vrna-20220630

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 June 30, 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 August 3, 2022, the registrant had 487,633,374 ordinary shares, nominal value £0.05 per share, outstanding, which if all held in ADS form, would be represented by 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	15
Item 3	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4	Controls and Procedures	28
PART II - OTHER INFORMATION
Item 1	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3	Defaults Upon Senior Securities	29
Item 4	Mine Safety Disclosure	29
Item 5	Other Information	29
Item 6	Exhibits	30
Signatures		31

PART I - FINANCIAL INFORMATION

Item 1. Financial statements

Verona Pharma plc

Condensed Consolidated Balance Sheets

(unaudited)

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


	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

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 Operations and Comprehensive Loss

(unaudited)

(in thousands, except per share amounts)


	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		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 one wholly-owned subsidiary, Verona Pharma, Inc., a Delaware 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 $306.7 million as of June 30, 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 June 30, 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 six months ended June 30, 2022, the Company sold 80,696 ordinary shares (equivalent to 10,087 ADSs) under the ATM Program, at an average price of approximately $0.86 per share (equivalent to $6.86 per ADS), raising aggregate net proceeds of approximately $0.1 million after deducting issuance costs. As of June 30, 2022, there remained 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 March 3, 2022 (the “2021 Form 10-K”). The Consolidated Balance Sheet as of December 31, 2021, was derived from audited consolidated financial statements included in the 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.

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.

Segment reporting

Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company has one 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 fair value of warrants, research and development tax credit and the carrying value of the equity interest 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 - Tax and tax incentive receivables

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


	June 30,		December 31,
	2022		2021
Research and development tax credit receivable - U.K.	$	20,185	$	15,583

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 4 - Accrued expenses

Accrued expenses consisted of the following (in thousands):


	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 5 - 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 June 30, 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 June 30, 2022, the carrying value of the Term Loan was approximately $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.

Verona Pharma plc

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 7 - 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 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 our unaudited condensed consolidated balance sheets. 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 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.

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 year ended December 31, 2021, and the $40.0 million revenue was therefore recognized as revenue in the year ended December 31, 2021. Revenue relating to the manufacture and supply obligations will be recognized when the drug product is delivered.

Verona Pharma plc

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 8 - 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 June 30,				Six months ended June 30,
	2022		2021		2022		2021
Research and development	$	1,330	$	3,234	$	2,869	$	6,666
Selling, general and administrative	1,723		4,217		3,932		9,634
Total	$	3,053	$	7,451	$	6,801	$	16,300

Share options

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


	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:


	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

Verona Pharma plc

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 9 - Net loss per share

Net 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 ordinary shares. The following table shows the computation of basic and diluted net loss per share for the three and six months ended June 30, 2022 and 2021 (net loss in thousands, loss per share in dollars):


	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 June 30, 2022 and 2021, outstanding share options, RSUs and warrants over 46,183,144 and 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.

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 next 12 months.

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, 2021 filed with the Securities and Exchange Commission on March 3, 2022 (the “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, 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 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”).

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 (

SEC Form 10-Q filed by Verona Pharma plc