UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

 

FORM 20-F

 

[  ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

[X]

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 2020

 

OR

 

[  ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from           to

 

OR

 

[  ] SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

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

 

Commission file number 000-51504

 

GENETIC TECHNOLOGIES LIMITED

(Exact name of Registrant as specified in its charter

and translation of Registrant’s name into English)

 

Australia

(Jurisdiction of incorporation or organization)

 

60-66 Hanover Street, Fitzroy, Victoria, 3065, Australia

(Address of principal executive offices)

 

Dr. Jerzy Muchnicki, Executive Director and Interim Chief

Executive Officer

 

60-66 Hanover Street, Fitzroy, Victoria, 3065, Australia

Telephone: 011 61 3 8412 7000; Facsimile: 011 61 3 8412 7040

(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:

 

Title of each class   Trading Symbol   Name of each exchange on which registered
N/A   N/A   N/A

  

Securities registered or to be registered pursuant to Section 12(g) of the Act: American Depositary Shares, each representing 600 Ordinary Shares

 

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. There were 8,261,726,743 Ordinary Shares outstanding as of October 01, 2020

 

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

 

[  ] 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.

 

[  ] 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 [  ] 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 [  ] 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 definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer [  ] Accelerated filer [  ] Non-accelerated filer [X]
    Emerging growth company [  ]

 

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. [  ]

 

 

† 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 whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.”

 

[  ] Yes [X] No

 

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

 

U.S. GAAP [  ] International Financial Reporting Standards as issued Other [  ]
  by the International Accounting Standards Board [X]  

 

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.

 

[  ] Item 17 [  ] 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).

[  ] 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. [  ] Yes [  ] No

 

 

 

 
 

 

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 4
Item 3.C Reasons for the Offer and Use of Proceeds 4
Item 3.D Risk Factors 5
Item 4. Information on the Company 21
Item 4.A History and Development of the Company 21
Item 4.B Business Overview 23
Item 4.C Corporate Structure 32
Item 4.D Property, Plant and Equipment 32
Item 5. Operating and Financial Review and Prospects 33
Item 5.A Operating Results 33
Item 5.B Liquidity and Capital Resources 38
Item 5.C Research and Development, Patents and Licenses, etc. 39
Item 5.D Trend Information 39
Item 5E. Off-balance sheet arrangements 40
Item 5F. Information about contractual obligations 40
Item 6. Directors, Senior Management and Employees 41
Item 6.A Directors and Senior Management 41
Item 6.B Compensation 42

 

i
 

 

Item 6.C Board Practices 50
Item 6.D Employees 52
Item 6.E Share Ownership 53
Item 7. Major Shareholders and Related Party Transactions 53
Item 7.A Major Shareholders 53
Item 7.B Related Party Transactions 53
Item 7.C Interests of Experts and Counsel 58
Item 8. Financial Information 58
Item 8.A Consolidated Statements and Other Financial Information 58
Item 8.B Significant Changes to Financial Information 59
Item 9. The Offer and Listing 59
Item 9.A Offer and Listing Details 59
Item 9.B Plan of Distribution 59
Item 9.C Markets 59
Item 9.D Selling Shareholders 59
Item 9.E Dilution 59
Item 9.F Expenses of the Issue 59
Item 10. Additional Information 60
Item 10.A Share Capital 60
Item 10.B Our Constitution 60
Item 10.C Material Contracts 61
Item 10.D Exchange Controls and Other Limitations Affecting Security Holders 62
Item 10.E Taxation 63
Item 10.F Dividends and Paying Agents 70
Item 10.G Statement by Experts 70
Item 10.H Documents on Display 70
Item 10.I Subsidiary Information 70
Item 11. Quantitative And Qualitative Disclosures About Market Risk 70

 

ii
 

 

Item 12. Description Of Securities Other Than Equity Securities 71
Item 12.A Debt Securities 71
Item 12.B Warrants and Rights 71
Item 12.C Other Securities 71
Item 12.D American Depositary Shares 72
Item 13. Defaults, Dividend Arrearages and Delinquencies 72
Item 14. Material Modifications to The Rights Of Security Holders and Use Of Proceeds 72
Item 15. Controls and Procedures 73
Item 15.A Disclosure controls and procedures 73
Item 15.B Management’s annual report on internal control over financial reporting 73
Item 15.C Attestation report of the registered public accounting firm 74
Item 15.D Changes in internal control over financial reporting 74
Item 16.A Audit Committee Financial Expert 75
Item 16.B Code Of Ethics 75
Item 16.C Principal Accountant Fees and Services 75
Item 16.D Exemptions From The Listing Standards For Audit Committees 76
Item 16.E Purchases Of Equity Securities By The Issuer And Affiliated Purchasers 76
Item 16.F Change in Registrant’s Certifying Accountant 76
Item 16.G Corporate Governance 76
Item 16.H Mine Safety Disclosure 76
Item 17. Financial Statements 76
Item 18. Financial Statements 77
Item 19. Exhibits 77

 

iii
 

 

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 beginning on page F1 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.

 

iv
 

 

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, 2020 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, 2020 and 2019 and the statement of comprehensive income/(loss) data for the 2020, 2019 and 2018 fiscal years are derived from our audited consolidated financial statements which are included in this Annual Report. Balance sheet data as of June 30, 2018, 2017 and 2016 and statements of comprehensive income/ (loss) data for the 2017 and 2016 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, 2020 as noted.

 

1
 

 

CONSOLIDATED STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME/ (LOSS)

FOR 2020, 2019, 2018, 2017 AND 2016

 

    Year ended     Year ended     Year ended     Year ended     Year ended  
    June 30, 2020     June 30, 2019     June 30, 2018     June 30, 2017     June 30, 2016  
    AUD     AUD     AUD     AUD     AUD  
    (in A$, except loss per share and number of shares)  
Revenue from operations                                        
Genetic testing services     9,864       25,444       189,254       518,506       824,586  
Less: cost of sales     (251,511 )     (276,267 )     (300,088 )     (492,417 )     (743,060 )
Gross profit/(loss) from operations     (241,647 )     (250,823 )     (110,834 )     26,089       81,526  
Other revenue                             300,548  
Selling and marketing expenses     (637,295 )     (576,077 )     (1,066,404 )     (2,721,474 )     (3,186,497 )
General and administrative expenses     (4,058,557 )     (3,830,198 )     (3,015,818 )     (3,109,530 )     (3,429,357 )
Licensing, patent and legal costs                             (103,581 )
Laboratory, research and development costs     (2,477,578 )     (2,360,762 )     (2,210,498 )     (2,366,334 )     (2,584,752 )
Finance costs     (14,823 )     (20,031 )     (28,843 )     (31,995 )     (28,889 )
Foreign exchange gains reclassified on liquidation of subsidiary                 527,049              
Other gains/(losses)     (5,522 )     (407,482 )                  
Gain on disposal of business                              
Impairment of intangible asset expense                       (544,694 )      
Fair value gain on financial liabilities at fair value through profit or loss     195,845                          
Non-operating income and expenses     1,140,647       1,019,769       441,476       344,112       492,037  
Loss from continuing operations before income tax     (6,098,930 )     (6,425,604 )     (5,463,872 )     (8,403,826 )     (8,458,965 )
Net profit from discontinued operation                              
Loss before income tax     (6,098,930 )     (6,425,604 )     (5,463,872 )     (8,403,826 )     (8,458,965 )
Income tax expense                              
Loss for the year     (6,098,930 )     (6,425,604 )     (5,463,872 )     (8,403,826 )     (8,458,965 )
Other comprehensive income/(loss)                                        
Exchange (losses)/gains on translation of controlled foreign operations     (33,175 )     23,668       (522,966 )     (130,655 )     1,307,219  
                                         
Other comprehensive (loss)/income for the year, net of tax     (33,175 )     23,668       (522,966 )     (130,655 )     1,307,219  
Total comprehensive loss for the year     (6,132,105 )     (6,401,936 )     (5,986,481 )     (8,534,481 )     (7,151,746 )
Loss for the year is attributable to:                                        
Owners of Genetic Technologies Limited     (6,098,930 )     (6,425,604 )     (5,463,872 )     (8,403,826 )     (8,458,965 )
                                         
Total loss for the year     (6,098,930 )     (6,425,604 )     (5,463,872 )     (8,403,826 )     (8,458,965 )
Total comprehensive income/(loss) for the year is attributable to:                                        
Owners of Genetic Technologies Limited     (6,132,105 )     (6,401,936 )     (5,986,838 )     (8,534,481 )     (7,151,746 )
Non-controlling interests                                
Total comprehensive loss for the year     (6,132,105 )     (6,401,936 )     (5,986,838 )     (8,534,481 )     (7,151,746 )
                                         
Loss per share (cents per share)                                        
Basic and diluted net loss per ordinary share     (0.15 )     (0.24 )     (0.22 )     (0.40 )     (0.49 )
Weighted-average shares outstanding     4,155,017,525       2,635,454,870       2,435,282,724       2,121,638,888       1,715,214,158  

 

2
 

 

CONSOLIDATED BALANCE SHEET DATA

FOR 2020, 2019, 2018, 2017 AND 2016

 

   

As of

June 30,

   

As of

June 30,

   

As of

June 30,

   

As of

June 30,

   

As of

June 30,

 
    2020     2019     2018     2017     2016  
    AUD     AUD     AUD     AUD     AUD  
               

(in A$)

             
Assets                              
Current assets     15,192,749       3,195,672       5,990,697       11,631,649       12,131,070  
Non-current assets     440,230       69,333       175,284       476,648       1,158,616  
Total assets     15,632,979       3,265,005       6,165,981       12,108,297       13,289,686  
Liabilities                                        
Current liabilities     (1,397,572 )     (1,492,990 )     (1,450,713 )     (1,465,293 )     (1,332,189 )
Non-current liabilities     (1,220,037 )     (809 )     (3,390 )     (63,960 )     (74,308 )
Total liabilities     (2,617,609 )     (1,493,799     (1,454,103 )     (1,529,253 )     (1,406,497 )
Net assets     13,015,370       1,771,206       4,711,878       10,579,044       11,883,189  
Equity                                        
Contributed equity     140,111,073       125,498,824       122,372,662       122,382,625       115,272,576  
Reserves     8,755,489       6,009,932       5,651,162       6,044,493       6,054,861  
Accumulated losses     (135,851,192 )     (129,737,550 )     (123,311,946 )     (117,848,074 )     (109,444,248 )
Non-controlling interests                              
Total equity     13,015,370       1,771,206       4,711,878       10,579,044       11,883,189  

 

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.

 

    At period end     Average rate     High     Low  
Period ended   USD     USD     USD     USD  
                         
Yearly data                                
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  
June 2019     0.7009       0.7153       0.7466       0.686  
June 2020     0.6893       0.6711       0.7043       0.5755  

 

3
 

 

Item 3.B Capitalization and Indebtedness

 

Not applicable.

 

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

 

Not applicable.

 

4
 

 

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

  

Our Company has a history of incurring losses.

 

We have incurred operating losses in every year since the year ended June 30, 2011. As at June 30, 2020, the Company had accumulated losses of A$135,851,192 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 remain constant for the foreseeable future as we continue to focus on R&D and new product development, IP creation and the introduction of predictive genetic testing products. If we fail to generate sufficient revenue and eventually become profitable, or if we are unable to fund our continuing losses by raising additional financing when required, our shareholders could lose all or part of their investments.

 

We may not be successful in transitioning from our existing product portfolio to our next generation of risk assessment tests, and our newly developed approach to marketing and distribution of such products may not generate revenues.

 

Although we developed and marketed our BREVAGen™ and BREVAGenplus products in the recent past, and had internally developed product distribution teams in both Australia and the U.S., we believe that our future success is dependent upon our ability to successfully introduce and sell our newly developed products, “GeneType for Breast Cancer”, and ‘GeneType for Colorectal Cancer’. Although we believe that we now have world class products that are poised to be an important part of making predictive genetic testing a mainstream healthcare activity, we may not be successful in transitioning from our existing products to these products, and there can be no assurance that the demand for these new products will develop. Furthermore, we plan to introduce our new products to healthcare providers through a global network of distribution partners instead of through our own sales force. Although we believe that we are building worthwhile sales and distribution relationships with experienced United States and Chinese medical product distribution firms, there can be no assurance that we will be able to enter into distribution arrangements on terms satisfactory to us, and that our marketing strategy will be successful and result in significant revenues.

 

5
 

 

Item 3.D Risk Factors (cont.)

 

Our products may never achieve significant market acceptance.

 

We may expend substantial funds and management effort on the development and marketing of our predictive genetic testing products with no assurance that we will be successful in selling our products or services. Our ability to enter into distribution arrangements to successfully sell our molecular risk assessment and predictive genetic testing products and services will depend significantly on the perception that our products and services can reduce patient risk and improve medical outcomes, and that our products and services are superior to existing tests. Our business could also be adversely affected if we expend money without any return.

 

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

 

The Company believes that its GeneType for Breast Cancer and GeneType for Colorectal Cancer tests, along with the pipeline of new tests under development have the capacity to transform health outcomes for entire populations. However, it is critical for the Company to demonstrate the clinical utility of its new products. Clinical utility is the usefulness of a test for clinical practice. If the Company is unable to demonstrate clinical utility, or if the data is deemed insufficient to validate utility, there may be insufficient demand for the Company’s products.

 

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 products, 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:

 

  continue to strengthen and maintain scientific credibility through the process of obtaining scientific validation through 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 regarding the importance and value that our cancer risk assessment tests provides to patients and physicians;
     
  diversify our product offerings in disease types other than breast cancer;
     
  obtain and maintain patent or other protection for our products and services;
     
  obtain and maintain 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, products 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, research collaborators at other institutions 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, 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, collaborator or advisors develop inventions or processes 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.

 

6
 

 

Item 3.D Risk Factors (cont.)

 

We may be subject to liability and our insurance may not be sufficient to cover damages.

 

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 and product 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 products.Litigation of such claims could be costly. 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 broad form liability and professional indemnity policies, the level or breadth of our coverage may not be adequate to fully cover any potential liability claims. In addition, we may not be able to obtain additional 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 and/or product 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.

 

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 broad form liability insurance coverage for these risks, the level or breadth of our coverage may not be adequate to fully cover potential liability claims.

 

We depend on the collaborative efforts of our academic and corporate partners for research, development and commercialization 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 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.

 

7
 

 

Item 3.D Risk Factors (cont.)

 

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.

 

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

 

We rely on our sole laboratory facilities in Melbourne, Australia, which has been certified under the U.S. Clinical Laboratory Improvements Amendments (“CLIA”). Our current lease of laboratory premises expires August 31, 2021. 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. If we were to lose our CLIA certification or other required certifications or licenses, or if the facility is harmed or rendered inoperable by natural or man-made disasters, including flooding and power outages, it will be difficult or impossible for us to perform our tests for some period of time. The inability to perform our tests or the backlog of tests that could develop if our facility is inoperable for even a short period of time may result in the loss of customers or harm our reputation, and we may be unable to regain those customers in the future.

 

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

 

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

 

Our success depends largely on the skills, experience and performance of key members of our executive management team and others in key management positions. The efforts of each of these persons together will be critical as we continue to develop our technologies and testing processes, continue our international expansion and transition to a company with multiple commercialized products. 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.

 

During the year, we experienced significant changes in our executive officers, including the appointment of Jerzy Muchnicki as our Interim Chief Executive Officer on September 24, 2019 following the resignation of Paul Kasian, our former Chief Executive Officer; appointment of Philip Hains as our Chief Financial Officer on July 15, 2019, and the appointment of Mr. Nicholas Burrows on 2 September, 2019 as a non-executive director. While we believe our current executive officers have the skills and experience to enable us to execute our business plan, these changes may nevertheless result in a transition phase that could adversely affect our operations in the short-term.

 

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.

 

8
 

 

Item 3.D Risk Factors (cont.)

 

Changes in the way that the FDA regulates our tests could result in the delay or additional expense in offering our tests and tests that we may develop in the future.

 

Historically, the U.S. Food and Drug Administration (“FDA”) has exercised enforcement discretion with respect to most laboratory-developed tests (“LDTs”) and has not required laboratories that furnish LDTs to comply with the agency’s requirements for medical devices (e.g., establishment registration, device listing, quality systems regulations, premarket clearance or premarket approval, and post-market controls). In recent years, however, the FDA publicly announced its intention to regulate certain LDTs and issued two draft guidance documents that set forth a proposed phased-in risk-based regulatory framework that would apply varying levels of FDA oversight to LDTs. However, these guidance documents were withdrawn at the end of the Obama administration and replaced by an informal discussion paper reflecting some of the feedback that FDA had received on LDT regulation. The FDA acknowledged that the discussion paper in January 2017 does not represent the formal position of the FDA and is not enforceable. Nevertheless, the FDA wanted to share its synthesis of the feedback that it had received in the hope that it might advance public discussion on future LDT oversight. Notwithstanding the discussion paper, the FDA continues to exercise enforcement discretion and may decide to regulate certain LDTs on a case-by-case basis at any time, which could result in delay or additional expense in offering our tests and tests that we may develop in the future.

 

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 comply with 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.

 

9
 

 

Item 3.D Risk Factors (cont.)

 

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, 2020, our Interim Chief Executive Officer and Chief Financial Officer assessed the effectiveness of our internal control over financial reporting. In connection with this assessment, we identified the material weakness in internal control over financial reporting as of June 30, 2020 in relation to segregation of duties: Refer to Item 15.B for the description of the material weakness and Item 15.D for the efforts currently being undertaken to remediate the material weakness identified.

 

In an effort to remediate the previously identified material weakness and to enhance our overall control environment, we continued to implement policies and procedures to ensure segregation of duties are appropriate and continuous training for the finance team is in place. However, 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.

 

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. 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.

 

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

 

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.

 

10
 

 

Item 3.D Risk Factors (cont.)

 

If we fail to comply with the complex federal, state, local and foreign laws and regulations that apply to our business, we could suffer severe consequences that could materially and adversely affect our operating results and financial condition.

 

Our operations are subject to extensive federal, state, local and foreign laws and regulations, all of which are subject to change. These laws and regulations currently include, among other things:

 

  CLIA, which requires that laboratories obtain certification from the federal government, and state licensure laws;
     
  FDA laws and regulations;
     
  HIPAA, which imposes comprehensive federal standards with respect to the privacy and security of protected health information and requirements for the use Of certain standardized electronic transactions; amendments to HIPAA under HITECH, which strengthen and expand HIPAA privacy and security compliance requirements, increase penalties for violators, extend enforcement authority to state attorneys general and impose requirements for breach notification;
     
  state laws regulating genetic testing and protecting the privacy of genetic test results, as well as state laws protecting the privacy and security of health information and personal data and mandating reporting of breaches to affected individuals and state regulators;
     
  the federal anti-kickback law, or the Anti-Kickback Statute, which prohibits knowingly and willfully offering, paying, soliciting, receiving, or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing, arranging for, or recommending of an item or service that is reimbursable, in whole or in part, by a federal health care program;
     
  other federal and state fraud and abuse laws, such as anti-kickback laws, prohibitions on self-referral, and false claims acts, which may extend to services reimbursable by any third-party payor, including private insurers;
     
  the federal Physician Payments Sunshine Act, which requires medical device manufactures to track and report to the federal government certain payments and other transfers of value made to physicians and teaching hospitals and ownership or investment interests held by physicians and their immediate family members;
     
  Section 216 of the federal Protecting Access to Medicare Act of 2014 (“PAMA”), which requires applicable laboratories to report private payor data in a timely and accurate manner beginning in 2017 and every three years thereafter (and in some cases annually);
     
  state laws that impose reporting and other compliance-related requirements; and
     
  similar foreign laws and regulations that apply to us in the countries in which we operate.

 

These laws and regulations are complex and are subject to interpretation by the courts and by government agencies. Our failure to comply could lead to civil or criminal penalties, exclusion from participation in state and federal health care programs, or prohibitions or restrictions on our laboratory’s ability to provide or receive payment for our services. We believe that we are in material compliance with all statutory and regulatory requirements, but there is a risk that one or more government agencies could take a contrary position, or that a private, party could file suit under the qui tam provisions of the federal False Claims Act or a similar state law. Such occurrences, regardless of their outcome, could damage our reputation and adversely affect important business relationships with third parties, including managed care organizations, and other private third-party payors.

 

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 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.

 

11
 

 

Item 3.D Risk Factors (cont.)

 

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

 

We also face efforts by 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. Some healthcare plans have been willing to limit the PPO or POS laboratory network to only a single national laboratory to obtain improved fee-for-service pricing. There are also an increasing number of patients enrolling in consumer driven products and high deductible plans that involve greater patient cost-sharing.

 

The increased consolidation among healthcare plans also has increased the potential adverse impact of ceasing to be a contracted provider with any such insurer. Sales volumes and prices of our products depend in large part on the availability of coverage and reimbursement from third-party payers. Third-party payers include governmental programs such as U.S. Medicare and Medicaid, private insurance plans, and workers’ compensation plans. These third-party payers 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 payers. In the United States, a uniform policy of coverage does not exist across all third-party payers 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 payers 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 payers 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 payers, that an adequate level of reimbursement will be available, or that the third-party payers’ 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 may have a material adverse effect on our business.

 

Changes in health care policy could increase our costs, decrease our revenues and impact sales of and reimbursement for our tests.

 

In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, or the ACA became law. This law substantially changed the way health care is financed by both governmental and private insurers, and significantly impacts our industry. The ACA contains a number of provisions that are expected to impact our business and operations, some of which in ways we cannot currently predict, including those governing enrollments in state and federal health care programs, reimbursement changes and fraud and abuse, which will impact existing state and federal health care programs and will result in the development of new programs. Since its enactment, there have been judicial and Congressional challenges to certain aspects of the ACA. Both Congress and President Trump have expressed their intention to repeal or repeal and replace the ACA, and as a result, certain sections of the ACA have not been fully implemented or were effectively repealed. The uncertainty around the future of the ACA, and in particular the impact to reimbursement levels and the number of insured individuals, may lead to delay in the purchasing decisions of our customers, which may in turn negatively impact our product sales. Further, if reimbursement levels are inadequate, our business and results of operations could be adversely affected.

 

12
 

 

Item 3.D Risk Factors (cont.)

 

In addition to the ACA, there will continue to be proposals by legislators at both the federal and state levels, regulators and private third-party payors to reduce costs while expanding individual healthcare benefits. Certain of these changes could impose additional limitations on the prices we will be able to charge for our tests or the amounts of reimbursement available for our tests from governmental agencies or private third-party payors.

 

We face risks associated with currency exchange rate fluctuations, which could adversely affect our operating results.

 

We receive a portion of our revenues and pay a portion of our expenses in currencies other than the United States dollar, such as the Australian dollar, the Euro and the British pound. As a result, we are at risk for exchange rate fluctuations between such foreign currencies and the United States dollar, which could affect the results of our operations. If the U.S. dollar strengthens against foreign currencies, the translation of these foreign currency denominated transactions will result in decreased revenues and operating expenses. We may not be able to offset adverse foreign currency impact with increased revenues. We do not currently utilize hedging strategies to mitigate foreign currency risk and even if we were to implement hedging strategies to mitigate foreign currency risk, these strategies might not eliminate our exposure to foreign exchange rate fluctuations and would involve costs and risks of their own, such as ongoing management time and expertise, external costs to implement the strategies and potential accounting implications.

 

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.

 

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. Failure of our information technology systems could adversely affect our business 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.

 

13
 

 

Item 3.D Risk Factors (cont.)

 

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 products and services.

 

Risks associated with 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 overuses 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 counterclaim of patent invalidity or other such claims. Subsequent legal action could potentially overturn, invalidate or limit the scope of our patents.

 

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 because 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 also rely upon unpatented proprietary technologies and databases. Although we require employees, consultants and collaborators to sign confidentiality agreements, we may not be able to adequately protect our rights in such unpatented proprietary technologies and databases, which could have a material adverse effect on our business. For example, others may independently develop substantially equivalent proprietary information or techniques or otherwise gain access to our proprietary technologies or disclose our technologies to our competitors.

 

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 laws of some jurisdictions do not protect intellectual property rights to the same extent as the laws in the United States and the European Union, and many companies have encountered significant difficulties in protecting and defending such rights in such other 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 competition 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.

 

14
 

 

Item 3.D Risk Factors (cont.)

 

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

 

We may be required to transport specimens from the U.S. or other distant locations 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.

 

Our CIT Platform will expose us to various risks.

 

Our Consumer Initiated Testing platform (CIT), which once implemented will allow for consumers to directly request any of our tests online with a practitioner involved in the process via telemedicine, will be subject to various risks, including but not limited to:

 

  The risk of failure to protect personal medical information;
  The risk of breach of cyber security for the platform; and
  The risk that the platform will fail to perform as expected.

 

Our ability to conduct telehealth services in a particular U.S. state or non-U.S. jurisdiction is dependent upon the applicable laws governing remote healthcare, the practice of medicine and healthcare delivery in general in such location which are subject to changing political, regulatory and other influences. Some state medical boards have established new rules or interpreted existing rules in a manner that limits or restricts the practice of telemedicine. The extent to which a U.S. state or non-U.S. jurisdiction considers particular actions or relationships to constitute practicing medicine is subject to change and to evolving interpretations by (in the case of U.S. states) medical boards and state attorneys general, among others, and (in the case of non-U.S. jurisdictions) the relevant regulatory and legal authorities, each with broad discretion. Accordingly, we must monitor our compliance with law in every jurisdiction in which we operate, on an ongoing basis, and we cannot provide assurance that our activities and arrangements, if challenged, will be found to be in compliance with the law. If a successful legal challenge or an adverse change in the relevant laws were to occur, and we were unable to adapt our business model accordingly, our operations in the affected jurisdictions would be disrupted, which could have a material adverse effect on our business, financial condition and results of operations.

 

Discontinuation or recalls of existing testing products or our customers using new technologies to perform their own tests could adversely affect our business.

 

Discontinuation or recalls of existing testing products or our customers using new technologies to perform their own tests could adversely affect the Company’s business. Manufacturers may discontinue or recall reagents, test kits or instruments used by us to perform laboratory testing. Such discontinuations or recalls could adversely affect our costs, testing volume and revenue. In addition, advances in technology may lead to the development of more cost-effective technologies such as point-of-care testing equipment that can be operated by physicians or other healthcare providers in their offices or by patients themselves without requiring the services of freestanding clinical laboratories. Development of such technology and its use by our customers could reduce the demand for our laboratory testing services and the utilization of certain tests offered by us and negatively impact our revenues.

 

There can be no assurances that we will be able to successfully transition our current lab facilities into a COVID-19 testing facility.

 

Although we believe we will be able to do so, there can be no assurances that we will be able to make available our existing lab facilities for conducting of COVID-19 testing. If we are unable to successfully transition our current lab facilities into a COVID-19 testing facility, we will not be able to move forward our planned short-term business transition of performing COVID-19 testing. Additionally, time spent attempting to transition our facilities would affect our ability to perform testing for our other products and could have an adverse impact on business operations.

 

Even if we are able to successfully transition our current lab facilities into a COVID-19 testing facility, there can be no assurances that we will generate revenue from COVID-19 testing.

 

The Company has not had any material conversations or entered into any agreements with a third party regarding the performance of COVID-19 testing and there is no guarantee that we will ever enter into any such agreements. As a result, despite our potential ability to conduct COVID-19 testing, there can be no assurances that we will be to commercialize such ability to generate any revenue.

 

We may not be able to produce a PRS test that successfully allows for the assessment of risk in a timely manner, if at all.

 

In response to the global COVID-19 pandemic, we have completed the development of our COVID-19 risk test, which we believe may allow for the assessment of risk of an individual contracting a serious disease as a result of the contracting the COVID-19 virus (see “Recent Developments”). We may be unable to produce a test that successfully allows for the assessment of risk in a timely manner, if at all. Additionally, our ability to develop an effective test depends upon our ability to rapidly produce the test, which we have not previously done, and which may require funding or assistance from third parties in order to enable us to prepare the test in a timely manner. If the outbreak is effectively contained or the risk of infection is diminished or eliminated before we can successfully develop and manufacture a PRS test, we may be unable to successfully generate revenue from the development of the PRS test. Our business could be negatively impacted by our allocation of significant resources to a global health threat that is unpredictable and could rapidly dissipate or against which our PRS test, if developed, may not be deemed useful or effective enough by the market.

 

Furthermore, the testing market is highly competitive, is subject to rapid technological change and is significantly affected by existing or new products. Our competitors may develop products more rapidly or more effectively than us. If our competitors are more successful in commercializing their products than us, their success could adversely affect our competitive position and harm our business prospectus.

 

15
 

 

Item 3.D Risk Factors (cont.)

 

Because the PRS test may not be able to obtain necessary regulatory clearance, we may not generate any revenue.

 

All of our existing products are subject to regulation in Australia by CLIA, the U.S. by the FDA and/or other domestic and international governmental, public health agencies, regulatory bodies or non-governmental organizations. The process of obtaining required approvals or clearances for a potential new product varies according to the nature of and uses for a specific product. These processes can involve lengthy and detailed laboratory testing, human clinical trials, sampling activities, and other costly, time-consuming procedures. The submission of an application to a regulatory authority does not guarantee that the authority will grant an approval or clearance for the product. Each authority may impose its own requirements and can delay or refuse to grant approval or clearance, even though a product has been approved in another country. The time taken to obtain approval or clearance varies depending on the nature of the application and may result in the passage of a significant period of time from the date of submission of the application. Delays in the approval or clearance processes increase the risk that we will not succeed in introducing or selling the subject products, and we may be required to abandon the PRS after devoting substantial time and resources to its development.

 

If our PRS test receives necessary CLIA and FDA approvals, it will be subject to continuing governmental regulations and additional foreign regulations.

 

If the FDA determines that enforcement discretion is not appropriate or that LDTs are generally subject to FDA regulation and that premarket review, including clearance or approval, is required for our PRS tests or any of our future tests, diagnostic test kits that we may develop, or other products that would be classified as medical devices, the process of obtaining regulatory clearances or approvals to market a medical device can be costly and time consuming, and we may not be able to obtain these clearances or approvals on a timely basis, if at all. In particular, the FDA permits commercial distribution of a new medical device only after the device has received clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act, or is the subject of an approved premarket approval application, or PMA unless the device is specifically exempt from those requirements. The FDA will clear marketing of a lower risk medical device through the 510(k) process if the manufacturer demonstrates that the new product is substantially equivalent to other 510(k)-cleared products. High risk devices deemed to pose the greatest risk, such as life-sustaining, life-supporting, or implantable devices, or devices not deemed substantially equivalent to a previously cleared device, require the approval of a PMA. The PMA process is more costly, lengthy and uncertain than the 510(k)-clearance process. A PMA application must be supported by extensive data, including, but not limited to, technical, preclinical, clinical trial, manufacturing and labeling data, to demonstrate to the FDA’s satisfaction the safety and efficacy of the device for its intended use. Our currently commercialized products have not received FDA clearance or approval, as they are marketed under the FDA’s enforcement discretion for LDTs. Even if regulatory clearance or approval of a product is required and granted, such clearance or approval may be subject to limitations on the intended uses for which the product may be marketed and reduce our potential to successfully commercialize the product and generate revenue from the product. If the FDA determines that our promotional materials, labeling, training or other marketing or educational activities constitute promotion of an unapproved use, it could request that we cease or modify our training or promotional materials or subject us to regulatory enforcement actions.

 

We are also subject to other federal, state, and foreign regulation concerning the manufacture and sale of our products. Our failure to comply with U.S. federal, state and foreign governmental regulations could lead to the issuance of warning letters or untitled letters, the imposition of injunctions, suspensions or loss of regulatory clearance or approvals, product recalls, termination of distribution, product seizures or civil penalties. In the most extreme cases, criminal sanctions or closure of our manufacturing facility are possible, any of which could adversely affect our business, operating results and prospects.

 

The FDA and similar foreign governmental authorities have the authority to require the recall of regulated products in the event of material deficiencies or defects in design or manufacture. In the case of the FDA, the authority to require a recall must be based on an FDA finding that there is a reasonable probability that the device would cause serious injury or death. In addition, foreign governmental bodies have the authority to require the recall of our products in the event of material deficiencies or defects in design or manufacture. Manufacturers may, under their own initiative, recall a product if any material deficiency in a device is found. A government-mandated or voluntary recall by us could occur as a result of component failures, manufacturing errors, design or labeling defects or other deficiencies and issues. Recalls of any of our products would divert managerial and financial resources and have an adverse effect on our financial condition and results of operations. The FDA requires that certain classifications of recalls be reported to FDA within 10 working days after the recall is initiated. Companies are required to maintain certain records of recalls, even if they are not reportable to the FDA. We may initiate voluntary recalls involving our products in the future that we determine do not require notification of the FDA. If the FDA disagrees with our determinations, they could require us to report those actions as recalls. A future recall announcement could harm our reputation with customers and negatively affect our sales. In addition, the FDA could take enforcement action for failing to report the recalls when they were conducted.

 

We may be subject to liability for our current products or for our planned COVID-19 testing and our insurance may not be sufficient to cover damages.

 

Our current business and potential COVID-19 testing 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 and product liability claims and possible adverse publicity. We may be subject to claims resulting from incorrect results of analysis of genetic variation or other screening tests performed using our products or from any future COVID-19 testing. Litigation of such claims could be costly. 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 broad form liability and professional indemnity policies, the level or breadth of our coverage may not be adequate to fully cover any potential liability claims. In addition, we may not be able to obtain additional 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 and/or product liability litigation upon the reputation and marketability of our technology and products, together with the diversion of the attention of key personnel, could negatively affect our business.

 

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Item 3.D Risk Factors (cont.)

 

Declining general economic or business conditions, including as a result of the recent COVID-19 outbreak, may have a negative impact on our business.

 

Continuing concerns over economic and business prospects in the United States and other countries have contributed to increased volatility and diminished expectations for the global economy. These factors, coupled with the prospect of decreased business and consumer confidence and increased unemployment resulting from the recent COVID-19 outbreak, may precipitate an economic slowdown and recession. If the economic climate deteriorates, our business, including our access to patient samples and the addressable market for diagnostic tests that we may successfully develop, as well as the financial condition of our suppliers and our third-party payors, could be adversely affected, resulting in a negative impact on our business, financial condition, results of operations and cash flows.

 

The COVID-19 pandemic is having a negative impact on global markets and business activity, which has had an effect on the operations of the Company, including but not limited to that sales of our products have been impacted not only by the inability for consumers to visit their practitioners but also the difficulty our sales team is having in arranging face to face meetings with practitioners. Our sales team has found it very difficult to reach practitioners to build on the sales momentum created prior to the pandemic, thus, sales have effectively ceased for the short term. Additionally, in response to the COVID-19 pandemic, the Company has done the following:

 

  Moved forward with its Consumer Initiated Testing platform (CIT), as previously announced on April 1, which allows for consumers to directly request any of the Company’s tests online with a practitioner involved in the process via telemedicine. Once the CIT platform goes live, which is anticipated to be within the next sixty days, we believe it will ensure that sales will be able to recommence in the event a lockdown is maintained and it opens up another significant sales channel.
  Began the process of attempting to make available our existing lab facilities for the conducting of COVID-19 testing via existing Polymerase Chain Reaction (or PCR) (a method of amplifying DNA prior to analysis) PCR equipment and personnel.
  We have also commenced work on a Polygenic Risk Score (or PRS) test for COVID-19, which may allow for the assessment of risk of an individual contracting a serious disease as a result of the contracting the COVID-19 virus. The proposed test will be designed using the same strategies used to build our existing GeneType for breast and colorectal cancer tests. Our objective will be to produce a test that can predict “disease severity” using either genetic information alone (PRS) or a combination of genetic and clinical information. Biobank data will be interrogated to discover any informative genetic and phenotypic associations. At this time, we are not certain whether an association exists between genetic or phenotypic variants and risk of an individual contracting a serious disease as a result of the contracting the COVID-19 virus. If such associations are identified, they will be incorporated into a proprietary algorithm to potentially predict future disease severity.

 

These new COVID-19 related activities may provide some revenue opportunities for us in the short term and will assist in the development of additional tests the company is currently working on. We have not made significant progress to date that would lead to orders or requests to increase capacity and there is no guarantee we will ever receive orders or requests.

 

17
 

 

Item 3.D Risk Factors (cont.)

 

Risks Related to our Securities

 

Our ADSs may be delisted from the Nasdaq Capital Market.

 

In 2019, we were subject to Nasdaq delisting proceedings as a result of our failure to maintain the bid price of the ADSs above the minimum $1.00 per share requirement and because our reported stockholders’ equity was less than the minimum specified amount of $2,500,000 as of December 31, 2018. We regained compliance with Nasdaq’s Listing Rules with respect to our bid price as a result of the adjustment to the ratio of the ADSs that took effect on August 15, 2019, and we regained compliance with the minimum stockholders’ equity requirement by raising gross proceeds of approximately $3,043,000 in a rights offering completed on October 29, 2019. On November 6, 2019, we received a letter from Nasdaq notifying us that we had regained compliance with the equity rule (the “Compliance Letter”).

 

On March 13, 2020, we received a determination letter (the “Letter”) from Nasdaq indicating that we did not comply with the stockholders’ equity rule. The Letter indicates that Listing Rule 5815(d)(4)(B) does not permit an issuer that is deficient in stockholders’ equity to present a plan of compliance to the Nasdaq Staff if such issuer has failed to comply with that provision within one year of a Hearing Panel (the “Panel”) determination of compliance. The Letter states that since we are out of compliance with the equity rule within one year of the Compliance Letter, the Staff cannot allow us to submit a plan of compliance. We requested an appeal hearing with the Panel to review the delisting determination. Upon Nasdaq’s receipt of the hearing request by the Company, Nasdaq stayed the suspension of our securities and the filing of the Form 25-NSE pending the Panel’s decision. An oral hearing took place on April 30, 2020 and in a letter dated May 12, 2020, the Panel granted the Company the full 180 day extension until September 9, 2020, to publicly disclose full compliance with the minimum shareholder equity requirement under Nasdaq rules. Subsequent to this, the Company has regained compliance with Nasdaq Listing Rule 5550(b)(1) as of August 25, 2020 (refer to sequence of events below).

 

On April 2, 2020, we closed a registered direct offering of 1,028,574 ADSs, at a purchase price of $1.75 per ADS (the “First April Offering”). H.C. Wainwright & Co., LLC acted as the placement agent for this offering. We intend to use the net proceeds from this offering to support the introduction and distribution of our new products in the United States, for general product research and development, including the development of polygenic risk tests with TGen in the United States, for implementation of our consumer initiated testing platform, and for working capital.   The Company issued 40,114,200 warrants to H.C. Wainright & Co on April 3, 2020, exercisable at US$0.00365 each, expiring in 5 years from issue date. The warrants are exercisable for fully paid ordinary shares.

 

On April 17, 2020, we announced that we have developed a detailed implementation plan to enable a temporary transition of our genetic testing laboratory to a high-throughput COVID-19 testing laboratory, should it be required by government agencies to assist with demand (we have not received any such requests to date and there is no guarantee that we will ever receive such requests). Initial work to identify laboratory workflows, instrument modification, laboratory compliance for biologics and contaminated materials handling has commenced. Secure supply chain of test reagents has been confirmed. We believe we are prepared to commence testing within 21 days of receiving a request to assist with demand, if any.

 

On April 22, 2020, we closed a registered direct offering of 722,502 ADSs at a purchase price of $2.00 per ADS (the “Second April Offering,” and together with the First April Offering, the “April Offerings”). H.C. Wainwright & Co., LLC acted as the placement agent for this offering. We intend to use the net proceeds of this offering to support the introduction and distribution of our new products in the United States, for general product research and development, including the development of polygenic risk tests with TGen in the United States, for implementation of our consumer initiated testing platform and preparation for potential COVID-19 testing as well as for working capital.  The Company issued 28,177,578 warrants to H.C. Wainright & Co on April 22, 2020, exercisable at US$0.00417 each, expiring in 5 years from issue date. The warrants are exercisable for fully paid ordinary shares.

 

On May 26, 2020, we completed a capital raise by offering of (i) 3,500,000 American Depositary Shares (“ADSs”), for a purchase price of United States Dollars (US$) US$2.00 per ADS (each representing six hundred (600) of the Company’s ordinary shares) and (ii) 500,000 pre-funded warrants to purchase one ADS (the “Pre-Funded Warrants”) for a purchase price of US$1.9999 per Pre-Funded Warrant. H.C. Wainwright & Co., LLC acted as the placement agent for this offering. In connection with such offering, the Company agreed to issue 156,000,000 warrants exercisable at US$0.004166 each, expiring in 5 years from issue date, to H.C. Wainwright & Co. The said warrants have not yet been issued as of the date of report as they are subject to shareholder approval.

 

On July 21, 2020, we closed a registered direct offering of 1,025,000 American Depository Shares (ADS’s), each representing six hundred (600) of the Company’s ordinary shares, at a purchase price of United States Dollars (US$) US$5.00 per ADS - or in Australian dollars $0.012 per ordinary share. The gross proceeds for this offering was approximately US$5.1 million. Against the offering, the Company agreed to issue 39,975,000 warrants exercisable at US$0.0104 each, expiring in 5 years from issue date, to H.C. Wainwright & Co which would form part of cost of raising capital. The said warrants have not been issued as of the date of report as they are subject to shareholder approval.

 

As of August 25, 2020, the Company has regained compliance with the equity requirement of NASDAQ Listing Rule 5550(b)(1), as required by the Hearings Panel decision dated May 12, 2020.

 

However, there can be no assurance that we will be successful in these in maintaining net assets compliance and our securities will remain listed on the Nasdaq Capital Market. The delisting of our ADSs by Nasdaq would have material negative impacts on the liquidity of our securities and our ability to raise future capital.

 

18
 

 

Item 3.D Risk Factors (cont.)

 

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 A$0.006 to a high of A$0.039 per share. Further fluctuations are likely to occur due to events which are not within our control and general market conditions affecting the biotechnology sector or the stock market generally.

 

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

 

The 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 doing 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.

 

19
 

 

Item 3.D Risk Factors (cont.)

 

Because we are not 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 and 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 reviewed financial results on a semi- annual basis (under International Standard on Review Engagements) and our audited financial results on an annual basis (under International Standards on Auditing). 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 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.

 

A lack of significant liquidity for our ADSs may negatively affect your ability to resell our securities.

 

Our ADSs have traded on the Nasdaq Capital Market since 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.

 

There is a substantial risk that we are a passive foreign investment company, or PFIC, which subjects 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 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. For U.S. federal income tax purposes, we are 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. As a result of our substantial cash position in relation to our other assets, we believe that we have been a PFIC in our most recent taxable years and will continue to be a PFIC in the current tax year. Highly complex rules 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.

 

20
 

 

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, the Company changed its name to Consolidated Victorian Gold Mines N.L. On December 2, 1991, the Company changed its name to Consolidated Victorian Mines N.L. On March 15, 1995, the Company changed its 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, the Company changed its name to Genetic Technologies Limited, which is its current name. At that time, the mining activities were phased out to focus on becoming a biotechnology company, following which its stock exchange listing was duly transferred from the mining board of the ASX to the industrial board and its shares were thereafter classified under the industry Company “Health and Biotechnology”, completing its transformation from a mining company into a biotechnology company. The Company’s 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 us in the Asia-Pacific region.

 

On April 14, 2010, the Company announced that it 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, the Company also acquired a suite of patents valid to 2022 which augment and extend its current non-coding patent portfolio. On June 28, 2010, the Company 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 BREVAGenplus.

 

On November 19, 2014, the Company completed the sale of its Heritage Australian Genetics business to Specialist Diagnostic Services Ltd (SDS), the wholly owned pathology subsidiary of Primary Health Care Ltd.

 

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 2018, the Company executed a further collaborative research and services agreement with The University of Melbourne, with the research designed to broaden the applicability of BREVAGenplus, 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 May 2019, the Company announced the development of two new cancer risk assessment tests branded as “GeneType for Colorectal Cancer” and “GeneType for Breast Cancer.” The new breast cancer test provides substantial improvement over its legacy breast cancer test BREVAGenplus, by incorporating multiple additional clinical risk factors. This test will provide healthcare providers and their patients with a 5-year and lifetime risk assessment of the patient developing breast cancer. The colorectal cancer test will provide healthcare providers and their patients a 5-year, 10-year, and lifetime risk assessment of the patient developing colorectal cancer.

 

In June 2020, the Company received US Patent No: US10,683,549, Methods for assessing risk of developing breast cancer. The Company is the first company in the world to successfully commercialize a polygenic risk test for breast cancer. The granted patent covers the Company’s proprietary panels of single nucleotide polymorphisms (SNPs) and the combination of clinical and phenotypic risk models to create the most comprehensive risk assessment tool on the market: GeneType for Breast Cancer.

 

The Company hired and trained a new internal sales employee to educate doctors on the Company’s polygenic risk score (PRS) tests and introduce them to preventative health strategies. The Company had a very positive response from doctors. Initial test results showed 10 per cent of subjects were high risk and 41 per cent were moderate risk. The Company believes that these results will help create personalized strategies specifically designed for the patient risk profile. We think early indications show the tests lead to better screening compliance and to the development of personalized screening solutions. This confirms the Company’s objective of focusing on preventative health rather than ‘after the fact’ medicine. However, there is no guarantee that the PRS tests will generate any substantial income for the Company in the near future or at all.

 

At the same time, the Company continued to develop other risk assessment tests across a range of diseases including:

 

  Cardiovascular disease
  Type 2 diabetes
  Prostate cancer
  Melanoma

 

21
 

 

Item 4. Information on the Company (cont.)

 

Item 4.A History and Development of the Company (cont.)

 

COVID-19 Related Testing

 

The Company developed a detailed implementation plan to allow a temporary transition of the Company’s genetic testing laboratory to a high-throughput COVID-19 test center, should government agencies need it to assist with demand. The Company has begun the initial work to identify laboratory workflows, instrument modification, and laboratory compliance for biologics and contaminated materials handling. The Company has also confirmed a secure supply chain of test reagents.

 

The Company is developing a polygenic risk score (PRS) test for COVID-19, which may enable an assessment of the risk of people developing a serious disease should they contract the virus. The test aims to predict disease severity using a combination of genetic and clinical information.

 

  Working prototype developed based on about 3,000 patients
  Options for clinical risk model currently under evaluation
  Discussions continue with several international biobanks and clinical laboratories to source an independent cross-validation dataset.

 

The Company has built strong relationships with international biobanks and health studies, including UK Biobank. They allow us to secure additional, current COVID-19 patient data to continuously develop, refine, and validate the COVID-19 risk test.

 

The Company has ordered its first single nucleotide polymorphism (SNP) array panel from US-based Thermo Fisher Scientific Inc., a world leader in genetic testing and the Company’s manufacturing partner for GeneType products.

 

The SNP array panel is a key reagent the Company needs to process the polygenic risk test portion of the COVID-19 risk test. The test aims to categorize subjects as being at high, average, or low risk of developing life-threatening conditions due to COVID-19.

 

The Company has also confirmed capacity to scale up production for a global rollout of the COVID-19 risk test (reagent and SNP array panel) with major manufacturers, including Thermo Fisher Scientific. The product uses technical components that healthcare manufacturers already produce for other genetic-based tests. This will support the Company’s plans to accelerate production to meet expected global demand.

 

We estimate that the Company’s Australian facilities can produce up to 250,000 tests a year. The scale-up of manufacturing will require global distribution partnerships if the COVID-19 risk test is widely adopted. In anticipation of high demand, the Company expects to make its data pack for the test available to global laboratories. Direct and indirect costs to date are approximately A$375,000.

 

Discussions have taken place with Centres for Medicare and Medicaid Services (CMS) and National Association of Testing Authorities, Australia (NATA) for regulatory approval for the Company’s COVID-19 risk severity test in the U.S. and Australia.

 

  The Company plans to submit a complete technical package to the Centres for Medicare and Medicaid Services (CMS) for review and approval. Clinical Laboratory Improvement Amendments (CLIA) turn-around time for approval is expected to be approximately 45 days from submission;
  Submission of the technical file to include scientific literature, algorithm validation, laboratory network validation, and laboratory procedural documentation; and
  NATA to provide an assessment after an internal review of the final independent data set for test validation.

 

The test should give risk stratification information which may help personal and population management in two ways, to:

 

  Guide quarantine measures on a personal, local, and national scale; and
  Prioritize vaccination if and when a vaccine becomes available

 

The Company has filed a provisional patent application for its COVID-19 risk test with IP Australia, an agency of Department of Industry, Innovation and Science (Intellectual Property Australia)   (2020901739 - Methods of assessing risk of developing a severe response to Coronavirus infection). The provisional patent covers the specific single nucleotide polymorphism (SNP) algorithm the Company designed to calculate a PRS and the testing model that combines PRS and the clinical risk factors that together constitute the COVID-19 risk test.

 

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Item 4. Information on the Company (cont.)

Item 4.A History and Development of the Company (cont.)

 

Corporate Information

 

The Company’s registered office, headquarters and laboratory is located at 60-66 Hanover Street, Fitzroy, Victoria, 3065, Australia and its telephone number is +-61 3 8412 7000. The office of its U.S. subsidiary, Phenogen Sciences Inc., is 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. The Company’s website address is www.gtglabs.com. The information in its website is not incorporated by reference into this Annual Report and should not be considered as part of this Annual Report.

 

The Company’s Australian Company Number (ACN) is 009 212 328. The Company’s Australian Business Number (ABN) is 17 009 212 328. The Company operate pursuant to its constitution, the Australian Corporations Act 2001, the Listing Rules of the Australian Securities Exchange, the Marketplace Rules of The Nasdaq Stock Market, and where applicable, local, state and federal legislation in the countries in which the Company operates.

 

Item 4.B Business Overview Description of Business

 

Founded in 1989, Genetic Technologies listed its Ordinary Shares on the ASX (GTG) in 2000 and its ADSs on Nasdaq’s Capital Market (GENE) in 2005. Genetic Technologies is a molecular diagnostics company that offers predictive testing and assessment tools to help physicians proactively manage women’s health. The Company’s legacy product, BREVAGenplus, was a clinically validated risk assessment test for non-hereditary breast cancer and was first in its class. BREVAGenplus improved upon the predictive power of the first generation BREVAGen test and was designed to facilitate better informed decisions about breast cancer screening and preventive treatment plans. BREVAGenplus expanded the application of BREVAGen from Caucasian women to include African-Americans and Hispanics and was 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 successfully launched the first generation BREVAGen test across the U.S. via its U.S. subsidiary Phenogen Sciences Inc., and believes the addition of BREVAGenplus, launched in October 2014, significantly expanded the applicable market. The Company marketed BREVAGenplus 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).

 

In May 2019, the Company announced that it had developed two new cancer risk assessment tests branded as ‘GeneType for Colorectal Cancer’ and ‘GeneType for Breast Cancer’. The new breast cancer test provides substantial improvement over the Company’s legacy breast cancer test BREVAGenplus, by incorporating multiple additional clinical risk factors. This test will provide healthcare providers and their patients with a 5-year and lifetime risk assessment of the patient developing breast cancer. The colorectal cancer test will provide healthcare providers and their patients a 5-year, 10-year, and lifetime risk assessment of the patient developing colorectal cancer.

 

In June 2020, the Company received US Patent No: US 10,683,549, Methods for assessing risk of developing breast cancer. The Company is the first company in the world to successfully commercialize a polygenic risk test for breast cancer. The granted patent covers the Company’s proprietary panels of single nucleotide polymorphisms (SNPs) and the combination of clinical and phenotypic risk models to create the most comprehensive risk assessment tool on the market: GeneType for Breast Cancer.

 

At the same time, the Company continued to develop other risk assessment tests across a range of diseases, including:

 

Cardiovascular disease
Type 2 diabetes
Prostate cancer
Melanoma

 

The Company’s 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

 

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Item 4. Information on the Company (cont.)

Item 4.B Business Overview (cont.)

 

The Company’s Genetic Testing Business (cont.)

 

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 the Company maintains 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, the Company established its cancer susceptibility testing facility within its 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 April 2010 the Company purchased various assets from Perlegen Sciences, Inc. of Mountain View, California, which included a breast cancer non-familial risk assessment test, BREVAGen™. The Company then began validating the test in our Australian laboratory and initiated 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 the United States.

 

In October 2014, the Company announced the U.S. release of BREVAGenplus, 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 its first generation BREVAGen product. The Company also made a pivotal change of sales and marketing emphasis toward large comprehensive breast treatment and imaging centers, which are more complex entities with a longer sales cycle, but higher potential.

 

GeneType for Breast Cancer; 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, the Company released its next generation breast cancer risk assessment test, BREVAGenplus. This new version of the test incorporated 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 was clinically validated in a broader population of women including, African American and Hispanic women. This increased the applicable market beyond the Caucasian only indication of the first-generation test, and simplified the marketing process in medical clinics and breast health centers in the U.S.

 

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

 

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

 

In May 2019, the Company announced the development of its next generation breast cancer risk assessment test, ‘GeneType for Breast Cancer’. The new breast cancer test provides substantial improvement over its legacy breast cancer test BREVAGenplus by incorporating multiple additional clinical risk factors. This test will provide healthcare providers and their patients with a 5-year and lifetime risk assessment of the patient developing breast cancer.

 

Germline genetic testing for mutations in BRCA1 and BRCA2 allows for the identification of individuals at significantly increased risk for breast and other cancers. However, such mutations are relatively rare in the general population and account for less than 10% of all breast cancer cases. The remaining 90% of non-familial or sporadic breast cancer have to be defined by other genetic/clinical markers common to the population at large and this is where the Company has focused its attention.

 

24
 

 

Item 4. Information on the Company (cont.)

 

The newly developed ‘GeneType for Breast Cancer’ test is aimed at risk detection of non-BRCA related sporadic breast cancer (that is, for those women who do not have an identified family history of breast cancer). Importantly, this means that the Company’s new test covers 95% of women.

 

In June 2020, the Company received the approval for its U.S. patent, patent number US 10,683,549, “Methods for Assessing Risk of Developing Breast Cancer.” The granted patent covers the Company’s proprietary panels of single nucleotide polymorphisms (SNPs) and the combination of clinical and phenotypic risk models to create the most comprehensive risk assessment tool on the market: GeneType for Breast Cancer.     

 

GeneType for Colorectal; a State-of-the-Art Risk Assessment Test for Colorectal Cancer.

 

Next generation risk assessments combine multiple clinical and genetic risk factors to better stratify individuals at increased risk of developing disease. ‘GeneType for Colorectal Cancer’ incorporates the most impactful risk factors in order to define an individual’s risk of developing colorectal cancer, so the healthcare provider can make screening and preventative care recommendations that are tailored to their patient’s personalized risk.

 

Colorectal cancer is the third most commonly diagnosed cancer in the U.S., yet 1 in 3 adults are not receiving the appropriate colorectal cancer screening for their age. In addition, rates of colorectal cancer among 20-49-year olds is steadily increasing.

Identifying patients who are most at risk for colorectal cancer can lead to enhanced screening protocols and better outcomes. Most individuals diagnosed with colorectal cancer do not have a significant family history of the disease. ‘GeneType for Colorectal Cancer’ evaluates the genometric risk of developing colorectal cancer for men and women over age 30 who do not have a known pathogenic gene variant.

 

In sporadic colorectal cancer, no single gene mutation is causal of disease. Rather, common DNA variations or SNPs, each contribute a small but measurable risk of developing disease. ‘GeneType for Colorectal Cancer’ analyses a patient’s DNA for more than 40 SNPs that have been clinically validated in their association with colorectal cancer. By combining the effects of all of these SNPs into a single polygenic risk score (PRS), ‘GeneType for Colorectal Cancer’ will provide a superior risk stratification over standard risk assessments that incorporate only clinical factors.

 

‘GeneType for Colorectal Cancer’ is clinically validated for men and women of 30 years of age or older and for individuals of Caucasian descent. The Company intend to provide updates as it continuously improves its tests and add fully validated models for additional ethnicities.

 

Government Regulations

 

CLIA AND FDA Regulations

 

In April 2011, the Company obtained certification of its Australian laboratory under the U.S. Clinical Laboratories Improvements Amendments of 1988 (“CLIA”), as regulated by the Centers for Medicare and Medicaid in Baltimore, Maryland. This certification enables the Company to accept and test samples from U.S. residents, and was the culmination of preparations required for the U.S. launch of the Company’s BREVAGen™ test which occurred in June 2011.

 

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 its risk assessment tests 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 CLIA license required for all laboratories offering testing the U.S.;
The CLEP license, an additional certification required to offer tests in New York State; and
A Medical Device Establishment License (MDEL) required for Canada.

 

Physicians who order clinical tests for their patients have historically represented the primary source of its testing volume. Fees invoiced to patients and third parties are based on its 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

 

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Item 4. Information on the Company (cont.)

 

The Company’s 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. The Company seek to and believe that it conducts business in compliance with all applicable laws and regulations.

 

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.

 

The tests on samples provided through the Company’s products are processed at its laboratory in Melbourne, Australia. The Company’s 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. Paper surveys were conducted in November 2017 and November 2019. Furthermore, the Company’s 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.

 

The Company believes that it is in compliance with all applicable federal and state laboratory requirements. Under CLIA, the Company remain 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.

 

Following a successful Q3 CLIA audit, the Company renewed its status as a fully NATA and CLIA –accredited laboratory. It places the Company in a unique position to service both the Australian and US markets subject to regulatory approvals.

 

Although the U.S. Food and Drug Administration (“FDA”) has consistently claimed that it has the authority to regulate laboratory-developed tests (“LDTs”) that are developed, validated and performed only by a CLIA certified laboratory, it has historically exercised enforcement discretion in not otherwise regulating most LDTs and has not required laboratories that furnish LDTs to comply with the agency’s requirements for medical devices (e.g., establishment registration, device listing, quality systems regulations, premarket clearance or premarket approval, and post-market controls). More recently, the FDA has indicated that it will apply a risk-based approach to determine the regulatory pathway for all in-vitro diagnostics, which includes LDTs, as it does with all medical devices. Accordingly, the regulatory pathway for the Company’s LDTs will depend on the level of risk to patients, based on the intended use of the LDT and the controls necessary to provide a reasonable assurance of the LDTs safety and effectiveness. The two primary types of marketing pathways for medical devices are clearance of a premarket notification under Section 510(k) of the Federal Food, Drug, and Cosmetic Act, or 510(k), and approval of a premarket approval application, or PMA.

 

HIPAA and other privacy laws

 

The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), established comprehensive federal standards for the privacy and security of health information. The HIPAA standards apply to three types of organizations: health plans, healthcare clearing houses, and healthcare providers that conduct certain healthcare transactions electronically (“Covered Entities”). Title II of HIPAA, the Administrative Simplification Act, contains provisions that address the privacy of health data, the security of health data, the standardization of identifying numbers used in the healthcare system and the standardization of certain healthcare transactions. The privacy regulations protect medical records and other protected health information by limiting their use and release, giving patients the right to access their medical records and limiting most disclosures of health information to the minimum amount necessary to accomplish an intended purpose. The HIPAA security standards require the adoption of administrative, physical, and technical safeguards and the adoption of written security policies and procedures.

 

On February 17, 2009, Congress enacted Subtitle D of the Health Information Technology for Economic and Clinical Health Act, or HITECH, provisions of the American Recovery and Reinvestment Act of 2009. HITECH expanded and strengthened HIPAA, created new targets for enforcement, imposed new penalties for noncompliance and established new breach notification requirements for Covered Entities. Regulations implementing major provisions of HITECH were finalized on January 25, 2013 through publication of the HIPAA Omnibus Rule (the “Omnibus Rule”).

 

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Item 4. Information on the Company (cont.)

 

Under HITECH’s breach notification requirements, Covered Entities must report breaches of protected health information that has not been encrypted or otherwise secured in accordance with guidance from the Secretary of the U.S. Department of Health and Human Services (the “Secretary”). Required breach notices must be made as soon as is reasonably practicable, but no later than 60 days following discovery of the breach. Reports must be made to affected individuals and to the Secretary and, in some cases depending on the size of the breach; they must be reported through local and national media. Breach reports can lead to investigation, enforcement and civil litigation, including class action lawsuits.

 

In addition to the federal privacy and security regulations, there are a number of state laws regarding the privacy and security of health information and personal data that are applicable to clinical laboratories. Many states have also implemented genetic testing and privacy laws imposing specific patient consent requirements and protecting test results by strictly limiting the disclosure of those results. State requirements are particularly stringent regarding predictive genetic tests, due to the risk of genetic discrimination against healthy patients identified through testing as being at a high risk for disease. The Company believes that it has taken the steps required to comply with health information privacy and security statutes and regulations, including genetic testing and genetic information privacy laws in all jurisdictions, both state and federal. However, these laws constantly change, and the Company may not be able to maintain compliance in all jurisdictions where it does business. Failure to maintain compliance, or changes in state or federal laws regarding privacy or security could result in civil and/or criminal penalties, significant reputational damage and could have a material adverse effect on the Company’s business.

 

Environmental and Safety Laws and Regulations

 

The Company is subject to laws and regulations related to the protection of the environment, the health and safety of employees and the handling, transportation and disposal of medical specimens, infectious and hazardous waste and radioactive materials. For example, the U.S. Occupational Safety and Health Administration (“OSHA”) has established extensive requirements relating specifically to workplace safety for healthcare employers in the U.S. This includes requirements to develop and implement multi- faceted programs to protect workers from exposure to blood-borne pathogens, including preventing or minimizing any exposure through needle stick injuries. For purposes of transportation, some biological materials and laboratory supplies are classified as hazardous materials and are subject to regulation by one or more of the following agencies: the U.S. Department of Transportation, the U.S. Public Health Service, the U.S. Postal Service and the International Air Transport Association. The Company generally use third- party vendors to dispose of regulated medical waste, hazardous waste and radioactive materials and contractually require them to comply with applicable laws and regulations.

 

The Company’s operations are also 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.

 

Transparency Laws and Regulations

 

A federal law known as the Physician Payments Sunshine Act (the “Sunshine Act”) requires medical device manufacturers to track and report to the federal government certain payments and other transfers of value made to physicians and teaching hospitals and ownership or investment interests held by physicians and their immediate family members. There are also state “sunshine” laws that require manufacturers to provide reports to state governments on pricing and marketing information. Several states have enacted legislation requiring medical device manufacturers to, among other things, establish marketing compliance programs, file periodic reports with the state, make periodic public disclosures on sales and marketing activities, and such laws may also prohibit or limit certain other sales and marketing practices. These laws may adversely affect our sales, marketing, and other activities by imposing administrative and compliance burdens on us. If the Company fail to track and report as required by these laws or to otherwise comply with these laws, it could be subject to the penalty provisions of the pertinent state and federal authorities.

 

Product Distribution

 

Despite significant resource allocation and efforts by a dedicated sales team, sales of BREVAGenplus were insufficient to defray the costs of the sales team. By late 2017, management decided that its sales strategy was not working and disbanded much of the sales infrastructure in the U.S. and transitioned to an ecommerce-based solution that allowed consumers to initiate testing online. Management then designed a “pivot plan” in an effort to reposition the Company, refine and improve products and reload with a newly developed approach to market.

 

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Item 4. Information on the Company (cont.)

 

With COVID-19 social distancing impacting on the Company’s ability to fully engage with physicians, the Company has brought forward its plans to introduce a consumer-initiated testing (CIT) platform. This sales pipeline deviates from a traditional sales approach that targets clinicians. Instead it allows patients to request a test directly, with clinician oversight of the testing process through an independent provider network and telemedicine. The Company has started negotiations with its preferred independent provider network which will oversee patient ordering of the CIT pipeline. The Company has entered into binding agreements and planned to launch its CIT platforms in the third calendar quarter of 2020.

 

The Company presented its latest technology and world-leading tests at the 2020 JP Morgan Healthcare Conference in January. The presentation coincided with the successful launch of the Company’s new tests and the introduction of the Company’s new management to the U.S. market.

 

The Company is finalizing verification of the diabetes test in its Australian laboratory. The Company has completed its marketing collateral, and plan to launch once more normal conditions return post COVID-19.

 

Reimbursement and Clinical Studies

 

Prior to April 2017, the Company’s payment model relied on a traditional reimbursement system by Preferred Provider Organizations (“PPOs”) and other third-party payers, which required credentialing its products with those payers. With effect from April 1, 2017, the Company transitioned to a direct patient self-pay program. Converting to a direct pay relationship with patients was aimed at providing economic and process certainty to the transaction for the healthcare provider and the patient. The change eliminated reimbursement issues from PPO and other third-party payors, including low levels of reimbursement, prolonged payment time, patient confusion around eligibility and financial responsibility and poor coverage.

 

This shift also has reduced the Company’s reliance on clinical utility studies that had been designed as a means to achieve reimbursement coverage through the private insurers. The Company recognize however that scientific papers are an essential marketing tool, and that scientific and clinical data are key drivers to help strengthen our commercial position. The Company intends 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 regarding the Company’s genetic tests, profiling product performance characteristics including clinical validity and utility, the more likely physicians will be to use the tests.

 

The Company had previously conducted multiple scientific studies to develop and validate the first generation BREVAGen test and also created two health economic models to demonstrate potential cost savings and health benefits associated with the BREVAGen test. Importantly, the research undertaken and published based on the original version of the Company’s test remains applicable to its new GeneType for Breast Cancer and GeneType for Colorectal Cancer tests.

 

Research & Development Projects

 

During the year ended June 30, 2020, the Company supported the following research and development programs, details of which are provided below:

 

Breast Cancer Risk Assessment Test (GeneType for Breast Cancer)
Colorectal Cancer Risk Assessment Test (GeneType for Colorectal Cancer)
Research collaboration with Translational Genomics Research Institute (“TGen”)
Research Agreement executed with Memorial Sloan Kettering New York Cambridge University
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 and plans to focus more on research and development activities in the future. In addition, the Company plans on having its science and management team engage with the world’s leading scientific experts working on predictive genetic testing and its role within world health systems. 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.

 

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Item 4. Information on the Company (cont.)

 

Collaboration with the University of Melbourne

 

On November 29, 2016, the Company 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 1 February 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.

 

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.

 

TGen Collaboration

 

In September 2019, the Company signed a three-year collaboration agreement with Translational Genomics Research Institute (TGen). The agreement includes cooperation in the design feasibility analysis of clinical research studies. The analysis is designed to support the Company’s polygenic risk tests, by specifically identifying clinical applications or workflows, which would directly benefit by the addition of a polygenic risk test. For example, some of the Company’s patients may be ineligible for routine screening based on their age, but if identified as having an elevated risk by the Company’s polygenic tests, they may become eligible for such screening. The studies are designed to identify areas of such need to enable successful implementation of the Company’s polygenic tests in the clinical arena. TGen is an Arizona-based world leading non-profit biomedical research institute dedicated to conducting ground-breaking genetic research. TGen is affiliated with Duarte, a world-renowned independent research and treatment center for cancer, diabetes, and other life-threatening.

 

The collaboration with TGen will focus on a clinical utility as the first stage, working with TGen’s extensive network of cancer center clinicians. The wide-ranging collaboration will cover distribution channels, reimbursement strategy, further research, and potential for the establishment of a new laboratory facility. The Company and TGen plan to develop a commercialization strategy and infrastructure for a suite of polygenic risk tests for the U.S. market, and set up the necessary fund-raising diseases.

 

Research Collaboration Memorial Sloan Kettering New York Cambridge University

 

In early 2019, the Company’s U.S. subsidiary entered into a Research Agreement with Memorial Sloan Kettering Cancer Center of New York and the University of Cambridge. This collaborative research study is to be led by Mark Robson, MD, Chief of the Breast Medicine Service at Sloan Kettering. The study is intended to assess whether the provision of individual risk information informed by a polygenic risk score reduces decisional conflict among BRCA mutation carriers considering preventive surgery.

 

The Company believes this collaboration will benefit its engagement and collaboration with high profile cancer genetics researchers who are at the forefront of risk assessment research, and by providing us with data that may potentially be beneficial in developing additional risk assessment products.

 

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 the Company was approached to be the collaborating partner, reflecting the growing awareness of the Company’s expertise in SNP-based risk assessment.

 

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Item 4. Information on the Company (cont.)

 

Under this Agreement, the Company 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.

 

Collaboration with Shivom

 

The Company entered into an agreement with Shivom in March 2018. Shivom is a biotechnology data and analysis company that optimizes the way DNA is shared, secured and analyzed. Under the agreement, Shivom would provide genetic population data for the development of an Indian market polygenic predictive diabetes test to be developed by the Company, as well as future genetic tests it develops, and its CLIA laboratory facilities would be used develop a regulatory approval strategy for the distribution of completed products. To date, the parties have not commenced development activities under this agreement.

 

Competition

 

The medical diagnostics and biotechnology industries are subject to intense competition. As more information regarding cancer genomics and personalized medicine becomes available to the public, the Company anticipates that more products aimed at identifying cancer risk will be developed and that these may compete with its products. 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 the Company’s breast cancer risk assessment products in the sporadic breast cancer risk assessment space. However, in March 2019, Genomics PLC announced that it was developing polygenic risk tests for several common diseases including breast cancer. In addition, Myriad Genetic Laboratories Inc. announced in December 2017 that it will market a new breast cancer risk-prediction tool, which the Company believes will compete with its GeneType for Breast Cancer test. Similarly, Ambry Genetics Corporation sells a precision risk tool that provides lifetime breast cancer risk information. 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 the Company’s products, 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. New entrants that the Company are aware of that are in early stages of product development include Counsyl Inc. and Invitae Corporation in the U.S.

 

There are also 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.

 

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Item 4. Information on the Company (cont.)

 

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

 

continue to strengthen and maintain scientific credibility through the process of obtaining scientific validation through 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 regarding the importance and value that the Company’s cancer risk assessment tests provides to patients and physicians;

 

diversify the Company’s product offerings in disease types other than breast and colorectal cancer;

 

obtain and maintain patent or other protection for the Company’s products and services;

 

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

 

successfully market the Company’s products and services.

 

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

 

31
 

 

Item 4. Information on the Company (cont.)

 

Item 4.C Organizational Structure

 

The diagram below shows the Company’s corporate structure as of the date of this Annual Report. All of the Company’s subsidiaries in the chart below are wholly owned.

 

 

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 Company.

 

Fitzroy, Victoria

 

The Company rents offices and laboratory premises 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, 2021. The total rental charge in respect of the year ended June 30, 2020 was approximately A$221,282.

 

32
 

 

Item 4. Information on the Company (cont.)

 

Charlotte, North Carolina

 

Phenogen Sciences Inc., the Company’s U.S. subsidiary, rents office premises which are located at 1300 Baxter Street, Suite 157, Charlotte, North Carolina, U.S. from Midtown Area Partners LLC. The original lease expired on October 31, 2017. It was then followed by a month to month lease. The total rental expense towards the premise for the year ended June 30, 2020 was A$24,548.

 

Subsequently, a lease agreement was signed on July 10, 2020 for a three-year term, commencing on August 1, 2020 and expiring July 31, 2023 . Total lease payable per annum are as follow:

 

US$ 16,280 for financial year ending June 30, 2021
US$ 18,248 for financial year ending June 30, 2022
US$ 18,795 for financial year ending June 30, 2023

 

Item 5. Operating and Financial Review and Prospects

 

The following discussion and analysis should be read in conjunction with Item 3.A “Selected Financial Data” and the Company’s 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 the Company’s plans, estimates, intentions, expectations and beliefs. The Company’s 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 tests for cancer.

 

The Company’s revenues during its years ended June 30, 2020, 2019 and 2018 were generated principally by sales of its BREVAGenplus breast cancer risk assessment test. However, during 2017, management determined that sales of this product were insufficient to defray the costs of the sales team. By late 2017, management decided that its sales strategy was not working and disbanded much of the sales infrastructure in the U.S. and transitioned to an ecommerce-based sales solution. Management then designed a “pivot plan” in an effort to reposition the Company and refine and improve products and reload with a newly developed approach to market. To that end, the Company intends to introduce its new ‘GeneType for Colorectal Cancer’ and ‘GeneType for Breast Cancer’ genetic tests to healthcare providers through a global network of distribution partners.

 

With COVID-19 social distancing impacting on the Company’s ability to fully engage with physicians, the Company has brought forward its plans to introduce a consumer-initiated testing (CIT) platform. This sales pipeline deviates from a traditional sales approach that targets clinicians. Instead it allows patients to request a test directly, with clinician oversight of the testing process through an independent provider network and telemedicine. The Company has started negotiations with its preferred independent provider network which will oversee patient ordering of the CIT pipeline. The Company has entered into binding agreements and will launch its CIT platforms in the third calendar quarter of 2020.

 

Since inception up to June 30, 2020, the Company has incurred A$135,851,192 in accumulated losses. The Company’s losses have resulted principally from costs incurred in research and development, general and administrative and sales and marketing costs associated with its operations. Further losses are anticipated as the Company continues to invest in new genetic testing product research and development, and explore optimal distribution methodologies to commercialize its product offering. Refer to the Financial Statements section in Item 18.

 

Fiscal year

 

As an Australian company, the Company’s fiscal, or financial, year ends on June 30 each year. The Company produces audited consolidated accounts at the end of June each year and furnish 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.

 

33
 

 

Item 5. Operating and Financial Review and Prospects (cont.)

 

Recent Accounting Pronouncements

 

The Company has adopted IFRS 16 Leases during the year ended June 30, 2020 using the modified retrospective approach. The modified approach does not require restatement of comparative periods. Instead the cumulative impact of applying IFRS 16 is accounted for as an adjustment to equity at the start of the current accounting period in which it is first applied, known as the ‘date of initial application’.

 

IFRS 16 will result in almost all leases being recognized on the balance sheet, as the distinction between operating and finance leases is removed. Under the new standard, an asset (the right to use the leased item) and a financial liability to pay rentals are recognized. The only exceptions are short-term and low-value leases.

 

On adoption of IFRS 16, the Company recognized lease liabilities in relation to leases which had previously been classified as ‘operating leases’ under the principles of IAS 17 Leases. These liabilities were measured at the present value of the remaining lease payments, discounted using the lessee’s incremental borrowing rate as of July 1, 2019. The weighted average lessee’s incremental borrowing rate applied to the lease liabilities on July 1, 2019 was 5.37%.

 

The associated right-of use assets were measured at the amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognized in the balance sheet as at July 1, 2019. There were no onerous lease contracts that would have required an adjustment to the right-of-use assets at the date of initial application.

 

In applying IFRS 16 for the first time, the Company has used the following practical expedients permitted by the standard:

 

the use of a single discount rate to a portfolio of leases with reasonably similar characteristics.
the accounting for operating leases with a lease term of less than 12 months as short-term leases.

 

The Company has also elected not to reassess whether a contract is or contains a lease at the date of initial application. Instead, for contracts entered into before the transition date the Company relied on its assessment made applying IAS 17 and interpretation 4 determining whether an arrangement contains a Lease.

 

    A$  
Operating lease commitments disclosed as at June 30, 2019   487,837  
Discounted using the lessee’s incremental borrowing rate of at the date of initial application   461,358  
Lease liability recognized as at July 1, 2019   461,358  
Of which are:      
Current lease liabilities   209,887  
Non-current lease liabilities   251,471  
Right of use of assets increased by   446,645  
Lease liabilities increased by   461,358  
The net impact on retained earnings on July 1, 2019 was a decrease of   14,712  

 

Critical Accounting Policies

 

The accounting policies which are applicable to the Company are set out in Notes 2 of the attached financial statements.

 

Comparison of the year ended June 30, 2020 to the year ended June 30, 2019 Revenues from operations

 

During the 2020 financial year, the Company’s consolidated gross revenues from continuing operations, excluding other revenue, decreased by A$15,580 (61%) from A$25,444 to A$9,864 when compared to previous year. The decrease in revenues was due to sales for the GeneType for Breast Cancer and GeneType for Colorectal cancer which commenced in January 2020 being impacted by the COVID-19 pandemic. This has had an effect on the operations of the Company, including but not limited to impacting sales of the Company’s products through consumers’ inability to visit their practitioners and also by the difficulty its sales team is having in arranging face to face meetings with practitioners. The Company’s sales team has found it very difficult to reach practitioners to build on the sales momentum created prior to the pandemic, with the launch into the Australian market being halted after less than 60 days of operations thus, sales have effectively ceased for the short term.

 

34
 

 

Item 5. Operating and Financial Review and Prospects (cont.)

 

Cost of sales

 

The Company’s cost of sales from continuing operations decreased by A$24,756 (9%) from A$276,267 in the previous financial year to A$251,511 in the current financial year. BREVAGenplus direct materials utilized increased by A$26,521 (47%) from A$55,995 to A$82,516 because of the increase in number of revenue free sample tests conducted along with the limited revenue generating tests during the year. Depreciation expense attributable to the laboratory testing equipment decreased by $12,992 (23%) whilst direct labor costs increased by A$3,989 because of a continued streamlining of the laboratory team to match the increase in number of tests (revenue generating and non-revenue generating). There was a decrease in inventories written-off by A$42,274 to A$18,917 in the current financial year when compared to A$61,191 in the previous financial year. The Australian segment of the cost of sales contributed A$243,506 and whereas the US segment contributed A$8,005 of the total cost of sales in the current year. The Australian segment had incurred majority of the costs since the Company operates its testing activities through its own laboratory in Australia.

 

Selling and marketing expenses

 

Selling and marketing expenses increased by A$61,218 (11%) from A$576,077 to A$637,295 when compared to previous year. Major movements during the year related to personnel costs which increased by A$20,505 (6%) to A$375,832 in the current financial year from A$355,327 in the previous financial year as we still maintained the minimum sales activities with our customers. Additionally, other marketing costs increased to A$27,750 (100%) in the current financial year against nil in the prior year, in addition to the general insurance costs allocated to selling and marketing category of expenses which increased by A$22,291 (164%) to A$35,861 in the current financial year when compared to A$13,570 in the previous financial year. These costs increased due to the commencement of new products or kits in the financial year. There were other small expenses within the category during the financial period which had a net impact on the overall movement value when compared to prior year expense.

 

General and administrative expenses

 

General and administrative expenses (excluding net foreign currency losses) decreased by A$362,975 (9%) to A$3,467,223 during the financial year when compared to A$3,830,198 in the previous financial year. The decrease is mainly due to the Company’s conscious effort to reduce administration costs such as decrease in employee expenses which reduced by A$942,410 (76%) to A$300,339 in the current financial year when compared to A$1,242,749 in the previous financial year, decrease in stock compensation expense by A$341,393 (104%) to A$(14,441) in the current financial year when compared to A$228,626 in the previous financial year due to the net impact of reversal of performance rights held by prior directors and the usual expense of share based payment, increase in accounting costs by A$506,872 (565%) to A$596,510 in the current financial year when compared to A$89,638 in the previous financial year which is due to support provided by outsourced accounting teams for ad-hoc services and out of scope activities hired by the Company, increase in the legal fees by A$97,893 (27%) from A$356,750 to A$454,643 in the current year when compared to prior year and an increase in consulting fees by A$442,450 (329%) to A$577,058 in the current financial year when compared to A$134,608 in the previous financial year.

 

Laboratory, research and development costs

 

Laboratory, research and development costs increased by A$116,816 (5%) from A$2,360,762 to A$2,477,578 when compared to previous year. Laboratory, research and development costs increased as the Company started to develop a polygenic risk score (PRS) test for COVID-19. The Company is also continuing research and development activities on the following genetic tests:

 

Cardiovascular disease
Type 2 diabetes
Prostate cancer
Melanoma

 

Finance costs

 

Finance costs decreased by A$5,208 (26%) from A$20,031 to A$14,823 when compared to previous year. Finance costs incurred in 2020 and 2019 were primarily bank charges.

 

Non-operating income

 

Other income mainly consists of research and development tax incentive income received from Australian Taxation Office. Research and development tax incentive income has decreased by 12% from A$856,707 to A$750,000 when compared to previous year. The research tax credit is recognized on an accrual basis when realizable. The lower research and development tax credit is due to completion of the development of GeneType for Breast Cancer and GeneType for Colorectal Cancer.

 

Other gains/losses

 

No impairment expense was recognized in the current year ended June 30, 2020 (2019: A$500,000).

 

35
 

 

Item 5. Operating and Financial Review and Prospects (cont.)

 

Comparison of the year ended June 30, 2019 to the year ended June 30, 2018

 

Revenues from operations

 

During the 2019 financial year, the Company’s consolidated gross revenues from continuing operations, excluding other revenue, was A$25,444 compared to A$189,254 in the preceding year. Revenues decreased as a result of management’s determination to discontinue sales of its legacy BREVAGenplus product and develop its new products. The Company expects sales to increase once distribution of its GeneType for Breast Cancer and GeneType for Colorectal Cancer commences later in the 2020 financial year.

 

Cost of sales

 

Our cost of sales from continuing operations decreased by 7.93% from A$300,088 to A$276,267. BREVAGenplus direct materials utilized decreased by 40% from A$93,869 to A$55,995 as a result of the reduced number of samples received. Depreciation expense attributable to the laboratory testing equipment decreased by A$10,373 whilst direct labour costs increased by A$14,911 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 A$9,515 in 2019.

 

Selling and marketing expenses

 

Selling and marketing expenses decreased by A$490,327 (46%) to A$576,077 during the 2019 financial year. Personnel related costs decreased by A$185,807 (38%) following the wind-down of direct to customer sales activity in the U.S. associated with the legacy BREVAGenplus product. Other decreases relate to lower rental costs, airfares, conference costs during the year.

 

General and administrative expenses

 

General and administrative expenses (excluding net foreign currency losses) increased by A$814,380 (27%) to A$3,830,198 during the financial year. The increase is mainly due to increase in spending on legal (73%) pertaining to placement in Blockshine Health Limited and Swisstec Health Analytic Ltd, legal expenses related to the annual general meeting and due diligence analysis of a potential acquisition and compliance costs (32%) which pertains to increased investor relations activities, insurance (25%), printing (135%) and accounting, tax and audit related costs (21%) due to higher compliance and legal activities affecting the company in the current period.

 

36
 

 

Item 5. Operating and Financial Review and Prospects (cont.)

 

Laboratory, research and development costs

 

Laboratory, research and development costs increased by A$150,264 (7%) to A$2,360,762 during the 2019 financial year. Laboratory, research and development costs increased due to the intensive research and development effort to develop the GeneType for Breast Cancer and GeneType for Colorectal Cancer genetic tests, which concluded in May 2019. The Company is continuing research and development activities on the following genetic tests:

 

Finance costs

 

Finance costs decreased by A$8,812 (30%) to A$20,031 during the 2019 year. Finance costs incurred in 2019 and 2018 were primarily bank charges.

 

Non-Operating income and expenses

 

Other income and expenses included the following movements:

 

Research and development tax credit of A$856,706 in the current financial year increased by A$557,356. The research tax credit is recognized on an accrual basis when realizable. The higher research and development tax credit is due to higher eligible research expenditure during the period ended June 30, 2020 as the Company has progressed development of its two new cancer risk assessment tests, and the proportion of costs associated with sales activities has declined.

 

Other gains/losses

 

● A net foreign currency gain of A$92,518 (2018: gain of A$128,360) was recorded for the year. The profit is primarily driven by the translation of US dollar cash reserves to Australian dollars at June 30, 2020.

 

● An impairment expense of A$500,000 was recognized in the current year ending June 30, 2020 (2018: $ Nil) relating to the impairment of investments in Swisstec and Blockshine Health Pty Ltd.

 

37
 

 

Item 5. Operating and Financial Review and Prospects (cont.)

 

Item 5.B Liquidity and Capital Resources

 

Summary

 

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

 

Currently the Company’s overall cash position depends on completion of its research and development activities, overall market acceptance of and revenue generated by its new genetic testing products. The Company’s cash and cash equivalents were A$14,214,160 as of June 30, 2020.

 

During the year ended June 30, 2020, 2019 and 2018 the Company incurred total comprehensive losses of A$6,132,105, A$6,401,936 and A$5,986,838

 

During the year ended June 30, 2020, 2019 and 2018 the Company’s net cash flows used in continuing operations were A$5,712,098, A$6,073,182 and A$5,636,533.

 

The additional capital raised during and since the end of the financial year puts the Company in its best financial position for approximately 2 years. The Company can expand and bring its comprehensive suite of risk assessment tests to market across both Australia and the US. The Company can also expand and upgrade the laboratory to incorporate next generation sequencing and high-density SNP arrays. These will allow-for the first time-risk assessments for 100 per cent of a person’s genomic risk, including monogenic, polygenic, clinical risk factors, and family history.

 

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.

 

The Company expects to continue to incur losses and cash outflows for the foreseeable future as it continues to invest resources in expanding the research and development activities in support of the distribution of existing and new products. Following successful capital raises in the last three months of the financial year, the Company has A$14,214,160 cash and cash equivalents as at June 30, 2020. In the Director’s opinion this, together with further gross proceeds of $5.1 million before transaction costs raised in July 2020, will underpin the Company’s funding requirements for approximately two years. As a result, the financial statements have been prepared on a going concern basis.

 

Operating Activities. The Company’s net cash used in operating activities was A$5,712,098, A$6,073,182 and A$5,636,533 for the years ended June 30, 2020, 2019 and 2018, respectively. Cash used in operating activities for each period consisted primarily of losses incurred in operations reduced by non-cash items such as impairment 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.

 

38
 

 

Item 5. Operating and Financial Review and Prospects (cont.)

 

Investing Activities. The Company’s net cash from/(used in) investing activities was A$64,787, A$(524,460) and A$12,833 for the years ended June 30, 2020, 2019 and 2018, respectively. During the year ended June 30, 2020 the Company spent A$38,100 towards purchase of computer equipment, furniture and fittings and A$37,000 was received from the sale of unutilized laboratory equipment. Apart from the purchase of plant and equipment of A$38,100 in 2020, A$50,309 in 2019 and A$2,385 in 2018, the Company had no other significant capital expenditures for the years ended June 30, 2020, 2019 and 2018.

 

Financing Activities. Our net cash from/(used in) financing activities was A$18,360,346, A$3,126,162 and A$(9,963) for the years ended June 30, 2020, 2019 and 2018, respectively. During the year ended June 30, 2020, the Company generated cash flows of A$21,793,678 from the issue of Ordinary Shares less costs associated with the transactions of A$3,215,174. For the year ended June 30, 2019, the Company generated cash flows of A$3,557,509 from the issue of Ordinary Shares less costs associated with the transactions of A$431,347 and during 2018 no proceeds from share issues were received.

 

Operating leases

 

We are obligated under two operating leases that were in place at June 30, 2020. 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 total rental charge in respect of the year ended June 30, 2020 was approximately A$221,282 and A$24,548, respectively.

 

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, 2020 were A$429,536.

 

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 intense focus by the scientific and laboratory team to develop and market a suite of world-leading predictive genetic tests.

 

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

 

    2020$     2019$     2018$  
          (in A$)        
RareCellect (1)                 12,555  
BREVAGenplus           228,643       266,723  
Colorectal Cancer Risk Assessment Test           14,286       114,315  
Ohio State University                 48,377  
Other general R&D           67,774       18,544  
Polygenic Risk Testing     380,667              
Total R&D expense     380,667       310,703       460,514  
Other expenditure     7,044,274       7,160,114       5,634,088  
Total expenditure     7,424,941       7,470,817       6,094,602  
R&D as a % of total expenditure     5.13 %     4.17 %     8 %

 

 

 

(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

 

See Item 5.A. “Operating Results” and Item 5.B. “Liquidity and Capital Resources” above.

 

39
 

 

Item 5. Operating and Financial Review and Prospects (cont.)

 

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, 2020:

 

    0-1 year     >1-<3 years     >3-<5 years     >5 years  
Operating lease commitments (A$)   $      -     $      -     $      -     $      -  

 

Due to the adoption of IFRS 16 effective July 1, 2019, the Company no longer has any non-cancellable operating lease to be recognized under commitments for the year ended June 30, 2020.

 

The Company rents offices and laboratory premises 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, 2021. The total rental charge in respect of the year ended June 30, 2020 was approximately A$221,282.

 

Phenogen Sciences Inc., the Company’s U.S. subsidiary, rents office premises which are located at 1300 Baxter Street, Suite 157, Charlotte, North Carolina, U.S. from Midtown Area Partners LLC. The original lease expired on October 31, 2017. It was then followed by a month to month lease. The total rental expense towards the premise for the year ended June 30, 2020 was A$24,548.

 

Subsequently, a lease agreement was signed on July 10, 2020, for a three-year term, commencing on August 1, 2020 and expiring July 31, 2023. Total lease payable per annum are as follow:

 

US$ 16,279.56 for financial year ending June 30, 2021
US$ 18,247.92 for financial year ending June 30, 2022
US$ 18,795.35 for financial year ending June 30, 2023

 

Apart from the operating lease commitment, the Company has a capital commitment entered as of June 30, 2020:

 

    2020     2019  
    A$     A$  
Property, plant and equipment     466,560       -  

 

The above commitment relates to the purchase of laboratory equipment which will assist the Company to conduct more tests in the future.

 

40
 

 

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:

 

Mr. Peter Rubinstein (Independent Non-Executive and Chairman)

 

Mr. Peter Rubinstein was appointed to the Board on January 31, 2018. He has over 20 years’ experience in early stage technology commercialisation through to public listings on the ASX. He is a lawyer, having worked at one of the large national firms prior to moving in house at Montech, the commercial arm of Monash University. Mr. Rubinstein has had significant exposure to the creation, launch and management of a diverse range of technology companies including in biotech, digital payments and renewable energy. Mr. Rubinstein is also a Director of DigitalX Limited (DCC).

 

Dr. Jerzy (George) Muchnicki (Executive Director and Interim Chief Executive Officer)

 

Dr. Muchnicki was appointed to the Board on January 31, 2018 and was appointed Interim Chief Executive Officer on September 24, 2019. Prior to his appointment as Interim Chief Executive Officer, he was a part time Business Development Director for the Company. Dr. Muchnicki graduated from Monash University having held positions in private practice for some 25 years to head of student health at Melbourne University. For the past 14 years he has been mostly involved in commercialization and funding R&D in the biotechnology sector from gene silencing to regenerative medicine.

 

Dr. Muchnicki brings with him strong commercial and medical skills, including broad interests in software development, blockchain and sustainable building materials. He is a co-founder and Non-Executive Director of Speed Panel Holdings a world leader in fire rated and acoustic wall solutions. He is also the co-founder of Candlebets, a software development company that is creating blockchain enabled platforms for the gaming industry.

 

Dr. Lindsay Wakefield, MBBS (Independent Non-Executive)

 

Dr. Wakefield was appointed to the Board on September 24, 2014. He started Safetech in 1985 and over the next 25 years Safetech became a force in the Australian material handling and lifting equipment market, designing and manufacturing a wide range of industrial products. In 1993, he left medicine to become the fulltime CEO of Safetech. In 2006 Safetech was awarded the Telstra Australian National Business of the Year. In 2013 Safetech merged and ultimately acquired Tieman Materials Handling. Dr. Wakefield continues as the CEO of Safetech. It is Australia’s largest manufacturer and supplier of dock equipment, freight hoists and custom lifting solutions. Safetech employs approximately 120 people. Dr. Wakefield has been a biotech investor for more than 20 years.

 

Mr. Nicholas Burrows (Independent Non-Executive)

 

Mr. Burrows was appointed to the Board on September 2, 2019. He is a contemporary independent Non-Executive Director across the listed, government and private sectors with significant expertise in corporate governance, and strategic, commercial, financial and risk management oversight. His current diverse multi-sector portfolio includes Non-Executive Directorships of Clean Seas Seafood Limited, TasWater, and a number of private companies. Mr. Burrows also provides board, governance, audit and risk advisory services to entities within the IT, tourism and hospitality, debt recovery, agribusiness, forestry, and Local/State Government sectors. Mr. Burrows was Chief Financial Officer and Company Secretary of Tassal Group Limited for 21 years from 1988 to 2009 and accordingly brings to the Board strong independent c-suite commercial experience and the benefits of an extensive and contemporary senior executive ASX200 listed entity background. Mr. Burrows is a respective Fellow of the Australian Institute of Company Directors, Institute of Chartered Accountants Australia, Governance Institute of Australia Ltd and the Financial Services Institute of Australasia and is also a Chartered Accountant and Registered Company Auditor. Mr. Burrows also served as National President of the Governance Institute of Australia in 2002 and served on their National Board for 6 years.

 

41
 

 

Item 6. Directors, Senior Management and Employees (cont.)

 

Senior Management

 

The Company has a professional team of qualified and experienced personnel, including a number of research and development scientists and technicians. The Company currently has 13 full-time-equivalent employees in addition to the three Non-Executive Directors listed above.

 

Mr. Phillip Hains, MBA, CA (Chief Financial Officer)

 

Phillip Hains was appointed as the Company’s Chief Financial Officer on July 15, 2019. Mr. Phillip Hains is a Chartered Accountant operating a specialist public practice, ‘The CFO Solution’. The CFO Solution focuses on providing back office support, financial reporting and compliance systems for listed public companies. A specialist in the public company environment, Mr. Hains has served the needs of a number of company boards and their related committees. He has over 25 years’ experience in providing businesses with accounting, administration, compliance and general management services. He holds a Master of Business Administration from RMIT and a Public Practice Certificate from the Institute of Chartered Accountants.

 

Mr. Justyn Stedwell (Company Secretary)

 

Justyn Stedwell was appointed as the Company Secretary on July 15, 2019. Mr. Stedwell is a professional Company Secretary consultant with over 12 years’ experience acting as a Company Secretary of ASX listed companies across a wide range of industries. He is currently the Company Secretary of several ASX listed companies.

 

Dr. Richard Allman, PhD (Chief Scientific Officer)

 

Dr. Allman joined the Company in 2004 and was appointed as Chief Scientific Officer in December 2012. He has over 20 years of scientific and research experience in both the academic arena in the UK and the commercial sector in Australia. He has wide experience in research leadership, innovation management, and intellectual property strategy, covering oncology, diagnostics, and product development. Prior to entering the biotech sector, Dr Allman’s academic career encompassed oncology research, drug development, and assay design.

 

Item 6.B Compensation

 

Details of the nature and amount of each major element of the compensation of each director of the Company and each of the named officers of the Company and its subsidiaries, for services in all capacities during the financial year ended June 30, 2020 are listed below. All figures are stated in Australian dollars (A$).

 

        Short-term benefits     Post-employment     Other
long-term
    Share-based
payments
       
Name and title of   Year   Salary/fees     Other     Superannuation*     benefits **     Equity ***     Totals  
Non-Executive Directors       A$     A$     A$     A$     A$     A$  
Dr. Lindsay Wakefield   2020     66,295             6,298             9,625       82,218  
Mr. Peter Rubinstein   2020     106,946             6,835             12,833       126,614  
Mr. Xue Lee (1)   2020     1,570             149             (5,616 )     (3,897 )
Mr. Nicholas Burrows (2)   2020     53,775             5,109                   58,884  
                                                     
Executives Directors                                                    
                                                     
Dr. Paul Kasian (3)   2020     62,789             5,923             (76,368 )     (7,656 )
Dr. Jerzy Muchnicki   2020     139,824             13,283             16,042       169,149  
                                                     
Management                                                    
                                                     
Dr. Richard Allman   2020     168,600       360       16,017       3,231       10,986       199,194  
Mr. Stanley Sack (4)   2020     38,500                               38,500  
Totals   2020     638,299       360       53,614       3,231       (32,498 )     663,006  

 

Mr Phillip Hains was appointed on July 15, 2019 as the Company’s Chief Financial Officer. During the year ended June 30, 2020, he does not earn any remuneration apart from the provision of advice on the capacity as the CFO, accounting and other finance related activities through his firm, The CFO Solution. During the reporting period, the total service fees of A$527,724 (2019: A$45,459) were paid.

 

During the financial year ended June 30, 2020, the board approved to obtain consulting services in relation to capital raises, compliance, NASDAQ hearings and investor relations from its Non-executive director and current Chairman, Mr. Peter Rubinstein. The services procured were through Mr. Peter Rubinstein’s associate entity, ValueAdmin.com Pty Ltd, and amounted to A$35,000 which remains payable and is included as part of the cash salary and fees above as at June 30, 2020.

 

During the financial year ended June 30, 2020, the board members sacrificed 20% of their fees for a certain period in order to support the staff costs during the COVID-19 cutback on working hours. Due to this there is a variance between the above disclosed and the contractual arrangement disclosures.

 

 

 

(1) Mr. Lee resigned as a Non-Executive Director on July 9, 2019.

(2) Mr. Burrows was appointed as Non-Executive Director on September 2, 2019.

(3) Dr. Kasian resigned on September 24, 2019.

(4) Mr. Sack was appointed as Chief Operating Officer on May 18, 2020.

 

42
 

 

Item 6. Directors, Senior Management and Employees (cont,)

 

        Short-term     Post-employment     Other long-term     Share-based Payments        
Name and title of   Year   Salary/fees     Other     Superannuation*     benefits**     Equity ***     Totals  
Non-Executives Directors       A$     A$     A$     A$     A$     $A  
Dr. Lindsay Wakefield   2019     67,462       -       6,409       -       5,615       79,486  
Mr. Peter Rubinstein   2019     67,462       -       6,409       -       7,486       81,357  
Mr. Xue Lee(6)   2019     58,330       -       5,541       -       28,849       92,037  
                                                     
Executives Directors                                                    
Dr. Paul Kasian(1)   2019     192,410       8,745       18,279             76,368       295,802  
Dr. Jerzy Muchnicki (2)   2019     82,995       (1,200 )     7,884             9,358       99,037  
Management                                                    
Dr. Richard Allman (3)   2019     168,600       72,865       20,319       4,124       36,486       302,394  
Kevin Fischer (4)   2019     101,644       48,364       12,785       (3,390 )     (6,276 )     153,127  
Paul Viney (5)   2019     89,519       6,965       8,504                   104,989  
Sub-totals for                                                    
Executives         635,168       128,194       67,772       734       115,936       955,349  
Total   2019     828,422       135,739       86,130       734       157,886       1,208,911  

 

 

 

Notes pertaining to changes during the year:

 

(1) Dr Kasian was appointed as the Chairman on January 31, 2018 and interim CEO on February 6, 2018, having previously served as a Non-Executive Director since his appointment in December 2013. Of the total remuneration, A$94,536.78 relates to Director Fees. Dr Kasian resigned on September 24, 2019 from all of his positions with the Company.

 

(2) Dr Muchnicki was engaged to do business development work on January 31, 2018. During 2018/19, Dr Muchnicki performed these duties as Additional Director Duties, rather than as an Executive role. Dr Muchnicki was appointed Interim Chief Executive Officer on September 24, 2019.

 

(3) “Other” includes a bonus paid or payable to Dr Allman in the amount of A$45,286 under a retention bonus scheme awarded to key management personnel (“KMP”).

 

(4) “Other” includes a bonus paid or payable to Mr Fischer in the amount of A$47,032 under a retention bonus scheme awarded to KMP. Mr. Kevin Fischer resigned on December 31, 2018.

 

(5) Mr Paul Viney was appointed as the Chief Financial Officer, Chief Operating Officer and Company Secretary on December 15, 2018 and subsequently resigned from the positions on July 15, 2019.

 

43
 

 

Item 6. Directors, Senior Management and Employees (cont.)

 

Referencing the previous two tables:

 

*Post-employment benefits as per Corporations Regulation 2M.3.03 (1) Item 7

** Other long-term benefits as per Corporations Regulation 2M.3.03 (1) Item 8

*** Equity settled share-based payments as per Corporations Regulation 2M.3.03 (1) Item 11

 

The details of those Executives nominated as Key Management Personnel under section 300A of the Corporations Act 2001 have been disclosed in this Report. No other employees of the Company meet the definition of “Key Management Personnel” as defined in IAS 24 Related Party Disclosures, or “senior manager” as defined in the Corporations Act

 

Executive officers are those officers who were involved during the year in the strategic direction, general management or control of the business at a company or operating division level. The remuneration paid to Executives is set with reference to prevailing market levels and comprises a fixed salary, various short-term incentives (which are linked to agreed key performance indicators), and an option component. Options are granted to Executives in line with their respective levels of experience and responsibility.

 

Options exercised, granted, and forfeited as part of remuneration during the year ended 30 June 2020

 

Details of the options held by the Executives nominated as Key Management Personnel during the year ended June 30, 2020 are set out below. As at June 30, 2020, there was one executive and twelve employees who held options that had been granted under the Company’s respective option plans.

 

During the year ended June 30, 2020, there were no options issued under Employee Option Plan (2019: 16,000,000 unlisted options were granted at no cost). The Company, however issued various unlisted options to underwriters and sub-underwriters as a part of capital raising costs.

 

The options mentioned below lapsed during financial year 2019, however they were not shown as lapsed in the prior year’s remuneration report. Hence, in the current year, the movement in options held by Dr. Jerzy Muchnicki has been reflected by taking into account these lapsed options.

 

Name of Executive   Options
Lapsed
    Options
forfeited
    Exercise price     Fair value
per option
    Final vesting date  
Dr. Jerzy Muchnicki     6,666,667            -     A$      0.015     A$      0.0017     December 2, 2014  
TOTAL     6,666,667       -                        

 

44
 

 

Item 6. Directors, Senior Management and Employees (cont.)

 

Option holdings of Key Management Personnel 30 June 2020

 

Options   Balance at
start of the
year
    Granted as
remuneration
    Granted as
part of cost
of capital
    Exercised     Other
Changes1
    Balance at
end of the
year
    Vested and
exercisable
 
Dr. Lindsay Wakefield     -            -       -            -           -       -       -  
Mr. Peter Rubinstein3     -       -       125,000,000       -       -       125,000,000       125,000,000  
Mr. Xue Lee (resigned on July 9, 2019)     -       -       -       -       -       -       -  
Mr. Nicholas Burrows (appointed on September 2, 2019)                                                        
Dr. Paul Kasian (resigned on September 24, 2019)     -       -       -       -       -       -       -  
Dr. Jerzy Muchnicki2     6,666,667       -       125,000,000       -       (6,666,667 )     125,000,000       125,000,000  
Dr. Richard Allman     15,000,000       -       -       -       -       15,000,000       15,000,000  
Mr. Stanley Sack (appointed on May 18, 2020)             -       -       -       -       -       -  
Mr. Phillip Hains (appointed on July 15, 2019)             -       -       -       -       -       -  
TOTAL     21,666,667       -       250,000,000       -       (6,666,667 )     265,000,000       265,000,000  

 

Notes

 

1. Other changes incorporates changes resulting from the expiration/forfeiture of options.

 

2.Dr. Jerzy Muchnicki currently holds 125,000,000 unlisted options issued as the sub-underwriter during the capital raise process in October 2019. Hence, the unlisted options have been accounted for as part of transactions costs to equity and are not issued as a part of his remuneration.

 

3.Mr. Peter Rubinstein currently holds 125,000,000 unlisted options issued as the sub-underwriter during the capital raise process in October 2019. Hence, the unlisted options have been accounted for as part of transactions costs to equity and are not issued as a part of his remuneration.

 

Options

 

The Company introduced a Staff Share Plan on November 30, 2001. On November 19, 2008, the shareholders of the Company approved the introduction of a new Employee Option Plan. Collectively, these Plans establish the eligibility of our employees and those of any subsidiaries, and of consultants and independent contractors to a participating company who are declared by the Board to be eligible, to participate. Broadly speaking, the respective Plans permits us, at the discretion of the Board, to issue traditional options (with an exercise price). The Plans conform to the IFSA Executive Share and Option Scheme Guidelines and, where participation is to be made available to staff who reside outside Australia, there may have to be modifications to the terms of grant to meet or better comply with local laws or practice.

 

As of June 30, 2020, there was 1 executive and 12 employees who held options that had been granted under the Company’s respective option plans. Options issued under the Plan carry no rights to dividends and no voting rights.

 

As of the date of this Annual Report, there was a total of 20,500,000 unlisted employee options outstanding.

 

Options granted under the Employee Option Plan carry no rights to dividends and no voting rights and generally have an expiry date of nearly five years from the date of grant.

 

During the year ended June 30, 2020, the Company recorded a share-based payments expense in respect of the options granted of A$67,542.

 

45
 

 

Item 6. Directors, Senior Management and Employees (cont.)

 

Unlisted Performance Rights

 

During the year ended June 30, 2019, the Company also issued 76,250,000 long term unlisted performance right s as incentives to the Directors which were approved by the shareholders on November 29, 2018.

 

The following are the details of the unlisted performance rights:

 

26,250,000 Class A Performance rights with an exercise price of $ nil each. Vesting per resolution passed at 2018 Annual General Meeting (AGM) and per the terms and conditions as set out below.
     
25,000,000 Class B Performance rights with an exercise price of $ nil each. Vesting per resolution passed at 2018 Annual General Meeting (AGM) and per the terms and conditions as set below.
     
25,000,000 Class C Performance rights with an exercise price of $ nil each. Vesting per resolution passed at 2018 Annual General Meeting (AGM) and per the terms and conditions as set out below.

 

During the year ended June 30, 2020, 3,750,000 Performance Rights previously issued to Mr. Xue Lee in the year ended June 30, 2019 were forfeited. Additionally, 57,500,000 Performance Rights previously issued to Dr. Paul Kasian in the year ended June 30, 2019 were forfeited in the year ended June 30, 2020. Due to the forfeiture of Performance Rights, a reversal amounting to A$81,984 relating to previously expensed amounts was accounted for during the current reporting period.

 

The Company has accounted for these Performance Rights in accordance with its accounting policy for share-based payment transactions and has recorded net reversal of A$43,484 of associated expense in the current year end (2019: A$104,441).

 

Based on the independent valuation of the performance rights, the company agrees that the total value of the performance rights to be issued to each director (depending on the share price at issue) is as follows:

 

Valuation of Class A Performance Rights

 

Performance rights vested during the year

 

    Number of Performance Rights issued     Valuation per Class A (cents)     Total fair value of Class A Performance Rights     Expense accounted for during the year  
Dr. Lindsay Wakefield     3,750,000       0.77     A$ 28,875     A$ 9,625  
Dr. Jerzy Muchnicki     6,250,000       0.77     A$ 48,125     A$ 16,042  
Mr. Peter Rubinstein     5,000,000       0.77     A$ 38,500     A$ 12,833  
Total     15,000,000             A$ 115,500     A$ 38,500  

 

Performance rights cancelled/forfeited during the year

 

Mr. Xue Lee2     3,750,000       0.77     A$ 28,875     A$ (5,616)  
Dr. Paul Kasian     7,500,000       0.77     A$ 57,750     A$ (11,229)  
Total     11,250,000             A$ 86,625     A$ (16,845)  

 

Valuation of Class B Performance Rights

 

    Number of Performance Rights issued   Valuation per Class B (cents)   Total fair value of Class B Performance Rights   Expense accounted for during the year
Dr Paul Kasian1     25,000,000       0.57     A$ 142,500     A$ (37,431)  

 

Valuation of Class C Performance Rights

 

    Number of Performance Rights issued   Valuation per Class C (cents)   Total fair value of Class C Performance Rights   Expense accounted for during the year
Dr Paul Kasian1     25,000,000       0.57     A$ 142,500     A$ (37,431)  

 

Notes:

 

1 Dr. Paul Kasian resigned on September 24, 2019.

2 Mr. Xue Lee resigned on July 9, 2019

 

46
 

 

Item 6. Directors, Senior Management and Employees (cont.)

 

The following is the reconciliation of Performance Rights for the year ended June 30, 2020 held by Key Management Personnel:

 

Performance Rights   Balance at start of the year     Granted as remuneration     Exercised     Other Changes1     Balance at the end of year  
Dr Lindsay Wakefield     3,750,000               -               -       -       3,750,000  
Mr Peter Rubinstein     5,000,000       -       -       -       5,000,000  
Mr Xue Lee
(resigned on July 9, 2019)
    3,750,000       -       -       (3,750,000 )     -  
Mr Nicholas Burrows
(appointed September 2, 2019)
    -       -       -       -       -  
Dr Paul Kasian
(resigned on September 24, 2019)
    57,500,000       -       -       (57,500,000 )     -  
Dr Jerzy Muchnicki     6,250,000       -       -       -       6,250,000  
Dr Richard Allman     -       -       -       -       -