In this settled action—part of a slew of SEC Enforcement cases reported out in the last days before the change in Administration—the SEC alleged that Celsius Holdings, Inc. engaged in improper accounting for stock-based compensation expenses when the company modified the terms of stock awards for six departing employees and retiring board members, but failed to re-value them as required under GAAP. As a result, the SEC alleged, in periodic and current reports, Celsius’ financial statements were materially inaccurate and misleading. The SEC charged that Celsius violated the reporting, books and records, internal accounting controls and disclosure controls and procedures provisions. Celsius has agreed to pay $3 million to settle the charges.
Background. As described in the Order, under ASC Topic No. 718 Compensation—Stock Compensation, changes to the vesting of stock awards are generally considered modifications of the awards that require companies to re-value the awards as of the date of the modification. In addition, the company is required to “record any additional value of the modified award over the fair value of the original award as incremental compensation costs over the remaining service period.”
In this case, Celsius, a developer and seller of fitness energy drinks traded on the Nasdaq Capital Market, usually provided that unvested stock awards to employees and directors would be forfeited if the individual left the company. However, in the second and third quarters of 2021, the SEC alleged, for six departing employees and retiring board members, “Celsius accelerated the vesting periods or allowed vesting to continue past their departure date, so the stock awards to these individuals would not be forfeited or cancelled upon their departure.” As noted above, these changes in vesting are considered modifications under GAAP. As alleged, revaluation of these stock awards would have resulted in an increase in their value and “material increases in the company’s stock-based compensation expenses.”
But Celsius, the SEC alleged, “failed to recognize and record the incremental compensation costs as required,” instead reporting “materially understated general and administrative expenses.” According to the SEC, Celsius included “materially misstated financial statements in quarterly reports on Forms 10-Q for the second and third quarters of 2021 and materially misstated financial information in its earnings releases furnished in Forms 8-K on August 12, 2021, and November 12, 2021.” What’s more, Celsius’ periodic reports stated that the company complied with ASC 718 to measure compensation costs for stock-based payments, but, the SEC alleged, “[n]o one at the company consulted ASC 718 or took other steps to ensure the accounting for the modified stock awards for the departing employees and board members was in accordance with GAAP.” In addition, the company’s agreement with its third-party stock-based compensation vendor “explicitly excluded accounting for modified stock awards.” The SEC charged that Celsius “failed to devise and maintain internal accounting controls to provide reasonable assurance that modifications to stock awards were properly accounted for” under GAAP. The improper accounting also resulted in inaccurate books and records.
In a current report on Form 8-K filed in March 2022, the company disclosed that its stock-based compensation expenses had been materially understated for two quarters, and that, as a result, Celsius had overstated net income by approximately 400% for the three months ended June 30, 2021, and understated net loss by approximately 130% for the three months ended September 30, 2021. In its 2021 Form 10-K, the company included restated financial information for the periods ended June 30, 2021, and September 30, 2021, which “caused Celsius’s previously reported net income to become a net loss for the three- and nine-month periods ended September 30, 2021.”
The SEC stated in the Order that “disclosure controls and procedures ‘are intended to cover a broader range of information than is covered by an issuer’s internal controls related to financial reporting’ and ‘should capture information that is relevant to an assessment of the need to disclose developments and risks that pertain to the issuer’s businesses.” The SEC alleged that, from at least September 2019 until August 2023, Celsius failed to maintain adequate disclosure controls and procedures; according to the Order, Celsius did not have established or written controls or procedures relating to the company’s non-financial disclosures.
According to the Order, after Celsius filed quarterly reports with misstated financial statements (which were subsequently restated), the company’s CEO sold 20,000 shares for a profit of almost $1.5 million. In addition, on January 1, 2022, the company granted to the CEO 18,000 restricted stock units, 12,000 of which had vested by January 2024. Celsius apparently clawed back these amounts: according to the Order, the CEO reimbursed to Celsius the amount of profits on the stock sale and returned to Celsius the 12,000 vested shares. Celsius also cancelled the remaining 6,000 restricted stock units.
Violations. The SEC charged that Celsius violated Exchange Act Section 13(a) of the Exchange Act and related Rules 13a-11, 13a-13, and 12b-20 (materially inaccurate and misleading financial statements in quarterly reports on Forms 10-Q and earnings releases furnished on Forms 8-K); Exchange Act Section 13(b)(2)(A) (books and records); Exchange Act Section 13(b)(2)(B) (internal accounting controls); Exchange Act Rule 13a-15(a) (disclosure controls and procedures).
In arriving at the settlement, the SEC took into account the remedial acts undertaken by Celsius, and imposed a civil money penalty of $3 million.
