Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. Quantitative and Qualitative
Disclosures About Market Risk.
We are exposed to market risk from changes in exchange rates,
interest rates and inflation. All of these market risks arise in the ordinary course of business, as we do not engage in speculative trading
activities. The following analysis provides additional information regarding these risks.
Foreign Currency and Exchange Risk
Our revenue and expenses are primarily denominated in U.S.
dollars. Our functional currency is the U.S. dollar. Our sales are mainly denominated in U.S. dollars and Euros. A significant portion
of our operating costs are in Israel, consisting principally of salaries and related personnel expenses, and facility expenses, which
are denominated in NIS. This foreign currency exposure gives rise to market risk associated with exchange rate movements of the U.S. dollar
against the NIS and Euros. Furthermore, we anticipate that a significant portion of our expenses will continue to be denominated in NIS.
To reduce the impact of foreign currency exchange risks associated
with forecasted future cash flows and certain existing assets and liabilities and the volatility in our consolidated statements of operations,
we established a hedging policy during the first quarter of 2022. Currently, our hedging activity relates to U.S. dollar/NIS exchange
rate exposure. We do not intend to enter into derivative instruments for trading or speculative purposes. We will account for our derivative
instruments as either assets or liabilities and carry them at fair value in the consolidated balance sheets. The accounting for changes
in the fair value of the derivative will depend on the intended use of the derivative and the resulting designation. Our hedging activities
are expected to reduce but not eliminate the impact of currency exchange rate movements.
A hypothetical 10% change in foreign currency exchange rates
applicable to our business would have had an impact on our results for the year ended December 31, 2021, of $8.6 million due to NIS and
$3.6 million due to Euros.
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Interest Rate Risk
As of December 31, 2021, we had outstanding floating rate debt obligations
of $38.6 million (consisting of the outstanding principal balance under our credit facilities). Accordingly, fluctuations in market interest
rates may increase or decrease our interest expense which will, in turn, increase or decrease our net income and cash flow. We seek to
manage exposure to adverse interest rate changes through our normal operating and financing activities. At this time, we do not use derivative
instruments to mitigate our interest rate risk. A hypothetical 10% change in interest rates during the periods presented would have resulted
in a change to interest expense of $0.3 million for the year ended December 31, 2021.
Impact of Inflation
While it is difficult to accurately measure the impact
of inflation due to the imprecise nature of the estimates required, we do not believe inflation has had a material effect on our historical
results of operations and financial condition. However, if our costs were to become subject to significant inflationary pressures, we
may not be able to fully offset higher costs through price increases or other corrective measures, and our inability or failure to do
so could adversely affect our business, financial condition, and results of operations.
Item 8. Financial Statements
and Supplementary Data.
The financial statements required to be filed pursuant to this
Item 8 are appended to this report. An index of those financial statements is found in Item 15 of Part IV of this Annual Report on Form
10-K.
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Item 9. Changes in and Disagreements
with Accountants on Accounting and Financial Disclosure.
None.