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.
As
of June 30, 2021, we had $31.25 million in cash and cash equivalents, $34.31 million in short-term bank deposits and restricted deposits
and $23.27 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 and Euro. As of June 30, 2021, 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.
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Foreign
Currency Exchange Risk and Inflation
Foreign
Currency Exchange Risk - NIS
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, 2021, we own net financial balances in NIS of approximately ($1,614,000).
Assuming
a 10% appreciation of the NIS against the U.S. dollar, we would experience exchange rate loss of approximately $179,000, while assuming
a 10% devaluation of the NIS against the U.S. dollars, we would experience an exchange rate gain of approximately $147,000, 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,
2020
2021
Average rate for period
3.507
3.322
Rate at period-end
3.466
3.260
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.
Foreign
Currency Exchange Risk - Euro ( €)
Following
the receipt of the first tranche in amount of €20 million (approximately $24 million) of the loan from the EIB pursuant to the EIB
Finance Agreement, we have established both a cash asset and a liability in our financial statements. If the Euro increases in value
in relation to the U.S. dollar, both the asset and liability of our loan from the EIB will increase, and if the Euro decreases in relation
to the U.S. dollar, both the asset and liability will conversely decrease.
Since
the tranche and the accumulated interest are payable together in a single installment within five years from disbursement of the tranche,
and we are likely to use the cash received to finance our operations, as time progress the cost basis of the liability of our loan is
expected to increase and the cash asset is expected to decrease.
As
part of our hedging strategy, we may use currency transactions of options and forward contracts to minimize the risk of financial exposure
from fluctuations in the exchange rate of the U.S. dollar against the Euro
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