Exhibit 99.1
MEREO BIOPHARMA GROUP PLC
Condensed Consolidated Statements of Comprehensive (Loss)/Income
(unaudited)
 

 
  
Notes
  
Six months
ended June 30,
2022
£’000
 
 
Six months
ended June 30,
2021
£’000
 
Revenue
    3      —         36,464  
Cost of revenue
    3      352       (18,137 ) 
Research and development expenses
           (13,322 )      (9,858 ) 
Administrative expenses
           (8,840 )      (8,673 ) 
         
 
 
    
 
 
  
Operating loss
        
 
(21,810
) 
  
 
(204
) 
         
 
 
    
 
 
  
Finance income
   
4
      173       1  
Finance costs
    4      (1,859 )      (1,987 ) 
Changes in the fair value of financial instruments
    4      1,210       14,363  
Net foreign exchange gain/(loss)
           1,582       (1,269 ) 
Other income and expenses
    5      811       —    
         
 
 
    
 
 
  
(Loss)/profit before tax
        
 
(19,893
) 
  
 
10,904
 
         
 
 
    
 
 
  
Taxation
           735       1,184  
         
 
 
    
 
 
  
(Loss)/profit for the period, attributable to equity holders of the parent
          
(19,158
)
 		  
 
12,088
 
         
 
 
    
 
 
  
Items that may be reclassified subsequently to profit or loss:
                      
Currency translation of foreign operations
           (1,775 )      (26 ) 
         
 
 
    
 
 
  
Total comprehensive (loss)/income for the period, attributable to equity holders of the parent
        
 
(20,933
) 
  
 
12,062
 
         
 
 
    
 
 
  
Basic (loss)/profit per share for the period (in £)
    6      (0.03 )      0.02  
Diluted loss per share for the period (in £)
    6      (0.03 )      0.00  
The accompanying notes form an integral part of these unaudited condensed consolidated financial statements.
MEREO BIOPHARMA GROUP PLC
Condensed Consolidated Balance Sheets
(unaudited)
 
     Notes    June 30,
2022
£’000		     December 31,
2021
£’000		  
Assets
                      
Non-current
assets
                      
Property, plant and equipment
    7      2,114       2,530  
Intangible assets
    8      24,116       24,564  
         
 
 
    
 
 
  
         
 
26,230
 
  
 
27,094
 
         
 
 
    
 
 
  
Current assets
                      
Prepayments
           2,741       2,799  
R&D tax credits
           740       —    
Other taxes receivable
           900       809  
Other receivables
           1,010       1,419  
Cash and short-term deposits
           76,415       94,296  
         
 
 
    
 
 
  
         
 
81,806
 
  
 
99,323
 
         
 
 
    
 
 
  
Total assets
        
 
108,036
 
  
 
126,417
 
         
 
 
    
 
 
  
Equity and liabilities
                      
Non-current
liabilities
                      
Provisions
    10      1,389       1,320  
Convertible loan notes
   
11
      —         14,384  
Warrant liability
    1
2
      222       8,336  
Lease liability
           1,456       1,754  
Other liabilities
           177       80  
         
 
 
    
 
 
  
         
 
3,244
 
  
 
25,874
 
         
 
 
    
 
 
  
Current liabilities
                      
Trade and other payables
           2,821       2,499  
Accruals
           5,088       3,826  
Current tax liabilities
           —         1,522  
Provisions
    10      2,945       2,803  
Convertible loan notes
   
11
      15,952       —    
Warrant liability
    1
2
      6,904       —    
Lease liability
           580       622  
Other liabilities
    3      917       1,269  
         
 
 
    
 
 
  
         
 
35,207
 
  
 
12,541
 
         
 
 
    
 
 
  
Total liabilities
        
 
38,451
 
  
 
38,415
 
         
 
 
    
 
 
  
Net assets
        
 
69,585
 
  
 
88,002
 
         
 
 
    
 
 
  
Equity
                      
Issued capital
    9      1,755       1,755  
Share premium
    9      247,460       247,460  
Other capital reserves
    9      132,269       129,835  
Employee Benefit Trust shares
           (1,058 )      (1,140 ) 
Other reserves
           7,401       7,401  
Accumulated losses
           (316,126 )      (296,968 ) 
Translation reserve
           (2,116 )      (341 ) 
         
 
 
    
 
 
  
Total equity
        
 
69,585
 
  
 
88,002
 
         
 
 
    
 
 
  
The accompanying notes form an integral part of these unaudited condensed consolidated financial statements.
MEREO BIOPHARMA GROUP PLC
Condensed Consolidated Statements of Cash Flows
(unaudited)
 
 
  
Notes
 
  
Six months
ended June 30,
2022
£’000
 
 
Six months
ended June 30,
2021
£’000
 
Operating activities
  
  
 
(Loss)/profit before tax
   
 
  
 
      (19,893 )      10,904  
Adjustments to reconcile (loss)/profit to net cash flows from operating activities
   
 
  
 
                 
- Depreciation and impairment of property, plant and equipment
   
 
 7
 
      436       260  
- Share-based payment expense
   
 
 9
 
      2,446       1,760  
- Net foreign exchange (gain)/loss
   
 
  
 
      (2,100 )     1,269  
- Increase in provisions and other liabilities
   
 
 10
 
      307       1,513  
- Finance income
   
 
4
 
      (173 )      (1 ) 
- Finance costs
   
 
 4
 
      1,696       1,915  
-
Changes in the fair
value
of financial instruments
   
 
 4
 
      (1,210 )      (14,363 ) 
- Other income and expenses
   
 
 5
 
      (811 )      —  
- Out-license of intangible asset
 
 
 
 
 
 
—  
 
 
 
9,457
 
- Other
non-cash
movements
   
 
 
      330       —    
Working capital adjustments
   
 
  
 
                 
- Decrease/(increase) in receivables and prepayments
   
 
  
 
      331       (1,675 ) 
- Increase/(decrease) in trade and other payables and accruals
   
 
  
 
      1,364       (1,137 ) 
Taxation
   
 
  
 
      (1,529 )     —    
    
 
  
 
   
 
 
    
 
 
  
Net cash flows (used in)/from operating activities
   
 
  
 
   
 
(18,806
 )  
 
9,902
 
    
 
  
 
   
 
 
    
 
 
  
Investing activities
   
 
  
 
                 
Purchase of property, plant and equipment
   
 
7
 
      (10 )      —    
Proceeds from intangible asset
   
 
 5
 
      1,484       —    
Payments to CVR holders
   
 
 5
 
      (673 )      —    
Interest earned
   
 
4
 
      173       1  
    
 
  
 
   
 
 
    
 
 
  
Net cash flows from investing activities
   
 
  
 
   
 
974
 
  
 
1
 
    
 
  
 
   
 
 
    
 
 
  
Financing activities
   
 
  
 
                 
Proceeds from issuance of ordinary shares
   
 
  
 
      —         78,532  
Transaction costs on issuance of shares
   
 
  
 
      —         (234 ) 
Proceeds from TAP agreement
   
 
  
 
      153       —    
Payment of lease liabilities
   
 
  
 
      (445 )      (290 ) 
    
 
  
 
   
 
 
    
 
 
  
Net cash flows (used in)/from financing activities
   
 
  
 
   
 
(292
) 
  
 
78,008
 
    
 
  
 
   
 
 
    
 
 
  
Net (decrease)/increase in cash and cash equivalents
   
 
  
 
   
 
(18,124
 )  
 
87,911
 
    
 
  
 
   
 
 
    
 
 
  
Cash and cash equivalents at the beginning of the period
   
 
  
 
      94,296       23,469  
Effect of exchange rate changes on cash and cash equivalents
   
 
  
 
      243       (1,287 ) 
    
 
  
 
   
 
 
    
 
 
  
Cash and cash equivalents at the end of the period
   
 
  
 
   
 
76,415
 
  
 
110,093
 
    
 
  
 
   
 
 
    
 
 
  
The accompanying notes form an integral part of these unaudited condensed consolidated financial statements.
MEREO BIOPHARMA GROUP PLC
Condensed Consolidated Statements of Changes in Equity
(unaudited)
 
 
  
Notes
  
Issued
capital
 
  
Share
premium
 
  
Other
capital
reserves
 
 
Employee
Benefit
Trust
 
 
Other
reserves
 
  
Accumulated
losses
 
 
Translation
reserve
 
 
Total
equity
 
 
  
 
  
£’000
 
  
£’000
 
  
£’000
 
 
£’000
 
 
£’000
 
  
£’000
 
 
£’000
 
 
£’000
 
At December 31, 2020
        
 
1,017
 
   
 
161,785
 
   
 
128,374
 
  
 
(1,305
)
 
   
 
5,001
 
  
 
(309,693
) 
  
 
(150
) 
  
 
(14,971
) 
         
 
 
     
 
 
     
 
 
    
 
 
     
 
 
    
 
 
    
 
 
    
 
 
  
Profit for the period
           —          —          —         —          —         12,088       —         12,088  
Other comprehensive income/(loss)
           —          —          —         —          —         —         (26 )      (26 ) 
    
 
   
 
 
     
 
 
     
 
 
    
 
 
     
 
 
    
 
 
    
 
 
    
 
 
  
Total
           —          —          —         —          —         12,088       (26 )      12,062  
Share-based payments
           —          —          1,760       —          —         —         —         1,760  
Issuance of share capital, net
           601        78,609        —         —          —         —         —         79,210  
Exercise of share options
           —          —          (108 )     
154

        —       —                 46  
Conversion of warrants
           16        158        —         —       
2,400

       —         —         2,574  
         
 
 
     
 
 
     
 
 
    
 
 
     
 
 
    
 
 
    
 
 
    
 
 
  
At June 30, 2021
        
 
1,634
 
   
 
240,552
 
   
 
130,026
 
  
 
(1,151
)
   
 
7,401
 
  
 
(297,605
) 
  
 
(176
) 
  
 
80,681
 
         
 
 
     
 
 
     
 
 
    
 
 
     
 
 
    
 
 
    
 
 
    
 
 
  
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 income/(loss)
           —          —          —         —          —         —         (1,775 )      (1,775 ) 
    
 
   
 
 
     
 
 
     
 
 
    
 
 
     
 
 
    
 
 
    
 
 
    
 
 
  
Total
           —          —          —         —          —         (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
 
         
 
 
     
 
 
     
 
 
    
 
 
     
 
 
    
 
 
    
 
 
    
 
 
  
The accompanying notes form an integral part of these unaudited condensed consolidated financial statements.
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 Global 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, 2022. The principal activities of the Company are the development and commercialization of innovative therapeutic pharmaceutical products.
2. Significant accounting policies
Basis of preparation
The unaudited condensed consolidated financial statements for the six-month period ended June 30, 2022 have been prepared in accordance with International Accounting Standards (IAS) 34,
Interim Financial Reporting
. These consolidated condensed 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, 2021 filed with the Securities and Exchange Commission (“SEC”) on March 31, 2022.
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, 2021 has been extracted from the Company’s audited financial statements for that year, filed with the SEC on March 31, 2022.
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, 2021 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 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, 2021.
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, 2021.
3. Revenue
The Company recognized upfront proceeds of £36.5 million ($50.0 million) from the license and collaboration agreement with Ultragenyx for setrusumab as revenue in the
six-month
period ended June 30, 2021. 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 license and collaboration agreement with Ultragenyx and in accordance with terms of the 2015 asset purchase with Novartis, the Company made a payment to Novartis of £7.2 million ($10.0 million). The payment included a deduction for costs of £2.4 million which was deferred to be recognized in the statement of comprehensive income when the associated costs are incurred. In the
six-month
period ended June 30, 2022, £0.4 million (six months ended June 30, 2021: £0.9 million) of these deductions were recognized within “Cost of revenue” in the
condensed consolidated 
statement of comprehensive
(loss)/
income. As of June 30, 2022, the remaining balance to be recognized of £
0.9
million (June 30, 2021: £
1.5
 million and December 31, 2021: £
1.3
million) is included within “Other liabilities” in the condensed consolidated balance
sheets
.
4. Finance income, finance costs and changes in the fair value of financial instruments
Finance income
 
    
Six months
to June 30,
2022

£’000
     
Six months
to June 30,
2021

£’000
  
Interest income on short-term deposits
      173        1  
    
 
 
     
 
 
  
Total
   
 
173
 
   
 
1
 
    
 
 
     
 
 
  
Finance costs
 
    
Six months
to June 30,
2022

£’000
     
Six months
to June 30,
2021

£’000
  
Interest on convertible loan notes
      (1,567 )       (1,792 ) 
Interest on lease liabilities
      (113 )       (105 ) 
Discounting of provision for deferred cash consideration
      (163 )       (72 ) 
Other
      (16 )       (18 ) 
    
 
 
     
 
 
  
Total
   
 
(1,859
) 
   
 
(1,987
) 
    
 
 
     
 
 
  
Changes in the fair value of financial instruments
 
    
Six months
to June 30,
2022

£’000
     
Six months
to June 30,
2021

£’000
  
Changes in the fair value of warrants – placement
      1,091        14,301  
Changes in the fair value of warrants – bank loan
      119        62  
    
 
 
     
 
 
  
Total
   
 
1,210
 
   
 
14,363
 
    
 
 
     
 
 
  
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. Earnings per share
Basic (loss)/profit per share is calculated by dividing the (loss)/profit 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 to
June 30,

2022
     
Six months to
June 30,

2021
  
Numerator – Basic earnings per share (£’000)
                  
(Loss)/profit attributable to equity holders of the parent
      (19,158 )       12,088  
Denominator – Basic earnings per share
                  
Weighted average number of ordinary shares
      583,892,445        494,617,344  
(Loss)/profit per share – basic (£)
      (0.03 )       0.02  
Numerator – Diluted earnings per share (£’000):
                  
(Loss)/profit attributable to equity holders of the parent
      (19,158 )       12,088  
Effect of dilutive ordinary shares
      —        (14,363 ) 
Numerator – Diluted earnings per share
      (19,158 )       (2,275 ) 
Denominator – Diluted earnings per share:
                  
Number of ordinary shares used for basic earnings per share
      583,892,445        494,617,344  
Weighted average effect of dilutive ordinary shares
      —        48,264,422  
Weighted average number of diluted ordinary shares outstanding
      583,892,445        542,881,766  
Loss per share – diluted (£)
      (0.03 )      (0.00 ) 
For the period ended June 30, 2021, the effect of dilutive ordinary shares is related to Company’s outstanding warrants. For the period ended June 30, 2022, 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)
    
Right-of-use

asset
(equipment)
    
Leasehold
improvements
    
Office
equipment
    
IT
equipment
    
Total
  
    
£’000
    
£’000
    
£’000
    
£’000
    
£’000
    
£’000
  
Cost or valuation
 
                                
At January 1, 2022
   
 
2,903
 
  
 
295
 
  
 
557
 
  
 
173
 
  
 
180
 
  
 
4,108
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Additions
      —         —         —         7       3       10  
Currency translation effects
      4       6       —         —         —         10  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
At June 30, 2022
   
 
2,907
 
  
 
301
 
  
 
557
 
  
 
180
 
  
 
183
 
  
 
4,128
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Depreciation and impairment
 
                        
At January 1, 2022
   
 
(1,025
) 
  
 
(231
) 
  
 
(124
) 
  
 
(69
) 
  
 
(129
) 
  
 
(1,578
) 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Impairment
      (18 )      —         —         —         —         (18 ) 
Depreciation for the period
      (309 )      (41 )      (47 )      (11 )      (10 )      (418 ) 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
At June 30, 2022
   
 
(1,352
) 
  
 
(272
) 
  
 
(171
) 
  
 
(80
) 
  
 
(139
) 
  
 
(2,014
) 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Net book value
 
                                        
At January 1, 2022
      1,878       64       433       104       51       2,530  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
At June 30, 2022
   
 
1,555
 
  
 
29
 
  
 
386
 
  
 
100
 
  
 
44
 
  
 
2,114
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
8. Intangible assets
 
    
Acquired
development
programs
  
Cost
   
£’000
  
At January 1, 2022 and June 30, 2022
   
 
33,005
 
    
 
 
  
Accumulated revision to estimated value
         
At January 1, 2022
      (8,441 ) 
Revision to estimated value
      (448 ) 
    
 
 
  
At June 30, 2022
   
 
(8,889
) 
    
 
 
  
Net book value
         
At January 1, 2022
      24,564  
    
 
 
  
At June 30, 2022
   
 
24,116
 
    
 
 
  
The present value of the provision for deferred cash consideration relating to the agreement with AstraZeneca was reviewed at June 30, 2022 (see Note
10
). The change in the period due to changes in timelines or probability of contractual milestones being achieved was a decrease of £0.4 
million which was
recognized as a reduction of the intangible asset in line with our accounting policies.
During the period the Company did not revise the value of any other intangible assets (2021: £nil). As the intangible assets remain under development, no amortization charge has been recognized (2021: £nil).
9. Issued capital and reserves
 
    
Number of
ordinary
shares
     
Ordinary
share
capital

£’000
     
Share
premium

£’000
  
At January 1, 2021
      338,953,141        1,017        161,785  
Issued during the period
      205,557,122        617        79,001  
Transaction costs for issued share capital
      —          —          (234 ) 
At June 30, 2021
      544,510,263        1,634        240,552  
    
 
 
     
 
 
     
 
 
  
At January 1, 2022 and June 30, 2022
 
584,908,239
 
 
1,755
 
 
247,460
 
    
 
 
     
 
 
     
 
 
  
Other capital reserves
 
    
Share-
based
payments
    
Equity
component of
convertible
loan
     
Other
warrants
issued
     
Merger
reserve
     
Other
reserve
     
Total
  
    
£’000
    
£’000
     
£’000
     
£’000
     
£’000
     
£’000
  
At January 1, 2021
   
 
19,843
 
  
 
34,565
 
   
 
44
 
   
 
40,818
 
   
 
33,104
 
   
 
128,374
 
    
 
 
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Share-based payments expense during the period
      1,760       —          —          —          —          1,760  
Share option exercise
      (108 )      —          —          —          —          (108 ) 
    
 
 
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
At June 30, 2021
   
 
21,495
 
  
 
34,565
 
   
 
44
 
   
 
40,818
 
   
 
33,104
 
   
 
130,026
 
    
 
 
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
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
 
    
 
 
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Share-based payments
The Company has a share option scheme under which options to subscribe for the Company’s shares have been granted to certain
executives, non-executive
directors (“NEDs”) and employees. The share-based payment reserve is used to recognize (i) the value of equity settled share-based payments provided to employees, including key management personnel, as part of their remuneration and (ii) deferred equity consideration.
The total charge for the six months to June 30, 2022 in respect of all share option schemes was £2.4 million (June 30, 2021: £1.8 million).
During the six months ended June 30, 2022, the Company granted 3,996,400 market value options over ADS under the Mereo 2019 Equity Incentive Plan to certain executives and other employees. The weighted average fair value of options granted was $1.23
 per option
.
The weighted average exercise price is $1.39
 per ADS
.
During the same period, the Company granted 507,987 market value options over ADS under the Mereo 2019 NED Equity Incentive Plan to
certain non-executive
directors. The weighted average fair value of options granted was $1.10
 per option
.
 The weighted average exercise price is $1.24
 per ADS
.
Options over ADSs issued during the six months ended June 30, 2022 were valued using the Black-Scholes model with the following weighted average inputs: expected volatility of 96%; risk free interest rate of 1.79%; expected life of 10 years; and market price per ADS of $1.38.
A total of 353,183
deferred restricted stock units, with a weighted average fair value of $1.12
 per restricted stock unit
,
were also granted
 in February 2022
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, 2022. 
10. Provisions
 
    
June 30,
2022

£’000
     
December 31,
2021

£’000
  
Provision for deferred cash consideration
      4,334        4,123  
    
 
 
     
 
 
  
Total
   
 
4,334
 
   
 
4,123
 
    
 
 
     
 
 
  
Current
      2,945        2,803  
Non-current
      1,389        1,320  
The deferred cash consideration is the estimate of the quantifiable but not certain future cash payment obligations due to AstraZeneca for the acquisition of certain assets. This provision 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 8).
11. Convertible loan notes
 
 
  
June 30,
 
  
December
 
 
  
2022
 
  
31, 2021
 
 
  
£’000
 
  
£’000
 
Novartis Loan Note
  
 
4,094
 
  
 
3,771
 
Loan Notes – private placement
  
 
11,858
 
  
 
10,613
 
 
  
 
 
 
  
 
 
 
Total
  
 
15,952
 
  
 
14,384
 
 
  
 
 
 
  
 
 
 
Current
  
 
15,952
 
  
 
—  
 
Non-current
  
 
—  
 
  
 
14,384
 
Novartis Loan Note is convertible at a fixed price of £0.265 per ordinary share
and bears an 
interest rate of 6% per annum with a maturity date of February 2023. Loan Notes from the June 2020 private placement are convertible at a fixed price of £
0.174
per ordinary share and bears an interest
rate
of 6% per annum with a maturity date of June 2023.
12. Warrant liability
 
    
June 30,
2022
£’000
     
June 30,
   2021 £’000  
  
At January 1
   
 
8,336
 
   
 
50,775
 
    
 
 
     
 
 
  
Warrants exercised
      —          (2,400 ) 
Fair value changes during the period
      (1,210 )       (14,364 ) 
    
 
 
     
 
 
  
At June 30
   
 
7,126
 
   
 
34,011
 
    
 
 
     
 
 
  
 
 
  
June 30,
2022
£’000
 
  
December 31,
2021

£’000
 
Current
      6,904        —    
Non-current
      222        8,336  
    
 
 
     
 
 
  
Total
   
 
7,126
 
   
 
8,336
 
    
 
 
     
 
 
  
The change in fair value of the warrant liability represents an unrealized gain for the six months ended June 30, 2022 and for the six months ended June 30, 2021.
Warrants - private placement
As a part of the private placement transaction on 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 are exercisable until June 2023. The warrants are classified as liabilities as the Company does not have an unconditional right to avoid redeeming the instruments for cash. The fair value of the warrant liability was £6.9 million as of June 30, 2022 (£8.0 million as of December 31, 2021). The change in the fair value of £1.1 million was recognized as a gain in the
condensed 
consolidated statement of comprehensive
(loss)/
income. In the six months ended June 30, 2022, 
no
 warrants were exercised.
Warrants – bank loan
As of June 30, 2022 and December 31, 2021, the former lenders of 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. 
At June 30, 2022, the fair value of these warrants were £0.2 million (December 31, 2021: £0.3 million). The change in the fair value of £0.1 million was recognized as a gain in the
condensed 
consolidated statement of comprehensive
(loss)/
income. There were no warrants exercised during the six months ended June 30, 2022.
Total outstanding warrants
At June 30, 2022, a total of 147,431,351 warrants are outstanding. The warrants outstanding are equivalent to 25% 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, 2022
     
December 31, 2021
  
Expected volatility (%)
      116        75  
Risk-free interest rate (%)
      2.4        0.9  
Expected life of share options (years)
      1.0        1.5  
Market price of ADS($)
      1.12        1.60  
Model used
     
Black-Scholes
       
Black-Scholes
  
Volatility was estimated by reference to the one year historical volatility of the historical share price of the Company.
1
3
. Financial instruments fair value disclosures
The Company held the following financial instruments at fair value at June 30, 2022. There are
no non-recurring
fair value measurements.
 
Financial liabilities
measured at fair value
    Fair value
measurements
using significant
unobservable
inputs (Level 1)		      Fair value
measurements
using significant
unobservable
inputs (Level 2)		      Fair value
measurements
using significant
unobservable
inputs (Level 3)		  
Warrant liabilities
      —          222        6,904  
Provision for deferred
consideration
      —          —          4,334  
    
 
 
     
 
 
     
 
 
  
Total
   
 
—  
 
   
 
222
 
   
 
11,238
 
    
 
 
     
 
 
     
 
 
  
There were no transfers between Level 1 and Level 2 during 2022.
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:
 
    
Provision for
deferred
consideration

£’000
     
Warrant
liability

£’000
  
At January 1, 2022
   
 
4,123
 
   
 
7,995
 
    
 
 
     
 
 
  
Settled during the period
      —       
 
—  
 
Movement during the period
      211        (1,091 ) 
    
 
 
     
 
 
  
At June 30, 2022
   
 
4,334
 
   
 
6,904
 
    
 
 
     
 
 
  
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 deferred 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 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.
 
    
Valuation
technique
   
Significant
unobservable
inputs
   
Input range
   
Sensitivity of the input to
fair value
Provision for deferred consideration    Discounted cash flow    WACC    2022: 14%    1% increase/decrease would result in a decrease/increase in fair value by £45,000
         
          WACC    2021: 12%    1% increase/decrease would result in a decrease/increase in fair value by £31,000
         
          Probability of success    2022: 40.6% - 81.2%    10% increase/decrease would result in an increase/decrease in fair value by £0.5 million
         
          Probability of success    2021: 40.6% - 81.2%    10% increase/decrease would result in an increase/decrease in fair value by £0.5 million
         
Warrant Liability related to the PIPE    Black-Scholes   
Expected volatility
   
2022: 116.3%

    Volatility was estimated by reference to the one year historical volatility of the historical share price of the Company. If the volatility is increased to 149% (six month volatility), the carrying value of the warrants as of June 30, 2022 would increase
to
£10.2
 
million.
 
 
 
 
 
 
 
 
 
 
 
 
 
Expected volatility
 
2021: 75.1%
 
In 2021, volatility was estimated by reference to the
1.4
year historical volatility of the historical share price of the Company. If the volatility is decreased to 67.4% (one year volatility), the carrying value of the warrants as of December 31, 2021 would decrease to £6.7 million.
1
4
. 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 period to June 30, 2022 (June 30, 2021: nil). The EBT repaid £45,493 of the funding previously loaned by the Company during the period ended June 30, 2021.
The EBT did not purchase any ordinary shares during the period to June 30, 2022 (2021: nil). A total of 78,225 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 period
 ended June 30, 2022 (June 30, 2021: 145,830).
As of June 30, 2022 a cash balance of £17,741 was held by the EBT. As of December 31, 2021 a cash balance of £17,866 was held by the EBT.
1
5
. Events after reporting period
On July 8, 2022, the Company issued and allotted 40,020,280 ordinary shares of £0.003 in nominal value in the capital of the Company, equivalent to 8,004,056 ADSs, at an exercise price of £0.174 per ordinary share on conversion of loan notes issued as part of the June 2020 private placement transaction. Following this conversion, the Company ha
d
 124,918,284 ADSs outstanding.

On October 18, 2022, the Company announced an updated operating plan, including a targeted reduction in the employee base of up to 40% and a significant reduction in other costs. In connection
with the implementation
of the operating plan, the Company estimates that it will incur approximately £0.5 million
in expenditure, which are expected to primarily relate to employee severance and other termination benefits. The Company expects to recognize substantially all of this expenditure in the fourth quarter of 2022.