MTPH.L Regulatory News (MTPH)

Midatech will host a conference call and live Q&A session today (Tuesday 4 April 2017) at 1400 BST / 0900 EDT for analysts and investors to discuss the Annual Results. Dr Jim Phillips, Chief Executive Officer, and Nick Robbins-Cherry, Chief Financial Officer, will participate. Dial-in details are: UK: +44 1452 555 566, US: +1 86 69 66 94 39, ID: 95480046.

The presentation will be available on Midatech's website shortly before the call, and a recording will be available shortly afterwards.

4 April 2017

Midatech Pharma PLC

("Midatech", "Company" or "Group")

Audited financial results for the year ended 31 December 2016

Midatech Pharma (AIM: MTPH; Nasdaq: MTP), the international specialty pharmaceutical company focused on commercialising and developing products in oncology, immunology and other therapeutic areas, today announces its audited financial results for the twelve-month period ended 31 December 2016.

Financial highlights

· Total gross revenues(1) for the year up 510% to £9.21m (2015: 844% to £1.51m) (2014: £0.16m), in line with expectations

· Statutory Revenue(2) for the year up 718% to £6.38m (2015: 2,500% to £0.78m) (2014: £0.03m)

· £17.61m cash and deposits at 31 December 2016 (2015: £16.18m, 2014: £30.33m), in line with market forecasts

· Net loss after tax of £20.16m (2015: £10.10m, 2014: £8.82m) with net cash inflow in the year of £0.97m (2015: £14.17m outflow, 2014: £27.94m inflow)

· Tax credit receivable of £1.44m (2015: £1.20m, 2014: £0.84m)

· Entered into a senior secured £6 million loan agreement with Silicon Valley Bank in Q1 2017

Operational highlights including post period end highlights

· Successful integration and strong sales performance from recently acquired US commercial business

· Midatech's launch of our anti-nausea product Zuplenz® in the US

· Preparation for final development and commercialisation of Q-Octreotide

· Product candidate testing for hepatocellular carcinoma (HCC) and glioblastoma (GBM)

· Dosing commenced in first immunotherapy vaccine Phase I study for type 1 diabetes

· Further positive progress seen in the Company's OpsiSporin and MTX110/111 (DIPG) programmes

1 Total gross revenues represents the full list price of products shipped to wholesalers and other customers before product returns, discounts, rebates and other incentives based on the sales price and grant revenue.

2 Statutory Revenue represents total gross revenue, excluding grant revenue and after deductions for product returns, discounts, rebates and other incentives.

Commenting on the Annual Results for 2016, Midatech's Chairman, Rolf Stahel, said: "Midatech has made significant progress in 2016 and continued to lay down sound foundations for future growth both across the commercial side of the business and with the exciting pipeline of drugs in development.

"Our operations in the US have the potential to deliver double-digit top-line growth in 2017 and our fully integrated R&D pipeline with two platform technologies continues to progress well with several clinical milestones expected in 2017.

"With the funds raised in November we have continued to invest in the pipeline, manufacturing and commercial platforms, all supporting the development of the Company towards future profitability. We look forward to another successful year of growth in 2017"

- Ends -

For more information, please contact:

Midatech Pharma PLC

Jim Phillips, CEO

Tel: +44 (0)1235 841575

www.midatechpharma.com

Panmure Gordon (UK) Limited (Nominated Adviser and Broker)

Corporate Finance

Freddy Crossley / Duncan Monteith

Broking

Tom Salvesen

Tel: +44 (0)20 7886 2500

Consilium Strategic Communications (Financial PR)

Mary Jane Elliott / Ivar Milligan / Cameron Standage

Tel: +44 (0)20 3709 5700

Email: midatech@consilium-comms.com

Westwicke Partners (US Investor Relations)

Chris Brinzey

Tel: +1 339 970 2843

Email: chris.brinzey@westwicke.com

Notes for Editors

About Midatech Pharma PLC

Midatech is an international specialty pharmaceutical company focused on oncology and other therapeutic areas with a US commercial operation marketing four cancer care supportive products, and co-promoting two others. Midatech's strategy is to internally develop oncology products and collaborate with partners in other therapy areas, and to drive growth both organically and through strategic acquisitions. The Company's R&D activities are supported by two breakthrough drug delivery technologies: Q-Sphera for sustained release and our proprietary gold nanoparticles. The Group, listed on AIM: MTPH and Nasdaq: MTP, employs c.110 staff in four countries. For further company information see: www.midatechpharma.com

Forward-Looking Statements

Certain statements in this press release may constitute "forward-looking statements" within the meaning of legislation in the United Kingdom and/or United States, including (without limitation) those regarding the Group's financial position, business strategy, products, plans and objectives of management for future operations, and any statement preceded or followed by, or including, words such as "target", "believe", "expect", "aim", "intend", "will", "may", "anticipate", "would" or "could", or negatives of such words. Any forward-looking statements are based on currently available competitive, financial and economic data together with management's views and assumptions regarding future events and business performance as of the time the statements are made and are subject to risks and uncertainties. We wish to caution you that there are some known and unknown factors that could cause actual results to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.

Reference should be made to those documents that Midatech shall file from time to time or announcements that may be made by Midatech in accordance with the London Stock Exchange AIM Rules for Companies ("AIM Rules"), the Disclosure and Transparency Rules ("DTRs") and the rules and regulations promulgated by the US Securities and Exchange Commission, which contains and identifies other important factors that could cause actual results to differ materially from those contained in any projections or forward-looking statements. These forward-looking statements speak only as of the date of this announcement. All subsequent written and oral forward-looking statements by or concerning Midatech are expressly qualified in their entirety by the cautionary statements above. Except as may be required under the AIM Rules or the DTRs or by relevant law in the United Kingdom or the United States, Midatech does not undertake any obligation to publicly update or revise any forward-looking statements because of new information, future events or otherwise arising.

CHAIRMAN AND CHIEF EXECUTIVE'S STATEMENT

We have made significant progress in 2016 and laid down sound foundations for future growth both across the commercial side of the business and with the exciting pipeline of drugs in development.

Year in review

Midatech has continued to make good progress in 2016 in research and development of its niche cancer therapies including some potentially ground-breaking new therapies for brain cancer and liver cancer using our GNP-enabled technology platforms and know-how.

This has also been a year of strong revenue growth, with the successful launch of Zuplenz®, alongside growing traction within our wider product base, and the reorganisation and optimisation of our US operation. We have brought in new management talent and new national accounts positions to allow us greater contact with hospital consortia, giving formulary access capabilities that did not exist before.

Total gross revenues for 2016 were £9.2m, in line with market expectations, up 510% from £1.51m in 2015 and an increase of 88% from £4.9m for the pro-forma combined Midatech and pre-acquisition DARA BioSciences, Inc. businesses in 2015.

Statutory Revenue was also up, by 718%, to £6.4m from £0.8m in 2015. Loss after tax was up significantly to £20.2m from £10.1m in 2015. However, 2016 included a full year of Midatech US costs and a one-off charge of £11.4m in respect of our Oravig product, discussed below. Cash balance at year end was £17.6m, an increase of £1.4m (including exchange gains) on 2015, thanks to the oversubscribed fundraise completed in Q4 2016, discussed below.

Strategy and path to profitability

Our primary objective is to grow our innovative product related revenues and launch our new products for rare cancers so that we can create value for our shareholders through a profitable and self-sustaining business with the resultant benefit to patients and clinicians.

Our strategic priorities are to grow revenues from the products we already have (which alone have the potential to allow the business to achieve profitability) and to take our three key R&D investment programmes efficiently through drug development and into commercialisation.

As part of this strategy, a significant step was completion of the latest investment in our Bilbao facility, enabling the manufacture of our sustained release products on a larger scale. This means we will be able to manufacture in-house most of our own products to clinical stage, i.e. human studies, and in some cases to early commercial scale. Following a recent, successful inspection by the Spanish Medicines Agency, AEMPS, we await the issuance of a revised licence that will allow us to manufacture products based on both of our platform technologies for use in humans.

Commercialised products

The US business, with the addition of Zuplenz®, continued to perform well after its reorganisation in the first quarter of 2016, and we met our revenue targets for the year. We continue to look for ways to increase our access to the US market, such as co-promotional deals of the type we have recently signed with R-Pharm, where they will be co-promoting our products into places that we don't currently have the capacity to call on, potentially doubling our reach into the US market.

Sales of our Oravig product, acquired as part of the DARA deal, have been disappointing, particularly in the latter part of the year. We were therefore required to write down the value of that asset. However, total sales of our other products, in aggregate, have outperformed our expectations, compensating for any shortfall in revenue from Oravig, such that the US business overall is doing well against expectations. Accounting standards do not permit us to reassess the book value of these other assets upwards where performance exceeds expectations.

R&D pipeline

Our EU based R&D operation is very much focussed on our three, lead research and development programmes, each of which could transform the business, both in terms of saving lives and in driving revenue growth and future profitability. Each has the potential to achieve highly significant revenue that would transform our financial performance.

Our Q-Octreotide programme for the treatment of acromegaly and carcinoid syndrome is preparing for a short phase of first in-man bioequivalence clinical trials in 2017 to take the product to market. Over the last year, we have completed the formulation of the product (which is a new version of an existing drug, requiring less clinic time and is easier to use) and completed pre-clinical testing. Now, we hope to follow an expedited route to get the product registered and filed over the next two years, requiring a small number of clinical trials.

The product would be entering a global market for the chronic treatment of acromegaly and metastatic carcinoid syndrome, worth an estimated $2 billion per year. The revised manufacturing licence for our Spanish facility opens the way for our first in-man study of Q-Octreotide in 2017.

MTX110 is a treatment for DIPG, a rare childhood brain cancer for which there is currently no satisfactory treatment. Patients' average survival time is just 7-9 months. Following unsolicited requests from treating physicians, the treatment has been made available on a compassionate use basis. We look forward this year to taking that programme into pivotal clinical trials which we hope will lead to successful regulatory filing and approval.

The third key programme is a new treatment for liver cancer. After having tested a large number of drug and targeting agent constructs, built around our gold nanoparticle platform, in 2016 we were able to identify a combination that appears to have a significant impact on liver cancer cells, while sparing the healthy tissues in the body. Levels of chemotherapy that, without our technology can be lethal to animals, have been exceptionally well tolerated when targeted using our nanoparticle system, while clearly showing strong anti-tumour activity. We are now taking that product forward to prepare it for clinical trials by 2018.

We have now exited the legacy insulin programme following the clinical trial readout in Q2 2016. The negative result has no impact on our cancer focus, however, and the learnings of the insulin programme have been applied - our current nanotechnology formulations are suitable for injection/infusion, but we do intend to develop alternative, novel forms for oral administration.

Fund raise

In Q4 2016 we concluded the first round of fundraising since the Group's IPO in 2014, culminating in a significantly oversubscribed offer which allowed the Company to raise £16.7m before costs. The additional capital will be used to fund the ongoing development of our R&D pipeline products and growth of the commercial business with a view to achieving sustainable profitability.

Summary and outlook

Midatech delivered against its business plan in 2016.

We are aware of increased scrutiny on pricing in the US but we do not expect it to have a significant impact on our product portfolio. As a business, we are not overly exposed to the potential implications of the UK leaving the EU. We earn revenues mainly in US dollars and our expenses are largely in Sterling or Euros, so the net effect of Brexit-related currency movements has had a generally positive impact on reported revenue and net assets. US and other non-EU pharmaceutical businesses operate successfully in Europe and we expect to continue to do so, however, through our operation in Bilbao, Spain, we are well established within the ongoing European Union.

We are well placed to deliver attractive further growth: our existing products give us the future opportunity to become profitable (even without further products coming to market), we have a strong management team and an exciting pipeline with the capability to increase our revenues substantially over the next five to ten years as those products come to market.

Thanks to the motivation, talent and hard work of our colleagues, we are optimistic that the business can continue to deliver strong revenue growth in preparation for the launch of our new products, currently in development, as they come to market over the coming years.

On behalf of the Board, we would like to thank all of Midatech staff, investors, clinicians and patients for their support in 2016.

Rolf Stahel Dr Jim Phillips

Chairman Chief Executive Officer

Date 4 April 2017

FINANCIAL REVIEW

Introduction

Midatech Pharma plc (the "Company") was incorporated as a company on 12 September 2014 and is domiciled in England. The Midatech Group was formed on 31 October 2014 when Midatech Pharma plc acquired the entire issued share capital of Midatech Limited and its wholly owned subsidiaries. The Group was expanded when, on 8 December 2014, the Company acquired the entire issued share capital of UK based Q Chip Limited ("Q Chip"), a pharmaceutical development company. Q Chip was subsequently renamed Midatech Pharma (Wales) Limited ("MPW"). On 4 December 2015, the Company acquired the entire issued share capital of U.S. based, DARA BioSciences, Inc. ("DARA"), an oncology supportive care pharmaceutical company. DARA was subsequently renamed Midatech Pharma US, Inc. ("MPUS").

The MPUS business brought with it a portfolio of five cancer supportive care products and an established commercial platform in the U.S. market with a field sales organisation. To supplement this acquisition, on 24 December 2015, the Company acquired Zuplenz® (ondansetron), a marketed anti-emetic oral soluble film from Galena Biopharma, Inc. (Nasdaq: GALE) for the prevention of chemotherapy-induced nausea and vomiting, radiotherapy-induced nausea and vomiting, and post-operative nausea and vomiting.

The Company was admitted to the London Stock Exchange's Alternative Investment Market ("AIM") on 8 December 2014, raising £32.0m before costs in new capital. On 4 December 2015, following the DARA acquisition, American Depositary Receipts ("ADRs") with each ADR representing the right to receive two ordinary shares, were admitted to trading on the NASDAQ Stock Market LLC trading platform ("NASDAQ").

On 28 October 2016, the Company announced that at a General Meeting, shareholders had approved the issuance of 15,157,044 new ordinary shares following a substantially oversubscribed Placing to new and existing institutional shareholders and additional Open Offer. This raised proceeds of £16.67m before expenses and the new shares were admitted to AIM on 31 October 2016.

Key performance indicators

Financial analysis

Midatech's KPIs have historically been focused on the key areas of cash management, operating results and R&D spend. These areas continue to be critical to the business, however, Midatech's US commercial operation is increasingly important and KPIs in this area are now included. Additional financial and non-financial KPIs, including further KPIs in respect of the research and development programmes and commercial operation, will be formalised in due course.

For the year ended 31 December 2016, Midatech generated consolidated total gross revenues(1) of £9.21m (2015: £1.51m), an increase of 510% on the prior year and in-line with the upper end of market expectation. Statutory Revenue for the year also increased, by 718%, to £6.38m (2015: £0.78m).

As part of the DARA deal, Midatech acquired the sales and marketing rights to five products, including Oravig®, for the treatment of oral thrush, a common side effect of chemotherapy. Whilst overall performance of the MPUS business has been good, sales of Oravig has been disappointing and, as a result, the value of this element of the acquired intangible assets has become impaired, resulting in a charge of £11.41m to the Income Statement. It is unfortunate that accounting standards do not permit an impairment to be offset by any increase in the value of other intangibles, however, the performance of the other products, including Zuplenz®, has enabled us to support the carrying value of goodwill in the MPUS business.

Net cash inflows for the year were £0.97m (2015: outflow of £14.17m) reflecting the share issue in October 2016 where £15.57m was raised after costs. Stripping out the share issue proceeds, the adjusted outflow of £14.14m was in line with the forecast for the year. Cash management continues to be a major focus for the Board and senior management.

Cost of sales

Cost of sales has increased commensurately with product sales to £0.67m (2015: £0.07m) reflecting both a full year of commercial operations and continued growth in sales.

Research and development expenditure

Research and development costs increased on the previous year to £6.68m (2015: £5.92m) reflecting significant, ongoing investment in Midatech's R&D programmes. Activities in the year included:

· Final pre-clinical studies of Midatech's Q-Octreotide sustained release treatment of acromegaly and carcinoid syndrome. This project is moving into its first in-man, bio-equivalence study in 2017.

· Ongoing development work on MTX110 for the treatment of the rare children's cancer, DIPG. This programme is moving towards a pivotal human study, expected during 2017.

· Investigational New Drug ("IND") enabling studies and final candidate selection for our liver cancer and glioblastoma (brain cancer) programmes. Further IND enabling programmes planned for 2017 and first human study in late 2017/early 2018.

· Final pre-clinical formulation development and toxicological studies of OpsiSporin sustained release treatment for uveitis in readiness for clinical development phase.

· Preparatory work leading to the Phase I study for our first immunotherapy vaccine for type 1 diabetes.

Distribution costs, sales and marketing

Prior to the acquisition of DARA/MPUS in December 2015, Midatech did not classify any of its costs as specifically relating to distribution, sales or marketing. With a full year of commercial operations in the US, distribution costs, sales and marketing has increased significantly to £9.52m (2015: £0.37m). This includes amortisation of intangible assets acquired as part of the acquisition of DARA/MPUS resulting in a charge of £3.38m (2015: £0.23m).

Administrative costs

Midatech's administrative costs also increased on the prior year to £9.22m (2015: £7.93m), largely due to the inclusion of a full year of US commercial operations (2015: included listing and acquisition expenses of £2.99m). The increase in 2016 administrative costs was driven by consolidation of the US commercial business for a full year added £4.38m to administrative costs (2015: £0.33m) including £1.10m associated with the departure of three former senior executives.

Impairment Charge

As noted above, write down by £11.41m of the product sales and marketing rights of our Oravig product following disappointing sales performance, particularly during the latter part of 2016.

Staff costs

During the year, the average number of staff employed grew by 13% to 84 (2015: 74) and the payroll cost increased by 66% to £7.49m (2015: £4.52m)., including £1.1m relating to former, senior DARA management who left during 2016.

Capital expenditure

The total cash expenditure on property plant and equipment in 2016 was £1.35m (2015: £0.92m), principally reflecting investment in Midatech's sustained release ("SR") platform technology in advance of the Q-Octreotide first in-man clinical trial scheduled for early 2017. Midatech's manufacturing facility in Bilbao, Spain was expanded to enable the in-house production of Q-Octreotide and additional equipment was purchased for our SR development facility in Cardiff, UK.

Movement in total assets

Total assets saw a reduction from £64.0m at 31 December 2015 to £56.7m at 31 December 2016. This was principally the result of the net effect of impairment and amortisation charges on product right intangible assets of £15.0m, and a £4.8m foreign exchange gain arising on US denominated intangible assets as set out in note 10. Property plant and equipment increased by £0.8m mainly as a result of the manufacturing facility in Bilbao, noted above. Cash and cash equivalents, increased by £1.4m as a result of the cash from the fundraise that completed in October 2016 being greater than net cash used in operating and investing activities during the year.

Movement in total liabilities

Total liabilities saw a reduction from £17.2m at 31 December 2015 to £11.0m at 31 December 2016. This was principally the result of the reduction of the £6.5m deferred tax liability as at 31 December 2015 to £nil at 31 December 2016. This reduction has been driven by the impairment and amortisation charges on product right intangible assets and the recognition of a deferred tax asset in respect of losses set against any remaining deferred tax liability. Furthermore, the derivative financial liability reduced by £1.2m as a result of the share options and warrants acquired with Midatech Pharma US lapsing during 2016 and the reduction in the share price as described in more detail in the notes to the financial statements.

Other comprehensive income

Other comprehensive income comprises £3.23m (2015: £0.40m) foreign exchange gain arising on retranslation of Midatech Pharma US operations.

Cash flow

Net cash outflow from operating activities for the year was £13.09m (2015: £12.42m). There was, however, a net cash inflow from financing activities of £15.26m (2015: outflow of £0.22m) which, along with the capital expenditure in the year, resulted in a net cash inflow for the year of £0.97m (2015: outflow of £14.17m). This saw the year end cash balance increase to £17.61m (2015: £16.18m).

Capital structure

As noted above, 15,157,044 new ordinary shares were issued on 28 October 2016 to subscribers in a Placing and additional Open Offer. This raised proceeds of £16.67m before expenses and the new shares were admitted to AIM on 31 October 2016. In addition, on 1 July 2016, 74,908 new ordinary shares were issued to former shareholders of Q Chip as the second and final tranche of deferred consideration shares for that acquisition. No other new shares were issued during the year.

As at 31 December 2016 Midatech Pharma plc had in issue 48,699,456 Ordinary Shares of 0.005 pence each.

The financial statements were approved and authorised for issue by the Board of Directors on 3r April 2017 and were signed on its behalf by:

Nick Robbins-Cherry

Chief Financial Officer

The notes form an integral part of these consolidated financial statements

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

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

General information

Midatech Pharma plc (the "Company") is a company domiciled in England. The Company was incorporated on 12 September 2014.

The Company is a public limited company, which has been listed on the Alternative Investment Market ("AIM"), which is a submarket of the London Stock Exchange, since 8 December 2014.

In addition, since 4 December 2015 the Company has American Depository Receipts ("ADRs") registered with the US Securities and Exchange Commission ("SEC") and is listed on NASDAQ.

Basis of preparation

The financial information set out above does not constitute the company's statutory accounts for 2016, 2015 or 2014. Statutory accounts for the years ended 31 December 2016, 31 December 2015 and 31 December 2014 have been reported on by the Independent Auditors. The Independent Auditors' Report on the Annual Report and Financial Statements for the years ended 31 December 2016, 31 December 2015 and 31 December 2014 was unqualified, did not draw attention to any matters by way of emphasis, and did not contain a statement under 498(2) or 498(3) of the Companies Act 2006.

Statutory accounts for the year ended 31 December 2015 and 31 December 2014 have been filed with the Registrar of Companies. The statutory accounts for the year ended 31 December 2016 will be delivered to the Registrar in due course.

The Group was formed on 31 October 2014 when Midatech Pharma plc entered into an agreement to acquire the entire share capital of Midatech Limited and its wholly owned subsidiaries through the issue equivalent of shares in the Company which took place on 13 November 2014.

The acquisition of the Midatech subsidiaries on 13 November 2014 was outside the scope of IFRS 3 "Business combinations" and was treated under the principles of merger accounting as set out under United Kingdom Generally Accepted Accounting Practice.

Accordingly, although the units which comprise the Group did not form a legal group for the entire comparative period ended 31 December 2014, and the 2014 results comprise the results of the subsidiary companies as if the Group had been in existence throughout the entire period.

These financial statements have been prepared in accordance with International Financial Reporting Standards, International Accounting Standards and Interpretations (collectively IFRS) issued by the International Accounting Standards Board (IASB) and as adopted by the European Union ("adopted IFRSs") and are presented in £'000's Sterling.

The principal accounting policies adopted in the preparation of the financial statements are set out below. The policies have been consistently applied to all the periods presented.

Adoption of new and revised standards

A number of new standards, amendments to standards, and interpretations are not effective for 2016, and therefore have not been applied in preparing these accounts.

IFRS 9 Financial Instruments

In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments that replaces IAS 39 Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. IFRS 9 brings together all three aspects of the accounting for financial instruments project: classification and measurement, impairment and hedge accounting. IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with early application permitted.

IFRS 9 requires the Company to record expected credit losses on all of its debt securities, loans and trade receivables, either on a 12-month or lifetime basis. The Company expects to apply the simplified approach and record lifetime expected losses on all trade receivables.

The Company plans to adopt the new standard on the required effective date. The Company expects no significant impact on its balance sheet and equity.

The Company does not expect a significant impact on its balance sheet or equity on applying the classification and measurement requirements of IFRS 9.

IFRS 15 Revenue from Contracts with Customers

IFRS 15 was issued in May 2014 and establishes a five-step model to account for revenue arising from contracts with customers. Under IFRS 15, revenue is recognized at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer.

The new revenue standard will supersede all current revenue recognition requirements under IFRS. Either a full retrospective application or a modified retrospective application is required for annual periods beginning on or after 1 January 2018. The Company plans to adopt the new standard on the required effective date. The Company has not yet performed a preliminary assessment of IFRS 15, but plans to do so by the end of Q3 which will then be subject to changes arising from a more detailed ongoing analysis. Once the analysis is performed the transition method will be chosen. Based on the current sales contracts, both methods are feasible from implementation perspective. Furthermore, the Company is considering the clarifications issued by the IASB in April 2016 and will monitor any further developments.

IFRS 16 Leases

IFRS 16 was issued in January 2016 and it replaces IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases-Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model similar to the accounting for finance leases under IAS 17. The standard includes two recognition exemptions for lessees - leases of 'low-value' assets (e.g., personal computers) and short-term leases (i.e., leases with a lease term of 12 months or less). At the commencement date of a lease, a lessee will recognize a liability to make lease payments (i.e., the lease liability) and an asset representing the right to use the underlying asset during the lease term (i.e., the right-of-use asset). Lessees will be required to separately recognize the interest expense on the lease liability and the depreciation expense on the right-of-use asset.

Lessees will be also required to remeasure the lease liability upon the occurrence of certain events (e.g., a change in the lease term, a change in future lease payments resulting from a change in an index or rate used to determine those payments). The lessee will generally recognize the amount of the remeasurement of the lease liability as an adjustment to the right-of-use asset.

IFRS 16 is effective for annual periods beginning on or after 1 January 2019, subject to endorsement by the European Union. Early application is permitted, but not before an entity applies IFRS 15. A lessee can choose to apply the standard using either a full retrospective or a modified retrospective approach. The standard's transition provisions permit certain reliefs.

During 2017 the Company plans to assess the potential effect of IFRS 16 on its consolidated financial statements. To see the volume of operating leases please refer to note 27.

The directors are currently reviewing the impact of the above-mentioned Standards and Interpretations and are yet to conclude on whether any such standards will have a significant impact on the financial statements of the Group in the year of initial application.

The other standards, interpretations and amendments issued by the IASB (of which some still subject to endorsement by the European Union), but not yet effective are not expected to have a material impact on the Group's future consolidated financial statements.

The Group financial statements consolidate those of the parent company and all of its subsidiaries. The parent controls a subsidiary if it has power over the investee to significantly direct the activities, exposure, or rights, to variable returns from its involvement with the investee, and the ability to use its power over the investee to affect the amount of the investor's returns. All subsidiaries have a reporting date of 31 December.

All transactions and balances between Group companies are eliminated on consolidation, including unrealised gains and losses on transactions between Group companies. Where unrealised losses on intra-Group asset sales are reversed on consolidation, the underlying asset is also tested for impairment from a Group perspective. Amounts reported in the financial statements of subsidiaries have been adjusted where necessary to ensure consistency with the accounting policies adopted by the Group.

The loss and other comprehensive income of Midatech Pharma US, Inc. (formerly DARA Biosciences, Inc) acquired in December 2015 is recognised from the effective date of acquisition i.e. 4 December 2015. Similarly, the loss and other comprehensive income of Zuplenz®, acquired as a business by Midatech Pharma plc., is recognised from the 24 December 2015.

The consolidated financial statements consist of the results of the following entities:

Going concern

The Group is subject to a number of risks similar to those of other development and early-commercial stage pharmaceutical companies. These risks include, amongst others, generation of revenues from the existing product portfolio and in due course the development portfolio and risks associated with research, development, testing and obtaining related regulatory approvals of its pipeline products. Ultimately, the attainment of profitable operations is dependent on future uncertain events which include obtaining adequate financing to fulfil the Group's commercial and development activities and generating a level of revenue adequate to support the Group's cost structure.

The Group has experienced net losses and significant cash outflows from cash used in operating activities over the past years as it develops its portfolio. As at 31 December 2016 the Group had total equity of £45.72m which includes an accumulated deficit of £59.11m, it incurred a net loss after tax for the year to 31 December 2016 of £20.16m and used cash in operating activities of £13.09m for the same period. As at 31 December 2016, the Group had cash and cash equivalents of £17.61m.

The future viability of the Group is dependent on its ability to generate cash from operating activities, to raise additional capital to finance its operations or to successfully obtain regulatory approval to allow marketing of the Group's development products. The Group's failure to raise capital as and when needed could have a negative impact on its financial condition and ability to pursue its business strategies.

The Directors have prepared cash flow forecasts and considered the cash flow requirement for the Group for a period including twelve months from the date of approval of this interim financial information. These forecasts show that the Group has sufficient cash resources for at least the next 12 months. The Directors therefore consider it appropriate to continue to adopt the going concern basis in preparing the financial information.

Revenue

The Group's income streams include milestone income from research and development contracts and the sale of goods. Milestone income is recognised as revenue in the accounting period in which the milestones are achieved. Milestones are agreed on a project by project basis and will be evidenced by set deliverables.

Revenue from the sales of goods by Midatech Pharma US, Inc. is recognised when the significant risks and rewards of ownership are transferred to the buyer and it is probable the previously agreed upon payment will be received. It represents the full list price of products shipped to wholesalers and other customers less product returns, discounts, rebates and other incentives based on the sales price. These criteria are considered to be met when the goods are delivered to the buyer.

Sales to wholesalers provide for selling prices that are fixed on the date of sale, although Midatech Pharma US, Inc offers certain discounts to group purchasing organisations and governmental programs. The wholesalers take title to the product, bear the risk and rewards and have ownership of the inventory. The group has sufficient experience with their material wholesaler distribution channel to reasonably estimate product returns from its wholesalers while the wholesalers are still holding inventory.

Grant revenue

Where grant income is received, which is not a direct re-imbursement of related costs and at the point at which the conditions have been met for recognition as income, this has been shown within grant revenue.

Government grants and government loans

Where government grants are received as a re-imbursement of directly related costs they are credited to research and development expense in the same period as the expenditure towards which they are intended to contribute.

The Group receives government loans that have a below-market rate of interest. These loans are recognised and measured in accordance with IAS 39. The benefit of the below-market rate of interest is measured as the difference between the initial carrying value of the loan discounted at a market rate of interest and the proceeds received.

The difference is held within deferred revenue as a government grant and is released as a credit to research and development expense in line with the expenditure to which it relates. In a situation where the proceeds were invested in plant and equipment, the deferred revenue is credited to research and development within the income statement in line with the depreciation of the acquired asset.

Business combinations and externally acquired intangible assets

Business combinations are accounted for using the acquisition method at the acquisition date, which is the date at which the Group obtains control over the entity. The cost of an acquisition is measured as the amount of the consideration transferred to the seller, measured at the acquisition date fair value, and the amount of any non-controlling interest in the acquiree. The Group measures goodwill initially at cost at the acquisition date, being:

- the fair value of the consideration transferred to the seller, plus

- the amount of any non-controlling interest in the acquiree, plus

- if the business combination is achieved in stages, the fair value of the existing equity interest in the acquiree re-measured at the acquisition date, less

- the fair value of the net identifiable assets acquired and assumed liabilities

Acquisition costs incurred are expensed and included in administrative costs. Any contingent consideration to be transferred by the acquirer is recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration, whether it is an asset or liability, will be recognised either as a profit or loss or as a change to other comprehensive income. If the contingent consideration is classified as equity, it is not re-measured.

An intangible asset, which is an identifiable non-monetary asset without physical substance, is recognised to the extent that it is probable that the expected future economic benefits attributable to the asset will flow to the Group and that its cost can be measured reliably. The asset is deemed to be identifiable when it is separable or when it arises from contractual or other legal rights.

Externally acquired intangible assets other than goodwill are initially recognised at cost and subsequently amortised on a straight-line basis over their useful economic lives where they are in use. The amortisation expense is included within the administrative cost in the consolidated statement of comprehensive income. Goodwill is stated at cost less any accumulated impairment losses.

The amounts ascribed to intangibles recognised on business combinations are arrived at by using appropriate valuation techniques (see section related to critical estimates and judgements below).

In-process research and development (IPRD) programmes acquired in business combinations are recognised as assets even if subsequent expenditure is written off because the criteria specified in the policy for development costs below are not met. IPRD is subject to annual impairment testing until the completion or abandonment of the related project. No further costs are capitalised in respect of this IPRD unless they meet the criteria for research and development capitalisation as set out below.

As per IFRS 3, once the research and development of each defined project is completed, the carrying value of the acquired IPRD is reclassified as a finite-lived asset and amortised over its useful life.

Product and marketing rights acquired in business combinations are recognised as assets and are amortised over their useful life. Under the terms of various licenses, the Group holds the US rights to sell four products approved by the Food and Drug Administration: Zuplenz®, Gelclair®, Oravig® and Soltamox®.

The significant intangibles recognised by the Group and their useful economic lives are as follows:

The useful economic life of IPRD will be determined when the in-process research projects are completed.

Internally generated intangible assets (development costs)

Expenditure on the research phase of an internal project is recognised as an expense in the period in which it is incurred. Development costs incurred on specific projects are capitalised when all the following conditions are satisfied:

· Completion of the asset is technically feasible so that it will be available for use or sale

· The Group intends to complete the asset and use or sell it

· The Group has the ability to use or sell the asset and the asset will generate probable future economic benefits (over and above cost)

· There are adequate technical, financial and other resources to complete the development and to use or sell the asset, and

· The expenditure attributable to the asset during its development can be measured reliably.

Judgement is applied when deciding whether the recognition criteria are met. Judgements are based on the information available. In addition, all internal activities related to the research and development of new projects are continuously monitored by the Directors. The Directors consider that the criteria to capitalise development expenditure are not met for a product prior to that product receiving regulatory approval in at least one country.

Development expenditure not satisfying the above criteria, and expenditure on the research phase of internal projects are included in research and development costs recognised in the Consolidated Statement of Comprehensive Income as incurred. No projects have yet reached the point of capitalisation.

Impairment of non-financial assets

Assets that have an indefinite useful life, for example goodwill, or intangible assets not ready for use, such as IPRD, are not subject to amortisation and are tested annually for impairment. 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 to sell and value in use. An impairment charge of £11.4m was recognised in 2016 against the product rights of Oravig, a product of Midatech Pharma US and £1.8m was recognised in 2014 against the IPRD of the Midatech Pharma (Wales) Limited cash generating unit.

Impairment of non-financial assets (continued)

For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). The group at 31 December 2016 had two cash generating units (2015: Two, 2014: One), see note 14. Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversal of impairment at each reporting date.

Impairment charges are included in profit or loss, except, where applicable, to the extent they reverse gains previously recognised in other comprehensive income. An impairment loss recognised for goodwill is not reversed.

Patents and trademarks

The costs incurred in establishing patents and trademarks are either expensed in accordance with the corresponding treatment of the development expenditure for the product to which they relate or capitalised if the development expenditure to which they relate has reached the point of capitalisation as an intangible asset.

Joint arrangements

The Group is a party to a joint arrangement when there is a contractual arrangement that confers joint control over the relevant activities of the arrangement to the Group and at least one other party. Joint control is assessed under the same principles as control over subsidiaries.

The Group classifies its interests in joint arrangements as either:

· Joint ventures: where the Group has rights to only the net assets of the joint arrangement.

· Joint operations: where the Group has both the rights to assets and obligations for the liabilities of the joint arrangement.

In assessing the classification of interests in joint arrangements, the Group considers:

· The structure of the joint arrangement

· The legal form of joint arrangements structured through a separate vehicle

· The contractual terms of the joint arrangement agreement

· Any other facts and circumstances (including any other contractual arrangements).

The Group accounts for its interests in joint ventures using the equity method. The equity accounted joint venture is highly immaterial with a profit and loss impact of £Nil during 2016 (2015: Nil, 2014: £12k).

Any premium paid for an investment in a joint venture above the fair value of the Group's share of the identifiable assets, liabilities and contingent liabilities acquired is capitalised and included in the carrying amount of the investment in joint venture. Where there is objective evidence that the investment in a joint venture has been impaired the carrying amount of the investment is tested for impairment in the same way as other non-financial assets.

Amounts received under collaborative joint agreements, representing contributions to the Group's research and development programmes, are recognised as a credit against research and development expense in the period over which the related costs are incurred. All costs related to these collaborative agreements are recorded as research and development expenditure.

The Group accounts for its interests in joint operations by recognising its share of assets, liabilities, revenues and expenses in accordance with its contractually conferred rights and obligations.

Foreign currency

Transactions entered into by subsidiaries entities in a currency other than the currency of the primary economic environment, in which they operate, are recorded at the rates ruling when the transactions occur. Foreign currency monetary assets and liabilities are translated at the rates ruling at the reporting date. Exchange differences arising on the retranslation of unsettled monetary assets and liabilities are recognised immediately in profit or loss.

The functional currency of the Company is Pounds Sterling, and the reporting currency is also Pounds Sterling. Foreign subsidiaries use the local currencies of the country where they operate. On consolidation, the results of overseas operations are translated into Pounds Sterling at rates approximating to those ruling when the transactions took place. All assets and liabilities of overseas operations, including goodwill arising on the acquisition of those operations, are translated at the rate ruling at the reporting date. Exchange differences arising on translating the opening net assets at opening rate and the results of overseas operations at actual rate are recognised in other comprehensive income and accumulated in the foreign exchange reserve.

Exchange differences recognised in the profit or loss of Group entities on the translation of long-term monetary items forming part of the Group's net investment in the overseas operation concerned are reclassified to other comprehensive income and accumulated in the foreign exchange reserve on consolidation.

On disposal of a foreign operation, the cumulative exchange differences recognised in the foreign exchange reserve relating to that operation up to the date of disposal are transferred to the consolidated statement of comprehensive income as part of the profit or loss on disposal.

Financial assets

The Group does not have any financial assets which it would classify as fair value through profit or loss, available for sale or held to maturity. Therefore, all financial assets are classed as loans and receivables as defined below.

Loans and receivables

These assets are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise principally through the provision of goods and services to customers (e.g. trade receivables), but also incorporate other types of contractual monetary asset. They are initially recognised at fair value plus transaction costs that are directly attributable to their acquisition or issue, and are subsequently carried at amortised cost using the effective interest rate method, less provision for impairment.

Impairment provisions are recognised when there is objective evidence (such as significant financial difficulties on the part of the counterparty or default or significant delay in payment) that the Group will be unable to collect all of the amounts due under the terms, the amount of such a provision being the difference between the net carrying amount and the present value of the future expected cash flows associated with the impaired receivable.

For trade receivables, which are reported net; such provisions are recorded in a separate allowance account with the loss being recognised within administrative expenses in the consolidated statement of comprehensive income. On confirmation that the trade receivable will not be collectable, the gross carrying value of the asset is written off against the associated provision.

The Group's loans and receivables comprise trade and other receivables and cash and cash equivalents in the consolidated statement of financial position.

Cash and cash equivalents include cash in hand, deposits held at call with original maturities of three months or less.

Financial liabilities

The Group classifies its financial liabilities into one of two categories, depending on the purpose for which the liability was acquired.

Fair value through profit and loss ("FVTPL")

The Group assumed fully vested warrants and share options on the acquisition of DARA Biosciences, Inc. The number of ordinary shares to be issued when exercised is fixed, however the exercise prices are denominated in US Dollars being different to the functional currency of the parent company. Therefore, the warrants and share options are classified as equity settled derivative financial liabilities through the profit and loss account. The financial liabilities were valued using the Black-Scholes option pricing model. Financial liabilities at FVTPL are stated at fair value, with any gains or losses arising on re-measurement recognised in profit or loss. The net gain or loss recognised in profit or loss incorporated any interest paid on the financial liability and is included in the 'other gains and losses' line item in the income statement. Fair value is determined in the manner described in note 22.

Other financial liabilities include the following items:

· Borrowings are initially recognised at fair value net of any transaction costs directly attributable to the issue of the instrument. Such interest-bearing liabilities are subsequently measured at amortised cost using the effective interest rate method, which ensures that any interest expense over the period to repayment is at a constant rate on the balance of the liability carried in the consolidated statement of financial position. Interest expense in this context includes initial transaction costs and premium payable on redemption, as well as any interest or coupon payable while the liability is outstanding.

· Government loans received on favourable terms below market rate are discounted at a market rate of interest. The difference between the present value of the loan and the proceeds is held as a government grant within deferred revenue and is released to research and development expenditure in line with when the asset or expenditure is recognised in the income statement.

· Trade payables and other short-term monetary liabilities are initially recognised at fair value and subsequently carried at amortised cost using the effective interest method.

Share capital

Financial instruments issued by the Group are classified as equity only to the extent that they do not meet the definition of a financial liability or financial asset. The Group has two classes of share in existence:

· Ordinary shares of £0.00005 each are classified as equity instruments;

· Deferred shares of £1 each are classified as equity instruments.

Retirement benefits: defined contribution schemes

Contributions to defined contribution pension schemes are charged to the consolidated statement of comprehensive income in the year to which they relate.

Provisions

Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event; it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.

Share-based payments

The Group operates a number of equity-settled, share-based compensation plans, under which the entity receives services from employees as consideration for equity instruments (options) of the Group. The fair value of the employee services received in exchange for the grant of the options is recognised as an expense. The total amount to be expensed is determined by reference to the fair value of the options granted:

· including any market performance conditions (including the share price);

· excluding the impact of any service and non-market performance vesting conditions (for example, remaining an employee of the entity over a specified time period); and

· including the impact of any non-vesting conditions (for example, the requirement for employees to save).

Non-market performance and service conditions are included in assumptions about the number of options that are expected to vest. The total expense is recognised over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. Where vesting conditions are accelerated on the occurrence of a specified event, such as a change in control or initial public offering, such remaining unvested charge is accelerated to the income statement.

In addition, in some circumstances employees may provide services in advance of the grant date and therefore the grant date fair value is estimated for the purposes of recognising the expense during the period between service commencement period and grant date.

At the end of each reporting period, the Group revises its estimates of the number of options that are expected to vest based on the non-market vesting conditions. It recognises the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity. When the options are exercised, the company issues new shares. The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium.

Leased assets

Where substantially all of the risks and rewards incidental to ownership of a leased asset have been transferred to the Group (a "finance lease"), the asset is treated as if it had been purchased outright. The amount initially recognised as an asset is the lower of the fair value of the leased property and the present value of the minimum lease payments payable over the term of the lease. The corresponding lease commitment is shown as a liability. Lease payments are analysed between capital and interest. The interest element is charged to the consolidated statement of comprehensive income over the period of the lease and is calculated so that it represents a constant proportion of the lease liability. The capital element reduces the balance owed to the lessor.

Where substantially all of the risks and rewards incidental to ownership are not transferred to the Group (an "operating lease"), the total rentals payable under the lease are charged to the consolidated statement of comprehensive income on a straight-line basis over the lease term. The aggregate benefit of lease incentives is recognised as a reduction of the rental expense over the lease term on a straight-line basis.

Deferred taxation

Deferred tax assets and liabilities are recognised where the carrying amount of an asset or liability in the consolidated statement of financial position differs from its tax base, except for differences arising on:

· the initial recognition of goodwill;

· the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction affects neither accounting or taxable profit; and

· investments in subsidiaries and jointly controlled entities where the Group is able to control the timing of the reversal of the difference and it is probable that the difference will not reverse in the foreseeable future.

Recognition of deferred tax assets is restricted to those instances where it is probable that taxable profit will be available against which the difference can be utilised.

The amount of the asset or liability is determined using tax rates that have been enacted or substantively enacted by the reporting date and are expected to apply when the deferred tax assets or liabilities are recovered or settled.

Property, plant and equipment

Items of property, plant and equipment are initially recognised at cost. As well as the purchase price, cost includes directly attributable costs.

Depreciation is provided on all items of property, plant and equipment so as to write off their carrying value over their expected useful economic lives. It is provided at the following rates:

Inventories

Inventories are stated at the lower of cost or net realisable value. Net realisable value is the market value. In evaluating whether inventories are stated at the lower of cost or net realisable value, management considers such factors as the amount of inventory on hand and in the distribution channel, estimated time required to sell such inventory, remaining shelf life, and current and expected market conditions, including levels of competition.

If net realisable value is lower than the carrying amount a write down provision is recognised for the amount by which the carrying value exceeds its net realisable value.

Inventory is valued at the lower of cost or market value using the FIFO method. Inventory is charged to the income statement as cost of sales as it is sold.

The preparation of these consolidated financial statements requires the Group to make estimates, assumptions and judgments that can have a significant impact on the reported amounts of assets and liabilities, revenue and expenses and related disclosure of contingent assets and liabilities, at the respective dates of our financial statements. The Group bases its estimates, assumptions and judgments on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. Management evaluates estimates, assumptions and judgments on a regular basis and makes changes accordingly, and discusses critical accounting estimates with the board of Directors.

The following are considered to be critical accounting policies because they are important to the portrayal of the financial condition or results of operations of the Group and they require critical management estimates and judgments about matters that are uncertain.

Business combinations

The Directors determine and allocate the purchase price of an acquired business to the assets acquired and liabilities assumed as of the business combination date. The purchase price allocation process requires the use of significant estimates and assumptions, including the estimated fair value of the acquired intangible assets.

While the Directors use their best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the date of acquisition, our estimates and assumptions are inherently uncertain and subject to refinement. Examples of critical estimates in valuing the intangible assets we have acquired or may acquire in the future include but are not limited to:

· future expected cash flows from in-process research and development;

· the fair value of the property, plant and equipment; and

· discount rates.

Judgement has also been applied in the distinction of an asset purchase and business combination with regard to the Zuplenz® acquisition. Judgement was applied in assessing the inputs, processes and outputs relevant to the acquisition to arrive at the conclusion that the treatment should be a business combination.

Impairment of goodwill and intangible assets not yet ready for use

Goodwill and intangibles not yet ready for use are tested for impairment at the cash generating unit level on an annual basis at the year end and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a cash generating unit below its carrying value. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit.

Application of the goodwill impairment test requires judgment, including the identification of cash generating units, assignment of assets and liabilities to such units, assignment of goodwill to such units and determination of the fair value of a unit and for intangible assets not yet ready for use, the fair value of the asset. The fair value of each cash generating unit or asset is estimated using the income approach, on a discounted cash flow methodology. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for the business, estimation of the useful life over which cash flows will occur and determination of our weighted-average cost of capital. The carrying value of our goodwill was £14.5 million and intangibles not yet ready for use was £10.8 million as at 31 December 2016.

The estimates used to calculate the fair value of a cash generating unit change from year to year based on operating results and market conditions. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for each such unit. Based on the analysis performed, there was no impairment in the year ended 31 December 2016 or in 2015 for goodwill, however there was an impairment charge of £11.4m against the Midatech Pharma US product rights in 2016. An impairment charge of £1.8m was also recognised against the IPRD of the Midatech Pharma (Wales) Limited cash generating unit in the year ended 31 December 2014. See note 14.

Share-based payments

The Group accounts for share-based payment transactions for employees in accordance with IFRS 2 Share-based Payment, which requires us to measure the cost of employee services received in exchange for the options on our ordinary shares, based on the fair value of the award on the grant date.

The Directors selected the Black-Scholes-Merton option pricing model as the most appropriate method for determining the estimated fair value of our share-based awards without market conditions. For performance-based options that include vesting conditions relating to the market performance of our ordinary shares, a Monte Carlo pricing model was used in order to reflect the valuation impact of price hurdles that have to be met as conditions to vesting.

The resulting cost of an equity incentive award is recognised as expense over the requisite service period of the award, which is usually the vesting period. Compensation expense is recognised over the vesting period using the straight-line method and classified in the consolidated statements of comprehensive income.

The assumptions used for estimating fair value for share-based payment transactions are disclosed in note 29 to our consolidated financial statements and are estimated as follows:

· Volatility is estimated based on the average annualized volatility of a number of publicly traded peer companies in the biotech sector;

· The estimated life of the option is estimated to be until the first exercise period, which is typically the month after the option vests; and

· The dividend return is estimated by reference to our historical dividend payments. Currently, this is estimated to be zero as no dividend has been paid in the prior periods.

Income Taxes

Deferred tax assets are recognised for unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilised. Significant management judgment is required to determine the amount of deferred tax assets that can be recognised based upon the likely timing and the level of future taxable profits together with future tax planning strategies.

In 2016, there were £26.96 million (2015: - £23.29 million, 2014 - £16.02 million)) of gross unutilised tax losses carried forward. No deferred tax asset has been provided in respect of these losses as there was insufficient evidence to support their recoverability in future periods.

Intangible asset recognition

Research and development costs are charged to expense as incurred and are typically made up of salaries and benefits, clinical and preclinical activities, drug development and manufacturing costs, and third-party service fees, including for clinical research organizations and investigative sites. Costs for certain development activities, such as clinical trials, are periodically recognised based on an evaluation of the progress to completion of specific tasks using data such as patient enrolment, clinical site activations, or information provided by vendors on their actual costs incurred. Payments for these activities are based on the terms of the individual arrangements, which may differ from the pattern of costs incurred, and are reflected in the financial statements as prepaid or accrued expenses.

Gross sales

Gross sales of £8.66m in the year ended 31 December 2016 (2015: £0.91m; 2014: £0.03m) represents the full list price of products shipped to wholesalers and other customers before product returns, discounts, rebates and other incentives based on the sales price.

Revenue

Geographical analysis of revenue by destination of customer

In 2016, the Group had three customers, all in the Commercial segment, that each accounted for at least 10% of total revenue (2015: one customer in Pipeline R&D, 2014: none):

Following the acquisition of Midatech Pharma US, Inc., the Group contains two reportable operating segments as follows:

· Pipeline Research and Development: The Pipeline Research and Development ("Pipeline R&D") segment seeks to develop products using the Group's nanomedicine and sustained release technology platforms.

· Commercial: The Commercial segment distributes and sells the Group's commercial products. Midatech Pharma US promotes the Group's commercial, cancer supportive care products in the US market, in which the Group has exclusive licenses to Soltamox, Oravig and Zuplenz®, an exclusive license to distribute, promote and market Gelclair, and a marketing agreement to co-promote two other products: Ferralet 90 and Aquoral. As and when new products are introduced the Commercial segment will include revenues from the marketing of these commercial products.

The accounting policies of the reportable segments are consistent with the Group's accounting policies described in note 1. Segment result represents the result of each segment without the allocation of head office expenses, interest expense, interest income and tax.

No measures of segment assets and segment liabilities are reported to the Group's Board of Directors in order to assess performance and allocate resources. There is no intersegment activity and all revenue is generated from external customers.

Both the UK and Spanish entities meet the aggregation criteria and have therefore been presented as a single reportable segment under Pipeline R&D. The research and development activities involve the discovery and development of pharmaceutical products in the field of nanomedicine and sustained release technology. The US operating company is engaged in the sale and marketing of cancer supportive care products and is reported under the Commercial segment.

 Segmented results for the year ended 31 December 2016

Segmented results for the year ended 31 December 2015

(1) There were no unallocated costs in 2016. Unallocated costs in 2015 represent fees associated with the acquisitions of Midatech Pharma US, Inc. and Zuplenz® in 2015.

For the year ended 31 December 2014 there was only one reportable segment being Pipeline R&D. The unallocated costs in respect of 2014 were £1.216m.

Non-current assets by location of assets

All material additions to non-current assets in 2016, 2015 and 2014 were in the Pipeline R&D segment.

Acquisition costs relate to professional fees incurred on the acquisition of Midatech Pharma US, Inc. and Zuplenz® in 2015 and Midatech Pharma (Wales) Limited in 2014.

Amortisation of product and marketing rights are included with distribution, sales and marketing expenses.

Employee numbers

The average number of staff employed by the Group during the financial year amounted to: