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Loan Agreement with HerculesIn March 2018, we entered into a loan and security agreement with Hercules for a $75.0 million non-dilutive, secured four-year credit facility with an initial interest rate of 9.45%. We drew the first tranche of $35.0 million on closing and a further tranche of $15.0 million was drawn in January 2019. An additional $25.0 million may be drawn, subject to certain conditions. The loan matures in March 2022. Principal repayments are due to commence in March 2021. Principal repayments can be further deferred to the loan maturity date of March 2022 if certain milestones are satisfied. Interest on the loan is payable monthly in arrears on the 1st day of the month. The interest rate is floating. It is computed daily based on the actual number of days elapsed and it is the greater of either 9.45% or the prime rate as reported in the Wall Street Journal plus a certain margin. At June 30, 2019, in line with increases in the U.S. prime rate, the interest rate was 10.45%. On August 1, September 19 and October 31, in line with the decreases in the U.S. prime rate, the interest rate on the loan decreased to 10.20%, 9.95% and 9.70%, respectively and remains at 9.70% at June 30, 2020 in line with the amended terms of the loan agreement. The loan agreement contains certain covenants, see “Item 5.B Liquidity and Capital Resource – Borrowings.”


Loan Agreement with NovaQuest In June 2018, we entered into a non-dilutive secured loan with NovaQuest for $40.0 million. There is a four-year interest only period, until July 2022, with the principal repayable in equal quarterly instalments over the remaining period of the loan. The loan matures in July 2026. Interest on the loan will accrue at a fixed rate of 15% per annum. The loan agreement contains certain covenants, see “Item 5.B Liquidity and Capital Resource – Borrowings.”All interest and principal payments will be deferred until after the first commercial sale of our allogeneic product candidate MSC-100-IV in pediatric patients with steroid refractory aGVHD, in the United States and other geographies excluding Asia (“pediatric aGVHD”). We can elect to prepay all outstanding amounts owing at any time prior to maturity, subject to a prepayment charge, and may decide to do so if net sales of pediatric aGVHD are significantly higher than current forecasts. If there are no net sales of pediatric aGVHD, the loan is only repayable on maturity in 2026. If in any annual period 25% of net sales of pediatric aGVHD exceed the amount of accrued interest owing and from 2022, principal and accrued interest owing (“the payment cap”), Mesoblast will pay the payment cap and an additional portion of excess sales which may be used for early prepayment of the loan. If in any annual period 25% of net sales of pediatric aGVHD is less than the payment cap, then the payment is limited to 25% of net sales of pediatric aGVHD. Any unpaid interest will be added to the principal amounts owing and will accrue further interest. At maturity date, any unpaid loan balances are repaid.

And Part 2:

Borrowings

Hercules

In March2018, we entered into a loan and security agreement with Hercules, for a $75.0million non-dilutive, four-year credit facility. We drew the first tranche of$35.0 million on closing and a further tranche of $15.0 million was drawn inJanuary 2019. An additional $25.0 million may be drawn, subject to certainconditions. The loan matures in March 2022. In August 2020, we amended theterms of the loan agreement to defer principal repayments to March 2021. As atJune 30, 2020, principal repayments were due to commence in October 2020 and asa result $24.3 million of the borrowings were recognized as a currentliability, given that the terms of the loan agreement to defer principalrepayments were amended subsequent to the period end. Principal repayments canbe further deferred to the loan maturity date of March 2022 if certainmilestones are satisfied. Interest on the loan is payable monthly in arrears onthe 1st day of the month. At closingdate, the interest rate was 9.45% per annum. At June 30, 2019, in line withincreases in the U.S. prime rate, the interest rate was 10.45%. On August 1,September 19 and October 31, in line with the decreases in the U.S. prime rate,the interest rate on the loan decreased to 10.20%, 9.95% and 9.70%,respectively, and remains at 9.70% at June 30, 2020 in line with the amendedterms of the loan agreement. As at June 30, 2020, we recognized $3.6 million ininterest payable within twelve months as a current liability.In the years endedJune 30, 2020 and 2019, we recognized gains of $1.3 million and $0.4 million,respectively, in the Income Statement as remeasurement of borrowingarrangements within finance costs. These remeasurement gains relate to theadjustment of the carrying amount of our financial liability to reflect therevised estimated future cash flows from our existing credit facility.

NovaQuest

On June29, 2018, we drew the first tranche of $30.0 million of the principal amountfrom the $40.0 million loan and security agreement with NovaQuest. There is afour-year interest only period, until July 2022, with the principal repayablein equal quarterly instalments over the remaining period of the loan. The loanmatures in July 2026. Interest on the loan will accrue at a fixed rate of 15%per annum.All interest and principal payments will be deferred until after thefirst commercial sale of RYONCIL for the treatment in pediatric SR-aGVHD. Wecan elect to prepay all outstanding amounts owing at any time prior tomaturity, subject to a prepayment charge, and may decide to do so if net salesof RYONCIL for pediatric SR-aGVHD are significantly higher than currentforecasts. If there are no net sales of RYONCIL for pediatric SR-aGVHD, theloan is only repayable on maturity in 2026. If in any annual period 25% of netsales of RYONCIL for pediatric SR-aGVHD exceed the amount of accrued interestowing and, from 2022, principal and accrued interest owing (“the payment cap”),Mesoblast will pay the payment cap and an additional portion of excess saleswhich may be used for early prepayment of the loan. If in any annual period 25%of net sales of RYONCIL for pediatric SR-aGVHD is less than the payment cap,then the payment is limited to 25% of net sales of RYONCIL for pediatricSR-aGVHD. Any unpaid interest will be added to the principal amounts owing andshall accrue further interest. At maturity date, any unpaid loan balances arerepaid.Because of this relationship of net sales and repayments, changes in ourestimated net sales as we approach the potential approval of RYONCIL for pediatricSR-aGVHD (Prescription Drug User Fee Act (“PDUFA”) date of September 30, 2020)may trigger an adjustment of the carrying amount of the financial liability toreflect the revised estimated cash flows. The carrying amount adjustment isrecalculated by computing the present value of the revised estimated futurecash flows at the financial instrument’s original effective interest rate. Theadjustment is recognized in the Income Statement as remeasurement of borrowingarrangements within other operating income and expenses and finance costs inthe period the revision is made.

92As of June 30, 2020, management have assumed that RYONCIL forpediatric SR-aGVHD will obtain BLA approval at the PDUFA action date ofSeptember 30, 2020. In August 2020, the ODAC of the FDA voted in favor thatavailable data support the efficacy of RYONCIL in pediatric patients withSR-aGVHD. The ODAC is an independent panel of experts that evaluates efficacyand safety of data and makes appropriate recommendations to the FDA. Althoughthe FDA will consider the recommendation of the panel, the final decisionregarding the approval of the product is made solely by the FDA, and therecommendations by the panel are non-binding. An FDA decision could lead to aremeasurement of the carrying value of the NovaQuest borrowings as managementupdate net sales forecasts and other key assumptions. As at June 30, 2020, wehave recognized a current liability of $4.5 million which represents thepresent value of interest payable of $4.2 million and $0.3 million loanadministration fee which is payable annually in June.In the years ended June30, 2020 and 2019, we recognized losses of $0.8 million and $0.7 million,respectively, in the Income Statement as remeasurement of borrowingarrangements within other operating income. In the years ended June 30, 2020and 2019, we recognized gains of $0.1 million and $Nil, respectively, in theIncome Statement as remeasurement of borrowing arrangements within financecosts. These remeasurements relate to the adjustment of the carrying amount ofour financial liability to reflect the revised estimated future cash flows fromour existing credit facility with NovaQuest.The carrying amount of the loan andsecurity agreement with NovaQuest is subordinated to the Group’s floating rateloan with the senior creditor, Hercules.

Compliance with loan covenants

Our loan facilities with Hercules and NovaQuest contain a number ofcovenants that impose operating restrictions on us, which may restrict ourability to respond to changes in our business or take specified actions. Inaddition, under our loan and security agreement with Hercules, we are obligedto maintain certain levels of cash in the United States and a minimumunrestricted cash balance across the Group. We have complied with the financialand other restrictive covenants of our borrowing facilities during the yearended June 30, 2020