PREDICTIVE TECHNOLOGY GROUP, INC. - Annual Report: 2020 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended June 30, 2020

For the transition period from              to             

PREDICTIVE TECHNOLOGY GROUP, INC.

(Exact name of registrant as specified in its charter)

Registrant's telephone number, including area code: (801) 584-3600

Securities registered pursuant to Section 12(b) of the Exchange Act: None

Securities registered pursuant to Section 12(g) of the Exchange Act:

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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐   No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes  ☐    No  ☒

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.    Yes  ☒   No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  ☒   No  ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☒

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ☐   No  ☒

The aggregate market value of the registrant's common stock held by non-affiliates of the registrant (without admitting that any person whose shares are not included in such calculation is an affiliate), computed by reference to the price at which the common stock was last sold on December 31, 2019, the last business day of the registrant's most recently completed second fiscal quarter, was $165,896,672.  

As of October 20, 2020, the registrant had 299,596,808 shares of common stock outstanding.

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TABLE OF CONTENTS

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PART I

References in this Form 10-K to "Predictive," "we," "us," or "the Company" refer to Predictive Technology Group, Inc., a Nevada corporation, and, unless the context otherwise requires or is otherwise expressly stated, its subsidiaries.

GENERAL

Predictive (the Company) was formed in 2005 under the laws of the State of Nevada. The Company is headquartered in Salt Lake City, Utah. We are a life sciences company and a leader in the use of data analytics for disease identification and subsequent therapeutic intervention through precision biopharmaceutical solutions. Through our wholly-owned subsidiaries, Predictive Biotech, Inc., Cellsure, L3C, Predictive Laboratories, Inc., Predictive Therapeutics, Inc., and our equity method investment in Juneau Biosciences, LLC, we focus on three main clinical categories: Endometriosis, Degenerative Disc Disease and Regenerative Human Cell and Tissue Products ("HCT/P"). In addition to our efforts to advance regenerative medicine, we are committed to assisting women in overcoming the devastating consequences of endometriosis via appropriate early-stage diagnosis and subsequent treatment.

PRODUCTS AND TECHNOLOGIES

The products we currently offer are various regenerative medicine products and HCT/Ps for use in regenerative medicine applications. In addition, we are preparing to offer a genetic diagnostic and prognostic test that will be marketed to women that are having trouble conceiving. We are currently offering the first genetic test through a limited number of Advanced Reproductive Technologies ("ART") clinics with groups whom we believe are key opinion leaders in the field. Substantially all of our historical sales relate to our HCT/P products.

 Reproductive Health Market

Our FertilityDX test is a state-of-the-art genetic testing service for couples experiencing infertility.  The test utilizes a portfolio of robust genomic testing technologies to uncover genetic factors for providers in ART clinics to help navigate conception, pregnancy, and delivery.  For conception, the test is expected to give insights into the best course of care related to ART, such as donor egg or sperm, intracytoplasmic sperm injection (ICSI), in vitro fertilization (IVF), or GnRH suppression.  For pregnancy and delivery, the testing will provide insights into genetic causes of pregnancy complications, which will provide ob-gyns with the knowledge of which patients may be higher risk for complications and need increased surveillance or preventative therapy.  The test will also inform physicians and patients if they are at a higher risk to pass on a genetic disorder to their child and will inform embryo and/or prenatal testing.

FertilityDX was launched to selected collaborators in October 2019 at the American Society for Reproductive Medicine conference.  We process FertilityDX in our CAP/CLIA approved laboratory in Salt Lake City, UT.  

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Endometriosis Diagnostic

Our ARTguide™ test is a proprietary genetic test for women experiencing infertility as a result of endometriosis and other genetic conditions. The test is expected to give additional insights into the best course of care related to ART, such as in vitro fertilization (IVF) or GnRH suppression that are used to assist couples having fertility issues. ARTguide™ test results are anticipated to enable clinicians to: (1) identify if endometriosis is a potential factor causing or contributing to infertility; (2) efficiently optimize treatment plan selection for patients; (3) reduce unnecessary laparoscopies, but allow for treatment of active endometriosis; (4) minimize out-of-pocket expenses; and (5) improve live birth rates. For the patient, ARTguide™ will assist with the identification of undetected endometriosis, the avoidance of multiple failed cycles, and provide an individualized plan to achieve higher rates of pregnancy. Over 30,000 DNA samples and medical records have been collected as part of the development and validation of ARTguide™.

ARTguide was launched to selected collaborators in Fall 2018. We are currently processing ARTguide™ in a CAP/CLIA approved laboratory in Salt Lake City, Utah.

Endometriosis affects an estimated one in ten women of reproductive age. See, for example, [Macer, et. al, "Endometriosis and Infertility: a review of the pathogenesis and treatment of endometriosis-associated infertility" Obstet Gynecol Clin – Dec. 2012] Endometriosis occurs when the tissue similar to the lining of the uterus (womb) is found in other parts of the body, most commonly in the pelvis. Monthly bleeding and inflammation caused by these lesions may severely impact a woman's quality of life. Some affected women experience severe pain, infertility, and menstrual difficulties, while some have no symptoms at all. Today, definitive diagnosis requires surgery. Due to the difficulty, invasiveness, and expense of diagnosing the condition, the majority of women diagnosed with endometriosis suffer for over a decade before receiving treatment. Treatment may involve hormonal suppression or a targeted destruction of the abnormal tissue during surgery.

Our ARTguide™ test was developed by Juneau Biosciences, LLC. We currently own 48.3% percent of Juneau. We have an exclusive license with Juneau to market Juneau's patented molecular diagnostics for use in the prognosis and monitoring of endometriosis in the infertility and pelvic pain markets.

ARTguide™ Exclusive License

In 2015 we entered into an exclusive license agreement for the commercialization of the ARTguide™ test and related services for the prognosis and monitoring of endometriosis. The license agreement was amended and restated in March 2018. Under the license, as amended, (i) upon the commercial sale of the rights to the ARTguide™ or a license thereof we are required to issue to Juneau common stock with a market value of $2,500,000, (ii) we split net profits earned from the ARTguide™ evenly between Predictive and Juneau, (iii) we must have minimum sales of $12.5 million in the twelve month period beginning nine months after commercial launch, (iv) during the second year following launch we must have minimum sales of $30 million, and (v) during the third year following launch and each year thereafter we must have minimum annual sales of $60 million. If we fail to meet these metrics the license is null and void unless Predictive (a) presents written plan to Juneau describing how Predictive will use reasonable commercial efforts to improve sales and (b) Predictive agrees to spend an amount equal to the difference between the projected minimum sales and actual sales on an enhanced sales and marketing effort over the next year.

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Regenerative Medicine Products

We founded our life sciences business in 2015. We are a leader in regenerative medicine products and HCT/Ps. A growing national network of clinics, health systems, researchers and physicians leverage our placental-derived and Wharton's Jelly umbilical cord-derived products. Regenerative medicine plays an important role in the medical community and care continuum. By using regenerative medicine products and HCT/Ps to create an optimal internal healing environment, it gives health care professionals new options that were not available just a few years ago.

In the emerging field of regenerative medicine, we are focused on tissue processing protocol. The power of our products is in their functionality, but just like all harvested tissue, that functionality can diminish if the tissue is not properly handled. This is why we process all of our products in our Food and Drug Administration ("FDA") registered cGMP/cCTP lab utilizing proprietary methods that reduce the loss of important scaffolding proteins, growth factors, cytokines and other properties. In our ISO Class 7 clean room, we cryogenically freeze the products to better preserve viability. Our products are derived from two tissue sources -- the Wharton's Jelly layer of the umbilical cord, as well as placental tissue. Our products are uniquely able to help protect, cushion and support injured parts of the body, as well as aid the optimal regenerative environment. Our products are ethically sourced from donated birthing tissues, such as umbilical cords and placentas from full-term deliveries. Comprehensive medical and social histories of the donor are obtained and tissues are procured, processed, and tested to meet standards established by FDA. Through rigorous research, we have identified the Wharton's jelly layer of the umbilical cord and placental tissues to be the richest sources of regenerative properties. It is from these two sources that we derive our products, each containing a unique blend of cytokines, proteins, growth factors and scaffolding proteins, which are the functional factors involved in the reconstruction, repair, and protection of human tissue.

Our four main products include AmnioCyte^TM, AmnioCyte Plus^TM, PolyCyte^TM, and CoreCyte^TM. AmnioCyte^TM and AmnioCyte Plus™ are derived from amniotic fluid. PolyCyte^TM is derived from the Wharton's Jelly of the umbilical cord. CoreCyte^TM is a minimally manipulated human tissue allograft derived from the Wharton's Jelly of the umbilical cord. CoreCyte^TM is processed to preserve the structural integrity of Wharton's jelly for homologous use and cryogenically preserved.

Virtually all the revenues earned to date are derived from the sales of Regenerative Medicine Products/HCT/Ps.  The percentage of revenues from each product for July 1, 2019 to June 30, 2020 are broken out in the table below:

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PRODUCTS IN DEVELOPMENT

Background - Molecular Diagnostics

We believe that advances in the emerging field of molecular diagnostics will improve our ability to determine which patients are subject to a greater risk of developing disease, and who therefore would benefit from preventive therapies. Molecular diagnostic products may also guide a patient's healthcare to ensure the patient receives the most appropriate drug at the optimal dose. Every week, disease-linked genetic variations are being discovered. Genetic tests are now available for over 4,000 diseases and conditions. Once only a niche market of the in vitro diagnostics industry, molecular genetic testing is playing an increasingly valuable and prominent role in health care. In all areas of medicine, DNA based tests are assisting clinicians in the management of diseases and in the selection of treatment by enabling earlier diagnosis or prediction of disease risk years before symptoms occur. The domestic market for molecular diagnostics is a multi-billion dollar market and is the strongest segment of the entire in vitro diagnostics market, growing at an annual average rate of over 20%.

We believe there are significant diagnostic market opportunities for disease identification. Simple, non-invasive diagnostic, prognostic, and predictive tests do not exist for many of the major diseases affecting women and men. Unlike traditional medical tests, molecular genetic tests are often proprietary, high-margin tests that can move quickly from discovery to commercialization, particularly in a CAP accredited and CLIA certified laboratory as a Laboratory Developed Test (LDT), for which the FDA currently exercises enforcement discretion.

In general, accurate early detection, disease identification and assessment of health status can translate into reduced morbidity, improved quality of life and reduced treatment costs associated with detection and treatment of disease during later stages.

COVID-19 Testing

Assurance AB™

In March 2020, the Company announced the availability of the Assurance AB™ COVID-19 antibody test for sale in the United States, and in April 2020 announced the execution of an exclusive distribution agreement with a distributor. The test is distributed under license from a Chinese manufacturer. The Company applied for an Emergency Use Authorization from the FDA in March 2020, and an approval decision is pending.

In April 2020, the Company received an initial purchase order from the distributor for one million units of Assurance AB™ COVID-19 antibody tests.  The Company also received a partial payment of $5,000,000 for the deposit due from the distributor of the Company's Assurance AB™ product for the initial purchase order. Under the terms of the agreement with the distributor, the purchase order may not be cancelled and product may only be returned if damaged in transit or subject to a recall order. In an effort to expeditiously satisfy the Company's obligations under the agreement with the distributor, the Company paid the full amount of the partial deposit to the manufacturer of the product. No units related to the initial order have been shipped. The Company will fulfill the purchase order upon receipt of the remaining deposit amount due from the distributor under the distribution agreement. As a result of failure to pay the full deposit amount in the timeframe specified by the distribution agreement, the distributor is no longer exclusive.

June 2020, the Company separately imported 200,000 Assurance AB™ units under a consignment agreement. The Company is not obligated to pay for units until they are sold, and the Company may return the units after six months. No units have been sold to date as the Company is awaiting a decision on its application for an Emergency Use Authorization from the FDA.

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Assurance VR™

The Company introduced the Assurance VR COVID-19 RT-PCR test in July 2020. The Assurance VR COVID-19 viral test is intended for the qualitative detection of SARS-CoV-2 coronavirus during the acute phase of COVID-19 infection. Assurance VR is intended for individuals suspected of COVID-19 infection by a healthcare provider. Assurance VR uses a saliva sample to detect the presence of the SARS-CoV-2 coronavirus genetic material (RNA) using a process called RT-PCR. The sample is processed and results delivered by Predictive Laboratories, a high-complexity CLIA laboratory. Assurance VR uses the EUA approved Thermo Fisher TaqPath COVID-19 Combo Kit for the detection of the SARS-CoV-2 virus. Assurance VR samples are collected using an EUA approved at-home saliva sample collection kit produced by Spectrum Solutions, LLC. This collection device is easier, less intrusive and safer for health care workers than nasopharyngeal or oropharyngeal swabs.

Technology and Products in Development

Juneau Biosciences, LLC has established a core team of physicians and scientists as well as state-of-the-art genetic analysis technologies to identify disease-associated genes in the field of women's health using clinical genetics. Juneau has the medical and patient resources which many biotechnology companies lack in disease areas of interest to Predictive. Based in Utah, Juneau's clinical network accesses the millions of living descendants of the original pioneers who settled in this region. Juneau believes that these large, genetically heterogeneous families who are well informed of their genealogy comprise the best population in the world for discovering human disease genes. In short, Juneau believes that it can move from clinical need to clinical trials more efficiently than many other companies.

We have acquired DNA and ancestry assets, including significant genetic data related to women's diseases and degenerative disc disease. The acquired assets include: (i) approximately 1,000 degenerative disc disease-related DNA samples, related family records, relevant clinical records (including approximately 600 affected probands) and 800 ancestry matched control samples, (ii) whole exome sequencing data on approximately 300 degenerative disc disease samples, over 800 local controls, and published reference populations, together with initial analysis of the markers, and (iii) exclusive use of a DNA biobank that has collected over 300,000 samples for multiple diseases that the Company may target.  

The acquisition of these DNA and ancestry assets strengthens our development platforms to commercialize gene-based diagnostics and biotechnology treatments for other debilitating diseases, such as additional difficult-to-diagnose women's health diseases and degenerative disc disease. These assets are complementary to our acquisition of Inception Dx, LLC, which included ancestry database records for over 31.9 million individuals for use in genetics research. We also acquired Taueret Laboratories, LLC, a fully certified genetic testing laboratory, for the purpose of processing our genetic testing products.

In the future, Predictive intends to develop additional diagnostics and therapeutics utilizing the development assets described above.  In the near-term, the Company will focus its resources on commercializing the ARTguide™, existing Regenerative Medicine Products and improvements to existing commercialized products.

Tissue Availability and Laboratory Processing

Our regenerative medicine products and HCT/Ps are derived from the Wharton's Jelly layer of the umbilical cord and from placental tissue. We obtain these tissues from donors in various parts of the country. Tissues are procured, processed, and tested in our laboratory in Salt Lake City, Utah to meet standards established by FDA. We are dependent on donors to supply us with sufficient umbilical cord and placental tissue to manufacture our four key regenerative medicine products and HCT/Ps. To date, we have been able to secure sufficient donated tissues to meet our manufacturing needs. In the event we are not able to secure required tissue, it will directly impact the quantity of regenerative medicine products and HCT/Ps that we are able to manufacture.

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INTELLECTUAL PROPERTY

In striving to protect and enhance proprietary technology, inventions, and improvements that are commercially important to the development of our business, we currently rely heavily on trade secrets relating to our proprietary technology platform and on know-how. We enter into confidentiality agreements with our employees, consultants, scientific advisors, and contractors. We also seek to preserve the integrity and confidentiality of our data and trade secrets by maintaining physical security of our premises and physical and electronic security of our information technology systems.

Our objective is to continue to expand our portfolio of patents and patent applications, in conjunction with our trade secrets and know-how, in order to further protect our molecular diagnostic, therapeutics, regenerative medicine platform and derivative technologies, as well as the manufacturing and deployment processes of those technologies.

Intellectual Property Related to Endometriosis

Related to the diagnosis and treatment of endometriosis, we own 3 issued U.S. patents that begin to expire in 2033, 2 pending U.S. non-provisional patent applications, 1 pending U.S. provisional patent application, and national phase applications have been entered in 4 foreign countries. In the field of the prediction, prognosis, or diagnosis or therapeutic assessment of endometriosis in infertility and/or pelvic pain and/or dysmenorrhea patients using genetic data, we have exclusive license rights to 3 issued U.S. patents, 5 pending U.S. non-provisional patent applications, 1 pending U.S. provisional patent application, national phase applications have been entered in 4 foreign countries, and 3 PCT International Patent Applications.

Intellectual Property Related to Spine Diseases

Related to the diagnosis and treatment of spine diseases, we own 5 issued U.S. patents that begin to expire in 2026 and 1 pending U.S. provisional patent application. Certain of these patents are the subject of a lawsuit. See Part I, Item 3 of this report for a description of the legal proceedings related to these patents.

Intellectual Property Related to Regenerative Medicine Products and HCT/Ps

Related to the processing of human cell tissue, we own 1 pending U.S. provisional patent application, 5 pending U.S. provisional patent applications, and 1 PCT International Patent Applications.

REIMBURSEMENT

Our ARTguide™ and current regenerative medicine products and HCT/Ps are targeted as self-pay markets and, to date, substantially all of our revenues are self-pay. To the extent ARTguide™, our current regenerative medicine products and HCT/Ps or any future products and/or future services we offer are reimbursed such transactions will be subject to additional regulation. In addition, in the United States, demand for access to many medical products will depend in large part on both the availability and the amount of reimbursement from third-party payers, including government healthcare programs (including Medicare and Medicaid), and commercial healthcare insurers, including managed care organizations and other private health plans. Third-party payers have complex rules and requirements for coverage and reimbursement of healthcare products and services. Even the applications to such third-party payers to be eligible for reimbursement for product or services are complex and can be lengthy and time consuming. For new technologies coming to market, these payers are increasingly examining the clinical evidence supporting medical necessity and cost effectiveness decisions in addition to safety and efficacy, which can result in barriers to early coverage reimbursement, or denial of coverage and reimbursement altogether. Accordingly, significant uncertainty exists as to the availability of coverage and reimbursement status for new medical products. If third-party payer reimbursement is unavailable to our customer hospitals, physicians, and providers, our sales may be limited and we may not be able to realize an appropriate return on our investment in research and product development.

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Payers often set payment rates depending on the site of service and many use the Medicare program as a benchmark for their own payment methodologies. In the hospital inpatient setting, Medicare payment generally is set at pre-determined rates for all products and services provided during a particular patient stay and is based on such factors as the patient diagnosis, procedures performed, patient age, and complications. In the physician office or clinic setting, Medicare payment generally is based on a fee schedule, with payment rates set for each procedure performed and product used, although the schedule may in some instance bundle the product into the payment for the procedure. In some outpatient settings, such as in the case of the hospital outpatient clinic setting, Medicare payment rates generally are premised on classifications of services that have similar clinical characteristics and similar costs.

Reimbursement policies depend in part on legislation designed to regulate the healthcare industry and federal and state governments continue to propose and pass new healthcare legislation and government agencies revise or change their regulations and policies from time to time. We cannot predict whether or how such reform measures and policy changes would affect reimbursement rates and demand for our products.

COMPETITION

Competition is intense in diagnostic, regenerative medicine products, and HCT/Ps markets. Our potential competitors in the United States and abroad are numerous and include, among others, major pharmaceutical companies, diagnostic reference laboratories, biotechnology firms, universities, and other research institutions. Many potential competitors have greater financial, technical, marketing, and other resources than we have. We expect competition to intensify in our current fields as technical advances occur and become more widely known.

The technologies for (i) discovering genes that cause major diseases, (ii) methods, processes and discoveries related to HCT/Ps, and (iii) approaches for commercializing those discoveries are rapidly evolving. Rapid technological developments could result in our services, products, or processes becoming obsolete before we recover a significant portion of our related research and development costs and associated capital expenditures. If we do not launch our services or products before our competitors, we could be adversely affected. Moreover, any products that we develop could be made obsolete by less expensive or more effective tests or methods that may be developed in the future.

There are a number of established pharmaceutical companies that have franchises in the women's health area. These include: AbbVie, Amgen, Inc., AstraZeneca, Teva/ Barr Laboratories, Bayer Corporation, Bristol-Myers Squibb Company, Eli Lilly and Company, Johnson & Johnson, GlaxoSmithKline, Neurocrine, Merck Novartis Corporation / Serono, Procter & Gamble, Pfizer, Inc. /Wyeth, Ferring Pharmaceuticals, Sanofi Aventis, and others. These companies are principally focused in the areas of HRT, contraception, osteoporosis and/or infertility based on their existing products and R&D pipeline. We view these companies as potential partners. Our gene discovery and target validation technologies will create a natural "fit" between our capabilities and large pharmaceutical companies' chemical libraries, preclinical/clinical development, and sales and marketing capabilities.

We face significant competition in the regenerative medicine products and HCT/Ps market. Our competitors include Alliqua, American Cryo, Athersys, AxoGen, Biodesix, Biotime, Burst Biologics, Compugen, DermaSciences, Human Regenerative Technologies, International Stem Cell, Invitrix, Lifecell, Liveyon, Longeveron, MiMeDx, Misoblast, MTF (Musculoskeletal Tissue Foundation), Orthofix, Osiris, Pluristem, Polarity, Regenerexx, TEI Biosciences, TissueTech, Wright, and Xtant. We believe that our HCT/Ps processing and preserving technologies deliver superior products and provide us with a competitive edge over other industry players.

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GOVERNMENT REGULATION

General

Regulation by governmental authorities in the United States and foreign countries is a significant factor in the development, manufacture and marketing of our products and services and in our ongoing research and development activities. The therapeutic products, and some of the molecular diagnostic products, regenerative medicine products and HCT/Ps to be developed, will require regulatory approval by governmental agencies prior to commercialization. Various federal statutes and regulations also govern or influence the testing, manufacturing, safety, labeling, storage, record keeping, and marketing of therapeutic products, regenerative medicine products and HCT/Ps. The process of obtaining these approvals and the subsequent compliance with applicable statutes and regulations require the expenditure of substantial time and financial resources. Any failure by us or our collaborators, licensors, or licensees to obtain regulatory approval or any delay in obtaining regulatory approval could have a material adverse affect on our business.

Molecular Diagnostics

Our laboratory that processes ARTguide™ and future molecular diagnostic tests is subject to governmental regulation at the federal, state, and local levels as a clinical laboratory. The Clinical Laboratory Improvement Amendments, or CLIA, provide for the regulation of clinical laboratories by the Department of Health and Human Services ("HHS"), and our diagnostic laboratory is subject to HHS regulations, which mandate that all clinical laboratories be certified to perform testing on human specimens and provide specific conditions for certification. These regulations also contain guidelines for the qualification, responsibilities, training, working conditions and oversight of clinical laboratory employees. In addition, specific standards are imposed for each type of test that is performed in a laboratory. CLIA and the regulations promulgated thereunder are enforced through quality inspections of test methods, equipment, instrumentation, materials and supplies on a periodic basis. Any change in CLIA or these regulations or in the interpretation thereof could have a material adverse effect on our business.

The FDA has regulatory responsibility over instruments, test kits, reagents and other medical devices used to perform diagnostic testing by clinical laboratories. In the past, the FDA has claimed regulatory authority over laboratory developed tests (LDTs), but has exercised "enforcement discretion" in not regulating most LDTs performed by high complexity CLIA-certified laboratories and marketed to physicians.

The FDA has published draft guidance documents regulating LDTs. It is anticipated that regulation, if it occurs, will commence with high risk tests, and proceed to low risk tests over time. If the FDA should require that our tests receive FDA approval prior to their commercial launch, there can be no assurance such approval would be received on a timely basis, if at all. At present, ARTguide™ does not require FDA approval before commercial launch.

The FDA has considered LDT regulations since 1992. Any attempt by the FDA to regulate LDTs now would be controversial, difficult to administer and likely to trigger legal challenges from the industry. A large number of medical laboratory tests enjoying broad clinical acceptance are LDTs that have been in use for decades and are run daily in labs throughout the country. FDA regulation of the entire menu of tests that currently fall under the legal definition of LDTs would be disruptive to patient care. Requiring regularly used and long-accepted LDTs to have FDA approval would drive health care costs up.

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LDTs are in vitro assays that clinical laboratories develop as testing services according to their own procedures. These tests are often created in response to unmet clinical needs, and are commonly used for early and precise diagnosis, monitoring, and guidance of patient treatment. LDTs are also used to diagnose and assess diseases and disorders for which no FDA-authorized test kit currently exists, such as rare diseases, or those with small patient populations. In some cases, LDTs represent the standard of care. The ability of laboratories to develop custom diagnostic tests has been critical to the growth of personalized medicine and to keeping pace with the changing face of disease.



Medical laboratories are highly regulated under CLIA. High complexity laboratories must undergo additional certification to ensure the clinical validity of tests. CLIA regulations address personnel qualifications, quality control procedures, and proficiency testing programs. CLIA contains different complexity categories to describe the degree of expertise a laboratory will be required to have, and the standards that it will need to meet, in order to perform a particular test of a given type. All laboratories performing molecular diagnostic testing must be CLIA High Complexity Laboratories.

More than 95% of high margin tests are performed as LDTs. Molecular test development by laboratories under CLIA has become the diagnostic or prognostic standard of care for many diseases or conditions.  Under CLIA, the laboratory director, without external review, determines the analytical validity of LDTs. The laboratory is not required by CLIA to demonstrate that the test is clinically valid. The laboratory must develop the test itself and must "manufacture" the test. The laboratory performing the test must have CLIA approval and approval of any relevant state regulators.

Typically molecular genetics laboratories have accreditation from the College of American Pathologists ("CAP") and generally the lab director meets professional certification requirements. Some states have implemented regulations concerning molecular diagnostic testing that require licensing or registration of general clinical laboratory activities.

We believe that we will be able to take all steps required in various jurisdictions in order for us to conduct business in those jurisdictions. Failure to maintain state regulatory compliance, or changes in state regulatory schemes, could result in a substantial curtailment or even prohibition of our clinical activities and could have a material adverse effect on our business.

Human Cell and Tissue Products (HCT/Ps)

The FDA has specific regulations governing the manufacture and commercialization of HCT/Ps and the level of these regulations by the FDA, depending on whether the procedure falls solely within the scope of Section 361 of the Public Health Service Act (the "PHS Act") (42 U.S.C. § 264) or if they are regulated as drugs, devices, and/or biological products under Section 351 of the PHS Act (42 U.S.C. § 262) and/or the FD&C Act.

If an HCT/P meets the criteria for regulation solely under Section 361 of the Public Health Service Act (so-called "361 HCT/Ps"), no premarket FDA review for safety and effectiveness under a drug, device, or biological product marketing application is required. However, the processor of the tissue is required to register and list its products with the FDA, comply with regulations regarding labeling, record keeping, donor eligibility and screening and testing, process the tissue in accordance with established current Good Tissue Practices (cGTP), and investigate and, in certain circumstances, report adverse events or deviations.

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To be a Section 361 HCT/P, a product generally must meet all four of the following criteria:

1)  It must be minimally manipulated;

2)  It must be intended for homologous use;

3)  Its manufacture must not involve combination with another article, except for water, crystalloids, or a sterilizing, preserving or storage agent, provided the addition of such article does not raise new clinical safety concerns; and

4)  It must not have a systemic effect and must not be dependent upon the metabolic activity of living cells for its primary function (unless the product is intended for reproductive use, autologous use, or use in a first- or second-degree blood relative).

Management believes our structural umbilical cord tissue products qualify as Section 361 HCT/Ps. Other regenerative medicine products and product candidates that we have developed or have commercialized are being evaluated with respect to regulatory classification. We plan to prepare for any regulatory pathway that is required.  Other HCT/Ps we are developing are being evaluated with respect to regulatory classification, and we will prepare for any pathway of manufacturing or regulation that is required.

All establishments that manufacture Section 361 HCT/Ps must register and list their HCT/Ps with the FDA's Center for Biologics Evaluation and Research ("CBER") within five days after commencing operations. In addition, establishments are required to update their registration annually in December or within 30 days of certain changes, and submit changes in HCT/P listing at the time of or within six months of such change. Establishments that manufacture Section 361 HCT/Ps will know that they are registered in compliance with 21 C.F.R. § 1271.10(a) when they receive a validated form with the registration number ("FEI#") after submitting the Form FDA 3356 (registration form). Applicable GTP requirements govern the facilities, controls, and methods used in the manufacture of HCT/Ps, including without limitation, recovery, donor screening, donor testing, processing, storage, labeling, packaging, and distribution of 361 HCT/Ps. FDA inspection and enforcement with respect to establishments described in 21 C.F.R. § 1271 includes inspections conducted, as deemed necessary, to determine compliance with the applicable provisions and may include, but is not limited to, an assessment of the establishment's facilities, equipment, finished and unfinished materials, containers, processes, HCT/Ps, procedures, labeling, records, files, papers, and controls required to be maintained under 21 C.F.R. § 1271. Such inspections can occur at any time with or without written notice at such frequency as is determined by the FDA in its sole discretion.

We received a Warning Letter from the FDA on August 17, 2020 regarding the marketing of our allograft product, CoreCyte. The letter alleges inappropriate marketing of CoreCyte as a treatment for COVID-19 and challenges the eligibility of CoreCyte for regulation under section 361 of the Public Health Service Act. Products regulated solely under section 361 of the Public Health Service Act do not require premarket approval. The Company is currently working with the FDA to address the concerns raised in the Warning Letter to the FDA's satisfaction. While the Company believes that it has complied with all applicable regulations to date, certain potential findings or interpretations by the FDA with regard to the regulatory character of CoreCyte could have a material adverse effect on our business or financial condition. For example, the Company may be required to accelerate the filing of an Investigational New Drug (IND) application, cease sales and marketing of CoreCyte, or both. CoreCyte represented 71.5% of the Company's sales for the year ended June 30, 2020.

In November 2019, Predictive Biotech's HCT/P processing facility successfully achieved the internationally recognized ISO 13485 certification over the Company's system of laboratory quality controls.

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Therapeutics

We intend to partner with one or more pharmaceutical partners to develop therapeutic products which will be subject to regulation by the FDA and require approval before they may be clinically tested and commercially marketed for human therapeutic use in the United States and other countries. The precise regulatory requirements with which we will have to comply are undergoing periodic revisions and refinement.

The steps required before a therapeutic product may be marketed in the United States are numerous and include, but are not limited to the following:

- completion of preclinical laboratory tests, animal studies, chemical process development, and formulation studies;

- the submission to the FDA of an IND, which must become effective before clinical trials may commence;

- performance of adequate and well-controlled clinical trials to establish the safety and efficacy of the drug for its intended use;

- the submission of a New Drug Application, or NDA, to the FDA; and

- FDA approval of the NDA, including approval of all product labeling and initial advertising.

The testing and approval process required to market a therapeutic product involves substantial time, effort, and financial resources and we cannot be certain that any approvals for any of our future therapeutic products will be granted on a timely basis, if at all.

Clinical trials are typically conducted in three sequential Phases that may overlap:

- PHASE 1: Initial safety study in healthy human subjects or patients where the candidate therapy is tested for safety, dosage tolerance, absorption, distribution, metabolism, and excretion.

- PHASE 2: Studies in a limited patient population designed to identify possible adverse effects and safety risks, to determine the efficacy of the product for specific targeted diseases and to determine tolerance and optimal dosage.

- PHASE 3: Studies in an expanded patient population to further evaluate clinical efficacy and to further test for safety.

We cannot be certain that we will successfully complete Phase 1, Phase 2, or Phase 3 testing of any compound within any specific time period, if at all. Furthermore, the FDA or the sponsor may suspend clinical trials at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk.

Satisfaction of the above FDA requirements or similar requirements of state, local and foreign regulatory agencies typically takes several years and the actual time required may vary substantially, based upon the type, complexity and novelty of the product or indication. Government regulation may delay or prevent marketing of potential products for a considerable period of time and impose costly procedures upon us or our partners' activities. The FDA or any other regulatory agency may not grant any approvals on a timely basis, if at all. Success in early stage clinical trials does not assure success in later stage clinical trials. Data obtained from clinical activities is not always conclusive and may be susceptible to varying interpretations that could delay, limit, or prevent regulatory approval. Even if a product receives regulatory approval, the approval may be significantly limited to specific indications and dosages. Delays in obtaining, or failures to obtain regulatory approvals may have a material adverse effect on our business. In addition, we cannot predict what adverse governmental regulations may arise from future U.S. or foreign governmental action.

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Any products manufactured or distributed by us pursuant to FDA approval is subject to pervasive and continuing regulation by the FDA, including record-keeping requirements and reporting of adverse experiences with the drug. Drug manufacturers and their subcontractors are required to register their establishments with the FDA and certain state agencies and are subject to periodic unannounced inspections by the FDA to assess compliance with current Good Manufacturing Practices, which impose certain procedural and documentation requirements upon us and our third-party manufacturers. We cannot be certain that we or our suppliers will be able to comply with current Good Manufacturing Practices regulations and other FDA regulatory requirements.

Fraud, Abuse and False Claims

We are directly and indirectly subject to various federal and state laws governing relationships with healthcare providers and other potential referral sources for our products pertaining to healthcare fraud and abuse, including anti-kickback, false claims, and similar laws. In addition, federal and state laws are also sometimes open to interpretation. We could potentially face legal risks if our interpretation differs from those of enforcement authorities. Further, from time to time we may find that we are at a competitive disadvantage if our interpretation differs from that of our competitors.

In particular, the federal healthcare program Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, offering, receiving or providing remuneration (in cash or in kind), directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing, arranging for, or recommending of, a good or service for which payment may be made in whole or part under federal healthcare programs, such as the Medicare and Medicaid programs. Penalties for violations include criminal penalties and civil sanctions such as fines, imprisonment and possible exclusion from Medicare, Medicaid, and other federal healthcare programs. The Anti-Kickback Statute is broad and prohibits many arrangements and practices that are lawful in businesses outside of the healthcare industry. In implementing the statute, the Office of Inspector General of the U.S. Department of Health and Human Services ("OIG") has issued a series of regulations, known as the "safe harbors." These safe harbors set forth provisions that, if all their applicable requirements are met, exclude certain specified remuneration and remunerative arrangements from being violations of the Anti-Kickback Statute. The failure of a transaction or arrangement to fit precisely within one or more safe harbors does not necessarily mean that it is illegal or that prosecution will be pursued. However, conduct and business arrangements that do not fully satisfy each applicable element of a safe harbor may result in increased scrutiny by Government enforcement authorities, such as the OIG. Many states have laws similar to the federal law.

Also, the federal civil False Claims Act ("FCA") imposes civil liability on any person or entity that submits, or causes the submission of, a false or fraudulent claim to the U.S. government. Damages under the FCA can be significant and consist of the imposition of fines and penalties. The FCA also allows a private individual or entity (i.e., a whistleblower) with knowledge of past or present fraud against the federal government to sue on behalf of the government and to be paid a portion of the government's recovery, which can include both civil penalties and up to three times the amount of the government's damages (usually the amount reimbursed by federal healthcare programs). The DOJ takes the position that the marketing and promotional practices of life sciences product manufacturers, including the off-label promotion of products, the provision of inaccurate or misleading reimbursement guidance, or the payment of prohibited kickbacks, may cause the submission of improper claims to federal and state healthcare entitlement programs such as Medicare and Medicaid by health care providers that use the manufacturer's products, which results in a violation of the FCA. In certain cases, manufacturers have entered into criminal and civil settlements with the federal government under which they entered into plea agreements, paid substantial monetary amounts and entered into corporate integrity agreements ("CIAs") that require, among other things, substantial government oversight, as well as reporting and remedial actions going forward.

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If we fail to comply with these laws, we could be subject to enforcement actions, including but not limited to:

- Multi-year investigations by federal and state governments;

- Criminal and civil fines and penalties;

- Obligations under settlement agreements, such as CIAs or Deferred Prosecution Agreements; and/or

- Exclusion from participation in federal and state healthcare programs. 

Other Regulations

In 1996, Congress passed the Health Insurance Portability and Accountability Act, or HIPAA. HIPAA, among other things, required HHS to issue regulations that are designed to improve the efficiency and effectiveness of the healthcare system by facilitating the transfer of health information along with protecting the confidentiality and security of health information. Specifically, Title II of HIPAA, the Administrative Simplification Act, contains four 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 data content, codes and formats used in healthcare transactions. We are currently subject to the HIPAA regulations and maintain an active program designed to address regulatory compliance issues. Penalties for non-compliance with HIPAA include both civil and criminal penalties. Violations could result in civil penalties of up to $25,000 per type of violation in each calendar year and criminal penalties of up to $250,000 per violation.

The privacy regulations protect medical records and other personal 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. In addition to the federal privacy regulations, there are a number of state laws regarding the confidentiality of health information that are applicable to clinical laboratories. The penalties for violation of state privacy laws may vary widely and new privacy laws in this area are pending. We believe that we have taken the steps required of us to comply with all applicable health information privacy and confidentiality statutes and regulations. Failure to maintain compliance, or changes in state or federal laws regarding privacy, could result in civil and/or criminal penalties and could have a material adverse effect on our business.

HHS has regulations which establish standards for electronic transactions and for code sets to be used in those transactions. They also contain requirements concerning the use of these standards by health plans, healthcare clearinghouses, and certain healthcare providers. In addition, HHS has security regulations which establish standards for the security of electronic protected health information to be implemented by health plans, healthcare clearinghouse, and certain healthcare providers. We believe we have taken the steps required of it to comply with both the transactions and code sets as well as the security regulations. However, failure to maintain compliance with these regulations could result in civil and/or criminal penalties and could have a material adverse effect on our business.

Our business is also subject to regulation under state and federal laws regarding environmental protection and hazardous substances control, such as the Occupational Safety and Health Act, the Environmental Protection Act, and the Toxic Substance Control Act. We believe that we are in material compliance with these and other applicable laws and that the costs of our ongoing compliance will not have a material adverse effect on our business. However, statutes or regulations applicable to our business may be adopted which could impose substantial additional costs to assure compliance and/or otherwise materially and adversely affect our operations.

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EMPLOYEES

We had 62 full-time employees and 2 part-time employees as of October 7, 2020. 

The following risks and uncertainties are important factors that could cause actual results or events to differ materially from those indicated by forward-looking statements. The factors described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations and results.  If any of the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected.  As a result, the market price of shares of our Common Stock could decline significantly.

This annual report on form 10-K includes management's best current estimate of the future potential of the business. Investors should be aware that this business has inherent risks that must be fully evaluated and discussed experts fully capable of interpreting the information prior to any investment.

Risks Relating to our Business and Industry Generally

Our operating results may fluctuate significantly as a result of a variety of factors, many of which are outside of our control.

We are subject to the following factors, among others, that may negatively affect our operating results:

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We have based our current and future expense levels largely on our investment plans and estimates of future events. However, certain of our costs are to a large extent fixed. We may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Accordingly, any significant shortfall in revenue relative to our planned expenditures would have an immediate adverse effect on our business, results of operations and financial condition.  Further, as a strategic response to changes in the competitive environment, we may from time to time make certain pricing, service or marketing decisions that could have a material and adverse effect on our business, results of operations and financial condition.  Due to the foregoing factors, our revenue and operating results are and will remain difficult to forecast.

We are in a highly competitive and evolving field and face competition from well-established tissue processors, genetic testing laboratories and medical device manufacturers, as well as new market entrants.

Our business is in a very competitive and evolving field. Competition from other tissue processors, genetic testing laboratories, medical device companies and from research and academic institutions is intense, expected to increase, subject to rapid change, and could be significantly affected by new product introductions. In addition, consolidation in the healthcare industry continues to lead to demands for price concessions or to the exclusion of some suppliers from certain of our markets, which could have an adverse effect on our business, results of operations or financial condition. The presence of this competition in our market may lead to pricing pressure, which would make it more difficult to sell our products at a price that will make us profitable or prevent us from selling our products at all. Our failure to compete effectively would have a material and adverse effect on our business, results of operations and financial condition.

Rapid technological change could cause our products to become obsolete and if we do not enhance our product offerings through our research and development efforts, we may be unable to effectively compete.

The technologies underlying our products are subject to rapid and profound technological change. Competition intensifies as technical advances in each field are made and become more widely known. We can give no assurance that others will not develop services, products, or processes with significant advantages over the products, services, and processes that we offer or are seeking to develop. Any such occurrence could have a material and adverse effect on our business, results of operations and financial condition.

We plan to enhance and broaden our product offerings in response to changing customer demands and competitive pressure and technologies. The success of any new product offering or enhancement to an existing product will depend on numerous factors, including our ability to:

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If we do not develop and, when necessary, obtain regulatory clearance or approval for new products or product enhancements in time to meet market demand, or if there is insufficient demand for these products or enhancements, our results of operations will suffer. Our research and development efforts may require a substantial investment of time and resources before we are adequately able to determine the commercial viability of a new product, technology, material, or other innovation. In addition, even if we are able to successfully develop enhancements or new generations of our products, these enhancements or new generations of products may not produce sales in excess of the costs of development and they may be quickly rendered obsolete by changing customer preferences or the introduction by our competitors of products embodying new technologies or features.

We are subject to numerous federal and state healthcare laws regulations, and a failure to comply with such laws and regulations could have an adverse effect on our business and our ability to compete in the marketplace.

If we fail to comply with the FDA regulations and laws applicable to our operations or tissue products, the FDA could take enforcement action, including, without limitation, pursuit of any of the following sanctions, among others:

In addition, there are numerous laws and regulations that govern the means by which companies in the healthcare industry may market their treatments to healthcare professionals and may compete by discounting the prices of their treatments, including for example, the federal Anti-Kickback Statute, the federal False Claims Act ("FCA"), the federal Health Insurance Portability and Accountability Act of 1996 ("HIPAA"), and state law equivalents to these federal laws that are meant to protect against fraud and abuse and analogous laws in foreign countries. Violations of these laws are punishable by criminal and civil sanctions, including, but not limited to, in some instances civil and criminal penalties, damages, fines, and exclusion from participation in federal and state healthcare programs, including Medicare and Medicaid. In addition, federal and state laws are also sometimes open to interpretation. Accordingly, we could potentially face legal risks if our interpretation differs from those of enforcement authorities. Further, from time to time we may find ourselves at a competitive disadvantage if our interpretation differs from that of our competitors.

Specifically, anti-kickback laws and regulations prohibit any knowing and willful offer, payment, solicitation or receipt of any form of remuneration (direct or indirect, in case or in kind) in return for the referral, use, ordering, or recommending of the use of a product or service for which payment may be made by Medicare, Medicaid or other government-sponsored healthcare programs. We have entered into consulting agreements, research agreements and product development agreements with physicians, including some who may order our products or make decisions to use them. In addition, some of these physicians own our stock, which they purchased in arm's length transactions on terms identical to those offered to non-physicians or received stock awards from us as consideration for services performed by them. While these transactions were structured with the intention of complying with all applicable laws, including state anti-referral laws and other applicable anti-kickback laws, it is possible that regulatory or enforcement agencies or courts may in the future view these transactions as prohibited arrangements that must be restructured or for which we would be subject to other significant civil or criminal penalties. There can be no assurance that regulatory or enforcement authorities will view these arrangements as being in compliance with applicable laws or that one or more of our employees or agents will not disregard the rules we have established. Because our strategy relies on the involvement of physicians who consult with us on the design of our potential products, perform clinical research on our behalf or educate the market about the efficacy and uses of our potential products, we could be materially impacted if regulatory or enforcement agencies or courts interpret our financial relationships with physicians who refer or order our potential products to be in violation of applicable laws and determine that we would be unable to achieve compliance with such applicable laws. This could harm our reputation and the reputations of the physicians we engage to provide services on our behalf. In addition, the cost of noncompliance with these laws could be substantial since we could be subject to monetary fines and civil or criminal penalties, and we could also be excluded from federally-funded healthcare programs, including Medicare and Medicaid, for non-compliance. Further, even the costs of defending investigations of noncompliance could be substantial.

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The scope and enforcement of all of these laws is uncertain and subject to rapid change, especially in light of the lack of applicable precedent and regulations. There can be no assurance that federal or state regulatory or enforcement authorities will not investigate or challenge our current or future activities under these laws. Any investigation or challenge could have a material adverse effect on our business, financial condition, and results of operations. Any state or federal regulatory or enforcement review of us, regardless of the outcome, would be costly and time consuming. Additionally, we cannot predict the impact of any changes in these laws, whether these changes are retroactive or will have effect on a going-forward basis only.

In order to grow revenues from certain of our products, we must expand our relationships with distributors and independent sales representatives, whom we do not control.

We derive significant revenues through our relationships with distributors and independent sales representatives. Sales through one distributor comprising more than 10% of our sales individually, totaled 34.5% of our sales for the period from July 1, 2019 to the June 30, 2020. If such relationships were terminated for any reason, it could materially and adversely affect our ability to generate revenues and profits. Because the independent distributor often controls the customer relationships within its territory, there is a risk that if our relationship with the distributor ends, our relationship with the customer will be lost. Also, because we do not control a distributor's field sales agents, there is a risk we will be unable to ensure that our sales processes, compliance, and other priorities will be consistently communicated and executed by the distributor. If we fail to maintain relationships with our key distributors or fail to ensure that our distributors adhere to our sales processes, compliance, and other priorities, this could have an adverse effect on our operations.

To be commercially successful, we must convince physicians that our products are safe and effective alternatives to existing treatments and that our products should be used in their procedures.

We believe physicians will only adopt our products if they determine, based on experience, clinical data, and published peer reviewed journal articles, that the use of our products in a particular procedure is a favorable alternative to conventional methods.  Physicians may be slow to change their practices for the following reasons, among others: 

In addition, we believe recommendations for and support of our products by influential physicians are essential for market acceptance and adoption.  If we do not receive this support or if we are unable to demonstrate favorable long-term clinical data, physicians and hospitals may not use our products, which would significantly reduce our ability to achieve expected revenue and would prevent us from sustaining profitability.

In the course of conducting our business, we must adequately address quality issues that may arise with our products, as well as defects in third-party components included in our products. Although we have established internal procedures to minimize risks that may arise from quality issues, we may not be able to eliminate or mitigate occurrences of these issues and associated liabilities. If the quality of our products does not meet the expectations of physicians or patients, then our brand and reputation could suffer and our business could be adversely impacted.

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We will need to expand our organization and managing growth may be more difficult than expected.

Managing our growth may be more difficult than we expect.  We anticipate that a period of significant expansion will be required to penetrate and service the market for our existing and anticipated future products and to continue to develop new products.  This expansion will place a significant strain on management, operational and financial resources.  To manage the expected growth of our operations and personnel, we must both modify our existing operational and financial systems, procedures and controls and implement new systems, procedures, and controls.  We must also expand our finance, administrative, and operations staff.  Management may be unable to hire, train, retain, motivate, and manage necessary personnel or to identify, manage and exploit existing and potential strategic relationships and market opportunities.

We face the risk of product liability claims and may not be able to obtain or maintain adequate product liability insurance.

Although we have never been sued for product liability, our business exposes us to the risk of product liability claims that are inherent in the manufacturing, processing, and marketing of medical devices, genetic tests, and human tissue products.  We may be subject to such claims if our products cause, or appear to have caused, an injury.  Claims may be made by patients, healthcare providers or others selling our products.  Defending a lawsuit, regardless of merit, could be costly, divert management attention and result in adverse publicity, and could result in the withdrawal of, or reduced acceptance of, our products in the market.

Although we have product liability insurance that we believe is adequate, this insurance is subject to deductibles and coverage limitations and we may not be able to maintain this insurance. Also, it is possible that claims could exceed the limits of our coverage. If we are unable to maintain product liability insurance at an acceptable cost or on acceptable terms with adequate coverage or otherwise protect ourselves against potential product liability claims or we underestimate the amount of insurance we need, we could be exposed to significant liabilities, which may harm our business.  A product liability claim or other claim with respect to uninsured liabilities or for amounts in excess of insured liabilities could result in significant costs and significant harm to our business.

Significant disruptions of information technology systems or breaches of information security could adversely affect our business.

We rely to a large extent upon sophisticated information technology systems to operate our business. In the ordinary course of business, we collect, store, and transmit large amounts of confidential information (including, but not limited to, personal information and intellectual property). We also have outsourced significant elements of our operations to third parties, including significant elements of our information technology infrastructure and, as a result, third party relationships with parties who may or could have access to our confidential information. The size and complexity of our information technology and information security systems, and those of our third parties with whom we contract (and the large amounts of confidential information that is present on them), make such systems potentially vulnerable to service interruptions or to security breaches from inadvertent or intentional actions by our employees or vendors, or from malicious attacks by third parties. Such attacks are of ever-increasing levels of sophistication and are made by groups and individuals with a wide range of motives (including, but not limited to, industrial espionage and market manipulation) and expertise. While we have invested significantly in the protection of data and information technology, there can be no assurance that our efforts will prevent service interruptions or security breaches. Although we have cyber-insurance coverage that may cover certain events described above, this insurance is subject to deductibles and coverage limitations and we may not be able to maintain this insurance. Also, it is possible that claims could exceed the limits of our coverage.  Any interruption or breach in our systems could adversely affect our business operations and/or result in the loss of critical or sensitive confidential information or intellectual property, and could result in financial, legal, business and reputational harm to us or allow third parties to gain material, inside information that they use to trade in our securities. 

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We may expand our business through acquisitions, licenses, investments, and other commercial arrangements in other companies or technologies, which contain significant risks.

We periodically evaluate strategic opportunities to acquire companies, divisions, technologies, products, and rights through licenses, distribution agreements, investments, and outright acquisitions to grow our business. In connection with one or more of those transactions, we may:

Any of these items could materially and adversely affect our revenues, financial condition, and profitability. Business acquisitions also involve the risk of unknown liabilities associated with the acquired business, which could be material. Incurring unknown liabilities or the failure to realize the anticipated benefits of an acquisition could materially, and adversely affect our business if we are unable to recover our initial investment, which could include the cost of acquiring licenses or distribution rights, acquiring products, purchasing initial inventory, or investments in early stage companies. Inability to recover our investment, or any write off of such investment, associated goodwill, or assets, could have a material and adverse effect on our business, results of operations and financial condition.

Our existing capital resources will not meet our current needs and we must raise additional funding in the immediate future to execute our business plan.

Available funding may not be sufficient to execute our business plan over the next twelve months and thereafter.  There can be no assurance that the necessary funds will be timely available if needed or that continuing operations will provide the needed cash flows.

Our financial resources are insufficient to repay amounts owed on outstanding liabilities.

Our cash reserves are not sufficient to pay current liabilities. We will be looking to pay these obligations through debt or equity financings and/or revenues from operations. We do not have any financial commitments with respect to future financings, we have found it difficult to raise funding in recent periods, and we have had negative cash flow from operating activities during most periods of our operating history. As a result, there can be no assurance that we will have the means to repay our obligations in full or at all.

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We rely on a single laboratory facility to process our molecular diagnostic tests and a second single laboratory facility to produce our regenerative medicine products and HCT/Ps.

We rely on a single CLIA-certified, CAP accredited laboratory facility in Salt Lake City, Utah that we lease and operate to process our molecular diagnostic tests. We rely on a second laboratory facility in Salt Lake City, Utah that we lease and operate to process our regenerative medicine products and HCT/Ps. These facilities and certain pieces of laboratory equipment would be difficult to replace and may require significant replacement lead-time. These facilities could be affected by natural disasters such as earthquakes, floods, and fires. In the event either of these facilities or the equipment located in the facilities are affected by man-made or natural disasters, we would be unable to continue our genetic and/or molecular diagnostic business and meet customer demands for a significant period of time. Any interruption in our molecular diagnostic and/or regenerative medicine business would result in a loss of goodwill, including damage to its reputation. If our regenerative medicine and/or planned molecular diagnostic business were interrupted, it would seriously harm our business.

Our success is dependent on our key personnel.

Our success depends upon the skills, experience, and efforts of senior management. We have employment agreements with all members of senior management listed in management section. Should the services of any of these people become unavailable to us for any reason, our business would likely be adversely affected and may not continue at all. Competition for such personnel is intense in the genetics industry, and there can be no assurance that we will be successful in attracting and retaining such personnel. Our success will depend on our continued ability to attract and retain highly skilled and qualified personnel.

We may never achieve the goals of our diagnostics business.

We have not generated operating revenues from the sale of diagnostic products. There can be no assurance that we will develop any commercially viable diagnostic testing or treatment techniques. Our success will depend in part on our ability to deal with the problems, expenses, and delays frequently associated with establishing a new business venture. Future losses relating to our diagnostics business are planned prior to diagnostic operations potentially becoming profitable. Given the uncertainties surrounding the commercialization of diagnostic discoveries, we are unable to predict when we will achieve profitability, if ever. Announcements by our present or potential competitors, technological innovations, new commercial products or services, regulatory developments, other developments, disputes concerning patent or proprietary rights, public concern regarding the safety, efficacy or other implications of the products or services that are expected to be developed by us or any future collaborators and other events or factors may have a significant impact on our business, financial condition and results of operations. As a result, there is no assurance that our operations will ever become profitable.

There can be no assurance of market acceptance for our genetic and other diagnostic tests.

The commercial success of genetic predisposition and other genetic tests and treatments, which we may develop, will depend upon their acceptance as medically useful and cost-effective by physicians and other members of the medical community, patients, and third-party payers. Broad market acceptance can be achieved only with substantial education about the benefits and limitations of such tests, as well as resolution of concerns about their appropriate and ethical use. For example, there continues to be widespread concern that people with genetic predispositions to diseases may suffer discrimination from employers, as well as providers of health and life insurance. There are also certain groups who oppose the use of genetic tests for inherited diseases for which no cures currently exist. We or our collaborative partners, if any, may be required to expend substantial financial resources to responsibly promote the benefits of any genetic tests and treatments developed. There can be no assurance that any genetic tests and treatments we develop will gain market acceptance on a timely basis, if at all. Failure to achieve market acceptance will have a material adverse effect on our business, financial condition, and results of operations.

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Our License Agreement is subject to certain minimum sales requirements

We have an exclusive license to promote, market, offer for sale and sell the ARTguide™ test and other endometriosis tests in the United States. The territory can be expanded. To maintain the license, we must have minimum sales of $12.5 million in the twelve-month period beginning nine months after commercial launch. In the next year minimum sales must be $30 million and in the third year and thereafter minimum sales must be $60 million. Failure to meeting the minimum sales can result in the termination of our license agreement. There can be no assurance that we will meet the minimum sales requirements. The termination of the license agreement will bar our continued use and sale of the ARTguide™ test.

Our ownership of Juneau is not fully paid

We currently own 48.3 percent of Juneau. We have fully paid for 40.0 percent of our ownership in Juneau and owe an additional $7,206,610 for the remainder of our interest. We are paying this amount in monthly installments for a period ending in November 2021. The company is currently in arrears on the subscription payments, and failure to pay the monthly installments may result in our loss of the Juneau equity that has not been paid. There can be no assurance that we will be able to pay for the entire outstanding balance.

We may not be successful in developing diagnostic tests or in correctly interpreting the results of our diagnostic tests.

Whether we will be successful in offering diagnostic testing depends in large part upon our ability to develop genetic tests for genes we have discovered. We are seeking to develop genetic tests that can identify the existence of a particular gene mutations that predispose a person to a particular disease. These gene mutations cannot be discovered until the relevant genes have been discovered and fully sequenced. Genes can be complex and may have numerous mutations. Moreover, a defective gene may malfunction in many different ways, and the many mutated versions of the gene may make a genetic test difficult to perform and interpret. Until a mutation has been characterized, researchers cannot say for sure what risk it poses for an individual. Further, even when a genetic test identifies the existence of a mutation in a particular individual, the interpretation of the genetic test results is limited to the identification of a statistical probability that the tested individual will develop the disease for which the test has been completed. There can be no assurance that we will be successful in developing genetic tests based on our gene discoveries or other such tests will be able to be marketed at acceptable prices or will receive commercial acceptance in the market.

We may not be successful in obtaining adequate reimbursement for our services and products.

Our ability to successfully commercialize any genetic test or treatments we develop, and the ability of any future collaborative partners, if any, to successfully commercialize such products, depends in part on obtaining adequate reimbursement for such services and products and related treatments from government and private health care insurers (including health maintenance organizations) and other third-party payers. Physicians' decisions to recommend genetic tests and treatments, as well as patients' elections to pursue testing and treatments, are likely to be heavily influenced by the scope and extent of coverage for such tests by third-party payers. Government and private third-party payers are increasingly attempting to contain health care costs by limiting both the extent of coverage and the reimbursement rate for new diagnostic and therapeutic products and services. In particular, services which are determined to be investigational in nature or which are not considered "reasonable and necessary" for diagnosis or treatment may be denied reimbursement coverage. If adequate reimbursement coverage is not available from third-party payers, there can be no assurance that individuals will elect to pay directly for the genetic testing and treatments and market acceptance of the genetic testing and treatments will likely be adversely impacted, which would have a material adverse effect on our business, financial condition and results of operations.

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In addition, Medicare often permits coverage decisions to be made by its carriers and intermediaries, leading to different coverage decisions in various parts of the United States. Disapproval of, or limitations in, coverage by the United States Health Care Financing Administration ("HCFA") or other third-party payers, as well as inadequate payment levels, could have a material adverse effect on our future revenues. A key component in the reimbursement decision by HCFA and most private insurers is the development of Current Procedural Terminology ("CPT") codes, which are used in the submission of claims to insurers for reimbursement for medical services. CPT codes are developed, maintained, and revised by a committee of medical specialists which is administered by the American Medical Association ("AMA"). Currently, reimbursement for genetic testing and treatments is made on the basis of CPT codes that may not accurately reflect the complexity or sophistication of specific genetic tests. There can be no assurance that specific CPT codes will be implemented for any genetic testing or treatments developed by us. Failure to secure recognition of such CPT codes would have a material adverse effect on our business, financial condition, and results of operations.

There can be no assurance that we will be able to maintain or develop appropriate collaborative arrangements that will be necessary for us to develop and commercialize our products and services.

Our current strategy is to rely, in part, on collaborative arrangements to develop and commercialize products based on gene discoveries. There can be no assurance that we will be able to negotiate acceptable collaborative arrangements, or that any collaborative arrangement will be successful. In addition, there can be no assurance that our collaborative partners will not pursue alternative technologies or develop alternative products either on their own or in collaboration with others, including with our competitors, as a means of developing diagnostic products or treatments for the diseases targeted by the collaborative programs. Milestone payments are frequently built into collaborative arrangements relating to gene discoveries. It is anticipated that our receipt of a substantial portion of the potential milestone payments under future collaborative agreements, if any, is dependent upon the efforts of our strategic collaborators. Failure of any collaborative arrangement could have a material adverse effect on our business, financial condition, or results of operations. Additionally, there can be no assurance that disputes over rights or technology or other proprietary interests will not arise. Such disputes or disagreements between with future collaborative partners could lead to delays in collaborative research projects, or could result in litigation or arbitration, any of which could have a material adverse effect on our business, financial condition or results of operations.

We may not be successful in protecting our intellectual property.

Our success will depend, in part, on our ability to obtain patent protection, both in the United States and in other countries. Patents may be issued for various aspects of our product, including genes, gene markers associated with disease, methods of diagnosing a women's predisposition to endometriosis, and methods for treating endometriosis which we believe are patentable. Also important to our success is our ability to preserve our trade secrets and to operate without infringing the proprietary rights of third parties. The patent position of biotechnology firms generally involves complex legal and factual questions. Isolated gene sequences have been considered patentable subject matter since the 1980s and the U.S. Patent and Trademark Office ("USPTO") has regularly issued patents covering isolated gene sequences. In addition, the USPTO has granted patents on gene markers associated with disease, as well as methods of diagnosing patients for a predisposition to disease. Some argue, however, that genes and diagnostics should not be eligible for patent protection for a number of public policy reasons. Recently, the Supreme Court of the United States ruled that "naturally occurring" genes are not patentable subject matter. As a result, the legal landscape is not settled and several important cases are under review at both the Federal Circuit and the U.S. Supreme Court. If one or more of these decisions rule against gene based diagnostic patents, it may significantly limit or eliminate our ability to obtain patent protection in the United States. Further, there can be no assurance that we will develop patentable applications or that patents will issue or that the claims of any issued patents will afford meaningful protection for any technology or products that we develop. In addition, there can be no assurance that any patents issued to us or our licensors will not be challenged, and subsequently narrowed, invalidated, or circumvented.

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We depend on a limited number of third parties for some of our supplies of equipment and reagents. If these supplies become unavailable, then we may not be able to successfully conduct research or operate our genetics business at all or on a timely basis.

We (and our suppliers) currently rely on a small number of suppliers to provide our gene sequencing machines, robots, and specialty reagents required in connection with our research. Management believes that currently there are limited alternative suppliers of gene sequencing machines, robots, and reagents. The gene sequencing machines, robots, or the reagents may not remain available in commercial quantities at acceptable costs. If we are unable to obtain when needed additional gene sequencing machines, robots, or an adequate supply of reagents or other ingredients at commercially reasonable rates, our ability to continue to identify genes and perform molecular diagnostic testing would be adversely affected.

Our business can be impacted by political events, international trade disputes, war, terrorism, natural disasters, public health issues, and industrial accidents, difficulties with our single manufacturer or other business interruptions.

Political events, international trade disputes, war, terrorism, natural disasters, public health issues, industrial accidents and other business interruptions could harm or disrupt international commerce and the global economy, and could have a material adverse effect on our business and our suppliers, contract manufacturers, distributors and other partners.

International trade disputes can result in tariffs and other measures that can adversely affect the sale of our Assurance AB™ COVID-19 antibody test. For example, trade tensions have led to a series of tariffs imposed by the U.S. on imports from China. Tariffs could increase the cost of our Assurance AB™ COVID-19 antibody test. These increased costs adversely impact the gross margin that the Company earns on these tests. Tariffs can also make our Assurance AB™ COVID-19 antibody tests more expensive for customers, which could make our Assurance AB™ COVID-19 antibody test less competitive and reduce consumer demand. Political uncertainty surrounding international trade disputes and measures could also have a negative effect on consumer confidence and spending, which could adversely affect our test sales.

The sole source and manufacturer of our Assurance AB™ COVID-19 antibody test is in China. The contract with our Chinese based manufacturer does not require the manufacturer to supply any minimum or maximum number of tests and the pricing and other purchase terms are subject to negotiation each time a purchase order is submitted. There can be no assurance that this manufacturer will produce a sufficient quantity of tests on a timely basis, that the tests will consistently be of acceptable quality, that the tests can be obtained at a competitive price, that there will not be unanticipated problems in moving tests through customs, that transportation of tests from China will be accomplished on a timely basis or that we will be able to replace its current manufacturer on a timely basis and on acceptable terms should circumstances require a change.

In addition, the manufacture of our Assurance AB™ COVID-19 antibody test is subject to the risk of interruption by fire, power shortages, and other industrial accidents, terrorist attacks and other hostile acts, labor disputes, public health issues and other events beyond our control. Such events could make it difficult or impossible for us to manufacture and deliver our Assurance AB™ COVID-19 antibody test to our customers and distributors. Following an interruption to our business, we could require substantial recovery time, experience significant expenditures to resume operations and lose significant sales. Because we rely on single source for the supply and manufacture of our Assurance AB™ COVID-19 antibody test, a business interruption affecting such source would exacerbate any negative consequences to us.

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There can be no assurance of regulatory or market acceptance for our Assurance AB™ COVID-19 antibody test.

The commercial success of our Assurance AB™ COVID-19 antibody test will depend upon its acceptance as medically useful and cost-effective by physicians and other members of the medical community, patients, and third-party payers. Broad market acceptance can be achieved only with substantial education about the benefits and limitations of such tests, as well as resolution of concerns about their appropriate use. We or our distributor, if any, may be required to expend substantial financial resources to responsibly promote the benefits of our Assurance AB™ COVID-19 antibody test.  Demand for the Assurance AB™ test may be significantly limited or eliminated if the FDA does not grant an Emergency Use Authorization (EUA) for the test. The test is currently under review by the FDA and an EUA may not be granted timely or at all.  There can be no assurance our Assurance AB™ COVID-19 antibody test will gain market acceptance on a timely basis, if at all. Failure to achieve regulatory or market acceptance will have a material adverse effect on our business, financial condition, and results of operations.

There can be no assurance that we will be able to maintain or develop appropriate distribution arrangements that will be necessary for us to develop and commercialize our Assurance AB™ COVID-19 antibody test.

In April 2020, we signed an exclusive distribution agreement for the Assurance AB™ test with Wellgistics, LLC. Wellgistics failed to pay the entire deposit amount stipulated in the agreement, and no product has been delivered to them. As a result of the failure to make payment, Wellgistics is no longer the exclusive distributor of Assurance AB™.  There can be no assurance that Wellgistics, LLC will meet its contractual commitments or be able to successfully market and distribute our Assurance AB™ COVID-19 antibody test.  In addition, there can be no assurance that Wellgistics, LLC or any other future collaborative partner will not pursue alternative technologies or develop alternative products either on their own or in collaboration with others, including with our competitors, as a means of developing competitive tests. There is no assurance that we can successfully replace Wellgistics, LLC with one or more future distributors. Failure of any distribution arrangement could have a material adverse effect on our business, financial condition, or results of operations. A dispute with our current or any future distributor could lead to delays in test sales, or could result in litigation or arbitration, any of which could have a material adverse effect on our business, financial condition or results of operations.

There can be no assurance of market acceptance for our Assurance VR™ COVID-19 RT-PCR viral test.

In July 2020, the Company validated a saliva-based RT-PCR viral test for COVID-19 that is being marketed as Assurance VR™. The test has been granted Emergency Use Authorization by the FDA. The commercial success of our Assurance VR™ COVID-19 test will depend upon its acceptance as medically useful and cost-effective by physicians and other members of the medical community, patients, and third-party payers. Broad market acceptance can be achieved only with substantial education about the benefits and limitations of such tests, as well as resolution of concerns about their appropriate use. We or our potential distributor, if any, may be required to expend substantial financial resources to responsibly promote the benefits of our Assurance VR™ COVID-19 test.  There can be no assurance our Assurance VR™ COVID-19 antibody test will gain market acceptance on a timely basis, if at all. Failure to achieve market acceptance will have a material adverse effect on our business, financial condition, and results of operations.

Risks Related to FDA Approval

As noted, our initial commercial genetics product will be an LDT, conducted in a CLIA-certified laboratory, for indications of endometriosis, which will be marketed to Assisted Reproductive Therapy centers and subsequently to the broader OB/GYN physician marketplace. We believe that this product does not require FDA approval. We currently contemplate the eventual launch of a test "kit", to be marketed as a companion diagnostic for on-label therapeutic indication. We believe that such a kit would be subject to the FDA approval process, including clinical trials.  The FDA Approval process can be an extended, complex, and expensive process.  No assurances can be given that, in the event we do elect to pursue a kit, FDA approval will be granted.

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Risks Relating to our regenerative medicine products and HCT/Ps

Our regenerative medicine products and HCT/Ps are dependent on the availability of tissue from human donors, and any disruption in supply could adversely affect our business.

The success of our regenerative medicine products and HCT/Ps depends upon, among other factors, the availability of tissue from human donors. Any failure to obtain tissue from our sources will interfere with our ability to effectively meet demand for our products incorporating human tissue. The processing of human tissue into our products is very labor-intensive and it is therefore difficult to maintain a steady supply stream. The availability of donated tissue could also be adversely impacted by regulatory changes, public opinion of the donor process as well as our own reputation in the industry. The challenges we may face in obtaining adequate supplies of human tissue involve several risks, including limited control over availability, quality, and delivery schedules. In addition, any interruption in the supply of any human tissue component could materially harm our ability to manufacture our products until a new source of supply, if any, could be found. We may be unable to find a sufficient alternative supply channel in a reasonable time period or on commercially reasonable terms, if at all, which would have a material adverse effect on our business, results of operations and financial condition.

The regenerative medicine products and HCT/Ps we manufacture and process are derived from human tissue and, therefore, have the potential for disease transmission.

The utilization of human tissue creates the potential for transmission of communicable disease, including, but not limited to, human immunodeficiency virus ("HIV"), viral hepatitis, syphilis and other viral, fungal, or bacterial pathogens.  We are required to comply with federal and state regulations intended to prevent communicable disease transmission. Although we maintain strict quality controls over the procurement and processing of our tissue including sterility testing by independent labs, there is no assurance that these quality controls will be adequate.  In addition, negative publicity concerning disease transmission from other companies' improperly processed donated tissue could have a negative impact on the demand for our products.

Disruption of our processing could adversely affect our business, financial condition, and results of operations.

Our results of operations are dependent upon the continued operation of our processing facilities.  Risks that could impact our ability to use these facilities include the occurrence of natural and other disasters, and the need to comply with the requirements of directives from government agencies, including the FDA.  We do not have a secondary processing facility. The unavailability of our manufacturing and processing facilities could have a material adverse effect on our business, financial condition, and results of operations during the period of such unavailability.

We may implement a product recall or voluntary market withdrawal, which could significantly increase our costs, damage our reputation, and disrupt our business.

The manufacturing, marketing, and processing of our regenerative medicine products and HCT/Ps involves an inherent risk that our tissue products or processes do not meet applicable quality standards and requirements.  In that event, we may voluntarily implement a recall or market withdrawal or may be required to do so by a regulatory authority.  A recall or market withdrawal of one of our products would be costly and would divert management resources.  A recall, withdrawal, or other regulatory action related to one of our products, or a similar product processed by another entity, also could impair sales of our products as a result of confusion concerning the scope of the recall or withdrawal, or as a result of the damage to our reputation for quality and safety.

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Any changes in the governmental regulatory classifications of our product candidates could prevent, limit, or delay our ability to market or develop our product candidates.

The FDA establishes regulatory requirements based on the classification of a product. An HCT/P is a product containing or consisting of human cells or tissue intended for transplantation into a human patient. 361 HCT/Ps are not subject to any premarket clearance or approval requirements and are subject to less extensive post-market regulatory requirements. Because our product development programs are designed to satisfy the standards applicable to 361 HCT/Ps, any change in the regulatory classification or designation of our products would affect our ability to obtain FDA approval or clearance for and marketing of our product candidates.  

If a product candidate is deemed not to be a 361 HCT/P, FDA regulations will require premarket clearance or approval requirements that will involve significant time and cost investments by us. Further, there can be no assurance that the FDA will not, at some future point, change its position on current or future products' 361 HCT/P status, and any regulatory reclassification could have adverse consequences for us and make it substantially more difficult or expensive for us to conduct our business by requiring extensive clinical trials, premarket clearance or approval and compliance with additional post-market regulatory requirements with respect to those product candidates. Moreover, increased regulatory scrutiny within the industry in which we operate could lead to increased regulation of HCT/Ps, including 361 HCT/Ps. We also cannot assure you that the FDA will not impose more stringent interpretations, restrictions, or requirements with respect to products that qualify as 361 HCT/Ps.

Risks Related to COVID-19

The COVID-19 pandemic could have a material impact on our business, results of operation and financial condition, operating results, cash flows and prospects.

In December 2019, a novel strain of coronavirus (COVID-19) emerged in Wuhan China. Less than four months later, in March 2020, the World Health Organization declared COVID-19 a pandemic. While the outbreak initially was largely concentrated in China and caused significant disruptions in its economy, the virus has now spread to many other countries and regions, and every state within the United States, including Utah, where our primary offices and manufacturing facility are located.

Towards the end of the third quarter of fiscal 2020 we began to experience, and through the date of this filing we are continuing to experience, impacts to our business and operations related to the COVID-19 pandemic, including the impact of stay-at-home mandates and related safety measures such as the delay of elective medical procedures, resulting in a decline in the volume of procedures using our products. In response to the pandemic, healthcare providers have, and may need to further, reallocate resources, such as physicians, staff and facilities, as they prioritize limited resources and personnel capacity to focus on the treatment of patients with COVID-19 and implement limitations on access to hospitals and other medical institutions due to concerns about the potential spread of COVID-19 in such settings. These actions have significantly delayed the provision of other medical care including elective and diagnostic procedures involving our products, having an adverse effect on our revenue. These measures and challenges may continue for the duration of the COVID-19 pandemic, and such duration is uncertain, and may significantly reduce our revenue and cash flows while the pandemic continues and thereafter until we and our customers are able to resume normal business operations. In the fourth quarter of fiscal 2020, the impact of the COVID-19 pandemic on our business was more significant than we experienced in the third quarter as pandemic precautions continue to limit demand for our products. We anticipate that these negative impacts will continue for the duration of the pandemic. We cannot predict the magnitude or duration of the pandemic's impact on our business.

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In connection with the COVID-19 pandemic, the following risks could have a material effect on our business, financial condition, results of operations and prospects:  

- The delay or cancellation by healthcare providers of the elective procedures in which our allograft products are used as a result of their COVID-19 response efforts and the duration of such effects, thereby reducing sales of our products for an unknown period of time;

- The inability or unwillingness of some patients to visit hospitals or clinics in order to undergo elective procedures in which our products are used, thereby reducing sales of our products for an unknown period of time;

- The inability of some patients to pay for elective procedures in which our products are used due to job loss or lack of insurance, thereby reducing sales of our products for an unknown period of time;

- The inability of our distributors and customers to conduct their normal operations, including supplying or conducting procedures in which our products are used, because of their COVID-19 response efforts, or the reduced capacity or productivity of their employees and contractors as a result of possible illness, quarantine or other inability to work, thereby reducing sales of our products for an unknown period of time;

- The inability of suppliers of raw materials or components used in the manufacture of our products, to supply and/or transport those raw materials, components and products to us in a timely and cost effective manner due to shutdowns, interruptions or delays, limiting and precluding the production of our finished products, impacting our ability to supply customers, reducing our sales, increasing our costs of goods sold, and reducing our absorption of overhead;

- The partial or complete delay or cancellation of international or domestic flights by our airfreight carriers, resulting in our inability to receive raw materials, components and products from our suppliers or to ship and deliver our finished products to our domestic and international customers in a timely or cost effective manner, thereby potentially increasing our freight costs as we seek alternate, potentially more expensive, methods to ship raw materials, components or products, and negatively impacting our sales;

- The reduced capacity or productivity of our operations as a result of possible illness, quarantine or other inability of our employees and contractors to work, despite all of the preventative measures we continue to undertake to protect the health and safety of our workforce;

- The illiquidity or insolvency of our suppliers and freight carriers whose business activities could be shut down, interrupted, or delayed;

- The illiquidity or insolvency of our distributors and customers, or their inability to pay our invoices in full or in a timely manner, due to the reduction in their revenues caused by the cancellation or delay of procedures and other factors, which could potentially reduce our cash flow, reduce our liquidity and increase our bad debt reserves;

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- A portion of our raw materials or finished product inventory may expire due to reduced demand for our products;

- Delays in our ability, and the ability of our development partners to conduct, enroll and complete clinical development programs such as the ARTGUIDE™ clinical development program currently being conducted by the Houston Fertility Institute;

- Delays of regulatory reviews and approvals, including with respect to our product candidates, by the FDA or other health or regulatory authorities;

- Decreased sales of our products due to the reduction of in-person sales and marketing activities and training caused by travel restrictions, quarantines, other similar social distancing measures and more restrictive healthcare facility access policies;

- Our ability to maintain employee morale and motivate and retain management personnel and other key employees as a result of our recent reduction in force;

- The instability to worldwide economies, financial markets, social institutions, labor markets and the healthcare systems as a result of the COVID-19 pandemic, which could result in an economic downturn that could adversely impact our business, results of operations and financial condition, as well as that of our suppliers, distributors, customers or other business partners; and

- A recurrence of the COVID-19 pandemic after social distancing and other similar measures have been relaxed.

The extent to which the COVID-19 pandemic impacts our business and our results of operations and financial condition will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge in connection with the severity of the virus, the ability to treat and ultimately prevent it, its potential recurrence, and actions that may be taken to contain its impact.

Risks Related to Our Common Stock

The price of our common stock has been, and will likely continue to be, volatile.

The market price of our common stock, like that of the securities of many other companies that are in, or are just emerging from, the development stage, has fluctuated over a wide range and it is likely that the price of our common stock will fluctuate in the future.  The market price of our common stock could be impacted by a variety of factors, including:

- Fluctuations in stock market prices and trading volumes of similar companies or of the markets generally;

- Our ability to successfully launch, market and earn significant revenue from our products; 

- Our ability to obtain additional financing to support our continuing operations;

- Disclosure of the details and results of regulatory applications and proceedings;

- Changes in government regulations or our failure to comply with any such regulations;

- Additions or departures of key personnel;

- Our investments in research and development or other corporate resources;

- Announcements of technological innovations or new commercial products by us or our competitors; 

- Developments in the patents or other proprietary rights owned or licensed by us or our competitors; 

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- The timing of new product introductions;

- Actual or anticipated fluctuations in our operating results, including any restatements of previously reported results; 

- Our ability to effectively and consistently manufacture our products and avoid costs associated with the recall of defective or potentially defective products;  

- Our ability and the ability of our distribution partners to market and sell our products;

- Changes in reimbursement for our products or the price for our products to our customers;

- Removal of our products from the Federal Supply Schedule, or changes in how government accounts purchase products such as ours or in the price for our products to government accounts;  

- Material amounts of short-selling of our common stock; and

- The other risks detailed in this Annual Report.

Further, due to the relatively fixed nature of most of our costs, which primarily include personnel costs as well as facilities costs, any unanticipated shortfall in revenue in any fiscal quarter would have an adverse effect on our results of operations in that quarter.  These fluctuations could cause the trading price of our stock to be negatively affected. Our quarterly operating results have varied substantially in the past and may vary substantially in the future.  In addition, the stock market and certain of the indices on which we are included have been very volatile in the recent past.  This volatility is often not related to the operating performance of companies listed thereon and will probably continue in the foreseeable future.

Securities analysts may elect not to report on our common stock or may issue negative reports that adversely affect the stock price.

There is no assurance that any analysts will report on our common stock in the future.  Rules mandated by the Sarbanes-Oxley Act and a global settlement reached in 2003 among the SEC, other regulatory agencies, and a number of investment banks led to a number of fundamental changes in how analysts are reviewed and compensated.  In particular, many investment banking firms are required to contract with independent financial analysts for their stock research.  If securities analysts discontinue covering our common stock, the lack of research coverage may adversely affect our actual and potential market price.  The trading market for our common stock may be affected in part by the research and reports that industry or financial analysts publish about our business.  If one or more analysts elect to cover us and then downgrade the stock, the stock price would likely decline rapidly.  If one or more of these analysts cease coverage of us, we could lose visibility in the market, which in turn could cause our stock price to decline.  This could have a negative effect on the market price of our shares.

Our charges to earnings resulting from acquisition, restructuring and integration costs may materially adversely affect the market value of our common stock.

We account for the completion of our acquisitions using the purchase method of accounting. We allocate the total estimated purchase prices to net tangible assets, amortizable intangible assets and indefinite-lived intangible assets, and based on their fair values as of the date of completion of the acquisitions, record the excess of the purchase price over those fair values as goodwill. Our financial results, including earnings per share, could be adversely affected by a number of financial adjustments required in purchase accounting including the following:

- We will incur additional depreciation expense as a result of recording purchased tangible assets.

- To the extent the value of goodwill or intangible assets becomes impaired, we may be required to incur material charges relating to the impairment of those assets.

- Cost of sales may increase temporarily following an acquisition as a result of acquired inventory being recorded at its fair market value.

- Earnings may be affected by changes in estimates of future contingent consideration to be paid when an earn-out is part of the consideration.

- Earnings may be affected by transaction and implementation costs, which are expensed immediately.

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We do not intend to pay cash dividends.

We have never declared or paid cash dividends on our capital stock. We currently expect to use available funds and any future earnings in the development, operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. As a result, capital appreciation, if any, of our common stock will be an investor's only source of potential gain from our common stock for the foreseeable future.

Substantial future sales of our common stock by us or by our existing stockholders could cause our stock price to fall.

Additional equity financings or other share issuances by us, including shares issued in connection with strategic alliances and corporate partnering transactions, could adversely affect the market price of our common stock. Sales by existing stockholders of a large number of shares of our common stock in the public market or the perception that additional sales could occur could cause the market price of our common stock to drop.

We have experienced volatility in the price of our stock and are subject to volatility in the future.

The price of our common stock has experienced significant volatility. The high and low bid quotations for our common stock, as reported by the OTC Markets, ranged between a high of $1.81 and a low of $0.10 during the past 12 months. The historic market price of our common stock may be higher or lower than the price paid for our shares and may not be indicative of future market prices, depending on many factors, some of which are beyond our control. As a result, investors may be unwilling to purchase our common stock and our market price may be affected. The price of our stock may change dramatically in response to our success or failure and based upon our relationship and the decisions of our Chief Executive Officer.

Our common stock is not listed on a major exchange and there is no assurance that we will be able to obtain such a listing.

Our common stock currently trades on the Over-The-Counter markets under the symbol PRED. As a result of the suspension of trading in our stock by the SEC in April 2020, trading in our stock was moved from the PTC Pink Sheets to the OTC Gray Sheets. The Over-The-Counter market in general and the Gray sheets in particular are considered to be a less efficient system than listing on markets such as NASDAQ or other national exchanges because of lower trading volumes, transaction delays and reduced security analyst and news media coverage. These factors could contribute to lower prices and larger spreads in the bid and ask prices for our common stock. Additionally, trading of our common stock on the Over-The-Counter markets may make us less desirable to institutional investors and may, therefore, limit our future equity funding options and could negatively affect the liquidity of our stock.

We are seeking to resume trading on the OTC Pink Sheets and simultaneously seeking a listing on NASDAQ. There can be no assurance that our common stock will qualify to resume trading on the OTC Pink Sheets. We currently do not qualify for a listing on NASDAQ and there can be no assurance that we will qualify for a NASDAQ listing in the future. In addition, if a NASDAQ listing is obtained then we will be subject to continued listing requirements to maintain the listing and to avoid delisting. Our results of operations and our current and fluctuating stock price directly impact our ability to satisfy these listing standards.

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We recently identified a material weakness in our internal control over financial reporting, and our business and stock price may be adversely affected if our internal control over financial reporting is not effective

Under Section 404 of the Sarbanes-Oxley Act of 2002 and rules promulgated by the SEC, companies are required to conduct a comprehensive evaluation of their internal control over financial reporting. Our internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be prevented or detected timely. Even effective internal controls over financial reporting can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements.

During the financial close for the quarter ended June 30, 2020, we identified material weaknesses in our internal controls over financial reporting related to insufficient controls over the accounting for our equity method investment, stock based compensation, and timely execution of contracts. A more complete description of these material weaknesses are included in Item 9A, "Controls and Procedures" in this Form 10-K.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting to ensure that information regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.

Item 1B. UNRESOLVED STAFF COMMENTS

None.

We occupy a 5,300 square-foot facility in Salt Lake City, Utah under the terms of an operating lease expiring in September 2021. This facility is used primarily to support our administrative staff.

We lease a 15,164 square-foot office and laboratory facility in Salt Lake City, Utah under the terms of an operating lease expiring in September 2021 which serves as our HCT/Ps laboratory.

We lease a second 7,507 square-foot office and laboratory facility in Salt Lake City, Utah under the terms of a renewable operating lease expiring in September 2021 which serves as our genetic testing laboratory.

We lease a third 6,711 square-foot office and warehouse facility in Salt Lake City, Utah under the terms of a renewable operating lease expiring in September 2021 which is primarily used to store inventory and for shipping and receiving.

We believe our current facilities are adequate to meet our needs through the end of fiscal 2021. Thereafter, we believe that additional space may be required, and that suitable additional or alternative space will be available on commercially reasonable terms as needed.

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On or about July 13, 2018, RTJ, LLC and two of its principals filed a lawsuit against Predictive Therapeutics LLC, Predictive Biotech, Inc., both subsidiaries of Predictive Technology Group, Inc., and Jack Turner, Jr., an employee of Predictive Biotech, Inc. The plaintiffs had acted in a distributor capacity. The relationship was terminated. Plaintiffs are alleging breach of contract, promissory estoppel, unjust enrichment, fraud, breach of fiduciary duty, defamation, false light, and tortious interference. Based on the information available to us, we do not believe any of the RTJ proceedings will have a material adverse effect on our business, results of operations, financial position, or liquidity. Further, we deny the allegations in the complaint, have not discovered any evidence of wrongdoing with respect to the allegations and will vigorously defend against these allegations.

On or about May 1, 2019, Surgenex, LLC and one of its principals filed a lawsuit against Predictive Therapeutics LLC, Predictive Biotech, Inc., both subsidiaries of Predictive Technology Group, Inc., and Doug Schmid, an employee of Predictive Biotech, Inc. In 2014 Surgenex contracted with Utah Cord Bank, Inc., a former employer of Doug Schmid, to assist Surgenex in the doing work relating to allograft tissue. Schmid was later hired by Predictive Biotech, Inc. In connection with Schmid's employment with Predictive Biotech, Surgenex has filed a lawsuit alleging unjust enrichment, conspiracy, conversion, tortious interference with contractual and business relations, violations of trade secrets act, and other claims. Based on the information available to us, we do not believe the Surgenex proceedings will have a material adverse effect on our business, results of operations, financial position, or liquidity. Further, we deny the allegations in the complaint, have not discovered any evidence of wrongdoing with respect to the allegations and will vigorously defend against these allegations.

On or about July 12, 2019, Predictive Technology Group, Inc. and Predictive Therapeutics, LLC, a subsidiary of Predictive Technology Group, Inc. filed a lawsuit against Michael Schramm (Schramm). Schramm entered into an agreement to sell us certain patents and patent applications in consideration for equity securities. Schramm represented that he owned all rights, title, and interest in and to the intellectual property. We were subsequently advised by our patent counsel that, while the patents are registered with the US Patent and Trademark Office in the Company's name, the Company may not have a full interest in the patents. An unrelated third-party law firm placed a lien on the patents due to non-payment of legal fees by a third-party entity to whom certain assets were sold by another third-party entity that originally owned the patents.  The Company raised these concerns with Schramm, who did not provide satisfactory evidence confirming that the Company had sole title to the patents.  We sued Schramm for breach of contract, conversion and on other legal theories and are seeking, among other things, rescission of the purchase and sale transaction. While there is some question as to whether the Company has full title to these patents, we believe that we have at least partial ownership and can develop products based on the said patents. Schramm filed a counterclaim against us and Bradley C. Robinson, our Chief Executive Officer and Transfer Online, Inc., our transfer agent. Schramm is alleging he did not make any false representations. He is alleging, among other things, that various parties involved in the transaction committed breach of contract, conversion, violations of Nevada state law for failure to transfer securities, breach of fiduciary duty, tortious interference, and civil conspiracy.  Based on the information available to us, we do not believe the Schramm proceedings will have a material adverse effect on our business, results of operations, financial position, or liquidity. Further, we deny the allegations in the counterclaim, have not discovered any evidence of wrongdoing with respect to the allegations in the counterclaim and will vigorously prosecute our claims against Schramm.

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On or about March 18, 2020, Predictive Biotech, Inc. filed a lawsuit in the Utah District Court against Auxocell Laboratories, Inc. for breach of contract, product liability, breach of warranty, negligent misrepresentation and other claims relating to defects in laboratory equipment Auxocell sold to Predictive Biotech. Alleged damages include wasted umbilical cord tissue, lost inventory, costs associated with particulate testing, reputational injury, and related claims. There can be no assurance that we will be successful in pursuing these claims.

Mackey Investment, LLLP ("Mackey") subscribed for and purchased 500,000 shares of Predictive common stock for $480,000 on or about January 29, 2020. Mackey was given all of the Company's SEC filings as part of his due diligence. Mackey, through counsel, sent a letter demanding rescission of his investment. He is alleging that Predictive failed to disclose material information in connection with its investment and has threatened a lawsuit for securities fraud. To date, no lawsuit has been filed. We deny the allegations in the demand letter and will vigorously defend against these allegations.

On or about April 30, 2020, Equitas Bio/Pharma Solutions, LLC ("Equitas") filed a lawsuit against Predictive Technology Group in New York District Court alleging nonpayment of "at least $551,080" in amounts owing under Master Service Agreement and Project Work Orders as of the date of filing. The claims are for breach of contract, breach of covenant of good faith and fair dealing and fraud. The basis of the fraud claim alleges that Predictive "made specific statements to Equitas that it was able to and intend to perform its obligations under the agreements" and at "the time Predictive made these promises it had no intention of keeping them." We agree that amounts are owed under the agreements, but we deny all allegations in the complaint relating to breach of covenant of good faith and fraud. Amounts due as of June 30, 2020 are included in accounts payable in the consolidated balance sheets included in the accompanying consolidated financial statements.

In June 2020, Wellgistics, LLC, the distributor of the Company's Assurance AB product, requested that the partial deposit paid on their non-cancellable purchase order of $5 million (see Note 7) be returned. As the purchase order is contractually non-cancellable and the Company performed on the order in good faith by transmitting the deposit to the Company's supplier, the request to return the deposit was not honored. To date there has been no legal action taken by either party.

As of June 30, 2020, we did not record a liability related to these matters (other than amounts recorded in accounts payable as described above) as it was determined that an unfavorable resolution is either not currently probable or that an amount or relevant range is not reasonably estimable, or both. However, litigation is inherently unpredictable and it is possible that losses may occur. Any unfavorable resolution of any of these matters could materially affect our consolidated financial position, cash flows, or results of operations. All legal costs associated with litigation are expensed as incurred.

None.

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PART II

Market Information

Our common stock is traded on the Other OTC Markets under the symbol PRED:

Stockholders

As of October 7, 2020, there are 269 stockholders of record and they hold 299,596,808 shares of the Company's common stock.  Each broker dealer or clearing corporation that holds shares for customers is counted as a single stockholder of record.

Equity Compensation Plan Information

The 2015 Stock Option Plan authorized the issuance of up to fifteen percent of the total outstanding shares. As of June 30, 2020, options exercisable for 30,014,704 shares had been granted under the Plan. In addition, the Company has outstanding warrants exercisable for 53,093,520 shares of common stock at a weighted average strike price of $0.84 per share. We have granted piggy-back registration rights, subject to certain restrictions, for 14,000,000 shares of common stock that will be issued upon exercise of outstanding warrants.  

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We have the following shares authorized for issuance under equity compensation plans:

(1) Fifteen percent of the total outstanding shares. As of June 30, 2020, there were 299,596,808 shares outstanding which results in: (i) options exercisable for 30,014,704 shares of common stock being authorized under the Plan and (ii) options that would be exercisable into 14,924,817 shares of common stock remaining available for issuance as of such date.

Unregistered Sales of Securities

1) On June 15, 2020, the Company entered into an agreement with a consultant for services. The consultant is an accredited investor. In consideration for these services, the Company issued 200,000 shares of our common stock and 300,000 warrants to purchase our common stock at an exercise prices of $0.35. The warrants expire five years from the date of issuance.

All securities issued by us in the transactions noted above are deemed "restricted securities" within the meaning of that term as defined in Rule 144 of the Securities Act and have been issued pursuant to the "private placement" exemption under Section 4(a)(2) of the Securities Act. Such transactions did not involve a public offering of securities, no underwriter was involved with the transactions, and no commissions were paid. All purchasers in the private placement had access to information on the Company necessary to make an informed investment decision. We have been informed that all purchasers are able to bear the economic risk of their investment and are aware that the securities were not registered under the Securities Act and cannot be re-offered or re-sold unless they are registered or are qualified for sale pursuant to an exemption from registration. The transfer agent and registrar of the Company were instructed to mark "stop transfer" on its ledger regarding these shares. 

Neither the Company nor any person acting on its behalf offered or sold the securities by means of any form of general solicitation or general advertising.

The securities were acquired for the purchasers own account and not with the view to, or for resale in connection with any distribution. A legend was placed on the certificates issued stating that the securities have not been registered under the Securities Act and cannot be sold or otherwise transferred without an effective registration or an exemption there from.

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Not applicable.

Unless otherwise noted, all of the financial information in this Report is consolidated financial information for the Company.

General

Predictive Technology Group, Inc., a Salt Lake City, UT life sciences company, is a leader in the use of data analytics for disease identification and subsequent therapeutic intervention through unique novel gene-based diagnostics, biotechnology treatments and companion therapeutics. Through its wholly-owned subsidiaries, Predictive Biotech, Predictive Laboratories, and Predictive Therapeutics, the company focuses on clinical categories such as: Endometriosis, Degenerative Disc Disease and Human Cell and Tissue Products ("HCT/P"). In addition to Predictive Biotech's efforts to advance regenerative medicine, Predictive Laboratories is committed to assisting women in overcoming the devastating consequences of endometriosis via appropriate early-stage diagnosis and subsequent treatment. During the year ended June 30, 2020, we reported total revenues of $24,441,424 and net loss attributable to common stockholders of $85,769,266 resulting in a $(0.30) loss per share. During the year ended June 30, 2019, we reported total revenues of $43,493,589 and net loss attributable to common stockholders of $15,305,169 resulting in a $(0.06) loss per share.

Our business units have been aligned with how the Chief Operating Decision Maker reviews performance and makes decisions in managing the Company.  The business units have been aggregated into two reportable segments:  Human Cell and Tissues Products (HCT/Ps) and diagnostics and therapeutics. Predictive Biotech's HCT/Ps are processed in our FDA registered lab. Our minimally manipulated tissue products are prepared utilizing proprietary extraction methods that reduce the loss of important scaffolding, growth factor and general cytokines and are intended for homologous use.  Predictive Laboratory's diagnostics and therapeutics uses data analytics for disease identification and subsequent therapeutic intervention through unique novel gene-based diagnostics, biotechnology treatments and companion therapeutics.

COVID-19 Pandemic

The global COVID-19 pandemic has had, and will continue to have, a material impact on our business. Towards the end of the third quarter of fiscal 2020 we began to experience, and through the date of this filing we are continuing to experience, impacts to our business and operations related to the COVID-19 pandemic, including the impact of stay-at-home mandates and related safety measures such as the delay of elective medical procedures, resulting in a decline in the volume of procedures using our products and a resulting decline in sales. We cannot predict the magnitude or duration of the pandemic's impact on our business.

As a result of the COVID-19 pandemic, we undertook a thorough analysis of all of our expenses and reduced discretionary expenses where practicable. In April 2020, we reduced headcount in our HCT/P segment by approximately 50%.  We can give no assurances that we will not have to take additional cost reduction measures if the pandemic continues to adversely affect the volume of procedures using our products.

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Business Highlights

Diagnostics and Therapeutics

On February 25, 2020, we announced preliminary results from a collaborative genomics analysis from our collaboration partner, Atrin Pharmaceuticals, that will be used to optimize patient selection for Atrin's upcoming ATRN-119 clinical trial.  This genomics analysis was a result of Atrin's collaboration with us to utilize next-generation genomics capabilities to improve predictive selection of clinical study patients most likely to respond and least likely to experience side effects from treatment with Atrin's DDR drug candidates. We and Atrin have been jointly developing proprietary approaches to better identify patients with specific mutations that drive cancer tumor growth, regardless of tumor type, and who are most likely to clinically respond to synthetically-lethal anti-cancer therapies. Our genomics capabilities were added to Atrin's existing proprietary proteomic and medicinal chemistry technologies to improve targeting of DDR proteins that are active in cancer cells and relatively inactive in healthy cells, ahead of Atrin's initiation of a Phase 1/2a clinical study of ATRN-119, Atrin's lead oral drug candidate. We are using a genomic data base analytics approach to help with patient selection, to increase efficiencies and quality of clinical trials, and to shorten time to market for Atrin's drug candidates. Atrin's pipeline also includes preclinical drug candidates in development for glioblastoma and hematological disorders that are being advanced towards IND enabling studies. This genomics analysis is already resulting in improved targeting of eligible patients for the upcoming Phase 1/2a ATRN-119 clinical study, and could potentially result in adoption of a new diagnostic for this type of anti-cancer treatment. Our unique genomic insights and modeling provide Atrin with enhanced diagnostic tools to accelerate Atrin's DDR therapies and studies. Atrin currently expects initiation of the ATRN-119 Phase 1/2a study in 2020, with a first interim clinical readout in 2021. We believe that the Atrin collaboration will result in improved design and faster clinical advancement of multiple individualized, precision oncology treatments.  By combining our state-of-the-art proprietary screening assay and related artificial intelligence capabilities with Atrin's breakthrough DDR therapy candidates, we have the potential to become a leader in development of improved personalized oncology therapies. Cancer is genomic disease; cancer tumors typically develop when otherwise healthy cells acquire mutations in key "driver genes." These cancer-causing mutations alter pathways regulating cellular growth and interactions with surrounding tissues.  Understanding the specific gene mutations underlying tumor formation is frequently more important than location of the cancer in selecting personalized anti-cancer therapies. The key to successful cancer therapy is matching specific cancer mutations with efficient and targeted therapies. Multiple benign diseases, cancer-predisposition syndromes, and cancers have now been linked to mutations in DDR genes.  DDR is a clinically validated therapeutic approach, following the commercial approval of multiple blockbuster Poly ADP Ribose Polymerase (PARP) inhibitor products. DDR drugs already represent a multi-billion-dollar market, and it is expected that DDR drugs may ultimately be used to treat over 200 different cancer targets, if a full set of complementary patient-targeting biomarkers are successfully developed and adopted for commercial use. Preliminary results from the collaborative genomics analysis using our proprietary assays in patients with a specific tumor type found an excess of DDR mutations in cancer cells compared with normal tissue. The analysis identified 92 genes as protein responders to ATRN-119 treatment, of which 18 genes are known TIER 1 cancer-driver genes, and well-characterized mutations were found in three dominant genes. Both in vitro and animal studies have confirmed synthetically-lethal interactions between ATRN-119 treatment and alteration of these three key cancer-causing genes. The overlap between DDR genes responding to ATRN-119 and those mutated in cancer cells suggest that genetic markers underlying response and resistance will be critical to optimizing patient selection in ATRN-119 clinical studies, by increasing clinical efficacy and minimizing systemic toxicities. Under the terms of the original Atrin-Predictive collaboration agreement, both companies will continue to contribute to the identification of additional druggable targets and pathways, both inside and outside of DDR, to treat a broad group of target indications, particularly in women's health.

On January 28, 2020, we announced a potential collaboration agreement with Atrin Pharmaceuticals LLC to develop molecular diagnostic tools to facilitate improved selection of cancer patients who would most benefit from treatment with DNA Damage and Response (DDR) inhibitors, including Atrin's and other small molecule ATR inhibitors. Atrin and Predictive will jointly utilize Predictive Laboratories' state-of-the-art sequencing capabilities and genomics expertise to identify cancer patients with specific molecular markers that predict the level of clinical response to Atrin's, and other, targeted therapies. This is intended to improve patient outcomes as well as improve Atrin's ability to successfully progress its product pipeline, and upon commercialization, improve on the treatments for women with cancer. Predictive, with its proprietary list of already identified genes and state-of-the-art sequencing capabilities, believes it is the ideal molecular diagnostic partner to help Atrin successfully advance their therapeutic pipeline through clinical development. The companies believe that this collaboration may become a ‘game changer' in oncology, as treatment continues to progress towards individualized precision medicine. As Atrin advances multiple Investigational New Drug (IND) applications and progresses their lead product candidate ATRN-119 into a first-in-human clinical study this year, Predictive's portfolio of genomic tests will help Atrin better identify cancer patient populations whose genetic profiles will likely have an optimal clinical response to Atrin's proprietary anti-cancer therapeutics. The collaboration will help optimize the safety and clinical efficacy of Atrin's targeted cancer therapeutics and other DDR drug candidates. Atrin will have access to Predictive's proprietary GenDB databases and women's health biobank to better understand the clinical spectrum of germline mutations in DDR pathways. The companies will also study common gynecologic disorders, such as endometriosis, associated with the development of cancers in affected patients. The goal of this collaboration is to develop actionable predictive molecular and companion diagnostics and therapeutics for these common disorders and related cancers.

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On October 16, 2019, Kenneth Ward, M.D., Chief executive officer of Juneau Biosciences; Rakesh Chettier M.S., director of biostatistics of Predictive Laboratories; and Hans Albertsen, Ph.D., chief scientific officer of Juneau Biosciences, received the 2019 Endometriosis Special Interest Group (EndoSIG) Prize Paper in the "Best in Clinical/Population Science" category at the American Society for Reproductive Medicine (ASRM) 2019 Scientific Congress & Expo in Philadelphia. The scientific breakthroughs reported in these award-winning discoveries provide us with insights into new non-hormonal therapies. The team's research is based on the genetic markers of endometriosis discovered by Juneau and Predictive scientists in recent years, and uncovers molecular pathways involved in the pathogenesis of endometriosis-induced lesions in women at risk for the disease.  Dr. Ward, a board-certified physician in obstetrics and gynecology, perinatology, clinical genetics and molecular genetics, presented two scientific papers at the Annual ASRM meeting:  a poster entitled, "Endometriosis risk allele in WNT4 may interact with rare mutations in HDAC2 gene" and an oral abstract entitled, "Somatic cancer driver mutations in endometriosis lesions contribute to secondary cancer risk."

On October 14, 2019, we launched the full U.S. market availability of ARTguide™ to evaluate the risk for endometriosis and other genetic causes of infertility in women. Endometriosis can be a debilitating disease for many women as it can cause severe pelvic pain, inflammation, adhesions to the fallopian tubes and uterus, and often, infertility. ARTguide can predict a patient's risk of endometriosis early on so that women have a better understanding of their barriers to conception, and therefore their physician can create a more personalized infertility treatment plan. ARTguide is appropriate for all women considering use of ART to overcome difficulty conceiving or carrying a pregnancy.

In October 2019, we launched FertilityDX™, a comprehensive genetic testing service that identifies barriers to healthy pregnancy and birth, allowing doctors to tailor fertility treatments. The objective of FertilityDX™ is to provide couples considering ART with an understanding of the genetic and medical obstacles that may be affecting their fertility and provide doctors with genetically relevant information to help their patients have a healthy baby. FertilityDX™ provides information by evaluating three key areas: contributors to (or causes of) infertility, risks of pregnancy complications, and risks for serious genetic conditions in offspring. The test will be launched in select fertility clinics across the United States.

In August 2019, we collected over 2,500 DNA samples along with comprehensive medical records since acquiring our CLIA operations in March 2019. We broadened our research initiatives by acquiring new sample collections in chronic pain, pregnancy complications, autism, and both female and male infertility. Personalized medicine and the development of new therapeutics are expected to play a critical role in human health. Access to high-quality biospecimens from our biobank will be important for furthering our biomedical and translational research, and ultimately its development of personalized molecular diagnostics and clinical therapies. Current sample collection efforts are designed to strategically augment our existing library of over 300,000 DNA samples that we believe will produce valuable insights into future research and development projects.

On August 9, 2019, we launched PGxPLUS+™, a pharmacogenomic test panel being marketed to pain clinics for patients with chronic pain.  PGxPLUS+™ evaluates genetic factors that play a major role in an individual's response to medications.  In parallel, we reached a milestone of enrolling 350 patients with chronic pain into an Investigational Review Board-approved clinical study aimed at providing additional insight into the mechanisms of chronic pain and responses to pain therapies. We are approaching chronic pain and the opioid crisis on multiple fronts. We have developed and in-licensed important prognostic DNA tests and novel treatments for osteoarthritis, lumbar disc disease, endometriosis, and other conditions causing chronic pain.  In 2016, the Institute of Medicine estimated that up to one-third of the U.S. population lives with ongoing pain.  Chronic pain is often triggered by one of these common conditions, and over time can develop into a chronic pain syndrome, which is a disease itself. The PGxPLUS+™ test evaluates 112 genetic variants across 38 genes that affect the metabolism of over 150 common medications, including pain medications.  More than 90% of the population has one or more gene variants that affect the efficacy or safety of prescription drugs.

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Variation in drug metabolism is largely determined by an individual's genetic profile, blood levels of a drug may vary up to 1,000-fold in similar patients taking identical doses of the same drug.  Pharmacogenomics is the study of the role of our genome in drug responses.

On July 29, 2019, we entered into an agreement with the Preeclampsia Foundation to expand the study of genetic factors associated with preeclampsia. The study will advance the Preeclampsia Foundation's database of collected preeclampsia medical information and will be utilized by Predictive Laboratories to develop a proprietary test for the early detection of women at risk for preeclampsia. Preeclampsia affects 5-8%, or approximately 300,000, pregnancies every year in the United States, sometimes causing severe adverse maternal and fetal outcomes, including organ failure, massive blood loss, permanent disability or even death. Globally, preeclampsia is a leading cause of pregnancy complications, preterm births, and related disabilities. The deaths of approximately 76,000 mothers and 500,000 babies annually are attributable to preeclampsia. Healthcare providers, even in medically advanced countries, are hampered by imprecise diagnostic tools. The Preeclampsia Registry, a key program of the Preeclampsia Foundation's research mission, is a patient registry that collects paired medical information and biological samples. Using established Institutional Review Board-approved protocols, we and the Preeclampsia Foundation will request samples from more than 2,500 existing and new registry participants for sequencing analysis. We have been granted a period of exclusive access to research data resulting from these new samples enrolled in the Preeclampsia Registry, after which samples and sequencing data will be available to other investigators for future research. This collaboration complements and extends our ongoing preeclampsia research initiatives. Over 20,000 DNA samples from our biorepository relating to preeclampsia and associated obstetric syndromes are being analyzed.

Human Cell and Tissue Products (HCT/P)

In November 2019, Predictive Biotech's HCT/P processing facility successfully achieved the internationally recognized ISO 13485 certification over the Company's system of laboratory quality controls.

Results of Operations for the Years Ended June 30, 2020 and 2019 

Revenue

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The decrease in revenue for the year ended June 30, 2020 is primarily due to the decline in sales volume of allograft products compared to the year ended June 30, 2019.  The Company believes the decrease in sales volume is due to increased United States Food and Drug Administration ("FDA") enforcement efforts affecting the regenerative medicine industry as a whole, which has negatively impacted the size of the market for regenerative medicine services and caused a contraction of sales of allograft products. Specifically, the FDA has issued warnings to competitors regarding their safety practices and increased regulatory scrutiny of potentially inappropriate marketing practices of some providers of regenerative medicine services. Predictive Biotech, Inc. continues to demonstrate an excellent safety and quality record of over 100,000 allografts implanted and no adverse events. In addition, sales during the second half of March and the fourth fiscal quarter were significantly negatively impacted by the decrease in elective medical procedures due to COVID-19. Our products are administered by clinicians, and a reduction in visits to clinicians results in a reduction in the sales volume of our products.

Revenues in our diagnostics and therapeutics segment were not material for the periods shown.

Cost of goods sold (Exclusive of Depreciation & Amortization)

Cost of goods sold for the year ended June 30, 2020 increased to $20.6 million from $16.3 million for the year ended June 30, 2019. The increase is primarily due to $5.5 million in scrap expense related to HCT/P product that did not pass quality control, or that is not expected to pass quality control. The increase in quality control failure rates above normal levels was primarily due to issues with a component supplied by a specific vendor.  In addition, $1.0 million of idle capacity costs contributed to the increase. These increases were offset by decreases in share-based compensation expense of $0.8 million, freight costs of $0.9 million, and merchant fees of $0.3 million.

Cost of goods sold as a percentage of sales increased due to investments and costs incurred to increase production capacity in anticipation of sales growth. Due to the factors described above, the anticipated sales growth did not occur and instead, sales declined. The increase in the numerator caused by the investment in capacity and the decrease in the denominator caused by the decline in sales caused the cost of sales as a percentage of revenue to increase significantly.

During the second half of fiscal 2020, the Company implemented several cost saving measures including a reduction in force that are intended to reduce production costs in response to the decrease in sales.

Cost of sales in our diagnostics and therapeutics segment was not material for the periods shown.

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Selling and marketing expenses

Selling and marketing expenses for the year ended June 30, 2020 decreased to $9.3 million from $13.9 million for the year ended June 30, 2019. The decrease is due to a decrease in commissions expense of $4.7 million.

Substantially all of our selling and marketing expenses were incurred in the HCT/P segment.

General and Administrative Expenses

General and administrative expenses for the year ended June 30, 2020 increased to $24.5 million from $18.2 million for the year ended June 30, 2019. Approximately $3.0 million of the increase is due to increased share-based compensation expense. Additionally, personnel costs increased by $1.6 million due to increased average headcount. Legal and consulting costs increased by $1.6 million, primarily due to increased utilization of our intellectual property attorneys.

Research and Development Expenses

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Research and development expenses for the year ended June 30, 2020 were consistent with those for the year ended June 30, 2019.

Depreciation and amortization expense

Depreciation and amortization expense increased compared to the same period in the prior fiscal year primarily due to an increase in our intangible asset portfolio arising from the business combinations and asset acquisitions described in Note 2 to the accompanying consolidated financial statements. Capital expenditures to acquire property, plant, and equipment in connection with our laboratory expansion also contributed to the increase.

Loss on impairment

Long-lived intangible assets acquired through the acquisition of Regenerative Medical Technologies, Inc. (see Note 2) were determined to have become impaired. See Note 5 to the accompanying consolidated financial statements for a full discussion of the impairment.

Other loss

Other loss for the year ended June 30, 2020 increased to $39.9 million from $0.8 million for the year ended June 30, 2019. The increase was primarily driven by the $37.9 million impairment charge recognized related to our equity method investment in Juneau Biosciences, LLC.

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Liquidity and Capital Resources

The Company incurred a net loss attributable to common stockholders of $85,769,266 and net cash outflows from operations of $13,058,837 for the year ended June 30, 2020. At June 30, 2020, the Company had $331,228 of cash and negative working capital of $13,132,688. The Company's historical and current use of cash in operations combined with limited liquidity resources raise substantial doubt regarding the Company's ability to continue as a going concern. Management may seek additional capital through debt financings, collaborative or other funding arrangements with partners, sale of assets, or through other sources of financing. Should the Company seek additional financing from outside sources, the Company may not be able to raise such financing on terms acceptable to the Company or at all. If the Company is unable to raise additional capital when required or on acceptable terms, this could have a material adverse effect on liquidity. In such a case, the Company may be required to scale back or to discontinue the promotion of currently available products, scale back or discontinue the advancement of product candidates, reduce headcount, file for bankruptcy, reorganize, merge with another entity, or cease operations.

The following table represents the consolidated cash flow statement:

Cash Flows from Operating Activities

The increase in cash used in operating activities for the year ended June 30, 2020 compared to the year ended June 30, 2019 was primarily due to a $70.5 million increase in net loss and a $5.3 million increase in deferred income tax benefits, offset by increases of non-cash addbacks for loss on equity method investment of $38.1 million, loss on impairment of $10.0 million, share based compensation of $4.0 million, depreciation and amortization of $1.5 million, and changes in operating assets and liabilities of $4.9 million.

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Cash Flows from Investing Activities

The decrease in cash used in investing activities for the year ended June 30, 2020 compared to the year ended June 30, 2019 was primarily due to a decrease in cash paid on our subscription payable of $1.5 million and a decrease in capital expenditures of $1.7 million. These changes were partly offset by $0.9 million in cash received from the acquisitions of InceptionDX, LLC and Taueret Laboratories, LLC in fiscal 2019.

Cash Flows from Financing Activities

The increase in cash provided by financing activities for the year ended June 30, 2020 compared to the year ended June 30, 2019 was primarily due to the receipt of $13.2 million in proceeds from the issuance of promissory notes.

Debt

The proceeds of debt issuances were used for general corporate purposes, which may include, among other things, funding for working capital, capital expenditures, acquisitions, and repayment of existing debt. Refer to Note 8 – Debt of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K) for further discussion. 

Effects of Inflation

We do not believe that inflation has had a material impact on our business, sales, or operating results during the periods presented.

Off-Balance Sheet Arrangements

We currently do not have any off-balance sheet arrangements.

Contractual Obligations

The following table represents our contractual obligations as of June 30, 2020:

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The expected timing of payment for the obligations listed above is estimated based on current information. Actual payment timing and amounts may differ depending on the timing of goods or services received or other changes.  The table above only includes payment obligations that are fixed or determinable. The table excludes royalties to third parties based on future sales of any of our products, as the amounts, timing, and likelihood of any such payments are based on the level of future sales and are unknown.

Critical Accounting Policies

Critical accounting policies are those policies which are both important to the portrayal of a company's financial condition and results and require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting policies are as follows:

· Revenue Recognition

· Inventory Reserve

· Long-Lived Assets, including Finite-Lived Intangible Assets

· Equity Method Investments

· Goodwill

· Income Taxes

Revenue Recognition.  We derive our revenue primarily from sales of HCT/P products to clinicians. Revenue is recognized when control of the product passes to the customer, typically upon confirmation of delivery of the product to the customer. As our products must remain frozen during transit, we typically ship our products overnight. Revenue is recognized in an amount that reflects the expected consideration to be received in exchange for such goods or services. 

Generally, we require authorization from a credit card or verification of receipt of payment before we ship products to customers. From time to time we grant credit to our customers with normal credit terms (typically 30 days). We do not recognize assets associated with costs to obtain or fulfill a contract with a customer, as the amortization period for any such costs if capitalized would be one year or less. As such, customer orders are recorded as deferred revenue prior to delivery of products or services ordered.

Long-Lived Assets, including Finite-Lived Intangible Assets. We review the recoverability of long-lived assets and finite-lived intangible assets whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, an impairment loss is recognized by reducing the recorded value of the asset to its fair value measured by future discounted cash flows. This analysis requires estimates of the amount and timing of projected cash flows and, where applicable, judgments associated with, among other factors, the appropriate discount rate. Such estimates are critical in determining whether any impairment charge should be recorded and the amount of such charge if an impairment loss is deemed to be necessary. We identified indicators of impairment during the fourth quarter of the year ended June 30, 2020 for certain intangible assets and performed a test for impairment as of June 30, 2020. We recorded an impairment charge of $10,041,556 related to certain long-lived intangible assets acquired with Regenerative Medical Technologies, Inc. See Note 5 to the accompanying consolidated financial statements for a full discussion of the impairment. No impairments were recognized for the year ended June 30, 2019.

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Equity Method Investments. The Company's investment in Juneau Biosciences, LLC is accounted for under the equity method. The Company reviews equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment may not be recoverable in accordance with generally accepted accounting principles. This determination requires significant judgment. In making this judgment, the Company considers available quantitative and qualitative evidence in evaluating potential impairment of these investments. If it is determined that an indicator of impairment exists, the Company assesses whether the carrying value exceeds the fair value of the asset. If the carrying value of the investment exceeds its fair value, the Company will evaluate, among other factors, general market conditions, the duration and extent to which the carrying value is greater than the fair value, and the Company's intent and ability to hold, or plans to sell, the investment. The Company also considers specific adverse conditions related to the financial health of and business outlook for the investee, including industry and sector performance, changes in technology, and operational and financing cash flow factors. Once a decline in fair value is determined to be other-than-temporary, an impairment charge will be recorded and a new carrying basis in the investment will be established. The Company recorded impairment charges totaling $37,907,283 related to our equity method investment in Juneau Biosciences, LLC for the year ended June 30, 2020 (see Note 6 to the accompanying consolidated financial statements). No impairments were recorded for the year ended June 30, 2019.

Goodwill.  We test goodwill for impairment on an annual basis and in the interim by reporting unit if events and circumstances indicate that goodwill may be impaired.  The events and circumstances that are considered include business climate and market conditions, legal factors, operating performance indicators and competition.  Impairment of goodwill is evaluated on a qualitative basis to determine if using a two-step process is necessary.  If the qualitative assessment suggests that impairment is more likely than not, a two-step impairment analysis is performed.  The first step involves comparison of the fair value of a reporting unit with its carrying amount. The valuation of a reporting unit requires judgment in estimating future cash flows, discount rates and other factors. In making these judgments, we evaluate the financial health of our business, including such factors as industry performance, market saturation and opportunity, changes in technology and operating cash flows.  Changes in our forecasts or decreases in the value of our common stock could cause book value of reporting units to exceed their fair values. If the carrying amount of a reporting unit exceeds its fair value, the second step of the process involves a comparison of the fair value and the carrying amount of the goodwill of that reporting unit.  If the carrying amount of the goodwill of the reporting unit exceeds the fair value of that goodwill, an impairment loss would be recognized in an amount equal to the excess of carrying value over fair value.  If an event occurs that would cause a revision to the estimates and assumptions used in analyzing the value of the goodwill, the revision could result in a non-cash impairment charge that could have a material impact on the financial results.

We have recorded goodwill of $5,254,451 from the acquisition of Predictive Biotech, Inc. (formerly Renovo Biotech, Inc.) that was completed on March 28, 2016. We measured the fair value of Predictive Biotech utilizing the discounted cash flow method under the income approach.  The income approach considered management's business plans and projections as the basis for expected cash flows for the next five years and a 3% long-term growth rate. We also used a weighted average discount rate of 20%. Other significant estimates used in the analysis include the profitability and working capital requirements of the reporting unit.  We noted the fair value of the Predictive Biotech reporting unit exceeded its carrying value, as the carrying value of the reporting unit was negative on the date of the impairment test. The fair value also exceeded the carrying value of the total assets of the reporting unit.  

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Inventory Reserve. The preparation of our financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect the reported amount of assets at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our inventory primarily consists of finished HCT/P products and HCT/P products that are quarantined pending the completion of quality control procedures. We record a reserve for the estimated amount of quarantined inventory that is not expected to pass quality control. We analyze our historical production and quality control pass rates when evaluating the adequacy of inventory reserve.

Income Taxes.  Our income tax provision is based on income before taxes and is computed using the liability method in accordance with Accounting Standards Codification ("ASC") 740 – Income Taxes. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using tax rates projected to be in effect for the year in which the differences are expected to reverse.  Significant estimates are required in determining our provision for income taxes.  Some of these estimates are based on interpretations of existing tax laws or regulations, or the expected results from any future tax examinations.  Various internal and external factors may have favorable or unfavorable effects on our future provision for income taxes.  Those factors include, but are not limited to, changes in tax laws, regulations and/or rates, the results of any future tax examinations, changing interpretations of existing tax laws or regulations, changes in estimates of prior years' items, past levels of research and development spending, acquisitions, changes in our corporate structure, and changes in overall levels of income before taxes all of which may result in periodic revisions to our provision for income taxes.  

Developing our provision for income taxes, including our effective tax rate and analysis of potential uncertain tax positions, if any, requires significant judgment and expertise in federal and state income tax laws, regulations and strategies, including the determination of deferred tax assets and liabilities and any estimated valuation allowance we deem necessary to offset deferred tax assets.  If we do not achieve and maintain taxable income from operations and deferred tax liabilities in future periods, we may increase the valuation allowance for our deferred tax assets and record material adjustments to our income tax expense. The Company currently records a full valuation allowance on deferred tax assets in excess of the taxable income provided by scheduled amortization of deferred tax liabilities. Our judgment and tax strategies are subject to audit by various taxing authorities.  While we believe we have provided adequately for our uncertain income tax positions in our consolidated financial statements, adverse determination by these taxing authorities could have a material adverse effect on our consolidated financial condition, results of operations or cash flows.  Estimated interest and penalties on income tax items are included as a component of overall income tax expense, if applicable.

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments – Credit Losses (Topic 326)" which introduces new guidance for the accounting for credit losses on instruments within its scope. The new guidance, as amended by subsequent ASUs, introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. For trade receivables, the Company will be required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses which reflects losses that are probable. For public business entities that meet the definition of a U.S. Securities and Exchange Commission (SEC) filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.  Early adoption is permitted. Application of the amendments is through a cumulative-effect adjustment to retained earnings as of the effective date. The Company is currently evaluating the impact of this update on the consolidated financial statements.

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In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes" (ASU 2019-12), which eliminates certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. This ASU also includes guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. ASU 2019-12 is effective for annual and interim periods in fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company is currently assessing the impact of ASU 2019-12 on its consolidated financial statements.

Certain Factors That May Affect Future Results of Operations

The Securities and Exchange Commission encourages companies to disclose forward-looking information so that investors can better understand a company's future prospects and make informed investment decisions. This Annual Report on Form 10-K contains such "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995.

All statements in this report, other than statements of historical fact, are forward-looking statements for purposes of these provisions, including any projections of earnings, revenues or other financial items, any statements of the plans and objectives of management for future operations, any statements concerning proposed new products or services, any statements regarding future economic conditions or performance, and any statements of assumptions underlying any of the foregoing. All forward-looking statements included in this report are made as of the date hereof and are based on information available to us as of such date. We assume no obligation to update any forward-looking statement. In some cases, forward-looking statements can be identified by the use of terminology such as "may," "will," "expects," "plans," "anticipates," "intends," "believes," "estimates," "potential," or "continue," or the negative thereof or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained herein are based upon reasonable assumptions at the time made, there can be no assurance that any such expectations or any forward-looking statement will prove to be correct. Our actual results will vary, and may vary materially, from those projected or assumed in the forward-looking statements. Future financial condition and results of operations, as well as any forward-looking statements, are subject to inherent risks and uncertainties, many of which we cannot predict with accuracy and some of which we might not anticipate, including, without limitation, product recalls and product liability claims; infringement of our technology or assertion that our technology infringes the rights of other parties; termination of supplier relationships, or failure of suppliers to perform; inability to successfully manage growth; delays in obtaining regulatory approvals or the failure to maintain such approvals; concentration of our revenue among a few customers, products or procedures; development of new products and technology that could render our products obsolete; market acceptance of new products; introduction of products in a timely fashion; price and product competition, availability of labor and materials, cost increases, and fluctuations in and obsolescence of inventory; volatility of the market price of our common stock; foreign currency fluctuations; changes in key personnel; work stoppage or transportation risks; integration of business acquisitions. All subsequent forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. In light of these assumptions, risks and uncertainties, the results and events discussed in the forward-looking statements contained in this Annual Report or in any document incorporated by reference might not occur. Stockholders are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this Annual Report. We are not under any obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. All subsequent forward-looking statements attributable to us or to any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.

Not applicable.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the stockholders and the Board of Directors of Predictive Technology Group, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of Predictive Technology Group, Inc. and subsidiaries (the "Company") as of June 30, 2020, the related consolidated statements of operations and comprehensive loss, stockholders' equity, and cash flows for the year then ended, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2020, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

Going Concern

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company's historical and current use of cash in operations combined with limited liquidity resources raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

/s/ Deloitte & Touche LLP

Salt Lake City, UT

October 20, 2020

We have served as the Company's auditor since 2020.

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Report of Independent Registered Public Accounting Firm

To the shareholders and the board of directors of Predictive Technology Group, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of Predictive Technology Group, Inc. (the "Company") as of June 30, 2019, the related statements of operations, stockholders' equity (deficit), and cash flows for the year then ended, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2019, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

/s/ BF Borgers CPA PC

BF Borgers CPA PC

We have served as the Company's auditor from 2017 to 2019.

Lakewood, CO

September 30, 2019

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 PREDICTIVE TECHNOLOGY GROUP, INC.

CONSOLIDATED BALANCE SHEETS

 See accompanying notes 

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STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

See accompanying notes

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CONSOLIDATED STATEMENTS OF CASH FLOWS

(Continued)

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CONSOLIDATED STATEMENTS OF CASH FLOWS

The following is a summary of supplemental cash flow activities:

See accompanying notes

(Concluded)

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

See accompanying notes

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1- BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES

BUSINESS DESCRIPTION:

Predictive Technology Group, Inc. together with its subsidiaries (collectively, "PTG" or the "Company") develops and commercializes discoveries and technologies involved in novel molecular diagnostic, therapeutic, and Human Cellular and Tissue-Based Products ("HCT/Ps"). The Company uses this information as the cornerstone in the development of new diagnostics that assess a person's risk of disease and develop pharmaceutical therapeutics and HCT/Ps for use by healthcare professionals to improve outcomes in their patients.  The Company's corporate headquarters are located in Salt Lake City, Utah

.

SEGMENT INFORMATION:

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker (CODM) in making decisions regarding resource allocation and assessing performance.  The Company operates in two reportable segments, which are differentiated by product.  The HCT/P segment offers minimally manipulated tissue products intended for homologous use, prepared utilizing proprietary extraction methods that reduce the loss of important scaffolding, growth factors and cytokines.  The Company's Diagnostics and Therapeutics segment uses data analytics for disease identification and subsequent therapeutic intervention through novel gene-based diagnostics, and companion therapeutics. Lastly, the "Unallocated Corporate" column in the table below represents those headquarters activities that do not qualify as operating segments and which are not allocated to operating segments in information provided to the CODM. We currently operate and sell our products exclusively in the United States.

Segment information was as follows during the periods presented:

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BASIS OF PRESENTATION:

The accompanying consolidated financial statements have been prepared by Predictive Technology Group, Inc. in accordance with U.S. generally accepted accounting principles ("GAAP") for financial information and pursuant to the applicable rules and regulations of the Securities and Exchange Commission ("SEC"). The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries.   All intercompany accounts and transactions have been eliminated in consolidation.

Fiscal Year End

The Company operates on a fiscal year basis with the fiscal year ending on June 30.

Cash Equivalents

The Company considers all highly-liquid investments with a maturity of three months or less, when purchased, to be cash equivalents.  The Company places its temporary cash investments with high-quality financial institutions.  

Going Concern

The accompanying financial statements have been prepared under the assumption that the Company will continue to operate as a going concern, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts of liabilities that may result from any inability of the Company to continue as a going concern.

The Company incurred a net loss attributable to common stockholders of $85,769,266 and net cash outflows from operations of $13,058,837 for the year ended June 30, 2020. At June 30, 2020, the Company had $331,228 of cash and negative working capital of $13,132,688. The Company's historical and current use of cash in operations combined with limited liquidity resources raise substantial doubt regarding the Company's ability to continue as a going concern. Management may seek additional capital through debt financings, collaborative or other funding arrangements with partners, sale of assets, or through other sources of financing. Should the Company seek additional financing from outside sources, the Company may not be able to raise such financing on terms acceptable to the Company or at all to mitigate the substantial doubt that exists. If the Company is unable to raise additional capital when required or on acceptable terms, this could have a material adverse effect on liquidity. In such a case, the Company may be required to scale back or to discontinue the promotion of currently available products, scale back or discontinue the advancement of product candidates, reduce headcount, file for bankruptcy, reorganize, merge with another entity, or cease operations.

Trade Accounts Receivable and Allowance for Doubtful Accounts

Trade accounts receivable are primarily comprised of amounts due from sales of the Company's HCT/P products that are recorded at the invoiced amount, and deposits in transit from credit card processors. The allowance for doubtful accounts is based on the Company's best estimate of the amount of probable losses in the Company's existing accounts receivable, which is based on historical write-off experience, customer creditworthiness, facts and circumstances specific to outstanding balances, and payment terms. Account balances are charged against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its customers and does not require collateral.

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Inventories

Inventories consist primarily of laboratory supplies used in genetic testing performed by Predictive Laboratories, Inc. ("Predictive Labs") and HCT/Ps produced by Predictive Biotech, Inc. ("Predictive Biotech"). We value inventory at the lower of cost or net realizable value. We determine the cost of inventory using the standard cost method, which approximates actual cost based on a first-in, first-out method.  All other costs, including administrative costs, are expensed as incurred.   

We analyze our inventory levels at least quarterly and write down inventory that has a cost basis in excess of its expected net realizable value, or that is considered in excess of normal operating levels, as determined by management.  We also reserve for the quantity of quarantined (WIP) inventory that is not expected to pass quality control based on historical averages. The related costs are recognized as cost of goods sold in the consolidated statements of operations.

Prepaid Expenses

Amounts paid in advance for expenses are accounted for as prepaid expenses and classified as current assets if such amounts are to be recognized as expense within one year from the balance sheet date.

Property, Plant and Equipment

Lab equipment, furniture and computer equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method based on the lesser of estimated useful lives of the related assets or the underlying lease term. Lab equipment items have depreciable lives of 5 years, furniture items have depreciable lives of 5 to 7 years, and computer equipment items have depreciable lives of 3 years. Repair and maintenance costs are charged to expense as incurred. Amortization of assets recorded under finance leases is included in depreciation expense.

The Company reviews property and equipment for impairment. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of these assets is measured by comparison of their carrying amounts to future undiscounted cash flows the assets are expected to generate. If property and equipment are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets exceeds its fair market value.

Leases

We have entered into operating and finance lease agreements primarily for office and laboratory facilities and laboratory equipment located in Salt Lake City, Utah with lease periods expiring between 2021 and 2023.

We determine if an arrangement is a lease at inception. For all classes of underlying assets, we elect not to recognize right of use assets or lease liabilities when a lease has a lease term of 12 months or less at the commencement date and does not include an option to purchase the underlying asset that we are reasonably certain to exercise. Operating lease assets and liabilities are included on our consolidated balance sheet beginning July 1, 2019. Finance lease assets are included in property and equipment, net.

Operating lease assets and liabilities are recognized at the present value of the future lease payments at the lease commencement date. The interest rate used to determine the present value of the future lease payments is our incremental borrowing rate, because the interest rate implicit in most of our leases is not readily determinable. Our incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms and payments, and in economic environments where the leased asset is located. Operating lease assets also include any prepaid lease payments and lease incentives. Our lease terms include periods under options to extend or terminate the lease when it is reasonably certain that we will exercise that option. We generally use the base, non-cancelable, lease term when determining the lease assets and liabilities. Operating lease expense is recognized on a straight-line basis over the lease term.

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Our lease agreements generally contain lease and non-lease components. Non-lease components primarily include payments for maintenance and utilities. We combine fixed payments for non-lease components with our lease payments and account for them together as a single lease component, which increases the amount of our lease assets and liabilities.

Intangible Assets and Other Long-Lived Assets

Intangible and other long-lived assets are comprised of acquired patents, licenses, trade secrets and other intellectual property.  Acquired intangible assets are recorded at fair value and amortized over the shorter of the contractual life or the estimated useful life.

The Company reviews definite-lived intangible assets for impairment. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of these assets is measured by comparison of their carrying amounts to future undiscounted cash flows the assets are expected to generate. If identifiable intangibles are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets exceeds its fair market value.

As of June 30, 2020, the Company had identified indicators of impairment for certain of its long-lived assets for certain of its long-lived assets and performed an impairment test related to those long-lived assets. An impairment charge of $10,041,556 was recorded related to assets acquired with Regenerative Medical Technologies, Inc. (see Note 5). There were no impairments for the year ended June 30, 2019.

Additional delays in the commercial launch of the Company's diagnostic products such as those that may result from a prolongation of the COVID-19 pandemic would adversely affect our business and potentially lead to additional impairment charges in the future.

Certain of the Company's patents are currently subject to litigation (see Note 13) to determine whether the seller of the patents had faithfully represented the nature of their ownership of patents that were sold to the Company. The seller of the patents represented that all rights, title, and interest to the patents was transferred to the Company as part of the sale.  However, the Company and its patent counsel have identified information in the US Patent and Trademark Office's (USPTO's) registry that calls into question whether the seller of the patents had all rights, title, and interest in the patents when they were sold to the Company. The Company raised these concerns with the seller of the patents but was unable to secure clear and satisfactory proof on a voluntary basis. These patents have a carrying value of $6,085,785 on our consolidated balance sheet as of June 30, 2020. While there is some question as to whether the Company has full title to these patents, we believe that we have at least partial ownership and can develop products based on the patents.

Goodwill

We test goodwill for impairment on an annual basis and in the interim by reporting unit if events and circumstances indicate that goodwill may be impaired.  The events and circumstances that are considered include business climate and market conditions, legal factors, operating performance indicators and competition.  Impairment of goodwill is evaluated on a qualitative basis to determine if using a two-step process is necessary.  If the qualitative assessment suggests that impairment is more likely than not, a two-step impairment analysis is performed.  The first step involves comparison of the fair value of a reporting unit with its carrying amount. The valuation of a reporting unit requires judgment in estimating future cash flows, discount rates and other factors. In making these judgments, we evaluate the financial health of our business, including such factors as industry performance, market saturation and opportunity, changes in technology and operating cash flows.

Changes in our forecasts or decreases in the value of our common stock could cause book value of reporting units to exceed their fair values. If the carrying amount of a reporting unit exceeds its fair value, the second step of the process involves a comparison of the fair value and the carrying amount of the goodwill of that reporting unit.  If the carrying amount of the goodwill of the reporting unit exceeds the fair value of that goodwill, an impairment loss would be recognized in an amount equal to the excess of carrying value over fair value.  If an event occurs that would cause a revision to the estimates and assumptions used in analyzing the value of the goodwill, the revision could result in a non-cash impairment charge that could have a material impact on the financial results.

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We have recorded goodwill of $5,254,451 from the acquisition of Predictive Biotech, Inc. (formerly Renovo Biotech, Inc.) that was completed on March 28, 2016.  All goodwill is included in the HCT/P segment. We measured the fair value of Predictive Biotech utilizing the discounted cash flow method under the income approach.  The income approach considered management's business plans and projections as the basis for expected cash flows for the next five years and a 3% long-term growth rate. We also used a weighted average discount rate of 20%. Other significant estimates used in the analysis include the profitability and working capital requirements of the reporting unit.  We noted the fair value of the Predictive Biotech reporting unit exceeded its carrying value, as the carrying value of the reporting unit was negative on the date of the impairment test. The fair value also exceeded the carrying value of the total assets of the reporting unit.  There were no impairments to goodwill during the years ended June 30, 2020 or 2019.

Equity Method Investment

We apply the equity method of accounting for investments in which we have significant influence but not a controlling interest. The Company reviews equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment may not be recoverable in accordance with generally accepted accounting principles. This determination requires significant judgment. In making this judgment, the Company considers available quantitative and qualitative evidence in evaluating potential impairment of these investments. If it is determined that an indicator of impairment exists, the Company assesses whether the carrying value exceeds the fair value of the asset. If the carrying value of the investment exceeds its fair value, the Company will evaluate, among other factors, general market conditions, the duration and extent to which the carrying value is greater than the fair value, and the Company's intent and ability to hold, or plans to sell, the investment. The Company also considers specific adverse conditions related to the financial health of and business outlook for the investee, including industry and sector performance, changes in technology, and operational and financing cash flow factors. Once a decline in fair value is determined to be other-than-temporary, an impairment charge will be recorded and a new carrying basis in the investment will be established. The Company recorded impairment charges totaling $37,907,283 related to our equity method investment in Juneau Biosciences, LLC for the year ended June 30, 2020 (see Note 6). There were no impairments for the year ended June 30, 2019.

Paycheck Protection Program Loan

On May 6, 2020, Company received loan proceeds of $1,665,985 under the Paycheck Protection Program ("PPP") under a promissory note from a commercial bank (the "PPP Loan"). The PPP, established as part of the CARES Act, provides for loans to qualifying businesses for amounts up to 2.5 times the average monthly payroll expenses of the qualifying business. As amended, the CARES act provides that the loans and accrued interest are forgivable after twenty-four weeks as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The PPP Loan is included in notes payable in the consolidated balance sheets. Should all or part of the PPP Loan be forgiven, the amount forgiven will be derecognized through other income in the period when forgiveness is granted by the governing authority.

Revenue Recognition

We derive our revenue primarily from sales of HCT/P products to clinicians. The majority of our contracts with customers have a single performance obligation, and all of our contracts with customers have a duration of less than one year. Revenue is recognized when control of the product passes to the customer, typically upon confirmation of delivery of the product to the customer. As our products must remain frozen during transit, we typically ship our products overnight. Revenue is recognized in an amount that reflects the expected consideration to be received in exchange for such goods or services. 

Generally, we require authorization from a credit card or verification of receipt of payment before we ship products to customers. From time to time we grant credit to our customers with normal credit terms (typically 30 days). We do not recognize assets associated with costs to obtain or fulfill a contract with a customer, as the amortization period for any such costs if capitalized would be one year or less. As such, customer orders are recorded as deferred revenue prior to delivery of products or services ordered.

Shipping and handling is considered a fulfillment activity, as it takes place prior to the customer obtaining control of the product, and fees charged to customers are included in net revenue upon completion of our performance obligation. Shipping and handling expenses are included in cost of sales. We present revenue net of sales taxes, discounts, and expected returns.

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Deferred Revenue

We recognize a contract liability when customer payment precedes the completion of our performance obligations.

The following table provides information about deferred revenue from contracts with customers, including significant changes in deferred revenue balances during the period (in thousands).

Research and Product Development Costs

The Company expenses research and product development costs as incurred.

Product Liability and Warranty Costs

The Company maintains product liability insurance and has not experienced any related claims from its product offerings. The Company also offers a warranty to customers providing that its products will be delivered free of any material defects.  There have been no material costs incurred since inception based on estimated return rates.  The Company reviews the adequacy of its accrual on a quarterly basis.

Income Taxes

Deferred tax assets and liabilities are recorded to reflect the future tax consequences attributable to the effects of differences between the carrying amounts of existing assets and liabilities for financial reporting and for income tax purposes. Deferred taxes are calculated by applying enacted statutory tax rates and tax laws to future years in which temporary differences are expected to reverse. The impact on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that the rate change is enacted.  Interest and penalties are included in benefit from income taxes on the consolidated statement of comprehensive loss, if applicable.

Deferred income tax assets are reduced by valuation allowances when necessary. Assessing whether deferred tax assets are realizable requires significant judgment. We consider all available positive and negative evidence, including historical operating performance and expectations of future operating performance. The ultimate realization of deferred tax assets is often dependent upon future taxable income and therefore can be uncertain. To the extent we believe it is more likely than not that all or some portion of the asset will not be realized, valuation allowances are established against our deferred tax assets, which increase income tax expense in the period when such a determination is made.

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Basic and Diluted Net Loss per Share

Basic net loss per common share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net loss per common share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common shares and dilutive common share equivalents outstanding during the period. Because the Company has reported a net loss attributable to common stockholders for all periods presented, diluted net loss per common share is the same as basic net loss per common share for these periods.

Other Comprehensive Loss

Comprehensive loss is comprised of net loss and is equal to net loss for the years ended June 30, 2020 and 2019.

Measurement of Fair Value

The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs. A fair value hierarchy is used to prioritize the quality and reliability of the information used to determine fair values.  Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined in the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market-based inputs or inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

During the years ended June 30, 2020 and 2019, we did not have any remeasurements of non-financial assets measured at fair value on a non-recurring basis subsequent to their initial recognition, other than the impairment of our equity method investment in Juneau Biosciences, LLC described in Note 6.

Concentrations

The Company sells its HCT/P products through its sales force and through a network of distributors. For the years ended June 30, 2020 and 2019, the following distributors' sales to end customers comprised more than 10% of total sales:

There were no end customers comprising more than 10% of sales.

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The Company obtains birthing tissue raw materials for its HCT/P products from several third-party suppliers. The following suppliers provided more than 10% of birthing tissues processed by our HCT/P segment:

The Company's molecular diagnostic tests are performed on gene sequencing instruments that require reagents proprietary to the manufacturer of the instrument. Generally, the manufacturer is the sole source of key reagents for a given instrument.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting periods.  Key estimates in the accompanying consolidated financial statements include, among others, revenue recognition, allowances for doubtful accounts and product returns, provisions for obsolete inventory, valuation of long-lived assets, and deferred income tax asset valuation allowances.  Actual results could differ materially from these estimates.

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments – Credit Losses (Topic 326)" which introduces new guidance for the accounting for credit losses on instruments within its scope. The new guidance, as amended by subsequent ASUs, introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. For trade receivables, the Company will be required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses which reflects losses that are probable. For public business entities that meet the definition of a U.S. Securities and Exchange Commission (SEC) filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.  Early adoption is permitted. Application of the amendments is through a cumulative-effect adjustment to retained earnings as of the effective date. The Company is currently evaluating the impact of this update on the consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes" (ASU 2019-12), which eliminates certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. This ASU also includes guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. ASU 2019-12 is effective for annual and interim periods in fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company is currently assessing the impact of ASU 2019-12 on its consolidated financial statements.

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Recently Adopted Accounting Standards

In February 2016, the FASB established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02, which requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.

The new standard was effective for us on July 1, 2019. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. If an entity chooses the second option, the transition requirements for existing leases also apply to leases entered into between the date of initial application and the effective date. The entity must also recast its comparative period financial statements and provide the disclosures required by the new standard for the comparative periods. We used the effective date as our date of initial application. Consequently, financial information was not updated, and the disclosures required under the new standard were not provided for dates and periods before July 1, 2019.

The new standard provides a number of optional practical expedients in transition. We elected the ‘package of practical expedients', which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We elected all of the new standard's available transition practical expedients that are applicable.

The new standard also provides practical expedients for an entity's ongoing accounting. We elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. We also elected the practical expedient to not separate lease and non-lease components for all of our leases, other than for leases of real estate.

We recognized a right of use asset for operating leases existing on the transition date of $580,574.

In January 2017, FASB issued Accounting Standards Update No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04) which eliminates Step 2 from the goodwill impairment test. ASU 2017-04 also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. Adoption of ASU 2017-04 is required for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019 with early adoption being permitted for annual or interim goodwill impairment tests performed on testing dates after January 1, 2017. We adopted ASU 2017-04 at the beginning of the fiscal year ended June 30, 2020. Adoption of ASU 2017-04 did not have a material impact on our consolidated financial statements.

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NOTE 2 BUSINESS COMBINATIONS AND EQUITY METHOD INVESTMENTS

Inception DX, LLC

On August 22, 2018, the Company completed an asset acquisition pursuant to an agreement captioned "Securities Purchase Agreement" with the members of Inception DX, LLC ("Inception"), a Utah limited liability company. Under the terms of the agreement, the Company acquired Inception for 15,500,000 shares of common stock. Inception owns laboratory equipment, partial interest in database records for over 31,900,000 individuals for use in genetics research, 400,000 units in Juneau Biosciences, LLC, initial CLIA registration, CLIA lab protocols, and other assets. A shareholder and member of the Board of Managers of Juneau Biosciences, LLC, our equity method investee, was also a minority investor in Inception prior to the acquisition.

The stock issued was for cash, laboratory equipment, membership units in Juneau Biosciences, LLC ("Juneau units"), and trade secrets related to the DNA database and protocols related to a future use as a CLIA laboratory. The Juneau units were valued based on the value assigned when the Company entered into a subscription to purchase units of Juneau ($1.10 per unit).  The equipment will be depreciated over 5 years.  The proprietary data, DNA library, protocols, research, and methods are classified as trade secrets in our industry.  The Company will amortize the trade secrets over an estimated useful life of 15 years.

The stock price on August 22, 2018 was $0.92 per share, indicating a purchase price of $14,260,000 requiring allocation:

Taueret Laboratories, LLC Asset Purchase

On August 22, 2018, the Company entered into an agreement captioned "Asset Purchase Agreement" (the "Purchase Agreement") with Taueret Laboratories, LLC ("Taueret"), and its members. Under the terms of the Purchase Agreement, the Company issued warrants exercisable for 16,500,000 shares of the Company's common stock. The warrants were exercisable at fair market value of the Company's common stock on the closing date. In consideration for the warrants, the Company acquired (i) approximately 1,000 degenerative disc disease related DNA samples, related family records, relevant clinical records (including approximately 600 affected probands) and 800 ancestry matched control samples, (ii) whole exome sequencing data on approximately 300 degenerative disc disease samples, over 800 local controls, and published reference populations, together with initial analysis of the markers, (iii) project plan, study paperwork, promotional study and materials used in the research study, (iv) exclusive use of a DNA biobank that has a collection of over 300,000 samples for multiple diseases that the Company may target, (v) the remaining interest in database records for over 31,900,000 individuals for use in genetics research, and (vi) other assets. A shareholder and member of the Board of Managers of Juneau Biosciences, LLC, our equity method investee, was a controlling shareholder of Taueret.

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The warrants issued are for proprietary data and methods that are otherwise a trade secret in our industry.  Therefore, the Company determined to classify the assets purchased as trade secrets with a 15-year life.  The Company used a Black Scholes calculation to determine valuation of the warrants of $13,860,000. As the purchase of the trade secrets with common stock warrants resulted in a difference between book and tax basis in the trade secrets, the carrying amount of the trade secrets was increased to $18,480,000 to reflect the deferred tax liability of $4,620,000 assumed in the transaction.

The fair value of the warrants was determined using the following inputs to the Black Scholes model: