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Monster Beverage Corp - Quarter Report: 2020 September (Form 10-Q)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2020

Commission File Number 001-18761

MONSTER BEVERAGE CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

47-1809393

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

1 Monster Way

Corona, California 92879

(Address of principal executive offices) (Zip code)

(951) 739 - 6200

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

    

Trading Symbol(s)

    

Name of each exchange on which registered

Common Stock

MNST

Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  X   No ___

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes  X   No ___

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ___ No   X 

The registrant had 527,916,757 shares of common stock, par value $0.005 per share, outstanding as of October 30, 2020.

Table of Contents

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

SEPTEMBER 30, 2020

INDEX

Part I.

FINANCIAL INFORMATION

Page No.

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019

3

Condensed Consolidated Statements of Income for the Three- and Nine-Months Ended September 30, 2020 and 2019

4

Condensed Consolidated Statements of Comprehensive Income for the Three- and Nine-Months Ended September 30, 2020 and 2019

5

Condensed Consolidated Statements of Stockholders’ Equity for the Three- and Nine-Months Ended September 30, 2020 and 2019

6

Condensed Consolidated Statements of Cash Flows for the Nine-Months Ended September 30, 2020 and 2019

7

Notes to Condensed Consolidated Financial Statements

9

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

33

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

48

Item 4.

Controls and Procedures

49

Part II.

OTHER INFORMATION

Item 1.

Legal Proceedings

49

Item 1A.

Risk Factors

49

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

51

Item 3.

Defaults Upon Senior Securities

51

Item 4.

Mine Safety Disclosures

51

Item 5.

Other Information

51

Item 6.

Exhibits

52

Signatures

53

2

Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2020 AND DECEMBER 31, 2019

(In Thousands, Except Par Value) (Unaudited)

September 30, 

December 31, 

    

2020

    

2019

ASSETS

CURRENT ASSETS:

Cash and cash equivalents

$

1,074,730

$

797,957

Short-term investments

 

599,326

 

 

533,063

Accounts receivable, net

 

740,813

 

 

540,330

Inventories

 

318,956

 

 

360,731

Prepaid expenses and other current assets

 

75,958

 

 

54,868

Prepaid income taxes

 

16,064

 

 

29,360

Total current assets

 

2,825,847

 

 

2,316,309

INVESTMENTS

 

20,571

 

 

12,905

PROPERTY AND EQUIPMENT, net

 

304,687

 

 

298,640

DEFERRED INCOME TAXES, net

 

84,777

 

 

84,777

GOODWILL

 

1,331,643

 

 

1,331,643

OTHER INTANGIBLE ASSETS, net

 

1,059,537

 

 

1,052,105

OTHER ASSETS

 

70,621

 

 

53,973

Total Assets

$

5,697,683

 

$

5,150,352

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:

Accounts payable

$

281,522

 

$

274,045

Accrued liabilities

 

168,398

 

 

114,075

Accrued promotional allowances

 

200,668

 

 

166,761

Deferred revenue

 

45,538

 

 

44,237

Accrued compensation

 

45,555

 

 

47,262

Income taxes payable

 

32,082

 

 

14,717

Total current liabilities

 

773,763

 

 

661,097

DEFERRED REVENUE

 

268,281

 

 

287,469

OTHER LIABILITIES

26,318

30,505

COMMITMENTS AND CONTINGENCIES (Note 12)

STOCKHOLDERS’ EQUITY:

Common stock - $0.005 par value; 1,250,000 shares authorized; 638,458 shares issued and 527,893 shares outstanding as of September 30, 2020; 636,460 shares issued and 536,698 shares outstanding as of December 31, 2019

3,192

3,182

Additional paid-in capital

 

4,513,743

 

 

4,397,511

Retained earnings

 

5,960,338

 

 

5,022,480

Accumulated other comprehensive loss

 

(32,529)

 

 

(32,387)

Common stock in treasury, at cost; 110,565 shares and 99,762 shares as of September 30, 2020 and December 31, 2019, respectively

 

(5,815,423)

 

 

(5,219,505)

Total stockholders’ equity

 

4,629,321

 

 

4,171,281

Total Liabilities and Stockholders’ Equity

$

5,697,683

 

$

5,150,352

See accompanying notes to condensed consolidated financial statements.

3

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE- AND NINE-MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(In Thousands, Except Per Share Amounts) (Unaudited)

Three-Months Ended

Nine-Months Ended

September 30, 

September 30, 

    

2020

    

2019

    

2020

    

2019

NET SALES

$

1,246,362

$

1,133,577

$

3,402,355

$

3,183,613

COST OF SALES

 

509,831

 

460,575

 

1,369,160

 

1,275,796

GROSS PROFIT

 

736,531

 

673,002

 

2,033,195

 

1,907,817

OPERATING EXPENSES

 

277,930

 

277,559

 

802,343

 

821,923

OPERATING INCOME

 

458,601

 

395,443

1,230,852

 

1,085,894

INTEREST and OTHER (EXPENSE) INCOME, net

 

(4,568)

 

3,121

 

(5,491)

 

8,835

INCOME BEFORE PROVISION FOR INCOME TAXES

 

454,033

 

398,564

1,225,361

 

1,094,729

PROVISION FOR INCOME TAXES

106,379

99,641

287,503

241,848

NET INCOME

$

347,654

$

298,923

$

937,858

$

852,881

NET INCOME PER COMMON SHARE:

Basic

$

0.66

$

0.55

$

1.77

$

1.57

Diluted

$

0.65

$

0.55

$

1.75

$

1.56

WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK AND COMMON STOCK EQUIVALENTS:

Basic

 

527,637

 

544,469

 

530,194

 

543,804

Diluted

 

533,263

 

548,422

 

535,011

 

548,387

See accompanying notes to condensed consolidated financial statements.

4

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE- AND NINE-MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(In Thousands) (Unaudited)

Three-Months Ended

    

Nine-Months Ended

September 30, 

September 30, 

    

2020

    

2019

    

2020

2019

Net income, as reported

$

347,654

$

298,923

$

937,858

$

852,881

Other comprehensive income (loss):

Change in foreign currency translation adjustment

 

21,217

 

(14,359)

 

(338)

 

(10,586)

Available-for-sale investments:

Change in net unrealized gains

 

(308)

 

32

 

196

 

367

Reclassification adjustment for net gains included in net income

 

 

 

 

Net change in available-for-sale investments

 

(308)

 

32

 

196

 

367

Other comprehensive income (loss)

 

20,909

 

(14,327)

 

(142)

 

(10,219)

Comprehensive income

$

368,563

$

284,596

$

937,716

$

842,662

See accompanying notes to condensed consolidated financial statements.

5

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE THREE- AND NINE-MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(In Thousands) (Unaudited)

Accumulated

Other

Total

Common stock

Additional

Retained

Comprehensive

Treasury stock

Stockholders’

  

Shares

  

Amount

  

Paid-in Capital

  

Earnings

  

Loss

  

Shares

  

Amount

  

Equity

Balance, December 31, 2019

    

636,460

    

$

3,182

    

$

4,397,511

    

$

5,022,480

    

$

(32,387)

    

(99,762)

    

$

(5,219,505)

    

$

4,171,281

Stock-based compensation

 

17,098

17,098

Exercise of stock options

 

644

4

13,971

13,975

Unrealized gain, net on available-for-sale securities

 

 

 

 

 

304

 

 

 

304

Repurchase of common stock

 

(10,503)

(579,948)

(579,948)

Foreign currency translation

 

(30,599)

(30,599)

Net income

 

278,835

278,835

Balance, March 31, 2020

 

637,104

 

$

3,186

 

$

4,428,580

 

$

5,301,315

 

$

(62,682)

(110,265)

 

$

(5,799,453)

 

$

3,870,946

Stock-based compensation

 

15,936

15,936

Exercise of stock options

 

820

4

29,863

29,867

Unrealized gain, net on available-for-sale securities

 

 

 

 

 

200

 

 

 

200

Repurchase of common stock

 

(298)

(15,822)

(15,822)

Foreign currency translation

 

9,044

9,044

Net income

 

311,369

311,369

Balance, June 30, 2020

 

637,924

 

$

3,190

 

$

4,474,379

 

$

5,612,684

 

$

(53,438)

(110,563)

 

$

(5,815,275)

 

$

4,221,540

Stock-based compensation

 

17,668

17,668

Exercise of stock options

 

534

2

21,696

21,698

Unrealized loss, net on available-for-sale securities

 

 

 

 

 

(308)

 

 

 

(308)

Repurchase of common stock

 

(2)

(148)

(148)

Foreign currency translation

 

21,217

21,217

Net income

 

347,654

347,654

Balance, September 30, 2020

 

638,458

$

3,192

$

4,513,743

$

5,960,338

$

(32,529)

(110,565)

$

(5,815,423)

$

4,629,321

Accumulated

Other

Total

Common stock

Additional

Retained

Comprehensive

Treasury stock

Stockholders’

  

Shares

  

Amount

  

Paid-in Capital

  

Earnings

  

Loss

  

Shares

  

Amount

  

Equity

Balance, December 31, 2018

    

630,970

    

$

3,155

    

$

4,238,170

    

$

3,914,645

    

$

(32,864)

    

(87,294)

    

$

(4,512,205)

    

$

3,610,901

Stock-based compensation

 

15,324

15,324

Exercise of stock options

 

3,871

19

35,144

35,163

Unrealized gain, net on available-for-sale securities

 

 

 

 

 

120

 

 

 

120

Repurchase of common stock

 

(4,000)

(222,792)

(222,792)

Foreign currency translation

 

(1,381)

(1,381)

Net income

 

261,485

261,485

Balance, March 31, 2019

 

634,841

 

$

3,174

 

$

4,288,638

 

$

4,176,130

 

$

(34,125)

(91,294)

 

$

(4,734,997)

 

$

3,698,820

Stock-based compensation

 

15,575

15,575

Exercise of stock options

 

1,288

6

45,964

45,970

Unrealized gain, net on available-for-sale securities

 

 

 

 

 

215

 

 

 

215

Repurchase of common stock

 

(10)

(621)

(621)

Foreign currency translation

 

5,154

5,154

Net income

 

292,473

292,473

Balance, June 30, 2019

 

636,129

 

$

3,180

 

$

4,350,177

 

$

4,468,603

 

$

(28,756)

(91,304)

 

$

(4,735,618)

 

$

4,057,586

Stock-based compensation

 

15,991

15,991

Exercise of stock options

 

106

1

4,112

4,113

Unrealized gain, net on available-for-sale securities

 

 

 

 

 

32

 

 

 

32

Repurchase of common stock

 

(4,340)

(254,308)

(254,308)

Foreign currency translation

 

(14,359)

(14,359)

Net income

 

298,923

298,923

Balance, September 30, 2019

 

636,235

$

3,181

$

4,370,280

$

4,767,526

$

(43,083)

(95,644)

$

(4,989,926)

$

4,107,978

See accompanying notes to condensed consolidated financial statements.

6

Table of Contents

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(In Thousands) (Unaudited)

Nine-Months Ended

September 30, 

2020

    

2019

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income

$

937,858

$

852,881

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

 

45,879

47,843

Gain on disposal of property and equipment

 

(210)

(7)

Impairment of intangibles

7,000

Stock-based compensation

 

53,042

46,890

Deferred income taxes

 

540

Effect on cash of changes in operating assets and liabilities:

Accounts receivable

 

(201,677)

(179,838)

Distributor receivables

 

341

5,813

Inventories

 

39,490

(44,947)

Prepaid expenses and other assets

 

(20,446)

(16,121)

Prepaid income taxes

 

11,460

6,174

Accounts payable

 

(9,724)

69,480

Accrued liabilities

 

53,501

(9,592)

Accrued promotional allowances

 

31,915

55,799

Accrued distributor terminations

 

(150)

6

Accrued compensation

 

(1,214)

(3,901)

Income taxes payable

17,969

10,311

Other liabilities

 

(562)

(631)

Deferred revenue

 

(15,236)

(19,631)

Net cash provided by operating activities

949,236

821,069

CASH FLOWS FROM INVESTING ACTIVITIES:

 

Sales of available-for-sale investments

 

795,858

558,128

Purchases of available-for-sale investments

 

(849,276)

(835,964)

Purchases of property and equipment

 

(42,062)

(44,392)

Proceeds from sale of property and equipment

 

880

810

Additions to intangibles

 

(19,686)

(5,478)

Increase in other assets

(26,228)

(1,289)

Net cash used in investing activities

(140,514)

(328,185)

CASH FLOWS FROM FINANCING ACTIVITIES:

Principal payments on debt

 

(2,500)

(12,841)

Issuance of common stock

 

65,540

85,245

Purchases of common stock held in treasury

 

(595,918)

(477,721)

Net cash used in financing activities

 

(532,878)

(405,317)

Effect of exchange rate changes on cash and cash equivalents

 

929

(7,463)

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

276,773

80,104

CASH AND CASH EQUIVALENTS, beginning of period

 

797,957

637,513

CASH AND CASH EQUIVALENTS, end of period

$

1,074,730

$

717,617

SUPPLEMENTAL INFORMATION:

Cash paid during the period for:

Interest

$

39

$

306

Income taxes

$

257,563

$

226,883

See accompanying notes to condensed consolidated financial statements.

7

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(In Thousands) (Unaudited) (Continued)

SUPPLEMENTAL DISCLOSURE OF NON-CASH ITEMS

Included in accrued liabilities as of September 30, 2020 and 2019 were $14.3 million and $8.6 million, respectively, related to additions to other intangible assets.

Included in accounts payable as of September 30, 2020 and 2019 were available-for-sale short-term investment purchases of $20.3 million and $3.0 million, respectively.

See accompanying notes to condensed consolidated financial statements.

8

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

1.

BASIS OF PRESENTATION

Reference is made to the Notes to Consolidated Financial Statements, in Monster Beverage Corporation and Subsidiaries (the “Company”) Annual Report on Form 10-K for the year ended December 31, 2019 for a summary of significant accounting policies utilized by the Company and its consolidated subsidiaries and other disclosures, which should be read in conjunction with this Quarterly Report on Form 10-Q (“Form 10-Q”).

The Company’s condensed consolidated financial statements included in this Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and Securities and Exchange Commission (“SEC”) rules and regulations applicable to interim financial reporting.  They do not include all the information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP.  The information set forth in these interim condensed consolidated financial statements for the three- and nine-months ended September 30, 2020 and 2019, respectively, is unaudited and reflects all adjustments, which include only normal recurring adjustments and which in the opinion of management are necessary to make the interim condensed consolidated financial statements not misleading.  Results of operations for periods covered by this report may not necessarily be indicative of results of operations for the full year.

The preparation of financial statements in conformity with GAAP necessarily 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 periods.  Actual results could differ from these estimates.

2.

RECENT ACCOUNTING PRONOUNCEMENTS

Recently issued accounting pronouncements not yet adopted

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, “Simplifying the Accounting for Income Taxes”, as part of its simplification initiative to reduce the cost and complexity in accounting for income taxes. ASU No. 2019-12 removes certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU No. 2019-12 also amends other aspects of the guidance to help simplify and promote consistent application of GAAP. The guidance is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of ASU No. 2019-12 on its financial position, results of operations and liquidity.

Recently adopted accounting pronouncements

In August 2018, the FASB issued ASU No. 2018-15, “Intangibles–Goodwill and Other–Internal–Use Software (Topic 350): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract.” ASU No. 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract, with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU No. 2018-15 was effective for the Company on a prospective or retrospective basis beginning on January 1, 2020. The adoption of ASU No. 2018-15 did not have a material impact on the Company’s financial position, results of operations and liquidity.

In August 2018, the FASB issued ASU No. 2018-14, “Compensation–Retirement Benefits–Defined Benefit Plans–General (Topic 715): Disclosure Framework–Changes to the Disclosure Requirements for Defined Benefit Plans.” ASU No. 2018-14 removes certain disclosures that are not considered cost beneficial, clarifies certain required disclosures and requires certain additional disclosures. ASU No. 2018-14 is effective for the Company on a retrospective basis beginning in the year ending December 31, 2020. The adoption of ASU No. 2018-14 did not have a material impact on the Company’s financial position, results of operations and liquidity.

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” ASU No. 2018-13 removes certain disclosure requirements related to the fair value hierarchy, modifies existing disclosure requirements related to measurement uncertainty and adds new disclosure requirements. ASU No. 2018-13 disclosure requirements include disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. ASU No. 2018-13 was effective for the Company beginning on January 1, 2020. Certain disclosures in the new guidance will need to be applied on a retrospective basis and others on a prospective basis. The adoption of ASU No. 2018-13 did 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. The adoption of ASU No. 2017-04 did not have a material impact on the Company’s financial position, results of operations and liquidity.

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 was effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. The adoption of ASU No. 2016-13 did not have a material impact on the Company’s disclosures, financial position, results of operations and liquidity.

3.

REVENUE RECOGNITION

The Company has three operating and reportable segments: (i) Monster Energy® Drinks segment (“Monster Energy® Drinks”), which is primarily comprised of the Company’s Monster Energy® drinks and Reign Total Body Fuel® high performance energy drinks (ii) Strategic Brands segment (“Strategic Brands”), which is primarily comprised of the various energy drink brands acquired from The Coca-Cola Company (“TCCC”) in 2015 as well as the Company’s affordable energy brands, and (iii) Other segment (“Other”), which is comprised of certain products sold by American Fruits and Flavors, LLC, a wholly-owned subsidiary of the Company, to independent third-party customers (the “AFF Third-Party Products”).

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

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 by such bottlers to other bottlers/distributors and to retail grocery and specialty chains, wholesalers, club stores, mass merchandisers, convenience chains, foodservice customers, drug stores, value stores, e-commerce retailers and the military. To a lesser extent, the Strategic Brands segment generates net operating revenues by selling certain ready-to-drink packaged energy drinks to bottlers/distributors.

The majority of the Company’s revenue is recognized when it satisfies a single performance obligation by transferring control of its products to a customer. Control is generally transferred when the Company’s products are either shipped or delivered based on the terms contained within the underlying contracts or agreements. Certain of the Company’s bottlers/distributors may also perform a separate function as a co-packer on the Company’s behalf. In such cases, control of the Company’s products passes to such bottlers/distributors when they notify the Company that they have taken possession or transferred the relevant portion of the Company’s finished goods. The Company’s general payment terms are short-term in duration. The Company does not have significant financing components or payment terms. The Company did not have any material unsatisfied performance obligations as of September 30, 2020 and December 31, 2019.

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

The Company excludes from revenues all taxes assessed by a governmental authority that are imposed on the sale of its products and collected from customers.

Distribution expenses to transport the Company’s products, where applicable, and warehousing expense after manufacture are accounted for within operating expenses.

Promotional and other allowances (variable consideration) recorded as a reduction to net sales, primarily include consideration given to the Company’s bottlers/distributors or retail customers including, but not limited to the following:

discounts granted off list prices to support price promotions to end-consumers by retailers;
reimbursements given to the Company’s bottlers/distributors for agreed portions of their promotional spend with retailers, including slotting, shelf space allowances and other fees for both new and existing products;
the Company’s agreed share of fees given to bottlers/distributors and/or directly to retailers for advertising, in-store marketing and promotional activities;
the Company’s agreed share of slotting, shelf space allowances and other fees given directly to retailers, club stores and/or wholesalers;
incentives given to the Company’s bottlers/distributors and/or retailers for achieving or exceeding certain predetermined sales goals;
discounted or free products;
contractual fees given to the Company’s bottlers/distributors related to sales made directly by the Company to certain customers that fall within the bottlers’/distributors’ sales territories; and
commissions to TCCC based on the Company’s sales to certain wholly-owned subsidiaries of TCCC (the “TCCC Subsidiaries”) and/or to certain companies accounted for under the equity method by TCCC (the “TCCC Related Parties”).

The Company’s promotional allowance programs with its bottlers/distributors and/or retailers are executed through separate agreements in the ordinary course of business. These agreements generally provide for one or more of the arrangements described above and are of varying durations, typically ranging from one week to one year. The Company’s promotional and other allowances are calculated based on various programs with bottlers/distributors and retail customers, and accruals are established at the time of initial product sale for the Company’s 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 bottler/distributor and retail customer performance levels. Differences between such estimated expenses 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 bottlers/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 agreements, generally over 20 years.

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

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

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

Disaggregation of Revenue

The following tables disaggregate the Company’s revenue by geographical markets and reportable segments:

Three-Months Ended September 30, 2020

    

    

    

Latin

    

America

 

U.S. and

and

 

Net Sales

Canada

EMEA1

Asia Pacific

Caribbean

Total

Monster Energy® Drinks

$

786,960

$

206,947

$

120,589

$

48,924

$

1,163,420

Strategic Brands

 

46,005

 

19,192

 

6,658

 

2,469

 

74,324

Other

 

8,618

 

 

 

 

8,618

Total Net Sales

$

841,583

$

226,139

$

127,247

$

51,393

$

1,246,362

Three-Months Ended September 30, 2019

    

    

    

Latin

    

America

U.S. and

and

Net Sales

Canada

EMEA1

Asia Pacific

Caribbean

Total

Monster Energy® Drinks

$

737,457

$

178,569

$

97,153

$

48,205

$

1,061,384

Strategic Brands

43,205

16,673

6,243

212

66,333

Other

5,860

5,860

Total Net Sales

$

786,522

$

195,242

$

103,396

$

48,417

$

1,133,577

Nine-Months Ended September 30, 2020

    

    

    

    

Latin

    

America

 

U.S. and

and

 

Net Sales

Canada

EMEA1

Asia Pacific

Caribbean

Total

Monster Energy® Drinks

$

2,223,925

$

501,639

$

319,325

$

138,671

$

3,183,560

Strategic Brands

125,030

52,333

17,161

3,904

198,428

Other

20,367

20,367

Total Net Sales

$

2,369,322

$

553,972

$

336,486

$

142,575

$

3,402,355

Nine-Months Ended September 30, 2019

    

    

    

    

Latin

    

America

 

U.S. and

and

 

Net Sales

Canada

EMEA1

Asia Pacific

Caribbean

Total

Monster Energy® Drinks

$

2,118,835

$

458,655

$

242,561

$

130,826

$

2,950,877

Strategic Brands

132,375

62,374

20,024

990

215,763

Other

16,973

16,973

Total Net Sales

$

2,268,183

$

521,029

$

262,585

$

131,816

$

3,183,613

1Europe, Middle East and Africa (“EMEA”)

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

Contract Liabilities

Amounts received from certain bottlers/distributors at inception of their distribution contracts or at the inception of certain sales/marketing programs are accounted for as deferred revenue. As of September 30, 2020, the Company had $313.8 million of deferred revenue, which is included in current and long-term deferred revenue in the Company’s condensed consolidated balance sheet. As of December 31, 2019, the Company had $331.7 million of deferred revenue, which is included in current and long-term deferred revenue in the Company’s condensed consolidated balance sheet. During the three-months ended September 30, 2020 and 2019, $10.5 million and $10.7 million, respectively, of deferred revenue was recognized in net sales. See Note 11. During the nine-months ended September 30, 2020 and 2019, $31.6 million and $35.6 million, respectively, of deferred revenue was recognized in net sales. See Note 11.

4.

LEASES

The Company leases identified assets comprising real estate and equipment. Real estate leases consist primarily of office and warehouse space and equipment leases consist of vehicles and warehouse equipment. At the inception of a contract, the Company assesses whether the contract is, or contains, a lease. The Company’s assessment is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether the Company obtains the right to substantially all the economic benefit from the use of the asset throughout the term, and (3) whether the Company has the right to direct the use of the asset. At inception of a lease, the Company allocates the consideration in the contract to each lease and non-lease component based on the component’s relative stand-alone price to determine the lease payments. Lease and non-lease components are accounted for separately.

Leases are classified as either finance leases or operating leases based on criteria in Accounting Standards Codification (“ASC”) 842. The Company’s operating leases are comprised of real estate and warehouse equipment, and the Company’s finance leases are comprised of vehicles.

Right-of-use (“ROU”) assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. As the Company’s leases generally do not provide an implicit rate, the Company uses its incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at the commencement date. ROU assets also include any lease payments made and exclude lease incentives. Lease terms include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.

Certain of the Company’s real estate leases contain variable lease payments, including payments based on an index or rate. Variable lease payments based on an index or rate are initially measured using the index or rate in effect at the lease commencement date. Additional payments based on the change in an index or rate, or payments based on a change in the Company’s portion of real estate taxes and insurance, are recorded as a period expense when incurred.

Lease expense for operating leases, consisting of lease payments, is recognized on a straight-line basis over the lease term and is included in operating expenses in the condensed consolidated statement of income. Lease expense for finance leases consists of the amortization of the ROU asset on a straight-line basis over the asset’s estimated useful life and is included in operating expenses in the condensed consolidated statement of income. Interest expense on finance leases is calculated using the amortized cost basis and is included in interest and other (expense) income, net in the condensed consolidated statement of income.

The Company’s leases have remaining lease terms of less than one year to 13 years, some of which include options to extend the leases for up to five years, and some of which include options to terminate the leases within one year.  The Company has elected not to recognize ROU assets and lease liabilities for short-term operating leases that have a term of 12 months or less.

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

The components of lease cost were comprised of the following:

Three-Months

Three-Months

Nine-Months

Nine-Months

Ended September 30,

Ended September 30,

Ended September 30,

Ended September 30,

  

2020

  

2019

  

2020

  

2019

Operating lease cost

$

1,161

$

1,223

$

3,499

$

3,548

Short-term lease cost

 

856

 

993

 

2,440

 

2,552

Variable lease cost

 

242

 

168

 

564

 

503

Finance leases:

Amortization of ROU assets

 

177

 

172

 

511

 

346

Interest on lease liabilities

 

9

 

13

 

34

 

43

Finance lease cost

 

186

 

185

 

545

 

389

Total lease cost

$

2,445

$

2,569

$

7,048

$

6,992

Supplemental cash flow information for the following periods:

Nine-Months

Nine-Months

Ended September 30,

Ended September 30,

  

2020

  

2019

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash outflows from operating leases

$

3,081

$

3,026

Operating cash outflows from finance leases

33

43

Financing cash outflows from finance leases

2,500

1,497

ROU assets obtained in exchange for lease obligations:

Finance leases

2,231

2,499

Operating leases

2,117

27,965

ROU assets for operating and finance leases recognized in the condensed consolidated balance sheets were comprised of the following at:

September 30, 2020

Real Estate

    

Equipment

    

Total

    

Balance Sheet Location

Operating leases

$

22,783

$

214

$

22,997

Other Assets

Finance leases

 

 

2,781

 

2,781

Property and Equipment, net

December 31, 2019

 

    

Real Estate

    

Equipment

    

Total

    

Balance Sheet Location

Operating leases

 

$

30,926

 

$

416

 

$

31,342

 

Other Assets

Finance leases

 

 

2,632

 

2,632

 

Property and Equipment, net

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

Operating and finance lease liabilities recognized in the condensed consolidated balance sheets were as follows at:

September 30, 2020

Operating Leases

    

Finance Leases

Accrued liabilities

    

$

2,982

$

1,214

Other liabilities

 

17,535

 

Total

$

20,517

$

1,214

December 31, 2019

    

Operating Leases

    

Finance Leases

Accrued liabilities

    

$

2,812

    

$

1,485

Other liabilities

 

25,651

 

Total

$

28,463

$

1,485

The weighted-average remaining lease terms and weighted-average discount rates for operating and finance leases at September 30, 2020 and December 31, 2019 were as follows:

September 30, 2020

Operating Leases

    

Finance Leases

 

Weighted-average remaining lease term (years)

9.7

 

0.6

Weighted-average discount rate

3.6

%  

2.1

%

December 31, 2019

    

Operating Leases

    

Finance Leases

Weighted-average remaining lease term (years)

 

10.1

0.6

Weighted-average discount rate

 

3.1

%  

2.9

%

The following table reconciles the undiscounted future lease payments for operating and finance leases to the operating and finance leases recorded in the condensed consolidated balance sheet at September 30, 2020:

    

Undiscounted Future Lease Payments

Operating Leases

    

Finance Leases

2020 (excluding the nine-months ended September 30, 2020)

$

811

$

588

2021

 

3,573

 

633

2022

 

2,898

 

2023

 

2,185

 

2024

 

1,890

 

2025 and thereafter

 

13,188

 

Total lease payments

 

24,545

 

1,221

Less imputed interest

 

(4,028)

 

(7)

Total

$

20,517

$

1,214

As of September 30, 2020, the Company did not have any significant additional operating or finance leases that have not yet commenced.

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

5.

INVESTMENTS

The following table summarizes the Company’s investments at:

Continuous

Continuous

Gross

Gross

Unrealized

Unrealized

Unrealized

Unrealized

Loss Position

Loss Position

Amortized

Holding

Holding

Fair

less than 12

greater than 12

September 30, 2020

    

Cost

    

Gains

    

Losses

    

Value

    

Months

    

Months

Available-for-sale

Short-term:

Commercial paper

$

91,445

$

$

$

91,445

$

$

Certificates of deposit

19,959

19,959

U.S. government agency securities

 

66,435

 

21

 

3

 

66,453

 

3

 

U.S. treasuries

421,093

398

22

421,469

22

Long-term:

U.S. government agency securities

10,205

1

10,204

1

U.S. treasuries

10,370

3

10,367

3

Total

$

619,507

$

419

$

29

$

619,897

$

29

$

Continuous

Continuous

Gross

Gross

Unrealized

Unrealized

Unrealized

Unrealized

Loss Position

Loss Position

Amortized

Holding

Holding

Fair

less than 12

greater than 12

December 31, 2019

    

Cost

    

Gains

    

Losses

    

Value

    

Months

    

Months

Available-for-sale

Short-term:

Commercial paper

$

83,478

$

$

$

83,478

$

$

Certificates of deposit

28,049

28,049

Municipal securities

 

147,983

 

145

 

20

 

148,108

 

20

 

U.S. government agency securities

 

40,620

 

5

 

35

 

40,590

 

35

 

U.S. treasuries

211,055

134

31

211,158

31

Variable rate demand notes

 

21,680

 

 

 

21,680

 

 

Long-term:

Municipal securities

1,562

1

1,561

1

U.S. government agency securities

5,267

1

5,266

1

U.S. treasuries

6,077

1

6,078

Total

$

545,771

$

285

$

88

$

545,968

$

88

$

During the three- and nine-months ended September 30, 2020 and 2019, realized gains or losses recognized on the sale of investments were not significant.

The Company’s investments at September 30, 2020 and December 31, 2019 carried investment grade credit ratings.

Variable rate demand notes (“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.

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

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

September 30, 2020

December 31, 2019

    

Amortized Cost

    

Fair Value

    

Amortized Cost

    

Fair Value

Less than 1 year:

Commercial paper

$

91,445

$

91,445

 

$

83,478

$

83,478

Municipal securities

 

 

 

 

147,983

 

148,108

U.S. government agency securities

 

66,435

 

66,453

 

 

40,620

 

40,590

Certificates of deposit

 

19,959

 

19,959

 

 

28,049

 

28,049

U.S. treasuries

421,093

421,469

211,055

211,158

Due 1 -10 years:

Municipal securities

 

 

 

 

1,562

 

1,561

U.S. treasuries

10,370

10,367

6,077

6,078

U.S. government agency securities

 

10,205

 

10,204

 

 

5,267

 

5,266

Variable rate demand notes

3,905

3,905

Due 11 - 20 years:

Variable rate demand notes

 

 

 

 

8,886

 

8,886

Due 21 - 30 years:

Variable rate demand notes

 

 

 

 

6,885

 

6,885

Due 31 - 40 years:

Variable rate demand notes

2,004

2,004

Total

$

619,507

$

619,897

 

$

545,771

$

545,968

6.

FAIR VALUE OF CERTAIN FINANCIAL ASSETS AND LIABILITIES

ASC 820 provides a framework for measuring fair value and requires disclosures regarding fair value measurements. ASC 820 defines fair value as the price that would be received on the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a fair value hierarchy that 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.

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.

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

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

September 30, 2020

    

Level 1

    

Level 2

    

Level 3

    

Total

Cash

$

719,429

$

$

$

719,429

Money market funds

 

319,984

 

 

 

319,984

Certificates of deposit

19,959

19,959

Commercial paper

 

 

91,445

 

 

91,445

U.S. government agency securities

 

 

76,657

 

 

76,657

U.S. treasuries

467,153

467,153

Foreign currency derivatives

 

 

(770)

 

 

(770)

Total

$

1,039,413

$

654,444

$

$

1,693,857

Amounts included in:

Cash and cash equivalents

$

1,039,413

$

35,317

$

$

1,074,730

Short-term investments

 

 

599,326

 

 

599,326

Accounts receivable, net

 

 

185

 

 

185

Investments

 

 

20,571

 

 

20,571

Accrued liabilities

 

 

(955)

 

 

(955)

Total

$

1,039,413

$

654,444

$

$

1,693,857

December 31, 2019

    

Level 1

    

Level 2

    

Level 3

    

Total

Cash

$

518,178

$

$

$

518,178

Money market funds

 

191,131

 

 

 

191,131

Certificates of deposit

28,049

28,049

Commercial paper

 

 

96,867

 

 

96,867

Variable rate demand notes

21,680

21,680

Municipal securities

 

 

167,224