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 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 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	)

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⁽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.

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.