10-Q 1 a14-9556_110q.htm 10-Q

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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 March 31, 2014 |  | Commission File Number 0-18761

MONSTER BEVERAGE CORPORATION

(Exact name of Registrant as specified in its charter)

| Delaware | 39-1679918
| (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)

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes X No __

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

Large Accelerated Filer x | Accelerated filer o
Non-accelerated filer o (Do not check if smaller reporting company) | Smaller reporting company o

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

Yes ___ No X

The Registrant had 167,077,394 shares of common stock, par value $0.005 per share, outstanding as of April 28, 2014.

Table of Contents

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

MARCH 31, 2014

INDEX

Part I. | FINANCIAL INFORMATION |  | Page No.
Item 1. | Condensed Consolidated Financial Statements (Unaudited) |  |
| Condensed Consolidated Balance Sheets as of March 31, 2014 and December 31, 2013 |  | 3
| Condensed Consolidated Statements of Income for the Three-Months Ended March 31, 2014 and 2013 |  | 4
| Condensed Consolidated Statements of Comprehensive Income for the Three-Months Ended March 31, 2014 and 2013 |  | 5
| Condensed Consolidated Statements of Cash Flows for the Three-Months Ended March 31, 2014 and 2013 |  | 6
| Notes to Condensed Consolidated Financial Statements |  | 8
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |  | 26
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |  | 38
Item 4. | Controls and Procedures |  | 39
Part II. OTHER INFORMATION |  |
Item 1. | Legal Proceedings |  | 39
Item 1A. | Risk Factors |  | 42
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |  | 42
Item 3. | Defaults Upon Senior Securities |  | 42
Item 4. | Mine Safety Disclosures |  | 42
Item 5. | Other Information |  | 43
Item 6. | Exhibits |  | 43
| Signatures |  | 44

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PART I – FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF MARCH 31, 2014 AND DECEMBER 31, 2013

(In Thousands, Except Par Value) (Unaudited)

|  | March 31, 2014 |  |  | December 31, 2013 |
ASSETS |  |  |  |  |  |
CURRENT ASSETS: |  |  |  |  |  |
Cash and cash equivalents |  | $ | 312,020 |  |  | $ | 211,349 |
Short-term investments |  | 438,932 |  |  | 402,247 |
Accounts receivable, net |  | 342,140 |  |  | 291,638 |
Distributor receivables |  | 3,646 |  |  | 4,542 |
Inventories |  | 204,061 |  |  | 221,449 |
Prepaid expenses and other current assets |  | 28,482 |  |  | 21,376 |
Prepaid income taxes |  | 5,008 |  |  | 9,518 |
Deferred income taxes |  | 20,924 |  |  | 20,924 |
Total current assets |  | 1,355,213 |  |  | 1,183,043 |
INVESTMENTS |  | 8,131 |  |  | 9,792 |
PROPERTY AND EQUIPMENT, net |  | 91,733 |  |  | 88,143 |
DEFERRED INCOME TAXES |  | 63,443 |  |  | 63,611 |
INTANGIBLES, net |  | 65,525 |  |  | 65,774 |
OTHER ASSETS |  | 9,538 |  |  | 10,146 |
Total Assets |  | $ | 1,593,583 |  |  | $ | 1,420,509 |
LIABILITIES AND STOCKHOLDERS’ EQUITY |  |  |  |  |  |
CURRENT LIABILITIES: |  |  |  |  |  |
Accounts payable |  | $ | 125,581 |  |  | $ | 119,376 |
Accrued liabilities |  | 71,959 |  |  | 59,113 |
Accrued promotional allowances |  | 113,846 |  |  | 99,470 |
Deferred revenue |  | 14,034 |  |  | 13,832 |
Accrued compensation |  | 9,046 |  |  | 14,864 |
Income taxes payable |  | 45,900 |  |  | 9,359 |
Total current liabilities |  | 380,366 |  |  | 316,014 |
DEFERRED REVENUE |  | 110,491 |  |  | 112,216 |
COMMITMENTS AND CONTINGENCIES (Note 10) |  |  |  |  |  |
STOCKHOLDERS’ EQUITY: |  |  |  |  |  |
Common stock - $0.005 par value; 240,000 shares authorized; 206,266 shares issued and 167,074 outstanding as of March 31, 2014; 206,014 shares issued and 166,822 outstanding as of December 31, 2013 |  | 1,031 |  |  | 1,030 |
Additional paid-in capital |  | 383,183 |  |  | 368,069 |
Retained earnings |  | 1,942,575 |  |  | 1,847,325 |
Accumulated other comprehensive loss |  | (1,131 | ) |  | (1,233 | )
Common stock in treasury, at cost; 39,192 and 39,192 shares as of March 31, 2014 and December 31, 2013, respectively |  | (1,222,932 | ) |  | (1,222,912 | )
Total stockholders’ equity |  | 1,102,726 |  |  | 992,279 |
Total Liabilities and Stockholders’ Equity |  | $ | 1,593,583 |  |  | $ | 1,420,509 |

See accompanying notes to condensed consolidated financial statements.

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE-MONTHS ENDED MARCH 31, 2014 AND 2013

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

|  | Three-Months Ended |
|  | March 31, |
|  | 2014 |  |  | 2013 |
NET SALES |  | $ | 536,129 |  |  | $ | 484,223 |
COST OF SALES |  | 249,311 |  |  | 232,184 |
GROSS PROFIT |  | 286,818 |  |  | 252,039 |
OPERATING EXPENSES |  | 137,955 |  |  | 144,733 |
OPERATING INCOME |  | 148,863 |  |  | 107,306 |
OTHER INCOME (EXPENSE): |  |  |  |  |  |
Interest and other income (expense), net |  | 155 |  |  | (4,473 | )
(Loss) gain on investments and put options, net (Note 3) |  | (1 | ) |  | 2,571 |
Total other income (expense) |  | 154 |  |  | (1,902 | )
INCOME BEFORE PROVISION FOR INCOME TAXES |  | 149,017 |  |  | 105,404 |
PROVISION FOR INCOME TAXES |  | 53,767 |  |  | 41,908 |
NET INCOME |  | $ | 95,250 |  |  | $ | 63,496 |
NET INCOME PER COMMON SHARE: |  |  |  |  |  |
Basic |  | $ | 0.57 |  |  | $ | 0.38 |
Diluted |  | $ | 0.55 |  |  | $ | 0.37 |
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK AND COMMON STOCK EQUIVALENTS: |  |  |  |  |  |
Basic |  | 166,913 |  |  | 165,525 |
Diluted |  | 173,741 |  |  | 172,559 |

See accompanying notes to condensed consolidated financial statements.

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE-MONTHS ENDED MARCH 31, 2014 AND 2013

(In Thousands) (Unaudited)

|  | Three-Months Ended March 31, |
|  | 2014 |  |  | 2013 |
Net income, as reported |  | $ | 95,250 |  |  | $ | 63,496 |
Other comprehensive income (loss): |  |  |  |  |  |
Change in foreign currency translation adjustment |  | 102 |  |  | (1,092 | )
Available-for-sale investments: |  |  |  |  |  |
Change in net unrealized gains |  | - |  |  | - |
Reclassification adjustment for net gains included in net income |  | - |  |  | (1,525 | )
Net change in available-for-sale investments |  | - |  |  | (1,525 | )
Other comprehensive income (loss) |  | 102 |  |  | (2,617 | )
Comprehensive income |  | $ | 95,352 |  |  | $ | 60,879 |

See accompanying notes to condensed consolidated financial statements.

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE-MONTHS ENDED MARCH 31, 2014 AND 2013

(In Thousands) (Unaudited)

|  | Three-Months Ended |
|  | March 31, 2014 |  | March 31, 2013 |
CASH FLOWS FROM OPERATING ACTIVITIES: |  |  |  |  |
Net income |  | $ | 95,250 |  | $ | 63,496 |
Adjustments to reconcile net income to net cash provided by operating activities: |  |  |  |  |
Depreciation and amortization |  | 6,453 |  | 5,060 |
Gain on disposal of property and equipment |  | (100) |  | (2) |
Stock-based compensation |  | 6,986 |  | 6,959 |
Loss (gain) on put option |  | 67 |  | (83) |
Gain on investments, net |  | (66) |  | (2,489) |
Deferred income taxes |  | 168 |  | (398) |
Tax benefit from exercise of stock options |  | (2,602) |  | (176) |
Effect on cash of changes in operating assets and liabilities: |  |  |  |  |
Accounts receivable |  | (42,544) |  | (69,713) |
Distributor receivables |  | 947 |  | (8,314) |
Inventories |  | 17,410 |  | (14,080) |
Prepaid expenses and other current assets |  | (7,110) |  | (10,584) |
Prepaid income taxes |  | 4,417 |  | 27,417 |
Accounts payable |  | 6,068 |  | 7,479 |
Accrued liabilities |  | 4,610 |  | 9,879 |
Accrued promotional allowances |  | 14,708 |  | 13,939 |
Accrued distributor terminations |  | - |  | 7,372 |
Accrued compensation |  | (5,838) |  | (5,377) |
Income taxes payable |  | 39,095 |  | 9,270 |
Deferred revenue |  | (1,517) |  | 6,238 |
Net cash provided by operating activities |  | 136,402 |  | 45,893 |
CASH FLOWS FROM INVESTING ACTIVITIES: |  |  |  |  |
Maturities of held-to-maturity investments |  | 151,035 |  | 66,344 |
Sales of trading investments |  | 1,725 |  | - |
Purchases of held-to-maturity investments |  | (187,718) |  | (69,464) |
Purchases of property and equipment |  | (9,871) |  | (8,732) |
Proceeds from sale of property and equipment |  | 237 |  | 18 |
Decrease (increase) in intangibles |  | 105 |  | (3,362) |
Decrease (increase) in other assets |  | 543 |  | (219) |
Net cash used in investing activities |  | (43,944) |  | (15,415) |
CASH FLOWS FROM FINANCING ACTIVITIES: |  |  |  |  |
Principal payments on debt |  | (620) |  | (296) |
Tax benefit from exercise of stock options |  | 2,602 |  | 176 |
Issuance of common stock |  | 5,728 |  | 2,381 |
Purchases of common stock held in treasury |  | (20) |  | (13,361) |
Net cash provided by (used in) financing activities |  | 7,690 |  | (11,100) |
Effect of exchange rate changes on cash and cash equivalents |  | 523 |  | 641 |
NET INCREASE IN CASH AND CASH EQUIVALENTS |  | 100,671 |  | 20,019 |
CASH AND CASH EQUIVALENTS, beginning of period |  | 211,349 |  | 222,514 |
CASH AND CASH EQUIVALENTS, end of period |  | $ | 312,020 |  | $ | 242,533 |
SUPPLEMENTAL INFORMATION: |  |  |  |  |
Cash paid during the period for: |  |  |  |  |
Interest |  | $ | 12 |  | $ | 5 |
Income taxes |  | $ | 9,747 |  | $ | 5,663 |

See accompanying notes to condensed consolidated financial statements.

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE-MONTHS ENDED MARCH 31, 2014 AND 2013

(In Thousands) (Unaudited) (Continued)

SUPPLEMENTAL DISCLOSURE OF NON-CASH ITEMS

Included in accounts payable are property and equipment purchases of $0.2 million and $2.0 million as of March 31, 2014 and December 31, 2013, respectively.

See accompanying notes to condensed consolidated financial statements.

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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” or, in reference to the Company’s former name, “Hansen Natural Corporation”) Annual Report on Form 10-K for the year ended December 31, 2013 (“Form 10-K”) 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-months ended March 31, 2014 and 2013 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 amount 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

In April 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08, “Presentation of Financial Statements and Property, Plant, and Equipment - Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”. ASU 2014-08 provides new guidance related to the definition of a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. This new guidance is effective for fiscal years beginning on or after December 15, 2014 and interim periods within those years. The adoption of ASU 2014-08 is not expected to have a material impact on the Company’s financial position, results of operations or 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)

3. INVESTMENTS

The following table summarizes the Company’s investments at:

March 31, 2014 |  | 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
Held-to-Maturity |  |  |  |  |  |  |  |  |  |  |  |
Short-term: |  |  |  |  |  |  |  |  |  |  |  |
Certificates of deposit |  | $ | 22,043 |  | $ | - |  | $ | - |  | $ | 22,043 |  | $ | - |  | $ | -
Commercial paper |  | 9,990 |  | - |  | - |  | 9,990 |  | - |  | -
Municipal securities |  | 400,504 |  | 25 |  | - |  | 400,529 |  | - |  | -
Total |  | $ | 432,537 |  | $ | 25 |  | $ | - |  | 432,562 |  | $ | - |  | $ | -
Trading |  |  |  |  |  |  |  |  |  |  |  |
Short-term: |  |  |  |  |  |  |  |  |  |  |  |
Auction rate securities |  |  |  |  |  |  |  | 6,395 |  |  |  |
Long-term: |  |  |  |  |  |  |  |  |  |  |  |
Auction rate securities |  |  |  |  |  |  |  | 8,131 |  |  |  |
Total |  |  |  |  |  |  |  | $ | 447,088 |  |  |  |
December 31, 2013 |  | 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
Held-to-Maturity |  |  |  |  |  |  |  |  |  |  |  |
Short-term: |  |  |  |  |  |  |  |  |  |  |  |
Certificates of deposit |  | $ | 22,045 |  | $ | - |  | $ | - |  | $ | 22,045 |  | $ | - |  | $ | -
Commercial paper |  | 5,991 |  | - |  | - |  | 5,991 |  | - |  | -
Municipal securities |  | 367,819 |  | 48 |  | - |  | 367,867 |  | - |  | -
Total |  | $ | 395,855 |  | $ | 48 |  | $ | - |  | 395,903 |  | $ | - |  | $ | -
Trading |  |  |  |  |  |  |  |  |  |  |  |
Short-term: |  |  |  |  |  |  |  |  |  |  |  |
Auction rate securities |  |  |  |  |  |  |  | 6,392 |  |  |  |
Long-term: |  |  |  |  |  |  |  |  |  |  |  |
Auction rate securities |  |  |  |  |  |  |  | 9,792 |  |  |  |
Total |  |  |  |  |  |  |  | $ | 412,087 |  |  |  |

During the three-months ended March 31, 2014, realized gains or losses recognized on the sale of investments were not significant. During the year ended December 31, 2013, the Company recognized $2.5 million of realized gains on the sale of available-for-sale investments. Realized gains or losses on the sale of all other investments during the year ended December 31, 2013 were not significant.

The Company recognized a net gain through earnings on its trading securities as follows:

|  | Three-Months Ended March 31, |
|  | 2014 |  |  | 2013 |
Gain on trading securities sold |  | $ | 131 |  |  | $ | - |
(Loss) gain on trading securities held |  | (64 | ) |  | 6 |
Gain on trading securites |  | $ | 67 |  |  | $ | 6 |

The Company’s investments at March 31, 2014 and December 31, 2013 in certificates of deposit, commercial paper and/or municipal securities carried investment grade credit ratings. All of the Company’s investments at March 31, 2014 and December 31, 2013 in municipal, educational or other public body securities with an auction reset feature (“auction rate securities”) also carried investment grade credit ratings.

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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:

|  | March 31, 2014 |  | December 31, 2013 |
|  | Amortized Cost |  | Fair Value |  | Amortized Cost |  | Fair Value |
Less than 1 year: |  |  |  |  |  |  |  |  |
Certificates of deposit |  | $ | 22,043 |  | $ | 22,043 |  | $ | 22,045 |  | $ | 22,045 |
Commercial paper |  | 9,990 |  | 9,990 |  | 5,991 |  | 5,991 |
Municipal securities |  | 400,504 |  | 400,529 |  | 367,819 |  | 367,867 |
Due 11 - 20 years: |  |  |  |  |  |  |  |  |
Auction rate securities |  | 11,053 |  | 11,053 |  | 11,102 |  | 11,102 |
Due 21 - 30 years: |  |  |  |  |  |  |  |  |
Auction rate securities |  | 3,473 |  | 3,473 |  | 5,082 |  | 5,082 |
Total |  | $ | 447,063 |  | $ | 447,088 |  | $ | 412,039 |  | $ | 412,087 |

4. FAIR VALUE OF CERTAIN FINANCIAL ASSETS AND LIABILITIES

Accounting Standards Codification (“ASC”) 820 provides a framework for measuring fair value and requires expanded 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 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.

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.

The following tables present the Company’s held-to-maturity investments at amortized cost as well as 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:

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

March 31, 2014 |  | Level 1 |  | Level 2 |  | Level 3 |  | Total |
Cash |  | $ | 207,079 |  | $ | - |  | $ | - |  | $ | 207,079 |
Money market funds |  | 73,014 |  | - |  | - |  | 73,014 |
Certificates of deposit |  | - |  | 22,043 |  | - |  | 22,043 |
Commercial paper |  | - |  | 9,990 |  | - |  | 9,990 |
Municipal securities |  | - |  | 432,431 |  | - |  | 432,431 |
Auction rate securities |  | - |  | - |  | 14,526 |  | 14,526 |
Put option related to auction rate securities |  | - |  | - |  | 1,024 |  | 1,024 |
Foreign currency derivatives |  | - |  | (21 | ) | - |  | (21 | )
Total |  | $ | 280,093 |  | $ | 464,443 |  | $ | 15,550 |  | $ | 760,086 |
Amounts included in: |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 280,093 |  | $ | 31,927 |  | $ | - |  | $ | 312,020 |
Short-term investments |  | - |  | 432,537 |  | 6,395 |  | 438,932 |
Accounts receivable, net |  | - |  | 349 |  | - |  | 349 |
Investments |  | - |  | - |  | 8,131 |  | 8,131 |
Prepaid expenses and other current assets |  | - |  | - |  | 485 |  | 485 |
Other assets |  | - |  | - |  | 539 |  | 539 |
Accrued liabilities |  | - |  | (370 | ) | - |  | (370 | )
Total |  | $ | 280,093 |  | $ | 464,443 |  | $ | 15,550 |  | $ | 760,086 |

December 31, 2013 |  | Level 1 |  | Level 2 |  | Level 3 |  | Total |
Cash |  | $ | 139,300 |  | $ | - |  | $ | - |  | $ | 139,300 |
Money market funds |  | 60,102 |  | - |  | - |  | 60,102 |
Certificates of deposit |  | - |  | 22,045 |  | - |  | 22,045 |
Commercial paper |  | - |  | 5,991 |  | - |  | 5,991 |
Municipal securities |  | - |  | 379,766 |  | - |  | 379,766 |
Auction rate securities |  | - |  | - |  | 16,184 |  | 16,184 |
Put option related to auction rate securities |  | - |  | - |  | 1,092 |  | 1,092 |
Total |  | $ | 199,402 |  | $ | 407,802 |  | $ | 17,276 |  | $ | 624,480 |
Amounts included in: |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 199,402 |  | $ | 11,947 |  | $ | - |  | $ | 211,349 |
Short-term investments |  | - |  | 395,855 |  | 6,392 |  | 402,247 |
Investments |  | - |  | - |  | 9,792 |  | 9,792 |
Prepaid expenses and other current assets |  | - |  | - |  | 486 |  | 486 |
Other assets |  | - |  | - |  | 606 |  | 606 |
Total |  | $ | 199,402 |  | $ | 407,802 |  | $ | 17,276 |  | $ | 624,480 |

The majority of the Company’s short-term investments are classified within Level 1 or Level 2 of 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 certificates of deposit, commercial paper and municipal 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 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 three-months ended March 31, 2014 or the year ended December 31, 2013, and there were no changes in the Company’s valuation techniques.

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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’s Level 3 assets are comprised of auction rate securities and put options. The Company’s Level 3 valuation utilized a mark-to-model approach which included estimates for interest rates, timing and amount of cash flows, credit and liquidity premiums, as well as expected holding periods for the auction rate securities. These assumptions are typically volatile and subject to change as the underlying data sources and market conditions evolve. A significant change in any single input could have a significant valuation impact; however, no single input has a more significant impact on valuation than another. There were no changes in the Company’s valuation techniques of its Level 3 assets during the three-months ended March 31, 2014.

The following table presents quantitative information related to the significant unobservable inputs utilized in the Company’s Level 3 recurring fair value measurements as of March 31, 2014.

|  | Valuation Technique |  | Unobservable Input |  | Range (Weighted-Average)
Auction Rate Securities: Trading |  | Discounted cash flow |  | Maximum rate probability |  | 0.61%-2.48% (1.53%)
|  |  |  | Principal returned probability |  | 85.58%-94.70% (86.91%)
|  |  |  | Default probability |  | 4.28%-12.18% (11.56%)
|  |  |  | Liquidity risk |  | 3.00%-3.00% (3.00%)
|  |  |  | Recovery rate |  | 60-60 (60)
Put Options |  | Discounted cash flow |  | Counterparty risk |  | 0.43%-0.68% (0.51%)

At March 31, 2014, the Company held auction rate securities with a face value of $15.5 million (amortized cost basis of $14.5 million). A Level 3 valuation was performed on the Company’s auction rate securities as of March 31, 2014 resulting in a fair value of $14.5 million for the Company’s trading auction rate securities (after a $1.0 million impairment), which are included in short-term and long-term investments.

In June 2011, the Company entered into an agreement (the “2011 ARS Agreement”), related to $24.5 million of par value auction rate securities (the “2011 ARS Securities”). Under the 2011 ARS Agreement, the Company has the right to sell the 2011 ARS Securities including all accrued but unpaid interest thereon (the “2011 Put Option”) as follows: (i) on or after July 1, 2013, up to $1.0 million aggregate par value; (ii) on or after October 1, 2013, up to an additional $1.0 million aggregate par value; and (iii) in quarterly installments thereafter based on a formula of the then outstanding 2011 ARS Securities, as adjusted for normal market redemptions, with full sale rights available on or after April 1, 2016. The 2011 ARS Securities will continue to accrue interest until redeemed through the 2011 Put Option, or as determined by the auction process, or should the auction process fail, the terms outlined in the prospectus of the respective 2011 ARS Securities. Under the 2011 ARS Agreement, the Company has the obligation, should it receive written notification from the put issuer, to sell the 2011 ARS Securities at par plus all accrued but unpaid interest. During the three-months ended March 31, 2014, $1.7 million of 2011 ARS Securities were redeemed at par through the exercise of a portion of the 2011 Put Option ($2.3 million, $1.3 million and $3.7 million of par value 2011 ARS Securities were redeemed at par during the years ended December 31, 2013, 2012 and 2011, respectively). Subsequent to March 31, 2014, $1.7 million of 2011 ARS Securities were redeemed at par through the exercise of a portion of the 2011 Put Option. The 2011 Put Option does not meet the definition of derivative instruments under ASC 815. Therefore, the Company elected the fair value option under ASC 825-10 in accounting for the 2011 Put Option. As of March 31, 2014, the Company recorded $1.0 million as the fair market value of the 2011 Put Option, included in prepaid expenses and other current assets, as well as in other assets, in the condensed consolidated balance sheet.

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

The net effect of (i) the revaluation of the 2011 Put Option as of March 31, 2014; (ii) the redemption at par of certain 2011 ARS Securities; and (iii) the revaluation of the Company’s trading auction rate securities as of March 31, 2014 resulted in a loss of $0.001 million, which is included in other income (expense) for the three-months ended March 31, 2014. The net effect of (i) the revaluation of the 2011 Put Option as of March 31, 2013; (ii) the revaluation of the Company’s trading auction rate securities as of March 31, 2013; and (iii) a recognized gain resulting from the redemption of previously other-than-temporary impaired securities resulted in a gain of $2.6 million, which is included in other income (expense) for the three-months ended March 31, 2013.

The following table provides a summary reconciliation of the Company’s financial assets that are recorded at fair value on a recurring basis using significant unobservable inputs (Level 3):

|  | Three-Months Ended March 31, 2014 |  | Three-Months Ended March 31, 2013
|  | Auction Rate Securities |  | Put Options |  | Auction Rate Securities |  | Put Options
Opening Balance |  | $ | 16,184 |  | $ | 1,092 |  | $ | 23,156 |  | $ | 1,929
Transfers into Level 3 |  | - |  | - |  | - |  | -
Transfers out of Level 3 |  | - |  | - |  | - |  | -
Total gains (losses) for the period: |  |  |  |  |  |  |  |
Included in earnings |  | 67 |  | (68) |  | 2,489 |  | 82
Included in other comprehensive income |  | - |  | - |  | (2,483) |  | -
Settlements |  | (1,725) |  | - |  | (5,792) |  | -
Closing Balance |  | $ | 14,526 |  | $ | 1,024 |  | $ | 17,370 |  | $ | 2,011

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 three-months ended March 31, 2014, 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 as of March 31, 2014 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 ASC 815. Therefore, gains and losses on the Company’s foreign currency exchange contracts are recognized in interest and other income (expense), net, in the condensed consolidated statements of income, and are largely offset by the changes in the fair value of the underlying economically hedged item.

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

|  | March 31,2014 |
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 |  | $ | 12,234 |  | $ | 70 |  | Accounts receivable, net |
Receive USD/pay JPY |  | 24,216 |  | 279 |  | Accounts receivable, net |
Liabilities: |  |  |  |  |  |  |
Foreign currency exchange contracts: |  |  |  |  |  |  |
Receive EUR/pay USD |  | $ | 15,577 |  | $ | (8) |  | Accrued liabilities |
Receive USD/pay AUD |  | 9,204 |  | (51) |  | Accrued liabilities |
Receive USD/pay ZAR |  | 14,713 |  | (235) |  | Accrued liabilities |
Receive USD/pay MXN |  | 3,742 |  | (25) |  | Accrued liabilities |
Receive USD/pay CLP |  | 5,106 |  | (46) |  | Accrued liabilities |
Receive USD/pay COP |  | 2,229 |  | (5) |  | Accrued liabilities |

The Company had no foreign currency exchange contracts outstanding at December 31, 2013.

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

|  |  |  | Amount of loss recognized in income on derivatives |
|  |  |  | Three-months ended |
Derivatives not designated as hedging instruments under FASB ASC 815-20 |  | Location of loss recognized in income on derivatives |  | March 31, 2014 |  | March 31, 2013 |
Foreign currency exchange contracts |  | Interest and other income (expense), net |  | $ | 359 |  | $ | - |

6. INVENTORIES

Inventories consist of the following at:

|  | March 31, 2014 |  |  | December 31, 2013 |
Raw materials |  | $ | 64,550 |  |  | $ | 68,088 |
Finished goods |  | 139,511 |  |  | 153,361 |
|  | $ | 204,061 |  |  | $ | 221,449 |

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

7. PROPERTY AND EQUIPMENT, Net

Property and equipment consist of the following at:

|  | March 31, 2014 |  | December 31, 2013
Land |  | $ | 5,382 |  | $ | 5,382
Leasehold improvements |  | 2,737 |  | 2,222
Furniture and fixtures |  | 3,494 |  | 3,474
Office and computer equipment |  | 14,514 |  | 14,135
Computer software |  | 655 |  | 791
Equipment |  | 66,752 |  | 62,552
Buildings |  | 37,980 |  | 33,468
Vehicles |  | 29,860 |  | 30,442
|  | 161,374 |  | 152,466
Less: accumulated depreciation and amortization |  | (69,641) |  | (64,323)
|  | $ | 91,733 |  | $ | 88,143

8. INTANGIBLES, Net

Intangibles consist of the following at:

|  | March 31, 2014 |  | December 31, 2013
Amortizing intangibles |  | $ | 1,140 |  | $ | 1,076
Accumulated amortization |  | (665) |  | (590)
|  | 475 |  | 486
Non-amortizing intangibles |  | 65,050 |  | 65,288
|  | $ | 65,525 |  | $ | 65,774

All amortizing intangibles have been assigned an estimated useful life and such intangibles are amortized on a straight-line basis over the number of years that approximate their respective useful lives ranging from one to 25 years (weighted-average life of 19 years). Amortization expense was $0.1 million and $0.01 million for the three-months ended March 31, 2014 and 2013, respectively.

9. DISTRIBUTION AGREEMENTS

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, have been accounted for as deferred revenue in the accompanying condensed consolidated balance sheets and are recognized as revenue ratably over the anticipated life of the respective distribution agreement, generally 20 years. Revenue recognized was $1.9 million and $2.4 million for the three-months ended March 31, 2014 and 2013, respectively.

The Company incurred termination costs to certain of its prior distributors amounting to $0.01 million and $8.3 million in aggregate for the three-months ended March 31, 2014 and 2013, respectively. Such termination costs have been expensed in full and are included in operating expenses for the three-months ended March 31, 2014 and 2013.

10. COMMITMENTS AND CONTINGENCIES

The Company had purchase commitments aggregating approximately $31.3 million at March 31, 2014, which represented 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.

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The Company had contractual obligations aggregating approximately $92.9 million at March 31, 2014, which related primarily to sponsorships and other marketing activities.

The Company had operating lease commitments aggregating approximately $14.8 million at March 31, 2014, which related primarily to warehouse and office space.

Value Added Tax (“VAT”) – The Company sought guidance from Her Majesty’s Revenue & Customs (“HMRC”), the VAT taxing authority in the United Kingdom, to determine if the Company should have charged VAT in the United Kingdom on a portion of the Company’s sales beginning May 26, 2010. The Company did not receive conclusive guidance from HMRC and has taken the position that it should only have charged VAT beginning October 3, 2013, pursuant to a new production agreement effective on this date. As a result, the Company has recorded for the period from October 3, 2013 to March 31, 2014, an $8.7 million VAT receivable and an $8.7 million VAT payable included in accounts receivable, net and accrued liabilities, respectively, in the accompanying condensed consolidated balance sheet at March 31, 2014.

Should it be determined that VAT should have been charged on such sales beginning on May 26, 2010, such VAT would represent a pass-through tax in the United Kingdom and would result in an adjustment to accounts receivable and a corresponding adjustment to accrued liabilities on the balance sheet and have no impact on the Company’s results of operations. The Company estimates the maximum amount of the potential VAT pass-through tax for the period beginning on May 26, 2010 through October 3, 2013 to be $47.1 million. If it is determined that the Company should have charged VAT on such sales prior to October 3, 2013, it is possible that a tax penalty may be assessed by HMRC. However, the Company believes that any such penalty would not have a material impact on its financial position, results of operations or liquidity.

Litigation – On October 17, 2012, Wendy Crossland and Richard Fournier filed a lawsuit in the Superior Court of the State of California, County of Riverside, styled Wendy Crossland and Richard Fournier v. Monster Beverage Corporation, against the Company claiming that the death of their 14 year old daughter (Anais Fournier) was caused by her consumption of two 24-ounce Monster Energy® drinks over the course of two days in December 2011. The plaintiffs allege strict product liability, negligence, fraudulent concealment, breach of implied warranties and wrongful death. The plaintiffs claim general damages in excess of $25,000 and punitive damages. The Company filed a demurrer and a motion to strike the plaintiffs’ complaint on November 19, 2012, and the plaintiffs filed a first amended complaint on December 19, 2012. The Company filed its answer to the first amended complaint on June 7, 2013. The parties attended a court ordered mediation on January 23, 2014. Discovery has commenced but no trial date has been set. The Company believes that the plaintiffs’ complaint is without merit and plans a vigorous defense. The Company also believes that any such damages, if awarded, would not have a material adverse effect on the Company’s financial position or results of operations.

The Company has also been named as a defendant in other complaints containing similar allegations to those presented in the Fournier lawsuit, each of which the Company believes is also without merit and would not have a material adverse effect on the Company’s financial position or results of operations in the event any damages were awarded.

Securities Litigation – On September 11, 2008, a federal securities class action complaint styled Cunha v. Hansen Natural Corp., et al. was filed in the United States District Court for the Central District of California (the “District Court”). On September 17, 2008, a second federal securities class action complaint styled Brown v. Hansen Natural Corp., et al. was also filed in the District Court. After the District Court consolidated the two actions and appointed the Structural Ironworkers Local Union #1 Pension Fund as lead plaintiff, a Consolidated Complaint for Violations of Federal Securities Laws was filed on August 28, 2009 (the “Consolidated Class Action Complaint”).

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The Consolidated Class Action Complaint purported to be brought on behalf of a class of purchasers of the Company’s stock during the period November 9, 2006 through November 8, 2007 (the “Class Period”). It named as defendants the Company, Rodney C. Sacks, Hilton H. Schlosberg, and Thomas J. Kelly. Plaintiff principally alleged that, during the Class Period, the defendants made false and misleading statements relating to the Company’s distribution coordination agreements with Anheuser-Busch, Inc. (“AB”) and its sales of “Allied” energy drink lines, and engaged in sales of shares in the Company on the basis of material non-public information. Plaintiff also alleged that the Company’s financial statements for the second quarter of 2007 did not include certain promotional expenses. The Consolidated Class Action Complaint alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 10b-5 promulgated thereunder, and sought an unspecified amount of damages.

The District Court dismissed the Consolidated Class Action Complaint, with leave to amend, on July 12, 2010. Plaintiff thereafter filed a Consolidated Amended Class Action Complaint for Violations of Federal Securities Laws on August 27, 2010 (the “Amended Class Action Complaint”). While similar in many respects to the Consolidated Class Action Complaint, the Amended Class Action Complaint dropped certain of the allegations set forth in the Consolidated Class Action Complaint and made certain new allegations, including that the Company engaged in “channel stuffing” during the Class Period that rendered false or misleading the Company’s reported sales results and certain other statements made by the defendants. In addition, it no longer named Thomas J. Kelly as a defendant.

On September 4, 2012, the District Court dismissed certain of the claims in the Amended Class Action Complaint, including plaintiff’s allegations relating to promotional expenses, but denied defendants’ motion to dismiss with regard to the majority of plaintiff’s claims, including plaintiff’s channel stuffing allegations. Plaintiff filed a motion seeking class certification on December 6, 2012, which the court denied, without prejudice, on January 17, 2014.

Following a mediation conducted by an independent mediator, the Company entered into a Stipulation of Settlement on April 16, 2014 that, if approved by the District Court, will resolve the litigation and result in the action being dismissed with prejudice. A preliminary approval hearing with respect to the proposed settlement is scheduled for June 19, 2014.

Under the terms of the proposed settlement, the Company has agreed that certain of its insurance carriers will pay $16.25 million into an escrow account for distribution to a proposed settlement class, certified by the District Court for settlement purposes only and consisting of all persons who purchased or otherwise acquired the Company’s stock during the Class Period. Excluded from the proposed settlement class are the Company’s officers and directors, members of their immediate families and their legal representatives, heirs, successors or assigns and any entity in which defendants have or had a controlling interest, as well as any putative member of the settlement class who submits a valid and timely request for exclusion in the manner ultimately approved by the District Court. Under the proposed settlement, defendants and various of their related persons and entities will receive a full release of all claims that were or could have been brought in the action as well as all claims that arise out of, are based upon or relate to the allegations, transactions, facts, representations, omissions or other matters involved in the complaints filed in the action or any statement communicated to the public during the Class Period, and the purchase, acquisition or sale of the Company’s stock during the Class Period.

The proposed settlement contains no admission of any liability or wrongdoing on the part of the defendants, each of whom continues to deny all of the allegations against them and believes that the claims are without merit. Because the full amount of the proposed settlement will be paid by the Company’s insurance carriers, the settlement will not have an effect on the Company’s results of operations.

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State Attorney General Inquiry – In July 2012, the Company received a subpoena from a state attorney general in connection with an investigation concerning the Company’s advertising, marketing, promotion, ingredients, usage and sale of its Monster Energy® brand of energy drinks. 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.

San Francisco City Attorney Litigation. On October 31, 2012, the Company received a written request for information from the City Attorney for the City and County of San Francisco concerning the Company’s advertising and marketing of its Monster Energy® brand of energy drinks and specifically concerning the safety of its products for consumption by adolescents. In a letter dated March 29, 2013, the San Francisco City Attorney threatened to bring suit against the Company if it did not agree to take the following five steps immediately: (i) “Reformulate its products to lower the caffeine content to safe levels”; (ii) “Provide adequate warning labels”; (iii) “Cease promoting over-consumption in marketing”; (iv) “Cease use of alcohol and drug references in marketing”; and (v) “Cease targeting minors.”

On April 29, 2013, the Company and its wholly owned subsidiary, Monster Energy Company, filed a complaint for declaratory and injunctive relief against the San Francisco City Attorney in United States District Court for the Central District of California (the “Central District Court”), styled Monster Beverage Corp., et al. v. Dennis Herrera. The Company seeks a declaration from the Central District Court that the San Francisco City Attorney’s investigation and demands are impermissible and preempted, subject to the doctrine of primary jurisdiction, are unconstitutional in that they violate the First and Fourteenth Amendments’ prohibitions against compelled speech, content-based speech and commercial speech, are impermissibly void-for-vagueness, and/or violate the Commerce Clause. On June 3, 2013, the City Attorney filed a motion to dismiss the Company’s complaint, arguing in part that the complaint should be dismissed in light of the San Francisco Action (described below) filed on May 6, 2013. On August 22, 2013, the Central District Court granted in part and denied in part the City Attorney’s motion.

On May 6, 2013, the San Francisco City Attorney filed a complaint for declaratory and injunctive relief, civil penalties and restitution for alleged violation of California’s Unfair Competition Law, Business & Professions Code sections 17200, et seq., styled People Of The State Of California ex rel. Dennis Herrera, San Francisco City Attorney v. Monster Beverage Corporation, in San Francisco Superior Court (the “San Francisco Action”). The City Attorney alleges that the Company (1) mislabeled its products as a dietary supplement, in violation of California’s Sherman Food, Drug and Cosmetic Law, California Health & Safety Code sections 109875 et. seq.; (2) is selling an “adulterated” product because caffeine is not generally recognized as safe (“GRAS”) due to the alleged lack of scientific consensus concerning the safety of the levels of caffeine in the Company’s products; and (3) is engaged in unfair and misleading business practices because its marketing (a) does not disclose the health risks that energy drinks pose for children and teens; (b) fails to warn against and promotes unsafe consumption; (c) implicitly promotes mixing of energy drinks with alcohol or drugs; and (d) is deceptive because it includes unsubstantiated claims about the purported special benefits of its “killer” ingredients and “energy blend.” The City Attorney seeks a declaration that the Company has engaged in unfair and unlawful business acts and practices in violation of the Unfair Competition Law; an injunction from performing or proposing to perform any acts in violation of the Unfair Competition Law; restitution; and civil penalties. On June 3, 2013, the Company removed the case to the United States District Court for the Northern District of California (the “Northern District Court”). On July 3, 2013, the City Attorney filed a motion to remand the case back to state court. On September 18, 2013, the Northern District Court granted the City Attorney’s motion to remand the San Francisco Action back to state court.

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On October 17, 2013 (after the San Francisco Action described above was remanded to San Francisco Superior Court), the City Attorney filed a renewed motion to dismiss and on December 16, 2013, the Central District Court granted the City Attorney’s renewed motion, dismissing the action. The Company filed a Notice of Appeal to the Ninth Circuit on December 18, 2013.

On January 15, 2014, the Company filed a demurrer to and motion to strike allegations in the complaint in the San Francisco Action. On March 5, 2014, the Court overruled the demurrer, granted the motion to strike as to one theory for relief pleaded by the City Attorney, and lifted the stay on discovery.

On March 20, 2014, the City Attorney filed an amended complaint, adding allegations supporting the theory for relief as to which the Court had granted the motion to strike. On April 18, 2014, the Company filed a renewed motion to strike, challenging the theory for relief previously rejected by the Court, as well as a motion asking the Court to bifurcate and/or stay claims relating to the safety of Monster Energy® drinks, pending resolution of the ongoing FDA investigation of the safety and labeling of food products to which caffeine is added. These motions are calendared for hearing on May 21, 2014.

The Company denies that it has violated the Unfair Competition Law or any other law and believes that the City Attorney’s claims and demands are preempted and unconstitutional, as alleged in the action the Company filed in the Central District Court. The Company intends to vigorously defend against this lawsuit. At this time, no evaluation of the likelihood of an unfavorable outcome or range of potential loss can be expressed.

In addition to the above matters, the Company has been named as a defendant in various false advertising putative class actions and in a private attorney general action. In these actions, plaintiffs allege that defendants misleadingly labeled and advertised Monster Energy® brand products that allegedly were ineffective for the advertised benefits (including, but not limited to, an allegation that the products do not hydrate as advertised because they contain caffeine). The plaintiffs further allege that the Monster Energy® brand products at issue are unsafe because they contain one or more ingredients that allegedly could result in illness, injury or death. In connection with these product safety allegations, the plaintiffs claim that the product labels did not provide adequate warnings and/or that the Company did not include sufficiently specific statements with respect to contra-indications and/or adverse reactions associated with the consumption of its energy drink products (including, but not limited to, claims that certain ingredients, when consumed individually or in combination with other ingredients, could result in high blood pressure, palpitations, liver damage or other negative health effects and/or that the products themselves are unsafe). Based on these allegations, the plaintiffs assert claims for violation of state consumer protection statutes, including unfair competition and false advertising statutes, and for breach of warranty and unjust enrichment. In their prayers for relief, the plaintiffs seek, inter alia, compensatory and punitive damages, restitution, attorneys’ fees, and, in some cases, injunctive relief. The Company regards these cases and allegations as having no merit. Furthermore, the Company is subject to litigation from time to time in the normal course of business, including intellectual property litigation and claims from terminated distributors. Although it is not possible to predict the 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.

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

11. ACCUMULATED OTHER COMPREHENSIVE LOSS

Changes in accumulated other comprehensive loss by component, after tax, for the three-months ended March 31, 2014 are as follows:

|  | Currency Translation Gains (Losses) |  |
Balance at December 31, 2013 |  | $ | (1,233) |  |
Other comprehensive income before reclassifications |  | 102 |  |
Amounts reclassified from accumulated other comprehensive loss |  | - |  |
Net current-period other comprehensive income |  | 102 |  |
Balance at March 31, 2014 |  | $ | (1,131) |  |

12. TREASURY STOCK PURCHASE

On April 7, 2013, the Company’s Board of Directors authorized a new share repurchase program for the repurchase of up to $200.0 million of the Company’s outstanding common stock (the “April 2013 Repurchase Plan”). During the three-months ended March 31, 2014, no shares of common stock were purchased under the April 2013 Repurchase Plan. During the year ended December 31, 2013, the Company purchased 0.951 million shares of common stock at an average purchase price of $56.98 per share for a total amount of $54.2 million (excluding broker commissions) under the April 2013 Repurchase Plan.

During the three-months ended March 31, 2014, 281 shares were purchased from employees in lieu of cash payments for options exercised or withholding taxes due for a total amount of $0.02 million. While such purchases are considered common stock repurchases, they are not counted as purchases against the Company’s authorized share repurchase programs, including the April 2013 Repurchase Plan.

13. STOCK-BASED COMPENSATION

The Company has two stock-based compensation plans under which shares were available for grant at March 31, 2014: the Monster Beverage Corporation 2011 Omnibus Incentive Plan (the “2011 Omnibus Incentive Plan”) and the 2009 Monster Beverage Corporation Stock Incentive Plan for Non-Employee Directors (the “2009 Directors Plan”).

The Company recorded $7.0 million of compensation expense relating to outstanding options, restricted stock awards, stock appreciation rights and restricted stock units for both the three-months ended March 31, 2014 and 2013.

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 three-months ended March 31, 2014 and 2013 was $2.6 million and $0.2 million, respectively.

Stock Options

Under the Company’s stock-based compensation plans, all stock options granted as of March 31, 2014 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

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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.

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

|  | Three-Months Ended March 31, |
|  | 2014 |  | 2013 |
Dividend yield |  | 0.0 % |  | 0.0 % |
Expected volatility |  | 43.1 % |  | 47.8 % |
Risk-free interest rate |  | 1.6 % |  | 0.9 % |
Expected term |  | 5.9 years |  | 5.4 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:

|  |  |  |  |  | Weighted- |  |  |
|  |  |  | Weighted- |  | Average |  |  |
|  |  |  | Average |  | Remaining |  |  |
|  | Number of |  | Exercise |  | Contractual |  |  |
|  | Shares (In |  | Price Per |  | Term (In |  | Aggregate |
Options |  | thousands) |  | Share |  | years) |  | Intrinsic Value |
Outstanding at January 1, 2014 |  | 12,973 |  | $ | 15.70 |  | 3.7 |  | $ | 675,595 |
Granted |  | 689 |  | $ | 70.06 |  |  |  |  |
Exercised |  | (235) |  | $ | 24.33 |  |  |  |  |
Cancelled or forfeited |  | (16) |  | $ | 47.09 |  |  |  |  |
Outstanding at March 31, 2014 |  | 13,411 |  | $ | 18.30 |  | 3.8 |  | $ | 686,398 |
Vested and expected to vest in the future at March 31, 2014 |  | 12,905 |  | $ | 16.92 |  | 3.6 |  | $ | 678,326 |
Exercisable at March 31, 2014 |  | 10,323 |  | $ | 9.45 |  | 2.4 |  | $ | 619,368 |

The weighted-average grant-date fair value of options granted during the three-months ended March 31, 2014 and 2013 was $29.86 per share and $20.52 per share, respectively. The total intrinsic value of options exercised during the three-months ended March 31, 2014 and 2013 was $11.4 million and $3.3 million, respectively.

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Cash received from option exercises under all plans for the three-months ended March 31, 2014 and 2013 was approximately $5.7 million and $2.4 million, respectively.

At March 31, 2014, there was $56.2 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 2.8 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.

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

|  | Number of Shares (in thousands) |  | Weighted Average Grant-Date Fair Value |
Non-vested at January 1, 2014 |  | 391 |  |  | $ | 49.27 |
Granted |  | - |  |  | $ | - |
Vested |  | (17 | ) |  | $ | 57.18 |
Forfeited/cancelled |  | (6 | ) |  | $ | 57.30 |
Non-vested at March 31, 2014 |  | 368 |  |  | $ | 48.78 |

No awards were granted during the three-months ended March 31, 2014. The weighted-average grant-date fair value of restricted stock units and restricted stock awards granted during the three-months ended March 31, 2013 was $50.89 per share. As of March 31, 2014, 0.3 million of restricted stock units and restricted stock awards are expected to vest over their respective terms.

At March 31, 2014, total unrecognized compensation expense relating to non-vested restricted stock awards and non-vested restricted stock units was $10.9 million, which is expected to be recognized over a weighted-average period of 1.9 years.

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

14. INCOME TAXES

The following is a roll-forward of the Company’s total gross unrecognized tax benefits, not including interest and penalties, for the three-months ended March 31, 2014:

|  | Gross Unrecognized Tax Benefits |  |
Balance at December 31, 2013 |  | $ | 935 |  |
Additions for tax positions related to the current year |  | - |  |
Additions for tax positions related to the prior year |  | - |  |
Decreases related to settlement with taxing authority |  | - |  |
Balance at March 31, 2014 |  | $ | 935 |  |

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes in the Company’s condensed consolidated financial statements. As of March 31, 2014, the Company had accrued approximately $0.4 million in interest and penalties related to unrecognized tax benefits. If the Company were to prevail on all uncertain tax positions, the resultant impact on the Company’s effective tax rate would not be significant. It is expected that the amount of unrecognized tax benefits will not change within the next 12 months.

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

On March 8, 2013, the Internal Revenue Service (“IRS”) began its examination of the Company’s U.S. federal income tax returns for the years ended December 31, 2010 and 2011. The Company is also in various stages of examination with certain states. The 2012 U.S. federal income tax return is subject to IRS examination. State income tax returns are subject to examination for the 2009 through 2012 tax years.

15. EARNINGS PER SHARE

A reconciliation of the weighted-average shares used in the basic and diluted earnings per common share computations is presented below:

|  | Three-Months Ended |
|  | March 31, |
|  | 2014 |  | 2013 |
Weighted-average shares outstanding: |  |  |  |  |
Basic |  | 166,913 |  | 165,525 |
Dilutive securities |  | 6,828 |  | 7,034 |
Diluted |  | 173,741 |  | 172,559 |

For the three-months ended March 31, 2014 and 2013, options and awards outstanding totaling 0.6 million shares and 0.8 million shares, respectively, were excluded from the calculations as their effect would have been antidilutive.

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

16. SEGMENT INFORMATION

The Company has two reportable segments, namely Direct Store Delivery (“DSD”), whose principal products comprise energy drinks, and Warehouse (“Warehouse”), whose principal products comprise juice-based and soda beverages. The DSD segment develops, markets and sells products primarily through an exclusive distributor network, whereas the Warehouse segment develops, markets and sells products primarily direct to retailers. Corporate and unallocated amounts that do not relate to DSD or Warehouse segments have been allocated to “Corporate & Unallocated.”

The net revenues derived from the DSD and Warehouse segments and other financial information related thereto are as follows:

|  | Three-Months Ended March 31, 2014
|  | DSD |  | Warehouse |  | Corporate and Unallocated |  | Total
Net sales |  | $ | 514,355 |  |  | $ | 21,774 |  |  | $ | - |  |  | $ | 536,129 |
Contribution margin |  | 186,468 |  |  | 296 |  |  | - |  |  | 186,764 |
Corporate and unallocated expenses |  | - |  |  | - |  |  | (37,901 | ) |  | (37,901 | )
Operating income |  |  |  |  |  |  |  |  |  |  | 148,863 |
Other income (expense) |  | 26 |  |  | - |  |  | 128 |  |  | 154 |
Income before provision for income taxes |  |  |  |  |  |  |  |  |  |  | 149,017 |
Depreciation and amortization |  | (4,944 | ) |  | (81 | ) |  | (1,428 | ) |  | (6,453 | )
|  | Three-Months Ended March 31, 2013
|  | DSD |  | Warehouse |  | Corporate and Unallocated |  | Total
Net sales |  | $ | 460,175 |  |  | $ | 24,048 |  |  | $ | - |  |  | $ | 484,223 |
Contribution margin |  | 138,974 |  |  | 382 |  |  | - |  |  | 139,356 |
Corporate and unallocated expenses |  | - |  |  | - |  |  | (32,050 | ) |  | (32,050 | )
Operating income |  |  |  |  |  |  |  |  |  |  | 107,306 |
Other income (expense) |  | 188 |  |  | - |  |  | (2,090 | ) |  | (1,902 | )
Income before provision for income taxes |  |  |  |  |  |  |  |  |  |  | 105,404 |
Depreciation and amortization |  | (4,421 | ) |  | (58 | ) |  | (581 | ) |  | (5,060 | )

Revenue is derived from sales to external customers. Operating expenses that pertain to each segment are allocated to the appropriate segment.

Corporate and unallocated expenses were $37.9 million for the three-months ended March 31, 2014 and included $21.1 million of payroll costs, of which $7.0 million was attributable to stock-based compensation expense (see Note 13, “Stock-Based Compensation”), $10.1 million attributable to professional service expenses, including accounting and legal costs and $6.7 million of other operating expenses. Corporate and unallocated expenses were $32.0 million for the three-months ended March 31, 2013 and included $19.4 million of payroll costs, of which $7.0 million was attributable to stock-based compensation expense (see Note 13, “Stock-Based Compensation”), $7.6 million attributable to professional service expenses, including accounting and legal costs and $5.0 million attributable to other operating expenses.

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Coca-Cola Refreshments USA Inc. (“CCR”), a customer of the DSD segment, accounted for approximately 31% and 30% of the Company’s net sales for the three-months ended March 31, 2014 and 2013, respectively.

Net sales to customers outside the United States amounted to $115.8 million and $106.3 million for the three-months ended March 31, 2014 and 2013, respectively.

The Company’s net sales by product line were as follows:

|  | Three-Months Ended
|  | March 31,
Product Line |  | 2014 |  |  | 2013 |
Energy drinks |  | $ | 499,013 |  |  | $ | 446,026 |
Non-carbonated (primarily juice based beverages and Peace Tea® iced teas) |  | 26,446 |  |  | 27,972 |
Carbonated (primarily soda beverages) |  | 7,014 |  |  | 6,401 |
Other |  | 3,656 |  |  | 3,824 |
|  | $ | 536,129 |  |  | $ | 484,223 |

17. RELATED PARTY TRANSACTIONS

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 three-months ended March 31, 2014 and 2013 were $0.07 million and $0.2 million, respectively.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our Business

Overview

Monster Beverage Corporation was incorporated in Delaware on April 25, 1990. Our principal place of business is located at 1 Monster Way, Corona, California 92879 and our telephone number is (951) 739-6200. When this report uses the words “the Company”, “Hansen Natural Corporation” (the Company’s former name), “we”, “us”, and “our”, these words refer to Monster Beverage Corporation and its subsidiaries, unless the context otherwise requires. We are a holding company and conduct no operating business except through our consolidated subsidiaries.

We develop, market, sell and distribute “alternative” beverage category beverages primarily under the following brand names:

· Monster Energy® |  | · Hansen’s®
· Monster Rehab® |  | · Hansen’s Natural Cane Soda®
· Monster Energy Extra Strength Nitrous Technology® |  | · Junior Juice®
· Java Monster® |  | · Blue Sky®
· X-Presso Monster® |  | · Hubert’s®
· Muscle Monster® |  | · Worx Energy®
· Punch Monster™ |  | · Peace Tea®

Our Monster Energy® drinks, which represented 92.9% and 91.9% of our net sales for the three-months ended March 31, 2014 and 2013, respectively, include the following:

· Monster Energy® |  | · Java Monster® Kona Blend
· Lo-Carb Monster Energy® |  | · Java Monster® Loca Moca®
· Monster Assault® |  | · Java Monster® Mean Bean®
· Monster Khaos® |  | · Java Monster® Vanilla Light
· Monster M-80® (named Ripper® in certain countries) |  | · Java Monster® Irish Blend®
· Monster Energy® Absolutely Zero |  | · Java Monster® Toffee
· Monster Energy® Import |  | · Java Monster® Kona Cappuccino™
· Monster Energy® Import Light |  | · Monster Energy Extra Strength Nitrous Technology® Super Dry™
· Punch Monster™ Baller’s Blend (formerly Dub Edition) |
· Punch Monster™ Mad Dog (formerly Dub Edition) |  | · Monster Energy Extra Strength Nitrous Technology® Anti-Gravity®
· Monster Rehab® Tea + Lemonade + Energy |
· Monster Rehab® Rojo Tea + Energy |  | · Monster Energy Extra Strength Nitrous Technology® Black Ice™
· Monster Rehab® Green Tea + Energy |
· Monster Rehab® Protean + Energy |  | · X-Presso Monster® Hammer
· Monster Rehab® Tea + Orangeade + Energy |  | · X-Presso Monster® Midnite
· Monster Rehab® Tea + Pink Lemonade + Energy |  | · Monster Cuba-Lima®
· Muscle Monster® Vanilla |  | · Monster Energy® Zero Ultra
· Muscle Monster® Chocolate |  | · Monster Energy® Ultra Blue™
· Muscle Monster® Coffee |  | · Monster Energy® Ultra Red™
· Muscle Monster® Strawberry |  | · M3® Monster Energy® Super Concentrate
· Muscle Monster® Peanut Butter Cup |  | · Übermonster® Energy Brew

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We have two reportable segments, namely Direct Store Delivery (“DSD”), whose principal products comprise energy drinks, and Warehouse (“Warehouse”), whose principal products comprise juice-based and soda beverages. The DSD segment develops, markets and sells products primarily through an exclusive distributor network, whereas the Warehouse segment develops, markets and sells products primarily direct to retailers.

During the three-months ended March 31, 2014, we continued to expand our existing product lines and flavors and further developed our markets. In particular, we continued to focus on developing and marketing beverages that fall within the category generally described as the “alternative” beverage category. During the three-months ended March 31, 2014, we introduced the following products:

· Punch Monster™ Baller’s Blend (formerly Dub Edition) (January 2014).

· Punch Monster™ Mad Dog (formerly Dub Edition) (January 2014).

· Peace Tea Beverage Company™ Viva Mango™, a mango flavored juice drink (February 2014).

In the normal course of business we discontinue certain products and/or product lines. Those products or product lines discontinued during the three-months ended March 31, 2014, either individually or in aggregate, did not have a material adverse impact on our financial position, results of operations or liquidity.

Our gross sales (as defined below) of $613.7 million for the three-months ended March 31, 2014 represented record sales for our first fiscal quarter. The vast majority of our gross sales are derived from our Monster Energy® brand energy drinks. Gross sales of our Monster Energy® brand energy drinks were $576.5 million for the three-months ended March 31, 2014, an increase of $55.3 million, or 94.2% of our overall increase in gross sales for the three-months ended March 31, 2014.

Our DSD segment represented 95.9% and 95.0% of our consolidated net sales for the three-months ended March 31, 2014 and 2013, respectively. Our Warehouse segment represented 4.1% and 5.0% of our consolidated net sales for the three-months ended March 31, 2014 and 2013, respectively.

Our sales and marketing strategy for all our beverages is to focus our efforts on developing brand awareness through image enhancing programs and product sampling. We use our branded vehicles and other promotional vehicles at events where we offer samples of our products to consumers. We utilize “push-pull” methods to enhance shelf and display space exposure in sales outlets (including advertising, in-store promotions and in-store placement of point-of-sale materials, racks, coolers and barrel coolers) to encourage demand from consumers for our products. We also support our brands with prize promotions, price promotions, competitions, endorsements from selected public and sports figures, personality endorsements (including from television and other well-known sports personalities), coupons, sampling and sponsorship of selected causes, events, athletes and teams. In-store posters, outdoor posters, print, radio and television advertising (directly and through our sponsorships and endorsements) and coupons may also be used to promote our brands.

We believe that one of the keys to success in the beverage industry is differentiation, making our brands and products visually distinctive from other beverages on the shelves of retailers. We review our products and packaging on an ongoing basis and, where practical, endeavor to make them different, better and unique. The labels and graphics for many of our products are redesigned from time to time to maximize their visibility and identification, wherever they may be placed in stores, which we will continue to reevaluate from time to time.

All of our beverage products are manufactured by various third party bottlers and co-packers situated throughout the United States and abroad, under separate arrangements with each party.

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Our growth strategy includes expanding our international business. Gross sales to customers outside the United States amounted to $144.3 million and $130.7 million for the three-months ended March 31, 2014 and 2013, respectively. Such sales were approximately 23% of gross sales for both the three-months ended March 31, 2014 and 2013.

Our customers are primarily full service beverage distributors, retail grocery and specialty chains, wholesalers, club stores, drug chains, mass merchandisers, convenience chains, health food distributors, food service customers and the military. Gross sales to our various customer types for the three-months ended March 31, 2014 and 2013 are reflected below. Such information includes sales made by us directly to the customer types concerned, which include our full service beverage distributors in the United States. Such full service beverage distributors in turn sell certain of our products to some of the same customer types listed below. We limit our description of our customer types to include only our sales to such full service distributors without reference to such distributors’ sales to their own customers.

|  | Three-Months Ended March 31,
|  | 2014 |  | 2013
Full service distributors |  | 62% |  | 62%
Club stores, drug chains & mass merchandisers |  | 9% |  | 10%
Outside the U.S. |  | 23% |  | 23%
Retail grocery, specialty chains and wholesalers |  | 4% |  | 3%
Other |  | 2% |  | 2%

Our customers include Coca-Cola Refreshments USA Inc. (“CCR”), Coca-Cola Enterprises, Coca-Cola Refreshments Canada, Ltd. (formerly known as Coca-Cola Bottling Company), CCBCC Operations, LLC, United Bottling Contracts Company, LLC, certain bottlers of the Coca-Cola Hellenic Bottling Company, Swire Coca-Cola, USA and certain other Coca-Cola Company independent bottlers, Anheuser-Busch, Inc. (“AB”), select independent AB distributors, Asahi, Kalil Bottling Group, Wal-Mart, Inc. (including Sam’s Club) and Costco. A decision by any large customer to decrease amounts purchased from us or to cease carrying our products could have a material negative effect on our financial condition and consolidated results of operations. CCR accounted for approximately 31% and 30% of our net sales for the three-months ended March 31, 2014 and 2013, respectively.

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Results of Operations

The following table sets forth key statistics for the three-months ended March 31, 2014 and 2013, respectively.

(In thousands, except per share amounts) |  | Three-Months Ended March 31, |  | Percentage Change |
|  | 2014 |  | 2013 |  | 14 vs. 13 |
Gross sales, net of discounts & returns * |  | $ | 613,723 |  | $ | 554,951 |  | 10.6% |
Less: Promotional and other allowances** |  | 77,594 |  | 70,728 |  | 9.7% |
Net sales |  | 536,129 |  | 484,223 |  | 10.7% |
Cost of sales |  | 249,311 |  | 232,184 |  | 7.4% |
Gross profit*** |  | 286,818 |  | 252,039 |  | 13.8% |
Gross profit as a percentage of net sales |  | 53.5% |  | 52.1% |  |  |
Operating expenses 1 |  | 137,955 |  | 144,733 |  | (4.7%) |
Operating expenses as a percentage of net sales |  | 25.7% |  | 29.9% |  |  |
Operating income |  | 148,863 |  | 107,306 |  | 38.7% |
Operating income as a percentage of net sales |  | 27.8% |  | 22.2% |  |  |
Other income (expense): |  |  |  |  |  |  |
Interest and other income (expense), net |  | 155 |  | (4,473) |  | 103.5% |
(Loss) gain on investments and put options, net |  | (1) |  | 2,571 |  | 100.0% |
Total other income (expense) |  | 154 |  | (1,902) |  | 108.1% |
Income before provision for income taxes |  | 149,017 |  | 105,404 |  | 41.4% |
Provision for income taxes |  | 53,767 |  | 41,908 |  | 28.3% |
Income taxes as a percentage of income before taxes |  | 36.1% |  | 39.8% |  |  |
Net income |  | $ | 95,250 |  | $ | 63,496 |  | 50.0% |
Net income as a percentage of net sales |  | 17.8% |  | 13.1% |  |  |
Net income per common share: |  |  |  |  |  |  |
Basic |  |  | $0.57 |  |  | $0.38 |  | 48.8% |
Diluted |  |  | $0.55 |  |  | $0.37 |  | 49.0% |
Case sales (in thousands) |  |  |  |  |  |  |
(in 192-ounce case equivalents) |  | 51,926 |  | 47,749 |  | 8.7% |

1 Includes $0.01 million and $8.3 million for the three-months ended March 31, 2014 and 2013, respectively, related to expenditures attributable to the costs associated with terminating existing distributors.

*Gross sales is used internally by management as an indicator of and to monitor operating performance, including sales performance of particular products, salesperson performance, product growth or declines and overall Company performance. The use of gross sales allows evaluation of sales performance before the effect of any promotional items, which can mask certain performance issues. We therefore believe that the presentation of gross sales provides a useful

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measure of our operating performance. Gross sales is not a measure that is recognized under GAAP and should not be considered as an alternative to net sales, which is determined in accordance with GAAP, and should not be used alone as an indicator of operating performance in place of net sales. Additionally, gross sales may not be comparable to similarly titled measures used by other companies, as gross sales has been defined by our internal reporting practices. In addition, gross sales may not be realized in the form of cash receipts as promotional payments and allowances may be deducted from payments received from certain customers.

** Although the expenditures described in this line item are determined in accordance with GAAP and meet GAAP requirements, the disclosure thereof does not conform with GAAP presentation requirements. Additionally, our definition of promotional and other allowances may not be comparable to similar items presented by other companies. Promotional and other allowances primarily include consideration given to the Company’s distributors or retail customers including, but not limited to the following: (i) discounts granted off list prices to support price promotions to end-consumers by retailers; (ii) reimbursements given to the Company’s distributors for agreed portions of their promotional spend with retailers, including slotting, shelf space allowances and other fees for both new and existing products; (iii) the Company’s agreed share of fees given to distributors and/or directly to retailers for advertising, in-store marketing and promotional activities; (iv) the Company’s agreed share of slotting, shelf space allowances and other fees given directly to retailers; (v) incentives given to the Company’s distributors and/or retailers for achieving or exceeding certain predetermined sales goals; (vi) discounted or free products; (vii) contractual fees given to the Company’s distributors related to sales made by the Company direct to certain customers that fall within the distributors’ sales territories; and (viii) commissions paid to our customers. The presentation of promotional and other allowances facilitates an evaluation of their impact on the determination of net sales and the spending levels incurred or correlated with such sales. Promotional and other allowances constitute a material portion of our marketing activities. The Company’s promotional allowance programs with its numerous 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, ranging from one week to one year.

***Gross profit may not be comparable to that of other entities since some entities include all costs associated with their distribution process in cost of sales, whereas others exclude certain costs and instead include such costs within another line item such as operating expenses. We include out-bound freight and warehouse costs in operating expenses rather than in cost of sales.

Results of Operations for the Three-Months Ended March 31, 2014 Compared to the Three-Months Ended March 31, 2013.

Gross Sales. Gross sales were $613.7 million for the three-months ended March 31, 2014, an increase of approximately $58.8 million, or 10.6% higher than gross sales of $555.0 million for the three-months ended March 31, 2013. The increase in the gross sales of our Monster Energy® brand energy drinks represented approximately $55.3 million, or 94.2%, of the overall increase in gross sales. Gross sales of our Monster Energy® brand energy drinks increased primarily due to increased sales by volume as a result of increased domestic and international consumer demand as well as our expansion into new international markets. Pricing changes did not have a material impact on the increase in gross sales. No other individual product line contributed either a material increase or decrease to gross sales for the three-months ended March 31, 2014. Promotional and other allowances, as described in the footnote above, were $77.6 million for the three-months ended March 31, 2014, an increase of $6.9 million, or 9.7% higher than promotional and other allowances of $70.7 million for the three-months ended March 31, 2013. Promotional and other allowances as a percentage of gross sales decreased to 12.6% from 12.7% for the three-months ended March 31, 2014 and 2013, respectively. As a result, the percentage increase in net sales for the three-months ended March 31, 2014 was slightly higher than the percentage increase in gross sales.

Net Sales. Net sales were $536.1 million for the three-months ended March 31, 2014, an increase of approximately $51.9 million, or 10.7% higher than net sales of $484.2 million for the three-months ended March 31, 2013. The increase in net sales of our Monster Energy® brand energy drinks represented approximately $52.8 million, or 101.8%, of the overall increase in net sales. Net sales of our Monster Energy® brand energy drinks increased primarily due to increased sales by volume as a result of increased domestic and international consumer demand as well as our expansion into new international markets. Pricing changes did not have a material impact on the increase in net sales. No other individual product line contributed either a material increase or decrease to net sales for the three-months ended March 31, 2014.

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Case sales, in 192-ounce case equivalents, were 51.9 million cases for the three-months ended March 31, 2014, an increase of approximately 4.2 million cases or 8.7% higher than case sales of 47.7 million cases for the three-months ended March 31, 2013. The overall average net sales per case increased to $10.32 for the three-months ended March 31, 2014, which was 1.8% higher than the average net sales per case of $10.14 for the three-months ended March 31, 2013.

Net sales for the DSD segment were $514.4 million for the three-months ended March 31, 2014, an increase of approximately $54.2 million, or 11.8% higher than net sales of $460.2 million for the three-months ended March 31, 2013. The increase in net sales of our Monster Energy® brand energy drinks represented approximately $52.8 million, or 97.5%, of the overall increase in net sales for the DSD segment. Net sales for the DSD segment of our Monster Energy® brand energy drinks increased primarily due to increased sales by volume as a result of increased domestic and international consumer demand as well as our expansion into new international markets. Pricing changes did not have a material impact on the increase in net sales for the DSD segment. No other individual product line contributed either a material increase or decrease to net sales for the DSD segment for the three-months ended March 31, 2014.

Net sales for the Warehouse segment were $21.8 million for the three-months ended March 31, 2014, a decrease of approximately $2.3 million, or 9.5% lower than net sales of $24.0 million for the three-months ended March 31, 2013. The decrease in net sales for the Warehouse segment was primarily attributable to decreased sales by volume of Hubert’s® lemonades.

Gross Profit. Gross profit was $286.8 million for the three-months ended March 31, 2014, an increase of approximately $34.8 million, or 13.8% higher than the gross profit of $252.0 million for the three-months ended March 31, 2013. Gross profit as a percentage of net sales increased to 53.5% for the three-months ended March 31, 2014 from 52.1% for the three-months ended March 31, 2013. The increase in gross profit dollars was primarily the result of the $55.3 million increase in gross sales of our Monster Energy® brand energy drinks. The increase in gross profit as a percentage of net sales was largely attributable to changes in product sales mix as well as an increase in production efficiencies.

Operating Expenses. Total operating expenses were $138.0 million for the three-months ended March 31, 2014, a decrease of approximately $6.8 million, or 4.7% lower than total operating expenses of $144.7 million for the three-months ended March 31, 2013. The decrease in operating expenses was partially attributable to decreased expenditures of $8.3 million relating to the costs associated with terminating existing distributors, decreased expenditures of $5.4 million for premiums, decreased expenditures of $1.8 million for allocated trade development and decreased expenditures of $1.3 million for other marketing expenses. The decrease in operating expenses was partially offset by increased out-bound freight and warehouse costs of $2.9 million, increased expenditures of $2.6 million for professional service costs, including legal and accounting fees (of which $2.0 million related to an increase in expenditures for regulatory matters and litigation concerning our Monster Energy® brand energy drinks) and increased payroll expenses of $2.2 million (of which $0.03 million related to an increase in stock-based compensation).

Contribution Margin. Contribution margin for the DSD segment was $186.5 million for the three-months ended March 31, 2014, an increase of approximately $47.5 million, or 34.2% higher than contribution margin of $139.0 million for the three-months ended March 31, 2013. The increase in the contribution margin for the DSD segment was primarily the result of the $55.3 million increase in gross sales of our Monster Energy® brand energy drinks. Contribution margin for the Warehouse segment was $0.3 million for the three-months ended March 31, 2014, approximately $0.1 million lower than contribution margin of $0.4 million for the three-months ended March 31, 2013.

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Operating Income. Operating income was $148.9 million for the three-months ended March 31, 2014, an increase of approximately $41.6 million, or 38.7% higher than operating income of $107.3 million for the three-months ended March 31, 2013. Operating income as a percentage of net sales increased to 27.8% for the three-months ended March 31, 2014 from 22.2% for the three-months ended March 31, 2013, primarily due to the increase in gross profit as a percentage of net sales as well as the decrease in operating expenses as a percentage of net sales. The increase in operating income in dollars was primarily due to an increase of $34.8 million in gross profit as well as a decrease in operating expenses of $6.8 million. Operating income (loss) was $1.9 million and ($2.3) million for the three-months ended March 31, 2014 and 2013, respectively, in relation to our operations in Africa, Asia, Australia, Europe, the Middle East and South America.

Other Income (Expense). Other income (expense) was $0.2 million for the three-months ended March 31, 2014, as compared to other income (expense) of ($1.9) million for the three-months ended March 31, 2013. Foreign currency transaction losses were $0.2 million and $4.7 million for the three-months ended March 31, 2014 and 2013, respectively. The decrease in foreign currency losses during the three-months ended March 31, 2014 was primarily related to our foreign currency transactions in Japan and Canada. Interest income was $0.4 million and $0.1 million for the three-months ended March 31, 2014 and 2013, respectively.

Provision for Income Taxes. Provision for income taxes was $53.8 million for the three-months ended March 31, 2014, an increase of $11.9 million or 28.3% higher than the provision for income taxes of $41.9 million for the three-months ended March 31, 2013. The effective combined federal, state and foreign tax rate decreased to 36.1% from 39.8% for the three-months ended March 31, 2014 and 2013, respectively. The decrease in the effective tax rate was primarily the result of profits earning in certain foreign subsidiaries that have no related income tax expense as a result of the prior establishment of valuation allowances on their deferred tax assets. In addition, the effective tax rate for the three-months ended March 31, 2013 was partially increased by the establishment of a full valuation allowance during the three-months ended March 31, 2013 against a tax capital loss recognized on the sale of certain available-for-sale auction rate securities.

Net Income. Net income was $95.3 million for the three-months ended March 31, 2014, an increase of $31.8 million or 50.0% higher than net income of $63.5 million for the three-months ended March 31, 2013. The increase in net income was primarily attributable to an increase in gross profit of $34.8 million and a decrease in operating expenses of $6.8 million. The increase in net income was partially offset by an increase in the provision for income taxes of $11.9 million.

Liquidity and Capital Resources

Cash flows provided by operating activities. Net cash provided by operating activities was $136.4 million for the three-months ended March 31, 2014, as compared with net cash provided by operating activities of $45.9 million for the three-months ended March 31, 2013. For the three-months ended March 31, 2014, cash provided by operating activities was primarily attributable to net income earned of $95.3 million and adjustments for certain non-cash expenses, consisting of $7.0 million of stock-based compensation and $6.5 million of depreciation and other amortization. For the three-months ended March 31, 2014, cash provided by operating activities also increased due to a $39.1 million increase in income taxes payable, a $17.4 million decrease in inventory, a $14.7 million increase in accrued promotional allowances, a $6.1 million increase in accounts payable, a $4.6 million increase in accrued liabilities and a $4.4 million decrease in prepaid income taxes. For the three-months ended March 31, 2014, cash provided by operating activities was reduced due to a $42.5 million increase in accounts receivable, a $7.1 million increase in prepaid expenses and other current assets, a $5.8 million decrease in accrued compensation, a $2.6 million tax benefit from the exercise of stock options and a $1.5 million decrease in deferred revenue. For the three-months ended March 31, 2013, cash provided by operating activities was primarily attributable to net income earned of $63.5 million and adjustments for certain non-cash expenses consisting of $7.0 million of stock-based compensation and $5.0 million of depreciation and other amortization. For the three-months ended March 31, 2013, cash provided by operating activities also increased due to a $27.4 million decrease in prepaid income taxes, a $13.9 million increase in accrued promotional allowances, a $9.3 million increase in income taxes payable, a $9.9 million increase in accrued liabilities, a $7.4 million increase in accrued distributor terminations, a $7.5 million increase in accounts payable, and a $6.2 million increase in deferred revenue. For the three-months ended

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March 31, 2013, cash provided by operating activities was reduced due to a $69.7 million increase in accounts receivable, a $14.1 million increase in inventory, a $10.6 million increase in prepaid expenses and other current assets, an $8.3 million increase in distributor receivables, a $5.4 million decrease in accrued compensation and a $2.5 million gain on investments.

Cash flows used in investing activities. Net cash used in investing activities was $43.9 million for the three-months ended March 31, 2014, as compared to net cash used in investing activities of $15.4 million for the three-months ended March 31, 2013. For the three-months ended March 31, 2014, cash used in investing activities was primarily attributable to purchases of held-to-maturity investments and purchases of property and equipment, including the purchase of real property. For the three-months ended March 31, 2013, cash used in investing activities was primarily attributable to purchases of held-to-maturity investments, purchases of property and equipment and additions to intangibles. For the three-months ended March 31, 2014, cash provided by investing activities was primarily attributable to maturities of held-to-maturity investments. For the three-months ended March 31, 2013, cash provided by investing activities was primarily attributable to maturities of held-to-maturity investments. For both the three-months ended March 31, 2014 and 2013, cash used in investing activities also included the acquisitions of fixed assets consisting of vans and promotional vehicles, coolers and other equipment to support our marketing and promotional activities, production equipment, furniture and fixtures, office and computer equipment, computer software, and equipment used for sales and administrative activities, as well as certain leasehold improvements. We expect to continue to use a portion of our cash in excess of our requirements for operations for purchasing short-term and long-term investments, and for other corporate purposes, including leasehold improvements, the acquisition of capital equipment, specifically, vans, trucks and promotional vehicles, coolers, other promotional equipment, merchandise displays, warehousing racks as well as items of production equipment required to produce certain of our existing and/or new products and to develop our brand in international markets. From time to time, we may also purchase additional real property related to our beverage business and/or acquire compatible businesses as a use of cash in excess of our requirements for operations.

Cash flows provided by (used in) financing activities. Net cash provided by financing activities was $7.7 million for the three-months ended March 31, 2014, as compared to net cash used in financing activities of $11.1 million for the three-months ended March 31, 2013. For the three-months ended March 31, 2014, cash provided by financing activities was primarily attributable to $5.7 million received from the issuance of common stock in connection with the exercise of certain stock options and a $2.6 million tax benefit from the exercise of stock options. For the three-months ended March 31, 2013, cash provided by financing activities was primarily attributable to $2.4 million received from the issuance of common stock in connection with the exercise of certain stock options and a $0.2 million tax benefit from the exercise of stock options. For the three-months ended March 31, 2013, cash used in financing activities was primarily attributable to $13.4 million of purchases on common stock.

Purchases of inventories, increases in accounts receivable and other assets, acquisition of property and equipment, leasehold improvements, acquisition and maintenance of trademarks, payments of accounts payable, income taxes payable and purchases of our common stock are expected to remain our principal recurring use of cash.

Cash and cash equivalents, short-term and long-term investments. At March 31, 2014, we had $312.0 million in cash and cash equivalents and $447.1 million in short-term and long-term investments. We have historically invested these amounts in U.S. Treasury bills, U.S. government agency securities and municipal securities (which may have an auction reset feature), corporate notes and bonds, commercial paper and money market funds meeting certain criteria. We maintain our investments for cash management purposes and not for purposes of speculation. Our risk management policies emphasize credit quality (primarily based on short-term ratings by nationally recognized statistical organizations) in selecting and maintaining our investments. We regularly assess market risk of our investments and believe our current policies and investment practices adequately limit those risks. However, certain of these investments are subject to general credit, liquidity, market and interest rate risks. These market risks associated with our investment portfolio may have an adverse effect on our future results of operations, liquidity and financial condition.

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We believe that cash available from operations, including our cash resources and the revolving line of credit, will be sufficient for our working capital needs, including purchase commitments for raw materials and inventory, increases in accounts receivable, payments of tax liabilities, expansion and development needs, purchases of shares of our common stock, as well as any purchases of capital assets, equipment and properties, through at least the next 12 months. Based on our current plans, at this time we estimate that capital expenditures are likely to be less than $100.0 million through March 31, 2015. However, future business opportunities may cause a change in this estimate.

The following represents a summary of the Company’s contractual commitments and related scheduled maturities as of March 31, 2014:

|  | Payments due by period (in thousands) |
Obligations |  | Total |  | Less than 1 year |  | 1-3 years |  | 3-5 years |  | More than 5 years |
Contractual Obligations¹ |  | $ | 92,916 |  | $ | 59,171 |  | $ | 33,059 |  | $ | 686 |  | $ | - |
Capital Leases |  | 664 |  | 664 |  | - |  | - |  | - |
Operating Leases |  | 14,783 |  | 4,876 |  | 8,610 |  | 884 |  | 413 |
Purchase Commitments² |  | 31,250 |  | 31,250 |  | - |  | - |  | - |
|  | $ | 139,613 |  | $ | 95,961 |  | $ | 41,669 |  | $ | 1,570 |  | $ | 413 |

¹Contractual obligations include our obligations related to sponsorships and other commitments.

²Purchase commitments include obligations made by us and our subsidiaries to various suppliers for raw materials used in the production of our products. These obligations vary in terms, but are generally satisfied within one year.

In addition, approximately $0.9 million of unrecognized tax benefits have been recorded as liabilities as of March 31, 2014. It is expected that the amount of unrecognized tax benefits will not significantly change within the next 12 months. We have also recorded a liability for potential penalties and interest of $0.4 million as of March 31, 2014.

Sales

The table below discloses selected quarterly data regarding sales for the three-months ended March 31, 2014 and 2013, respectively. Data from any one or more quarters or periods is not necessarily indicative of annual results or continuing trends.

Sales of beverages are expressed in unit case volume. A “unit case” means a unit of measurement equal to 192 U.S. fluid ounces of finished beverage (24 eight-ounce servings). Unit case volume means the number of unit cases (or unit case equivalents) of beverages sold by us.

Our quarterly results of operations reflect seasonal trends that are primarily the result of increased demand in the warmer months of the year. It has been our experience that beverage sales tend to be lower during the first and fourth quarters of each calendar year. Because the primary historical market for our products is California, which has a year-long temperate climate, the effect of seasonal fluctuations on quarterly results may have been somewhat mitigated; however, such fluctuations may become more pronounced with the expansion of the distribution of our products outside of California. In addition, our experience with our energy drink products suggests they may be less seasonal than the seasonality expected from traditional beverages. Quarterly fluctuations may also be affected by other factors including the introduction of new products, the opening of new markets where temperature fluctuations are more pronounced, the addition of new bottlers, customers and distributors, changes in the sales mix of our products and changes in advertising and promotional expenses.

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(In thousands, except average |  | Three-Months Ended |
net sales per case) |  | March 31, |
|  | 2014 |  | 2013 |
Net sales |  | $ | 536,129 |  | $ | 484,223 |
Case sales (192-ounce case equivalents) |  | 51,926 |  | 47,749 |
Average net sales per case |  | $ | 10.32 |  | $ | 10.14 |

S ee Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Our Business” for additional information related to the increase in sales.

Critical Accounting Policies

There have been no material changes to our critical accounting policies from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, included in our Form 10-K for the fiscal year ended December 31, 2013.

Recent Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08, “Presentation of Financial Statements and Property, Plant, and Equipment - Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”. ASU 2014-08 provides new guidance related to the definition of a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. This new guidance is effective for fiscal years beginning on or after December 15, 2014 and interim periods within those years. The adoption of ASU 2014-08 is not expected to have a material impact on the Company’s financial position, results of operations or liquidity.

Inflation

We believe inflation did not have a significant impact on our results of operations for the periods presented.

Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 (the “Act”) provides a safe harbor for forward-looking statements made by or on behalf of the Company. Certain statements made in this report may constitute forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended) (the “Exchange Act”) regarding the expectations of management with respect to revenues, profitability, adequacy of funds from operations and our existing credit facility, among other things. All statements containing a projection of revenues, income (loss), earnings (loss) per share, capital expenditures, dividends, capital structure or other financial items, a statement of management’s plans and objectives for future operations, or a statement of future economic performance contained in management’s discussion and analysis of financial condition and results of operations, including statements related to new products, volume growth and statements encompassing general optimism about future operating results and non-historical information, are forward-looking statements within the meaning of the Act. Without limiting the foregoing, the words “believes,” “thinks,” “anticipates,” “plans,” “expects,” and similar expressions are intended to identify forward-looking statements.

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Management cautions that these statements are qualified by their terms and/or important factors, many of which are outside our control, involve a number of risks, uncertainties and other factors, that could cause actual results and events to differ materially from the statements made including, but not limited to, the following:

· | Disruption in distribution or sales and/or decline in sales due to the termination and/or appointment of existing and/or new domestic and/or international distributors;
· | Lack of anticipated demand for our products in international markets;
· | Unfavorable regulations, including taxation requirements, product registration requirements, tariffs and/or trade restrictions;
· | The effect of inquiries from and/or actions by state attorneys general, the Federal Trade Commission (the “FTC”), the FDA, municipalities or city attorneys and/or other government agencies and/or quasi-government agencies and/or government officials, including members of Congress, into the advertising, marketing, promotion, ingredients, sale and/or consumption of our energy drink products, including voluntary changes to our business practices;
· | Our ability to achieve profitability from our operations outside the United States;
· | Our ability to manage legal and regulatory requirements in foreign jurisdictions, potential difficulties in staffing and managing foreign operations, potentially higher incidence of fraud or corruption and credit risk of foreign customers and distributors;
· | Our ability to produce our products in international markets in which they are sold, thereby reducing freight costs and/or product damages;
· | Our ability to effectively manage our inventories and/or our accounts receivables;
· | Our foreign currency exchange rate risk with respect to our sales, expenses, profits, assets and liabilities denominated in currencies other than the U.S. dollar, which will continue to increase as foreign sales increase;
· | Changes in accounting standards may affect our reported profitability;
· | Any proceedings which may be brought against us by the Securities and Exchange Commission (the “SEC”), the FDA, the FTC or other governmental agencies or bodies;
· | The outcome of shareholder securities litigation and/or shareholder derivative actions filed against us and/or against certain of our officers and directors, and the possibility of other private shareholder litigation;
· | The possibility of future shareholder derivative actions or shareholder securities litigation filed against us;
· | The outcome of product liability litigation and/or class action litigation regarding the safety of our products and/or the ingredients in and/or claims made in connection with our products and/or alleging false advertising, marketing and/or promotion, and the possibility of future product liability and/or class action lawsuits;
· | The current uncertainty and volatility in the national and global economy;
· | The outcome of future auctions of auction rate securities and/or our ability to recover payments thereunder and/or the creditworthiness of issuers of our auction rate securities and/or our 2011 Put Option (as defined in Note 4 of Notes to the Condensed Consolidated Financial Statements) and/or their ability to make payment thereunder;
· | Our ability to address any significant deficiencies or material weakness in our internal control over financial reporting;
· | Our ability to continue to generate sufficient cash flows to support capital expansion plans and general operating activities;
· | Decreased demand for our products resulting from changes in consumer preferences and/or from decreased consumer discretionary spending power and/or from high gasoline prices;
· | Changes in demand that are weather related, particularly in areas outside of California;
· | Competitive products and pricing pressures and our ability to gain or maintain our share of sales in the marketplace as a result of actions by competitors;

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· | Our ability to introduce new products;
· | An inability to achieve volume growth through product and packaging initiatives;
· | Our ability to sustain the current level of sales and/or increase the sales of our Monster Energy® brand energy drinks and/or our Peace Tea® iced teas and/or our other products;
· | The impact of criticism of our energy drink products and/or the energy drink market generally and/or legislation enacted, whether as a result of such criticism or otherwise, that restrict the sale of energy drinks (including prohibiting the sale of energy drinks at certain establishments or pursuant to certain governmental programs), limit caffeine content in beverages, require certain product labeling disclosures and/or warnings, impose excise and/or sales taxes, limit product sizes or impose age restrictions for the sale of energy drinks;
· | Our ability to comply with and/or resulting lower consumer demand for energy drinks due to proposed and/or future U.S. federal, state and local laws and regulations and/or proposed or existing laws and regulations in certain foreign jurisdictions and/or any changes therein, including changes in taxation requirements (including tax rate changes, new tax laws, new and/or increased excise and/or sales and/or other taxes on our products and revised tax law interpretations) and environmental laws, as well as the FFDC Act, including as amended by the Dietary Supplement Health and Education Act, and regulations made thereunder or in connection therewith, as well as changes in any other food, drug or similar laws in the United States and internationally, especially those that may restrict the sale of energy drinks (including prohibiting the sale of energy drinks at certain establishments or pursuant to certain governmental programs), limit caffeine content in beverages, require certain product labeling disclosures and/or warnings, impose excise taxes, limit product sizes, or impose age restrictions for the sale of energy drinks, as well as laws and regulations or rules made or enforced by the FDA, and/or the Bureau of Alcohol, Tobacco and Firearms and Explosives, and/or the Federal Trade Commission;
· | Our ability to satisfy all criteria set forth in any model energy drink guidelines, including, without limitation, those adopted by the American Beverage Association, of which the Company is a member, and the impact on the Company of such guidelines;
· | The effect of unfavorable press and/or articles, comments and/or media attention;
· | Changes in the cost, quality and availability of containers, packaging materials, raw materials, other ingredients and juice concentrates, and our ability to obtain and/or maintain favorable supply arrangements and relationships and procure timely and/or sufficient production of all or any of our products to meet customer demand;
· | Our ability to pass on to our customers all or a portion of the increasing costs of fuel and/or raw materials and/or ingredients and/or commodities affecting our business;
· | Our ability to achieve both domestic and international forecasts, which may be based on projected volumes and sales of many product types and/or new products, certain of which are more profitable than others; there can be no assurance that we will achieve projected levels of sales as well as forecasted product and/or geographic mixes;
· | Our ability to penetrate new domestic and/or international markets and/or gain approval or mitigate the delay in securing approval for the sale of our products in various countries;
· | Economic or political instability in one or more of our international markets;
· | Our ability to secure and/or retain competent and/or effective distributors internationally;
· | The effectiveness of sales and/or marketing efforts of distributors of our products, most of which distribute products that are competitive with our products;
· | Unilateral decisions by distributors, convenience chains, grocery chains, specialty chain stores, club stores and other customers to discontinue carrying all or any of our products that they are carrying at any time and/or restrict the range of our products they carry and/or devote less resources to the sale of our products;
· | The costs and/or effectiveness, now or in the future, of our advertising, marketing and promotional strategies;
· | Changes in product category consumption;
· | Unforeseen economic and political changes;
· | Possible recalls of our products and/or defective production;

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· | Our ability to make suitable arrangements for the co-packing of any of our products both domestically and internationally and/or the timely replacement of discontinued co-packing arrangements;
· | Our ability to make suitable arrangements for the procurement of non-defective raw materials;
· | Our inability to protect and/or the loss of our intellectual property rights and/or our inability to use our trademarks and/or trade names or designs in certain countries;
· | Volatility of stock prices which may restrict stock sales, stock purchases or other opportunities;
· | Provisions in our organizational documents and/or control by insiders which may prevent changes in control even if such changes would be beneficial to other stockholders;
· | The failure of our bottlers and contract packers to manufacture our products on a timely basis or at all;
· | Exposure to significant liabilities due to litigation, legal or regulatory proceedings;
· | Any disruption in and/or lack of effectiveness of our information technology systems that disrupts our business or negatively impacts customer relationships; and
· | Recruitment and retention of senior management, other key employees and our employee base in general.

The foregoing list of important factors and other risks detailed from time to time in our reports filed with the SEC is not exhaustive. See the section entitled “Risk Factors” in our Form 10-K for the fiscal year ended December 31, 2013, for a more complete discussion of these risks and uncertainties and for other risks and uncertainties. Those factors and the other risk factors described therein are not necessarily all of the important factors that could cause actual results or developments to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could harm our results. Consequently, our actual results could be materially different from the results described or anticipated by our forward-looking statements, due to the inherent uncertainty of estimates, forecasts and projections and may be better or worse than anticipated. Given these uncertainties, you should not rely on forward-looking statements. Forward-looking statements represent our estimates and assumptions only as of the date that they were made. We expressly disclaim any duty to provide updates to forward-looking statements, and the estimates and assumptions associated with them, after the date of this report, in order to reflect changes in circumstances or expectations or the occurrence of unanticipated events except to the extent required by applicable securities laws.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Exchange Rate Risk

Our gross sales to customers outside of the United States were approximately 23% of consolidated gross sales for both the three-months ended March 31, 2014 and 2013. Our growth strategy includes expanding our international business. As a result, we are subject to risks from changes in foreign currency exchange rates. During the three-months ended March 31, 2014, we 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 us as of March 31, 2014 have terms of one month or less. We do not enter into forward currency exchange contracts for speculation or trading purposes.

We have not designated our foreign currency exchange contracts as hedge transactions under ASC 815. Therefore, gains and losses on our foreign currency exchange contracts are recognized in interest and other income (expense), net, in the condensed consolidated statements of income, and are largely offset by the changes in the fair value of the underlying economically hedged item. We do not consider the potential loss resulting from a hypothetical 10% adverse change in quoted foreign currency exchange rates as of March 31, 2014 to be significant.

There have been no additional material changes in our market risk during the three-months ended March 31, 2014 compared with the disclosures in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2013.

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ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures – Under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13(a)-15(e) and 15(d)-15(e) of the Exchange Act) as of the end of the period covered by this report. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are adequate and effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in rules and forms of the SEC and (2) accumulated and communicated to our management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosures.

Changes in Internal Control Over Financial Reporting – There were no changes in the Company’s internal controls over financial reporting during the quarter ended March 31, 2014, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On October 17, 2012, Wendy Crossland and Richard Fournier filed a lawsuit in the Superior Court of the State of California, County of Riverside, styled Wendy Crossland and Richard Fournier v. Monster Beverage Corporation, against the Company claiming that the death of their 14 year old daughter (Anais Fournier) was caused by her consumption of two 24-ounce Monster Energy® drinks over the course of two days in December 2011. The plaintiffs allege strict product liability, negligence, fraudulent concealment, breach of implied warranties and wrongful death. The plaintiffs claim general damages in excess of $25,000 and punitive damages. The Company filed a demurrer and a motion to strike the plaintiffs’ complaint on November 19, 2012, and the plaintiffs filed a first amended complaint on December 19, 2012. The Company filed its answer to the first amended complaint on June 7, 2013. The parties attended a court ordered mediation on January 23, 2014. Discovery has commenced but no trial date has been set. The Company believes that the plaintiffs’ complaint is without merit and plans a vigorous defense. The Company also believes that any such damages, if awarded, would not have a material adverse effect on the Company’s financial position or results of operations.

The Company has also been named as a defendant in other complaints containing similar allegations to those presented in the Fournier lawsuit, each of which the Company believes is also without merit and would not have a material adverse effect on the Company’s financial position or results of operations in the event any damages were awarded.

Securities Litigation – On September 11, 2008, a federal securities class action complaint styled Cunha v. Hansen Natural Corp., et al. was filed in the United States District Court for the Central District of California (the “District Court”). On September 17, 2008, a second federal securities class action complaint styled Brown v. Hansen Natural Corp., et al. was also filed in the District Court. After the District Court consolidated the two actions and appointed the Structural Ironworkers Local Union #1 Pension Fund as lead plaintiff, a Consolidated Complaint for Violations of Federal Securities Laws was filed on August 28, 2009 (the “Consolidated Class Action Complaint”).

The Consolidated Class Action Complaint purported to be brought on behalf of a class of purchasers of the Company’s stock during the period November 9, 2006 through November 8, 2007 (the “Class Period”). It named as defendants the Company, Rodney C. Sacks, Hilton H. Schlosberg, and Thomas J. Kelly. Plaintiff principally alleged that, during the Class Period, the defendants made false and misleading statements relating to the Company’s distribution coordination agreements with Anheuser-Busch, Inc. (“AB”) and its sales of “Allied” energy drink lines, and engaged in sales of shares in the Company on the basis of material non-public

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information. Plaintiff also alleged that the Company’s financial statements for the second quarter of 2007 did not include certain promotional expenses. The Consolidated Class Action Complaint alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 10b-5 promulgated thereunder, and sought an unspecified amount of damages.

The District Court dismissed the Consolidated Class Action Complaint, with leave to amend, on July 12, 2010. Plaintiff thereafter filed a Consolidated Amended Class Action Complaint for Violations of Federal Securities Laws on August 27, 2010 (the “Amended Class Action Complaint”). While similar in many respects to the Consolidated Class Action Complaint, the Amended Class Action Complaint dropped certain of the allegations set forth in the Consolidated Class Action Complaint and made certain new allegations, including that the Company engaged in “channel stuffing” during the Class Period that rendered false or misleading the Company’s reported sales results and certain other statements made by the defendants. In addition, it no longer named Thomas J. Kelly as a defendant.

On September 4, 2012, the District Court dismissed certain of the claims in the Amended Class Action Complaint, including plaintiff’s allegations relating to promotional expenses, but denied defendants’ motion to dismiss with regard to the majority of plaintiff’s claims, including plaintiff’s channel stuffing allegations. Plaintiff filed a motion seeking class certification on December 6, 2012, which the court denied, without prejudice, on January 17, 2014.

Following a mediation conducted by an independent mediator, the Company entered into a Stipulation of Settlement on April 16, 2014 that, if approved by the District Court, will resolve the litigation and result in the action being dismissed with prejudice. A preliminary approval hearing with respect to the proposed settlement is scheduled for June 19, 2014.

Under the terms of the proposed settlement, the Company has agreed that certain of its insurance carriers will pay $16.25 million into an escrow account for distribution to a proposed settlement class, certified by the District Court for settlement purposes only and consisting of all persons who purchased or otherwise acquired the Company’s stock during the Class Period. Excluded from the proposed settlement class are the Company’s officers and directors, members of their immediate families and their legal representatives, heirs, successors or assigns and any entity in which defendants have or had a controlling interest, as well as any putative member of the settlement class who submits a valid and timely request for exclusion in the manner ultimately approved by the District Court. Under the proposed settlement, defendants and various of their related persons and entities will receive a full release of all claims that were or could have been brought in the action as well as all claims that arise out of, are based upon or relate to the allegations, transactions, facts, representations, omissions or other matters involved in the complaints filed in the action or any statement communicated to the public during the Class Period, and the purchase, acquisition or sale of the Company’s stock during the Class Period.

The proposed settlement contains no admission of any liability or wrongdoing on the part of the defendants, each of whom continues to deny all of the allegations against them and believes that the claims are without merit. Because the full amount of the proposed settlement will be paid by the Company’s insurance carriers, the settlement will not have an effect on the Company’s results of operations.

State Attorney General Inquiry – In July 2012, the Company received a subpoena from a state attorney general in connection with an investigation concerning the Company’s advertising, marketing, promotion, ingredients, usage and sale of its Monster Energy® brand of energy drinks. As the investigation is in an early stage, 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.

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San Francisco City Attorney Litigation. On October 31, 2012, the Company received a written request for information from the City Attorney for the City and County of San Francisco concerning the Company’s advertising and marketing of its Monster Energy® brand of energy drinks and specifically concerning the safety of its products for consumption by adolescents. In a letter dated March 29, 2013, the San Francisco City Attorney threatened to bring suit against the Company if it did not agree to take the following five steps immediately: (i) “Reformulate its products to lower the caffeine content to safe levels”; (ii) “Provide adequate warning labels”; (iii) “Cease promoting over-consumption in marketing”; (iv) “Cease use of alcohol and drug references in marketing”; and (v) “Cease targeting minors.”

On April 29, 2013, the Company and its wholly owned subsidiary, Monster Energy Company, filed a complaint for declaratory and injunctive relief against the San Francisco City Attorney in United States District Court for the Central District of California (the “Central District Court”), styled Monster Beverage Corp., et al. v. Dennis Herrera. The Company seeks a declaration from the Central District Court that the San Francisco City Attorney’s investigation and demands are impermissible and preempted, subject to the doctrine of primary jurisdiction, are unconstitutional in that they violate the First and Fourteenth Amendments’ prohibitions against compelled speech, content-based speech and commercial speech, are impermissibly void-for-vagueness, and/or violate the Commerce Clause. On June 3, 2013, the City Attorney filed a motion to dismiss the Company’s complaint, arguing in part that the complaint should be dismissed in light of the San Francisco Action (described below) filed on May 6, 2013. On August 22, 2013, the Central District Court granted in part and denied in part the City Attorney’s motion.

On May 6, 2013, the San Francisco City Attorney filed a complaint for declaratory and injunctive relief, civil penalties and restitution for alleged violation of California’s Unfair Competition Law, Business & Professions Code sections 17200, et seq., styled People Of The State Of California ex rel. Dennis Herrera, San Francisco City Attorney v. Monster Beverage Corporation, in San Francisco Superior Court (the “San Francisco Action”). The City Attorney alleges that the Company (1) mislabeled its products as a dietary supplement, in violation of California’s Sherman Food, Drug and Cosmetic Law, California Health & Safety Code sections 109875 et. seq.; (2) is selling an “adulterated” product because caffeine is not generally recognized as safe (“GRAS”) due to the alleged lack of scientific consensus concerning the safety of the levels of caffeine in the Company’s products; and (3) is engaged in unfair and misleading business practices because its marketing (a) does not disclose the health risks that energy drinks pose for children and teens; (b) fails to warn against and promotes unsafe consumption; (c) implicitly promotes mixing of energy drinks with alcohol or drugs; and (d) is deceptive because it includes unsubstantiated claims about the purported special benefits of its “killer” ingredients and “energy blend.” The City Attorney seeks a declaration that the Company has engaged in unfair and unlawful business acts and practices in violation of the Unfair Competition Law; an injunction from performing or proposing to perform any acts in violation of the Unfair Competition Law; restitution; and civil penalties. On June 3, 2013, the Company removed the case to the United States District Court for the Northern District of California (the “Northern District Court”). On July 3, 2013, the City Attorney filed a motion to remand the case back to state court. On September 18, 2013, the Northern District Court granted the City Attorney’s motion to remand the San Francisco Action back to state court.

On October 17, 2013 (after the San Francisco Action described above was remanded to San Francisco Superior Court), the City Attorney filed a renewed motion to dismiss and on December 16, 2013, the Central District Court granted the City Attorney’s renewed motion, dismissing the action. The Company filed a Notice of Appeal to the Ninth Circuit on December 18, 2013.

On January 15, 2014, the Company filed a demurrer to and motion to strike allegations in the complaint in the San Francisco Action. On March 5, 2014, the Court overruled the demurrer, granted the motion to strike as to one theory for relief pleaded by the City Attorney, and lifted the stay on discovery.

On March 20, 2014, the City Attorney filed an amended complaint, adding allegations supporting the theory for relief as to which the Court had granted the motion to strike. On April 18, 2014, the Company filed a renewed motion to strike, challenging the theory for relief previously rejected by the Court, as well as a motion asking the Court to bifurcate and/or stay claims relating to the safety of Monster Energy® drinks, pending resolution of the ongoing FDA investigation of the safety and labeling of food products to which caffeine is added. These motions are calendared for hearing on May 21, 2014.

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The Company denies that it has violated the Unfair Competition Law or any other law and believes that the City Attorney’s claims and demands are preempted and unconstitutional, as alleged in the action the Company filed in the Central District Court. The Company intends to vigorously defend against this lawsuit. At this time, no evaluation of the likelihood of an unfavorable outcome or range of potential loss can be expressed.

In addition to the above matters, the Company has been named as a defendant in various false advertising putative class actions and in a private attorney general action. In these actions, plaintiffs allege that defendants misleadingly labeled and advertised Monster Energy® brand products that allegedly were ineffective for the advertised benefits (including, but not limited to, an allegation that the products do not hydrate as advertised because they contain caffeine). The plaintiffs further allege that the Monster Energy® brand products at issue are unsafe because they contain one or more ingredients that allegedly could result in illness, injury or death. In connection with these product safety allegations, the plaintiffs claim that the product labels did not provide adequate warnings and/or that the Company did not include sufficiently specific statements with respect to contra-indications and/or adverse reactions associated with the consumption of its energy drink products (including, but not limited to, claims that certain ingredients, when consumed individually or in combination with other ingredients, could result in high blood pressure, palpitations, liver damage or other negative health effects and/or that the products themselves are unsafe). Based on these allegations, the plaintiffs assert claims for violation of state consumer protection statutes, including unfair competition and false advertising statutes, and for breach of warranty and unjust enrichment. In their prayers for relief, the plaintiffs seek, inter alia, compensatory and punitive damages, restitution, attorneys’ fees, and, in some cases, injunctive relief. The Company regards these cases and allegations as having no merit. Furthermore, the Company is subject to litigation from time to time in the normal course of business, including intellectual property litigation and claims from terminated distributors. Although it is not possible to predict the 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.

ITEM 1A. RISK FACTORS

Our Risk Factors are discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013. There have been no material changes with respect to the risk factors disclosed in our Annual Report on Form 10-K for the period ended December 31, 2013.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the three-months ended March 31, 2014, 281 shares were purchased from employees in lieu of cash payments for options exercised or withholding taxes due for a total amount of $0.02 million. While such purchases are considered common stock repurchases, they are not counted as purchases against our authorized share repurchase program, including the April 2013 Repurchase Plan.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

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ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

31.1* Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes- Oxley Act of 2002
31.2* Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes- Oxley Act of 2002
32.1* Certification of Chief Executive Officer 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 Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101* The following financial information from Monster Beverage Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of March 31, 2014 and December 31, 2013, (ii) Condensed Consolidated Statements of Income for the three-months ended March 31, 2014 and 2013, (iii) Condensed Consolidated Statements of Comprehensive Income for the three-months ended March 31, 2014 and 2013, (iv) Condensed Consolidated Statements of Cash Flows for the three-months ended March 31, 2014 and 2013, and (v) the Notes to Condensed Consolidated Financial Statements.

* Filed herewith

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

|  | MONSTER BEVERAGE CORPORATION
|  | Registrant
Date: May 9, 2014 |  | /s/ RODNEY C. SACKS
|  | Rodney C. Sacks
|  | Chairman of the Board of Directors
|  | and Chief Executive Officer

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