Item 5. Operating and Financial Review and Prospects.

The following discussion and analysis of our financial condition and results of operations should be read together with Item 3.A. “Selected Consolidated Financial Data” of our Annual Report and our consolidated financial statements and related notes appearing elsewhere in this Transition Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Transition Report and in our Annual Report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those set forth in the Item 3.D. “Risk Factors” section of our Annual Report, our actual results could differ materially from the results described in or implied by these forward-looking statements. Please also see the section titled “Cautionary Statement Regarding Forward-Looking Statements.”

We maintain our books and records in pounds sterling, our results are subsequently converted to U.S. dollars and we prepare our consolidated financial statements in accordance with U.S. GAAP, as issued by FASB. All references in this Transition Report to “$” are to U.S. dollars and all references to “£” are to pounds sterling. Our consolidated financial statements as of and for the three months ended December 31, 2018 have been translated from pounds sterling into U.S. dollars at the rate of £1.00 to $1.2763, which was the noon buying rate of the Federal Reserve Bank of New York on December 31, 2018. Our consolidated financial statements as of and for the years ended September 30, 2018 and 2017 have been translated from pounds sterling into U.S. dollars at the rate of £1.00 to $1.3053 and £1.00 to $1.3402, which were the noon buying rates of the Federal Reserve Bank of New York on the last business day of the years ended September 30, 2018 and 2017, respectively. These translations should not be considered representations that any such amounts have been, could have been or could be converted into U.S. dollars at that or any other exchange rate as of that or any other date.

We have historically conducted our business through Autolus Limited, and therefore our historical consolidated financial statements previously presented the consolidated results of operations of Autolus Limited. Following the completion of our IPO in June 2018, our consolidated financial statements present the consolidated results of operations of Autolus Therapeutics plc.

Overview

We are a biopharmaceutical company developing next-generation programmed T cell therapies for the treatment of cancer. Using our broad suite of proprietary and modular T cell programming technologies, we are engineering precisely targeted, controlled and highly active T cell therapies that are designed to better recognize cancer cells, break down their defense mechanisms and attack and kill these cells. We believe our programmed T cell therapies have the potential to be best-in-class and offer cancer patients substantial benefits over the existing standard of care, including the potential for cure in some patients.

Since our inception in July 2014, we have devoted substantially all of our resources to conducting preclinical studies and clinical trials, organizing and staffing our company, business planning, raising capital and establishing our intellectual property portfolio. We do not have any products approved for sale and have not generated any revenue from product sales. We have funded our operations to date primarily with sales of our equity securities, including the net proceeds from our recently completed IPO in June 2018. Through December 31, 2018, we have received net proceeds of $333.3 million from sales of our equity securities. We do not expect to generate significant revenue unless and until we obtain marketing approval for and commercialize one of our product candidates.

Since our inception, we have incurred significant operating losses. For the three months ended December 31, 2018, we incurred a net loss of $20.6 million . For the years ended September 30, 2018 , 2017 , and 2016 , we incurred net losses of $44.8 million , $19.7 million and $12.6 million, respectively. As of December 31, 2018, we had an accumulated deficit of $113.3 million .

We expect to continue to incur significant expenses for the foreseeable future as we advance our product candidates through preclinical and clinical development, seek regulatory approval and pursue commercialization of any approved product candidates. In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution. In addition, we may incur expenses in connection with the in-license or acquisition of additional product candidates. Furthermore, we have incurred and expect to continue to incur, additional costs associated with operating as a public company, including significant legal, accounting, investor relations and other expenses that we did not incur as a private company.

As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through the sale of equity, debt financings or other capital sources, including potential collaborations with other companies or other strategic transactions.

We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more of our drug candidates or delay our pursuit of potential in-licenses or acquisitions.

As of December  31, 2018 , we had cash on hand of $217.5 million . Based on our current clinical development plans, we believe our existing cash and cash equivalents will be able to fund our current and planned operating expenses and capital expenditure requirements into calendar year 2021. We have based this estimate on assumptions that may prove to be wrong, and we could deplete our available capital resources sooner than we expect.

Components of Our Results of Operations

Grant Income

Grant income consists of proceeds from government research grants used to perform specific research and development activities. We recognize grant income over the period in which we recognize the related costs covered under the terms and conditions of the grant. We have received grants from the U.K. government, which are repayable under certain circumstances, including breach or noncompliance with the terms of the grant. For grants with refund provisions, we review the grant to determine the likelihood of repayment. If the likelihood of repayment of the grant is determined to be remote, then the grant is recognized as grant income.

Operating Expenses

Research and Development Expenses

Research and development expenses consist of costs incurred in connection with the research and development of our product candidates, which are partially offset by research and development expenditure tax credits provided by Her Majesty’s Revenue & Customs, or HMRC. We expense research and development costs as incurred. These expenses include:

We recognize external development costs based on an evaluation of the progress to completion of specific tasks using information provided to us by our service providers.

Our direct research and development expenses are tracked on a program-by-program basis for our product candidates and consist primarily of external costs, such as fees paid to outside consultants and CROs in connection with our preclinical development, manufacturing and clinical development activities. Our direct research and development expenses by program also include fees incurred under license agreements. We do not allocate employee costs or facility expenses, including depreciation or other indirect costs, to specific programs because these costs are deployed across multiple programs and, as such, are not separately classified. We use internal resources primarily to oversee research and development as well as for managing our preclinical development, process development, manufacturing and clinical development activities.

The following table summarizes our research and development expenses incurred by program (in thousands):

Research and development activities are central to our business model. Product candidates in later stages of clinical development 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. As a result, we expect that our research and development expenses will increase substantially over the next few years as we increase personnel costs, initiate and conduct additional clinical trials and prepare regulatory filings related to our product candidates. We also expect to incur additional expenses related to milestone, royalty payments and maintenance fees payable to third parties with whom we have entered into license agreements to acquire the rights related to our product candidates.

The successful development and commercialization of our product candidates is highly uncertain. At this time, we cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the clinical development of any of our product candidates or when, if ever, material net cash inflows may commence from sales of any of our product candidates. This uncertainty is due to the numerous risks and uncertainties associated with development and commercialization activities, including the uncertainty of:

We may never succeed in achieving regulatory approval for any of our product candidates. We may obtain unexpected results from our clinical trials. We may elect to discontinue, delay or modify clinical trials of some product candidates or focus on others. Any changes in the outcome of any of these variables with respect to the development of our product candidates in clinical development could mean a significant change in the costs and timing associated with the development of these product candidates. For example, if the EMA, the FDA, or another regulatory authority were to delay our planned start of clinical trials or require us to conduct clinical trials or other testing beyond those that we currently expect or if we experience significant delays in enrollment in any of our planned clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development of that product candidate. Commercialization of our product candidates will take several years and millions of dollars in development costs.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries, related benefits, travel and share-based compensation expense for personnel in executive, finance, legal and administrative functions. General and administrative expenses also include allocated facility-related costs, patent filing and prosecution costs and professional fees for marketing, insurance, legal, consulting, accounting and audit services.

We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support the planned development of our product candidates. We have experienced, and expect to continue to experience, increased expense with being a public company, including increased accounting, audit, legal, regulatory and compliance costs associated with maintaining compliance with Nasdaq listing rules and SEC requirements, director and officer insurance premiums, as well as higher investor and public relations costs.

Additionally, if we believe a regulatory approval of one of our product candidates appears likely, we would anticipate an increase in payroll and expense as a result of our preparation for commercial operations, especially as it relates to the sales and marketing of our product candidate.

Other Income (Expense)

Other income consists primarily of interest income earned on our cash balances held at a commercial bank. Other expense consists primarily of foreign currency transaction losses.

Income Tax Benefit

We are subject to corporate taxation in the United Kingdom and in the United States. Due to the nature of our business, we have generated losses since inception. Our income tax credit recognized represents the sum of the research and development tax credits recoverable in the United Kingdom and income tax payable in the United States.

As a company that carries out extensive research and development activities, we benefit from the U.K. research and development tax credit regime under the scheme for small or medium-sized enterprises, or SMEs, and also claim a Research and Development Expenditure Credit, or RDEC, to the extent that our projects are grant funded. Under the SME regime, we are able to surrender some of our trading losses that arise from our qualifying r esearch and development activities for a cash rebate of up to 33.35% of such qualifying

research and development expenditure. The net tax benefit of the RDEC is expected to be 9.7% in the year ending December 31, 2019. We meet the conditions of the SME regime, but also can make claims under the RDEC regime to the extent that our projects are grant funded. Qualifying expenditures largely comprise employment costs for research staff, consumables, outsourced CRO costs and utilities costs incurred as part of research projects. Certain subcontracted qualifying research and development expenditures are eligible for a cash rebate of up to 21.67%. A large portion of costs relating to our research and development, clinical trials and manufacturing activities are eligible for inclusion within these tax credit cash rebate claims.

We may not be able to continue to claim research and development tax credits under the SME regime in the future because we may no longer qualify as a small or medium-sized company. However, we should continue to be able to make claims under the RDEC regime.

Un-surrendered U.K. losses may be carried forward indefinitely to be offset against future taxable profits, subject to numerous utilization criteria and restrictions. The amount that can be offset each year is limited to £5.0 million plus an incremental 50% of U.K. taxable profits. After accounting for tax credits receivable, there were accumulated tax losses for carry forward in the United Kingdom o f $46.2 million as of December 31, 2018. We currently do not recognize a deferred tax asset from our accumulated losses and r ecord a full valuation allowance against the net deferred tax asset as the recoverability due to future taxable profits is unknown.

In the event we generate revenues in the future, we may benefit from the new U.K. “patent box” regime that allows profits attributable to revenues from patents or patented products to be taxed at an effective rate of 10%.

Value Added Tax, or VAT, is broadly charged on all taxable supplies of goods and services by VAT-registered businesses. Under current rates, an amount of 20% of the value, as determined for VAT purposes, of the goods or services supplied is added to all sales invoices and is payable to HMRC. Similarly, VAT paid on purchase invoices is generally reclaimable from HMRC.

Results of Operations

We previously announced results for our fiscal year ended September 30, 2018 and comparative periods.  We are transitioning to reporting our results on a calendar year basis, starting with the fiscal year ended December 31, 2018, and as such we are reporting herein audited results for the three-month period from October 1, 2018 to December 31, 2018, and the comparative period for 2017, which is unaudited.

Comparison of Three Months Ended December 31, 2018 and 2017

The following table summarizes our results of operations for the three months ended December 31, 2018 and 2017 (in thousands):

Grant Income

Grant income increased to $0.3 million for the three months ended December 31, 2018 from $0.2 million for the three months ended December 31, 2017 . The increase in grant income of $0.1 million was related to an increase in reimbursable expenditures submitted in the three months ended December 31, 2018 to the U.K. government as part of the reimbursement terms of additional government research grants used to perform specific research and development activities.

Research and Development Expenses

Research and development expenses increased to $17.7 million for the three months ended December 31, 2018 from $5.6 million for the three months ended December 31, 2017 . Cash costs, which exclude depreciation as well as share-based compensation, increased to $15.2 million from $5.1 million. The increase in research and development cash costs of $10.1 million consisted primarily of an increase of $4.3 million in project expenses related to the activities necessary to prepare, activate, and monitor clinical trial programs, an increase in compensation-related costs of $3.8 million primarily due to an increase in headcount to support the advancement of our product candidates in clinical development, and an increase of $2.0 million in facilities costs and consumables supporting the expansion of our research and translational science capability and investment in manufacturing facilities and equipment.

Non-cash costs increased to $2.5 million for the three months ended December 31, 2018 from $0.5 million for the three months ended December 31, 2017. The increase is related to an increase of $1.6 million share-based compensation expense as a result of an increase in headcount and the increase in the price of our American Depositary Shares, or ADSs, during the three months ended December 31, 2018 an increase of $0.3 million in depreciation related to the purchase of equipment to support our clinical trials and research activities.

General and Administrative Expenses

General and administrative expenses increased to $ 7.6 million for the three months ended December  31, 2018 from $3.1 million for the three months ended December 31, 2017. Cash costs, which exclude depreciation as well as share-based compensation increased to $5.7 million from $2.5 million. The increase of $3.2 million consisted primarily of an increase of $2.3 million in insurance, patent costs, commercial costs, investor relations and communication costs and additional facility costs, as well as an increase in compensation-related expense of $0.9 million.

Non-cash costs increased to $1.9 million for the three months ended December 31, 2018 from $0.5 million for the three months ended December 31, 2017. The increase is primarily due to an increase of $1.1 million share-based compensation expense as a result of an increase in headcount and the increase in the price of our ADSs during the three months ended December 31, 2018 and an impairment expense of $0.4 million related to discontinued software.

Interest Income

Interest income increased to $0.7 million for the three months ended December 31 , 2018 from $0.2 million f or the three months ended December 31, 2017 primarily due to a higher cash balance related to the proceeds from our IPO in June 2018.

Other Income (Expense)

Other income increased to $1.1 million for the three months ended December 31 , 2018 from other expense of $0.7 million for the three months ended December 31, 2017 primarily due to foreign currency gains related to the British pound strength relative to the U.S. dollar during 2018 as compared to 2017.

Income Tax Benefit

Income tax benefit increased to $2.6 million for the three months ended December 31 , 2018 from $1.0 million for the three months ended December 31, 2017 due to increased U.K. research and development tax credits receivable from HMRC. Research and development credits are obtained at a maximum rate of 33.35% of our qualifying research and development expenses, and the increase in the net credit was primarily attributable to an increase in our eligible research and development expenses.

Comparison of Years Ended September 30, 2018 and 2017

The following table summarizes our results of operations for the years ended September 30, 2018 and 2017 (in thousands):

Grant Income

Grant income decreased to $1.4 million for the year ended September 30, 2018 from $1.7 million for the year ended September 30, 2017. The decrease in grant income of $0.3 million was related to a decrease in reimbursable expenditures submitted in 2018 to the U.K. government.

Research and Development Expenses

Research and development expenses increased to $36.2 million for the year ended September 30, 2018 from $16.0 million for the year ended September 30, 2017. Cash costs, which exclude depreciation as well as share-based compensation, increased to $31.8 million from $14.1 million. The increase in research and development cash costs of $17.6 million consisted primarily of an increase in compensation-related costs of $6.0 million primarily due to an increase in headcount to support the advancement of our product candidates in clinical development, the expansion of our research and translational science capability and investment in manufacturing facilities and equipment, an increase of $4.4 million in project expenses related to the activities necessary to prepare, activate and monitor clinical trial programs, an increase of $3.3 million in materials, an increase of $2.0 million in license fees to UCL Business plc, or UCLB, the technology-transfer company of University College London, and $0.7 million in a milestone payment to UCLB.

Non-cash costs increased to $4.4 million for the year ended September 30, 2018 from $1.8 million for the year ended September 30, 2017. The increase is related to an increase of $2.0 million share-based compensation expense as a result of an increase in headcount and an increase of $0.6 million related to the purchase of equipment to support our clinical trials and research activities.

General and Administrative Expenses

General and administrative expenses increased to $22.8 million for the year ended September 30, 2018 from $9.1 million for the year ended September 30, 2017. Cash costs, which exclude depreciation as well as share-based compensation increased to $18.8 million from $6.9 million. The increase of $11.9 million consisted primarily of an increase in compensation-related of $5.1 million due to an overall increase in headcount, an increase in legal and professional fees of $4.2 million that includes $1.8 million in the preparations for becoming a public company and an increase of $1.0 million for patent filing fees, an increase of $0.7 million in facility costs related to rent and maintenance costs, and an increase of $0.7 million in IT costs related to software services and hardware maintenance contracts.

Non-cash costs increased to $4.0 million for the year ended September 30, 2018 from $2.3 million for the year ended September 30, 2017. The increase is primarily due to an increase of $1.6 million share-based compensation expense as a result of an increase in headcount and the increase in the market value of our ordinary shares and price of our ADSs during the year ended September 30, 2018.

Interest Income

Interest income increased to $1.5 million for the year ended September 30, 2018 from $84,000 for the year ended September 30, 2017 primarily due to a higher cash balance related to proceeds from private placements and our IPO.

Other Income (Expense)

Other income increased to $4.0 million for the year ended September 30, 2018 from other expense of $46,000 for the year ended September 30, 2017 primarily due to foreign currency gains related to the British pound strength relative to the U.S. dollar during 2018 as compared to 2017.

Income Tax Benefit

Income tax benefit increased to $7.3 million for the year ended September 30, 2018 from $3.7 million for the year ended September 30, 2017 due to additional U.K. research and development tax credits receivable from HMRC. Research and development credits are obtained at a maximum rate of 33.35% of our qualifying research and development expenses, and the increase in the net credit was primarily attributable to an increase in our eligible research and development expenses.

Comparison of Years Ended September 30, 2017 and 2016

The following table summarizes our results of operations for the years ended September 30, 2017 and 2016 (in thousands):

Grant Income

Grant income increased to $1.7 million for the year ended September 30, 2017 from $1.2 million for the year ended September 30, 2016. The increase of $0.5 million related to an increase in research grant income as we received an additional research grant from the U.K. government to fund additional projects in 2017.

Research and Development Expenses

Research and development expenses increased to $16.0 million for the year ended September 30, 2017 from $10.4 million for the year ended September 30, 2016. The increase of $5.6 million consisted primarily of an increase in salaries, bonuses and benefits of $2.3 million due to an overall increase in headcount as we advanced toward the commencement of clinical trials and manufacturing of our product candidates and additional share-based compensation expense, an increase of $3.1 million primarily related to direct costs associated with the additional activities necessary to prepare and activate clinical trial sites and with our viral vector and cell manufacturing processes for patients enrolled in the clinical trials for each of our research programs AUTO2, AUTO3, AUTO4 and AUTO5. In addition, our indirect costs increased by $1.6 million to support the functions of our research programs due to an increase in laboratory use of $0.5 million, an increase in overhead costs of $0.3 million, an increase of $0.3 million in rent fees related to our laboratory facilities, an increase of $0.3 million in lab equipment depreciation and an increase of $0.2 million related to other research and development costs. The overall increases were partially offset by higher license fees of $1.4 million in the year ended September 30, 2016 resulting from the issuance of 1,000,000 B ordinary shares to UCLB in March 2016; there were no such expenses recognized in 2017.

General and Administrative Expenses

General and administrative expenses increased to $9.1 million for the year ended September 30, 2017 from $5.2 million for the year ended September 30, 2016. The increase of $3.9 million consisted primarily of an increase in salaries, bonuses and benefits of $2.2 million due to an overall increase in headcount and the recognition of additional share-based compensation, an increase in legal and professional fees of $0.8 million related to new equity incentive plans and activities related to preparations for becoming a public company,

an increase of $0.4 million related to other administrative expenses, an increase in corporate costs of $0.3 million related to the overall growth of the business and an increase in depreciation of $0.2 million.

Income Tax Benefit

Income tax benefit increased to $3.7 million for the year ended September 30, 2017 from $1.8 million for the year ended September 30, 2016 due to additional U.K. research and development tax credits receivable from HMRC. Research and development credits are obtained at a maximum rate of 33.35% of our qualifying research and development expenses, and the increase in the net credit was primarily attributable to an increase in our eligible research and development expenses.

B. Liquidity and capital resources.

Since our inception, we have not generated any product revenue and have incurred operating losses and negative cash flows from our operations. We expect to incur significant expenses and operating losses for the foreseeable future as we advance our product candidates through preclinical and clinical development, seek regulatory approval and pursue commercialization of any approved product candidates. We expect that our research and development and general and administrative costs will increase in connection with our planned research activities. As a result, we will need additional capital to fund our operations until such time as we can generate significant revenue from product sales.

We do not currently have any approved products and have never generated any revenue from product sales or otherwise. We have funded our operations to date primarily with proceeds from government grants and sales of our securities . Through December 31, 2018 , we have received aggregate net cash proceeds of $333.3 million from sales of our equity securities. As of December  31, 2018 , we had cash of $217.5 million .

We currently have no ongoing material financing commitments, such as lines of credit or guarantees, that are expected to affect our liquidity over the next five years, other than our lease obligations and supplier purchase commitments described below.

Cash Flows

The following table summarizes our cash flows for each of the periods presented:

Net Cash Used in Operating Activities

During the three months ended December  31, 2018 , operating activities used $19.8 million of cash, resulting from our net loss of $20.6 million , and net cash used resulting from changes in our operating assets and liabilities of $3.6 million , partially offset by non-cash charges of $4.4 million . Net cash used resulting from changes in our operating assets and liabilities for the three months ended December  31, 2018 consisted primarily of a $3.7 million increase in prepaid expenses and other assets and a $0.7 million decrease in accounts payable, partially offset by a $2.1 million increase in accrued expenses.

During the three months ended December  31, 2017 , operating activities used $8.8 million of cash, resulting from our net loss of $7.5 million, net cash used resulting from changes in our operating assets and liabilities of $2.5 million, partially offset by non-cash charges of $1.2 million. Net cash used resulting from changes in our operating assets and liabilities for the three months ended December  31, 2018 consisted primarily of a $1.4 million increase in prepaid expenses and a a $1.1 million decrease in accounts payable.

Net Cash Used in Investing Activities

During the three months ended December 31, 2018 and 2017, we used $4.4 million and $0.8 million, respectively, of cash in investing activities, each of which consisted of purchases of property and equipment.

Net Cash Provided by Financing Activities

During the three months ended December 31, 2018, there were no financing activities.

During the three months ended December 31, 2017 , net cash provided by financing activities was $0.4 million consisting of net cash proceeds from our sale and issuance of equity securities in a private placement.

Cash Denomination

As of December 31, 2018 and 2017, we held $217.5 million and $129.0 million in cash, respectively. Of the $217.5 million cash balance as of December 31, 2018, $49.0 million was held in U.S. dollars and the remainder ( £132.1 million) was held as pounds sterling. Of the $129.0 million cash balance as of December 31, 2017, $79.3 million was held in U.S. dollars and the remainder ( £36.8 million) was held as pounds sterling.

The following table summarizes our cash flows for each of the periods presented:

Net Cash Used in Operating Activities

During the year ended September 30, 2018 , operating activities used $31.5 million of cash, resulting from our net loss of $44.8 million , offset by net cash provided from changes in our operating assets and liabilities of $4.7 million , and non-cash charges of $8.5 million . Net cash provided resulting from changes in our operating assets and liabilities for the year ended September 30, 2018 consisted primarily of an $11.0 million increase in accrued expenses and a $0.8 million increase in accounts payable, partially offset by a $7.1 million increase in prepaid expenses and other assets.

During the year ended September 30, 2017, operating activities used $16.4 million of cash, resulting from our net loss of $19.7 million and net cash used resulting from changes in our operating assets and liabilities of $0.8 million, partially offset by non-cash charges of $4.2 million. Net cash used resulting from changes in our operating assets and liabilities for the year ended September 30, 2017 consisted primarily of a $2.3 million increase in prepaid expenses and other assets, partially offset by a $1.1 million increase in accrued expenses and a $0.4 million increase in accounts payable.

During the year ended September 30, 2016, operating activities used $9.8 million of cash, resulting from our net loss of $12.6 million and net cash used resulting from changes in our operating assets and liabilities of $1.2 million, partially offset by non-cash charges of $3.9 million. Net cash used resulting from changes in our operating assets and liabilities for the year ended September 30, 2016 consisted primarily of a $2.0 million increase in prepaid expenses and other current assets, partially offset by $0.3 million increase in accrued expenses and a $0.5 million increase in accounts payable.

Net Cash Used in Investing Activities

During the years ended September 30, 2018 , 2017 and 2016, we used $9.5 million, $2.9 million, and $1.9 million, respectively, of cash in investing activities, each of which consisted primarily of purchases of property and equipment.

Net Cash Provided by Financing Activities

During the year ended September 30, 2018, net cash provided by financing activities was $156.9 million consisting of the $156.5 million net cash proceeds from our IPO in June 2018 and $0.4 million received in October 2017 from a private placement financing completed at the end of September 2017.

During the years ended September 30, 2017 and 2016, net cash provided by financing activities was $127.7 million and $32.2 million, respectively, in each case consisting of net cash proceeds from our sale and issuance of preferred shares.

Cash Denomination

As of September 30, 2018, 2017 and 2016, we held $247.1 million, $137.1 million, and $28.1 million in cash, respectively. Of the $247.1 million cash balance as of September 30, 2018, $53.4 million was held in U.S. dollars and the remainder ( £ 148.3 million) was held as pounds sterling. Of the $137.1 million cash balance as of September 30, 2017, $79.5 million was held in U.S. dollars and the remainder ( £43.0 million) was held as pounds sterling. Of the $28.1 million cash balance as of September 30, 2016, the entire amount ( £21.7 million) was held as pounds sterling and there were no U.S. dollar holdings.

Funding Requirements

We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance the preclinical activities and clinical trials of our product candidates. Our expenses will increase as we:

Our primary uses of capital are, and we expect will continue to be, compensation and related expenses, clinical costs, external research and development services, laboratory and related supplies, legal and other regulatory expenses, and administrative and overhead costs. Our future funding requirements will be heavily determined by the resources needed to support development of our product candidates.

Based on our current clinical development plans, we believe our existing cash of $217.5 million at December 31, 2018 will enable us to fund our current and planned operating expenses and capital expenditure requirements for at least the next 12 months. We have based these estimates on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect. If we receive regulatory approval for our other product candidates, we expect to incur significant commercialization expenses related to product manufacturing, sales, marketing and distribution, depending on where we choose to commercialize. We may also require additional capital to pursue in-licenses or acquisitions of other product candidates.

Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical product candidates, we are unable to estimate the exact amount of our working capital requirements. Our future funding requirements will depend on and could increase significantly as a result of many factors, including:

Until such time, if ever, that we can generate product revenue sufficient to achieve profitability, we expect to finance our cash needs through equity offerings. To the extent that we raise additional capital through the sale of equity, your ownership interest will be diluted. If we raise additional funds through other third-party funding, collaborations agreements, strategic alliances, licensing arrangements or marketing and distribution arrangements, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market products or product candidates that we would otherwise prefer to develop and market ourselves.

Critical Accounting Policies and Significant Judgments and Estimates

Our financial statements are prepared in accordance with U.S. GAAP. The preparation of our financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, costs and expenses, and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail in Note 2 to our financial statements appearing at the end of this Transition Report, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our financial statements.

Share-Based Compensation

We issue ordinary shares as well as options and other securities exercisable for or convertible into ordinary shares or ADSs, as incentives to our employees and directors. To the extent such incentives are in the form of share options, the options are granted pursuant to the terms of our 2017 Share Option Plan, or the 2017 Plan, or pursuant to the terms of our 2018 Equity Incentive Plan, or the 2018 Plan. Options granted under the 2017 Plan and 2018 Plan, as well as shares granted as employee incentives, typically vest over a four-year service period with 25% of the award vesting on the first anniversary of the commencement date and the balance vesting monthly over the remaining three years, unless the awards contain specific performance vesting provisions. For equity awards issued that have both a performance vesting condition and a services condition, or performance awards, once the performance criteria is achieved, the performance awards are then subject to a four-year service vesting with 25% of the performance award vesting on the first anniversary of the performance condition being achieved, with the balance vesting monthly over the remaining three years. For certain members of senior management and directors, the board has approved an alternative vesting schedule for the equity awards. The options granted under the 2017 Plan and 2018 Plan generally expire ten years from the date of grant. We expect our share-based compensation expense for awards granted to employees, directors and other service providers to increase in future periods due to the planned increases in our headcount.

We recognize compensation expense for equity awards based on the grant date fair value of the award. For equity awards that vest based on a service condition, the share-based compensation expense is recognized on a straight-line basis over the requisite service period. For equity awards that contain both performance and service conditions, we recognize share-based compensation expense ratably over the requisite service period when the achievement of a performance-based milestone is probable based on the relative satisfaction of the performance condition as of the reporting date. We use the fair value of our ordinary shares to determine the fair value of restricted share awards.

Share-based compensation is recognized as an expense in the financial statements based on the grant date fair value over the requisite service period. For awards granted to our employees and directors that vest based on service conditions, we use the accelerated method to allocate compensation expense to reporting periods. We do not adjust share-based compensation for estimated forfeitures and account for forfeitures when they occur.

We use the Black-Scholes option pricing model to estimate the fair value of share options. This option-pricing model requires the input of various subjective assumptions, including the option’s expected life and the price volatility of the security.

The fair value of each share option grant is estimated on the date of grant using the Black-Scholes option pricing model and applying assumptions used in connection with option grants made during the periods covered by these financial statements. Assumptions used in the option pricing model include the following:

Expected volatility.   We lack company-specific historical and implied volatility information for our ADSs. Therefore, we estimate the expected share volatility based on the historical volatility of publicly traded peer companies and expect to continue to do so until such time as we have adequate historical data regarding the volatility of our own traded security price.

Expected term .  The expected term of options granted represents the weighted average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and our historical exercise patterns. The expected term of our share options has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options.

Risk-free interest rate .  The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods that are approximately equal to the expected term of the award.

Expected dividend.   Expected dividend yield of zero is based on the fact that we have never paid cash dividends on ordinary shares and do not expect to pay any cash dividends in the foreseeable future.

Fair value of ordinary shares.   Options granted after our IPO are issued at the fair market value of our ADSs at the date the grant is approved by the Board.

Prior to the IPO, we calculated the fair value of our ordinary shares in accordance with the guidelines in the American Institute of Certified Public Accountants’ Accounting and Valuation Guide,  Valuation of Privately-Held-Company Equity Securities Issued as Compensation . The valuations of ordinary shares were prepared using a market approach, based on precedent transactions in the shares, to estimate our total equity value using the option-pricing method, or OPM, which used a combination of market approaches and an income approach to estimate our enterprise value.

The OPM derives an equity value such that the value indicated is consistent with the investment price, and it provides an allocation of this equity value to each class of our securities. The OPM treats the various classes of shares as call options on the total equity value of a company, with exercise prices based on the value thresholds at which the allocation among the various holders of a company’s securities changes. Under this method, each class of shares has value only if the funds available for distribution to shareholders exceed the value of the share liquidation preferences of the class or classes of shares with senior preferences at the time of the liquidity event. Key inputs and assumptions used in the OPM calculation include the following:

Expected volatility.     We applied re-levered equity volatility based on the historical unlevered and re-levered equity volatility of publicly traded peer companies.

Expected dividend.     Expected dividend yield of zero is based on the fact that we have never paid cash dividends on ordinary shares and does not expect to pay any cash dividends in the foreseeable future.

Expected term .    The expected term of the option or the estimated time until a liquidation event.

Risk-free interest rate .    The risk-free interest rate is determined by reference to the U.S. Treasury yield curve for the period commensurate with the expected of the exit event.

When considering the fair value of options granted in the period prior to the IPO, management considered probability-weighted scenarios based on the relative likelihoods of completing the IPO and remaining a privately-held company. In the IPO scenarios, the fair value was calculated by dividing our total estimated equity value by the number of fully diluted ordinary shares outstanding, and then discounting the implied per-share value at a rate intended to approximate our cost of equity between the share option grant date and the expected IPO date. The stay-private scenario utilized an OPM "Backsolve" calculation to estimate our equity value implied by the purchase price of the series A preference shares in September 2017. In March and May 2018, we issued share option grants to employees that applied a 50% and 80% probability weighting of an IPO, respectively, to the fair value of the underlying ordinary share utilized in the Black-Scholes option pricing model.

Income Taxes

We account for income taxes under the asset and liability method which includes the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in our financial statements. Under this approach, deferred taxes are recorded for the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year plus deferred taxes. Deferred taxes result from differences between the financial statements and tax bases of our assets and liabilities, and are adjusted for changes in tax rates and tax laws when changes are enacted. The effects of future changes in income tax laws or rates are not anticipated.

We are subject to corporation taxes in the United Kingdom and the United States. The calculation of our tax provision involves the application of U.K. tax law and requires judgement and estimates.

We evaluate the realizability of our deferred tax assets at each reporting date, and we establish a valuation allowance when it is more likely than not that all or a portion of our deferred tax assets will not be realized.

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income of the same character and in the same jurisdiction. We consider all available positive and negative evidence in making this assessment, including, but not limited to, the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies. In circumstances where

there is sufficient negative evidence indicating that our deferred tax assets are not more likely than not realizable, we establish a valuation allowance.

We use a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate tax positions taken or expected to be taken in a tax return by assessing whether they are more likely than not sustainable, based solely on their technical merits, upon examination, and including resolution of any related appeals or litigation process. The second step is to measure the associated tax benefit of each position as the largest amount that we believe is more likely than not realizable. Differences between the amount of tax benefits taken or expected to be taken in our income tax returns and the amount of tax benefits recognized in our financial statements represent our unrecognized income tax benefits, which we either record as a liability or as a reduction of deferred tax assets.

Deferred Tax and Current Tax Credits

Tax on the profit or loss for the year comprises current and deferred tax. Tax is recognized in the statement of operations, except to the extent that it relates to items recognized directly in equity, in which case it is recognized in equity. Current tax is the expected tax payable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Tax credits are accrued for the year based on calculations that conform to the U.K. research and development tax credit regime, under both the SME and large company regimes. We meet the conditions of the SME regime, but also can make claims under the RDEC regime to the extent that our projects are grant funded.

We may not be able to continue to claim research and development tax credits under the SME regime in the future because we may no longer qualify as a small or medium-sized company. However, we should continue to be able to make claims under the RDEC regime.

Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax is based on the expected manner of realization or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. A deferred tax asset is recognized only to the extent that it is probable that future taxable profits will be available against which the asset can be utilized. No deferred tax assets are recognized on our losses carried forward and other attributes because there is currently no indication that we will make sufficient profits to utilize these attributes.

JOBS Act

On April 5, 2012, the Jumpstart Our Business Startups Act, or the JOBS Act, was enacted. The JOBS Act provides that, among other things, an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. As an emerging growth company, we have irrevocably elected not to take advantage of the extended transition period afforded by the JOBS Act for implementation of new or revised accounting standards and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth public companies.

In addition, we also currently rely on the other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, we are entitled to continue to rely on certain exemptions as an “emerging growth company,” and we are not required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b), (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (iii) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis), and (iv) disclose certain executive compensation-related items such as the correlation between executive compensation and performance and comparisons of the chief executive officer’s compensation to median employee compensation. These exemptions will apply for a period of five years following the completion of our IPO or until we no longer meet the requirements of being an emerging growth company, whichever is earlier.

Recently Issued Accounting Pronouncements

A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2, “Summary of Significant Accounting Policies,” to our consolidated financial statements included in this Transition Report.

Full details of our research and development activities and expenditures are given in “Item 4. Information on the Company - B. Business” in our Annual Report and “Item 5.A. Operating and Financial Review and Prospects — A. Operating Results” within this Transition Report.

D.      Trend information.

See Item 5.A. "Operating and Financial Review and Prospects - Operating Results” and Item 5.B. " Operating and Financial

Review and Prospects - Liquidity and Capital Resources” within this Transition Report.

E. Off-balance sheet arrangements.

We did not have any off-balance sheet arrangements during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the Securities and Exchange Commission other than operating leases as described under “Tabular Disclosure of Contractual Obligations” below.

F. Tabular disclosure of contractual obligations.

The following table summarizes our contractual obligations as of December 31, 2018 and the effects that such obligations are expected to have on our liquidity and cash flows in future periods (in thousands) :

Operating Leases

Operating lease obligations relate to (i) our lease of office space for our corporate headquarters at Forest House in White City, London, (ii) subleases for our two manufacturing suites at the Cell and Gene Therapy Catapult manufacturing center in Stevenage, United Kingdom, and (iii) the sublease agreement for office space in Rockville, Maryland. In connection with the Forest House lease, as amended, we, in conjunction with the landlord, made tenant improvements to the leased space. The total cost of these improvements was funded by the landlord with a portion of the cost to be reimbursed by us over the term of the amended lease.

Not included in the table above are (i) an arrangement we entered into in June 2018 for additional office space in White City, London, under which a lease is expected to be executed in March 2019 with annual minimum payments of approximately £ 1.6 million, (ii) an arrangement we entered into September 2018 for additional manufacturing space in Enfield, United Kingdom, under which a lease will commence in February 2019 and expires in February 2034 with an annual minimum payments of approximately £ 0.5 million, and (iii) a lease agreement we entered into January 2019 for office and manufacturing space in Rockville, Maryland, under which the lease term is expected to commence in June 2020 and expires in June 2035 with an annual minimum payments of approximately $ 3.3 million.

Purchase and Other Obligations

We enter into contracts in the normal course of business with CROs and other third parties for clinical trials and preclinical research studies and testing. These contracts are generally cancelable by us upon prior notice. Payments due upon cancellation consist only of payments for services provided or expenses incurred, including noncancelable obligations of our service providers, up to the date of cancellation. These payments are not included in the table above, as the amount and timing of such payments are not known as of December 31, 2018.

We have not included any contingent payment obligations that we may incur upon achievement of clinical, regulatory and commercial milestones, as applicable, or royalty payments that we may be required to make under our license agreement with UCL Business plc, as the amount, timing and likelihood of such payments are not known as of December 31, 2018.

G. Safe harbor.

This Transition Report contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act and as defined in the Private Securities Litigation Reform Act of 1995. See the section titled “Cautionary Statement Regarding Forward-Looking Statements” at the beginning of this Transition Report.