Exhibit 99.1
MEREO BIOPHARMA GROUP PLC
Condensed Consolidated Statement of Comprehensive Income
(unaudited)
 
   Notes   
Six months ended

June 30, 2021

£’000
  
Six months ended

June 30, 2020

£’000
 
Revenue
   3    36,464    
Cost of revenue
        (18,137)   
Research and development expenses
        (9,858)  (8,479
Administrative expenses
        (8,673)  (8,212
        
 
 
  
 
 
 
Operating loss
       
 
(204
  (16,691
        
 
 
  
 
 
 
Finance income
        1   39 
Finance costs
   4    (1,987)  (2,924
Changes in the fair value of financial instruments
   4    14,363   (94,704
Loss on disposal of intangible assets
        —     (11,302
Net foreign exchange loss
        (1,269)  (519
        
 
 
  
 
 
 
Profit/(loss) before tax
       
 
10,904
 
  (126,101
Taxation
        1,184
 
  1,482 
        
 
 
  
 
 
 
Profit/(loss) for the period, attributable to equity holders of the parent
 
  
 
12,088
 
  (124,619
        
 
 
  
 
 
 
Basic profit/(loss) per share for the
period (
in
 £)
5   
 
0.02
 
  (1.05
        
 
 
  
 
 
 
Diluted loss per share for the
period (in £)
   5   
 
0.00
 
  (1.05
        
 
 
  
 
 
 
Fair value changes on investments held at fair value through OCI
       
 
—  
 
  3 
Currency translation of foreign operations
        (26)  1,324 
        
 
 
  
 
 
 
Total comprehensive
 
profit/(loss)
 
for
 
the
 
period,
 
attributable
 
to
 
equity
 
holders
 
of
 
the
 
parent
       
 
12,062
 
  (123,292
)
 
        
 
 
  
 
 
 
The accompanying notes form an integral part of these unaudited condensed consolidated financial statements.

MEREO BIOPHARMA GROUP PLC
Condensed Consolidated Balance Sheet
(unaudited)
 
   Notes   
June 30, 2021

£’000
  December 31, 2020
£’000
 
Assets
              
Non-current
assets
              
Property, plant and equipment
   6    2,390   1,573 
Intangible assets
   7    22,192   31,648 
        
 
 
  
 
 
 
        
 
24,582
 
  33,221 
        
 
 
  
 
 
 
Current assets
              
Prepayments
        4,420   1,619 
R&D tax credits
        4,004   2,818 
Other taxes receivable
        788   804 
Other receivables
        1,030   1,016 
Cash and short-term deposits
        110,093   23,469 
        
 
 
  
 
 
 
        
 
120,335
 
  29,726 
        
 
 
  
 
 
 
Total assets
       
 
144,917
 
  62,947 
        
 
 
  
 
 
 
Equity and liabilities
              
Non-current
liabilities
              
Provisions
   9    392   1,216 
Interest-bearing loans and borrowings
        17,933   16,142 
Other liabilities
        78   62 
Warrant liability
   10    34,011   50,775 
Lease liability
        1,950   1,158 
        
 
 
  
 
 
 
        
 
54,364
 
  69,353 
        
 
 
  
 
 
 
Current liabilities
              
Trade and other payables
        2,187   3,333 
Accruals
        4,206   4,178 
Provisions
   9    1,256   418 
Lease liability
        724   636 
Other liabilities
   3    1,499   —   
        
 
 
  
 
 
 
        
 
9,872
 
  8,565 
        
 
 
  
 
 
 
Total liabilities
       
 
64,236
 
  77,918 
        
 
 
  
 
 
 
Net assets/(liabilities)
       
 
80,681
 
  (14,971
        
 
 
  
 
 
 
Equity
              
Issued capital
   8    1,634   1,017 
Share premium
   8    240,552   161,785 
Other capital reserves
   8    130,026   128,374 
Other reserves
       7,401   5,001 
Employee Benefit Trust
       (1,151  (1,305
Accumulated losses
       (297,605)  (309,693
Translation reserve
        (176  (150
        
 
 
  
 
 
 
Total equity
       
 
80,681
 
  (14,971
        
 
 
  
 
 
 
The accompanying notes form an integral part of these unaudited condensed consolidated financial statements.
 
2

MEREO BIOPHARMA GROUP PLC
Condensed Consolidated Statement of Cash Flows
(unaudited)
 
   
Notes
   
Six months ended

June 30, 2021

£’000
  
Six months ended

June 30, 2020

£’000
 
Operating activities
              
Profit/(loss) before tax
        10,904   (126,101
Adjustments to reconcile profit/(loss) before tax to net cash flows from operating activities:
              
– Depreciation and impairment of property, plant and equipment
   6    260   1,018 
– Share-based payment expense
        1,760   911 
– Net foreign exchange loss
        1,269   519 
– Increase in provisions and other liabilities
        1,513   38 
– Finance income
        (1  (39
– Finance costs
        1,915   2,813 
– Loss on disposal of intangible assets
        —     11,302 
– Transaction costs relating to PIPE
        —     1,349 
– Gain on disposal of fixed assets
        —     (53
– Fair value remeasurement on warrants
   10    (14,363  94,704 
– Disposal of intangible asset
   7    9,457   —   
Working capital adjustments:
              
– (Increase)/decrease in trade and other receivables
        (1,675)  (553
– Increase/(decrease) in trade and other payables
        (1,137)  (3,329
– Tax credits received
        —     6,263 
        
 
 
  
 
 
 
Net cash flows from/(used in) operating activities
       
 
9,902
 
  (11,158
        
 
 
  
 
 
 
Investing activities
              
Proceeds from sale of property, plant and equipment
        —     59 
Sale of intangible assets (net of transaction costs)
        —     1,965 
Acquisition of subsidiary
        —     (354
Interest earned
        1   39 
        
 
 
  
 
 
 
Net cash flows received from investing activities
       
 
1
 
  1,709 
        
 
 
  
 
 
 
Financing activities
              
Proceeds from issue of ordinary shares
   8    78,532   20,136 
Transaction costs on issue of shares
        (234  (1,307
Proceeds from issue of convertible loan
        —     44,375 
Transaction costs issue of convertible loan
        —     (3,598
Capital repayment of bank loan
        —     (8,011
Interest paid on bank loan
        —     (581
Payment of lease liabilities
        (290  (1,461
        
 
 
  
 
 
 
Net cash generated from financing activities
       
 
78,008
 
  49,553 
        
 
 
  
 
 
 
Net increase in cash and cash equivalents
        87,911   40,104 
Cash and cash equivalents at the beginning of the period
 
   23,469   16,347 
Effect of exchange rate changes on cash and cash equivalents
 
   (1,287  370 
        
 
 
  
 
 
 
Cash and cash equivalents at the end of the period
 
  
 
110,093
 
  56,821 
        
 
 
  
 
 
 
The accompanying notes form an integral part of these unaudited condensed consolidated financial statements.
 
3

MEREO BIOPHARMA GROUP PLC
Condensed Consolidated Statement of Changes in Equity
(unaudited)
 
   Issued
capital
£’000
   Share
premium
£’000
   Other
capital
reserves
£’000
  Other
reserves
£’000
   Employee
Benefit
Trust
£’000
  Accumulated
losses
£’000
  Translation
reserve
£’000
  Total equity
£’000
 
At December 31, 2020
  
 
1,017
 
  
 
161,785
 
  
 
128,374
 
 
 
5,001
 
  
 
(1,305
 
 
(309,693
 
 
(150
 
 
(14,971
   
 
 
   
 
 
   
 
 
  
 
 
   
 
 
  
 
 
  
 
 
  
 
 
 
Profit for the period
                     12,088      12,088 
Other comprehensive income/(loss)
                        (26  (26
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
 
 
 
7,401
 
  
 
(1,151
 
 
(297,605
) 
 
(176
 
 
80,681
 
   
 
 
   
 
 
   
 
 
  
 
 
   
 
 
  
 
 
  
 
 
  
 
 
 
 
   Issued
capital
£’000
   Share
premium
£’000
   Other
capital
reserves
£’000
   Other
reserves
£’000
  Employee
Benefit
Trust
£’000
  Accumulated
losses
£’000
  Translation
reserve
£’000
  Total equity
£’000
 
At December 31, 2019
  
 
294
 
  
 
121,684
 
  
 
59,147
 
  
 
7,000
 
 
 
(1,305
 
 
(146,065
 
 
(499
 
 
40,256
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Loss for the period
                     (124,619     (124,619
Other comprehensive income
                     3   1,324   1,327 
Share-based payments
           911                911 
Issuance of share capital, net
   347    18,715        (2,125           16,937 
Issuance of share capital for conversion of loan notes
   375    21,386    33,104                54,865 
Issuance of share capital for conversion of loan notes and warrants
           1,084                1,084 
Reclassification of embedded derivative
           33,481                33,481 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
At June 30, 2020
  
 
1,016
 
  
 
161,785
 
  
 
127,727
 
  
 
4,875
 
 
 
(1,305
 
 
(270,681
 
 
825
 
 
 
24,242
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
The accompanying notes form an integral part of these unaudited condensed consolidated financial statements.
 
4

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 oncology and rare diseases.
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, 2021. 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, 2021 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, 2020 filed with the SEC on March 31, 2021.
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, 2020 has been extracted from the Company’s audited financial statements for that year, filed with the Securities and Exchange Commission (“SEC”) on March 31, 2021.
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, 2020 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 at a product candidate level. 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 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.
As a result of these anticipated expenditures, the Company will need additional financing to support its continuing operations. Until such time as the Company can generate significant revenue from product sales, or other commercialization revenues, if ever, in respect of its oncology or rare disease product candidates or through partnering and/or
out-licensing
its product candidates, the Company will seek to finance its operations through a combination of public or private equity or debt financings or other sources.
The Company has adequate resources to meet its liabilities as they fall due for the foreseeable future and at least the subsequent 12 months. Therefore, the Company continues to adopt the going concern basis of accounting in preparing condensed consolidated financial statements for the six months ended June 30, 2021.
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, 2020. Additional accounting policies relevant to the six months ended June 30, 2021 are disclosed below.
Revenue
The Company’s ordinary business activities are the development of product candidates to key clinical milestones and either strategically partnering them or further developing such product candidates through regulatory approval and potentially commercialization. The Company may enter into a range of different agreements with third parties, including: (i) licensing agreements where the global rights to a product candidate are licensed to a partner; and (ii) collaboration agreements where rights to a product candidate are licensed to a partner but the Company retains certain rights, for example to further develop or commercialize the product candidate in specified geographical territories. Under both licensing and collaboration agreements, rights to product candidates are provided to a partner typically in exchange for consideration in the form of upfront payments and/or development, regulatory, commercial or other similar milestones, and royalties on commercial sales, should regulatory approval be obtained for the product candidates.
Revenue includes income from licensing and collaboration agreements. Consideration received up front is recognized at the point in time in which the right to use an intangible asset is transferred and further payments received are recognized upon the achievement of specified development, regulatory, commercial or other similar milestones. For agreements with a right to access an intangible asset, revenue is recognized over time, typically on a straight-line basis over the life of the license or collaboration agreement. When there are other performance obligations in such agreements, the consideration is allocated using the residual approach and recognized when the performance obligations are satisfied.
Income from development, regulatory, commercial or similar milestones is recognized when considered highly probable that a significant reversal will not occur. Timing of the recognition of such milestones are considered to be a key judgment, as they are often dependent on third parties. In general, for milestones which are subject to the decisions of third parties (e.g. the acceptance or approval of a filing by a regulatory authority), the Company recognizes milestone income when the decision occurs.
We do not currently have any approved product candidates. Accordingly, we have not generated any commercial sales revenue during the period.
Intangible assets disposed of in a license or collaboration agreement are recorded within “Cost of revenue” in the Company’s consolidated statement of comprehensive income based on an allocation of cost or value to the rights that have been licensed. Payments to third parties arising as a direct consequence of the income recognized are also recorded within “Cost of revenue” in the Company’s consolidated statement of comprehensive income.
 
5

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, 2020.
Judgment is required to determine the appropriate accounting policy for the license and collaboration agreement with Ultragenyx Pharmaceutical, Inc. (“Ultragenyx”). Management has determined that the upfront proceeds from the license and collaboration agreement represent proceeds from the Company’s ordinary business activities and, therefore, represent revenue within the scope of IFRS 15, Revenue from Contracts with Customers. Judgment is also required to determine the portion of the carrying amount of the intangible asset to derecognize, relative to the value retained, as a result of the license and collaboration agreement with Ultragenyx.
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 achieved.
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 has been deferred and will be recognized in the statement of comprehensive income when the associated costs are incurred. In the six month period ended June 30, 2021, £0.9
 
million of these deductions were recognized within “Cost of revenue” in the statement of comprehensive income. As of June 30, 2021 the remaining balance to be recognized of
 £1.5
million is included within “Other liabilities” in the condensed consolidated balance sheet.
4. Finance costs and changes in the fair value of financial instruments
Finance costs
 
   
Six months
to June 30,
2021

£’000
   Six months
to June 30,
2020
£’000
 
Interest on convertible loan
  
 
(1,792
   (606
Interest on bank loan
  
 
—  
 
   (581
Interest on lease liabilities
  
 
(105
   (873
Accreted interest on bank loan
   —      (753
Discounting of provision for deferred cash consideration
  
 
(72
   (111
Other
  
 
(18
   —   
   
 
 
   
 
 
 
Total finance costs
  
 
(1,987
   (2,924
   
 
 
   
 
 
 
Changes in the fair value of financial instruments
 
   
Six months
to June 30,
2021

£’000
   Six months
to June 30,
2020
£’000
 
Changes in the fair value of warrants – placement
  
 
14,301
 
   (31,493
Changes in the fair value of warrants – bank loan
  
 
62
 
   (53
Changes in the fair value of embedded derivative
  
 
—  
 
   (63,158
   
 
 
   
 
 
 
Total changes in fair value of financial instruments
  
 
14,363
 
   (94,704
   
 
 
   
 
 
 
 
6

5. Earnings per share
For the six months ended June 30, 2021, basic profit per share of £0.02 is calculated by dividing the profit attributable for the period to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the period of 494.6 million. Diluted profit per share of £0.00 is based on dividing the profit attributable for the period by 542.9 million ordinary share equivalents, which includes the weighted average number of ordinary shares outstanding and the effect of 48.3 million dilutive ordinary share equivalents.
For the six months ended June 30, 2020, basic and diluted loss per share of £1.05 is calculated by dividing the profit attributable for the period to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the period of 117.8 million. The potential shares issued through equity settled transactions 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 per share was the same.
6. Property, plant and equipment
 
   
Right-of-use

asset
(buildings)
  
Right-of-use
asset
(equipment)
  Leasehold
improvements
  Office
equipment
  
IT
equipment
  Total 
       
   £’000  £’000  £’000  £’000  £’000  £’000 
Cost or valuation
                         
At January 1, 2021
  
 
1,848
 
 
 
1,169
 
 
 
164
 
 
 
71
 
 
 
132
 
 
 
3,384
 
Additions
   923   —     —     —     31   954 
Lease modification
   134   29   —     —     —     163 
Disposals
   —     (861  —     —     —     (861
Currency translation effects
   (5  (35  —     —     —     (40
At June 30, 2021
  
 
2,900
 
 
 
302
 
 
 
164
 
 
 
71
 
 
 
163
 
 
 
3,600
 
      
Depreciation and impairment
 
                    
At January 1, 2021
  
 
(531
 
 
(1,023
 
 
(85
 
 
(65
 
 
(107
 
 
(1,811
Disposals
   —     861   —     —     —     861 
Depreciation for the year
   (199  (37  (8  (4  (12  (260
At June 30, 2021
  
 
(730
 
 
(199
 
 
(93
 
 
(69
 
 
(119
 
 
(1,210
Net book value
At January 1, 2021
  
 
1,318
 
 
 
146
 
 
 
79
 
 
 
6
 
 
 
25
 
 
 
1,573
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
At June 30, 2021
  
 
2,170
 
 
 
103
 
 
 
71
 
 
 
2
 
 
 
44
 
 
 
2,390
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
In June 2021, the Company entered into a new lease agreement for additional office space in London, UK. The Company also extended the lease term of the existing office space, which resulted in the modification of the right-of-use asset. In relation to the leasehold improvements of the office space, the Company had commitments of
£0.5 million as
o
f
 June 30, 2021.
7. Intangible assets
 
   Acquired
development
programs
£’000
 
Cost
     
At January 1, 2021
   33,005 
Disposal
   (9,456
At June 30, 2021
  
 
23,549
 
  
Accumulated revision to estimated value
     
At January 1, 2021 and June 30, 2021
  
 
(1,357
  
Net book value
     
At January 1, 2021
   31,648 
   
 
 
 
At June 30, 2021
  
 
22,192
 
   
 
 
 
On January 25, 2021, the Company’s
l
icense and
c
ollaboration agreement with Ultragenyx for the development and commercialization of setrusumab for OI became effective. Under the terms of the agreement, the Company received an upfront payment of £36.5 million ($50 million). Additionally, the Company will be eligible to receive up to $254 million in future milestones and royalties. The
l
icense and
c
ollaboration
a
greement grants Ultragenyx an exclusive license to develop and commercialize setrusumab in the US and rest of the world, excluding Europe where the Company retains commercial rights. As a result, intangible assets with a carrying value of £9.5 
million was derecognized and recorded within “Cost of revenue” in the Company’s condensed consolidated statement of comprehensive income.
The present value of the provision for deferred cash consideration relating to the agreement with AstraZeneca was reviewed at June 30, 2021 (see Note 9). There were no changes in the period due to changes in timelines or probability of contractual milestones being achieved (2020: £67,000) to recognize 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 (2020: £nil). As the intangible assets remain under development, no amortization charge has been recognized (2020: £nil).
 
7

8. 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, 2020
  
 
97,959,622
 
  
 
294
 
  
 
121,684
 
   
 
 
   
 
 
   
 
 
 
Issued during the period
   240,754,340    722    41,408 
Transaction costs for issued share capital
   —      —      (1,307
   
 
 
   
 
 
   
 
 
 
At June 30, 2020
  
 
338,713,962
 
  
 
1,016
 
  
 
161,785
 
   
 
 
   
 
 
   
 
 
 
Since January 1, 2021, the following alterations to the Company’s share capital have been made:
 
 i)
On February 12, 2021, the Company issued and allotted 198,375,000 ordinary shares of £0.003 in nominal value in the capital of the Company at a price of £0.395 per share, equivalent to 39,675,000 ADS at a price of $2.726 per ADS, which resulted in proceeds of £78,358,125. Transaction costs incurred for the issuance of share capital was £0.2 million.
 
 ii)
During the six months ended June 30, 2021, 14,954,491 warrants (equivalent to 2,990,898 ADSs) were exercised. These transactions were completed by way of a cashless exercise resulting in 4,621,147 ordinary shares (924,229 ADSs) being issued at the aggregate nominal value of the ordinary shares underlying the ADSs issued, in place of the exercise price of £0.348 per ordinary share. A further 460,135 warrants were also exercised on a cash basis at the exercise price of £0.348, which resulted in aggregate proceeds of £160,127.
 
 iii)
On May 4, 2021 the Company issued and allotted 2,100,840 ordinary shares of £0.003 in nominal value in the capital of the Company at a price of £0.517 per share to Cancer Focus Fund.
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, 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, 2020
  
 
18,285
 
 
 
 
  
 
44
 
  
 
40,818
 
  
 
 
  
 
59,147
 
   
 
 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Share-based payments expense during the period
   1,061                   1,061 
Shares issued
   (150                  (150
Equity component of the Novartis convertible loan instrument and warrants
      1,084                1,084 
Conversion of the Loan Notes following the Resolutions passing on 30 June 2020
                  33,104    33,104 
Reclassification of the remaining embedded derivative following the Resolutions passing on 30 June 2020
      33,481                33,481 
   
 
 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
At June 30, 2020
  
 
19,196
 
 
 
34,565
 
  
 
44
 
  
 
40,818
 
  
 
33,104
 
  
 
127,727
 
   
 
 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
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, 2021 in respect of all share option schemes was £1.8 million (June 30, 2020: £0.9 million).
 
8

During the six
 
months ended June 30, 2021, the Company granted 2,378,060 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 £1.84. The weighted average exercise price is $2.88. During the same period, the Company granted 296,000 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 £1.80.
The weighted average
exercise price is $2.81.
 
Options over ADSs issued during the six months ended June 30, 2021 were valued using the Black-Scholes model with the following weighted average inputs: expected volatility of 98%; risk free interest rate of 1%; expected life of 10 years; and market price per ADS of $2.87. 
9. Provisions
 
   
June 30,
2021

£’000
   
December 31,
2020

£’000
 
Social security contributions on share options
  
 
51
 
   109 
Provision for deferred cash consideration
  
 
1,597
 
   1,525 
   
 
 
   
 
 
 
Total
  
 
1,648
 
   1,634 
   
 
 
   
 
 
 
Current
  
 
1,256
 
   418 
Non-current
  
 
392
 
   1,216 
   
 
 
   
 
 
 
The provision for social security contributions on share options is calculated based on the number of options outstanding at the reporting date that are expected to be exercised. The provision is based on the estimated gain arising on exercise of the share options, using the best estimate of the market price at the balance sheet date.
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 liability 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 7).
10. Warrant liability
 
   
Six months
to June 30,
2021

£’000
   Year ended
December 31,
2020
£’000
 
Opening balance
  
 
50,775
 
   131 
Warrants issued
  
 
—  
 
   4,080 
Warrants exercised
  
 
(2,400   (127
Fair value changes during the period
  
 
(14,364
)
 
   46,691 
   
 
 
   
 
 
 
Closing balance
  
 
34,011
 
   50,775 
   
 
 
   
 
 
 
The change in fair value of the warrant liability represents an unrealized gain for the six months ended June 30, 2021 and an unrealized loss for the six months ended June 30, 2020.
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 £33.2 million as of June 30, 2021 (£49.9 million as of December 31, 2020). The change in the fair value of £14.4 million was recognized as a gain in the consolidated statement of comprehensive income. In the six months ended June 30, 2021, 15,414,626 warrants were exercised.
Warrants - bank loan
Pursuant to the terms of its loan facility, the Company issued warrants to its two former lenders constituted by Warrant Instruments dated August 21, 2017 and October 1, 2018 (the “Warrant Instruments”). The terms of the Warrant Instruments allow for a cashless exercise and provide for ‘adjustment’ of the warrants in the event that the Company takes certain corporate actions, including issuing further equity securities or effecting a consolidation or subdivision of its shares, among others.
There have been several adjustments to the Warrants Instruments to date to address issuances of ordinary shares by the Company, and in each case additional warrants were issued, resulting in each of the former lenders holding 621,954 warrants
,
with each warrant being exercisable at a subscription price of £2.95.
Subsequently, on December 15, 2020, the Company prepaid all amounts due and owing to the former lenders and also issued further warrants giving each of the former lenders the right to subscribe for an additional 621,954 ordinary shares at a price of $0.4144 per ordinary share (the “2020 Warrants”).
As of June 30, 2021, the former lenders have warrants outstanding to purchase a total of 1,243,908 ordinary shares at an exercise price of £2.95 per share for the Warrant Instruments and a total of 1,243,908 ordinary shares at an exercise price of $0.4144 per share for the 2020 Warrants.
 
9

At June 30, 2021 the fair value of the warrants was £0.8 million. There were no warrants exercised as at June 30, 2021.
Total outstanding warrants
At June 30, 2021, a total of 147,431,351 warrants are outstanding. The warrants outstanding are equivalent to 27% 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:
 
   
Six months to
June 30, 2021
   
Year ended
December 31,
 
2020
 
Expected volatility (%)
  
 
79
 
   84-85 
Risk-free interest rate (%)
  
 
0.19
 
   0.25-(0.05
Expected life of share options (years)
  
 
2
 
   3 
Market price of ADS($)
  
$
3.17
 
  $3.58 
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.
11. Financial instruments fair value disclosures
The Company held the following financial instruments at fair value at June 30, 2021. There are no
non-recurring
fair value measurements.
 
Financial liabilities measured at fair value
  
Fair value
measurements
using significant
unobservable
inputs (Level 1)

£’000
   
Fair value
measurements
using significant
unobservable
inputs (Level 2)

£’000
   
Fair value
measurements
using significant
unobservable
inputs (Level 3)

£’000
 
Warrant liabilities (note 10)
   —      783    33,228 
Deferred consideration
   —      —      1,597 
   
 
 
   
 
 
   
 
 
 
Total
   —     
 
783
 
  
 
34,825
 
   
 
 
   
 
 
   
 
 
 
There were no transfers between Level 1 and Level 2 during 2021.
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

£’000
 
At January 1, 2021
   1,525    49,930 
Settled during the period
   —      (2,400
Movement during the period
   72    (14,302
   
 
 
   
 
 
 
At June 30, 2021
   1,597    33,228 
   
 
 
   
 
 
 
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.
 
10

   
Valuation
technique
  
Significant
unobservable
inputs
  
Input range
 
Sensitivity of the input to fair value
Provision for deferred cash consideration
  DCF  WACC  2021: 12.0% 1% increase/decrease would result in a decrease/increase in fair value by £18,000.
      WACC  2020: 12.0% 1% increase/decrease would result in a decrease/increase in fair value by £25,000.
      Probability of success  2021: 13.8%–95% 10% increase/decrease would result in an increase/decrease in fair value by £0.5 million.
      Probability of success  2020: 13.8%–95% 10% increase/decrease would result in a increase/decrease in fair value by £0.4 million.
Warrant Liability related to the PIPE
  Black- Scholes model  Expected volatility  2021: 79.0%
2020: 85.1%
 Volatility was estimated by reference to the one year (2020: six month) historical volatility of the historical share price of the
C
ompany. If the volatility is decreased to 72.5% (six month volatility), the carrying value of the warrants as of June 30, 2021 would decrease
by
£1.7
 
million.
12. 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, 2021 (June 30, 2020: 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, 2021 (2020: 7 ordinary shares). 145,830 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.
As at June 30, 2021 a cash balance of £17,866 was held by the EBT. As at December 31, 2020 a cash balance of £21,525 was held by the EBT.
 
11