Mereo BioPharma : Condensed Consolidated Statements of Comprehensive Loss - Form 6-K

Condensed Consolidated Statements of Comprehensive Loss

(unaudited)

		Notes			Six months ended June 30, 2023 £'000			Six months ended June 30, 2022 £'000
Revenue			3				7,128				-
Cost of revenue			3				(2,455	)			352
Research and development expenses							(7,898	)			(13,322	)
Administrative expenses							(9,548	)			(8,840	)
Other operating income			3				2,864				-
Operating loss							(9,909	)			(21,810	)
Finance income			4				550				173
Finance costs			4				(1,498	)			(1,859	)
Changes in the fair value of financial instruments			4				365				1,210
Net foreign exchange (loss)/gain							(1,445	)			1,582
Other income			5				-				811
Loss before tax							(11,937	)			(19,893	)
Taxation							907				735
Loss for the period, attributable to equity holders of the parent							(11,030	)			(19,158	)
Items that may be reclassified subsequently to profit or loss:
Currency translation of foreign operations							1,493				(1,775	)
Total comprehensive loss for the period, attributable to equity holders of the parent							(9,537	)			(20,933	)
Basic loss per share for the period (in £)			6				(0.02	)			(0.03	)
Diluted loss per share for the period (in £)			6				(0.02	)			(0.03	)

The accompanying notes form an integral part of these unaudited condensed consolidated financial statements.

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MEREO BIOPHARMA GROUP PLC

Condensed Consolidated Balance Sheets

(

unaudited)

		Notes			June 30, 2023 £'000			December 31, 2022 £'000
Assets
Non-current assets
Property, plant and equipment			7				1,565				1,831
Intangible assets			8				24,845				24,116
							26,410				25,947
Current assets
Prepayments							1,376				3,125
R&D tax credits							2,203				1,296
Other taxes receivable							643				614
Trade and other receivables			3				7,893				762
Cash and short-term deposits							42,113				56,334
							54,228				62,131
Total assets							80,638				88,078
Equity and liabilities
Non-current liabilities
Provisions			10				411				-
Convertible loan notes			11				3,665				-
Warrant liability			12				166				129
Lease liability							973				1,222
Other liabilities							220				182
							5,435				1,533
Current liabilities
Trade and other payables							1,911				3,078
Accruals							4,786				4,491
Provisions			10				4,701				4,822
Convertible loan notes			11				4,186				11,085
Warrant liability			12				-				402
Lease liability							488				466
Other liabilities			3				1,386				333
							17,458				24,677
Total liabilities							22,893				26,210
Net assets							57,745				61,868
Equity
Issued capital			9				1,930				1,875
Share premium			9				257,343				254,303
Other capital reserves			9				134,999				132,680
Employee Benefit Trust shares							(1,058	)			(1,058	)
Other reserves							7,401				7,401
Accumulated losses							(342,194	)			(331,164	)
Translation reserve							(676	)			(2,169	)
Total equity							57,745				61,868

The accompanying notes form an integral part of these unaudited condensed consolidated financial statements.

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MEREO BIOPHARMA GROUP PLC

Condensed Consolidated Statements of Cash Flows

(unaudited)

		Notes			Six months ended June 30, 2023 £'000			Six months ended June 30, 2022 £'000
Operating activities
Loss before tax							(11,937	)			(19,893	)
Adjustments to reconcile (loss)/profit to net cash flows:
Depreciation and impairment of property, plant and equipment			7				266				436
Amortization of intangible assets			8				138				-
Share-based payment expense			9				1,931				2,446
Net foreign exchange loss/(gain)							1,282				(2,100	)
Increase in provisions and other liabilities			10,3				1,130				307
Finance income			4				(550	)			(173	)
Finance costs			4				1,084				1,696
Fair value remeasurement on warrants			4				(365	)			(1,210	)
Other income and expenses			5				-				(811	)
Other non-cash movements			3				155				330
Working capital adjustments
(Increase)/decrease in receivables and prepayments							(5,521	)			331
(Decrease)/increase in trade and other payables and accruals							(846	)			1,364
Taxation							(29	)			(1,529	)
Net cash flows used in operating activities							(13,262	)			(18,806	)
Investing activities
Purchase of property, plant and equipment			7				-				(10	)
Proceeds from intangible asset (net of transaction costs)			5				-				1,484
Payments to CVR holders			5				-				(673	)
Interest earned			4				468				173
Payments to acquire intangible assets							(337	)			-
Net cash flows from investing activities							131				974
Financing activities
Proceeds from issuance of ordinary shares							2				-
Interest paid			4				(771	)			-
Payment of lease liabilities							(226	)			(445	)
Proceeds from TAP agreement							79				153
Net cash flows used in financing activities							(916	)			(292	)
Net decrease in cash and cash equivalents							(14,047	)			(18,124	)
Cash and cash equivalents at the beginning of the period							56,334				94,296
Effect of exchange rate changes on cash and cash equivalents							(174	)			243
Cash and cash equivalents at the end of the period							42,113				76,415

The accompanying notes form an integral part of these unaudited condensed consolidated financial statements.

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MEREO BIOPHARMA GROUP PLC

Condensed Consolidated Statements of Changes in Equity

(unaudited)

		Notes			Issued capital £'000			Share premium £'000			Other capital reserves £'000			Employee Benefit Trust £'000			Other reserves £'000			Accumulated losses £'000			Translation reserve £'000			Total equity £'000
At December 31, 2021							1,755				247,460				129,835				(1,140	)			7,401				(296,968	)			(341	)			88,002
Loss for the period							-				-				-				-				-				(19,158	)			-				(19,158	)
Other comprehensive loss							-				-				-				-				-				-				(1,775	)			(1,775	)
Total comprehensive loss							-				-				-				-				-				(19,158	)			(1,775	)			(20,933	)
Share-based payments			9				-				-				2,446				-				-				-				-				2,446
Exercise of share options							-				-				(82	)			82				-				-				-				-
Issuance of warrants							-				-				70				-				-				-				-				70
At June 30, 2022							1,755				247,460				132,269				(1,058	)			7,401				(316,126	)			(2,116	)			69,585
At December 31, 2022							1,875				254,303				132,680				(1,058	)			7,401				(331,164	)			(2,169	)			61,868
Loss for the period							-				-				-				-				-				(11,030	)			-				(11,030	)
Other comprehensive income							-				-				-				-				-				-				1,493				1,493
Total comprehensive loss							-				-				-				-				-				(11,030	)			1,493				(9,537	)
Share-based payments			9				-				-				1,931				-				-				-				-				1,931
Exercise of share options							2				-				-				-				-				-				-				2
Issuance of shares			9				53				3,040				347				-				-				-				-				3,440
Issuance of warrants							-				-				41				-				-				-				-				41
At June 30, 2023							1,930				257,343				134,999				(1,058	)			7,401				(342,194	)			(676	)			57,745

The accompanying notes form an integral part of these unaudited condensed consolidated financial statements.

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MEREO BIOPHARMA GROUP PLC

Notes to the Condensed Consolidated Financial Statements

(unaudited)

1. Corporate information

Mereo BioPharma Group plc (the "Company" or "Mereo") is a clinical-stage, United Kingdom ("UK") based biopharmaceutical company focused on rare diseases and oncology.

The Company is a public limited company incorporated and domiciled in the UK, and registered in England, with shares publicly traded on the Nasdaq Capital Market via American Depositary Shares ("ADSs") under the ticker symbol MREO. The Company's registered office is located at Fourth Floor, 1 Cavendish Place, London, W1G 0QF, United Kingdom.

These financial statements are the unaudited condensed consolidated financial statements of Mereo BioPharma Group plc and its subsidiaries for the six months ended June 30, 2023. The principal activities of the Company are the development and commercialization of innovative therapeutic pharmaceutical products for rare diseases.

2. Significant accounting policies

Basis of preparation

The unaudited condensed consolidated financial statements for the six months ended June 30, 2023 have been prepared in accordance with International Accounting Standards (IAS) 34, Interim Financial Reporting. These unaudited condensed consolidated financial statements do not include all information and disclosures required in the annual financial statements in accordance with International Financial Reporting Standards (IFRS) and should be read in conjunction with the Company's annual consolidated financial statements for the year ended December 31, 2022 filed with the Securities and Exchange Commission ("SEC") on March 28, 2023.

The financial information is presented in pound sterling ("£"), which is the presentational currency of the Company. The functional currencies of consolidated subsidiaries are pound sterling and US dollars ("$"). All amounts disclosed in the condensed consolidated financial statements and notes have been rounded to the nearest thousand, unless otherwise stated.

The financial information for the year ended December 31, 2022 has been extracted from the Company's audited financial statements for that year, filed with the SEC on March 28, 2023.

These condensed consolidated financial statements are unaudited and do not constitute statutory accounts of the Company as defined in section 434 of the Companies Act 2006. A copy of the statutory accounts for financial year ended December 31, 2022 has been delivered to the Registrar of Companies. The auditors reported on those accounts and their report was unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

Segmental information

The Company has one operating segment. The Chief Operating Decision Maker ("CODM") is the Chief Executive Officer. The Company has a single portfolio of product candidates, with only direct research and development expenses monitored by product candidate. The CODM makes decisions over resource allocation at an overall portfolio level and the Company's financing is managed and monitored on a consolidated basis.

Going concern

The going concern basis has been applied in these condensed consolidated financial statements as the Company has adequate resources to meet its liabilities as they fall due for the foreseeable future and at least 12 months from the issuance date of these condensed consolidated financial statements.

The Company expects to incur significant operating losses for the foreseeable future as it continues its research and development efforts, seeks to obtain regulatory approval of its product candidates and pursues any future product candidates the Company may develop.

Until such time as the Company can generate significant revenue from product sales, or other commercial revenues, if ever, or through licensing and/or collaboration agreements for its rare disease or oncology product candidates, the Company will seek to finance its operations through a combination of public or private equity or debt financings or other

non-dilutive

sources.

Summary of significant accounting policies

The accounting policies adopted in the preparation of the condensed consolidated financial statements are consistent with those followed in the preparation of the Company's consolidated financial statements for the year ended December 31, 2022.

Significant accounting estimates and judgments

The preparation of these condensed consolidated financial statements requires the management of the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The Company bases its estimates and judgments on historical experience and on various other assumptions that it considers to be reasonable. Actual results may differ from these estimates under different assumptions or conditions.

The significant accounting estimates and judgments adopted in the preparation of the condensed consolidated financial statements are consistent with those followed in the preparation of the Company's consolidated financial statements for the year ended December 31, 2022.

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3. Revenue, Cost of revenue and Other operating income

The Company recognized milestone proceeds of $9 million (£

7.1

million) as revenue under the collaboration and license agreement with Ultragenyx for setrusumab following achievement of a development milestone in the six months ended June 30, 2023. The milestone proceeds w

ere

received in July 2023.

The variable consideration relating to future milestones and sales royalties will be recognized in the statement of comprehensive income when the milestones are achieved or the underlying commercial sales are made, in the event regulatory approval is obtained.

As a consequence of the milestone proceeds paid to the Company under the collaboration and license agreement with Ultragenyx and in accordance with the terms of the 2015 asset purchase agreement with Novartis, the Company also accrued for a payment to Novartis of £

1.7

million. The payment included a deduction for costs of £

1.4

million which was deferred to be recognized in the statement of comprehensive loss when the associated costs are incurred.

In the six month period ended June 30, 2023, £

0.6 million (six months ended June 30, 2022: £

0.4

million) of these deductions were recognized in the condensed consolidated statement of comprehensive loss. As of June 30, 2023, the remaining balance to be recognized of £

1.1

million (December 31, 2022: £

0.3

million) is included within "Other liabilities" in the condensed consolidated balance sheets.

In June 2023, the Company received a payment of £2.9 million from its depositary for reimbursement of certain expenses incurred by the Company in respect of its ADR program in the current and prior years pursuant to the agreement between both parties. The Company recognizes such amounts as "Other operating income" when it becomes entitled to them.

4. Finance income, finance costs and changes in the fair value of financial instruments

Finance income

		Six months ended June 30, 2023 £'000			Six months ended June 30, 2022 £'000
Interest income on short-term deposits			468				173
Modification of convertible loan notes			82				-
Total			550				173

Finance income includes a £0.1 million

(2022:

£nil) gain recognized on the modification of the Private Placement Loan Notes (see Note 11).

Finance costs

		Six months ended June 30, 2023 £'000			Six months ended June 30, 2022 £'000
Interest on convertible loan notes			(1,004	)			(1,567	)
Interest on lease liabilities			(79	)			(113	)
Discounting of provisions for deferred contingent cash consideration			(395	)			(163	)
Other			(20	)			(16	)
Total			(1,498	)			(1,859	)

Interest on convertible loan notes includes £0.7 million of accrued interest paid as part of the amendment of the Novartis convertible loan note (see Note 11).

Changes in the fair value of financial instruments

		Six months ended June 30, 2023 £'000			Six months ended June 30, 2022 £'000
Changes in the fair value of warrants - private placement			402				1,091
Changes in the fair value of warrants - bank loan			(37	)			119
Total			365				1,210

See Note 12 for additional information on the warrant liability.

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5. Other income and expenses

In February 2022, the Company received a milestone payment of $2.0 million (£1.5 million) under the Navi License Agreement with OncXerna. An associated payment was made to the former shareholders of Mereo BioPharma 5, Inc. under the Contingent Value Rights Agreement ("CVR") of a total of $0.9 million (£0.7 million), after deductions of costs, charges and expenditures, which resulted in other income, net of £0.8 million.

6. Loss per share

Basic loss per share is calculated by dividing the loss attributable for the period to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the period. Diluted loss per share is based on dividing the loss attributable for the period, adjusted for the effect of dilutive ordinary shares, by ordinary share equivalents, which includes the weighted average number of ordinary shares outstanding and the effect of dilutive ordinary share equivalents.

		Six months ended June 30, 2023 £'000			Six months ended June 30, 2022 £'000
Numerator - Basic loss per share (£'000)
Loss attributable to equity holders of the parent			(11,030	)			(19,158	)
Denominator - Basic loss per share
Weighted average number of ordinary shares			627,087,752				583,892,445
Loss per share - basic (£)			(0.02	)			(0.03	)
Numerator - Diluted loss per share (£'000):
Loss attributable to equity holders of the parent			(11,030	)			(19,158	)
Effect of dilutive ordinary shares			-				-
Numerator - Diluted loss per share			(11,030	)			(19,158	)
Denominator - Diluted loss per share:
Number of ordinary shares used for basic loss per share			627,087,752				583,892,445
Weighted average effect of dilutive ordinary shares			-				-
Weighted average number of diluted ordinary shares outstanding			627,087,752				583,892,445
Loss per share - diluted (£)			(0.02	)			(0.03	)

For both periods, share options, convertible loan notes and warrants were considered to be anti-dilutive as they would have decreased the loss per share and were therefore excluded from the calculation of diluted loss per share. Therefore, the weighted average shares outstanding used to calculate both the basic and diluted loss per share was the same.

7. Property, plant and equipment

		Right-of-use asset (building) (£'000)			Leasehold improvements (£'000)			Office Equipment (£'000)			IT Equipment (£'000)			Total (£'000)
Cost or valuation at January 1, 2023 and June 30, 2023			2,465				557				164				173				3,359
Depreciation and impairment
At January 1, 2023			(1,088	)			(219	)			(76	)			(145	)			(1,528	)
Depreciation for the period			(199	)			(48	)			(11	)			(9	)			(266	)
At June 30, 2023			(1,287	)			(267	)			(87	)			(154	)			(1,794	)
Net book value
At January 1, 2023			1,377				338				88				28				1,831
At June 30, 2023			1,178				290				77				19				1,565

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8. Intangible assets

		Acquired development programs
Cost
At January 1, 2023			33,005
Additions			1,166
At June 30, 2023			34,172
Accumulated revision to estimated value
At January 1, 2023			(8,889	)
Revision to estimated value			(300	)
At June 30, 2023			(9,189	)
Accumulated amortization
At January 1, 2023			-
Amortization for the period			(138	)
At June 30, 2023			(138	)
Net book value
At January 1, 2023			24,116
At June 30, 2023			24,845

On February 3, 2023, the Company's wholly-owned subsidiary Mereo BioPharma 3 Limited, Ultragenyx, UCB Pharma SA ("UCB") and Amgen Inc. ("Amgen") entered into a non-exclusive worldwide, royalty-free license (the "UCB/Amgen License") to research, develop, and commercialize setrusumab in osteogenesis imperfecta ("OI") under certain UCB/Amgen-owned patent rights related to anti-sclerostin compounds and their uses. An intangible asset of £

1.2

million was recognized in the period reflecting payments under the agreement that are not contingent. A corresponding liability of £

0.6

million and a provision of

£0.6

million for contingent consideration payable was also recognized (see Note 10). The license is amortized on a straight-line basis over its useful economic life. During the six months ended June 30, 2023, amortization expense of £

0.1 million (

2022:

£nil)

has been recorded within "Administrative expenses" in the condensed consolidated statement of comprehensive (loss)/income.

The present value of the provision for deferred contingent cash consideration relating to the agreement with AstraZeneca was reviewed as of June 30, 2023 (see Note 10). The decrease in the present value due to changes in timelines or probability of contractual milestones being achieved was £0.3

million (2022: £

0.4

million) and was recognized as a reduction of the intangible asset.

During the period the Company did

not revise the value of any other intangible assets (2022: £nil

). With the exception of the UCB/Amgen License which is amortized, the intangible assets remain under development and no amortization charge has been recognized.

9. Issued capital and reserves

		Number of ordinary shares			Ordinary Share Capital £'000			Share Premium £'000
At January 1, 2022 and June 30, 2022			584,908,239				1,755				247,460
At January 1, 2023			624,928,519				1,875				254,303
Issued during the period			18,276,275				55				3,040
At June 30, 2023			643,204,794				1,930				257,343

During the six months ended June 30, 2023, Private Placement Loan Notes with a carrying value of

£3.1 million were converted into 17,774,895 ordinary shares at a conversion price of £0.174

per ordinary share (see Note 11) and 501,380 ordinary shares were issued upon the vesting of equity awards.

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Other capital reserves

		Share-based payments £'000			Equity component of convertible loan £'000			Other warrants issued £'000			Merger reserve £'000			Other reserve £'000			Total £'000
At January 1, 2022			23,026				32,843				44				40,818				33,104				129,835
Share-based payments expense during the period			2,446				-				-				-				-				2,446
Share option exercise			(82	)			-				-				-				-				(82	)
Issuance of warrants			-				-				70				-				-				70
At June 30, 2022			25,390				32,843				114				40,818				33,104				132,269
At January 1, 2023			26,806				31,838				114				40,818				33,104				132,680
Share-based payments expense during the period			1,931				-				-				-				-				1,931
Extinguishment and issuance of Novartis Loan Note			-				347				-				-				-				347
Issue of warrants			-				-				41				-				-				41
At June 30, 2023			28,737				32,185				155				40,818				33,104				134,999

Equity component of convertible loan

The amendment of the Novartis Loan Note was treated as the extinguishment of the original instrument and the issuance of a new instrument (see Note 11). Accordingly, £

0.3

million was allocated to the equity components of the new Novartis Loan Note, representing the embedded conversion option and the new warrants.

Other warrants issued

Other warrants issued also relate to funding arrangements with The Alpha-1 Project which are a compound instrument consisting of a liability and an equity component. In 2023, the Company issued

408,730 warrants over ordinary shares and received funding of £0.1 million, of which less than £0.1 million was allocated to the equity component. The total value of the equity component (consideration received for the warrants) as

of

June 30, 2023 is £0.2 million (2022: £ 0.1 million).

Share-based payments

The Company has two principal share-based incentive schemes under which options at market value to subscribe for the Company's shares, restricted stock units ("RSUs") and performance share units ("PSUs") have been granted to certain executives,

non-executive

directors ("NEDs") and employees. The share-based payment reserve is used to recognize the value of equity settled share-based payments provided to employees, including key management personnel, as part of their remuneration.

The total charge for the six months ended June 30, 2023 in respect of all share-based incentive schemes was

£1.9 million (June 30, 2022: £2.4

million).

The following awards were granted during the six months ended June 30, 2023:

		Mereo 2019 Equity Incentive Plan			Mereo 2019 NED Equity Incentive Plan
		Awards (ADS)			Weighted average fair value ($) per share			Weighted average exercise price ($) per share			Awards (ADS)			Weighted average fair value ($) per share			Weighted average exercise price ($) per share
Options			4,617,000				0.91				1.01				440,000				0.84				0.94
RSU's			617,750				1.01				-				479,813				0.94				-
PSU's			1,543,150				0.61				-				-				-				-

Mereo 2019 Equity Incentive Plan

•

Options over ADSs granted during the six months ended June 30, 2023, were valued using the Black-Scholes model with the following weighted average inputs: expected volatility of 98.06%; risk free interest rate of 3.43%; expected life of 10 years; and market price per ADS of $1.01.

•

RSUs over ADSs granted during the six months ended June 30, 2023 vest over three years with one third of the awards vesting after twelve months and the remainder vesting equally every six months thereafter. These awards were valued by reference to the value of the shares awarded.

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•

PSUs over ADSs granted during the six months ended June 30, 2023 will only vest upon achievement of specified stretching share price performance targets. These awards were valued using a Monte Carlo model with the following key inputs: expected volatility of 105.6%; expected life of between 0.9 and 1.1 years; risk free interest rate of 4.14% and market price per ADS of $1.01.

Mereo 2019 NED Equity Incentive Plan

•

Options over ADSs granted under the Mereo 2019 NED Equity Incentive Plan to certain non-executive directors during the six months ended June 30, 2023 were valued using the Black-Scholes model with the following inputs: expected volatility of 97.94%; risk free interest rate of 3.36%; expected life of 10 years; and market price per ADS of $0.94.

•

Deferred RSU's over ADSs were granted during the six months ended June 30, 2023 under the Mereo 2019 NED Equity Incentive Plan to certain non-executive directors who elected to receive restricted stock units in lieu of their cash fees for the year commencing February 1, 2023. These awards were valued by reference to the value of the shares awarded.

10. Provisions

		June 30, 2023 £'000			December 31, 2022 £'000
Social security contribution on vested share options			56				9
Provisions for deferred contingent cash consideration			5,056				4,634
Restructuring			-				179
Total			5,112				4,822
Current			4,701				4,822
Non-Current			411				-

Provisions for deferred contingent cash consideration is the estimate of the quantifiable but not certain future cash payment obligations due to AstraZeneca for the acquisition of certain intangible assets and to UCB/Amgen for the UCB/Amgen License.

The provision for amounts payable to AstraZeneca is calculated as the risk adjusted net present value of future cash payments to be made by the Company. The payments are dependent on reaching certain milestones based on the commencement and outcome of clinical trials. The likelihood of achieving such milestones is reviewed at the balance sheet date and increased or decreased as appropriate (see Note 13).

The provision for deferred contingent cash consideration under the UCB/Amgen License is calculated as the present value of fees expected to be paid under the license which are dependent on the expected expiry date of certain intellectual property owned by UCB/Amgen and the outcome of clinical trials and regulatory consideration.

11. Convertible Notes

		June 30, 2023 £'000			December 31, 2022 £'000
Novartis Loan Note			3,665				4,449
Loan Notes - Private Placement			4,186				6,636
Total			7,851				11,085
Current			4,186				11,085
Non-Current			3,665				-

Novartis Loan Note

The Novartis Loan Note is convertible at a fixed price of £0.265 per ordinary share and originally bore interest at a rate of 6% per annum with a maturity date of February 2023. Effective 10 February 2023, the maturity date of the Novartis Loan Note was extended to February 10, 2025 and the interest rate amended to 9%. Interest accrued to the amendment date of £0.7 million was paid in cash, and

w

arrants to purchase 2,000,000 ordinary shares were issued (see Note 9).

The amendments to the Novartis Loan Note have been treated as the extinguishment of the original instrument and the issuance of a new instrument. Accordingly, on the extinguishment date, the carrying value of £4.5

million was derecognized. At the same time, a new liability of £

3.5

million was recognized which represents the fair value of the liability component of the new Novartis Loan Notes, net of fees. The remaining amount was allocated between the £0.7

million of interest paid in cash (see Note 4) and the residual £

0.3

million which was recorded in equity to reflect the warrants and the conversion option embedded in the new Novartis Loan Notes. No extinguishment gain or loss was recognized in the condensed consolidated statement of comprehensive loss.

Private Placement Loan Notes

Loan Notes from the June 2020 private placement are convertible at a fixed price of £0.174 per ordinary share and bears interest at a rate of 6% per annum with an original maturity date of June 3, 2023. On May 31, 2023, the maturity date of the Loan Notes was extended to August 3, 2023

,

with all other terms remaining unchanged. The maturity date extension was

treated as a modification with a modification gain of

£

0.1 million recognized within finance income (see Note 4).

During the six months ended June 30, 2023, the Company issued and allotted 17,774,895 ordinary shares (202

2

: nil) at a price of £0.174 per share on conversion of the Loan Notes.

A further conversion and subsequent redemption of the remaining Loan Notes took place in July and August 2023, respectively (see Note 15).

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12. Warrant liability

		June 30, 2023 £'000			June 30, 2022 £'000
At January 1			531				8,336
Fair Value changes during the period			(365	)			(1,210	)
At June 30			166				7,126

		June 30, 2023 £'000			December 31, 2022 £'000
Current			-				402
Non-current			166				129
Total			166				531

The change in fair value of the warrant liability represents an unrealized gain for the six months ended June 30, 2023 and for the six months ended June 30, 2022.

Warrants - private placement

As a part of the private placement transaction

o

n June 3, 2020, the participating investors received conditional warrants entitling them to subscribe for an aggregate of 161,048,366 ordinary shares in the Company. The warrants were conditional on certain resolutions being passed at the Company's general meeting on June 30, 2020. On the passing of the resolutions, the warrants entitled the investors to subscribe for ordinary shares at an exercise price of £0.348 per warrant and were exercisable until June 2023 when they expired. The warrants were classified as liabilities as the Company did not have an unconditional right to avoid redeeming the instruments for cash. As

the warrants

expired during the period, the fair value of the warrant liability was £nil as of June 30, 2023 (£0.4 million as of December 31, 2022). The change in the fair value of £0.4

million was recognized as a gain in the condensed consolidated statement of comprehensive loss. In the six months ended June 30, 2023,

no warrants were exercised.

Warrants - bank loan

As of June 30, 2023 and December 31, 2022, the former lenders to the Company have warrants outstanding to purchase a total of 1,243,908 ordinary shares at an exercise price of £2.95 per share exercisable until August 2027 and a total of 1,243,908 ordinary shares at an exercise price of $0.4144 per share exercisable until October 2028.

A

s of

June 30, 2023, the fair value of these warrants were £0.2

million (December 31, 2022:

£0.1

million. There were

no warrants exercised during the six months ended June 30, 2023 (

2022:

nil).

Total outstanding warrants

A

s of

June 30, 2023, a total of 2,487,816

liability-classified warrants are outstanding. The warrants outstanding are equivalent to

0.4

% of the ordinary share capital of the Company.

The following table lists the weighted average inputs to the models used for the fair value of warrants:

		June 30, 2023 £'000			December 31, 2022 £'000
Expected volatility (%)			100				95
Risk-free interest rate (%)			3.45				3.99
Expected life of warrants (years)			4.70				0.5
Market price of ADS($)			1.32				0.75
Model used			Black-Scholes				Black-Scholes

Volatility was estimated by reference to the one-year historical volatility of the share price of the Company.

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13. Financial instruments fair value disclosures

The Company held the following financial instruments at fair value as of June 30, 2023. There are no

non-recurring

fair value measurements.

		Fair value measured using unadjusted quoted prices (Level 1)			Fair value measured using significant observable inputs (Level 2)			Fair value measured using significant unobservable inputs (Level 3)
Warrant liabilities			-				166				-
Provisions for deferred contingent cash consideration			-				-				5,056
Total			-				166				5,056

There were no transfers between any level during 2023.

The management of the Company assessed that the fair values of cash and short-term deposits, other receivables, trade payables, and other current liabilities approximate their carrying amounts largely due to the short-term maturities of these instruments.

The movements for level 3 instruments during the period are detailed in the table below:

		Provisions for deferred contingent cash consideration £'000			Warrant liability £'000
At January 1, 2023			4,634				402
Additions during the period			561				-
Revisions to estimate			(300	)			-
Movement during the period			161				(402	)
At June 30, 2023			5,056				-

The warrant liability is estimated using a Black Scholes model, taking into account appropriate amendments to inputs in respect of volatility, remaining expected life of the warrants and rates of interest at each reporting date.

The fair value of the provision for the AstraZeneca deferred contingent cash consideration is estimated by discounting future cash flows using rates currently available for debt on similar terms and credit risk. In addition to being sensitive to a reasonably possible change in the forecast cash flows or the discount rate, the fair value of the deferred contingent cash consideration is also sensitive to a reasonably possible change in the probability of reaching certain milestones. The valuation requires management to use unobservable inputs in the model, of which the significant unobservable inputs are disclosed in the tables below. Management regularly assesses a range of reasonably possible alternatives for those significant unobservable inputs and determines their impact on the total fair value.

The fair value of the provision for the deferred contingent cash consideration under the UCB/Amgen License is estimated by discounting future cash flows using the Company's Weighted Average Cost of Capital ("WACC"). In addition to being dependent on the discount rate, the fair value of the deferred contingent cash consideration is also sensitive to a reasonably possible change in the expectation of the timing of the outcome of clinical trials and regulatory approvals. A 10% change in either of these assumptions would not result in a material change in the provision amount.

		Valuation technique		Significant unobservable inputs		Input range		Sensitivity of the input to fair value
Provision for AstraZeneca deferred contingent cash consideration		Discounted cash flow		WACC		2023: 15%		1% increase/decrease would result in a decrease/increase in fair value by £ 21,000 .
				WACC		2022: 15%		1% increase/decrease would result in a decrease/increase in fair value by £31,000.
				Probability of success		2023: 40.6% - 81.2%		10% increase/decrease would result in an increase/decrease in fair value by £0.5 million.
				Probability of success		2022: 40.6% - 81.2%		10% increase/decrease would result in an increase/decrease in fair value by £0.5 million.

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14. Related party disclosures

Transactions between the parent and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note.

Employee benefit trust

In 2016 the Company set up an Employee Benefit Trust ("EBT"). The EBT holds ADS's to satisfy the exercise of options by employees under the Company's share-based incentive schemes.

No funding was loaned to the EBT by the Company during the

six months ended

June 30, 2023 (June 30, 2022: nil).

The EBT did not purchase any ordinary shares during the

six months ended

June 30, 2023 (2022: nil).

No

ordinary shares owned by the EBT were used to satisfy exercise of options by employees under the Company's share-based incentive schemes during the

six months ended

June 30, 2023 (June 30, 2022: 78,225). As of June 30, 2023

,

a cash balance of £17,241 was held by the EBT. As of December 31, 2022

,

a cash balance of £17,741 was held by the EBT.

15. Events after reporting period

Issuance of ordinary shares

In July 2023, the Company issued and allotted 9,645,200 ordinary shares of £0.003 in nominal value in the capital of the Company, equivalent to 1,929,040 ADSs, at an exercise price of £0.174

per ordinary share on conversion of convertible loan notes with a principal amount of £1,025,641 issued as part of the June 2020 private placement transaction.

In July 2023, 9,673,419

ADSs representing

48,367,095 ordinary shares were issued for aggregate gross proceeds of $12.0 million (£9.3

million) through an "at-the-market" offering pursuant to an Open Market Sale Agreement with Jefferies LLC.

Settlement of convertible loan notes

On the maturity date in August 2023, the Company paid £2.6 million to settle the outstanding principal and accrued interest balance on convertible loan notes issued as part of the June 2020 private placement transaction.