10. Financial risk management

This note explains the Group’s exposure to financial risks and how these risks could affect the Group’s future financial performance. Current year profit and loss information has been included where relevant to add further context.

Risk	Exposure arising from	Measurement	Management
Market risk – currency risk	Future commercial transactions Recognized financial assets and liabilities not denominated in the functional currency of each entity within the Group	Cash flow forecasting Sensitivity analysis	The future cash flows of each currency are forecast and the quantum of cash reserves held for each currency are managed in line with future forecasted requirements. Cross currency swaps are undertaken as required.

Market risk – interest rate risk	Long-term borrowings at floating rates	Sensitivity analysis	The facility can be refinanced and/or repaid. Interest rate swaps can be entered into to convert the floating interest rate to a fixed interest rate as required.

	Term deposits at fixed rates	Sensitivity analysis	Vary length of term deposits.

Market risk – price risk	Long-term borrowings	Sensitivity analysis	Forecasts of net sales of the product underlying the NovaQuest borrowing arrangement are updated on a quarterly basis to evaluate the impact on the carrying amount of the financial liability.

Credit risk	Cash and cash equivalents, and trade and other receivables	Aging analysis Credit ratings	Only transact with the best risk rated banks available in each region giving consideration to the products required.

Liquidity risk	Cash and cash equivalents Borrowings	Rolling cash flow forecasts	Future cash flows requirements are forecasted and capital raising strategies are planned to ensure sufficient cash balances are maintained to meet the Group’s future commitments.

a.	Market risk

(i) Currency risk

The Group has foreign currency amounts owing primarily in USD in Mesoblast Limited (AUD functional currency) relating to clinical, regulatory and overhead activities as well as Euro deposits and Euro receivables held in the Swiss and Singapore entities, respectively (USD functional currency) primarily relating to revenue recognized from its patent license agreement with Takeda entered into in December 2017. The Group also has foreign currency amounts owing in various other non-USD currencies in USD functional currency entities in the Group relating to clinical, regulatory and overhead activities. These foreign currency balances give rise to a currency risk, which is the risk of the exchange rate moving, in either direction, and the impact it may have on the Group’s financial performance.

Currency risk is minimized by ensuring the proportion of cash reserves held in each currency matches the expected rate of spend of each currency.

As of June 30, 2018, the Group held 92% of its cash in USD, and 8% in AUD. As of June 30, 2017 the Group held 95% of its cash in USD, and 5% in AUD.

The balances held at the end of the year that give rise to currency risk exposure are presented in USD in the following table, together with a sensitivity analysis which assesses the impact that a change of +/-20% in the exchange rate as of June 30, 2018 and June 30, 2017 would have had on the Group’s reported net profits/(losses) and/or equity balance.

		+20%			-20%
(in U.S. dollars, in thousands) As of June 30, 2018	Foreign currency balance held	Profit/(Loss) USD			Profit/(Loss) USD
Bank accounts - USD	USD 81	$	(14	)	$	20
Bank accounts - CHF	CHF 157	$	31		$	(31	)
Bank accounts - SGD	SGD 178	$	49		$	(49	)
Bank accounts - EUR	EUR 2	$	0		$	(0	)
Trade and other receivables - SGD	SGD 29	$	8		$	(8	)
Trade and other receivables - USD	USD 10,000	$	(1,667	)	$	2,500
Trade and other receivables - CHF	CHF 6	$	1		$	(1	)
Trade and other receivables - EUR	EUR 4,750	$	815		$	(815	)
Trade payables and accruals - USD	(USD 1,797)	$	300		$	(449	)
Trade payables and accruals - AUD	(AUD 446)	$	(121	)	$	121
Trade payables and accruals - SGD	(SGD 176)	$	(48	)	$	48
Trade payables and accruals - GBP	(GBP 52)	$	(0	)	$	(2	)
Trade payables and accruals - EUR	(EUR 1)	$	(0	)	$	0
Trade payables and accruals - CHF	(CHF 50)	$	(10	)	$	10
Trade payables and accruals - SEK	(SEK 118)	$	2		$	(3	)
Provisions - SGD	(SGD 74)	$	(20	)	$	20
Provisions - CHF	(CHF 2)	$	(0	)	$	0
		$	(674	)	$	1,361

		+20%			-20%
(in U.S. dollars, in thousands) As of June 30, 2017	Foreign currency balance held	Profit/(Loss) USD			Profit/(Loss) USD
Bank accounts - USD	USD 447	$	(74	)	$	112
Bank accounts - CHF	CHF 183	$	35		$	(35	)
Bank accounts - SGD	SGD 325	$	90		$	(90	)
Trade and other receivables - SGD	SGD 48	$	13		$	(13	)
Trade and other receivables - USD	USD 40	$	(7	)	$	10
Trade and other receivables - CHF	CHF 1	$	0		$	(0	)
Trade payables and accruals - USD	(USD 2,016)	$	336		$	(504	)
Trade payables and accruals - AUD	(AUD 441)	$	(115	)	$	115
Trade payables and accruals - SGD	(SGD 197)	$	(54	)	$	54
Trade payables and accruals - EUR	(EUR 42)	$	(7	)	$	7
Trade payables and accruals - CHF	(CHF 19)	$	(4	)	$	4
Provisions - SGD	(SGD 65)	$	(18	)	$	18
		$	195		$	(322	)

(ii) Cash flow and fair value interest rate risk

The Group’s main interest rate risk arises from long-term borrowings with a floating interest rate under our loan facility with Hercules, which exposes the Group to cash flow interest rate risk. As interest rates fluctuate, the amount of interest payable on financing where the interest rate is not fixed will also fluctuate. This interest rate risk can be managed by interest rate swaps which can be entered into to convert the floating interest rate to a fixed interest rate as required. Additionally, the Group can repay its loan facility at its discretion and can also refinance if the terms are suitable in the marketplace or from the existing lender.

The Group did not enter into any interest rate swaps during the year ended June 30, 2018.

The exposure of the Group’s borrowing to interest rate changes are as follows:

	As of					As of
	June 30, 2018					June 30, 2017
(in U.S. dollars, in thousands, except percent data)	Total		% of total loans			Total		% of total loans
Financial liabilities
Non-current borrowings
Variable rate borrowings - Hercules		31,966		54	%		—		—
		31,966		54	%		—		—

An analysis by maturities is provided in Note 10(c) below. The percentage of total loans shows the proportion of loans that are currently at variable rates in relation to the total amount of borrowings.

The borrowings which expose the Group to interest rate risk are described in the table below, together with the maximum and minimum interest rates being earned as of June 30, 2018 and June 30, 2017. The effect on profit is shown if interest rates change by 5%, in either direction, is as follows:

	As of									As of
	June 30, 2018									June 30, 2017
(in U.S. dollars, in thousands, except percent data)	Low			High						Low		High
Borrowings - USD		9.95	%		9.95	%	USD 31,966⁽²⁾				—		—	—
Rate increase by 5%		10.45	%		10.45	%		USD 159			—		—	—
Rate decrease by 5%⁽¹⁾		9.45	%		9.45	%		(USD 159	)		—		—	—

(1)	The interest rate will not decrease to below 9.45% per the terms of the loan agreement.

(2)	The effect on profit/loss of interest rate changes is based on the loan carrying value of $32.0 million with principal payments commencing in October 2019.

The Group is also exposed to interest rate movements which impacts interest income earned on its deposits. The interest income derived from these balances can fluctuate due to interest rate changes. This interest rate risk is managed by spreading the maturity date of our deposits across various periods. The Group ensures that sufficient funds are available, in at call accounts, to meet the working capital requirements of the Group.

The deposits held which derive interest revenue are described in the table below, together with the maximum and minimum interest rates being earned as of June 30, 2018 and June 30, 2017 The effect on profit is shown if interest rates change by 10%, in either direction, is as follows:

	As of								As of
	June 30, 2018								June 30, 2017
(in U.S. dollars, in thousands, except percent data)	Low			High					Low			High
Funds invested - USD		0.80	%		0.80	%	USD 99			0.55	%		0.55	%	USD 37,577
Rate increase by 10%		0.88	%		0.88	%	USD 0			0.61	%		0.61	%	USD 21
Rate decrease by 10%		0.72	%		0.72	%	(USD 0	)		0.50	%		0.50	%	(USD 21	)


AUD	Low			High					Low			High
Funds invested - AUD		2.72	%		2.72	%	AUD 600			2.42	%		2.42	%	AUD 600
Rate increase by 10%		2.99	%		2.99	%	AUD 2			2.66	%		2.66	%	AUD 1
Rate decrease by 10%		2.45	%		2.45	%	(AUD 2	)		2.18	%		2.18	%	(AUD 1	)

(iii) Price risk

Price risk is the risk that future cash flows derived from financial instruments will be altered as a result of a market price movement, which is defined as movements other than foreign currency rates and interest rates. The Group is exposed to price risk which arises from long-term borrowings under its facility with NovaQuest, where the timing and amounts of principal and interest payments is dependent on net sales of product candidate MSC-100-IV for the treatment of aGVHD in pediatric patients in the United States and other territories excluding Asia. As net sales of MSC-100-IV for the treatment of aGVHD in pediatric patients in these territories increase/decrease, the timing and amount of principal and interest payments relating to this type of financing arrangement will also fluctuate, resulting in an adjustment to the carrying amount of financial liability. The adjustment is recognized in the Income Statement as income or expense in the period the revision is made.

The exposure of the Group’s borrowing to price rate changes are as follows:

	As of					As of
	June 30, 2018					June 30, 2017
(in U.S. dollars, in thousands, except percent data)	Total		% of total loans			Total		% of total loans
Financial liabilities
Non-current borrowings
Borrowings - NovaQuest		27,431		46	%		—		—
		27,431		46	%		—		—

As at June 30, 2018, all other factors held constant, a 20% increase in the forecast net sales of MSC-100-IV for the treatment of aGVHD in pediatric patients in the United States and other territories excluding Asia would increase non-current borrowing and decrease profit by $2.3 million, whereas a 20% decrease in the net sales of MSC-100-IV for the treatment of aGVHD in pediatric patients in the United States and other territories excluding Asia would decrease non-current borrowings and increase profit by $1.3 million.

The Group does not consider it has any exposure to price risk other than those already described above.

b.	Credit risk

Credit risk is the risk that one party to a financial instrument will fail to discharge its obligation and cause financial loss to the other party. The Group does not generally have trade receivables. The Group’s receivables are tabled below.

	As of June 30,
(in U.S. dollars, in thousands)	2018		2017
Cash and cash equivalents
Deposits at call (Note 5(a)) - minimum A rated		542		38,039
Cash at bank (Note 5(a)) - minimum A rated		37,221		7,722
Trade and other receivables
Receivable from other parties (non-rated)		45,745		1,067
Receivable from the Australian Government (Income Tax)		3,305		1,631
Receivable from the Australian Government (Foreign Withholding Tax)		400		—
Receivable from minimum A rated bank deposits (interest)		262		12
Receivable from the Australian Government (Goods and Services Tax)		48		86
Receivable from the United States Government (Income Tax)		24		27
Receivable from the Swiss Government (Value-Added Tax)		6		1
Other non-current assets
Receivable from the United States Government (U.S. tax credits)		1,473		—

c.	Liquidity risk

Liquidity risk is the risk that the Group will not be able to pay its debts as and when they fall due. Liquidity risk has been assessed in Note 1(i).

All financial liabilities, excluding contingent consideration, held by the Group as of June 30, 2018 and June 30, 2017 are non-interest bearing and mature within 6 months. The total contractual cash flows associated with these liabilities equate to the carrying amount disclosed within the financial statements.

As of June 30, 2018, the maturity profile of the anticipated future contractual cash flows including interest in relation to the Group’s borrowings, on an undiscounted basis and which, therefore differs from the carrying value, is as follows:

(in U.S. dollars, in thousands)

Within

1 year

Between

1-2 years

Between

2-5 years

Over

5 years

Total

contractual

cash flows

Carrying

amount

Borrowings⁽¹⁾⁽²⁾

(3,928

)

(15,495

)

(54,826

)

(49,228

)

(123,477

)

(59,397

)