Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk.
We are exposed to a variety of risks, including
changes in interest rates, foreign currency exchange rates and inflation.
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As of June 30, 2020, we had $8.3 million
in cash and cash equivalents, $38 million in short-term bank deposits and restricted deposits and $12.7 million in long-term bank
deposits and restricted deposits.
We adhere to an investment policy set by
our investment committee, which aims to preserve our financial assets, maintain adequate liquidity and maximize return while minimizing
exposure to the NIS. Such policy further provides that we should hold most of our current assets in bank deposits and the remainder
of our current assets should be invested in low risk instruments. As of June 30, 2020, the currency of our financial portfolio
is mainly in U.S. dollars and we use options contracts in order to hedge our exposures to currencies other than the U.S. dollar.
Interest Rate Risk
We invest a major portion of our cash surplus
in bank deposits in banks in Israel. Since the bank deposits typically carry fixed interest rates, financial income over the holding
period is not sensitive to changes in interest rates. However, our interest gains from future deposits may decline in the future
as a result of changes in the financial markets. In any event, given the historic low levels of the interest rate, we estimate
that a further decline in the interest rate we are receiving will not result in a material adverse effect to our business.
Foreign Currency Exchange Risk and Inflation
A significant portion of our expenditures,
including salaries, materials, consultants’ fees and facility expenses relate to our operations in Israel. The cost of those
Israeli operations, as expressed in U.S. dollars, is influenced by the extent to which any increase in the rate of inflation in
Israel is not offset (or is offset on a lagging basis) by a devaluation of the NIS in relation to the U.S. dollar. If the U.S.
dollar declines in value in relation to the NIS, it will become more expensive for us to fund our operations in Israel. In addition,
as of June 30, 2020, we own net financial balances in NIS of approximately ($13,989,000).
Assuming a 10% appreciation of the NIS against
the U.S. dollar, we would experience exchange rate loss of approximately $1,272,000, while assuming a 10% devaluation of the NIS
against the U.S. dollars, we would experience an exchange rate gain of approximately $1,554,000, in both cases excluding the effect
of our hedging transactions (as described below).
The exchange rate of the U.S. dollar to
the NIS, based on exchange rates published by the Bank of Israel, was as follows:
Year Ended June 30,
2018
2019
2020
Average rate for period
3.529
3.647
3.507
Rate at period-end
3.650
3.566
3.466
We use currency transactions of options
and forward contracts to decrease the risk of financial exposure from fluctuations in the exchange rate of the U.S. dollar against
the NIS.
For the year ended June 30, 2020, our net
realized loss from hedging transactions that are non-designated and consist primarily of options strategies and also forward contracts
to minimize the risk associated with the foreign exchange effects of monetary assets and liabilities denominated in NIS was $11,000.
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