locations by 96% for the year and expect that growth to continue in 2022. In the fitness vitamin specialty channel, Celsius launch with Lifetime Fitness and is now available in over 150 of their locations and their Life Cafe. We also signed partnership agreements with Cycle Bar as their official energy drink and expect more clubs than ever to join before as -- the country continues to reopen in 2021 as we gain more awareness and placements in the fitness channel. Our mass club channel to accelerate growth following of the rollout of 561 Costco stores in Q2. Costco's fourth quarter established a new record, growing over 1,100% for the fourth quarter versus the prior year. We're also seeing significant opportunities in the club channel in other markets, to include Sam's Club and BJ's through 2022. In the convenience channel. Our convenience channel store locations increased by 95%, as I said, to over 29,000 locations for the full year, totaling 60,000. We recently signed a national contract with Circle K, which will drive further expansion in the channel in 2022. The convenience store channel has the largest growth in number of doors in 2021 and expect similar growth trends to continue through 2022. Industry-backed third-party data continues to show Celsius' accelerating growth metrics, and we are confident that Celsius will continue to drive sales even higher as we increase our ACV across channels through additional launches with new nationwide retailers and further transitioning existing accounts to our DSD network. Consumer data for Celsius accelerates through the fourth quarter of 2021 and through February of 2022 to record levels, with the most recent Nielsen scan data as of February 12, 2022, showing Celsius sales were up 233% year-over-year for two weeks, up 234% for the four weeks, up 227% for the 12 weeks, with a 3% share of the energy category over the last two weeks. And on Amazon, as I said, Celsius is the second-largest energy drink with a 20% share of the energy category, an approximately 7% share ahead of Red Bull at a 13% share and moving closer to the number one spot, just four share points behind Monster at a 24% share. This is according to the last four weeks' data ending February 12, 2022, stack line energy drink category, total U.S. In addition, Celsius has a year-over-year growth rate of about 94% compared to Amazon's energy growth rate of 37%. That's just over 2.5x the category for the last four weeks ending February 12, 2022, and according to Stackline. Our U.S. store count now exceeds 135,000 locations nationally, growing over 53,000 doors or 65% from 82,000 at the beginning of 2021, with additional expansion plans throughout 2022 as retailer resets take place. On our co-packing front, we continue to expand with our partners in scaling at existing locations, improving our line time priority. Our total U.S. co-packer footprint now totals over 13 that are active, which will help protect for future out-of-stocks and support our massive growth as we continue to improve efficiencies in our supply chain. In the fourth quarter, Europe mainly derived from Nordics totaled $7.4 million compared to $6.9 million in the fourth quarter of 2020, an increase of 7%. Our market share in our largest market, Sweden, increased through the fourth quarter to just over 10%. For the full year, sales in Europe reached a record with an annual growth rate of 13% for 2021. We recently launched on Amazon EU. Expansion begins with Great Britain, which was launched with three SKUs of CELSIUS and six FAST protein bars. And in Germany, we launched with three great flavors of CELSIUS. We are also expanding to additional EU markets to include France and Italy launching in early 2022. In China, we maintain a licensing royalty model in the market with a fixed royalty rate through 2024, which then becomes a volume-based royalty starting in the first year of 2024 with a minimum royalty of $2.2 million annually. In our international markets, additionally, ending 2021 drove about $3.2 million, an increase of 109% from $1.5 million in the prior year period. Material markets to include Malaysia, Hong Kong, Korea and Singapore where we saw great growth. Now moving to the marketing. On the marketing front, we continue to activate, targeting new and existing consumers where they live, work and play, building meaningful emotional connections through a robust integrated marketing programs. Our momentum is accelerating, and our brand is resonating with a robust consumer base, expanding the category demographics. Focus on health and wellness is beyond the trend now. Functional energy is recognized throughout the industry as a driver of future growth with retailers and customers. We are driving and leading growth in the energy category across all channels, expanding the demographic while bringing an industry-leading percentage of consumers from outside and new to the category, while accelerating our share in the growing energy market. We have committed the resources, both in personnel and operational infrastructure, to maximize our opportunity. I'll now turn the call over to Edwin Negron-Carballo, our Chief Financial Officer, for his prepared remarks. Edwin?

Thank you, John. I wanted to start by providing additional clarity on the adjustments that John highlighted regarding the non-cash stock compensation expense. During Q2 and Q3, the Company calculated and recognized non-cash stock-based compensation expense related to options and RSUs held by former foundational employees and retired directors ratably over their vesting period. However, because the options and the RSUs were allowed to continue to vest after the employees separated and the directors retired from the Company, those awards were deemed to have been modified. And the expense should have been calculated and recognized using the firm market value of the stock as of the data termination or retirement. This led to the adjustments that John discussed, which resulted in the understatement of the stock compensation expense in Q2 in the amount of $3.1 million and $12.1 million for Q3. These aspects are further detailed in the 8-K that we filed today. As a result of this situation, the Company's management and the Audit Committee of its Board of Directors have determined that the Company's previously issued interim unaudited financial statements contained in the Company's quarterly reports on Form 10-Q for each of the affected quarters should no longer be relied upon. The Company's management has also concluded that in light of this situation, as previously described, a material weakness existed in the Company's internal control over the proper valuation of stock compensation expense regarding the modifications performed to stock awards for some former employees and retired directors. Now turning to our fourth quarter financial results. We had a record fourth quarter revenue for the three months ended December 31, 2021, of $104.3 million, an increase of $68.6 million or a strong 192% increase from $35.7 million for the three months ended December 31, 2020. Approximately 98% of this growth was a result of increased revenues from North America. For 2021, four quarter revenues were $96 million an increase of $67.5 million or a robust 238% increase from $28.4 million in the 2020 quarter. The balance of the revenues for the 2021 quarter were mainly related to European revenues of $7.4 million, or 7% higher when compared to $6.9 million in the year ago period. Asian revenues, which included royalty revenues from our China licensee, contributed an additional $680,000, an increase of 203% from $224,000 from the prior year quarter. Other international markets generated $265,000 in revenues during the three months ended December 31, 2021, an increase of $148,000 or 127% from $117,000 for the prior year quarter. Gross profit for Q4 increased by $24.2 million or 139% to $42.4 million from $17.4 million for the three months ended December 31, 2021. Gross profit margins reflected a decrease to 39.9% for the three months ended December 31, 2021 from 48.9% for the 2020 quarter. Excluding freight out, as some of our competitors do not include this expense as part of cost of goods sold, our adjusted gross margin for the fourth quarter was 48.4% compared to 57.2% for the fourth quarter of 2020. The increase in gross profit dollars is related to increase in volume, while the decrease in gross profit margins is mainly related to increase in costs pertaining to imported cans, higher raw material costs, ocean freights and transportation costs and repackaging costs. Sales and marketing expenses for the three months ended December 31, 2021, were approximately $24.6 million, an increase of approximately $13.4 million or 119.2% from $11.2 million for the three months ended December 31, 2020. This increase was primarily attributable to higher marketing investment activities, which resulted in an increase of $8.2 million when compared to the prior year quarter. Additionally, employee costs increased by approximately $1.5 million from the year ago quarter as we continued to invest in this area in order to have the proper infrastructure to support our growth as well as incurring in additional travel and business expenses since we are now able to resume in-person marketing events and selling activities. Additionally, storage and distribution expenses as well as broker costs accounted for the remainder of the increase in this area in the amount of $4.2 million from the 2020 quarter, basically related to the increase in business and revenue volume. Lastly, there were slight offsets in other sales and marketing expenses in the amount of $487,000, mainly related to savings in trade marketing activities. As a percentage of revenue, sales and marketing charges amounted to 23.6% for the fourth quarter of 2021 compared to 31.5% to the fourth quarter of 2020. General and administrative expenses for the three months ended December 31, 2021, were $14.2 million, an increase of $8.4 million or 147% from $5.7 million for the three months ended December 31, 2020. This increase was mainly related to stock option expense, which amounted to $7.8 million for the three months ended December 31, 2021, an increase of $6.2 million, which accounts for 74% of the total increase in this area when compared to the prior year quarter. This increase is mainly related to the non-cash expense adjustments that I mentioned at the beginning of my prepared comments. Additionally, employee costs for the three months ended December 31, 2021, reflected an increase of $804,000 or 53.8% as investments in this area are also required to properly support our higher business volume and commercial and operational areas of the business as well as the increased travel and expenses that are now being incurred. Administrative expenses amounted to $3.5 million, an increase of $2.1 million or 153% when compared to the prior year quarter. This variance includes an increase in the bad debt reserve of $425,000 as well as increases in other costs, legal expenses, insurance cost and office rent, which account for the majority of the remaining fluctuation of $1.7 million. Depreciation and amortization decreased by approximately $222,000 when compared to the prior year quarter. As a percentage of revenue, G&A costs amounted to 14% for the three months ended December 31, 2021, compared to 16% in the prior year. However, excluding the non-cash stock option expense for both periods, G&A decreased as a percentage of revenue for the fourth quarter of 2021 to 6.1% compared to 11.5% for the fourth quarter of 2020. Other income and other expenses. Total net other income for the three months ended December 31, 2021, amounted to $250,000, which reflects a decrease of $350,000 when compared to the total net other income of $600,000 for the three months ended December 31, 2020. The prior year quarter included a foreign exchange gain of $730,000, which accounts for the majority of the variance from the 2021 four quarter. The net other income of $250,000 for the fourth quarter of 2021 is composed of foreign currency exchange gains of $175,000 and interest income of $77,400 related to the note receivable from our China licensee, which were partially offset by miscellaneous other interest expenses of $2,100. Net income. Our net income for the three months ended December 31, 2021, was $11.9 million, which included a tax benefit of $8.8 million, mainly related to the release of valuation allowances regarding prior year tax losses. As such, earnings for the three months ended December 31, 2021, were $0.16 per share based on weighted average of 74.8 million shares outstanding and diluted earnings per share of $0.15, based on a fully diluted weighted average of 78.4 million shares outstanding, which includes the dilutive impact of stock options to purchase 3.6 million shares. In comparison, for the three months ended December 31, 2020, the Company had fourth quarter net income of $950,000 or $0.01 per basic share, and diluted share based on basic of 71.9 million shares and 76.5 million fully diluted shares. Now focusing on liquidity and capital resources. 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 million and $66.8 million, respectively, with no long-term debt. Cash flow used in operation and operating activities totaled $95.8 million during 2021, which compares to $3.4 million provided by operating activities for the three -- for the year ended December 31, 2020. The use of cash in the 2021 year was primarily driven by higher inventory levels in order to properly service our -- the demand for our products, support our new six-orbit warehouse model and mitigate the impact of supply chain inefficiencies and inconsistencies as well as also to anticipate our upcoming spring resets. Specifically, our net inventory value increased $172.8 million from $18.4 million in the fourth quarter of 2020 to $191.2 million for the year ended December 31, 2021. Excluding the significant increase in inventory, cash flow from operations for the full year, December 31, 2021, would have totaled approximately $84.3 million. Our current cash position, together with the expected results from operations, should provide us with sufficient cash to operate our business as we're also normalizing and optimizing our inventory levels, which should release significant funds over the next 12 to 15 months. This concludes our prepared remarks. Operator, you may now open the call for questions. Thank you.

Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Kevin Grundy with Jefferies. Please proceed with your question.

First, just a housekeeping question on the control issue. Can you just confirm that the issues here, as you wait for the audit to wrap up as best you know, are just going to be exclusively isolated to the stock-based comp accounting?

That's the expectation. Hi, Kevin, this is Edwin. Yes, that's the indication right now. But yes, as you well pointed out, we're still going through the audit and obviously internal control system making effect of what's remaining. So that's the expectation, but we'll see what happens.

Okay. Fair enough, Edwin. Two more quick ones for me. John, you were pretty optimistic on the shelf-space resets, which is encouraging. I think the comment was you expect material new placements and expansion in the club channel. Maybe just spend a little bit of time on that. And John, I guess, within the answer, we can see the really positive trends in Nielsen scan data at about 2% market share. Maybe as part of your response, just talk a little bit about how you expect distribution velocity to kind of play out here, and where you expect that share to go within scanned channels over the next 12 to 36 months?

Yes. No, Kevin, you're absolutely right. I mean the scan data has been extremely strong, as we were talking earlier about on the call, and we look at that. What's interesting is, as we're expanding into these reported channels, we're still seeing great increases in velocity in the club channel, mainly at Costco and also on Amazon, seeing that improve. So, we anticipate that to level off at some point as we're gaining more broader distribution. But initial feedback has been -- I mean the data looks really strong as we stand now, especially looking at that February data, the most recent. When we talk about the club channel, that was a big surprise for us in 2021, seeing how well the product was performing. And we're talking to Sam's Club right now, and hopefully, we will see opportunities with them in 2022 as well as BJ's, as I mentioned. And the big win in Circle K is, for us, in the convenience channel. And that's where about 6,000 stores that we're getting a national distribution agreement with. So we're going to continue to expand. We had a great NACS. We talked about that in the third quarter. In October, the Company had one of the best NACS shows that I've ever attended with the Company. So we feel we're in a good spot. We've got a great key accounts team as well that's been working really hard. And we're going to see the fruits of all their hard work here over the next several quarters -- next several months really.

Got it. Just one more for me and I'll pass it on. I have a number of questions we can take offline. But just the -- on the gross margin, Edwin, maybe just -- I know you guys don't like to guide, but maybe just at a high level now, what the expectation is given commodity cost pressure? You made the comment that you have higher-cost cans in inventory, and inventory is up materially here as you look at inventory days in the fourth quarter. Can you just help give us some directional sort of guidance on how you expect gross margins to sort of trends here as we look out in '22? And then within that, anything you can give more broadly because there's sort of this near-term pressure, which is a little bit worse and new investors, but this massive longer-term opportunity for margin expansion as you could potentially approach Monster-like EBITDA margins. So maybe just sort of marry up near-term expectation versus sort of the promise of what could be really material margin expansion longer term. And then I'll pass it on.

Thanks, Kevin. Yes, sure. I mean as we said in the past, there are several variables to that equation to say the least. One of them is kind of the mix between the local-sourced cans and the cans that we source out of the U.S., which are a higher cost. So clearly, that's going to have an impact. And we're seeing that that's probably going to be -- they're going to be flowing through cost of goods sold, at least through Q2, a little bit thereafter as well. So that's going to be an impact. And then obviously, the issues that we're seeing with the supply chain in terms of freight, we're all seeing the impact of the macroeconomics in terms of the price of oil and all that. So we'll have to see how that plays out as well in terms of transportation costs. We saw at one point freight cost of a container all the way close to $20,000. So again, there's a lot of variables in this equation, which is very difficult at this point to -- for us to kind of evaluate. And as again, the mix between the local cans and the foreign cans is also going to play an important part of this equation as we cycle those cans through. In terms of the EBITDA or going forward, yes, at one point, hopefully, when this normalizes, there's always talk about this inflation being transition in nature, so -- or transitory in nature, I should say. So once we normalize, sure, I think the expectation is that we go back to kind of the gross profitability that we were seeing initially in 2020 and, thereafter, also continue to leverage, with the volume that we have, to then improve our EBITDA margin.

Yes. I'll just chime in. When we look at our internal forecast, we're expecting to cycle through the import cans, sourced cans currently sometime in the third quarter. So expect that to be more normalized to 2020 levels as we cycle through it. And we are working on a variety of pricing promotional strategies to offset some of this inflationary pressure that we're currently seeing.

Our next question comes from the line of Mark Astrachan with Stifel. Please proceed with your question.

I guess, first, just following up on the stock-based comp commentary. Edward, I think you said that's the expectation, that it was just specific to that. So are you saying that there's nothing else that you're aware of that could potentially come up, at least at this point? I respect the fact that it could potentially come up over the next 15 days. But are you saying there's nothing else that you're aware of beyond that? And then related to that, was this in any way related to the SEC investigation?

Well, no, first of all, I mean, it's a first year audit, right. So clearly, when you -- I've been on the other side of that when I was an auditor. And first year audit are more -- you go into a lot more scrutiny, that kind of thing. We're playing now in the big leagues with Ernst & Young. So perhaps there's something that could surface. At this point, we're not seeing something to that nature. But you never know. That's why kind of leave the door open at that point or at this point because, again, they're doing a very thorough job. And that's fine, and that's what we expect them to do, that kind of thing. In terms of your other comment, I'm not sure as it relates to that, not necessarily. It's more of a situation that happened regarding some of the awards that had to be properly valued at fair market value for some of these employees that were separated and some of the Board members that also retired.

And I'll just chime in, in regards to some of the employees. It was also -- it's a technical aspect there because some of them are still providing services through contractual services. So there was just a technicality. That was an error and interpretation there on those stock awards. So it definitely was an oversight and a correction that was noted. And I think also management feels very confident in the numbers we put out in preliminary numbers. So obviously, I think anything can come up. But at this point, we wouldn't put out preliminary numbers unless management felt confident in the numbers provided today.

Got it. Okay. That's helpful. And then switching over to the business, John. If you looked at your market share on a state-by-state basis, it's pretty interesting that your home state share is something slightly in excess of 10% relative to current national share. It's somewhere in the mid-3s based on the latest data that we've seen. So I guess I'm curious if you could talk a bit about how you think about those two numbers sort of ultimately working in unison. And is there anything that would potentially prevent your state market share from improving in some material way once you get more distribution. And I guess, sort of related to that, maybe you could talk about the state of distribution the further you move away from Florida from just an overall penetration standpoint.

Yes. Let me -- the share count you referenced in Florida is phenomenal. I mean the Company has been working extremely hard at that. And also, I think you're really seeing the power of the DSD network. Florida has been fully covered now for a little over -- almost going on two years now. So you're really seeing that availability, that increased ACV. Also, you saw Circle K. We did land Circle K in the Southeast. So that came on as well, and 7-Eleven and a variety of other key accounts as well as Publix. So we've been doing extremely phenomenal there. I think it's just an indicator. It's another indicator, given the same opportunity, CELSIUS will perform at the same level, if not better than the competition. So Florida is extremely a great state for us as well as Texas and California. And several other states around the country are starting to really increase share in those markets as we build out the DSD network and really been able to activate those accounts, those key accounts and gain more distribution.

Got it. Okay. I just want to clarify one thing, going back to the SEC. So Edwin, is the SEC investigation related to this? Or they are separate items?

Again, they're completely separate aspects here. I mean, this was more, yes, an internal aspect.

Our next question comes from the line of Jeff Van Sinderen with B. Riley. Please proceed with your question.

So just wanted to follow up on the Circle K contract, what we're looking at there as far as the rollout. And then also, I wanted to follow up just on the DSD expansion, kind of where we are now in overall percentage. And then what you think is a reasonable target by the end of fiscal '22?

Yes, Jeff, thank you. When we look at our overall -- where we're at when we see Circle K, that was a great opportunity. We've been long-term partner with 7-Eleven, and Circle K is a great opportunity for us, and we've been testing in some regions. So getting this national contract and national rollout is really exciting. So it puts us in about -- approximately about 6,000 doors nationwide with about probably around -- right around average about four flavors. And its a great really jump start to the DSD network. So we're bringing another great key account to our distribution network. We got a bunch more coming as well. And that's going to further activate and allow us to close that white space that's out there. So, we talked about -- I mentioned earlier in the comments, some of the DSD gaps that have been closed in 2021. The team -- the old DSD management team has done a phenomenal job, really working on closing those gaps, which is extremely difficult to do. We get up to almost over 270 direct store delivery, really warehouses at facilities that are out there that are being managed. We got systems, processes in place, and we're at about 98% of the population covered. So we do have some gaps in certain states we're working to close, we're looking to get a majority coverage and be able to service all of our key accounts nationwide, definitely by the end of 2022. It's definitely the plan. And we're pretty much able to service 98% of the population now. So, it's really the next phase. 2022 is all about activation, activating our DSD network, driving more distribution, increasing velocity and getting -- better activating sales and bringing new consumers to the portfolio.

Okay. Great. And then if we could just turn to the six-orbit warehouse model. Can you give us more detail on, I guess, where you are on ramping that up, what the next milestones are that you're targeting there, time frame around that? And then if you could speak more about what level of benefit you anticipate once the six orbit system is fully optimized.

Yes. We started that six orbit model in the third quarter, built that out, building the warehouses. We did increase inventories, as you can see in our balance sheet. We feel we're at a really good inventory level, and we're going to be able to activate. Really it's about optimization. So Q4 is about optimizing inventory levels, and also really getting those proper servicing lanes established within the logistics supply chain. So, we're working with some of the largest logistics suppliers -- providers to provide us the best rates to service our customers, reducing the number of days to service customers, lead times, and most importantly, driving more efficiency through the networks, full truckloads, full pallet flavors, those types of things, which just really improve your -- we'll be able to improve our freight costs as well so -- and margins. So that's where we're at. We're looking to be really -- when you look at Q1, we're looking to be fully further optimized by the end of the first quarter is what the team is really working on. So, always optimizing, always trying to improve and get better, but by the end of Q1 2022, we should be really well optimized for 2022.

Our next question comes from the line of Kaumil Gajrawala with Credit Suisse. Please proceed with your question.

If I could follow up on the last question as it relates to how much -- how many of those accounts you've actually changed over of the 98%. I think you gave a lot of examples of accounts, specific names. But are you now 60% converted, 70%. I don't know if I missed it or maybe you never gave out that figure.

Yes, no worries. Thank you, Kaumil. In regards to -- the 98% is the population coverage. So we're able to service all our key accounts as -- assuming they were all flipped over to our DSD network, we'll be able to service about 98% of the population. So that's really what we meant by the 98%. When you look at our -- right now, if you break it down, if you look at -- in the press release, we kind of break it out. We have about 65% of our MULO+C, so MULO and convenience stores, are now being serviced by DSD. So we have a lot more optimization to go. And that's what the teams are working on in 2022. So new accounts are all coming on through DSD, and some of our existing established accounts, we're working on converting them over. So like I said on prior calls, it does take time. It's not as easy as an overnight flicking a switch. There is a process that has to take place, and the teams are working hard to move over. Because we know when servicing -- by having Celsius serviced by DSD, we increase velocity, increase within the given store. So -- and it benefits everyone, benefits of the store owners, it benefits our distributors and benefits us.

That MULO+C number is representative of your overall, does that sound fair, 65-ish percent?

Yes.

Yes. Okay. The next question on margins. Can you give maybe a little more context on what the perhaps the spread is on the imported cans versus the domestic cans. We look at how much gross margins were down. Would they have been down half as much if you were sourcing domestically 1/3? Can you maybe just give some context of as you work through that inventory, we have a sense of where margins or margin should look like?

Yes. I mean as we work through the margins, I mean, we said once we cycle through the international cans, we expect to be back to margins somewhere closer to the full year of 2020. So that's really where we see the margins at this current level, where our current run rate is. But when you look at the international -- some of these sourced cans, they're coming in, as Edwin mentioned, some of the costs on containers are $20,000 a container. We're starting to see container prices drop a little bit. We do have some more imported cans that have to come over, and we have some on the water. So that's why we anticipate those to cycle through some time, based on our current internal forecast, right around the third quarter, so 2022. And you're seeing some of those imported cans are right around a 3% -- or 3% to 4% margin impact overall. So it's pretty substantial. And then we have some -- also some transitory freight increases that we've seen, and raw material costs that we're working through. And we're trying to offset and mitigate some of those increases with pricing and promotional strategies that we have implemented.

Okay. Great. And then finally, if I could ask about marketing spend. You're now -- as you push to fulfill that 98%, as you mentioned, '22 is all about activation. How should we be thinking about your marketing and sales spending?

We are investing ahead of revenue based on our -- where we are in our life cycle and our growth cycle. So we're hiring a variety of staff members in all departments from finance, sales, marketing, operations. So we're really building out our team. So we are investing head count resources in regards to marketing. We're trying to be very methodical in our approach on marketing, but we are, as Edwin mentioned in his comments -- prepared comments, we're getting back into events. We're really seeing some great activation. We're gaining more distribution as well. So it's very important, as we gain distribution, we continue to market and invest behind the brand to continue to drive those new consumers to the portfolio, to maintain those velocities at retail. So we're working on that. We're going to gain more efficiencies as we go. I think if you look at what -- our current quarter, we're probably somewhere around -- maintain some of those spending levels currently on a go-forward basis through 2022. And if you look at the G&A, I think if you back out some of the stock-based compensation expense there that was in the fourth quarter, we're right around a 6%, 6.1%. And that does include increased costs associated with accounting and legal and those type of fees as well as consultants that are helping us as well. So there's definitely a lot of leverage in the model as we grow.

Our next question comes from the line of Sean McGowan with Roth Capital. Please proceed with your question.

Yes, I wanted to start a couple of quickies, too. So is -- I mean, is all of the stock-based compensation expense taken in the G&A line? So like 100% of that is in that line?

Correct. Yes.

And the level that we see then for the fourth quarter, is that -- do you think that's going to be like a normal level that we should expect to see each quarter? Or is there kind of some catch-up from this issue that you flagged, and we would see that level actually go down over time?

I mean it should be around what you're seeing now or what we commented on going forward.

Okay. Then shifting to a housekeeping on taxes. Can you give us what the dollar amount was of that deferred tax credit reversal in the release?

Yes, I think it was around $8 million, $8.5 million.

That's the whole thing then. What would you expect would be the tax rate going forward then?

Well, we still have some NOLs. So again, and we're cycling through that in terms of the provision and finalizing those computations. So -- but yes, we're still going to have some -- a little bit of NOLs going forward.

Okay. But it should be higher, I mean, some significantly higher rate than what we've been showing, right?

Yes, obviously, yes, depending on the profitability and profit. But yes.

And jurisdiction. Okay. And a couple of other questions, John. On the -- could you provide a little bit more color on the inventory build? How much of that is just pure inflation? And where do you expect maybe more use -- where would you expect these inventory to be 12 months from now?

Yes, jump in as well. I mean feel free to chime in. But our days of inventory, we're looking at a -- when you look back, you got to get a look forward on a go forward. And we did prepay a lot of -- a big chunk of raw materials. So we got a little -- right around $60 million, $70 million of additional prepaid associated with cans and raw materials. It's still a lot -- very difficult out there, environment in raw materials. We took advantage of making strategic prepayments, making sure we secured raw materials as we enter 2022 and enter really this -- start to get in position for resets and summer beverage season as well. So that puts us in a good position, so we maintain stock levels. But as you go forward, I mean, in the growth that we're seeing, some of the growth rates, especially in North America, upwards of 200%, you really need to be very close to the inventory levels. It's important that we maintain a higher inventory level as we go forward with these growth rates. But ideally, we want to be, somewhere at this stage, right around 90 to 120 days on hand. We are sitting currently at the end of the year at a higher level just due to the large production runs we made in December, strategically positioning us for 2022.

Okay. Then final question on international. We've talked quite a bit over the course of last year about North America being the focus because that's where there's so much low-hanging fruit and opportunity. Is there anything else that's constraining international sales from being higher? Can we expect that growth rate to accelerate?

I think what we've said on somewhat conservative on international currently. We do see a lot of opportunities there. We did -- you have that opportunity in the Nordics to expand out. We started to do that on Amazon, as mentioned, entering Great Britain, the U.K. and also into Germany. So there is opportunities also in Asia with Southeast Asia. There's a lot of opportunities there. But we're being very methodical in our approach as we continue to grow in scale. As we see increased velocity, we'll put increased investments in currently. But I think the current -- where we stand now, it's being a very methodical approach and conservative.

Yes. What we've said in international, the key aspect is to identify good partners. You own master distributors so that then you avoid having a large footprint. And again, even things like currency exposure and things of that nature. So like John said, it's always about identifying those key partners in those different markets.

Our next question comes from the line of Sean King with UBS. Please proceed with your question.

I guess I said just looking at how strong growth was in the quarter and thinking about some of the difficult comparisons in the back half of 2022, like how should we be thinking about sort of bumping up against production constraints? And I guess the confidence that you have that you can keep up this level of growth.

Yes. I think when you look at the growth we've had, I mean we're going to continue -- we're forecasting internally in regards to our inventory levels. We expect to continue to drive continued momentum and share in the category. So as we mentioned, we've got 13 co-packers that are active. We're talking to a variety of others. We have Paul Storey we brought on last year, who has a great knowledge of the beverage industry, especially with co-packing and associated with energy drinks. So we really feel we're in a really good position currently as we scale. We have capacity levels. Internally, we're telling sales to outsell production and having an internal competition on it. So I think we're in really good position. We feel in a really good space. Things happened that can happen out of your control. But as we sit right now, we're ready for -- to continue to drive scale.

Our next comes from the line of Jeffrey Cohen with Ladenburg Thalmann. Please proceed with your question.

If I could follow up a little bit as far as the co-packers, up to 13 now. How does that pace look over the third quarter? And what would you anticipate domestically for '22?

Right now, we're at six orbits. You're going to see us -- what we want to do is as we drive efficiencies, you want to keep your supply chain in your warehouses in an orbit. You really don't want to ship outside of an orbit to gain efficiencies. So right now where our volumes are at, we're at a six orbit. But as we grow in scale, we'll continue to create more orbits, which will further drive efficiencies through the model and the supply chain. So that is really based on how fast and how quickly we scale, and that we're building our plans and you'll see those to come alive. So, we're talking to a variety of additional co-packers, strategically placed around the country as well as additional warehouse facilities that we'll be able to -- you want to put the least amount of miles on cases and be as efficient as you possibly can. So that's what we're working on, but we feel we're in a good position right now, given our current growth levels and current volume.

Got it. And I wanted to touch base again on the inventory levels and cans specifically. So, domestic cans have caught up as far as supply and demand out there. Is that a good way to look at it over the past few months?

I wouldn't say it's -- you're still hearing a lot of capacity constraints out there. So we feel we're in a good position based on some long-term agreements arrangements we've made. But in general, can supply is still tight. If you look at a lot of the major can manufacturers that are out there and the comments that they're saying, it's tight right now. And that's going to be difficult for a lot of smaller brands. You're still seeing a lot of smaller brands wrapping cans out there. Obviously, that's a lot more expensive than importing cans or sourcing cans abroad. But we feel, based on our volume, we have additional leverage to be able to buy and purchase and secure domestic cans on a go-forward basis, based on our current internal forecast, once we cycle through these sourced cans that we have currently in inventory.

Okay. And when we think of inventory, could you give us a sense of what percent that is of cans as opposed to fully finished products?

Yes, we're probably about 15% to 20% of our inventory is probably currently within our packaging components.

Got it. Okay. And the balance is finished products.

We do have some additional raw materials in there as well, packaging materials. Yes.

Okay. Got it. And then any sense -- and I know you talked a little bit about some of the challenges of labor and logistics. Any sense of how they may affect the gross profit differential between the outbound freight and the gross profit going forward? Does it feel like it's peaked out? Or does it potentially continue to diverge slightly?

There so many macro elements that are happening right now, I mean, gas prices and what's happening in the current environment. So we're sitting in a really unknown area going forward. I mean we're trying to mitigate as much as we can. In regards to labor, there's still a lot of labor shortages around. We're having that -- those challenges internally here in all of our departments. We have positions open, where we're trying to get really qualified, good talent into the Company. So I think every company is being affected these days in regards to logistics and trucking labor. That is short as well I don't have the number in front of me. I think I had it in the last call there was a substantial number of open positions and drivers. And also now you have gas prices that are anticipated to continue to climb. So, we're getting into somewhat of an interesting area, which we're going to all be impacted by.

Yes, the gap in outbound freight has always been you around 8% to 10%. So yes, who knows again, with the gas prices and all that, how that's going to further perhaps make that gap broader. But that's what it's been in the past historically.

Okay. Got it. And then lastly for us, on the CycleBar exclusive, is that with all the national CycleBars? I think there's a couple of hundred out there.

That is -- there's a couple of hundred currently out there. It's a great partnership for us, a great partnership, a great brand, and we're looking for a great year with them. So we've got a lot of things planned, a lot of events planned, cross promotions planned and should be exciting.

Our next question comes from the line of Anthony Vendetti with Maxim Group. Please proceed with your question.

This is actually Jeremy on the line for Anthony. So just two quick questions. First, regarding store expansion, how much runway do you think you have left for that? You had a really tremendous growth in 2021, and how should we look at the growth in store expansion in 2022.

Well, I think there's -- the biggest opportunity for us right now, it's twofold. So number one is optimizing existing accounts, so gaining better placements, additional flavors. Cold placements is a big opportunity where we see increased velocities. So that's what our teams are really working on, is really better -- having that perfect store, working towards that perfect store. So -- and that's really leveraging the DSD network and our team. So, that is one component. So existing same-store sales opportunities. And then number two, when you look at where our convenience is, the convenience channel, we're sitting roughly around a 44% ACV. So lots of runway left just in the reported stores in the convenience channel. You're looking at -- we got almost a 56% opportunity of additional distribution and convenience, which is usually the higher, in the energy space, the higher-velocity location. And then the expansion in non-reported, tracked channels is a great opportunity for us. So it's a little bit of a variety of things, same-store sales, optimization, convenience channel, big opportunity, and then some of the opportunities that lie in untracked channels.

Okay. And then the Costco contract, I know that you're about -- you said you were in about 500 stores in Costco.

We're in 561 today roughly.

Right. Okay. And then there -- is there plans to grow? Because I know they have about 880 stores nationwide or warehouses they call them.

Yes, warehouse. Currently, we're in about 561. I have to check on the expansion number, but roughly 561, I think, was the last count, but should be in a Costco near you. If not, Edward.

No, I have seen it, have seen it. So is there any risk that -- I know -- I shop at Costco a lot. I've seen a lot of times products, they have a -- they're there for a little bit and then they're out and you don't see them again. Is there a risk that they have -- you have certain metrics you have to hit? Is there a risk that they could pull that contract? I don't know that works exactly, if you could give us a little more insight into that.

Yes. That's the beverage business. So in pretty much any business in retail, so you really have about six months to perform otherwise you're out. So retail shelf is expensive, not only at Costco but every single retailer in the country. So, it's important to continue to drive velocity, drive consumers, drive growth and share in the category. So that's just the business we operate in, and it's extremely important that we rotate at retail. Otherwise, you start losing distribution. At this point, we're gaining distribution because of the velocity that's happening in existing accounts.

This is all the time we have for questions. I'd like to hand the call back over to John Fieldly for closing remarks.

Thank you. On behalf of the Company, I'd like to thank everyone for their continued interest and support. Our results demonstrate the product is gaining considerable momentum. We're capitalizing on today's health and wellness trends and transformation taking place in the energy category. Our active lifestyle position is a global position with mass appeal. We're building upon our core and leveraging best practices. We have a winning portfolio, strategy and team in a rapidly transformation category. We see great opportunities. We believe we will navigate through the challenges ahead, and we are well positioned to thrive in today's energy drink category. Thank you, everyone, for your time today and confidence in the team. Stay safe, stay healthy and lifted. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.