PRAN Prana Biotechnology Ltd ADS

Note 1 - Basis of Preparation

This general purpose financial report for the interim half year reporting period ended 31 December 2013 has been prepared in accordance with Accounting Standard AASB 134 Interim Financial Reporting and the Corporations Act 2001 . This interim financial report complies with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB"), Australian equivalents to International Financial Reporting Standards ("A-IFRS") and AASB 134.

This interim financial report does not include all the notes of the type normally included in an annual financial report.

Accordingly, this report is to be read in conjunction with the Annual Report for the year ended 30 June 2013 and any public announcements made by Prana Biotechnology Limited (‘the Group’) during the interim reporting period in accordance with the continuous disclosure requirements of the Corporations Act 2001.

This interim financial report of the Group was authorised for issue by the Board of Directors on 26 February 2014.

Accounting Policies

The Group had to change some of its accounting policies as the result of new or revised accounting standards which became effective for the annual reporting period commencing on 1 July 2013.

The affected policies and standards are:

AASB 119

The adoption of the revised AASB 119 Employee Benefits resulted in changes to the entity’s accounting policy which significantly affected items recognised in the consolidated financial statements:

The revised standard has also changed the accounting for the Group’s annual leave obligations. As the Group does not expect all annual leave to be taken within 12 months of the respective service being provided, annual leave obligations are now classified as long-term employee benefits in their entirety. This revision affects the measurement of these obligations, as the obligations are now measured on a discounted basis. The impact of this change was immaterial therefore the Group did not change the measurement of these obligations.

AASB 13

AASB 13 defines and sets out a framework for measuring fair value and aims to enhance fair value disclosures. In substance, AASB 13 codifies many of the existing fair value practices but may in certain instances result in a change to fair values. The new guidance will also increase financial statement disclosure at both the half and full years.

There are a number of new principles that could result in a change to the fair value measurement of assets and liabilities. These include:

AASB 13 also introduces extensive disclosure requirements for financial and non-financial instruments, including disclosures about:

All other accounting policies adopted are consistent with the most recent Annual Financial Report for the year ended 30 June 2013. 

Going Concern

The Group is a development stage medical biotechnology company and as such expects to be utilizing cash until its research activities have become marketable. For the six months ended 31 December 2013, the Group incurred an operating loss of A$7,928,392, compared to an operating loss of A$4,332,321 during the six months ended 31 December 2012. As at 31 December 2013, the Group’s net assets stood at A$19,791,368, compared to A$13,974,713 at 30 June 2013. The Group’s cash position has increased to A$19,300,061 at 31 December 2013 from A$13,346,760 at 30 June 2013.

Since the end of the reporting period to the time the consolidated financial statements were authorized for issue, 6,128,900 unlisted options due to expire on 24 March 2015 were exercised for consideration of A$0.225 per share. A further 50,000 unlisted options due to expire on 20 March 2017 were exercised for consideration of A$0.25 per share. The options were exercised into ordinary shares resulting in A$1,391,503 received by the Group to fund operations. In addition, since the end of the reporting period, the Group received payment of A$4.09 million from the Australian Tax Office in respect of its 2013 R&D claim. This amount was recorded as a Trade Receivable at 31 December 2013.

Cash on hand at 31 December 2013 plus subsequent capital inflows are considered sufficient to meet the Group's forecast cash outflows for, at least, 12 months from the date of this report. While there is an inherent uncertainty in the Group's cash flow forecast in relation to the phasing of proposed expenditure on research and development which may impact the forecast cash position, the Directors believe the Group will be able to maintain sufficient cash reserves through a range of options, including:

On this basis, the Directors are satisfied that the Group is a going concern and at this time and are of the opinion that no asset is likely to be realised for an amount less than the amount at which it is recorded in the Consolidated Statement of Financial Position as at 31 December 2013.

Therefore, no adjustments have been made to the financial report relating to the recoverability and classification of the asset carrying amounts or the classification of liabilities that might be necessary should the Group not continue as a going concern.

R&D Tax Incentives

The Australian Government replaced the research and development tax concession with the research and development tax incentive from July 1, 2011. The new provisions provide refundable or non-refundable tax offsets. The research and development tax incentive applies to expenditure incurred and the use of depreciating assets in an income year commencing on or after 1 July 2011. A 45% refundable tax offset, equivalent to a deduction of 150%, will be available to eligible small companies with an annual aggregate turnover of less than $20 million. Eligible companies can receive a refundable tax offset of 45% of their research and development spending.

The Group's research and development activities are eligible under an Australian Government tax incentive for eligible expenditure from 1 July 2011. Management has assessed these activities and expenditure to determine which are likely to be eligible under the incentive scheme. For the six month period to 31 December 2013 the Group has recorded an item in other income of A$1.45 million compared to an amount of A$2.19 million recorded for the six month period to 31 December 2012.

Note 2 - Dividends

The Group resolved not to declare any dividends for the period ended 31 December 2013.

Note 3 - Segment Information

The Group's activities are predominately within Australia and cover research into Alzheimer's Disease and other major age-related degenerative disorders.

(a) Personnel expenses related to research and development consist of expenses paid for wages of employees and consultants engaged by the Group to conduct research and development activities.

(b) Research and development expenses consist of expenses paid for contracted research and development activities conducted by third parties on behalf of the Group.

Note 6 - Contingent Liabilities and Assets

There has been no change in contingent liabilities and assets since the last annual reporting date.

(ii) Exercise of options

(iii) Expiration of options

(i) Expired options, unexercised

Options that are considered to be potential ordinary shares are excluded from the weighted average number of ordinary shares used in the calculation of basic loss per share. Where dilutive, potential ordinary shares are included in the calculation of diluted loss per share. All the options on issue do not have the effect to dilute the loss per share. Therefore all the options have been excluded from the calculation of diluted loss per share. There have been no other conversions to, call of, or subscriptions for ordinary shares since the reporting date and before the completion of this report.

(b) Reconciliation of cash and cash equivalents

Note 12 - Events Subsequent to Reporting Date

Post 31 December 2013, 6,128,900 unlisted options due to expire on March 24, 2015 were exercised for consideration of A$0.225 per share. A further 50,000 unlisted options due to expire on March 20, 2017 were exercised for consideration of A$0.25 per share. The options were exercised into ordinary shares resulting in A$1,391,503 received by the Group to fund operations.

No other matters or circumstances have arisen since the end of the reporting period, not otherwise disclosed in this report, which significantly affected or may significantly affect the operations of the Group, the result of those operations or the state of affairs of the Group in subsequent financial years.

Note 13 – Related Party Transactions

There has been no significant change in related party transactions since the last annual reporting date.

In the Financial Year ended 30 June 2011 the Group entered into an agreement with the Alzheimer’s Drug Discovery Foundation (“ADDF”) to receive a grant of up to US$700,000, receivable in two instalments of US$350,000. As at 31 December 2013 both instalments totalling US$700,000 have been received. As a condition to receiving the grant and on execution of the agreement, the Group executed a Convertible Promissory Note in the amount of the first instalment. The Group increased the Convertible Promissory in the amount of the second instalment following receipt of the second instalment in the Financial Year ended 30 June 2013. This Convertible Promissory Note will govern the terms of repayment of the grant or the conversion into ordinary shares of the Group. Further, as a condition to receiving the grant, on receipt of the first instalment, the Group issued a warrant to ADDF to purchase ordinary shares of the Group.

The Convertible Promissory Note is classified as a financial liability in accordance with AASB 132 and AASB 139 for recognition and measurement.

The terms of the Convertible Promissory Note are as follows:

As per an agreement with the Alzheimer's Drug Discovery Foundation, the Group issued warrants to purchase 612,397 ordinary shares to the ADDF representing 30% of the value of the first tranche of US$350,000 received during the financial year ended 30 June 2011.

The warrants are exercisable into Ordinary Shares on or before 25 February 2016 at an exercise price of AUD$ 0.17 per share.

Under AASB 132 paragraph 11, the warrants associated with this transaction are required to be classified as a Financial Liability, as opposed to Issued Capital.

On initial recognition the warrants issued to ADDF are measured at fair value on the Consolidated Statement of Financial Position. At each reporting date the Financial Liability representing the Warrants are required to be re-valued to fair value with the movement in the fair value recorded in the Consolidated Statement of Comprehensive Income.

Note 15 – Financial Instruments measured at Fair Value

The financial instruments recognised at fair value in the Consolidated Statement of Financial Position have been analysed and classified using a fair value hierarchy reflecting the significance of the inputs used in making the measurements. The fair value hierarchy consist of the following levels:

During the current and previous reporting periods, none of the Group’s assets and liabilities except for other financial liabilities had their fair value determined using the fair value hierarchy. Other financial liabilities consisting of the convertible promissory note and warrants (as detailed in Note 14) were classified as a level 2 instrument. The value of the loss in the current and previous reporting period recognised from revaluing the liability was $313,094 (2012: $75,835). This amount was included in loss on fair valuation of financial liabilities in the Consolidated Statement of Comprehensive Income. No transfers between the levels of the fair value hierarchy occurred during the current or previous reporting periods.

The directors consider that the carrying amount of all other financial assets and liabilities recorded in the financial statements approximate their fair value. 

The Directors’ of the Group declare that;

This declaration is made in accordance with a resolution of the Board of Directors.

Mr Geoffrey Kempler

Executive Chairman and Chief Executive Director

Melbourne

Dated: This 26 ^th Day of February 2014