NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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1.
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Nature of Operations and Summary of Significant Accounting Policies
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Jones Soda Co. develops, produces, markets and distributes premium beverages which we sell and distribute primarily in North America through our network of independent distributors located throughout the U.S. and Canada and directly to our national and regional retail accounts.
We are a Washington corporation and have two operating subsidiaries, Jones Soda Co. (USA) Inc. and Jones Soda (Canada) Inc. (Subsidiaries).
Basis of presentation and consolidation
The accompanying condensed consolidated balance sheet as of December 31, 2013, which has been derived from audited consolidated financial statements, and unaudited interim condensed consolidated financial statements as of March 31, 2014, have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and the Securities and Exchange Commission (SEC) rules and regulations applicable to interim financial reporting. The condensed consolidated financial statements include our accounts and accounts of our wholly owned subsidiaries. All intercompany transactions between us and our subsidiaries have been eliminated in consolidation.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all material adjustments, consisting only of those of a normal recurring nature, considered necessary for a fair presentation of our financial position, results of operations and cash flows at the dates and for the periods presented. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2013
.
Use of estimates
The preparation of the condensed consolidated financial statements requires management to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Significant items subject to such estimates and assumptions include, but are not limited to, inventory valuation, depreciable lives and valuation of capital assets, valuation allowances for receivables, trade promotion liabilities, stock-based compensation expense, valuation allowance for deferred income tax assets, contingencies, and forecasts supporting the going concern assumption and related disclosures. Actual results could differ from those estimates.
Liquidity
As of
March 31, 2014
, we had cash and cash-equivalents of approximately
$1.2 million
and working capital of
$
2.9
million. Cash used in operations during the three months ended
March 31, 2014
totaled
$264,000
compared to
$415,000
for the same period a year ago. The decrease in cash used in operations compared to the same period a year ago is due to timing of settlement for outstanding payables. Our cash flows vary throughout the year based on seasonality. We traditionally use more cash in the first half of the year as we build inventory to support our historically seasonally-stronger shipping months of April through September, and expect cash used by operating activities to decrease in the second half of the year as we collect receivables generated during our stronger shipping months. We incurred a net loss of
$539,000
for the three months ended
March 31, 2014
.
As of the date of this Report, we believe that our current cash and cash equivalents will be sufficient to meet our anticipated cash needs through
December 31, 2014
. Additionally, our Loan Facility (described below), is available for our working capital needs. Beginning in 2012, we made significant reductions in operating expenses and personnel, primarily in the second half of 2012, to better align our operations with available capital and slow our cash used in operations. We have continued at these reduced operating expense levels and anticipate a similar overhead structure this year. We believe that these cost controls and realigned expenses are strategically important to further the Company's long-term viability. However, these significant cost containment measures may negatively impact our sales and may make it difficult to achieve top-line growth.
We have a secured credit facility (Loan Facility) with BFI Business Finance (BFI). The Loan Facility allows us to borrow a maximum aggregate amount of up to
$2.0 million based on eligible accounts receivable and inventory. (The Loan Facility is described in Note 3 in this Report.)
We may use the Loan Facility for our working capital needs. To date, we have not drawn on the facility, but it is available for our working capital needs should the need arise.
On
April 1, 2014
, we received
$124,000
in cash from the exercise by several of our directors and officers of stock options for a total of
385,833
shares of common stock, as described
in
Note 5. We may receive additional cash through the exercise of stock options or warrants in the future. However, we cannot predict the timing or amount of cash proceeds we may receive from exercise, if at all, of any of the outstanding stock options or warrants. We do not consider the potential for future cash exercises of the stock options
or
warrants as a dependable source of financing for the Company.
We may require additional financing to support our working capital needs in the future. The amount of additional capital we may require, the timing of our capital needs and the availability of financing to fund those needs will depend on a number of factors, including our strategic initiatives and operating plans, the performance of our business and the market conditions for debt or equity financing. Additionally, the amount of capital required will depend on our ability to meet our case sales goals and otherwise successfully execute our operating plan. We believe it is imperative to meet these sales objectives in order to lessen our reliance on external financing in the future. Part of our Turnaround Plan is to focus on core geographic markets and retail channels that are considered operating priorities and to redirect resources to support our distributor network through promotion allowances at retail. It is critical that we meet our case sales goals and increase case sales going forward, as our operating plan already reflects prior significant cost containment measures and may make it difficult to achieve top-line growth if further significant reductions become necessary. We intend to continually monitor and adjust our business plan as necessary to respond to developments in our business, our markets and the broader economy. Although we believe various debt and equity financing alternatives will be available to us to support our working capital needs, financing arrangements on acceptable terms may not be available to us when needed. Additionally, these alternatives may require significant cash payments for interest and other costs or could be highly dilutive to our existing shareholders. Any such financing alternatives may not provide us with sufficient funds to meet our long-term capital requirements. If necessary, we may explore strategic transactions that we consider to be in the best interest of the Company and our shareholders, which may include, without limitation, public or private offerings of debt or equity securities, a rights offering, and other strategic alternatives; however, these options may not ultimately be available or feasible.
The uncertainties relating to our ability to successfully execute on our Turnaround Plan, combined with the difficult financing environment, continue to raise substantial doubt about our ability to continue as a going concern. Our financial statements for the periods presented were prepared assuming we would continue as a going concern, which contemplates that we will continue in operation for the foreseeable future and will be able to realize assets and settle liabilities and commitments in the normal course of business. These financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that could result should we be unable to continue as a going concern.
Seasonality
Our sales are seasonal and we experience fluctuations in quarterly results as a result of many factors. We historically have generated a greater percentage of our revenues during the warm weather months of April through September. Timing of customer purchases will vary each year and sales can be expected to shift from one quarter to another. As a result, management believes that period-to-period comparisons of results of operations are not necessarily meaningful and should not be relied upon as any indication of future performance or results expected for the fiscal year.
Reclassification
A reclassification of Licensing revenue to Revenue has been made to the prior year balances to conform to the current year presentation.
2.
Inventory
Inventory consisted of the following (in thousands):
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March 31, 2014
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December 31, 2013
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Finished goods
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$
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2,248
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$
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1,455
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Raw materials
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581
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860
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$
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2,829
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$
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2,315
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Finished goods primarily include product ready for shipment, as well as promotional merchandise held for sale. Raw materials primarily include ingredients, concentrate and packaging.
3.
Line of Credit
On December 27, 2013, we entered into a revolving secured Loan Facility with BFI, pursuant to which we, through our Subsidiaries, may borrow a maximum aggregate amount of up to
$2.0
million, subject to satisfaction of certain conditions.
Under this
Loan Facility, we may periodically request advances equal to the lesser of: (a)
$2.0
million, or (b) the Borrowing Base which is the sum of and in the following priority (i)
85%
of eligible U.S. accounts receivable, plus (ii)
35%
of finished goods inventory not to exceed
$300,000
, plus (iii)
50%
of eligible Canadian accounts receivable not to exceed
$300,000
, subject to any reserve amount established by BFI. Advances under the Loan Facility bear interest at the prime rate plus
2%
, where prime may not be less
4%
, and a monthly loan fee of
0.15%
will be payable to BFI monthly on the daily loan balance. The Loan Facility has an initial term of
one
year which automatically extends for successive
one
year terms unless either party gives at least
30
days' prior written notice of its intent to terminate the Loan Facility at the end of the then current term, with an annual fee of
$15,000
. BFI has the right to terminate the Loan Facility upon
120
days’ prior written notice. All present and future obligations of the Subsidiaries arising under the Loan Facility are guaranteed by the Company and are secured by a first priority security interest in all of the assets of the Company and the Subsidiaries. The Loan Facility contains customary representations and warranties as well as affirmative and negative covenants. As of March 31, 2014, we were in compliance with all debt covenants and
had
not
borrowed
on this Loan Facility
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4
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Warrants
I
n February 2012
as part of our registered offering,
we sold
and issued
Warrants
for the
purchase
of
up to
3,207,500
shares of common stock.
Each Warrant has an exercise price of
$
0.70
per share, for total potential proceeds to us of up to
$
2,245,250
if all of the Warrants are exercised in full for cash. The Warrants are exercisable for cash or, solely in the absence of an effective registration statement, by cashless exercise. The exercise price of the Warrants is subject to adjustment in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions, and also upon any distributions to Company shareholders, business combinations, sale of substantially all assets and other fundamental transactions. The exercise of the Warrants is subject to certain beneficial ownership and other limitations set forth in the Warrants. The term of the Warrants expire on
August 6, 2017
.
Any
remaining Warrants that are outstanding on
August 6, 2017
, the expiration date, will automatically be exercised at that time by cashless exercise.
As of
March 31, 2014
,
3,057,500
of the Warrants
remain outstanding
and Warrants for
150,000
shares were previously exercised for cash.
No
Warrants were exercised during the three months ended March, 31, 2014 or 2013
.
5.
Shareholders’ Equity
Under the terms of our 2011 Incentive Plan (Plan), the number of shares authorized under the Plan may be increased each January 1st by an amount equal to the least of (a)
1,300,000
shares, (b)
4.0
%
of our outstanding common stock as of the end of our immediately preceding fiscal year, and (c) a lesser amount determined by the Board of Directors (the Board), provided that the number of shares that may be granted pursuant to awards in a single year may not exceed
10
%
of our outstanding shares of common stock on a fully diluted basis as of the end of the immediately preceding fiscal year. Effective January 1, 2014, the total number of shares of common stock authorized under the Plan increased
to
6,884,032
shares.
Under the terms of the Plan, the Board may grant awards to employees, officers, directors, consultants, agents, advisors and independent contractors. Awards may consist of stock options, stock appreciation rights, stock awards, restricted stock, stock units, performance awards or other stock or cash-based awards. Stock options are granted at the closing price of our stock on the date of grant, and generally have a
ten
-year term and vest over a period of
48
months
with the first
25.0
%
cliff vesting
one
year
from the grant date and monthly thereafter. As of
March 31, 2014
, there were
3,154,683
shares of unissued common stock authorized and available for future awards under the Plan.
A summary of our stock option activity is as follows:
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Outstanding Options
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Number of Shares
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Weighted Average Exercise Price
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Balance at January 1, 2014
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4,227,820
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$
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0.44
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Options granted
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10,000
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0.63
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Options exercised
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—
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—
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Options cancelled/expired
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(91,667)
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0.40
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Balance at March 31, 2014
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4,146,153
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$
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0.44
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Exercisable, March 31, 2014
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2,979,236
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$
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0.45
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Vested and expected to vest
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4,092,158
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$
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0.45
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On
April 1, 2014
, several of our directors and officers exercised stock options for
385,833
shares of common stock for an aggregate amount of
$124,000
. The stock options had exercise prices ranging between $0.29 and $0.42.
(b)
Stock-based compensation expense:
Stock-based compensation expense is recognized using the straight-line attribution method over the employees’ requisite service period. We recognize compensation expense for only the portion of stock options or restricted stock expected to vest. Therefore, we apply estimated forfeiture rates that are derived from historical employee termination behavior. If the actual number of forfeitures differs from those estimated by management, additional adjustments to stock-based compensation expense may be required in future periods.
At
March 31, 2014
, we had unrecognized compensation expense related to stock options of
$201,000
to be recognized over a weighted-average period of
1.7
years. At
March 31, 2014
, all prior awards of restricted stock had vested, and we had
no
unrecognized compensation expense related to
non
-vested restricted stock.
The following table summarizes the stock-based compensation expense (in thousands):
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Three months ended March 31,
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2014
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2013
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Type of awards:
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Stock options
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$
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87
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$
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65
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Restricted stock
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—
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3
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$
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87
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$
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68
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Income statement account:
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Selling and marketing
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$
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10
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$
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11
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General and administrative
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77
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57
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$
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87
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$
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68
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We employ the following key weighted-average assumptions in determining the fair value of stock options, using the Black-Scholes option pricing model and the simplified method to estimate the expected term of “plain vanilla” options:
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Three months ended March 31,
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2014
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2013
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Expected dividend yield
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—
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—
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Expected stock price volatility
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105.5
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%
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107.6
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%
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Risk-free interest rate
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2.0
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%
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1.0
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%
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Expected term (in years)
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6.1
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years
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5.8
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years
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Weighted-average grant date fair-value
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$
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0.52
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$
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0.22
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During the quarter ended
March 31, 2014
, no modifications were made to outstanding stock options.
The aggregate intrinsic value of stock options outstanding at
March 31, 2014
and
2013
was
$
136,000
and
$
106,800
and for options exercisable was
$
397,000
and
$
50,800
, respectively. The intrinsic value of outstanding and exercisable stock options is calculated as the quoted market price of the stock at the balance sheet date less the exercise price of the option. There was
no
intrinsic value of
option
exercised or restricted stock vested during the three months ended
March 31, 2014
and
2013
.
6.
Segment Information
We have
one
operating segment with operations primarily in the United States and Canada. Sales are assigned to geographic locations based on the location of customers. Geographic is as follows (in thousands):
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Three months ended March 31,
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2014
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2013
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Revenue:
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United States
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$
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2,199
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$
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2,295
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Canada
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592
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770
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Other countries
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99
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31
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Total revenue
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$
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2,890
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$
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3,096
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During the
three months
ended
March 31, 2014
and
2013
, three of our customers represented approximately
30%
and
34%
, respectively
,
of revenue.
7.
Subsequent Events
On
April 1, 2014
,
we received $
124,000
in cash from the exercise by several of our d
irectors and
o
fficers
of
stock options
for a total of
385,833
shares of common
,
as described in Note 1 and Note 5.