10-Q 1 mreo-20240331.htm 10-Q 10-Q
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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 March 31, 2024

OR

 

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 001-38452

MEREO BIOPHARMA GROUP PLC

(Exact name of Registrant as specified in its charter)

 

England and Wales

 

Not Applicable

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

One Cavendish Place, 4th Floor

 

 

London, W1G 0QF

 

 

United Kingdom

 

+44-333-023-7300

(Address of principal executive offices)

 

(Registrant’s telephone number, including area code)

 

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

 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

American Depositary Shares, each representing five ordinary shares, nominal value of £0.003 per share

 

Ordinary Shares, nominal value of £0.003 per share

 

MREO

 

The Nasdaq Stock Market LLC

 

 

The Nasdaq Stock Market LLC*

 

* Not for trading, but only in connection with the registration of American Depositary Shares representing such Ordinary Shares pursuant to the requirements of the U.S. Securities and Exchange Commission.

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

None

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, 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 Act). Yes No

 

As of May 15, 2024 the number of outstanding ordinary shares, par value £0.003 per share, of the registrant was 701,363,484.

 

 

 


Table of Contents

 

 

 

 

Page

 

 

 

 

PART I

 

 

 

 

 

 

 

Item 1.

Financial Statements

 

2

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

19

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

25

 

 

 

 

Item 4.

Controls and Procedures

 

25

 

 

 

 

PART II

 

 

 

 

 

 

 

Item1.

Legal Proceedings

 

26

 

 

 

 

Item 1A.

Risk Factors

 

26

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

26

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

26

 

 

 

 

Item 4.

Mine Safety Disclosures

 

26

 

 

 

 

Item 5.

Other Information

 

26

 

 

 

 

Item 6.

Exhibits

 

27

 

 

 

 

Signatures

 

28

 

 


 

GENERAL INFORMATION

In this Quarterly Report on Form 10‑Q (“Quarterly Report”), “Mereo,” the “Group,” the “Company,” “we,” “us” and “our” refer to Mereo BioPharma Group plc and its consolidated subsidiaries, except where the context otherwise requires.

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. All statements other than statements of historical facts contained in this Quarterly Report are forward-looking statements. In some cases, you can identify forward-looking statements by words such as “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect” or the negative of these words or other comparable terminology.

Any forward-looking statements in this Quarterly Report reflect our current views with respect to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under Part I, Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2023. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

This Quarterly Report also contains estimates, projections and other information concerning our industry, our business, and the markets for certain diseases, including data regarding the estimated size of those markets, and the incidence and prevalence of certain medical conditions. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained this industry, business, market and other data from reports, research surveys, studies and similar data prepared by third parties, industry, medical and general publications, government data and similar sources.

 

 

 

 

 

1


 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

MEREO BIOPHARMA GROUP PLC

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)

(Unaudited)

 

 

 

March 31,

 

 

December 31,

 

 

2024

 

 

2023

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

48,660

 

 

$

57,421

 

Prepaid expenses and other current assets

 

 

3,188

 

 

 

5,156

 

Research and development incentives receivables

 

 

1,648

 

 

 

1,183

 

Total current assets

 

 

53,496

 

 

 

63,760

 

Property and equipment, net

 

 

360

 

 

 

405

 

Operating lease right-of-use assets

 

 

1,109

 

 

 

1,245

 

Intangible assets

 

 

972

 

 

 

1,089

 

Total assets

 

$

55,937

 

 

$

66,499

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

2,455

 

 

$

2,346

 

Accrued expenses

 

 

2,539

 

 

 

5,467

 

Convertible loan notes – current

 

 

4,630

 

 

 

 

Operating lease liabilities – current

 

 

662

 

 

 

652

 

Other current liabilities

 

 

718

 

 

 

1,021

 

Total current liabilities

 

 

11,004

 

 

 

9,486

 

Convertible loan notes – non-current

 

 

 

 

 

4,394

 

Warrant liabilities – non-current

 

 

855

 

 

 

412

 

Operating lease liabilities – non-current

 

 

727

 

 

 

906

 

Other non-current liabilities

 

 

513

 

 

 

764

 

Total liabilities

 

 

13,099

 

 

 

15,962

 

Commitments and contingencies (Note 15)

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

 

Ordinary shares, par value £0.003 per share; 701,349,434 shares issued at March 31, 2024 (December 31, 2023: 701,217,089).

 

 

2,775

 

 

 

2,775

 

Treasury shares

 

 

 

 

 

(1,230

)

Additional paid-in capital

 

 

486,927

 

 

 

486,107

 

Accumulated deficit

 

 

(428,581

)

 

 

(419,630

)

Accumulated other comprehensive loss

 

 

(18,283

)

 

 

(17,485

)

Total shareholders’ equity

 

 

42,838

 

 

 

50,537

 

Total liabilities and shareholders’ equity

 

$

55,937

 

 

$

66,499

 

 

 

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

2


 

MEREO BIOPHARMA GROUP PLC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

2024

 

 

2023

 

Revenue

 

$

 

 

$

 

Operating expenses:

 

 

 

 

 

 

Cost of revenue

 

 

 

 

 

347

 

Research and development

 

 

(3,994

)

 

 

(5,307

)

General and administrative

 

 

(5,906

)

 

 

(6,450

)

Loss from operations

 

 

(9,900

)

 

 

(11,410

)

Other income/(expenses)

 

 

 

 

 

 

Interest income

 

 

617

 

 

 

306

 

Interest expense

 

 

(310

)

 

 

(800

)

Changes in the fair value of financial instruments

 

 

(448

)

 

 

542

 

Foreign currency transaction gain/(loss), net

 

 

613

 

 

 

(1,207

)

Other expenses, net

 

 

 

 

 

(6

)

Benefit from research and development tax credit

 

 

477

 

 

 

499

 

Net loss before income tax

 

 

(8,951

)

 

 

(12,076

)

Income tax benefit

 

 

 

 

 

 

Net loss

 

$

(8,951

)

 

$

(12,076

)

 

 

 

 

 

 

 

Loss per share – basic and diluted

 

$

(0.01

)

 

$

(0.02

)

Weighted average shares outstanding – basic and diluted

 

 

700,263,490

 

 

 

623,925,635

 

 

 

 

 

 

 

 

Net loss

 

$

(8,951

)

 

$

(12,076

)

Other comprehensive (loss)/income – Foreign currency transaction adjustments, net of tax

 

 

(798

)

 

 

2,278

 

Total comprehensive loss

 

$

(9,749

)

 

$

(9,798

)

 

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

3


 

MEREO BIOPHARMA GROUP PLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

2024

 

 

2023

 

Cash flows from operating activities

 

 

 

 

 

 

Net loss

 

$

(8,951

)

 

$

(12,076

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

Stock-based compensation

 

 

2,050

 

 

 

1,635

 

Depreciation

 

 

41

 

 

 

42

 

Amortization of intangible assets

 

 

108

 

 

 

64

 

Amortization of operating lease right-of-use assets

 

 

126

 

 

 

121

 

Change in fair value of warrants

 

 

448

 

 

 

(542

)

Interest expense

 

 

306

 

 

 

(70

)

Foreign currency transaction (gain)/loss

 

 

(613

)

 

 

1,207

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

1,939

 

 

 

3,292

 

Research and development incentives receivable

 

 

(477

)

 

 

(499

)

Accounts payable

 

 

127

 

 

 

812

 

Accrued expenses and other liabilities

 

 

(2,939

)

 

 

(3,098

)

Operating lease liabilities

 

 

(156

)

 

 

(136

)

Net cash used in operating activities

 

 

(7,991

)

 

 

(9,248

)

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

Purchase of intangible assets

 

 

(700

)

 

 

(419

)

Net cash used in investing activities

 

 

(700

)

 

 

(419

)

 

 

 

 

 

 

 

Decrease in cash and cash equivalents

 

 

(8,691

)

 

 

(9,667

)

Cash and cash equivalents at January 1

 

 

57,421

 

 

 

68,182

 

Effect of exchange rate changes

 

 

(70

)

 

 

1,293

 

Cash and cash equivalents at March 31

 

$

48,660

 

 

$

59,808

 

 

 

 

 

 

 

 

Supplemental disclosure

 

 

 

 

 

 

Cash paid for interest

 

 

4

 

 

 

680

 

Cash paid for income taxes

 

 

 

 

 

37

 

Cash paid for the amounts included in the measurement of operating lease liabilities

 

 

194

 

 

 

153

 

 

 

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

4


 

MEREO BIOPHARMA GROUP PLC

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(In thousands, except per share amounts)

(Unaudited)

 

 

Ordinary shares

 

 

Treasury shares

 

 

Additional
paid-in

 

 

Accumulated
other
comprehensive

 

 

Accumulated

 

 

Total
shareholders’

 

 

 

Shares

 

 

Cost

 

 

Shares

 

 

Cost

 

 

capital

 

 

(loss)/income

 

 

deficit

 

 

equity

 

Balance, December 31, 2023

 

 

701,217,089

 

 

$

2,775

 

 

 

923,400

 

 

$

(1,230

)

 

$

486,107

 

 

$

(17,485

)

 

$

(419,630

)

 

$

50,537

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,951

)

 

 

(8,951

)

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(798

)

 

 

 

 

 

(798

)

Share-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,050

 

 

 

 

 

 

 

 

 

2,050

 

Exercise of share options

 

 

132,345

 

 

 

 

 

 

(210,485

)

 

 

280

 

 

 

(280

)

 

 

 

 

 

 

 

 

 

Delivery of shares on vesting of restricted stock units

 

 

 

 

 

 

 

 

(712,915

)

 

 

950

 

 

 

(950

)

 

 

 

 

 

 

 

 

 

Balance, March 31, 2024

 

 

701,349,434

 

 

$

2,775

 

 

 

 

 

$

 

 

$

486,927

 

 

$

(18,283

)

 

$

(428,581

)

 

$

42,838

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2022

 

 

624,928,519

 

 

$

2,478

 

 

 

1,003,030

 

 

$

(1,335

)

 

$

476,521

 

 

$

(21,687

)

 

$

(404,575

)

 

$

51,402

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,076

)

 

 

(12,076

)

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,278

 

 

 

 

 

 

2,278

 

Extinguishment and reissuance of convertible loan note

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,161

 

 

 

 

 

 

 

 

 

1,161

 

Share-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,635

 

 

 

 

 

 

 

 

 

1,635

 

Balance, March 31, 2023

 

 

624,928,519

 

 

$

2,478

 

 

 

1,003,030

 

 

$

(1,335

)

 

$

479,317

 

 

$

(19,409

)

 

$

(416,651

)

 

$

44,400

 

 

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

5


 

MEREO BIOPHARMA GROUP PLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Nature of business

Mereo BioPharma Group plc (the “Company” or “Mereo”) is United Kingdom (“U.K.”) based biopharmaceutical company focused on the development of innovative therapeutics for rare diseases. The Company has developed a portfolio of late-stage clinical product candidates, and its two rare disease product candidates are setrusumab for the treatment of osteogenesis imperfecta (“OI”) and alvelestat primarily for the treatment of severe alpha-1 antitrypsin deficiency-associated lung disease (“AATD-LD”).

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

2. Basis of presentation and summary of significant accounting policies

Basis of presentation

The Company’s significant accounting policies are disclosed in the audited consolidated financial statements for the year ended December 31, 2023, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, which was filed with the Securities and Exchange Commission (the “SEC”) on March 27, 2024 (the “2023 Annual Report”). Since the date of such consolidated financial statements, there have been no changes to the Company’s significant accounting policies. In the opinion of management, the accompanying unaudited condensed financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of its financial position as of March 31, 2024, and its results of operations and cash flows for the three months ended March 31, 2024 and 2023.

Going concern

The Company has prepared its financial statements on the basis that it will continue as a going concern. In accordance with the Financial Accounting Standards Board (“FASB”), Accounting Standards Update, or ASU, 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40), the Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern.

The Company is subject to risks common to companies in the biotechnology industry, including but not limited to, risks of delays in initiating or continuing research programs and clinical trials, risks of failure of preclinical studies and clinical trials, the need to obtain marketing approval for any drug product candidate that it may identify and develop, the need to successfully commercialize and gain market acceptance of its product candidates, if approved, dependence on key personnel and collaboration partners, protection of proprietary technology, compliance with government regulations, development by competitors of technological innovations, and the ability to secure additional capital to fund operations. Product candidates currently under development will require significant additional research and development efforts, including preclinical and clinical testing and regulatory approval prior to commercialization. Even if the Company’s research and development efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales.

The Company has historically been loss making and anticipates that it will continue to incur losses for the foreseeable future and had an accumulated deficit of $428.6 million as of March 31, 2024. The Company has funded these losses through a combination of public equity, private equity and debt financings, and it expects it will continue to do so until such time as it can generate significant revenue from product sales, or other commercial revenues, if ever, or through licensing and/or collaboration agreements for its rare disease or oncology product candidates. Although management continues to pursue these plans, there is no assurance that the Company will be successful in obtaining sufficient funding on terms acceptable to the Company to fund continuing operations, if at all.

The Company currently operates in a period of economic uncertainty which has been significantly impacted by domestic and global monetary and fiscal policy, geopolitical conflicts such as the ongoing wars involving Ukraine and Israel, inflation and interest rates, and fluctuations in monetary exchange rates. While the Company has experienced limited financial impacts at this time, these factors may in turn adversely impact the Company’s ability to deliver its goals so the Company continues to monitor these factors and events and the potential effects each may have on the Company’s business, financial condition, results of operations and growth prospects.

6


 

As of March 31, 2024, the Company had cash and cash equivalents of $48.7 million. The Company expects that its cash and cash equivalents as of March 31, 2024, will be sufficient to fund its operations and capital expenditure requirements for at least twelve months from the date of filing of this Quarterly Report on Form 10-Q.

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting periods. Significant estimates and assumptions reflected in the Company's unaudited condensed financial statements include, but are not limited to, revenue recognition on contracts with customers and convertible loan notes. 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 those estimates.

3. Recent accounting pronouncements

There have been no recent accounting pronouncements, changes in accounting pronouncements or recently adopted accounting guidance other than those previously included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, which was filed with the SEC on March 27, 2024, that are of significance or potential significance to the Company. The Company is continuing to evaluate the impact of the recently issued pronouncements that are effective in future periods that were discussed in its Annual Report on Form 10-K.

4. Fair value measurement

The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, certain accrued expenses, contingent consideration, warrant liability and convertible loan notes. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate their fair value due to the short-term nature of those financial instruments.

The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis and classified under the appropriate level of the fair value hierarchy as described above:

There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2024.

 

 

As of March 31, 2024

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

($'000)

 

 

($'000)

 

 

($'000)

 

 

($'000)

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Warrant liabilities

 

 

855

 

 

 

 

 

 

855

 

 

 

 

CVR liability

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2023

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

($'000)

 

 

($'000)

 

 

($'000)

 

 

($'000)

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Warrant liabilities

 

 

412

 

 

 

 

 

 

412

 

 

 

 

CVR liability

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrant liabilities

 

At March 31, 2024 and December 31, 2023, warrant liabilities solely related to those warrants outstanding to the former lenders of the Company as described in Note 11.

 

 

7


 

 

Contingent Value Rights Agreement Liability ("CVR liability")

In 2019, the Company acquired OncoMed and subsequently renamed it Mereo BioPharma 5, Inc. The Company made a provision for the estimated fair value of amounts payable to the former shareholders of Mereo BioPharma 5, Inc. under a Contingent Value Rights Agreement (“CVR”), established at the time of the acquisition of Mereo BioPharma 5, Inc. which is accounted for as a contingent consideration liability. The CVR expired on April 23, 2024 with no further amounts payable (see Note 17).

At March 31, 2024 and December 31, 2023, the Company estimated the fair value of the liability for its obligations under the CVR to be $nil. Total potential payments under the CVR on a gross, undiscounted basis, were approximately $80.0 million.

The CVR liability was estimated based on a risk-adjusted, probability-based scenario. Under this approach the likelihood of future payments being made to the former shareholders of Mereo BioPharma 5, Inc. under the CVR was considered.

 

5. Prepaid expenses and other current assets

Prepaid expenses and other current assets consisted of the following:

 

 

March 31,

 

 

December 31,

 

 

2024

 

 

2023

 

 

 

($'000)

 

 

($'000)

 

VAT receivable

 

$

502

 

 

$

599

 

Prepaid research and development services

 

 

1,375

 

 

 

632

 

Insurance claim receivable

 

 

 

 

 

1,950

 

Security deposits

 

 

447

 

 

 

615

 

Other prepaid expense and current assets

 

 

864

 

 

 

1,360

 

Total

 

$

3,188

 

 

$

5,156

 

 

6. Property and equipment, net

Property and equipment, net consists of the following (in thousands):

 

 

March 31,

 

 

December 31,

 

 

2024

 

 

2023

 

 

 

($'000)

 

 

($'000)

 

Leasehold improvements

 

$

704

 

 

$

710

 

Office equipment

 

 

198

 

 

 

199

 

IT equipment

 

 

294

 

 

 

296

 

Property and equipment, at cost

 

 

1,196

 

 

 

1,205

 

Less: accumulated depreciation

 

 

(836

)

 

 

(800

)

Property and equipment, net

 

$

360

 

 

$

405

 

 

Depreciation expense was less than $0.1 million and $0.1 million for the three months ended March 31, 2024 and 2023, respectively.

 

7. Leases

In August 2015, the Company entered into a lease agreement under which it leased office space located on the fourth floor of One Cavendish Place, London, with a lease term ending in August 2025. In June 2021, the Company entered into a new lease agreement to lease additional office space located on the fifth floor of that building for a lease period ending in June 2026. At the same time, the Company entered into a revisionary lease to extend the term for the original fourth floor lease to be coterminous with the fifth floor, ending in June 2026.

The Company made lease payments of $0.2 million in the three months ended March 31, 2024 and 2023. The total lease expenses included in the statements of operations and comprehensive loss was $0.2 million in the three months ended March 31, 2024 and 2023. There were no material variable lease costs.

8


 

 

 

As of March 31,

 

 

 

2024

 

 

2023

 

Operating leases

 

 

 

 

 

 

Weighted-average remaining contractual lease term (years)

 

 

2.20

 

 

 

3.30

 

Weighted average discount rate

 

 

10.0

%

 

 

10.0

%

 

 

Three months ended March 31,

 

 

 

2024

 

 

2023

 

 

 

($'000)

 

 

($'000)

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

 

 

Operating cash flows from operating leases

 

$

194

 

 

$

153

 

 

The following table summarizes the maturities of the Company’s operating lease liabilities as of March 31, 2024:

 

 

As of March 31, 2024

 

 

 

($'000)

 

Maturity analysis of the operating lease liabilities for the years ending December 31,

 

 

 

2024

 

$

578

 

2025

 

 

771

 

2026

 

 

193

 

Total undiscounted payments

 

 

1,542

 

Less: Present value discount

 

 

(153

)

Lease liability

 

$

1,389

 

Lease liability - current

 

$

662

 

Lease liability - non-current

 

$

727

 

 

 

8. Other current liabilities

Other current liabilities consist of the following:

 

 

March 31,

 

 

December 31,

 

 

 

2024

 

 

2023

 

 

 

($'000)

 

 

($'000)

 

Social security and other taxes

 

$

391

 

 

$

280

 

Deferred consideration liability

 

 

290

 

 

 

711

 

Other current liabilities

 

 

37

 

 

 

30

 

Total

 

$

718

 

 

$

1,021

 

 

 

 

 

 

 

 

 

 

9


 

9. Accrued expenses

Accrued expenses consist of the following:

 

 

March 31,

 

 

December 31,

 

 

 

2024

 

 

2023

 

 

 

($'000)

 

 

($'000)

 

Accrued research and development costs

 

$

566

 

 

$

1,821

 

Accrued legal fees

 

 

375

 

 

 

266

 

Accrued bonus

 

 

428

 

 

 

1,624

 

Accrued audit fees

 

 

417

 

 

 

671

 

Accrued professional fees

 

 

353

 

 

 

338

 

Accrued local taxes

 

 

 

 

 

382

 

Other accrued expenses

 

 

400

 

 

 

365

 

Total

 

$

2,539

 

 

$

5,467

 

 

10. Convertible loan notes

Novartis Loan Note

On February 10, 2020, the Company entered into a convertible equity financing with Novartis Pharma (AG) (“Novartis”) under which Novartis purchased a £3.8 million ($5.2 million) convertible loan note (the “Novartis Loan Note”). The Novartis Loan Note is convertible at the discretion of the holder, at a fixed price of £0.265 per ordinary share and originally bore interest at 6% per annum with a maturity date of February 10, 2023. In connection with the Novartis Loan Note, the Company also issued 1,449,614 warrants which are exercisable until February 2025 at an exercise price of £0.265 per ordinary share. These warrants were recognized separately as equity instruments.

Effective February 10, 2023, the maturity date of the Novartis Loan Note was extended to February 10, 2025 and the interest rate amended to 9%. Interest accrued to the amendment date of $0.9 million was paid in cash, and additional warrants to purchase 2,000,000 ordinary shares were issued. These warrants were also recognized separately as equity instruments.

The amendments to the Novartis Loan Note were an extinguishment of the original instrument and the issuance of a new one. Accordingly, on the extinguishment date, the carrying value of $5.5 million was derecognized. At the same time, a new liability of $3.4 million was recognized, which represents the portion of the consideration of the new arrangement allocated to the liability component of the new Novartis Loan Note on the basis of its relative fair value, net of fees. The remaining amount was allocated between the $0.9 million of interest paid in cash and the residual $1.3 million which was recorded in additional paid-in capital to reflect the relative fair value of the warrants and the conversion option embedded in the new Novartis Loan Note. No extinguishment gain or loss was recognized in the unaudited condensed consolidated statements of operations and comprehensive loss. The Company recognized interest expense of $0.3 million in relation to the Novartis Loan Note in the unaudited condensed consolidated statements of operations and comprehensive loss for the three months ended March 31, 2024 and 2023. The effective interest rate applied to the liability portion of the Novartis Loan Note in the three months ended March 31, 2024 was 27.8% and the effective interest rate in the three months ended March 31, 2023 after the amendments was 27.8% and 37.4% before the amendments

As of March 31, 2024, and December 31, 2023 the net carrying amount of the liability component of the convertible debt instrument was $4.6 million and $4.4 million, respectively. The fair value was $3.2 million and $3.1 million at March 31, 2024 and December 31, 2023 respectively.

Private Placement Loan Notes

The Private Placement Loan Notes were issued in 2020 as part of a $70.0 million private placement transaction which also included the issuance of ordinary shares and warrants. As of January 1, 2023, Private Placement Loan Notes with an aggregate principal of £6.2 million ($7.5 million) were still outstanding and were convertible at a fixed price of £0.174 per ordinary share. The Private Placement Loan Notes bore interest at a rate of 6% per annum and had a maturity date of June 3, 2023.

10


 

In May 2023, the maturity date of the Private Placement Loan Notes was extended to August 3, 2023, with all other terms remaining unchanged. This extension was a modification and the carrying value of the liability component was adjusted to the present value of the modified cash flows discounted at the original effective interest rate, net of identifiable transaction costs. The carrying value was also reduced by $0.6 million with a corresponding adjustment to additional paid-in capital to reflect the increase in the fair value of the embedded conversion option.

In 2023, the Company received conversion notices and subsequently issued and allotted 17,774,895 and 9,645,200 ordinary shares respectively, both at a price of £0.174 per share on non-cash conversion of Private Placement Loan Notes with an aggregate principal amount of $4.6 million. In 2023, the Company also paid $3.2 million to fully settle the outstanding principal and accrued interest balance on the remaining Private Placement Loan Notes such that at both March 31, 2024 and December 31, 2023 the net carrying amount of the convertible debt instrument was $nil.

The Company recognized no interest expense in relation to the Private Placement Loan Notes in the unaudited condensed consolidated statements of operations and comprehensive loss for the three months ended March 31, 2024 (2023: $0.5 million). The effective interest rate applied to the liability portion of the Private Placement Loan Notes in 2023 after the amendments was 27.1% while the effective interest rate applied in 2023 before the amendments was 25.1%.

11. Warrant liability

 

 

 

 

 

 

 

Warrant labilities

 

 

 

 

($'000)

 

 

At January 1, 2023

 

$

643

 

 

Fair value changes during the year

 

 

(245

)

 

Foreign exchange

 

 

14

 

 

At December 31, 2023

 

 

412

 

 

Fair value changes during the quarter

 

 

448

 

 

Foreign exchange

 

 

(5

)

 

At March 31, 2024

 

$

855

 

 

 

The change in fair value of the warrant liability represents an unrealized loss in the quarter ended March 31, 2024 and an unrealized gain in the quarter ended March 31, 2023.

Warrant liability – private placement

As a part of a private placement transaction on June 3, 2020, the participating investors received conditional warrants entitling them to subscribe for an aggregate of 161,048,366 ordinary shares in the Company at an exercise price of £0.348 per warrant and were exercisable until June 2023 when they expired. The warrants were classified as liabilities as the Company did not have an unconditional right to avoid redeeming the instruments for cash. As the warrants expired in 2023, the fair value of the warrant liability was $nil as of both March 31, 2024 and December 31, 2023.

Warrant liability – bank loan

As of March 31, 2024, the former lenders of the Company have warrants outstanding to purchase a total of 1,243,908 ordinary shares at an exercise price of £2.95 per share, exercisable until August 2027 and a total of 1,243,908 ordinary shares at an exercise price of $0.4144 per share, exercisable on dates between August 2027 and October 2028.

The fair value of these warrants was $0.9 million and $0.4 million at March 31, 2024 and December 31, 2023 respectively. The change in the fair value of $0.4 million was recognized as a loss in the unaudited condensed consolidated statements of operations and comprehensive loss. There were no warrants exercised during either the quarter ended March 31, 2024 or 2023.

Total outstanding warrants

As of March 31, 2024 and December 31, 2023, a total of 2,487,816 warrants are outstanding. These warrants outstanding are equivalent to 0.4% of the issued ordinary share capital of the Company at March 31, 2024 and December 31, 2023.

11


 

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

 

 

March 31,

 

 

December 31,

 

 

 

2024

 

 

2023

 

Expected volatility (%)

 

 

90

 

 

 

102

 

Risk-free interest rate (%)

 

 

3.80

 

 

 

3.36

 

Expected life of warrants (years)

 

 

3.9

 

 

 

5.2

 

Market price of ADS ($)

 

 

3.41

 

 

 

2.31

 

Model used

 

Black-Scholes

 

 

Black-Scholes

 

 

12. Shareholders’ Equity

Common Shares

 

 

Number of
ordinary shares

 

 

Cost
($'000)

 

At January 1, 2023 and March 31, 2023

 

 

624,928,519

 

 

 

2,478

 

 

 

 

 

 

 

 

At January 1, 2024

 

 

701,217,089

 

 

 

2,775

 

Share options exercised in the quarter

 

 

132,345

 

 

 

 

At March 31,2024

 

 

701,349,434

 

 

 

2,775

 

 

During the quarter ended March 31, 2024, 132,345 ordinary shares were issued due to the exercise of employee share options in March. The exercise of employee share options were satisfied by delivering shares from the Employee Benefit Trust until all of the shares in the Employee Benefit Trust were used and the trust was terminated.

13. Share based compensation

The Company currently grants equity awards under the Mereo 2019 Equity Incentive Plan (the "2019 EIP") and the 2019 Non-Employee Equity Incentive Plan (the “2019 NED EIP”). There are also still outstanding awards under two previous plans, the 2015 Plan and the Mereo Share Option Plan (together the "Previous Share Option Plans"), however no awards have been granted under these plans since 2016 and no further grants are envisioned.

The total number of ADSs available for issue under the 2019 EIP and 2019 NED EIP was 9.0 million as of March 31, 2024.

The charge for share-based compensation arises solely in respect of awards made under these two active plans as follows:

 

 

Three months ended March 31,

 

 

2024

 

 

2023

 

 

($'000)

 

 

($'000)

 

2019 EIP

 

 

1,459

 

 

 

1,207

 

2019 NED EIP

 

 

591

 

 

 

428

 

Total

 

 

2,050

 

 

 

1,635

 

 

As of March 31, 2024, the total unrecognized compensation cost related to outstanding share awards was $9.3 million, which the Company expects to recognize over a weighted-average period of 1.7 years.

 

 

 

 

 

 

 

 

 

12


 

2019 EIP

The Company has awarded the following instruments under the 2019 EIP:

Market Value Options (“Options”)

A summary of the Company’s Option activity and related information under the 2019 EIP for the three months ended March 31, 2024 is as follows; all outstanding Options are expected to vest:

 

 

Number of
options
(ADSs)

 

 

Weighted
Average
Exercise
Price ($)

 

 

Weighted
Average
Grant
Date Fair
Value ($)

 

 

Aggregate
intrinsic
value
($'000)

 

At December 31, 2023

 

 

9,595,161

 

 

 

1.63

 

 

 

1.41

 

 

 

8,122

 

Granted

 

 

2,414,404

 

 

 

3.36

 

 

 

2.60

 

 

 

120

 

Forfeited

 

 

(40,288

)

 

 

1.77

 

 

 

1.53

 

 

 

67

 

Exercised

 

 

(119,217

)

 

 

3.36

 

 

 

2.78

 

 

 

239

 

Expired

 

 

 

 

 

 

 

 

 

 

 

 

At March 31, 2024

 

 

11,850,060

 

 

 

1.98

 

 

 

1.65

 

 

 

17,349

 

Vested

 

 

4,713,688

 

 

 

1.98

 

 

 

1.67

 

 

 

6,753

 

Nonvested

 

 

7,136,372

 

 

 

1.98

 

 

 

1.64

 

 

 

10,172

 

 

At December 31, 2023, 6,169,952 Options with a weighted average grant date fair value of $1.13 were nonvested. The weighted average per share fair value of options vesting during the quarter ended March 31, 2024 was $1.43 (2023: $1.55).

At March 31, 2024, the weighted average contractual life of Options outstanding was 8.3 years (2023: 8.1 years) and for vested Options was 7.4 years (2023: 7.1 years).

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted market price of the Company’s ADSs for the Options that were in-the-money at March 31, 2024.

The fair value of each Option is estimated on the date of grant using the Black-Scholes option pricing model based on the following weighted average assumptions:

 

 

Three Months Ended
March 31,

 

 

 

2024

 

 

2023

 

Market value of ADSs ($)

 

 

3.36

 

 

 

1.89

 

Risk-free interest rate (%)

 

 

4.01

%

 

 

3.43

%

Expected life (years)

 

 

6.25

 

 

 

10.00

 

Expected volatility (%)

 

 

90.80

%

 

 

98.01

%

Expected dividends

 

 

 

 

 

 

 

The expected volatility assumption is calculated by reference to the historical volatility of an appropriate peer group of companies for a period equal to the expected term of the Option. The grant date fair value is recognized over the requisite service period using the accelerated graded-vesting attribution method.

 

 

 

 

 

13


 

Restricted Stock Units (“RSUs”)

RSUs were first awarded in 2023 and each RSU entitles the holder a conditional right to receive an ADS at no cost upon the completion of the applicable vesting period. RSUs granted under the EIP vest over three years with one-third of the awards vesting on the first anniversary of the grant date and the remainder vesting in four equal six-monthly installments thereafter. Upon vesting of the RSUs, the Company issues the requisite ADSs, a portion of which are sold to satisfy the resulting withholding tax obligations, and the remaining ADSs are delivered to the holder. RSUs have a maximum contractual life of 3.0 years.

A summary of the Company’s RSU activity and related information under the 2019 EIP for 2023 is as follows. As of March 31, 2024 all outstanding RSUs are expected to vest:

 

 

Number of
RSUs
(ADSs)

 

 

Weighted
Average
Grant
Date Fair
Value ($)

 

 

Aggregate
intrinsic
value
($'000)

 

At December 31, 2023

 

 

489,225

 

 

 

1.03

 

 

 

1,130

 

Granted

 

 

204,914

 

 

 

3.36

 

 

 

 

Vested

 

 

(142,583

)

 

 

1.01

 

 

 

481

 

Forfeited

 

 

(23,533

)

 

 

1.36

 

 

 

 

At March 31, 2024

 

 

528,023

 

 

 

1.93

 

 

 

1,801

 

 

At March 31, 2024, the weighted average remaining period of RSUs outstanding was 2.3 years.

The aggregate intrinsic value is calculated as the quoted market price of the Company’s ADSs at March 31, 2024. The fair value of each RSU was calculated by reference to the value of the shares awarded. The grant date fair value is recognized over the vesting period using the accelerated graded-vesting attribution method.

Performance Based Restricted Stock Units (PSUs)

PSUs were first awarded in 2023 and each PSU entitles the holder a conditional right to receive an ADS at no cost upon satisfaction of four escalating ADS price performance targets over a two year performance period following the date of grant. A summary of the Company’s PSU activity and related information under the 2019 EIP for the first quarter of 2024 is as follows. As of March 31, 2024, performance conditions on 802,890 PSUs had been met and the awards will vest in June 2024.

 

 

Number of
PSUs
(ADSs)

 

 

Weighted
Average
Grant
Date Fair
Value ($)

 

 

Aggregate
intrinsic
value
($'000)

 

At December 31, 2023

 

 

1,338,150

 

 

 

0.61

 

 

 

3,091

 

Granted

 

 

 

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

 

 

 

At March 31, 2024

 

 

1,338,150

 

 

 

0.61

 

 

 

4,563

 

 

At March 31, 2024, the weighted average contractual life of PSUs outstanding was 0.3 years.

The grant date fair value is recognized over the expected life using the straight-line attribution method.