Item 16. FORM 10-K SUMMARY

None

INDEX TO EXHIBITS

The following designated exhibits, as indicated below, are either filed or furnished, as applicable herewith or have heretofore been filed or furnished with the Securities and Exchange Commission under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, as indicated by footnote.

2.1	Transaction Agreement, dated as of August 14, 2014, by and among Monster Beverage Corporation, New Laser Corporation, New Laser Merger Corp, The Coca-Cola Company and European Refreshments (incorporated by reference to Exhibit 2.1 to our Form 8-K dated August 18, 2014).
2.2	Asset Transfer Agreement, dated as of August 14, 2014, by and among Monster Beverage Corporation, New Laser Corporation and The Coca-Cola Company Refreshments (incorporated by reference to Exhibit 2.2 to our Form 8-K dated August 18, 2014).
3.1	Certificate of Incorporation of the Company, as amended (incorporated by reference to Exhibit 3.1 to our Form 10-K dated November 7, 2016).
3.2	Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to our Form 8-K dated June 18, 2015).
10.1	Amended and Restated Distribution Coordination Agreement, dated as of June 12, 2015, between Monster Energy Company and The Coca-Cola Company (incorporated by reference to Exhibit 10.1 to our 10-Q dated August 10, 2015).
10.2	Amended and Restated International Distribution Coordination Agreement, dated as of June 12, 2015, between Monster Energy Ltd. and Monster Energy Company and The Coca-Cola Company (incorporated by reference to Exhibit 10.2 to our 10-Q dated August 10, 2015).
10.3	Form of Indemnification Agreement (to be provided by Hansen Natural Corporation to its directors) (incorporated by reference to Exhibit 10.1 to our Form 8-K dated November 14, 2005).
10.4+	Hansen Natural Corporation 2001 Amended and Restated Stock Option Plan (incorporated by reference to Exhibit A to our Proxy Statement dated September 25, 2007).
10.5+	Form of Restricted Stock Unit Agreement pursuant to the 2009 Hansen Natural Corporation Stock Incentive Plan for Non-Employee Directors (incorporated by reference to Exhibit 10.1 to our Form 10-K dated August 5, 2016).
10.6+	Form of Restricted Stock Agreement (incorporated by reference to Exhibit 10.1 to our Form 10-Q dated August 9, 2011).
10.7+	Monster Beverage Corporation 2011 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.1 to our Form 8-K dated May 24, 2011).
10.8+	Employment Agreement between Monster Beverage Corporation and Rodney C. Sacks (incorporated by reference to Exhibit 10.1 to our Form 8-K dated March 19, 2014).
10.9+	Employment Agreement between Monster Beverage Corporation and Hilton H. Schlosberg (incorporated by reference to Exhibit 10.2 to our Form 8-K dated March 19, 2014).
10.10+*	Form of Stock Option Agreement
10.11+*	Form of Stock Option Agreement of Chief Executive Officer and President and Chief Financial Officer
10.12+	Monster Beverage Corporation 2017 Compensation Plan for Non-Employee Directors (incorporated by reference to Exhibit 4.1 to our Form S-8 dated June 21, 2017).
10.13+	Monster Beverage Corporation Deferred Compensation Plan for Non-Employee Directors (incorporated by reference to Exhibit 4.2 to our Form S-8 dated June 21, 2017).
10.14+*	Amended and Restated Monster Beverage Corporation Deferred Compensation Plan.
21*	Subsidiaries
23*	Consent of Independent Registered Public Accounting Firm

31.1*	Certification by CEO pursuant to Rule 13A-14(a) or 15D-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
31.2*	Certification by CFO pursuant to Rule 13A-14(a) or 15D-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
32.1*	Certification by CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *
32.2*	Certification by CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *
101*	The following materials from Monster Beverage Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017 are furnished herewith, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets as of December 31, 2017 and 2016, (ii) the Consolidated Statements of Income for the years ended December 31, 2017, 2016 and 2015, (iii) the Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2017, 2016 and 2015, (iv) Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015, (v) Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015, and (vi) the Notes to Consolidated Financial Statements.

• Filed herewith.

• Management contract or compensatory plans or arrangements.

SIGNATURES

Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

MONSTER BEVERAGE CORPORATION

/s/ RODNEY C. SACKS	Rodney C. Sacks	Date: March 1, 2018
	Chairman of the Board

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.

Signature		Title		Date
/s/ RODNEY C. SACKS		Chairman of the Board of		March 1, 2018
Rodney C. Sacks		Directors and Chief Executive Officer (principal executive officer)
/s/ HILTON H. SCHLOSBERG		Vice Chairman of the Board of		March 1, 2018
Hilton H. Schlosberg		Directors, President, Chief Operating Officer, Chief Financial Officer and Secretary (principal financial officer, controller and principal accounting officer)
/s/ NORMAN C. EPSTEIN		Director		March 1, 2018
Norman C. Epstein
/s/ MARK J. HALL		Director		March 1, 2018
Mark J. Hall
/s/ GARY P. FAYARD		Director		March 1, 2018
Gary P. Fayard
/s/ BENJAMIN M. POLK		Director		March 1, 2018
Benjamin M. Polk
/s/ SYDNEY SELATI		Director		March 1, 2018
Sydney Selati
/s/ HAROLD C. TABER, JR.		Director		March 1, 2018
Harold C. Taber, Jr.
/s/ MARK S. VIDERGAUZ		Director		March 1, 2018
Mark S. Vidergauz
/s/ KATHY N WALLER		Director		March 1, 2018
Kathy N. Waller

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

	Page
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
Report of Independent Registered Public Accounting Firm	73
Consolidated Balance Sheets as of December 31, 2017 and 2016	74
Consolidated Statements of Income for the years ended December 31, 2017, 2016 and 2015	75
Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015	76
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2017, 2016 and 2015	77
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015	78
Notes to Consolidated Financial Statements	80
Financial Statement Schedule – Valuation and Qualifying Accounts for the years ended December 31, 2017, 2016 and 2015	116

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Monster Beverage Corporation

Corona, California

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Monster Beverage Corporation and subsidiaries (the “Company”) as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows, for each of the three years in the period ended December 31, 2017, and the related notes and the schedule listed in the Index at Item 15(a) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2018, expressed an unqualified opinion on the Company’s internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ DELOITTE & TOUCHE LLP

Costa Mesa, California

March 1, 2018

We have served as the Company’s auditor since 1991.

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2017 AND 2016 (In Thousands, Except Par Value)

		2017			2016
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	528,622		$	377,582
Short-term investments		672,933			220,554
Accounts receivable, net		449,476			448,051
TCCC Transaction receivable		–			125,000
Inventories		255,745			161,971
Prepaid expenses and other current assets		40,877			32,562
Prepaid income taxes		138,724			66,550
Total current assets		2,086,377			1,432,270
INVESTMENTS		2,366			2,394
PROPERTY AND EQUIPMENT, net		230,276			173,343
DEFERRED INCOME TAXES		92,333			159,556
GOODWILL		1,331,643			1,331,643
OTHER INTANGIBLE ASSETS, net		1,034,085			1,032,635
OTHER ASSETS		13,932			21,630
Total Assets		$	4,791,012		$	4,153,471
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	245,910		$	193,270
Accrued liabilities		87,475			79,526
Accrued promotional allowances		137,998			110,237
Accrued distributor terminations		91			8,184
Deferred revenue		43,236			41,672
Accrued compensation		34,996			30,043
Income taxes payable		10,645			7,657
Total current liabilities		560,351			470,589
DEFERRED REVENUE		334,354			353,173
OTHER LIABILITIES		1,095			–
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS’ EQUITY:
Common stock - $0.005 par value; 1,250,000 shares authorized; 629,255 shares issued and 566,298 shares outstanding as of December 31, 2017; 623,201 shares issued and 566,566 shares outstanding as of December 31, 2016		3,146			3,116
Additional paid-in capital		4,150,628			4,051,245
Retained earnings		2,928,226			2,107,548
Accumulated other comprehensive loss		(16,659)			(23,249)
Common stock in treasury, at cost; 62,957 shares and 56,635 shares as of December 31, 2017 and 2016, respectively		(3,170,129)			(2,808,951)
Total stockholders’ equity		3,895,212			3,329,709
Total Liabilities and Stockholders’ Equity		$	4,791,012		$	4,153,471

See accompanying notes to consolidated financial statements.

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015

(In Thousands, Except Per Share Amounts)

		2017			2016				2015
NET SALES		$	3,369,045		$	3,049,393			$	2,722,564
COST OF SALES		1,231,355			1,107,393				1,090,263
GROSS PROFIT		2,137,690			1,942,000				1,632,301
OPERATING EXPENSES		938,903			856,662				900,118
GAIN ON SALE OF MONSTER NON-ENERGY (NOTE 2)		–			–				161,470
OPERATING INCOME		1,198,787			1,085,338				893,653
OTHER INCOME (EXPENSE), NET		2,836			(5,653)				(2,105)
INCOME BEFORE PROVISION FOR INCOME TAXES		1,201,623			1,079,685				891,548
PROVISION FOR INCOME TAXES		380,945			367,000				344,815
NET INCOME		$	820,678		$		712,685		$	546,733
NET INCOME PER COMMON SHARE:
Basic		$	1.45		$		1.21		$	0.97
Diluted		$	1.42		$		1.19		$	0.95
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK AND COMMON STOCK EQUIVALENTS:
Basic		566,782			587,874				566,448
Diluted		577,141			599,819				577,758

See accompanying notes to consolidated financial statements.

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015 (In Thousands)

		2017			2016			2015
Net income, as reported		$	820,678		$	712,685		$	546,733
Other comprehensive (loss) income:
Change in foreign currency translation adjustment, net of tax		7,238			(1,178)			(10,425)
Available-for-sale investments:
Change in net unrealized losses		(648)			(193)			-
Reclassification adjustment for net gains included in net income		-			-			-
Net change in available-for-sale investments		(648)			(193)			-
Other comprehensive (loss) income		6,590			(1,371)			(10,425)
Comprehensive income		$	827,268		$	711,314		$	536,308

See accompanying notes to consolidated financial statements.

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015 (In Thousands)

													Accumulated Other								Total
		Common stock					Additional			Retained			Comprehensive			Treasury stock					Stockholders’
		Shares		Amount			Paid-in Capital			Earnings			Loss			Shares		Amount			Equity
Balance, January 1, 2015		621,012		$	3,105		$	424,075		$	2,330,510		$	(11,453)		(117,846)		$	(1,231,087)		$	1,515,150
Stock-based compensation		-		-			32,719			-			-			-		-			32,719
Exercise of stock options		22,275		111			49,217			-			-			-		-			49,328
Issuance of common stock		102,123		511			3,168,624			-			-			-		-			3,169,135
Excess tax benefits from share based payment arrangements		-		-			314,737			-			-			-		-			314,737
Repurchase of common stock		-		-			-			-			-			(18,864)		(807,967)			(807,967)
Cancellation of treasury stock		(124,353)		(622)			415			(1,482,380)			-			124,353		1,482,587			-
Foreign currency translation		-		-			-			-			(10,425)			-		-			(10,425)
Net income		-		-			-			546,733			-			-		-			546,733
Balance, December 31, 2015		621,057		$	3,105		$	3,989,787		$	1,394,863		$	(21,878)		(12,357)		$	(556,467)		$	4,809,410
Stock-based compensation		-		-			45,848			-			-			-		-			45,848
Exercise of stock options		2,144		11			16,441			-			-			-		-			16,452
Unrealized loss on available-for- sale securities		-		-			-			-			(193)			-		-			(193)
Excess tax benefits from share based payment arrangements		-		-			(831)			-			-			-		-			(831)
Repurchase of common stock		-		-			-			-			-			(44,278)		(2,252,484)			(2,252,484)
Foreign currency translation		-		-			-			-			(1,178)			-		-			(1,178)
Net income		-		-			-			712,685			-			-		-			712,685
Balance, December 31, 2016		623,201		$	3,116		$	4,051,245		$	2,107,548		$	(23,249)		(56,635)		$	(2,808,951)		$	3,329,709
Stock-based compensation		-		-			52,282			-			-			-		-			52,282
Exercise of stock options		6,054		30			52,596			-			-			-		-			52,626
Unrealized loss on available-for- sale securities		-		-			-			-			(648)			-		-			(648)
Reversal of excess tax benefits from share based payment arrangements		-		-			(5,495)			-			-			-		-			(5,495)
Repurchase of common stock		-		-			-			-			-			(6,322)		(361,178)			(361,178)
Foreign currency translation		-		-			-			-			7,238			-		-			7,238
Net income		-		-			-			820,678			-			-		-			820,678
Balance, December 31, 2017		629,255		$	3,146		$	4,150,628		$	2,928,226		$	(16,659)		(62,957)		$	(3,170,129)		$	3,895,212

See accompanying notes to consolidated financial statements.

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015 (In Thousands)

		2017			2016			2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	820,678		$	712,685		$	546,733
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		48,887			40,845			30,860
(Gain) loss on disposal of property and equipment		(1,161)			(204)			193
Gain on sale of Monster Non-Energy		–			–			(161,470)
Stock-based compensation		52,282			45,848			32,719
Loss on put option		–			–			250
Gain on investments, net		–			–			(250)
Deferred income taxes		67,935			(19,092)			(181,582)
Effect on cash of changes in operating assets and liabilities, net of acquisitions and divestitures:
Accounts receivable		11,822			(86,382)			(77,331)
TCCC Transaction receivable		125,000			–			–
Distributor receivables		4,716			(19,981)			600
Inventories		(88,867)			20,875			(7,068)
Prepaid expenses and other current assets		(2,396)			(6,682)			(9,713)
Prepaid income taxes		(71,332)			(48,023)			(11,009)
Accounts payable		29,579			45,340			20,864
Accrued liabilities		(4,499)			(2,852)			43,312
Accrued promotional allowances		21,135			(3,939)			7,009
Accrued distributor terminations		(8,172)			(3,328)			11,196
Accrued compensation		4,491			8,051			4,507
Income taxes payable		(3,590)			4,375			311,534
Other liabilities		1,095			–			–
Deferred revenue		(19,872)			13,819			(38,631)
Net cash provided by operating activities		987,731			701,355			522,723
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of held-to-maturity investments		–			868,304			2,089,788
Sales of available-for-sale investments		533,183			120,987			4,001
Sales of trading investments		–			–			4,160
Proceeds from the transfer of distribution rights to TCCC		–			–			179,658
Proceeds from the sale of Monster Non-Energy		–			–			198,008
Purchase of AFF assets, net		–			(688,485)			–
Proceeds from sale of property and equipment		1,416			807			926
Purchases of held-to-maturity investments		–			(152,050)			(2,033,584)
Purchases of available-for-sale investments		(971,813)			(300,426)			–
Purchases of property and equipment		(83,435)			(99,819)			(35,605)
Additions to intangibles		(9,693)			(5,518)			(6,888)
(Increase) decrease in other assets		(1,199)			7			(398)
Net cash (used in) provided by investing activities		(531,541)			(256,193)			400,066
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt		(2,583)			(2,359)			(1,083)
Issuance of common stock		52,626			16,405			1,696,661
Purchases of common stock held in treasury		(361,178)			(2,252,437)			(807,967)
Net cash (used in) provided by financing activities		(311,135)			(2,238,391)			887,611
Effect of exchange rate changes on cash and cash equivalents		5,985			(4,606)			(5,306)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		151,040			(1,797,835)			1,805,094
CASH AND CASH EQUIVALENTS, beginning of year		377,582			2,175,417			370,323
CASH AND CASH EQUIVALENTS, end of year		$	528,622		$	377,582		$	2,175,417
SUPPLEMENTAL INFORMATION:
Cash paid during the year for:
Interest		$	75		$	68		$	29
Income taxes		$	389,490		$	431,273		$	224,928

See accompanying notes to consolidated financial statements.

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015

SUPPLEMENTAL DISCLOSURE OF NON-CASH ITEMS:

During the years ended December 31, 2017, 2016 and 2015, the Company entered into capital leases of $2.7 million, $2.6 million and $1.5 million, respectively, for the acquisition of promotional vehicles.

Accounts payable included equipment purchases of $2.3 million, $0.1 million and $0.6 million as of December 31, 2017, 2016 and 2015, respectively.

Accrued liabilities included equipment purchases of $3.8 million, $4.6 million and $0.1 million as of December 31, 2017, 2016 and 2015, respectively.

Accrued liabilities included additions to intangibles of $3.7 million, $3.8 million and $2.2 million as of December 31, 2017, 2016 and 2015, respectively.

During the year ended December 31, 2015, the Company issued 35.4 million shares of the Company’s common stock in exchange for KO Energy.

During the year ended December 31, 2015, in connection with the TCCC Transaction (as defined in Note 2), $125.0 million relating to the transfer of certain distribution rights was deposited into escrow pending certain transition milestones.

During the year ended December 31, 2015, the Company cancelled 124.5 million shares of treasury stock. Amounts previously recorded as treasury stock were netted against common stock and retained earnings.

See accompanying notes to consolidated financial statements.

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization – Monster Beverage Corporation (the “Company”) was incorporated in the state of Delaware. The Company is a holding company and has no operating business except through its consolidated subsidiaries.

Nature of Operations – The Company develops, markets, sells and distributes energy drink beverages, sodas and/or concentrates for energy drink beverages, primarily under the following brand names: Monster Energy®, Monster Energy Ultra®, Monster Rehab®, Monster Energy Extra Strength Nitrous Technology®, Java Monster®, Muscle Monster®, Punch Monster®, Juice Monster®, Übermonster®, BU®, Mutant® Super Soda, Monster Hydro®, Espresso MonsterTM, Caffé MonsterTM, Nalu®, NOS®, Full Throttle®, Burn®, Mother®, Ultra Energy®, Play® and Power Play(stylized)®, Relentless® and BPM®. Through June 12, 2015, the Company also developed, marketed, sold and distributed “alternative” beverage category beverages under the following brand names: Peace Tea®, Hansen’s®, Hansen’s Natural Cane Soda®, Junior Juice®, Blue Sky® and Hubert’s®. These brands were transferred to The Coca-Cola Company (“TCCC”) as part of the TCCC Transaction (as defined and described in Note 2 below).

Basis of Presentation – The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of the Company and its consolidated subsidiaries.

Principles of Consolidation – The Company consolidates all entities that it controls by ownership of a majority voting interest. All intercompany balances and transactions have been eliminated in consolidation.

Business Combinations – Business acquisitions are accounted for in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805 “Business Combinations”. FASB ASC 805 requires the reporting entity to identify the acquirer, determine the acquisition date, recognize and measure the identifiable tangible and intangible assets acquired, the liabilities assumed and any non-controlling interest in the acquired entity, and recognize and measure goodwill or a gain from the purchase. The acquiree’s results are included in the Company’s consolidated financial statements from the date of acquisition. Assets acquired and liabilities assumed are recorded at their fair values and the excess of the purchase price over the amounts assigned is recorded as goodwill. Adjustments to fair value assessments are recorded to goodwill over the measurement period (not longer than twelve months). The acquisition method also requires that acquisition-related transaction and post-acquisition restructuring costs be charged to expense and requires the Company to recognize and measure certain assets and liabilities including those arising from contingencies and contingent consideration in a business combination.

Cash and Cash Equivalents – The Company considers all highly liquid investments with an original maturity of three months or less from date of purchase to be cash equivalents. Throughout the year, the Company has had amounts on deposit at financial institutions that exceed the federally insured limits. The Company has not experienced any loss as a result of these deposits and does not expect to incur any losses in the future.

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts)

Investments – The Company’s investments in debt securities are classified as either held-to-maturity, available-for-sale or trading, in accordance with FASB ASC 320. Held-to-maturity securities are those securities that the Company has the positive intent and ability to hold until maturity. Trading securities are those securities that the Company intends to sell in the near term. All other securities not included in the held-to-maturity or trading category are classified as available-for-sale. Held-to-maturity securities are recorded at amortized cost which approximates fair market value. Trading securities are carried at fair value with unrealized gains and losses charged to earnings. Available-for-sale securities are carried at fair value with unrealized gains and losses recorded within accumulated other comprehensive loss as a separate component of stockholders’ equity. FASB ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available (see Note 4). Under FASB ASC 320-10-35, a security is considered to be other-than-temporarily impaired if the present value of cash flows expected to be collected are less than the security’s amortized cost basis (the difference being defined as the “Credit Loss”) or if the fair value of the security is less than the security’s amortized cost basis and the investor intends, or will be required, to sell the security before recovery of the security’s amortized cost basis. If an other-than-temporary impairment exists, the charge to earnings is limited to the amount of Credit Loss if the investor does not intend to sell the security, and will not be required to sell the security, before recovery of the security’s amortized cost basis. Any remaining difference between fair value and amortized cost is recognized in other comprehensive loss, net of applicable taxes. The Company evaluates whether the decline in fair value of its investments is other-than-temporary at each quarter-end. This evaluation consists of a review by management, and includes market pricing information and maturity dates for the securities held, market and economic trends in the industry and information on the issuer’s financial condition and, if applicable, information on the guarantors’ financial condition. Factors considered in determining whether a loss is temporary include the length of time and extent to which the investment’s fair value has been less than its cost basis, the financial condition and near-term prospects of the issuer and guarantors, including any specific events which may influence the operations of the issuer and the Company’s intent and ability to retain the investment for a reasonable period of time sufficient to allow for any anticipated recovery of fair value.

Accounts Receivable – The Company evaluates the collectability of its trade accounts receivable based on a number of factors. In circumstances where the Company becomes aware of a specific customer’s inability to meet its financial obligations to the Company, a specific reserve for bad debts is estimated and recorded, which reduces the recognized receivable to the estimated amount the Company believes will ultimately be collected. In addition to specific customer identification of potential bad debts, bad debt charges are recorded based on the Company’s recent loss history and an overall assessment of past due trade accounts receivable outstanding. In accordance with FASB ASC 210-20-45, in its consolidated balance sheets, the Company has presented accounts receivable, net of promotional allowances, only for those customers that it allows net settlement. All other accounts receivable and related promotional allowances are shown on a gross basis.

Inventories – Inventories are valued at the lower of first-in, first-out, cost or market value (net realizable value).

Property and Equipment – Property and equipment are stated at cost. Depreciation of furniture and fixtures, office and computer equipment, computer software, equipment, and vehicles is based on their estimated useful lives (three to ten years) and is calculated using the straight-line method. Amortization of leasehold improvements is based on the lesser of their estimated useful lives or the terms of the related leases and is calculated using the straight-line method. Normal repairs and maintenance costs are expensed as incurred. Expenditures that materially increase values or extend useful lives are capitalized. The related costs and accumulated depreciation of disposed assets are eliminated and any resulting gain or loss on disposition is included in net income.

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts)

Goodwill – The Company records goodwill when the consideration paid for an acquisition exceeds the fair value of net tangible and intangible assets acquired, including related tax effects. Goodwill is not amortized; instead goodwill is tested for impairment on an annual basis, or more frequently if the Company believes indicators of impairment exist. The Company first assesses qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying value. If the Company determines that the fair value is less than the carrying value, the Company will use a two-step process to determine the amount of goodwill impairment. The first step requires comparing the fair value of the reporting unit to its net book value, including goodwill. A potential impairment exists if the fair value of the reporting unit is lower than its net book value. The second step of the process, performed only if a potential impairment exists, involves determining the difference between the fair value of the reporting unit’s net assets, other than goodwill, and the fair value of the reporting unit. An impairment charge is recognized for the excess of the carrying value of goodwill over its implied fair value. For the fiscal years ended December 31, 2017, 2016 and 2015 there were no impairments recorded.

Other Intangibles – Other Intangibles are comprised primarily of trademarks that represent the Company’s exclusive ownership of the Monster Energy®, ®, Monster Energy Ultra®, Monster Rehab®, Mutant®, Java Monster®, Unleash the Beast!®, Monster Hydro®, Monster Energy Extra Strength Nitrous Technology®, Muscle Monster®, Punch Monster®, Juice Monster®, Espresso MonsterTM, Caffé MonsterTM, M3(stylized)®, Übermonster®, BU®, Nalu®, NOS®, Full Throttle®, Burn®, Mother®, Ultra Energy®, Play® and Power Play(stylized)®, Gladiator®, Relentless® Samurai® and BPM® trademarks, all used in connection with the manufacture, sale and distribution of beverages. The Company also owns a number of other trademarks in the United States, as well as in a number of countries around the world. In accordance with FASB ASC 350, intangible assets with indefinite lives are not amortized but instead are measured for impairment at least annually, or when events indicate that an impairment exists. The Company calculates impairment as the excess of the carrying value of its indefinite-lived assets over their estimated fair value. If the carrying value exceeds the estimate of fair value a write-down is recorded. The Company amortizes its trademarks with finite useful lives over their respective useful lives. For the fiscal years ended December 31, 2017, 2016 and 2015 there were no impairments recorded.

Long-Lived Assets – Management regularly reviews property and equipment and other long-lived assets, including certain definite-lived intangible assets, for possible impairment. This review occurs annually, or more frequently if events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. If there is indication of impairment, management then prepares an estimate of future cash flows (undiscounted and without interest charges) expected to result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment loss is recognized to write down the asset to its estimated fair value. The fair value is estimated using the present value of the future cash flows discounted at a rate commensurate with management’s estimates of the business risks. Preparation of estimated expected future cash flows is inherently subjective and is based on management’s best estimate of assumptions concerning expected future conditions. For the fiscal years ended December 31, 2017, 2016 and 2015, there were no impairment indicators identified. Long-lived assets held for sale are recorded at the lower of their carrying amount or fair value less cost to sell.

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts)

Foreign Currency Translation and Transactions – The accounts of the Company’s foreign subsidiaries are translated in accordance with FASB ASC 830. Foreign currency transaction gains and losses are recognized in other expense, net, at the time they occur. Net foreign currency exchange gains or losses resulting from the translation of assets and liabilities of foreign subsidiaries whose functional currency is not the U.S. dollar are recorded as a part of accumulated other comprehensive loss in stockholders’ equity. Unrealized foreign currency exchange gains and losses on certain intercompany transactions that are of a long-term investment nature (i.e., settlement is not planned or anticipated in the foreseeable future) are also recorded in accumulated other comprehensive loss in stockholders’ equity. During the years ended December 31, 2017, 2016 and 2015, the Company entered into forward currency exchange contracts with financial institutions to create an economic hedge to specifically manage a portion of the foreign exchange risk exposure associated with certain consolidated subsidiaries non-functional currency denominated assets and liabilities. All foreign currency exchange contracts outstanding as of December 31, 2017 have terms of one month or less. We do not enter into forward currency exchange contracts for speculation or trading purposes.

The Company has not designated its foreign currency exchange contracts as hedge transactions under FASB ASC 815. Therefore, gains and losses on the Company’s foreign currency exchange contracts are recognized in other expense, net, in the consolidated statements of income, and are largely offset by the changes in the fair value of the underlying economically hedged item. For the years ended December 31, 2017, 2016 and 2015, aggregate foreign currency transaction losses, including the gains or losses on forward currency exchange contracts, amounted to $3.3 million, $9.7 million and $5.5 million, respectively, and have been recorded in other income (expense), net in the accompanying consolidated statements of income.

Revenue Recognition – The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectability is reasonably assured.

Generally, ownership of and title to the Company’s finished products passes to customers upon delivery of the products to customers. Certain of the Company’s distributors may also perform a separate function as a co-packer on the Company’s behalf. In such cases, ownership of and title to the Company’s products that are co-packed on the Company’s behalf by those co-packers who are also distributors, passes to such distributors when the Company is notified by them that they have taken transfer or possession of the relevant portion of the Company’s finished goods.

Revenue for the Strategic Brands segment is generally recognized when title to the concentrate is transferred to the customer. In particular, title to the concentrate usually passes upon shipment to the customers’ locations, as determined by the specific sales terms of the transactions.

Net sales have been determined after deduction of promotional and other allowances in accordance with FASB ASC 605-50. The Company’s promotional and other allowances are calculated based on various programs with its distributors and retail customers, and accruals are established during the year for the anticipated liabilities. These accruals are based on agreed upon terms as well as the Company’s historical experience with similar programs and require management’s judgment with respect to estimating consumer participation and/or distributor and retail customer performance levels. Differences between such estimated expense and actual expenses for promotional and other allowance costs have historically been insignificant and are recognized in earnings in the period such differences are determined. Amounts received pursuant to new and/or amended distribution agreements entered into with certain distributors, relating to the costs associated with terminating the Company’s prior distributors, are accounted for as revenue ratably over the anticipated life of the respective distribution agreement, generally 20 years.

The Company also enters into license agreements that generate revenues associated with third-party sales of non-beverage products bearing our trademarks including, but not limited to, clothing hats, t-shirts, jackets, helmets and automotive wheels.

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts)

Management believes that adequate provision has been made for cash discounts, returns and spoilage based on the Company’s historical experience.

Cost of Sales – Cost of sales consists of the costs of concentrates and/or beverage bases, the costs of raw materials utilized in the manufacture of products, co-packing fees, repacking fees, in-bound freight charges, as well as certain internal transfer costs, warehouse expenses incurred prior to the manufacture of the Company’s finished products and certain quality control costs. Raw materials account for the largest portion of the cost of sales. Raw materials include cans, bottles, other containers, flavors, ingredients and packaging materials.

Operating Expenses – Operating expenses include selling expenses such as distribution expenses to transport products to customers and warehousing expenses after manufacture, as well as expenses for advertising, sampling and in-store demonstration costs, costs for merchandise displays, point-of-sale materials and premium items, sponsorship expenses, other marketing expenses and design expenses. Operating expenses also include such costs as payroll costs, travel costs, professional service fees including legal fees, termination payments made to certain of the Company’s prior distributors, depreciation and other general and administrative costs.

Freight-Out Costs – For the years ended December 31, 2017, 2016 and 2015, freight-out costs amounted to $91.9 million, $83.6 million and $87.0 million, respectively, and have been recorded in operating expenses in the accompanying consolidated statements of income.

Advertising and Promotional Expenses – The Company accounts for advertising production costs by expensing such production costs the first time the related advertising takes place. A significant amount of the Company’s promotional expenses result from payments under endorsement and sponsorship contracts. Accounting for endorsement and sponsorship payments is based upon specific contract provisions. Generally, endorsement and sponsorship payments are expensed on a straight-line basis over the term of the contract after giving recognition to periodic performance compliance provisions of the contracts. Advertising and promotional expenses, including, but not limited to, production costs amounted to $324.0 million, $270.6 million and $209.7 million for the years ended December 31, 2017, 2016 and 2015, respectively. Advertising and promotional expenses are included in operating expenses in the accompanying consolidated statements of income.

Income Taxes – The Company utilizes the liability method of accounting for income taxes as set forth in FASB ASC 740. Under the liability method, deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized. In determining the need for valuation allowances the Company considers projected future taxable income and the availability of tax planning strategies. If in the future the Company determines that it would not be able to realize its recorded deferred tax assets, an increase in the valuation allowance would be recorded, decreasing earnings in the period in which such determination is made.

The Company assesses its income tax positions and records tax benefits for all years subject to examination based upon the Company’s evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where there is a greater than 50% likelihood that a tax benefit will be sustained, the Company has recorded the largest amount of tax benefit that may potentially be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where there is less than 50% likelihood that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements.

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts)

Stock-Based Compensation – The Company accounts for stock-based compensation under the provisions of FASB ASC 718. The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes-Merton option pricing formula. The Company records compensation expense for non-employee stock options based on the estimated fair value of the options as of the earlier of (1) the date at which a commitment for performance by the non-employee to earn the stock option is reached or (2) the date at which the non-employee’s performance is complete, using the Black-Scholes-Merton option pricing formula. Stock-based compensation cost for restricted stock awards and restricted stock units is measured based on the closing fair market value of the Company’s common stock at the date of grant. In the event that the Company has the option and intent to settle a restricted stock unit in cash, the award is classified as a liability and revalued at each balance sheet date. (See Note 14).

Net Income Per Common Share – In accordance with FASB ASC 260, net income per common share, on a basic and diluted basis, is presented for all periods. Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during each period. Diluted net income per share is computed by dividing net income by the weighted average number of common and dilutive common equivalent shares outstanding. The calculation of common equivalent shares assumes the exercise of dilutive stock options, net of assumed treasury share repurchases at average market prices, as applicable.

Concentration of Risk – Certain of the Company’s products utilize components (raw materials and/or co-packing services) from a limited number of sources. A disruption in the supply of such components could significantly affect the Company’s revenues from those products, as alternative sources of such components may not be available at commercially reasonable rates or within a reasonably short time period. The Company continues to endeavor to secure the availability of alternative sources for such components and minimize the risk of any disruption in production.

TCCC, through certain wholly-owned subsidiaries (the “TCCC Subsidiaries”), accounted for approximately 18%, 41% and 43% of the Company’s net sales for the years ended December 31, 2017, 2016 and 2015, respectively. As part of TCCC’s North America Refranchising initiative (the “North America Refranchising”), the territories of certain TCCC Subsidiaries have been transitioned to certain independent/non wholly-owned TCCC bottlers/distributors. Accordingly, the Company’s percentage of net sales classified as sales to the TCCC Subsidiaries decreased for the year ended December 31, 2017. CCBCC Operations, LLC accounted for approximately 13%, 9% and 6% of the Company’s net sales for the years ended December 31, 2017, 2016 and 2015, respectively.

Credit Risk – The Company sells its products nationally and internationally, primarily to full service beverage distributors, retail grocery and specialty chains, wholesalers, club stores, mass merchandisers, convenience chains and food service customers. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains reserves for estimated credit losses, and historically, such losses have been within management’s expectations.

Fair Value of Financial Instruments – The carrying value of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximate fair value due to the relatively short maturity of the respective instruments.

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts)

Use of Estimates – The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Recent Accounting Pronouncements – In May 2017, the FASB issued ASU No. 2017-09, “Compensation–Stock Compensation (Topic 718): Scope of Modification Accounting,” clarifying when a change to the terms or conditions of a share-based payment award must be accounted for as a modification. The new guidance requires modification accounting if the fair value, vesting condition or the classification of the award is not the same immediately before and after a change to the terms and conditions of the award. The new guidance is effective for the Company on a prospective basis beginning on January 1, 2018, with early adoption permitted. The adoption of ASU No. 2017-09 will not have a material impact on the Company’s financial position, results of operations and liquidity.

In January 2017, the FASB issued ASU No. 2017-01_, “Business Combinations (Topic 805): Clarifying the Definition of a Business”_, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This amendment is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The adoption of ASU No. 2017-01 will not have a material impact on the Company’s financial position, results of operations and liquidity.

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles and Other (Topic 350): Simplifying the Test for Goodwill Impairment_”_, which eliminates the requirement to calculate the implied fair value of goodwill, but rather requires an entity to record an impairment charge based on the excess of a reporting unit’s carrying value over its fair value. This amendment is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact of ASU No. 2017-04 on its financial position, results of operations and liquidity.

In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory”, in an effort to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Current GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. FASB ASU No. 2016-16 establishes the requirement that an entity recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. ASU No. 2016-16 is effective for financial statements issued for annual periods beginning after December 15, 2017 and interim periods within those annual periods. Earlier application is permitted as of the beginning of an interim or annual reporting period, with any adjustments reflected as of the beginning of the fiscal year of adoption. The Company is currently evaluating the impact of ASU No. 2016-16 on its financial position, results of operations and liquidity.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230)”. The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. ASU No. 2016-15 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted, provided that all of the amendments are adopted in the same period. The guidance requires application using a retrospective transition method. The Company is currently evaluating the impact of ASU No. 2016-15 on its financial position, results of operations and liquidity.

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts)

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The accounting standard changes the methodology for measuring credit losses on financial instruments and the timing when such losses are recorded. ASU No. 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company is currently evaluating the impact of ASU No. 2016-13 on its financial position, results of operations and liquidity.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”. This update is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This update is effective for annual and interim reporting periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of ASU No. 2016-02 on its financial position, results of operations and liquidity.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”, which supersedes previous revenue recognition guidance. ASU No. 2014-09 requires that a company recognize revenue at an amount that reflects the consideration to which the company expects to be entitled in exchange for transferring goods or services to a customer. In applying the new guidance, a company will (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the contract’s performance obligations; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. This guidance was to be effective for reporting periods beginning after December 15, 2016. However, on July 9, 2015, the FASB voted to approve a one-year deferral of the effective date. This new guidance is effective for the Company beginning January 1, 2018 and can be adopted using either a full retrospective or modified approach. The majority of the Company’s revenue arrangements generally consist of a single performance obligation to transfer promised goods. Based on the Company’s evaluation process and review of its contracts with customers, the timing and amount of revenue recognized based on ASU No. 2014-09 is consistent with the Company’s revenue recognition policy under previous guidance. The Company adopted the new standard effective January 1, 2018, using the modified retrospective approach, and will expand its consolidated financial statement disclosures in order to comply with ASU No. 2014-09. The Company has completed its evaluation and determined the adoption of ASU No. 2014-09 will not have a material impact on its financial position, results of operations and liquidity.

2. ACQUISITIONS AND DIVESTITURES

American Fruits & Flavors

On April 1, 2016, the Company completed its acquisition of flavor supplier and long-time business partner American Fruits & Flavors (“AFF”), in an asset acquisition that brought the Company’s primary flavor supplier in-house, secured the intellectual property of the Company’s most important flavors in perpetuity and further enhanced its flavor development and global flavor footprint capabilities (the “AFF Transaction”). Pursuant to the terms of the AFF Transaction, the Company purchased AFF for $688.5 million in cash after adjustments. The Company accounted for the AFF Transaction in accordance with FASB ASC No. 805 “Business Combinations”.

In accordance with Regulation S-X, pro forma unaudited financial information for the AFF Transaction has not been provided as the impact of the transaction on the Company’s financial position, results of operations and liquidity was not material.

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts)

The Coca-Cola Company

On June 12, 2015, the Company completed the transactions contemplated by the definitive agreements entered into with The Coca-Cola Company (“TCCC”) on August 14, 2014 (the “TCCC Transaction”), which provided for a long-term strategic relationship in the global energy drink category.

In consequence of the TCCC Transaction, (1) the Company issued to TCCC 102,121,602 newly issued Company common shares representing approximately 16.7% of the total number of outstanding Company common shares (after giving effect to such issuance) at such time and TCCC appointed two individuals to the Company’s Board of Directors, (2) TCCC transferred all of its rights in and to TCCC’s worldwide energy drink business (“KO Energy”) to the Company, (3) the Company transferred all of its rights in and to its non-energy drink business (“Monster Non-Energy”) to TCCC, (4) the Company and TCCC amended the distribution coordination agreements previously existing between them to govern the transition of third parties’ rights to distribute the Company’s energy products in most territories in the U.S. to members of TCCC’s distribution network, which consists of owned or controlled bottlers/distributors and independent bottling/distribution partners, and (5) TCCC and one of its subsidiaries made an aggregate net cash payment to the Company of $2.15 billion, $125.0 million of which was held in escrow, as described below, pursuant to an escrow agreement (the “Escrow Agreement”) through June 17, 2016, subject to release upon the achievement of certain milestones relating to the transition of distribution rights to TCCC’s distribution network.

Under the terms of the Escrow Agreement and the transition payment agreement entered into in connection therewith, if the distribution rights in the U.S. transitioned to TCCC’s distribution network represented case sales in excess of the following percentages of a target case sale amount agreed to by the parties, amounts in the escrow fund in excess of the applicable amounts below would be released to the Company:

Percentage Transitioned		Escrow Release
40%		Amounts in excess of $375 million
50%		Amounts in excess of $312.5 million
60%		Amounts in excess of $250 million
70%		Amounts in excess of $187.5 million
80%		Amounts in excess of $125 million
90%		Amounts in excess of $62.5 million
95%		All remaining amounts

As of December 31, 2016, distribution rights in the U.S. representing approximately 89% of the target case sales had been transitioned to TCCC’s distribution network. As a result, on the one-year anniversary of the closing of the TCCC Transaction, the then-remaining escrow amount of $125 million was released to TCCC. During the year ended December 31, 2017, target case sales in excess of 95% were transitioned to TCCC’s distribution network, resulting in the receipt of the remaining amounts due from TCCC related to the TCCC Transaction.

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts)

The following unaudited pro forma combined financial information is presented as if the TCCC Transaction had closed on January 1, 2015:

		Year Ended December 31, 2015
						Pro Forma Adjustments
		Monster Beverage Corporation as reported¹		KO Energy²		Disposal of Monster Non- Energy³		Other		Pro Forma Combined
Net sales		$ 2,722,564		$ 138,127		$ (60,778)		$ 8,887		$ 2,808,800
Net income		546,733		100,575	4	(101,618)		(30,390)		515,300

¹Includes net sales of $143.3 million and net income of $55.2 million (tax affected) related to the acquired KO Energy assets since the date of acquisition, June 12, 2015.

²Includes results through June 12, 2015, the date the TCCC Transaction was finalized. Net income for KO Energy includes only net revenues and direct operating expenses, rather than full “carve-out” financial statements, because such financial information would not be meaningful given that it is not possible to provide a meaningful allocation of business unit and corporate costs, interest or tax in respect of KO Energy.

³Includes results through June 12, 2015. Net income includes gain recognized on the sale of Monster Non-Energy of $161.5 million.

4The $100.6 million of net income for KO Energy for the year ended December 31, 2015 is presented before tax. The associated estimated provision for income taxes is included in the “Other” category.

Pro-Forma Adjustments – Other include the following:

		Year Ended December 31, 2015¹
Net sales:
Amortization of deferred revenue		$	8,887
Net income:
Amortization of deferred revenue		$	8,887
To record sales commissions		(15,470)
To record amortization of definite lived KO Energy intangibles		(3,126)
To eliminate TCCC Transaction expenses		15,495
Estimated provision for income taxes on pro forma adjustments		2,545
Estimated provision for income taxes on KO Energy income		(38,721)
Total		$	(30,390)

¹Includes amortization of deferred revenue, sales commissions and amortization of intangibles through June 12, 2015, the date the TCCC Transaction was consummated.

For purposes of the unaudited pro forma financial information, a combined U.S. Federal and state statutory tax rate of 38.5% was used. This rate does not reflect the Company’s expected effective tax rate, which includes other tax charges and benefits, and does not take into account any historical or possible future tax events that may impact the combined company.

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts)

The unaudited pro forma financial information is presented for information purposes only and is not intended to represent or be indicative of the combined results of operations that the Company would have reported had the TCCC Transaction been completed as of the date and for the periods presented, and should not be taken as representative of the Company’s consolidated results of operations following the completion of the TCCC Transaction. In addition, the unaudited pro forma financial information is not intended to project the future financial results of operations of the combined company. The unaudited pro forma combined financial information does not reflect any cost savings, operational synergies or revenue enhancements that the combined company may achieve as a result of the TCCC Transaction, or the costs to combine the operations or costs necessary to achieve cost savings, operating synergies and revenue enhancements.

3. INVESTMENTS

The following table summarizes the Company’s investments at:

December 31, 2017		Amortized Cost			Gross Unrealized Holding Gains			Gross Unrealized Holding Losses			Fair Value			Continuous Unrealized Loss Position less than 12 Months			Continuous Unrealized Loss Position greater than 12 Months
Available-for-sale
Short-term:
Commercial paper		$	81,026		$	-		$	-		$	81,026		$	-		$	-
Certificates of deposit		11,869			-			-			11,869			-			-
Municipal securities		469,604			1			740			468,865			740			-
U.S. government agency securities		61,307			-			88			61,219			88			-
Variable rate demand notes		49,954			-			-			49,954			-			-
Long-term:
U.S. government agency securities		2,369			-			3			2,366			3			-
Total		$	676,129		$	1		$	831		$	675,299		$	831		$	-
December 31, 2016		Amortized Cost			Gross Unrealized Holding Gains			Gross Unrealized Holding Losses			Fair Value			Continuous Unrealized Loss Position less than 12 Months			Continuous Unrealized Loss Position greater than 12 Months
Available-for-sale
Short-term:
Commercial paper		$	40,382		$	-		$	-		$	40,382		$	-		$	-
Municipal securities		140,379			-			181			140,198			181			-
U.S. government agency securities		26,057			-			6			26,051			6			-
Variable rate demand notes		13,923			-			-			13,923			-			-
Long-term:
Municipal securities		2,403			-			9			2,394			9			-
Total		$	223,144		$	-		$	196		$	222,948		$	196		$	-

During the years ended December 31, 2017 and 2016, realized gains or losses recognized on the sale of investments were not significant.

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts)

The Company’s investments at December 31, 2017 and 2016 in commercial paper, certificates of deposit, municipal securities, U.S. government agency securities and/or variable rate demand notes (“VRDNs”) carried investment grade credit ratings. VRDNs are floating rate municipal bonds with embedded put options that allow the bondholder to sell the security at par plus accrued interest. All of the put options are secured by a pledged liquidity source. While they are classified as marketable investment securities, the put option allows the VRDNs to be liquidated at par on a same day, or more generally, on a seven-day settlement basis.

The following table summarizes the underlying contractual maturities of the Company’s investments at:

		December 31, 2017						December 31, 2016
		Amortized Cost			Fair Value			Amortized Cost			Fair Value
Less than 1 year:
Commercial paper		$	81,026		$	81,026		$	40,382		$	40,382
Municipal securities		469,604			468,865			140,379			140,198
U.S. government agency securities		61,307			61,219			26,057			26,051
Certificates of deposit		11,869			11,869			-			-
Due 1 -10 years:
Municipal securities		-			-			2,403			2,394
U.S. government agency securities		2,369			2,366			-			-
Variable rate demand notes		6,366			6,366			3,917			3,917
Due 11 - 20 years:
Variable rate demand notes		28,377			28,377			6,003			6,003
Due 21 - 30 years:
Variable rate demand notes		15,211			15,211			4,003			4,003
Total		$	676,129		$	675,299		$	223,144		$	222,948

The Company recognized a net gain through earnings on its trading securities as follows for the years ended:

		2017			2016			2015
Gain (loss) on transfer from available-for-sale to trading		$	-		$	-		$	-
Gain on trading securities sold		-			-			250
(Loss) gain on trading securities held		-			-			-
Gain on trading securites		$	-		$	-		$	250

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts)

4. FAIR VALUE OF CERTAIN FINANCIAL ASSETS AND LIABILITIES

FASB ASC 820 provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. FASB ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available. The three levels of inputs required by the standard that the Company uses to measure fair value are summarized below.

· Level 1: Quoted prices in active markets for identical assets or liabilities.

· Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities.

· Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

FASB ASC 820 requires the use of observable market inputs (quoted market prices) when measuring fair value and requires a Level 1 quoted price to be used to measure fair value whenever possible.

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts)

The following tables present the Company’s financial assets that are recorded at fair value on a recurring basis, segregated among the appropriate levels within the fair value hierarchy at:

December 31, 2017		Level 1			Level 2			Level 3			Total
Cash		$	310,885		$	-		$	-		$	310,885
Money market funds		112,848			-			-			112,848
Certificates of deposit		-			15,720			-			15,720
Commercial paper		-			99,903			-			99,903
Variable rate demand notes		-			49,954			-			49,954
Municipal securities		-			529,984			-			529,984
U.S. government agency securities		-			81,230			-			81,230
U.S. Treasuries		-			3,397			-			3,397
Foreign currency derivatives		-			(1,484		)	-			(1,484		)
Total		$	423,733		$	778,704		$	-		$	1,202,437
Amounts included in:
Cash and cash equivalents		$	423,733		$	104,889		$	-		$	528,622
Short-term investments		-			672,933			-			672,933
Accounts receivable, net		-			95			-			95
Investments		-			2,366			-			2,366
Accrued liabilities		-			(1,579		)	-			(1,579		)
Total		$	423,733		$	778,704		$	-		$	1,202,437
December 31, 2016		Level 1			Level 2			Level 3			Total
Cash		$	278,972		$	-		$	-		$	278,972
Money market funds		76,112			-			-			76,112
Commercial paper		-			47,855			-			47,855
Variable rate demand notes		-			13,923			-			13,923
Municipal securities		-			157,617			-			157,617
U.S. government agency securities		-			26,051			-			26,051
Foreign currency derivatives		-			(528		)	-			(528		)
Total		$	355,084		$	244,918		$	-		$	600,002
Amounts included in:
Cash and cash equivalents		$	355,084		$	22,498		$	-		$	377,582
Short-term investments		-			220,554			-			220,554
Accounts receivable, net		-			236			-			236
Investments		-			2,394			-			2,394
Accrued liabilities		-			(764		)	-			(764		)
Total		$	355,084		$	244,918		$	-		$	600,002

All of the Company’s short-term investments are classified within Level 1 or Level 2 within the fair value hierarchy. The Company’s valuation of its Level 1 investments, which include money market funds, is based on quoted market prices in active markets for identical securities. The Company’s valuation of its Level 2 investments, which include municipal securities, commercial paper, U.S. Treasuries, certificates of deposit, VRDNs and U.S. government agency securities, is based on other observable inputs, specifically a market approach which utilizes valuation models, pricing systems, mathematical tools and other relevant information for the same or similar securities. The Company’s valuation of its Level 2 foreign currency exchange contracts is based on quoted market prices of the same or similar instruments, adjusted for counterparty risk. There were no transfers between Level 1 and Level 2 measurements during the years ended December 31, 2017 and 2016, and there were no changes in the Company’s valuation techniques.

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts)

5. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company is exposed to foreign currency exchange rate risks related primarily to its foreign business operations. During the years ended December 31, 2017, 2016 and 2015, respectively, the Company entered into forward currency exchange contracts with financial institutions to create an economic hedge to specifically manage a portion of the foreign exchange risk exposure associated with certain consolidated subsidiaries’ non-functional currency denominated assets and liabilities. All foreign currency exchange contracts entered into by the Company that were outstanding as of December 31, 2017 have terms of one month or less. The Company does not enter into forward currency exchange contracts for speculation or trading purposes.

The Company has not designated its foreign currency exchange contracts as hedge transactions under FASB ASC 815. Therefore, gains and losses on the Company’s foreign currency exchange contracts are recognized in other expense, net, in the consolidated statements of income, and are largely offset by the changes in the fair value of the underlying economically hedged item.

The notional amount and fair value of all outstanding foreign currency derivative instruments in the consolidated balance sheets consist of the following at:

December 31, 2017
Derivatives not designated as hedging instruments under FASB ASC 815-20		Notional Amount			Fair Value			Balance Sheet Location
Assets:
Foreign currency exchange contracts:
Receive CAD/pay USD		$	4,892		$	61		Accounts receivable, net
Receive SGD/pay USD		223			2			Accounts receivable, net
Receive NOK/pay USD		1,534			18			Accounts receivable, net
Receive USD/pay BRL		1,806			1			Accounts receivable, net
Receive USD/pay COP		2,803			13			Accounts receivable, net
Liabilities:
Foreign currency exchange contracts:
Receive USD/pay GBP		$	31,342		$	(334)		Accrued liabilities
Receive USD/pay EUR		65,131			(642)			Accrued liabilities
Receive USD/pay AUD		17,238			(177)			Accrued liabilities
Receive USD/pay ZAR		21,311			(222)			Accrued liabilities
Receive USD/pay MXN		7,720			(126)			Accrued liabilities
Receive USD/pay NZD		1,826			(18)			Accrued liabilities
Receive USD/pay TRY		5,483			(52)			Accrued liabilities
Receive USD/pay CLP		1,112			(8)			Accrued liabilities

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts)

December 31, 2016
Derivatives not designated as hedging instruments under FASB ASC 815-20		Notional Amount			Fair Value			Balance Sheet Location
Assets:
Foreign currency exchange contracts:
Receive CAD/pay USD		$	22,314		$	173		Accounts receivable, net
Receive SGD/pay USD		7,915			24			Accounts receivable, net
Receive NOK/pay USD		2,138			28			Accounts receivable, net
Receive USD/pay CLP		4,094			9			Accounts receivable, net
Receive USD/pay COP		2,330			2			Accounts receivable, net
Liabilities:
Foreign currency exchange contracts:
Receive USD/pay GBP		$	7,718		$	(57)		Accrued liabilities
Receive USD/pay EUR		29,621			(325)			Accrued liabilities
Receive USD/pay AUD		15,135			(74)			Accrued liabilities
Receive USD/pay ZAR		20,405			(296)			Accrued liabilities
Receive USD/pay MXN		25,864			(4)			Accrued liabilities
Receive USD/pay BRL		3,138			(3)			Accrued liabilities
Receive USD/pay NZD		2,076			(5)			Accrued liabilities

The net gain on derivative instruments in the consolidated statements of income were as follows:

				Amount of gain (loss) recognized in income on derivatives
				Year ended
Derivatives not designated as hedging instruments under FASB ASC 815-20		Location of gain (loss) recognized in income on derivatives		December 31, 2017			December 31, 2016			December 31, 2015
Foreign currency exchange contracts		Other income (expense), net		$	(13,733)		$	1,819		$	2,503

6. INVENTORIES

Inventories consist of the following at December 31:

		2017			2016
Raw materials		$	78,834		$	58,658
Finished goods		176,911			103,313
		$	255,745		$	161,971

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts)

7. PROPERTY AND EQUIPMENT, Net

Property and equipment consist of the following at December 31:

		2017				2016
Land		$	47,373			$	46,596
Leasehold improvements		3,109				2,687
Furniture and fixtures		6,461				3,635
Office and computer equipment		14,506				11,701
Computer software		3,650				3,274
Equipment		148,434				114,230
Building		107,374				69,547
Vehicles		38,179				31,582
		369,086				283,252
Less: accumulated depreciation and amortization		(138,810		)		(109,909		)
		$	230,276			$	173,343

Total depreciation and amortization expense recorded was $37.0 million, $30.2 million and $27.0 million for the years ended December 31, 2017, 2016 and 2015, respectively.

8. GOODWILL AND OTHER INTANGIBLE ASSETS

The following is a roll-forward of goodwill for the years ended December 31, 2017 and 2016 by reportable segment:

		Monster Energy® Drinks			Strategic Brands			Other			Total
Balance at December 31, 2016		$	693,644		$	637,999		$	-		$	1,331,643
Acquisitions		-			-			-			-
Balance at December 31, 2017		$	693,644		$	637,999		$	-		$	1,331,643

		Monster Energy® Drinks			Strategic Brands			Other			Total
Balance at December 31, 2015		$	641,716		$	637,999		$	-		$	1,279,715
Acquisitions		51,928			-			-			51,928
Balance at December 31, 2016		$	693,644		$	637,999		$	-		$	1,331,643

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts)

Intangible assets consist of the following at:

		December 31, 2017				December 31, 2016
Amortizing intangibles		$	71,400			$	71,290
Accumulated amortization		(26,383		)		(14,535		)
		45,017				56,755
Non-amortizing intangibles		989,068				975,880
		$	1,034,085			$	1,032,635

Amortizing intangibles primarily consist of customer relationships. All amortizing intangibles have been assigned an estimated finite useful life and such intangibles are amortized on a straight-line basis over the number of years that approximate their respective useful lives, generally five to seven years. Total amortization expense recorded was $11.9 million, $10.6 million and $3.9 million for the years ended December 31, 2017, 2016 and 2015, respectively.

The following is the future estimated amortization expense related to amortizing intangibles as of December 31, 2017:

Year Ending December 31:
2018		$	11,847
2019		11,847
2020		7,964
2021		4,722
2022		4,697
2023 and thereafter		3,940
		$	45,017

At December 31, 2017, non-amortizing intangibles primarily consist of indefinite-lived tradenames.

9. DISTRIBUTION AGREEMENTS

In accordance with FASB ASC No. 420 “Exit or Disposal Cost Obligations”, the Company expenses distributor termination costs in the period in which the written notification of termination occurs. As a result, the Company incurred termination costs of $35.4 million, $79.8 million and $224.0 million for the years ended December 31, 2017, 2016 and 2015, respectively. Such termination costs have been expensed in full and are included in operating expenses for the years ended December 31, 2017, 2016 and 2015, respectively.

In the normal course of business, amounts received pursuant to new and/or amended distribution agreements entered into with certain distributors, relating to the costs associated with terminating agreements with the Company’s prior distributors, are accounted for as deferred revenue and are recognized as revenue ratably over the anticipated life of the respective distribution agreement, generally 20 years. Revenue recognized was $22.3 million, $26.1 million and $50.5 million for the years ended December 31, 2017, 2016 and 2015, respectively. Included in the $22.3 million of revenue recognized for the year ended December 31, 2017 was $0.6 million related to the accelerated amortization of the deferred revenue balances associated with certain of the Company’s prior distributors who were sent

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts)

notices of termination during the year ended December 31, 2017. Included in the $26.1 million of revenue recognized for the year ended December 31, 2016 was $5.7 million related to the accelerated amortization of the deferred revenue balances associated with certain of the Company’s prior distributors who were sent notices of termination during the year ended December 31, 2016. Included in the $50.5 million of revenue recognized for the year ended December 31, 2015 was $39.8 million related to the accelerated amortization of the deferred revenue balances associated with certain of the Company’s prior distributors who were sent notices of termination during the year ended December 31, 2015.

10. DEBT

The Company entered into a credit facility with Comerica Bank (“Comerica”) consisting of a revolving line of credit, which was amended in June 2017, under which the Company may borrow up to $10.0 million of non-collateralized debt. The revolving line of credit is effective through June 1, 2020. Interest on borrowings under the line of credit is based on Comerica’s base (prime) rate minus 1% to 1.5%, or London Interbank Offered Rates plus an additional percentage of 1.25% to 1.75%, depending upon certain financial ratios maintained by the Company. The Company had no outstanding borrowings on this line of credit at December 31, 2017. Under this revolving line of credit, the Company may also issue standby Letters of Credit with an aggregate amount of up to $4.0 million. The fee on the standby Letters of Credit ranges from 1.00% to 1.50% depending upon certain financial ratios maintained by the Company. The Company had no outstanding standby Letters of Credit at December 31, 2017.

In December 2016, the Company entered into a credit facility with HSBC Bank (China) Company Limited, Shanghai Branch consisting of a working capital line of credit under which the Company may borrow up to $4.0 million of non-collateralized debt. In February 2017, the working capital line limit was increased from $4.0 million to $9.0 million. Interest on borrowings under the line of credit is based on the People’s Bank of China benchmark lending rates multiplied by 1.10. As of December 31, 2017, the Company had $6.0 million outstanding on this line of credit, including interest, which is included in accounts payable in the condensed consolidated balance sheet.

The Company’s debt of $1.3 million and $1.1 million at December 31, 2017 and 2016, respectively, consisted of capital leases, collateralized by vehicles, payable over 12 months in monthly installments at various effective interest rates, with final payments ending on or before December 31, 2018.

At December 31, 2017 and 2016, the assets acquired under capital leases had a net book value of $5.3 million and $4.5 million, net of accumulated depreciation of $4.2 million and $4.5 million, respectively.

Interest expense for capital lease obligations amounted to $0.08 million, $0.07 million and $0.03 million for the years ended December 31, 2017, 2016 and 2015, respectively.

11. COMMITMENTS AND CONTINGENCIES

The Company is obligated under various non-cancellable lease agreements providing for office space, warehouse space, and automobiles that expire at various dates through the year 2031.

Rent expense under operating leases was $10.7 million, $9.9 million and $10.7 million for the years ended December 31, 2017, 2016 and 2015, respectively.

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts)

Future minimum rental payments at December 31, 2017 under the operating leases referred to above are as follows:

Year Ending December 31:
2018		$	2,588
2019		1,802
2020		1,764
2021		1,745
2022		1,469
2023 and thereafter		7,347
		$	16,715

Contractual obligations – The Company has the following contractual obligations related primarily to sponsorships and other commitments as of December 31, 2017:

Year Ending December 31:
2018		$	96,774
2019		29,427
2020		23,996
2021		5,666
2022		8
2023 and thereafter		-
		$	155,871

Purchase Commitments – The Company has purchase commitments aggregating approximately $37.8 million at December 31, 2017, which represent commitments made by the Company and its subsidiaries to various suppliers of raw materials for the production of its products. These obligations vary in terms, but are generally satisfied within one year.

The Company purchases various raw material items, including, but not limited to, flavors, ingredients, dietary ingredients, containers, milk, glucose, sucralose, cream and protein, from a limited number of suppliers. An interruption in supply from any of such resources could result in the Company’s inability to produce certain products for limited or possibly extended periods of time. The aggregate value of purchases from suppliers of such limited resources described above for the years ended December 31, 2017, 2016 and 2015 was $273.6 million, $205.9 million and $332.0 million, respectively.

In September 2016, the Company completed its acquisition of approximately 49 acres of land, located in Rialto, CA, for a purchase price of approximately $39.1 million. In the fourth quarter of 2017, the Company completed the construction of an approximately 1,000,000 square-foot building (the “Rialto Warehouse”) on this land, which it anticipates will be LEED certified, to replace its leased warehouse and distribution facilities located in Corona, CA. The Company entered into an approximately $38.1 million guaranteed maximum price construction contract for the construction of the building, of which $4.6 million remained outstanding as of December 31, 2017. During the three-months ended December 31, 2017, the Company transitioned its Southern California warehouse and distribution operations to the Rialto Warehouse, which was fully operational by December 31, 2017.

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts)

Guarantees – The Company from time to time enters into certain types of contracts that contingently require the Company to indemnify parties against third-party claims. These contracts primarily relate to: (i) certain agreements with the Company’s officers, directors and employees under which the Company may be required to indemnify such persons for liabilities arising out of their employment relationship, (ii) certain distribution or purchase agreements under which the Company may have to indemnify the Company’s customers from any claim, liability or loss arising out of any actual or alleged injury or damages suffered in connection with the consumption or purchase of the Company’s products or the use of Company trademarks, and (iii) certain real estate leases, under which the Company may be required to indemnify property owners for liabilities and other claims arising from the Company’s use of the applicable premises. The terms of such obligations vary and typically, a maximum obligation is not explicitly stated. Generally, the Company believes that its insurance coverage is adequate to cover any resulting liabilities or claims.

Litigation – The Company is currently a defendant in a number of personal injury lawsuits, claiming that the death or other serious injury of the plaintiffs was caused by consumption of Monster Energy® brand energy drinks. The plaintiffs in these lawsuits allege strict product liability, negligence, fraudulent concealment, breach of implied warranties and wrongful death. The Company believes that each complaint is without merit and plans a vigorous defense. The Company also believes that any damages, if awarded, would not have a material adverse effect on the Company’s financial position or results of operations.

State Attorney General Inquiry – In July 2012, the Company received a subpoena from the Attorney General for the State of New York in connection with its investigation concerning the Company’s advertising, marketing, promotion, ingredients, usage and sale of its Monster Energy® brand energy drinks. Production of documents pursuant to that subpoena was completed in approximately May 2014.

On August 6, 2014, the Attorney General for the State of New York issued a second subpoena seeking additional documents and the deposition of a Company employee. On September 8, 2014, the Company moved to quash the second subpoena in the Supreme Court, New York County. The motion was fully briefed and was argued on March 17, 2015. On January 13, 2017, the Court issued an opinion in which it agreed with certain Company arguments regarding the scope of the subpoena and the Attorney General’s investigation, but denied the motion to quash and granted the Attorney General’s cross-motion to compel compliance. The Company has complied with the second subpoena. It is unknown what, if any, action the state Attorney General may take against the Company, the relief which may be sought in the event of any such proceeding or whether such proceeding could have a material adverse effect on the Company’s business, financial condition or results of operations.

Furthermore, from time to time in the normal course of business, the Company is named in other litigation, including consumer class actions, intellectual property litigation and claims from prior distributors. Although it is not possible to predict the ultimate outcome of such litigation, based on the facts known to the Company, management believes that such litigation in the aggregate will likely not have a material adverse effect on the Company’s financial position or results of operations.

The Company evaluates, on a quarterly basis, developments in legal proceedings and other matters that could cause an increase or decrease in the amount of the liability that is accrued, if any, or in the amount of any related insurance reimbursements recorded. As of December 31, 2017, the Company’s condensed consolidated balance sheet includes accrued loss contingencies of approximately $1.9 million.

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts)

12. ACCUMULATED OTHER COMPREHENSIVE LOSS

The components of accumulated other comprehensive loss are as follows at December 31:

		2017			2016
Accumulated net unrealized loss on available-for-sale securities		$	841		$	193
Foreign currency translation adjustments, net of tax		15,818			23,056
Total accumulated other comprehensive loss		$	16,659		$	23,249

13. TREASURY STOCK PURCHASE

On February 28, 2017, the Company’s Board of Directors authorized a new share repurchase program for the purchase of up to $500.0 million of the Company’s outstanding common stock (the “February 2017 Repurchase Plan”). During the year ended December 31, 2017, the Company purchased 4.6 million shares of common stock at an average purchase price of $54.91 per share, for a total amount of $249.9 million (excluding broker commissions), under the February 2017 Repurchase Plan.

During the year ended December 31, 2017, 1.8 million shares of common stock were purchased from employees in lieu of cash payments for options exercised or withholding taxes due, for a total amount of $111.2 million. While such purchases are considered common stock repurchases, they are not counted as purchases against the Company’s authorized share repurchase programs. Such shares are included in common stock in treasury in the accompanying consolidated balance sheet at December 31, 2017.

14. STOCK-BASED COMPENSATION

The Company has two stock-based compensation plans under which shares were available for grant at December 31, 2017: the Monster Beverage Corporation 2011 Omnibus Incentive Plan (the “2011 Omnibus Incentive Plan”), including the Monster Beverage Deferred Compensation Plan (the “Deferred Compensation Plan”) as a sub plan thereunder, and the Monster Beverage Corporation 2017 Compensation Plan for Non-Employee Directors (the “2017 Directors Plan”), including the Monster Beverage Deferred Compensation Plan for Non-Employee Directors (the “Non-Employee Director Deferral Plan”) as a sub plan thereunder.

The 2011 Omnibus Incentive Plan permits the granting of options, stock appreciation rights, restricted stock, restricted stock units, performance awards and other stock-based awards up to an aggregate of 43,500,000 shares of the common stock of the Company to employees or consultants of the Company and its subsidiaries. Shares authorized under the 2011 Omnibus Incentive Plan are reduced by 2.16 shares for each share granted or issued with respect to a Full Value Award. A Full Value Award is an award other than an incentive stock option, a non-qualified stock option, or a stock appreciation right, which is settled by the issuance of shares. Options granted under the 2011 Omnibus Incentive Plan may be incentive stock options under Section 422 of the Internal Revenue Code, as amended, or non-qualified stock options. The Compensation Committee of the Board of Directors (the “Compensation Committee”) has sole and exclusive authority to grant stock awards to all employees who are not new hires and to all new hires who are subject to Section 16 of the Exchange Act. The Compensation Committee and the Executive Committee of the Board of Directors (the “Executive Committee”) each independently has the authority to grant stock awards to new hires who are not Section 16 employees. Awards granted by the

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts)

Executive Committee are not subject to approval or ratification by the Board or the Compensation Committee. Options granted under the 2011 Omnibus Incentive Plan generally vest over a five-year period from the grant date and are generally exercisable up to 10 years after the grant date. As of December 31, 2017, 19,978,932 shares of the Company’s common stock have been granted, net of cancellations, and 19,651,474 shares (as adjusted for Full Value Awards) of the Company’s common stock remain available for grant under the 2011 Omnibus Incentive Plan.

In 2016, the Company adopted the Deferred Compensation Plan (as a sub plan to the 2011 Omnibus Incentive Plan), pursuant to which eligible employees may elect to defer cash and/or equity based compensation and to receive the deferred amounts, together with an investment return (positive or negative), either at a pre-determined time in the future or upon termination of their employment with the Company or its subsidiaries or affiliates that are participating employers under the Deferred Compensation Plan, as provided under the Deferred Compensation Plan and in relevant deferral elections. Deferrals under the Deferred Compensation Plan are unfunded and unsecured. As of December 31, 2017, deferrals under the Deferred Compensation Plan are solely comprised of cash compensation and equity compensation coming due after December 31, 2018 and are not material in the aggregate.

In 2017, the Company adopted the 2017 Directors Plan, a successor plan to the 2009 Monster Beverage Corporation Stock Incentive Plan for Non-Employee Directors (the “2009 Directors Plan”). The 2017 Directors Plan permits the granting of stock options, stock appreciation rights, restricted shares or restricted stock units, deferred awards, dividend equivalents, and other share based-awards up to an aggregate of 1,250,000 shares of common stock of the Company to non-employee directors of the Company.

Each calendar year, a non-employee director will receive an annual retainer and annual equity award, as provided for in the 2017 Directors Plan, which may be modified from time to time. Currently, with respect to equity awards, each non-employee director receives an award of restricted stock units at each annual meeting of the Company’s stockholders or promptly thereafter. A non-employee director’s annual award of restricted stock units will generally vest on earliest to occur of: (a) the last business day immediately preceding the annual meeting of the Company’s stockholders in the calendar year following the calendar year in which the grant date occurs, (b) a Change of Control (as defined in the 2017 Directors Plan), (c) the non-employee director’s death, or (d) the date of the non-employee director’s separation from service due to disability, so long as the non-employee director remains a non-employee director through such date. The Board of Directors may in its discretion award non-employee directors stock options, stock appreciation rights, restricted stock, and other share-based awards in lieu of or in addition to restricted stock units. The Board of Directors may amend or terminate the 2017 Directors Plan at any time, subject to certain limitations set forth in the 2017 Directors Plan. As of December 31, 2017, 23,566 shares of the Company’s common stock had been granted under the 2017 Directors Plan, and 1,226,434 shares of the Company’s common stock remain available for grant.

In 2017, the Company adopted the Deferred Compensation Plan for Non-Employee Directors (as a sub plan to the 2017 Directors Plan), pursuant to which the Board of Directors may permit non-employee directors to elect (a “Deferral Election”), at such times and in accordance with rules and procedures (or sub-plan) adopted by the Board of Directors (which are intended to comply with Code Section 409A, as applicable), to receive all or any portion of such non-employee director’s compensation, whether payable in cash or in equity, on a deferred basis. The 2017 Directors Plan was adopted to effectuate any such deferrals. The 2017 Directors Plan is administered by the Board of Directors. Each award granted under the 2017 Directors Plan will be evidenced by a written agreement and will contain the terms and conditions that the Board of Directors deems appropriate.

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts)

Under the 2017 Directors Plan, the Board of Directors requires each non-employee director to satisfy the share ownership guidelines set forth below, as may be amended by the Board of Directors from time to time. The current share ownership guidelines provide that non-employee directors of the Company must:

· Hold at least 9,000 shares of Company common stock. For this purpose, shares will be deemed held if deferred shares or deferred restricted stock units, to the extent vested.

· The minimum stock ownership level must be achieved by each non-employee director by the third (3rd) anniversary of such non-employee director’s initial appointment to the Board of Directors.

· Once achieved, ownership of the guideline amount should be maintained for so long as the non-employee director retains his or her seat on the Board of Directors.

· There may be rare instances where these guidelines would place a hardship on a non-employee director. In these cases or in similar circumstances, the Board of Directors will make the final decision as to developing an alternative stock ownership guideline for a non-employee director that reflects the intention of these guidelines and his or her personal circumstances.

The Company recorded $52.3 million, $45.8 million and $32.7 million of compensation expense relating to stock options, restricted stock awards, SARs and restricted stock units during the years ended December 31, 2017, 2016 and 2015, respectively.

The excess tax benefit realized for tax deductions from non-qualified stock option exercises, disqualifying dispositions of incentive stock options, vesting of restricted stock units and restricted stock awards for the years ended December 31, 2017, 2016 and 2015 was $96.7 million, $20.8 million and $314.7 million, respectively. As a result of the Company’s early adoption of ASU No. 2016-09 effective January 1, 2016, the Company recorded excess tax benefits of $96.7 million and $20.8 million in net income for the years ended December 31, 2017 and 2016, respectively. The excess tax benefits for the year ended December 31, 2015 of $314.7 million were recorded in additional paid-in-capital.

Stock Options

Under the Company’s stock-based compensation plans, all stock options granted as of December 31, 2017 were granted at prices based on the fair value of the Company’s common stock on the date of grant. The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes-Merton option pricing formula with the assumptions included in the table below. The Company records compensation expense for non-employee stock options based on the estimated fair value of the options as of the earlier of (1) the date at which a commitment for performance by the non-employee to earn the stock option is reached or (2) the date at which the non-employee’s performance is complete, using the Black-Scholes-Merton option pricing formula with the assumptions included in the table below. The Company uses historical data to determine the exercise behavior, volatility and forfeiture rate of the options.

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts)

The following weighted-average assumptions were used to estimate the fair value of options granted during:

		2017		2016		2015
Dividend yield		0.0 %		0.0 %		0.0 %
Expected volatility		36.5 %		36.2 %		37.1 %
Risk-free interest rate		2.11 %		1.57 %		1.57 %
Expected term		6.1 Years		6.3 Years		5.8 Years

Expected Volatility: The Company uses historical volatility as it provides a reasonable estimate of the expected volatility. Historical volatility is based on the most recent volatility of the stock price over a period of time equivalent to the expected term of the option.

Risk-Free Interest Rate: The risk-free interest rate is based on the U.S. Treasury zero coupon yield curve in effect at the time of grant for the expected term of the option.

Expected Term: The Company’s expected term represents the weighted-average period that the Company’s stock options are expected to be outstanding. The expected term is based on expected time to post-vesting exercise of options by employees. The Company uses historical exercise patterns of previously granted options to derive employee behavioral patterns used to forecast expected exercise patterns.

The following table summarizes the Company’s activities with respect to its stock option plans as follows:

Options		Number of Shares (In thousands)		Weighted- Average Exercise Price Per Share			Weighted- Average Remaining Contractual Term (In years)		Aggregate Intrinsic Value
Outstanding at January 1, 2017		22,643		$	23.55		5.8		$	474,739
Granted 01/01/17 - 03/31/17		1,319		$	45.94
Granted 04/01/17 - 06/30/17		26		$	49.71
Granted 07/01/17 - 09/30/17		12		$	56.08
Granted 10/01/17 - 12/31/17		77		$	61.71
Exercised		(5,754)		$	9.15
Cancelled or forfeited		(504)		$	40.09
Outstanding at December 31, 2017		17,819		$	29.62		6.1		$	600,032
Vested and expected to vest in the
future at December 31, 2017		16,863		$	28.81		6.0		$	581,425
Exercisable at December 31, 2017		9,282		$	18.68		4.4		$	414,052

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts)

The following table summarizes information about stock options outstanding and exercisable at December 31, 2017:

				Options Outstanding							Options Exercisable
Range of Exercise Prices ($)				Number Outstanding (In Thousands)		Weighted Average Remaining Contractual Term (Years)		Weighted Average Exercise Price ($)			Number Exercisable (In Thousands)		Weighted Average Exercise Price ($)
$4.51	-	$5.61		204		0.7		$	5.25		204		$	5.25
$5.94	-	$5.94		3,159		1.9		$	5.94		3,159		$	5.94
$6.02	-	$17.99		2,776		4.8		$	15.27		2,289		$	15.14
$18.64	-	$23.35		2,441		6.0		$	22.67		1,889		$	22.63
$23.68	-	$23.68		12		6.3		$	23.68		-		$	-
$36.05	-	$43.64		2,219		8.2		$	41.59		397		$	39.85
$43.99	-	$43.99		2,567		8.2		$	43.99		418		$	43.99
$44.73	-	$45.01		634		8.1		$	44.94		110		$	44.94
$45.16	-	$45.16		2,158		7.2		$	45.16		779		$	45.16
$45.55	-	$62.92		1,649		8.7		$	47.74		37		$	48.99
				17,819		6.1		$	29.62		9,282		$	18.68

The weighted-average grant-date fair value of options granted during the years ended December 31, 2017, 2016 and 2015 was $18.29 per share, $16.90 per share and $16.73 per share, respectively. The total intrinsic value of options exercised during the years ended December 31, 2017, 2016 and 2015 was $285.8 million, $70.6 million and $870.1 million, respectively.

Cash received from option exercises under all plans for the years ended December 31, 2017, 2016 and 2015 was approximately $52.6 million, $16.4 million and $49.2 million, respectively.

At December 31, 2017, there was $83.4 million of total unrecognized compensation expense related to non-vested options granted to employees under the Company’s share-based payment plans. That cost is expected to be recognized over a weighted-average period of 2.6 years.

Restricted Stock Awards and Restricted Stock Units

Stock-based compensation cost for restricted stock awards and restricted stock units is measured based on the closing fair market value of the Company’s common stock at the date of grant. In the event that the Company has the option and intent to settle a restricted stock unit in cash, the award is classified as a liability and revalued at each balance sheet date. Total cash paid to settle restricted stock unit liabilities and the increase in the liabilities for future cash settlements during the years ended December 31, 2017 and 2016 were not material.

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts)

The following table summarizes the Company’s activities with respect to non-vested restricted stock units as follows:

		Number of Shares (in thousands)		Weighted Average Grant-Date Fair Value
Non-vested at January 1, 2017		556		$	39.95
Granted 01/01/17- 03/31/17		252		$	46.27
Granted 04/01/17- 06/30/17		23		$	50.86
Granted 07/01/17- 09/30/17		-			-
Granted 10/01/17- 12/31/17		2		$	59.43
Vested		(300)		$	37.26
Forfeited/cancelled		(3)		$	27.02
Non-vested at December 31, 2017		530		$	45.09

The weighted-average grant-date fair value of restricted stock units and restricted stock awards granted during the years ended December 31, 2017, 2016 and 2015 was $46.74, $44.71 and $45.50 per share, respectively. As of December 31, 2017, 0.5 million of restricted stock units are expected to vest.

At December 31, 2017, total unrecognized compensation expense relating to non-vested restricted stock awards and non-vested restricted stock units was $14.2 million, which is expected to be recognized over a weighted-average period of 1.5 years.

Employee and Non-Employee Share-Based Compensation Expense

The table below shows the amounts recognized in the consolidated financial statements for the years ended December 31, 2017, 2016 and 2015 for share-based compensation related to employees and non-employees. Employee and non-employee share-based compensation expense of $52.3 million for the year ended December 31, 2017 is comprised of $8.7 million that relates to incentive stock options and $43.6 million that relates to non-qualified stock options and restricted units and awards. Employee and non-employee share-based compensation expense of $45.8 million for the year ended December 31, 2016 is comprised of $8.0 million that relates to incentive stock options and $37.8 million that relates to non-qualified stock options and restricted units and awards. Employee and non-employee share-based compensation expense of $32.7 million for the year ended December 31, 2015 is comprised of $6.2 million that relates to incentive stock options and $26.5 million that relates to non-qualified stock options and restricted units and awards.

		2017			2016			2015
Operating expenses		$	52,282		$	45,848		$	32,719
Total employee and non-employee share-based compensation expense included in income, before income tax		52,282			45,848			32,719
Less: Amount of income tax benefit recognized in earnings		(100,635)			(34,909)			(9,058)
Amount charged against net income		$	(48,353)		$	10,939		$	23,661

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts)

15. INCOME TAXES

On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the “Tax Reform Act”). The legislation significantly changes U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The Tax Reform Act permanently reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. A company may select between one of three scenarios to determine a reasonable estimate arising from the Tax Reform Act. Those scenarios are (i) a final estimate which effectively closes the measurement window; (ii) a reasonable estimate leaving the measurement window open for future revisions; and (iii) no estimate as the law is still being analyzed. The Company was able to provide a reasonable estimate for the revaluation of deferred taxes and the effects of the toll charge on undistributed foreign subsidiary earnings and profits (“E&P”). As a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the Tax Reform Act, the Company revalued its net deferred tax assets at December 31, 2017, resulting in a provisional $39.8 million charge included in the provision for income taxes for the year ended December 31, 2017. The Tax Reform Act also provided for a one-time deemed mandatory repatriation of Post-1986 E&P through the year ended December 31, 2017. As a result, the Company recognized a provisional $2.1 million charge in the provision for income taxes for the year ended December 31, 2017 related to the deemed mandatory repatriation. The Company continues to evaluate the various provisions of Tax Reform Act, including, the global intangible low-taxed income (“GILTI”) and the foreign derived intangible income (“FDII”) provisions. The ultimate impact of the Tax Reform Act may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and any related actions the Company may take. The measurement period begins in the reporting period that includes the enactment date and ends when an entity has obtained, prepared, and analyzed the information that was needed in order to complete the accounting requirements under ASC Topic 740.

The domestic and foreign components of the Company’s income before provision for income taxes are as follows:

		Year Ended December 31,
		2017			2016			2015
Domestic*		$	1,062,713		$	1,029,763		$	859,039
Foreign*		138,910			49,922			32,509
Income before provision for income taxes		$	1,201,623		$	1,079,685		$	891,548

*After intercompany royalties, management fees and interest charges from the Company’s domestic to foreign entities of $42.5 million, $25.6 million and $29.4 million for the years ended December 31, 2017, 2016 and 2015, respectively.

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts)

Components of the provision for income taxes are as follows:

		Year Ended December 31,
		2017			2016			2015
Current:
Federal		$	243,127		$	212,283		$	548,018
State		43,252			35,756			88,671
Foreign		27,522			17,171			10,634
		313,901			265,210			647,323
Deferred:
Federal		61,797			87,360			(255,422)
State		3,062			15,254			(40,446)
Foreign		(4,579)			(9,709)			(5,420)
		60,280			92,905			(301,288)
Valuation allowance		6,764			8,885			(1,220)
		$	380,945		$	367,000		$	344,815

The differences in the total provision for income taxes that would result from applying the 35% federal statutory rate to income before provision for income taxes and the reported provision for income taxes are as follows:

		Year Ended December 31,
		2017			2016			2015
U.S. Federal tax expense at statutory rates		$	420,568		$	377,599		$	312,042
State income taxes, net of federal tax benefit		27,569			33,148			31,046
Permanent differences		10,356			954			5,285
Stock based compensation		(79,687)			(13,654)			3,203
Domestic production deduction		(22,229)			(21,447)			-
Deferred tax asset reduction (Tax Reform Act)		39,763			-			-
Other		3,736			(8,765)			(127)
Foreign rate differential		(25,895)			(9,720)			(5,414)
Valuation allowance		6,764			8,885			(1,220)
		$	380,945		$	367,000		$	344,815

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts)

Major components of the Company’s deferred tax assets (liabilities) at December 31, 2017 and 2016 are as follows:

		2017			2016
Deferred Tax Assets:
Reserve for sales returns		$	159		$	149
Reserve for inventory obsolescence		522			524
Reserve for marketing development fund		6,360			8,065
Capitalization of inventory costs		1,598			2,714
State franchise tax - current		2,050			18,016
Accrued compensation		1,473			1,212
Accrued other liabilities		3,917			1,817
Deferred revenue		93,321			145,319
Stock-based compensation		21,119			31,873
Foreign net operating loss carryforward		28,965			29,894
Prepaid supplies		7,273			8,022
Termination payments		70,637			98,244
Elimination Company Profit		-			2,843
Gain on intercompany transfer		6,793			7,274
Other deferred tax assets		3,449			376
Total gross deferred tax assets		$	247,636		$	356,342
Deferred Tax Liabilities:
Amortization of trademarks		$	(21,657)		$	(18,663)
Intangibles		(84,867)			(131,264)
State franchise tax - deferred		(7,617)			(12,946)
Other deferred tax liabilities		(62)			(1,101)
Depreciation		(8,260)			(6,736)
Total gross deferred tax liabilities		(122,463)			(170,710)
Valuation Allowance		(32,840)			(26,076)
Net deferred tax assets		$	92,333		$	159,556

During the years ended December 31, 2017, 2016 and 2015, the Company established full valuation allowances against certain deferred tax assets, resulting from cumulative net operating losses incurred by certain foreign subsidiaries of the Company. The effect of the valuation allowances and the subsequent related impact on the Company’s overall tax rate was to increase (decrease) the Company’s provision for income taxes by $6.8 million, $8.9 million and ($0.5) million for the years ended December 31, 2017, 2016 and 2015, respectively. At December 31, 2017, the Company had net operating loss carryforwards of approximately $105.2 million. Of this amount, $76.6 million may be carried forward indefinitely. The remaining $28.6 million of net operating loss carryforwards will begin to expire in 2018.

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts)

The following is a roll-forward of the Company’s total gross unrecognized tax benefits, not including interest and penalties, for the years ended December 31, 2017, 2016 and 2015:

		Gross Unrealized Tax Benefits
Balance at January 1, 2015		$	935
Additions for tax positions related to the current year		-
Additions for tax positions related to the prior year		-
Decreases for tax positions related to prior years		(464)
Balance at December 31, 2015		$	471
Additions for tax positions related to the current year		-
Additions for tax positions related to the prior year		-
Decreases for tax positions related to prior years		(462)
Balance at December 31, 2016		$	9
Additions for tax positions related to the current year		-
Additions for tax positions related to the prior year		6,540
Decreases for tax positions related to prior years		(9)
Balance at December 31, 2017		$	6,540

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes in the Company’s consolidated financial statements. As of December 31, 2017, the Company had accrued approximately $1.3 million in interest and penalties related to unrecognized tax benefits. If the Company were to prevail on all uncertain tax positions it would not have a significant impact on the Company’s effective tax rate.

It is expected that the amount of unrecognized tax benefit change within the next 12 months will not be significant.

The Company is subject to U.S. federal income tax as well as to income tax in multiple state and foreign jurisdictions.

On August 7, 2015, the Internal Revenue Service (the “IRS”) began its examination of the Company’s U.S. federal income tax returns for the years ended December 31, 2012 and 2013. On October 18, 2016, the IRS began its examination of the Company’s U.S. federal income tax return for the year ended December 31, 2014. On March 27, 2017, the IRS began its examination of the Company’s U.S. federal income tax return for the year ended December 31, 2015.

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts)

The Company is in various stages of examination with certain states and certain foreign jurisdictions. The Company’s 2012 through 2016 U.S. federal income tax returns are subject to examination by the IRS. The Company’s state income tax returns are subject to examination for the 2012 through 2016 tax years.

16. EARNINGS PER SHARE

A reconciliation of the weighted average shares used in the basic and diluted earnings per common share computations for the years ended December 31, 2017, 2016 and 2015 is presented below (in thousands):

		2017		2016		2015
Weighted-average shares outstanding:
Basic		566,782		587,874		566,448
Dilutive securities		10,359		11,945		11,310
Diluted		577,141		599,819		577,758

For the years ended December 31, 2017, 2016 and 2015, options and awards outstanding totaling 7.9 million shares, 5.7 million shares and 3.0 million shares, respectively, were excluded from the calculations as their effect would have been antidilutive.

17. EMPLOYEE BENEFIT PLAN

Employees of the Company may participate in the Monster Beverage Corporation 401(k) Plan, a defined contribution plan, which qualifies under Section 401(k) of the Internal Revenue Code. Participating employees may contribute up to 15% of their pretax salary up to statutory limits. The Company contributes 50% of the employee contribution, up to 6% of each employee’s earnings, which vest 25% each year for four years after the first anniversary date. Matching contributions were $2.5 million, $2.0 million and $0.7 million for the years ended December 31, 2017, 2016 and 2015, respectively.

18. SEGMENT INFORMATION

The Company has three operating and reportable segments, (i) Monster Energy® Drinks segment (“Monster Energy® Drinks”), which is comprised of our Monster Energy® drinks, Monster Hydro® energy drinks and Mutant® Super Soda drinks, (ii) Strategic Brands segment (“Strategic Brands”), which is comprised of the various energy drink brands acquired from The Coca-Cola Company (“TCCC”) in 2015 and (iii) Other segment (“Other”), the principal products of which include the non-energy brands disposed of as a result of the TCCC Transaction (effectively from January 1, 2015 to June 12, 2015), as well as certain products sold by AFF to independent third-party customers (the “AFF Third-Party Products”) (effectively from April 1, 2016).

The Company’s Monster Energy® Drinks segment generates net operating revenues by selling ready-to-drink packaged drinks primarily to bottlers and full service beverage distributors. In some cases, the Company sells directly to retail grocery and specialty chains, wholesalers, club stores, drug stores, mass merchandisers, convenience chains, food service customers and the military.

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts)

The Company’s Strategic Brands segment primarily generates net operating revenues by selling “concentrates” and/or “beverage bases” to authorized bottling and canning operations. Such bottlers generally combine the concentrates and/or beverage bases with sweeteners, water and other ingredients to produce ready-to-drink packaged energy drinks. The ready-to-drink packaged energy drinks are then sold to other bottlers, full service distributors or retailers, including, retail grocery and specialty chains, wholesalers, club stores, mass merchandisers, convenience chains, food service customers, drug stores and the military. To a lesser extent, the Company’s Strategic Brands segment generates net operating revenues by selling ready-to-drink packaged energy drinks to bottlers and full service beverage distributors.

Generally, the Monster Energy® Drinks segment generates higher per case net operating revenues, but lower per case gross profit margins than the Strategic Brands segment.

Corporate and unallocated amounts that do not relate to a reportable segment have been allocated to “Corporate & Unallocated.” No asset information, other than goodwill and other intangible assets, has been provided for in the Company’s reportable segments as management does not measure or allocate such assets on a segment basis.

The net revenues derived from the Company’s reportable segments and other financial information related thereto for the years ended December 31, 2017, 2016 and 2015 are as follows:

		2017			2016			2015
Net sales:
Monster Energy® Drinks(1)		$	3,047,596		$	2,759,862		$	2,518,505
Strategic Brands		299,844			272,520			143,282
Other		21,605			17,011			60,777
Corporate and unallocated		-			-			-
		$	3,369,045		$	3,049,393		$	2,722,564
		2017			2016			2015
Operating Income:
Monster Energy® Drinks(1) (2)		$	1,264,579		$	1,148,427		$	836,053
Strategic Brands		174,458			163,121			89,841
Other(3)		5,583			2,295			165,233
Corporate and unallocated		(245,833)			(228,505)			(197,474)
		$	1,198,787		$	1,085,338		$	893,653
		2017			2016			2015
Income before tax:
Monster Energy® Drinks(1) (2)		$	1,264,555		$	1,148,640		$	836,429
Strategic Brands		174,442			163,084			89,825
Other(3)		5,583			2,295			165,233
Corporate and unallocated		(242,957)			(234,334)			(199,939)
		$	1,201,623		$	1,079,685		$	891,548

(1) Includes $43.4 million, $40.3 million and $62.8 million for the years ended December 31, 2017, 2016 and 2015, respectively, related to the recognition of deferred revenue.

(2) Includes $35.4 million, $79.8 million and $224.0 million for the years ended December 31, 2017, 2016 and 2015, respectively, related to distributor termination costs.

(3) Includes $161.5 million gain on the sale of Monster Non-Energy for the year ended December 31, 2015.

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts)

		2017			2016			2015
Depreciation and amortization:
Monster Energy® Drinks		$	29,591		$	24,048		$	21,464
Stategic Brands		7,443			7,113			3,868
Other		4,608			3,457			231
Corporate and unallocated		7,245			6,227			5,297
		$	48,887		$	40,845		$	30,860

Corporate and unallocated expenses were $245.8 million for the year ended December 31, 2017 and included $156.3 million of payroll costs, of which $52.3 million was attributable to stock-based compensation expense (see Note 14, “Stock-Based Compensation”), $51.8 million of professional service expenses, including accounting and legal costs, $6.0 million of insurance costs and $31.7 million of other operating expenses. Corporate and unallocated expenses were $228.5 million for the year ended December 31, 2016 and included $128.0 million of payroll costs, of which $45.8 million was attributable to stock-based compensation expense (see Note 14, “Stock-Based Compensation”), $66.3 million of professional service expenses, including accounting and legal costs, $6.0 million of insurance costs and $28.2 million of other operating expenses. Corporate and unallocated expenses were $197.5 million for the year ended December 31, 2015 and included $109.8 million of payroll costs, of which $32.7 million was attributable to stock-based compensation expense (see Note 14, “Stock-Based Compensation”), $60.8 million of professional service expenses, including accounting and legal costs, $7.0 million of insurance costs and $19.9 million of other operating expenses.

TCCC, through the TCCC Subsidiaries, accounted for approximately 18%, 41% and 43% of the Company’s net sales for the years ended December 31, 2017, 2016 and 2015, respectively. As part of TCCC’s North America Refranchising initiative (the “North America Refranchising”), the territories of certain TCCC Subsidiaries have been transitioned to certain independent/non wholly-owned TCCC bottlers/distributors. Accordingly, the Company’s percentage of net sales classified as sales to the TCCC Subsidiaries decreased for the year ended December 31, 2017. CCBCC Operations, LLC accounted for approximately 13%, 9% and 6% of the Company’s net sales for the years ended December 31, 2017, 2016 and 2015, respectively.

Net sales to customers outside the United States amounted to $909.3 million, $733.7 million and $580.3 million for the years ended December 31, 2017, 2016 and 2015, respectively. Such sales were approximately 27%, 24% and 21% of net sales for the years ended December 31, 2017, 2016 and 2015, respectively.

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts)

Goodwill and other intangible assets for the Company’s reportable segments as of December 31, 2017 and 2016 are as follows:

		2017				2016
Goodwill and other intangible assets:
Monster Energy® Drinks		$		1,346,648		$	1,334,494
Strategic Brands		995,582				1,001,749
Other		23,498				28,035
Corporate and unallocated		-				-
		$	2,365,728			$	2,364,278

19. RELATED PARTY TRANSACTIONS

TCCC controls approximately 18% of the voting interests of the Company. TCCC, through the TCCC Subsidiaries and through certain TCCC affiliated companies (the “TCCC Affiliates”) purchases and distributes certain of the Company’s products both domestically and in certain international territories. The Company also pays TCCC a commission based on certain sales within the TCCC distribution network.

TCCC commissions, based on sales to the TCCC Affiliates for the years ended December 31, 2017, 2016 and 2015, were $45.0 million, $28.2 million and $18.0 million, respectively.

TCCC commissions, based on sales to the TCCC Subsidiaries, are accounted for as a reduction to revenue and are reported in net sales to the TCCC Subsidiaries.

Net sales to the TCCC Subsidiaries for the years ended December 31, 2017, 2016 and 2015 were $594.1 million, $1,259.7 million and $1,151.7 million, respectively. As part of the North America Refranchising, the territories of certain TCCC Subsidiaries have been transitioned to certain independent/non wholly-owned TCCC bottlers/distributors. Accordingly, the Company’s net sales classified as sales to the TCCC Subsidiaries decreased for year ended December 31, 2017.

The Company also purchases concentrates from TCCC which are then sold to both the TCCC Affiliates and the TCCC Subsidiaries. Concentrate purchases from TCCC were $26.2 million, $26.2 million and $16.0 million for the years ended December 31, 2017, 2016 and 2015, respectively.

Certain TCCC Subsidiaries also contract manufacture certain of the Company’s Monster Energy® brand energy drinks as well as Mutant® Super Soda drinks. Contract manufacturing expenses were $11.8 million, $9.6 million and $6.9 million for the years ended December 31, 2017, 2016 and 2015, respectively.

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts)

Accounts receivable, accounts payable and accrued promotional allowances related to the TCCC Subsidiaries are as follows at:

		December 31, 2017			December 31, 2016
Accounts receivable, net		$	32,607		$	151,756
TCCC Transaction receivable		$	-		$	125,000
Accounts payable		$	(45,465)		$	(41,210)
Accrued promotional allowances		$	(5,884)		$	(27,056)

Two directors and officers of the Company and their families are principal owners of a company that provides promotional materials to the Company. Expenses incurred with such company in connection with promotional materials purchased during the years ended December 31, 2017, 2016 and 2015 were $2.2 million, $1.5 million and $1.9 million, respectively.

20. SUBSEQUENT EVENTS

On February 27, 2018, the Company’s Board of Directors authorized a new share repurchase program for the purchase of up to $250.0 million of the Company’s outstanding common stock (the “February 2018 Repurchase Plan”). As $250.0 million remains available for grant under the February 2017 Repurchase Plan, the aggregate amount available to repurchase the Company’s common stock is currently $500.0 million.

21. QUARTERLY FINANCIAL DATA (Unaudited)

											Net Income per Common Share
		Net Sales			Gross Profit			Net Income			Basic			Diluted
Quarter ended:
March 31, 2017		$	742,146		$	480,874		$	177,980		$	0.31		$	0.31
June 30, 2017		907,068			583,497			222,633			$	0.39		$	0.39
September 30, 2017		909,476			569,709			218,744			$	0.39		$	0.38
December 31, 2017		810,355			503,610			201,321			$	0.36		$	0.35
		$	3,369,045		$	2,137,690		$	820,678
Quarter ended:
March 31, 2016		$	680,186		$	423,098		$	163,877		$	0.27		$	0.26
June 30, 2016		827,488			517,814			184,219			$	0.31		$	0.30
September 30, 2016		787,954			502,975			191,643			$	0.34		$	0.33
December 31, 2016		753,765			498,113			172,946			$	0.30		$	0.30
		$	3,049,393		$	1,942,000		$	712,685

Certain of the figures reported above may differ from previously reported figures for individual quarters due to rounding.

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS

FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015 (Dollars in Thousands)

Description		Balance at beginning of period			Charged to cost and expenses			Deductions			Balance at end of period
Allowance for doubtful accounts, sales returns and cash discounts:
2017		$	1,121		$	8,364		$	(8,380)		$	1,105
2016		$	1,248		$	7,389		$	(7,516)		$	1,121
2015		$	1,704		$	8,407		$	(8,863)		$	1,248
Allowance on Deferred Tax Assets and Unrecognized Tax Benefits:
2017		$	26,086		$	14,594		$	-		$	40,680
2016		$	17,846		$	8,240		$	-		$	26,086
2015		$	19,786		$	(1,940)		$	-		$	17,846