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AXOVANT SCIENCES LTD. Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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02/09/2018 | 10:24pm CET
The following discussion and analysis of our financial condition, results of
operations and cash flows should be read in conjunction with (1) the unaudited
interim condensed consolidated financial statements and the related notes
thereto included elsewhere in this Quarterly Report on Form 10-Q, and (2) the
audited consolidated financial statements and notes thereto and management's
discussion and analysis of financial condition and results of operations for the
fiscal year ended March 31, 2017 included in our Annual Report on Form 10-K,
filed with the Securities and Exchange Commission, or the SEC, on June 13, 2017.
Unless the context requires otherwise, references in this report to "Axovant",
the "Company," "we," "us," and "our" refer to Axovant Sciences Ltd. and its
subsidiaries.
This Quarterly Report on Form 10-Q contains "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, or the
Securities Act, and Section 21E of the Securities Exchange Act of 1934, as
amended, or the Exchange Act.  These statements are often identified by the use
of words such as "anticipate," "believe," "continue," "could," "estimate,"
"expect," "intend," "may," "plan," "project," "will," "would" or the negative or
plural of these words or similar expressions or variations, although not all
forward-looking statements contain these identifying words.  We cannot assure
you that the events and circumstances reflected in the forward-looking
statements will be achieved or occur and actual results could differ materially
from those projected in the forward-looking statements. The forward-looking
statements in this Quarterly Report on Form 10-Q include, but are not limited
to, statements regarding our intentions, beliefs, projections, outlook, analyses
or current expectations concerning, among other things:

• the success and timing of our ongoing development programs for nelotanserin

and RVT-104;

• the success of our interactions with international regulatory authorities;

• our plans to develop and commercialize nelotanserin and RVT-104;

• the anticipated start dates, durations and completion dates of our ongoing

and future preclinical studies and clinical trials;

• the anticipated designs of our future clinical studies;

• anticipated future regulatory submissions and the timing of, and our ability

to, obtain and maintain regulatory approval for our product candidates;

• our anticipated commercial launch of our key product candidate, nelotanserin;

• the rate and degree of market acceptance and clinical utility of any approved

product candidate;

• our ability to quickly and efficiently identify and develop product

candidates;

• our commercialization, marketing and manufacturing capabilities and strategy;

• continued service of our key scientific or management personnel;

• our ability to obtain, maintain and enforce intellectual property rights for

our drug candidates;

• our anticipated future cash position;

• our estimates regarding our results of operations, financial condition,

liquidity, capital requirements, prospects, growth and strategies;

• the success of competing drugs that are or may become available;

• our stated objective of becoming the leading biopharmaceutical company

focused on neurology, with an initial emphasis on the treatment of dementia

by addressing multiple forms and aspects of this condition.



We have based these forward-looking statements largely on our current
expectations and projections about future events, including the responses we
expect from the U.S. Food and Drug Administration, or FDA, and other regulatory
authorities and financial trends that we believe may affect our financial
condition, results of operations, business strategy, preclinical studies and
clinical trials and financial needs. Such forward-looking statements are subject
to a number of risks, uncertainties, assumptions and other factors known and
unknown that could cause actual results and the timing of certain events to
differ materially from future results expressed or implied by the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those identified herein, and those
discussed in the section titled "Risk Factors" set forth in Part II, Item 1A of
this Quarterly Report on Form 10-Q and in our other filings with the SEC. These
risks are not exhaustive. You should not rely upon forward-looking statements as
predictions of future events. Furthermore, such forward-looking statements speak
only as of the date of this report. New risk factors emerge from time to time
and it is not possible for our management to predict all risk factors, nor can
we assess the impact of all factors on our business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially
from those contained in any forward-looking statements. Except as required by
law, we undertake no obligation to update any forward-looking statements to
reflect events or circumstances after the date of such statements.


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Overview

We are a clinical-stage biopharmaceutical company dedicated to advancing
treatments for patients with life-altering neurologic conditions. To date, our
primary focus has been on developing nelotanserin, a selective inverse agonist
of the 5-HT2A receptor, and intepirdine, an antagonist of the 5-HT6 receptor. In
January 2018, we announced the results of a pilot Phase 2 Visual Hallucination
study of nelotanserin in patients with Lewy body dementia, or LBD. We plan to
make a determination of the overall development strategy for nelotanserin once
we complete our ongoing comprehensive clinical, regulatory and commercial
review. Also in January 2018, we announced the discontinuation of our
development of intepirdine following our announcement that neither Phase 2b
HEADWAY clinical trial of intepirdine in patients with dementia with Lewy
bodies, or DLB, nor the pilot Phase 2 Gait and Balance clinical trial of
intepirdine in patients with dementia and gait impairment met their respective
primary endpoints and the September 2017 announcement that our Phase 3 MINDSET
clinical trial of intepirdine in patients with mild-to-moderate Alzheimer's
disease did not meet its co-primary efficacy endpoints. We remain committed to
identifying, developing and commercializing other novel treatments for unmet
needs in neurology, including areas outside of dementia. We are actively
exploring opportunities to acquire or in-license additional products, product
candidates and technologies to continue to build our pipeline.

We were founded in October 2014 and our operations to date have been limited to
organizing and staffing our company, raising capital, acquiring our product
candidates and advancing our product candidates, intepirdine and nelotanserin,
into clinical development. In June 2015, we completed our initial public
offering, or IPO, from which we raised net proceeds of $334.5 million, after
deducting underwriting discounts and commissions and offering expenses paid by
us. In February 2017, we and our subsidiaries entered into a loan and security
agreement with Hercules Capital, Inc., from which we raised net proceeds of
$53.5 million. In April 2017, we completed a follow-on public offering of our
common shares, from which we raised net proceeds of approximately $134.5
million, after deducting underwriting discounts and commissions and offering
expenses paid by us.

To date, we have not generated any revenue. We have recorded net losses of $57.9
million and $47.8 million for the three months ended December 31, 2017 and 2016,
respectively, $196.3 million and $128.1 million for the nine months ended
December 31, 2017 and 2016, respectively, and $181.0 million for the year ended
March 31, 2017. We have determined that we have one operating and reporting
segment.

Nelotanserin

Overview

In October 2015, we acquired from our parent company, Roivant Sciences Ltd., or
RSL, the global rights to nelotanserin, a selective inverse agonist of the
5-HT2A receptor. To date, we have been investigating and developing nelotanserin
to address visual hallucinations and REM behavior disorder, or RBD, in patients
with LBD. In June 2017, we received Fast Track designation from the FDA for
nelotanserin for the treatment of visual hallucinations in DLB.
Nelotanserin in Lewy Body Dementia
LBD includes two similar conditions, DLB and Parkinson's disease dementia. There
is significant overlap in the pathology and clinical presentation of both
conditions; however, the primary difference generally depends on the timing of
the onset of cognitive decline relative to the onset of movement-related
symptoms. LBD is a progressive neurodegenerative disorder pathologically
characterized by the aggregation of alpha-synuclein and other proteins, known as
Lewy bodies, in the brain, causing disruption in cognition, function and
behavior. In DLB, the cognitive decline typically occurs before or within one
year of the onset of movement disorder symptoms. In Parkinson's disease
dementia, movement disorder symptoms typically precede cognitive decline by more
than one year. The Lewy Body Dementia Association estimates that there are 1.4
million patients with LBD in the United States.
LBD patients suffer from frequent visual hallucinations, which are often treated
with off-label atypical antipsychotic medications such as quetiapine. Use of
atypical antipsychotic medications, which have activity against the dopamine D2
receptor, can lead to increased or possibly irreversible parkinsonism in LBD
patients and a life-threatening side-effect resembling neuroleptic malignant
syndrome. We believe that there is a need for new therapeutic options that can
reduce visual hallucinations in LBD patients without risk of these severe side
effects.


                                       17
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In January 2018, we reported results for a pilot Phase 2 Visual Hallucination
study of nelotanserin in patients with LBD. On the primary endpoint of safety,
including an assessment of symptoms as measured by the Unified Parkinson's
Disease Rating Scale (UPDRS), nelotanserin was generally well tolerated. A
number of exploratory efficacy assessments were conducted, including the UPDRS
Part III; the Scale for the Assessment of Positive Symptoms (SAPS); SAPS-PD; the
Patient Global Impression of Change of Visual Hallucinations (PGIC-VH); and an
internally developed patient diary. In a prespecified intention-to-treat
analysis, nelotanserin treatment versus placebo (n=27) resulted in a 3.12 point
improvement in the UPDRS Part III with a positive trend (p=0.075, unadjusted).
In a prespecified analysis of the DLB patient subset (n=19), nelotanserin
improved the UPDRS Part III by 4.00 points (p=0.041, unadjusted). No other
statistical trends of improvement were seen on prespecified analyses of the full
SAPS, SAPS-PD, PGIC-VH, or in the patient diary. Further analyses of these data
are being conducted which could yield new insights into the effects of
nelotanserin. We plan to make a determination of the overall development
strategy for nelotanserin once we complete our ongoing comprehensive clinical,
regulatory and commercial review.

Nelotanserin for REM Behavior Disorder in Lewy Body Dementia
RBD is a common clinical feature of LBD, and is a condition in which patients
can physically act out their dreams, impacting their quality of life and
endangering themselves and their bed partners. While off-label treatment of RBD
with benzodiazepines is common, this class of drugs is associated with severe
side effects in patients with dementia, including sedation, worsening of
cognition and increased risk of falls. We believe that there is a need for new
therapeutic options that can reduce the frequency of RBD without sedating
patients or worsening cognition in patients with dementia.
In March 2016, we initiated a four-week double-blind, randomized,
placebo-controlled Phase 2 study in patients with DLB and Parkinson's disease
dementia experiencing RBD. This study will utilize objective measures of
efficacy as assessed in a sleep-lab setting. Due to slower than anticipated
enrollment, technical challenges and the complexity of this study, we believe it
may not qualify as pivotal. Therefore, we have elected to close enrollment prior
to reaching our enrollment target, and we expect to receive top-line results in
the third quarter of calendar year 2018. Patients completing the double-blind
portion of this study are eligible to enroll in an open label extension study of
nelotanserin.

Intepirdine
Overview
We acquired the worldwide rights to intepirdine from Glaxo Group Limited and
GlaxoSmithKline Intellectual Property Development Limited, collectively GSK,
under an asset purchase agreement entered into in December 2014, or the GSK
Agreement.

Intepirdine Clinical Studies
In September 2017, we announced top-line results from the Phase 3 MINDSET trial.
At 24 weeks, patients treated with 35 mg of intepirdine did not experience
improvement in cognition or in measures of activities of daily living as
measured by the Alzheimer's Disease Assessment Scale-Cognitive Subscale
(ADAS-Cog) and by the Alzheimer's Disease Cooperative Study-Activities of Daily
Living scale (ADCS-ADL), respectively, compared to patients treated with
placebo. In January 2018, we announced results for the Phase 2b HEADWAY trial of
intepirdine in patients with DLB and the pilot Phase 2 Gait and Balance trial in
patients with dementia and gait impairment. In each of these trials, while
intepirdine was generally well tolerated, it did not meet its primary efficacy
endpoints. In light of the data from these trials, we have discontinued any
further development of intepirdine.


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RVT-104

Overview

In August 2016, we and Qaam Pharmaceuticals LLC, or Qaam, entered into an
exclusive license agreement under which we in-licensed the rights to develop and
commercialize RVT-104, a product candidate that combines rivastigmine, a
cholinesterase inhibitor, with peripherally acting quaternary amine muscarinic
receptor antagonists. This combination could provide a means to mitigate the
known peripheral side effects of cholinesterase inhibitors and may also allow
higher than currently approved doses of rivastigmine, which we believe may
improve treatment of symptoms of neurodegenerative disorders such as Alzheimer's
disease and LBD.
RVT-104 in Alzheimer's Disease and Dementia with Lewy Bodies
Cholinesterase inhibitors are the standard of care in both Alzheimer's disease
and DLB. Despite their widespread use, many patients cannot tolerate the
cholinesterase inhibitors because of their cholinergic side effects such as
nausea, vomiting and diarrhea. We believe that drugs that can mitigate these
cholinergic side effects may allow more patients to receive optimal
cholinesterase inhibitor therapy. We are exploring RVT-104, a combination of
rivastigmine and a peripheral muscarinic receptor antagonist, as a potential
treatment for patients with Alzheimer's disease or DLB. We anticipate making a
decision about this study after an internal portfolio review occurs in the first
quarter of 2018.

Our Key Agreements

Arena Development Agreement for Nelotanserin
In October 2015, we exercised an option to acquire global rights, title,
interest and obligations in and to nelotanserin from our parent company, RSL. In
May 2015, RSL entered into a development, marketing and supply agreement for
nelotanserin, or the Arena Development Agreement, with Arena Pharmaceuticals
GmbH, or Arena, and we entered into a Waiver and Option Agreement with RSL. Upon
the exercise of our option, we assumed RSL's rights and obligations under the
Arena Development Agreement, as amended on October 18, 2017. Under the Waiver
and Option Agreement, we recorded $5.3 million as research and development
expense which was 110% of the payments made to Arena by RSL, and the costs
incurred by RSL in connection with the development of nelotanserin. We will be
responsible for future contingent payments under the Arena Development
Agreement, including up to $4.0 million in potential development milestone
payments, up to $37.5 million in potential regulatory milestone payments and up
to $60.0 million in potential commercial milestone payments. Under the Arena
Development Agreement, we are also obligated to purchase all commercial supplies
of nelotanserin from Arena at a fixed price equal to 15% of net sales of
nelotanserin.
The Arena Development Agreement will remain in effect until terminated: (1) by
the parties' mutual agreement; (2) for any reason by us upon 90 days' written
notice to Arena; (3) by either party upon written notice for the other party's
material breach or insolvency event if such party fails to cure such breach or
the insolvency event is not dismissed within the specified cure period; or (4)
by Arena if we or our affiliates participate in a challenge to certain Arena
patents.
Services Agreements with Roivant Sciences, Inc. and Roivant Sciences GmbH
In October 2014, we and our wholly owned subsidiary, Axovant Sciences, Inc., or
ASI, entered into a services agreement with Roivant Sciences, Inc., or RSI, a
wholly owned subsidiary of RSL, pursuant to which RSI provides us with services
in relation to the identification of potential product candidates and project
management of clinical trials, as well as other services related to our
development, administrative and financial functions. In February 2017, in
connection with the contribution and assignment of all of our intellectual
property rights to Axovant Sciences GmbH, or ASG, we amended and restated this
services agreement effective as of December 13, 2016, as a result of which ASG
was added as a recipient of services from RSI. In addition, ASG also entered
into a separate services agreement with Roivant Sciences GmbH, or RSG, a wholly
owned subsidiary of RSL, effective as of December 13, 2016, for the provision of
services by RSG to ASG in relation to the identification of potential product
candidates and project management of clinical trials, as well as other services
related to development, administrative and financial activities. Under the terms
of both services agreements, we are obligated to pay or reimburse RSI and RSG
for the costs they, or third parties acting on their behalf, incur in providing
services to us or ASG, including administrative and support services as well as
research and development services. In addition, we are obligated to pay RSI and
RSG for their services at a pre-determined mark-up on the costs incurred
directly by RSI and RSG in connection with any general and administrative and
research and development services provided directly by RSI and RSG.

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Under the services agreement in effect as of December 31, 2016, we incurred
expenses of $1.4 million and $1.9 million for the three months ended
December 31, 2017 and 2016, respectively, and $5.8 million and $5.3 million for
the nine months ended December 31, 2017 and 2016, respectively, inclusive of the
mark-up. We have recorded these charges as research and development expense and
general and administrative expense in our condensed consolidated statements of
operations.
Venture Debt Financing from Hercules Capital, Inc.

On February 2, 2017, we and our wholly owned subsidiaries, Axovant Holdings
Limited, or AHL, ASG and ASI entered into a loan and security agreement, as
amended on May 24 and September 22, 2017, or the ''Loan Agreement'', with
Hercules Capital, Inc., or Hercules, under which we, AHL and ASG, collectively
the Borrowers, borrowed an aggregate of $55.0 million, or the Term Loan. ASI
issued a guaranty of the Borrowers' obligations under the Loan Agreement. At the
closing of the Term Loan, the Borrowers paid Hercules a facility charge of
$550,000. The Term Loan bears interest at a variable per annum rate calculated
for any day as the greater of either (i) the prime rate plus 6.80%, and (ii)
10.55%. The Term Loan has a scheduled maturity date of March 1, 2021. The
Borrowers are obligated to make monthly payments of accrued interest under the
Loan Agreement until September 1, 2018, followed by monthly installments of
principal and interest through March 1, 2021. In connection with the Loan
Agreement, the Borrowers and ASI, as guarantor, granted Hercules a first
position lien on substantially all of their respective assets, excluding
intellectual property. Prepayment of the Term Loan is subject to penalty.

The Loan Agreement includes customary affirmative and restrictive covenants and
representations and warranties, including
a minimum cash covenant, a covenant against the occurrence of a "change in
control," financial reporting obligations, and certain limitations on
indebtedness, liens (including a negative pledge on intellectual property and
other assets), investments, distributions (including dividends), collateral,
transfers, mergers or acquisitions, taxes, corporate changes, and deposit
accounts. The Loan Agreement also includes customary events of default,
including payment defaults, breaches of covenants following any applicable cure
period, the occurrence of certain events that could reasonably be expected to
have a "material adverse effect" as set forth in the Loan Agreement, cross
acceleration to the debt and certain events relating to bankruptcy or
insolvency. Upon the occurrence of an event of default, a default interest rate
of an additional 5.0% may be applied to the outstanding principal balance, and
Hercules may declare all outstanding obligations immediately due and payable and
take such other actions as set forth in the Loan Agreement.

In addition, for so long as the Term Loan remains outstanding, we are required
to use commercially reasonable efforts to afford Hercules the opportunity to
participate in future underwritten equity offerings of our common shares up to a
specified amount.
In connection with the entry into the Loan Agreement, we issued a warrant to
Hercules which was exercisable for an aggregate of 274,086 of our common shares
at an exercise price of $12.04 per share. In August 2017, Hercules exercised the
warrant on a cashless basis and received a net issuance of 129,827 of our common
shares.

Financial Operations Overview
Revenue
We have not generated any revenue from the sale of any products, and we do not
expect to generate any revenue unless and until we obtain regulatory approval of
and begin to commercialize one of our product candidates in development.
Research and Development Expense
Since our inception, our operations have primarily been focused on organizing
and staffing our company, raising capital, acquiring, preparing for and
advancing our product candidates, intepirdine, nelotanserin and RVT-104, into
clinical development. Our research and development expenses include
program-specific costs, as well as unallocated internal costs.
Program-specific costs include:
•      direct third-party costs, which include expenses incurred under agreements

with contract research organizations and contract manufacturing

organizations, the cost of consultants who assist with the development of

our product candidates on a program-specific basis, investigator grants,

sponsored research, manufacturing costs in connection with producing

materials for use in conducting preclinical and clinical studies, and any

other third-party expenses directly attributable to the development of our

product candidates; and

• upfront payments for the purchase of in-process research and development,

       which include costs incurred under the GSK Agreement and the Arena
       Development Agreement.



                                       20
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Unallocated internal costs include: • share-based compensation expense for research and development personnel,

       including expense related to RSL common share awards and RSL options
       issued by RSL to RSI employees;

• personnel-related expenses, which include employee-related expenses, such

as salaries, benefits and travel expenses, for research and development

personnel;

• costs allocated to us under our services agreements with RSI and RSG; and

• other expenses, which includes the cost of consultants who assist with our

research and development, but are not allocated to a specific program.




Research and development activities will continue to be central to our business
model. We expect to continue to incur research and development expense as we
wind down our MINDSET, HEADWAY and Gait and Balance trials of intepirdine, and
our MINDSET and HEADWAY extension studies, and continue our development program
for nelotanserin in LBD. However, due to the termination of the MINDSET, HEADWAY
and Gait and Balance trials of intepirdine, we expect our overall research and
development expense to decrease significantly until such time as we undertake
additional development programs, including in relation to additional product
candidates we may in-license or acquire as we pursue our updated business plan.
We also expect our share-based compensation and other employee-related expenses
for our research and development personnel to decrease as a result of the recent
reduction in headcount.

Product candidates in later stages of clinical development, such as
nelotanserin, generally have higher development costs than those in earlier
stages of clinical development, primarily due to the increased size and duration
of later-stage clinical trials.
The duration, costs and timing of clinical trials of our products in development
and any other product candidates will depend on a variety of factors that
include, but are not limited to, the following:
• the number of trials required for approval;


• the per patient trial costs;

• the number of patients who participate in the trials;

• the number of sites included in the trials;

• the countries in which the trials are conducted;

• the length of time required to enroll eligible patients;

• the number of doses that patients receive;

• the drop-out or discontinuation rates of patients;

• the potential additional safety monitoring or other studies requested by

regulatory agencies;

• the duration of patient follow-up;

• the timing and receipt of regulatory approvals; and

• the efficacy and safety profile of the product candidates.


In addition, the probability of success of our products in development and any
other product candidate will depend on numerous factors, including competition,
manufacturing capability and commercial viability. We may never succeed in
achieving regulatory approval of our product candidates for any indication in
any country. As a result of the uncertainties discussed above, we are unable to
determine in advance the duration and completion costs of any clinical trial we
conduct, or when and to what extent we will generate revenue from the
commercialization and sale of our products in development or other product
candidates, if at all.

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General and Administrative Expense
General and administrative expenses consist primarily of share-based
compensation, legal and accounting fees, consulting services, services received
under the services agreements with RSI and RSG and employee-related expenses,
such as salaries, benefits and travel expenses, for general and administrative
personnel.
We anticipate that our general and administrative expenses will decrease,
primarily as the result of a reduction in share-based compensation and other
employee-related expenses for our general and administrative personnel due to
the recent reduction in headcount.


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Results of Operations for the Three and Nine Months Ended December 31, 2017 and
2016
The following table summarizes our results of operations for the three and nine
months ended December 31, 2017 and 2016 (in thousands):

                                     Three Months Ended                   Nine Months Ended December
                                        December 31,                                 31,
                                      2017          2016       Change         2017          2016         Change
Operating expenses:
Research and development expenses
(includes share-based
compensation expense of $2,453
and $4,592 for the three months
ended December 31, 2017 and 2016
and $14,625 and $14,029 for the
nine months ended December 31,
2017 and 2016, respectively)      $   37,346$ 36,630$   716$  119,613$  93,980$ 25,633
General and administrative
expenses
(includes share-based
compensation expense of $8,186
and $3,739 for the three months
ended December 31, 2017 and 2016
and $26,954 and $13,800 for the
nine months ended December 31,
2017 and 2016, respectively)          18,032       11,342       6,690         69,662        33,422       36,240
Total operating expenses          $   55,378$ 47,972$ 7,406$  189,275$ 127,402$ 61,873



Research and Development Expenses
For the three and nine months ended December 31, 2017 and 2016, the Company's
research and development expenses consisted of the following (in thousands):
                                           Three Months Ended                        Nine Months Ended
                                              December 31,                             December 31,
                                            2017          2016        Change         2017          2016        Change
Program-specific costs:
  Intepirdine                           $   23,064$ 22,599$    465$   70,794$ 59,074$ 11,720
  Nelotanserin                               5,842        3,187        2,655         12,635        7,990        4,645
  RVT-103                                       79          725         (646 )          691        1,358         (667 )
  RVT-104                                      582            -          582          1,216            -        1,216

Unallocated internal costs:

  Share-based compensation                   2,453        4,592       (2,139 )       14,625       14,029          596
  Personnel-related                          4,035        2,323        1,712         12,631        6,428        6,203
  Services agreements                          186          690         (504 )        1,573        2,013         (440 )
  Other                                      1,105        2,514      

(1,409 ) 5,448 3,088 2,360 Total research and development expenses $ 37,346$ 36,630$ 716$ 119,613$ 93,980$ 25,633



Research and development expenses increased by $0.7 million, to $37.3 million,
in the three months ended December 31, 2017 compared to the three months ended
December 31, 2016, as program-specific costs increased by $3.1 million,
primarily due to increased expenses related to nelotanserin. Personnel-related
expenses increased by $1.7 million primarily due to expenses associated with
severance costs. These increases were partially offset by a decrease in
share-based compensation expense of $2.1 million, primarily due to decreased
headcount related to our previously announced reduction in force.

                                       23
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Research and development expenses for the three months ended December 31, 2017
consisted primarily of $23.1 million related to intepirdine clinical studies and
related wind down activities, $5.8 million related to nelotanserin, share-based
compensation expense of $2.5 million and employee salaries and benefits of $4.0
million. The share-based compensation expense for the three months ended
December 31, 2017 included $0.2 million related to the RSL common share awards
and RSL options issued by RSL to RSI employees.
Research and development expenses were $36.6 million for the three months ended
December 31, 2016, and consisted primarily of program-specific costs of $26.5
million, share-based compensation of $4.6 million and personnel-related expenses
of $2.3 million. The share-based compensation expense included $2.1 million
related to the RSL common share awards and RSL options issued by RSL to RSI
employees.
Research and development expenses increased by $25.6 million, to $119.6 million,
in the nine months ended December 31, 2017 compared to the nine months ended
December 31, 2016, as program-specific costs increased by $16.9 million,
primarily due to increased expenses related to the MINDSET trial for
intepirdine. Personnel-related expenses and share-based compensation increased
by $6.2 million and $0.6 million, respectively, primarily due to increased
headcount.
Research and development expenses for the nine months ended December 31, 2017
consisted primarily of $70.8 million related to intepirdine, share-based
compensation of $14.6 million and employee salaries and benefits of $12.6
million. The share-based compensation expense included $4.1 million related to
the RSL common share awards and RSL options issued by RSL to RSI employees.
Research and development expenses were $94.0 million for the nine months ended
December 31, 2016, and consisted primarily of program-specific costs of $68.4
million, share-based compensation of $14.0 million and personnel-related
expenses of $6.4 million. The share-based compensation expense included $6.8
million related to the RSL common share awards and RSL options issued by RSL to
RSI employees.
General and Administrative Expenses
General and administrative expenses increased by $6.7 million, to $18.0 million,
in the three months ended December 31, 2017 compared to the three months ended
December 31, 2016, primarily due to increases in share based compensation
expense of $4.4 million and personnel-related expenses of $2.4 million primarily
due to expenses associated with severance costs.
General and administrative expenses for the three months ended December 31, 2017
consisted primarily of share-based compensation expense of $8.2 million,
employee salaries and related benefits of $4.2 million, marketing expenses,
legal and professional fees, and $1.2 million of direct and indirect costs
allocated to us under the services agreements with RSI and RSG. The share-based
compensation expense for the three months ended December 31, 2017 included
share-based compensation expense of $0.2 million for RSL common share awards and
RSL options issued to RSI employees.

General and administrative expenses were $11.3 million for the three months
ended December 31, 2016, and consisted primarily of share-based compensation
expense of $3.7 million, employee salaries and related benefits of $1.8 million,
legal and professional fees of $1.4 million, and $1.2 million of direct and
indirect costs allocated to us under the services agreement with RSI. The
share-based compensation expense for the three months ended December 31, 2016
included $0.5 million for RSL common share awards issued to RSI employees.

General and administrative expenses increased by $36.2 million, to $69.7
million, in the nine months ended December 31, 2017 compared to the nine months
ended December 31, 2016, primarily due to increases in share-based compensation
expense of $13.2 million, personnel-related expenses of $9.7 million resulting
from increased headcount, marketing expenses of $5.9 million related to
pre-commercial launch activities and legal and professional fees of $1.0
million.

General and administrative expenses for the nine months ended December 31, 2017
consisted primarily of share-based compensation expense of $27.0 million,
employee salaries and related benefits of $15.2 million, marketing expenses of
$8.9 million, legal and professional fees of $5.0 million, and $4.2 million of
direct and indirect costs allocated to us under the services agreements with RSI
and RSG. The share-based compensation expense for the nine months ended
December 31, 2017 included share-based compensation expense of $0.7 million for
RSL common share awards and RSL options issued to RSI employees.

General and administrative expenses were $33.4 million for the nine months ended
December 31, 2016, and consisted primarily of share-based compensation expense
of $13.8 million, employee salaries and related benefits, legal and professional
fees, and $3.3 million of direct and indirect costs allocated to us under the
services agreement with RSI. The share-based compensation expense for the nine
months ended December 31, 2016 included share-based compensation of $1.3 million
for RSL common share awards and RSL options issued to RSI employees.


                                       24
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Interest Expense
Interest expense was $2.0 million and $5.7 million for the three and nine months
ended December 31, 2017, respectively, consisting of interest paid and the
amortization of debt discount related to the Loan Agreement.

There was no interest expense for the three and nine months ended December 31, 2016.

Liquidity and Capital Resources
Overview
 As of December 31, 2017, we had cash totaling $188.3 million. In April, 2017,
we raised net proceeds of approximately $134.5 million, after deducting
underwriting discounts and commissions and offering expenses paid by us, from
the sale of 7,753,505 common shares in a follow-on public offering.
Loan and Security Agreement with Hercules Capital, Inc.
On February 2, 2017, we and our wholly owned subsidiaries, AHL, ASG and ASI,
entered into the Loan Agreement with Hercules. Pursuant to the Loan Agreement,
we, AHL and ASG, as the borrowers, borrowed an aggregate of $55.0 million. ASI
issued a guaranty of the borrowers' obligations under the Loan Agreement, and at
the closing, we paid Hercules a facility charge of $550,000.
The Term Loan bears interest at a variable per annum rate calculated for any day
as the greater of either (i) the prime rate plus 6.80%, and (ii) 10.55%. The
Term Loan has a scheduled maturity date of March 1, 2021. The borrowers are
obligated to make monthly payments of accrued interest under the Loan Agreement
until September 1, 2018, followed by monthly installments of principal and
interest through March 1, 2021. The borrowers' obligations under the Loan
Agreement are secured by a first position lien on substantially all of their and
ASI's respective assets, other than intellectual property. If we prepay the loan
prior to March 1, 2021, we will be obligated to pay Hercules a prepayment
charge, based on a percentage of the then-outstanding principal balance, equal
to 3.0% if the prepayment occurs within the first 18 months following February
2, 2017, 2.0% if the prepayment occurs after 18 months but prior to 36 months
following February 2, 2017, and 1.0% if the prepayment occurs thereafter.
The Loan Agreement includes customary affirmative and restrictive covenants and
representations and warranties, including a minimum cash covenant, a covenant
against the occurrence of a "change in control," financial reporting
obligations, and certain limitations on indebtedness, liens (including a
negative pledge on intellectual property and other assets), investments,
distributions (including dividends), collateral, transfers, mergers or
acquisitions, taxes, corporate changes, and deposit accounts. The Loan Agreement
also includes customary events of default, including payment defaults, breaches
of covenants following any applicable cure period, the occurrence of certain
events that could reasonably be expected to have a "material adverse effect" as
set forth in the Loan Agreement, cross acceleration to the debt and certain
events relating to bankruptcy or insolvency. Upon the occurrence of an event of
default, a default interest rate of an additional 5.0% may be applied to the
outstanding principal balance, and Hercules may declare all outstanding
obligations immediately due and payable and take such other actions as set forth
in the Loan Agreement.
In connection with the entry into the Loan Agreement, we issued a warrant to
Hercules which was exercisable for an aggregate of 274,086 of our common shares
at an exercise price of $12.04 per share. In August 2017, Hercules exercised the
warrant on a cashless basis and received a net issuance of 129,827 of our common
shares.
For the nine months ended December 31, 2017, we used $156.1 million and $4.2
million of cash in our operating and investing activities, respectively. We have
incurred and expect to continue to incur significant and increasing operating
losses at least for the next several years. We do not expect to generate revenue
unless and until after we successfully complete development and obtain
regulatory approval for one of our products in development. Our cash utilization
may fluctuate significantly from quarter-to-quarter and year-to-year, depending
on the timing of our planned clinical trials and our expenditures on other
research and development activities and activities related to potential
commercialization. We anticipate that we will continue to incur significant
expenses as we:

•      continue the clinical development of nelotanserin for LBD and other
       indications;



•      continue the clinical development of RVT-104, a combination of a

peripheral muscarinic receptor antagonist and high-dose rivastigmine;

• wind down the MINDSET, HEADWAY and Gait and Balance trials for intepirdine;


•      continue open-label extension studies for patients completing our
       nelotanserin phase 2 studies;



                                       25
--------------------------------------------------------------------------------

• seek to identify, acquire, develop and commercialize additional product

       candidates;


•      integrate acquired technologies into a comprehensive regulatory and
       product development strategy;


•      achieve milestones under our agreements with third parties that will
       require us to make substantial payments to those parties;

• maintain, expand and protect our intellectual property portfolio;

• hire and retain scientific, clinical, regulatory, manufacturing, quality

       control, commercial and administrative personnel;


•      add operational, financial and management information systems and

personnel, including personnel to support our drug development efforts;

• seek regulatory approvals for any product candidates that successfully

complete clinical trials;

• scale up external manufacturing capabilities to commercialize our product

       candidates;


•      establish a sales, marketing and distribution infrastructure for drug
       candidates for which we may obtain regulatory approval; and

• operate as a public company.


Our primary use of cash is to fund the research and development of our product
candidates. We believe that our existing cash resources will be sufficient to
enable us to fund our operating expenses and capital expenditure requirements
for at least the next 12 months. We have based our estimates on assumptions that
may prove to be incorrect, and we could use our available capital resources
sooner than we currently expect. Our existing funds will not be sufficient to
enable us to complete all necessary development and to commercially launch all
of our products. Accordingly, we may be required to obtain further funding
through public or private equity offerings, debt financing, collaboration and
licensing arrangements or other sources. Adequate additional funding may not be
available to us on acceptable terms, or at all. If we are unable to raise
capital in sufficient amounts or on terms acceptable to us, we may have to
significantly delay, scale back or discontinue the development or
commercialization of one or more of our product candidates or potentially
discontinue operations.

Until such time, if ever, as we can generate substantial revenue from sales of
our products in development, we expect to finance our cash needs through a
combination of equity offerings, debt financings and potential collaboration,
license or development agreements. We do not currently have any committed
external source of funds. To the extent that we raise additional capital through
the sale of equity or convertible debt securities, our shareholders' ownership
interests will be diluted, and the terms of these securities may include
liquidation or other preferences that adversely affect our shareholders'
rights. Debt financing and preferred equity financing, if available, may involve
agreements that include covenants limiting or restricting our ability to take
specific actions, such as incurring additional debt, making capital expenditures
or declaring dividends. If we raise additional funds through collaborations,
strategic alliances or marketing, distribution or licensing arrangements with
third parties, we may be required to relinquish valuable rights to our
technologies, future revenue streams, research programs or product candidates or
to grant licenses on terms that may not be favorable to us. If we are unable to
raise additional funds when needed, we may be required to delay, limit, reduce
or terminate our drug development or future commercialization efforts or grant
rights to develop and market product candidates that we would otherwise prefer
to develop and market ourselves.


                                       26
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Cash Flows
The following table sets forth a summary of our cash flows for the nine months
ended December 31, 2017 and 2016 (in thousands):
                                                        Nine Months Ended 

December 31,

                                                           2017             

2016

Net cash used in operating activities               $      (156,148 )$       (70,751 )
Net cash used in investing activities                        (4,246 )                (105 )
Net cash provided by (used in) financing activities         136,072         

(4,990 )


Operating Activities
Cash flows from operating activities consist of net loss adjusted for non-cash
items, including depreciation and amortization and share-based compensation
expense, as well as the effect of changes in working capital and other
activities.
For the nine months ended December 31, 2017, net cash used in operating
activities was $156.1 million and was primarily attributable to a net loss of
$196.3 million, which includes costs incurred for research and development
activities, including CRO fees, manufacturing, regulatory and other clinical
trial costs and our general and administrative expenses, and a decrease of $7.5
million in accounts payable, partially offset by $41.6 million of non-cash
share-based compensation expense. For the nine months ended December 31, 2016,
net cash used in operating activities was $70.8 million and was primarily
attributable to a net loss of $128.1 million, which includes costs incurred for
research and development activities, including CRO fees, manufacturing,
regulatory and other clinical trial costs, and our general and administrative
expenses, partially offset by $27.8 million of non-cash share-based compensation
expense and increases of $17.1 million to accrued liabilities and $8.6 million
to accounts payable.
Investing Activities
For the nine months ended December 31, 2017 and 2016, net cash used in investing
activities was $4.2 million and $105,000, respectively, in each case consisting
of purchases of furniture and equipment.
Financing Activities
For the nine months ended December 31, 2017, net cash provided by financing
activities was $136.1 million and consists primarily of net proceeds of $134.5
million received from the sale of 7,753,505 common shares in a follow-on public
offering. For the nine months ended December 31, 2016, net cash used in
financing activities was $5.0 million, which represents the deferred payment
made to GSK under the terms of the GSK Agreement in June 2016.
Contractual Obligations
Our long-term contractual obligations include commitments and estimated purchase
obligations entered into in the normal course of business. We have entered into
commitments under the GSK Agreement, the Arena Development Agreement, the Loan
Agreement with Hercules, an amended services agreement with RSI, a separate
service agreement with RSG (Refer to Note 5(A)), and a license agreement with
Qaam. In addition, the Company has entered into services agreements with third
parties for pharmaceutical manufacturing and research activities. Expenditures
to CROs and CMOs represent significant costs in clinical development. Subject to
required notice periods and the Company's obligations under binding purchase
orders, the Company can elect to discontinue the work under these agreements at
any time. The Company expects to enter into other commitments as the business
further develops.
As of December 31, 2017, the Company did not have any ongoing material financial
commitments, other than pursuant to the GSK Agreement, Arena Development
Agreement and Loan Agreement.
During the nine months ended December 31, 2017, there were no material changes
outside the ordinary course of business to our specified contractual obligations
from those disclosed in our contractual obligations section included in our
Annual Report on Form 10-K for the year ended March 31, 2017.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any
off-balance sheet arrangements, as defined under the SEC's rules. Accordingly,
our operating results, financial condition and cash flows are not subject to
off-balance sheet risks.

                                       27
--------------------------------------------------------------------------------


Critical Accounting Policies and Significant Judgments and Estimates
Our unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States,
or U.S. GAAP. The preparation of these financial statements requires us to make
estimates, judgments and assumptions that affect the reported amounts of assets
and liabilities, disclosure of contingent assets and liabilities as of the dates
of the balance sheets and the reported amounts of expenses during the reporting
periods. In accordance with U.S. GAAP, we evaluate our estimates and judgments
on an ongoing basis. Significant estimates include assumptions used in the
determination of some of our costs incurred under the services agreements with
RSI and RSG, which costs are charged to research and development and general and
administrative expense, as well as assumptions used to estimate the fair value
of our common shares. We base our estimates on historical experience and on
various other factors that we believe are reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
value of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
We define our critical accounting policies as those under U.S. GAAP that require
us to make subjective estimates and judgments about matters that are uncertain
and are likely to have a material impact on our financial condition and results
of operations, as well as the specific manner in which we apply those
principles.
We believe the estimates and judgments involved in our contingent payment
liabilities, research and development accruals, share-based compensation and
income taxes have the greatest potential impact on our unaudited condensed
consolidated financial statements, and consider these to be our critical
accounting policies and estimates.
Our significant accounting policies are more fully described in Note 2 to our
unaudited condensed consolidated financial statements in this Quarterly Report
on Form 10-Q and Note 2 to our consolidated financial statements in our Annual
Report on Form 10-K for the year ended March 31, 2017. There have been no
material changes to our critical accounting policies and significant judgments
and estimates as compared to the critical accounting policies and significant
judgments and estimates described in our Annual Report on Form 10-K for the year
ended March 31, 2017.
Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board, or FASB, issued ASU
No. 2016-02, ''Leases (Topic 842)'', or ASU No. 2016-02, which is a
comprehensive new lease standard that amends various aspects of existing
accounting guidance for leases. The core principle of ASU No. 2016-02 will
require lessees to present the assets and liabilities that arise from leases on
their balance sheets. ASU No. 2016-02 is effective for annual periods beginning
after December 15, 2018, and interim periods within fiscal years beginning after
December 15, 2018. Early adoption is permitted. We are currently evaluating ASU
No. 2016-02 and its impact on our consolidated financial position and results of
operations.

In March 2016, the FASB issued ASU No. 2016-09, ''Compensation - Stock
Compensation (Topic 718): Improvements to Employee Share-Based Payment
Accounting'', or ASU No. 2016-09. ASU No. 2016-09 makes several modifications to
Topic 718 related to the accounting for forfeitures, employer tax withholding on
share-based compensation, and the financial statement presentation of excess tax
benefits or deficiencies. ASU No. 2016-09 also clarifies the statement of cash
flows presentation for certain components of share-based awards. We have adopted
this guidance as of April 1, 2017, using a modified retrospective transition
method. As a result of the adoption of this standard, we elected to change our
policy from estimating forfeitures to recognizing forfeitures when they occur
and, as a result, recorded an adjustment of $235,000 to accumulated deficit with
a corresponding offset to additional paid-in-capital as of April 1, 2017. The
other requirements of ASU No. 2016-09 did not have a material impact on our
unaudited condensed consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU 2017-01, ''Business Combinations (Topic
805): Clarifying the Definition of a Business'', or ASU No. 2017-01, which
clarifies the definition of a business with the objective of adding guidance to
assist entities with evaluating whether transactions should be accounted for as
acquisitions (or disposals) of assets or businesses. ASU No. 2017-01 is
effective for annual reporting periods beginning after December 15, 2017, and
interim periods within those years, with early adoption permitted. We will apply
the guidance to applicable transactions after the adoption date. The impact on
our consolidated financial statements will depend on the facts and circumstances
of any specific future transactions.



                                       28

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