SPS COMMERCE INC Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

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This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of the U.S. Private Securities Litigation Reform Act of 1995.
Forward-looking statements regarding us, our business prospects and our results
of operations are subject to certain risks and uncertainties posed by many
factors and events that could cause our actual business, prospects, and results
of operations to differ materially from those that may be anticipated by such
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date of this
report. In some cases, you can identify forward-looking statements by the
following words: "anticipate," "assume," "believe," "continue," "could,"
"estimate," "expect," "intend," "may," "ongoing," "plan," "potential,"
"predict," "project," "should," "will," "would," or the negative of these terms
or other comparable terminology, although not all forward-looking statements
contain these words. Similarly, statements that describe our future plans,
objectives or goals are also forward-looking. Forward-looking statements may
also be made from time to time in oral presentations, including telephone
conferences and/or webcasts open to the public. Shareholders, potential
investors and others are cautioned that all forward-looking statements involve
risks and uncertainties that could cause results in future periods to differ
materially from those anticipated by some of the statements made in this report,
including the risks and uncertainties described under the heading "Risk Factors"
appearing in our Annual Report on Form 10-K for the year ended December 31,
2021, as may be updated in our subsequent Quarterly Reports on Form 10-Q from
time to time. We expressly disclaim any intent or obligation to update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise. Readers are urged to carefully review and consider the
various disclosures made by us in this report and in our other reports filed
with the SEC that advise interested parties of the risks and factors that may
affect our business.

Overview

SPS Commerce is a leading provider of cloud-based supply chain management
services across our global retail network. Our products make it easier for
retailers, suppliers, grocers, distributors, and logistics firms to orchestrate
the management of item data, order fulfillment, inventory control, and sales
analytics across omnichannel retail channels. SPS Commerce delivers our products
using a full-service model whereby our internal experts monitor, update, and
boost network performance on our customers' behalf.

The services offered by SPS Commerce eliminate the need for on-premise software
and support staff by taking on that capability on the customer's behalf. The
services we provide enable our customers to increase their supply cycle agility,
optimize their inventory levels and sell-through, reduce operational costs and
gain increased visibility into customer orders, to help ensure that suppliers,
grocers, distributors, and logistics firms can satisfy exacting retailer
requirements.

We plan to continue to grow our business by further penetrating the supply chain
management market, increasing revenues from our customers as their businesses
grow, expanding our distribution channels, expanding our international presence
and, from time to time, developing new products and applications. We also intend
to selectively pursue acquisitions that will add customers, allow us to expand
into new regions, or allow us to offer new functionalities.

Key Financial Terms, Measures and Non-GAAP Measures

We have several key financial terms and metrics, as discussed in our Annual
Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC,
under the heading "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

To supplement our financial statements, we provide investors with Adjusted
EBITDA, Adjusted EBITDA Margin, and non-GAAP income per share, all of which are
non-GAAP financial measures. We believe that these non-GAAP measures provide
useful information to our management, board of directors, and investors
regarding certain financial and business trends relating to our financial
condition and results of operations. Our management uses these non-GAAP measures
to compare our performance to that of prior periods for trend analyses and
planning purposes. Adjusted EBITDA is also used for purposes of determining
executive and senior management incentive compensation.

These non-GAAP measures should not be considered a substitute for, or superior
to, financial measures calculated in accordance with GAAP. These non-GAAP
financial measures exclude significant expenses and income that are required by
GAAP to be recorded in our financial statements and are subject to inherent
limitations. Investors should review the reconciliations of non-GAAP financial
measures to the comparable GAAP financial measures that are included in this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
                                                                                             Form 10-Q for the Quarterly Period
[[Image Removed: spsc-20220630_g2.jpg]]SPS COMMERCE, INC.                    18                             ended June 30, 2022


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Results of Operations

Three months completed June 30, 2022 Compared to the three months ended June 30, 2021

The following table presents our results of operations for the periods
indicated:

                                                                  Three Months Ended June 30,
                                                     2022                                               2021                                      Change
(dollars in thousands)                  $                   % of revenue(1)                $                % of revenue(1)                $                 %
Revenues                        $      109,178                         100.0  %       $ 94,539                         100.0  %       $ 14,639               15.5  %
Cost of revenues                        37,530                          34.4            31,730                          33.6             5,800               18.3
Gross profit                            71,648                          65.6            62,809                          66.4             8,839               14.1
Operating expenses
Sales and marketing                     24,582                          22.5            21,952                          23.2             2,630               12.0
Research and development                11,432                          10.5             8,899                           9.4             2,533               28.5
General and administrative              17,198                          15.8            15,758                          16.7             1,440                9.1
Amortization of intangible
assets                                   2,468                           2.3             2,671                           2.8              (203)              (7.6)
Total operating expenses                55,680                          51.0            49,280                          52.1             6,400               13.0
Income from operations                  15,968                          14.6            13,529                          14.3             2,439               18.0
Other expense, net                      (1,338)                         (1.2)             (383)                         (0.4)             (955)             249.4
Income before income taxes              14,630                          13.4            13,146                          13.9             1,484               11.3
Income tax expense                       3,877                           3.6             2,963                           3.1               914               30.8
Net income                      $       10,753                           9.8  %       $ 10,183                          10.8  %       $    570                5.6  %

(1) Amounts in column may not match due to rounding


Revenues - Revenues increased for the 86th consecutive quarter. The increase in
revenue resulted from two primary factors: the increase in recurring revenue
customers, which is driven primarily by continued business growth and by
business acquisitions, and the increase in average recurring revenues per
recurring revenue customer, which we also refer to as wallet share.

•The number of recurring revenue customers increased 12% to 38,650 at June 30,
2022 from 34,550 at June 30, 2021 primarily due to sales and marketing efforts
to acquire new customers and due to recent acquisitions.

•Wallet share increased 4% to $10,550 for the three months ended June 30, 2022
from $10,150 for the same period in 2021. This was primarily attributable to
increased usage of our products by our recurring revenue customers.

Recurring revenues increased 16% to $101.2 million for the three months ended
June 30, 2022 compared to the three months ended June 30, 2021. Recurring
revenues from recurring revenue customers accounted for 93% and 92% of our total
revenues for the three months ended June 30, 2022 and 2021, respectively. We
anticipate that the number of recurring revenue customers and wallet share will
continue to increase as we execute our growth strategy focused on further
penetrations of our market.

Revenue cost – The increase in revenue cost is mainly due to the increase in headcount, which resulted in an increase in $4.7 million staff costs and an increase of $0.5 million in software subscriptions.

Sales and marketing expenses – The increase in sales and marketing expenses is mainly explained by the increase in headcount, which resulted in an increase in $2.0 million in personnel expenses.

Research and Development Expenses - The increase in research and development
expense was primarily due to increased headcount, which resulted in an increase
of $2.1 million in personnel-related costs.
                                                                                             Form 10-Q for the Quarterly Period
[[Image Removed: spsc-20220630_g2.jpg]]SPS COMMERCE, INC.                    19                             ended June 30, 2022


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General and Administrative Expenses - The increase in general and administrative
expense was primarily related to supporting continued business growth, including
an increase in headcount which resulted in an increase in personnel-related
costs of $0.8 million. Additionally, there was an increase in professional fees
of $0.8 million, which was offset by a decrease of $0.8 million in charitable
contributions.

Amortization of Intangible Assets - The decrease in amortization of intangible
assets was driven by the full amortization of previously acquired intangible
assets as partially offset by acquired intangible assets related to recent
business combinations.

Other expenses, net – The increase in other expenses, net is mainly due to unfavorable fluctuations in exchange rates.

Income Tax Expense - The increase in income tax expense was primarily driven by
a decrease in the excess tax deductions due to the current quarter equity award
settlements. Excess tax benefits generated upon the settlement or exercise of
stock awards are recognized as a reduction to income tax expense and, as a
result, we expect that our annual effective income tax rate will fluctuate.

Adjusted EBITDA – Adjusted EBITDA, which is a non-GAAP measure of financial performance, consists of net income adjusted for income tax expense, amortization and depreciation expense, expense stock-based compensation, realized foreign exchange gain or loss on cash and investments held, investment income or loss and other adjustments necessary for fair presentation.

For the three months ended June 30, 2021other adjustments included cost divestments of implementing a cloud hosting agreement.

The following table provides a reconciliation of net income to Adjusted EBITDA:

                                                                         Three Months Ended
                                                                              June 30,
(in thousands)                                                        2022                2021
Net income                                                       $    10,753          $   10,183
Income tax expense                                                     3,877               2,963
Depreciation and amortization of property and equipment                3,950               3,529
Amortization of intangible assets                                      2,468               2,671
Stock-based compensation expense                                       8,661               7,499
Realized loss from foreign currency on cash and investments held       1,327                 349
Investment income                                                       (172)                (79)
Other                                                                      -                 213
Adjusted EBITDA                                                  $    30,864          $   27,328


                                                                                             Form 10-Q for the Quarterly Period
[[Image Removed: spsc-20220630_g2.jpg]]SPS COMMERCE, INC.                    20                             ended June 30, 2022


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Adjusted EBITDA Margin - Adjusted EBITDA Margin, which is a non-GAAP measure of
financial performance, consists of Adjusted EBITDA divided by revenue. Margin,
the comparable GAAP measure of financial performance, consists of net income
divided by revenue.

The following table provides a comparison of Margin to Adjusted EBITDA Margin:

                                                                               Three Months Ended
                                                                                    June 30,
(in thousands, except Margin and Adjusted EBITDA Margin)                   2022                      2021
Revenue                                                          $                109,178       $        94,539

Net income                                                                         10,753                10,183
Margin                                                                            10    %                11   %

Adjusted EBITDA                                                                    30,864                27,328
Adjusted EBITDA Margin                                                            28    %                29   %


Non-GAAP Income per Share - Non-GAAP income per share, which is a non-GAAP
measure of financial performance, consists of net income plus stock-based
compensation expense, amortization expense related to intangible assets,
realized gain or loss from foreign currency on cash and investments held, other
adjustments as necessary for a fair presentation, and the corresponding tax
impacts of the adjustments to net income, divided by the weighted average number
of shares of common and diluted stock outstanding during each period.

For the three months ended June 30, 2021other adjustments included cost divestments of implementing a cloud hosting agreement.

To quantify the tax effects, we recalculated income tax expense excluding the
direct book and tax effects of the specific items constituting the non-GAAP
adjustments. The difference between this recalculated income tax expense and
GAAP income tax expense is presented as the income tax effect of the non-GAAP
adjustments.

The following table provides a reconciliation of net income to non-GAAP income
per share:

                                                                         Three Months Ended
                                                                              June 30,
(in thousands, except per share amounts)                              2022                2021
Net income                                                       $    10,753          $   10,183
Stock-based compensation expense                                       8,661               7,499
Amortization of intangible assets                                      2,468               2,671

Realized foreign exchange loss on cash and investments held 1,327

                 349
Other                                                                      -                 213
Income tax effects of adjustments                                     (3,491)             (3,999)
Non-GAAP income                                                  $    19,718          $   16,916
Shares used to compute non-GAAP income per share
Basic                                                                 36,085              35,903
Diluted                                                               36,862              36,753
Non-GAAP income per share
Basic                                                            $      0.55          $     0.47
Diluted                                                          $      0.53          $     0.46


                                                                                             Form 10-Q for the Quarterly Period
[[Image Removed: spsc-20220630_g2.jpg]]SPS COMMERCE, INC.                    21                             ended June 30, 2022


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Semester completed June 30, 2022 Compared to the half-year ended June 30, 2021

The following table presents our results of operations for the periods
indicated:

                                                                    Six Months Ended June 30,
                                                      2022                                                 2021                                      Change
(dollars in thousands)                   $                    % of revenue(1)                $                 % of revenue(1)                $                 %
Revenues                        $    214,371                             100.0  %       $ 184,633                         100.0  %       $ 29,738               16.1  %
Cost of revenues                      72,919                              34.0             61,700                          33.4            11,219               18.2
Gross profit                         141,452                              66.0            122,933                          66.6            18,519               15.1
Operating expenses
Sales and marketing                   49,237                              23.0             43,307                          23.5             5,930               13.7
Research and development              22,133                              10.3             17,605                           9.5             4,528               25.7
General and administrative            32,666                              15.2             30,495                          16.5             2,171                7.1
Amortization of intangible
assets                                 4,938                               2.3              5,335                           2.9              (397)              (7.4)
Total operating expenses             108,974                              50.8             96,742                          52.4            12,232               12.6
Income from operations                32,478                              15.2             26,191                          14.2             6,287               24.0
Other expense, net                      (915)                             (0.4)              (708)                         (0.4)             (207)              29.2
Income before income taxes            31,563                              14.7             25,483                          13.8             6,080               23.9
Income tax expense                     8,207                               3.8              5,100                           2.8             3,107               60.9
Net income                      $     23,356                              10.9  %       $  20,383                          11.0  %       $  2,973               14.6  %

(1) Amounts in column may not match due to rounding


Revenues - The increase in revenue resulted from two primary factors: the
increase in recurring revenue customers, which is driven primarily by continued
business growth and by business acquisitions, and the increase in average
recurring revenues per recurring revenue customer, which we also refer to as
wallet share.

• The number of recurring revenue customers increased by 12% to 38,650 at June 30, 2022 from 34,550 to June 30, 2021.

• The share of wallet increased by 4% for $10,450 for the six months ended June 30, 2022
of $10,100 for the same period in 2021. The increase is mainly attributable to the increased use of our solutions by our recurring revenue customers.

Recurring revenues increased 17% to $198.7 million for the six months ended
June 30, 2022 compared to the six months ended June 30, 2021. Recurring revenues
from recurring revenue customers accounted for 93% and 92% of our total revenues
for the six months ended June 30, 2022 and 2021, respectively. We anticipate
that the number of recurring revenue customers and wallet share will continue to
increase as we execute our growth strategy focused on further penetrations of
our market.

Revenue cost – The increase in revenue cost is mainly due to the increase in headcount, which resulted in an increase in $8.4 million personnel costs, an increase of $1.1 million of stock-based compensation and an increase of $1.0 million software subscriptions. Additionally, as we continued to invest in the infrastructure supporting our platform, depreciation expense increased by $0.8 million.

Sales and Marketing Expenses - The increase in sales and marketing expense was
primarily due to increased headcount, which resulted in an increase of $3.7
million in personnel-related costs, an increase of $0.8 million in stock-based
compensation, and an increase of $0.7 million in variable compensation earned by
sales personnel.

Research and Development Expenses - The increase in research and development
expense was primarily due to increased headcount, which resulted in an increase
of $3.2 million in personnel-related costs, an increase of $0.8 million in
stock-based compensation, and an increase of $0.6 million in software
subscriptions.
                                                                                             Form 10-Q for the Quarterly Period
[[Image Removed: spsc-20220630_g2.jpg]]SPS COMMERCE, INC.                    22                             ended June 30, 2022


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General and Administrative Expenses - The increase in general and administrative
expense was primarily related to supporting continued business growth, including
an increase in headcount, which resulted in an increase in personnel-related
costs of $1.6 million and an increase in stock-based compensation of $0.6
million. This was partially offset by a decrease of $1.3 million in charitable
contributions.

Amortization of Intangible Assets - The decrease in amortization of intangible
assets was driven by the full amortization of previously acquired intangible
assets as partially offset by acquired intangible assets related to recent
business combinations.

Other expenses, net – The increase in other expenses, net is mainly due to unfavorable fluctuations in exchange rates.

Income Tax Expense - The increase in income tax expense was primarily driven by
a decrease in the excess tax deductions due to the current period equity award
settlements, partially offset by a decrease in nondeductible executive
compensation. Excess tax benefits generated upon the settlement or exercise of
stock awards are recognized as a reduction to income tax expense and, as a
result, we expect that our annual effective income tax rate will fluctuate.

Adjusted EBITDA – Adjusted EBITDA, which is a non-GAAP measure of financial performance, consists of net income adjusted for income tax expense, amortization and depreciation expense, expense stock-based compensation, realized foreign exchange gain or loss on cash and investments held, investment income or loss and other adjustments necessary for fair presentation.

For the six months ended June 30, 2021, other adjustments included disposals of
cloud hosting arrangement implementation costs and accelerated tenant
improvement benefit, which was incurred as part of executing a lease agreement.
This tenant improvement adjustment was partially offset by accelerated
depreciation, which is included within Depreciation and amortization of property
and equipment and was also incurred as part of executing a lease agreement.

The following table provides a reconciliation of net income to Adjusted EBITDA:

                                                                         Six Months Ended
                                                                             June 30,
(in thousands)                                                       2022                2021
Net income                                                       $   23,356          $   20,383
Income tax expense                                                    8,207               5,100
Depreciation and amortization of property and equipment               7,814               7,294
Amortization of intangible assets                                     4,938               5,335
Stock-based compensation expense                                     17,676              14,424

Realized exchange loss on cash and investments held 859

                638
Investment income                                                      (220)               (176)
Other                                                                     -                (213)
Adjusted EBITDA                                                  $   62,630          $   52,785


Adjusted EBITDA Margin - Adjusted EBITDA Margin, which is a non-GAAP measure of
financial performance, consists of Adjusted EBITDA divided by revenue. Margin,
the comparable GAAP measure of financial performance, consists of net income
divided by revenue.

The following table provides a margin to margin comparison of Adjusted EBITDA:

                                                                                             Form 10-Q for the Quarterly Period
[[Image Removed: spsc-20220630_g2.jpg]]SPS COMMERCE, INC.                    23                             ended June 30, 2022


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                                                                               Six Months Ended
                                                                                   June 30,
(in thousands, except Margin and Adjusted EBITDA Margin)                 2022                      2021
Revenue                                                          $             214,371       $        184,633

Net income                                                                      23,356                 20,383
Margin                                                                         11    %                11    %

Adjusted EBITDA                                                                 62,630                 52,785
Adjusted EBITDA Margin                                                         29    %                29    %


Non-GAAP Income per Share - Non-GAAP income per share, which is a non-GAAP
measure of financial performance, consists of net income plus stock-based
compensation expense, amortization expense related to intangible assets,
realized gain or loss from foreign currency on cash and investments held, other
adjustments as necessary for a fair presentation, and the corresponding tax
impacts of the adjustments to net income, divided by the weighted average number
of shares of common and diluted stock outstanding during each period.

For the six months ended June 30, 2021, other adjustments included disposals of
cloud hosting arrangement implementation costs and accelerated tenant
improvement benefit, which was incurred as part of executing a lease agreement.
This tenant improvement adjustment was partially offset by accelerated
depreciation, which is included within Depreciation and amortization of property
and equipment and was also incurred as part of executing a lease agreement.

To quantify the tax effects, we recalculated income tax expense excluding the
direct book and tax effects of the specific items constituting the non-GAAP
adjustments. The difference between this recalculated income tax expense and
GAAP income tax expense is presented as the income tax effect of the non-GAAP
adjustments.

The following table provides a reconciliation of net income to non-GAAP income
per share:

                                                                         Six Months Ended
                                                                             June 30,
(in thousands, except per share amounts)                             2022                2021
Net income                                                       $   23,356          $   20,383
Stock-based compensation expense                                     17,676              14,424
Amortization of intangible assets                                     4,938               5,335

Realized exchange loss on cash and investments held 859

                 638
Other                                                                     -                (213)
Income tax effects of adjustments                                    (6,710)             (7,974)
Non-GAAP income                                                  $   40,119          $   32,593
Shares used to compute non-GAAP income per share
Basic                                                                36,110              35,828
Diluted                                                              36,897              36,741
Non-GAAP income per share
Basic                                                            $     1.11          $     0.91
Diluted                                                          $     1.09          $     0.89

Significant Accounting Policies and Estimates

This discussion of our financial condition and results of operations is based
upon our condensed consolidated financial statements, which are prepared in
accordance with GAAP and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. The preparation of these financial statements requires us to
make estimates, judgments and assumptions that affect the reported amounts of
assets, liabilities, revenues, and expenses and related disclosures. On an
ongoing basis,
                                                                                             Form 10-Q for the Quarterly Period
[[Image Removed: spsc-20220630_g2.jpg]]SPS COMMERCE, INC.                    24                             ended June 30, 2022


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we evaluate our estimates and assumptions. We base our estimates of the carrying
value of certain assets and liabilities on historical experience and on various
other assumptions that we believe to be reasonable. Our actual results may
differ from these estimates under different assumptions or conditions.

A critical accounting policy or estimate is one that is both material to the
presentation of our financial statements and requires us to make difficult,
subjective, or complex judgments relating to uncertain matters that could have a
material effect on our financial condition and results of operations.
Accordingly, we believe that our policies for revenue recognition, internal-use
software, and business combinations are the most critical to fully understand
and evaluate our financial condition and results of operations.

During the six months ended June 30, 2022, there were no changes in our critical
accounting policies or estimates. For additional information regarding our
critical accounting policies and estimates, see the discussion under "Critical
Accounting Policies and Estimates" in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in our Annual Report on
Form 10-K for the year ended December 31, 2021, as filed with the SEC.

Cash and capital resources

As of June 30, 2022, our principal sources of liquidity were cash and cash
equivalents and short-term investments totaling $259.2 million and net accounts
receivable of $40.1 million. Our investments are selected in accordance with our
investment policy, with a goal of maintaining liquidity and capital
preservation. Our cash equivalents and short-term investments are held in highly
liquid money market funds, certificates of deposits, and commercial paper.

The summary of activity within the condensed consolidated statements of cash
flows was as follows:

                                                 Six Months Ended
                                                     June 30,
(in thousands)                                  2022          2021

Net cash flow generated by operating activities $36,785 $54,658
Net cash used in investing activities (5,294) (17,772) Net cash used in financing activities (26,183) (2,276)

Net cash flow from operating activities

The decrease in cash flow from operating activities is mainly due to changes in the amount and timing of settlement of operating assets and liabilities, mainly the change in compensation payable.

Net cash flow from investing activities

The decrease in cash used in investing activities is mainly attributable to the increase in maturities of investments, partially offset by the increase in purchases of investments.

Net cash flow from financing activities

The increase in cash flow used in financing activities is mainly due to the increase in cash flow used for share buybacks.

                                                                                             Form 10-Q for the Quarterly Period
[[Image Removed: spsc-20220630_g2.jpg]]SPS COMMERCE, INC.                    25                             ended June 30, 2022


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Summary of contractual and commercial commitments

Our contractual obligations and commercial commitments as of June 30, 2022 are
summarized below:

                                                                          Payments Due by Period
                                          Less Than                                                  More Than
(in thousands)                              1 Year            1-3 Years           3-5 Years           5 Years             Total
Operating lease obligations, including
imputed interest                         $   5,012          $    8,459          $    6,887          $       -          $ 20,358
Purchase commitments                         5,516                 515                   -                  -             6,031
Total                                    $  10,528          $    8,974          $    6,887          $       -          $ 26,389


Future Capital Requirements

Our future capital requirements may differ significantly from those currently anticipated and will depend on many factors, including:

•costs of developing and implementing new products and applications, if any;

•the sales and marketing resources needed to further penetrate our market and gain acceptance for new products and applications that we may develop;

•the expansion of our operations in the WE and internationally;

•response of competitors to our products and applications; and

•the use of capital for acquisitions, if any.

Historically, we have experienced increases in our expenses in line with the growth of our operations and our workforce, and we expect our expenses to continue to increase as we expand our business.

We believe that our cash, cash equivalents, investments and cash flow from operations will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months.

Off-balance sheet arrangements

We have no off-balance sheet arrangements, investments in special purpose entities or undisclosed borrowings or debts. In addition, we are not a party to any derivative contracts or synthetic leases.

Exchange rate and inflation rate

For information regarding the effect of foreign currency exchange rate changes,
refer to the section entitled "Foreign Currency Exchange Risk," included in Part
I, Item 3, "Quantitative and Qualitative Disclosures About Market Risk" of this
Quarterly Report on Form 10-Q.

Inflation and changing prices did not have a material effect on our business
during the six months ended June 30, 2022 and we do not expect that inflation or
changing prices will materially affect our business in the foreseeable future.

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