Greetings, welcome to the Celsius Holdings, Inc. Q1 2017 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Cameron Donahue, Partner of Hayden IR. Thank you. You may begin.
Thank you, good afternoon, everyone. We appreciate you joining us today for Celsius Holdings' first quarter 2017 earnings conference call. Joining me on the call today are John Fieldly, Interim Chief Executive Officer and Chief Financial Officer, and Vanessa Walker, Executive Vice President of Sales and Marketing. Following the prepared comments, we'll open the call to your questions, and instructions will be given at that time. We filed the quarterly reports with the OTC Markets and initiated a press release today. All materials are available on the company's website at celsius.com in the investor relations section. As a reminder, before I turn the call over to John, the audio replay will be available later today. Please also be aware this call may contain forward-looking statements which are based on forecasts, expectations, and other information available to management as of today, May 11th, 2017.
These statements involve numerous risks and uncertainties, including many that are beyond the company's control. Except to the extent required by applicable law, Celsius Holdings undertakes no obligations and disclaims any duty to update any of these forward-looking statements. We encourage you to review in full our safe harbor disclosures contained in today's press release and our quarterly filings for the OTC Markets for additional information. With that, I'd like to turn the call over to John Fieldly for his prepared comments. John?
Thank you, Cameron, good afternoon, everyone, thank you for joining us today. Our financial results reflect a solid start to our ongoing business operations in 2017. Our revenue for the first quarter was $6 million, a 63% increase over the first quarter of last year, driven by both solid domestic and international growth. Domestically, revenues increased 81% to a record $4.8 million for the quarter, demonstrating strong demand for our products, where we saw continued strong reorders from existing accounts and positive acceptance of the launch of our second line in the product portfolio, CELSIUS HEAT. This new trainer's grade line launched in late March in Vitamin Shoppe and National Fitness Channel distributors, major club chains, and local studios. In addition, late in March, we launched a naturally sweetened and caffeinated Celsius line extension to broaden our reach in the Natural Channel.
We are very excited about these two new lines, which are well positioned and have received great acceptance by retailers and customers. Internationally, we continue to maintain our market position as the number one fitness beverage and number two in energy, according to Nielsen in Sweden, and have continued our expansion into Finland and Singapore. With this growth, we continue our global expansion and are currently preparing for a Hong Kong launch in the third quarter of 2017 with our distribution partner, A.S. Watson. During the quarter, our rebranding and repositioning took hold with the addition of adding a global brand mark iconic C to our packaging and tagline, "Celsius, Live Fit." This lifestyle rebranding is resonating well with consumers as we are pioneering our position as the leading global fitness drink designed for the active lifestyle.
I'm proud to report that Celsius has received its 18th award. Celsius was named Best Functional Drink at the recent 13th Global Beverage Congress organization by Zenith Global and held in Frankfurt, Germany last month. We are honored to have Celsius selected as the winner among many products from around the world. This award further validates our vision and mission at Celsius. All of this momentum is laying a solid foundation for continued growth in 2017 and beyond. I am now going to turn the call over to Vanessa Walker, Executive Vice President of Sales and Marketing, to provide an update on our key growth drivers and new product launches.
Thank you, John. We had a very exciting first quarter. Our rebranding efforts took hold, and the brand experienced a surge of positive consumer and trade feedback as the new package debuted on store shelves early January. In mature retailers, the year-over-year reorders appear to show double-digit growth, and retailer scan data indicates the same momentum. The most significant aspect of the rebrand is a move to solidify Celsius' position as a fitness drink, an on-trend lifestyle brand with mass appeal for consumption at any time of day for those who wish to live an active, healthy lifestyle versus a quick calorie burning diet fix. The classification of diet or calorie burner, or just healthy energy alone, did not communicate the unique, clinically proven attributes and brand benefits Celsius' proprietary formula provides.
The tagline "Live Fit" calls consumers to take action to invest in themselves, alternate copy "Delicious that Delivers" speaks to the brand's greatly improved taste profile and clinically proven ability to deliver the claims made on pack. Our pioneering of the fitness drink category has a clear advantage at retail, as the trade is recognizing the consumer's desires to move beyond traditional sugary or HFCS drinks in all categories. Retailers are seeking new ways to bring cutting-edge function to their shelves. Directionally, the year-over-year sales growth at mature, direct ship retail chains, e-commerce, and the fitness channel drove the growth first quarter last year. In addition to the repositioning and repackaging, there were 2 exciting introductions in the first quarter. The first, the natural line extension of our flagship brand, which is naturally caffeinated and naturally sweetened and available in 6 flavors, 3 sparkling and 3 non-carbonated.
The natural line extension debuted at trade show, Natural Products Expo West in Anaheim, California, the first week of March. As well as the launch of the second product line in our portfolio, 16-ounce CELSIUS HEAT. Also a dietary supplement, Heat includes the Celsius proprietary thermogenic formula, MetaPlus Blend, which when combined with exercise, is proven to accelerate metabolism, burn body fat and calories, and provide energy. Heat, however, also offers added caffeine and L-citrulline, which is a vasodilator. The new Heat line is available in three flavors: Inferno Punch, Blueberry Pomegranate, and Cherry Lime. We are excited with the initial orders and customer response from our national fitness channel distribution partners, major club chains, and local studios. CELSIUS HEAT was developed for athletic trainers, bodybuilders, military personnel, and endurance athletes. It is sold outside the fitness channel in The Vitamin Shoppe retail locations and their website as well.
In preparation for the seeding and selling of the two new product introductions, the team expanded with two new hires. Director of the fitness channel, Bryan Alesiano , formerly of Glanbia Performance Nutrition, and the director of the natural channel, Paula Burke, formerly of the KIND Snacks company. They will spearhead the launches of these new products in their respective channels. On an international front, Celsius' new C logo mark and updated can graphics have been adopted by Singapore and Hong Kong and will be seen in both markets this summer. Plans are underway to work with our Swedish partner, Func Food, on evolving the can in the Nordic market to include the global brand mark and other distinctive features in future packaging. These changes will bring together a cohesive branded appearance and positioning as a fitness drink, staging Celsius brand for global expansion.
I will now turn the call back to John to provide details on our financial results. John?
Thank you, Vanessa. Total revenues for the first quarter of 2017 were $6 million compared to $3.7 million for the corresponding period in 2016. This 63% increase was driven primarily by an 81% growth in domestic sales, which was driven by blended growth rates of a 47% growth in retailer accounts, 237% growth in health and fitness accounts, where the product continues to resonate well. In addition, we saw an 88% growth in internet retailer accounts. In addition, our international sales grew at a healthy 18% year-over-year. Gross profit for the quarter was $2.4 million, or 39.7% of revenue, compared to $1.5 million, or 41.3% of revenues for the corresponding period last year. The increase in gross profit on a dollar basis is primarily due to increases in revenue and reductions in cost of raw materials.
The decrease in gross profit as a percentage of revenue is the result of a one-time charge of $235,000 associated with a write-down of old packaging and fees associated with our new label changes. Excluding these one-time charges, gross profit increased 230 basis points or 2.3 percentage points to 42% compared to the prior year period. Operating expenses in the first quarter of 2017 increased $1.6 million to $4.2 million, up from $2.7 million in the prior year period. This increase was driven in part by an increase of 20% in sales and marketing from investments in human resources, warehousing costs, and certain marketing programs. Increase in operating expense was also driven by an increase in general and administrative expenses, which included an extraordinary level of non-recurring items during the first quarter of 2017.
G&A expense for the first quarter of 2017 were $2.1 million compared to $875,000 in the first quarter of 2016. The increase in the first quarter of 2017 was driven by an increase of option expense, $200,000, investments in human resources, professional fees, and increases in research and development costs compared to the first quarter of 2017. In addition, the first quarter of 2017 included one-time charges of $490,000 for CEO retirement and transition costs and $328,000 of stock-based compensation for directors. The increase in general and administrative expenses was partially offset by reductions in travel expense. Total other expense was $48,000 for the first quarter of 2017, compared to $57,000 for the quarter in 2016. This modest decrease was a result of lower interest expense and a lower outstanding balance.
Net loss to common shareholders for the first quarter of 2017 was $2 million, or a loss of $0.05 per share, compared to a net loss of $1.3 million, or $0.03 per share, basic or diluted, for the corresponding period last year. Net loss attributable to common shareholders is inclusive of preferred dividends. For the three months ending March 31st, 2017 and 2016, the net losses include preferred dividends of $90,000 and $86,000 respectively. Operating expenses for the quarter included non-cash expense, including depreciation, amortization, and stock-based compensation, totaling approximately $787,000 compared to $258,000 last year. Adjusted EBITDA for the quarter, excluding one-time charges, was $322,000, compared to a negative adjusted EBITDA of $886,000 for the corresponding period in 2016. Adjusted EBITDA for the first quarter of 2017 excluded non-recurring items as discussed earlier.
The $490,000 for CEO retirement and transition costs and the $235,000 for write-downs and old packaging and fees associated with the new label changes. We believe information concerning adjusted EBITDA, a non-GAAP financial measure, enhances overall understanding of our financial performance. A reconciliation of our GAAP results to this non-GAAP measure was included in our earnings press release. Turning to the balance sheet. As of March 31st, 2017, the company had cash and cash equivalents of $20.9 million and working capital of $24.2 million. At this time, we believe our current cash balance will be sufficient to meet our anticipated cash needs over the next 12 months. Cash used in operations for the first three months of 2017 totaled $861,000, compared to $887,000 in the first three months of 2016.
Before I turn the call over for questions, I would like to thank Tim Leissner, one of our board members, for his service to the board and company. Tim's last day on the board was May 4th. On behalf of the board, management, shareholders, we thank Tim Leissner for his service over the last several years. In the interim to our next annual shareholder meeting, I was appointed to his vacancy. On another note, we will be presenting at the upcoming 18th Annual B. Riley & Co. Investor Conference in Santa Monica on Wednesday, May 24th. I encourage you all to attend. We look forward to meeting many of you. That concludes our prepared remarks. Operator, you may now open the call for questions. Thank you.
Thank you, ladies and gentlemen. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from the line of Paul Johnson, private investor. Please state your question. Paul, you may be on mute.
I'm sorry. Can you hear me now?
Yes. Hi, Paul. Good afternoon.
Go ahead.
Thank you for your call.
I'm wondering if you can just help investors understand why we've had fairly sudden departures lately of key people. First it was Gerry and now Tim Leissner. These are people who have been with the company for a long time. Tim, I think, has invested a lot of money in the company. While I appreciate your thanking him for his help, the elephant in the room is why would he suddenly depart so quickly? I think you need to answer those questions. The second question, it may be related or maybe not, has to do with the expansion into China. I think I'd asked on the last call why it's going to take so incredibly long to go to Mainland China when you have Watson as a partner, because distribution is everything, and we already have it.
The third thing related to that is, why do we need all this cash if we're not going to be expanding into China and other areas? The sales are up big year-over-year, but sequentially, they've been flat for the last three quarters. It's been sort of $6 million. Anyway, I know those are unrelated questions, but if you want to take them one at a time, that would be great.
Sure. Thank you, Paul. On the departures question, just starting off with Gerry. I think Gerry came to the company nearly on his 60th birthday. We all knew that this might be his last turnaround during that time. I'm not sure his retirement was a surprise to some folks. Over the last five years, he really built the firm's foundation for the company. We do have a solid infrastructure in place. The company couldn't be better positioned right now for the future.
Unfortunately, it felt like it was his time. That's all I can really comment on that. In regards to the recent board of director change with Tim, he stepped down for personal reasons. We do have Chris Lai, who's taking his co-chair role from Horizon. We still have a great Horizon presence on the board as well. That's just personal reasons, unfortunately. We'll continue to move forward with the management team that we have in place, and our current board of directors. In regards to your comment in China, we continue to, as I've mentioned on prior calls, we will continue to leverage the networks of our investors. As we mentioned earlier, we are preparing for a launch in Hong Kong with A.S. Watson, as that is our starting point. We'll look at expanding at that point.
I'm not going to provide forward-looking information at this point as we continue to move forward. At this time, we are focused on a successful launch in the third quarter in Hong Kong with A.S. Watson, then we'll take it from there at that point.
Okay.
In regards to the private placement which took place, we're using that to fund our global expansion as well as product innovation, as well as our working capital needs. A portion of those funds that were raised through the private placement will be utilized for these expansion initiatives in Singapore as well as Hong Kong, also allocated to some of the product innovation that we just most recently came out with CELSIUS HEAT and our natural lines, also future innovation.
Okay.
If that's right.
Yeah, no, you did answer the question. Thank you. I guess the only other question was just given how well things seem to be doing in all the various retail channels, particularly domestically, why have the sales, and I know there's some seasonality, but why have the sales been sort of flat for the last three quarters?
Yeah. We continue to show great growth domestically. When you're looking at our domestic front, and you look at the numbers we've reported domestically, we continue to show great results domestically, over double-digit growth rates. I might add that domestically, when you look at some quarter-over-quarter growth, which was mentioned last time on our prior call, domestically, we've grown on a quarter-over-quarter basis 37% when you look at fourth quarter domestic to first quarter results. We are growing domestically. What is impacting the numbers is mainly our international revenues, which is coming mainly from our Swedish distribution partner. Over the last several quarters, as we reported, they've had some contraction on their inventory levels. We are seeing good results there, and we expect consistent ordering patterns going forward.
That has really impacted our overall top-line revenue number as we look at our quarterly growth over the last several quarters. When you look at just exclusively the domestic revenues, I think you get a broader picture of much better results on a quarter-over-quarter basis and year-over-year basis.
Fair enough. Thank you. Just one more question about any news on possible NASDAQ uplifting?
Not at this time, except for what we disclosed before. We continue to pursue. We have submitted our application, as has been disclosed prior. We will continue to move through the process. At this point in time, that's all I have.
Very good. Thank you.
Thank you, Paul.
Thank you. Ladies and gentlemen, as a reminder, if you would like to ask a question in today's call, please press star one on your telephone keypad. Our next question comes from the line of David Benson, private investor. Please state your question.
Hello, Vanessa and John. It's David.
Hi, David.
Hi, David.
You've taken some significant time to prepare the Hong Kong launch, and I'm assuming a portion of that has gone into a sales and marketing strategy, in particular, a digital strategy. Do you feel like you have the digital piece and the advertising piece in place? Is that different from the U.S.? Could you describe that a little?
Sure. I'll field that question.
Sure.
With regard to Hong Kong, I happen to be heading there on Saturday morning, at 7:30 A.M. I'm wheels up on my way to Hong Kong. We do have agencies in Hong Kong. We have people on the ground in Hong Kong who are looking after the launch. As well, we are partnering with our connections at Horizon who are helping us with press, public relations, and other trade and marketing events on a localized level that would speak more towards specifically the Hong Kong trade and press. We do have a plan in place. We have a Hong Kong launch plan. We have an agency in place. We are localizing those events, and we are creating digital awareness. Next week when I arrive, we'll be confirming and solidifying some of those plans, which will be then put into motion as a teaser in effect.
The launch itself should be forthcoming in the beginning of the third quarter. We still have a bit of ways to go. However, we have creative plans, and we do have excellent partners, and we feel confident that we will have a nice launch.
A follow-up question. Assuming the launch in Hong Kong goes well, would you then launch in China in total, or would you do something like launch in, and I'm going to mispronounce this Guangdong, which is just north of Hong Kong, which of course, is highly populated. Have you laid any groundwork for how you would proceed in China proper based on what happens in Hong Kong?
Well, China as a whole is an interesting place in terms of a launch. As you know, they go to business province by province.
Yes.
However, we have not made plans as of yet to discuss launch plans or timing for China. I'll turn that over to John.
Yeah. Thank you.
Okay.
Thank you, David, for your question. At this point in time, we're really just focused on executing Hong Kong at this point. We have to pace ourselves as we continue to move forward. We are looking forward to following, as I mentioned before, our investors networks. At this point in time, the team is extremely focused on this Hong Kong launch, which we're very excited about.
Great. Thank you.
Thank you.
Thank you. Ladies and gentlemen, as a final reminder, if you would like to ask a question on today's call, please press star one on your telephone keypad. Our next question comes from the line of Drew Justman with Madison Asset Management. Please state your question.
Hello. Thanks for taking my call. I guess I'd like to follow up on some of the China questions. I haven't heard much of an update about Wang Rui and her distribution within China over the past couple of conference calls. Is there an update there, or has something changed?
As I mentioned before on the last call, we're really focusing on Hong Kong at this point, and we're going to continue to move through the networks as we move forward. Our main focus at this point is really focusing in on that launch, that Hong Kong Macau launch. We're still working on continuing to move forward with Singapore as well. At this point in time, I'm not going to provide any forward-looking information at this point in time. As information comes readily available, we'll put that out to the public. At this point in time, we're really focusing on Hong Kong.
I guess I'm confused why it was mentioned on prior conference calls then or in The Wall Street Transcript. Madam Wang and the huge distribution opportunity in China was highlighted. Now the company doesn't want to discuss that?
We'll have to double-check those transcripts. We have talks with Wang Rui, and we still continue to move forward, but I don't have any tangible information to disclose at this time.
Okay.
We continue to leverage their networks. I don't have an update at this time.
Okay. Understood. The placement into 7-Eleven really did a nice job of kind of taking sales to another level higher. Without getting into specifics, is there expectation on the part of management that the Hong Kong launch can do a similar leg higher?
I think with regard to Hong Kong, I believe that it will have a fantastic positive effect for the overall region and the sales of the company, the international sales of the company. I believe with our contacts, as John mentioned, direct distribution partner A.S. Watson will be able to access the many key retail chains through their relationship. We are anticipating that we will have a successful launch and that, I believe your question was, are we anticipating that it will do for us what 7-Eleven did for us in the U.S.? We don't know the answer to that. We are planning for success.
Understood. I just have a few more questions, if you don't mind. I'm a little surprised to hear Sweden mentioned being a little bit weak again. I thought maybe that was in the rear view mirror. Sounds like they've kind of brought down some of their inventories. Are there plans for them to restock, or is this kind of their going run right now for Sweden?
Thank you. It's really a timing of orders. We continue to maintain the number two position in energy and the number one in fitness, according to Nielsen. Based on the last report, they increased their market share and continue to perform very well in the region. We expect them to continue to move towards a normalized ordering pattern. They came a little bit below our expectations in Q1, but we anticipate that to continue on as it has in prior years.
Okay. Two quick questions for me then. Any update on Whole Foods? I think the product was changed so it could get placed in there. Is that still on track?
The Whole Foods has been a target retail account for us, and obviously it's the holy grail of the natural channel being a key anchor. As we set our sights in creating the natural line extension, we hope that we will deliver the ability to access new consumers, future consumers, through the natural channel and anchor the Whole Foods chain nationwide. We're pitching them, and we will continue to set our sights on the buyer and the selling cycle and try to sell that in as part of our overall strategy to tackle the natural channel with the new natural line extension.
Okay. Thank you. Last question from me. Is any general timeline on when a permanent CEO might be named?
Thank you, Drew. Just to give an update on that, the board is currently reviewing their candidates. They're coming towards more of the late rounds. I don't have exact timing on that, but I know it's most likely to be in the near future.
Okay, great. Thank you for taking my questions. I appreciate it. Have a nice day.
Thank you, Drew.
Thank you.
Thank you. There are no further questions. That does conclude our question and answer session. At this time, I will now turn it back to Mr. John Fieldly for closing comments.
Thank you. We are very encouraged by the first quarter 2017 results. We continue to build a firm foundation for our future. We will continue to build upon our core business and leverage opportunities both domestically and abroad. Thank you everyone for your interest today in Celsius, and have a good day.
This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.