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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.

	2,435,282,724 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 has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x Yes   o No

 

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

 

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. o Yes  o No

 

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

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 2.	Offer Statistics And Expected Timetable	1
Item 3.	Key Information	1
Item 3.A	Selected Financial Data	1
Item 3.B	Capitalization and Indebtedness	3
Item 3.C	Reasons for the Offer and Use of Proceeds	3
Item 3.D	Risk Factors	4
Item 4.	Information on the Company	19
Item 4.A	History and Development of the Company	19
Item 4.B	Business Overview	20
Item 4.C	Corporate Structure	29
Item 4.D	Property, Plant and Equipment	29
Item 5.	Operating and Financial Review and Prospects	30
Item 5.A	Operating Results	30
Item 5.B	Liquidity and Capital Resources	34
Item 5.C	Research and Development, Patents and Licenses, etc.	35
Item 5.D	Trend Information	36
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	44
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	51
Item 9.C	Markets	51
Item 9.D	Selling Shareholders	51
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	55
Item 10.C	Material Contracts	56
Item 10.D	Exchange Controls and Other Limitations Affecting Security Holders	56
Item 10.E	Taxation	57
Item 10.F	Dividends and Paying Agents	63
Item 10.G	Statement by Experts	63
Item 10.H	Documents on Display	63
Item 10.I	Subsidiary Information	63
Item 11.	Quantitative And Qualitative Disclosures About Market Risk	64

 

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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	65
Item 15.A	Disclosure controls and procedures	65
Item 15.B	Management’s annual report on internal control over financial reporting	65
Item 15.C	Attestation report of the registered public accounting firm	66
Item 15.D	Changes in internal control over financial reporting	66
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	68
Item 16.E	Purchases Of Equity Securities By The Issuer And Affiliated Purchasers	68
Item 16.F	Change in Registrant’s Certifying Accountant	68
Item 16.G	Corporate Governance	68
Item 16.H	Mine Safety Disclosure	68
Item 17.	Financial Statements	68
Item 18.	Financial Statements	69
Item 19.	Exhibits	69

 

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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 F39 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

 

Not applicable

 

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, 2018 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, 2018 and 2017 and the statement of comprehensive income/(loss) data for the 2018, 2017 and 2016 fiscal years are derived from our audited consolidated financial statements which are included in this Annual Report.  Balance sheet data as of June 30, 2016, 2015 and 2014 and statement of comprehensive income/ (loss) data for the 2015 and 2014 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 2018, 2017, 2016, 2015 AND 2014

 

		Year ended June 30, 2018		Year ended June 30, 2017		Year ended June 30, 2016		Year ended June 30, 2015		Year ended June 30, 2014
		AUD		AUD		AUD		AUD		AUD
Revenue from operations
Genetic testing services		189,254		518,506		824,586		2,011,918		4,564,280
Less: cost of sales		(300,088	)	(492,417	)	(743,060	)	(891,243	)	(1,837,729	)
Gross profit from operations		(110,834	)	26,089		81,526		1,120,675		2,726,551
Other revenue		—		—		300,548		1,027,151		863,832
Gain on deconsolidation of subsidiary		—		—		—		—		761,361
Selling and marketing expenses		(1,066,404	)	(2,721,474	)	(3,186,497	)	(4,504,299	)	(6,251,595	)
General and administrative expenses		(3,015,818	)	(3,109,530	)	(3,429,357	)	(4,222,988	)	(3,173,109	)
Licensing, patent and legal costs		—		—		(103,581	)	(435,418	)	(1,079,199	)
Laboratory, research and development costs		(2,210,498	)	(2,366,334	)	(2,584,752	)	(2,851,665	)	(3,298,127	)
Finance costs		(28,843	)	(31,995	)	(28,889	)	(264,694	)	(744,199	)
Foreign exchange gains reclassified on liquidation of subsidiary		527,049
Gain on disposal of business		—		—		—		1,396,798		—
Impairment of intangible asset expense		—		(544,694	)	—		—		—
Fair value loss on ImmunAid option fee		—		—		—		(795,533	)	—
Share of net loss of associates accounted for using the equity method		—		—		—		—		(362,682	)
Fair value gain/ (loss) on financial liabilities at fair value through profit or loss		—		—		—		349,246		(648,374	)
Non-operating income and expenses		441,476		344,112		492,037		370,557		1,071,072
Profit/(loss) from continuing operations before income tax		(5,463,872	)	(8,403,826	)	(8,458,965	)	(8,810,170	)	(10,134,469	)
Net profit from discontinued operation		—		—		—		—		—
Profit/(loss) before income tax		(5,463,872	)	(8,403,826	)	(8,458,965	)	(8,810,170	)	(10,134,469	)
Income tax expense		—		—		—		—		—
Profit/(loss) for the year		(5,463,872	)	(8,403,826	)	(8,458,965	)	(8,810,170	)	(10,134,469	)
Other comprehensive income/(loss)
Exchange gains/(losses) on translation of controlled foreign operations		(522,966	)	(130,655	)	1,307,219		414,005		(149,162	)
Exchange gains/(losses) on translation of non-controlled foreign operations		—		—		—		—		86
Other comprehensive income/(loss) for the year, net of tax		(522,966	)	(130,655	)	1,307,219		414,005		(149,076	)
Total comprehensive profit/(loss) for the year		(5,986,481	)	(8,534,481	)	(7,151,746	)	(8,396,165	)	(10,283,545	)
Profit/(loss) for the year is attributable to:
Owners of Genetic Technologies Limited		(5,463,872	)	(8,403,826	)	(8,458,965	)	(8,810,170	)	(10,125,197	)
Non-controlling interests		—		—		—		—		(9,272	)
Total profit/(loss) for the year		(5,463,872	)	(8,403,826	)	(8,458,965	)	(8,810,170	)	(10,134,469	)
Total comprehensive profit/(loss) for the year is attributable to:
Owners of Genetic Technologies Limited		(5,986,838	)	(8,534,481	)	(7,151,746	)	(8,396,165	)	(10,274,359	)
Non-controlling interests		—		—		—		—		(9,186	)
Total comprehensive profit/(loss) for the year		(5,986,838	)	(8,534,481	)	(7,151,746	)	(8,396,165	)	(10,283,545	)
Earnings/(loss) per share (cents per share)
Basic and diluted net profit/(loss) per ordinary share		(0.22	)	(0.40	)	(0.49	)	(0.82	)	(1.76	)
Weighted-average shares outstanding		2,435,282,724		2,121,638,888		1,715,214,158		1,072,803,358		574,557,747

 

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GENETIC TECHNOLOGIES LIMITED

 

CONSOLIDATED BALANCE SHEET DATA
FOR 2018, 2017, 2016, 2015 AND 2014

 

		As of June 30, 2018		As of June 30, 2017		As of June 30, 2016		As of June 30, 2015		As of June 30, 2014
		AUD		AUD		AUD		AUD		AUD
Assets
Current assets		5,990,697		11,631,649		12,131,070		19,566,096		4,360,509
Non-current assets		175,284		476,648		1,158,616		1,153,636		2,368,690
Total assets		6,165,981		12,108,297		13,289,686		20,719,732		6,729,199
Liabilities
Current liabilities		(1,450,713	)	(1,465,293	)	(1,332,189	)	(1,735,163	)	(2,318,016	)
Non-current liabilities		(3,390	)	(63,960	)	(74,308	)	(25,321	)	(2,583,664	)
Total liabilities		(1,454,103	)	(1,529,253	)	(1,406,497	)	(1,760,484	)	(4,901,680	)
Net assets		4,711,878		10,579,044		11,883,189		18,959,248		1,827,519
Equity
Contributed equity		122,372,662		122,382,625		115,272,576		115,247,128		90,080,492
Reserves		5,651,162		6,044,493		6,054,861		4,697,403		3,922,140
Accumulated losses		(123,311,946	)	(117,848,074	)	(109,444,248	)	(100,985,283	)	(92,175,113	)
Non-controlling interests		—		—		—		—		—
Total equity		4,711,878		10,579,044		11,883,189		18,959,248		1,827,519

 

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 2014		0.9427		0.9186		0.9705		0.8715
June 2015		0.7704		0.8365		0.9488		0.7566
June 2016		0.7432		0.7289		0.7817		0.6855
June 2017		0.7676		0.7562		0.7680		0.7387
June 2018		0.7399		0.7753		0.8105		0.7355
Monthly data
April 2018		0.7543		0.7684		0.7784		0.7543
May 2018		0.7570		0.7525		0.7595		0.7445
June 2018		0.7399		0.7498		0.7677		0.7355
July 2018		0.7438		0.7403		0.7466		0.7322
August 2018		0.7192		0.7325		0.7428		0.7192
September 2018		0.7238		0.7206		0.7278		0.7107
October 19, 2018		0.7132

 

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 our Business and Business Strategy

 

A material uncertainty exists that may cast significant doubt about our Company’s ability to continue as a Going concern.

 

For the year ending June 30, 2018, the Group incurred a total comprehensive loss of $5,986,838 (2017: $8,534,481) and net cash outflow from operations of $5,621,315 (2017: $6,813,639). As at June 30, 2018 the Group held total cash and cash equivalents of $5,487,035.

 

During the 2019 financial year, the Directors expect increased cash outflows from operations as the Company continues to invest resources in expanding the research & development, sales & marketing, and blockchain activities in support of the distribution of BREVAGen plus® and its pipeline of risk assessment products. As a result of these expected cash outflows, the Directors intend to raise new equity funding within the next twelve months in order to ensure the Company continues to hold adequate levels of available cash resources to meet creditors and other commitments. The Company has subsequent to June 30, 2018 executed an equity placement facility with Kentgrove Capital Pty Ltd whereby it has an opportunity to raise equity funding of up to $20 million in a series of individual placements of up to $1 million (or a higher amount by mutual agreement) over a period of 20 months, expiring April 7, 2020. The Company has in place an open Placement Prospectus, which provides the Company with greater flexibility should the opportunity arise to offer and issue any of the Placement Shares while this Prospectus remains open.  Since June 30, 2018, the Company has issued 100,000,000 shares under this facility, resulting in cash inflows from financing of $1,350,000.  In addition to this facility the Directors will also consider other sources of equity funding through traditional offerings in either Australia or the United States.

 

The continuing viability of the Company and its ability to continue as a going concern and meet its debts and commitments as they fall due is dependent on the satisfactory completion of planned equity raisings, which are not guaranteed.

 

Due to the uncertainty surrounding the timing, quantum or the ability to raise additional equity, there is a material uncertainty that may cast significant doubt on the Group’s ability to continue as a going concern and therefore, that it may be unable to realise its assets and discharge its liabilities in the normal course of business.  However, the Directors believe that the Group will be successful in the above matters and accordingly, have prepared the financial report on a going concern basis. As such no adjustments have been made to the financial statements relating to the recoverability and classification of the asset carrying amounts or classification of liabilities that might be necessary should the Group not be able to continue as a going concern.

 

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 $0.006 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.

 

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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)

(Source: Yahoo Finance: https//au.finance.yahoo.com/)

 

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

 

We have never declared or paid a cash dividend on our Ordinary Shares and we do not anticipate to do so 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, which is uncertain and unpredictable. There is no guarantee that our ordinary shares will appreciate in value or even maintain the price at which an investor purchased the ordinary shares.

 

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.

 

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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 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 June 30, 2011, the Company has incurred operating losses in every year of its existence.  As at June 30, 2018, the Company had accumulated losses of $123,311,946 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.  We expect our capital outlays and operating expenditures to continue to increase for the foreseeable future as we continue to commercialise existing R&D capabilities, IP and introduce an enhanced BREVAGen plus breast cancer risk assessment test and a colon cancer risk assessment test progress development of a suite of genetic screening tests targeting both cancer and non-oncological diseases utilising the latest technology and platforms, and explore and capitalise on blockchain opportunities in the medical and biotech industries.

 

There is 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. If we fail to generate sufficient revenue and eventually become profitable, or if we are unable to fund our continuing losses, our shareholders could lose all or part of their investments.

 

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There is a substantial risk that we are, or will become, a passive foreign investment company, or PFIC, which will subject our U.S. investors to adverse tax rules.

 

Holders of our ADSs who are U.S. residents face income tax risks. There is a substantial risk that we are, or will become, a passive foreign investment company, commonly referred to as a PFIC. Our treatment as a PFIC could result in a reduction in the after-tax return to the holders of our ADSs and would likely cause a reduction in the value of such ADSs. For U.S. federal income tax purposes, we will be classified as a PFIC for any taxable year in which either (i) 75% or more of our gross income is passive income, or (ii) at least 50% of the average value of all of our assets for the taxable year produce or are held for the production of passive income. For this purpose, cash is considered to be an asset that produces passive income. We believe that we were a PFIC for the taxable year ended June 30, 2018 and there is a substantial risk we will be classified as a PFIC for the current taxable year. If we are classified as a PFIC for U.S. federal income tax purposes, highly complex rules will apply to U.S. holders owning ADSs. Accordingly, you are urged to consult your tax advisors regarding the application of such rules. United States residents should carefully read “Item 10.E. Additional Information—Taxation, United States Federal Income Tax Consequences” in this Annual Report, for a more complete discussion of the U.S. federal income tax risks related to owning and disposing of our ADSs.

 

The failure to establish sales, marketing and distribution capacity will materially impact our ability to successfully market and sell our genetic risk assessment tests

 

We currently have no experience in marketing, sales or distribution of genetic risk assessment tests. We announced in August 2018 that we were transitioning the BREVAGenplus commercial program from a direct salesforce in the US to an ecommerce based sales solution.  To successfully establish a web based Consumer Initiated Testing (CIT) platform for the BREVAGenplus and future genetic risk assessment tests, we will have to enter into marketing arrangements with other parties who have established appropriate marketing and sales capabilities in the design and development of a suitable ecommerce platform. We may not be able to enter into marketing arrangements with any marketing party, or if such arrangements are established, our marketing partners may not be able to develop and design an ecommerce sales solution that achieves commercial success for BREVAGenplus or other future genetic risk assessment test. Failure to establish sufficient marketing capabilities through engagement with third party marketing service providers will materially impact our ability to successfully market and sell our tests.

 

If We Fail To Maintain An Effective System Of Internal Control Over Financial Reporting, We May Not Be Able To Accurately Report Our Financial Results Or Prevent Fraud.

 

Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, are designed to prevent fraud. Any failure to design and implement an effective system of internal control may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses.  Ineffective internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of the ADSs and our ordinary shares.

 

As of June 30, 2018 Chief Executive Officer and Chief Financial Officer assessed the effectiveness of our internal control over financial reporting. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in  Internal Control — Integrated Framework (2013) . A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. In connection with this assessment, we identified the following material weaknesses in internal control over financial reporting as of June 30, 2018.

 

The Company did not maintain an adequate segregation of duties with respect to internal control over financial reporting, given we have limited accounting personnel to enable and sufficiently evidence an independent review of complex financial reporting matters.

 

In an effort to remediate the identified material weaknesses and to enhance our overall control environment, we have implemented key steps to ensure continuity in the finance team and ongoing training, which through the introduction of a more controlled month end closing process has provided opportunity for the finance team to take on tasks including the preparation of the month end Finance Board reports and the FY2018 Annual Report which can now be reviewed by the CFO.    Refer to Item 15 of this annual report on Form 20-F for further information on our remediation activities. We cannot assure you that the measures we have taken to date, and actions we may take in the future, will be sufficient to remediate the control deficiencies that led to our material weaknesses in our internal control over financial reporting or that they will prevent potential future material weaknesses.

 

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Risks related to the Company’s Blockchain Projects

 

There is an Uncertain Regulatory Framework for Blockchain Technology.  Changes to the framework could negatively affect us.

 

The regulatory status of blockchain technology is unclear or unsettled in many jurisdictions. It is difficult to predict how or whether governmental authorities will regulate such technologies. It is likewise difficult to predict how or whether any governmental authority may make changes to existing laws, regulations and/or rules that will affect blockchain technology and its applications. Such changes could negatively affect us in various ways, including ceasing the development of our blockchain projects or ceasing operations in a jurisdiction in the event that governmental or other actions make such operations unlawful or commercially undesirable to continue.

 

Blockchain technology will operate in a new and developing legal and regulatory environment. There is no established body of law or court decisions concerning blockchain and smart contracts. The Company may need to change its business model to comply with these licensing and/or registration requirements (or any other legal or regulatory requirements) in order to avoid violating applicable laws or regulations or because of the cost of such compliance. Uncertainty in how the legal and regulatory environment will develop could negatively impact the Company.

 

There is a risk that the Company’s  Blockchain Technology could be Superseded or not function as intended.

 

There can be no assurance that the technology being proposed to underpin the Company’s blockchain applications will not be supplanted by competing protocols that improve upon, or fully replace, the Company’s technology. In addition, the Company’s use of blockchain may include coding errors or otherwise not function as intended, which may negatively affect its functionality.

 

Blockchain technology may be subject to risks of hacking and security weakness, which could have an adverse effect on the Company’s projects or implementation.

 

Hackers or other malicious groups or organizations may attempt to interfere with the Company’s blockchain in a variety of ways, including but not limited to malware attacks, denial of service attacks, consensus-based attacks, Sybil attacks, smurfing and spoofing. Furthermore, hackers or other individuals may uncover and exploit intentional or unintentional bugs or weaknesses in the network.  Any of these risks if they occur could have a materially adverse effect on the Company’s projects or the implementation of its blockchain applications.

 

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 molecular risk assessment and predictive 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.

 

We are currently subject to increased 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 molecular risk assessment testing services, or which otherwise address the needs of our customers and potential customers.  Our competitors in the predictive genetic testing and assessment 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 name / brand recognition and more extensive collaborative relationships.

 

Our competitive position in the molecular risk assessment and predictive 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;

 

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·              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 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 molecular risk assessment and predictive 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.

 

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.

 

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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.

 

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. We do not expect to recognize significant revenues from BREVAGen plus , a second generation BREVAGen product, until increased levels of adoption and reimbursement for this test have been established. If we are unable to increase sales of   BREVAGen plus or successfully develop and commercialize other tests or enhancements, our ability to achieve sustained revenues and profitability would be impacted.

 

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 Clinical Laboratory Improvements Amendments (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.

 

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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.

 

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 federal Food and Drug Administration (FDA). The FDA has exercised its discretion and has not subjected most Laboratory Developed Tests, or LDTs to FDA regulation, although reagents or software provided by third parties and used to perform LDTs may be subject to regulation.

 

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.

 

Even if the clinical trials are timely completed, there is no assurance that the results of those trials will be sufficient to support regulatory clearance or approval for the intended indications.  Failure of the clinical data to support an intended use of given LDT would likely have an adverse impact on the Company.

 

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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 . If the certification of one laboratory owned by the Company is suspended or revoked that may preclude the Company from owning or operating any other laboratory in the Country for two years.

 

We cannot assure you that applicable statutes and regulations and more specifically, the Food, Drug, and Cosmetic Act, 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.

 

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 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, Medicaid and other federal health care programs. Government authorities or whistleblowers 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 $21,563 for violations occurring after November 2, 2015 and $11,000 for violations occurring before November 2, 2015.   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 or if it were determined that we improperly paid physicians who referred patients to our laboratory.  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.

 

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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 the 2009 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, HIPAA not only seeks to ensure patient privacy, but also requires providers that bill electronically to do so using standard code sets.  These 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, 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.

 

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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, on the one hand, and physicians and teaching hospitals, on the other hand. 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, 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 Department of Health and Human Services’  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 rely heavily on communications and information systems to conduct our business. Our operations depend heavily upon the secure transmission of confidential information over public networks. We are transitioning our products’ commercial program to an ecommerce based solution, which places our assets, customer data and other personally identifiable data at higher risks. We are making investments to ensure that our employees are aware of cyber security risks facing the Company and how to prevent data breaches. 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 affect our operations, financial condition and liquidity. Although we are not aware of the occurrence of any data beaches, we continue to update our cyber security tools and processes in an attempt to keep pace with evolving cyber security risks.

 

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, 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, or other policy changes.

 

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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 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.

 

The transition to a direct self-pay program in April 2017 may reduce the reimbursement risks by placing the responsibility for payment purely with the patient, although overall market adoption and revenue generation may be adversely affected.

 

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.

 

Fees for most laboratory services reimbursed by Medicare are established in the Clinical Laboratory Fee Schedule (CLFS), and fees for other testing reimbursed by Medicare, primarily related to pathology, are covered by the Physician Fee Schedule (PFS). Over the past several years, the Company has experienced governmental pay reductions as a direct result of the Affordable Care Act (ACA), the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) and the Achieving a Better Life Experience Act of 2014 (ABLE Act). In addition, the Protecting Access to Medicare Act (PAMA), which became law on April 1, 2014, is expected to result in a future net reduction in reimbursement revenue under the CLFS. These laws include provisions designed to control healthcare expenses reimbursed by government programs through a combination of reductions to fee schedules, incentives to providers to participate in alternative payment models such as risk-sharing and new methods to establish and adjust fees.

 

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 (medical device excise tax “MDET”) in an amount equal to 2.3% of the price for which such manufacturer sells its medical devices that are listed with the FDA. The Consolidated Appropriations Act, 2016 (Dec. 18, 2015) imposed a two-year moratorium on this medical device tax so it would not apply to the sale of a taxable medical device by the manufacturer, producer, or importer of the device during the period beginning on Jan. 1, 2016, and ending on Dec. 31, 2017.Repeal of the MDET was included in the House passed American Health Care Act of 2017 and the Senate’s Better Care Reconciliation Act released on July 13, 2017; however, the Senate has thus far failed to pass its bill to repeal and replace the Affordable Care Act. The moratorium has subsequently on January 22, 2018 been extended  for a further period of 2 years. Unless additional action is taken, the MDET will be reinstated on January 1, 2020. The medical device industry has garnered significant support for the permanent repeal of the MDET. It is likely that advocates will continue to push Congress to consider legislation to repeal the MDET before it is reinstated.

 

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, once the moratorium sunsets, 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.  Moreover, under Protecting Access to Medicare Act, CMS will be required to set and make adjustments to the CLFS using market-based information that reflects the scope of prices paid across the laboratory industry. On October 1, 2015, CMS issued a proposed rule to implement PAMA that would require applicable laboratories, including the Company, to begin reporting their test-specific private payer payment amounts to CMS during the first quarter of 2016. CMS intends to use that private market data to calculate weighted median prices for each test (based on applicable CPT codes) that would represent the new CLFS rates beginning in 2017, subject to certain phase-in limits. For 2017-2019, a test price cannot be reduced by more than 10.0% per year; for 2020-2022, a test price cannot be reduced by more than 15.0% per year. Reporting and pricing will occur every three years, or annually with respect to certain types of tests, to update the CLFS thereafter.

 

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

 

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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 was 0.25%.

 

We may also be subject to the U.S. federal Physician Payments Sunshine Act and various state laws on reporting remunerative relationships with healthcare customers. These laws impact the kinds of financial arrangements we may have with hospitals, surgeons or other potential purchasers of our products. They particularly impact how we structure our sales offerings, including discount practices, customer support, education and training programs, physician consulting, research grants and other arrangements. These laws are administered by, among others, the U.S. Department of Justice, the Office of Inspector General of the Department of Health and Human Services and state attorneys general. Many of these agencies have increased their enforcement activities with respect to medical device manufacturers in recent years. If our operations are found to be in violation of these laws, we may be subject to penalties, including potentially significant criminal, civil and/or administrative penalties, damages, fines, disgorgement, exclusion from participation in government healthcare programs, contractual damages, reputational harm, administrative burdens, diminished profits and future earnings, and the curtailment or restructuring of our operations.

 

On June 23, 2016, the CMS published a final rule implementing PAMA, which required establishment of a new Medicare reimbursement system for clinical lab tests paid under the CLFS, based on private payer rates, as reported to CMS. Although the new payment system was supposed to go into effect for tests furnished after January 1, 2017, the CMS rulemaking process was delayed, and the new rates will not be effective until January 1, 2018 pursuant to the final rule. Under the new system the Company must collect data on private payer rates and report the data to CMS every three years for most types of tests.  The Company does not expect that the new reporting requirements will have a material impact on its business or results of operations. CMS will use the data reported by all applicable labs to calculate a weighted median of private payer rates for each test performed, and that weighted median will be the new Medicare rate. Rate reductions for existing tests under the new system will be phased in over six years. The public comment period on the preliminary private payor rate based CLFS payment amounts will close on October 23, 2017 after which CMS will make available final CY 2018 CLFS rates on the CMS website for a January 1, 2018 implementation. The Company is still assessing the full impact of the final rule, but has been preparing for it for some time.

 

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

 

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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. Sales volumes and prices of our products depend in large part on the availability of coverage and reimbursement from third-party payors. Third-party payors include governmental programs such as U.S. Medicare and Medicaid, private insurance plans, and workers’ compensation plans. These third-party payors may deny coverage or reimbursement for a product or procedure if they determine that the product or procedure was not medically appropriate or necessary. Even though a new product may have been cleared for commercial distribution by relevant regulatory authorities, we may find limited demand for the product until reimbursement approval is assured from multiple governmental and private third-party payors. In the United States, a uniform policy of coverage does not exist across all third-party payors relative to payment of claims for all products. Therefore, coverage and payment can be quite different from payor to payor, and from one region of the country to another. This is also true for foreign countries in that coverage and payment systems vary from country to country.

 

Third-party payors are developing increasingly sophisticated methods of controlling healthcare costs through more cost-effective methods of delivering healthcare. All of these types of programs can potentially impact market access for, and pricing structures of our products, which in turn, can impact our future sales. There can be no assurance that third-party reimbursement will be available or adequate, or that current and future legislation, regulation or reimbursement policies of third-party payors will not adversely affect the demand for our products or our ability to sell our products on a profitable basis. The unavailability or inadequacy of third-party payor reimbursement could have a material adverse effect on our business, operating results, and financial condition.

 

Outside the United States, reimbursement and healthcare payment systems vary significantly by country, and many countries have instituted price ceilings on specific product lines and procedures. There can be no assurances that procedures using our products will be considered medically reasonable and necessary for a specific indication, that our products will be considered cost-effective by third-party payors, that an adequate level of reimbursement will be available, or that the third-party payors’ reimbursement policies will not adversely affect our ability to sell our products profitably .

 

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.

 

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

 

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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.

 

Breaches of network or information technology, natural disasters or terrorist attacks could have an adverse impact on our business

 

Cyber-attacks or other breaches of information technology security, natural disasters, or acts of terrorism or war may result in hardware failure or disrupt our product testing or research and development activities. There has been a substantial increase in frequency of successful and unsuccessful cyber-attacks on companies in recent years. Such an event may result in our inability, or the inability of our collaborative partners, to operate the facilities to conduct and complete the necessary activities. which even if the event is for a limited period of time, may result in significant expenses and/ or significant damage or delay to our commercial or research activities. While we maintain insurance cover for some of these events, the potential liabilities associated with these events could exceeded the cover we maintain. We are likely to be subject to attempts to breach the security of our networks and information technology infrastructure through cyber-attack, malware, computer viruses or other means of unauthorized access. To date however, we have not been subject to any cyber incidents which individually or in aggregate have resulted in a material impact to our operations or 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 have been 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 .  These studies have required 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.

 

With the change in our pricing and billing model effective April 1, 2017, to a direct patient self-pay model, this requirement has currently become redundant. We recognize, however  that scientific papers are an essential marketing tool and that scientific and clinical data are key drivers in commercial adoption. We intend to  explore opportunities to engage in further research collaborations to support clinical utility.

 

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.

 

We do not however 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.

 

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We rely heavily upon patents and proprietary technology that may fail to protect our business.

 

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 may face difficulties in certain jurisdictions in protecting our intellectual property rights, which may diminish the value of our intellectual property rights in those jurisdictions.

 

The laes of some jurisdictions do not protect intellectual property rights to the same extent as the laes in the United States and the European Union, and many companies have encountered significant difficulties in protecting and defending such rights in such jurisdictions. If we or our collaboration partners encounter difficulties in protecting, or are otherwise precluded from effectively protecting, the intellectual property rights for our business in such jurisdictions, the value of those rights may be diminished and we may face additional completion from others in those jurisdictions.

 

In addition, many countries limit the enforceability of patents against governments agencies or government contractors. In those countries, the patent owner may have limited remedies, which could materially diminish the value of such patent.

 

Item 4.                                                Information on the Company

 

Item 4.A                                       History and Development of the Company

 

Originally incorporated under the laws of Western Australia on January 5, 1987 as Concord Mining N.L. the Company 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, the mining activities were phased out to focus on becoming 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”.

 

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.

 

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.

 

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

 

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.

 

In line with this strategy, in November 2016, the Company executed an exclusive worldwide license agreement with The University of Melbourne, for the development and commercialization of a novel colorectal cancer (CRC) risk assessment test, providing the Company with an opportunity to enhance its pipeline of risk assessment products. Additionally, in June 2017, the Company executed an investigator initiated Research Agreement with The Ohio State University, reflecting  the growing awareness of the Company’s expertise in SNP-based risk assessment.

 

During the current financial year, the Company executed a further Collaborative research & services agreement with The University of Melbourne, with the research designed to broaden the applicability of BREVAGen plus®, enabling its use by women with extended family history of breast cancer as well as increase the range of factors analyzed in assessing breast cancer. In addition., the Company  has commenced development of a pipeline of other cancer and disease target tests for its predictive technologies, initially focusing on:

 

·                   Prostate cancer

·                   Melanoma

·                   Type 2 Diabetes

·                   Cardiovascular disease

 

On February 15, 2018, following changes to composition of the majority of the Board on January 31, 2018,  the Company announced that it had entered into a non-binding terms sheet with Blockchain Global Limited (BCG) with the objective of providing a framework for entering into a strategic alliance with BCG to explore potential medical and biotech blockchain applications to provide efficiencies and new opportunities leveraging off the Company’s existing genomics business and BCG’s extensive blockchain application experience. This collaboration has subsequently (August 2, 2018)  been formalized through a framework agreement.

 

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 1300 Baxter Street, Suite 157, 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.

 

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.

 

Item 4.B                                                 Business Overview

 

Description of our Business

 

Founded in 1989, Genetic Technologies Listed on the ASX (GTG) in 2000 and NASDAQ (GENE) in 2005, Genetic Technologies is today a molecular diagnostics company that offers predictive testing and assessment tools to help physicians proactively manage women’s health. The Company’s lead product, BREVAGen plus , is a clinically validated risk assessment test for non-hereditary breast cancer and is first in its class. BREVAGen plus improves upon the predictive power of the first generation BREVAGen test and is designed to facilitate better informed decisions about breast cancer screening and preventive treatment plans. BREVAGen plus expands the application of BREVAGen from Caucasian women to include African-Americans and Hispanics, and is directed towards women aged 35 years or above, who have not had breast cancer and have one or more risk factors for developing breast cancer.

 

The Company has successfully launched the first generation BREVAGen test across the U.S. via its U.S. subsidiary Phenogen Sciences Inc. and the addition of BREVAGen plus , launched in October 2014, significantly expands the applicable market. The Company markets BREVAGen plus to healthcare professionals in comprehensive breast health care and imaging centers, as well as to obstetricians/gynecologists (OBGYNs) and breast cancer risk assessment specialists (such as breast surgeons).

 

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The Genetic Testing Business

 

Following the acquisition of Genetype AG in 1999 and the subsequent renaming to Genetic Technologies Limited, the Company focused on establishing a genetic testing business, which over the following decade saw it become the largest provider of paternity and related testing services in Australia.  The Company’s service testing laboratory in Melbourne became the leading non-Government genetic testing service provider in Australia. The genetic testing services of the Company expanded to include at certain times:

 

·                   Medical testing

·                   Animal Testing

·                   Forensic Testing

·                   Plant Testing

 

The acquisition of GeneType AG also provided the Company with ownership rights to a potentially significant portfolio of issued patents.  During the intervening years, this portfolio has since been expanded by both organic growth and the acquisition of intellectual property assets from third parties. The patent portfolio is constantly reviewed to ensure that we maintain potentially important patents but at the same time keep costs to a minimum by no longer pursuing less commercially attractive and relevant intellectual property.

 

A 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”).

 

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 provided the Company with the ability to offer comprehensive testing services to its customer base in the Asia-Pacific region as well as increasing its exposure to other markets.

 

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.

 

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 centres, 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.

 

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.

 

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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.

 

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.

 

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, Maryland, Pennsylvania, Rhode Island 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.

 

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 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;

 

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. 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.

 

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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), 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. A re-certification from CMS i.e. paper survey, was performed in November 2013 and another on-site re-certification followed up in February 2016. A . A paper survey was conducted in November 2017 and the company’s next scheduled re-certification survey is due in November 2019. Furthermore, our laboratory completed its first CLEP inspection under the NYS DOH CLEP guidelines and received its certificate of compliance effective August 30, 2013. Since the initial survey, the laboratory has been successful in submitting documents via the NYS eCLEP Health Commerce System for each subsequent year to date. Although no firm date has been provided, the laboratory is expecting an on-site visit in the near future.

 

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.

 

The CLIA regulations apply to laboratory developed test (LDT) medical device. The FDA defines a LDT as an in vitro diagnostic test that is manufactured by and used within a single laboratory (i.e. a laboratory with a single CLIA certificate). As with other in vitro diagnostic tests, LDTs are considered “devices,” as defined by the Federal Food, Drug and Cosmetic Act (FD&CA), and are therefore subject to regulatory oversight by FDA. When a laboratory develops a test system such as an LDT in-house without receiving FDA clearance or approval, the CLIA prohibits the release of any test results prior to the laboratory establishing certain performance characteristics relating to analytical validity for the use of that test system in the laboratory’s own environment, see 42 CFR 493.1253(b)(2) (establishment of performance specifications). This analytical validation is limited, however, to the specific conditions, staff, equipment and patient population of the particular laboratory, so the findings of these laboratory-specific analytical validation are limited in how they can be commercialized outside of the laboratory that did the analysis. Furthermore, the laboratory’s analytical validation of LDTs is reviewed during its routine CLIA biennial survey — after the laboratory has already started testing.

 

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. In 2017, FDA announced its position that FDA and CMS should share oversight of LDTs  and also reiterated that already marketed LDTs would be grandfathered.  In its prospective approach, FDA proposed a four year phase in period for pre-market review of LDTs and this approach can affect new or modified current products.

 

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, in October 2014, the number of test samples received up to balance date June 30, 2018, was 11,042 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 BREVAGen tests it performs. As of June 2014, the Company had enough historical data to use to enable it to determine a reliable estimate of the

 

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amount of revenue expected to be received. Accordingly the Group up to June 30, 2017 recognized the revenue on the BREVAGen test on an accruals basis. With the transition to a patient self-pay program from April 1, 2017, revenues are recognized on an individual billed basis from July 1, 2017.

 

In an ongoing effort to establish the most optimal methodology to effectively market the product and improve overall market adoption, during September 2017, the Company transitioned the BREVAGen plus commercial program from a direct salesforce in the U.S. to an ecommerce based solution that will allow the consumer to initiate the testing via a consumer initiated testing (CIT) platform via the Company’s U.S. subsidiary, Phenogen Sciences Inc. website. This transition is ongoing as the Company seeks to effectively address all of the regulatory requirements of a CIT solution.

 

Further expansion of the Company’s credentialing program

 

Credentialing with Preferred Provider Organization (“PPOs”) Networks 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 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.

 

Historically, the positive impact of this activity was 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.

 

Ongoing challenges experienced with the traditional reimbursement system resulted in the Company transitioning to a patient self-pay program on April 1, 2017 (see “Reimbursement” below). This change currently eliminates the need for credentialing and the role of the PPO’s for new test samples received subsequent to this date.

 

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 January 1, 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 up to April 1, 2017 used 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.”

 

These ongoing reimbursement challenges through the use of a miscellaneous CPT code, as well as overall pressure on the U.S. health care market to lower cost and maximize efficiency were major factors in the Company’s decision to transition from a traditional reimbursement system through insurance providers to a direct patient self-pay program from April 1, 2017.  Converting to a direct pay relationship with patients is aimed at providing economic and process certainty to the transaction for the healthcare provider and the patient.  The change is expected to eliminate ongoing reimbursement issues being experienced, such as low levels of reimbursement, prolonged payment time, patient confusion around eligibility and financial responsibility and poor coverage

 

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

 

With effect from April 1, 2017, the Company transitioned from a traditional reimbursement system through insurance providers, to a direct patient self-pay program.  This shift has implications for the series of clinical utility studies, the first two of three which had commenced in the fourth quarter of 2016, that were designed as a means to achieve reimbursement coverage through the private insurers.  With the change in the pricing model, that requirement has become redundant.

 

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We recognize, however  that scientific papers are an essential marketing tool and that scientific and clinical data are key drivers in to help strengthen our commercial position. We intend to  explore opportunities to engage in further research collaborations to support clinical utility.

 

Physicians and the major breast health centers seek multiple points of confirmation that the medical device works as intended and leads to a meaningful improvement in women’s health.  Therefore, the more papers that are published on BREVAGen plus , profiling its performance characteristics including clinical validity and utility, the more likely physicians will be to use the test

 

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.

 

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.

 

5)              “SNP’s and Breast cancer risk prediction for African-American and Hispanic women .” Breast Cancer Research & Treatment. 2015 Dec; 4(3): 583-89.

 

6)              “ Breast cancer risk prediction based on clinical models and 77 independent risk-associated SNPs in women aged under 50 years: Australian Breast Cancer Family Registry” Cancer, Epidemiology, Biomarkers and Prevention. 2016 Feb; 25(2): 359-65.

 

7)              “ Prediction of breast cancer risk based on profiling with common genetic variants ”. J Natl Cancer Inst. 2015; 107(5):doi:10.1093/jnci/djv036. doi: 10.1093/jnci/djv036.

 

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.

 

4)              Allman R, Dite GS, Hopper JL.  (2015).  Should women with a projected 5-year risk of developing breast cancer of 1.4% or higher be offered pharmacologic risk reduction? World Congress on Controversies in Breast Cancer: 22-24 October 2015.

 

5)              Dite GS, Allman R, Hopper JL (2014).  Value of adding Single-Nucleotide Polymorphism panel markers to phenotypic algorithms of Breast Cancer risk.  Presented at the San Antonio Breast Cancer Symposium December 2014.

 

Although there is strong scientific data behind BREVAGen plus , there is always a need for further clinical data to show clinical efficacy and utility of the product.  As such, in June 2017, we have engaged in a research collaboration with The Ohio State University which is conducting a clinical trial surrounding the efficacy of polygenic risk in patient management of at-risk women.  Our medical affairs team continues to engage with other influential medical centers across the U.S. in order to facilitate further research collaborations that will continue to support the utility of polygenic risk in clinical practice.

 

Research & Development Projects

 

During the year ended June 30, 2018, Genetic Technologies supported the following research programs, details of which have been provided below;

 

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·                   BREVAGen plus

·                   Colorectal Cancer Risk Assessment Test

·                   Research collaboration with The Ohio State University

·                   Expanded range of other cancer and disease target predictive risk assessment tests

 

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 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.

 

Further modifications to BREVAGen plus were implemented in December 2016. Changes included a simplification of the clinical risk questionnaire, utilized in BREVAGen plus, from the seven questions of the Gail Model to just two questions: “Age” and “Any First Degree Relatives.”  Additionally, test results are now reported as a 5-year Absolute Risk of Developing Breast Cancer.  This approach is modelled on that of Mavaddat et al (2015) 107(5): djv036 and provides multiple product benefits.  It simplifies the data-input requirement by the physician, aligns the product more firmly with U.S. clinical guidelines, in particular, the United States Preventative Services Task Force (USPSTF) recommendation statement on chemoprevention of breast cancer, and automatically strengthens the validation data by tying the test to a multinational study of approximately 80,000 women.

 

Colorectal Cancer (CRC) risk assessment test Project

 

On November 29, 2016, Genetic Technologies announced the signing of an exclusive worldwide license agreement with The University of Melbourne for the development and commercialization of a novel colorectal cancer (CRC) risk assessment test.

 

The core technology behind this test was developed by a research team at the University’s Centre for Epidemiology and Biostatistics, with results from preliminary modelling studies first published online in Future Oncology on February 1, 2016, in a Paper entitled “Quantifying the utility of single nucleotide polymorphisms to guide colorectal cancer screening,” 2016 Feb: 12(4), 503-13. This simulated case-control study of 1 million patients indicated that a panel of 45 known susceptibility SNPs can stratify the population into clinically useful CRC risk categories. In practice, the technology could be used to identify people at high risk for CRC who should be subjected to intensive screening, ultimately reducing the risk of occurrence and death from the disease. Those identified as low risk of CRC can be spared expensive and invasive screening, thereby preventing adverse events and unjustified expenses.

 

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A scientific validation study supporting this work has been completed, and a report of the research program progress has been delivered to the Company. Whilst the terms of the Agreement are confidential, these events represent an important first milestone in the development of a new test as the Company seeks to diversify its product pipeline and become a key player in the SNP-based cancer risk assessment landscape.

 

The fundamental technology is similar to the BREVAGen plus test and is expected to fit synergistically into the Company’s existing infrastructure and processes.

 

The Company is on track to begin the commercialisation process for the new colon cancer screening test in October 2018. A scientific validation study was completed during the current year, the results of which confirm previously evaluated modelling data. Test design and identification of relevant reporting requirements are in progress.

 

Research Collaboration with The Ohio State University

 

On June 15, 2017 the Company executed a Clinical Study Agreement with The Ohio State University, Technology Commercialization Office and Division of Human Genetics. This is an “investigator-initiated” study in which Genetic Technologies was approached to be the collaborating partner, reflecting the growing awareness of the Company’s expertise in SNP-based risk assessment.

 

The terms and conditions of the Agreement are confidential; however Genetic Technologies will supply novel SNP-based genotyping for a clinical research study, through its CLIA laboratory facility, on a fee for service basis. The Company will be responsible for the development and validation of the new assay, although the fundamental technology is similar to the BREVAGenplus test and will fit synergistically into the Company’s existing laboratory infrastructure and processes. Importantly, if the first phase of the study is successful, several other major genetics centers in the U.S. have expressed an interest in joining the study.

 

This collaborative study provides two tangible benefits for the Company:

 

(i)                                      engagement and collaboration with high profile cancer genetics researchers in the U.S. who are at the forefront of risk assessment research; and

 

(ii)                                   the resulting data can be used to inform the design of future pipeline products

 

Whilst sample collection by the University has been slower than expected during the current year, the Company remains committed to delivering a high standard of service as envisaged under the terms of the agreement.

 

New Product Development

 

Whilst very much at an early stage of activity, during the current year, the Company commenced development of a suite of genetic screening tests targeting both cancer and non-oncological diseases, including:

 

·                   Prostate Cancer

 

·                   Melanoma

 

·                   Type 2 Diabetes

 

·                   Cardiovascular Disease

 

The new risk assessment tests represent a significant market opportunity. To assist with this programme GTG is investigating alternative technology and platforms for performing the Company’s genetic testing.

 

Blockchain Projects

 

Through a strategic alliance with Blockchain Global Limited (BCG) and establishment of a new functional team, the Company is actively engaging with stakeholders and pursuing opportunities that potentially allow it to not only build on the genomic assets and expertise that it has developed to date but also take advantage of the new and developing opportunities that blockchain digital platforms may create in the medical and biotech industries.  Blockchain technology presents a unique opportunity for the Company to contribute to the advancement of cancer research and to improve the health of individuals around the world. The security and privacy inherent in the blockchain provides a means by which individuals can share their genomic information while retaining control of their personal medical records.

 

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Through the wholly owned subsidiary, GeneVentures, the Company  is actively seeking to assist with efforts required for the successful introduction of products or services into the biotech market through;

 

·                   Expertise in commercialising and operationalising new medical technology

·                   Knowledge and experience applying blockchain technology to the biotech sector

·                   Introduction of cutting-edge technology solutions into the US and APAC

·                   Marketing in support of product launches

·                   Pathways to development resources for blockchain solutions

 

As part of our blockchain initiative, to date we have commenced work with several organisations, including Swisstec Helath Analytics Limited to develop a blockchain-enabled platform to address the retail market in Southeast Asia, and Project Shivom (Omix Ventures) whose platform will act as a distribution channel for existing and planned genetic risk screening tests in India.

 

Historical Research Projects

 

Following a significant corporate restructure undertaken during the 2015 fiscal year, a strategic decision was made to focus the Company on the US diagnostics market and all historical research projects were ceased.

 

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.

 

Until recently, there have been no active direct competitors marketing an assay similar to that of BREVAGEN plus in the sporadic breast cancer risk assessment space. Effective August 31, 2017, Myriad Genetic Laboratories Inc. announced that it will market a new breast cancer risk-prediction tool, which according to our early understanding is  a direct competitor for BREVAGEN plus. Similarly, effective March 14, 2018, Ambry Genetics Corporation launched a precision risk tool that provides lifetime breast cancer risk information and from information we have available is s direct competitor to BREVAGEN plus. Other organizations such as 23andMe and Color Genomics in the U.S. have also over the past few years developed SNP based risk tests that whilst not currently direct competitors to BREVAGEN plus, are attracting significant consumer interest.

 

In recent years, a number of other organizations, including deCODE (Iceland), 23andMe, Intergenetics, and Navigenics (subsequently acquired by Life Technologies — now ThermoFisher) 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. New entrants that we are aware of that are in early stages of product development include Counsyl Inc. and Invitae Corporation in the U.S.

 

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 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.

 

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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.

 

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.

 

At December 13, 2017, liquidation of the dormant subsidiary GeneTypeAG was completed.

 

Item 4.D                                                 Property, Plant and Equipment

 

As at date of this Report, the Company has executed two leases in respect of premises occupied by the Group.

 

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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 three year lease is due to expire on August 31, 2018.  The anticipated total rental charge in respect of the year ending June 30, 2018 is approximately $35,676.  On July 3, 2018 the lease agreement for the Fitzroy premises in Melbourne was extended for 3 years from September 1, 2018 to August 31, 2021.

 

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. This lease expired on October 31, 2017. It was then followed by a month to month lease. The anticipated total rental charge in respect of the year ending June 30, 2018, based on the month to month lease, is approximately USD 4,404.  Phenogen Sciences Inc. entered into a 2 year lease agreement effective July 23, 2018 for premises situated at Suite 157, 1300 Baxter Street, Charlotte, North Carolina.

 

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

 

Founded in 1989, Genetic Technologies is an established Australian-based molecular diagnostics company that offers predictive genetic testing and risk assessment tools, with a current focus on women’s health. During the year ended June 30, 2015 the Company divested its interest in other genetic testing services, which up until then together with licensing of non-coding technology had provided the main source of income to fund operations, to concentrate on the principal activity of the provision of molecular risk assessment for cancer.

 

In August 2017 the Company initiated a comprehensive strategic review, whereby it appointed Roth Capital Partners LLC, a U.S. based investment firm, to explore a wide range of strategic alternatives including a business combination or strategic merger, reverse merger, sale of the Company or its assets, in-licensing assets, an acquisition, or other transaction designed to maximize near and long term value for the Company’s shareholders. Following a significant change to the composition of the Board of Directors on January 31, 2018, which saw three new Directors elected, the Company elected not to pursue any of the potential strategic opportunities that were identified during the comprehensive review undertaken by Roth Capital Partners during the latter half of 2017, instead electing to focus on commercialising existing R&D capabilities, IP and BREVAGen plus to achieve better patient outcomes and exploring blockchain opportunities.

 

The operating result for the year ended June 30, 2018 is directly reflective of these activities .

 

Since inception up to June 30, 2018, we have incurred $123,311,946 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.

 

During the 2018 financial year, Genetic Technologies Limited and its subsidiaries generated consolidated gross revenues from continuing operations, excluding other income, of approximately $0.2 million, a decrease from $0.5 million in 2017 and $ 0.8 million in 2016. As the Company continues to explore the optimal methodology to effectively market its product offering , the comparisons reflect;

 

a.               the impact of the substantial restructuring changes that took place during 2015,

b.               the slow growth rates being experienced in the market adoption of the BREVAGen plus breast cancer risk assessment test in the U.S.,

c.                the impact of the change to a patient self-pay billing model in 2017, and

d.               whilst undertaking a comprehensive review of strategic alternatives for the Commpany, the transition from a direct salesforce in the U.S. to an ecommerce CIT platform in September 2017

 

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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, 2018, 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 effect on the profit and loss or the financial position of the Group.  Certain new accounting standards and interpretations have been published that are not mandatory for June 30, 2018 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(u) of the attached financial statements.

 

Comparison of the year ended June 30, 2018 to the year ended June 30, 2017

 

Revenues from operations

 

During 2018, the Group continued to focus on  achieving market acceptance and physician adoption of the BREVAGen plus® breast cancer risk assessment test in the U.S. through its wholly owned U.S. subsidiary, Phenogen Sciences Inc.

 

During the 2018 financial year, Genetic Technologies Limited and its subsidiaries generated consolidated gross revenues from continuing operations, excluding other revenue, of $189,254 compared to $518,506 in the preceding year.  The overall decline of $329,252 is as a result of a $197,734 reduction in previously accrued BREVAGen TM  and BREVAGen plus revenues, driven by ongoing reduced test samples and collection rates, with the balance of $131,518 of the differential directly attributable to a decrease in the overall combined sales of the BREVAGen TM  and BREVAGen plus ® tests. Samples received for BREVAGen TM  and BREVAGen plus ® tests during 2018 were 405 compared to 895 in the previous financial year.

 

Overheads decreased by $1,603,539 compared with 2017.  The combined areas of selling/ marketing, administration, licensing and operations (excluding net foreign currency losses) totaled $6,449,923 for the year compared with $8,053,462 for 2017.  The overall decrease is reflective of the ongoing commitment to effectively manage overhead spending, and a transition from a direct salesforce to an ecommerce based solution in the U.S.

 

The loss for the 2017 year of $8,403,826 (2018: $5,463,872) includes a $544,694 (2018: Nil) expense for the impairment of intangible assets.

 

Cost of sales

 

Our cost of sales from continuing operations decreased by 39% from $492,417 to $300,088. BREVAGenplus ® direct materials utilized decreased by 45% from $172,070 to $ 93,869 as a result of the reduced number of samples received. Depreciation expense attributable to the laboratory testing equipment increased by $ 5,286 whilst direct labour costs decreased by $64,077 as a result of a continued streamlining of the laboratory team to match the reduced samples received. There was a decrease in inventories written off of $44,765 in 2018, which included BREVAGen plus ® materials that had expired during the year of $ 24,506.

 

Selling and marketing expenses

 

Selling and marketing expenses decreased by $1,655,070 (61%) to $1,066,404 during the 2018 financial year. Personnel related costs decreased by $822,151 (54%) as a direct result of the transition from a direct sales force in the U.S. to an ecommerce web enabled sales platform to sell BREVAGen plus . Fees paid billing and collection services decreased by $208,974 to $49,086 as the Company terminated its agreement with a service provider in 2017 and introduced a patient self-pay pricing model for its tests. Marketing and promotion costs decreased by $242,058 (93%) as certain sponsorship agreements and other marketing activities were not pursued in light of the strategic review initiated by the Company in August 2017.

 

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General and administrative expenses

 

General and administrative expenses (excluding net foreign currency losses) increased by $210,519 (7%) to $3,144,178 during the financial year.

 

Personnel related costs increased by $270,993 (18%) as a result of the payout to the previous CEO on his departure in February 2018, as well as 3 additional headcount engaged in February 2018 to oversee the blockchain opportunities being pursued by the Company. This was offset by a decrease in audit, accounting and tax fees of $129,736 in line with streamlined commercial operations.

 

Laboratory, research and development costs

 

Laboratory, research and development costs decreased by $155,836 (7%) to $2,210,498 during the 2018 financial year. As a result of lower test samples received, there was a reduction in 1 part time position, and 1 full time positions resigned during the year, which when combined with reductions in headcount in the previous year, resulted in a decrease in employee related costs of $216,041 (26%) to $611,888. Patent & legal costs increased by $95,320 (22%) to $534,235 as the Company continued to strengthen its patent portfolio around the BREVAGenplus technology and Colorectal Cancer research project. Laboratory materials related to in-house research and development work performed on the BREVAGenplus, CRC & OSU projects increased by $182,767 to $220,809. This was offset by a decrease of $100,000 (100%) in fees payable to the University Of Melbourne as part of the Colorectal Cancer research project.

 

Finance costs

 

Finance costs decreased by $3,152 (10%) to $ 28,843 during the 2018 year. Finance costs incurred in 2018 and 2017 were primarily bank charges.

 

Non-Operating income and expenses

 

Other income and expenses included the following movements:

 

·                   Research and development tax credit of $299,351 in the current financial year increased by $46,192. The research tax credit is recognized on an accrual basis when realizable.  There was an increase in laboratory supplies used in research activates of $ 182,767 as the Company refocused on the BREVAGenplus and CRC projects in the second half opf the year, whilst license fees payable to the University of Melbourne for the CRC project decreased by $100,000.

 

·                       Export Marketing And Development Grant of $126,907 for eligible expenditure related to 2016 & 2017 was received during the year. The grant was not previously recognized by the Company as there was no reasonable assurance of receipt.

 

·                   A net foreign currency gain of $128,360 (2017; loss of $175,871) was recorded for the year. The profit is primarily driven by the translation of US dollar cash reserves to Australian dollars at June 30, 2018.

 

·                   An impairment expense of $544,694 was recognized in the prior year ending June 30, 2017 (2018: $ Nil) relating to the BREVAGen intangible assets was recognized. The assets have were impaired in line with IAS 36, Impairment of assets and the Company’s accounting policy, as disclosed in note 2 of the 2018 Annual Report

 

Comparison of the year ended June 30, 2017 to the year ended June 30, 2016

 

Revenues from operations

 

The Group’s primary focus during 2017 was aimed at achieving market acceptance and physician adoption of the BREVAGen plus® breast cancer risk assessment test in the U.S. through its wholly owned U.S. subsidiary, Phenogen Sciences Inc. This strategy resulted in the implementation of several modifications to the BREVAGen plus®  test as well as the transition from a traditional reimbursement system through insurance providers to a direct patient self-pay pay program in an effort to simplify the BREVAGen plus® billing and collection policy. An enhanced medical affairs presence together with  a refined marketing message, with a focus on health care provider education have been key elements in the drive to achieve this market acceptance and adoption.

 

During the 2017 financial year, Genetic Technologies Limited and its subsidiaries generated consolidated gross revenues from continuing operations, excluding other revenue, of $518,506 compared to $824,586 in the preceding year.  The overall decline of $306,080 is as a result of a $191,661 reduction in previously accrued BREVAGen TM  and BREVAGen plus revenues, driven by ongoing

 

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reduced test samples and collection rates, with the balance of $114,419 of the differential directly attributable to a decrease in the overall combined sales of the BREVAGen TM  and BREVAGen plus ® tests. Samples received for BREVAGen TM  and BREVAGen plus ® tests during 2017 were 895 compared to 1,184 in the previous financial year.

 

Overheads decreased by $852,040 compared with 2016.  The combined areas of selling/ marketing, administration, licensing and operations (excluding net foreign currency losses) totaled $8,053,462 for the year compared with $8,905,502 for 2016.  The overall decrease is reflective of the ongoing commitment to effectively manage overhead spending.

 

The loss for the year of $8,403,826 includes a $544,694 expense for the impairment of intangible assets. No significant items were reported during the previous financial year.

 

Cost of sales

 

Our cost of sales from continuing operations decreased by 34% from $743,060 to $492,417. There was a slight increase in BREVAGenplus ® direct materials utilized of $12,814 as a result of the operating inefficiencies of performing testing on a reduced number of samples received. Depreciation expense attributable to the laboratory testing equipment increased by $ 10,890 whilst direct labor costs decreased by $46,347 as a result of a streamlined laboratory team. There was a decrease in inventories written off of $228,000 in 2017, which included BREVAGen plus ® materials that had expired during the year of $ 53,856.

 

Other revenue

 

Other revenue which in prior years included total revenues generated from our licensing and royalty and annuity activities decreased by $300,548 (100%) to $ Nil. This decrease is attributable to the expiry of a license agreement with Applera Corporation December 2015 as well as being reflective of the Company’s restructuring activities initiated in 2015, whereby focus on the previous licensing and assertion program was minimized.

 

Although there was an overall change in focus 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.

 

Selling and marketing expenses

 

Selling and marketing expenses decreased by $465,023 (15%) to $2,721,474 during the 2017 financial year. Personnel related costs decreased by $201,799 (12%) as a direct result of ongoing natural attrition within the U.S. sales and marketing team . Fees paid for public relations services decreased by $207,361 to $Nil as the Company terminated its agreement with a service provider in 2016.

 

General and administrative expenses

 

General and administrative expenses (excluding net foreign currency losses) decreased by $68,124 (2%) to $2,933,659 during the financial year.

 

In line with streamlined commercial operations subsequent to the 2015 restructuring, fees for tax advice and compliance, accounting and other services decreased by $55,259 (34%) to $107,997. In the absence of any specific U.S. filing such as an f-3 shelf filing undertaken in the U.S. during 2016, Legal and other U.S. regulatory costs incurred under a  streamlined operating structure decreased by 32% ($58,006) to $125,992

 

Licensing, patent and legal costs

 

No Licensing, patent and legal costs were incurred during 2017. The last of the personnel associated with the Licensing assertion program left the Company in July 2015 and consulting fees paid in relation to the program ceased in November 2014. Prior year costs have been combined with Laboratory, research and development costs for disclosure purposes in the Statement of Comprehensive Income/ (loss) for 2017.

 

Laboratory, research and development costs

 

Laboratory, research and development costs decreased by $321,999 (12%) to $2,366,334 during the 2017 financial year. As a result of lower test samples received, there was a reduction in 2 part time and 1 full time positions during the year, which resulted in a decrease in employee related costs of $72,384 (8%) to $827,929. Patent & legal costs decreased by $59,724 (12%) to $438,915, primarily ($49,212 or 82% of the decrease) attributable to the restructuring activities of 2015, and the decision to no longer actively pursue the

 

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RareCellect research project. Additionally, as a result of the impairment of the intangible assets at December 31, 2016, the amortization expense associated with the intangible assets decreased by $63,782 (50%) in 2017.

 

Finance costs

 

Finance costs increased by $3,106 (11%) to $ 31,995 during the 2017 year. Finance costs incurred in 2017 and 2016 were primarily bank charges.

 

Non-Operating income and expenses

 

Other income and expenses included the following movements:

 

·                   Research and development tax credit of $253,159 for the year ended June 30, 2017 decreased by $106,614. The research tax credit is recognized on an accrual basis when realizable.  There was a decrease in laboratory supplies used in research activates of $ 155,240 as most of the work was undertaken at third party collaborator facilities.

 

·                   A net foreign currency loss of $175,871 (2016; $427,574) was recorded for the year ended June 30, 2017. The loss is primarily driven by the translation of US dollar cash reserves to Australian dollars at June 30, 2017.

 

·                   An impairment expense of $544,694 (2016: $ Nil) relating to the BREVAGen intangible assets was recognized. The assets were impaired in line with IAS 36, Impairment of assets and the Company’s accounting policy, as disclosed in note 2 of the 2017 Annual Report

 

Item 5.B                                                 Liquidity and Capital Resources

 

Summary

 

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 earne d on the Company’s cash and cash equivalents. Currently our overall cash position depends on completion of our research & development activities, overall market acceptance of and revenue generated by our BREVAGenplus® test, blockchain opportunities, grants and interest earned on the Company’s cash & cash equivalents. The Company’s cash and cash equivalents were $5,487,035 as of June 30, 2018.

 

During the year ended June 30, 2018, we incurred comprehensive losses of $5,986,838.  During the year ended June 30, 2017, we incurred comprehensive losses of $8,534,481. During the year ended June 30, 2016, we incurred comprehensive losses of $7,151,746.

 

During the year ended June 30, 2018, the Company’s net cash flows used in continuing operations were $5,621,315. During the year ended June 30, 2017, the Company’s net cash flows used in continuing operations were $6,813,639. During the year ended June 30, 2016, the Company’s net cash flows used in continuing operations were $7,726,838.

 

The Directors expect increased cash outflows from operations during the 2019 financial year as the Company continues to invest resources in expanding the research & development, particularly the enhancement of the BREVAGen plus test, development of the colorectal cancer risk assessment test and a suite of genetic screening tests targeting both cancer and non-oncological diseases, exploring distribution activities of BREVAGen plus in the U.S. and Asia as well as embracing blockchain opportunities in the medical and biotech space. As a result of these expected cash outflows, the Directors have subsequent to June 30, 2018 executed an equity placement facility with Kentgrove Capital Pty Ltd whereby it has an opportunity to raise equity funding of up to $20 million in a series of individual placements of up to $ 1 million over a period of 20 months, expiring April 2020. In addition to this facility, the Directors will also consider other sources of equity funding through traditional offerings in either Australia or the U.S.

 

Going Concern . The longer-term viability of the Company and its ability to continue as a going concern and meet its debts and commitments as they fall due is dependent on the satisfactory completion of planned equity raisings which are not guaranteed.

 

Due to the uncertainty surrounding the timing, quantum or the ability to raise additional equity, there is a material uncertainty that may cast significant doubt on the Company’s ability to continue as a going concern and therefore, that it may be unable to realize its assets and discharge its liabilities in the normal course of business.  However, the Directors believe that the Company will be successful in the above matters and accordingly, have prepared the attached financial report on a going concern basis.

 

Operating Activities. Our net cash from / (used in) operating activities was $ (5,621,315), $(6,813,639) and $(7,726,838)  for the years ended June 30, 2018, 2017 and 20165, respectively.  Cash from / (used in) operating activities for each period consisted

 

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primarily of losses incurred in operations reduced by impairment of intangible assets expenses, 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, marketing expenses, service testing expenses, general and administrative expenses, legal/patent fees and research and development costs.

 

Investing Activities . Our net cash  (used in) investing activities was $(2,385), $(182,149) and $(296,331) for the years ended June 30, 2018, 2017 and 2016, respectively.  During the year ended June 30, 2017, $52,650 was received from the sale of unutilized laboratory equipment that was superfluous to the requirements of the Company’s current operations following the 2015 divestment of the Heritage business. Apart from the purchase of plant and equipment of $2,385 in 2018, $234,799 in 2017 and  $303,462 in 2016, we had no other significant capital expenditures for the years ended June 30, 2018, 2017 and 2016.

 

Financing Activities . Our net cash from / (used in) financing activities was $(9,963), $7,110,049 and $(1,654) for the years ended June 30, 2018, 2017 and 2016, respectively. During the year ended June 30, 2017, the Company generated cash flows of $8,049,369 from the issue of 720,000,000 ordinary shares and $295,110 from a facility fee rebate on previously issued shares less costs associated with the transactions of $(1,234,430). No new financing activities were undertaken for the years ended June 30, 2018 and 2016,

 

Future cash requirements

 

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 at which the Financial Report was authorized and lodged and the cash balance on hand as of that date.  The Directors recognize that there is uncertainty in the consolidated entity’s cash flow forecasts, and that the continuing viability of the Company and its ability to continue as a going concern and meet its debts and commitments as they fall due is dependent on the successful completion of planned equity raisings.

 

We do not have any  lines of credit  and nominal credit card facilities with National Australia Bank Limited (“NAB”) and Bank of America, N.A. which, as of June 30, 2018, had total available credit of $171,739

 

Operating leases

 

We are obligated under two operating leases that were in place at June 30, 2018.  These leases relate to the premises occupied by the Company in Fitzroy, Victoria, Australia and by its U.S. subsidiary, Phenogen Sciences Inc., in Charlotte, North Carolina, U.S.A.

 

The future minimum lease payments in respect of the two operating leases that were in place and had remaining non-cancellable lease terms as of June 30, 2018 were $41,625.

 

Item 5.C                             Research and Development, Patents and Licenses, etc.

 

Our principal business is biotechnology, with a historical emphasis on genomics and genetics, the licensing of our non-coding patents, reduction to practice of our fetal cell patents and expansion of the related service testing business. Research and development expenditure as below is reflective of the changes implemented during 2015 following the sale of the Australian Heritage business in November 2014, and a focus the BREVAGen plus® breast cancer risk test. In November 2016, we commenced work on the colorectal cancer (CRC) risk assessment test project, and in June 2017 we commenced work on the Ohio State University research collaboration.

 

The following table details historic R&D expenditure by project.

 

		2018		2017		2016
		$		$		$
RareCellect (1)		12,555		10,782		59,453
BREVAGen plus		266,723		216,121		282,460
Colorectal Cancer Risk Assessment Test		114,315		114,651		—
Ohio State University		48,377

 

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Other general R&D		18,544		77,044		53,625
Total R&D expense		460,514		418,598		395,538
Other expenditure		5,634,088		8,847,846		9,680,597
Total expenditure		6,094,602		9,266,444		10,076,136
R&D as a % of total expenditure		8	%	5	%	4	%

 

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(1)     The RareCellect project ceased during 2014. The costs incurred since then relate to legal fees associated with the patent portfolio.

 

Item 5.D                             Trend Information

 

The direction of genetic research and breast cancer

 

During the 1990s, the two major susceptibility genes for breast cancer, BRCA1 and BRCA2 , were identified. Mutations in these genes account for approximately 30% of the familial risk for breast cancer. Following these discoveries, a large number of candidate gene studies were conducted over the following decade, aimed at identifying moderate and low-penetrance alleles believed to be responsible for the remaining familial risk.

 

In 2007, one of the very first large scale genome-wide association studies (GWAS) reported five significant loci associated with breast cancer risk. It was these loci which formed the basis of the Company’s first generation BREVAGen breast cancer risk assessment test. Further GWAS continue to provide additional loci associated with breast cancer risk and these are incorporated into the Company’s second generation BREVAGen plus test. The Company continues to monitor developments in the field.

 

Following the success of the initial GWAS for breast cancer and improvements in the technology required to conduct the studies, many international research groups are now investigating genetic associations with different types of cancer and other “multifactorial” diseases. These studies are likely to lead to new genetic tests for disease susceptibility, both in cancer and other diseases.

 

Our ability to produce such tests will depend on our ability to secure licensing agreements to the underlying technology or to take part in the basic research studies.

 

We believe that the demand for genetic risk assessment testing is in its infancy and will continue to grow in the coming years.

 

Item 5E.                             Off-balance sheet arrangements

 

We are not a party to any material off-balance sheet arrangements.  In addition, we have no unconsolidated special purpose financing or partnership entities that are likely to create any material contingent obligations.

 

Item 5F.                              Information about contractual obligations

 

The table below shows the contractual obligations and commercial commitments as of June 30, 2018:

 

		0-1 year			>1-<3 years			>3-<5 years			>5 years
Operating lease commitments		$	41,625		$	—		$	—		$	—

 

The above financial obligations are in respect of leases over office and laboratory premises.

 

On July 3, 2018 the lease agreement for the Fitzroy premises in Melbourne was extended for 3 years from September 1, 2018 to August 31, 2021. In addition, Phenogen Sciences Inc. has vacated the Harris Corners Parkway office in Charlotte and entered into a 2 year lease agreement effective July 23, 2018 for premises at 1300 Baxter Street, Suite 157, Charlotte, North Carolina.

 

Item 6.                                  Directors, Senior Management and Employees

 

Item 6.A                         Directors and Senior Management

 

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

 

Dr Paul A. Kasian , PhD, MBA, GAICD (Chairman & Chief Executive Officer)

 

Dr Kasian was appointed to the Board on December 12, 2013 and became Chairman of the Company on January 31, 2018 and interim, part time CEO on February 6, 2018. He brings to the Board a combination of expertise in strategic business leadership and biotech investment giving him a deep understanding on key value drivers for companies in generating shareholder value.  He is an experienced

 

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