UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September~~June 30, ~~2021~~2022

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM __________ TO __________

Commission File Number: 001-38067

Verona Pharma plc

(Exact name of Registrant as specified in its Charter)


United Kingdom									98-1489389
(State or other jurisdiction of incorporation or organization)									(I.R.S. Employer Identification No.)

3 More London Riverside London SE1 2RE United Kingdom									Not Applicable
(Address of principal executive offices)									(Zip Code)

Registrant’s telephone number, including area code: +44 203 283 4200

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Ordinary shares, nominal value £0.05 per share*	VRNA	The Nasdaq Stock Market LLC (Nasdaq Global Market)

* The ordinary shares are represented by American Depositary Shares (each representing 8 ordinary shares), which are exempt from the operation of Section 12(a) of the Securities Exchange Act of 1934, as amended, pursuant to Rule 12a-8 thereunder.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☒

Emerging growth company

☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of ~~November 8, 2021,~~August 3, 2022, the registrant had ~~480,082,966~~487,633,374 ordinary shares, nominal value £0.05 per share, outstanding, which if all held in ADS form, would be represented by ~~60,010,371~~60,954,172 American Depositary Shares, each representing eight (8) ordinary shares.


		Page
PART I - FINANCIAL INFORMATION
Item 1	Financial Statements	2
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1415
Item 3	Quantitative and Qualitative Disclosures About Market Risk	3128
Item 4	Controls and Procedures	3128
PART II - OTHER INFORMATION
Item 1	Legal Proceedings	3229
Item 1A.	Risk Factors	3229
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	3429
Item 3	Defaults Upon Senior Securities	3429
Item 4	Mine Safety Disclosure	3429
Item 5	Other Information	3429
Item 6	Exhibits	3530
Signatures		3631

PART I - FINANCIAL INFORMATION

Item 1. Financial statements

September 30, December 31,
2021 2020
ASSETS
Current assets:
Cash and cash equivalents $ 166,547 $ 187,986
Prepaid expenses 6,672 4,538
Tax and tax incentive receivable 10,606 8,260
Other current assets 667 1,720
Total current assets 184,492 202,504
Non-current assets:
Furniture and equipment, net 88 107
Goodwill 545 545
Equity interest 15,000 —
Right-of-use assets 1,435 1,050
Total non-current assets 17,068 1,702
Total assets $ 201,560 $ 204,206
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 9 $ 178
Accrued expenses 26,457 10,863
Operating lease liability 690 798
Warrants 2 2,246
Taxes payable 397 —
Other current liabilities 185 118
Total current liabilities 27,740 14,203
Non-current liabilities:
Term loan 4,821 4,635
Operating lease liability 797 514
Total non-current liabilities 5,618 5,149
Total liabilities 33,358 19,352
Commitments and contingencies 0 0
Shareholders' equity:
Ordinary £0.05 par value shares; 489,177,550 and 488,304,446 issued, and 477,649,646 and 463,304,446 outstanding, at September 30, 2021 and December 31, 2020, respectively 31,855 31,794
Additional paid-in capital 382,005 366,411
Ordinary shares held in treasury (770) (1,700)
Accumulated other comprehensive loss (4,601) (4,601)
Accumulated deficit (240,287) (207,050)
Total shareholders' equity 168,202 184,854
Total liabilities and shareholders' equity $ 201,560 $ 204,206

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

Verona Pharma plc

Condensed Consolidated ~~Statements of Operations and Comprehensive Profit/(Loss)~~Balance Sheets

(unaudited)

(in thousands, except per share ~~amounts)~~amounts and par value of shares)

Three months ended September 30, Nine months ended September 30,
2021 2020 2021 2020
Revenue $ 40,000 $ — $ 40,000 $ —
Operating expenses
Research and development 22,560 12,820 56,697 28,259
Selling, general and administrative 10,883 8,284 28,150 18,318
Total operating expenses 33,443 21,104 84,847 46,577
Operating profit/(loss) 6,557 (21,104) (44,847) (46,577)
Other income/(expense)
Research and development tax credit 4,749 2,338 10,655 5,809
Interest income 4 13 11 116
Interest expense (86) — (255) —
Fair value movement on warrants 40 (978) 2,244 (747)
Foreign exchange (loss)/gain (86) 844 117 1,188
Total other income, net 4,621 2,217 12,772 6,366
Profit/(loss) before income taxes 11,178 (18,887) (32,075) (40,211)
Income tax expense (127) (44) (232) (110)
Net profit/(loss) 11,051 (18,931) (32,307) (40,321)
Other comprehensive profit/(loss):
Foreign currency translation adjustments — — — (2,321)
Total comprehensive profit/(loss) attributable to shareholders of the Company $ 11,051 $ (18,931) $ (32,307) $ (42,642)
Profit/(loss) per ordinary share - basic $ 0.02 $ (0.05) $ (0.07) $ (0.20)
Profit/(loss) per ordinary share - diluted $ 0.02 $ (0.05) $ (0.07) $ (0.20)
Weighted-average shares outstanding - basic 475,334,354 344,809,792 471,159,171 197,049,240
Weighted-average shares outstanding - diluted 515,819,439 344,809,792 471,159,171 197,049,240


	June 30,		December 31,
	2022		2021
ASSETS
Current assets:
Cash and cash equivalents	$	111,510	$	148,380

Prepaid expenses	4,731		4,037
Tax and tax incentive receivable	20,185		15,583


Other current assets	2,206		2,063
Total current assets	138,632		170,063

Non-current assets:
Furniture and equipment, net	91		80
Goodwill	545		545
Equity interest	15,000		15,000
Right-of-use assets	588		899
Total non-current assets	16,224		16,524
Total assets	$	154,856	$	186,587

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	9,364	$	10,044
Accrued expenses	28,603		22,256

Operating lease liability	464		648

Taxes payable	311		147
Other current liabilities	121		327
Total current liabilities	38,863		33,422

Non-current liabilities:

Term loan	4,981		4,874
Operating lease liability	132		286
Total non-current liabilities	5,113		5,160
Total liabilities	43,976		38,582

Commitments and contingencies	0		0

Shareholders' equity:
Ordinary £0.05 par value shares; 494,058,246 and 489,177,550 issued, and 485,298,326 and 480,082,966 outstanding, at June 30, 2022 and December 31, 2021, respectively	32,182		31,855
Additional paid-in capital	390,543		385,070
Ordinary shares held in treasury	(591)		(603)
Accumulated other comprehensive loss	(4,601)		(4,601)
Accumulated deficit	(306,653)		(263,716)
Total shareholders' equity	110,880		148,005
Total liabilities and shareholders' equity	$	154,856	$	186,587

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

Verona Pharma plc

Condensed Consolidated Statements of ~~Shareholders’ Equity~~Operations and Comprehensive Loss

(unaudited)

(in thousands, except per share ~~data)~~amounts)

Ordinary shares Additional paid-in capital Ordinary shares held in treasury Accumulated other comprehensive loss Accumulated deficit Total shareholders' equity
Number Amount
Balance at January 1, 2021 488,304,446 $ 31,794 $ 366,411 $ (1,700) $ (4,601) $ (207,050) $ 184,854
Net loss — — — — — (21,290) (21,290)
Share-based compensation — — 8,850 — — — 8,850
Restricted share units vested — — — 30 — (30) —
Balance at March 31, 2021 488,304,446 $ 31,794 $ 375,261 $ (1,670) $ (4,601) $ (228,370) $ 172,414
Net loss — — — — — (22,068) (22,068)
Share-based compensation — — 7,450 — — — 7,450
Restricted share units vested — — — 827 — (827) —
Common shares withheld for taxes on vested stock awards — — (3,782) — — — (3,782)
Issuance of common shares under at-the-market sales agreement 434,704 30 353 — — — 383
Balance at June 30, 2021 488,739,150 $ 31,824 $ 379,282 $ (843) $ (4,601) $ (251,265) $ 154,397
Net profit — — — — — 11,051 11,051
Share-based compensation — — 4,938 — — — 4,938
Restricted share units vested — — — 73 — (73) —
Common shares withheld for taxes on vested stock awards — — (2,167) — — — (2,167)
Issuance of common shares under at-the-market sales agreement 438,400 31 319 — — — 350
Equity settled share-based compensation reclassified as cash-settled — — (367) — — — (367)
Balance at September 30, 2021 489,177,550 $ 31,855 $ 382,005 $ (770) $ (4,601) $ (240,287) $ 168,202


	Three months ended June 30,				Six months ended June 30,
	2022		2021		2022		2021



Operating expenses
Research and development	$	14,982	$	20,563	$	32,607	$	34,137
Selling, general and administrative	5,526		7,985		12,966		17,267
Total operating expenses	20,508		28,548		45,573		51,404
Operating loss	(20,508)		(28,548)		(45,573)		(51,404)
Other income/(expense)
Research and development tax credit	5,409		3,836		6,711		5,906
Interest income	165		3		180		7
Interest expense	(91)		(85)		(175)		(169)
Fair value movement on warrants	—		2,711		—		2,204
Foreign exchange (loss)/gain	(2,662)		40		(3,585)		203
Total other income, net	2,821		6,505		3,131		8,151
Loss before income taxes	(17,687)		(22,043)		(42,442)		(43,253)
Income tax expense	(79)		(25)		(161)		(105)
Net loss	$	(17,766)	$	(22,068)	$	(42,603)	$	(43,358)




Loss per ordinary share - basic and diluted	$	(0.04)	$	(0.05)	$	(0.09)	$	(0.09)


Weighted-average shares outstanding - basic and diluted	484,777,837		470,786,767		483,226,039		469,036,978

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

Verona Pharma plc

Condensed Consolidated Statements of Shareholders’ Equity

(unaudited)

(in thousands except share data)


	Ordinary shares			Additional paid-in capital		Ordinary shares held in treasury		Accumulated other comprehensive loss		Accumulated deficit		Total shareholders' equity
	Number	Amount
Balance at December 31, 2021	489,177,550	$	31,855	$	385,070	$	(603)	$	(4,601)	$	(263,716)	$	148,005
Net loss	—	—		—		—		—		(24,837)		(24,837)


Issuance of common shares under at-the-market sales agreement	80,696	5		62		—		—		—		67
Restricted share units vested	—	—		—		186		—		(186)		—
Issuance of ordinary shares to treasury	4,800,000	322		—		(322)		—		—		—

Common shares withheld for taxes on vested stock awards	—	—		(793)		—		—		—		(793)
Equity settled share-based compensation reclassified as cash-settled	—	—		118		—		—		—		118
Share-based compensation	—	—		3,747		—		—		—		3,747
Balance at March 31, 2022	494,058,246	$	32,182	$	388,204	$	(739)	$	(4,601)	$	(288,739)	$	126,307
Net loss	—	—		—		—		—		(17,766)		(17,766)



Restricted share units vested	—	—		—		148		—		(148)		—


Common shares withheld for taxes on vested stock awards	—	—		(689)		—		—		—		(689)
Equity settled share-based compensation reclassified as cash-settled	—	—		(25)		—		—		—		(25)
Share-based compensation	—	—		3,053		—		—		—		3,053
Balance at June 30, 2022	494,058,246	$	32,182	$	390,543	$	(591)	$	(4,601)	$	(306,653)	$	110,880

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

Verona Pharma plc

Condensed Consolidated Statements of Shareholders’ Equity

(unaudited)

(in thousands except share data)

Ordinary shares Additional paid-in capital Accumulated other comprehensive loss Accumulated deficit Total shareholders' equity
Number Amount
Balance at January 1, 2020 105,326,638 $ 7,265 $ 179,535 $ (2,280) $ (141,779) $ 42,741
Net loss — — — — (12,346) (12,346)
Retranslation of foreign operations — — — (2,157) — (2,157)
Share-based compensation — — 1,867 — — 1,867
Issuance of ordinary shares from restricted share units 887,080 52 — — — 52
Balance at March 31, 2020 106,213,718 $ 7,317 $ 181,402 $ (4,437) $ (154,125) $ 30,157
Net loss — — — — (9,044) (9,044)
Retranslation of foreign operations — — — (164) — (164)
Share-based compensation — — 950 — — 950
Issuance of ordinary shares from restricted share units 267,288 16 — — (68) (52)
Balance at June 30, 2020 106,481,006 $ 7,333 $ 182,352 $ (4,601) $ (163,237) $ 21,847
Net loss — — — — (18,931) (18,931)
Share-based compensation — — 6,486 — — 6,486
Issuance of ordinary shares from restricted share units 322,296 21 — — (21) —
Issuance of ordinary shares, net of issuance costs 355,831,184 22,700 164,660 — — 187,360
Balance at September 30, 2020 462,634,486 $ 30,054 $ 353,498 $ (4,601) $ (182,189) $ 196,762

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

~~Verona Pharma plc~~

~~Condensed Consolidated Statements of Cash Flows~~

~~(unaudited)~~

~~(in thousands)~~

Nine months ended September 30,
2021 2020
Operating activities:
Net loss: $ (32,307) $ (40,321)
Adjustments to reconcile net income to net cash used in operating activities:
Foreign exchange loss/(gain) 556 (1,282)
Amortization of debt issue costs 92 —
Accretion of redemption premium on debt 94 —
Fair value movement on warrants (2,244) 747
Impairment of right-of-use asset — 289
Share-based compensation 21,238 9,303
Depreciation and amortization 467 472
Equity interest (15,000) —
Changes in operating assets and liabilities:
Prepaid expenses (2,134) (2,444)
Tax incentive receivable (2,677) 3,336
Other current assets 1,053 1,151
Right-of-use asset (823) —
Accounts payable (169) (983)
Accrued expenses 15,595 3,916
Lease liabilities 177 (461)
Taxes payable 451 —
Other current liabilities (300) (4)
Net cash used in operating activities (15,931) (26,281)
Cash flows from investing activities:
Purchases of furniture and equipment (11) (73)
Sale of short-term investments — 9,792
Net cash (used in)/provided by investing activities (11) 9,719
Cash flows from financing activities:
Proceeds from issuance of ordinary shares — 200,156
Payment of offering costs in connection with the issuance of ordinary shares — (11,763)
Payments of withholding taxes from share-based awards (5,949) —
Proceeds from at-the-market sales agreement 733 —
Net cash (used in)/provided by financing activities (5,216) 188,393
Effect of exchange rate changes on cash and cash equivalents (281) (291)
Net change in cash and cash equivalents (21,439) 171,540
Cash and cash equivalents at beginning of the period 187,986 30,428
Cash and cash equivalents at end of the period $ 166,547 $ 201,968
Supplemental disclosure of cash flow information:
Income taxes paid $ — $ —
Interest paid $ 162 $ —


	Ordinary shares			Additional paid-in capital		Ordinary shares held in treasury		Accumulated other comprehensive loss		Accumulated deficit		Total shareholders' equity
	Number	Amount
Balance at December 31, 2020	488,304,446	$	31,794	$	366,411	$	(1,700)	$	(4,601)	$	(207,050)	$	184,854
Net loss	—	—		—		—		—		(21,290)		(21,290)



Restricted share units vested	—	—		—		30		—		(30)		—



Share-based compensation	—	—		8,850		—		—		—		8,850
Balance at March 31, 2021	488,304,446	$	31,794	$	375,261	$	(1,670)	$	(4,601)	$	(228,370)	$	172,414
Net loss	—	—		—		—		—		(22,068)		(22,068)


Issuance of common shares under at-the-market sales agreement	434,704	30		353		—		—		—		383
Restricted share units vested	—	—		—		827		—		(827)		—

Common shares withheld for taxes on vested stock awards	—	—		(3,782)		—		—		—		(3,782)

Share-based compensation	—	—		7,450		—		—		—		7,450
Balance at June 30, 2021	488,739,150	$	31,824	$	379,282	$	(843)	$	(4,601)	$	(251,265)	$	154,397

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

Verona Pharma plc

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands)


	Six months ended June 30,
	2022		2021
Operating activities:
Net loss:	$	(42,603)	$	(43,358)
Adjustments to reconcile net income to net cash used in operating activities:
Foreign exchange loss/(gain)	3,256		(186)
Amortization of debt issue costs	44		69
Accretion of redemption premium on debt	63		63
Fair value movement on warrants	—		(2,204)

Share-based compensation	6,801		16,300
Depreciation and amortization	328		305

Changes in operating assets and liabilities:
Accounts receivable	—		(25,002)
Equity interest receivable	—		(15,000)
Prepaid expenses	(694)		(5,279)
Tax incentive receivable	(6,461)		(5,848)
Other current assets	(143)		(600)
Right-of-use asset	—		(4,823)
Accounts payable	(680)		(144)
Accrued expenses	6,347		6,325
Lease liabilities	(338)		393
Taxes payable	164		—
Deferred revenue	—		40,051
Other current liabilities	(113)		182
Net cash used in operating activities	(34,029)		(38,756)
Cash flows from investing activities:
Purchases of furniture and equipment	(29)		—

Net cash used in investing activities	(29)		—
Cash flows from financing activities:




Payments of withholding taxes from share-based awards	(1,482)		(3,782)

Proceeds from at-the-market sales agreement	67		383
Net cash used in financing activities	(1,415)		(3,399)
Effect of exchange rate changes on cash and cash equivalents	(1,397)		204
Net change in cash and cash equivalents	(36,870)		(41,951)
Cash and cash equivalents at beginning of the period	148,380		187,986
Cash and cash equivalents at end of the period	$	111,510	$	146,035
Supplemental disclosure of cash flow information:
Income taxes paid	$	1	$	—
Interest paid	$	115	$	109

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

Verona Pharma plc

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 1 - Organization and description of business operations

Verona Pharma plc (the “Company”) is incorporated and domiciled in the United Kingdom. Verona Pharma plc has 1 wholly-owned subsidiary, Verona Pharma, Inc., a Delaware ~~corporation.~~corporation. Rhinopharma Limited, a Canadian company that was previously a non-operating, wholly-owned subsidiary, was dissolved in June 2021. The address of the registered office is 1 Central Square, Cardiff, CF10 1FS, United Kingdom.

The Company is a clinical-stage biopharmaceutical group focused on developing and commercializing innovative therapeutics for the treatment of respiratory diseases with significant unmet medical needs. The Company’s American Depositary Shares (“ADSs”) are listed on the Nasdaq Global Market (“Nasdaq”) and trade under the symbol “VRNA”.

Liquidity

The Company has incurred recurring losses and negative cash flows from operations since inception, and has an accumulated deficit of ~~$240.3~~$306.7 million as of ~~September~~June 30, ~~2021.~~2022. The Company expects to incur additional losses and negative cash flows from operations until its products potentially gain regulatory approval and reach commercial profitability, if at all.

The Company expects that its cash and cash equivalents as of ~~September~~June 30, ~~2021,~~2022, will be sufficient to fund its operating expenses and capital expenditure requirements for at least the next 12 months from the date of issuance.

In March, 2021, the Company entered into an open market sale agreement with respect to an at-the-market offering program (the “ATM Program”) under which the Company may issue and sell its ordinary shares in the form of ADSs, with an aggregate offering price of up to $100.0 million.

During the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, the Company sold ~~873,104~~80,696 ordinary shares (equivalent to ~~109,138~~10,087 ADSs) under the ATM Program, at an average price of approximately $0.86 per share (equivalent to ~~$6.91~~$6.86 per ADS), raising aggregate net proceeds of approximately ~~$0.7~~$0.1 million after deducting issuance costs. As of ~~September~~June 30, ~~2021,~~2022, there remained ~~$99.2 million of~~ ordinary shares, in the form of ADSs, with a value up to $99.2 million available for sale under the ATM Program.

The Company’s commercial revenue, if any, will be derived from sales of products that we do not expect to be commercially available for several years, if ever. Additionally we may enter into out-licensing transactions from time to time but there can be no assurance that the company can secure such transactions in the future. Accordingly, we will need to obtain substantial additional funds to achieve our business objectives including to further advance clinical and regulatory activities, to fund prelaunch and launch related costs and to create an effective sales and marketing organization to commercialize ensifentrine. We will need to seek additional funding through public or private financings, debt financing, collaboration or licensing agreements and other arrangements. However, there is no guarantee that we will be successful in securing additional capital on acceptable terms, or at all.

Note 2 - Basis of presentation and summary of significant accounting policies

Basis of presentation and consolidation

The unaudited condensed consolidated financial statements include the accounts of Verona Pharma plc and its wholly-owned subsidiary Verona Pharma, Inc. All inter-company balances and transactions have been eliminated.

The accompanying unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared in conformity with accounting principles generally accepted in the U.S. (“U.S. GAAP”).

The unaudited condensed consolidated financial statements presented in this Quarterly Report should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K filed with the SEC on ~~February 25, 2021~~March 3, 2022 (the ~~“2020~~“2021 Form 10-K”). The Consolidated Balance Sheet as of December 31, ~~2020,~~2021, was derived from audited consolidated financial statements included in the ~~2020~~2021 Form 10-K but does not include all disclosures required by U.S. GAAP for complete financial statements. The Company’s significant accounting policies are described in Note 2 to those consolidated financial statements. ~~In addition, the Company’s policies on revenue recognition, contract assets, trade receivables and the equity interest are set out below.~~

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted from these interim financial statements. The unaudited condensed consolidated financial statements reflect all adjustments which in the opinion of management are necessary for a fair statement of results of operations, comprehensive income, financial condition, cash flows and shareholders' equity for the periods presented. Except as otherwise disclosed, all such adjustments are of a normal recurring nature. Operating results for the interim periods are not necessarily indicative of the results that may be expected for the full year.

~~Revenue recognition~~Segment reporting

~~The Company’s deferred revenue and revenue arise from the Company’s agreement~~Operating segments are defined as components of an enterprise about which separate discrete information is available for the development and commercialization of ensifentrine in Greater China (the “Nuance Agreement”). The terms of the Nuance Agreement include non-refundable upfront fees, payments based upon achievement of developmental and regulatory milestones, commercial milestones, royalties payable on sales, and manufacturing and supply. These payments are viewed as both fixed and variable consideration. Non-refundable upfront fees are considered fixed, while milestone payments and revenue from the commercialized product are identified as variable consideration~~. The Company follows the five-step model in ASC 606 “Revenue from Contracts with Customers”:~~

~~Step 1: Identify the contract(s) with a customer.~~

~~Step 2: Identify the performance obligations in the contract.~~

~~Step 3: Determine the transaction price.~~

~~Step 4: Allocate the transaction price to the performance obligations in the contract.~~

~~Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.~~

~~All of the Company’s revenue is derived from contracts with customers.~~

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC Topic 606. The Company’s performance obligations include intellectual property rights, (which include the license, patents and developmental and regulatory data) and manufacturing and supply. Management are required to judge when performance obligations are satisfied and consequently when revenue is recognized.

If the right to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenue from non-refundable, upfront fees allocated to the right when the right is transferred to the customer, and the customer can use and benefit from the right.

If an arrangement includes development and regulatory milestone payments, the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the

~~Company’s control or the licensee’s control, such as regulatory approvals, are generally not considered probable of being achieved until those approvals are received.~~

For arrangements with licenses of intellectual property that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes royalty revenue and sales-based milestones at the later of (i) when the related sales occur, or (ii) when the performance obligation to which the royalty has been allocated has been satisfied.

~~Contract assets~~

~~The Company recognizes incremental costs of obtaining a contract such as commission costs as an asset and amortizes the asset on a~~ ~~basis that is consistent with the satisfaction of the performance obligations to which the asset relates. Consideration receivable that is in excess of the value of satisfied, or part satisfied, performance~~ ~~obligations is recognized as a deferred revenue liability.~~

~~Trade receivables~~

~~Accounts receivable relate to amounts billed to customers. Management determine the likelihood of uncollectible accounts and provide for this accordingly.~~

~~Equity interest~~

As of June 30, 2021, as part of the Nuance Agreement, the Company recorded a $15 million equity receivable, relating to an equity interest in Nuance Biotech, the parent company of Nuance Pharma (see note 8). This equity interest was received in the three months ended September 30, 2021. As Nuance Biotech is not publicly listed the equity interest’s fair value is not readily determinable. The Company therefore uses the fair value measurement alternative and measures the securities at cost, which is deemed to be the value indicatedevaluation by the ~~last observable transaction~~chief operating decision maker, or decision-making group, in ~~Nuance Biotech's stock, subject~~deciding how to ~~impairment. The valuation will be adjusted for any observable price changes~~allocate resources and in ~~orderly transactions for an identical or similar investment in Nuance Biotech, or if there is an indicator of impairment.~~

~~Segment reporting~~

assessing performance. The Company has 1 operating and reportable segment, pharmaceutical development.

Use of estimates

The preparation of interim unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting periods. Significant estimates and assumptions reflected in these unaudited condensed consolidated financial statements include, but are not limited to, the accrual and prepayment of research and development expenses, the fair value of share-based compensation, the ~~initial recognition~~fair value of warrants, research and development tax credit and the carrying value of the equity interest ~~and the fair value of warrants.~~in Nuance Pharma (as defined below). Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ from the Company’s estimates.

Recently adopted accounting standards and recent accounting standards not yet adopted

There are no recently adopted accounting standards and recent accounting standards not yet adopted that the Company believes will have a material impact on the Company’s consolidated financial statements.

Verona Pharma plc

Notes to Condensed Consolidated Financial Statements

(unaudited)

~~Note 3 - Prepaid expenses~~

~~Prepaid expenses consisted of the following (in thousands):~~

September 30, December 31,
2021 2020
Clinical trial and other development costs $ 3,568 $ 2,551
Insurance 2,713 1,701
Other 391 286
Total prepaid expenses $ 6,672 $ 4,538

Note 43 - Tax and tax incentive receivables

Tax and tax incentive receivables consisted of the following (in thousands):


		September 30,		December 31,			June 30,		December 31,
		2021		2020			2022		2021
Research and development tax credit receivable - U.K.	Research and development tax credit receivable - U.K.	$	10,606	$	8,202	Research and development tax credit receivable - U.K.	$	20,185	$	15,583
Tax receivable - U.S.		—		58

Total tax receivable	Total tax receivable	$	10,606	$	8,260	Total tax receivable	$	20,185	$	15,583

The Company conducts research and development activities including, but not limited to, developing ensifentrine for various indications and delivery methods, and as a result the Company benefits in the U.K. from the HM Revenue and Customs, or HMRC, small and medium sized enterprises research and development relief, or SME R&D credit, which provides relief against U.K. Corporation Tax.

Effective for accounting periods starting after April 1, 2021, new rules were introduced whereby the amount of SME R&D tax credit that a business can receive in any one year will be capped at £20,000 plus three times the company’s total Pay As You Earn (“PAYE”) and National Insurance contributions (“NIC”) liability, unless an exception applies. That exception requires the Company to a) be creating, taking steps to create or managing intellectual property, as well as b) having qualifying research and development expenditures in respect of related parties which does not exceed 15% of the total claimed. In July, 2022, the Company received a response to its’ clearance application from HMRC agreeing to a) above and based upon analysis performed by the Company, it does not believe related party expenditures will exceed 15% of the total claim for 2022. Therefore, the Company has not applied the cap in determining the tax credit receivable.

Note 54 - Accrued expenses

Accrued expenses consisted of the following (in thousands):

September 30, December 31,
2021 2020
Clinical trial and other development costs $ 24,063 $ 8,607
Professional fees and general corporate costs 995 2,149
People related costs 1,399 107
Total accrued expenses $ 26,457 $ 10,863

~~Verona Pharma plc~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

~~Note 6 - Warrants~~

~~In the periods ended September 30, 2021, and December 31, 2020, no warrants were exercised or forfeited. The warrants had no intrinsic value as of September 30, 2021.~~

There have been no changes in valuation techniques or transfers between fair value measurement levels during the period ended September 30, 2021. They are measured at fair value and included at level 3 in the fair value hierarchy. The warrants are valued using the Black-Scholes model and the table below presents the assumptions used:

September 30, December 31,
2021 2020
Shares potentially issued under warrants 12,401,262 12,401,262
Exercise price in pounds sterling £ 1.7238 £ 1.7238
Risk-free interest rate 0.07 % — %
Expected term to exercise 0.6 1.3
Annualized volatility 51.6 % 105.4 %
Dividend rate — % — %
Calculated value of the warrants, in thousands of U.S. dollars $ 2 $ 2,246

~~For the amount recognized at September 30, 2021, the effect when the following parameter deviates up or down is presented in the below table (in thousands):~~


~~10% volatility increase~~	$	11
~~Base case, reported fair value~~	2
~~10% volatility decrease~~	$	—


	June 30,		December 31,
	2022		2021
Clinical trial and other development costs	$	26,364	$	21,336
Professional fees and general corporate costs	1,093		919
People related costs	1,146		1
Total accrued expenses	$	28,603	$	22,256

Note 75 - Term loan

In November 2020, the Company entered into a term loan facility of up to $30.0 million (the “Term Loan”), consisting of advances of $5.0 million funded at closing and $10.0 million and $15.0 million contingent upon achievement of certain clinical development milestones and other specified conditions. As of ~~September~~June 30, ~~2021,~~2022, the Company had $5.0 million principal outstanding under the Term Loan.

The Term Loan is governed by a loan and security agreement, dated as of November 19, 2020, between the Borrowers and Silicon Valley Bank (“SVB”), as amended (the “Loan Agreement”). The Term B Loan will be available, subject to customary terms and conditions, only during the period commencing upon the achievement of a specific clinical milestone relating to ensifentrine through and including September 30, 2022. The Term C Loan will be available, subject to customary terms and conditions, only during the period commencing upon the achievement of an additional specific clinical milestone relating to ensifentrine through and including June 30, 2023.

The Term Loan will mature on November 1, 2024. Each advance under the Term Loan accrues interest at a floating per annum rate equal to the greater of (a) the sum of the prime rate reported in The Wall Street Journal plus 1.00% and (b) four and one-quarter of one percent (4.25%). The Term Loan provides for interest-only payments on a monthly basis until the payment date immediately preceding December 1, 2023. Thereafter, amortization payments will be payable monthly in equal installments of principal plus monthly payments of accrued interest. Upon repayment (whether at maturity, upon acceleration or by prepayment or otherwise), the Borrowers shall make a final payment to SVB in the amount of 10% of the aggregate Term Loans advanced (the "Final Payment"). The Borrowers may prepay the Term Loan in full but not in part provided that the Borrowers (i) provide ten days’ prior written notice to SVB, (ii) pays on the date of such prepayment (A) all outstanding principal plus accrued and

Verona Pharma plc

Notes to Condensed Consolidated Financial Statements

(unaudited)

unpaid interest, (B) a prepayment fee of $450,000 plus 3.0% of the Term C Loans advanced if paid on or before the first anniversary of the closing date; $300,000 plus 2.00% of the Term C Loans advanced if paid after the first anniversary of the closing date and on or before the second anniversary of the closing date; and $150,000 plus 1.00% of the Term C Loans advanced if paid thereafter and prior to maturity, (C) the Final Payment and (D) all other sums, if any, that shall become due and payable with respect to the Term Loan Advances, including interest at the Default Rate with respect to any past due amounts. Amounts outstanding during an event of default are payable upon SVB's demand and shall accrue interest at an additional rate of 3.0% per annum.

The Term Loan is secured by a lien on substantially all of the assets of the Borrowers, other than the equity interests of Verona U.S. and other than intellectual property, provided that such lien on substantially all assets includes any rights to payments and proceeds from the sale, licensing or disposition of intellectual property. The Borrowers have also granted SVB a negative pledge with respect to its intellectual property.

The Loan Agreement contains customary covenants and representations, including but not limited to financial reporting obligations and limitations on dividends, indebtedness, collateral, investments, distributions, transfers, mergers or acquisitions, taxes, corporate changes, deposit accounts, and subsidiaries. The Loan Agreement also contains other customary provisions, such as expense reimbursement, non-disclosure obligations as well as indemnification rights for the benefit of SVB. The Loan Agreement includes a minimum cash covenant triggered when Borrowers' consolidated cash and cash equivalents drop below $45.0 million at any time after the earliest to occur of any of the following: (i) the release of negative data from ENHANCE-2 and/or ENHANCE-1, which in the reasonable business discretion Borrowers’ senior management, would be considered insufficient to support submission of an NDA to the FDA, (ii) the FDA issues a complete response letter with respect to an NDA submitted for ensifentrine, or (iii) failure to achieve a specific regulatory milestone relating to ensifentrine by June 30, 2023 (extendable to March 31, 2024 upon the Borrowers receiving a specified amount of new cash proceeds after September 8, 2020 from the sale of equity securities in one or more public financings or other bona fide equity financings, subordinated debt and/or upfront/milestone payments from one or more collaboration agreements not prohibited in the Loan Agreement). Upon such trigger, Borrowers must cash collateralize an amount equal to the outstanding obligations to SVB plus the amount of any prepayment penalty and Final Payment which would be due in the event the Loan Agreement were prepaid in full with respect to the Term Loans advanced as of such time.

As of ~~September~~June 30, ~~2021,~~2022, the carrying value of the Term Loan was approximately ~~$4.8~~$5.0 million, of which all was due in more than 12 months. The debt balance has been categorized within Level 3 of the fair value hierarchy. The carrying amount of the debt approximates its fair value based on prevailing interest rates as of the balance sheet date.

Note 6 - Equity interest

The Company follows guidance from ASC 321-10-35-2 and uses the fair value measurement alternative and measures the securities at cost, which is deemed to be the value indicated by the last observable transaction in Nuance Biotech's stock, subject to impairment. The valuation will be adjusted for any observable price changes in orderly transactions for an identical or similar investment in Nuance Biotech, or if there is an indicator of impairment. As of June 30, 2022, there had been no observable transactions to indicate any price changes in the value of Nuance Biotech’s stock, nor had there been any indications of impairment. The equity interest is therefore recorded at a value of $15.0 million.

910

Verona Pharma plc

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 87 - Significant agreements

Ligand agreement

In 2006 the Company acquired Rhinopharma and assumed contingent liabilities owed to Ligand UK Development Limited (“Ligand”) (formerly Vernalis Development Limited). The Company refers to the assignment and license agreement as the Ligand Agreement.

Ligand assigned to the Company all of its rights to certain patents and patent applications relating to ensifentrine and related compounds (the “Ligand Patents”) and an exclusive, worldwide, royalty-bearing license under certain Ligand know-how to develop, manufacture and commercialize products (the “Ligand Licensed Products”) developed using Ligand Patents, Ligand know-how and the physical stock of certain compounds.

The contingent liability comprises a milestone payment (the “Milestone Payment”) on obtaining the first approval of any regulatory authority for the commercialization of a Ligand Licensed Product, low single digit royalties based on the future sales performance of all Ligand Licensed Products and a portion equal to a mid-twenty percent of any consideration received from any sub-licensees for the Ligand Patents and for Ligand know-how.

At the time of the acquisition the contingent liability was not recognized as part of the acquisition accounting as it was immaterial. The Company will therefore record as a research and development expense the ~~milestone payment~~Milestone Payment or royalties when they are probable.

In March 2022, the Company entered into an Amendment Agreement (the “Amendment”) with Ligand whereby the Ligand Agreement was amended to clarify certain ambiguous terms in the Ligand Agreement. Pursuant to the Amendment:

•the Company agreed to pay to Ligand (i) $2.0 million within five business days of the date of the Amendment and (ii) $15.0 million upon the first commercial sale of ensifentrine by the Company or a sub-licensee, which amount is payable in cash or, at the Company's discretion, by the issuance of Company equity of equivalent value, as determined based on the volume-weighted average price of the Company's American Depositary Shares on the Nasdaq Global Market over the ten (10) trading days including and prior to such milestone event;

•the Ligand Agreement shall expire on March 24, 2042 unless terminated earlier by either party in accordance with its terms;

•upon termination of the Ligand Agreement, any Sub-licensee (as defined in the Amendment) shall have the right to enter into a direct license agreement with Ligand for the portion of the Program IP (as defined in the Amendment) that was sub-licensed by such Sub-licensee;

•the Milestone Payment may be paid in cash or, at the Company’s discretion, by issuing to Ligand shares in the Company of equivalent value; and

•each party’s right to terminate the Ligand Agreement is conditioned upon such party obtaining a final judgment of the English High Court declaring that the other party is in material breach of its obligations under the Ligand Agreement.

The Company accounted for the $2.0 million payment at execution as selling, general and administrative expense in the condensed consolidated statements of operations as the payment is related to a contract modification.

Verona Pharma plc

Notes to Condensed Consolidated Financial Statements

(unaudited)

Nuance agreement

The Company entered into a collaboration and license agreement (the “Nuance Agreement”) with Nuance Pharma Limited (“Nuance Pharma”) effective June 9, 2021 (the “Effective Date”) under which the Company granted Nuance Pharma the exclusive rights to develop and commercialize ensifentrine in Greater China (China, Taiwan, Hong Kong and Macau). In return, the Company received an unconditional right to consideration aggregating $40.0 million consisting of $25.0 million in cash and an equity interest, valued at $15.0 million as of the Effective Date, in Nuance Biotech, the parent company of Nuance Pharma. The Company is eligible to receive future milestone payments of up to $179.0 million triggered upon achievement of certain clinical, regulatory, and commercial milestones, as well as tiered double-digit royalties as a percentage of net sales of the products in Greater China.

As of September 30, 2021, the $25.0 million cash payment and $15.0 million equity interest had been received and the holding in Nuance Biotech was recorded as Equity Interest on ~~the Condensed Consolidated Balance Sheet.~~our unaudited condensed consolidated balance sheets. The ~~Equity Interest is recorded at~~Company follows guidance from ASC 321-10-35-2 and uses the fair value measurement alternative and measures the securities at cost, which is deemed to be the value indicated by the last observable transaction in Nuance ~~Biotech’s~~Biotech's stock, ~~which was a fund raising~~subject to impairment. The valuation will be adjusted for any observable price changes in ~~November, 2020.~~orderly transactions for an identical or similar investment in Nuance Biotech, or if there is an indicator of impairment. As of ~~September~~June 30, ~~2021,~~2022, there had been no other transactions to indicate any price changes in the value of Nuance Biotech’s stock, nor had there been any indications of impairment. The Equity Interest is therefore recorded at a value of $15 million.

Under the terms of the Nuance Agreement, at any time until three months prior to the expected submission of the first New Drug Application in Greater China, if (i) a third party is interested in partnering with the Company, either globally or in territory covering at least the United States or Europe, for the development and/or commercialization of ensifentrine or (ii) the Company undergoes a change of control, the Company will have an exclusive option right to buy back the license granted to Nuance Pharma and all related assets. The price is agreed to be equal to the aggregate of (i) all prior amounts paid by Nuance Pharma to the Company in cash under the agreement and (ii) all development and regulatory costs incurred and paid by Nuance Pharma in connection with the development and commercialization of ensifentrine under the Nuance Agreement multiplied by a single-digit factor range dependent upon achievement of certain milestones, subject to a specified maximum amount.

The Nuance Agreement will continue on a jurisdiction-by-jurisdiction and product-by-product basis until the expiration of royalty payment obligations with respect to such product in such jurisdiction unless earlier terminated by the parties. Either party may terminate the Nuance Agreement for an uncured material breach or bankruptcy of the other party. Nuance Pharma may also terminate the Nuance Agreement at will upon 90 days' prior written notice.

The Company reviewed the buy-back option and determined that because it is conditional on a third party the Company does not have the practical ability to exercise it and, accordingly, the contract is accounted for under ASC 606.

~~Verona Pharma plc~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

The transaction price at the Effective Date of the Nuance Agreement was $40.0 million consisting of the $25.0 million upfront cash payment and $15.0 million equity interest. Developmental and regulatory milestones, and the manufacture and supply of ensifentrine drug product, were not included in the transaction price as management determined that it is not probable that a significant reversal in the amount of cumulative revenue recognized will not occur. Commercial milestones and sales royalties were also excluded and will be recognized when the milestones are achieved or the sales occur in Greater China.

The performance obligations in the Nuance Agreement include the grant of the license (including the right to commercialize ensifentrine until the end of the term, the sharing of certain know how, and the sharing of certain clinical and regulatory data), and manufacture and supply of ensifentrine drug product.

The Company has determined that the license and the know how shared with Nuance Pharma constitutes functional intellectual property and that revenue relating to this should be recognized at a point in time. Consequently, the Company determined that it fulfilled its obligations to Nuance Pharma after it delivered the know how that will allow Nuance Pharma to file an investigational new drug application in Greater China. This know how was delivered in the ~~three months~~year ended ~~September 30,~~December 31, 2021, and the $40.0 million revenue was therefore recognized as revenue in ~~this period.~~the year ended December 31, 2021. Revenue relating to the manufacture and supply obligations will be recognized when the drug product is delivered.

~~The Company has reviewed the two performance obligations in the Nuance Agreement and has determined that these are priced at fair value.~~

On the Effective Date, $4.0 million of costs of obtaining the contract were recorded as a contract asset. As of September 30, 2021, the entire cost had been recognized in the Condensed Consolidated Statement of Operations.

Subsequent to the Effective Date, Ligand notified the Company that it believes that Nuance Pharma is a sub-licensee under the Ligand Agreement and that the Company is therefore under an obligation to make a sublicense payment to Ligand equal to 25% of the $40.0 million upfront transaction price. The Company does not believe it has granted a sublicense of or otherwise transferred to Nuance any Ligand intellectual property or know how and therefore the Company believes that it is not under any obligation to pay the requested sum to Ligand.

1112

Verona Pharma plc

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 98 - Share-based compensation

The following table shows the allocation of share-based compensation between research and development and selling, general and administrative costs (in thousands):


		Three months ended September 30,				Nine months ended September 30,					Three months ended June 30,				Six months ended June 30,
		2021		2020		2021		2020			2022		2021		2022		2021
Research and development	Research and development	$	1,466	$	2,747	$	8,132	$	3,738	Research and development	$	1,330	$	3,234	$	2,869	$	6,666
Selling, general and administrative	Selling, general and administrative	3,472		3,739		13,106		5,565		Selling, general and administrative	1,723		4,217		3,932		9,634
Total	Total	$	4,938	$	6,486	$	21,238	$	9,303	Total	$	3,053	$	7,451	$	6,801	$	16,300

Share options

The following table shows share option activity, in ordinary shares, in the period:

2021
Number of share options outstanding
Weighted average exercise price
Outstanding at January 1 13,125,672 $ 1.41
Forfeited (996,720) 1.17
Outstanding at March 31 12,128,952 $ 1.43
Granted 800,000 0.73
Outstanding at June 30 12,928,952 $ 1.38
Granted 576,000 0.78
Forfeited (638,112) 0.75
Outstanding at September 30 12,866,840 $ 1.39


	2022
	Number of share options outstanding	Weighted average exercise price
Balance as of December 31, 2021	12,695,200	$	1.38
Granted	608,000	0.62



Balance as of March 31, 2022	13,303,200	$	1.34
Granted	1,760,000	0.51



Balance as of June 30, 2022	15,063,200	$	1.24

Restricted stock units activity

The following table shows restricted stock unit (“RSU”) activity, in ordinary shares, in the period:

2021
Number of RSUs outstanding Weighted average remaining contractual term (years)
Outstanding at January 1 61,992,360 1.5
Granted 750,928
Vested (441,304)
Outstanding at March 31 62,301,984 1.3
Vested (11,920,928)
Outstanding at June 30 50,381,056 1.3
Forfeited (1,572,176)
Vested (8,452,520)
Outstanding at September 30 40,356,360 1.3


	2022
	Number of RSUs outstanding	Weighted average remaining contractual term (years)
Balance as of December 31, 2021	38,347,352	1.2
Granted	468,224

Vested	(3,943,144)
Balance as of March 31, 2022	34,872,432	1.1


Vested	(3,752,488)
Balance as of June 30, 2022	31,119,944	1.0

1213

Verona Pharma plc

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 109 - Net ~~profit/(loss)~~loss per share

Net ~~profit/(loss)~~loss per share is calculated on an ordinary share basis. The Company’s ADSs that are listed on the Nasdaq Global Market each represent ~~eight~~8 ordinary shares. The following table shows the computation of basic and diluted ~~earnings~~net loss per share for the ~~periods~~three and six months ended ~~September~~June 30, 2022 and 2021 ~~and 2020~~ (net ~~profit/(loss)~~loss in thousands, ~~profit/(loss)~~loss per share in dollars):

Three months ended September 30, Nine months ended September 30,
2021 2020 2021 2020
Numerator:
Net profit/(loss) $ 11,051 $ (18,931) $ (32,307) $ (40,321)
Denominator:
Weighted-average shares outstanding - basic 475,334,354 344,809,792 471,159,171 197,049,240
Net profit/(loss) per share - basic $ 0.02 $ (0.05) $ (0.07) $ (0.20)
Weighted-average shares outstanding - diluted 515,819,439 344,809,792 471,159,171 197,049,240
Net profit/(loss) per share - diluted $ 0.02 $ (0.05) $ (0.07) $ (0.20)


	Three months ended June 30,				Six months ended June 30,
	2022		2021		2022		2021
Numerator:
Net loss	$	(17,766)	$	(22,068)	$	(42,603)	$	(43,358)
Denominator:
Weighted-average shares outstanding - basic and diluted	484,777,837		470,786,767		483,226,039		469,036,978
Net loss per share - basic and diluted	$	(0.04)	$	(0.05)	$	(0.09)	$	(0.09)

During the three and six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, outstanding share options, RSUs and warrants over ~~25,139,377~~46,183,144 and ~~88,402,414~~75,713,291 ordinary shares, respectively, were not included in the computation of diluted earnings per ordinary share, because to do so would be antidilutive.

~~During~~

Note 10 - Commitments and contingencies

Management is currently negotiating a matter with a supplier that has an estimated exposure of approximately $1.3 million. Management does not currently consider it probable that a payment will be made and therefore no accrual is recorded at June 30, 2022. This matter is expected to be resolved within the nine months ended September 30, 2021 and 2020, outstanding share options, RSUs and warrants over 65,624,462 and 88,402,414 ordinary shares, respectively, were not included in the computation of diluted earnings per ordinary share, because to do so would be antidilutive.

next 12 months.

1314

Item 2. Management’s discussion and analysis of financial condition and results of operations

You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and related notes as disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 filed with the Securities and Exchange Commission on ~~February 25, 2021~~March 3, 2022 (the ~~“2020~~“2021 Form 10-K”).

In addition to historical information, this Quarterly Report on Form 10-Q contains statements that constitute forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of these terms or other similar expressions, although not all forward-looking statements contain these words.

All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including without limitation statements regarding our future results of operations and financial position, business strategy and plans and objectives of management for future operations, the development of ensifentrine or any other product candidates, including statements regarding the expected initiation, timing, progress and availability of data from our clinical trials and potential regulatory approvals, research and development costs, timing and likelihood of success, potential collaborations, ~~anticipated management changes,~~ our estimates regarding expenses, future revenues, capital requirements, debt service obligations and our need for additional financing, the funding we expect to become available from cash receipts from U.K. tax credits, and the sufficiency of our cash and cash equivalents to fund operations, are forward-looking statements.

The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions and are based largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to a number of known and unknown risks, uncertainties, assumptions, and other important factors including, but not limited to, those set forth under Part I, Item 1A of the ~~2020~~2021 Form 10-K under the heading “Risk Factors”. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified and some of which are beyond our control, you should not rely on these forward-looking statements as predictions of future events.

Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise. We intend the forward-looking statements contained in this Quarterly Report on Form 10-Q to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

1415

Overview

We are a clinical-stage biopharmaceutical company focused on developing and commercializing innovative therapeutics for the treatment of respiratory diseases with significant unmet medical need. Our product candidate, ensifentrine, is an investigational, potential first-in-class, inhaled, dual inhibitor of the enzymes phosphodiesterase 3 and 4 ~~or PDE3~~(“PDE3” and ~~PDE4,~~“PDE4”), which is designed to act as both a bronchodilator and an anti-inflammatory agent.

In the third quarter of 2020, we commenced our Phase 3 ENHANCE (“Ensifentrine as a Novel inHAled Nebulized COPD thErapy”) trials evaluating nebulized ensifentrine for the maintenance treatment of COPD. In August 2022, we announced positive top-line results from the ENHANCE-2 trial. ENHANCE-2 successfully met its primary endpoint, as well as secondary endpoints demonstrating improvements in lung function, and ~~if approved,~~significantly reduced the rate and risk of COPD exacerbations. Ensifentrine was well tolerated with safety results similar to placebo.

We expect to report top-line results from ENHANCE-1 around the end of 2022. Conditional upon positive results, we ~~intend~~expect to ~~commercialize~~submit a New Drug Application (“NDA”) to the US Food and Drug Administration (“FDA”) in the first half of 2023 for inhaled ensifentrine for the maintenance treatment of chronic obstructive pulmonary disease (“COPD”) ~~for the nebulized formulation in the United States.~~.

We have incurred recurring losses and negative cash flows from operations since inception, and have an accumulated deficit of ~~$240.3~~$306.7 million as of ~~September~~June 30, ~~2021.~~2022. We expect to incur additional losses and negative cash flows from operations until our product candidates potentially gain regulatory approval and reach commercial profitability, if at all.

We anticipate ~~that our~~significant expenses ~~will increase significantly~~ in connection with our ongoing activities, as we:

•build out infrastructure and prepare for potential commercial launch;

•continue to invest in the clinical development of ensifentrine for the treatment of ~~COPD;~~COPD or other indications;

•manufacture ensifentrine and engage in other Chemistry, Manufacturing and ~~Control~~Controls activities; and

•maintain, expand and protect our intellectual property ~~portfolio; and~~

•~~build out infrastructure and prepare for commercial launch~~portfolio.

We believe that our cash and cash equivalents as of ~~September~~June 30, ~~2021,~~2022, expected cash receipts from U.K. tax credits and funding expected to become available under the $30.0 million ~~debt financing facility~~term loan secured in November 2020, will enable us to fund our planned operating expenses and capital expenditure requirements through at least the end of 2023. The Term Loan advances are contingent upon achievement of certain clinical development milestones and other specified conditions. See “Indebtedness” for additional information.

1516

Clinical development update

~~During~~In August 2022, we announced positive top-line results from our Phase 3 ENHANCE-2 clinical trial evaluating nebulized ensifentrine for the ~~third quarter~~maintenance treatment of ~~2021,~~COPD. ENHANCE-2 successfully met its primary endpoint, as well as secondary endpoints demonstrating improvements in lung function, and significantly reduced the rate and risk of COPD exacerbations.

Highlights

•Study population (n=789):

◦Subject demographics and disease characteristics were well balanced between treatment groups.

◦Approximately 52% of subjects received background COPD therapy, either a long-acting muscarinic antagonist (“LAMA”) or a long-acting beta-agonist (“LABA”). Additionally, approximately 15% of all subjects also received inhaled corticosteroids (“ICS”) with concomitant LAMA or LABA.

•Primary endpoint met (FEV1* AUC 0-12 hr):

◦Placebo corrected, the change from baseline in average FEV1 area under the curve 0-12 hours post dose at week 12 was 94 mL (p<0.0001) for ensifentrine.

◦Statistically significant and clinically meaningful improvements with ensifentrine demonstrated across all subgroups including gender, age, smoking status, COPD severity, background medication, ICS use, chronic bronchitis, FEV1 reversibility, and geographic region.

•Secondary endpoints of lung function met:

◦Placebo corrected, increase in peak FEV1 of 146 mL (p<0.0001) 0-4 hours post dose at week 12.

◦Placebo corrected, increase in morning trough FEV1 of 49 mL (p=0.0017) at week 12,confirming twice daily dosing regimen.

•Exacerbation rate reduced:

◦Subjects receiving ensifentrine demonstrated a 42% reduction in the rate of moderate to severe COPD exacerbations over 24 weeks compared to those receiving placebo (p=0.0109).

◦Treatment with ensifentrine significantly decreased the risk of a moderate/severe exacerbation as measured by time to first exacerbation when compared with placebo by 42% (p=0.0088).

•COPD symptoms and Quality of Life (“QOL”):

◦Daily symptoms and QOL as measured by E-RS** Total Score and SGRQ** Total Score in the ensifentrine group improved from baseline to greater than the minimal clinically important difference (“MCID”) of -2 units and -4 units, respectively, at week 24. Improvements in these measures were seen as early as 6 weeks and showed continued improvement at 12 and 24 weeks, numerically exceeding placebo at each measurement. Statistical significance was not achieved due to improvements observed in the placebo group over time.

•Favorable safety profile:

◦Ensifentrine was well tolerated with safety results similar to placebo, including occurrence of pneumonia, gastrointestinal and cardiovascular adverse events.

*FEV1: Forced Expiratory Volume in one second, a standard measure of lung function

**E-RS, Evaluating Respiratory Symptoms, and SGRQ, St. George’s Respiratory Questionnaire, are validated patient reported outcome tools

We plan to release additional information from ENHANCE-2 at upcoming scientific conferences.

In June 2022, we ~~continued to make substantial progress on patient recruitment~~completed enrollment in our Phase 3 ~~ENHANCE~~ENHANCE-1 clinical ~~program. Patient enrollment is nearing completion and, by the end of November, we expect both the~~trial with more than 800 patient ENHANCE-2 trial and the 400 patient 48-week subset of the ENHANCE-1 trial will be approximately 95% enrolled. Although the pace of enrollment is expected to slow due to the approaching holiday season and the continued effects of the COVID-19 pandemic, we still expect to complete enrollment in ENHANCE-2 and the 48-week subset of ENHANCE-1 around year-end 2021.

~~As of November 8, 2021, ENHANCE-2 had approximately 90% of~~ patients ~~randomized into the study. Including those patients currently entered in the run-in period, we expect ENHANCE-2 to be approximately 95% enrolled by the end of November 2021.~~

The 48-week subset of ENHANCE-1 is a critical driver of delivering top-line data. As of November 8, 2021, this subset had approximately 95% of patients randomized into the study. Enrollment in the full ENHANCE-1 trial is expected to complete in the second quarter of 2022.

randomized. Based on our current models of ~~forecasted recruitment and~~ study progress, we expect to report top-line data for ~~ENHANCE-2 mid-year 2022 and for~~ ENHANCE-1 around the end of 2022. ~~Should COVID-19 related challenges increase further, our models predict top-line data for ENHANCE-2 would be expected in~~

The two randomized, double-blind placebo-controlled studies (ENHANCE-1 and ENHANCE-2) evaluate the ~~third quarter~~efficacy and safety of 2022 and for ENHANCE-1 in the first quarter of 2023. With the COVID-19 pandemic and government and other measures continuing to impact a number of clinical trial activities, including contractor staffing issues and disruptions to supply chains globally, we continue to closely monitor these timelines.

~~In September, 2021, we presented an abstract describing the results of a Phase 1 study assessing the effect of CYP2C9 inhibitor, fluconazole, on the pharmacokinetics of~~nebulized ensifentrine in ~~healthy individuals at the European Respiratory Society International Congress (“ERS”) 2021. Ensifentrine~~subjects with COPD as monotherapy and added onto a single bronchodilator, either a LAMA or a LABA, compared to placebo, and up to approximately 20% of subjects may receive ICS. The two study designs replicate measurements of efficacy and safety data over 24 weeks and ENHANCE-1 also evaluates longer-term safety over 48 weeks. The primary endpoint of both studies is primarily metabolized via the hepatic route by the cytochrome P450 enzyme, CYP2C9. Results from the study demonstrated co-administration of fluconazole had a less than 2-fold, not clinically relevant, effect on pharmacokinetic measures of the maximum concentration and area under the curve for ensifentrine.

In December 2021, we expect to report results from a 32-patient thorough QT study to evaluate the effect of ensifentrine on measures of cardiac conduction, which we are carrying out in support of a potential NDA submission.

~~Management update~~

In mid-November, Caroline Diaz will join Verona Pharma as Senior Vice President of Regulatory Affairs, bringing more than 18 years of experience in both large and small pharmaceutical companies across key regions. Ms. Diaz has served at ReViral as Vice President, Regulatory Affairs, and, previously, as Vice President, Regulatory and Quality at Dova Pharmaceuticals where she built the regulatory function from the ground up and led regulatory strategy development and implementation efforts resulting in the first marketing approvals for the company.

1617

improvement in lung function, as measured by FEV1 area under curve (“AUC”) 0-12 hours post dose at week 12. Key secondary endpoints comprise measurements of COPD symptoms and health-related quality of life measures, including SGRQ and E-RS.

The design of the ENHANCE program was based on analysis of our two Phase 2b clinical trials, which each enrolled 400 subjects with moderate to severe COPD. The attributes of the patient population enrolled in the ENHANCE program are consistent with those enrolled in prior Phase 2b trials of ensifentrine including demographics and baseline COPD characteristics, including smoking history, lung function, symptoms and quality of life measures.

In May 2022, we presented a successful thorough QT analysis demonstrating ensifentrine had no clinically relevant effect on the QT interval or cardiac conduction at the American Thoracic Society International Conference (“ATS”) 2022. The abstract was published on the ATS website and in the peer reviewed publication, American Journal of Respiratory and Critical Care Medicine.

In June 2022, we hosted an investor event where leading pulmonologists discussed the COPD treatment landscape, including unmet needs, and the treatment paradigm.

COVID-19 impact

We ~~are closely monitoring~~continue to monitor the potential impact of the COVID-19 pandemic on our operations and clinical trials, in particular the timelines and costs of ~~our~~its Phase 3 clinical ~~program.~~program ENHANCE. The pandemic and ~~associated~~ government and other measures in response continue to impact a number of clinical trial activities and wemanagement will provide an update if ~~we become~~it becomes aware of any meaningful disruption caused by the pandemic to ~~our~~its clinical trials.

To help protect the health and safety of the ~~patients,~~subjects, caregivers and healthcare professionals involved in ~~our~~its clinical trials, as well as ~~our~~its employees and independent contractors, we continue to follow guidance from the FDA and other health regulatory authorities regarding the conduct of clinical trials during the COVID-19 pandemic to ensure the safety of study participants, minimize risks to study integrity, and maintain compliance with good clinical practice.

The COVID-19 pandemic is disrupting supply chains, and employee retention and recruitment, globally and ~~we are~~management is closely monitoring this situation and will provide an update if we become aware of any meaningful disruption caused by the pandemic to the supply of ensifentrine and drug-related products, equipment and services for our clinical trials.

Russia-Ukraine Conflict

We are conducting ENHANCE-1 at a number of clinical trial sites in Russia and Europe (but not including Ukraine). The sanctions and other restrictions imposed by the U.S. and other countries as a result of the current conflict between Russia and Ukraine are impacting, and may continue to impact, our outsourced clinical research vendor’s ability to pay the clinical trial sites and investigators in Russia and may impact the vendor’s ability to supply ensifentrine and equipment to the sites and validate their trial data. If the conflict extends into other countries in Europe where our clinical trials are being conducted, our clinical trial activities in those countries may also be impacted. Management is closely monitoring the Russia-Ukraine conflict and will provide an update if we become aware of any meaningful disruption to the cost and timelines of our Phase 3 program or our plans to submit an NDA for ensifentrine.

1718

Significant agreements

Ligand agreement

In 2006 we acquired Rhinopharma and assumed contingent liabilities owed to Ligand UK Development Limited (“Ligand”) (formerly Vernalis Development Limited). We refer to the assignment and license agreement as the Ligand Agreement.

Ligand assigned to us all of its rights to certain patents and patent applications relating to ensifentrine and related compounds (the “Ligand Patents”) and an exclusive, worldwide, royalty-bearing license under certain Ligand know-how to develop, manufacture and commercialize products (the ”Ligand Licensed Products”) developed using Ligand Patents, Ligand know-how and the physical stock of certain compounds.

At time of the acquisition the contingent liability was not recognized as part of the acquisition accounting as it was immaterial. We will therefore record as a research and development expense the ~~milestone payment~~Milestone Payment or royalties when they are probable.

In March 2022 we entered into an Amendment Agreement (the “Amendment”) with Ligand whereby the Ligand Agreement was amended to clarify certain ambiguous terms in the Ligand Agreement. Pursuant to the Amendment:

•we agreed to pay to Ligand (i) $2.0 million within five business days of the date of the Amendment and (ii) $15.0 million upon the first commercial sale of ensifentrine by us or a sub-licensee, which amount is payable in cash or, at the our discretion, by the issuance of Company equity of equivalent value, as determined based on the volume-weighted average price of the our American Depositary Shares on the Nasdaq Global Market over the ten (10) trading days including and prior to such milestone event;

•the Ligand Agreement shall expire on March 24, 2042 unless terminated earlier by either party in accordance with its terms;

• upon termination of the Ligand Agreement, any Sub-licensee (as defined in the Amendment) shall have the right to enter into a direct license agreement with Ligand for the portion of the Program IP (as defined in the Amendment) that was sub-licensed by such Sub-licensee;

•the Milestone Payment may be paid in cash or, at our discretion, by issuing to Ligand shares in the Company of equivalent value; and

Nuance agreement

We entered into a collaboration and license agreement (the “Nuance Agreement”) with Nuance Pharma Limited (“Nuance Pharma”) effective June 9, 2021 (the “Effective Date”) under which we granted Nuance Pharma the exclusive rights to develop and commercialize ensifentrine in Greater China (China, Taiwan, Hong Kong and Macau). In return, we received an unconditional right to consideration aggregating ~~$40~~$40.0 million consisting of $25.0 million in cash and an equity interest valued at $15.0 million as of the Effective Date in Nuance Biotech, the parent company of Nuance Pharma. We are eligible to receive future milestone payments of up to ~~$179~~$179.0 million, triggered upon achievement of certain clinical, regulatory, and commercial milestones as well as tiered double-digit royalties on net sales in Greater China.

As of September 30, 2021, the $25.0 million cash payment and $15.0 million equity interest had been received and the holding in Nuance Biotech was recorded as Equity Interest on ~~the Condensed Consolidated Balance Sheet, included elsewhere in this Quarterly Report on Form 10-Q.~~our unaudited condensed consolidated balance sheet. The equity interest is recorded at the fair value indicated by the last observable transaction in Nuance Biotech’s stock, which was a fund raising in November, ~~2020, subject to impairment.~~2020. As of ~~September~~June 30, ~~2021,~~2022, there had been no other observable transactions to indicate any price changes in the value of Nuance Biotech’s stock, nor had there been any indications of impairment. The equity interest is therefore recorded at a value of $15.0 million.

Nuance Pharma will be responsible for all costs related to clinical development and commercialization of ensifentrine in Greater China. A joint steering committee has been established between us and Nuance Pharma to

oversee and coordinate the overall conduct of such clinical development and commercialization. We intend to use the joint steering committee to help ensure the clinical development of ensifentrine in Greater China aligns with our overall global development and commercialization strategy.

Under the terms of the Nuance Agreement, at any time until three months prior to the expected submission of the first New Drug Application in Greater China, if (i) a third party is interested in partnering with us, either globally or in territory covering at least the United States or Europe, for the development and/or commercialization of ensifentrine or (ii) we undergo a change of control, we will have an exclusive option right to buy back the license granted to Nuance Pharma and all related assets. The price is agreed to be equal to the aggregate of (i) all prior amounts paid by Nuance Pharma to us in cash under the agreement and (ii) all development and regulatory costs incurred and paid by Nuance Pharma in connection with the development and commercialization of the ensifentrine under the Nuance Agreement multiplied by a single-digit factor range dependent upon achievement of certain milestones, subject to a specified maximum amount.

We reviewed the buy-back option and determined that because it is conditional on a third party we do not have the practical ability to exercise it and, accordingly, the contract is accounted for under ASC 606.

The transaction price at the Effective Date of the Nuance Agreement was $40.0 million consisting of the $25.0 million upfront cash payment and $15.0 million equity interest. Developmental and regulatory milestones, and the manufacture and supply of ensifentrine drug product, were not included in the transaction price as we determined that it is not probable that a significant reversal in the amount of cumulative revenue recognized will not occur. Commercial milestones and sales royalties were also excluded and will be recognized when the milestones are achieved or the sales occur in Greater China.

We have determined that the license and the know how shared with Nuance Pharma constitutes functional intellectual property and that revenue relating to this should be recognized at a point in time. Consequently, we have determined that we fulfilled our obligations to Nuance Pharma when we delivered the know how that will allow Nuance Pharma to file an investigational new drug application in Greater China. We delivered this ~~know how~~know-how in the ~~three months~~year ended ~~September 30,~~December 31, 2021, and the $40.0 million revenue was therefore recognized as revenue in ~~this period.~~the year ended December 31, 2021. Revenue relating to the manufacture and supply obligations will be recognized when the drug product is delivered.

~~We reviewed the two performance obligations in the Nuance Agreement and have determined that these were priced at fair value.~~

Subsequent to the Effective Date, Ligand notified us that it believes that Nuance Pharma is a sub-licensee under the Ligand Agreement and that we are therefore under an obligation to make a sublicense payment to Ligand equal to 25% of the $40.0 million upfront transaction price. We do not believe we have granted a sublicense of or otherwise transferred to Nuance Pharma any Ligand intellectual property or know how and therefore we believe that we are not under any obligation to pay the requested sum to Ligand.

For additional information regarding the Nuance Agreement, see Note 86 to our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q.

Warrants

On July 29, 2016, as part of a private placement we issued warrants to investors. The warrant holders ~~can~~could subscribe for an ordinary share at a per share exercise price of £1.7238. They ~~can~~could also opt for a cashless exercise of their warrants whereby they ~~can~~could choose to exchange the warrants held for a reduced number of warrants exercisable at nil consideration.

If, after a transaction, should the warrants be exercisable for unlisted securities, the warrant holders ~~may~~were able to demand a cash payment instead of the delivery of the underlying securities. Accordingly, they ~~are~~were accounted for as a liability under ASC 480 “Distinguishing Liabilities from Equity” and recorded at fair value using the Black-Scholes valuation methodology, on recognition and at each reporting date. The warrants ~~are currently~~were exercisable ~~and may be exercised~~ by the holders until ~~April 2022 when~~May 2, 2022. None of the ~~warrant instruments may either be~~warrants were exercised ~~cashlessly exercised, or expire.~~prior to their expiration.

Loan and security agreement

In November 2020 we and Verona Pharma Inc. entered into a term loan facility of up to $30.0 million with Silicon Valley Bank (the “Term Loan”). See “Indebtedness” for additional information.

1920

Critical accounting ~~policies and significant judgments and~~ estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the U.S. (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting periods. Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limited to, the recognition of revenue, the accrual and prepayment of research and development expenses, the fair value of share-based compensation, the carrying value of the equity interest in Nuance Pharma, research and development tax credit and the fair value of warrants. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ from our estimates. The accounting policies considered to be critical to the judgments and estimates used in the preparation of our financial statements are disclosed in the Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our ~~2020~~2021 Form 10-K. ~~Except as described below there~~There have been no material changes to that information disclosed in our ~~2020~~2021 Form 10-K during the ~~nine~~six months ended ~~September 30, 2021.~~

Critically, management are required to identify the promises in the Nuance Agreement, determine whether these promises are distinct and determine when we have satisfied these obligations. Our consideration of these issues is discussed in Note 8 to our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q.

~~Revenue recognition~~

Our revenue arises from the Nuance Agreement. The terms of the Nuance Agreement include non-refundable upfront fees, payments based upon achievement of developmental and regulatory milestones, commercial milestones, royalties payable on sales, and manufacturing and supply. These payments are viewed as both fixed and variable consideration. Non-refundable upfront fees are considered fixed, while milestone payments and revenue from the commercialized product are identified as variable consideration~~. We follow the five-step model in ASC 606 “Revenue from Contracts with Customers”:~~

~~Step 1: Identify the contract(s) with a customer.~~

~~Step 2: Identify the performance obligations in the contract.~~

~~Step 3: Determine the transaction price.~~

~~Step 4: Allocate the transaction price to the performance obligations in the contract.~~

~~Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.~~

~~All of our revenue is derived from contracts with customers.~~

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC Topic 606. Our performance obligations include intellectual property rights, (which include the license, patents and developmental and regulatory data) and manufacturing and supply. Management are required to judge when performance obligations are satisfied and consequently when revenue is recognized.

If the right to the our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we recognize revenue from non-refundable, upfront fees allocated to the right when the right is transferred to the customer, and the customer can use and benefit from the right.

If an arrangement includes development and regulatory milestone payments, we evaluate whether the milestones are considered probable of being reached and estimate the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within our control or the licensee’s control, such as regulatory approvals, are generally not considered probable of being achieved until those approvals are received.

For arrangements with licenses of intellectual property that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, we recognize royalty revenue and sales-based milestones at the later of (i) when the related sales occur, or (ii) when the performance obligation to which the royalty has been allocated has been satisfied.

~~Contract assets~~

~~We recognize incremental costs of obtaining a contract such as commission costs as an asset and amortize the asset on a~~ ~~basis that is consistent with the satisfaction of the performance obligations to which the asset relates. Consideration receivable that is in excess of the value of satisfied, or part satisfied, performance~~ ~~obligations is recognized as a deferred revenue liability.~~

~~Trade receivable~~

~~Accounts receivable relate to amounts billed to customers. Management determine the likelihood of uncollectible accounts and provide for this accordingly.~~

~~Equity interest~~

~~As of~~ June 30, 2021, as part of the Nuance Agreement, we recorded a $15.0 million equity receivable, relating to an equity interest in Nuance Biotech, the parent company of Nuance Pharma. This equity interest was received in the three months ended September 30, 2021. As Nuance Biotech is not publicly listed the equity interest’s fair value is not readily determinable. We therefore use the fair value measurement alternative and measure the securities at cost, which is deemed to be the value indicated by the last observable transaction in Nuance Biotech's stock, subject to impairment. The valuation will be adjusted for any observable price changes in orderly transactions for an identical or similar investment in Nuance Biotech, or if there is an indicator of impairment.2022.

Components of results of operations

We anticipate that our expenses will increase substantially if and as we:

•establish a sales, marketing and distribution infrastructure and scale-up manufacturing capabilities to potentially commercialize any products for which we may obtain regulatory approval;

•conduct our ongoing Phase 3 clinical trials for ensifentrine for the maintenance treatment of COPD;

•continue the clinical development of our DPI and pMDI formulations of ensifentrine and research and develop other formulations of or combinations with ensifentrine;

•initiate and conduct further clinical trials for ensifentrine for the treatment of acute COPD, CF or any other indication;

•initiate and progress pre-clinical studies relating to other potential indications of ensifentrine;

•seek to discover and develop additional product candidates;

•seek regulatory approvals for any of our product candidates that successfully complete clinical trials;

•~~potentially establish a sales, marketing and distribution infrastructure and scale-up manufacturing capabilities to commercialize any products for which we may obtain regulatory approval;~~

•maintain, expand and protect our intellectual property portfolio;

•add clinical, scientific, operational, financial and management information systems and personnel, including personnel to support our product development and potential future commercialization efforts and to support our continuing operations as a U.S. public company; or

•experience any delays or encounter any issues from any of the above, including but not limited to failed studies, complex results, safety issues or other regulatory challenges.

~~Revenue~~

Revenue relates to the Nuance Agreement. We have recognized the $40.0 million upfront consideration in the three months ended September 30, 2021. We expect that we will generate revenue from the manufacturing and supply agreement and potentially from the milestone payments defined in the Nuance Agreement.

Operating expenses

Research and development costs

Research and development costs consist of salary and personnel related costs and third party costs for our research and development activities for ensifentrine. Personnel related costs include a share-based compensation charge relating to our stock option plan. The largest component of third party costs is for clinical trials, as well as manufacturing for clinical supplies and associated development, and pre-clinical studies. Research and development costs are expensed as incurred.

WeAs the phase 3 ENHANCE program is completing, over the next several quarters we expect our research and development costs to ~~increase through at least the first quarter of 2022 as we progress our ENHANCE program. Unless~~decrease until we add new compounds or develop ensifentrine further in other delivery methods or ~~indications, we expect our research and development costs to begin to decrease in mid-2022.~~indications. Due to the nature of research and development, the ~~expect~~edexpected costs are inherently uncertain and may vary significantly from our current expectations.

Selling, general and administrative costs

Selling, general and administrative costs consist of salary and personnel related costs, including share-based compensation, expenses relating to operating as a public company, including professional fees, insurance and commercial related costs, as well as other operating expenses.

We expect commercial costs to increase as we continue to develop our ~~potential~~ commercial operations, prepare for a potential launch and, in the event of successful regulatory approval, ~~we expect to~~ incur sales force, marketing and other launch related costs. As we develop our knowledge of the market and refine our commercialization plans, expected costs may vary significantly from our current expectations.

Other income/(expense)

Other income/(expense) are driven by interest income and expense, the fair value movement of the warrant liability, foreign exchange movements on cash and cash equivalents and taxes receivable, and the U.K. research and development tax credits.

We ~~are entitled to~~ participate in the U.K. Small and Medium Enterprises research and development tax relief program. The tax credits are calculated as a percentage of qualifying research and development expenditure and are payable in cash by the U.K. government to us. Credits recorded in the 2021 financial year are expected to be received in the 2022 financial year.

Effective January 1, 2022, this tax credit will be subject to a cap equal to a multiple of employment taxes the entity pays in the year in question. ~~We are currently reviewing~~In July, 2022, we received a response to our clearance application from HMRC agreeing we meet certain conditions to qualify as an exception. Therefore, we have not applied the ~~impact these changes could have on our~~cap in determining the tax credit ~~for the 2022 financial year, payable in 2023.~~receivable.

Taxation

We are subject to corporate taxation in the United States and the United Kingdom. We have generated losses since inception and have therefore not paid United Kingdom corporation tax. The income taxes presented in our consolidated statements of operations and comprehensive loss represents the tax impact from our operating activities in the United States, which generates taxable income based on intercompany service arrangements.

United Kingdom losses may be carried forward indefinitely to be offset against future taxable profits, subject to various utilization criteria and restrictions. The amount that can be offset each year is limited to £5.0 million plus an incremental 50% of U.K. taxable profits.

Results of operations for the three months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~

In prior periods we prepared our financial information in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”), in pounds sterling, until July 1, 2020, when our functional and presentational currency changed to U.S. dollars. As a consequence of becoming a U.S. domestic issuer as of January 1, 2021 we are required to present our financial information in accordance with U.S. GAAP. The below financial information has been prepared in accordance with U.S. GAAP. The financial information should not be expected to correspond to figures we have previously presented under IFRS, in pounds sterling or in U.S. dollars.

The following table shows our statements of operations for the three months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, (in thousands):


		Three months ended September 30,							Three months ended June 30,
		2021		2020		Change			2022		2021		Change
Revenue		$	40,000	$	—	$	40,000

Operating expenses	Operating expenses							Operating expenses
Research and development	Research and development	22,560		12,820		9,740		Research and development	14,982		20,563		(5,581)
Selling, general and administrative	Selling, general and administrative	10,883		8,284		2,599		Selling, general and administrative	5,526		7,985		(2,459)
Total operating expenses	Total operating expenses	33,443		21,104		12,339		Total operating expenses	20,508		28,548		(8,040)
Operating profit/(loss)		6,557		(21,104)		27,661
Operating loss								Operating loss	(20,508)		(28,548)		8,040
Other income/(expense)	Other income/(expense)							Other income/(expense)
Research and development tax credit	Research and development tax credit	4,749		2,338		2,411		Research and development tax credit	5,409		3,836		1,573
Interest income	Interest income	4		13		(9)		Interest income	165		3		162
Interest expense	Interest expense	(86)		—		(86)		Interest expense	(91)		(85)		(6)
Fair value movement on warrants	Fair value movement on warrants	40		(978)		1,018		Fair value movement on warrants	—		2,711		(2,711)
Foreign exchange (loss)/gain	Foreign exchange (loss)/gain	(86)		844		(930)		Foreign exchange (loss)/gain	(2,662)		40		(2,702)
Total other income, net	Total other income, net	4,621		2,217		2,404		Total other income, net	2,821		6,505		(3,684)
Profit/(loss) before income taxes		11,178		(18,887)		30,065
Loss before income taxes								Loss before income taxes	(17,687)		(22,043)		4,356
Income tax expense	Income tax expense	(127)		(44)		(83)		Income tax expense	(79)		(25)		(54)
Net profit/(loss)		$	11,051	$	(18,931)	$	29,982
Net loss								Net loss	$	(17,766)	$	(22,068)	$	4,302

~~Revenue~~

~~Revenue of $40.0~~Research and development costs were $15.0 million for the three months ended ~~September~~June 30, ~~2021 is related~~2022, compared to ~~upfront consideration received under the Nuance Agreement. There was no revenue for the three months ended September 30, 2020.~~

~~Research and development costs~~

~~Research and development costs were $22.6~~$20.6 million for the three months ended ~~September~~June 30, 2021, ~~compared to $12.8 million for the three months ended September 30, 2020, an increase~~a decrease of ~~$9.8~~$5.6 million. This ~~increase~~decrease was primarily due to ~~an $11.0~~a $4.2 million ~~increase~~decrease in clinical trial and other development costs, as we progressed to later stages of our Phase 3 ENHANCE program ~~partially offset by~~and a ~~$1.3~~$1.9 million decrease in share-based compensation.

Selling, general and administrative costs

Selling, general and administrative costs were ~~$10.9~~$5.5 million for the three months ended ~~September~~June 30, ~~2021,~~2022, compared to ~~$8.3~~$8.0 million for the three months ended ~~September~~June 30, ~~2020, an increase~~2021, a decrease of ~~$2.6 million. This increase was driven~~$2.5 million, primarily ~~by professional fees associated with the Nuance Agreement, partially offset by non-recurring costs relating~~due to ~~the $200 million PIPE financing~~a decrease in ~~July 2020.~~share-based compensation.

Other income/(expense)

The research and development tax credit for the three months ended ~~September~~June 30, ~~2021~~2022 was ~~$4.7~~$5.4 million compared to ~~$2.3~~$3.8 million for the three months ended ~~September~~June 30, ~~2020,~~2021, an increase of ~~$2.4~~$1.6 million. ~~This~~Based upon feedback received from HMRC in July 2022, we concluded a cap on this credit is not applicable for Verona Pharma in 2022. Therefore we recognized the full credit for expenditures made in the second quarter and also recognized an increase ~~is attributable to our higher qualifying research and development~~in the credit for expenditures made in the first quarter, which had been recognized previously as if the cap applied.

We recorded no movements in the three months ended ~~September~~June 30, ~~2021,~~2022, compared to ~~the comparative 2020 period, as we treated more patients in our ENHANCE trials.~~

~~We recorded~~ income of ~~$40 thousand in the three months ended September 30, 2021, compared to a loss of $1.0~~$2.7 million in the comparative period relating to the fair value movements of the warrants. The ~~income recorded~~warrants expired in the three months ended ~~September~~June 30, ~~2021~~2022 and having previously no value in the three months ended March 31, 2022 no income was ~~driven by the fall of our share price, as well as lower volatility and a shorter term of the warrants.~~recorded. In the three months ended ~~September~~June 30, ~~2020,~~2021, the ~~loss~~reduction in liability was ~~driven by~~due to a ~~rise~~decrease in the share price in that period ~~as well as greater~~and reduced volatility.

Net ~~profit/(loss)~~loss

Net ~~profit~~loss was ~~$11.1~~$17.8 million for the three months ended ~~September~~June 30, ~~2021,~~2022, compared to a net loss of ~~$18.9~~$22.1 million for the three months ended ~~September~~June 30, ~~2020,~~2021, because of the factors outlined above.

Results of operations for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021

The following table shows our statements of operations for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021 (in thousands):

Nine months ended September 30,
2021 2020 Change
Revenue $ 40,000 $ — $ 40,000
Operating expenses
Research and development 56,697 28,259 28,438
Selling, general and administrative 28,150 18,318 9,832
Total operating expenses 84,847 46,577 38,270
Operating loss (44,847) (46,577) 1,730
Other income/(expense)
Research and development tax credit 10,655 5,809 4,846
Interest income 11 116 (105)
Interest expense (255) — (255)
Fair value movement on warrants 2,244 (747) 2,991
Foreign exchange (loss)/gain 117 1,188 (1,071)
Total other income, net 12,772 6,366 6,406
Loss before income taxes (32,075) (40,211) 8,136
Income tax expense (232) (110) (122)
Net loss $ (32,307) $ (40,321) $ 8,014

~~Revenue~~

Revenue of $40.0 million for the nine months ended September 30, 2021 is related to upfront consideration received under the Nuance Agreement. There was no revenue for the nine months ended September 30, 2020.


	Six months ended June 30,
	2022		2021		Change



Operating expenses
Research and development	$	32,607	$	34,137	$	(1,530)
Selling, general and administrative	12,966		17,267		(4,301)
Total operating expenses	45,573		51,404		(5,831)
Operating loss	(45,573)		(51,404)		5,831
Other income/(expense)
Research and development tax credit	6,711		5,906		805
Interest income	180		7		173
Interest expense	(175)		(169)		(6)
Fair value movement on warrants	—		2,204		(2,204)
Foreign exchange (loss)/gain	(3,585)		203		(3,788)
Total other income, net	3,131		8,151		(5,020)
Loss before income taxes	(42,442)		(43,253)		811
Income tax expense	(161)		(105)		(56)
Net loss	$	(42,603)	$	(43,358)	$	755

Research and development costs

Research and development costs were ~~$56.7~~$32.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, compared to ~~$28.3~~$34.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020, an increase~~2021, a decrease of ~~$28.4~~$1.5 million. This ~~increase~~decrease was primarily due to a ~~$24.6~~$3.8 million decrease in share-based compensation charges, partially offset by a $1.3 million increase in clinical trial and other development costs ~~as we progressed our Phase 3 ENHANCE program, as well as~~and a ~~$4.4~~$0.7 million increase in ~~share-based compensation charges.~~clinical trial site audit and NDA filling preparation costs.

Selling, general and administrative costs

Selling, general and administrative costs were ~~$28.2~~$13.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 compared to ~~$18.3~~$17.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020, an increase~~2021, a decrease of ~~$9.9~~$4.3 million. This ~~increase~~decrease was driven primarily by a ~~$7.5~~$5.7 million ~~increase~~decrease in share-based compensation charges and a $0.5 million decrease in professional fees, ~~associated with the Nuance Agreement,~~ partially offset by ~~severance, executive change costs and non-recurring costs relating~~a $2.0 million charge related to the ~~$200.2 million PIPE financing in July 2020.~~modification of the Ligand Agreement.

Other income/(expense)

The research and development tax credit for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 was ~~$10.7~~$6.7 million compared to ~~$5.8~~$5.9 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, an increase of ~~$4.9~~$0.8 million. This increase ~~was~~is attributable to ~~our~~ higher qualifying research and development expenditures in the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, compared to the comparative ~~2020 period, as we enrolled more patients in our Phase 3 trials.~~2021 period.

We recorded no income in the six months ended June 30, 2022, compared to an income of $2.2 ~~million in the nine months ended September 30, 2021, compared to a charge of $0.7~~ million in the comparative period relating to the fair value movements of the warrants. ~~The income recorded in~~In the ~~nine~~six months ended ~~September~~June 30, 2021, ~~is driven by the fall of our share price, as well as lower volatility and a shorter term of the warrants. In the nine months ended September 30, 2020,~~ there was a ~~loss~~reduction in liability due to a ~~rise~~decrease in the share price in that period and ~~greater~~reduced volatility.

Net loss

Net loss was ~~$32.3~~$42.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, compared to ~~$40.3~~$43.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, because of the factors outlined above.

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Cash flows

The following table summarizes our cash flows for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 (in thousands):


		Nine months ended September 30,							Six months ended June 30,
		2021		2020		Change			2022		2021		Change
Cash and cash equivalents at beginning of the period	Cash and cash equivalents at beginning of the period	$	187,986	$	30,428	$	157,558	Cash and cash equivalents at beginning of the period	$	148,380	$	187,986	$	(39,606)
Net cash used in operating activities	Net cash used in operating activities	(15,931)		(26,281)		10,350		Net cash used in operating activities	(34,029)		(38,756)		4,727
Net cash (used in)/provided by investing activities		(11)		9,719		(9,730)
Net cash (used in)/provided by financing activities		(5,216)		188,393		(193,609)
Net cash used in investing activities								Net cash used in investing activities	(29)		—		(29)
Net cash used in financing activities								Net cash used in financing activities	(1,415)		(3,399)		1,984
Effect of exchange rate changes on cash and cash equivalents	Effect of exchange rate changes on cash and cash equivalents	(281)		(291)		10		Effect of exchange rate changes on cash and cash equivalents	(1,397)		204		(1,601)
Cash and cash equivalents at end of the period	Cash and cash equivalents at end of the period	$	166,547	$	201,968	$	(35,421)	Cash and cash equivalents at end of the period	$	111,510	$	146,035	$	(34,525)

Operating activities

Net cash used in operating activities was ~~$15.9~~$34.0 million in the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, compared to ~~$26.3~~$38.8 million during the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, a decrease of ~~$10.4~~$4.8 million. ~~The $25.0 million upfront payment related to the Nuance Agreement and $11.8 million related~~This decrease is predominantly due to timing of supplier ~~payments offset a $26.4 million increase in cash based operating expenses.~~

~~Investing activities~~

Net cash used in investing activities was $11 thousand in the nine months ended September 30, 2021 compared to $9.7 million provided in the nine months ended September 30, 2020. In the prior period all funds that were held on deposit, classified as short-term investments, were transferred to money market mutual funds that are classified as cash equivalents.payments.

Financing activities

Net cash used in financing activities was ~~$5.2~~$1.4 million in the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, compared to ~~$188.4~~$3.4 million ~~provided~~ in the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. This ~~consisted of $5.9 million for payment~~decrease is primarily due to lower payments of withholding taxes due on the net-settling of certain employees’ RSU awards, partially offset by $0.7 million generated from the issuance of ADSs under the ATM Program. The $188.4 million provided in the nine months ended September 30, 2020, related to net funds received from the $200.2 million PIPE financing in July 2020.

awards.

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Liquidity and capital resources

We do not currently have any approved products and have never generated any revenue from product sales. To date, we have financed our operations primarily through the issuances of our equity securities, including warrants, from borrowings under the Term Loan and upfront payments from the Nuance Agreement. See “Significant Agreements” and “Indebtedness” for additional information.

We have incurred recurring losses since inception, including net losses of ~~$32.3~~$42.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, and ~~$65.1~~$55.6 million for the year ended December 31, ~~2020.~~2021. As of ~~September~~June 30, ~~2021,~~2022, we had an accumulated deficit of ~~$240.3~~$306.7 million. We expect to continue to generate operating losses for the foreseeable future.

We have no ongoing material financing commitments, such as lines of credit or guarantees, that are expected to affect our liquidity over the next five years, other than leases and the Term Loan with Silicon Valley Bank.

Open market sale agreement

In March 2021, we entered into an open market sale agreement with Jefferies LLC (“Jefferies”) to sell shares of our ordinary shares, in the form of ADSs, with aggregate gross sales proceeds of up to $100.0 million, from time to time, through an “at the market” equity offering program under which Jefferies will act as sales agent (the “ATM Program”).

During the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, we sold ~~873,104~~80,696 ordinary shares (equivalent to ~~109,138~~10,087 ADSs) under the ATM Program, at an average price of approximately $0.86 per share (equivalent to ~~$6.91~~$6.86 per ADS), raising aggregate net proceeds of approximately ~~$0.7~~$0.1 million after deducting issuance costs. As of ~~September~~June 30, ~~2021,~~2022, $99.2 million of ordinary shares, in the form of ADSs, remained available for sale under the ATM Program.

Indebtedness

In November 2020, we and Verona Pharma, Inc. entered into a term loan facility of up to $30.0 million with Silicon Valley Bank, which we refer to as the Term Loan, consisting of term loan advances in an aggregate amount of $5.0 million funded at closing, a term loan advance of an aggregate amount of $10.0 million available subject to certain terms and conditions and the achievement of a specific clinical milestone, and a term loan advance of an aggregate amount of $15.0 million contingent upon achievement of a specific clinical development milestone and other specified conditions. As of ~~September~~June 30, ~~2021,~~2022, the Company had $5.0 million principal outstanding under the Term Loan. Additional detail surrounding the Term Loan is included under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our ~~2020~~2021 Form 10-K. There have been no material changes to that information disclosed in our ~~2020~~2021 Form 10-K during the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~

2022.

Funding requirements

We believe that our cash and cash equivalents as of ~~September~~June 30, ~~2021,~~2022, expected cash receipts from U.K. tax credits and funding expected to become available under the Term Loan, will enable us to fund our planned operating expenses and capital expenditure requirements through at least the end of 2023. The Term Loan advances are contingent upon achievement of certain clinical development milestones and other specified conditions.

We will require significant additional capital to further advance clinical and regulatory activities, to fund prelaunch and launch related costs and to create an effective sales and marketing organization to commercialize ensifentrine. We will need to seek additional funding through public or private financings, debt financing, collaboration or licensing agreements and other arrangements. However, there is no guarantee that we will be successful in securing additional ~~finance~~capital on acceptable terms, or at all.

To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our shareholders and ADS holders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect such holders’ rights as a shareholder or ADS holder. Any future debt financing or preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends and may require the issuance of warrants, which could potentially dilute our security holders’ ownership interests.

If we raise additional funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds

through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development programs or any future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Our future capital requirements for ensifentrine or any future product candidates will depend on many factors, including:

•the progress, timing and completion of pre-clinical testing and clinical trials for ensifentrine or any future product candidates and the potential that we may be required to conduct additional clinical trials for ensifentrine;

•the number of potential new product candidates we decide to in-license and develop;

•the costs involved in growing our organization to the size needed to allow for the research, development and potential commercialization of ensifentrine or any future product candidates;

•the costs involved in filing patent applications and maintaining and enforcing patents or defending against claims or infringements raised by third parties;

•the time and costs involved in obtaining regulatory approvals for ensifentrine or any future product candidate we develop and any delays we may encounter as a result of evolving regulatory requirements or adverse results with respect to ensifentrine or any future product candidates;

•any licensing or milestone fees we might have to pay during future development of ensifentrine or any future product candidates;

•selling and marketing activities undertaken in connection with the anticipated commercialization of ensifentrine or any future product candidates, if approved, and costs involved in the creation of an effective sales and marketing organization; and

•the amount of revenues, if any, we may derive either directly or in the form of royalty payments from future sales of ensifentrine or any future product candidates, if approved.

Our commercial revenues, if any, will be derived from sales of products that we do not expect to be commercially available for ~~many~~several years, if ever. Accordingly, we will need to obtain substantial additional funds to achieve our business ~~objective.~~

~~Off-balance sheet arrangements~~

We do not have any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We do not engage in off-balance sheet financing arrangements. In addition, we do not engage in trading activities involving non-exchange traded contracts. We therefore believe that we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.objectives.

Recent accounting pronouncements

For a discussion of pending and recently adopted accounting pronouncements, see Note 2 to our consolidated financial statements included in the ~~2020~~2021 Form 10-K.

3027

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are a smaller reporting company as defined in Rule 12b-2 of the Exchange Act and are not required to provide the information otherwise required under this Item 3.

Item 4. Controls and Procedures

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) under the Exchange Act as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our principal executive officer and principal financial officer have concluded that, as of ~~September~~June 30, ~~2021,~~2022, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

In June 2021, we entered into the Nuance Agreement. Consequently we are implementing certain controls over financial reporting in the year ending December 31, 2021, with regards to obligations to supply drug product to Nuance, and other related accounting matters. Apart from the foregoing changes noNo change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter ended ~~September~~June 30, ~~2021~~2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

We are not currently subject to any material legal proceedings.

Item 1A. Risk Factors

Our business is subject to risks and events that, if they occur, could adversely affect our financial condition and results of operations and the trading price of our securities. ~~Except as set forth below, our~~Our risk factors have not changed materially from those described in Part I, Item 1A of the ~~2020~~2021 Form 10-K under the heading “Risk Factors”.

The collaboration and license agreement with Nuance Pharma is important to our business. If Nuance Pharma is unable to develop and commercialize products containing ensifentrine in Greater China, if we or Nuance Pharma fail to adequately perform under the Nuance Agreement, or if we or Nuance Pharma terminate the Nuance Agreement, our business would be adversely affected.

We entered into a collaboration and license agreement with Nuance Pharma Limited (“Nuance Pharma”) effective June 9, 2021 (the “Nuance Agreement”) under which we granted Nuance Pharma the exclusive rights to develop and commercialize products containing ensifentrine (the “Nuance Licensed Products”) in Greater China (China, Taiwan, Hong Kong and Macau).

Termination of the Nuance Agreement could cause significant setbacks in our ability to develop and commercialize the Nuance Licensed Products in Greater China. Any suitable alternative collaboration or license agreement would take considerable time to negotiate and could also be on less favorable terms to us. In addition, under the Nuance Agreement, Nuance Pharma agreed to assume all costs related to clinical development and commercialization of the Nuance Licensed Products in Greater China. If the Nuance Agreement were to be terminated, and whether or not we identify another suitable collaborator, we may need to seek additional financing to support the clinical development and commercialization of the Nuance Licensed Products in Greater China, which could have a material adverse effect on our business.

Under the Nuance Agreement, we are dependent upon Nuance Pharma to successfully develop and commercialize Nuance Licensed Products. Although we have formed a joint steering committee with Nuance Pharma to oversee and coordinate the overall conduct of the clinical development and commercialization of the Nuance Licensed Products in Greater China, we do not control all aspects of Nuance Pharma’s development and commercialization or the resources it allocates to the development of the Nuance Licensed Products identified under the Nuance Agreement. Our interests and Nuance Pharma’s interests may differ or conflict from time to time, or we may disagree with Nuance Pharma’s level of effort or resource allocation. Nuance Pharma may internally prioritize programs under development within the collaboration differently than we would, or it may not allocate sufficient resources to effectively or optimally develop or commercialize the Nuance Licensed Products. If these events were to occur, our ability to receive revenue from the commercialization of the Nuance Licensed Products would be reduced, and our business would be adversely affected.

~~If we fail to enter into new strategic relationships for ensifentrine, our business, research and development and commercialization prospects could be adversely affected.~~

Our development program for ensifentrine and the potential commercialization of ensifentrine will require substantial additional cash to fund expenses. Therefore, we may decide to enter into collaborations with pharmaceutical or biopharmaceutical companies for the development and potential commercialization of ensifentrine. For example, we may seek a collaborator for development of our DPI or MDI formulation of ensifentrine for the maintenance treatment of COPD and potentially asthma and other respiratory diseases.

We face significant competition in seeking appropriate collaborators. Collaborations are complex and time consuming to negotiate and document. We may also be restricted under existing and future collaboration agreements from entering into agreements on certain terms with other potential collaborators. We may not be able to negotiate collaborations on acceptable terms, or at all. If that were to occur, we may have to curtail the development of ensifentrine, reduce or delay its development program, delay its potential commercialization or reduce the scope of our sales or marketing activities, or increase our expenditures and undertake development or commercialization activities at our own expense. If we elect to increase our expenditures to fund development or commercialization activities on our own, we may need to obtain additional capital, which may not be available to us on acceptable terms or at all. If we do not have sufficient funds, we will not be able to bring ensifentrine to market and generate product revenue. If we do enter into a collaboration agreement, we could be subject to the following risks, among others, any of which could adversely affect our ability to develop and commercialize ensifentrine:

•~~we may not be able to control the amount and timing of resources that the collaborator devotes to the development of ensifentrine;~~

•~~the collaborator may experience financial difficulties;~~

•~~we may be required to relinquish important rights such as marketing, distribution and intellectual property rights;~~

•~~a collaborator could move forward with a competing product developed either independently or in collaboration with third parties, including our competitors;~~

•~~safety and/or efficacy data from a collaborator’s clinical development activities may conflict with our data and could potentially impact our global clinical development activities;~~

•~~a collaborator may unlawfully use or disclose confidential information and materials in breach of confidentiality obligations to us;~~

•~~business combinations or significant changes in a collaborator’s business strategy may adversely affect our willingness to complete our obligations under any arrangement;~~

•~~we or a collaborator could fail to adequately perform our obligations under the agreement and/or the agreement could fall into dispute;~~

•~~we may be involved in lawsuits to protect or enforce patents covering ensifentrine, or relating to the terms of our collaborations, which could be expensive, time consuming and unsuccessful; or~~

• ~~the collaboration may not provide sufficient funds to be profitable for us after we fulfill any payment liabilities under the Ligand Agreement.~~

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

3429

Item 6. Exhibits

Incorporated by Reference to Filings Indicated

Exhibit Number

Exhibit Description

Form

File No.

Exhibit No.

Filing date

Filed/Furnished Herewith

3.1

Articles of Association, as amended and as currently in effect

6-K

001-38067

12/30/2020

31.1

Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

31.2

Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

32.1

Section 1350 Certification of Chief Executive Officer

32.2

Section 1350 Certification of Chief Financial Officer

101.INS

Inline XBRL Instance Document

101.SCH

Inline XBRL Taxonomy Extension Schema Document

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

* Filed herewith.

** Furnished herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	VERONA PHARMA PLC

Date: ~~November~~August 9, ~~, 2021~~2022	By:	/s/ David Zaccardelli
		David Zaccardelli, Pharm. D.
		President and Chief Executive Officer

Date: ~~November~~August 9, ~~, 2021~~2022	By:	/s/ Mark W. Hahn
		Mark W. Hahn
		Chief Financial Officer

3631