What changed in this filing

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Item 1. Financial Statements

2020-08-07 compared with 2020-05-07 · 133 added, 156 removed, 533 unchanged (35% of the section changed)

3 unchanged sentences

(In thousands, except share amounts)

March 31, 2020 December 31, 2019

June 30, 2020 December 31, 2019

Current assets:

24 unchanged sentences

Convertible preferred stock, $ 0.01 par value;

40,000,000 shares authorized as of March 31, 2020 and December 31, 2019;

0 shares issued and outstanding as of March 31, 2020 and December 31, 2019

40,000,000 shares authorized as of June 30, 2020 and December 31, 2019;

0 shares issued and outstanding as of June 30, 2020 and December 31, 2019

Common stock, $ 0.01 par value;

400,000,000 shares authorized as of March 31, 2020 and December 31, 2019;

105,541,343 shares and 96,189,935 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively

400,000,000 shares authorized as of June 30, 2020 and December 31, 2019;

105,897,872 shares and 96,189,935 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively

Additional paid-in capital 1,041,303 818,803

7 unchanged sentences

(In thousands, except share and per share amounts)

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

Collaboration revenue:

9 unchanged sentences

Loss before income taxes ( 58,679 ) ( 58,650 ) ( 115,577 ) ( 97,642 )

Income tax benefit 135 —

Income tax benefit (provision) ( 79 ) 313 56 313

Net loss ( 58,758 ) ( 58,337 ) ( 115,521 ) ( 97,329 )

Other comprehensive income (loss):

Net unrealized gain on marketable securities, net of tax

Net unrealized gain (loss) on marketable securities, net of tax

( 284 ) 547 201 1,528

Comprehensive loss $ ( 59,042 ) $ ( 57,790 ) $ ( 115,320 ) $ ( 95,801 )

7 unchanged sentences

Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders' Equity

Three Months Ended March 31, 2020 Shares Amount

Shares Amount

Balance at December 31, 2019 96,189,935 $ 1,288 $ 818,803 $ 350 $ ( 425,551 ) $ 394,890

8 unchanged sentences

— — — — ( 115,521 ) ( 115,521 )

Other comprehensive lncome

Other comprehensive income

— — — 201 — 201

Balance at June 30, 2020 105,897,872 $ 1,385 $ 1,041,303 $ 551 $ ( 541,072 ) $ 502,167

Balance at March 31, 2020 105,541,343 $ 1,382 $ 1,025,408 $ 835 $ ( 482,314 ) $ 545,311

Three Months Ended March 31, 2019

Issuances under equity incentive plans

329,947 3 3,411 — — 3,414

Vesting of restricted stock units

26,582 — — — — —

Stock-based compensation

— — 12,484 — — 12,484

— — — — ( 58,758 ) ( 58,758 )

Other comprehensive loss

— — — ( 284 ) — ( 284 )

Balance at June 30, 2020 105,897,872 $ 1,385 $ 1,041,303 $ 551 $ ( 541,072 ) $ 502,167

Balance at December 31, 2018 94,662,435 $ 1,273 $ 774,158 $ ( 649 ) $ ( 227,937 ) $ 546,845

3 unchanged sentences

93,752 2 62 — — 64

Vesting of restricted stock awards

Vesting of restricted stock awards and units

353,585 3 ( 3 ) — — —

4 unchanged sentences

— — — 1,528 — 1,528

Balance at June 30, 2019 95,656,896 $ 1,283 $ 798,277 $ 879 $ ( 325,266 ) $ 475,173

Balance at March 31, 2019 95,257,705 $ 1,279 $ 781,966 $ 332 $ ( 266,929 ) $ 516,648

Issuances under equity incentive plans

347,621 3 2,566 — — 2,569

Vesting of early exercised common stock

46,878 1 31 — — 32

Vesting of restricted stock awards and units

4,692 — — — — —

Stock-based compensation

— — 13,714 — — 13,714

— — — — ( 58,337 ) ( 58,337 )

Other comprehensive income

— — — 547 — 547

Balance at June 30, 2019 95,656,896 $ 1,283 $ 798,277 $ 879 $ ( 325,266 ) $ 475,173

See accompanying notes to unaudited condensed consolidated financial statements.

2 unchanged sentences

(In thousands)

Three Months Ended

Six Months Ended

Operating activities

4 unchanged sentences

Net amortization of discounts on marketable securities ( 1,025 ) ( 2,734 )

Non-cash operating lease expense 321 1,265

Non-cash adjustment to operating lease expense ( 978 ) 1,740

Other non-cash items ( 39 ) ( 313 )

4 unchanged sentences

Contract liabilities ( 8,644 ) ( 1,616 )

Operating lease liability ( 642 ) —

Net cash used in operating activities ( 97,849 ) ( 73,498 )

3 unchanged sentences

Maturities and sales of marketable securities 281,057 212,162

Net cash used in investing activities ( 13,333 ) ( 8,047 )

Net cash provided by (used in) investing activities ( 43,744 ) 55,834

Financing activities

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These interim financial results are not necessarily indicative of results expected for the full fiscal year or for any subsequent interim period.

During the three months ended March 31, 2020, except as discussed below in the sections titled "Marketable Securities" and "Recently Adopted Accounting Pronouncement," there were no material changes to the Company's significant accounting and financial reporting policies from those reflected in the 2019 Annual Report on Form 10-K.

During the six months ended June 30, 2020, except as discussed below in the sections titled "Marketable Securities" and "Recently Adopted Accounting Pronouncement," there were no material changes to the Company's significant accounting and financial reporting policies from those reflected in the 2019 Annual Report on Form 10-K.

For further information with regard to the Company’s Significant Accounting Policies, please refer to Note 1, "Significant Accounting Policies," to the Company’s Consolidated Financial Statements included in the 2019 Annual Report on Form 10-K.

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The Company is exposed to credit risk in the event of a default by the financial institutions holding its cash, cash equivalents and marketable securities and issuers of marketable securities to the extent recorded on the Condensed Consolidated Balance Sheets.

As of March 31, 2020 and December 31, 2019, the Company had no off-balance sheet concentrations of credit risk.

As of June 30, 2020 and December 31, 2019, the Company had no off-balance sheet concentrations of credit risk.

The Company is exposed to counterparty credit risk on all of its derivative financial instruments.

5 unchanged sentences

Credit risk associated with investments in securities may increase if any institution with which the Company has an investment is significantly impacted by the COVID-19 pandemic.

As of March 31, 2020, the Company has not realized any losses on its cash deposits or investments.

As of June 30, 2020, the Company has not realized any losses on its cash deposits or investments.

Further, COVID-19 may impact the timelines and progress of the Company's preclinical activities and clinical trials, and may impact its ability to raise capital in the near term.

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Derivatives and Hedging Activities

The Company measures its derivative instruments at fair value, and accounts them as either assets or liabilities included within prepaid assets and other current assets and other accruals and current liabilities, respectively, on the Condensed Consolidated Balance Sheets.

The Company measures its derivative instruments at fair value, and accounts for them as either assets or liabilities included within prepaid assets and other current assets and other accruals and current liabilities, respectively, on the Condensed Consolidated Balance Sheets.

Derivatives are adjusted to fair value through interest and other income, net in the Condensed Consolidated Statements of Operations and Comprehensive Loss.

3 unchanged sentences

A right-of-use (“ROU”) asset an d operating lease liability is recognized for identified operating leases in the Condensed Consolidated Balance Sheets.

The changes in operating lease ROU assets and operating lease liabilities are presented net within non-cash adjustment to operating lease expense in the Condensed Consolidated Statements of Cash Flows.

ROU assets represent the Company’s right to use the underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease.

47 unchanged sentences

Comprehensive Income (Loss)

Comprehensive income (loss) is composed of net loss and certain changes in stockholders’ equity (deficit) that are excluded from net loss, primarily unrealized gains or losses on the Company’s marketable securities.

Comprehensive income (loss) is composed of net loss and certain changes in stockholders’ equity that are excluded from net loss, primarily unrealized gains or losses on the Company’s marketable securities.

Net Loss per Share

17 unchanged sentences

Assets and liabilities measured at fair value at each balance sheet date are as follows (in thousands):

March 31, 2020

June 30, 2020

Level 1 Level 2 Level 3 Total

1 unchanged sentence

Money market funds $ 111,201 $ — $ — $ 111,201

government treasuries 84,996 — — 84,996

Commercial paper — 2,996 — 2,996

Short-term marketable securities:

3 unchanged sentences

Long-term marketable securities:

government treasuries 2,565 — — 2,565

Corporate debt securities — 7,229 — 7,229

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The pricing services utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly.

There were no transfers of assets or liabilities between the fair value measurement levels during the three months ended March 31, 2020 or 2019.

There were no transfers of assets or liabilities between the fair value measurement levels during the three and six months ended June 30, 2020 or 2019.

Cash and Marketable Securities

1 unchanged sentence

A reconciliation of cash, cash equivalents, and restricted cash reported within the Condensed Consolidated Balance Sheets to the amount reported within the Condensed Consolidated Statements of Cash Flows is shown in the table below (in thousands):

March 31, December 31, March 31, December 31,

June 30, December 31, June 30, December 31,

2020 2019 2019 2018

6 unchanged sentences

Marketable securities

All marketable securities were considered available-for-sale at March 31, 2020 and December 31, 2019.

All marketable securities were considered available-for-sale at June 30, 2020 and December 31, 2019.

On a recurring basis, the Company records its marketable securities at fair value using Level 1 or Level 2 inputs as discussed in Note 2, "Fair Value Measurements".

The amortized cost, gross unrealized holding gains or losses, and fair value of the Company’s marketable securities by major security type at each balance sheet date are summarized in the tables below (in thousands):

March 31, 2020

June 30, 2020

Amortized Cost Unrealized Holding Gains Unrealized Holding Losses Aggregate Fair Value

9 unchanged sentences

Long-term marketable securities:

government treasuries

2,525 40 — 2,565

Corporate debt securities

4 unchanged sentences

__________________________________________________

(1) Unrealized holding losses on 10 securities, with an aggregate fair value of $ 35.7 million.

(2) Unrealized holding losses on 1 security, with an aggregate fair value of $ 7.1 million.

(1) Immaterial unrealized holding losses on 4 securities.

December 31, 2019

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(4) Unrealized holding losses on 3 securities with an aggregate fair value of $ 17.2 million.

As of March 31, 2020 and December 31, 2019, some of the Company’s marketable securities were in an unrealized loss position.

The Company has no t recognized an allowance for credit losses as of March 31, 2020 or December 31, 2019.

As of December 31, 2019, some of the Company’s marketable securities were in an unrealized loss position, and unrealized losses were immaterial as of June 30, 2020.

The Company has no t recognized an allowance for credit losses as of June 30, 2020 and there was no other-than-temporary impairment as of December 31, 2019.

The Company determined that it had the ability and intent to hold all marketable securities that have been in a continuous loss position until maturity or recovery.

Further, these marketable securities were initially, and continue to be, held with investment grade, high credit quality institutions, and the unrealized losses are believed to be the result of the recent widespread market and interest rate impact of the COVID-19 pandemic.

Further, these marketable securities were initially, and continue to be, held with investment grade, high credit quality institutions.

All marketable securities with unrealized losses as of each balance sheet date have been in a loss position for less than twelve months or the loss is not material.

The Company recorded unrealized gains on marketable securities as other comprehensive income in the three months ended March 31, 2020.

As a result, the Company recorded a tax benefit of $ 0.1 million for the three months ended March 31, 2020 on the Condensed Consolidated Statements of Operations and Comprehensive Loss and a corresponding tax charge in other comprehensive income.

During the three months ended March 31, 2019, no tax benefit was recorded on unrealized gains recorded in other comprehensive income.

The Company recorded unrealized gains on marketable securities as other comprehensive income in the six months ended June 30, 2020 and the three and six months ended June 30, 2019.

There was no unrealized gain on marketable securities in other comprehensive income for the three months ended June 30, 2020.

As a result, the Company recorded a tax benefit of $ 0.1 million for the six months ended June 30, 2020, and a tax benefit of $ 0.3 million for the three and six months ended June 30, 2019 on the Condensed Consolidated Statements of Operations and Comprehensive Loss and a corresponding tax charge in other comprehensive income.

All of the Company’s marketable securities have an effective maturity of less than two years .

7 unchanged sentences

Information regarding the specific instruments used by the Company to hedge its exposure to foreign currency exchange rate fluctuations is provided below.

The following table summarizes the Company’s forward foreign currency exchange contracts outstanding as of March 31, 2020 and December 31, 2019, respectively (notional amounts in thousands):

The following table summarizes the Company’s forward foreign currency exchange contracts outstanding as of June 30, 2020 and December 31, 2019, respectively (notional amounts in thousands):

Foreign Exchange Contracts Number of Contracts Aggregate Notional (1) Amount in Foreign Currency

26 2,746 Apr 2020 - Feb 2021

26 3,535 July 2020 - May 2021

British Pounds

17 2,482 Apr 2020 - Feb 2021

5 34 Apr 2020 - Aug 2020

Total at March 31, 2020

19 2,868 July 2020 - May 2021

2 21 July 2020 - Aug 2020

Total at June 30, 2020

23 1,500 Jan 2020 - Nov 2020

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The amount of the contingent payments will vary based on whether F-star delivers an Fcab (constant Fc-domains with antigen-binding activity) that meets pre-defined criteria and whether the Fcab has been identified solely by the Company or solely by F-star or jointly by the Company and F-star.

In June 30, 2019, the Company made a payment of $ 1.5 million to F-star Ltd upon the achievement of a specified preclinical milestone in the Company's ETV:IDS program.

The Company concluded that the assets acquired and liabilities assumed upon the exercise of the Option Agreement did not meet the accounting definition of a business, and as such, the acquisition was accounted for as an asset purchase.

As the transaction was accounted for as an asset purchase rather than a business combination, the Company did no t recognize any contingent consideration on the acquisition date.

To date, the Company has paid consideration of $ 19.8 million in aggregate, consisting of up-front and contingent consideration, all of which was recorded as research and development expense as incurred.

No contingent consideration was recognized in the three months ended March 31, 2020 or March 31, 2019.

To date, the Company has paid consideration of $ 19.8 million in the aggregate, consisting of up-front and contingent consideration, all of which was recorded as research and development expense as incurred.

The Company recognized $ 1.5 million of contingent consideration as research and development expense for the three and six months ended June 30, 2019.

There has been no contingent consideration recognized for the three and six months ended June 30, 2020.

Any future contingent consideration is expected to be recognized as incurred in research and development expense on the Condensed Consolidated Statements of Operations and Comprehensive Loss.

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The responsibility for costs under the second development plan related to an undisclosed Fcab target commenced in February 2019.

The Company recognized $ 0.3 million and $ 0.2 million in research and development expense related to the funding of F-star Ltd activities under this development plan during the three months ended March 31, 2020 and March 31, 2019, respectively.

The Company recognized $ 0.3 million and $ 0.6 million in research and development expense related to the funding of F-star Ltd activities under this development plan during the three and six months ended June 30, 2020, respectively, and $ 0.3 million and $ 0.5 million for the three and six months ended June 30, 2019, respectively.

Collaboration Agreements

In October 2018, the Company entered into a Collaboration and License Agreement ("Sanofi Collaboration Agreement") with Genzyme Corporation, a wholly owned subsidiary of Sanofi S.A.

("Sanofi") pursuant to which certain small molecule CNS and peripheral RIPK1 inhibitors contributed by Sanofi and by Denali will be developed and commercialized.

The Sanofi Collaboration Agreement became effective in November 2018 when the HSR requirements were satisfied at which time Sanofi paid the Company an upfront payment of $ 125.0 million.

("Sanofi") pursuant to which certain small molecule CNS and peripheral receptor interacting serine/threonine protein kinase 1 (" RIPK1") inhibitors contributed by Sanofi and by Denali will be developed and commercialized.

The Sanofi Collaboration Agreement became effective in November 2018 when the Hart-Scott-Rodino ("HSR") requirements were satisfied at which time Sanofi paid the Company an upfront payment of $ 125.0 million.

Under the Sanofi Collaboration Agreement, Denali is eligible to receive milestone payments from Sanofi up to approximately $ 1.1 billion upon achievement of certain clinical, regulatory and sales milestone events.

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The Company will be responsible, at its own cost, for conducting Phase 1 and Phase 2 trials for CNS Products in Alzheimer’s disease and any activities required to support such clinical trials and specific for Alzheimer’s disease.

Denali is conducting, at Sanofi’s cost, a Phase 1b trial for the lead CNS penetrant RIPK1 inhibitor, DNL747, in ALS.

Denali conducted, at Sanofi’s cost, a Phase 1b trial for the initial lead CNS penetrant RIPK1 inhibitor, DNL747, in ALS.

In June 2020, Denali announced that clinical activities on DNL747 would be paused and efforts focused on the development of the backup preclinical candidate, DNL788.

Sanofi is responsible, at its cost, for all other Phase 1 and Phase 2 trials for CNS Products, including for multiple sclerosis.

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All potential future milestones and other payments were considered constrained at the inception of the Sanofi Collaboration Agreement since the Company could not conclude it was probable that a significant reversal in the amount recognized would not occur.

From inception through March 31, 2020, the transaction price increased by $ 23.3 million, consisting of $ 13.3 million related to costs incurred for Retained Activities that were no longer constrained, and $ 10.0 million related to a milestone triggered in July 2019.

During the three months ended March 31, 2020 and 2019, the transaction price increased by $ 0.5 million and $ 3.4 million, respectively, related entirely to costs incurred for Retained Activities that were no longer constrained.

The respective standalone value for each of the performance obligations has been determined by applying the SSP method and the transaction price allocated based on the relative SSP method with revenue recognition timing to be determined either by delivery or the provision of services.

From inception through June 30, 2020, the transaction price increased by $ 23.5 million, consisting of $ 13.5 million related to costs incurred for Retained Activities that were no longer constrained, and $ 10.0 million related to a milestone triggered in July 2019.

The transaction price increased by $ 0.3 million and $ 0.8 million for the three and six months ended June 30, 2020, respectively, and $ 3.4 million and $ 6.8 million for the three and six months ended June 30, 2019, respectively, related entirely to costs incurred for Retained Activities that were determined to no longer be constrained during these periods.

The respective standalone value for each of the performance obligations was determined by applying the SSP method and the transaction price allocated based on the relative SSP method with revenue recognition timing to be determined either by delivery or the provision of services.

The Company used an adjusted market assessment approach to estimate the selling price for the program licenses, and an expected cost plus margin approach for estimating the Alzheimer’s Disease Services and the Retained Activities.

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For the Retained Activities, revenue will be recognized over time using the output method, based on amounts invoiced to Sanofi, since this is believed to directly correlate to the value of the services performed.

A contract liability of $ 3.4 million and $ 3.5 million was recorded on the Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019, respectively.

These contract liabilities relate to the portion of the Alzheimer's Disease Services performance obligation yet to be satisfied, with such amounts to be recognized over the estimated period of the services, which is expected to be several years.

There was a receivable of $ 0.5 million and $ 1.2 million at March 31, 2020 and December 31, 2019, respectively, associated with the Sanofi Collaboration Agreement.

A contract liability of $ 3.4 million and $ 3.5 million was recorded on the Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019, respectively.

This contract liability relates to the portion of the Alzheimer's Disease Services performance obligation yet to be satisfied, with such amounts to be recognized over the estimated period of the services, which is expected to be several years.

There was a receivable of $ 0.3 million and $ 1.2 million at June 30, 2020 and December 31, 2019, respectively, associated with the Sanofi Collaboration Agreement.

In assessing the Sanofi Collaboration Agreement, management is required to exercise considerable judgment in estimating revenue to be recognized.

Managem ent applies judgment in determining the separate performance obligations, in estimating the selling price, in determining when control was transferred to Sanofi for the licenses, and in estimating total future costs when using the input method.

Through March 31, 2020, Denali has received milestone payments of $ 10.0 million and has no t recorded any product sales recorded under the Sanofi Collaboration Agreement.

Through June 30, 2020, Denali has received milestone payments of $ 10.0 million and has no t recorded any product sales recorded under the Sanofi Collaboration Agreement.

In January 2018, the Company entered into a Collaboration and Option Agreement ("Takeda Collaboration Agreement") with Takeda Pharmaceutical Company Limited ("Takeda"), pursuant to which the Company granted Takeda an option to develop and commercialize, jointly with the Company, certain biologic products that are enabled by Denali's blood-brain barrier ("BBB") delivery technology and intended for the treatment of neurodegenerative disorders.

The programs were Denali’s ATV:BACE1/Tau and ATV:TREM2 and PTV:PGRN programs.

The programs were Denali’s Antibody Transport Vehicle (“ATV”):BACE1/Tau and ATV:TREM2 and PTV:PGRN programs.

The Takeda Collaboration Agreement became effective in February 2018, at which time Takeda paid the Company an upfront payment of $ 40.0 million.

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The performance obligations under each of the three programs are separate since the activities and risks under the programs are distinct.

The Company has determined that all other goods or services which are contingent upon Takeda exercising its option for each program are not considered performance obligations at the inception of the Takeda Collaboration Agreement.

The Company determined that all other goods or services which are contingent upon Takeda exercising its option for each program were not considered performance obligations at the inception of the Takeda Collaboration Agreement.

The transaction price at inception included fixed consideration consisting of the upfront fee of $ 40.0 million, the $ 15.6 million premium on the sale of common stock, and the first preclinical milestone payment of $ 5.0 million.

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Revenue is being recognized over time using the input method, based on costs incurred to perform the research services, since the level of costs incurred over time is thought to best reflect the transfer of services to Takeda.

There were no material changes in estimates during the three months ended March 31, 2020 or March 31, 2019.

A contract liability of $ 56.0 million and $ 59.0 million is recorded on the Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019, respectively.

There were no material changes in estimates during the three and six months ended June 30, 2020 or June 30, 2019.

A contract liability of $ 50.4 million and $ 59.0 million is recorded on the Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019, respectively.

This contract liability relates to the three performance obligations identified, with such amounts to be recognized over the estimated period of the pre-IND research services, which is expected to be several years.

There was no receivable as of March 31, 2020 or December 31, 2019, related to the Takeda Collaboration Agreement.

Revenue recognized relating to future milestone payments of $ 3.3 million and $ 2.4 million, which the Company concluded is probable that a significant reversal in the amount recognized will not occur, is presented net in the contract liability on the Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019, respectively.

There was no receivable as of June 30, 2020 or December 31, 2019, related to the Takeda Collaboration Agreement.

Revenue recognized relating to future milestone payments of $ 4.9 million and $ 2.4 million, which the Company concluded is probable that a significant reversal in the amount recognized will not occur, is presented net in the contract liability on the Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019, respectively.

In assessing the Takeda Collaboration Agreement, management is required to exercise considerable judgment in estimating revenue to be recognized.

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This may impact the split between current and non-current contract liability on the Condensed Consolidated Balance Sheet in the future.

Through March 31, 2020, Denali has received $ 15.0 million in preclinical milestone payments from Takeda and has no t recorded any product sales under the Takeda Collaboration Agreement.

Through June 30, 2020, Denali has received $ 15.0 million in preclinical milestone payments from Takeda and has no t recorded any product sales under the Takeda Collaboration Agreement.

Collaboration Revenue

Revenue disaggregated by collaboration agreement and performance obligation is as follows (in thousands):

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

Takeda Collaboration Agreement (1)

10 unchanged sentences

(“Genentech”).

The agreement gives the Company access to Genentech’s LRRK2 inhibitor small molecule program for Parkinson’s disease.

The agreement gives the Company access to Genentech’s leucine-rich repeat kinase 2 (“LRRK2”) inhibitor small molecule program for Parkinson’s disease.

Under the agreement, Genentech granted the Company (i) an exclusive, worldwide, sublicensable license under Genentech’s rights to certain patents and patent applications directed to small molecule compounds which bind to and inhibit LRRK2 and (ii) a non-exclusive, worldwide, sublicensable license to certain related know-how, in each case, to develop and commercialize certain compounds and licensed products incorporating any such compound.

3 unchanged sentences

To date, the Company has paid Genentech $ 12.5 million in the aggregate, including an upfront fee, a technology transfer fee and a clinical milestone payment, all of which was recorded as research and development expense as incurred.

No amounts were recorded in the three months ended March 31, 2020 or 2019.

No amounts were recorded in the three and six months ended June 30, 2020 or 2019.

Commitments and Contingencies

7 unchanged sentences

In addition, the Headquarters Lease Amendment provided a tenant improvement allowance ("TIA") of up to $ 25.9 million, which was fully utilized, of which $ 4.4 million will be repaid to the landlord in the form of additional monthly rent.

This is recorded as leasehold improvement assets and an offset to the lease ROU asset on the Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019.

This is recorded as leasehold improvement assets and an offset to the lease ROU asset on the Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019.

The Company is also required to pay the operating expenses for the New Premises, such as taxes and insurance, which are treated as variable lease payments.

2 unchanged sentences

To estimate the incremental borrowing rate, management considered observable debt yields of comparable market instruments, as well as benchmarks within the Headquarters Lease Amendment that may be indicative of the rate implicit in the lease.

Total operating lease costs, including variable and short-term lease costs, was $ 2.6 million and $ 2.3 million for the three months ended March 31, 2020 and 2019, respectively.

Total operating lease costs, including variable and short-term lease costs, were $ 2.9 million and $ 5.5 million for the three and six months ended June 30, 2020, respectively, and $ 2.5 million and $ 4.8 million for the three and six months ended June 30, 2019, respectively.

Operating lease liabilities are calculated as the net present value of the remaining lease payments over the remaining lease term.

In determining the present value of lease payments, the Company uses its incremental borrowing rate based on the information available at the lease commencement date.

As of March 31, 2020, the weighted average remaining lease term was 9.1 years and the weighted average discount rate used to determine the operating lease liability was 9.0 %.

Cash paid for amounts included in the measurement of lease liabilities for the three months ended March 31, 2020 and March 31, 2019 of $ 2.2 million and $ 0.7 million, respectively, was included in net cash used in operating activities in the Company's Condensed Consolidated Statements of Cash Flows.

The following table reconciles the undiscounted cash flows for the next five years and total of the remaining years to the operating lease liabilities recorded in the Condensed Consolidated Balance Sheet as of March 31, 2020 (in thousands):

As of June 30, 2020, the weighted average remaining lease term was 8.8 years and the weighted average discount rate used to determine the operating lease liability was 9.0 %.

Cash paid for amounts included in the measurement of lease liabilities for the six months ended June 30, 2020 and June 30, 2019 of $ 4.7 million and $ 1.9 million, respectively, was included in net cash used in operating activities in the Company's Condensed Consolidated Statements of Cash Flows.

Year Ended December 31:

2020 (nine months) $ 7,572

2020 (six months) $ 5,071

Thereafter 54,074

5 unchanged sentences

The Company also passes through a portion of the operating expenses, such as taxes and insurance for the New Premises to the sublessee, which are treated as variable sublease income.

Total sublease income, including rent and variable sublease cost reimbursements, was $ 0.9 million for three months ended March 31, 2020, respectively.

There was no sublease income for the three months ended March 31, 2019.

The following table details the future undiscounted cash inflows relating to the Sublease Agreement as of March 31, 2020 (in thousands):

Total sublease income, including rent and variable sublease cost reimbursements, was $ 1.0 million and $ 1.9 million for the three and six months ended June 30, 2020, respectively, and $ 0.8 million for the three and six months ended June 30, 2019, respectively.

The following table details the future undiscounted cash inflows relating to the Sublease Agreement as of June 30, 2020 (in thousands):

Year Ended December 31:

2020 (nine months) $ 2,146

2020 (six months) $ 1,431

Total undiscounted sublease receipts $ 11,337

6 unchanged sentences

Unless earlier terminated, the DMSA will expire on September 6, 2022.

As of March 31, 2020 and December 31, 2019, the Company had open non-cancellable purchase orders for biological product development and manufacturing costs totaling $ 14.6 million and $ 21.2 million respectively.

The activities under these purchase orders are expected to be completed by March 2026.

As of March 31, 2020 and December 31, 2019, the Company had total non-cancellable purchase commitments under the DMSA of $ 7.6 million and $ 11.2 million, respectively.

During the three months ended March 31, 2020 and 2019, the Company incurred costs of $ 1.0 million and $ 3.6 million, respectively, and made payments of $ 3.2 million and $ 2.6 million, respectively, for the development and manufacturing services rendered under the DMSA.

As of June 30, 2020 and December 31, 2019, the Company had open non-cancellable purchase orders for biological product development and manufacturing costs totaling $ 18.0 million and $ 21.2 million, respectively.

The activities under these purchase orders are expected to be completed by May 2027.

As of June 30, 2020 and December 31, 2019, the Company had total non-cancellable purchase commitments under the DMSA of $ 12.1 million and $ 11.2 million, respectively.

During the three months ended June 30, 2020 and 2019, the Company incurred costs of $ 3.8 million and $ 3.1 million, respectively, and made payments of $ 2.0 million and $ 3.9 million, respectively, for the development and manufacturing services rendered under the DMSA.

During the six months ended June 30, 2020 and 2019, the Company incurred costs of $ 4.8 million and $ 6.7 million, respectively, and made payments of $ 5.2 million and $ 6.5 million, respectively, for the development and manufacturing services rendered under the DMSA.

Stock-Based Awards

2017 Equity Incentive Plan

In December 2017, the Company adopted the 2017 Equity Incentive Plan (the “2017 Plan”), which initially reserved approximately 6.4 million shares of common stock for the issuance of stock options, restricted stock and other stock awards, to employees, non-employee directors, and consultants under terms and provisions established by the Board of Directors and approved by the stockholders.

The 2017 Plan provides that the number of shares reserved and available for issuance under the 2017 Plan will automatically increase each year on January 1st, by the least of (i) 10.0 million shares, (ii) 5 % of the outstanding shares on the last day of the immediately preceding fiscal year, or (iii) such number of shares determined by the administrator of the 2017 Plan.

In January 2020, common stock available for issuance under the 2017 Plan was increased by approximately 4.8 million shares as a result of this automatic increase provision.

Awards granted under the 2017 Plan expire no later than ten years from the date of grant.

For stock options, the option price shall not be less than 100 % of the estimated fair value of the Company's common stock on the day of grant.

Options granted typically vest over a four -year period but may be granted with different vesting terms.

2015 Stock Incentive Plan

In May 2015, the Company adopted the 2015 Stock Incentive Plan (the “2015 Plan”), which as amended, reserved approximately 8.3 million shares of common stock for the issuance of stock options, restricted stock and other stock awards, to employees, non-employee directors, and consultants under terms and provisions established by the Board of Directors and approved by the stockholders.

Awards granted under the 2015 Plan expire no later than ten years from the date of grant.

For stock options, the option price shall not b e less than 100 % of the estimated fair value of the Company's common stock on the day of grant.

Options granted typically vest over a four -year period but may be granted with different vesting terms.

Upon adoption of the 2017 Plan, no new awards or grants are permitted under the 2015 Plan, and the approximately 0.2 million shares that were then unissued and available for future award under the 2015 Plan became available under the 2017 Plan.

The 2015 Plan will continue to govern restricted stock awards and option awards previously granted thereunder.

As of March 31, 2020 and December 31, 2019, there were approximately 4.5 million and 3.4 million shares of common stock, respectively, available for the Company to grant under the 2017 Plan.

The Company has issued stock-based awards from various equity incentive and stock purchase plans, as more fully described in Note 11, Stock-Based Awards to the consolidated financial statements in the Company's 2019 Annual Report on Form 10-K.

Stock Option Activity

The following table summarizes option award activity under the 2017 Plan and the 2015 Plan:

The following table summarizes option award activity under the Company's 2017 Equity Incentive Plan and the 2015 Stock Incentive Plan:

Exercise Price

Value (in thousands)

Balance at December 31, 2019 11,640,734 $ 12.96

Options granted

3,244,298 24.78

Options exercised

( 461,968 ) 7.67

Options forfeited

( 232,093 ) 19.08

Balance at March 31, 2020 14,249,678 $ 15.47 8.03 $ 64,492

Options vested and expected to vest at March 31, 2020

Balance at June 30, 2020 14,190,971 $ 15.74

Vested and expected to vest at June 30, 2020

12,446,239 $ 17.85

Options exercisable at March 31, 2020 4,729,113 $ 12.63 7.42 $ 29,163

Aggregate intrinsic value represents the difference between the fair value of the Company's common stock and the exercise price of outstanding options.

The total intrinsic value of options exercised for the three months ended March 31, 2020 and 2019 was $ 3.7 million and $ 3.3 million, respectively.

During the three months ended March 31, 2020 and 2019, the weighted-average grant date fair value of the vested options was $ 11.23 and $ 11.82 per share, respectively.

The weighted-average grant date fair value of all options granted during the three months ended March 31, 2020 and 2019 was $ 14.73 and $ 11.60 per share, respectively.

Stock Options Granted to Employees with Service-Based Vesting

Exercisable at June 30, 2020 5,318,846 $ 13.52

The estimated fair value of stock options granted to employees were calculated using the Black-Scholes option-pricing model using the following assumptions:

Three Months Ended March 31,

Six Months Ended June 30,

Expected term (in years)

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Dividend yield

Expected Term:

The expected term represents the period that the options granted are expected to be outstanding and is determined using the simplified method (based on the mid-point between the vesting date and the end of the contractual term).

Expected Volatility:

The Company uses an average historical stock price volatility of comparable public companies within the biotechnology and pharmaceutical industry that were deemed to be representative of future stock price trends as the Company does not have sufficient trading history for its common stock.

The Company will continue to apply this process until a sufficient amount of historical information regarding the volatility of its own stock price becomes available.

Risk-Free Interest Rate:

The Company based the risk-free interest rate over the expected term of the options based on the constant maturity rate of U.S.

Treasury securities with similar maturities as of the date of the grant.

Expected Dividend Yield:

The Company has no t paid and does not anticipate paying any dividends in the near future.

Therefore, the expected dividend yield was zero .

Performance and Market Contingent Stock Options Granted to Employees

In August and November 2015, the Board of Directors granted approximately 1.6 million and 0.1 million shares of performance- and market- contingent awards to members of the senior management team, respectively.

These awards have an exercise price of $ 0.68 per share.

These awards have two separate market triggers for vesting based upon either (i) the successful achievement of stepped target closing prices on a national securities exchange for 90 consecutive trading days later than 180 days after the Company’s initial public offering for its common stock, or (ii) stepped target prices for a change in control transaction.

In the event that neither of these market triggers are achieved by the specified timelines, such awards will terminate with respect to that portion of the shares.

General and administrative expense of $ 0.1 million was recognized associated with these performance- and market- contingent awards for the three months ended March 31, 2020 .

The remaining expense for these awards, to be recognized using the accelerated attribution method, is $ 0.2 million, which will be recognized over the remaining derived service period of approximately six months .

The Company used a lattice model with a Monte Carlo simulation to value these stock options.

This valuation methodology utilized the estimated fair value of the Company’s common stock on grant date and several key assumptions, including expected volatility of the Company’s stock price based on comparable public companies, risk-free rates of return and expected dividend yield.

Stock Options Granted to Non-Employees with Service-Based Vesting Valuation Assumptions

Stock-based compensation related to stock options granted to non-employees is recognized as the stock options are earned.

Prior to the adoption of ASU 2018-07 during the third quarter of 2018, the unvested options granted to non-employees were revalued using the Company's estimate of fair value on each reporting date.

Subsequent to the adoption of ASU 2018-07, existing stock options granted to non-employees are no longer revalued, and the estimated fair value of new stock options granted to non-employees is calculated on the date of grant and not remeasured, similar to stock options granted to employees.

Restricted Stock Activity

Under the 2017 Plan, the Company may grant restricted stock awards ("RSAs"), which represent restricted shares of issued common stock for which the recipient's rights in the stock are restricted until the shares are vested, and restricted stock units ("RSUs"), which represent a commitment to issue shares of common stock in the future upon vesting.

The fair value of restricted stock underlying the RSAs and RSUs is determined based on the closing market price of the Company's common stock on the date of grant.

Aggregated information regarding RSAs and RSUs granted under the 2017 Plan for the three months ended March 31, 2020 is summarized below:

Aggregated information regarding restricted stock for the six months ended June 30, 2020 is summarized below:

Share Awards & Units Weighted-Average Fair Value at Date of Grant per Share

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Forfeited ( 48,412 ) 21.52

Unvested at March 31, 2020 1,637,984 $ 21.75

Expected to vest - March 31, 2020 1,637,984 $ 21.75

The aggregate intrinsic value of RSUs is calculated as the closing price per share of the Company's common stock on the last trading day of the fiscal period, multiplied by the number of RSUs expected to vest.

The total intrinsic value of RSUs expected to vest was $ 28.7 million as of March 31, 2020.

During the three months ended March 31, 2020 and 2019, the weighted-average grant-date fair value of RSUs granted was $ 24.50 and $ 18.27 , respectively.

The total fair value of RSAs and RSUs that vested during the three months ended March 31, 2020 and 2019, was $ 2.1 million and $ 7.4 million, respectively.

Employee Stock Purchase Plan

In December 2017, the Company adopted the 2017 Employee Stock Purchase Plan (the “2017 ESPP”), which initially reserved 1.0 million shares of common stock for employee purchases under terms and provisions established by the Board of Directors.

The 2017 ESPP provides that the number of shares reserved and available for issuance under the 2017 ESPP will automatically increase each year on January 1st, by the least of (i) 2.0 million shares, (ii) 1 % of the outstanding shares on the last day of the immediately preceding fiscal year, or (iii) such number of shares determined by the administrator of the 2017 Plan.

In January 2020, common stock available for issuance under the 2017 ESPP was increased by approximately 1.0 million shares as a result of this automatic increase provision.

Under the 2017 ESPP, employees may purchase common stock through payroll deductions at a price equal to 85 % of the lower of the fair market value of common stock on the first trading day of each offering period or on the exercise date.

The 2017 ESPP provides for consecutive, overlapping 12-month offering periods.

The offering periods are scheduled to start on the first trading day on or after May 31 or November 30 of each year, except for the first offering period which commenced on December 8, 2017, the first trading day after the effective date of the Company’s registration statement.

Contributions under the 2017 ESPP are limited to a maximum of 15 % of an employee's eligible compensation.

During the three months ended March 31, 2020 and 2019, the Company did no t issue any shares of common stock under the 2017 ESPP.

Unvested at June 30, 2020 1,673,052 $ 21.98

Expected to vest at June 30, 2020 1,673,052 $ 21.98

Stock-Based Compensation Expense

The Company’s results of operations include expenses relating to stock-based compensation as follows (in thousands):

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

Research and development

2 unchanged sentences

5,338 8,419 10,069 11,311

As of March 31, 2020, total unamortized stock-based compensation expense related to employee and non-employee awards was $ 129.5 million.

The weighted-average period over which such stock-based compensation expense will be recognized is approximately 3.2 years.

$ 12,484 $ 13,714 $ 23,269 $ 20,588

Net Loss Per Share

1 unchanged sentence

Potentially dilutive securities that were not included in the diluted per share calculations because they would be anti-dilutive were as follows:

Three Months Ended March 31,

Three and Six Months Ended June 30,

Options issued and outstanding and ESPP shares issuable

4 unchanged sentences

16,024,847 12,865,704

Subsequent Event

On August 5, 2020, the Company entered into a binding Provisional Collaboration and License Agreement (“Provisional Collaboration Agreement”) with Biogen Inc.’s subsidiaries Biogen MA, Inc.

and Biogen International GmbH (collectively “Biogen”), to co-develop and co-commercialize Denali’s small molecule inhibitors of LRRK2 for Parkinson’s disease.

In addition to the LRRK2 program, Biogen will also receive an exclusive option to license two preclinical programs from our TV platform, which aims to improve brain uptake of biotherapeutics, including our Antibody Transport Vehicle (“ATV”):

Abeta program (ATV enabled anti-amyloid beta program) and a second program utilizing our TV technology.

Further, Biogen will have right of first negotiation on two additional TV-enabled therapeutics, currently at a preclinical stage, should we decide to seek a collaboration for such programs.

Under the terms of the agreement, Biogen will make an upfront payment to Denali of $ 560 million.

Should the LRRK2 program achieve certain development and commercial milestones, Denali will be eligible to receive milestone payments exceeding $ 1.1 billion as well as profit sharing and royalties.

Biogen and Denali will share responsibility and costs for global development ( 60 percent Biogen;

40 percent Denali), and will share responsibility and costs as well as profits and losses for commercialization in the U.S.

( 50 percent Biogen;

50 percent Denali) and China ( 60 percent Biogen and 40 percent Denali).

Outside the U.S.

and China, Biogen will be responsible for commercialization and pay Denali tiered royalties.

Further, under an associated common stock purchase agreement, Denali will receive proceeds of $ 465 million for the sale of approximately 13.3 million newly issued shares of Denali common stock at $ 34.94 per share, representing approximately 11.2 percent of Denali’s outstanding stock.

Closing of the transaction is contingent on satisfaction of requirements under applicable antitrust laws, including the HSR Antitrust Improvements Act of 1976, as amended, in the U.S., and other customary closing conditions, and with respect to the collaboration, execution of a definitive collaboration agreement.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements