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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 20-F

 

 

Date of event requiring this shell company report . . . . . . . . . . . . . . . . . . .

 

For the transition period from                       to                        

 

Commission file number 0-51504

 

GENETIC TECHNOLOGIES LIMITED

(Exact name of Registrant as specified in its charter)

N/A

(Translation of Registrant’s name into English)

AUSTRALIA

(Jurisdiction of incorporation or organization)

60-66 Hanover Street, Fitzroy, Victoria, 3065, Australia Telephone: 011 61 3 8412 7000; Facsimile: 011 61 3 8412 7040

(Address of principal executive offices)

Kevin Fischer Telephone: 011 61 3 8412 7000; Facsimile: 011 61 3 8412 7040 Email: kevin.fischer@gtglabs.com 60-66 Hanover Street, Fitzroy, Victoria, 3065, Australia

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act. None

 

Securities registered or to be registered pursuant to Section 12(g) of the Act.

 

American Depositary Shares each representing 150 Ordinary Shares and evidenced by American Depositary Receipts

Title of each Class

 

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Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. None

 

Number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

 

	1,715,282,724 Ordinary Shares

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

o Yes    x No

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

o Yes    x No

 

Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x Yes    o No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

o Item 17    o Item 18

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes    x No

 

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

 

o Yes    o No

 

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TABLE OF CONTENTS

 

Item 1.	Identity of Directors, Senior Management and Advisers	1
Item 1.A	Directors and Senior Management	1
Item 1.B	Advisers	2
Item 1.C	Auditor	2
Item 2.	Offer Statistics And Expected Timetable	2
Item 3.	Key Information	2
Item 3.A	Selected Financial Data	2
Item 3.B	Capitalization and Indebtedness	4
Item 3.C	Reasons for the Offer and Use of Proceeds	4
Item 3.D	Risk Factors	5
Item 4.	Information on the Company	17
Item 4.A	History and Development of the Company	17
Item 4.B	Business Overview	18
Item 4.C	Corporate Structure	26
Item 4.D	Property, Plant and Equipment	27
Item 5.	Operating and Financial Review and Prospects	27
Item 5.A	Operating Results	27
Item 5.B	Liquidity and Capital Resources	33
Item 5.C	Research and Development, Patents and Licenses, etc.	35
Item 5.D	Trend Information	35
Item 5E.	Off-balance sheet arrangements	36
Item 5F.	Information about contractual obligations	36
Item 6.	Directors, Senior Management and Employees	36
Item 6.A	Directors and Senior Management	36
Item 6.B	Compensation	38

 

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Item 6.C	Board Practices	43
Item 6.D	Employees	46
Item 6.E	Share Ownership	46
Item 7.	Major Shareholders and Related Party Transactions	46
Item 7.A	Major Shareholders	46
Item 7.B	Related Party Transactions	46
Item 7.C	Interests of Experts and Counsel	47
Item 8.	Financial Information	47
Item 8.A	Consolidated Statements and Other Financial Information	47
Item 8.B	Significant Changes to Financial Information	48
Item 9.	The Offer and Listing	49
Item 9.A	Offer and Listing Details	49
Item 9.B	Plan of Distribution	50
Item 9.C	Markets	50
Item 9.D	Selling Shareholders	50
Item 9.E	Dilution	51
Item 9.F	Expenses of the Issue	51
Item 10.	Additional Information	51
Item 10.A	Share Capital	51
Item 10.B	Our Constitution	54
Item 10.C	Material Contracts	55
Item 10.D	Exchange Controls and Other Limitations Affecting Security Holders	55
Item 10.E	Taxation	56
Item 10.F	Dividends and Paying Agents	62
Item 10.G	Statement by Experts	62
Item 10.H	Documents on Display	62
Item 10.I	Subsidiary Information	63
Item 11.	Quantitative And Qualitative Disclosures About Market Risk	63

 

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Item 12.	Description Of Securities Other Than Equity Securities	64
Item 12.A	Debt Securities	64
Item 12.B	Warrants and Rights	64
Item 12.C	Other Securities	64
Item 12.D	American Depositary Shares	64
Item 13.	Defaults, Dividend Arrearages and Delinquencies	64
Item 14.	Material Modifications to The Rights Of Security Holders and Use Of Proceeds	64
Item 15.	Controls and Procedures	64
Item 15.A	Disclosure controls and procedures	64
Item 15.B	Management’s annual report on internal control over financial reporting	64
Item 15.C	Attestation report of the registered public accounting firm	65
Item 15.D	Changes in internal control over financial reporting	65
Item 16.A	Audit Committee Financial Expert	66
Item 16.B	Code Of Ethics	66
Item 16.C	Principal Accountant Fees and Services	67
Item 16.D	Exemptions From The Listing Standards For Audit Committees	67
Item 16.E	Purchases Of Equity Securities By The Issuer And Affiliated Purchasers	67
Item 16.F	Change in Registrant’s Certifying Accountant	67
Item 16.G	Corporate Governance	67
Item 16.H	Mine Safety Disclosure	67
Item 17.	Financial Statements	68
Item 18.	Financial Statements	68
Item 19.	Exhibits	68

 

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INTRODUCTION

 

In this Annual Report, the “Company,” “Genetic Technologies”, “we,” “us” and “our” refer to Genetic Technologies Limited and its consolidated subsidiaries.

 

Our consolidated financial statements are set out on pages F1 to F40 of this Annual Report (refer to Item 18 “Financial Statements”).

 

References to the “ADSs” are to our ADSs described in Item 12.D “American Depositary Shares” and references to the “Ordinary Shares” are to our Ordinary Shares described in Item 10.A “Share Capital”.

 

Our fiscal year ends on June 30 and references in this Annual Report to any specific fiscal year are to the twelve month period ended on June 30 of such year.

 

FORWARD-LOOKING STATEMENTS

 

This Annual Report contains forward-looking statements that involve risks and uncertainties.  We use words such as “anticipates”, “believes”, “plans”, “expects”, “future”, “intends” and similar expressions to identify such forward-looking statements.  This Annual Report also contains forward-looking statements attributed to certain third parties relating to their estimates regarding the growth of Genetic Technologies and related service markets and spending.  You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Annual Report.  Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks faced by us described below under the caption “Risk Factors” and elsewhere in this Annual Report.

 

Although we believe that the expectations reflected in such forward-looking statements are reasonable at this time, we can give no assurance that such expectations will prove to be correct.  Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.  Important factors that could cause actual results to differ materially from our expectations are contained in cautionary statements in this Annual Report including, without limitation, in conjunction with the forward-looking statements included in this Annual Report and specifically under Item 3.D “Risk Factors”.

 

All subsequent written and oral forward-looking statements attributable to us are expressly qualified in their entirety by reference to these cautionary statements.

 

ENFORCEMENT OF LIABILITIES AND SERVICE OF PROCESS

 

We are incorporated under the laws of Western Australia in the Commonwealth of Australia.  The majority of our directors and executive officers, and any experts named in this Annual Report, reside outside the U.S.  Substantially all of our assets, our directors’ and executive officers’ assets and such experts’ assets are located outside the U.S.  As a result, it may not be possible for investors to affect service of process within the U.S. upon us or our directors, executive officers or such experts, or to enforce against them or us in U.S. courts, judgments obtained in U.S. courts based upon the civil liability provisions of the federal securities laws of the U.S.  In addition, we have been advised by our Australian solicitors that there is doubt that the courts of Australia will enforce against us, our directors, executive officers and experts named herein, judgments obtained in the U.S. based upon the civil liability provisions of the federal securities laws of the U.S. or will enter judgments in original actions brought in Australian courts based upon the federal securities laws of the U.S.

 

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PART I

 

Item 1.                                  Identity of Directors, Senior Management and Advisers

 

Item 1.A                         Directors and Senior Management

 

The Directors of the Company as of the date of this Annual Report are as follows:

 

Name		Position/Function		Business Address
Dr. Malcolm R. Brandon		Non-Executive Chairman		60-66 Hanover Street Fitzroy Victoria 3065 Australia
Eutillio Buccilli		Executive Director		60-66 Hanover Street Fitzroy Victoria 3065 Australia
Grahame J. Leonard AM		Non-Executive Director		60-66 Hanover Street Fitzroy Victoria 3065 Australia
Dr. Paul A. Kasian		Non-Executive Director		60-66 Hanover Street Fitzroy Victoria 3065 Australia
Dr. Lindsay P. Wakefield		Non-Executive Director		60-66 Hanover Street Fitzroy Victoria 3065 Australia

 

The members of Senior Management of the Company as of the date of this Annual Report are as follows:

 

Name		Position/Function		Business Address
Eutillio Buccilli		Chief Executive Officer		60-66 Hanover Street Fitzroy Victoria 3065 Australia
Kevin Fischer		Chief Financial Officer		60-66 Hanover Street Fitzroy Victoria 3065 Australia
Dr. Richard Allman		Scientific Director		60-66 Hanover Street Fitzroy Victoria 3065 Australia
Diana Newport		Quality and Business Operations Director		60-66 Hanover Street Fitzroy Victoria 3065 Australia
Chris Saunders		Vice President Sales & Marketing (Phenogen Sciences Inc.)		9115 Harris Corners Parkway Suite 320 Charlotte, North Carolina, 28269 USA

 

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Item 1.B                             Advisers

 

Our principal bankers, accountants and legal advisers are as follows:

 

Name of Adviser		Function		Business Address
National Australia Bank Limited		Bankers - Australia		Level 2, 151 Rathdowne Street Carlton Victoria 3053 Australia
Bank of America, N.A.		Bankers - USA		155 Town Centre Drive Mooresville North Carolina 28117 USA
K&L Gates		General Counsel		525 Collins Street Melbourne Victoria 3000 Australia
Sheridan Ross PC		Licensing and Patent Attorneys		1560 Broadway, Suite 1200 Denver Colorado 80202-5141 USA
Greenberg Traurig, LLP		U.S. Securities Counsel		200 Park Avenue New York New York 10166 USA

 

Item 1.C                         Auditor

 

The auditor of the Group’s financial statements for the years ended June 30, 2015, 2014 and 2013 was PricewaterhouseCoopers, whose address is 2 Southbank Boulevard, Southbank, Victoria, 3006, Australia.  PricewaterhouseCoopers is the Company’s current independent registered public accounting firm, an appointment ratified at the Annual General Meeting held on November 25, 2009.

 

Item 2.                                  Offer Statistics and Expected Timetable

 

Not applicable.

 

Item 3.                                  Key Information

 

Item 3.A                         Selected Financial Data

 

The following selected financial data for the five years ended June 30, 2015 is derived from the audited consolidated financial statements of Genetic Technologies Limited, prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board, which became effective for our Company as of our fiscal year ended June 30, 2006.

 

The balance sheet data as of June 30, 2015 and 2014 and the statement of comprehensive income/(loss) data for the 2015, 2014 and 2013 fiscal years are derived from our audited consolidated financial statements which are included in this Annual Report.  Balance sheet data as of June 30, 2013, 2012 and 2011 and statement of comprehensive income/ (loss) data for the 2012 and 2011 financial years are derived from our audited consolidated financial statements which are not included in this Annual Report.  The data should be read in conjunction with the consolidated financial statements, related notes and other financial information included herein.

 

All amounts are stated in Australian dollars as of June 30, as noted.

 

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GENETIC TECHNOLOGIES LIMITED

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/ (LOSS)

FOR 2015, 2014, 2013, 2012 AND 2011

 

		Year ended June 30, 2015		Year ended June 30, 2014		Year ended June 30, 2013		Year ended June 30, 2012		Year ended June 30, 2011
		AUD		AUD		AUD		AUD		AUD
Revenue from operations
Genetic testing services		2,011,918		4,564,280		3,377,183		3,691,215		4,594,960
Less: cost of sales		(891,243	)	(1,837,729	)	(1,945,467	)	(1,948,625	)	(2,034,916	)
Gross profit from operations		1,120,675		2,726,551		1,431,716		1,742,590		2,560,044
Other revenue		1,027,151		863,832		4,784,913		2,526,599		13,680,741
Gain on deconsolidation of subsidiary		—		761,361		—		5,113,175		—
Selling and marketing expenses		(4,504,299	)	(6,251,595	)	(5,266,818	)	(4,384,184	)	(3,018,947	)
General and administrative expenses		(4,222,988	)	(3,173,109	)	(4,413,782	)	(5,608,038	)	(3,696,165	)
Licensing, patent and legal costs		(435,418	)	(1,079,199	)	(2,399,824	)	(1,267,838	)	(4,097,323	)
Laboratory, research and development costs		(2,851,665	)	(3,298,127	)	(3,462,466	)	(4,029,369	)	(4,380,866	)
Finance costs		(264,694	)	(744,199	)	(38,968	)	(45,217	)	(81,934	)
Gain on disposal of business		1,396,798		—		—		—		—
Fair value loss on ImmunAid option fee		(795,533	)	—		—		—		—
Share of net loss of associates accounted for using the equity method		—		(362,682	)	(437,185	)	(132,037	)	—
Fair value gain/ (loss) on financial liabilities at fair value through profit or loss		349,246		(648,374	)	—		—		—
Non-operating income and expenses		370,557		1,071,072		452,931		787,491		(85,771	)
Profit/(loss) from continuing operations before income tax		(8,810,170	)	(10,134,469	)	(9,349,483	)	(5,296,828	)	879,779
Net profit from discontinued operation		—		—		—		—		21,562
Profit/(loss) before income tax		(8,810,170	)	(10,134,469	)	(9,349,483	)	(5,296,828	)	901,341
Income tax expense		—		—		—		—		—
Profit/(loss) for the year		(8,810,170	)	(10,134,469	)	(9,349,483	)	(5,296,828	)	901,341
Other comprehensive income/(loss)
Realized gain on sale of available-for-sale investments transferred from reserve		—		—		—		—		—
Exchange gains/(losses) on translation of controlled foreign operations		414,005		(149,162	)	9,347		(6,818	)	(85,079	)
Exchange gains/(losses) on translation of non-controlled foreign operations		—		86		17,073		(296	)	(11,585	)
Other comprehensive income/(loss) for the year, net of tax		414,005		(149,076	)	26,420		(7,114	)	(96,664	)
Total comprehensive profit/(loss) for the year		(8,396,165	)	(10,283,545	)	(9,323,063	)	(5,303,942	)	804,677
Profit/(loss) for the year is attributable to:
Owners of Genetic Technologies Limited		(8,810,170	)	(10,125,197	)	(9,298,367	)	(5,287,523	)	910,002
Non-controlling interests		—		(9,272	)	(51,116	)	(9,305	)	(8,661	)
Total profit/(loss) for the year		(8,810,170	)	(10,134,469	)	(9,349,483	)	(5,296,828	)	901,341
Total comprehensive profit/(loss) for the year is attributable to:
Owners of Genetic Technologies Limited		(8,396,165	)	(10,274,359	)	(9,289,020	)	(5,294,341	)	824,923
Non-controlling interests		—		(9,186	)	(34,043	)	(9,601	)	(20,246	)
Total profit/(loss) for the year		(8,396,165	)	(10,283,545	)	(9,323,063	)	(5,303,942	)	804,677
Earnings/(loss) per share (cents per share)
Basic and diluted net profit/(loss) per ordinary share		(0.82	)	(1.76	)	(1.97	)	(1.15)		0.22
Weighted-average shares outstanding		1,072,803,358		574,557,747		472,084,970		460,402,869		404,605,152

 

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GENETIC TECHNOLOGIES LIMITED

 

CONSOLIDATED BALANCE SHEET DATA
FOR 2015, 2014, 2013, 2012 AND 2011

 

		As of June 30, 2015		As of June 30, 2014		As of June 30, 2013		As of June 30, 2012		As of June 30, 2011
		AUD		AUD		AUD		AUD		AUD
Assets
Current assets		19,566,096		4,360,509		2,657,416		9,949,795		6,255,344
Non-current assets		1,153,636		2,368,690		5,662,111		6,491,956		2,667,010
Total assets		20,719,732		6,729,199		8,319,527		16,441,751		8,922,354
Liabilities
Current liabilities		(1,735,163	)	(2,318,016	)	(2,465,016	)	(1,930,568	)	(2,025,629	)
Non-current liabilities		(25,321	)	(2,583,664	)	(96,224	)	(108,541	)	(82,730	)
Total liabilities		(1,760,484	)	(4,901,680	)	(2,561,240	)	(2,039,109	)	(2,108,359	)
Net assets		18,959,248		1,827,519		5,758,287		14,402,642		6,813,995
Equity
Contributed equity		115,247,128		90,080,492		83,735,845		83,280,142		72,378,105
Reserves		4,697,403		3,922,140		3,951,771		3,719,419		1,697,914
Accumulated losses		(100,985,283	)	(92,175,113	)	(82,049,916	)	(72,751,549	)	(67,464,026	)
Non-controlling interests		—		—		120,587		154,630		202,002
Total equity		18,959,248		1,827,519		5,758,287		14,402,642		6,813,995

 

Exchange rates

 

The following table sets forth, for the periods and dates indicated, certain information concerning the noon buying rate in New York City for Australian dollars expressed in U.S. dollars per $1.00 as certified for customs purposes by the Federal Reserve Bank of New York.

 

Period ended		At period end USD		Average rate USD		High USD		Low USD
Yearly data
June 2011		1.0732		0.9905		1.0732		0.8380
June 2012		1.0236		1.0323		1.1026		0.9453
June 2013		0.9165		1.0272		1.0591		0.9165
June 2014		0.9427		0.9186		0.9705		0.8715
June 2015		0.7704		0.8365		0.9488		0.7566
Monthly data
May 2015		0.7659		0.7891		0.8118		0.7631
June 2015		0.7704		0.7715		0.7831		0.7613
July 2015		0.7332		0.7407		0.7664		0.7278
August 2015		0.7100		0.7295		0.7419		0.7087
September 2015		0.7020		0.7059		0.7222		0.6917
October 2015		0.7133		0.7200		0.7316		0.7025
November 6, 2015		0.7034

 

Item 3.B                         Capitalization and Indebtedness

 

Not applicable.

 

Item 3.C                         Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

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Item 3.D         Risk Factors

 

Before you purchase our ADSs, you should be aware that there are risks, including those described below.  You should consider carefully these risk factors together with all of the other information contained elsewhere in this Annual Report before you decide to purchase our ADSs.

 

Risks Related to Us

 

Our stock price is volatile and can fluctuate significantly based on events not in our control and general industry conditions.  As a result, the value of your investment may decline significantly.

 

The biotechnology sector can be particularly vulnerable to abrupt changes in investor sentiment.  Stock prices of companies in the biotechnology industry, including ours, can swing dramatically, with little relationship to operating performance.  Our stock price may be affected by a number of factors including, but not limited to:

 

·                        product development events;

·                        the outcome of litigation;

·                        decisions relating to intellectual property rights;

·                        the entrance of competitive products or technologies into our markets;

·                        new medical discoveries;

·                        the establishment of strategic partnerships and alliances;

·                        changes in reimbursement policies or other practices related to the pharmaceutical industry; or

·                        other industry and market changes or trends.

 

Since our listing on the Australian Securities Exchange in August 2000, the price of our Ordinary Shares has ranged from a low of $0.012 to a high of $0.97 per share.  Further fluctuations are likely to occur due to events which are not within our control and general market conditions affecting the biotechnology sector or the stock market generally.

 

In addition, low trading volume may increase the volatility of the price of our ADSs.  A thin trading market could cause the price of our ADSs to fluctuate significantly more than the stock market as a whole.  For example, trades involving a relatively small number of our ADSs may have a greater impact on the trading price for our ADSs than would be the case if the trading volume were higher.

 

The following chart illustrates the fluctuation in the price of our shares (in Australian dollars) over the last five years:

 

(Refer Item 9.A for more information on key data points on this chart)

 

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The fact that we do not expect to pay cash dividends may lead to decreased prices for our stock.

 

We have never paid a cash dividend on our Ordinary Shares and we do not anticipate paying a cash dividend in the foreseeable future.  We intend to retain future cash earnings, if any, for reinvestment in the development and expansion of our business.  Whether we pay cash dividends in the future will be at the discretion of our Board of directors and may be dependent on our financial condition, results of operations, capital requirements and any other factors our Board of directors decides is relevant.  As a result, an investor may only recognize an economic gain on an investment in our stock from an appreciation in the price of our stock.

 

You may have difficulty in effecting service of legal process and enforcing judgments against us and our Management.

 

We are a public company limited by shares, registered and operating under the Australian Corporations Act 2001 .  The majority of our directors and officers named in this Annual Report reside outside the U.S.  Substantially all, or a substantial portion of, the assets of those persons are also located outside the U.S.  As a result, it may not be possible to affect service on such persons in the U.S. or to enforce, in foreign courts, judgments against such persons obtained in U.S. courts and predicated on the civil liability provisions of the federal securities laws of the U.S.  Furthermore, substantially all of our directly-owned assets are located outside the U.S., and, as such, any judgment obtained in the U.S. against us may not be collectible within the U.S.  There is doubt as to the enforceability in the Commonwealth of Australia, in original actions or in actions for enforcement of judgments of U.S. courts, of civil liabilities predicated solely upon federal or state securities laws of the U.S., especially in the case of enforcement of judgments of U.S. courts where the defendant has not been properly served in Australia.

 

Because we are not necessarily required to provide you with the same information as an issuer of securities based in the United States, you may not be afforded the same protection or information you would have if you had invested in a public corporation based in the United States.

 

We are exempt from certain provisions of the Securities Exchange Act of 1934, as amended, commonly referred to as the Exchange Act, that are applicable to U.S. public companies, including (i) the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q or current reports on Form 8-K; (ii) the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act; and (iii) the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time.  The exempt provisions would be available to you if you had invested in a U.S. corporation.

 

However, in line with the Australian Securities Exchange regulations, we disclose our financial results on a semi-annual basis (which is performed under International Standard on Review Engagements) and to be fully audited annually (which is performed under International Standards on Auditing) which are required to have a limited review semi-annually and to be fully audited annually.   The information, which may have an effect on our stock price on the Australian Securities Exchange, will be disclosed to the Australian Securities Exchange and also the Securities Exchange Commission.  Other relevant information pertaining to our Company will also be disclosed in line with the Australian Securities Exchange regulations and information dissemination requirements for listed companies.  We will provide our semi-annual results and other material information that we make public in Australia in the U.S. under the cover of an SEC Form 6-K.  Nevertheless, you may not be afforded the same protection or information, which would be made available to you, were you investing in a United States public corporation because the requirements of a Form 10-Q and Form 8-K are not applicable to us.

 

If significant liquidity does not eventuate for our ADSs on NASDAQ, your ability to resell your ADSs could be negatively affected because there would be limited buyers for your interests.

 

Historically, there was virtually no trading in our ADSs through the pink sheets after the establishment of our Level I ADR Program.  However, subsequent to the Level II listing of our ADSs on the NASDAQ Global Market on September 2, 2005, the trading volumes of our ADSs have increased.  The Company subsequently transferred the listing of its ADSs to the NASDAQ Capital Market effective as from June 30, 2010.  An active trading market for the ADSs, however, may not be maintained in the future.  If an active trading market is not maintained, the liquidity and trading prices of the ADSs could be negatively affected.

 

In certain circumstances, holders of ADSs may have limited rights relative to holders of Ordinary Shares .

 

The rights of holders of ADSs with respect to the voting of Ordinary Shares and the right to receive certain distributions may be limited in certain respects by the deposit agreement entered into by us and The Bank of New York Mellon.  For example, although ADS holders are entitled under the deposit agreement, subject to any applicable provisions of Australian law and of our Constitution, to instruct the depositary as to the exercise of the voting rights pertaining to the Ordinary Shares represented by the American Depositary Shares, and the depositary has agreed that it will try, as far as practical, to vote the Ordinary Shares so represented in accordance with such instructions, ADS holders may not receive notices sent by the depositary in time to ensure that the depositary will vote the Ordinary Shares.  This means that, from a practical point of view, the holders of ADSs may not be able to exercise their

 

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right to vote.  In addition, under the deposit agreement, the depositary has the right to restrict distributions to holders of the ADSs in the event that it is unlawful or impractical to make such distributions.  We have no obligation to take any action to permit distributions to holders of our American Depositary Receipts, or ADSs.  As a result, holders of ADSs may not receive distributions made by us.

 

Our Company has a history of incurring losses.

 

The business now called Genetic Technologies Limited was founded in 1989.  With the exception of the year ended 30 June 2011, the Company has incurred operating losses in every year of its existence.  As at June 30, 2015, the Company had accumulated losses of $100,985,283 and the extent of any future losses and whether or not the Company can generate profits in future years remains uncertain.  The Company currently does not generate sufficient revenue to cover its operating expenses.  There is also no certainty that the Company will be able to raise additional funds by issuing further shares and/or the raising of debt and, if such funds are available, on what terms the Company would be able to secure them.

 

Going concern.

 

During the 2015 financial year, the Company incurred a total comprehensive loss after income tax of $8,396,165 (2014: $10,283,545) and net cash outflows from operations of $9,691,528 (2014: $10,987,088).

 

As at June 30, 2015, the Company held cash reserves of $18,341,357 and had net current assets of $17,830,933.

 

The cash generated from revenue combined with its existing cash reserves will enable the Company to fund its operations in the next twelve months from the date of this report.

 

However, we are aware that the long term viability of the Company is directly dependent on the ability to grow revenue, control costs and raise additional funds via the issuance of new equity should the need arise.   Any issuance of new equity will be subject to normal risks and therefore could impact the ability of the Company to continue as a going concern. However, the Directors believe that the Company would be successful in raising new funds if the need arises and have prepared the financial report on a going concern basis.

 

Risks Related to our Industry

 

Our sales cycle is typically lengthy.

 

The sales cycle for our testing products is typically lengthy.  As a result, we may expend substantial funds and management effort with no assurance of successfully selling our products or services.  Our ability to obtain customers for our genetic testing services depends significantly on the perception that our services can help accelerate efforts in genomics.  Our sales effort requires the effective demonstration of the benefits of our services to, and significant training of, many different departments within a potential customer.  In addition, we sometimes are required to negotiate agreements containing terms unique to each customer.  Our business could also be adversely affected if we expend money without any return.

 

If our competitors develop superior products, our operations and financial condition could be affected.

 

Though we currently have no direct competition in this space, we are currently subject to competition from biotechnology and diagnostic companies, academic and research institutions and government or other publicly-funded agencies that are pursuing products and services which are substantially similar to our genetic testing services, or which otherwise address the needs of our customers and potential customers.  Our competitors in the testing market include private and public sector enterprises located in Australia, the U.S. and elsewhere. Many of the organizations competing with us are much larger and have more ready access to needed resources. In particular, they would have greater experience in the areas of finance, research and development, manufacturing, marketing, sales, distribution, technical and regulatory matters than we do.  In addition, many of the larger current and potential competitors have already established r name / brand recognition and more extensive collaborative relationships.

 

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Our competitive position in the genetic testing area is based upon, amongst other things, our ability to:

 

·              maintain first to market advantage;

 

·              continue to strengthen and maintain scientific credibility through the process of obtaining scientific validation and undertaken further clinical trials supported by Peer-reviewed publication in medical journals;

 

·              create and maintain scientifically-advanced technology and offer proprietary products and services

 

·              attract and retain qualified personnel;

 

·              obtain patent or other protection for our products and services;

 

·              obtain required government approvals and other accreditations on a timely basis; and

 

·              successfully market our products and services.

 

If we are not successful in meeting these goals, our business could be adversely affected.  Similarly, our competitors may succeed in developing technologies, products or services that are more effective than any that we are developing or that would render our technology and services obsolete, noncompetitive or uneconomical.

 

We rely heavily upon our patents and proprietary technology and any future claims that our patents are invalid could adversely affect our revenues and our financial condition.

 

We rely upon our portfolio of patent rights, patent applications and exclusive licenses to patents and patent applications relating to genetic technologies.  We expect to aggressively patent and protect our proprietary technologies.  However, we cannot be certain that any additional patents will be issued to us as a result of our domestic or foreign patent applications or that any of our patents will withstand challenges by others.  Patents issued to, or licensed by us may be infringed or third parties may independently develop the same or similar technologies.  Similarly, our patents may not provide us with meaningful protection from competitors, including those who may pursue patents which may prevent, limit or interfere with our products or which may require licensing and the payment of significant fees or royalties by us to such third parties in order to enable us to conduct our business.  We may sue or be sued by third parties regarding our patents and other intellectual property rights.  These suits are often costly and would divert valuable funds, time and technical resources from our operations and cause a distraction to management.

 

We have important relationships with external parties over whom we have limited control.

 

We have relationships with academic consultants and other advisers who are not employed by us.  Accordingly, we have limited control over their activities and can expect only limited amounts of their time to be dedicated to our activities.  These persons may have consulting, employment or advisory arrangements with other entities that may conflict with or compete with their obligations to us.  Our consultants typically sign agreements that provide for confidentiality of our proprietary information and results of studies.  However, in connection with every relationship, we may not be able to maintain the confidentiality of our technology, the dissemination of which could hurt our competitive position and results from operations.  To the extent that our scientific consultants develop inventions or processes independently that may be applicable to our proposed products, disputes may arise as to the ownership of the proprietary rights to such information, and we may not be successful with any dispute outcomes.

 

We may be subject to professional liability suits and our insurance may not be sufficient to cover damages.  If this occurs, our business and financial condition may be adversely affected.

 

Our business exposes us to potential liability risks that are inherent in the testing, manufacturing, marketing and sale of genetic tests.  The use of our products and product candidates, whether for clinical trials or commercial sale, may expose us to professional liability claims and possible adverse publicity.  We may be subject to claims resulting from incorrect results of analysis of genetic variations or other screening tests performed using our services.  Litigation of such claims could be costly.  We could expend significant funds during any litigation proceeding brought against us.  Further, if a court were to require us to pay damages to a plaintiff, the amount of such damages could be significant and severely damage our financial condition.  Although we have public and product liability insurance coverage under broadform liability and professional indemnity policies, for an aggregate amount of A$60,000,000, the level or breadth of our coverage may not be adequate to fully cover any potential liability claims.  To date we have not been subject to any claims, or ultimately liability, in excess of the amount of our coverage.  In addition, we may not be able to obtain additional professional liability coverage in the future at an acceptable cost.  A successful claim or series of claims brought against us in excess of our insurance coverage and the effect of professional liability litigation upon the reputation and marketability of our technology and products, together with the diversion of the attention of key personnel, could negatively affect our business.

 

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We use potentially hazardous materials, chemicals and patient samples in our business and any disputes relating to improper handling, storage or disposal of these materials could be time consuming and costly.

 

Our research and development, production and service activities involve the controlled use of hazardous laboratory materials and chemicals, including small quantities of acid and alcohol, and patient tissue samples.  We do not knowingly deal with infectious samples.  We, our collaborators and service providers are subject to stringent Australian federal, state and local laws and regulations governing occupational health and safety standards, including those governing the use, storage, handling and disposal of these materials and certain waste products.  However, we could be liable for accidental contamination or discharge or any resultant injury from hazardous materials, and conveyance, processing, and storage of and data on patient samples.  If we, our collaborators or service providers fail to comply with applicable laws or regulations, we could be required to pay penalties or be held liable for any damages that result and this liability could exceed our financial resources.  Further, future changes to environmental health and safety laws could cause us to incur additional expense or restrict our operations.  To date, we have not had a reportable event or serious injury.

 

In addition, our collaborators and service providers may be working with these same types of hazardous materials, including hazardous chemicals, in connection with our collaborations.  In the event of a lawsuit or investigation, we could be held responsible for any injury caused to persons or property by exposure to, or release of, these hazardous materials or patient samples that may contain infectious materials.  The cost of this liability could exceed our resources.  While we maintain broadform liability insurance coverage for these risks, in the amount of up to A$40,000,000, the level or breadth of our coverage may not be adequate to fully cover potential liability claims.  To date, we have not been subject to claims, or ultimately liability, in excess of the amount of our coverage.  Our broadform insurance coverage also covers us against losses arising from an interruption of our business activities as a result of the mishandling of such materials.  We also maintain workers’ compensation insurance, which is mandatory in Australia, covering all of our workers in the event of injury.

 

We depend on the collaborative efforts of our academic and corporate partners for research, development and commercialization of some of our products.  A breach by our partners of their obligations, or the termination of the relationship, could deprive us of valuable resources and require additional investment of time and money.

 

Our strategy for research, development and commercialization of some of our products has historically involved entering into various arrangements with academic, corporate partners and others.  As a result, the success of our strategy depends, in part, upon the strength of those relationships and these outside parties undertaking their responsibilities and performing their tasks to the best of their ability and responding in a timely manner.  Our collaborators may also be our competitors.  We cannot necessarily control the amount and timing of resources that our collaborators devote to performing their contractual obligations and we have no certainty that these parties will perform their obligations as expected or that any revenue will be derived from these arrangements.

 

If our collaborators breach or terminate their agreement with us or otherwise fail to conduct their collaborative activities in a timely manner, the development or commercialization of the product candidate or research program under such collaborative arrangement may be delayed.  If that is the case, we may be required to undertake unforeseen additional responsibilities or to devote unforeseen additional funds or other resources to such development or commercialization, or such development or commercialization could be terminated.  The termination or cancellation of collaborative arrangements could adversely affect our financial condition, intellectual property position and general operations.  In addition, disagreements between collaborators and us could lead to delays in the collaborative research, development, or commercialization of certain products or could require or result in formal legal process or arbitration for resolution.  These consequences could be time-consuming and expensive and could have material adverse effects on the Company.

 

Other than our contractual rights under our license agreements, we may be limited in our ability to convince our licensees to fulfill their obligations.  If our licensees fail to act promptly and effectively, or if a dispute arises, it could have a material adverse effect on our results of operations and the price of our ordinary shares and ADSs.

 

We rely upon scientific, technical and clinical data supplied by academic and corporate collaborators, licensors, licensees, independent contractors and others in the evaluation and development of potential therapeutic methods.  There may be errors or omissions in this data that would materially adversely affect the development of these methods.

 

We may seek additional collaborative arrangements to develop and commercialize our products in the future.  We may not be able to negotiate acceptable arrangements in the future and, if negotiated, we have no certainty that they will be on favorable terms or if they will be successful.  In addition, our partners may pursue alternative technologies independently or in collaboration with others as a means of developing treatments for the diseases targeted by their collaborative programs with us.  If any of these events occur, the progress of the Company could be adversely affected and our results of operations and financial condition could suffer.

 

Problems associated with international business operations could affect our results of operations.

 

We seek to market our growing range of other products and services on a global scale, including in countries that are considered to provide significantly less protection to intellectual property than does the United States and Australia.  In addition, a number of other

 

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risks are inherent in international transactions and commerce, including political and economic instability, foreign currency exchange fluctuations and changes in tax laws.

 

Currently our financial results depend largely on the sales of our breast cancer risk assessment test, BREVAGen plus.

 

For the near future, we expect to continue to derive a substantial majority of our revenues from sales of one product, our breast cancer risk test BREVAGen. Although in October 2014, we announced the U.S. release of BREVAGen plus , a second generation BREVAGen product, we do not expect to recognize significant revenues from this test until significant levels of adoption have been established. If we are unable to increase sales of our BREVAGen or BREVAGen plus or successfully develop and commercialize other tests or enhancements, our ability to achieve sustained revenues would be impaired.

 

If our sole laboratory facility becomes inoperable, we will be unable to perform our tests and our business will be harmed.

 

We do not have redundant clinical reference laboratory facilities outside of Melbourne, Australia. Our current lease of laboratory premises expires August 31 2018. The facility and the equipment we use to perform our tests would be costly to replace and could require substantial lead time to repair or replace. The facility may be harmed or rendered inoperable by natural or man-made disasters, including flooding and power outages, which may render it difficult or impossible for us to perform our tests for some period of time. The inability to perform our tests or the backlog of tests that could develop if our facility is inoperable for even a short period of time may result in the loss of customers or harm our reputation, and we may be unable to regain those customers in the future.

 

If we no longer had our own facility and needed to rely on a third party to perform our tests, we could only use another facility with established state licensure and CLIA accreditation under the scope of which BREVAgen plus tests could be performed following validation and other required procedures. We cannot assure you that we would be able to find another CLIA-certified facility willing to comply with the required procedures, that this laboratory would be willing to perform the tests on commercially reasonable terms, or that it would be able to meet our quality standards. In order to establish a redundant clinical reference laboratory facility, we would have to spend considerable time and money securing adequate space, constructing the facility, recruiting and training employees, and establishing the additional operational and administrative infrastructure necessary to support a second facility. We may not be able, or it may take considerable time, to replicate our testing processes or results in a new facility. Additionally, any new clinical reference laboratory facility would be subject to certification under CLIA and licensing by several states, including California and New York, which could take a significant amount of time and result in delays in our ability to begin operations.

 

The loss of key members of our senior management team or our inability to attract and retain highly skilled scientists, clinicians and salespeople could adversely affect our business.

 

Our success depends largely on the skills, experience and performance of key members of our executive management team and others in key management positions. The efforts of each of these persons together will be critical as we continue to develop our technologies and testing processes, continue our international expansion and transition to a company with multiple commercialized products on offer. If we were to lose one or more of these key employees, we may experience difficulties in competing effectively, developing our technologies and implementing our business strategies.

 

Our research and development programs and commercial laboratory operations depend on our ability to attract and retain highly skilled scientists and technicians, including licensed laboratory technicians, chemists, biostatisticians and engineers. We may not be able to attract or retain qualified scientists and technicians in the future due to the competition for qualified personnel among life science businesses. In addition, if there were to be a shortage of clinical laboratory scientists in coming years, this would make it more difficult to hire sufficient numbers of qualified personnel. We also face competition from universities and public and private research institutions in recruiting and retaining highly qualified scientific personnel. In addition, our success depends on our ability to attract and retain salespeople with extensive experience in oncology and close relationships with medical oncologists, pathologists and other hospital personnel. We may have difficulties sourcing, recruiting or retaining qualified salespeople, which could cause delays or a decline in the rate of adoption of our tests. If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may experience constraints that could adversely affect our ability to support our research and development and sales programs. All of our U.S employees are at-will, which means that either we or the employee may terminate their employment at any time.

 

FDA regulation of LDTs may result in significant changes, and our business could be adversely impacted if we fail to adapt.

 

Clinical laboratory tests like ours are regulated under the CLIA, as well as by applicable state laws. Diagnostic kits that are sold and distributed through interstate commerce are regulated as medical devices by the FDA. FDA has exercised its discretion and has not subjected most LDTs to FDA regulation, although reagents or software provided by third parties and used to perform LDTs may be subject to regulation.

 

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The FDA claims to have regulatory authority over LDTs under the Medical Device Amendments of 1976 and has stated in the past that it would issue guidance to the industry regarding its regulatory approach. In such discussions, the FDA has indicated that it would use a risk-based approach to regulation and would direct more resources to tests with wider distribution and with the highest risk of injury, but that it will be sensitive to the need to not adversely impact patient care or innovation.  In October 2014, the FDA announced its framework and timetable for implementing this guidance.  We cannot predict the ultimate timing or form of any such guidance or regulation and the potential impact on our existing tests. If adopted, such a regulatory approach by the FDA may lead to an increased regulatory burden, including additional costs and delays in introducing new tests or even continuing with our current tests. While the ultimate impact of the FDA’s approach is unknown, it may be extensive and may result in significant changes. Our failure to adapt to these changes could have a material adverse effect on our business.

 

If the FDA decides to regulate our tests, it may require additional pre-market clinical testing prior to submitting a regulatory notification or application for commercial sales. If we are required to conduct pre-market clinical trials, whether using prospectively acquired samples or archival samples, delays in the commencement or completion of clinical testing could significantly increase our test development costs and delay commercialization of any future tests, and interrupt sales of our current tests. Many of the factors that may cause or lead to a delay in the commencement or completion of clinical trials may also ultimately lead to delay or denial of regulatory clearance or approval. The commencement of clinical trials may be delayed due to insufficient patient enrollment, which is a function of many factors, including the size of the patient population, the nature of the protocol, the proximity of patients to clinical sites and the eligibility criteria for the clinical trial.

 

We may find it necessary to engage contract research organizations to perform data collection and analysis and other aspects of our clinical trials, which might increase the cost and complexity of our trials. We may also depend on clinical investigators, medical institutions and contract research organizations to perform the trials. If these parties do not successfully carry out their contractual duties or obligations or meet expected deadlines, or if the quality, completeness or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or for other reasons, our clinical trials may have to be extended, delayed or terminated. Many of these factors would be beyond our control. We may not be able to enter into replacement arrangements without undue delays or considerable expenditures. If there are delays in testing or approvals as a result of the failure to perform by third parties, our research and development costs would increase, and we may not be able to obtain regulatory clearance or approval for our tests. In addition, we may not be able to establish or maintain relationships with these parties on favorable terms, if at all. Each of these outcomes would harm our ability to market our tests, or to achieve sustained profitability.

 

Our business could be harmed from the loss or suspension of a license or imposition of a fine or penalties under, or future changes in, or changing interpretations of, CLIA or state laboratory licensing laws to which we are subject.

 

The clinical laboratory testing industry is subject to extensive federal and state regulation, and many of these statutes and regulations have not been interpreted by the courts.  The regulations implementing CLIA set out federal regulatory standards that apply to virtually all clinical laboratories (regardless of the location, size or type of laboratory), including those operated by physicians in their offices, by requiring that they be certified by the federal government or by a federally approved accreditation agency.  CLIA does not preempt state law, which in some cases may be more stringent than federal law and require additional personnel qualifications, quality control, record maintenance and proficiency testing. The sanction for failure to comply with CLIA and state requirements may be suspension, revocation or limitation of a laboratory’s CLIA certificate, which is necessary to conduct business, as well as significant fines and/or criminal penalties. Several states have similar laws and we may be subject to similar penalties.

 

We cannot assure you that applicable statutes and regulations will not be interpreted or applied by a prosecutorial, regulatory or judicial authority in a manner that would adversely affect our business. Potential sanctions for violation of these statutes and regulations include significant fines and the suspension or loss of various licenses, certificates and authorizations, which could have a material adverse effect on our business. In addition, compliance with future legislation could impose additional requirements on us, which may be costly.

 

Failure to establish, and perform to, appropriate quality standards to assure that the highest level of quality is observed in the performance of our testing services and in the design, manufacture and marketing of our products could adversely affect the results of our operations and adversely impact our reputation.

 

The provision of clinical testing services, and the design, manufacture and marketing of diagnostic products involve certain inherent risks. The services that we provide and the products that we design, manufacture and market are intended to provide information for healthcare providers in providing patient care. Therefore, users of our services and products may have a greater sensitivity to errors than the users of services or products that are intended for other purposes.

 

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Similarly, negligence in performing our services can lead to injury or other adverse events. We may be sued under common law, physician liability or other liability law for acts or omissions by our laboratory personnel.  We are subject to the attendant risk of substantial damages awards and risk to our reputation.

 

Failure to timely or accurately bill for our services could have a material adverse effect on our business.

 

Billing for clinical testing services is extremely complicated and is subject to extensive and non-uniform rules and administrative requirements. Depending on the billing arrangement and applicable law, we bill various payers, such as patients, insurance companies, Medicare, Medicaid, physicians and hospitals. Changes in laws and regulations could increase the complexity and cost of our billing process. Additionally, auditing for compliance with applicable laws and regulations as well as internal compliance policies and procedures adds further cost and complexity to the billing process.

 

Missing or incorrect information on requisitions adds complexity to and slows the billing process, creates backlogs of unbilled requisitions, and generally increases the aging of accounts receivable and bad debt expense. Failure to timely or correctly bill may lead to us not being reimbursed for our services or an increase in the aging of our accounts receivable, which could adversely affect our results of operations and cash flows. Failure to comply with applicable laws relating to billing government healthcare programs or private healthcare programs that operate under government contract could lead to various penalties, including: (1) exclusion or suspension from participation in Center for Medicare & Medicaid Services (CMS) and other government programs; (2) asset forfeitures; (3) civil and criminal fines and penalties; and (4) the loss of various licenses, certificates and authorizations necessary to operate our business, any of which could have a material adverse effect on our results of operations or cash flows.

 

Failure to comply with complex federal and state laws and regulations related to submission of claims for clinical laboratory services could result in significant monetary damages and penalties and exclusion from the Medicare and Medicaid programs.

 

We are subject to extensive federal and state laws and regulations relating to the submission of claims for payment for clinical laboratory services, including those that relate to coverage of our services under Medicare, Medicaid and other governmental health care programs, the amounts that may be billed for our services and to whom claims for services may be submitted. In addition, we are subject to various laws regulating our interactions with other healthcare providers and with patients, such as the Anti-Kickback Statute, the Anti-Inducement Statute, and the Ethics in Patient Referrals Act of 1989, commonly referred to as the Stark law.  These laws are complicated.

 

Our failure to comply with applicable laws and regulations could result in our inability to receive payment for our services or result in attempts by third-party payers, such as Medicare and Medicaid, to recover payments from us that have already been made. Submission of claims in violation of certain statutory or regulatory requirements can result in penalties, including substantial civil penalties for each item or service billed to Medicare in violation of the legal requirement, and exclusion from participation in Medicare and Medicaid. Government authorities may also assert that violations of laws and regulations related to submission or causing the submission of claims violate the federal False Claims Act, or FCA, or other laws related to fraud and abuse, including submission of claims for services that were not medically necessary. Violations of the FCA could result in significant economic liability. The FCA provides that all damages are trebled, and each false claim submitted is subject to a penalty of up to $11,000. For example, we could be subject to FCA liability if it were determined that the services we provided were not medically necessary and not reimbursable, particularly if it were asserted that we contributed to the physician’s referrals of unnecessary services to us. It is also possible that the government could attempt to hold us liable under fraud and abuse laws for improper claims submitted by an entity for services that we performed if we were found to have knowingly participated in the arrangement that resulted in submission of the improper claims.

 

Failure to comply with HIPAA, including regarding the use of new “standard transactions,” may negatively impact our profitability and cash flows.

 

Pursuant to the Health Insurance Portability and Accountability Act of 1996, as amended, or HIPAA, we must comply with comprehensive privacy and security standards with respect to the use and disclosure of protected health information, as well as standards for electronic transactions, including specified transaction and code set rules. Under recent HITECH amendments to HIPAA, the law was expanded, including requirements to provide notification of certain identified data breaches, direct patient access to laboratory records, the extension of certain HIPAA privacy and security standards directly to business associates, and heightened penalties for noncompliance, and enforcement efforts.

 

In addition, the HIPAA transaction standards are complex, and subject to differences in interpretation by payers. For instance, some payers may interpret the standards to require us to provide certain types of information, including demographic information not usually provided to us by physicians. As a result of inconsistent application of transaction standards by payers or our inability to obtain certain billing information not usually provided to us by physicians, we could face increased costs and complexity, a temporary disruption in receipts and ongoing reductions in the timeliness of reimbursement. In addition, new requirements for additional standard transactions,

 

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such as claims attachments, Version 5010 of the HIPAA Transaction Standards and the ICD-10-CM Code Set, could prove technically difficult, time-consuming or expensive to implement.

 

Complying with numerous regulations pertaining to our business is an expensive and time-consuming process, and any failure to comply could result in substantial penalties.

 

The clinical laboratory testing industry is highly regulated and there can be no assurance that the regulatory environment in which we operate will not change significantly and adversely in the future. Areas of the regulatory environment that may affect our ability to conduct business include, without limitation:

 

·                   federal and state laws applicable to billing and claims payment;

·                   federal and state laboratory anti-mark-up laws;

·                   federal and state anti-kickback laws;

·                   federal and state false claims laws;

·                   federal self-referral and financial inducement prohibition laws, commonly known as the Stark Law, and the state equivalents;

·                   federal and state laws governing laboratory licensing and testing, including CLIA;

·                   federal and state laws governing the LDTs;

·                   HIPAA, along with the revisions to HIPPA as a result of the HITECH Act, and analogous state laws;

·                   federal, state and foreign regulation of privacy, security, electronic transactions and identity theft;

·                   federal, state and local laws governing the handling, transportation and disposal of medical and hazardous waste;

·                   Occupational Safety and Health Administration rules and regulations;

·                   changes to laws, regulations and rules as a result of the Health Care Reform Law; and

·                   changes to other federal, state and local laws, regulations and rules, including tax laws.

 

We have adopted policies and procedures designed to comply with these laws.  In the ordinary course of business, there is an ongoing awareness of the importance of compliance with these laws.  The growth of our business and sales organization may increase the potential for violating these laws or our internal policies and procedures, despite our ongoing vigilance in maintaining and updating our compliance procedures. The risk of being found in violation of these or other laws and regulations is further increased by the fact that many of them are extremely complex and in many instances, there are no significant regulatory or judicial interpretations of these laws and regulations. Any action brought against us for violation of these or other laws or regulations, even if we successfully defend against it, could cause us to incur significant legal expenses and divert management’s attention. Any determination that we have violated these laws or regulations, or a public announcement that we are being investigated for possible violations of these laws or regulations, could harm our reputation, operating results and financial condition. If our operations are found to be in violation of any of these laws and regulations, we may be subject to any applicable penalty associated with the violation, including civil and criminal penalties, damages and fines, we could be required to refund payments received by us, and we could be required to curtail or cease our operations. In addition, a significant change in any of these laws or regulations may require us to change our business model in order to maintain compliance with these laws or regulations, which could harm our operating results and financial condition.

 

A failure to comply with any of federal or state laws applicable to our business, particularly laws related to the elimination of healthcare fraud, may adversely impact our business.

 

Federal officials responsible for administering and enforcing the healthcare laws and regulations have made a priority of eliminating healthcare fraud. For example, the Patient Protection and Affordable Care Act, as amended by the Health Care Education and Reconciliation Act of 2010, jointly the “Affordable Care Act,”  includes significant new fraud and abuse measures, including required disclosures of financial arrangements between drug and device manufacturers, and physicians and teaching hospitals. Federal funding available for combating health care fraud and abuse generally has increased. While we seek to conduct our business in compliance with all applicable laws and regulations, many of the laws and regulations applicable to our business, particularly those relating to billing and reimbursement of tests and those relating to relationships with physicians, hospitals and patients, contain language that has not been interpreted by courts. We must rely on our interpretation of these laws and regulations based on the advice of our counsel and regulatory or law enforcement authorities may not agree with our interpretation of these laws and regulations and may seek to enforce legal remedies or penalties against us for violations. From time to time we may need to change our operations, particularly pricing or billing practices, in response to changing interpretations of these laws and regulations or regulatory or judicial determinations with respect to these laws and regulations. These occurrences, regardless of their outcome, could damage our reputation and harm important business relationships that we have with healthcare providers, payers and others. Furthermore, if a regulatory or judicial authority finds that we have not complied with applicable laws and regulations, we could be required to refund amounts that were billed and collected in violation of such laws and regulations. In addition, we may voluntarily refund amounts that were alleged to have been billed and collected in violation of applicable laws and regulations. In either case, we could suffer civil and criminal damages, fines and penalties, exclusion from participation in governmental healthcare programs and the loss of licenses,

 

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certificates and authorizations necessary to operate our business, as well as incur liabilities from third-party claims, all of which could harm our operating results and financial condition. Moreover, regardless of the outcome, if we or physicians or other third parties with whom we do business are investigated by a regulatory or law enforcement authority we could incur substantial costs, including legal fees, and our management may be required to divert a substantial amount of time to an investigation.

 

To enhance compliance with applicable health care laws, and mitigate potential liability in the event of noncompliance, regulatory authorities, such as the United States Health and Human Services Department Office of Inspector General, or OIG, have recommended the adoption and implementation of a comprehensive health care compliance program that generally contains the elements of an effective compliance and ethics program described in Section 8B2.1 of the United States Sentencing Commission Guidelines Manual, and for many years the OIG has made available a model compliance program targeted to the clinical laboratory industry.  In addition, certain states, such as New York, require that health care providers, such as clinical laboratories, that engage in substantial business under the state Medicaid program have a compliance program that generally adheres to the standards set forth in the Model Compliance Program.  Also, under the Affordable Care Act, the U.S. Department of Health and Human Services, or HHS, will require suppliers, such as the Company, to adopt, as a condition of Medicare participation, compliance programs that meet a core set of requirements.

 

Failure to maintain the security of patient-related information or compliance with security requirements could damage our reputation with customers, cause us to incur substantial additional costs and become subject to litigation.

 

Pursuant to HIPAA, and certain similar state laws, we must comply with comprehensive privacy and security standards with respect to the use and disclosure of protected health information. Under the HITECH amendments to HIPAA, HIPAA was expanded to require certain data breach notification, to extend certain HIPAA privacy and security standards directly to business associates, to heighten penalties for noncompliance, and enhance enforcement efforts.

 

We receive certain personal and financial information about our clients and their patients. In addition, we depend upon the secure transmission of confidential information over public networks. A compromise in our security systems that results in client or patient personal information being obtained by unauthorized persons or our failure to comply with security requirements for financial transactions could adversely affect our reputation with our clients and result in litigation against us or the imposition of penalties, all of which may adversely impact our results of operations, financial condition and liquidity.

 

Changes in regulation and policies, including increasing downward pressure on health care reimbursement, may adversely affect reimbursement for diagnostic services and could have a material adverse impact on our business.

 

Reimbursement levels for health care services are subject to continuous and often unexpected changes in policies, and we face a variety of efforts by government payers to reduce utilization and reimbursement for diagnostic testing services. Changes in governmental reimbursement may result from statutory and regulatory changes, retroactive rate adjustments, administrative rulings, competitive bidding initiatives, and other policy changes.

 

The U.S. Congress has considered, at least yearly in conjunction with budgetary legislation, changes to one or both of the Medicare fee schedules under which we receive reimbursement, which include the clinical laboratory fee schedule for our clinical laboratory services. For example, Congress has periodically considered imposing a 20 percent coinsurance on laboratory services. If enacted, this would require us to attempt to collect this amount from patients, although in many cases the costs of collection would exceed the amount actually received.

 

The CMS pays laboratories on the basis of a fee schedule that is reviewed and re-calculated on an annual basis.  CMS may change the fee schedule upward or downward on billing codes that we submit for reimbursement on a regular basis. Our revenue and business may be adversely affected if the reimbursement rates associated with such codes are reduced. Even when reimbursement rates are not reduced, policy changes add to our costs by increasing the complexity and volume of administrative requirements. Medicaid reimbursement, which varies by state, is also subject to administrative and billing requirements and budget pressures. Recently, state budget pressures have caused states to consider several policy changes that may impact our financial condition and results of operations, such as delaying payments, reducing reimbursement, restricting coverage eligibility and service coverage, and imposing taxes on our services.

 

Healthcare policy changes, including recently enacted legislation reforming the U.S. healthcare system, may have a material adverse effect on our financial condition and results of operations.

 

The Affordable Care Act makes changes that are expected to significantly affect clinical laboratories, among others.  Beginning in 2013, each medical device manufacturer must pay a sales tax in an amount equal to 2.3% of the price for which such manufacturer sells its medical devices that are listed with the FDA. Although the FDA has contended that LDTs are medical devices, none of our products is currently listed with the FDA. We cannot assure you that the tax will not be extended to services such as ours in the future.  The  Affordable Care Act also mandates a reduction in payments for clinical laboratory services paid under the Medicare Clinical Laboratory Fee Schedule, or CLFS, of 1.75% through 2015 and a productivity adjustment to the CLFS.

 

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Other significant measures contained in the Affordable Care Act includes, for example, coordination and promotion of research on comparative clinical effectiveness of different technologies and procedures, initiatives to revise Medicare payment methodologies, such as bundling of payments across the continuum of care by providers and physicians, and initiatives to promote quality indicators in payment methodologies. The Affordable Care Act also includes significant new fraud and abuse measures, including required disclosures by drug and device manufacturers and distributors of financial arrangements with physicians and teaching hospitals. In addition, the Health Care Reform Law establishes an Independent Payment Advisory Board, or IPAB, to reduce the per capita rate of growth in Medicare spending. The IPAB has broad discretion to propose policies to reduce expenditures, which may have a negative impact on payment rates for services. The IPAB proposals may impact payments for clinical laboratory services beginning in 2016. We are monitoring the impact of the Health Care Reform Law in order to enable us to determine the trends and changes that may be necessitated by the legislation that may potentially impact on our business over time.

 

In addition to the Affordable Care Act, various healthcare reform proposals have also emerged from federal and state governments. For example , in February 2012, Congress passed the “Middle Class Tax Relief and Job Creation Act of 2012” which in part reduced the potential future cost-based increases to the Medicare Clinical Laboratory Fee Schedule by 2%. Overall the expected total fee cut to the CLFS for 2013 was 2.95% not including a further reduction of 2% from implementation of the automatic expense reductions (sequester) under the Budget Control Act of 2011 which went into effect for dates of service on or after April 1, 2013.  Reductions made by the Congressional sequester are applied to total claims payments made.  While these reductions did not result in a rebasing of the negotiated or established Medicare or Medicaid reimbursement rates, rebasing could occur as a result of future legislation.  In 2015, the total fee cut to the CLFS will be 0.25%.

 

We cannot be certain that these or future changes will not affect payment rates in the future. We also cannot predict whether future healthcare initiatives will be implemented at the federal or state level, or the effect any future legislation or regulation will have on us. The taxes imposed by the new federal legislation, cost reduction measures and the expansion in government’s role in the U.S. healthcare industry may result in decreased profits to us, lower reimbursements by payers for our products or reduced medical procedure volumes, all of which may adversely affect our business, financial condition and results of operations.

 

Healthcare plans have taken steps to control the utilization and reimbursement of healthcare services, including clinical test services .

 

We also face efforts b y non-governmental third-party payers, including healthcare plans, to reduce utilization and reimbursement for clinical testing services.

 

The healthcare industry has experienced a trend of consolidation among healthcare insurance plans, resulting in fewer but larger insurance plans with significant bargaining power to negotiate fee arrangements with healthcare providers, including clinical testing providers. These healthcare plans, and independent physician associations, may demand that clinical testing providers accept discounted fee structures or assume all or a portion of the financial risk associated with providing testing services to their members through capped payment arrangements. In addition, some healthcare plans have been willing to limit the PPO or POS laboratory network to only a single national laboratory to obtain improved fee-for-service pricing. There are also an increasing number of patients enrolling in consumer driven products and high deductible plans that involve greater patient cost-sharing.

 

The increased consolidation among healthcare plans also has increased the potential adverse impact of ceasing to be a contracted provider with any such insurer.

 

We expect continuing efforts to reduce reimbursements, to impose more stringent cost controls and to reduce utilization of clinical test services. These efforts, including future changes in third-party payer rules, practices and policies, or ceasing to be a contracted provider to a healthcare plan, may have a material adverse effect on our business.

 

Government regulation of genetic research or testing may adversely affect the demand for our services and impair our business and operations.

 

In addition to the regulatory framework governing healthcare, genetic research and testing has been the focus of public attention and regulatory scrutiny.  From time to time, federal, state and/or local governments adopt regulations relating to the conduct of genetic research and genetic testing.  In the future, these regulations could limit or restrict genetic research activities as well as genetic testing for research or clinical purposes.  In addition, if such regulations are adopted, these regulations may be inconsistent with, or in conflict with, regulations adopted by other government bodies.  Regulations relating to genetic research activities could adversely affect our ability to conduct our research and development activities.  Regulations restricting genetic testing could adversely affect our ability to market and sell our products and services.  Accordingly, any regulations of this nature could increase the costs of our operations or restrict our ability to conduct our testing business and might adversely affect our operations and financial condition.

 

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Our operations may be adversely affected by the effects of extreme weather conditions or other interruptions in the timely transportation of specimens.

 

We transport specimens from our North Carolina offices in the U.S. to our laboratory located in Melbourne, Australia.  Our operations may be adversely impacted by extreme weather conditions or other interruptions in the timely transportation of such specimens or otherwise to provide our services, from time to time. The occurrence of any such event and/or a disruption to our operations as a result may harm our reputation and adversely impact our results of operations.

 

Failure in our information technology systems could significantly increase testing turn-around times or impact on the billing processes or otherwise disrupt our operations.

 

Our laboratory operations depend, in part, on the continued performance of our information technology systems. Our information technology systems are potentially vulnerable to physical or electronic break-ins, computer viruses and similar disruptions. Sustained system failures or interruption of our systems in our laboratory operations could disrupt our ability to process laboratory requisitions, perform testing, and provide test results in a timely manner and/or billing process.  Breaches with respect to protected health information could result in violations of HIPAA and analogous state laws, and risk the imposition of significant fines and penalties.  Failure of our information technology systems could adversely affect our reputation, business, profitability and financial condition.

 

Failure to demonstrate the clinical utility of our products could have a material adverse effect on our financial condition and results of operations.

 

In order to assure adequate insurance coverage and favorable insurance reimbursement of our products, we are required to demonstrate the clinical utility of our tests. Clinical utility—which is the usefulness of a test for clinical practice (as contrasted with diagnostic accuracy, which is how well the test can determine the presence, absence, or risk of a specific disease)—may well be the most significant limitation for the widespread acceptance of molecular diagnostic tools such as BREVAGen plus .   We are currently undertaking studies intended to demonstrate the clinical utility of our tests in order to assure continued acceptance of the value of our products.  These studies will require us to invest considerable financial and management resources without any assurance of favorable results.  Successful studies are difficult to plan, execute and validate, because of the time involved and variables that are difficult to control and which can impact outcomes.   If we are unable to demonstrate clinical utility, or if our data is deemed insufficient to validate utility, which are required for Medicare coverage, then we may face negative coverage decisions for our products.  The resulting negative coverage decisions could have a material adverse effect on our financial conditions and results of operations.

 

Ethical and other concerns surrounding the use of genetic information may reduce the demand for our services.

 

Public opinion regarding ethical issues related to the confidentiality and appropriate use of genetic testing may influence government authorities to call for limits on, or regulation of the use of, genetic testing.  In addition, such authorities could prohibit testing for genetic predisposition to certain conditions, particularly for those that have no known cure.  Furthermore, adverse publicity or public opinion relating to genetic research and testing, even in the absence of any governmental regulation, could reduce the potential markets for our services, which could materially and adversely affect our financial position.

 

Although we are a leader in the field of genetics in Australia, we do not undertake any activities in the contentious areas of cloning, stem cell research or other gene-altering areas.  As such, many of the ethical issues that may be relevant to other participants in the genetics industry are not necessarily applicable to us.

 

Risks associated with Out-licensing of our intellectual property

 

The patenting of genes and issues surrounding access to genetic knowledge are the subjects of extensive and ongoing public debate in many countries.  By way of example, the Australian Law Reform Commission has previously conducted two inquiries into the social uses of genetic information.  The patents we hold over uses of “non-coding” DNA have broad scope and have also been the subject of debate and some criticism in the media.  Individuals or organizations, in any one of the countries in which these patents have issued, could take legal action to seek their amendment, revocation or invalidation, something which has happened previously, on several occasions in various jurisdictions, though we have prevailed in all such cases.

 

Furthermore, any time that we initiate legal action against parties that infringe our patents we face a risk that the infringer will defend itself through a counter-claim of patent invalidity or other such claims.  Subsequent legal action could potentially overturn, invalidate or limit the scope of our patents.

 

Under the relevant Patent Acts in most of the countries in which our non-coding patents have issued, the relevant judicial system has rights to impose compulsory licensing.  The relevant governments typically hold “march-in” rights by which they may unilaterally choose to exploit the technology.  To the extent that the Company’s non-coding technology is used in the conduct of research, we also face risks, uncertainty and controversy over the licensing of our technology to those conducting the research. 

 

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Whether or not researchers should be exempted from obligations to take licenses to relevant patents was the subject of another government inquiry conducted by the Australian Council for Intellectual Property who recommended the creation of a research exemption.

 

Item 4.            Information on the Company

 

Item 4.A          History and Development of the Company

 

We were incorporated under the laws of Western Australia on January 5, 1987 as Concord Mining N.L. and operated as a mining company.  On August 13, 1991, we changed our name to Consolidated Victorian Gold Mines N.L.  On December 2, 1991, we changed our name to Consolidated Victorian Mines N.L.  On March 15, 1995, we changed our name to Duketon Goldfields N.L.

 

On October 15, 1999, the Company’s corporate status was changed from a No Liability Company to a company limited by shares.  On August 29, 2000, following the acquisition of Swiss company GeneType AG, we changed our name to Genetic Technologies Limited, which is our current name.  At that time, we phased out our mining activities and became a biotechnology company, following which our stock exchange listing was duly transferred from the mining board of the ASX to the industrial board and our shares were thereafter classified under the industry group “Health and Biotechnology”, completing our transformation from a mining company into a biotechnology company.  Our current activities in biotechnology primarily concentrate on one clearly defined area of activity which is covered under Item 4.B “Business Overview”.

 

Our Australian Company Number (ACN) is 009 212 328.  Our Australian Business Number (ABN) is 17 009 212 328.  We operate pursuant to our constitution, the Australian Corporations Act 2001 , the Listing Rules of the Australian Securities Exchange, the Marketplace Rules of NASDAQ and, where applicable, local, state and federal legislation in the countries in which we operate.

 

Our registered office, headquarters and laboratory are all located at 60-66 Hanover Street, Fitzroy, Victoria, 3065 Australia.  Our telephone number is +61 3 8412 7000.  Our website address is www.gtglabs.com.  The offices of our U.S. subsidiary, Phenogen Sciences Inc., are located at 9115 Harris Corners Parkway, Suite 320, Charlotte, North Carolina, 28269 U.S.A.  The telephone number for the Phenogen Sciences office is +1 877 992 7382.  Information on our websites and websites linked to them do not constitute part of this Annual Report.

 

In July 2008, we acquired all of the issued shares of Frozen Puppies Dot Com Pty. Ltd. based in Calga, New South Wales, which was Australia’s leading provider of canine reproductive services for a total consideration of $1,550,097, comprising a combination of shares in the Company (with a value of $1,041,667) and cash.  During the year ended June 30, 2010, a decision was made by the Company to strategically realign its animal business and to focus on the provision of animal genetic tests, rather than the services that were acquired as part of the acquisition of the Frozen Puppies Dot Com business in 2008.  Following the disposal of assets related to the reproductive services business during the 2011 financial year, the associated business was discontinued and, as a result, Frozen Puppies Dot Com Pty. Ltd. was subsequently deregistered on June 1, 2011.

 

On April 14, 2010, we announced that we had acquired certain assets from Perlegen Sciences, Inc. in California, with the main asset being the BREVAGen™ breast cancer risk assessment test (“BREVAGen™”).  In addition to the BREVAGen™ test, we also acquired a suite of patents valid to 2022 which augment and extend our current non-coding patent portfolio.  On June 28, 2010, we incorporated a wholly-owned subsidiary named Phenogen Sciences Inc. in the State of Delaware which commenced selling the BREVAGen™ test in the U.S. marketplace in June 2011. In October 2014, the Company released its next generation breast cancer risk assessment test BREVAGen plus®

 

During 2014, the Directors considered an offer by Specialist Diagnostic Services Ltd (SDS), the wholly owned pathology subsidiary of Primary Health Care Ltd., to purchase the assets of the Australian Genetic testing business, which included Paternity, Forensics, Animal and Medical testing for the ANZ region.  In September 2014, the Company signed a binding Sale and Purchase Agreement with SDS.

 

On 19 November 2014, the Company completed the sale of its heritage Australian Genetics business to SDS.

 

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Item 4.B       Business Overview

 

Founded in 1989, Genetic Technologies is an established Australian-based global genetic testing business specializing in cancer diagnostics, with a focus on women’s health.

 

Listed on the ASX (GTG) in 2000 and NASDAQ (GENE) in 2005, the Company has established a successful fee-for-service genetic testing business that is primarily focused on the U.S. market.

 

From its headquarters in Melbourne, Victoria, the Company’s laboratory holds a number of accreditations including:

 

·                  The Clinical Laboratory Improvement Amendments (CLIA) license required for all laboratories offering testing in the U.S.;

·                  The Clinical Laboratory Evaluation Program (CLEP) license, an additional certification required to offer tests in New York State;

·                  A Medical Device Establishment License (MDEL) required for Canada;

·                  The BREVAGen plus ® test is CE marked for sale in Europe; and

·                  The laboratory complies with the International Organisation for Standardisation (ISO), enabling it to accept test samples from anywhere in the world

 

Following its acquisition, in 2010, of a proprietary breast cancer risk assessment test named BREVAGen™, the Company established a permanent office in North Carolina from which its current U.S sales activities are based.

 

On September 15, 2014 we announced plans to restructure and realign our group activities, in order to focus our strategy on the U.S. molecular diagnostics market and the commercialisation of our lead breast cancer risk test BREVAGen through our U.S. subsidiary Phenogen Sciences, Inc.  In October 2014, we announced the U.S. release of BREVAGen plus , an easy-to-use predictive risk test for the millions of women at risk of developing sporadic, or non-hereditary, breast cancer, representing a marked enhancement in accuracy and broader patient applicability, over our first generation BREVAGen product.  We also made a pivotal change of sales and marketing emphasis toward large comprehensive breast treatment and imaging centers, which are more complex entities with a longer sales cycle, but higher potential.  As part of this realignment, on November 19, 2014 we completed the sale of our heritage Australian genetics business to Specialist Diagnostic Services Ltd.  As part of the Company’s strategy to focus on the expansion of its cancer diagnostic franchise, we continue to evaluate opportunities to sell, out-license or co-develop other assets and technologies in which we have an interest, including our legacy non-coding assertion and licensing program.

 

Physicians who order clinical tests for their patients represent the primary sources of our testing volume. Fees invoiced to patients and third parties are based on our fee schedule, which may be subject to limitations imposed by third-party payers. Fees invoiced to federal health care programs such as Medicare and Medicaid, are based on fee schedules set by applicable governmental authorities, such as the Center for Medicare and Medicaid Services (CMS). The clinical laboratory industry is highly regulated and subject to significant and changing Federal and state laws and regulations. These laws and regulations affect key aspects of our business, including licensure and operations, billing and payment for laboratory services, sales and marketing interactions with ordering physicians, security and confidentiality of health information, and environmental and occupational safety.  Oversight by government officials includes regular inspections and audits.  We seek to and believe that we do conduct our business in compliance with all applicable laws and regulations.

 

The United States Clinical Laboratory Improvement Amendments of 1988, or CLIA, extends Federal licensing requirements to all clinical laboratories (regardless of the location, size or type of laboratory), including those operated by physicians in their offices, based on the complexity of the tests they perform.  CLIA also establishes a stringent proficiency testing program for laboratories and includes substantial sanctions, such as suspension, revocation or limitation of a laboratory’s CLIA certificate (which is necessary to conduct business), cancellation or suspension of the laboratory’s approval to receive Medicare and Medicaid reimbursement, and significant fines and/or criminal penalties.

 

CLIA, and its implementing regulations, includes quality standards (establishing Federal quality standards for all clinical laboratories); application and user fee requirements; and enforcement procedures.  The quality standard regulations establish varying levels of regulatory scrutiny depending upon the complexity of testing performed. The tests on samples provided through our products are processed at our laboratory in Melbourne, Australia.  Our laboratory completed its first CLIA inspection under CLIA guidelines and received its certificate of compliance effective November 17, 2011. We expect a second inspection in late 2015 or early 2016.  We believe the Company is in compliance with all applicable federal and state laboratory requirements. Under CLIA, the company remains subject to state and local laboratory regulations.   CLIA provides that a state may adopt laboratory regulations that are more stringent than those under federal law, and some states require additional personnel qualifications, quality control, record maintenance and other requirements.

 

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BREVAGen and BREVAGen plus are laboratory developed tests, or LDTs.  The federal Food and Drug Administration, or FDA, has regulatory responsibility over, among other areas, instruments, test kits, reagents and other medical devices used by clinical laboratories to perform diagnostic testing.  CLIA-certified laboratories, such as ours, frequently develop internal testing procedures to provide diagnostic results to customers. These tests are referred to as laboratory developed tests, or LDTs.  LDT’s are subject to CMS oversight through its enforcement of CLIA.  The FDA has also claimed regulatory authority over all LDTs, but indicates that it has exercised enforcement discretion with regard to most LDTs offered by high complexity CLIA-certified laboratories, and has not subjected these tests to the panoply of FDA rules and regulations governing medical devices.  However, the FDA has stated that it has been considering changes in the way it believes that laboratories ought to be allowed to offer these LDTs, and during 2010 publicly announced that it would be exercising regulatory authority over LDTS, using a risk-based approach that will direct more resources to tests with the highest risk of injury.  In September 2014, the FDA announced its framework and timetable for implementing this guidance.

 

Corporate Information

 

Our registered office, headquarters and laboratory is located at 60-66 Hanover Street, Fitzroy, Victoria, 3065, Australia and our telephone number is +-61 3 8412 7000. The offices of our U.S. subsidiary, Phenogen Sciences Inc., are located at 9115 Harris Corners Parkway, Suite 320, Charlotte, North Carolina, 28269 U.S.A.  The telephone number for the Phenogen Sciences office is (877) 992 7382.  Our website address is www.gtglabs.com.  The information in our website is not incorporated by reference into this Annual Report and should not be considered as part of this Annual Report

 

Industry background

 

The Human Genome Project announced (in April 2003) the completion of the first draft of the entire sequence of the human genome.  The biotechnology industry has since worked to build upon the vast amount of knowledge generated by that program in order to develop a better understanding of the genetic basis of human health and disease.  Increasingly, genetics is being shown to play a key role in the diagnosis and treatment of many diseases in humans, as well as diseases in animals and plants.  This increasing understanding of genetics is providing new information for understanding such predisposing or causative factors in many diseases.

 

A major focus in science is now the identification and analysis of genetic variations and disease-associated genes within the genome.  These genetic variations, or polymorphisms, in the DNA sequences vary between individuals.  The most common genetic variations are Single Nucleotide Polymorphisms, or SNPs, which are merely a difference in a single nucleotide.  The first draft of the human genome identified over 1.4 million SNPs that can be useful as positional signposts for disease-associated DNA sequences in a gene or as markers to map genes along a chromosome.

 

Genomics

 

A genome is an organism’s complete set of DNA and the study of that DNA is called genomics.  Genomes vary in size, with bacteria displaying the smallest known genome at 600,000 DNA base pairs, while human and mouse genomes have over 3 billion.  The DNA of the human genome is organized into 24 distinct chromosomes that contain from 50 million to 250 million base pairs on each chromosome.  The DNA on each chromosome contains genes that are specific sequences that encode proteins that actually perform the work within a cell and also make up the cell itself

 

Genetic variability

 

Almost 99.9% of an individual’s genome is identical to that of every other individual’s genome.  However, even slight variations in sequence can drastically change how a gene functions.  Variations can lead to harmless changes, such as blue eyes instead of brown, or to major diseases such as cancer, cystic fibrosis, or cardiovascular disease.  Genetic variations can also be responsible for many of the differences in the ways individuals respond to drug therapies.  As a result of this knowledge, routine analysis of SNPs and other genetic variations is expected to play an increasingly important role in the discovery and development of new drugs, as well as in a variety of diagnostic therapeutic and other medical and life science applications.  Industry sources estimate there are millions of genetic variations in the human genome, creating demand for products and technologies that can quickly and accurately detect and analyze these variations.  It is thought that the medicine of the future will be dispensed to a patient based on his or her own specific DNA variations.  This type of “personalized medicine” will require sophisticated genetic tests to determine the genetic composition of an individual and the science is progressing rapidly.

 

Genetic tests

 

Most genes come in many different forms, called alleles.  One or more allele may be associated with a particular disease state.  Genetic testing involves the direct examination of an individual’s DNA for a DNA marker associated with the allele of interest.  The determination of the particular alleles an individual has within his or her DNA is called genotyping.

 

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The most commonly tested marker of a particular allele is a SNP.  The variations within genes that may be responsible for a disease are now known to be much more complicated than was previously understood, and the role of SNPs is now being found to be highly relevant in a growing number of diseases.

 

Medical testing

 

The strategic alliance with Myriad Genetics Inc. delivered to the Company exclusive rights in Australia and New Zealand to perform DNA testing for susceptibility to a range of cancers.  In April 2003, we established our cancer susceptibility testing facility within our Australian laboratory.  In June 2003, this facility was granted provisional accreditation by the National Association of Testing Authorities, Australia (“NATA”).  This important area of testing has since gained momentum, with the addition of new equipment and new employees joining the Company.

 

In November 2003, the Company joined the world-wide genetic testing network GENDIA as the sole reference laboratory for the network in Australia and New Zealand.  GENDIA consists of more than 50 laboratories from around the world, each contributing expertise in their respective disciplines to create a network capable of providing more than 2,000 different genetic tests.  This has provided the Company with the ability to offer comprehensive testing services to its customer base in the Asia-Pacific region as well as increasing our exposure to other markets.

 

In October 2009, a new strategic direction was established to focus efforts in creating a portfolio of tests that would be aimed at assisting medical clinicians with cancer management.  This would comprise tests that were created by the Company and in-licensed from third parties which would then be marketed by Genetic Technologies in the Asia-Pacific region.  In November 2009, distribution agreements were executed with Trimgen and Rosetta Genomics of the U.S. to acquire distribution rights for their tests across Oceania.  In addition to the current test portfolio, GTG began introducing itself to the global oncology market via regular attendance at international medical conferences and direct to market selling activities.  An additional agreement to acquire local distribution rights from Response Genetics of the U.S. was then executed by the Company in January 2010.

 

In December 2009, Genetic Technologies negotiated an exclusive option to investigate the purchase of various assets from Perlegen Sciences, Inc. of Mountain View, California which included a breast cancer non-familial risk assessment test, BREVAGen™.  Those assets were subsequently purchased by the Company in April 2010.  Work then began on validating the test in the Company’s Australian laboratory as well as initiating the process for obtaining CLIA certification which would enable the Company to undertake the testing of samples received from the U.S. market.  By July 2010, a new U.S. subsidiary named Phenogen Sciences Inc. had been incorporated by the Company in Delaware to market and distribute the BREVAGen™ test across mainland U.S.A.

 

In April 2011, the Company announced that it had gained certification of its Australian laboratory under the U.S. Clinical Laboratories Improvements Amendments, as regulated by the Centers for Medicare and Medicaid in Baltimore, Maryland.  This certification, which enables the Company to accept and test samples from U.S. residents, was the culmination of preparations required for the U.S. launch of the Company’s BREVAGen™  test which occurred in June 2011.  Phenogen Sciences has since established an office in Charlotte, North Carolina.

 

In August 2012, the Company announced that it had received European CE Mark approval for BREVAGen™, which will allow BREVAGen™ to be sold in the EU and other countries that recognize the CE Mark.

 

During the first half of the 2013 financial year, the Company announced that it had received licensure to sell BREVAGen™ into the states of California and Florida, bringing the total number of U.S. states in which the BREVAGen™ test can be sold to 49 of the 50 U.S. states.  In July 2013, the Company was inspected by a representative of the New York State Department of Health, Clinical Laboratory Evaluation Program (“CLEP”).  The Company’s laboratory received an inspection result with no deficiencies reported and, on August 30, 2013, the Company announced that it had received its Clinical Laboratory Permit (CLEP) from the New York State Department of Health.  This permit, which allows the Company to offer the BREVAGen™ test to residents of New York State, completed the final out-of-state licensure allowing the Company to provide testing services to all 50 U.S. states.

 

Test samples received since launch

 

Since launching its BREVAGen test in the U.S. market in July 2011, followed by the U.S. release of BREVAGen plus , in October 2014, the number of test samples received up to balance date June 30 2015, was 8,558 tests.

 

During the financial year ended June 30, 2012, the Company generated the first sales of its BREVAGen™ test.  Whilst not material to the overall result, in accordance with revenue recognition principles, due to the relatively limited numbers of tests sold in that first year of launch, the income generated from these sales was recorded on a cash basis.  Effective January 1, 2013, significant changes in the US reimbursement system have impacted (positively) on the amounts the Company has since received for the

 

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BREVAGen tests it performs. As at June 2014, the Company had enough historical data to use to enable it to determine a reliable estimate of the amount of revenue expected to be received. Accordingly the Group now recognises the revenue on the BREVAGen test on an accruals basis.

 

Further expansion of the Company’s credentialing program

 

Credentialing with Preferred Provider Organizations (“PPOs”) allows for expedited claim adjudication as “in-network”.  A PPO is a managed care organization of medical doctors, hospitals and other health care providers which has covenanted with insurers or third-party administrators to provide health care, at reduced rates, to the clients of the respective insurer or administrator.  Credentialing is a process whereby provider organizations such as physicians, care facilities and ancillary providers (including testing service providers such as Phenogen Sciences) contract directly with the PPO.  Contracts with PPOs are fundamental to having claims for the BREVAGen™ test adjudicated as “in-network”.

 

Credentialing contracts have now been executed between the Company and InterWest Health, FedMed Inc., MultiPlan Network, Three Rivers Provider Network, Prime Health Services, National Preferred Provider Network / PlanCare America / Ohio Preferred Provider Network LLC (NPPN / OPPN), Galaxy Health Network and Fortified Provider Network.

 

The positive impact of this activity is reflected in the fact that the average reimbursement received in respect of claims that were adjudicated as “in-network” was significantly higher than the amounts received in respect of claims that were adjudicated as “out-of-network”, with the time taken to collect the funds also being materially shorter.

 

Once in-network, the Company receives improved cash flow via faster payment while still obtaining an acceptable level of reimbursement and reducing the costs incurred through appealing denials.  Once BREVAGen sample volumes reach a significant level and Genetic Technologies has gathered the necessary additional clinical utility data, the Company intends to approach insurers directly to contract.

 

Reimbursement

 

Up until the end of the 2012 calendar year, insurance claims for BREVAGen were submitted using the so-called “code stack” of CPT methodology codes.  Reimbursement under this regime was positive, with a low percentage of denials and appeals.  However, effective 1 January 2013, the AMA removed the code stack claim process, requiring tests without a specific CPT code to be claimed via an “Unlisted or Miscellaneous Code”.

 

As a result of the above changes the Company now uses a miscellaneous code when submitting claims for reimbursement from insurers. As part of this transition, the list price for the BREVAGen test was increased to enable the Company to receive payment for aspects of the test that were not previously available under the code stack. Importantly, notwithstanding this, the Company did not seek to increase the maximum out-of-pocket amount that a given patient is required to pay for a BREVAGen plus test under its “Patient Protection Program.”

 

Though the Company’s reimbursement per test (including write-offs and denials for non-coverage) has increased by more than 30%, the use of a miscellaneous code requires more administration and time by the Insurance Company to adjudicate and process the claim, thus increasing the time taken to receive reimbursement.

 

Clinical utility studies and peer-review publications to drive reimbursement outcome

 

The Company has launched an initiative to reinvigorate the pathway to Peer- Review Publication. Attaining such publications in medical journals will help to further strengthen the Company’s commercial position and accelerate reimbursement discussions with private payers.

 

The Company had previously conducted multiple scientific studies to develop and validate the first generation BREVAGen test as well as created two health economic models to demonstrate potential cost savings and health benefits associated with the BREVAGen test. Importantly, due to the nature of the technology and the specific improvements incorporated in BREVAGen plus , the research undertaken and published based on the original version of the test remains applicable to the new and improved BREVAGen plus test.

 

Following is a list of peer-reviewed publications on the BREVAGen test, to date:

 

1)              “ Cost-effectiveness of a Genetic Test for Breast Cancer Risk ”. Cancer Prevention Research. 2013 Dec; 6(12):1328-36 .

 

2)              “ Economic Evaluation of Using a Genetic Test to Direct Breast Cancer Chemoprevention in White Women with a Previous Breast Biopsy ”. Applied Health Economics and Health Policy . 2014 Apr; 12(2):203-17.

 

3)              “ Using SNP genotypes to improve the discrimination of a simple breast cancer risk prediction model ”. Breast Cancer Res Treat. 2013 Jun; 139(3):887-96.

 

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4)              “ Assessment of clinical validity of a breast cancer risk model combining genetic and clinical information ”. J Natl Cancer Inst. 2010 Nov 3; 102(21):1618-27.

 

And supporting presentations:

 

1)              Jacoby E, DiCicco, Allman R. (2013). Impact of genomics on the assessment and management of breast cancer risk in a women’s healthcare clinic. Proceedings of the National Consortium of Breast Centers March 2013.

 

2)              Fohlse HJ, Dinh TA, Allman R. (2013). Genetic testing for breast cancer risk estimation — A cost-effectiveness analysis. Presented at The California Pacific Medical Centre Breast Cancer Risk Assessment Workshop June 2013.

 

3)              Fohlse HJ, Dinh TA, Allman R. (2013). Genetic testing for breast cancer risk estimation — A cost-effectiveness analysis. Presented at the San Antonio Breast Cancer Symposium December 2013.

 

While these papers remain relevant to the BREVAGen plus test, they:

 

1)              Underestimate its improved performance, due to its inclusion of a greatly expanded single-nucleotide polymorphism (SNP) panel; and

 

2)              Do not capture the performance of BREVAGen plus in African American and Hispanic women, two groups for which the first iteration of the test was not validated.

 

Even though the BREVAGen concept has already demonstrated market acceptance, the Company  recognizes that in order to secure wider commercial payer coverage and or to improve the level of commercial payer payments currently received, it needs to provide additional evidence that demonstrate the impact of the test on treatment decision-making that is aligned with payer evidence requirements. As such, the Company is about to commence a series of clinical utility studies that will provide further evidence to support the product’s value proposition and clinical benefits.

 

The first of three clinical trials planned is scheduled to begin in Q2 FY16 with completion expected before the end of FY16. Two longer-term clinical trials are also expected to commence within the current financial year and are designed to run for up to two years. One of the longer term studies will be prospective in design looking at patient outcomes, with the other being retrospective, assessing the impact of the test on MRI screening rates.

 

The data obtained from these studies will be utilized in direct contracting discussions with insurers and self-insured employer groups. Peer-reviewed publications demonstrating the product’s utility in terms of patient outcomes and its impact on healthcare costs is the most powerful marketing tool for a product like BREVAGen plus. Such publications are crucial in convincing physicians’ to use a product and how much payers will pay for its use.

 

Additional Clinical

 

New Product Development

 

BREVAGen plus is a State-of-the-Art Breast Cancer Risk Assessment Test designed to enable a more personalized breast cancer risk assessment in a greater number of women

 

The identification, in 2007, of a number of single nucleotide polymorphisms (SNPs), each with an associated small relative risk of breast cancer, led to the development of the first commercially available genetic risk test for sporadic breast cancer, BREVAGen TM .  The Company launched the product, in the U.S. in June 2011.  In October 2014, Genetic Technologies released its next generation breast cancer risk assessment test, BREVAGen plus .  This new version of the test incorporates a 10-fold expanded panel of genetic markers (SNPs), known to be associated with the development of sporadic breast cancer, providing an increase in predictive power relative to its first-generation predecessor test.  In addition, the new test is clinically validated in a broader population of women including, African American and Hispanic women. This increases the applicable market beyond the Caucasian only indication of the first generation test, and simplifies the marketing process in medical clinics and breast health centres in the U.S.

 

The expanded panel of SNPs incorporated into BREVAGen plus were identified from multiple large-scale genome-wide association studies and subsequently tested in case-control studies utilising specific Caucasian, African American and Hispanic patient samples.

 

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BREVAGen plus is a first-in-class, clinically validated, predictive risk test for sporadic breast cancer which examines a woman’s clinical risk factors, combined with seventy seven scientifically validated genetic biomarkers (SNPs), to allow for more personalised breast cancer risk assessment and risk management.

 

Physicians worldwide look largely to family history of breast cancer as an indication of risk in patients for developing this disease. However, 85% of women who develop breast cancer have little or no family history of developing the disease and BREVAGen plus is designed to help elucidate risk in this group of women.

 

Targeted towards women over the age of 35 who have little or no family history of breast cancer but harbor one or more known clinical risk factors such as early menstruation, late childbirth, late menopause, a history of atypical or benign breast biopsies, BREVAGen plus provides a more accurate tool for assessing a woman’s personal risk of developing breast cancer.

 

In addition, women designated as having ‘dense breasts’ upon mammographic evaluation are recognized as being at elevated risk of developing breast cancer, which makes these patients potential candidates for the BREVAGen plus test.  Several U.S. States have enacted legislation, which mandates that breast density be documented on mammogram reports, and encourages physicians to discuss risk profiles and risk reduction strategies with these patients. Recent scientific evidence indicates that BREVAGen plus may help to properly identify the high risk women in this category. It is expected that more U.S. jurisdictions will adopt similar legislation in the coming years, increasing awareness of the correlation between dense breast and breast cancer risk amongst healthcare providers, patients and health insurance payers.

 

Australian Genetics testing business

 

During 2014, the Directors considered an offer by Specialist Diagnostic Services Ltd (SDS), the wholly owned pathology subsidiary of Primary Health Care Ltd., to purchase the assets of the Australian Genetic testing business, which included Paternity, Forensics, Animal and Medical testing for the ANZ region.  In September 2014, the Company signed a binding Sale and Purchase Agreement with SDS.

 

On 19 November 2014, the Company completed the sale of its heritage Australian Genetics business to SDS.

 

The divestment of the Australian Genetics business was in line with the Company’s announcement on September 15, 2014, of plans to sell non-core assets and focus business activities on the US Molecular Diagnostics market and commercialization of the Company’s lead breast cancer risk test BREVAGen plus .

 

Our Support for Significant Research Projects

 

During the year ended June 30, 2015, Genetic Technologies supported one major research program (BREVAGen plus ), details of which have been provided below.  In previous years, other projects, which have since been terminated or otherwise commercialized, have also been supported by the Company. The Company is constantly seeking new opportunities. Historically some projects have arisen from new inventions made by the Company while some have been made by others who have approached the Company seeking collaboration and support for their activities.

 

By its very nature, research is unpredictable and involves a considerable element of risk.  Such risks may relate to scientific concepts, the implementation of the science, the protection of any inventions made and the success or otherwise in persuading others to respect the intellectual property acquired or created by the Company.  Specifically, patents filed may not issue or may later be challenged by others.  Even if patents issue, the methods described may, with time, be superseded by alternative methods which may prove to be commercially more attractive.  Even if patents issue and the methods developed are successfully reduced to practice and can be shown to be commercially relevant, there is still no assurance that other parties will respect the patents or will take licenses to use the intellectual property.  In such circumstances, it is possible that legal action will be necessary to enforce the Company’s rights.  Such action, in turn, raises a new series of risks including potentially significant legal costs and uncertain outcomes.

 

To the extent that delays are encountered in concluding the research projects, additional costs may be incurred.  Further, the projected revenues from the projects may also be deferred, potentially impacting on the Company’s liquidity.  In such cases, the Company may seek to partner with outside parties, who will contribute to the costs of research in return for an interest in the project, or the Company may seek to raise additional working capital from the Market.  In a worst case scenario, the projects may well be closed down with no valuable intellectual property having been created for the Company.

 

BREVAGen plus ® Project

 

In June 2011, the Company launched the first iteration of the breast cancer risk assessment test; BREVAGen™. In October 2014, Genetic Technologies released its next-generation breast cancer risk assessment test, BREVAGen plus . This new version of the

 

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test incorporates a 10-fold expanded panel of genetic markers (SNPs), known to be associated with the development of sporadic breast cancer, providing an increase in predictive power relative to its first-generation predecessor test. In addition, the new test has been studied in a broader population of women including, African American and Hispanic women. This increases the applicable market beyond the Caucasian only application of the first generation test, and simplifies the marketing process in medical clinics and breast health centres in the U.S. The expanded panel of SNPs incorporated into BREVAGen plus were identified from multiple large-scale genome-wide association studies and subsequently tested in case-control studies utilising specific Caucasian, African American and Hispanic patient samples.

 

Background and unmet need

 

Physicians worldwide look largely to family history of breast cancer as an indication of risk in patients for developing this disease. However, 85% of women who develop breast cancer have little or no family history of developing the disease and BREVAGen plus is designed to help elucidate risk in this group of women.

 

Targeted towards women over the age of 35 who have little or no family history of breast cancer but harbour one or more known clinical risk factors such as early menstruation, late childbirth, late menopause, a history of atypical or benign breast biopsies, BREVAGen plus provides a more accurate tool for assessing a woman’s personal risk of developing breast cancer.

 

Additional clinical utility studies and peer-reviewed publication strategy

 

Although the BREVAGen concept has already demonstrated market acceptance, the Company recognises that in order to secure wider commercial payer coverage and improve the level of commercial payer payments currently received, it needs to provide additional evidence that demonstrate the impact of the test on treatment decision-making that is aligned with payer evidence requirements. As such, Genetic Technologies will be conducting further research and development projects to demonstrate the clinical utility of the BREVAGen plus test. Peer-reviewed publications demonstrating the product’s utility in terms of patient outcomes and its impact on healthcare costs is the most powerful marketing tool for a product like BREVAGen plus .

 

Government regulation:

 

The provision of clinical testing services and in vitro diagnostic medical devices is subject to extensive regulatory requirements in most developed countries.  In the United States, the Centers for Medicare and Medicaid Services (CMS) regulates all laboratory testing (except research) performed on human tissue or fluid samples on behalf of the Food and Drug Administration (FDA) through the Clinical Laboratory Improvement Amendments (CLIA).  The FDA regulates clinical trials and medical devices.  In Australia, the regulation of clinical trials and medical devices is performed by the Therapeutic Goods Administration (TGA).  Accreditation of laboratories offering pathology services is granted by the Health Insurance Commission, based on a report of assessment by the National Association of Testing Authorities, Australia (NATA).  In addition, in the State of Victoria, where the Company has its headquarters, accreditation may also be obtained from the Pathology Services Accreditation Board, again subject to favourable assessment by NATA.

 

Historical Research Projects

 

Following a significant corporate restructure during the 2015 fiscal year, a strategic decision was made to focus the Company on the US diagnostics market and all historical research projects, including the RareCellect TM  Project have been suspended. The Company will continue to pursue out-licensing/co-development partnering options for the RareCellect™ Project.

 

Competition

 

The medical diagnostics and biotechnology industries is subject to intense competition.  As more information regarding cancer genomics and personalized medicine becomes available to the public, we anticipate that more products aimed at identifying cancer risk will be developed and that these products may compete with ours. However, the use of Single Nucleotide Polymorphisms (SNPs), for disease risk prediction is still a relatively new field of medicine.

 

Currently, there are no active direct competitors marketing an assay similar to that of BREVAGEN plus in the sporadic breast cancer risk assessment space.   In recent years, a number of organizations, including 23andMe, Intergenetics, and Navigenics have attempted to commercialize SNP-based genetic tests, to both physicians and consumers, to assess sporadic breast cancer risk in relevant patient populations.  But, either due to a lack of adequate and compelling scientific validation, and/or sufficient commercial impetus and capability, these efforts have led to lackluster market adoption, resulting in either the dissolution of these businesses or a marked change in their strategy and ultimate competitive posture to genuinely challenge the efforts of the Company to commercialize and grow its BREVAGEN plus franchise.

 

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Nonetheless, there are a number of academic centers and affiliated research and development bodies, in the U.S and in Europe, that are reportedly exploring the validity and clinical viability of SNP-based commercial tests in the clinical setting, but it is unclear to what extent these entities currently represent  a direct or indirect potential competitive liability to the Company.   A number of established, mature laboratory services companies, such as Myriad Genetics, Ambry Genetics, and Laboratory Corporation of America, among others, have the demonstrable product development, marketing skill and resources to enter into this market for sporadic breast cancer risk assessment. Many of these larger potential competitors have already established name and brand recognition and more extensive collaborative relationships, but again, it is unclear to what extent these potential competitive threats could manifest in the near-to-long term.

 

The Company continues to invest in proprietary, differentiating features of its BREVAGEN plus test offering to diminish any prospective efforts of a potential competitor, be they an established commercial laboratory provider, a research/academic test development or laboratory services entity.  Therefore, any imminent bona fide risk that any one of these entities represents to the continued success and growth of the Company’s BREVAGEN plus commercialization efforts and market-leading position in this area is not clear.

 

The Company’s competitive position in the genetic testing area is based upon, amongst other things, our ability to:

 

·              maintain first to market advantage;

 

·              continue to strengthen and maintain scientific credibility through the process of obtaining scientific validation and undertaken further clinical trials supported by Peer-reviewed publication in medical journals;

 

·              create and maintain scientifically-advanced technology and offer proprietary products and services

 

·              Continue to strengthen and improve the messaging and the importance and value of the breast cancer information that BREVAGen plus provides to Physicians

 

·              attract and retain qualified personnel;

 

·              obtain patent or other protection for our products and services;

 

·              obtain required government approvals and other accreditations on a timely basis; and

 

·              successfully market our products and services.

 

If we are not successful in meeting these goals, our business could be adversely affected.  Similarly, our competitors may succeed in developing technologies, products or services that are more effective than any that we are developing or that would render our technology and services obsolete, noncompetitive or uneconomical.

 

Licensing

 

Non-Coding Assertion Program

 

Our out-licensing business principally covers two families of “non-coding DNA” patents.  As we are the sole owners of these patents there is, by definition, no direct competition in this activity.  However, to some degree, there are alternate technologies in the market place which can be used to perform genetic analysis and genomic mapping and so in this regard we do face indirect competition and a potential risk of technological obsolescence.  A risk of patent invalidation always exists with the possibility of the discovery of previously unknown prior art, as well as the risk of patent re-examination.  Apart from these risks, the aging and expiry of our non-coding family of patents remains, and thus our ability to generate future license revenues from these particular patents may be restricted.  It is anticipated that, over time however, licensing of additional patents filed by the Company in other areas of genetics and our other research projects may replace revenues currently generated from the licensing of these non-coding patents.

 

During the year ended June 30, 2009, we successfully prevailed in legal proceedings with respect to a Nullity Action in the German Patent Court regarding the equivalent to U.S. Patent No. 5,612,179 (the “‘179 patent”).  We subsequently responded to questions raised by the U.S. Patents and Trademarks Office (“USPTO”) in relation to a Request for Re-examination of seven of the thirty six claims contained in ‘179 patent and, on May 10, 2010, we announced that we had received formal notification from the USPTO that it had upheld, without amendment, all of the claims which formed the basis of the re-examination action of the Company’s core non-coding DNA patent.

 

On July 9, 2012, the Company announced that it had received formal notification from the USPTO that it had received and granted a request for a second ex parte re-examination of claims 1-18 and 26-32 of the ‘179 patent brought by Merial LLC of Duluth,

 

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Georgia (“Merial”).  Requesting re-examination is a common strategy employed by defendants in patent infringement proceedings and, as such, it is not unexpected from Merial who is currently a defendant in the action originally brought by the Company in the U.S. District Court for the District of Colorado for infringement of the ‘179 patent.  On March 15, 2013, the Company announced that the USPTO had issued an action reaffirming the validity of certain claims contained in the Company’s ‘179 patent.  In its formal notification to the Company, the USPTO stated that “claims 1-18 and 26-32 of the ‘179 patent are confirmed and claims 19-25 and 33-36 are not reexamined”.

 

On April 19, 2013, the Company advised that the USPTO had received a third request for an ex parte re-examination of the ‘179 patent, again from Merial, and that the request had been granted.  As was the case in all previous challenges, GTG will actively defended this matter and had the patent upheld.  On September 30, 2013, the Company announced that it had received an Ex-Parte Re-examination Certificate once again confirming the patentability of claims 1-18 and 26-32 of the ‘179 patent.  However, the Company also announced that Merial filed yet another (its third) request with the USPTO for re-examination of the ‘179 patent. This request for re-examination was once again, defended by the Company and again upheld with all claims intact as announced on February 12, 2014. The ‘179 patent is robust and our efforts have been very successful, now having been through four re-examinations with the USPTO which resulted in the re-issuing of the patent in full with all claims upheld, as mentioned above.

 

As a further result of our assertion program in the US, three independent but similar motions to dismiss have been brought by defendants in our assertion program. In each case, motions to dismiss were filed arguing the patents were invalid because they covered natural phenomenon or laws of nature and thus not entitled to patent protection. Again the Company has actively defended these actions and to date has prevailed in two cases that have been heard as announced by the Company on March 12, 2014 and August 26, 2014.

 

On the 30 October 2014, Judge Stark issued a Memorandum Opinion finding Claim 1 of the Company’s foundation ‘179 patent ineligible and granted that Motion to Dismiss. Legal Counsel has now prepared an appeal to the decision in the Federal Circuit. It is anticipated that the appeal will be argued in September 2015, with a decision being issued between December 2015 and June 2016.  Counsel sought and achieved a stay of all non-appealed actions pending resolution of the Appeal. Several of those cases are asserted against major pharmaceutical companies.

 

If the appeal is successful in overturning Judge Stark’s decision, the pending cases will be resumed.

 

Environmental Regulations

 

The Company’s operations are subject to environmental regulations under Australian State legislation.  In particular, the Company is subject to the requirements of the Environment Protection Act 1993 .  A license has been obtained under this Act to produce listed waste.

 

Item 4.C                         Corporate Structure

 

The diagram below shows the corporate structure of the Genetic Technologies group as of the date of this Annual Report:

 

 

Genetic Technologies is the holding company of the Group and is listed on the Australian Securities Exchange, under the code GTG and, via its ADRs, on the NASDAQ Capital Market, under the ticker symbol GENE.

 

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Item 4.D                         Property, Plant and Equipment

 

Subsequent to June 30, 2015, the Company renewed its two leases in respect of premises occupied by the Group.

 

Fitzroy, Victoria

 

Genetic Technologies Limited rents the offices and laboratory premises which are located at 60-66 Hanover Street, Fitzroy, Victoria, Australia (an inner suburb of Melbourne) from Crude Pty. Ltd.  The renewed lease is due to expire on August 31, 2018.  The anticipated total rental charge in respect of the year ending June 30, 2016 is approximately $211,672.  Genetic Technologies Limited does not have an option to purchase the leased premises at the expiry of the lease period.

 

Charlotte, North Carolina

 

Phenogen Sciences Inc., a wholly-owned subsidiary of Genetic Technologies Limited, rents office premises which are located at 9115 Harris Corners Parkway, Suite 320, Charlotte, North Carolina, USA from New Boston Harris Corners LLC.  The lease has been renegotiated for a further 12 months to October 31, 2016.  The anticipated total rental charge in respect of the year ending June 30, 2016 is approximately USD 33,520.  Phenogen Sciences Inc. does not have an option to purchase the leased premises at the expiry of the lease period.

 

Item 5.                                  Operating and Financial Review and Prospects

 

You should read the following discussion and analysis in conjunction with Item 3.A “Selected Financial Data” and our financial statements, the notes to the financial statements and other financial information appearing elsewhere in this Annual Report.  In addition to historical information, the following discussion and other parts of this Annual Report contain forward-looking statements that reflect our plans, estimates, intentions, expectations and beliefs.  Our actual results could differ materially from those discussed in the forward-looking statements.  See the “Risk Factors” section of Item 3 and other forward-looking statements in this Annual Report for a discussion of some, but not all, factors that could cause or contribute to such differences.

 

Item 5.A                         Operating Results

 

Overview

 

Our Formation

 

GeneType AG was incorporated in Zug, Switzerland on February 13, 1989 to exploit the commercialization of the hypothesis that the non-coding region of the human HLA gene complex of chromosome 6 is a valuable and highly ordered reservoir of useful genetic information, largely overlooked by the rest of the world at that time.

 

Genetic Technologies Limited was incorporated on January 5, 1987 as Concord Mining NL in Western Australia.  On August 13, 1991, we changed our name to Consolidated Victorian Gold Mines NL to better reflect the operations of the Company at the time.  On December 2, 1991, we again changed our name to Consolidated Victorian Mines NL.  On March 5, 1995, we again changed our name to Duketon Goldfields NL.  On October 15, 1995, we changed our status from a “No Liability” company to a company limited by shares and the name became Duketon Goldfields Limited.  On August 29, 2000, we changed our name to Genetic Technologies Limited, which is the current name of the Company.

 

On August 29, 2000, Duketon Goldfields Limited received shareholder approval to change its activities from a mining company to a biotechnology and genetics company on the acquisition of all the issued capital of GeneType AG of Switzerland.  Following the acquisition of GeneType AG, the new combination has been engaged in the researching, developing and commercialization of genetic concepts primarily related to our intron sequence patents and genomic mapping patents.  We were also the largest accredited paternity testing laboratory in Australia which GeneType had operated since 1990.  Over the past seven years, the Company granted licenses to its patents and expects to derive revenue from further licensing of its patents.  Prior to the merger with GeneType AG, the mining exploration activities had ceased and were being progressively disposed of by August 2000.  The Company was basically an investment shell and following the completion of the merger the old shareholders of GeneType AG were in control of the company which formed the basis for treating the acquisition of GeneType AG as a reverse acquisition.

 

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Formerly a Development Stage Enterprise

 

Until 2002, we were a development stage enterprise.  We had been developing our technology that resulted in the granting of seven families of patents in the U.S.A. which we have now actively started to commercialize and enforce.  Since inception up to June 30, 2015, we have incurred $100,985,283 in accumulated losses.  Our losses have resulted principally from costs incurred in research and development, general and administrative and sales and marketing costs associated with our operations.  Refer to the Consolidated Statements of Operations in Item 18.

 

The research and development costs incurred prior to August 2000 were funded by the shareholders of GeneType AG.  On completion of the merger of Duketon Goldfields Limited and GeneType AG in August 2000, to form Genetic Technologies Limited, existing funds of approximately $6 million within Genetic Technologies Limited were applied towards the Group’s research and development and general and administrative expenses.  The Company has since completed several placements of shares in August 2003, July 2011, December 2014 and March 2015. There have also been other amounts raised from the exercise of unlisted options, principally in April 2005 and February 2015.  We have primarily depended on these sources of funds to meet our financing needs.  However, we now license our non-coding technology and provide a series of genetic tests, both of which generate revenue to fund our expenses.

 

In 2011, we generated our first net profit after tax.  However, the extent to which we continue to generate profits will, amongst other things, depend on the quantum of license fees received from the licensing of our patents, the amount of annuities and royalties we receive from past licenses, the success we have with respect to the commercialization of our research projects, the rate at which our new genetic tests are taken up by our customers, and in particular the BREVAGen TM  test in the U.S. market, and generally the number of genetic tests we conduct.

 

Where we derive our revenues

 

During the year, the Company divested its interest in other genetic testing services to concentrate on the principal activity of the provision of molecular risk assessment for cancer.

 

The operating revenues for the year is directly reflective of the repositioned business.  Non-core business was sold, operations appropriately scaled back and equity raised to set the Company up for future success.  Critical to this was the release of the much improved 2nd generation BREVAGenplus® test in October 2014.  The Company has purposefully moved focus away from reliance on its past licensing assertion programme as there is now a clear focus on concentrating effort on the Company’s lead product BREVAGen plus ® in the U.S.

 

During the 2015 financial year, Genetic Technologies Limited and its subsidiaries generated consolidated gross revenues from continuing operations, excluding other revenue, of approximately $2.0 million compared to $4.6 million in the preceding year.  $(2.2) million of this differential is directly attributable to the divested Heritage business with the balance of $(0.4) million due to a decrease in the overall combined sales of the BREVAGenTM and BREVAGenplus® tests.

 

Our major source of revenues and other income up to June 30, 2002 were grants received from the Australian Government under the START Program licensing, fees from licensing the non-coding patents, DNA paternity testing services income in Australia.  From 2003 to 2014, our revenues were derived principally from the sale of genetic tests and the granting of licenses to our non-coding technology.  During that period, our licensing program successfully secured licenses from a total of 72 commercial licensees and 6 research licensees.  In June 2011, we launched the BREVAGen TM  breast cancer risk assessment test in the U.S. marketplace and, as we are now accredited to offer the test in all 50 U.S. States, we anticipate that the revenues from the sale of this test will increase.

 

Fiscal year

 

As an Australian company, our fiscal, or financial, year ends on June 30 each year.  We produce audited consolidated accounts at the end of June each year and provide reviewed half-yearly accounts for the periods ending on December 31 each year, both of which are prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board.

 

Recent Accounting Pronouncements

 

In respect of the year ended June 30, 2015, the Group has assessed all new accounting standards mandatory for adoption during the current year, noting no new standards which would have a material effect on the disclosure in these financial statements.  There has been no affect on the profit and loss or the financial position of the Group.  Certain new accounting standards and

 

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interpretations have been published that are not mandatory for June 30, 2015 reporting periods.  The Group’s and the parent entity’s assessment of the impact of these new standards and interpretations is set out in Note 2(b) of the attached financial statements.

 

Critical Accounting Policies

 

The accounting policies which are applicable to the Group and the parent entity are set out in Notes 2(c) to 2(ab) of the attached financial statements.

 

Comparison of the year ended June 30, 2015 to the year ended June 30, 2014

 

Revenues from operations

 

The operating result for the year is directly reflective of the repositioning of the business.  Non-core business was sold, operations have been appropriately scaled back and equity has been raised to set the Company up for future success.  Critical to this was the release of the much improved 2nd generation BREVAGenplus® test in October 2014.  The Company has purposefully moved focus away from reliance on its past licensing assertion programme as there is now a clear focus on concentrating effort on the Company’s lead product BREVAGenplus® in the U.S.

 

During the 2015 financial year, Genetic Technologies Limited and its subsidiaries generated consolidated gross revenues from continuing operations, excluding other revenue, of approximately $2.0 million compared to $4.6 million in the preceding year.  $(2.2) million of this differential is directly attributable to the divested Heritage business with the balance of $(0.4) million due to a decrease in the overall combined sales of the BREVAGenTM and BREVAGenplus® tests.

 

Overheads have decreased by approximately $2.6 million compared with 2014.  The combined areas of selling/ marketing, administration (excluding net foreign currency losses), licensing and operations totaled $11.9 million for the year compared with $14.5 million for 2014.  The decreased licensing activities accounted for approximately $0.6 million of the decrease with the remaining $2.1 million the result of the divestment of the Heritage business in November 2014, benefits derived from restructure activities and better management with overhead spending.

 

With reference to significant “one-off” items, the loss for the year of approximately $8.8 million includes a $1.4 million pre-tax profit on the sale of the Heritage business and a write-down of $0.8 million against the opening asset value for the Immunaid option.

 

Gain on sale of Business

 

On November 19, 2014, the Company announced the sale of its heritage Australian Genetics business, which had previously provided diagnostic and sequencing services encompassing Australia only medical, forensic, paternity and animal genomic testing to Specialist Diagnostics Services Limited (SDS) for $ 2.1 million in cash. The divestment of the Australian Genetics business followed the Company’s announced plans to sell non-core assets and focus business activities on the commercialization of the BREVANGen plus® breast cancer risk test. The company recognized a one-off profit on disposal of $ 1,396,798 as a result of this disposal.

 

Cost of sales

 

Our cost of sales from continuing operations (which include direct costs incurred in performing our genetic testing services prior to disposal in November 2014) decreased by $946,486 (51.5%), from the 2014 financial year. The decrease is directly attributable to the divested Heritage business in November 2014.

 

Other revenue

 

Other revenue which includes the total revenues generated from our licensing activities increased by $ 163,319 (19%) in 2015 to $1,027,151 primarily as a result of licensing income from Applera Corporation of $781,108 (2014: $291,628 -this agreement will end in December 2015). This is offset by a decrease in royalties and annuities received of $ 146,655 as well as a decrease in other licensing income of $ 179,506. Although the overall focus changed during 2015 to grow sales revenues of BREVAGenplus® in the U.S, the Company will continue to use Sheridan Ross to assist with its licensing and intellectual property activities.

 

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Selling and marketing expenses

 

Selling and marketing expenses decreased by $1,747,296 (28%) to $4,504,299 during the 2015 financial year. Personnel related costs decreased by $1,010,012 as a direct result of restructuring activities in Australia as well as the USA. There were also significant decreases in peer to peer/ consulting fees paid of $ 391,594 and travel related costs of $ 229,741.

 

General and administrative expenses

 

General and administrative expenses increased by $1,049,879 (33%) to $4,222,988 during the financial year.  There was an increase of $ 183,992 in share based payment expense primarily as a result of the Kentgrove Standby facility negotiated in 2015. At year end, an accrual of $200,000 for costs associated with a lease fitouts of the Company’s Fitzroy premises was recognized as part of the restructuring activities. The remaining increase in general & administrative expenses is contributed by an increase in professional service fees of $ 215,330 and travel expenses of $ 53,588. The increase is also contributed by the reversal of a provision for doubtful debts of $ 278,242 recognised in 2014.

 

Licensing, patent and legal costs

 

Licensing, patent and legal costs decreased significantly by $643,781 (60%) to $435,418 during the 2015 financial year. The change in focus away from reliance on the previous licensing assertion saw a decrease in legal fees of $ 232,957. Employee related costs decreased by $ 145,450 in line with the change and restructuring initiatives. There was also a decrease in commissions paid on new licenses of $126,950.

 

Laboratory, research and development costs

 

Laboratory, research and development costs decreased by $446,462 (14%) to $2,851,665 during the 2015 financial year. Patent and legal costs decreased by $192,696 (31%) mostly due to the suspension of the RareCellect research project. There was also a substantial decrease in employee costs of $278,449 as a result of this suspension and the sale of the Australian Heritage business. Contract research expenses increased by $ 185,146 as the Company intensified its clinical trial activities associated with the BREVAGen TM  breast cancer risk assessment test.

 

Finance costs

 

Finance costs decreased by $479,505 (64%) to $ 264,694 during the 2015 year. The costs for 2014 included $691,649 incurred with the establishment of the Iron Ridge convertible note facility. Finance costs associated with the issue of convertible notes in 2015 were $ 150,500.

 

Other income and expenses

 

Other income and expenses included the following movements:

 

·                       Research and development tax credit of $111,188 in the current financial year decreased by $247,207. As per 2014, the research tax credit is recognized on an accrual basis when realizable.

 

·                   A net Foreign exchange loss of $ 200,243 was recognized during the financial year compared to a gain of $167,584 in 2014.

 

·                       Rental recoveries of $ 215,575 were received from SDS when the Australian Heritage business was sold at the end of November 2014 — this arrangement continued until August 2015 when SDS vacated the premises in Fitzroy.

 

Fair value loss on ImmunAid option fee

 

·                       The loss of $ 795,533 in 2015 resulted from the write down of the options granted by ImmunAid to Nil.

 

Comparison of the year ended June 30, 2014 to the year ended June 30, 2013

 

Revenues from operations

 

Our revenues from continuing operations (which include fees from the sale of genetic testing services) increased by 35%, or $1,187,097, as compared to the 2013 financial year. The increase in revenue was primarily due to the increase in the sales of the BREVAGen TM  breast cancer risk assessment test by $1,365,150 from the previous financial year. The increase included a one off adjustment of $446,000 due the Group changing from recognizing revenue on a cash basis to an accrual basis for this test. As at June 30, 2014, the Company now has enough historical data to use to enable it to determine a reliable estimate of the amount of revenue expected to be received.  Declines in revenues other medical testing ($50,849), together with canine disease testing ($113,417), contributed to the decrease, both of which were due to increased price competition from our competitors.

 

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Cost of sales

 

Our cost of sales from continuing operations (which include direct costs incurred in performing our genetic testing services) decreased by $107,738 (5.5%), from the 2013 financial year.  There was a reduction in the amount of stock written off during the 2014 year ($98,788) compared to the previous financial year. There was also a reduction in the depreciation expense ($46,358) as some of the laboratory equipment became fully depreciated during the current financial year.

 

Gain on deconsolidation of subsidiary

 

On December 12, 2013, the Company announced that its former Canadian-listed subsidiary, Gtech International Resources Limited (“Gtech”) had completed its acquisition of Sydney-based company Simavita Holdings Limited (“Simavita Holdings”), as originally disclosed by the Company to the ASX on July 30, 2013. The Group recognised a one-off gain on disposal of the subsidiary in the 2014 financial year of $761,361.  As part of the transaction, in which Simavita Holdings raised approximately $14.3 million via the issue of approximately 34.9 million new shares at an issue price of $0.41 per share (before the payment of costs and the repayment of certain debts), Gtech changed its name to Simavita Limited (“Simavita”).

 

The shares of Simavita commenced trading on the TSXV, under the trading symbol “SV”, on December 6, 2013.  On December 9, 2013, Simavita lodged documents with the ASX pursuant to which it also sought a listing of CHESS Depositary Interests (“CDIs”) on the ASX.  The Simavita CDIs were listed on the ASX, under the ASX code “SVA”, on February 20, 2014.

 

Immediately following the completion of the acquisition, Genetic Technologies Limited held a total of 1,306,166 shares in Simavita, representing approximately 2.2% of that company’s total issued capital.  As a result of the transaction, Gtech was deconsolidated from the GTG Group and a number of changes were made to the Board of that company to reflect the new ownership. Cash disposed on loss of control of subsidiary was $162,576 (refer Cash Flow Statement).

 

On this date the subsidiary was deconsolidated and the retained interest was recognised as an available for sale financial asset recognised at fair value. This asset has since been sold prior to the balance sheet date for $577,497 and has been included as proceeds from the sale of available-for-sale financial assets within the cash flow statement.

 

The Gtech International Resources Limited subsidiary was allocated to the corporate segment .

 

There were no such transactions in the 2013 financial year.

 

Other revenue

 

Other revenue includes the total revenues generated from our licensing activities.  For the 2014 financial year, the Company’s licensing revenues were $863,832 which represented a decrease of 82% as compared to the result from the previous year of $4,784,913.  During the 2014 financial year, we executed Settlement and License Agreements with five parties: Genesis Genetic Institute, LLC. Genelex Corporation., BioReference / Genepath and Lenetix., Reprogenetics LLC., Promega Corporation.  Included in the total licensing revenues is royalty and annuity income of $235,335, which decreased by $969,901 during the 2014 year.  Licensing revenues form part of the Australian geographic segment.

 

The 2014 financial year continued to present new challenges for the Company’s licensing program, including the below mentioned re-examination proceedings for the `179 patent, and also certain changes to US legislation and new interpretations of US case law, all of which have contributed to some delay in reaching various settlements. The Company announced that on September 30, 2013, Merial had filed yet another request, its third, with the USPTO for re-examination of the ‘179 patent. On February12, 2014: the Company announced that it had received a further ExParte Re-Examination Certificate from the United States Patent and Trademark Office (“USPTO”), this one dated February 10, 2014 (the “Certificate”).  In the Certificate, the USPTO confirms the patentability of claims 1-15, 17,18, 26-29 and 32 and no amendments have been made to the ‘179 patent. As previously stated, Genetic Technologies will actively defend such re-examinations and will also continue to vigorously pursue entities infringing the Company’s proprietary non-coding DNA technology.

 

On December 24, 2013, the Company reported that efficiencies in both legal resources and court times have been achieved by consolidating 4 cases, pending in the district of Delaware, in front of the same judge. The consolidation includes significant cases against companies such as Bristol Myers Squibb and Pfizer. These cases are awaiting scheduling orders but have been deferred until the court has ruled on the pending invalidity motion brought by 3 of the parties. Pleasingly, 2 invalidity motions have been dismissed and the case for GSK is proceeding. However, we are still awaiting the ruling for the third motion in the District of Delaware.

 

On March 12, 2014, the Company announced that a further consolidation had been achieved in the Northern District of California where, following the transfer of the Natera case, it has been consolidated, for at least some of the proceeding with the

 

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Agilent case. Following the court’s ruling in favour of the Company, - denying the motion to dismiss based on invalidity, issued on March 9, 2014. The company has and will continue to resolve these cases appropriately based on the evidence found during the prosecution of cases.

 

In the Glaxo-SmithKline LLC (“GSK”) case in the District of North Carolina, the Company has filed a second amended complaint introducing infringement activities related to a second Company patent. Subsequently, GSK has filed a motion to dismiss based on the familiar invalidity arguments raised by other parties. Again pleasingly, the motion was dismissed and the case is proceeding.

 

The Company intends to maintain the momentum of its U.S. assertion program and to continue generating licensing revenues during the 2015 financial year. Sheridan Ross continues to assist GTG with its licensing and intellectual property activities.

 

Selling and marketing expenses

 

Selling and marketing expenses increased by $984,778 (19%) to $6,251,595 during the 2014 financial year.  Considerable expenses $5,762,023 were incurred this financial year as part of the expansion of the Company’s U.S. activities with respect to the sale of BREVAGen TM  as compared with $3,608,635incurred during the preceding financial year.  This was an increase of $2,153,388 over the previous financial year. There were offsetting decreases in selling and marketing expenses incurred in Australia due to decreased personnel related costs of $625,666 due to restructuring measures incurred by the Company in the 2013 financial year and decreased consultancy costs of $154,407 and decreased marketing expenses of $146,769 compared with the prior financial year.

 

General and administrative expenses

 

General and administrative expenses decreased by $1,240,673 (28%) to $3,173,109 during the financial year.  In the previous financial year a provision for doubtful debts was expensed for $278,242 relating to an advance to an associate. The advance was forgiven in the 2014 financial year and the provision was reversed. In the 2013 financial year one off capital raising expenses (which were not allowed to be offset against equity) of $292,081 were incurred. In the 2014 financial year no such costs have been incurred. Employee related costs have also decreased by $218,679 during the 2014 financial year.

 

Licensing, patent and legal costs

 

Licensing, patent and legal costs decreased significantly by $1,320,625 (55%) to $1,079,199 during the 2014 financial year. The decrease in revenues from the new licenses granted during the financial year resulted in a material decrease in the quantum of commission payable of $1,080,116, together with a decrease in associated legal fees of $155,314.

 

Laboratory, research and development costs

 

Laboratory, research and development costs decreased by $164,339 (5%) to $3,298,127 during the 2014 financial year. During the financial year patent costs increased by $112,621 (22%) mostly due to increased patent costs from the RareCellect research project. Offsetting decreases in employee costs of $167,850 and offsetting decreases in contract research costs of $146,614 occurred in the current financial year. The reductions in current year contract research expenses were due to the one-off expense of a cost effectiveness study of the BREVAGen TM  breast cancer risk assessment test in the previous financial year.

 

Finance costs

 

Finance costs increased by $705,231 during the 2014 the financial year due to significant finance costs $691,649 incurred with the establishment of the Iron Ridge convertible note facility.

 

Other income and expenses

 

Other income and expenses included the following movements:

 

·                       Receipt of the research and development tax credit of $358,395 in the current financial year increased by $177,359. The Research Tax Credit is now recognized on an accrual basis when realizable. In the prior year this was accounted for on a cash basis and the Company has corrected the accounting policy in the current year.  Foreign exchange gains incurred during financial year of $167,584 compared with foreign exchange gains in the prior year of $46,264.  This represented a net increase in overall exchange gains of $121,320 or 262%.

 

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·                       The gain arising from the disposal of fixed assets of $53,277 during the 2014 financial year compared to a loss of $1,416 in the prior year.  The gain on sale this financial year arose from the sale of an item of plant and equipment that had previously been fully written down.

 

·                       The fair value gains on financial assets at fair value through profit or loss of $295,533 for the current financial year related to the revaluation of the ImmunAid option fee. There was no similar amount incurred in the 2013 financial year.

 

On May 16, 2014, as part of the share exchange agreement approved at an Extraordinary General meeting of Shareholders held on April 17, ImmunAid Limited (ImmunAid) granted the Company a total of 2,250,000 options to acquire ordinary shares in ImmunAid at a price of $1.35 per share at any time during the three years from the date on which the ImmunAid Options are granted. As part of the consideration the Company paid ImmunAid an option fee of $500,000 of which $114,159 was paid in cash and the balance of $ 385,841 was applied against outstanding debts.

 

Fair value loss on financial liabilities at fair value through profit or loss

 

·                       Fair value loss on financial liabilities at fair value through profit or loss for the current financial year of $648,374 that related to the year-end valuation of the convertible note facility included in the balance sheet under borrowings. There was no similar amount incurred in the 2013 financial year.

 

Item 5.B                         Liquidity and Capital Resources

 

Summary

 

Our overall cash position depends on numerous factors, including the success of licensing our non-coding patents, the numbers of genetic tests processed by our laboratory, completion of our product research and development activities, ability to commercialize our products, market acceptance of our products and services and how we choose to commercially exploit our technology.

 

During the year ended June 30, 2015, we incurred comprehensive losses of $8,396,165.  During the year ended June 30, 2014, we incurred comprehensive losses of $10,283,545. During the year ended June 30, 2013, we incurred comprehensive losses of $9,323,063.

 

Since inception, our operations have been financed primarily from capital contributions by our stockholders, proceeds from our licensing activities and revenues from operations, grants, and interest earned on the Company’s cash and cash equivalents.

 

During the year ended June 30, 2015, the Company’s net cash flows used in continuing operations were $9,691,528. During the year ended June 30, 2014, the Company’s net cash flows used in continuing operations were $10,987,088. During the year ended June 30, 2013, the Company’s net cash flows used in continuing operations were $7,516,779.  The Company’s cash and cash equivalents were $18,341,357 as of June 30, 2015.

 

Financing and plans for restructure

 

On September 15, 2014 the Company announced plans to restructure and realign its group activities to focus its strategy on the US molecular diagnostics (“MDx”) market and commercialisation of the Company’s lead breast cancer risk test BREVAGen.

 

The core actions for these plans included the following which have been delivered during the past financial year:

 

·                   Sale/ divestment of non-core assets;

 

·                   Realignment of internal cost structures through a disciplined approach to cost management and capital allocation being driven by the recently appointed CFO; and

 

·                   Board restructure, including the appointment of new directors, to support and enhance Company’s focus on the US MDx market.

 

The proposed Company name change to represent a MDx focus was approved by shareholders at the Annual General Meeting held on November 25, 2014. On January 21, 2015, the Board resolved to defer the Company name change until a later date.

 

These implemented plans are expected to provide investors with a focused MDx company and refined US commercialisation strategy for BREVAGen, with a significantly reduced operating cost base.

 

In support of these plans, the following changes to the issued capital of the Company were completed:

 

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·               Contributed equity increased by $25,166,636 to $115,247,128 as the result of a private share placements, a Share Purchase Plan, the issue of shares as part of the conversion of convertible notes and on the exercise of options attached to the convertible notes. (Refer Item 10.A — Share Capital for details)

 

·               The Company issued $2,150,000 of interest bearing convertible notes during the year which are convertible into ordinary shares at the option of the holder.  All but $25,000 of these notes were converted during the year.

 

·               On July 31 2014, the Company granted a total of 6,875,000 options over ordinary shares in the Company to its US employees.  The options, which were granted at no cost, entitle the holders to acquire one ordinary share at a price of $0.040 at any time up to, and including May 31, 2018, subject to certain vesting conditions.

 

·               On December 2, 2014, the Company granted a total of 143,333,333 fully vested options over ordinary shares in the Company to the holders of convertible notes.  The options, which were granted at no cost, entitle the holders to acquire one ordinary share at a price of $0.015 at any time up to, and including December 2, 2018.  As at June 30, 2015, 20,366,667 of these options remain unexercised.

 

The net cash received from the increase in contributed equity and the issue of the convertible notes was used principally to provide the Company with general working capital and to fund the continuing commercialisation and to facilitate the acceptance and growth of the Company’s flagship lead breast cancer risk test BREVAGenplus®.

 

T he Directors have undertaken an assessment of the Company’s ability to pay its debts as and when they fall due.  As part of this assessment, the Directors have had regard to the Company’s cash flow forecasts for the twelve month period from the date of the attached Financial Report and the cash balance on hand as at that date.  The Directors believe that the Company will maintain sufficient cash reserves beyond the twelve month period from the date of this Annual Report.

 

Our net cash from / (used in) operating activities was $(9,691,528), $(10,987,088) and $(7,516,779) for the years ended June 30, 2015, 2014 and 2013, respectively.  Cash from / (used in) operating activities for each period consisted primarily of losses incurred in operations reduced by depreciation and amortization expenses, share based payments expenses, foreign exchange movements and unrealized profits and losses relating to investments.  In approximate order of magnitude, cash outflows typically consist of staff-related costs, selling and marketing expenses, service testing expenses, general and administrative expenses, legal/patent fees and research and development costs.

 

Our net cash from / (used in) investing activities was $1,965,422, $232,375 and $(178,652) for the years ended June 30, 2015, 2014 and 2013, respectively.  Typically, cash used in investing activities related to the acquisition of laboratory equipment, however in 2015 the sale of the Heritage business accounted for $2,100,895 of the cash generated from investing activities.  In addition, the agreement reached with Applera Corporation in December 2005 has provided us with significant credits for laboratory equipment and reagents produced by that company. Total credits received from Applera Corporation from December 2005 to June 2015 are $ 8,397,684, of which $ 781,138 was received in the June 30, 2015 financial year.  As of June 30, 2015, the balance of credits receivable under the various agreements with Applera Corporation was $ 149,815.

 

Our net cash from / (used in) financing activities was $22,867,263, $11,922,964 and $437,955 for the years ended June 30, 2015, 2014 and 2013, respectively. In respect of the year ended June 30, 2015, the Company generated gross cash flows of $23,289,927 from the issue of ordinary shares, $2,150,000 from the issue of convertible notes less costs associated with these transactions of $(2,572,664).  In respect of the year ended June 30, 2014, the Company generated net cash flows of $7,000,000 from the issue of 97,222,302 ordinary shares and $5,581,462 net from the issue of convertible notes. In respect of the year ended June 30, 2013, the Company generated net cash flows of $481,500 from the issue of 10,700,000 ordinary shares.

 

Apart from the purchase of plant and equipment of $192,592 in 2015, $47,917 in 2014, and $53,611 in 2013, we had no material capital expenditures for the years ended June 30, 2015, 2014 and 2013.

 

Future cash requirements

 

As disclosed above, the Directors have undertaken an assessment of the Company’s ability to pay its debts as and when they fall due.  As part of this assessment, the Directors have had regard to the Company’s cash flow forecasts for the twelve month period from the date of the attached Financial Report and the cash balance on hand as at that date.  The Directors recognize that there is uncertainty in the consolidated entity’s cash flow forecasts, however the Directors believe that the consolidated entity will be able to maintain sufficient cash reserves beyond the twelve month period from the date of this Annual Report through a range of available options as disclosed in Note 2(a) of the attached financial statements.  We do not have any lines of credit with National Australia Bank Limited (“NAB”) and nominal credit card facilities with NAB and Bank of America, N.A. which, as of June 30, 2015, had total available credit of $281,042.

 

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