FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OF 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the quarterly period ended 3/31/2005
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the transition period from ________ to ________
1mage Software, Inc.
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(Exact name of Registrant as specified in its charter)
0-12535
(Commission File Number)
Colorado 84-0866294
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(State of Incorporation) (IRS Employer Identification Number)
6025 S. Quebec St. Suite 300 Englewood CO 80111 (303) 694-9180
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(Address of principal executive offices) (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 is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |_| No |X|
As of May 6, 2005, there were 3,302,597 shares of the Registrant's Common
Stock outstanding.
Page 1
TABLE OF CONTENTS
PART I. Financial Information
Item 1 Financial Statements
Balance Sheets -March 31, 2005, and December 31, 2004.................................................. 3
Statements of Operations - for three months ended March 31, 2005 and March 31, 2004.................... 4
Statements of Cash Flows - for three months ended March 31, 2005 and March 31, 2004 ................... 5
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations......... 8
Item 3 Quantitative and Qualitative Disclosures About Market Risk..................................... 9
Item 4 Controls and Procedures........................................................................ 9
PART II. Other Information
Items 1-5.............................................................................................. 10
Item 6 Exhibits and Reports on Form 8-K.............................................................. 11
2
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
1mage Software, Inc.
BALANCE SHEETS
Unaudited
March 31, December 31,
ASSETS 2005 2004
--------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 190,281 $ 50,503
Receivables:
Trade (less allowance: 2005, $3,750; 2004, $20,000) 187,104 81,851
Other 25,000
Prepaid expenses and other current assets 6,815 2,033
Inventory 4,878 5,756
Employee advances 348 393
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Total current assets 414,426 140,536
PROPERTY AND EQUIPMENT, at cost, net 29,728 33,816
OTHER ASSETS:
Software development costs, net 668,704 680,613
Loan costs, net 4,329 8,649
Rent/security deposit 7,841 7,841
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TOTAL ASSETS $ 1,125,028 $ 871,455
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LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Line of credit- bank $ 162,300 $ 172,300
Current portion of capital lease obligations 4,124 4,124
Deferred revenue 302,865 310,403
Accounts payable 122,541 60,002
Accrued liabilities 345,989 370,040
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Total current liabilities 937,819 916,869
LONG-TERM OBLIGATIONS:
Capital lease obligations 4,375 5,311
Deferred rent 11,930 12,636
Line of credit-Related Parties, net of discount 393,273 197,772
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409,578 215,719
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SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, $.004 par value - 10,000,000 shares authorized;
shares outstanding: 2005 and 2004: 3,302,597 13,210 13,210
Additional paid-in capital 7,421,601 7,361,988
Accumulated deficit (7,657,180) (7,636,331)
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Total shareholders' equity (deficit) (222,369) (261,133)
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 1,125,028 $ 871,455
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See Notes to Condensed Financial Statements
3
1mage Software, Inc.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31,
------------------------------
2005 2004
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REVENUE
System sales and software licenses $ 172,056 $ 156,007
Services and annual fees 234,085 287,737
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Total revenue 406,141 443,744
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COST OF REVENUE
System sales and software licenses 111,700 102,265
Services and annual fees 86,088 138,051
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Total cost of revenue 197,788 240,316
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GROSS PROFIT 208,353 203,428
% of Revenue 51% 46%
OPERATING EXPENSES:
Selling, general & administrative 200,043 349,269
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INCOME/(LOSS) FROM OPERATIONS 8,310 (145,841)
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OTHER INCOME/(EXPENSE):
Interest expense (29,590) (9,104)
Interest income 399 82
Other income 32 --
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Total other income (expense) (29,159) (9,022)
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LOSS BEFORE INCOME TAXES (20,849) (154,863)
PROVISION FOR INCOME TAXES -- --
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NET LOSS $ (20,849) $ (154,863)
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BASIC AND DILUTED LOSS PER COMMON SHARE: $
$ (.01) (.05)
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WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING: 3,302,597 3,287,597
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See Notes to Condensed Financial Statements
4
1mage Software, Inc.
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
----------------------------
2005 2004
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings/(Loss) $ (20,849) $ (154,863)
Adjustments to reconcile earnings to net cash
provided by operating activities:
Depreciation and amortization 74,338 84,093
Amortization of deferred loan costs 4,320 --
Amortization of debt discount 16,664 --
Deferred rent (706) --
Deferred revenue (7,538) (10,000)
Changes in assets and liabilities:
Receivables (130,253) (21,243)
Inventory 878 (3,532)
Prepaid expenses and other assets (4,737) 32,180
Accounts payable 62,539 (27,627)
Accrued liabilities (24,051) (13,775)
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Net cash used for operating activities (29,395) (114,767)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment -- (2,963)
Additions to capitalized software (58,341) (65,286)
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Net cash used for investing activities (58,341) (68,249)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of line of credit- Bank (10,000) --
Additions to the line of credit- Bank -- 50,686
Additions to the line of credit- Related Party 238,450 50,000
Principal payments under capital lease obligations (936) (702)
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Net cash provided by (used for) financing activities 227,514 99,984
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DECREASE IN CASH AND CASH EQUIVALENTS 139,778 (83,032)
CASH AND CASH EQUIVALENTS, beginning of period 50,503 143,505
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CASH AND CASH EQUIVALENTS, end of period $ 190,281 $ 60,473
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SUPPLEMENTAL CASH FLOWS INFORMATION
Beneficial conversion option associated with DEMALE $ 59,613 $ --
line of credit
Capital lease obligation incurred for purchase of equipment $ -- $ 1,993
See Notes to Condensed Financial Statements
5
1mage Software, Inc.
NOTES TO INTERIM FINANCIAL STATEMENTS
GENERAL:
Management has elected to omit substantially all notes to the unaudited interim
financial statements. Reference should be made to the Company's annual report on
Form 10-K for the year ended December 31, 2004 as this report incorporates the
Notes to the Company's year-end financial statements. The condensed balance
sheet of the Company as of December 31, 2004 has been derived from the audited
balance sheet of the Company as of that date.
UNAUDITED INTERIM INFORMATION:
The unaudited interim financial statements contain all necessary adjustments
(consisting of only normal recurring adjustments), which, in the opinion of
Management, are necessary for a fair statement of the results for the interim
periods presented. The results of operations for the interim periods presented
are not necessarily indicative of those expected for the year.
Revenue Recognition - Revenue from the sale of software licenses, computer
equipment, and existing application software packages is recognized when the
software and computer equipment are shipped to the customer, remaining vendor
obligations are insignificant, there are no significant uncertainties about
customer acceptance and collectibility is probable. Revenue from related
services, including installation and software modifications, is recognized upon
performance of services. Maintenance revenue is recognized ratably over the
maintenance period.
Income Taxes - The Company follows the liability method of accounting for income
taxes in accordance with Statement of Financial Accounting Standards (SFAS) No.
109. Under this method, deferred income taxes are recorded based upon
differences between the financial reporting and tax bases of assets and
liabilities and are measured using enacted tax rates and laws that will be in
effect when the underlying assets or liabilities are received or settled.
The Company has recorded a valuation allowance against the deferred tax assets
due to the uncertainty of ultimate realizability.
Earnings (Loss) Per Share - Earnings/ (Loss) per share is computed by dividing
net income (loss) by the weighted average number of common and equivalent shares
outstanding during the period. Outstanding stock options are treated as common
stock equivalents for purposes of computing diluted earnings per share. As the
Company incurred a net loss for the periods ended March 31, 2005 and 2004, the
outstanding stock options and stock purchase warrants were antidilutive and have
been excluded from the computation of diluted earnings per share.
Stock-Based Compensation -The Company has three stock-based employee
compensation plans. The Company accounts for these plans under the recognition
and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. No stock-based employee compensation
cost is reflected in net income, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
grant date. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation, to stock-based
employee compensation.
6
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For the three months ended
March 31
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2005 2004
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Net (loss), as reported $ (20,849) $(154,863)
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Less: Total stock-based employee compensation cost determined under
the fair value based method, net of income taxes (5,420) (5,807)
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Pro forma net (loss) $ (26,269) $(160,670)
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Loss per share:
- -----------------------------------------------------------------------------------------------------
Basic and Diluted Loss - as reported $ (0.01) $ (0.05)
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Basic and Diluted Loss - pro forma $ (0.01) $ (0.05)
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Line of Credit - Related Party - On April 1, 2003, the Company entered into a
$300,000 revolving line-of-credit agreement (the "Agreement") with DEMALE, LLC,
an entity controlled by certain stockholders of the Company. The lender was
given the right to convert all or any portion of the unpaid principal and
interest owed under the line into shares of the Company's common stock at a
conversion price equal to 80% of the fair market value on that date. Effective
March 31, 2005, the Agreement was amended to increase the line of credit to
$500,000 and to extend the due date until June 30, 2007 or such earlier date as
is mutually agreed upon by the Company and DEMALE. The amendment also changed
the conversion price for the outstanding principal and interest on the line to
$.14 per share, or 80% of the fair market value on the date of the written
notice, whichever is lower. At March 31, 2005, there was $462,050 borrowed
against this line. The line is secured by substantially all of the Company's
assets but is subordinated to the bank line of credit, which holds a senior lien
on the same assets. Interest is accrued and payable quarterly at prime plus 1
1/2% (7.25% at March 31, 2005) but may not be less than 7%; therefore, at March
31, 2005, interest was being accrued at 7.25%.
Subsequent Event
In April 2005, the Company filed an appeal from the district court's judgment
confirming the award against the Company in the Reynolds and Reynolds
arbitration. The appeal was filed with the United States Court of Appeals for
the Tenth Circuit and required the Company to file a cash bond for $180,000,
which substantially reduced the Company's cash and cash equivalents of $190,000
reported on March 31, 2005.
7
OVERVIEW
1mage Software, Inc. (the "Company") continues to face the challenge of
consistently generating revenues at or above the same level it achieved prior to
the termination by Reynolds & Reynolds, Inc., its largest customer. Revenues
from the Company's new customers since that time, which would have otherwise
represented business growth, have been used instead to sustain operations.
Accordingly, the Company has focused on the development of new customers and new
markets through its channel partners program, with mixed success.
The Company has developed a new, lower cost, strategy for the distribution
of its products and services. The downturn in revenue associated with this
change in strategy, however, has required the Company to bring its cost
structure in line with its available revenue. As a result, the Company
implemented new stringent cost cutting measures throughout 2004 and into 2005
that are expected to help improve its results of operations in 2005.
Despite the lower sales revenue, the Company made a number of positive
improvements during the first quarter of 2005. While total revenue decreased 8%,
gross profit as a percent of revenue increased, as the Company began to see some
positive results from changing its sales model to an independent sales network.
By outsourcing consulting services and eliminating related salary expenses, the
Company was able to make progress in its goal of returning to profitability by
dramatically reducing SG&A expenses. In the first quarter of 2005, the Company
improved its bottom line by $134,000 from a year earlier. This improvement
occurred notwithstanding a sharp increase in interest expense, due in part to
the amortization of the DEMALE debt discount, which was $30,000 for the first
quarter of 2005, as compared to $9,000 for the first quarter of 2004. Despite
the overall improvement, the Company still reported a $21,000 net loss for the
first quarter of the current year, as compared to a $155,000 loss a year ago.
Because the Company has limited capital resources, namely a bank line of credit
and a private line of credit from its shareholders, it cannot continue to
sustain such losses without a seriously adverse effect on its liquidity and
operations. Thus, the Company has redoubled its sales efforts and continues to
eliminate non-essential expenses as part of its relentless efforts to
re-establish profitability.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS FOR THREE MONTHS ENDED MARCH 31, 2005 VERSUS MARCH 31,
2004
The Company reported revenue of $406,000 for the first quarter of 2005, a
$38,000 decrease (8%) from $444,000 posted for the first quarter in 2004. This
decrease was primarily due to a $49,000 decrease in consulting services revenue
that was, in terms of overall profitability, offset by a $62,000 reduction in
consulting services salaries. This is a result of the Company's new focus on
generating revenue through an independent sales network, rather than selling
through its direct sales channels. By utilizing an outside sales network, fixed
costs of salaried employees are significantly reduced. Annual license fee
revenue of $175,000 for the first quarter was roughly equivalent to the $179,000
reported in 2004. Revenue from hardware sales of $40,000 was $27,000 (209%)
higher than the same quarter in 2004. A significant reduction in technical
support salaries and related expenses caused gross profit as a percentage of
total revenue to increase 5% over last year to 51% of total revenue (versus 46%
in first quarter 2004). SG&A expenses of $200,000 were 43% lower than first
quarter last year, a decrease of $149,000 from the $349,000 posted a year ago.
Expenses were lower for nearly every category, as a result of eliminating all
8
non-essential expenses. Legal expenses were $47,000 less for the first quarter
of 2005, as compared to the first quarter of 2004, on account of the diminished
activity in the Reynolds and Reynolds litigation. Interest expense, due in part
to the amortization of the DEMALE debt discount, was $30,000 for the first
quarter of 2005, a $21,000 (106%) increase from $9,000 recorded in 2004. The
combination of lower revenues, reduced operating expenses and higher interest
expense caused the Company to incur a net loss of $21,000, or $(.01) per share
for the first quarter of 2005 versus a net loss of $155,000 or $(.05) per share
for the same quarter a year ago.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents of $190,000 increased approximately
$140,000 during the three months ended March 31, 2005 as compared to December
31, 2004. Besides the $21,000 loss for the first quarter, the Company used cash
of $58,000 for deferred development expenses to offset the additional $238,000
drawn down on the DEMALE line of credit. The Company had deficit working capital
of $523,000 as of March 31, 2005, versus deficit working capital of $776,000 as
of December 31, 2004. Included in current liabilities is $303,000 for Deferred
Revenue, which represents payments on annual maintenance contracts that will be
earned over the next twelve months.
The Company had drawn $162,300 on its bank line of credit on March 31, 2005. The
$200,000 bank line matured in February 2005 and is collateralized by all
accounts receivable and general intangibles of the Company. The Company has
negotiated an extension of time to repay the promissory note underlying the bank
line of credit, which was due in full on March 31, 2005, until August 15, 2005.
During the four and a half month extension, the Company will make payments of
principal and interest based on a 48 month amortization schedule. There can be
no assurance that the Company will be able to obtain a further extension from
the bank or that it will be able to locate alternative sources of capital to pay
the entire remaining principal when it falls due on August 15, 2005.
The Company had drawn $462,050 on its line of credit with DEMALE on March 31,
2005. This private line of credit has a limit of $500,000, expires in June 2007
and is secured by a second lien on the same assets as the bank line of credit.
Shortly after the end of the quarter, in April 2005, the Company filed an appeal
from the district court's judgment confirming the award against the Company in
the Reynolds and Reynolds arbitration. The appeal was filed with the United
States Court of Appeals for the Tenth Circuit and required the Company to file a
cash bond for $180,000, which substantially reduced the Company's cash and cash
equivalents of $190,000 reported on its March 31, 2005 balance sheet.
The Company receives its revenues from software licenses, recurring annual
maintenance/license fees, consulting services and minimal hardware sales.
Notwithstanding the burdens and unprecedented hardships imposed by the Reynolds
arbitration award and judgment, the Company expects that its continued
relationship with DEMALE, and the cash flows generated from current operations,
will be sufficient to meet its immediate needs for working capital. There can be
no assurance, however, that the Company's expectations in this regard will prove
to be accurate or that the Company will be able to continue as a going concern.
Moreover, the long-term availability of new capital to the Company remains
uncertain.
The Company has no material commitments for capital expenditures for 2005.
9
Forward Looking Statements
Some of the statements made herein are not historical facts and may be
considered "forward looking statements." All forward-looking statements are, of
course, subject to varying levels of uncertainty. In particular, statements
which suggest or predict future events or state the Company's expectations or
assumptions as to future events may prove to be partially or entirely
inaccurate, depending on any of a variety of factors, such as adverse economic
conditions, new technological developments, competitive developments,
competitive pressures, changes in the management, personnel, financial condition
or business objectives of one or more of the Company's customers, increased
governmental regulation or other actions affecting the Company or its customers
as well as other factors.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk Inapplicable
Item 4. Controls and Procedures
Internal Controls
As of the end of the period reported on in this report, the Company has
undertaken an evaluation under the supervision and with the participation of
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Rule 13a-15 of the Securities
Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure controls and
procedures were effective, in all material respects, with respect to the
recording, processing, summarizing and reporting, within the time periods
specified in the SEC's rules and forms, of information required to be disclosed
by the Company in the reports that it files or submits under the Exchange Act.
There have been no significant changes in the Company's internal controls during
the quarter ended March 31, 2005, or in other factors that could significantly
affect internal controls subsequent to the date of the evaluation described
above.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Shortly after the end of the quarter, in April 2005, the Company filed an
appeal from the district court's judgment confirming the award against the
Company in the Reynolds and Reynolds arbitration. The appeal was filed with the
United States Court of Appeals for the Tenth Circuit and required the Company to
file a $180,000 cash bond pending appeal.
Item 2. Changes in Securities and Use of Proceeds Inapplicable
Item 3. Defaults Upon Senior Securities Inapplicable
Item 4. Submission of Matters to a Vote of Security Holders Inapplicable
Item 5. Other Information Inapplicable
10
Item 6. Exhibits
Exhibit Table
31.1 Certificate of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certificate of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32 Certificate of CEO and CFO pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
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.
1mage Software, Inc.
(Registrant)
Date: 5/13/2005 /s/ David R. DeYoung
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David R. DeYoung
President, Principal and Chief Executive Officer
Date: 5/13/2005 /s/ Mary Anne DeYoung
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Mary Anne DeYoung
Vice President, Finance and Principal Financial Officer
11