Share-Based Compensation

The Prothena Corporation plc 2012 Long Term Incentive Plan (“LTIP”)

Employees and consultants of the Company, its subsidiaries and affiliates, as well as members of the Board, are eligible to receive equity awards under the LTIP. The LTIP provides for the grant of stock options, including incentive stock options and nonqualified stock options, stock appreciation rights (“SARS”), restricted shares, restricted share units, cash or stock-based performance awards and other share-based awards to eligible individuals. Options under the LTIP may be granted for periods up to ten years. All options issued to date have had a ten year life. In March 2014, the Board adopted the Amended and Restated LTIP, which was subsequently approved by the shareholders on May 21, 2014 during the Company's Annual General Meeting of Shareholders. The Company's shareholders approved the increase in the aggregate number of ordinary shares authorized for issuance under the Amended and Restated LTIP by 2,900,000 ordinary shares, to a total of 5,550,000 ordinary shares.

The Company granted 154,000 and 469,500 share options during the three months ended June 30, 2014 and 2013, respectively, and 663,000 and 1,835,500 share options during the six months ended June 30, 2014 and 2013, respectively, under the Amended and Restated LTIP. The Company's options awards generally vest over four years. As of June 30, 2014, 2,913,500 ordinary shares remain available for grant and options to purchase 2,579,324 ordinary shares granted from the Amended and Restated LTIP were outstanding with a weighted-average exercise price of approximately $12.95 per share.

Prothena Share-based Compensation Expense

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 highly 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 has no historic employee share option exercise data, the simplified method has been used to estimate the expected life of all options. 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 2017 related to unvested share-based payment awards at June 30, 2014 is $18.1 million. The weighted-average period over which the unearned share-based compensation is expected to be recognized is 2.9 years. If there are any modifications or cancellations of the underlying unvested securities, the Company may be required to accelerate, increase or cancel 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, 2014 and 2013 was based on awards granted under the 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,
	2014		2013		2014		2013
Research and development⁽¹⁾	$	566	$	226	$	1,049	$	305
General and administrative	872		516		1,732		777
Total	$	1,438	$	742	$	2,781	$	1,082

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⁽¹⁾	Includes $26,000 and $63,000 for the three months ended June 30, 2014 and 2013, respectively, and $72,000 and $63,000 for the six months ended June 30, 2014 and 2013, respectively, of share-based compensation expense related to options granted to a consultant.

The fair value of the options granted to employees and non-employee directors during the three and six months ended June 30, 2014 and 2013 is 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,
	2014	2013	2014	2013
Expected volatility	86.0%	84.5%	84.3%	84.2%
Risk-free interest rate	1.9%	1.7%	1.8%	1.2%
Expected dividend yield	—%	—%	—%	—%
Expected life (in years)	6.0	6.0	6.0	6.0
Weighted average grant date fair value	$17.66	$5.28	$20.40	$4.56

The following table summarizes the Company’s share option activity during the six months ended June 30, 2014:



	Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)	Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2013	1,973,500		$	7.50	9.17	$	37,528
Granted	663,000		28.63
Exercised	(57,176	)	6.87
Canceled	—		—
Outstanding at June 30, 2014	2,579,324		$	12.95	8.93	$	28,937
Vested and expected to vest at June 30, 2014	2,491,212		$	12.74	8.92	$	28,341
Vested at June 30, 2014	747,871		$	6.48	8.63	$	12,015

The following table summarizes information about the Company's share options outstanding as of June 30, 2014:



				Options Outstanding				Options Exercisable
Range of Exercise Prices				Number of Options	Weighted - Average Remaining Contractual Life (Years)	Weighted Average Exercise Price		Number of Options	Weighted Average Exercise Price
$	6.03	$	6.03	453,375	8.58	$	6.03	159,843	$	6.03
6.41		6.41		808,949	8.58	6.41		391,208	6.41
6.65		6.65		50,000	8.72	6.65		50,000	6.65
6.73		6.73		366,000	8.75	6.73		126,603	6.73
8.21		20.53		232,000	9.12	14.94		20,217	9.55
22.14		22.14		100,000	9.84	22.14		—	—
24.26		24.26		30,000	9.34	24.26		—	—
29.52		29.52		25,000	9.59	29.52		—	—
29.81		29.81		484,000	9.60	29.81		—	—
37.02		37.02		30,000	9.75	37.02		—	—
$	6.03	$	37.02	2,579,324	8.93	$	12.95	747,871	$	6.48