Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
The following discussion provides forward-looking quantitative and qualitative information about our potential exposure to market risk. Market risk represents the potential loss arising from adverse changes in the value of financial instruments. The risk of loss is assessed based on the likelihood of adverse changes in fair values, cash flows or future earnings. We are exposed to market risk for changes in the market values of our investments (Investment Risk), the impact of interest rate changes (Interest Rate Risk), and the impact of foreign currency exchange changes (Foreign Currency Exchange Risk).
Investment Risk
We regularly review the carrying value of our investments and identify and recognize losses, for income statement purposes, when events and circumstances indicate that any declines in the fair values of such investments below our accounting basis are other than temporary. As of December 31, 2022, none of our investments experienced any declines in fair value that are other than temporary. We do not enter into investments for trading or speculative purposes.
As of December 31, 2022, we had $14.1 million deposited in four banks located in China, $0.7 million deposited in one bank located in France, and $0.4 million deposited in one bank located in the United Kingdom. We also maintained $130.2 million in cash equivalents that include money market accounts as of December 31, 2022. Additionally, we maintain approximately $15.1 million in investment grade corporate and municipal bonds as of December 31, 2022. The remaining amounts of our cash equivalent as of December 31, 2022, are in non-interest bearing accounts.
As of December 31, 2021, we had $13.1 million deposited in seven banks located in China, $1.2 million deposited in one bank located in France, and $0.3 million deposited in one bank located in the United Kingdom. We also maintained $102.9 million in cash equivalents that include money market accounts as of December 31, 2021. Additionally, we maintain approximately $6.5 million in investment grade corporate and municipal bonds as of December 31, 2021. The remaining amounts of our cash equivalent as of December 31, 2021, are in non-interest bearing accounts.
Interest Rate Risk
Our primary exposure to market risk is interest rate sensitive investments and credit facilities, which are affected by changes in the general level of U.S. interest rates. Due to the nature of our short-term investments, we believe that we are not subject to any material interest rate risk with respect to our short-term investments.
As of December 31, 2022, we had $75.9 million in long-term debt and finance leases outstanding. Of this amount, $13.3 million had variable interest rates which were not locked-in through fixed interest rate swap contracts. The debt with variable interest rate exposure had a weighted-average interest rate of 5.2% at December 31, 2022. An increase in the index underlying these rates of 1% (100 basis points) would increase our annual interest expense on the debt with variable interest rate exposure by approximately $0.1 million per year.
As of December 31, 2021, we had $77.0 million in long-term debt and finance leases outstanding. Of this amount, $14.9 million had variable interest rates which were not locked-in through fixed interest rate swap contracts. The debt with variable interest rate exposure had a weighted-average interest rate of 1.8% at December 31, 2021.
Foreign Currency Exchange Risk
Our finished pharmaceutical products are primarily sold in the U.S. domestic market, and have little exposure to foreign currency price fluctuations. Our API manufacturing business in France is exposed to market risk related to changes in foreign currency exchange rates, because our insulin sales contracts are frequently denominated in euros, which are subject to fluctuations relative to the USD.
Our Chinese subsidiary, ANP, maintains its books of record in Chinese yuan. These books are remeasured into the functional currency of USD, using the current or historical exchange rates. The resulting currency remeasurement adjustments and other transactional foreign exchange gains and losses are reflected in our statement of operations.
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Our French subsidiary, AFP, maintains its books of record in euros. AUK’s subsidiary, IMS UK, maintains its books of record in British pounds. These local currencies have been determined to be the subsidiaries’ respective functional currencies. Activities in the statements of operations are translated to USD using average exchange rates during the period. Assets and liabilities are translated at the rate of exchange prevailing on the balance sheet date. Equity is translated at the prevailing rate of exchange at the date of the equity transactions. Translation adjustments are reflected in stockholders’ equity and are included as a component of other accumulated comprehensive income (loss). The unrealized gains or losses of intercompany foreign currency transactions that are of a long-term investment nature are reported in other accumulated comprehensive income (loss).
We are also exposed to the potential earnings effects from intercompany foreign currency assets and liabilities that arise from normal trade receivables and payables and other intercompany loans.
As of December 31, 2022, a 10% unfavorable change in the exchange rate of the U.S. dollar strengthening against the foreign currencies to which we have exposure would result in approximately $2.6 million reduction of foreign currency gains, and approximately $1.6 million reduction in other comprehensive income.
As of December 31, 2021, a 10% unfavorable change in the exchange rate of the U.S. dollar strengthening against the foreign currencies to which we have exposure would result in approximately $1.7 million reduction of foreign currency gains, and approximately $2.8 million reduction in other comprehensive income.
As of December 31, 2022 and 2021, our foreign subsidiaries had cash balances denominated in foreign currencies in the amount of $2.5 million and $5.7 million, respectively.
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