1.         General information

Verona Pharma plc (the "Company") and its subsidiaries (together, the "Group") are a clinical‑stage biopharmaceutical group focused on developing and commercialising innovative therapeutics for the treatment of respiratory diseases with significant unmet medical needs.

The Company is a public limited company, which is listed on the Alternative Investment Market of the London Stock Exchange and incorporated and domiciled in the United Kingdom.

The Company has two subsidiaries, Verona Pharma, Inc. and Rhinopharma Limited ("Rhinopharma"), both of which are wholly owned.

On 8 February, 2017 the Company effected a 50-for-1 consolidation of its shares. Prior to the consolidation the total number of issued shares as at 31 December, 2016 would read as 2,568,053,160 shares and after the consolidation this number would read as 51,361,063 shares. Earnings per share information has been retrospectively adjusted to reflect the consolidation as if it had occurred at the beginning of the accounting period.

2.         Accounting policies

A summary of the principal accounting policies, all of which have been applied consistently throughout the year, is set out below.

2.1       Basis of preparation

The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the European Union and the Companies Act 2006 applicable to companies reporting under IFRS. The consolidated financial statements have been prepared under the historical cost convention, with the exception of derivative financial instruments which have been measured at fair value.

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group's accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in note 4.

Going concern

During the year ended 31 December, 2016, the Group had a loss of £5,018 thousand (2015: £7,493 thousand). As of 31 December, 2016, the Group had net assets of £34,468 thousand (2015: £5,434 thousand) of which £39,785 thousand (2015: £3,524 thousand) was cash and cash equivalents.

The operation of the Group is currently being financed from funds that the Company raised from share placings. On July 29, 2016, the Company raised gross proceeds of £44.7 million from a placing, subscription and open offer (the "July Placement"). These funds are expected to be used primarily to support the development of RPL554 in chronic obstructive pulmonary disease ("COPD") as well as corporate and general administrative expenditures.

The Directors believe that the Group has sufficient funds to complete the current clinical trials, to cover corporate and general administration costs and for it to comply with all commitments for at least 12 months from the end of the reporting period and, accordingly, are satisfied that the going concern basis remains appropriate for the preparation of these consolidated financial statements.

 

2.         Accounting policies (continued)

Business combination

The Group applies the acquisition method to account for business combinations regardless of whether equity instruments or other assets are acquired. The consideration transferred for the acquisition of a subsidiary is the fair value of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement and the fair value of any pre‑existing equity interest in the subsidiary. The excess of the cost of acquisition over the fair value of the Group's share of the identifiable net assets acquired is recorded as goodwill. Goodwill arising on acquisitions is capitalised and is subject to an impairment review, both annually and when there are indications that the carrying value may not be recoverable.

Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. Acquisition‑related costs are expensed as incurred and included in administrative expenses.

Basis of consolidation

These consolidated financial statements include the accounts of Verona Pharma plc and its wholly owned subsidiaries Verona Pharma, Inc. and Rhinopharma. The acquisition method of accounting was used to account for the acquisition of Rhinopharma.

Inter‑company transactions, balances and unrealised gains on transactions between Group companies are eliminated.

Verona Pharma Inc. and Rhinopharma adopt the same accounting policies as the Company.

2.2       Correction of errors in 2015 Group and Company comparative figures

Acquisition of Rhinopharma Limited

On September 19, 2006, the Group acquired Rhinopharma for a total consideration of £1,520 thousand payable in ordinary shares. Net assets of £51 thousand were recorded as part of the acquisition, resulting in excess consideration of £1,469 thousand, which was classified in its entirety as goodwill in the statement of financial position.

During 2016, the Group identified an error relating to the accounting for this acquisition. After further due diligence it has been identified that the excess consideration should have been recorded as an in‑process research and development intangible ("IP R&D") and a corresponding deferred tax liability should have been recorded in relation to this intangible. In addition, there was a financial liability in relation to an assumed contingent obligation that Rhinopharma held with Vernalis plc ("Vernalis") that was not identified and fair valued at the date of the acquisition. The intangible asset and the financial liability should have been recognised at fair value on the acquisition date. The impact of these to the Group and Company as of the time of the acquisition was as follows:

•           Reclassification from goodwill to IP R&D of £1,469 thousand;

•           Recognition of a deferred tax liability of £441 thousand; and

•           Recognition of goodwill of £441 thousand.

The assumed contingent obligation was deemed to be insignificant at the acquisition date and therefore not recognised.

 

2.         Accounting policies (continued)

Subsequent to the business combination the following should have been applied:

Goodwill and IP R&D are not amortised as explained in the accounting policy in note 2.8 and should be annually tested for impairment. The cash generating unit ("CGU") has been tested for impairment annually and no impairment has been recorded.

The assumed contingent obligation is subsequently carried at amortised cost using the effective interest method. Further, since 2006, a corresponding deferred tax asset has been recognised in relation to Verona Pharma plc losses which offset the deferred tax liability.

The financial statements have been restated retrospectively for these errors. The entries to the 2015 opening Consolidated Statement of Financial Position as of 1 January, 2015 are:

•        an IP R&D asset of £1,469 thousand;

•        an assumed contingent obligation of £522 thousand;

•        a decrease in goodwill of £1,028 thousand; and

•        a reduction in accumulated loss of £81 thousand.

The entries to the Consolidated Statement of Financial Position on 31 December, 2015 as a result of the errors identified, are:

•        an IP R&D asset of £1,469 thousand;

•        an assumed contingent obligation of £594 thousand;

•        a decrease in goodwill of £1,028 thousand; and

•        a reduction in accumulated loss of £81 thousand.

As a consequence the net impact on the Consolidated Statement of Comprehensive Income for 2015 is:

•        a £72 thousand finance expense in respect of the movement in the value of the assumed contingent obligation. Further details are set out in note 21 to these consolidated financial statements.

The following tables set forth a summary of the restatements performed:

1 January, 2015

Financial statement element		Pre restatement £'000	Correction amount	Post restatement £'000
Intangibles - IP R&D.................................................................		-	1,469	1,469
Assumed contingent obligation.......................................................		-	(522)	(522)
Goodwill.......................................................................................		1,469	(1,028)	441
Accumulated loss.........................................................................		15,733	81	15,814

31 December, 2015

Financial statement element			Pre restatement £'000	Correction amount	Post restatement £'000
Intangibles - IP R&D................................................................			-	1,469	1,469
Assumed contingent obligation......................................................			-	(594)	(594)
Goodwill......................................................................................			1,469	(1,028)	441
Accumulated loss.........................................................................			23,096	81	23,177
Finance expense..........................................................................			-	72	72

 

2.         Accounting policies (continued)

The business within Rhinopharma was hived up to the Company immediately after the acquisition of Rhinopharma by the Group. The hive-up was accounted for in the Company's separate financial statements using the acquisition values for Rhinopharma. Therefore the error relating to the initial business combination accounting is also reflected in the separate financial statements of the Company.

Reclassifications

During the period, five reclassifications have been made to the 31 December, 2015 primary statements as follows:

·       Taxation recoverable amounting to £1,535 thousand has been reclassified from prepayments and other receivables to current tax receivable (for both Group and Company).

·       Computer software with a net book value of £1 thousand has been reclassified from property, plant and equipment to intangible assets (for both Group and Company).

·       Exchange differences arising on translating foreign operations have been reclassified from research and development to other comprehensive gains due to an error in the prior period amounting to £4 thousand (for the Group only).

·       Transfers of previously expensed share‑based payment charges upon lapse of options between the share‑based payment reserve and the total accumulated losses have been reclassified amounting to £503 thousand (both for Group and Company).

·       US taxation payable amounting to £14 thousand has been reclassified from trade and other payables to tax payable - US operations (for the Group only).

The following table sets forth a reconciliation of Group accumulated loss before restatements and reclassifications to the accumulated loss following the restatements and reclassifications.

1 January, 2015

	Group £'000	Company £'000
Accumulated loss before restatements/reclassification............................................	15,733	15,750
Impact of business combination restatement...........................................................	81	65
Accumulated loss following restatement above.......................................................	15,814	15,815
Impact of reclassification from the share based payment reserve.............................	449	449
Accumulated losses per the statement of changes in equity.....................................	16,263	16,264

31 December, 2015

	Group £'000	Company £'000
Accumulated loss before restatements/reclassification............................................	23,096	23,138
Impact of business combination restatement...........................................................	81	65
Accumulated loss following restatement above.......................................................	23,177	23,203
Assumed contingent obligation income statement charge.........................................	72	72
Impact of reclassification from the share based payment reserve.............................	503	503
Accumulated losses per the statement of changes in equity.....................................	23,752	23,778

 

 

2.         Accounting policies (continued)

IAS 8 requires the disclosure of an opening balance sheet when an error has occurred before the earliest period presented. Management has judged that this disclosure gives sufficient information for a user to understanding the impact on the opening balance sheet. Management has also judged due to the nature of this adjustment, which is mainly a balance sheet gross up that not including the full opening balance sheet would not be misleading to the user.

2.3       Foreign currency translation

Items included in the Group's consolidated financial statements are measured using the currency of the primary economic environment in which the Group operates ("the functional currency"). The consolidated financial statements are presented in pounds sterling ("£"), which is the functional and presentational currency of the Company and the presentational currency of the Group.

Transactions in foreign currencies are recorded using the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated using the rate of exchange ruling at the balance sheet date and the gains or losses on translation are included in the Consolidated Statement of Comprehensive Income. Non‑monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the original transactions. Non‑monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.

The assets and liabilities of foreign operations are translated into pounds sterling at the rate of exchange ruling at the balance sheet date. Income and expenses are translated at weighted average exchange rates for the period. The exchange differences arising on translation for consolidation are recognised in Other Comprehensive Income.

2.4       Cash and cash equivalents

Cash and cash equivalents includes cash in hand, deposits held at call with banks, and other short‑term highly liquid investments with original maturities of three months or less.

2.5       Deferred taxation

Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and expected to apply when the related deferred tax is realised or the deferred liability is settled.

Deferred tax assets are recognised to the extent that it is probable that the future taxable profit will be available against which the temporary differences can be utilised.

2.6       Research and development costs

Capitalisation of expenditure on product development commences from the point at which technical feasibility and commercial viability of the product can be demonstrated and the Group is satisfied that it is probable that future economic benefits will result from the product once completed. No such costs have been capitalised to date, given the early stage of the Group's product candidate development.

Expenditure on research and development activities that do not meet the above criteria is charged to the Consolidated Statement of Comprehensive Income as incurred.

 

2.         Accounting policies (continued)

2.7       Property, plant and equipment

Property, plant and equipment are stated at cost, net of depreciation and any provision for impairment. Cost includes the original purchase price of the asset and the costs attributable to bringing the asset to its working condition for its intended use. Depreciation is calculated so as to write off the cost less their estimated residual values, on a straight‑line basis over the expected useful economic lives of the assets concerned. The principal annual periods used for this purpose are:

Computer hardware......................................................................	3 years
Office equipment..........................................................................	5 years

2.8       Intangible assets and goodwill

(a)        Goodwill

Goodwill arises on the acquisition of subsidiaries and represents the excess of the consideration transferred over the fair value of the identifiable net assets acquired.

(b)        Patents

Patent costs associated with the preparation, filing, and obtaining of patents are capitalised and amortised on a straight‑line basis over the estimated useful lives of the patents of ten years.

(c)        Computer software

Amortisation is calculated so as to write off the cost less estimated residual values, on a straight‑line basis over the expected useful economic life of two years.

 (d)       In‑process research & development

IP R&D assets acquired through business combinations which, at the time of acquisition, have not reached technical feasibility are recognised at fair value. The amounts are capitalised and are not amortised but are subject to impairment testing until completion, abandonment of the projects or when the research findings are commercialised through a revenue generating project. The Group determines whether intangible assets (including goodwill) are impaired on an annual basis and this requires the estimation of the higher of fair value less costs of disposal and value in use. Upon successful completion or commercialisation of the relevant project, IP R&D will be reclassified to developed technology. The Group will make a determination as to the then useful life of the developed technology, generally determined by the period in which the substantial majority of the cash flows are expected to be generated, and begin amortisation. In case of abandonment the asset will be impaired.

2.9       Impairment of intangible assets, goodwill and non‑financial assets

Goodwill and intangible assets that have an indefinite useful life and intangible assets not ready to use are not subject to amortisation. These assets are tested annually for impairment or more frequently if impairment indicators exist. Non‑financial assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value (less costs of disposal) and value in use.

For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows, which are largely independent of the cash flows from other assets or group of assets (i.e. CGU).

 

2.         Accounting policies (continued)

Goodwill is allocated to CGUs for the purpose of impairment testing. The allocation is made to those CGUs or groups of CGUs that are expected to benefit from the business combination in which the goodwill arose. The units or group of units are identified at the lowest level at which goodwill is monitored for internal management purposes, being the operating segments.

The Group is a single cash generating unit. Goodwill that arose on the acquisition of Rhinopharma has been thus allocated to this single CGU. IP R&D is tested for impairment at this level as well, since it is the lowest level at which independent cash flows can be identified.

Non‑financial assets, other than goodwill, that have been previously impaired are reviewed for possible reversal of the impairment at each subsequent reporting date.

2.10     Employee Benefits

(a)        Pension

The Group operates a defined contribution pension scheme for UK employees. Contributions payable for the year are charged to the Consolidated Statement of Comprehensive Income. The contributions are recognised as employee benefit expense when they are due. Differences between contributions payable in the year and contributions actually paid are shown as either accruals or prepayments in the Consolidated Statement of Financial Position. The Group has no further payment obligation once the contributions have been paid.

(b)        Bonus plans

The Company recognises a liability and an expense for bonus plans if contractually obligated or if there is a past practice that has created a constructive obligation.

2.11     Share‑based payments

The Group operates a number of equity‑settled, share‑based compensation schemes. The fair value of share‑based payments under such schemes is expensed on a straight‑line basis over the vesting period, based on the Group's estimate of shares that will eventually vest.

Where equity-settled transactions are entered into with third party service providers, fair value is determined by reference to the value of the services provided in lieu of payment. The expense is measured based on the services received at the date of receipt of those services and is charged to the Consolidated Statement of Comprehensive Income over the period for which the services are received and a corresponding credit is made to reserves. For other equity‑settled transactions fair value is determined using the Black‑Scholes model and requires several assumptions and estimates as disclosed in note 20.

For equity settled share-based payments where employees of subsidiary undertakings are rewarded with shares issued by the parent company, a capital contribution is recorded in the subsidiary with a corresponding increase in the investment by the parent company.

2.12     Provisions

Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and the amount can be reliably estimated. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre‑tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation.

 

2.         Accounting policies (continued)

2.13     Assumed contingent obligation related to the business combinations

On September 19, 2006, the Company acquired Rhinopharma for a total consideration of £1,520 thousand payable in ordinary shares. In addition, the Group assumed certain contingent obligations owed by Rhinopharma to Vernalis under an assignment and license agreement (the "assumed contingent consideration") following the sale of IP by Vernalis to Rhinopharma. Pursuant to the agreement, Vernalis (i) assigned to the Company all of its rights to certain patents and patent applications relating to RPL554 and related compounds (the "Vernalis Patents") and (ii) granted to the Company an exclusive, worldwide, royalty‑bearing license under certain Vernalis know‑how to develop, manufacture and commercialise products (the "Licensed Products") developed using Vernalis Patents, Vernalis know‑how and the physical stock of certain compounds.

The assumed contingent obligation comprises (a) a milestone payment on obtaining the first approval of any regulatory authority for the commercialisation of a Licensed Product; (b) low‑to‑mid single digit royalties based on the future sales performance of all Licensed Products; and (c) a portion equal to a mid‑twenty percent of any consideration received from any sub‑licensees for the Vernalis Patents and for Vernalis know‑how.

On the date of acquisition the fair value of the assumed contingent obligation was estimated as the expected value of the milestone payment, royalty payments and sub‑license payments, based on management's estimate of the likely probability of success. The risk‑weighted value of the assumed contingent arrangement was then discounted back to its net present value applying an effective interest rate of 12%. The initial fair value of the assumed contingent obligation as of 31 December, 2006 was deemed to be insignificant at the date of the acquisition, so it was not recorded.

The amount of royalties payable under the agreement is based on the future sales performance of certain products, and so the total amount payable is unlimited. The level of sales that may be achieved under the agreement is inherently uncertain and difficult to predict and the range of outcomes cannot be reliably estimated.

The value of this assumed contingent obligation is measured at amortised cost using the effective interest rate method, and is re-measured for changes in estimated cash flows, which may include charges based upon management's assessment as to the timing or the probability of achieving the various outcomes which trigger payment, or due to the time value of money, or due to changes in exchange rates, which affect the expected value of future net sales made in foreign currencies. The assumed contingent obligation is accounted for as a liability, and any adjustments made to the value of the liability will be recognised in the Consolidated Statement of Comprehensive Income for the period.      

2.14     Government and other grants

The Group may receive government, regional or charitable grants to support its research efforts in defined projects where these grants provide for reimbursement of approved costs incurred as defined in the respective grants. Income in respect of such grants would include contributions towards the costs of research and development. Income would be recognised when costs under each grant are incurred in accordance with the terms and conditions of the grant and the collectability of the receivable is reasonably assured. Government, regional and charitable grants relating to costs would be deferred and recognised in the Consolidated Statement of Comprehensive Income over the period necessary to match them with the costs they are intended to compensate. When the cash in relation to recognised government, regional or charitable grants is not yet received the amount is included as a receivable on the Consolidated Statement of Financial Position.

 

2.         Accounting policies (continued)

Where the grant income is directly related to the specific items of expenditure incurred, the income would be netted against such expenditure. Where the grant income is not a specific reimbursement of expenditure incurred, the Group would include such income under "Other income" in the Consolidated Statement of Comprehensive Income. Grants or investment credits may be repayable if the Group successfully commercialises a relevant program that was funded in whole or in part by the grant or investment credit within a particular timeframe. Prior to successful commercialisation, the Group would not make any provision for repayment.

2.15     Financial instruments-initial recognition and subsequent measurement

Initial recognition

The Company classifies a financial instrument, or its component parts as a financial liability, a financial asset or an equity instrument in accordance with the substance of the contractual arrangement and the definitions of a financial liability, a financial asset and an equity instrument.

The Company evaluates the terms of the financial instrument to determine whether it contains an asset, a liability or an equity component. Such components shall be classified separately as financial assets, financial liabilities or equity instruments.      

A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

(a)        Financial assets, initial recognition and measurement

All financial assets, such as receivables and deposits, are recognised initially at fair value plus transaction costs, for all financial assets not recorded at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognised at fair value, and transaction costs are expensed in the income statement.

 (b)       Financial liabilities, initial recognition and measurement

Financial liabilities are classified, at initial recognition, as financial liabilities at fair value through profit or loss, loans and borrowings, or payables, as appropriate. All financial liabilities are recognised initially at fair value and, in the case of loans and borrowings and payables, net of directly attributable transaction costs.

The Group's financial liabilities include trade and other payables and derivative financial instruments.

(c)        Subsequent measurement

The measurement of financial assets and financial liabilities depends on their classification.

Financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial liabilities designated upon initial recognition as at fair value through profit or loss. These are subsequently measured at fair value with any gains or losses recognised in profit or loss. All other financial liabilities are measured at amortised cost using the effective interest method.

Financial assets such as receivables and deposits are subsequently measured at amortised cost. The Group does not hold any financial assets at fair value through profit or loss or available for sale financial assets.

(d)        Derivative financial instruments

Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured at fair value at the end of each reporting date. The Company holds only one type of derivative financial instrument, the warrants, as explained in Note 2.16.

The full fair value of the derivative is classified as a non-current asset or liability when the item is more than 12 months and as a current asset or liability when the remaining maturity of the item is less than 12 months.

2.         Accounting policies (continued)

Changes in fair value of a derivative financial liability when related to a financing arrangement are recognised in the Consolidated Statement of Comprehensive Income within Finance income or Finance expense. Fair value gains or losses on derivatives used for non-financing arrangements are recognised in other operating income or expense.

2.16     Warrants

Warrants issued by the Company to investors as part of a share subscription are compound financial instruments where the warrant meets the definition of a financial liability. A compound financial instrument is separated into its equity and financial liability component.

The financial liability component is initially measured at fair value in the Consolidated Statement of Financial Position. Equity is measured at the residual between the subscription price for the entire instrument and the liability component.  Subsequently the financial liability component is subsequently remeasured depending on its classification. Equity is not subsequently remeasured.

2.17     Transaction costs

Qualifying transaction costs are often incurred in anticipation of an issuance of equity instruments and may cross reporting periods. The entity defers these costs on the balance sheet until the equity instrument is recognised. Deferred costs are subsequently reclassified as a deduction from equity when the equity instruments are recognised, to the extent that the costs are directly attributable to the equity transaction.  If the equity instruments are not subsequently issued, the transaction costs are expensed. Any costs not directly attributable to the equity transaction are expensed.

Transaction costs that relate to the issue of a compound financial instrument are allocated to the liability and equity components of the instrument in proportion to the allocation of proceeds.  Where the liability component is held at fair value through profit or loss, the transaction costs are expensed to the Consolidated Statement of Comprehensive Income. For liabilities held at amortised cost, transaction costs are deducted from the liability and subsequently amortised. The amount of transaction costs accounted for as a deduction from equity in the period is disclosed separately in accordance with IAS 1.

2.18     Investments in subsidiaries

Investments in subsidiaries are shown at cost less any provision for impairment.

2.19     New standards, amendments and interpretations adopted by the Group

The following amendment has been adopted by the Group for the first time for the financial year beginning on or after 1 January, 2016. It did not materially impact the Group's results:

·        Annual Improvements 2014 (2012-2014 cycle)

 

2.         Accounting policies (continued)

2.20     New standards, amendments and interpretations issued but not effective for the financial year beginning 1 January, 2016 and not early adopted

A number of new standards and amendments to standards and interpretations have been issued but are not yet effective for annual periods beginning after 1 January, 2017 (noted below), and have not been adopted in preparing these consolidated financial statements.

•        IFRS 9) "Financial instruments" (effective for annual periods beginning on or after 1 January, 2018)

•        IFRS 15 "Revenue from contracts with customers" (effective for annual periods beginning on or after 1 January, 2018

•        IFRS 16 "Leases" (effective for annual periods beginning on or after 1 January, 2019)

IFRS 9 is not expected to have a material impact on the accounting for the assumed contingent obligation or the derivative financial instrument. IFRS 15 and 16 will have an immaterial impact on the financial statements of the Group as the Group is not currently revenue generating and does not have any leases of over one year.

3.         Financial Instruments

3.1       Financial Risk Factors

The Group's activities have exposed it to a variety of financial risks: market risk (including currency risk and interest rate risk), credit risk, and liquidity risk. The Group's overall risk management program is focused on preservation of capital and the unpredictability of financial markets and has sought to minimise potential adverse effects on the Group's financial performance and position.     

(a)        Currency risk

Foreign currency risk reflects the risk that the Group's net assets will be negatively impacted due to fluctuations in exchange rates. The Group has not entered into foreign exchange contracts to hedge against gains or losses from foreign exchange fluctuations. As of 31 December, 2016, cash and cash equivalents included €282 thousand, US $13,110 thousand, and SEK 20 thousand, and accounts payable and accrued liabilities included balances of €211 thousand and US $375 thousand.

Foreign currency denominated trade payables are short term in nature (generally 30 to 45 days). The Group has a US-operation, whose net assets are exposed to foreign currency translation risk.

(b)        Credit risk

Credit risk reflects the risk that the Group may be unable to recover contractual receivables. The Group is still in the development stage; therefore, no policies are required at this time to mitigate this risk.      

For banks and financial institutions, only independently rated parties with a minimum rating of "B+" are accepted. The Directors recognise that this is an area in which they may need to develop specific policies should the Group become exposed to further financial risks as the business develops.

 

3.         Financial Instruments (continued)

As of 31 December, 2016 and 31 December, 2015, the majority of cash and cash equivalents were placed at the following banks:

	Year ended 31 December, 2015	Credit rating	Year ended 31 December, 2016	Credit rating
	£ thousands		£ thousands
Banks
Royal Bank of Scotland............................................................................................	63	A3	11,287	A3
Lloyds Bank............................................................................................................	3,460	A1	28,447	A1
Wells Fargo (1).........................................................................................................	1	Aa1	51	Aa2
Total.......................................................................................................................	3,524		39,785

 

⁽¹⁾    The Wells Fargo account holds the operating account for the Verona Pharma Inc. US operations.

(c)        Management of capital

The Group considers capital to be its equity reserves. At the current stage of the Group's life cycle, the Group's objective in managing its capital is to ensure funds raised meet the research and operating requirements until the next development stage of the Group's suite of projects.

The Group ensures it is meeting its objectives by reviewing its Key Performance Indicators ("KPIs") to ensure the research activities are progressing in line with expectations, costs are controlled and unused funds are placed on deposit to conserve resources and increase returns on surplus cash held.

(d)        Interest rate risk

As of 31 December, 2016, the Group had cash deposits of £39,785 thousand (2015: £3,524 thousand). The rates of interest received during 2016 ranged between 0.0% and 0.5%. The Group's exposure to interest rate risk, which is the risk that the interest received will fluctuate as a result of changes in market interest rates on classes of financial assets and financial liabilities, was as follows:

	31 December, 2016
	Floating interest rate	Fixed Interest rate
	£	£
Financial asset
Cash deposits............................................................................................	11,338,225	28,446,873

 

 

3.         Financial Instruments (continued)

 (e)       Liquidity risk

The Group prepares periodic working capital forecasts for the foreseeable future, allowing an assessment of the cash requirements of the Group, to manage liquidity risk. The following table provides an analysis of the remaining contractually agreed cash flows for the Group's non‑derivative financial liabilities on an undiscounted basis, which therefore differs from both the carrying value and fair value. Balances due within 12 months equal their carrying value balances as the impact of discounting is not significant.

	LESS THAN 1 YEAR	BETWEEN 1 AND 2 YEARS	BETWEEN 2 AND 5 YEARS	OVER 5 YEARS(1)
At 31 December, 2015	£	£	£	£
Trade payables.................................................................	1,108,991	-	-	-
Corporation tax payable - US operation.............................	14,057	-	-	-
Trade payables due to related parties.................................	172,955	-	-	-
Other payables.................................................................	40,907	-	-	-
Total...............................................................................	1,336,910	-	-	-

⁽¹⁾             This table excludes a milestone payment, which may fall due under the assumed contingent obligation, of £5 million and sales based royalties.

	LESS THAN 1 YEAR	BETWEEN 1 AND 2 YEARS	BETWEEN 2 AND 5 YEARS	OVER 5 YEARS(1)
At 31 December, 2016	£	£	£	£
Trade payables................................................................	592,931	-	-	-
Corporation tax payable - US operation............................	126,063	-	-	-
Trade payables due to related parties................................	-	-	-	-
Other payables................................................................	180,567	-	-	-
Total..............................................................................	899,561	-	-	-

⁽¹⁾             This table excludes a milestone payment which may fall due under the assumed contingent obligation, of £5 million and sales based royalties.

3.2       Fair value estimation

            The carrying amounts of cash and cash equivalents, receivables, accounts payable, accrued liabilities and the assumed contingent obligation, approximate to fair value due to their short‑term nature.

For financial instruments that are measured in the Consolidated Statement of Financial Position at fair value, IFRS 7 requires disclosure of fair value measurements by level of the following fair value measurement hierarchy:

·     Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1); 

·     Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly (level 2); and

·     Inputs for the asset or liability that are not based on observable market data (level 3).

For the year ended 31 December, 2016 and 2015 fair value adjustments to financial instruments through profit and loss resulted in the recognition of finance income of £1,068 thousand and £nil respectively.

 

3.         Financial Instruments (continued)

The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity specific estimates. If all significant inputs required to ascertain the fair value of an instrument are observable, the instrument is included in level 2. If one or more of the significant inputs are not based on observable market data, the instrument is included in level 3. The carrying amount of a financial asset or financial liability is a reasonable approximation of the fair value and therefore information about the fair values of each class has not been disclosed.

 

	Level 1	Level 2	Level 3	Total
At 31 December, 2016	£	£	£	£
Derivative financial instrument .........................................	- -	- -	7,922,603 7,922,603	7,922,603 7,922,603
Total...............................................................................

Movements in Level 3 items during the year ended 31 December, 2016 are as follows:

			Derivative financial instrument		Total
At 1 January, 2016		£		£
Initial recognition of derivative financial instrument...............		8,990,794		8,990,794
Fair value adjustments recognised in profit or loss................		(1,068,191) 7,922,603		(1,068,191) 7,922,603
At 31 December, 2016...................................................

Further details relating to the derivative financial instrument are set out in notes 4 and 22 of these financial statements.

In determining the fair value of the derivative financial instrument the Company applied the Black Scholes model; key inputs include the share price at reporting date, estimations on timelines, volatility and risk-free rates. These assumptions and the impact of changes in these assumptions, where material, are disclosed in note 22.

4.         Critical accounting estimates

The preparation of financial statements in conformity with IFRS requires the use of accounting estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Although these estimates are based on management's best knowledge of current events and actions, actual results ultimately may differ from those estimates. IFRS also requires management to exercise its judgement in the process of applying the Group's accounting policies.

The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are as follows:

(a)  Impairment of intangible assets

The Group is required to test goodwill and the IP R&D annually for impairment in accordance with the accounting policy in note 2.9. Goodwill and the IP R&D are tested for impairment at the Group level, which is viewed as a single CGU in accordance with the accounting policy in note 2.9.

The Group determines the recoverable amount of the single CGU and compares it to its carrying amount. Impairment is recognised when the carrying amount exceeds the recoverable amount of the CGU.

Determining the recoverable amount of the CGU, containing goodwill and IP R&D for impairment purposes requires estimation.

4.         Critical accounting estimates (continued)

Since the Group is a single CGU, the entity measures its recoverable amount with reference to the market capitalisation of the Group, as an indication of the fair value less costs of disposal. Details of the Group's impairment assessment for the CGU containing goodwill and IP R&D are disclosed in notes 16 and 17.

(b)  Share‑based payments

The Group records charges for share‑based payments. For option based share‑based payments management estimates certain factors used in the option pricing model, including volatility, vesting date of options and number of options likely to vest. If these estimates vary from actual occurrence, this will impact the value of the equity carried in reserves. Further details of the Group's estimation of share‑based payments are disclosed in note 20.

(c)  Assumed contingent obligation

The Group has a material obligation for the future payment of royalties and milestones associated with contractual obligations on RPL554, a development product acquired as part of the acquisition of Rhinopharma. The estimation of the fair value of the assumed contingent obligation requires the selection of an appropriate valuation model at the date of acquisition, consideration as to the inputs necessary for the valuation model chosen, the estimation of the likelihood that the regulatory milestone will be achieved and fair value of the future cash flows (for further detail see note 21). The estimates for the assumed contingent obligation are based on a discounted cash flow model. Key assessments and judgements included in the calculation of deferred consideration are:

•        development, regulatory and marketing risks associated with progressing the product to market approval in key target territories;

•        market size and product acceptance by clinicians, patients and reimbursement bodies;

•        gross and net selling price;

•        costs of manufacturing, product distribution and marketing support;

•        launch of competitive products; and

•        discount rate and time to crystallisation of contingent consideration.

In accordance with IAS 39 ("Financial Instruments Recognition and Measurement" (para AG8)), when there is a change in the projected cash flows, the assumed contingent obligation will be remeasured with the change in value going through the Consolidated Statement of Comprehensive Income. The assumed contingent obligation is measured at amortised cost with the discount unwinding in the Consolidated Statement of Comprehensive Income throughout the year. Actual outcomes could differ significantly from the estimates made.

The value of the assumed contingent obligation as of 31 December, 2016 amounts to £802 thousand. (2015: £594 thousand. The increase in value of the assumed contingent obligation during 2016 amounted to £208 thousand (2015: £72 thousand) and was recorded as finance expense. Periodic remeasurement is triggered by changes in updated timelines of achieving commercialisation and updated probabilities of success resulting from clinical programmes. The discount percentage applied is 12 %.

(d)  Valuation of the July 2016 warrants

The fair value is determined by applying the Black-Scholes valuation model and requires several assumptions and estimates as disclosed in note 4(d) and 22.

Pursuant to the July Placement, the Company issued 1,555,796,345 units to new and existing investors at the   placing price of 2.8730p per unit. Each unit comprises one placing share and one warrant. The warrants entitle the investors to subscribe for in aggregate a maximum of 622,318,538 shares.

4.         Critical accounting estimates (continued)

In accordance with IAS 32 and Company accounting policy as disclosed in note 2.17, the Company classified the warrants as a derivative financial liability to be presented on the Company's Consolidated Statement of Financial Position.

The fair value of these warrants is determined by applying the Black-Scholes model. Assumptions are made on inputs such as time to maturity, the share price, volatility and risk free rate, in order to determine the fair value per warrant. For further details please see note 22.

Transaction costs arising on the issues of these shares and warrants are allocated to the equity and warrant liability components in proportion to the allocation of proceeds.

5.         Earnings per share

Basic loss per share of 0.30p (2015: 0.74p) for the Group is calculated by dividing the loss for the year ended 31 December, 2016 by the weighted average number of ordinary shares in issue of 1,674,970,686 as of 31 December, 2016 (2015: 1,009,923,481). Potential ordinary shares are not treated as dilutive as the entity is loss making and such shares would be anti‑dilutive.

After giving effect to the 50-for-1 consolidation of shares (as described in Note 1) the above numbers would read as follows: Basic loss per share of 14.98p (2015: 37.10p) for the Group is calculated by dividing the loss for the year ended 31 December, 2016 by the weighted average number of ordinary shares in issue of 33,499,413 as of 31 December, 2016 (2015: 20,198,469).

6.         Segmental reporting

During 2016, there has been a change to management's assessment of the operating and reporting segments of the Group and how the Chief Operating Decision Maker reviews management information. Management has concluded that the Group's activities now consist of one operating and reportable segment: Drug development. Previously management had two reporting segments: Clinical research for RPL554 and Basic research, which contained VRP700 and NAIP. During the year ended 31 December, 2015, the Group abandoned the development of the product candidates VRP700 and NAIP. As a consequence, management information is only prepared and reviewed for RPL554, resulting in a single operating and reportable segment.

All non‑current assets are based in the United Kingdom.

 

7.         Operating loss

Group	Year ended 31 December, 2015	Year ended 31 December, 2016
	£	£
Operating Loss is stated after charging:
Research and development costs:
Employee benefits  (note 8).........................................................................	1,322,109	2,036,505
Amortisation of patents (note 16).................................................................	43,262	50,972
Loss on disposal of patents (note 16)...........................................................	134,532	8
Other research and development expenses...................................................	5,768,944	2,434,335
Total research and development costs..........................................................	7,268,847	4,521,820
General and administrative costs:
Employee benefits (note 8)..........................................................................	624,821	865,250
Legal and professional fees.........................................................................	608,447	884,040
Amortisation of computer software (note 16)...............................................	166	599
Loss on disposal of property, plant and equipment (note 15)...........................	-	2,625
Depreciation of property, plant and equipment (note 15)................................	9,689	10,051
Operating lease charge - land and buildings................................................	156,632	168,763
Loss on variations in foreign exchange rate..................................................	20,732	139,091
Other general and administrative expenses...................................................	285,457	427,930
Total general and administrative costs..........................................................	1,705,944	2,498,349
Operating loss............................................................................................	8,974,791	7,020,169

During the periods indicated, the Group obtained the services from and paid the fees of the Group's auditors and their associates as detailed below:

	Year ended 31 December, 2015	Year ended 31 December, 2016
	£	£
Audit of Verona Pharma plc and consolidated financial statements............................	25,000	80,000
Audit related services.............................................................................................	-	525,000
IT services review..................................................................................................	9,972	-
Total.....................................................................................................................	34,972	605,000

For the year ended 31 December, 2016, audit related services include assurance reporting on historical financial information included in the Company's U.S. initial public offering registration statement that was confidentially filed with the U.S. Securities and Exchange Commission on November 23, 2016. As per 31 December, 2016 an amount of £466 thousand in relation to these services was booked in deferred IPO costs as they will be offset against share premium on completion of the plans to conduct a registered initial public offering in the United States (the "Global Offering") (see note 12).

 

8.         Directors' emoluments and staff costs

Group	Year ended 31 December, 2015		Year ended 31 December, 2016
The monthly average number of employees of the Group during the year:....................
Research and Development......................................................................................	5		5
General and Administrative.......................................................................................	3		2
Total.......................................................................................................................	8		7
		Year ended 31 December, 2015	Year ended 31 December, 2016
		£	£
Aggregate emoluments of directors:
Salaries and other short‑term employee benefits.........................................................		854,012	1,068,529
Incremental payment for additional services...............................................................		89,051	44,000
Pension costs...........................................................................................................		37,989	18,882
Total directors' emoluments......................................................................................		981,052	1,131,411
Share‑based payment charge....................................................................................		231,790	256,615
Directors' emoluments including share‑based payment charge....................................		1,212,842	1,388,026
		Year ended 31 December, 2015	Year ended 31 December, 2016
		£	£
Aggregate other staff costs:
Wages and salaries..................................................................................................		539,802	1,027,339
Social security costs.................................................................................................		41,966	97,827
Incremental payment for additional services...............................................................		-	57,917
Share‑based payment charge....................................................................................		137,393	319,278
Pension costs...........................................................................................................		14,927	11,368
Total other staff costs..............................................................................................		734,088	1,513,729

The Group operates a defined contribution pension scheme for U.K. employees and executive directors. The total pension cost during the year ended 31 December, 2016 was £30 thousand (2015: £53 thousand). There were no prepaid or accrued contributions to the scheme at 31 December, 2016.

 

9.         Finance income and expense

Group	Year ended 31 December, 2015	Year ended 31 December, 2016
	£	£
Finance income:
Interest received on cash balances............................................................	44,791	86,542
Foreign exchange gain on translating foreign currency denominated bank balances..................................................................................................	-	686,549
Fair value adjustment on derivative financial instruments (note 22)..............	-	1,068,191
Total finance income................................................................................	44,791	1,841,282

 

			Year ended 31 December, 2015		Year ended 31 December, 2016
			£			£
Finance expense:
Transaction costs allocated to the issue of warrants (note 22)....................		-		585,425
Remeasurement of assumed contingent arrangement (note 21)..................		9,239		123,554
Unwinding of discount factor related to the assumed contingent arrangement (note 21)		63,052		84,711
Total finance expense..............................................................................		72,291		793,690

10.       Investment in subsidiaries

The Company currently has two wholly owned subsidiaries, Rhinopharma Limited and Verona Pharma Inc.

		2015	2016
		£	£
Net book amount:
At the start of the year		2	79,593
Capital contribution arising from share-based payments		79,591	162,964
Net book amount at the end of year		79,593	242,557

 

A capital contribution arises where share-based payments are provided to employees of subsidiary undertakings settled with equity to be issued by the Company.

The Company's investments comprise interests in Group undertakings, details of which are shown below:

 

Name of undertaking	Verona Pharma Inc.	Rhinopharma Limited
Country of incorporation	Delaware	British Columbia
	USA	Canada
Description of shares held	$0.001	Without Par Value
	Common stock	Common shares
Proportion of shares held by the Company	100%	100%

 

 

10.       Investment in subsidiaries (continued)

Verona Pharma Inc. was incorporated on the 12 December 2014 under the laws of the State of Delaware, USA and has its registered office at 2711 Centerville Road, Suite 400, City of Wilmington 19808, County of New Castle, Delaware, United States of America.

Rhinopharma Limited is incorporated under the laws of the Province of British Columbia, Canada and has its registered office at Suite 700, 625 Howe Street, Vancouver, British Columbia, Canada V6C 2T6.  Rhinopharma Limited was a drug discovery and development company focused on developing proprietary drugs to treat allergic rhinitis and other respiratory diseases prior to its acquisition by the Company on 18 September 2006.

11.       Taxation

Group	Year ended 31 December, 2015	Year ended 31 December, 2016
	£	£
Analysis of tax credit for the year
Current tax:
UK and US tax ......................................................................................	(1,520,732)	(937,772)
Adjustment in respect of prior periods.......................................................	11,284	(16,412)
Total tax credit.....................................................................................	(1,509,448)	(954,184)
Factors affecting the tax charge for the year
Loss on ordinary activities........................................................................	(9,002,291)	(5,972,577)
Multiplied by standard rate of corporation tax of 20% (2015: 20.25%).........	(1,822,964)	(1,194,515)
Effects of:
Non‑deductible expenses.........................................................................	113,529	78,489
Research and development incentive........................................................	(599,368)	(427,304)
Timing differences not recognised............................................................	(1,880)	(4,131)
Difference in overseas tax rates...............................................................	-	55,581
Tax losses carried forward not recognised................................................	789,951	554,108
	(1,520,732)	(937,772)
Adjustment in respect of prior periods.......................................................	11,284	(16,412)
Total tax credit.....................................................................................	(1,509,448)	(954,184)

 

UK corporation tax is charged at 20% (2015: 20.25%) and US federal tax at 35% (2015: 35%).

 

11.       Taxation (continued)

Deferred tax

The following tables represent deferred tax balances recognised in the Consolidated Statement of Financial Position and the Company Statement of Financial Position, and the movements in both the deferred tax asset and the deferred tax liability.

 

	Year ended 31 December, 2015	Year ended 31 December, 2016
	£	£
Deferred tax assets......................................................................................	265,000	249,749
Deferred tax liabilities...................................................................................	(265,000) -	(249,749) -
Net balances................................................................................................

 

	Year ended 31 December, 2015	Year ended 31 December, 2016
	£	£
Movements on the deferred tax asset
1 January..........................................................................................................	294,000	265,000
Impact of rate changes......................................................................................	(29,000) 265,000	(15,251) 249,749
31 December....................................................................................................

 

	Year ended 31 December, 2015	Year ended 31 December, 2016
	£	£
Movements on the deferred tax liability
1 January..........................................................................................................	(294,000)	(265,000)
Impact of rate changes......................................................................................	29,000 (265,000)	15,251 (249,749)
31 December....................................................................................................

Factors that may affect future tax charges

The Group and Company have UK tax losses available for offset against future profits in the UK. However an additional deferred tax asset has not been recognised in respect of such items due to uncertainty of future profit streams. As of 31 December, 2016, the unrecognised deferred tax asset at 17% is estimated to be £3,149 thousand (2015: £2,819 thousand at 18%).

 

12.       Prepayments and other receivables

Group	As of 31 December, 2015	As of 31 December, 2016
	£	£
Prepayments and accrued income ..........................................................	196,313	1,360,812
Deferred IPO costs................................................................................	-	1,526,829
Other receivables...................................................................................	316,987	70,946
Total prepayments and other receivables..................................................	513,300	2,958,587

Deferred IPO costs relate to the Global Offering. These costs will be offset against share premium in the period in which the Global Offering is completed.

The prepayments balance includes prepayments for insurance and clinical activities.

Company	As of 31 December, 2015	As of 31 December, 2016
	£	£
Prepayments and accrued income ..........................................................	196,313	1,354,959
Deferred IPO costs................................................................................	-	1,526,829
Other receivables...................................................................................	316,987	70,918
Amounts due from group undertakings.....................................................	529	652
Total prepayments and other receivables..................................................	513,829	2,953,358

There are no impaired assets within prepayments and other receivables. Amounts due from group undertakings are unsecured, interest free and have no fixed date of repayment.

13.       Cash and cash equivalents

Group	As of 31 December, 2015	As of 31 December, 2016
	£	£
Cash at bank and in hand........................................................................	3,524,387	39,785,098
Company	As of 31 December, 2015	As of 31 December, 2016
	£	£
Cash at bank and in hand........................................................................	3,523,140	39,733,658

The increase in cash during 2016 resulted from the July Placement.

 

14.       Trade and other payables

Group	As of 31 December, 2015	As of 31 December, 2016
	£	£
Trade payables.................................................................................................	1,108,991	718,994
Trade payables due to related parties.................................................................	172,955	-
Other payables.................................................................................................	40,907	54,504
Accruals..........................................................................................................	475,829	2,049,991
Total trade and other payables...........................................................................	1,798,682	2,823,489

As of 31 December, 2016 accruals include £890 thousand related to expenses associated with the Global Offering.

Company	As of 31 December, 2015	As of 31 December, 2016
	£	£
Trade payables ................................................................................................	1,108,991	718,994
Trade payables due to related parties.................................................................	172,955	-
Other payables ................................................................................................	32,328	53,718
Amounts due to group undertakings...................................................................	135,900	462,131
Accruals..........................................................................................................	467,732	1,915,542
Total trade and other payables...........................................................................	1,917,906	3,150,385

Amounts due to Group undertakings are not interest bearing and have no fixed repayment date.

 

15.       Property, plant and equipment

Group and Company	Computer hardware	Office equipment	Total
	£	£	£
Cost
At 1 January, 2015.............................................................................	41,302	36,461	77,763
Additions...........................................................................................	1,193	-	1,193
At 31 December, 2015........................................................................	42,495	36,461	78,956
Accumulated depreciation
At 1 January, 2015.............................................................................	35,890	20,214	56,104
Charge for the year............................................................................	2,664	7,025	9,689
At 31 December, 2015........................................................................	38,554	27,239	65,793
Net book value
At 31 December, 2015........................................................................	3,941	9,222	13,163
	Computer hardware	Office equipment	Total
	£	£	£
Cost
At 1 January, 2016.............................................................................	42,495	36,461	78,956
Additions...........................................................................................	13,351	-	13,351
Disposals...........................................................................................	(38,845)	(36,461)	(75,306)
At 31 December, 2016........................................................................	17,001	-	17,001
Accumulated depreciation
At 1 January, 2016.............................................................................	38,554	27,239	65,793
Charge for the year............................................................................	3,027	7,024	10,051
Disposals...........................................................................................	(38,418)	(34,263)	(72,681)
At 31 December, 2016........................................................................	3,163	-	3,163
Net book value
At 31 December, 2016........................................................................	13,838	-	13,838

 

 

16.       Intangible assets

Group and Company	IP R&D	Computer software	Patents	Total
	£	£	£	£
Cost
At 1 January, 2015.......................................................	1,469,112	23,934	515,569	2,008,615
Additions.....................................................................	-	637	141,239	141,876
Disposal.......................................................................	-	-	(174,944)	(174,944)
At 31 December, 2015..................................................	1,469,112	24,571	481,864	1,975,547
Accumulated amortisation
At 1 January, 2015.......................................................	-	23,746	135,029	158,775
Charge for year............................................................	-	166	43,262	43,428
Disposal.......................................................................	-	-	(40,412)	(40,412)
At 31 December, 2015..................................................	-	23,912	137,879	161,791
Net book value
At 31 December, 2015..................................................	1,469,112	659	343,985	1,813,756
	IP R&D	Computer software	Patents	Total
	£	£	£	£
Cost
At 1 January, 2016.......................................................	1,469,112	24,571	481,864	1,975,547
Additions.....................................................................	-	4,750	109,757	114,507
Disposal.......................................................................	-	(23,982)	-	(23,982)
At 31 December, 2016..................................................	1,469,112	5,339	591,621	2,066,072
Accumulated amortisation
At 1 January, 2016.......................................................	-	23,912	137,879	161,791
Charge for year............................................................	-	599	50,972	51,571
Disposal.......................................................................	-	(23,974)	-	(23,974)
At 31 December, 2016..................................................	-	537	188,851	189,388
Net book value
At 31 December, 2016..................................................	1,469,112	4,802	402,770	1,876,684

Intangible assets comprise patents, computer software and an IP R&D asset that arose on the acquisition of Rhinopharma and investment in patents to protect RPL554.

IP R&D is currently not amortised and is reviewed for impairment on an annual basis or where there is an indication that the assets might be impaired until the asset is brought into use.

Patents are amortised over a period of ten years and are regularly reviewed for impairment to ensure the carrying amount exceeds the recoverable amount in accordance with note 2.9.

Recognising that the Group is still in pre‑revenue phase and that the research projects are not yet ready for commercial use, the Group assesses the recoverable amount of the CGU containing the IP R&D with reference to the Group's market capitalisation as of 31 December, 2016, the date of testing of goodwill impairment. The market capitalisation of the Group was approximately £80 million as of 31 December, 2016, compared to the Group's net assets of £34.5 million. Therefore, no impairment was recognised.

 

17.       Goodwill

Group and Company	As of 31 December, 2015	As of 31 December, 2016
	£	£
Goodwill at 1 January and 31 December......................................................	441,000	441,000

Goodwill represents the excess of the purchase price over the book value of the net assets acquired in connection with the acquisition of Rhinopharma Limited in September 2006. 

Recognising that the Group is still in pre-revenue phase and that the research projects are not yet ready for commercial use, management assesses the recoverable amount of such goodwill with reference to Verona's market capitalisation.  As at 31 December 2016 this was several times the carrying value of goodwill.  Accordingly, management believes it is appropriate to carry goodwill at full historical value.

Goodwill is not amortised, but is tested annually for impairment. Annual impairment testing is performed by comparing the expected recoverable amount of the CGU to the carrying amount of the CGU to which goodwill has been allocated to the carrying amount of the CGU. See notes 2.9, 4 and 16 to these financial statements.

18.       Share Capital

The movements in the Company's share capital are summarised below:

Date		Description	Number of shares		Share Capital amounts in £
1 January, 2015..............		Brought forward	1,009,923,481		1,009,923
31 December, 2015.......			1,009,923,481		1,009,923
July 29, 2016..................		Issuance of shares	1,555,796,345		1,555,796
September 12, 2016........		Exercise of options	166,667		167
October 24, 2016............		Exercise of options	166,667		167
December 28, 2016.........		Exercise of options	2,000,000		2,000
31 December, 2016.......			2,568,053,160		2,568,053

The total number of authorised ordinary shares, with a nominal value of 0.1p each, is 10,000,000,000 (share capital of £10,000,000). All 2,568,053,160 ordinary shares at 31 December, 2016 are allotted, unrestricted, called up and fully paid.

On July 29, 2016, the Company issued 1,555,796,345 units to new and existing investors at the placing price of 2.8730p per unit. Each unit comprises one ordinary share and one warrant (with an entitlement to subscribe for 0.4 of an ordinary share at a per share exercise price of 120% of the placing price or 3.4476p). The warrants entitle the investors to subscribe for in aggregate a maximum of 622,318,538 shares. The gross proceeds received of £44.7 million were in exchange for both ordinary shares and the warrants. During 2016, the Company issued 2,333,334 ordinary shares (2015: nil) upon exercise of employee share options.

19.       Related parties transactions

The Company entered into relationship agreements with Vivo Capital Fund VIII ("Vivo Capital"), Orbimed Private Investments VI L.P. ("Orbimed"), Abingworth Bioventures VI L.P. ("Abingworth") and Arix Bioscience plc ("Arix"), Arthurian Life Sciences SPV GP Limited, ("Arthurian"). As agreed in these relationship agreements, the above parties invested in the Company as part of the July Placement, and the Company agreed to appoint representatives designated by Vivo Capital, OrbiMed, Arix and Arthurian, and Abingworth to the board of directors, who are Dr. Mahendra Shah, Mr. Rishi Gupta, Dr. Ken Cunningham and Dr. Andrew Sinclair, respectively.

 

19.       Related parties transactions (continued)

These agreements will continue in effect after the Company's intended NASDAQ listing, except that the appointment rights within the relationship agreement with Arix and Arthurian will be terminated prior to the closing of that offering. The respective appointment rights under the remaining relationship agreements will automatically terminate upon (i) Vivo Capital, OrbiMed or Abingworth (or any of their associates), as applicable, ceasing to beneficially hold 6.5% of the issued ordinary shares, or (ii) the ordinary shares ceasing to be admitted to AIM.

The Company also has a management rights agreement with Novo A/S under which Novo A/S is entitled to appoint an observer to the Board until the earlier to occur of the Company's intended NASDAQ listing or a sale by Novo A/S of 50% of its shares in the Company.

The Company entered into a shareholder agreement with the Wales Life Sciences Investment Fund ("WLSIF") in connection with the March 2014 financing under which the Company has certain obligations to the WLSIF, including the obligation to maintain the registered office in Wales and to carry out certain other activities in Wales.

For the year ended 31 December, 2015, the Company and Group were charged £2,376 thousand by Simbec‑Orion in respect of clinical and pre‑clinical support and research services, a group of which Prof. Trevor Jones is a Director. As of 31 December, 2015, the Company owed £173 thousand to this related party. Prof. Trevor Jones was a Director of the Company until September 2015.  During 2016, there were no transactions with Simbec-Orion or any other related parties. As of 31 December, 2016, there were no outstanding balances to related parties.

The Directors have authority and responsibility for planning, directing and controlling the activities of the Group and they therefore comprise key management personnel as defined by IAS 24, ("Related Party Disclosures"). Remuneration of Directors and senior management is disclosed in the Directors' emoluments report in note 8.

20.       Share‑based payments charge

Group and Company  

In accordance with IFRS 2 "Share Based Payments," the cost of equity‑settled transactions is measured by reference to their fair value at the date at which they are granted. Where equity‑settled transactions were entered into with third party service providers, fair value is determined by reference to the value of the services provided. For other equity‑settled transactions fair value is determined using the Black‑Scholes model. The cost of equity‑settled transactions is recognised over the period until the award vests. No expense is recognised for awards that do not ultimately vest. At each reporting date, the cumulative expense recognised for equity‑based transactions reflects the extent to which the vesting period has expired and the number of awards that, in the opinion of the Directors at that date, will ultimately vest.

The costs of equity-settled share-based payments to employees are recognised in the Statement of Comprehensive Loss, together with a corresponding increase in equity during the vesting period. During the twelve months ended 31 December, 2016, the Group recognised a share-based payment expense of £576 thousand (2015: £399 thousand). The charge is included within both general and administrative costs as well as in research and development costs and represents the current year's allocation of the expense for relevant share options.

The Company grants share options under an Unapproved Share Option Scheme (the "Unapproved Scheme") and under its tax efficient EMI Option Scheme (the "EMI Scheme"). Under the Unapproved Scheme, options are granted to employees, directors and consultants to acquire shares at a price to be determined by the Directors which is typically set at a price that is above the share price at the date of the grant. In general, options are granted at a premium to the share price at the date of grant and vest over a period of three years from the date of the grant in two different methods. The first method is with one half vesting over 24 months and the other half vesting over 36 months. The second method is one third vesting over one year, the second third vesting over two years and the final third vesting over three years. The


20.       Share based payments charge (continued)

vesting period is defined as the period between the date of grant and the date when the options become exercisable. The options are exercisable during a period ending ten years after the date of grant. Options also are issued to advisors under the Unapproved Scheme. Such options generally vest immediately and are exercisable between one and two years after grant. Under the EMI Scheme, options are granted to employees and directors who are contracted to work at least 25 hours a week for the Company or for at least 75% of their working time. The options granted under the EMI Scheme are exercisable at a price that is above the share price at the date of the grant and in accordance with a vesting schedule determined by the Directors at the time of grant and have an exercise period of ten years from the date of grant.

In the year ended 31 December, 2016, the Company granted 1,600,000 (2015: 5,100,000) share options under the EMI Scheme and 83,500,000 (2015: 27,500,000) share options under the Unapproved Scheme. The total fair values were estimated either by reference to the fair value of the services provided in respect of equity‑settled transactions that were entered into with third‑party service providers, or using the Black‑Scholes option‑pricing model for other equity‑settled transactions and amounted to £1,927 thousand (2015: £371 thousand). The cost is amortised over the vesting period of the options on a straight‑line basis. The expense for the Company during 2016 amounted to £413 thousand and the balance of £163 thousand is in relation to Verona Pharma Inc. and is held as an investment.

Prior to the July Placement, management determined to take an option's contractual maximum life as an input into the Black-Scholes option-pricing model. Starting from the July Placement and in line with the continued development of the Company's clinical trials, the Company determined the time to maturity to be used in the valuation model to be better represented by the weighted-average life of the options granted.

The following assumptions were used for the Black‑Scholes valuation of share options granted in 2015 and 2016. For the options granted under the Unapproved Scheme the table indicates the ranges used in determining the fair-market values, aligning with the various dates of the underlying grants. The volatility is calculated using historic weekly averages of the Company's share price over a period that is in line with the expected life of the options.

	EMI Scheme Employees 5,100,000	Unapproved Scheme Employees 27,500,000
Issued in 2015
Options granted..................................................................................
Risk‑free interest rate.........................................................................	1.42%	1.42%
Expected life of options......................................................................	10 years	10 years
Annualised volatility............................................................................	76.5%	76.5%
Dividend rate.....................................................................................	0.00%	0.00%
	1,600,000	83,500,000
Issued in 2016
Options granted..................................................................................
Risk‑free interest rate.........................................................................	1.42%	0.23% - 1.42%
Expected life of options......................................................................	10 years	5.5 - 10 years
Annualised volatility............................................................................	88.0%	74.3% - 88.0%
Dividend rate.....................................................................................	0.00%	0.00%

 

 

20.       Share‑based payments charge (continued)

The Company had the following share options movements in the year ended 31 December, 2016:

Year of issue		Exercise price (p)		At 1 January, 2016		Options granted		Options exercised		Options forfeited		Options expired		At 31 December, 2016		Expiry date
2006..................................	5		8,000,000		-		-		-		(8,000,000)		-		September 18, 2016*
2012..................................	5 -15		5,000,000		-		-		-		-		5,000,000		June 1, 2022
2013..................................	4.8		5,000,000		-		-		-		(5,000,000)		-		January 31, 2016**
2013..................................	4		5,000,000		-		-		-		-		5,000,000		April 15, 2023
2013..................................	4		1,000,000		-		-		-		-		1,000,000		June 1, 2023***
2013..................................	4		8,000,000		-		-		-		-		8,000,000		July 29, 2023
2014..................................	3.5		5,500,000		-		-		-		-		5,500,000		May 15, 2024
2014..................................	3.5		3,500,000		-		-		(333,333)		-		3,166,667		May 15, 2024***
2014..................................	2.2		6,000,000		-		(2,000,000)		(4,000,000)		-		-		September 26, 2024***
2014..................................	2.2 - 3.5		10,000,000		-		-		-		-		10,000,000		August 6, 2018****
2015..................................	2.5		5,100,000		-		(333,334)		(666,666)		-		4,100,000		January 29, 2025***
2015..................................	2.5		27,500,000		-		-		(2,000,000)		-		25,500,000		January 29, 2025
2016..................................	4		-		13,000,000		-		-		-		13,000,000		February 2, 2026
2016..................................	4		-		1,600,000		-		(500,000)		-		1,100,000		February 2, 2026***
2016..................................	3.6		-		40,500,000		-		-		-		40,500,000		August 3, 2026
2016..................................	3.78		-		15,000,000		-		-		-		15,000,000		September 13, 2026
2016..................................	4.08		- 89,600,000		15,000,000 85,100,000		- (2,333,334)		- (7,4999,999)		- (13,000,000)		15,000,000 151,866,667		September 16, 2026
Total.................................

 

*          10,000,000 directors' options with an expiry date on September 18, 2011 were extended for five years to September 18, 2016 (2,000,000 of these options expired during 2015)

**         Options granted to agents upon closing of a placing or financing facility.

***       Options granted under the EMI Scheme.

****     Valued based on fair value of services received.

The average fair value in p at grant date, by year of grant and plan, of the exercisable options as per 31 December, 2016 is presented in the below table.

Year of issue	EMI Scheme	Unapproved Scheme
2012........................	1.27 -2.40	-
2013........................	1.66	1.57 -  1.91
2014........................	1.53	0.47 - 1.53
2015........................	1.14	1.14
2016........................	2.70	1.86 - 2.70

Outstanding and exercisable share options by scheme as of 31 December, 2016:

Plan			Outstanding	Exercisable	Weighted average exercise price in p for Outstanding	Weighted average exercise price in p for Exercisable
Unapproved...................................................................			139,500,000	30,833,335	3.55	3.29
EMI...............................................................................			12,366,667 151,866,667	9,033,336	5.80	6.74
Total..............................................................................				39,866,671	3.73	4.08

20.       Share‑based payments charge (continued)

The options outstanding at 31 December, 2016 had a weighted average remaining contractual life of 8.2 years (2015: 6.6 years). For 2015 and 2016, the number of options granted and expired and the weighted average exercise price of options were as follows:

	Number of options	Weighted average exercise price (p)
At 1 January, 2015.................................................................................	60,155,717	4.2
Options granted in 2015:
Employees.........................................................................................	15,600,000	2.5
Directors...........................................................................................	17,000,000	2.5
Options expired in the year.....................................................................	(3,155,717)	5.4
At 31 December, 2015...........................................................................	89,600,000	3.6
Exercisable at 31 December, 2015.......................................................	42,333,338	4.5

 

	Number of options	Weighted average exercise price (p)
At 1 January, 2016................................................................................	89,600,000	3.6
Options granted in 2016:
Employees........................................................................................	50,100,000	3.8
Directors..........................................................................................	35,000,000	4.1
Options exercised in the year................................................................	(2,333,334) (7,499,999) (13,000,000)	2.2
Options forfeited in the year..................................................................		2.5
Options expired in the year....................................................................		4.9
At 31 December, 2016.........................................................................	151,866,667	3.7
Exercisable at 31 December, 2016......................................................	39,866,671	4.1

21.       Assumed contingent obligation related to the business combination

Group and Company

The value of the assumed contingent obligation as of 31 December, 2016 amounts to £802 thousand (2015: £594 thousand. The increase in value of the assumed contingent obligation during 2016 amounted to £208 thousand (2015: 72 thousand) and was recorded as finance expense. Periodic remeasurement is triggered by changes in updated timelines of achieving commercialisation and updated probabilities of success resulting from clinical programmes. In 2016 remeasurement was triggered by the success of the results of the Company's Phase 2a trials which were presented in March 2016. The discount percentage applied is 12%.

	2015 £	2016 £
1 January, 2016....................................................................................................	521,650	593,941
Re‑measurement of assumed contingent obligation.................................................	9,239	123,554
Unwinding of discount factor................................................................................	63,052	84,710
31 December, 2016..............................................................................................	593,941	802,205

 

21.       Assumed contingent obligation related to the business combination (continued)

The table below describes the reported change to the value of the liability during 2016 of £208 thousand (2015: £72 thousand) compared to what this number would be following the presented variations to the underlying assumptions:

	2015	2016
Change in value of the assumed contingent obligation, in £ thousand.......................	£72	£208
1% lower discount rate %....................................................................................	£73	£216
1% higher discount rate %...................................................................................	£71	£201
10% lower revenue assumption............................................................................	£69	£202
10% higher revenue assumption...........................................................................	£75	£215
1% lower risk assumption....................................................................................	£70	£216
1% higher risk assumption....................................................................................	£75	£201

 

22.       Warrants

Group and Company

Pursuant to the July Placement the Company has issued 1,555,796,345 units to new and existing investors at the placing price of 2.8730p per unit. Each unit comprises one ordinary share and one warrant.

The warrant holders can subscribe for 0.4 of an ordinary share at a per share exercise price of 120% of the placing price or 3.4476p. The warrant holders can opt for a cashless exercise of their warrants. The warrant holders can choose to exchange the warrants held for reduced number of warrants exercisable at nil consideration. The reduced number of warrants is calculated based on a formula considering the share price and the exercise price of the shares. The warrants were therefore classified as a derivative financial liability, since their exercise might result into a variable number of shares to be issued.

The warrants entitle the investors to subscribe for in aggregate a maximum of 622,318,538 shares. The warrants can be exercised on the earlier of the Company's planned Global Offering or the first anniversary of the grant, and the exercise period shall end on the fifth anniversary of such date.

The ordinary share and warrant were accounted for as a compound financial instrument. The warrants component of the instrument issued at the July Placement were classified as a derivative financial liability and were initially measured at fair value of £8,991 thousand. The residual amount of proceeds totalling £35,707,235 has been recognised within equity. Subsequently the financial liability was re-measured at the reporting date at fair value through profit or loss. A change in fair value of £1,068 thousand is recognised in the Consolidated Statement of Comprehensive Income within Finance income.

The residual value of the proceeds less the fair value of the financial instrument of £8,991 thousand was attributed to the equity component of the instrument.

The total of transaction costs the Company incurred for the above transactions amounted to £2,910 thousand of which £585 thousand was allocated to the warrants and the remaining £2,325 thousand has been presented as a reduction to share premium, by reference to the proceeds allocated to each component. The amount assigned to the financial liability of the warrants was subsequently presented as finance expense in the Consolidated Statement of Comprehensive Income.

 

22.       Warrants (continued)

The table below presents the assumptions in applying the Black-Scholes model to determine the fair value of the warrants at date of recognition and the reporting date of 31 December, 2016. For valuation purposes at recognition the Company used the closing share price on July 29, 2016.

Issued in 2016	At recognition on July 29, 2016	At 31 December, 2016
Warrants......................................................................................	622,318,532	622,318,532
Exercise price...............................................................................	3.4476p	3.4476p
Risk‑free interest rate...................................................................	0.039 %	0.088 %
Expected life of options.................................................................	2.86 years	2.43 years
Annualised volatility......................................................................	82.61%	73.53%
Dividend rate................................................................................	0.00%	0.00%

 

As per the reporting date the Company updated the underlying assumptions and calculated a fair value of these warrants amounting to £7,923 thousand. The variance of £1,068 thousand is recorded as finance income in the Consolidated Statement of Comprehensive Income.

		Derivative financial instrument		Total
At 1 January, 2016			£		£
Derivative Financial instrument issued following the July Placement			8,990,794		8,990,794
Fair value adjustments recognised in profit or loss.....................			(1,068,191) 7,922,603		(1,068,191) 7,922,603
At 31 December, 2016........................................................

 

For the amount recognised at 31 December, 2016, the effect, when some of these underlying parameters would deviate up or down, is presented in the below table.

	Volatility (up / down 10 % pts)	Time to maturity (up / down 6 months)
	£ thousands	£ thousands
Variable up............................................................................	8,972	8,687
Base case, reported fair value............................................	7,923	7,923
Variable down.......................................................................	6,826	7,046

 

 

23.       Financial commitments

As of 31 December, 2016, the Group was committed to making the following payments under non‑cancellable operating leases related to its facilities.

	Land and Buildings	Land and Buildings
	2015	2016
	£	£
Operating leases which expire:
Within one year...................................................................................................................	151,240	270,350
Beyond one year.............................................................................................................	-	-
Total...............................................................................................................................	151,240	270,350

 

As of 31 December, 2016, the Company was committed to making the following payments under non‑cancellable operating leases related to its facilities.

	Land and Buildings	Land and Buildings
	2015	2016
	£	£
Operating leases which expire:
Within one year...................................................................................................................	151,240	249,440
Beyond one year.............................................................................................................	-	-
Total...............................................................................................................................	151,240	249,440

 

24.         Loss of the parent company

The Parent has taken advantage of the exemption permitted by Section 408 of the Companies Act 2006 not to present an income statement for the year.  The Parent Company's loss for the year was £4,964,487 (2015: loss of £7,514,076), which has been included in the Group's income statement.

25.         Control

The Company is not under the control of any individual or group of connected parties.

26.       Events after the reporting date

On 8 February, 2017 the board of the Company approved a share consolidation where every 50 existing ordinary shares of £0.001 each shall be consolidated into one ordinary share of £0.05. Prior to the consolidation the total number of issued shares as at 31 December, 2016 would read as a total of 2,568,053,160 shares and after the consolidation this number would read as a total of 51,361,063 shares. Earnings per share information has been retrospectively adjusted to reflect the consolidation as if it had occurred at the beginning of the earliest period presented.