Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss arising from adverse changes in market rates and prices. We are primarily exposed to market risks from
changes in foreign exchange rates, changes in the market value of our investments and changes in our stock price.
Approximately 17% of our revenues and expenses are generated internationally in the United Kingdom and are typically denominated in the local currency. Accordingly, our U.K. subsidiary uses the local currency as their functional currency.
Our international business is subject to risks typical of any international business, including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions and
foreign exchange rate volatility. Our future results could be materially adversely impacted by changes in these or other factors.
The financial statements of our U.K. business are denominated in the local currency. As a result, we are also exposed to foreign exchange rate fluctuations as the financial results of foreign subsidiaries are translated into
U.S. dollars in consolidation. As exchange rates fluctuate, these results, when translated, may vary from expectations and adversely impact overall expected results and profitability. We have not historically used hedging instruments to protect
ourselves against foreign exchange risk because the effect on the Company has been immaterial to our operating results.
We
performed a sensitivity analysis as of December 31, 2009 assuming a hypothetical 10% adverse change in foreign currency exchange rates. Holding all other variables constant, the analysis indicated that such a market movement would affect our
income from operations by approximately $216,000. However, actual gains and losses in the future could differ materially from this analysis based on the timing and amount of both foreign currency exchange rate movements and our actual exposure.
Equity price risk arises from exposure to securities that represent an ownership interest in our investments. The value of
our marketable equity securities are based on quoted market prices. Market prices of common equity securities, in general, are subject to fluctuations, which could cause the amount to be realized upon the sale of the instruments to differ
significantly from the current reported value. The fluctuations may result from perceived changes in the underlying economic characteristics of our investments, the relative price of alternative investments, general market conditions and supply
and demand imbalances for a particular security.
The Company invests its cash in highly liquid investments with original
maturities of three months or less as well as in other short-term debt instruments. We have not used derivative financial instruments in fiscal year 2009 to alter the interest rate characteristics of our investment holdings. We have concluded that
we do not have material market risk exposure with regard to these investments.
In connection with the Note and Warrant
Purchase Agreement we entered into on October 22, 2009 as further discussed in Note 7 to the consolidated financial statements contained elsewhere in this annual report on Form 10-K, we issued warrants to allow the Lender to purchase up to
437,500 shares of our common stock at any time until October 22, 2014. These warrants are considered an embedded derivative instrument. US GAAP requires bifurcation of embedded derivative instruments and measure of their fair value for
accounting purposes. We estimate the fair value of this derivative instrument using the Black-Scholes option pricing model, which takes into account a variety of factors, including historical stock price volatility, risk-free interest rates,
remaining term and the closing price of our common stock. Changes in the assumptions used to estimate the fair value of these derivative instruments could result in a material change in the fair value of the instruments.
We performed an analysis as of December 31, 2009 assuming a hypothetical $1, $2 and $3 change in our stock price. Holding all other
variables constant, the analysis indicated that such market movements would affect our income from operations by approximately $324,000, $677,000 and $1,050,000, respectively. However, actual gains and losses in the future could differ materially
from this analysis.
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