Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
______________________________________ 
FORM 10-Q
 _____________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
Or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 001-35676
______________________________________ 
PROTHENA CORPORATION PUBLIC LIMITED COMPANY
(Exact name of registrant as specified in its charter)
______________________________________ 
Ireland
 
98-1111119
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
77 Sir John Rogerson’s Quay, Block C
Grand Canal Docklands
Dublin 2, D02 T804, Ireland
(Address of principal executive offices including Zip Code)
Registrant’s telephone number, including area code: 011-353-1-236-2500
 ______________________________________

Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol
Name of Each Exchange on Which Registered
Ordinary Shares, par value $0.01 per share
PRTA
The Nasdaq Global Select Market
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  x    No  o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.




Large accelerated filer
o
Accelerated filer
x
 
 
 
 
Non-accelerated filer
o
Smaller reporting company
x
 
 
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   o   No  x
The number of ordinary shares outstanding as of July 19, 2019 was 39,896,561.




PROTHENA CORPORATION PLC
Form 10-Q – QUARTERLY REPORT
For the Quarter Ended June 30, 2019
TABLE OF CONTENTS

 
Page
 
 
Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2019 and 2018
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018
Condensed Consolidated Statements of Shareholders' Equity for the three and six months ended June 30, 2019 and 2018.
 
 
 
 
 
 





PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Prothena Corporation plc and Subsidiaries
Condensed Consolidated Balance Sheets (unaudited)
(in thousands, except share and per share data)
 
June 30,
 
December 31,
 
2019
 
2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
398,144

 
$
427,659

Restricted cash, current
1,352

 

Prepaid expenses and other current assets
19,212

 
3,731

Total current assets
418,708

 
431,390

Non-current assets:
 
 
 
Property and equipment, net
4,318

 
52,835

Operating lease right-of-use assets
25,927

 

Deferred tax assets
9,492

 
9,702

Restricted cash, non-current
2,704

 
4,056

Other non-current assets
923

 
813

Total non-current assets
43,364

 
67,406

Total assets
$
462,072

 
$
498,796

Liabilities and Shareholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
1,525

 
$
1,470

Accrued research and development
2,260

 
5,370

Income taxes payable, current
22

 
54

Lease liability, current
4,904

 

Build-to-suit lease obligation, current

 
1,645

Restructuring liability

 
461

Other current liabilities
19,305

 
5,926

Total current liabilities
28,016

 
14,926

Non-current liabilities:
 
 
 
Deferred revenue
110,242

 
110,242

Deferred rent

 
176

Lease liability, non-current
20,454

 

Build-to-suit lease obligation, non-current

 
49,901

Other liabilities
553

 
553

Total non-current liabilities
131,249

 
160,872

Total liabilities
159,265

 
175,798

Commitments and contingencies (Note 6)

 

Shareholders’ equity:
 
 
 
Euro deferred shares, €22 nominal value:

 

Authorized shares — 10,000 at June 30, 2019 and December 31, 2018
 
 
 
Issued and outstanding shares — none at June 30, 2019 and December 31, 2018
 
 
 
Ordinary shares, $0.01 par value:
399

 
399

Authorized shares — 100,000,000 at June 30, 2019 and December 31, 2018
 
 
 
Issued and outstanding shares — 39,896,561 and 39,863,711 at June 30, 2019 and December 31, 2018, respectively
 
 
 
Additional paid-in capital
933,291

 
920,594

Accumulated deficit
(630,883
)
 
(597,995
)
Total shareholders’ equity
302,807

 
322,998

Total liabilities and shareholders’ equity
$
462,072

 
$
498,796

 See accompanying Notes to Condensed Consolidated Financial Statements.

1



Prothena Corporation plc and Subsidiaries
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
 (unaudited)

 
 
Three Months Ended June 30,
 
Six Months Ended
June 30,
 
 
2019
 
2018
 
2019
 
2018
Collaboration revenue
 
$
167

 
$
279

 
$
353

 
$
506

Total revenue
 
167

 
279

 
353

 
506

Operating expenses:
 
 
 
 
 
 
 
 
Research and development
 
9,583

 
31,452

 
22,879

 
66,158

General and administrative
 
9,081

 
10,992

 
18,986

 
25,221

Restructuring charges (credits)
 

 
20,904

 
(61
)

20,904

Total operating expenses
 
18,664

 
63,348

 
41,804

 
112,283

Loss from operations
 
(18,497
)
 
(63,069
)
 
(41,451
)
 
(111,777
)
Other income (expense):
 
 
 
 
 
 
 
 
Interest income, net
 
2,296

 
831

 
4,600

 
1,031

Other income, net
 
235

 
410

 
218

 
138

Total other income, net
 
2,531

 
1,241

 
4,818

 
1,169

Loss before income taxes
 
(15,966
)
 
(61,828
)
 
(36,633
)
 
(110,608
)
Provision for (benefit from) income taxes
 
(156
)
 
(1,946
)
 
42

 
(1,983
)
Net loss
 
$
(15,810
)
 
$
(59,882
)
 
$
(36,675
)
 
$
(108,625
)
Basic and diluted net loss per share
 
$
(0.40
)
 
$
(1.50
)
 
$
(0.92
)
 
$
(2.77
)
Shares used to compute basic and diluted net loss per share
 
39,872

 
39,824

 
39,868

 
39,257

See accompanying Notes to Condensed Consolidated Financial Statements.



2



Prothena Corporation plc and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
Six Months Ended June 30,
 
2019
 
2018
Operating activities
 
 
 
Net loss
$
(36,675
)
 
$
(108,625
)
Adjustments to reconcile net loss to cash used in operating activities:
 
 
 
Depreciation and amortization
772

 
1,596

Share-based compensation
12,482

 
13,211

Restructuring share-based compensation

 
2,512

Deferred income taxes
(784
)
 
(1,198
)
Interest expense under build-to-suit lease obligation

 
1,825

Amortization of right-of-use assets
2,603

 

Loss from disposal of fixed assets

 
101

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
2

 
232

Prepaid and other assets
(15,593
)
 
2,991

Deferred revenue

 
110,242

Accounts payable, accruals and other liabilities
10,414

 
(12,222
)
Restructuring liability
(461
)
 
15,884

Operating lease liabilities
(2,298
)
 

Net cash provided by (used in) operating activities
(29,538
)
 
26,549

Investing activities
 
 
 
Purchases of property and equipment
(200
)
 
(280
)
Proceeds from disposal of fixed assets
8

 

Net cash used in investing activities
(192
)
 
(280
)
Financing activities
 
 
 
Proceeds from subscription of ordinary shares

 
39,758

Proceeds from issuance of ordinary shares upon exercise of stock options
215

 
4,473

Reduction of build-to-suit lease obligation

 
(1,908
)
Net cash provided by financing activities
215

 
42,323

Net increase (decrease) in cash, cash equivalents and restricted cash
(29,515
)
 
68,592

Cash, cash equivalents and restricted cash, beginning of the year
431,715

 
421,676

Cash, cash equivalents and restricted cash, end of the period
$
402,200

 
$
490,268

 
 
 
 
Supplemental disclosures of cash flow information
 
 
 
Cash paid for income taxes, net
$
755

 
$
576

 
 
 
 
Supplemental disclosures of non-cash investing and financing activities
 
 
 
Acquisition of property and equipment included in accounts payable and accrued liabilities
$
12

 
$

Right-of-use assets recorded upon adoption of ASC 842
$
28,530

 
$

Reduction of build-to-suit lease obligation upon adoption of ASC 842
$
(51,546
)
 
$

Reduction of amounts capitalized under build-to-suit lease upon adoption of ASC 842
$
(46,760
)
 
$

Reduction of capitalized interest under build-to-suit lease upon adoption of ASC 842
$
(1,099
)
 
$

 See accompanying Notes to Condensed Consolidated Financial Statements.

3



The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the statement of financial position that sum to the total of the same such amounts shown in the Condensed Consolidated Statements of Cash Flows.
 
Six Months Ended June 30,
 
2019
 
2018
Cash and cash equivalents
$
398,144

 
$
486,212

Restricted cash, current
1,352

 

Restricted cash, non-current
2,704

 
4,056

Total cash, cash equivalents and restricted cash, end of the period
$
402,200

 
$
490,268



4



Prothena Corporation plc and Subsidiaries
Condensed Consolidated Statements of Shareholders' Equity
(in thousands, except share data)
 
Three Months Ended June 30, 2019
 
Ordinary Shares
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Total
Shareholders' Equity
 
Shares
 
Amount
 
Balances at March 31, 2019
39,864,561

 
$
399

 
$
926,804

 
$
(615,073
)
 
$
312,130

Share-based compensation
 
 
 
 
6,277

 
 
 
6,277

Issuance of ordinary shares upon exercise of stock options
32,000

 

 
210

 
 
 
210

Net loss
 
 
 
 
 
 
(15,810
)
 
(15,810
)
Balances at June 30, 2019
39,896,561

 
$
399

 
$
933,291

 
$
(630,883
)
 
$
302,807


 
Three Months Ended June 30, 2018
 
Ordinary Shares
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Total
Shareholders' Equity
 
Shares
 
Amount
 
Balances at March 31, 2018
39,821,799

 
$
398

 
$
900,200

 
$
(491,093
)
 
$
409,505

Share-based compensation
 
 
 
 
6,309

 
 
 
6,309

Issuance of ordinary shares upon exercise of stock options
10,037

 

 
74

 
 
 
74

Net loss
 
 
 
 
 
 
(59,882
)
 
(59,882
)
Balances at June 30, 2018
39,831,836

 
$
398

 
$
906,583

 
$
(550,975
)
 
$
356,006


 
Six Months Ended June 30, 2019
 
Ordinary Shares
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Total
Shareholders' Equity
 
Shares
 
Amount
 
Balances at December 31, 2018
39,863,711

 
$
399

 
$
920,594

 
$
(597,995
)
 
$
322,998

Cumulative adjustment to accumulated deficit upon adoption of ASC-842
 
 
 
 
 
 
3,787

 
3,787

Share-based compensation
 
 
 
 
12,482

 
 
 
12,482

Issuance of ordinary shares upon exercise of stock options
32,850

 

 
215

 
 
 
215

Net loss
 
 
 
 
 
 
(36,675
)
 
(36,675
)
Balances at June 30, 2019
39,896,561

 
$
399

 
$
933,291

 
$
(630,883
)
 
$
302,807

 
Six Months Ended June 30, 2018
 
Ordinary Shares
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Total
Shareholders' Equity
 
Shares
 
Amount
 
Balances at December 31, 2017
38,482,764

 
$
385

 
$
849,154

 
$
(442,350
)
 
$
407,189

Issuance of ordinary shares under share subscription agreement with Celgene
1,174,536

 
12

 
39,746

 

 
39,758

Share-based compensation

 

 
13,211

 

 
13,211

Issuance of ordinary shares upon exercise of stock options
174,536

 
1

 
4,472

 

 
4,473

Net loss

 

 

 
(108,625
)
 
(108,625
)
Balances at June 30, 2018
39,831,836

 
$
398

 
$
906,583

 
$
(550,975
)
 
$
356,006

See accompanying Notes to Consolidated Financial Statements.

5



Notes to the Condensed Consolidated Financial Statements
(unaudited)
 
1.
Organization
Description of Business

Prothena Corporation plc (“Prothena” or the “Company”) is a clinical-stage neuroscience company focused on the discovery and development of novel therapies with the potential to fundamentally change the course of devastating neurological disorders. Fueled by its deep scientific understanding built over decades of neuroscience research, Prothena is advancing a pipeline of therapeutic candidates for a number of indications and novel targets including Parkinson’s disease and other related synucleinopathies (prasinezumab - PRX002/RG7935, in collaboration with Roche) and ATTR amyloidosis (PRX004), as well as tau for the potential treatment of Alzheimer’s disease and other neurodegenerative disorders and TDP-43 for the potential treatment of ALS (amyotrophic lateral sclerosis) and FTD (frontotemporal dementia) (both programs in collaboration with Celgene), for which its scientific understanding of disease pathology can be leveraged.

The Company was formed on September 26, 2012 under the laws of Ireland and re-registered as an Irish public limited company on October 25, 2012. The Company's ordinary shares began trading on The Nasdaq Global Market under the symbol “PRTA” on December 21, 2012 and currently trade on The Nasdaq Global Select Market.
Liquidity and Business Risks
As of June 30, 2019, the Company had an accumulated deficit of $630.9 million and cash and cash equivalents of $398.1 million.
Based on the Company's business plans, management believes that the Company’s cash and cash equivalents at June 30, 2019 are sufficient to meet its obligations for at least the next twelve months. To operate beyond such period, or if the Company elects to increase its spending on research and development programs significantly above current long-term plans or enters into potential licenses and or other acquisitions of complementary technologies, products or companies, the Company may need additional capital. The Company expects to continue to finance future cash needs that exceed its cash from operating activities primarily through its current cash and cash equivalents, its collaborations with Roche and Celgene, and to the extent necessary, through proceeds from public or private equity or debt financings, loans and other collaborative agreements with corporate partners or other arrangements.
The Company is subject to a number of risks, including but not limited to: the uncertainty of the Company’s research and development (“R&D”) efforts resulting in future successful commercial products; obtaining regulatory approval for its product candidates; its ability to successfully commercialize its product candidates, if approved; significant competition from larger organizations; reliance on the proprietary technology of others; dependence on key personnel; uncertain patent protection; dependence on corporate partners and collaborators; and possible restrictions on reimbursement from governmental agencies and healthcare organizations, as well as other changes in the healthcare industry.
2.
Summary of Significant Accounting Policies
Basis of Preparation and Presentation of Financial Information
These accompanying Unaudited Interim Condensed Consolidated Financial Statements have been prepared in accordance with the accounting principles generally accepted in the U.S. (“GAAP”) and with the instructions for Form 10-Q and Regulation S-X statements. Accordingly, they do not include all of the information and notes required for complete financial statements. These interim Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto contained in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 15, 2019 (the “2018 Form 10-K”). These Unaudited Interim Condensed Consolidated Financial Statements are presented in U.S. dollars, which is the functional currency of the Company and its consolidated subsidiaries. These Unaudited Interim Condensed Consolidated Financial Statements include the accounts of the Company and its consolidated subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Unaudited Interim Financial Information
The accompanying Unaudited Interim Condensed Consolidated Financial Statements and related disclosures are unaudited, have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect

6



all adjustments, which include only normal recurring adjustments, necessary for a fair presentation of the results of operations for the periods presented. The year-end condensed consolidated balance sheet data was derived from audited financial statements, however certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. The condensed consolidated results of operations for any interim period are not necessarily indicative of the results to be expected for the full year or for any other future year or interim period.
Use of Estimates
The preparation of the Condensed Consolidated Financial Statements in conformity with GAAP requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures. On an ongoing basis, management evaluates its estimates, including critical accounting policies or estimates related to revenue recognition, share-based compensation and research and development expenses. The Company bases its estimates on historical experience and on various other market specific and other relevant assumptions that management believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Because of the uncertainties inherent in such estimates, actual results may differ materially from these estimates.
Significant Accounting Policies
There were no significant changes to the accounting policies during the six months ended June 30, 2019, from the significant accounting policies described in Note 2 of the Notes to Consolidated Financial Statements in the 2018 Form 10-K, with the exception of those noted below.

Loss Contingencies

Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. The Company's accruals for losses are based on management's judgment of all possible outcomes and their financial effect, the probability of losses, and where applicable, the consideration of opinions of the Company's legal counsel. The Company’s accounting policy for legal costs related to loss contingencies is to accrue for the probable fees that can be reasonably estimated and expensed as incurred. Additionally, the Company records insurance recovery receivable from third party insurers when recovery has been determined to be probable. As of June 30, 2019, the Company has recorded a provision for legal settlement for $15.75 million within other current liabilities and a litigation insurance recovery receivable of $15.75 million, which represents the expected payment of the settlement by the Company’s insurance carriers, within prepaid expenses and other current assets on its Condensed Consolidated Balance Sheets.

Recently Adopted Accounting Pronouncement
In August 2018, the SEC issued Final Rule 33-10532, which updates and simplifies certain disclosure requirements. The rule was effective for filings on or after November 5, 2018. However, the SEC released guidance advising it will not object to a registrant adopting the requirement to include changes in stockholders' equity in the Form 10-Q for the first quarter beginning after the effective date of the rule (e.g. for a calendar year-end company, the first quarter of fiscal year 2019). The following amendments from the Final Rule 33-10532 are applicable to the Company: (1) an analysis of changes in stockholders' equity will now be required for the current and comparative year-to-date interim periods; and (2) for market price information, a registrant will disclose the ticker symbol of its common equity instead of disclosure of the high and low trading prices of an entity's common stock for specified quarterly periods. The Company's disclosure reflects the applicable amendments.
In February 2016, the FASB issued Accounting Standards Update 2016-02 Topic 842, Leases ("ASC 842"), which requires lessees to recognize assets and liabilities for leases with lease terms of more than 12 months and disclose key information about leasing arrangements. ASC 842 was subsequently amended by ASU 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU 2018-10, Codification Improvements to Topic 842, Leases; ASU 2018-11, Targeted Improvements; ASU 2018-20, Narrow-Scope Improvements for Lessors; and ASU 2019-01, Codification Improvements. Under the new standard, a lessee will recognize liabilities on the balance sheet, initially measured at the present value of the lease payments, and right-of-use (ROU) assets representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less at the commencement date, a lessee is permitted to make an accounting policy election not to recognize lease assets and lease liabilities. The new standard also eliminates the previous build-to-suit lease accounting guidance, which results in the derecognition of build-to-suit assets and liabilities that remained on the balance sheet after the end of the construction period. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. The new guidance requires both types of leases to be recognized on the balance sheet. The Company adopted the new standard on January 1, 2019 using the modified retrospective transition method wherein the effective date is its date of initial application. Consequently, prior period amounts are not adjusted and continue to be reported in accordance with the

7



Company’s historical accounting under ASC 840. The new standard provides a number of optional practical expedients in transition. The Company elected the "package of practical expedients", which permitted the Company not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct cost. The Company did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to the Company. For the Company's build-to-suit lease, Prothena has historically excluded executory costs, when part of the fixed payments in a lease contract, as part of the minimum rental payment disclosed in its financial statements footnote for the Current SSF Facility lease under ASC 840. Executory cost of a lease includes costs of taxes, insurance and maintenance (including common area maintenance). With the selection of practical expedient, the Company believes it is appropriate to continue applying the same accounting policy with its transition to ASC 842 (i.e. exclude the executory cost in determining the minimum rental payment).
As of January 1, 2019, the Company recorded $3.8 million change to the opening balance of the accumulated deficit for the cumulative effect of applying ASC 842, which included a reduction of $1.0 million in deferred tax assets. See Note 6, “Commitments and Contingencies,” which provides additional details on the Company's current lease arrangements. The impact of the adoption of ASC 842 on the accompanying Condensed Consolidated Balance Sheet as of January 1, 2019 was as follows (in thousands):
 
December 31, 2018
 
Adjustments due to the Adoption of Topic 842
 
January 1, 2019
Property and equipment, net
$
52,835

 
$
(47,859
)
 
$
4,976

Operating lease right-of-use assets
$

 
$
28,530

 
$
28,530

Deferred tax assets
$
9,702

 
$
(994
)
 
$
8,708

Lease liability, current
$

 
$
4,717

 
$
4,717

Other current liabilities(1)
$
5,926

 
$
(44
)
 
$
5,882

Build-to-suit lease obligation, current
$
1,645

 
$
(1,645
)
 
$

Lease liability, non-current
$

 
$
22,939

 
$
22,939

Build-to-suit lease obligation, non-current
$
49,901

 
$
(49,901
)
 
$

Deferred rent, non-current
$
176

 
$
(176
)
 
$

Accumulated deficit
$
(597,995
)
 
$
3,787

 
$
(594,208
)
__________________
(1) Amount as of December 31, 2018 includes Deferred rent, current.

The adjustments due to the adoption of ASC 842 relate to (1) the change in classification of build-to-suit lease under ASC 840 for the Company's current facility in South San Francisco, California to an operating lease under ASC 842 and as a result the Company derecognized its build-to-suit asset of $47.9 million under Property and equipment, net as of December 31, 2018 and related liability of $51.5 million, and (2) recognized an operating lease right-of-use asset of $28.5 million and operating lease liability of $27.7 million on the condensed consolidated balance sheet for the Company's operating lease. The right-of-use asset includes tenant improvements added by the Company wherein the lessor was deemed the accounting owner, net of tenant improvement allowance paid by the lessor. The Company has no debt and has not had an established incremental borrowing rate. For the purpose of estimating the incremental borrowing rate in the adoption of ASC 842, the Company inquired with banks that had business relationship with the Company to determine the Company's collateralized incremental borrowing rate. The discount rate used to determine the lease liability was 4.25%. There is no change in the accounting of the Sub-Sublease of the Current SSF Facility upon adoption of ASC 842. Further, the Company's operating lease at Dublin is not included in the lease liability and right-of-use asset recorded due to its nominal amount.
For the purpose of the adoption of ASC 842, the Company also performed an evaluation of its other contracts with customers and suppliers in accordance with ASC 842 and determined that, except for the office leases described in Note 6, “Commitments and Contingencies” (a nominal operating lease for medical monitoring equipment and a nominal operating lease for office equipment), none of the Company’s contracts contain a lease.
Leases
At the inception, the Company determines if an arrangement is a lease. If so, the Company evaluates the lease agreement to determine whether the lease is an operating or capital using the criteria in ASC 842. The Company does not recognize right-of-use assets and lease liabilities that arise from short-term leases for any class of underlying assets.

8



When lease agreements also require the Company to make additional payments for taxes, insurance and other operating expenses incurred during the lease period, such payments are expensed as incurred.
Operating Leases
Operating leases are included in the operating lease right-of-use assets, lease liability, current and lease liability, non-current in the Company's Condensed Consolidated Balance Sheets. Operating lease right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of minimum lease payments over the lease term. In determining the present value of lease payments, the Company uses its incremental borrowing rate based on information available at the lease commencement date. The operating lease right-of-use assets also include any lease prepayments made and exclude lease incentives including rent abatements and/or concessions and rent holidays. Tenant improvements made by the Company as a lessee in which they are deemed to be owned by the lessor is viewed as lease prepayments by the Company and included in the operating lease right-of-use assets. Lease expense is recognized on a straight-line basis over the expected lease term. For lease agreements entered after the adoption of ASC 842 that include lease and non-lease components, such components are generally accounted separately.

Segment and Concentration of Risks
The Company operates in one segment. The Company’s chief operating decision maker (the “CODM”), its Chief Executive Officer, manages the Company’s operations on a consolidated basis for purposes of allocating resources. When evaluating the Company’s financial performance, the CODM reviews all financial information on a consolidated basis.
Financial instruments that potentially subject the Company to concentration of credit risk consist of cash and cash equivalents and accounts receivable. The Company places its cash equivalents with high credit quality financial institutions and by policy, limits the amount of credit exposure with any one financial institution. Deposits held with banks may exceed the amount of insurance provided on such deposits. The Company has not experienced any losses on its deposits of cash and cash equivalents and its credit risk exposure is up to the extent recorded on the Company's Consolidated Balance Sheet.
The receivable from Roche recorded in prepaid expenses and other current assets in the Condensed Consolidated Balance Sheet are amounts due from a Roche entity located in Switzerland under the License Agreement that became effective January 22, 2014. Revenue recorded in the Condensed Consolidated Statements of Operations consists of reimbursement from Roche for research and development services. The Company's credit risk exposure is up to the extent recorded on the Company's Condensed Consolidated Balance Sheet.
As of June 30, 2019, $4.3 million of the Company’s property and equipment, net were held in the U.S. and none were in Ireland. As of December 31, 2018, $52.8 million of the Company's property and equipment, net were held in the U.S. and none were in Ireland.
The Company does not own or operate facilities for the manufacture, packaging, labeling, storage, testing or distribution of nonclinical or clinical supplies of any of its drug candidates. The Company instead contracts with and relies on third-parties to manufacture, package, label, store, test and distribute all preclinical development and clinical supplies of our drug candidates, and it plans to continue to do so for the foreseeable future. The Company also relies on third-party consultants to assist in managing these third-parties and assist with its manufacturing strategy.
Recent Accounting Pronouncements
In November 2018, the FASB issued Accounting Standards Update 2018-18 ("ASU 2018-18"), Collaborative Arrangements: Clarifying the Interaction between Topic 808 and Topic 606, which clarifies when transactions between collaborative arrangement participants are in the scope of ASC 606 and provides some guidance on presentation of transactions not in the scope of ASC 606. This ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2019. Early adoption is permitted as long as entities have already adopted the guidance in ASC 606. The Company does not currently expect the adoption of ASU 2018-18 to have an impact on its consolidated financial statements. The Company will continue to evaluate the impact of ASU 2018-18 on its consolidated financial statements in connection with Roche License Agreement and Celgene Collaboration Agreement.
3.
Fair Value Measurements
The Company measures certain financial assets and liabilities at fair value on a recurring basis, including cash equivalents. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined

9



based on assumptions that market participants would use in pricing an asset or a liability. A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value:
Level 1 —    Observable inputs such as quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 —
Include other inputs that are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant inputs are observable in the market or can be derived from observable market data. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, foreign exchange rates, and credit ratings.
Level 3 —
Unobservable inputs that are supported by little or no market activities, which would require the Company to develop its own assumptions.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The carrying amounts of certain financial instruments, such as cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximate fair value due to their relatively short maturities, and low market interest rates, if applicable.
Based on the fair value hierarchy, the Company classifies its cash equivalents within Level 1. This is because the Company values its cash equivalents using quoted market prices. The Company’s Level 1 securities consisted of $375.3 million and $306.2 million in money market funds included in cash and cash equivalents at June 30, 2019 and December 31, 2018, respectively.
4.
Composition of Certain Balance Sheet Items
Prepaid expenses and other current assets
Prepaid expenses and other current assets consisted of the following (in thousands):
 
June 30,
 
December 31,
 
2019
 
2018
Litigation insurance recovery receivable(1)
$
15,750

 
$

Other
3,462

 
3,731

Prepaid expenses and other current assets
$
19,212

 
$
3,731

______________________ 
(1) The Company has recorded a litigation insurance recovery receivable of $15.75 million as of June 30, 2019 within prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets, which represents the the expected payment of the litigation settlement by the Company’s insurance carriers. See Note 6, Commitments and Contingencies.
Property and Equipment, net
Property and equipment, net consisted of the following (in thousands):
 
June 30,
 
December 31,
 
2019
 
2018
Machinery and equipment
$
9,242

 
$
9,693

Leasehold improvements
1,017

 
98

Purchased computer software
1,303

 
1,303

Build-to-suit property(2)

 
52,245

 
11,562

 
63,339

Less: accumulated depreciation and amortization
(7,244
)
 
(10,504
)
Property and equipment, net
$
4,318

 
$
52,835

______________________ 

10



(2) The Company derecognized its build-to-suit asset for its current facility in South San Francisco, California on January 1, 2019 upon adoption of ASC 842 due to a change in classification of its build-to-suit lease under ASC 840 to an operating lease under ASC 842.
Depreciation expense was $0.4 million and $0.8 million for the three and six months ended June 30, 2019, respectively, compared to $0.8 million and $1.6 million for the three and six months ended June 30, 2018, respectively.
Other Current Liabilities
Other current liabilities consisted of the following (in thousands):
 
June 30,
 
December 31,
 
2019
 
2018
Payroll and related expenses
$
2,882

 
$
4,507

Provision for legal settlement(3)
15,750

 

Professional services
272

 
1,097

Deferred rent

 
44

Other
401

 
278

Other current liabilities
$
19,305

 
$
5,926


______________________ 
(3) As a result of signing of the memorandum of understanding and the potential liability becoming probable and estimable, the Company has recorded a provision for legal settlement for $15.75 million within other current liabilities on the Condensed Consolidated Balance Sheets as of June 30, 2019. See Note 6, "Commitment and Contingencies".

5.
Net Loss Per Ordinary Share
Basic net income (loss) per ordinary share is calculated by dividing net income (loss) by the weighted-average number of ordinary shares outstanding during the period. Shares used in diluted net income per ordinary share would include the dilutive effect of ordinary shares potentially issuable upon the exercise of stock options outstanding. However, potentially issuable ordinary shares are not used in computing diluted net loss per ordinary share as their effect would be anti-dilutive due to the loss recorded during the three and six months ended June 30, 2019 and 2018, and therefore diluted net loss per share is equal to basic net loss per share.
Net loss per ordinary share was determined as follows (in thousands, except per share amounts):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Numerator:
 
 
 
 
 
 
 
Net loss
$
(15,810
)
 
$
(59,882
)
 
$
(36,675
)
 
$
(108,625
)
Denominator:
 
 
 
 
 
 
 
Weighted-average ordinary shares outstanding
39,872

 
39,824

 
39,868

 
39,257

Net loss per share:
 
 
 
 
 
 
 
Basic and diluted net loss per share
$
(0.40
)
 
$
(1.50
)
 
$
(0.92
)
 
$
(2.77
)
The equivalent ordinary shares not included in diluted net loss per share because their effect would be anti-dilutive are as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Stock options to purchase ordinary shares
7,168

 
7,719

 
7,168

 
7,719



11



6. Commitments and Contingencies
Lease Commitments

The Company adopted ASC 842 effective January 1, 2019. Prior period amounts have not been adjusted and continued to be reported in accordance with the Company’s historical accounting under ASC 840. For lease arrangements entered prior to the adoption of ASC 842, right-of-use asset and lease liability are determined based on the present value of minimum lease payments over the remaining lease term and the Company’s incremental borrowing rate based on information available as of January 1, 2019. The right-of-use asset also includes any lease prepayments made and excludes unamortized lease incentives including rent abatements and/or concessions and rent holidays. Tenant improvements made by the Company as a lessee in which they are deemed to be owned by the lessor is viewed as lease prepayments by the Company and are included in the right-of-use asset. Lease expense is recognized on a straight-line basis over the expected lease term. Total operating lease cost was $1.6 million and $3.2 million for the three and six months ended June 30, 2019, respectively. Total cash paid against the operating lease liability was $1.4 million and $2.9 million for the three and six months ended June 30, 2019, respectively. See Note 2,“Summary of Significant Accounting Policies,” which provides additional details on the Company's adoption of ASC 842.
Prior to the adoption of ASC 842, the Company recognized rent expense for its operating leases on a straight-line basis over the noncancelable lease term and recorded the difference between cash rent payments and the recognition of rent expense as a deferred rent liability. Where leases contained escalation clauses, rent abatements and/or concessions, such as rent holidays and landlord or tenant incentives or allowances, the Company applied them in the determination of straight-line rent expense over the lease term. The Company recorded the tenant improvement allowance for operating leases as deferred rent and associated expenditures as leasehold improvements that were being amortized over the shorter of their estimated useful life or the term of the lease. Rent expense was $0.2 million and $0.4 million for the three and six months ended June 30, 2018, respectively.

As of June 30, 2019, the Company performed an evaluation of its other contracts with customers and suppliers in accordance with ASC 842 and have determined that, except for the leases described below, a nominal operating lease for medical monitoring equipment and a nominal operating lease for office equipment, none of the Company’s contracts contain a lease.

Current SSF Facility

In March 2016, the Company entered into a noncancelable operating sublease (the “Lease”) to lease 128,751 square feet of office and laboratory space in South San Francisco, California, U.S. (the “Current SSF Facility”). Subsequently, in April 2016, the Company took possession of the Current SSF Facility. The Lease includes a free rent period and escalating rent payments and has a remaining lease term of 4.5 years that expires on December 31, 2023, unless terminated earlier. The Company's obligation to pay rent commenced on August 1, 2016. The Company is obligated to make lease payments totaling approximately $39.2 million over the lease term. The Lease further provides that the Company is obligated to pay to the sublandlord and master landlord certain costs, including taxes and operating expenses. Prior to the adoption of ASC 842 on January 1, 2019, this Lease was considered a build-to-suit lease.

In connection with this Lease, the Company received a tenant improvement allowance of $14.2 million from the sublandlord and the master landlord, for the costs associated with the design, development and construction of tenant improvements for the Current SSF Facility. The Company is obligated to fund all costs incurred in excess of the tenant improvement allowance. The scope of the tenant improvements did not qualify as “normal tenant improvements” under ASC 840. Accordingly, for accounting purposes, the Company was the deemed owner of the building during the construction period under ASC 840 and the Company capitalized $36.5 million within property and equipment, net, including $1.2 million for capitalized interest and recognized a corresponding build-to-suit obligation in other non-current liabilities in the Consolidated Balance Sheets as of December 31, 2018. The Company has also recognized structural and non-structural tenant improvements totaling $15.8 million as of December 31, 2018 as an addition to the build-to-suit lease property for amounts incurred by the Company during the construction period, of which $14.2 million were reimbursed by the landlord during the year ended December 31, 2016 through the tenant improvement allowance. Under ASC 840, the Company increased its financing obligation for the additional building costs reimbursements received from the landlord during the construction period. For the three and six months ended June 30, 2018, the Company recorded rent expense associated with the ground lease of $0.1 million and $0.2 million, respectively, in the Condensed Consolidated Statements of Operations. Total interest expense, which represents the cost of financing obligation under the Lease agreement, was $0.9 million and $1.8 million for the three and six months ended June 30, 2018, respectively, which was recognized in its Condensed Consolidated Statements of Operations. No corresponding amounts were recorded for the three and six months ended June 30, 2019 due to the adoption of ASC 842.

During the fourth quarter of 2016, construction on the build-to-suit lease property was substantially completed and the build-to-suit lease property was placed in service. As such, the Company evaluated the Lease under ASC 840 to determine whether

12



it had met the requirements for sale-leaseback accounting, including evaluating whether all risks of ownership have been transferred back to the landlord, as evidenced by a lack of continuing involvement in the build-to-suit lease property. The Company determined that the construction project did not qualify for sale-leaseback accounting and was accounted for under ASC 840 as a financing lease, given the Company’s expected continuing involvement after the conclusion of the construction period. Prior to the adoption of the new lease guidance, ASC 842, the build-to-suit lease property was recorded on the Company’s Consolidated Balance Sheet as of December 31, 2018 at its historical cost of $52.3 million and the total amount of the build-to-suit lease obligation as of December 31, 2018 was $51.5 million, of which $1.6 million and $49.9 million were classified as current and non-current liability, respectively.

The Lease is considered to be an operating lease under ASC 842 as it does not meet the criteria of a capital lease under ASC 840 and the construction was completed before the adoption of ASC 842. The Company derecognized the build-to-suit property and build-to-suit lease obligations upon adoption of ASC 842 and as of June 30, 2019, the operating lease right-of-use asset and lease liability was $25.9 million and $25.4 million, respectively. The discount rate used to determine the lease liability was 4.25%.

The Company obtained a standby letter of credit in April 2016 in the initial amount of $4.1 million, which may be drawn down by the sublandlord in the event the Company fails to fully and faithfully perform all of its obligations under the Lease and to compensate the sublandlord for all losses and damages the sublandlord may suffer as a result of the occurrence of any default on the part of Company not cured within the applicable cure period. This standby letter of credit is collateralized by a certificate of deposit of the same amount which is classified as restricted cash. The Company is entitled to a $1.4 million reduction in the face amount of the standby letter of credit on the third anniversary of the contractual rent commencement and another $1.4 million on the fifth anniversary of the contractual rent commencement. As a condition to the reduction of the standby letter of credit amount, no uncured default by the Company shall then exist under the Lease. As of June 30, 2019, none of the standby letter of credit amount has been used.

Sub-Sublease of Current SSF Facility

On July 18, 2018, the Company entered into a Sub-Sublease Agreement (the “Sub-Sublease”) with Assembly Biosciences, Inc. (the “Sub-Subtenant”) for Sub-Subtenant to sub-sublease from the Company approximately 46,641 square feet of office and laboratory space of the Company’s Current SSF Facility. Prior to the adoption of ASC 842 on January 1, 2019, this Sub-Sublease was considered an operating lease. There is no change in the accounting of the Sub-Sublease of the Current SSF Facility upon adoption of ASC 842. For the three and six months ended June 30, 2019, the Company recorded $0.7 million and $1.5 million, respectively, for sub-lease rental income as an offset to its operating expenses.

The Sub-Sublease provides for initial annual base rent for the complete Sub-Subleased Premises of approximately $2.7 million, with increases of approximately 3.5% in annual base rent on September 1, 2019 and each anniversary thereof. The Sub-Sublease rental income excludes reimbursements for executory costs received from the Sub-Subtenant. The Sub-Sublease became effective on September 24, 2018 and has a term of 5.2 years which terminates on December 15, 2023. The Sub-Sublease will terminate if the Master Lease or the Sublease terminates. The Company or the Sub-Subtenant may elect, subject to limitations set forth in the Sub-Sublease, to terminate the Sub-Sublease following a material casualty or condemnation affecting the Subleased Premises. The Company may terminate the Sub-Sublease following an event of default, which is defined in the Sub-Sublease to include, among other things, non-payment of amounts owing by the Sub-Subtenant under the Sub-Sublease.

The Company is required under the Lease to pay to the sublandlord 50% of that portion of the cash sums and other economic consideration received from the Sub-Subtenant that exceeds the base rent paid by the Company to the sublandlord after deducting certain of the Company’s costs.

Dublin
In September 2018, the Company entered into an agreement to lease 133 square feet of office space in Dublin, Ireland. The lease has a term of one year and expires on November 30, 2019. The Dublin Lease also has an automatic renewal clause, in which the agreement will be extended automatically for successive periods equal to the current term but no less than three months, unless the agreement is cancelled by the Company. This operating lease is not included in the lease liability and operating lease right-of-use asset recorded due to its nominal amount.
As of June 30, 2019, the Company is obligated to make lease payments over the remaining term of the lease of approximately €9,000, or $11,000 as converted using an exchange rate as of June 30, 2019.


13



Future minimum payments under the above-described noncancelable operating leases, including a reconciliation to the lease liabilities recognized in the Condensed Consolidated Balance Sheets, and future minimum rentals to be received under the Sub-Sublease as of June 30, 2019 are as follows (in thousands):
Year Ended December 31,
 
Operating Leases
 
Sub-Sublease Rental
2019 (6 months)
 
2,948

 
$
1,389

2020
 
5,979

 
2,843

2021
 
6,165

 
2,944

2022
 
6,350

 
3,047

2023
 
6,535

 
3,019

Total
 
27,977

 
$
13,242

Less: Present value adjustment
 
(2,608
)
 
 
Nominal lease payments
 
(11
)
 
 
Lease liability
 
$
25,358

 
 

Under ASC 840, future minimum payments under operating lease, build-to-suit lease obligation and future minimum rentals to be received under the Sub-Sublease as of December 31, 2018 was as follows (in thousands):
Year Ended December 31,
 
Operating Lease
 
Expected Cash Payments Under Build-To-Suit Lease Obligation
 
Sub-Sublease Rental
2019
 
$
23

 
$
5,803

 
$
2,746

2020
 

 
5,979

 
2,843

2021
 

 
6,165

 
2,944

2022
 

 
6,350

 
3,047

2023
 

 
6,535

 
3,019

Total
 
$
23

 
$
30,832

 
$
14,599

Indemnity Obligations
The Company has entered into indemnification agreements with its current and former directors and officers and certain key employees. These agreements contain provisions that may require the Company, among other things, to indemnify such persons against certain liabilities that may arise because of their status or service and advance their expenses incurred as a result of any indemnifiable proceedings brought against them. The obligations of the Company pursuant to the indemnification agreements continue during such time as the indemnified person serves the Company and continues thereafter until such time as a claim can be brought. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a director and officer liability insurance policy that limits its exposure and enables the Company to recover a portion of any future amounts paid. As a result of its insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal. Accordingly, the Company had no liabilities recorded for these agreements as of June 30, 2019 and December 31, 2018.
Other Commitments
In the normal course of business, the Company enters into various firm purchase commitments primarily related to research and development activities. As of June 30, 2019, the Company had non-cancelable purchase commitments to suppliers for $0.7 million of which $0.1 million is included in accrued current liabilities, contractual obligations under license agreements of $1.2 million of which $0.1 million is included in accrued current liabilities and provision for legal settlement of $15.75 million, which is included in accrued current liabilities. The following is a summary of the Company's non-cancelable purchase commitments and contractual obligations as of June 30, 2019 (in thousands):

14



 
 
Total
 
2019
 
2020
 
2021
 
2022
 
2023
 
Thereafter
Purchase Obligations (1)
 
$
725

 
$
725

 
$

 
$

 
$

 
$

 
$

Contractual obligations to employees
 
125

 
125

 

 

 

 

 

Provision for legal settlement (2)
 
15,750

 
15,750

 

 

 

 

 

Contractual obligations under license agreements (3)
 
1,170

 
275

 
105

 
95

 
80

 
80

 
535

Total
 
$
17,770

 
$
16,875

 
$
105

 
$
95

 
$
80

 
$
80

 
$
535

________________
(1) Purchase obligations consist of non-cancelable purchase commitments to suppliers.
(2) The Company has recorded a litigation insurance recovery receivable of $15.75 million as of June 30, 2019 within prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets, which represents the expected payment of the litigation settlement by the Company’s insurance carriers.
(3) Excludes future obligations pursuant to the cost-sharing arrangement under the Company's License Agreement with Roche. Amounts of such obligations, if any, cannot be determined at this time.
Legal Proceedings

On July 16, 2018, a purported class action lawsuit entitled Granite Point Capital v. Prothena Corporation plc, et al., Civil Action No. 18-cv-06425, was filed in the U.S. District Court for the Southern District of New York against the Company and certain of its current and former officers. The plaintiff seeks compensatory damages, costs and expenses in an unspecified amount on behalf of a putative class of persons who purchased the Company’s ordinary shares between October 15, 2015 and April 20, 2018, inclusive. The complaint alleges that the defendants violated federal securities laws by allegedly making false and misleading statements and omitting certain material facts in certain public statements and in the Company’s filings with the U.S. Securities and Exchange Commission during the putative class period, regarding the clinical trial results and prospects for approval of the Company’s NEOD001 drug development program. On October 31, 2018, the Court issued an order naming Granite Point Capital and Simon James, an individual, as the lead plaintiffs in the purported class action, which is now entitled In re Prothena Corporation plc Securities Litigation.
On June 10, 2019, the Company and the individual defendants entered into a binding memorandum of understanding with the lead plaintiffs to settle that lawsuit based on an aggregate settlement amount of $15.75 million. The memorandum of understanding contemplates that the parties will enter into a settlement agreement, which will be subject to customary conditions including Court approval following notice to the Company’s current and former shareholders who are members of the purported class, and a hearing at which the Court will consider the fairness, reasonableness and adequacy of the settlement. If the settlement is approved by the Court, it will resolve, as to all settlement class members, all of the claims that were or could have been brought in the lawsuit. On June 20, 2019, consistent with the memorandum of understanding to settle the lawsuit and intention to seek the Court’s approval of settlement of the lawsuit, the lead plaintiffs filed an amended complaint, asserting in substance the same allegations as were made in the original complaint. The Company continues to believe that the claims in the lawsuit are without merit and, to the extent the settlement is not finalized, intends to vigorously defend against them. 

The Company maintains insurance for claims of this nature. As a result of signing of the memorandum of understanding and the potential liability becoming probable and estimable, the Company has recorded a provision for legal settlement for $15.75 million within other current liabilities on the Condensed Consolidated Balance Sheets as of June 30, 2019. Additionally, the Company recorded a litigation insurance recovery receivable of $15.75 million within prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets as of June 30, 2019, which represents the expected payment of the settlement by the Company’s insurance carriers.
7. Significant Agreements
Roche License Agreement
In December 2013, the Company through its wholly owned subsidiary Prothena Biosciences Limited and Prothena Biosciences Inc entered into a License, Development, and Commercialization Agreement (the “License Agreement”) with F. Hoffmann-La Roche Ltd. and Hoffmann-La Roche Inc. (together, “Roche”) to develop and commercialize certain antibodies that target α-synuclein, including prasinezumab, which are referred to collectively as “Licensed Products.” Upon the effectiveness of the License Agreement in January 2014, the Company granted to Roche an exclusive, worldwide license to develop, make, have made, use, sell, offer to sell, import and export the Licensed Products. The Company retained certain rights to conduct development of the Licensed Products and an option to co-promote prasinezumab in the U.S. During the term of the License Agreement, the Company and Roche will work exclusively with each other to research and develop antibody products targeting alpha-synuclein (or α-synuclein) potentially including incorporation of Roche’s proprietary Brain Shuttle™ technology to potentially increase delivery of therapeutic antibodies to the brain. The License Agreement provided for Roche making an upfront payment to the Company of $30.0 million, which was received in February 2014; making a clinical milestone payment of $15.0 million upon initiation of the Phase 1 study for prasinezumab, which was received in May 2014; and making a clinical milestone payment of $30.0 million upon dosing of the first patient in the Phase 2 study for prasinezumab, which was achieved in June 2017.
For prasinezumab, Roche is also obligated to pay:
up to $350.0 million upon the achievement of development, regulatory and various first commercial sales milestones;
up to an additional $175.0 million upon achievement of ex-U.S. commercial sales milestones; and
tiered, high single-digit to high double-digit royalties in the teens on ex-U.S. annual net sales, subject to certain adjustments.
Roche bore 100% of the cost of conducting the research collaboration under the License Agreement during the research term, which expired December 31, 2017. In the U.S., the parties share all development and commercialization costs, as well as profits, all of which will be allocated 70% to Roche and 30% to the Company, for prasinezumab in the Parkinson’s disease indication, as well as any other Licensed Products and/or indications for which the Company opts in to participate in co-development and co-funding. After the completion of specific clinical trial activities, the Company may opt out of the co-development and cost and profit sharing on any co-developed Licensed Products and instead receive U.S. commercial sales milestones totaling up to $155.0 million and tiered, single-digit to high double-digit royalties in the teens based on U.S. annual net sales, subject to certain adjustments, with respect to the applicable Licensed Product.
The Company filed an Investigational New Drug Application (“IND”) with the FDA for prasinezumab and subsequently initiated a Phase 1 study in 2014. Following the Phase 1 studies, Roche became primarily responsible for developing, obtaining and maintaining regulatory approval for and commercializing Licensed Products. Roche also became responsible for the clinical and commercial manufacture and supply of Licensed Products.
In addition, the Company has an option under the License Agreement to co-promote prasinezumab in the U.S. in the Parkinson’s disease indication. If the Company exercises such option, it may also elect to co-promote additional Licensed Products in the U.S. approved for Parkinson’s disease. Outside the U.S., Roche will have responsibility for developing and commercializing the Licensed Products. Roche bears all costs that are specifically related to obtaining or maintaining regulatory approval outside the U.S. and will pay the Company a variable royalty based on annual net sales of the Licensed Products outside the U.S.
While Roche will record product revenue from sales of the Licensed Products, the Company and Roche will share in the net profits and losses of sales of the prasinezumab for the Parkinson's disease indication in the U.S. on a 70%/30% basis with the Company receiving 30% of the profit and losses provided that the Company has not exercised its opt-out right.
The License Agreement continues on a country-by-country basis until the expiration of all payment obligations under the License Agreement. The License Agreement may also be terminated (i) by Roche at will after the first anniversary of the effective date of the License Agreement, either in its entirety or on a Licensed Product-by-Licensed Product basis, upon 90 days’ prior written notice to the Company prior to first commercial sale and 180 days’ prior written notice to Prothena after first commercial sale, (ii) by either party, either in its entirety or on a Licensed Product-by-Licensed Product or region-by-region basis, upon written notice in connection with a material breach uncured 90 days after initial written notice, and (iii) by either party, in its entirety,

15



upon insolvency of the other party. The License Agreement may be terminated by either party on a patent-by-patent and country-by-country basis if the other party challenges a given patent in a given country. The Company’s rights to co-develop Licensed Products under the License Agreement will terminate if the Company commences certain studies for certain types of competitive products. The Company’s rights to co-promote Licensed Products under the License Agreement will terminate if the Company commences a Phase 3 study for such competitive products.
The License Agreement cannot be assigned by either party without the prior written consent of the other party, except to an affiliate of such party or in the event of a merger or acquisition of such party, subject to certain conditions. The License Agreement also includes customary provisions regarding, among other things, confidentiality, intellectual property ownership, patent prosecution, enforcement and defense, representations and warranties, indemnification, insurance, and arbitration and dispute resolution.

Collaboration Accounting

The License Agreement was evaluated under ASC 808, Collaborative Agreements. At the outset of the License Agreement, the Company concluded that it did not qualify as collaboration under ASC 808 because the Company does not share significant risks due to the net profit and loss split (under which Roche incurs substantially more of the costs of the collaboration) and because of the Company’s opt-out provision. The Company believes that Roche will be the principal in future sales transactions with third parties as Roche will be the primary obligor bearing inventory and credit risk. The Company will record its share of pre-tax commercial profit generated from the collaboration as collaboration revenue once the Company can conclude it is probable that a significant revenue reversal will not occur in future periods. Prior to commercialization of a Licensed Product, the Company’s portion of the expenses related to the License Agreement reflected on its income statement will be limited to R&D expenses. After commercialization, if the Company opts-in to co-detail commercialization, expenses related to commercial capabilities, including expenses related to the establishment of a field sales force and other activities to support the Company’s commercialization efforts, will be recorded as sales, general and administrative (“SG&A”) expense and will be factored into the computation of the profit and loss share. The Company will record the receivable related to commercialization activities as collaboration revenue once the Company can conclude it is probable that a significant revenue reversal will not occur in future periods.

Adoption of ASC 606, Revenue from Contracts with Customers

The Company adopted ASC 606, Revenue from Contracts with Customers, as of January 1, 2018 using the modified retrospective transition method. The Company recognized the cumulative effect of applying the new revenue standard as an adjustment to the opening balance of the accumulated deficit as of January 1, 2018.

As of January 1, 2018, the Company did not record any changes to the opening balance of the accumulated deficit since the cumulative effect of applying the new revenue standard was the same as applying ASC 605. The impact of the adoption of ASC 606 to revenues for the three and six months ended June 30, 2018 was an increase of $0.3 million and $0.5 million, respectively, which represents the revenue recognized for the development services provided by the Company during the period that is reimbursable by Roche. Historically, the Company recorded such reimbursement as an offset against its R&D expenses under ASC 605. Upon the adoption of ASC 606, the reimbursement for development services is now included as part of the Company’s collaboration revenue.

Performance Obligations

The License Agreement was evaluated under ASC 606. The License Agreement includes the following distinct performance obligations: (1) the Company’s grant of an exclusive royalty bearing license, with the right to sublicense to develop and commercialize certain antibodies that target α-synuclein, including prasinezumab, and the initial know how transfer which was delivered at the effective date (the “Royalty Bearing License”); (2) the Company’s obligation to supply clinical material as requested by Roche for a period up to twelve months (the “Clinical Product Supply Obligation”); (3) the Company’s obligation to provide manufacturing related services to Roche for a period up to twelve months (the “Supply Services Obligation”); (4) the Company’s obligation to prepare and file the IND (the “IND Obligation”); and (5) the Company’s obligation to provide development activities under the development plan during Phase 1 clinical trials (the “Development Services Obligation”). Revenue allocated to the above performance obligations under the License Agreement are recognized when the Company has satisfied its obligations either at a point in time or over a period of time.

The Company concluded that the Royalty Bearing License and the Clinical Product Supply Obligation were satisfied at a point in time. The Royalty Bearing License is considered to be a functional intellectual property, in which the revenue would be recognized at the point in time since (a) the Company concluded that the license to Roche has a significant stand-alone functionality, (b) the Company does not expect the functionality of the intellectual property to be substantially changed during the license period

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as a result of activities of Prothena, and (c) Prothena’s activities transfer a good or service to Roche. The Clinical Product Supply Obligation does not meet criteria for over time recognition; as such, the revenue related to such performance obligation was recognized the point in time at which Roche obtained control of manufactured supplies, which occurred during the first quarter of 2014.

The Company concluded that the Supply Services Obligation, the IND Obligation and the Development Services Obligation were satisfied over time. The Company utilized an input method measure of progress by basing the recognition period on the efforts or inputs towards satisfying the performance obligation (i.e. costs incurred and the time elapsed to complete the related performance obligations). The Company determined that such input method provides an appropriate measure of progress toward complete satisfaction of such performance obligations.

As of June 30, 2019 and December 31, 2018, there were no remaining performance obligations under License Agreement since the obligations related to research and development activities were only for the Phase 1 clinical trial and the remaining obligations were delivered or performed.

Transaction Price

According to ASC 606-10-32-2, the transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (for example, some sales taxes). The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. Factors considered in the determination of the transaction price include, among other things, estimated selling price of the license and costs for clinical supply and development costs.

The initial transaction price under the License Agreement, pursuant to ASC 606, was $55.1 million, including $45.0 million for the Royalty Bearing License, $9.1 million for the IND and Development Services Obligations, and $1.1 million for the Supply Services Obligation. The $45.0 million for the Royalty Bearing License included the upfront payment of $30.0 million and the clinical milestone payment of $15.0 million upon initiation of the Phase 1 clinical trial of prasinezumab, both of which were made in 2014. The remaining transaction price amounts the Company expected to receive as reimbursements were based on costs expected to be paid to third parties and other costs to be incurred by the Company in order to satisfy its performance obligations. They are considered to be variable considerations not subject to constraint. The Company did not incur any incremental costs, such as commissions, to obtain or fulfill the License Agreement.
Under ASC 606, the transaction price was allocated to the performance obligations as follows: $48.9 million to the Royalty Bearing License; $4.6 million to the IND and Development Services Obligations; $1.1 million to the Clinical Product Supply Obligation; and $0.6 million to the Supply Services Obligation. As of June 30, 2019, the aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied is $nil. Prior to the adoption of ASC 606, the transaction price was allocated to the deliverables as follows: $35.6 million to the Royalty Bearing License; $3.3 million to the IND and Development Services Obligations; $0.8 million to the Clinical Product Supply Obligation; and $0.4 million to the Supply Services Obligation.
The Company allocated the initial transaction price to the Royalty Bearing License and other performance obligations using the relative selling price method based on its best estimate of selling price for the Royalty Bearing License and third party evidence for the remaining performance obligations. The best estimate of selling price for the Royalty Bearing License was based on a discounted cash flow model. The key assumptions used in the discounted cash flow model used to determine the best estimate of selling price for the Royalty Bearing License included the market opportunity for commercialization of prasinezumab in the U.S. and the royalty territory (for licensed products that are jointly funded the royalty territory is worldwide except for the U.S., and for all licensed products that are not jointly funded the Royalty Territory is worldwide), the probability of successfully developing and commercializing prasinezumab, the estimated remaining development costs for prasinezumab, and the estimated time to commercialization of prasinezumab. The Company concluded that a change in the assumptions used to determine the best estimate of selling price (“BESP”) of the license deliverable would not have a significant effect on the allocation of arrangement consideration.
The Company’s discounted cash flow model included several market conditions and entity-specific inputs, including the likelihood that clinical trials for prasinezumab will be successful, the likelihood that regulatory approval will be obtained and the product commercialized, the appropriate discount rate, the market locations, size and potential market share of the product, the expected life of the product, and the competitive environment for the product. The market assumptions were generated using a patient-based forecasting approach, with key epidemiological, market penetration, dosing, compliance, length of treatment and pricing assumptions derived from primary and secondary market research, referenced from third-party sources.

Significant Payment Terms

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Payments for development services are due within 45 days after receiving an invoice from the Company. Variable considerations related to clinical and regulatory milestone payments are constrained due to high likelihood of a revenue reversal. The payment term for all milestone payments are due within 45 days after the achievement of the relevant milestone and receipt by Roche of an invoice for such an amount from the Company.
According to ASC 606-10-32-17, a significant financing component does not exist if a substantial amount of the consideration promised by the customer is variable, and the amount or timing of that consideration varies on the basis of the occurrence or nonoccurrence of a future event that is not substantially within the control of the customer or the entity. Since a “substantial amount of the consideration” promised by Roche to the Company is variable (i.e., is in the form of either milestone payments or sales-based royalties) and the amount of such variable consideration varies based upon the occurrence or nonoccurrence of future events that are not within the control of either Roche or the Company (i.e., are largely subject to regulatory approval), the License Agreement does not have a significant financing component.

Optional Goods and Services
An option for additional goods or services exists when a customer has a present contractual right that allows it to choose the amount of additional distinct goods or services that are purchased. Prior to the customer’s exercise of that right, the vendor is not presently obligated to provide those goods or services. ASC 606-10-25-18(j) requires recognition of an option as a distinct performance obligation when the option provides a customer with a material right.
In addition to the distinct performance obligations noted above, the Company was obligated to provide indeterminate research services for up to three years ending in 2017 at rates that were not significantly discounted and fully reimbursable by Roche (the “Research Services”). The amount for any such Research Services was not fixed and determinable and was not at a significant incremental discount. There were no refund rights, concessions or performance bonuses to consider.
The Company evaluated the obligation to perform Research Services under ASC 606-10-55-42 and 55-43 to determine whether it gave Roche a “material right”. According to ASC 606-10-55-43, if a customer has the option to acquire an additional good or services at a price that would reflect the standalone selling price for that good or service, that option does not provide the customer with a material right even if the option can be exercised only by entering into a previous contract.
The Company concluded that Roche’s option to have the Company perform Research Services did not represent a “material right” to Roche that it would not have received without entering into the License Agreement. As a result, Roche’s option to acquire additional Research Services was not considered a performance obligation at the outset of the License Agreement under ASC 606. Accordingly, this deliverable will become new performance obligation for Prothena when Roche asks Prothena to conduct such Research Services. As of June 30, 2019, there were no remaining Research Services performance obligations. Prior to the adoption of ASC 606, the Company recognized Research Services as collaboration revenue as earned.
Post Contract Deliverables
Any development services provided by the Company after performance of the Development Service Obligation are not considered a contractual performance obligation under the License Agreement, since the License Agreement does not require the Company to provide any development services after completion of the Development Service Obligation. However, the collaboration’s Joint Steering Committee approved continued funding for additional development services to be provided by the Company (the “Additional Development Services”). Under the License Agreement and upon the adoption of ASC 606, the Company recognizes the reimbursements for Additional Development Services as collaboration revenue as earned.

Revenue and Expense Recognition

The Company recognized $0.2 million and $0.4 million as collaboration revenue for the three and six months ended June 30, 2019, respectively from Roche for Additional Development Services, as compared to $0.3 million and $0.5 million as collaboration revenue from Roche for Additional Development Services for the three and six months ended June 30, 2018, respectively. Cost sharing payments to Roche are recorded as R&D expenses. The Company recognized $1.1 million and $4.0 million in R&D expenses for payments made to Roche during the three and six months ended June 30, 2019, as compared to $4.0 million and $6.4 million for the three and six months ended June 30, 2018, respectively. The Company had accounts receivable from Roche of nil and $2,000 recorded in prepaid expenses and other current assets at June 30, 2019 and December 31, 2018, respectively.
Milestone Accounting


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Under the License Agreement, only if the U.S. and or global options are exercised, the Company is eligible to receive milestone payments upon the achievement of development, regulatory and various first commercial sales milestones. Milestone payments are evaluated under ASC Topic 606. Factors considered in this determination included scientific and regulatory risk that must be overcome to achieve each milestone, the level of effort and investment required to achieve the milestone, and the monetary value attributed to the milestone. Accordingly, the Company estimates payments in the transaction price based on the most likely approach, which considers the single most likely amount in a range of possible amounts related to the achievement of these milestones. Additionally, milestone payments are included in the transaction price only when the Company can conclude it is probable that a significant revenue reversal will not occur in future periods when the milestone is achieved.
The Company excludes the milestone payments and royalties in the initial transaction price calculation because such payments are considered to be variable considerations with constraint. Such milestone payments and royalties will be recognized as revenue once the Company can conclude it is probable that a significant revenue reversal will not occur in future periods.
The clinical and regulatory milestones under the License Agreement after the point at which the Company could opt-out are considered to be variable considerations with constraint due to the fact that active participation in the development activities that generate the milestones is not required under the License Agreement, and the Company can opt-out of these activities. There are no refunds or claw-back provisions and the milestones are uncertain of occurrence even after the Company has opted out. Based on this determination, these milestones will be recognized when the Company can conclude it is probable that a significant revenue reversal will not occur in future periods.
In June 2017, the Company achieved a $30.0 million clinical milestone under the License Agreement as a result of dosing of first patient in Phase 2 study for prasinezumab. The milestone was accounted for under ASC 605 and was allocated to the units of accounting based on the relative selling price method for income statement classification purposes. As such, the Company recognized $26.6 million of the $30.0 million milestone as collaboration revenue and $3.4 million as an offset to R&D expenses in 2017. The Company did not achieve any clinical and regulatory milestones under the License Agreement during the six months ended June 30, 2019.
Celgene Collaboration Agreement
Overview

On March 20, 2018, the Company, through its wholly owned subsidiary Prothena Biosciences Limited, entered into a Master Collaboration Agreement (the “Collaboration Agreement”) with Celgene Switzerland LLC (“Celgene”), a subsidiary of Celgene Corporation, pursuant to which Prothena granted to Celgene a right to elect in its sole discretion to exclusively license rights both in the U.S. (the “US Rights”) and on a global basis (the “Global Rights”), with respect to the Company’s programs to develop and commercialize antibodies targeting Tau, TDP-43 and an undisclosed target (the “Collaboration Targets”). For each such program, Celgene may exercise its US Rights at the IND filing, and if it so exercises such US Rights would also have a right to expand the license to Global Rights. If Celgene exercises its US Rights for a program, then following the first to occur of (a) completion by the Company, in its discretion and at its cost, of Phase 1 clinical trials for such program or (b) the date on which Celgene elects to assume responsibility for completing such Phase 1 clinical trials (at its cost), Celgene would have decision making authority over development activities and all regulatory, manufacturing and commercialization activities in the U.S.
The Collaboration Agreement provided for Celgene making an upfront payment to the Company of $100.0 million, which was received in April 2018, plus future potential license exercise payments and regulatory and commercial milestones for each program under the Collaboration Agreement, as well as royalties on net sales of any resulting marketed products. In connection with the Collaboration Agreement, the Company and Celgene entered into a Share Subscription Agreement on March 20, 2018, under which Celgene subscribed to 1,174,536 of the Company’s ordinary shares for a price of $42.57 per share, for a total of approximately $50.0 million.
Celgene US and Global Rights and Licenses

On a program-by-program basis, beginning on the effective date of the Collaboration Agreement and ending on the date that the IND Option term expires for such program (which generally occurs sixty days after the date on which Prothena delivers to Celgene the first complete data package for an IND that was filed for a lead candidate from the relevant program), Celgene may elect in its sole discretion to exercise its US Rights to receive an exclusive license to develop, manufacture and commercialize antibodies targeting the applicable Collaboration Target in the U.S. (the “US License”). If Celgene exercises its US Rights for a collaboration program, it is obligated to pay the Company an exercise fee of approximately $80.0 million per program. Thereafter, following the first to occur of (a) completion by the Company, in its discretion and at its cost, of Phase 1 clinical trials for such program or (b) Celgene’s election to assume responsibility to complete such Phase 1 clinical trials (at its cost), Celgene would

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have the sole right to develop, manufacture and commercialize antibody products targeting the relevant Collaboration Target for such program (the “Collaboration Products”) in the U.S.
On a program-by-program basis, following completion of a Phase 1 clinical trial for a collaboration program for which Celgene has previously exercised its US Rights, Celgene may elect in its sole discretion to exercise its Global Rights with respect to such collaboration program to receive a worldwide, exclusive license to develop, manufacture and commercialize antibodies targeting the applicable Collaboration Target (the “Global License”). If Celgene exercises its Global Rights, Celgene would be obligated to pay the Company an additional exercise fee of $55.0 million for such collaboration program. The Global Rights would then replace the US Rights for that collaboration program, and Celgene would have decision making authority over developing, obtaining and maintaining regulatory approval for, manufacturing and commercializing the Collaboration Products worldwide.
After Celgene’s exercise of Global Rights for a collaboration program, the Company is eligible to receive up to $562.5 million in regulatory and commercial milestones per program. Following an exercise by Celgene of either US Rights or Global Rights for such collaboration program, the Company will also be eligible to receive tiered royalties on net sales of Collaboration Products ranging from high single digit to high teen percentages, on a weighted average basis depending on the achievement of certain net sales thresholds. Such exercise fees, milestones and royalty payments are subject to certain reductions as specified in the Collaboration Agreement, the agreement for US Rights and the agreement for Global Rights.
Celgene will continue to pay royalties on a Collaboration Product-by-Collaboration Product and country-by-country basis, until the latest of (i) expiration of certain patents covering the Collaboration Product, (ii) expiration of all regulatory exclusivity for the Collaboration Product, and (iii) an agreed period of time after the first commercial sale of the Collaboration Product in the applicable country (the “Royalty Term”).
Term and Termination
 
The research term under the Collaboration Agreement continues for a period of six years, which Celgene may extend for up to two additional 12-month periods by paying an extension fee of $10.0 million per extension period. The term of the Collaboration Agreement continues until the last to occur of the following: (i) expiration of the research term; (ii) expiration of all US Rights terms; and (iii) expiration of all Global Rights terms.
The term of any US License or Global License would continue on a Licensed Product-by-Licensed Product and country-by-country basis until the expiration of all Royalty Terms under such agreement.
The Collaboration Agreement may be terminated (i) by either party on a program-by-program basis if the other party remains in material breach of the Collaboration Agreement following a cure period to remedy the material breach, (ii) by Celgene at will on a program-by-program basis or in its entirety, (iii) by either party, in its entirety, upon insolvency of the other party, or (iv) by Prothena, in its entirety, if Celgene challenges a patent licensed by Prothena to Celgene under the Collaboration Agreement.
Share Subscription Agreement
  
Pursuant to the terms of the Collaboration Agreement, the Company entered into a Share Subscription Agreement (the “SSA”) with Celgene, pursuant to which the Company issued, and Celgene subscribed for, 1,174,536 of the Company’s ordinary shares (the “Shares”) for an aggregate subscription price of approximately $50.0 million, pursuant to the terms and conditions thereof.
Under the SSA, Celgene is subject to certain transfer restrictions. In addition, Celgene will be entitled to request the registration of the Shares with the U.S. Securities and Exchange Commission on Form S-3ASR or Form S-3 following termination of the transfer restrictions if the Shares cannot be resold without restriction pursuant to Rule 144 promulgated under the U.S. Securities Act of 1933, as amended (the “Securities Act”).
Collaboration Accounting

The Collaboration Agreement was evaluated under ASC 808, Collaborative Agreements. At the outset of the Collaboration Agreement, the Company concluded that it does not qualify as collaboration under ASC 808 because the Company does not share significant risks due to economics of the collaboration.
Performance Obligations

The Company assessed the Collaboration Agreement and concluded that it represented a contract with a customer within the scope of ASC 606. Per ASC 606, a performance obligation is defined as a promise to transfer a good or service or a series of distinct goods or services. At inception of the Collaboration Agreement, the Company is not obligated to transfer the US License

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or Global License to Celgene unless Celgene exercises its US Rights or Global Rights, respectively, and the Company is not obligated to perform development activities under the development plan during preclinical and Phase 1 clinical trials including the regulatory filing of the IND.
The discovery, preclinical and clinical development activities performed by the Company are to be performed at the Company’s discretion and are not promised goods or services and therefore are not considered performance obligations under ASC 606, unless and until the Company agrees to perform the Phase 1 clinical studies (after the IND option exercise) that are determined to be performance obligations at the time the option is exercised. Per the terms of the Collaboration Agreement, the Company may conduct discovery activities to characterize, identify and generate antibodies to become collaboration candidates that target such Collaboration Target, and thereafter may pre-clinically develop collaboration candidates to identify lead candidates that target such Collaboration Target and file an IND with the U.S. Food and Drug Administration (the “FDA”) for a Phase 1 clinical trial for such lead candidates. In the event the Company agrees to be involved in a Phase 1 clinical study, the Company will further evaluate whether any such promise represents a performance obligation at the time the option is exercised. If it is concluded that the Company has obligated itself to an additional performance obligation besides the license granted at IND option exercise then the effects of the changes in the arrangement will be evaluated under the modification guidance of ASC 606.
The Company is not obligated to perform manufacturing activities. Per the terms of the Collaboration Agreement, to the extent that the Company, at its discretion, conducts a program, the Company shall be responsible for the manufacture of collaboration candidates and collaboration products for use in such program, as well as the associated costs. Delivery of manufactured compound (clinical product supply) is not deemed a performance obligation under ASC 606 as the Company is not obligated to transfer supply of collaboration product to Celgene unless Celgene exercises its right to participate in the Phase 1 development.
Compensation for the Company’s provision of inventory supply, to the extent requested by Celgene would be paid to Prothena by Celgene at a reasonable stand-alone selling price for such supply. Given that (i) there is substantial uncertainty about the development of the programs, (ii) the pricing for the inventory is at its standalone selling price and (iii) the manufacturing services require the entity to transfer additional goods or services that are incremental to the goods and services provided prior to the resolution of the contingency, the Company’s supply of product is not a material right. Therefore, the inventory supply is not considered a performance obligation unless and until, requested by Celgene.

In addition to the grant of the US License after Celgene exercises its US Rights for a program, Celgene is entitled to receive certain ancillary development services from the Company, such as technology transfer assistance, regulatory support, safety data reporting activities and transition supply, if requested by Celgene.

In addition to the grant of the Global License after Celgene exercises the Global Rights for a program, Celgene is entitled to receive certain ancillary development services from Prothena, such as ongoing clinical trial support upon request by Celgene, transition supply, if requested by Celgene, and regulatory support for coordination of pharmacovigilance matters.

The Company evaluated the potential obligations to transfer the US Licenses and Global Licenses and performance of the ancillary development services subsequent to exercise of the US Rights and Global Rights, if the options are exercised by Celgene, under ASC 606-10-55-42 and 55-43 to determine whether the US Rights or the Global Rights provided Celgene a “material right” and concluded that Celgene’s options to exercise its US Rights and Global Rights represented “material rights” to Celgene that it would not have received without entering into the Agreement.

There are a total of six options including US Rights and Global Rights to acquire a US License and a Global License, respectively, and rights to request certain development services (following exercise of the US Rights and Global Rights, respectively) for each of the three programs. Per ASC 606, the US Rights and Global Rights are material rights and therefore are performance obligations. The goods and services underlying the options are not accounted for as separate performance obligations, but rather become performance obligations, if and when, an option is exercised.

Transaction Price

According to ASC 606-10-32-2, the transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (for example, some sales taxes). The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. Factors considered in the determination of the transaction price included, among other things, estimated selling price of the license and costs for clinical supply and development costs.
The initial transaction price under the Collaboration Agreement, pursuant to ASC 606, was $110.2 million, including the $100.0 million upfront payment and $10.2 million premium on the ordinary shares purchased under the SSA. The Company

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expects that the initial transaction price will be allocated across the US Rights and Global Rights for each program in a range of approximately $15-$25 million and $10-$18 million, respectively.
The Company did not include the option fees in the initial transaction price because such fees are contingent on the options to the US Rights and the Global Rights being exercised. Upon the exercise of the US Rights and the Global Rights for a program, the Company will have the obligation to deliver the US License and Global License and provide certain ancillary development services if requested by Celgene, subsequent to its exercise of the US Rights and Global Rights, respectively, for such program. The Company will include the option fees in the transaction price at the point in time a material right is exercised. In addition, the Company did not include in the initial transaction price certain clinical and regulatory milestone payments since they relate to licenses for which Celgene has not yet exercised its option to obtain and these variable considerations are constrained due to the likelihood of a significant revenue reversal.
At the inception of the Collaboration Agreement, the Company did not transfer any goods or services to Celgene that are material. Accordingly, the Company has concluded that the initial transaction price will be recognized as contract liability and will be deferred until the Company transfers control of goods or services to Celgene (which would be when Celgene exercises the US Right or Global Right and receives control of the US License or Global License for at least one of the programs), or when the IND Option term expires if Celgene does not exercise the US Right (which is generally sixty days after the date on which Prothena delivers to Celgene the first complete data package for an IND that was filed for a lead candidate from the relevant program), or when the Phase 1 Option term expires if Celgene does not exercise the Global Right (which is generally ninety days after the date on which Prothena delivers to Celgene the first complete data package for a Phase 1 clinical trial for a lead candidate from the relevant program) or at the termination of the Collaboration Agreement, whichever occurs first. At such point that the Company transfers control of goods or services to Celgene, or when the option expires, the Company will recognize revenue as a continuation of the original contract. Under this approach, the Company will treat the consideration allocated to the material right as an addition to the consideration for the goods or services underlying the contract option.
At inception of the Collaboration Agreement, the Company estimated the standalone selling price for each performance obligation (i.e., the US Rights and Global Rights by program). The estimate of standalone selling price for the US Rights and Global Rights by program was based on the adjusted market assessment approach using a discounted cash flow model. The key assumptions used in the discounted cash flow model included the market opportunity for commercialization of each program in the U.S. or globally depending on the license, the probability of successfully developing and commercializing a given program target, the estimated remaining development costs for the respective program, the estimated time to commercialization of the drug for that program and a discount rate.

Significant Payment Terms

The upfront payment of $100.0 million was due within ten business days after the effective date of the Collaboration Agreement and was received in April 2018, while all option fees and milestone payments are due within 30 days after the achievement of the relevant milestone by Celgene or receipt by Celgene of an invoice for such an amount from the Company.
The Collaboration Agreement does not have a significant financing component since a substantial amount of consideration promised by Celgene to the Company is variable and the amount of such variable consideration varies based upon the occurrence or non-occurrence of future events that are not within the control of either Celgene or the Company. Variable considerations related to clinical and regulatory milestone payments and option fees are constrained due to the likelihood of a significant revenue reversal.

Milestone and Royalties Accounting

The Company is eligible to receive milestone payments of up to $90.0 million per program upon the achievement of certain specified regulatory milestones and milestone payments of up to $375.0 million per program upon the achievement of certain specified commercial sales milestones under the US License for such program. The Company is also eligible to receive milestone payments of up to $187.5 million per program upon the achievement of certain specified regulatory milestones and milestone payments of up $375.0 million per program upon the achievement of certain specified commercial sale milestones under the Global License for such program. Milestone payments are evaluated under ASC Topic 606. Factors considered in this determination included scientific and regulatory risk that must be overcome to achieve each milestone, the level of effort and investment required to achieve the milestone, and the monetary value attributed to the milestone. Accordingly, the Company estimates payments in the transaction price based on the most likely approach, which considers the single most likely amount in a range of possible amounts related to the achievement of these milestones. Additionally, milestone payments are included in the transaction price only when the Company can conclude it is probable that a significant revenue reversal will not occur in future periods.

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The Company excluded the milestone payments and royalties in the initial transaction price because such payments are considered to be variable considerations with constraint. Such milestone payments and royalties will be recognized as revenue at a point in time when the Company can conclude it is probable that a significant revenue reversal will not occur in future periods.
The Company did not achieve any clinical and regulatory milestones under the Collaboration Agreement during the six months ended June 30, 2019.
8. Shareholders' Equity
Ordinary Shares
As of June 30, 2019, the Company had 100,000,000 ordinary shares authorized for issuance with a par value of $0.01 per ordinary share and 39,896,561 ordinary shares issued and outstanding. Each ordinary share is entitled to one vote and, on a pro rata basis, to dividends when declared and the remaining assets of the Company in the event of a winding up.
Euro Deferred Shares
As of June 30, 2019, the Company had 10,000 Euro Deferred Shares authorized for issuance with a nominal value of €22 per share. No Euro Deferred Shares are outstanding at June 30, 2019. The rights and restrictions attaching to the Euro Deferred Shares rank pari passu with the ordinary shares and are treated as a single class in all respects.
Celgene Share Subscription Agreement
In connection with the Celgene Collaboration Agreement, the Company entered into a Share Subscription Agreement (the “SSA”) with Celgene, pursuant to which the Company issued, and Celgene subscribed for, 1,174,536 of the Company’s ordinary shares (the “Shares”) for an aggregate subscription price of approximately $50.0 million, of which the fair value of $39.8 million was recorded in shareholders' equity and the premium of $10.2 million was recorded as deferred revenue from Celgene.
Under the SSA, Celgene is subject to certain transfer restrictions. In addition, Celgene will be entitled to request the registration of the Shares with the SEC on Form S-3ASR or Form S-3 following termination of the transfer restrictions if the Shares cannot be resold without restriction pursuant to Rule 144 promulgated under the Securities Act.
9. Share-Based Compensation
2018 Long Term Incentive Plan
In May 2018, the Company’s shareholders approved the 2018 Long Term Incentive Plan (the “2018 LTIP”), which provides for the grant of ISOs, NQSOs, SARs, restricted shares, RSUs, performance bonus awards, performance share units awards, dividend equivalents and other share or cash-based awards to eligible individuals. Options under the 2018 LTIP may be granted for periods up to ten years. All options issued to date have had a ten year life. Under the 2018 LTIP, the number of ordinary shares authorized for issuance under the 2018 LTIP is equal to the sum of (a) 1,800,000 shares, (b) 1,177,933 shares that were available for issuance under the 2012 LTIP as of the May 15, 2018 effective date of the 2018 LTIP, and (c) any shares subject to issued and outstanding awards under the 2012 Long Term Incentive Plan (the “2012 LTIP”) that expire, are cancelled or otherwise terminate following the effective date of the 2018 LTIP; provided, that no more than 2,500,000 shares may be issued pursuant to the exercise of ISOs.
Amended and Restated 2012 Long Term Incentive Plan
Prior to the effective date of the 2018 LTIP, employees and consultants of the Company, its subsidiaries and affiliates, as well as members of the Company’s Board of Directors, received equity awards under the 2012 LTIP. Options under the 2012 LTIP were granted for periods up to ten years. All options issued to date have had a ten year life.
Shares Available for Grant
The Company granted 145,000 and 2,953,200 during the three months ended June 30, 2019 and 2018, respectively, and 997,975 and 4,046,300 options during the six months ended June 30, 2019 and 2018, respectively, in aggregate under the 2012 LTIP and the 2018 LTIP. The Company’s option awards generally vest over four years. As of June 30, 2019, 1,060,772 ordinary shares remained available for grant under the 2018 LTIP, and options to purchase 7,168,464 ordinary shares in aggregate under the 2012 LTIP and the 2018 LTIP were outstanding with a weighted-average exercise price of approximately $24.41 per share.
Share-based Compensation Expense

23



The Company estimates the fair value of share-based compensation on the date of grant using an option-pricing model. The Company uses the Black-Scholes model to value share-based compensation, excluding RSUs, which the Company values using the fair market value of its ordinary shares on the date of grant. The Black-Scholes option-pricing model determines the fair value of share-based payment awards based on the share price on the date of grant and is affected by assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, the Company’s share price, volatility over the expected life of the awards and actual and projected employee stock option exercise behaviors. Since the Company does not have sufficient historical employee share option exercise data, the simplified method has been used to estimate the expected life of all options. The Company uses its historical volatility for the Company’s stock to estimate expected volatility starting January 1, 2018. Although the fair value of share options granted by the Company is estimated by the Black-Scholes model, the estimated fair value may not be indicative of the fair value observed in a willing buyer and seller market transaction.
As share-based compensation expense recognized in the Condensed Consolidated Financial Statements is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from estimates. Forfeitures were estimated based on estimated future turnover and historical experience.
Share-based compensation expense will continue to have an adverse impact on the Company’s results of operations, although it will have no impact on its overall financial position. The amount of unearned share-based compensation currently estimated to be expensed from now through the year 2023 related to unvested share-based payment awards at June 30, 2019 is $51.5 million. The weighted-average period over which the unearned share-based compensation is expected to be recognized is 2.89 years. If there are any modifications or cancellations of the underlying unvested securities, the Company may be required to accelerate and/or increase any remaining unearned share-based compensation expense. Future share-based compensation expense and unearned share-based compensation will increase to the extent that the Company grants additional equity awards.

Share-based compensation expense recorded in these Condensed Consolidated Financial Statements for the three and six months ended June 30, 2019 and 2018 was based on awards granted under the 2012 LTIP and the 2018 LTIP. The following table summarizes share-based compensation expense for the periods presented (in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Research and development
 
$
2,100

 
$
2,553

 
$
4,199

 
$
4,810

General and administrative
 
4,177

 
3,756

 
8,283

 
8,401

Restructuring costs (1)
 
$

 
$
2,512

 

 
$
2,512

Total share-based compensation expense
 
$
6,277

 
$
8,821

 
$
12,482

 
$
15,723

(1) Restructuring costs for the three and six months ended June 30, 2018 includes $2.5 million of share-based compensation expenses related to the contractual acceleration of vesting of certain stock options granted to executive officers.
The Company recognized tax benefits from share-based awards of $1.2 million and $1.0 million for the three months ended June 30, 2019 and 2018, respectively, and $2.5 million and $2.1 million for six months ended June 30, 2019 and 2018, respectively.
The fair value of the options granted to employees and non-employee directors during the three and six months ended June 30, 2019 and 2018 was estimated as of the grant date using the Black-Scholes option-pricing model assuming the weighted-average assumptions listed in the following table:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Expected volatility
81.5%
 
83.9%
 
81.5%
 
79.4%
Risk-free interest rate
2.2%
 
2.8%
 
2.5%
 
2.8%
Expected dividend yield
—%
 
—%
 
—%
 
—%
Expected life (in years)
6.0
 
6.0
 
6.0
 
6.0
Weighted average grant date fair value
$6.58
 
$11.28
 
$9.06
 
$13.82
The fair value of employee stock options is being amortized on a straight-line basis over the requisite service period for each award. Each of the inputs discussed above is subjective and generally requires significant management judgment to determine.

24



The following table summarizes the Company’s stock option activity during the six months ended June 30, 2019:
 
Options
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term (years)
 
Aggregate
Intrinsic
Value
(in thousands)
Outstanding at December 31, 2018
6,726,715

 
$
26.82

 
7.39
 
$
2,169

Granted
997,975

 
12.85

 
 
 
 
Exercised
(32,850
)
 
6.56

 
 
 
 
Canceled
(523,376
)
 
34.43

 
 
 
 
Outstanding at June 30, 2019
7,168,464

 
$
24.41

 
7.88
 
$
2,368

Vested and expected to vest at June 30, 2019
6,739,513

 
$
24.78

 
7.62
 
$
2,352

Vested at June 30, 2019
3,375,931

 
$
28.87

 
6.59
 
$
2,192

The total intrinsic value of options exercised was approximately $0.1 million and $0.1 million during the three months ended June 30, 2019 and 2018, respectively, and $0.1 million and $2.2 million during the six months ended June 30, 2019 and 2018, respectively, determined as of the date of exercise.
10. Restructuring

In May 2018, the Company commenced a reorganization plan to reduce its operating costs and better align its workforce with the needs of its business following the Company’s April 23, 2018 announcement of its decision to discontinue further development of NEOD001. Restructuring charges incurred under this plan primarily consisted of employee termination benefits and contract termination costs primarily associated with exit fees relating to third-party manufacturers that the Company contracted with for NEOD001 clinical and commercial supplies.

Restructuring charges incurred under this plan primarily consisted of employee termination benefits and contract termination costs primarily associated with exit fees relating to third-party manufacturers that the Company contracted with for NEOD001 clinical and commercial supplies. Employee termination benefits included severance costs, employee-related benefits, supplemental one-time termination payments and non-cash share-based compensation expense related to the acceleration of stock options. Charges and other costs related to the workforce reduction and structure realignment were presented as restructuring costs in the Condensed Consolidated Statements of Operations. The Company recorded a restructuring credit of approximately $61,000 for the six months ended June 30, 2019 as compared to aggregate restructuring charges of approximately $20.9 million for the same period in the prior year. No restructuring cost was recorded for the three months ended June 30, 2019. The following table summarizes the restructuring charges (credits) recognized in the Condensed Consolidated Statements of Operations during the six months ended June 30, 2019 and 2018 (in thousands):

 
 
Six Months Ended
June 30,
 
 
2019
 
2018
Termination Benefits
 
$
(61
)
 
8,507

Non-Cash Termination Benefits
 

 
2,512

Contract Termination Costs
 

 
9,875

Non-Cash Contract Termination Costs
 

 
10

Total restructuring charges (credits)
 
$
(61
)
 
$
20,904

 
The Company has completed all of its restructuring activities and does not expect to incur additional costs associated with the restructuring. The cumulative amount incurred to date is $16.1 million as of June 30, 2019.

The following table summarizes the restructuring liability and utilization by cost type associated with the restructuring activities during the six months ended June 30, 2019 (in thousands):

25



 
 
Restructuring Liability
 
 
Termination Benefits
 
Contract Termination Costs
 
Assets Impairment
 
Other
 
Total
Balance at December 31, 2018
 
$
461

 
$

 
$

 
$

 
$
461

Restructuring charges (credit)
 
(61
)
 

 

 

 
(61
)
Reductions for cash payments
 
(400
)
 

 

 

 
(400
)
Balance at June 30, 2019
 
$

 
$

 
$

 
$

 
$

11. Income Taxes
The major taxing jurisdictions for the Company are Ireland and the U.S. The Company recorded an income tax benefit of $156,000 and an income tax provision of $42,000 for the three and six months ended June 30, 2019, respectively, as compared to an income tax benefit of $1.9 million and $2.0 million for three and six months ended June 30, 2018, respectively. The provision for income taxes differs from the statutory tax rate of 12.5% applicable to Ireland primarily due to Irish net operating losses for which a tax provision benefit is not recognized, U.S. income taxed at different rates, and net tax shortfall from cancellations of stock options. The income tax provision reflects the estimate of the effective tax rate expected to be applicable for the full year and the Company re-evaluates this estimate each quarter based on its forecasted tax expense for the full year. Jurisdictions with a projected loss for the year where no tax benefit can be recognized are excluded from the estimated annual effective tax rate.
The Company adopted ASU 2016-09 on January 1, 2017. Pursuant to the adoption of ASU 2016-09, tax attributes previously tracked off balance sheet have been recorded as deferred tax assets, offset by a valuation allowance. Further, excess benefits of stock compensation have been recorded as a benefit to the tax provision for all periods presented. The Company recorded a net tax shortfall of $0.3 million and $1.0 million for the three and six months ended June 30, 2019, respectively, and a net tax shortfall of $16,000 and $0.4 million for the three and six months ended June 30, 2018, respectively, all of which were recorded as part of its income tax provision in the Condensed Consolidated Statements of Operations. The Company’s income tax expense will continue to be impacted by fluctuations in stock price between the grant dates and the exercise dates of its option awards.
On January 1, 2019, the Company adopted ASC 842, Leases and it recorded a reduction in deferred tax assets of $1.0 million as part of the $3.8 million change in the opening balance of the accumulated deficit for the cumulative effect of applying ASC 842 (See Note 2, “Summary of Significant Accounting Policies”).
The Company's deferred tax assets are composed primarily of its Irish subsidiaries' net operating loss carryovers, state net operating loss carryforwards available to reduce future taxable income of the Company's U.S. subsidiary, federal and California tax credit carryforwards, share-based compensation and other temporary differences. The Company maintains a valuation allowance against certain U.S. federal and state and Irish deferred tax assets. Each reporting period, the Company evaluates the need for a valuation allowance on its deferred tax assets by jurisdiction.
No provision for income tax in Ireland has been recognized on undistributed earnings of the Company’s U.S. and Swiss subsidiaries. The Company considers the U.S. earnings to be indefinitely reinvested. The Company expects to distribute the remaining cash from its Swiss subsidiary to its Irish parent in 2019 however, the Company considers any potential tax associated with the distribution of Swiss earnings to be insignificant. Unremitted earnings may be subject to withholding taxes (potentially at 5% in the U.S. and 5% in Switzerland) and Irish taxes (potentially at a rate of 12.5%) if they were to be distributed as dividends. However, Ireland allows a credit against Irish taxes for U.S. and Swiss taxes withheld, and the Company's current year net operating losses in Ireland are sufficient to offset any potential dividend income received from its overseas subsidiaries.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q, including this Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These statements relate to, among other things, our objective to fundamentally change the course of progressive, life-threatening diseases; our goal of advancing a pipeline of therapeutic candidates for a number of potential indications and novel targets; our expected research and development (“R&D”) and general and administrative (“G&A”) expenses in 2019; our expectation that we have made substantially all cash payments under our restructuring plan; our expectation of continued impacts on our income tax expense from fluctuations in our stock price; the sufficiency of our cash and cash equivalents to meet our obligations; our anticipated need for additional capital; our estimates of certain future contractual obligations; and foreign currency, interest rate and credit risks. Forward-looking statements may include words such as “aim,” “anticipate,”

26



“assume,” “believe,” “contemplate,” “continue,” “could,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective” “plan,” “predict,” “potential,” “positioned,” “seek,” “should,” “target,” “will,” “would” and other similar expressions that are predictions of or indicate future events and future trends, or the negative of these terms or other comparable terminology. Forward-looking statements are subject to risks and uncertainties, and actual events or results may differ materially. Factors that could cause our actual results to differ materially include, but are not limited to, the risks and uncertainties listed below as well as those discussed under Part II Item 1A - Risk Factors of this Form 10-Q:
our ability to obtain additional financing in future offerings and/or obtain funding from future collaborations;
our operating losses;
our ability to successfully complete research and development of our drug candidates;
our ability to develop, manufacture and commercialize products;
our collaborations with third parties, including Roche and Celgene;
our ability to protect our patents and other intellectual property;
our ability to hire and retain key employees;
tax treatment of our separation from Elan and subsequent distribution of our ordinary shares;
our ability to maintain financial flexibility and sufficient cash, cash equivalents and investments and other assets capable of being monetized to meet our liquidity requirements;
potential disruptions in the U.S. and global capital and credit markets;
government regulation of our industry;
the volatility of our ordinary share price;
business disruptions; and
the other risks and uncertainties described in Part II Item 1A - Risk Factors of this Form 10-Q.
We undertake no obligation to revise or update any forward-looking statements to reflect any event or circumstance that arises after the date of this report.
This discussion should be read in conjunction with the Condensed Consolidated Financial Statements and Notes presented in this Quarterly Report on Form 10-Q and the Consolidated Financial Statements and Notes contained in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 15, 2019 (the “2018 Form 10-K”).

Overview
Prothena Corporation plc is a clinical-stage neuroscience company focused on the discovery and development of novel therapies with the potential to fundamentally change the course of devastating neurological disorders. Fueled by a deep scientific understanding built over decades of neuroscience research, we are advancing a pipeline of therapeutic candidates for a number of indications and novel targets including Parkinson’s disease and other related synucleinopathies (prasinezumab, or PRX002/RG7935, in collaboration with Roche) and ATTR amyloidosis (PRX004), as well as tau for the potential treatment of Alzheimer’s disease and other neurodegenerative disorders, and TDP-43 for the potential treatment of ALS (amyotrophic lateral sclerosis) and FTD (frontotemporal dementia) (both programs in collaboration with Celgene) for which its scientific understanding of disease pathology can be leveraged.

We were formed on September 26, 2012 under the laws of Ireland and re-registered as an Irish public limited company on October 25, 2012. Our ordinary shares began trading on The Nasdaq Global Market under the symbol “PRTA” on December 21, 2012 and currently trade on The Nasdaq Global Select Market.

Critical Accounting Policies and Estimates
Management’s discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with the accounting principles generally accepted in the U.S. (“GAAP”). The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions for the reported amounts of assets, liabilities, revenues, expenses and related disclosures.

Except for the accounting policies for leases that was updated as a result of adopting ASC 842, there were no significant changes to our critical accounting policies and estimates during the six months ended June 30, 2019 from the critical accounting

27



policies and estimates disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2018 Form 10-K.
Recent Accounting Pronouncements
Except as described in Note 2 to the Condensed Consolidated Financial Statements under the heading “Recent Accounting Pronouncements”, there have been no new accounting pronouncements or changes to accounting pronouncements during the six months ended June 30, 2019, as compared to the recent accounting pronouncements described in our 2018 Form 10-K, that are of significance or potential significance to us.
Results of Operations
Comparison of Three and Six Months Ended June 30, 2019 and 2018
Revenue
 
Three Months Ended
June 30,
 
Percentage Change
2019
 
2018
 
(Dollars in thousands)
 
 
Collaboration revenue
$
167

 
$
279

 
(40
)%
Total revenue
$
167

 
$
279

 
(40
)%
 
Six Months Ended June 30,
 
Percentage Change
2019
 
2018
 
(Dollars in thousands)
 
 
Collaboration revenue
$
353

 
$
506

 
(30
)%
Total revenue
$
353

 
$
506

 
(30
)%

Total revenue was $0.2 million and $0.3 million for the three months ended June 30, 2019 and 2018, respectively, and $0.4 million and $0.5 million for the six months ended June 30, 2019 and 2018, respectively.
Collaboration revenue includes reimbursements for development services under our License Agreement with Roche. See Note 7, “Significant Agreements” to the Condensed Consolidated Financial Statements regarding the Roche License Agreement for more information.
Operating Expenses

 
Three Months Ended
June 30,
 
Percentage Change
2019
 
2018
 
(Dollars in thousands)
 
 
Research and development
$
9,583

 
$
31,452

 
(70
)%
General and administrative
9,081

 
10,992

 
(17
)%
Restructuring charges

 
20,904

 
(100
)%
Total operating expenses
$
18,664

 
$
63,348

 
(71
)%
 
Six Months Ended June 30,
 
Percentage Change
2019
 
2018
 
(Dollars in thousands)
 
 
Research and development
$
22,879

 
$
66,158

 
(65
)%
General and administrative
18,986

 
25,221

 
(25
)%
Restructuring charges (credits)
(61
)
 
20,904

 
(100
)%
Total operating expenses
$
41,804

 
$
112,283

 
(63
)%

28




Total operating expenses consist of R&D expenses, G&A expenses and restructuring charges (credits). Our operating expenses were $18.7 million and $41.8 million for the three and six months ended June 30, 2019, respectively, and $63.3 million and $112.3 million for the three and six months ended June 30, 2018, respectively.
Our R&D expenses primarily consist of personnel costs and related expenses, including share-based compensation and external costs associated with nonclinical activities and drug development related to our drug programs, including NEOD001, prasinezumab, PRX004 and our discovery programs. Pursuant to our License Agreement with Roche, we make payments to Roche for our share of the development expenses incurred by Roche the related to the prasinezumab program, which is included in our R&D expense.
Our G&A expenses primarily consist of professional service expenses and personnel costs and related expenses, including share-based compensation.
Research and Development Expenses
Our R&D expense decreased by $21.9 million, or 70%, for the three months ended June 30, 2019, and decreased by $43.3 million, or 65%, for the six months ended June 30, 2019, compared to the same periods in the prior year. The decrease for the three months ended June 30, 2019 was primarily due to lower clinical costs associated with the discontinuation of the NEOD001 program offset by higher costs for the PRX004 program, lower manufacturing costs associated with the PRX004 program with lesser extent from the discontinuation of the NEOD001 program, lower personnel costs (including share-based compensation expense) and lower consulting costs. The decrease for the six months ended June 30, 2019 was primarily due to lower clinical costs associated with the discontinuation of the NEOD001 program offset by higher costs for the PRX004 program, lower consulting costs, lower personnel costs (including share-based compensation expense) and lower manufacturing costs associated with the discontinuation of the NEOD001 program and to a lesser extent from the PRX004 program.
Our research activities are aimed at developing new drug products. Our development activities involve the translation of our research into potential new drugs. R&D expenses include personnel costs and related expenses, external expenses associated with nonclinical and drug development and materials, equipment and facilities costs that are allocated to clearly related R&D activities.
The following table sets forth the R&D expenses for our major programs (specifically, any program with successful first dosing in a Phase 1 clinical trial, which were NEOD001, prasinezumab, PRX003 and PRX004) and other R&D expenses for the three and six months ended June 30, 2019 and 2018 and the cumulative amounts to date (in thousands):
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
Cumulative to Date
 
 
2019
 
2018
 
2019
 
2018
 
NEOD001(1)
 
$
116

 
$
19,747

 
$
735

 
$
45,343

 
$
309,379

Prasinezumab (PRX002/RG7935)(2)
 
1,649

 
4,525

 
5,064

 
7,132

 
70,594

PRX003(3)
 
18

 
169

 
82

 
363

 
59,092

PRX004(4)
 
3,823

 
4,308

 
8,168

 
8,380

 
54,848

Other R&D(5)
 
3,977

 
2,703

 
8,830

 
4,940

 
 
 
 
$
9,583

 
$
31,452

 
$
22,879

 
$
66,158

 
 
 
(1) 
Cumulative R&D costs to date for NEOD001 include the costs incurred from the date when the program was separately tracked in preclinical development. Expenditures in the early discovery stage are not tracked by program and accordingly have been excluded from this cumulative amount. In April 2018, we announced that we were discontinuing development of NEOD001. Since that date we have incurred costs associated with the close out of our Phase 2b PRONTO, Phase 3 VITAL as well as the open label extension studies of NEOD001.
(2) 
Cumulative R&D costs to date for prasinezumab and related antibodies include the costs incurred from the date when the program was separately tracked in nonclinical development. Expenditures in the early discovery stage are not tracked by program and accordingly have been excluded from this cumulative amount. Prasinezumab costs include payments to Roche for our share of the development expenses incurred by Roche related to prasinezumab programs and, through December 31, 2017, is net of reimbursements from Roche for development and supply services recorded as an offset to R&D expense. For the three and six months ended June 30, 2019, $0.2 million and $0.4 million, respectively, and for the

29



three and six months ended June 30, 2018, $0.3 million and $0.5 million, respectively, of reimbursements from Roche for development services were recorded as part of collaboration revenue.
(3) 
Cumulative R&D costs to date for PRX003 include the costs incurred from the date when the program was separately tracked in nonclinical development. Expenditures in the early discovery stage are not tracked by program and accordingly have been excluded from this cumulative amount. Based on the Phase 1b multiple ascending dose study results we announced in September 2017 that we will not advance PRX003 into mid-stage clinical development for psoriasis or psoriatic arthritis as previously planned.
(4) 
Cumulative R&D costs to date for PRX004 include the costs incurred from the date when the program was separately tracked in nonclinical development. Expenditures in the early discovery stage are not tracked by program and accordingly have been excluded from this cumulative amount.
(5) 
Other R&D is comprised of preclinical development and discovery programs that have not progressed to first patient dosing in a Phase 1 clinical trial.
As a result of the restructuring and the discontinuation of NEOD001 program in 2018, we expect our R&D expenses to decrease in 2019 compared to the prior year.

General and Administrative Expenses
Our G&A expenses decreased by $1.9 million or 17% for the three months ended June 30, 2019, and decreased by $6.2 million, or 25%, for the six months ended June 30, 2019, as compared to the same periods in the prior year. The decrease for the three and six months ended June 30, 2019 was primarily due to lower personnel costs, sublease rental income received from Sub-Sublease of Current SSF Facility and lower legal and other expenses, which was offset in part by higher lease costs recorded as operating expenses due to the adoption of ASC 842.

As a result of the restructuring in 2018, we expect our G&A expenses to decrease in 2019 compared to the prior year.

Restructuring and Impairment Related Charges

In May 2018, we commenced a reorganization plan to reduce our operating costs and better align our workforce with the needs of our business following our decision in April 2018 to discontinue further development of NEOD001. For the six months ended June 30, 2019, we recorded a restructuring credit of approximately $61,000 primarily due to an adjustment in previously recorded employee termination benefits. See Note 10, “Restructuring” to the Condensed Consolidated Financial Statements for more information.
Other Income (Expense)
 
Three Months Ended
June 30,
 
Percentage Change
2019
 
2018
 
(Dollars in thousands)
 
 
Interest income
$
2,296

 
$
1,748

 
31
 %
Interest expense

 
(917
)
 
(100
)%
Interest income, net
2,296

 
831

 
176
 %
Other income
235

 
410

 
(43
)%
Total other income, net
$
2,531

 
$
1,241

 
104
 %

 
Six Months Ended June 30,
 
Percentage Change
2019
 
2018
 
(Dollars in thousands)
 
 
Interest income
$
4,600

 
$
2,856

 
61
 %
Interest expense

 
(1,825
)
 
(100
)%
Interest income, net
4,600

 
1,031

 
346
 %
Other income
218

 
138

 
58
 %
Total other income, net
$
4,818

 
$
1,169

 
312
 %

30




Interest income, net increased by $1.5 million, or 176%, for the three months ended June 30, 2019, and increased by $3.6 million, or 346%, for the six months ended June 30, 2019, as compared to the same periods in the prior year. The increase for the three and six months ended June 30, 2019 was primarily due to higher interest income in our cash and money market accounts and no recorded interest expense associated with the build-to-suit accounting upon the adoption of ASC 842 in 2019.
Other income, net for the three and six months ended June 30, 2019 and 2018 were primarily due to foreign exchange favorability from transactions with vendors denominated in Euros.
Provision for (benefit from) Income Taxes
 
Three Months Ended
June 30,
 
Percentage Change
2019
 
2018
 
(Dollars in thousands)
 
 
Provision for (benefit from) income taxes
$
(156
)
 
$
(1,946
)
 
(92
)%

 
Six Months Ended June 30,
 
Percentage Change
2019
 
2018
 
(Dollars in thousands)
 
 
Provision for (benefit from) income taxes
$
42

 
$
(1,983
)
 
(102
)%

The benefit from income taxes for the three months ended June 30, 2019 and 2018 was $0.2 million and $1.9 million, respectively. The provision for income taxes for the six months ended June 30, 2019 was $42,000 and the benefit from income taxes for six months ended June 30, 2019 was $2.0 million. The change in provision for (benefit from) income taxes for the three and six months ended June 30, 2019 as compared to the same periods in the prior year was primarily due to the absence of discrete tax benefit for the restructuring charge and increase in tax shortfall related to option cancellations. Our income tax expense will continue to be impacted by fluctuations in stock price between the grant dates and the exercise or cancellation dates of stock options.
The tax provisions for all periods presented reflect U.S. federal taxes associated with recurring profits attributable to intercompany services that our U.S. subsidiary performs for the Company. No tax benefit has been recorded related to tax losses recognized in Ireland and any deferred tax assets for those losses are offset by a valuation allowance.
Liquidity and Capital Resources
Overview
 
June 30,
 
December 31,
 
2019
 
2018
Working capital
$
390,692

 
$
416,464

Cash and cash equivalents
398,144

 
427,659

Total assets
462,072

 
498,796

Total liabilities
159,265

 
175,798

Total shareholders’ equity
302,807

 
322,998

Working capital was $390.7 million as of June 30, 2019, a decrease of $25.8 million from working capital of $416.5 million as of December 31, 2018. This decrease in working capital during the six months ended June 30, 2019 was primarily due to cash use of $41.8 million for operating expenses (adjusted to exclude non-cash charges).
As of June 30, 2019, we had $398.1 million in cash and cash equivalents. Although we believe, based on our current business plans, that our existing cash and cash equivalents will be sufficient to meet our obligations for at least the next twelve months, we anticipate that we will require additional capital in the future in order to continue the research and development of our drug candidates. As of June 30, 2019, $106.7 million of our outstanding cash and cash equivalents related to U.S. operations are considered permanently reinvested. We do not intend to repatriate these funds. However, if these funds were repatriated back to Ireland we would incur a withholding tax from the dividend distribution.

31



We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenses associated with completing the development of our product candidates. Our future capital requirements will depend on numerous factors, including, without limitation, the timing of initiation, progress, results and costs of our clinical trials; the results of our research and nonclinical studies; the costs of clinical manufacturing and of establishing commercial manufacturing arrangements; the costs of preparing, filing and prosecuting patent applications and maintaining, enforcing and defending intellectual property-related claims; the costs and timing of capital asset purchases; our ability to establish research collaborations, strategic collaborations, licensing or other arrangements; the costs to satisfy our obligations under current and potential future collaborations; the costs of any in-licensing transactions; and the timing, receipt, and amount of revenues or royalties, if any, from any approved drug candidates. Pursuant to the License Agreement with Roche, in the U.S., we and Roche share all development and commercialization costs, as well as profits, all of which will be allocated 70% to Roche and 30% to us, for prasinezumab, as well as any other Licensed Products and/or indications for which we opt in to co-develop and co-fund. Pursuant to the Collaboration Agreement with Celgene the Company is eligible to receive payments for commercial and regulatory milestones and royalties on net sales of Collaboration Products. In order to develop and obtain regulatory approval for our potential products we will need to raise substantial additional funds. We expect to raise any such additional funds through public or private equity or debt financings, collaborative agreements with corporate partners or other arrangements. We cannot assume that such additional financings will be available on acceptable terms, if at all, and such financings may only be available on terms dilutive to our shareholders.
Cash Flows for the Six Months Ended June 30, 2019 and 2018
The following table summarizes, for the periods indicated, selected items in our Condensed Consolidated Statements of Cash Flows (in thousands):
 
Six Months Ended June 30,
 
2019
 
2018
Net cash provided by (used in) operating activities
$
(29,538
)
 
$
26,549

Net cash used in investing activities
(192
)
 
(280
)
Net cash provided by financing activities
215

 
42,323

Net increase (decrease) in cash and cash equivalents and restricted cash
$
(29,515
)
 
$
68,592

Cash Provided by (Used in) Operating Activities
Net cash used in operating activities was $29.5 million for the six months ended June 30, 2019, primarily due to $41.8 million for operating expenses (adjusted to exclude non-cash charges) and a decrease in accounts payable, accruals and other liabilities and operating lease liabilities.
Net cash provided by operating activities was $26.5 million for the six months ended June 30, 2018, primarily due to $110.2 million in deferred revenue related largely to the upfront payment from Celgene Collaboration Agreement and increase in restructuring liability of $15.9 million, which were partially offset by use of $112.3 million for operating expenses (adjusted to exclude non-cash charges).
Cash Used in Investing Activities
Net cash used in investing activities was $0.2 million and $0.3 million for the six months ended June 30, 2019 and 2018, respectively. Net cash used in investing activities for the six months ended June 30, 2019 and 2018 were primarily related to purchases of property and equipment.
Cash Provided by Financing Activities
Net cash provided by financing activities was $0.2 million for the six months ended June 30, 2019, primarily from proceeds from issuances of ordinary shares upon exercises of stock options.
Net cash provided by financing activities was $42.3 million for the six months ended June 30, 2018, primarily from the $39.8 million in proceeds from Celgene's subscription of ordinary shares at market value, and to a lesser extent, from $4.5 million in proceeds from issuances of ordinary shares upon exercises of stock options.
Off-Balance Sheet Arrangements

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At June 30, 2019, we were not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.
Contractual Obligations
Our contractual obligations as of June 30, 2019 consisted of minimum cash payments under operating leases of $28.0 million, purchase obligations of $0.7 million (of which $0.1 million is included in accrued current liabilities), and contractual obligations under license agreements of $1.2 million (of which $0.1 million is included in accrued current liabilities). Purchase obligations consist of non-cancelable purchase commitments to suppliers. Operating leases represent our future minimum rental commitments under our non-cancelable operating leases. We also recorded a provision for legal settlement of $15.75 million, which is included in accrued current liabilities.

In March 2016, we entered into a noncancelable operating sublease to lease 128,751 square feet of office and laboratory space in South San Francisco, California. We are obligated to make lease payments totaling approximately $39.2 million over the lease term. Of this obligation, approximately $28.0 million remains outstanding as of June 30, 2019.
In September 2018, we entered into an agreement to lease an office space in Dublin, Ireland. The lease term expires on November 2019. As of June 30, 2019, we are obligated to make lease payments over the remaining term of the lease of approximately €9,000, or $11,000 as converted using an exchange rate as of June 30, 2019.
The following is a summary of our contractual obligations as of June 30, 2019 (in thousands):
 
 
Total
 
2019
 
2020
 
2021
 
2022
 
2023
 
Thereafter
Operating leases (1)
 
$
27,977

 
$
2,948

 
$
5,979

 
$
6,165

 
$
6,350

 
$
6,535

 
$

Purchase obligations
 
725

 
725

 

 

 

 

 

Contractual obligations to employees
 
125

 
125

 

 

 

 

 

Provision for legal settlement (2)
 
15,750

 
15,750

 

 

 

 

 

Contractual obligations under license agreements (3)
 
1,170

 
275

 
105

 
95

 
80

 
80

 
535

Total
 
$
45,747

 
$
19,823

 
$
6,084

 
$
6,260

 
$
6,430

 
$
6,615

 
$
535

 
(1) See Note 6, Commitments and Contingencies to our Condensed Consolidated Financial Statements.
(2) We recorded a litigation insurance recovery receivable of $15.75 million as of June 30, 2019 within prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets, which represents the expected payment of the litigation settlement by the Company’s insurance carriers.
(3) Excludes future obligations pursuant to the cost-sharing arrangement under our License Agreement with Roche. Amounts of such obligations, if any, cannot be determined at this time.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Risk
Our business is primarily conducted in U.S. dollars except for our agreements with contract manufacturers for drug supplies which are denominated in Euros. We recorded a gain on foreign currency exchange rate differences of approximately $218,000 and $138,000 during the six months ended June 30, 2019 and 2018, respectively. If we continue or increase our business activities that require the use of foreign currencies, we may incur further losses if the Euro and other such currencies continue to strengthen against the U.S. dollar.
Interest Rate Risk
Our exposure to interest rate risk is limited to our cash equivalents, which consist of accounts maintained in money market funds. We have assessed that there is no material exposure to interest rate risk given the nature of money market funds. In general, money market funds are not subject to interest rate risk because the interest paid on such funds fluctuates with the prevailing interest rate. Accordingly, our interest income fluctuates with short-term market conditions.
In the future, we anticipate that our exposure to interest rate risk will primarily be related to our investment portfolio. We intend to invest any surplus funds in accordance with a policy approved by our board of directors which will specify the categories,

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allocations, and ratings of securities we may consider for investment. The primary objectives of our investment policy are to preserve principal and maintain proper liquidity to meet our operating requirements. Our investment policy also specifies credit quality standards for our investments and limits the amount of credit exposure to any single issue, issuer or type of investment.
Credit Risk
Our receivable from Roche are amounts due from Roche entities located in the U.S. and Switzerland under the License Agreement with Roche.
Financial instruments that potentially subject us to concentration of credit risk consist of cash and cash equivalents and accounts receivable. We place our cash and cash equivalents with high credit quality financial institutions and pursuant to our investment policy, we limit the amount of credit exposure with any one financial institution. Deposits held with banks may exceed the amount of insurance provided on such deposits. We have not experienced any losses on our deposits of cash and cash equivalents.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer (“CEO”) and chief financial officer (“CFO”) evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Form 10-Q.  Based on this evaluation, our CEO and CFO concluded that, as of June 30, 2019, our disclosure controls and procedures are designed and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
During the six months ended June 30, 2019, we implemented certain internal controls in connection with our adoption of ASC 842. There were no other changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
Internal control over financial reporting has inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements will not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management necessarily applies its judgment in evaluating the benefits of possible controls and procedures relative to their costs.


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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We may at times be party to ordinary routine litigation incidental to our business. When appropriate in management’s estimation, we may record reserves in our financial statements for pending legal proceedings.

On July 16, 2018, a purported class action lawsuit entitled Granite Point Capital v. Prothena Corporation plc, et al., Civil Action No. 18-cv-06425, was filed in the U.S. District Court for the Southern District of New York against the Company and certain of its current and former officers. The plaintiff seeks compensatory damages, costs and expenses in an unspecified amount on behalf of a putative class of persons who purchased the Company’s ordinary shares between October 15, 2015 and April 20, 2018, inclusive. The complaint alleges that the defendants violated federal securities laws by allegedly making false and misleading statements and omitting certain material facts in certain public statements and in the Company’s filings with the U.S. Securities and Exchange Commission during the putative class period, regarding the clinical trial results and prospects for approval of the Company’s NEOD001 drug development program. On October 31, 2018, the Court issued an order naming Granite Point Capital and Simon James, an individual, as the lead plaintiffs in the purported class action, which is now entitled In re Prothena Corporation plc Securities Litigation.

On June 10, 2019, the Company and the individual defendants entered into a binding memorandum of understanding with the lead plaintiffs to settle that lawsuit based on an aggregate settlement amount of $15.75 million. The memorandum of understanding contemplates that the parties will enter into a settlement agreement, which will be subject to customary conditions including Court approval following notice to the Company’s current and former shareholders who are members of the purported class, and a hearing at which the Court will consider the fairness, reasonableness and adequacy of the settlement. If the settlement is approved by the Court, it will resolve, as to all settlement class members, all of the claims that were or could have been brought in the lawsuit. On June 20, 2019, consistent with the memorandum of understanding to settle the lawsuit and intention to seek the Court’s approval of settlement of the lawsuit, the lead plaintiffs filed an amended complaint, asserting in substance the same allegations as were made in the original complaint. The Company continues to believe that the claims in the lawsuit are without merit and, to the extent the settlement is not finalized, intends to vigorously defend against them. 

ITEM 1A. RISK FACTORS
Investing in our ordinary shares involves a high degree of risk. Our Annual Report on Form 10-K for 2018 (filed with the SEC on March 15, 2019) includes a detailed discussion of our business and the risks to our business. You should carefully read that Form 10-K. You should also read and carefully consider the risks described below and the other information in this Quarterly Report on Form 10-Q. The occurrence of any of the events or developments described below could harm our business, financial condition, results of operations and/or growth prospects. In such an event, the market price of our ordinary shares could decline, and you may lose all or part of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations.
Risks Relating to Our Financial Position, Our Need for Additional Capital and Our Business
We anticipate that we will incur losses for the foreseeable future and we may never sustain profitability.
We may not generate the cash that is necessary to finance our operations in the foreseeable future. We incurred net losses of $155.6 million, $153.2 million and $160.1 million for the years ended December 31, 2018, 2017 and 2016, respectively. We expect to continue to incur substantial losses for the foreseeable future as we:
support the Phase 2 PASADENA clinical trial for prasinezumab (PRX002/RG7935) being conducted by Roche, conduct our Phase 1 clinical trial for PRX004 and possibly initiate additional clinical trials for these and other programs;
develop and possibly commercialize our product candidates, including prasinezumab and PRX004;
undertake nonclinical development of other product candidates and initiate clinical trials, if supported by nonclinical data; and
pursue our early stage research and seek to identify additional drug candidates; and
potentially acquire rights from third parties to drug candidates or technologies through licenses, acquisitions or other means.

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We must generate significant revenue to achieve and maintain profitability. Even if we succeed in discovering, developing and commercializing one or more drug candidates, we may not be able to generate sufficient revenue and we may never be able to achieve or sustain profitability.
We will require additional capital to fund our operations, and if we are unable to obtain such capital, we will be unable to successfully develop and commercialize drug candidates.
As of June 30, 2019, we had cash and cash equivalents of $398.1 million. Although we believe, based on our current business plans, that our existing cash and cash equivalents will be sufficient to meet our obligations for at least the next twelve months, we anticipate that we will require additional capital in the future in order to continue the research and development, and eventual commercialization, of our drug candidates. Our future capital requirements will depend on many factors that are currently unknown to us, including, without limitation:
the timing of progress, results and costs of our clinical trials, including the Phase 2 clinical trial for prasinezumab and our Phase 1 clinical trial for PRX004;
the timing, initiation, progress, results and costs of these and our other research, development and possible commercialization activities;
the results of our research, nonclinical and clinical studies;
the costs of manufacturing our drug candidates for clinical development as well as for future commercialization needs;