Denali Therapeutics Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS Denali Therapeutics Inc. Condensed Consolidated Balance Sheets (Unaudited) (In thousands, except share amounts) March 31, 2021 December 31, 2020 Assets Current assets: Cash and cash equivalents $ 435,321 $ 507,144 Short-term marketable securities 977,827 962,553 Cost sharing reimbursements due from related party 2,511 5,674 Prepaid expenses and other current assets 15,963 20,284 Total current assets 1,431,622 1,495,655 Long-term marketable securities 38,885 32,699 Property and equipment, net 41,376 40,846 Operating lease right-of-use asset 32,236 32,618 Other non-current assets 3,739 2,462 Total assets $ 1,547,858 $ 1,604,280 Liabilities and stockholders' equity Current liabilities: Accounts payable $ 1,626 $ 1,071 Accrued compensation 4,963 20,503 Accrued clinical costs 5,049 6,497 Accrued manufacturing costs 13,342 7,140 Other accruals and other current liabilities 8,299 8,315 Operating lease liability, current 4,876 4,690 Related party contract liability, current 3,569 3,569 Contract liabilities, current 12,886 19,914 Total current liabilities 54,610 71,699 Related party contract liability, less current portion 292,956 293,849 Contract liabilities, less current portion 31,322 23,325 Operating lease liability, less current portion 62,916 64,175 Other non-current liabilities 701 701 Total liabilities 442,505 453,749 Commitments and contingencies (Note 7) Stockholders' equity: Convertible preferred stock, $ 0.01 par value; 40,000,000 shares authorized as of March 31, 2021 and December 31, 2020; 0 shares issued and outstanding as of March 31, 2021 and December 31, 2020 — — Common stock, $ 0.01 par value; 400,000,000 shares authorized as of March 31, 2021 and December 31, 2020; 121,147,432 shares and 120,531,333 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively 1,537 1,531 Additional paid-in capital 1,528,504 1,503,660 Accumulated other comprehensive loss ( 232 ) ( 245 ) Accumulated deficit ( 424,456 ) ( 354,415 ) Total stockholders' equity 1,105,353 1,150,531 Total liabilities and stockholders’ equity $ 1,547,858 $ 1,604,280 See accompanying notes to unaudited condensed consolidated financial statements. 3 Table of Contents Denali Therapeutics Inc. Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited) (In thousands, except share and per share amounts) Three Months Ended March 31, 2021 2020 Collaboration revenue: Collaboration revenue from customers (1) $ 7,922 $ 3,552 Other collaboration revenue 1 52 Total collaboration revenue 7,923 3,604 Operating expenses: Research and development (2) 60,207 51,016 General and administrative 18,936 12,555 Total operating expenses 79,143 63,571 Loss from operations ( 71,220 ) ( 59,967 ) Interest and other income, net 1,179 3,069 Loss before income taxes ( 70,041 ) ( 56,898 ) Income tax benefit — 135 Net loss ( 70,041 ) ( 56,763 ) Other comprehensive income: Net unrealized gain on marketable securities, net of tax 13 485 Comprehensive loss $ ( 70,028 ) $ ( 56,278 ) Net loss per share, basic and diluted $ ( 0.58 ) $ ( 0.55 ) Weighted average number of shares outstanding, basic and diluted 120,884,665 102,419,718 __________________________________________________ (1) Includes related party collaboration revenue from customer of $ 0.9 million for the three months ended March 31, 2021. (2) Includes an offset to expense from related party cost reimbursement of $ 2.5 million for the three months ended March 31, 2021. See accompanying notes to unaudited condensed consolidated financial statements. 4 Table of Contents Denali Therapeutics Inc. Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) (In thousands, except share amounts) Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders' Equity Three Months Ended March 31, 2021 Shares Amount Balance at December 31, 2020 120,531,333 $ 1,531 $ 1,503,660 $ ( 245 ) $ ( 354,415 ) $ 1,150,531 Issuances under equity incentive plans 334,634 3 3,819 — — 3,822 Vesting of restricted stock units 281,465 3 ( 3 ) — — — Stock-based compensation — — 21,028 — — 21,028 Net loss — — — — ( 70,041 ) ( 70,041 ) Other comprehensive income — — — 13 — 13 Balance at March 31, 2021 121,147,432 $ 1,537 $ 1,528,504 $ ( 232 ) $ ( 424,456 ) $ 1,105,353 Three Months Ended March 31, 2020 Balance at December 31, 2019 96,189,935 $ 1,288 $ 818,803 $ 350 $ ( 425,551 ) $ 394,890 Issuance of common stock in follow-on offering, net of issuance costs of $ 632 9,000,000 90 193,858 — — 193,948 Issuances under equity incentive plans 259,569 3 1,963 — — 1,966 Vesting of restricted stock units 91,839 1 ( 1 ) — — — Stock-based compensation — — 10,785 — — 10,785 Net loss — — — — ( 56,763 ) ( 56,763 ) Other comprehensive income — — — 485 — 485 Balance at March 31, 2020 105,541,343 $ 1,382 $ 1,025,408 $ 835 $ ( 482,314 ) $ 545,311 See accompanying notes to unaudited condensed consolidated financial statements. 5 Table of Contents Denali Therapeutics Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands) Three Months Ended March 31, 2021 2020 Operating activities Net loss $ ( 70,041 ) $ ( 56,763 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 2,108 2,109 Stock–based compensation expense 21,028 10,785 Net amortization of discounts on marketable securities 1,161 ( 607 ) Non-cash adjustment to operating lease expense ( 691 ) ( 321 ) Other non-cash items ( 2 ) ( 53 ) Changes in operating assets and liabilities: Prepaid expenses and other assets 6,301 ( 2,454 ) Accounts payable 623 ( 292 ) Accruals and other current liabilities ( 10,804 ) ( 3,827 ) Contract liabilities 969 ( 3,069 ) Related party contract liability ( 892 ) — Net cash used in operating activities ( 50,240 ) ( 54,492 ) Investing activities Purchases of marketable securities ( 463,105 ) ( 153,155 ) Purchases of property and equipment ( 2,800 ) ( 879 ) Maturities and sales of marketable securities 440,500 140,701 Net cash used in investing activities ( 25,405 ) ( 13,333 ) Financing activities Proceeds from public offering of common stock, net of issuance costs — 193,948 Proceeds from exercise of awards under equity incentive plans 3,822 1,965 Net cash provided by financing activities 3,822 195,913 Net increase (decrease) in cash, cash equivalents and restricted cash ( 71,823 ) 128,088 Cash, cash equivalents and restricted cash at beginning of period 508,644 80,949 Cash, cash equivalents and restricted cash at end of period $ 436,821 $ 209,037 See accompanying notes to unaudited condensed consolidated financial statements. 6 Table of Contents Denali Therapeutics Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) 1. Significant Accounting Policies Organization and Description of Business Denali Therapeutics Inc. ("Denali" or the “Company”) is a biopharmaceutical company, incorporated in Delaware, that discovers and develops therapeutics to defeat neurodegenerative diseases. The Company is headquartered in South San Francisco, California. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of SEC Regulation S-X for interim financial information. These unaudited condensed consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the Securities and Exchange Commission on February 26, 2021 (the "2020 Annual Report on Form 10-K"). The Condensed Consolidated Balance Sheet as of December 31, 2020 was derived from the audited annual consolidated financial statements as of and for the period then ended. Certain information and footnote disclosures typically included in the Company's annual consolidated financial statements have been condensed or omitted. The accompanying unaudited condensed consolidated financial statements reflect all adjustments that, in the opinion of management, are necessary for a fair statement of the results of the interim periods presented. All such adjustments are of a normal recurring nature except for the impacts of adopting new accounting standards, if any, discussed below. 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, 2021, except as discussed below in the section titled "Recently Adopted Accounting Pronouncement," there were no material changes to the Company's significant accounting and financial reporting policies from those reflected in the 2020 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 2020 Annual Report on Form 10-K. Principles of Consolidation These unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All intercompany balances and transactions have been eliminated in consolidation. For the Company and its subsidiary, the functional currency has been determined to be U.S. dollars. Monetary assets and liabilities denominated in foreign currency are remeasured at period-end exchange rates. Non-monetary assets and liabilities denominated in foreign currencies are remeasured at historical rates. Foreign currency transaction gains and losses resulting from remeasurement are recognized in interest and other income, net in the Condensed Consolidated Statements of Operations and Comprehensive Loss. 7 Table of Contents Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires the Company to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, as well as the reported amounts of expenses during the reporting period. Actual results could differ from those estimates, and such differences could be material to the Condensed Consolidated Balance Sheets and Statements of Operations and Comprehensive Loss. Concentration of Credit Risk and Other Risks and Uncertainties Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents, marketable securities and forward foreign currency exchange contracts. Substantially all of the Company’s cash and cash equivalents are deposited in accounts with financial institutions that management believes are of high credit quality. Such deposits have and will continue to exceed federally insured limits. The Company maintains its cash with accredited financial institutions and accordingly, such funds are subject to minimal credit risk. The Company’s investment policy limits investments to certain types of securities issued by the U.S. government, its agencies and institutions with investment-grade credit ratings and places restrictions on maturities and concentration by type and issuer. 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, 2021 and December 31, 2020, 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. The Company has established and maintains strict counterparty credit guidelines and enters into hedges only with financial institutions that are investment grade or better to minimize the Company’s exposure to potential defaults. The Company does not require collateral to be pledged under these agreements. The Company is subject to a number of risks similar to other early-stage biopharmaceutical companies, including, but not limited to, the need to obtain adequate additional funding, possible failure of current or future preclinical testing or clinical trials, its reliance on third parties to conduct its clinical trials, the need to obtain regulatory and marketing approvals for its product candidates, competitors developing new technological innovations, the need to successfully commercialize and gain market acceptance of the Company’s product candidates, its right to develop and commercialize its product candidates pursuant to the terms and conditions of the licenses granted to the Company, protection of proprietary technology, the ability to make milestone, royalty or other payments due under any license or collaboration agreements, and the need to secure and maintain adequate manufacturing arrangements with third parties. If the Company does not successfully commercialize or partner any of its product candidates, it will be unable to generate product revenue or achieve profitability. The COVID-19 pandemic has caused increased risk and uncertainty for the Company. 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, 2021, the Company has not realized any losses on its cash deposits or investments. 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. Segments The Company has one operating segment. The Company’s chief operating decision maker, its Chief Executive Officer, manages the Company’s operations on a consolidated basis for the purposes of allocating resources. 8 Table of Contents Cash, Cash Equivalents and Restricted Cash The Company considers all highly liquid investments with original maturities of 90 days or less at the date of purchase to be cash and cash equivalents. Cash equivalents are reported at fair value. Cash, cash equivalents, and restricted cash reported within the Condensed Consolidated Statements of Cash Flows is composed of Cash and Cash equivalents reported in the Condensed Consolidated Balance Sheets and $ 1.5 million of restricted cash for the letter of credit for the Company’s headquarters building lease, which is included within other non-current assets in the Condensed Consolidated Balance Sheets. Marketable Securities The Company generally invests its excess cash in money market funds and investment grade short to intermediate-term fixed income securities. Such investments are included in cash and cash equivalents, short-term marketable securities, or long-term marketable securities on the Condensed Consolidated Balance Sheets, are considered available-for-sale, and reported at fair value with net unrealized gains and losses included as a component of stockholders’ equity. The Company classifies investments in securities with remaining maturities of less than one year, or where its intent is to use the investments to fund current operations or to make them available for current operations, as short-term investments. The Company classifies investments in securities with remaining maturities of over one year as long-term investments. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity, which is included in interest and other income, net in the Condensed Consolidated Statements of Operations and Comprehensive Loss. Realized gains and losses and declines in value determined to be due to credit losses on marketable securities, if any, are included in interest and other income, net. The Company periodically evaluates the need for an allowance for credit losses. This evaluation includes consideration of several qualitative and quantitative factors, including whether it has plans to sell the security, whether it is more likely than not it will be required to sell any marketable securities before recovery of its amortized cost basis, and if the entity has the ability and intent to hold the security to maturity, and the portion of any unrealized loss that is the result of a credit loss. Factors considered in making these evaluations include quoted market prices, recent financial results and operating trends, implied values from any recent transactions or offers of investee securities, credit quality of debt instrument issuers, expected cash flows from securities, other publicly available information that may affect the value of the marketable security, duration and severity of the decline in value, and the Company's strategy and intentions for holding the marketable security. Accounts Receivable Accounts receivable are included within prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets. The accounts receivable balance represents amounts receivable from the Company's collaboration partners, net of an allowance for credit losses, if required. Derivatives and Hedging Activities The Company measures its derivative instruments at fair value, and accounts for them as either assets or liabilities included within Prepaid expenses and other current assets and Other accruals and other 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. 9 Table of Contents Leases The Company leases real estate, and certain equipment for use in its operations. A determination is made as to whether an arrangement is a lease at inception. 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. Certain amounts for the three months ended March 31, 2020 were reclassified to conform to the current period presentation. 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. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments due over the lease term, with the ROU assets adjusted for lease incentives received. When determining the present value of lease payments, the Company uses its incremental borrowing rate on the date of lease commencement, or the rate implicit in the lease, if known. The Company does not assume renewals in its determination of the lease term unless the renewals are deemed by management to be reasonably certain at lease inception. Leases with an initial term of 12 months or less are not recorded on the balance sheet, unless they include an option to purchase the underlying asset that the Company is reasonably certain to exercise. The Company recognizes lease expenses on a straight-line basis over the lease term. The Company has leases with lease and non-lease components, which the Company has elected to account for as a single lease component. Revenue Recognition License and Collaboration Revenue The Company analyzes its collaboration arrangements to assess whether they are within the scope of ASC 808, Collaborative Arrangements (“ASC 808”) to determine whether such arrangements involve joint operating activities performed by parties that are both active participants in the activities and exposed to significant risks and rewards dependent on the commercial success of such activities. This assessment is performed throughout the life of the arrangement based on changes in the responsibilities of all parties in the arrangement. For collaboration arrangements within the scope of ASC 808 that contain multiple elements, the Company first determines which elements of the collaboration are deemed to be within the scope of ASC 808 and those that are more reflective of a vendor-customer relationship and, therefore, within the scope of Topic 606. For elements of collaboration arrangements that are accounted for pursuant to ASC 808, an appropriate recognition method is determined and applied consistently, generally by analogy to Topic 606. The accounting treatment pursuant to Topic 606 is outlined below. The terms of licensing and collaboration agreements entered into typically include payment of one or more of the following: non-refundable, up-front license fees; development, regulatory and commercial milestone payments; payments for manufacturing supply and research and development services and royalties on net sales of licensed products. Each of these payments results in license, collaboration and other revenue, except for revenues from royalties on net sales of licensed products, which are classified as royalty revenue. The core principle of Topic 606 is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received in exchange for those goods or services. The Company may also receive reimbursement or make payments to a collaboration partner to satisfy cost sharing requirements. These payments are accounted for pursuant to ASC 808 and are recorded as an offset or increase to research and development expenses, respectively. 10 Table of Contents In determining the appropriate amount of revenue to be recognized as the Company fulfills its obligations under each of its agreements, the Company performs the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations based on estimated selling prices; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation. Amounts received prior to satisfying the revenue recognition criteria are recorded as contract liabilities in the Company’s Condensed Consolidated Balance Sheets. If the related performance obligation is expected to be satisfied within the next twelve months this will be classified in current liabilities. Amounts recognized as revenue prior to the Company having an unconditional right (other than a right that is conditioned only on the passage of time) to receipt are recorded as contract assets in the Company's Condensed Consolidated Balance Sheets. If the Company expects to have an unconditional right to receive the consideration in the next twelve months, this will be classified in current assets. A net contract asset or liability is presented for each contract with a customer. At contract inception, the Company assesses the goods or services promised in a contract with a customer and identifies those distinct goods and services that represent a performance obligation. A promised good or service may not be identified as a performance obligation if it is immaterial in the context of the contract with the customer, if it is not separately identifiable from other promises in the contract (either because it is not capable of being separated or because it is not separable in the context of the contract), or if the promised good or service does not provide the customer with a material right. The Company considers the terms of the contract to determine the transaction price. The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring promised goods or services to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. Variable consideration will only be included in the transaction price when it is not considered constrained, which is when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. If it is determined that multiple performance obligations exist, the transaction price is allocated at the inception of the agreement to all identified performance obligations based on the relative standalone selling prices ("SSP"). The relative SSP for each deliverable is estimated using external sourced evidence if it is available. If external sourced evidence is not available, the Company uses its best estimate of the SSP for the deliverable. Revenue is recognized when, or as, the Company satisfies a performance obligation by transferring a promised good or service to a customer. An asset is transferred when, or as, the customer obtains control of that asset, which for a service is considered to be as the services are received and used. The Company recognizes revenue over time by measuring the progress toward complete satisfaction of the relevant performance obligation using an appropriate input or output method based on the nature of the service promised to the customer. After contract inception, the transaction price is reassessed at every period end and updated for changes such as resolution of uncertain events. Any change in the transaction price is allocated to the performance obligations on the same basis as at contract inception, or to a single performance obligation as applicable. Management may be required to exercise considerable judgment in estimating revenue to be recognized. Judgment is required in identifying performance obligations, estimating the transaction price, estimating the SSP of identified performance obligations, which may include forecasted revenue, development timelines, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success, and estimating the progress towards satisfaction of performance obligations. 11 Table of Contents Comprehensive Loss Comprehensive 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 Basic net loss per share is calculated by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period, without consideration for common stock equivalents. Diluted net loss per share is the same as basic net loss per share, since the effects of potentially dilutive securities are antidilutive given the net loss for each period presented. Recently Adopted Accounting Pronouncement In December 2019, the Financial Accounting Standards Board ("FASB") issued ASU No. 2019-12 , Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes. ASU No. 2019-12 modifies ASC 740 to simplify several aspects of accounting for income taxes, including eliminating certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation. The guidance is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years, with early adoption permitted, and is required to be adopted prospectively, with the exception of certain specific amendments, which were not applicable to the Company. The Company adopted this standard as of January 1, 2021 using a prospective approach. Adoption of the standard did not have a material impact on its Condensed Consolidated Financial Statements. 2. Fair Value Measurements Assets and liabilities measured at fair value at each balance sheet date are as follows (in thousands): March 31, 2021 Level 1 Level 2 Level 3 Total Assets: Cash equivalents: Money market funds $ 426,770 $ — $ — $ 426,770 Short-term marketable securities: U.S. government treasuries 870,756 — — 870,756 U.S. government agency securities — 20,136 — 20,136 Corporate debt securities — 15,729 — 15,729 Commercial paper — 71,206 — 71,206 Long-term marketable securities: U.S. government treasuries 4,050 — — 4,050 Corporate debt securities — 34,835 — 34,835 Foreign currency derivative contracts — 45 — 45 Total $ 1,301,576 $ 141,951 $ — $ 1,443,527 Liabilities: Foreign currency derivative contracts $ — $ 176 $ — $ 176 Total $ — $ 176 $ — $ 176 12 Table of Contents December 31, 2020 Level 1 Level 2 Level 3 Total Assets: Cash equivalents: Money market funds $ 335,284 $ — $ — $ 335,284 U.S. government treasuries 149,997 — — 149,997 Short-term marketable securities: U.S. government treasuries 878,938 — — 878,938 U.S. government agency securities — 25,217 — 25,217 Corporate debt securities — 27,180 — 27,180 Commercial paper — 31,218 — 31,218 Long-term marketable securities: U.S. government treasuries 2,561 — — 2,561 Corporate debt securities — 30,138 — 30,138 Foreign currency derivative contracts — 185 — 185 Total $ 1,366,780 $ 113,938 $ — $ 1,480,718 Liabilities: Foreign currency derivative contracts $ — $ 11 $ — $ 11 Total $ — $ 11 $ — $ 11 The carrying amounts of prepaid expenses and other current assets, accounts payable and accrued liabilities approximate their fair values due to their short-term maturities. The Company’s Level 2 securities are valued using third-party pricing sources. 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. The company has not transferred any assets or liabilities between the fair value measurement levels. 3. Marketable Securities All marketable securities were considered available-for-sale at March 31, 2021 and December 31, 2020. 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): 13 Table of Contents March 31, 2021 Amortized Cost Unrealized Holding Gains Unrealized Holding Losses Aggregate Fair Value Short-term marketable securities: U.S. government treasuries (1) $ 870,674 $ 90 $ ( 8 ) $ 870,756 U.S. government agency securities 20,126 10 — 20,136 Corporate debt securities (2) 15,684 48 ( 3 ) 15,729 Commercial paper 71,206 — — 71,206 Total short-term marketable securities 977,690 148 ( 11 ) 977,827 Long-term marketable securities: U.S. government treasuries 4,049 1 — 4,050 Corporate debt securities (3) 34,854 — ( 19 ) 34,835 Total long-term marketable securities 38,903 1 ( 19 ) 38,885 Total $ 1,016,593 $ 149 $ ( 30 ) $ 1,016,712 __________________________________________________ (1) Unrealized holding losses on 3 securities with an aggregate fair value of $ 126.4 million. (2) Unrealized holding losses on 4 securities with an aggregate fair value of $ 7.1 million. (3) Unrealized holding losses on 4 securities with an aggregate fair value of $ 34.8 million. December 31, 2020 Amortized Cost Unrealized Holding Gains Unrealized Holding Losses Aggregate Fair Value Short-term marketable securities: U.S. government treasuries (1) $ 878,906 $ 44 $ ( 12 ) $ 878,938 U.S. government agency securities (2) 25,214 5 ( 2 ) 25,217 Corporate debt securities 27,101 79 — 27,180 Commercial paper 31,218 — — 31,218 Total short-term marketable securities 962,439 128 ( 14 ) 962,553 Long-term marketable securities: U.S. government treasuries 2,561 — — 2,561 Corporate debt securities (3) 30,147 2 ( 11 ) 30,138 Total long-term marketable securities 32,708 2 ( 11 ) 32,699 Total $ 995,147 $ 130 $ ( 25 ) $ 995,252 __________________________________________________ (1) Unrealized holding losses on 19 securities with an aggregate fair value of $ 369.9 million. (2) Unrealized holding losses on 2 securities with an aggregate fair value of $ 10.1 million. (3) Unrealized holding losses on 1 security with an aggregate fair value of $ 20.1 million. As of March 31, 2021 and December 31, 2020, 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, 2021 or December 31, 2020. 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. 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 in other comprehensive income for 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. All of the Company’s marketable securities have an effective maturity of less than two years . 14 Table of Contents 4. Derivative Financial Instruments Foreign Currency Exchange Rate Exposure The Company uses forward foreign currency exchange contracts to hedge certain operational exposures resulting from potential changes in foreign currency exchange rates. Such exposures result from portions of the Company’s forecasted cash flows being denominated in currencies other than the U.S. dollar, primarily the Euro and British Pound. The derivative instruments the Company uses to hedge this exposure are not designated as cash flow hedges, and as a result, changes in their fair value are recorded in interest and other income, net, on the Company's Condensed Consolidated Statements of Operations and Comprehensive Loss. The fair values of forward foreign currency exchange contracts are estimated using current exchange rates and interest rates and take into consideration the current creditworthiness of the counterparties. 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, 2021 and December 31, 2020, respectively (notional amounts in thousands): Foreign Exchange Contracts Number of Contracts Aggregate Notional (1) Amount in Foreign Currency Maturity Euros 26 4,305 Apr 2021- Mar 2022 British Pounds 11 963 Apr 2021- Nov 2021 Total at March 31, 2021 37 Euros 26 3,855 Jan 2021 - Nov 2021 British Pounds 21 2,658 Jan 2021 - Nov 2021 Total at December 31, 2020 47 _________________________________________________ (1) The notional amount represents the net amount of foreign currency that will be received upon maturity of the forward contracts. A derivative liability balance of $ 0.2 million is recorded on the Condensed Consolidated Balance Sheets as of March 31, 2021 and an immaterial derivative liability balance is recorded on the Condensed Consolidated Balance Sheets as of December 31, 2020. An immaterial derivative asset balance is recorded in prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets as of March 31, 2021 and a derivative asset balance of $ 0.2 million is recorded in prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets as of December 31, 2020. A net loss of $ 0.2 million associated with the Company's derivative instruments is recognized in interest and other income, net on the Condensed Consolidated Statements of Operations and Comprehensive Loss for each of the three months ended March 31, 2021 and March 31, 2020. 15 Table of Contents 5. Collaboration Agreements Biogen Provisional Biogen Collaboration Agreement and Common Stock Purchase Agreement On August 5, 2020, the Company entered into a binding Provisional Collaboration and License Agreement (“Provisional Biogen Collaboration Agreement”) with Biogen Inc.’s subsidiaries, Biogen MA Inc. (“BIMA”) and Biogen International GmbH (“BIG”) (BIMA and BIG, collectively, “Biogen”) pursuant to which the Company granted Biogen a license to co-develop and co-commercialize Denali’s small molecule LRRK2 inhibitor program (the “LRRK2 Program”), an option in respect of each of (i) the Company’s amyloid beta program utilizing the Company's Transport Vehicle ("TV") technology platform to cross the blood-brain barrier ("BBB") and (ii) one other unnamed program also utilizing the Company's TV technology platform (the “Option Programs”), and a right of first negotiation with respect to two additional unnamed programs for indications within Alzheimer’s disease, Parkinson’s disease, amyotrophic lateral sclerosis ("ALS") or multiple sclerosis utilizing the Company's TV technology platform (the “ROFN Programs”) should the Company decide to seek a collaboration with a third party for such programs. The Provisional Biogen Collaboration Agreement was a binding agreement, which became effective on the closing of the Common Stock Purchase Agreement ("SPA"), as described further below. The Provisional Biogen Collaboration Agreement expired in October 2020 upon the execution of a Definitive LRRK2 Collaboration and License Agreement (“LRRK2 Agreement”) with Biogen on October 4, 2020 and a Right of First Negotiation, Option and License Agreement (the “ROFN and Option Agreement”) on October 6, 2020 (collectively, the "Biogen Collaboration Agreement"). Under the terms of the Provisional Biogen Collaboration Agreement, Biogen was obligated to pay the Company a $ 560.0 million upfront payment, payable upon execution of the Biogen Collaboration Agreement, which occurred in October 2020. With respect to the LRRK2 Program, Biogen is required to make milestone payments up to approximately $ 1.125 billion upon achievement of certain development and sales milestone events. Such milestone payments include $ 375.0 million in development, $ 375.0 million upon first commercial sale, and $ 375.0 million in net sales-based milestones. The Company will share 50 % of the profits and losses with Biogen for LRRK2 Products in the United States, and 40 % of such profits and losses in China. The Company will be entitled to receive royalties in the high teens to low twenties percentages on net sales for LRRK2 Products outside of the United States and China. Under the terms of the Provisional Biogen Collaboration Agreement, Denali conducted and controlled LRRK2 clinical development through the effective date of the Biogen Collaboration Agreement. Subsequently, the Company and Biogen are jointly developing LRRK2 Products pursuant to a clinical development plan set forth within the LRRK2 Agreement. The parties share responsibility and costs for global development of LRRK2 Products pursuant to a mutually agreed development plan and budget ("LRRK2 Development Activities"), with Biogen funding 60 % and the Company funding 40 % of such costs. The Company may opt out of development cost sharing worldwide and upon such election, from any further profit-sharing from the LRRK2 Program. The Company also has the right to opt-out of the profit sharing arrangement for the LRRK2 Program or for only those LRRK2 Products that do not penetrate the BBB (“Peripheral LRRK2 Products”), in each of the United States and China. After such an opt out, the Company will no longer be obligated to share in the development and commercialization costs for, or be entitled to share in the applicable revenues from, such LRRK2 Program (or from the Peripheral LRRK2 Products) for such country, as applicable. If the Company chooses to exercise its opt out rights, the Company will be entitled to receive tiered royalties on net sales of the applicable LRRK2 Program in the relevant country (or countries). The royalty rates for the applicable LRRK2 Program will be a percentage in the high teens to low twenties, but may increase to the mid-twenties if the Company has met certain co-funding thresholds or there has been a first commercial sale at the time of the Company's election. 16 Table of Contents In addition to the LRRK2 Program, Biogen received an exclusive option to license two preclinical programs enabled by the Company's TV technology platform, which platform aims to improve brain uptake of biotherapeutics, including its Antibody Transport Vehicle ("ATV"): Abeta program ("ATV-enabled anti-amyloid beta program") and a second program utilizing the Company's TV technology for an unnamed target ("TV program"), excluding small molecules, Adeno-associated viruses ("AAV") and oligonucleotides. Biogen’s option may be exercised up to initiation of investigational new drug ("IND")-enabling studies for each program and continues for each program until a specified period of time after delivery of an option data package, or thirty business days after the 5th anniversary of the effective date of the Provisional Biogen Collaboration Agreement, whichever is earlier. Further, Biogen will have the right of first negotiation ("ROFN") on two additional TV-enabled therapeutics within Alzheimer’s disease, Parkinson’s disease, ALS or multiple sclerosis should the Company decide to seek a collaboration with a third party for such programs, but this does not include any of the Company’s small molecule, AAV or oligonucleotide programs. The ROFN period continues until seven years after the effective date of the Provisional Biogen Collaboration Agreement or the date on which the Company has offered Biogen two ROFN Programs, and for which Biogen has agreed to trigger a ROFN for such program, whichever is earlier. However, if the Company does not execute an agreement with a third party with respect to a particular ROFN Program offered to Biogen within a specified amount of time, Biogen will have one additional right to exercise the ROFN again with respect to such ROFN Program. In connection with the Provisional Biogen Collaboration Agreement, the Company entered into a common stock purchase agreement (the "Stock Purchase Agreement") with BIMA on August 5, 2020, pursuant to which the Company agreed to issue and sell, and BIMA agreed to purchase, 13,310,243 shares of the Company’s common stock (the “Shares”) for an aggregate purchase price of $ 465.0 million pursuant to the terms and conditions thereof. Since the shares of common stock owned by Biogen as of March 31, 2021 represent more than 10% of the voting interest of the Company, Biogen is considered a related party as defined in ASC 850. Management determined that it was appropriate to account for the Provisional Biogen Collaboration Agreement and the SPA as one arrangement because they were entered into at the same time with interrelated financial terms. On September 22, 2020, the Company closed the sale of the Shares to BIMA pursuant to the Stock Purchase Agreement. The estimated fair market value of the Shares issued to BIMA was $ 420.1 million, based on the closing stock price of $ 35.87 on the date of issuance adjusted by a discount for lack of marketability due to certain holding period restrictions, which was valued using an option pricing model. This stock issuance resulted in a $ 44.9 million premium paid to the Company above the estimated fair value of the Company's common stock (the "Stock Premium"), which forms part of the transaction price for the Biogen Collaboration Agreement. Biogen Collaboration Agreement The Company entered into the LRRK2 Agreement with Biogen on October 4, 2020 and the ROFN and Option Agreement on October 6, 2020. Collectively these are known as the Biogen Collaboration Agreement, the material terms of which are consistent with, and supersede, the Provisional Biogen Collaboration Agreement discussed above. Under the ROFN and Option Agreement, with respect to the options granted by the Company to Biogen, Biogen is obligated to pay to the Company an aggregate of up to $ 270.0 million in option exercise and development milestone payments, up to $ 325.0 million upon first commercial sale, and up to $ 290.0 million of net sales-based milestone payments, following the achievement of certain prespecified milestone events and if Biogen exercises both of its options. Furthermore, Biogen is obligated to pay to the Company royalties in the mid-single digit to mid-teens percentages, depending on the program for which Biogen exercises its option and upon the achievement of certain sales thresholds. In October 2020, the Company received upfront payments totaling $ 560.0 million pursuant to the Biogen Collaboration Agreement. 17 Table of Contents The Biogen Collaboration Agreement is considered a contract modification to the Provisional Biogen Collaboration Agreement and was accounted for as a termination of the provisional agreement and commencement of a new contract. The Company identified the following distinct performance obligations associated with the Biogen Collaboration Agreement that had not yet been delivered under the original contract: the LRRK2 Program license, the research services for the ATV:Abeta and TV programs (“Option Research Services”) which include option joint steering committee ("JSC") participation, and a material right for an option under the ROFN and Option Agreement. Further, the LRRK2 Development Activities which includes LRRK2 JSC and joint development committee (“JDC”) participation was identified as a unit of account under ASC 808. The LRRK2 Development Activities, JSC and JDC participation are considered to be a single unit of account since the development activities are highly interrelated with the JSC and JDC involvement and these are not distinct in the context of the contract. Further, the same was considered to be true for the option research services and option JSC participation performance obligation. The Company believes that the Biogen Collaboration Agreement is a collaboration arrangement as defined in ASC 808, Collaborative Arrangements. The Company also believes that Biogen meets the definition of a customer as defined in ASC 606, Revenue From Contracts With Customers for all of the performance obligations identified at inception except for the LRRK2 Development Activities. Since ASC 808 does not address recognition and measurement, the Company looked to other accounting literature for guidance where the performance obligation does not fall under ASC 606, and determined that for the interim LRRK2 development activities subject to cost sharing provisions, the guidance in ASC 730, Research and Development should be applied. The transaction price at inception included fixed consideration consisting of the upfront fee of $ 560.0 million and the $ 44.9 million premium on the sale of common stock. All potential future milestones and other payments were considered constrained at the inception of the Biogen Collaboration Agreement since the Company could not conclude it was probable that a significant reversal in the amount recognized would not occur. From inception of the Biogen Collaboration Agreement through March 31, 2021, there was no change to the transaction price. The respective standalone value for each of the performance obligations was determined by applying the SSP method and the transaction price was allocated based on the relative SSP method with revenue recognition timing to be determined either by delivery, resolution of an option, or the provision of services. The Company used an adjusted market assessment approach to estimate the selling price for the LRRK2 Program license, an expected cost plus margin approach for estimating the Option Research Services and estimated the intrinsic value of the material right for the option, taking into account the likelihood that an option would be exercised. The LRRK2 Program license was delivered on or around the effective date of the Biogen Collaboration Agreement and the revenue allocated to this performance obligation was recognized during the year ended December 31, 2020. The Option Research Services are expected to be delivered over time as the services are performed, with revenue being recognized over time based on costs incurred to perform the services, since the level of costs incurred over time is thought to best reflect the transfer of services to Biogen. Revenue allocated to the material right for an option under the ROFN and Option Agreement is deferred as a contract liability until the option opt in period ends, expiration or ROFN and Option Agreement termination. The LRRK2 Development Activities cost sharing reimbursements or expenses will be recognized over time as earned or incurred, since this is believed to directly correlate to the value of the services performed. 18 Table of Contents A related party contract liability of $ 296.5 million was recorded on the Consolidated Balance Sheet as of March 31, 2021. Approximately $ 288.9 million of this contract liability relates to the revenue allocated to the material right for an option under the ROFN and Option Agreement which is being deferred until resolution of the option which is expected to be several years from the balance sheet date, and $ 7.6 million of this contract liability relates to the portion of the Option Research Services performance obligation yet to be satisfied, with such amount to be recognized over the estimated period of the services, which is expected to be several years. The Company recorded $ 2.5 million of cost sharing reimbursements for LRRK2 Development Activities as an offset to research and development expenses in the Consolidated Statement of Operations and Comprehensive Income for the three months ended March 31, 2021. The Company recorded cost sharing reimbursements due from Biogen on the Condensed Consolidated Balance Sheet as of March 31, 2021 and December 31, 2020 of $ 2.5 million and $ 5.7 million, respectively. In assessing the Biogen Collaboration Agreement, management exercised considerable judgment in estimating revenue to be recognized, specifically related to estimating the discount for lack of marketability associated with the stock issuance, determining the separate performance obligations under the Biogen Collaboration Agreement, and estimating the standalone selling price of those performance obligations. As of March 31, 2021, the Company had no t achieved any milestones or recorded any product sales under the Biogen Collaboration Agreement. Sanofi 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 receptor interacting serine/threonine protein kinase 1 (" RIPK1") inhibitors contributed by Sanofi and by the Company will be developed and commercialized. The Sanofi Collaboration Agreement became effective in November 2018 at which time Sanofi paid the Company an upfront payment of $ 125.0 million. Under the Sanofi Collaboration Agreement, the Company is eligible to receive milestone payments from Sanofi up to approximately $ 1.1 billion upon achievement of certain clinical, regulatory and sales milestone events. Such milestone payments include $ 215.0 million in clinical milestone payments and $ 385.0 million in regulatory milestone payments for CNS Products, as defined, that are developed and approved in the United States, by the European Medicines Agency ("EMA") and in Japan for three indications, including Alzheimer's disease. These milestones also include $ 120.0 million in clinical milestone payments, $ 175.0 million in regulatory milestone payments and $ 200.0 million in commercial milestone payments for Peripheral Products, as defined, that are developed and approved in the United States, by the EMA and Japan for three indications. The Company will share profits and losses equally with Sanofi for CNS Products sold in the United States and China, and receive variable royalties on net sales for CNS Products sold outside of the United States and China and for Peripheral Products sold worldwide. The Company and Sanofi will jointly develop CNS Products pursuant to a global development plan. 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 CNS Development Activities"). The Company conducted, at Sanofi’s cost, a Phase 1b trial for the initial lead CNS penetrant RIPK1 inhibitor, DNL747 (SAR443060), in ALS. In June 2020, the Company announced that clinical activities on DNL747 would be paused and efforts focused on the development of the backup preclinical candidate, DNL788 (SAR443820). Other than with the Denali CNS Development Activities, Sanofi is responsible, at its cost, for all other Phase 1 and Phase 2 trials for CNS Products, including for ALS and multiple sclerosis. Sanofi will lead the conduct of all Phase 3 and later stage development trials for CNS Products, with Sanofi and the Company funding 70 % and 30 % of such costs, respectively. Sanofi will also lead the commercialization activities globally for CNS Products, subject to certain options that the Company has to conduct co-commercialization activities with respect to each CNS Product in the United States and China. 19 Table of Contents Sanofi will be responsible, at its cost, for conducting activities relating to the development and commercialization of all Peripheral Products. Denali will be entitled to receive tiered royalties in the low- to mid- teen percentages on net sales of Peripheral Products. The Company identified the following distinct performance obligations associated with the Sanofi Collaboration Agreement upon inception: the CNS program license, the Peripheral program license, the Phase 1 and Phase 2 trials for CNS Products for Alzheimer’s disease ("Alzheimer's Disease Services"), and the Phase 1b trial for DNL747 for ALS and associated activities ("Retained Activities"). The Company believes that the Sanofi Collaboration Agreement is a collaboration arrangement as defined in ASC 808, Collaborative Arrangements. The Company also believes that Sanofi meets the definition of a customer as defined in ASC 606, Revenue From Contracts With Customers for three of the performance obligations identified at inception, but does not meet the definition of a customer for the Alzheimer's Disease Services. Further, Sanofi does not meet the definition of a customer for all Phase 3 and later stage development trials for CNS Products led by Sanofi for which the Company will fund 30 % of total costs. Since ASC 808 does not address recognition and measurement, the Company looked to other accounting literature for guidance where the performance obligation does not fall under ASC 606, and determined that for the Alzheimer's Disease Services, the guidance in ASC 606 should be analogized for the recognition, measurement and reporting of this performance obligation, and for the cost sharing provisions, the Company determined that the guidance in ASC 730, Research and Development should be applied. The transaction price at inception included upfront fixed consideration of $ 125.0 million. 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. The transaction price did no t increase in the three months ended March 31, 2021, and increased by $ 0.5 million for the three months ended March 31, 2020 related to costs incurred for Retained Activities that were no longer constrained. 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. The program licenses and existing know-how were delivered on the effective date of the Sanofi Collaboration Agreement. The Alzheimer’s Disease Services and the Retained Activities were expected to be delivered over time as the services are performed. For the Alzheimer's Disease Services, revenue is being recognized over time using the input method, based on costs incurred to perform the services, since the level of costs incurred over time is thought to best reflect the transfer of services to Sanofi. For the Retained Activities, revenue is being 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 was recorded on the Condensed Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020. 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. The Company recorded no receivable associated with the Sanofi Collaboration Agreement on the Condensed Consolidated Balance Sheets as of March 31, 2021, and a receivable of $ 44,303 as of December 31, 2020. 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, 2021, the Company has received milestone payments of $ 10.0 million and has no t recorded any product sales under the Sanofi Collaboration Agreement. 20 Table of Contents Takeda 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 the Company's BBB delivery technology and intended for the treatment of neurodegenerative disorders. The programs were the Company’s 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. Takeda may pay up to an aggregate of $ 25.0 million with respect to each of the three programs directed to a target and based upon the achievement of certain preclinical milestone events, up to $ 75.0 million in total, $ 5.0 million of which was paid upon the Takeda Collaboration Agreement becoming effective. In February 2019, the agreement was amended to replace the ATV:BACE1/Tau program with the ATV:Tau program. The amendment did not have a material impact to the condensed consolidated financial statements. Under the Takeda Collaboration Agreement and unless otherwise agreed jointly between both parties, the Company will be responsible, at its cost, for conducting activities relating to pre-IND development of biologic products directed to the three identified targets and enabled by its BBB delivery technology targeting TfR during the applicable research period. The period through which the option can be exercised continues for each target until the first biologic product directed to the relevant target is IND-ready or approximately five years after selection of the target, whichever is earlier. If Takeda exercises its option with respect to a particular target, then Takeda will have the right to develop and commercialize, jointly with the Company, a specified number of biologic products enabled by its BBB delivery technology that were developed during the research period and which are directed to the relevant target. The Company will grant to Takeda a co-exclusive license under the intellectual property the Company controls related to those biologic products. Takeda is obligated to pay the Company a $ 5.0 million option fee for each target for which Takeda exercises its option, up to $ 15.0 million in total. In addition, if Takeda exercises its option for all three collaboration programs, Takeda may be obligated to pay the Company up to an aggregate of $ 407.5 million upon achievement of certain clinical milestone events and up to an aggregate of $ 300.0 million in regulatory milestone events relating to receipt of regulatory approval in the United States, certain European countries and Japan. Takeda may also be obligated to pay the Company up to $ 75.0 million per biologic product upon achievement of a certain sales-based milestone, or an aggregate of $ 225.0 million if one biologic product from each program achieves this milestone. If Takeda exercises its option for a particular target, the Company and Takeda will share equally in the development and commercialization costs, and, if applicable, the profits, for each collaboration program. Pursuant to the terms of the Takeda Collaboration Agreement, the Company entered into a common stock purchase agreement (the "Stock Purchase Agreement") with Takeda on January 3, 2018, pursuant to which Takeda purchased 4,214,559 shares of the Company's common stock (the "Shares") for an aggregate purchase price of $ 110.0 million. The sale of the Shares closed on February 23, 2018. The fair market value of the common stock sold to Takeda was $ 94.4 million, based on the closing stock price of $ 22.40 on the date of issuance, resulting in a $ 15.6 million premium paid to the Company above the fair value of the Company's common stock which was credited to contract liability in the Company's Condensed Consolidated Balance Sheets. The Company believes that the Takeda Collaboration Agreement is a collaboration arrangement as defined in ASC 808, Collaborative Arrangements. Further, during the research period, the Company believes that the arrangement is a contract with a customer as defined in ASC 606, Revenue From Contracts With Customers . The Takeda Collaboration Agreement and the Stock Purchase Agreement are being accounted for as one arrangement because they were entered into at the same time with interrelated financial terms. 21 Table of Contents The Company identified performance obligations during the research period consisting of the license, the development options, and joint steering committee ("JSC") participation together with the research services for each collaboration program. The license rights, JSC involvement, option and research services are considered to be a single performance obligation for each program since the research services are highly interrelated with the option and JSC involvement and will significantly modify the license. The performance obligations under each of the three programs are separate since the activities and risks under the programs are distinct. 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. It also included variable consideration of $ 26.0 million relating to future milestones that were not constrained, and have since all been met and received. The remaining $ 44.0 million of preclinical milestones were considered constrained at the inception of the Takeda Collaboration Agreement since the Company could not conclude it is probable that a significant reversal in the amount recognized will not occur. Additionally, cost and profit-sharing income, and the development and commercial milestones as outlined above, have not been considered given Takeda has not exercised its options for the development and commercial phases for any program. No change in the transaction price has been recorded since inception. This will be reassessed at each reporting period. The transaction price has been ascribed in its entirety to the three performance obligations identified in the research term of the Takeda Collaboration Agreement. Revenue is recognized when, or as, the Company satisfies its performance obligations by transferring the promised services to Takeda. 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, 2021 or March 31, 2020. A contract liability of $ 40.8 million and $ 39.8 million was recorded on the Condensed Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020, 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. In December 2020 and January 2021, GLP toxicology studies were initiated for PTV:PGRN and ATV:TREM2, respectively, triggering the second preclinical milestone payments of $ 8.0 million for each program, which were received in January and March 2021, respectively. There was no receivable as of March 31, 2021 and a receivable of $ 8.0 million for the PTV:PGRN milestone as of December 31, 2020. In assessing the Takeda Collaboration Agreement, management is required to exercise considerable judgment in estimating revenue to be recognized. Management applies judgment in determining the separate performance obligations in the research period and estimating total future costs when using the input method. There is some increase in the judgment required in estimating the timing of future costs due to the COVID-19 pandemic. This is because it is challenging to predict the duration and extent of the impact of the COVID-19 pandemic on the third-party service providers assisting with the Company's ATV:Tau, ATV:TREM2 and PTV:PGRN programs. This may impact the split between current and non-current contract liability on the Condensed Consolidated Balance Sheets in the future. Through March 31, 2021, the Company had received $ 31.0 million in preclinical milestone payments from Takeda which are included in the transaction price described above, and had no t recorded any product sales under the Takeda Collaboration Agreement. 22 Table of Contents Collaboration Revenue Revenue disaggregated by collaboration agreement and performance obligation is as follows (in thousands): Three Months Ended March 31, 2021 2020 Takeda Collaboration Agreement (1) $ 7,030 $ 3,018 Sanofi Collaboration Agreement Retained Activities — 534 Alzheimer's Disease Services (2) 1 52 Total Sanofi Collaboration Revenue 1 586 Biogen Collaboration Agreement Option Research Services (2) 892 — Total Collaboration Revenue $ 7,923 $ 3,604 _________________________________________________ (1) $ 5.7 million of revenue for the three months ended March 31, 2021 and all of revenue for the three months ended March 31, 2020 was included in the contract liability balance at the beginning of the period. (2) Revenue for the three months ended March 31, 2021 and March 31, 2020, where applicable, represent amounts that were included in the contract liability balance at the beginning of the respective period. 6. License Agreements Genentech In June 2016, the Company entered into an Exclusive License Agreement with Genentech, Inc. (“Genentech”). The agreement gives the Company access to Genentech’s 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. The Company may owe Genentech milestone payments upon the achievement of certain development, regulatory, and commercial milestones, up to a maximum of $ 315.0 million in the aggregate. These milestones include up to $ 37.5 million in clinical milestone payments, $ 102.5 million in regulatory milestone payments and $ 175.0 million in commercial milestone payments. In addition, the Company may owe royalties on net sales of licensed products ranging from low to high single-digit percentages. Under the terms of our LRRK2 Agreement with Biogen, Biogen is responsible for 50 % of any payment obligation to Genentech under this agreement accruing after October 4, 2020. 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 expenses were recorded in the three months ended March 31, 2021 or 2020. 23 Table of Contents 7. Commitments and Contingencies Lease Obligations In May 2018, the Company entered into an amendment to its operating lease for its former corporate headquarters in South San Francisco (the "Headquarters Lease Amendment") to relocate and expand its headquarters to 148,020 rentable square feet in a building in South San Francisco, California (the "New Premises"). The Headquarters Lease Amendment has a contractual term of ten years from the legal commencement date, which was April 1, 2019, when the building was ready for occupancy. For accounting purposes, the lease commencement date was determined to be August 1, 2018, which was the date at which the Company was deemed to have obtained control over the property. The Company has an option to extend the lease term for a period of ten years by giving the landlord written notice of the election to exercise the option at least nine months , but not more than twelve months , prior to the expiration of the Headquarters Lease Amendment lease term. The Company determined that this renewal was not reasonably certain at lease inception. The remaining lease term was 8.1 years at March 31, 2021. The Headquarters Lease Amendment provides for monthly base rent amounts escalating over the term of the lease. 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, 2021 and December 31, 2020. 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. Management exercised judgment in applying the requirements of ASC 842, including the determination as to whether certain contracts contain a lease and for the Headquarters Lease Amendment, the discount rate used to determine the measurement of the lease liability. As the implicit rate of the Headquarters Lease Amendment was not known, the Company estimated a 9.0 % discount rate, which was management’s estimate of the Company’s incremental borrowing rate. 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, were $ 2.8 million and $ 2.6 million for the three months ended March 31, 2021 and 2020, respectively. Cash paid for amounts included in the measurement of lease liabilities for the three months ended March 31, 2021 and March 31, 2020 of $ 2.5 million and $ 2.2 million, respectively, was included in net cash used in operating activities in the Company's Condensed Consolidated Statements of Cash Flows. 24 Table of Contents 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, 2021 (in thousands): Year Ended December 31: 2021 (nine months) $ 7,855 2022 10,731 2023 11,083 2024 11,447 2025 11,824 Thereafter 42,250 Total undiscounted lease payments 95,190 Present value adjustment ( 27,398 ) Net operating lease liabilities $ 67,792 In October 2018, the Company entered into a sublease agreement ("Sublease Agreement") to sublease approximately 36,835 rentable square feet of space in its New Premises. The Sublease Agreement has a term of five years from the commencement date of April 12, 2019 and provides for the Company to receive monthly base rent amounts escalating over the term of the lease. 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 both the three months ended March 31, 2021 and 2020. The following table details the future undiscounted cash inflows relating to the Sublease Agreement as of March 31, 2021 (in thousands): Year Ended December 31: 2021 (nine months) $ 2,209 2022 3,009 2023 3,096 2024 876 Total undiscounted sublease receipts $ 9,190 Indemnification In the ordinary course of business, the Company may provide indemnifications of varying scope and terms to vendors, lessors, business partners, board members, officers, and other parties with respect to certain matters, including, but not limited to, losses arising out of breach of such agreements, services to be provided by the Company, negligence or willful misconduct of the Company, violations of law by the Company, or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with directors and certain officers and employees that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers or employees. No demands have been made upon the Company to provide indemnification under such agreements, and thus, there are no claims that the Company is aware of that could have a material effect on the Company’s Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Operations and Comprehensive Loss, or Condensed Consolidated Statements of Cash Flows. 25 Table of Contents Commitments Effective September 2017, the Company entered into a Development and Manufacturing Services Agreement as amended (“DMSA”) with Lonza Sales AG (“Lonza”) for the development and manufacture of biologic products. Under the DMSA, the Company will execute purchase orders based on project plans authorizing Lonza to provide development and manufacturing services with respect to certain of the Company's antibody and enzyme products, and will pay for the services provided and batches delivered in accordance with the DMSA and project plan. Unless earlier terminated, the DMSA will expire on September 6, 2022. As of March 31, 2021 and December 31, 2020, the Company had open purchase orders for biological product development and manufacturing costs totaling $ 33.4 million and $ 33.0 million, respectively. The activities under these purchase orders are expected to be completed by February 2028. As of March 31, 2021 and December 31, 2020, the Company had total non-cancellable purchase commitments under the DMSA of $ 28.5 million and $ 27.1 million, respectively, under the DMSA. During the three months ended March 31, 2021 and 2020, the Company incurred costs of $ 5.2 million and $ 1.0 million, respectively, and made payments of $ 0.7 million and $ 3.2 million, respectively, for the development and manufacturing services rendered under the DMSA. Contingencies From time to time, the Company may be involved in lawsuits, arbitration, claims, investigations and proceedings consisting of intellectual property, employment and other matters which arise in the ordinary course of business. The Company records accruals for loss contingencies to the extent that the Company concludes that it is probable that a liability has been incurred and the amount of the related loss can be reasonably estimated. On September 10, 2020, the Company and all Directors were named in a shareholder derivative action filed in the Delaware Court of Chancery challenging the compensation paid to the Company's Directors since the initial public offering ("IPO") in December 2017. On January 13, 2021, the parties to the derivative action entered into a settlement agreement, the terms of which were disclosed in a Form 8-K filed on February 5, 2021. The settlement agreement was approved by the Court on April 16, 2021. Amounts owed by the Company pursuant to the settlement agreement are not material to the Company. 8. Stock-Based Awards The Company has issued stock-based awards from various equity incentive and stock purchase plans, as more fully described in Note 10, "Stock-Based Awards" to the consolidated financial statements in the Company's 2020 Annual Report on Form 10-K. Stock Option Activity The following table summarizes stock option activity for the three months ended March 31, 2021: Number of Options Weighted-Average Exercise Price Balance at December 31, 2020 12,959,926 $ 16.31 Granted 1,639,041 75.52 Exercised ( 334,634 ) 11.42 Forfeited ( 34,056 ) 26.77 Balance at March 31, 2021 14,230,277 $ 23.22 Vested and expected to vest at March 31, 2021 13,357,914 $ 24.69 Exercisable at March 31, 2021 7,013,040 $ 14.01 26 Table of Contents 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, 2021 2020 Expected term (in years) 6.08 6.08 Volatility 62.2 % - 63.4 % 65.2 % - 65.6 % Risk-free interest rate 0.5 % - 1.0 % 0.7 % - 1.7 % Dividend yield — — Restricted Stock Activity The following table summarizes restricted stock unit ("RSU") activity for the three months ended March 31, 2021: Number of RSU shares Weighted-Average Fair Value at Date of Grant per Share Unvested at December 31, 2020 2,301,679 $ 27.08 Granted 696,270 76.33 Vested and released ( 281,465 ) 22.73 Forfeited ( 17,377 ) 61.97 Unvested at March 31, 2021 2,699,107 $ 40.24 Expected to vest at March 31, 2021 2,699,107 $ 40.24 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, 2021 2020 Research and development $ 12,314 $ 6,054 General and administrative 8,714 4,731 Total $ 21,028 $ 10,785 1 9. Net Loss Per Share Since the Company was in a loss position for all periods presented, basic net loss per share is the same as diluted net loss per share for all periods as the inclusion of all potential shares of common stock outstanding would have been anti-dilutive. 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, 2021 2020 Options issued and outstanding and ESPP shares issuable 14,323,256 14,530,378 Restricted shares subject to future vesting 2,699,107 1,637,984 Total 17,022,363 16,168,362 27 Table of Contents 10. Related Party Transactions On September 22, 2020, upon becoming an owner of record of more than 10% of the voting interest in the Company, Biogen became a related party under ASC 850. Refer to Note 5, "Collaboration Agreements" for further information. 28 Table of Contents