OPERATING AND FINANCIAL REVIEW 9 For more information with respect to the subsidies and conditional 9.2.4 OPERATING EXPENSES advances, see Section 10.3, “Funding Sources” of this Registration Since inception, our operating expenses have consisted Document. primarily of research and development activities and general Research Tax Credits and administrative costs and since 2017, marketing and sales expenses. The research tax credit (crédit d’impôt recherche), or CIR is granted to companies by the French tax authorities in order to encourage them 9.2.4.1 Research and Development to conduct technical and scientific research and included as other We engage in substantial research and development efforts to income. Companies demonstrating that they have expenditures develop innovative pharmaceutical product candidates. Research that meet the required criteria, including research expenditures and development expense consists primarily of: located in France or, since January 1, 2005, within the European Community or in another State that is a party to the Agreement on • sub-contracting, collaboration and consultant expenses, that the European Economic Area that has concluded a tax treaty with primarily include the cost of third-party contractors such as France that contains an administrative assistance clause, receive a contract research organizations, or CROs, who conduct our tax credit that can be used against the payment of the corporate tax non-clinical studies and clinical trials; due the fiscal year in which the expenditures were made and during • personnel costs, including salaries, related benefits and share- the next three fiscal years, or, as applicable, can be reimbursed for based compensation, for our employees engaged in scientific the excess portion. The expenditures taken into account for the research and development functions, and which includes calculation of the CIR only involve research expenses. contributions required by French law related to certain share- The main characteristics of the CIR are the following: based compensation, which we refer to as social contributions; • the CIR results in a source of cash inflow for us from the tax • licensing and intel lectual property costs, including upfront authorities, since it is used to offset the payment of corporate payment for exclusive licensing; tax or is paid directly to us for the portion that remains unused • purchases, real-estate leasing costs and rental income received for corporate tax; from sublease agreements, as well as conferences and travel • a company’s corporate tax liability does not limit the amount of costs; and the CIR – a company that does not pay any corporate tax can • depreciation and amortization. request direct cash payment of the research tax credit; and Our research and development expenses in the periods • the CIR is not included in the determination of the corporate presented, and for the current period to date, mainly relate to the tax. following activities: As a result, we have concluded that the CIR meets the definition • GS010: Our Phase I/I I dose-escalation safety study for GS010 of a government grant as defined in IAS 20 Accounting for was completed in 2016 and a fol low-up study is currently Government Grants and Disclosure of Government Assistance ongoing. In 2017, we reported additional clinical trial results and, as a result, it has been classified as other income within with the product candidate after two and two and a half operating income in our statement of income (loss). years of follow-up in our Phase I/I I study. GS010 entered into Phase I I I trials, RESCUE and REVERSE, in the fourth quarter We requested the reimbursement of the 2015 CIR under the of 2015, following the release of our investigational new drug, Community tax rules for small and medium-sized companies in IND, application by the U.S. Food and Drug Administration, compliance with the regulatory texts in effect and we received or the FDA. The trials are designed as a double-masked, the reimbursement in December 2016. We requested the sham-control led, multi-center, multi-country clinical trial in reimbursement of the 2016 CIR in the amount of €2.9 million, Europe and the United States. We completed enrollment of which was received in August 2017. We have requested the all 37 subjects for REVERSE and 39 subjects for RESCUE in reimbursement of the 2017 CIR in the amount of €3.7 million, February and August 2017, respectively. Top-line results for which has not been received at the date of this Registration REVERSE and RESCUE are expected in 2018. REFLECT, a Document. bilateral Phase I I I clinical trial conducted pursuant to a special Legislative or regulatory changes relating to CIR or challenges protocol assessment with the FDA, was initiated in 2018. The by the French tax authorities with respect to our research first subject in this trial is expected to be treated in the first expenditures or our eligibility to receive CIR could have a material quarter of 2018 in the United States. adverse effect on our ability to operate our business and our • GS030: From 2014 to 2016, we conducted preclinical proof- financial condition, results of operations and prospects. of-concept studies with different molecules that led to the GENSIGHT BIOLOGICS – 2017 Registration Document– 115