TiGenix NV | CIK:0001581987 |

 

5. Financial instruments and financial risk management

 

The principal financial instruments used by the Group, from which financial risk arises, are as follows:

 

 

 

 

 

 

 

 

 

Capital risk management

 

The Group policy with respect to managing capital is to safeguard the Group’s ability to continue as a going concern and to obtain an optimal capital structure over time. With this objective, the cash position is monitorized in a monthly basis.

 

Categories of financial instruments

 

 

Fair value of financial instruments

 

 

 

 

The fair values of the financial assets and financial liabilities measured at amortized cost in the statement of financial position have been determined in accordance with generally accepted pricing models based on discounted cash flow analysis, with the most significant inputs being the discount rate that reflects the credit risk.

 

At December 31, 2017 the market credit risk for a company such as TiGenix has been determined at 2.70% (3.03% at December 31, 2016 and 4.97% at December 31, 2015). This discount rate has been used to determine the fair values of the financial liabilities at amortized cost as of December 31, 2017.

 

The fair value of other liabilities contingent consideration is explained in note 4.

 

The current financial assets and liabilities are not included in the table above as their carrying amounts approximate their fair values.

 

Financial risk management objectives

 

The Group coordinates access to financial markets, monitors and manages the financial risks relating to the operations through internal risk reports that analyze exposures by degree and magnitude of risks. These risks include market risk (including currency risk, interest rate risk and other price risk), credit risk and liquidity risk.

 

The Group does not use any derivative financial instruments to hedge risk exposures.

 

Currency risk

 

The Group may be subject to limited currency risk. The Group’s presentation currency is the euro, in addition to which we are exposed to the U.S. dollar. The Company tries to match foreign currency cash inflows with foreign currency cash outflows. The Company has not engaged in hedging of its foreign currency risk using derivative instruments. The Group’s financial assets and financial liabilities were denominated in the following currencies:

 

 

The Group’s exposure is only limited to pounds sterling, U.S. dollars and Swiss-francs.

 

Except for the currency effect, mentioned in Note 2, in relation to the intercompany loan with TiGenix Inc, there is limited external currency exposure, and therefore no sensitivity analysis has been performed.

 

Interest rate risk

 

The Group is not exposed to interest rate risk, because the Group’s external borrowings are at fixed interest rates.

 

Liquidity risk

 

The Group manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities, by continuously monitoring forecasted and actual cash flows, and by matching the maturity profiles of financial assets and liabilities.

 

The following table details the Group’s remaining contractual maturity for its financial liabilities with agreed repayment periods. The table has been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Group can be required to pay. The table includes both interest and principal cash flows.

 

 

On March 6, 2015, the Company issued senior, unsecured convertible bonds due 2018 for a total principal amount of 25 million euros. The bonds are issued and will be redeemed at 100% of their principal amount and have a coupon of 9% per annum, payable semi-annually in arrear in equal instalments on March 6 and September 6 of each year. The first interest payment date was on September 6, 2015. On November 10, 2017, 7 million euros of the Company´s senior unsecured convertible bonds were converted into 7,792,496 shares. Final maturity date for the rest of the EUR 18 million convertible bonds is March 6, 2018.

 

More information can be found in note 18.

 

Following the acquisition of Coretherapix, the Group has an additional interest-free loan from the Innpacto Program. It has a term of 10 years, with a grace period of three years. In January 2012, the Group received the first annual instalment of the Innpacto loan amounting to 0.5 million euros. In 2013, the Group received two annual payments of the Innpacto loan, one of 0.5 million euros and another of 0.1 million euros. Final maturity date is 2022, 2023 and 2024 per tranche.

 

Additionally, on December 20, 2013, the Group entered into a loan facility agreement of up to 10.0 million euros with Kreos. The loan was drawn in three tranches (5.0 million euros by February 3, 2014; 2.5 million euros by May 31, 2014; and 2.5 million euros by September 30, 2014).

 

As part of the consideration for this debt financing agreement, in April 2014 the Group issued a warrant plan to Kreos Capital IV (Expert Fund). The warrant plan consisted of 1,994,302 warrants that were issued with an exercise price of 0.75 euros exercisable immediately and which expire in April 2019. The warrants also include a put option that authorizes Kreos Capital IV (Expert Fund) to return the warrants to the Company and to settle the warrants in cash at any time during the repayment term of the Kreos loan, provided that (i) the put option can only be exercised in three equal tranches of each one third of the total number of warrants; (ii) no more than one tranche can be exercised in a twelve month period; (iii) the put option cannot be exercised if, at the time of the proposed exercise, the price of a share of the Company is higher than 0.9957 euros; and (iv) the put option shall lapse and can no longer be exercised if the average stock price per share in the Company on each trading day included in any period of thirty (30) consecutive calendar days during the duration of the warrant plan exceeds 0.9957 euros. In May 2015, Kreos Capital IV (Expert Fund) exercised the first tranche of the put option of the Kreos Warrant Plan, equivalent to 664,767 warrants. In the meantime, the put option has lapsed in accordance with the afore-mentioned item (iv).

 

The loan is measured at amortized cost in accordance with IAS 39. At initial recognition of the loan, the nominal amount of the loan is decreased with the transactions costs related to the loan which also includes the amount of the warrants allocated to the tranches. The interest rate is the effective interest rate (20.16%).

 

The warrants, including the put option, are accounted for as one instrument (not separating the put option from the warrants) and at issuance had a fair value of 0.7 million euros. Since Kreos Capital IV (Expert Fund) has the option to settle the warrants in cash, the instrument is considered as a financial derivative liability measured at fair value with changes in fair value recognized immediately in profit or loss. The measurement of the warrant at every reporting date at fair value is based on a Black-Scholes valuation model taking into account following inputs: share price, strike price, volatility of the share, duration and risk-free interest rate.

 

On December 19, 2017, Kreos Capital IV exercised the right to convert 1,329,535 warrants into TiGenix shares.

 

The measurement of the warrant (including the put option) at December 31, 2016 at fair value was based on a Black-Scholes valuation model taking into account following inputs: share price (0.71 euros), strike price (0.7449 euros), volatility of the share (66.6%), duration (2.31 years) and risk-free interest rate (-0.16%).

 

The measurement of the warrant (including the put option) at December 31, 2015 at fair value was based on a Black-Scholes valuation model taking into account following inputs: share price (1.19 euros), strike price (0.74 euros), volatility of the share (66.7%), duration (3.31 years) and risk-free interest rate (0.10%).

 

Credit risk management

 

Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. The Group has adopted a policy of only dealing with creditworthy counterparties and obtaining sufficient collateral, where appropriate, as a means of mitigating the risk of financial loss from defaults. The Group’s exposure is continuously monitored, and the aggregate value of transactions concluded is spread among approved counterparties.

 

The maximum exposure to credit risk at the reporting date is the carrying amount of each class of financial assets. The Group does not hold any collateral as security.

 

More information on the trade receivables can be found in note 15 to the consolidated financial statements.

 

Market risk

 

The Group is exposed to market risk. Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises three types of risk: interest rate risk, currency risk and other price risk, such as equity price risk and commodity risk. Financial instruments affected by market risk include the derivate instruments linked to the convertible bonds issued on March 6, 2015.

 

Pursuant to the terms and conditions of the convertible bonds issued on March 6, 2015, the measurement of the warrant at fair value shall be reflected at any time at its fair value as determined by direct observation.

 

At December 31, 2017 the inputs with the most significant effect on the fair value calculation are the value and volatility of TiGenix’s shares. The potential effect of using reasonable assumptions (Black-Scholes formula) for changes in these inputs are the following: i) share price (10% increase/decrease would have an impact of 2,779 thousand euros/-2,632 thousand euros) ii) volatility of the shares (10% increase/decrease would have an impact of 485 thousand euros/ -461 thousand euros).

 

At December 31, 2016 the inputs with the most significant effect on the fair value calculation are the value and volatility of TiGenix’s shares. The potential effect of using reasonable assumptions (Black-Scholes formula) for changes in these inputs are the following: i) share price (10% increase/decrease would have an impact of 238 thousand euros/-38 thousand euros) ii) volatility of the shares (10% increase/decrease would have an impact of 238 thousand euros/ -238 thousand euros).