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 $4.8 million for the three and nine months ended September 30, 2019, respectively. Total cash paid against the operating lease liability was $1.5 million and $4.3 million for the three and nine months ended September 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 $0.6 million for the three and nine months ended September 30, 2018, respectively.

As of September 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 4.3 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 nine months ended September 30, 2018, the Company recorded rent expense associated with the ground lease of $0.1 million and $0.4 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 $2.8 million for the three and nine months ended September 30, 2018, respectively, which was recognized in its Condensed Consolidated Statements of Operations. No corresponding amounts were recorded for the three and nine months ended September 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 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 September 30, 2019, the operating lease right-of-use asset and lease liability was $24.6 million and $24.2 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 was 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, which was received during the three months ended September 30, 2019, 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 September 30, 2019, none of the standby letter of credit amount of $2.7 million 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 nine months ended September 30, 2019, the Company recorded $0.7 million and $2.2 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. The Company renewed the Dublin Lease in August 2019 for one year and expires on November 30, 2020. 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 September 30, 2019, the Company is obligated to make lease payments over the remaining term of the lease of approximately €28,000, or $31,000 as converted using an exchange rate as of September 30, 2019.

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 September 30, 2019 are as follows (in thousands):



Year Ended December 31,	Operating Leases			Sub-Sublease Rental
2019 (3 months)	1,482			$	702
2020	6,004			2,843
2021	6,165			2,944
2022	6,350			3,047
2023	6,535			3,019
Total	26,536			$	12,555
Less: Present value adjustment	(2,343		)
Nominal lease payments	(31		)
Lease liability	$	24,162

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 September 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 September 30, 2019, the Company had non-cancelable purchase commitments to suppliers for $0.5 million of which $0.1 million is included in accrued current liabilities, contractual obligations under license agreements of $1.2 million of which $0.2 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 September 30, 2019 (in thousands):



	Total		2019		2020		2021		2022		2023		Thereafter
Purchase Obligations⁽¹⁾	$	545	$	545	$	—	$	—	$	—	$	—	$	—
Provision for legal settlement ⁽²⁾	15,750		15,750		—		—		—		—		—
Contractual obligations under license agreements⁽³⁾	1,160		265		105		95		80		80		535
Total	$	17,455	$	16,560	$	105	$	95	$	80	$	80	$	535

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⁽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 September 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, to be paid by the Company’s directors and officers insurance carriers. On August 26, 2019, the parties entered into a Stipulation and Agreement of Settlement and the lead plaintiffs filed an Unopposed Motion for Preliminary Approval of Proposed Class Action Settlement. On September 12, 2019, the Court granted preliminary approval of Class Action Settlement, Approving Form and Manner of Notice, And Setting Date for Hearing on Final Approval of Settlement and specified December 2, 2019 at 11:30 a.m. for the Settlement Hearing. 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. 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 September 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 September 30, 2019, which represents the expected payment of the settlement by the Company’s insurance carriers.