Denali Therapeutics Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Denali Therapeutics Inc. Index to Consolidated Financial Statements Page Report of Independent Registered Public Accounting Firm (PCAOB ID: 42 ) 152 Consolidated Balance Sheets 154 Consolidated Statements of Operations and Comprehensive Income (Loss) 155 Consolidated Statements of Stockholders' Equity 156 Consolidated Statements of Cash Flows 157 Notes to Consolidated Financial Statements 158 151 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Denali Therapeutics Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Denali Therapeutics Inc. (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive income (loss), stockholders' equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 28, 2022 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. 152 Revenue recognition for license, option and collaboration arrangements Description of the Matter The Company recognized total collaboration revenue of $48.7 million for the year ended December 31, 2021. As discussed in Note 1 to the consolidated financial statements, the terms of license, option and collaboration arrangements typically include payments for up-front license fees, option exercise fees, milestones, manufacturing supply and research development services, as well as royalties on net sales of licensed products. The license, option and collaboration agreements often contain multiple elements delivered to the counterparty, including but not limited to i) licenses to IP; ii) research and / or development services; iii) options to license IP in the future; and iv) participation in joint collaborative activities to develop and commercialize the partnered IP. Auditing the Company's accounting for license, option and collaboration arrangements, such as the accounting resulting from Takeda’s exercise of its option rights to collaborate on DNL593 (PTV:PGRN) and DNL919 (ATV:TREM2) under the Takeda Option and Collaboration Agreement during 2021, is complex and requires significant auditor judgment. Significant judgment and technical complexity is required to apply the authoritative accounting literature at the outset of the arrangement, including i) determining whether the arrangement is a new contract or a modification to an existing contract; ii) identifying the underlying promised goods and / or services iii) evaluating whether the underlying promised goods and / or services are elements within the scope of Accounting Standards Codification (ASC) 808 Collaborative Arrangements or distinct performance obligations within the scope of ASC 606, Revenue from Contracts with Customers ; and iv) determining and allocating transaction price to identified performance obligations. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design, and tested the operating effectiveness of internal controls over the Company’s process for accounting for new license, option and collaboration arrangements or modifications to existing arrangements. For example, we tested management’s controls over the i) assessment of contracts as either new contracts or modifications to existing contracts; ii) identification of promised goods and / or services within the arrangement; and iii) determination of the accounting treatment for such promised goods and / or services. Our audit procedures included, among others, i) evaluating the Company’s assessment of the authoritative guidance applied to the arrangements; ii) inspecting the executed contracts to verify the completeness and accuracy of management’s assessment; iii) evaluating management’s interpretation of certain contract provisions when determining which promises represent distinct performance obligations; and iv) testing the allocation and recognition of transaction price to such identified performance obligations. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2015. Redwood City, California February 28, 2022 153 Table of Contents Denali Therapeutics Inc. Consolidated Balance Sheets (In thousands, except share amounts) December 31, 2021 December 31, 2020 Assets Current assets: Cash and cash equivalents $ 293,477 $ 507,144 Short-term marketable securities 571,930 962,553 Cost sharing reimbursements due from related party 1,226 5,674 Prepaid expenses and other current assets 30,601 20,284 Total current assets 897,234 1,495,655 Long-term marketable securities 425,449 32,699 Property and equipment, net 38,865 40,846 Operating lease right-of-use asset 30,743 32,618 Other non-current assets 11,871 2,462 Total assets $ 1,404,162 $ 1,604,280 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 4,779 $ 1,071 Accrued expenses and other current liabilities 53,165 47,145 Related party contract liability, current 292,386 3,569 Contract liabilities, current 27,915 19,914 Total current liabilities 378,245 71,699 Related party contract liability, less current portion 1,295 293,849 Contract liabilities, less current portion 3,398 23,325 Operating lease liability, less current portion 58,554 64,175 Other non-current liabilities 379 701 Total liabilities 441,871 453,749 Commitments and contingencies (Note 9) Stockholders’ equity: Convertible preferred stock, $ 0.01 par value; 40,000,000 shares authorized as of December 31, 2021 and December 31, 2020; 0 shares issued and outstanding as of December 31, 2021 and December 31, 2020 — — Common stock, $ 0.01 par value; 400,000,000 shares authorized as of December 31, 2021 and December 31, 2020; 122,283,305 and 120,531,333 shares issued and outstanding as of December 31, 2021 and December 31, 2020, respectively 1,548 1,531 Additional paid-in capital 1,608,238 1,503,660 Accumulated other comprehensive loss ( 2,499 ) ( 245 ) Accumulated deficit ( 644,996 ) ( 354,415 ) Total stockholders’ equity 962,291 1,150,531 Total liabilities and stockholders’ equity $ 1,404,162 $ 1,604,280 See accompanying notes to consolidated financial statements. 154 Table of Contents Denali Therapeutics Inc. Consolidated Statements of Operations and Comprehensive Income (Loss) (In thousands, except share and per share amounts) Year Ended December 31, 2021 2020 2019 Collaboration revenue: Collaboration revenue from customers (1) $ 48,657 $ 335,561 $ 26,320 Other collaboration revenue 4 98 358 Total collaboration revenue 48,661 335,659 26,678 Operating expenses: Research and development (2) 265,353 212,615 193,382 General and administrative 79,059 60,326 46,480 Total operating expenses 344,412 272,941 239,862 Income (loss) from operations ( 295,751 ) 62,718 ( 213,184 ) Interest and other income, net 4,595 9,241 15,219 Income (loss) before income taxes ( 291,156 ) 71,959 ( 197,965 ) Income tax benefit (expense) 575 ( 823 ) 351 Net income (loss) ( 290,581 ) 71,136 ( 197,614 ) Other comprehensive income (loss): Net unrealized gain (loss) on marketable securities, net of tax ( 2,254 ) ( 595 ) 999 Comprehensive income (loss) $ ( 292,835 ) $ 70,541 $ ( 196,615 ) Net income (loss) per share: Basic net income (loss) per share $ ( 2.39 ) $ 0.65 $ ( 2.07 ) Diluted net income (loss) per share $ ( 2.39 ) $ 0.63 $ ( 2.07 ) Weighted-average shares used in calculating: Basic net income (loss) per share 121,524,795 108,974,137 95,608,208 Diluted net income (loss) per share 121,524,795 112,703,108 95,608,208 __________________________________________________ (1) Includes related party collaboration revenue from customer of $ 3,736 and $ 307,437 for the years ended December 31, 2021 and 2020, respectively. (2) Includes an offset to expense from related party cost reimbursement of $ 6,499 and $ 9,260 for the years ended December 31, 2021 and 2020, respectively. See accompanying notes to consolidated financial statements. 155 Table of Contents Denali Therapeutics Inc. Consolidated Statements of Stockholders’ Equity (In thousands, except share amounts) Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders' Equity Shares Amount Balance at December 31, 2018 94,662,435 $ 1,273 $ 774,158 $ ( 649 ) $ ( 227,937 ) $ 546,845 Issuances under equity incentive plans 973,012 9 6,181 — — 6,190 Vesting of early exercised common stock 135,424 2 90 — — 92 Vesting of restricted stock awards and units 419,064 4 ( 4 ) — — — Stock-based compensation — — 38,378 — — 38,378 Net loss — — — — ( 197,614 ) ( 197,614 ) Other comprehensive income — — — 999 — 999 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 Issuance of common stock in connection with the Biogen Stock Purchase Agreement 13,310,243 133 420,013 — — 420,146 Issuances under equity incentive plans 1,722,058 17 20,638 — — 20,655 Vesting of restricted stock units 309,097 3 ( 3 ) — — — Stock-based compensation — — 50,351 — — 50,351 Net Income — — — — 71,136 71,136 Other comprehensive loss — — — ( 595 ) — ( 595 ) Balance at December 31, 2020 120,531,333 $ 1,531 $ 1,503,660 $ ( 245 ) $ ( 354,415 ) $ 1,150,531 Issuances under equity incentive plans 1,117,636 11 19,337 — — 19,348 Vesting of restricted stock awards 634,336 6 ( 6 ) — — — Stock-based compensation — — 85,247 — — 85,247 Net loss — — — — ( 290,581 ) ( 290,581 ) Other comprehensive loss — — — ( 2,254 ) — ( 2,254 ) Balance at December 31, 2021 122,283,305 $ 1,548 $ 1,608,238 $ ( 2,499 ) $ ( 644,996 ) $ 962,291 See accompanying notes to consolidated financial statements. 156 Table of Contents Denali Therapeutics Inc. Consolidated Statements of Cash Flows (In thousands) Year Ended December 31, 2021 2020 2019 Operating activities Net income (loss) $ ( 290,581 ) $ 71,136 $ ( 197,614 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 8,593 8,531 7,991 Stock-based compensation expense 85,247 50,351 38,378 Net amortization of premiums and (discounts) on marketable securities 8,748 55 ( 5,019 ) Non-cash adjustment to operating lease expense ( 2,984 ) ( 2,360 ) 2,117 Other non-cash items — 38 ( 351 ) Changes in operating assets and liabilities: Prepaid expenses and other assets ( 12,865 ) ( 10,569 ) 6,675 Accounts payable 3,705 ( 1,623 ) 1,033 Accruals and other current liabilities 4,732 22,106 1,500 Contract liabilities ( 11,925 ) ( 19,253 ) ( 6,286 ) Related party contract liability ( 3,737 ) 297,418 — Other non-current liabilities ( 322 ) 322 — Net cash provided by (used in) operating activities ( 211,389 ) 416,152 ( 151,576 ) Investing activities Purchases of marketable securities ( 1,422,938 ) ( 1,285,468 ) ( 369,696 ) Purchases of property and equipment ( 8,500 ) ( 3,095 ) ( 17,919 ) Maturities and sales of marketable securities 1,409,812 665,357 535,327 Net cash provided by (used in) investing activities ( 21,626 ) ( 623,206 ) 147,712 Financing activities Proceeds from issuance of common stock in connection with Collaboration Agreements — 420,146 — Proceeds from public offering of common stock, net of issuance costs — 193,948 — Proceeds from exercise of awards under equity incentive plans 19,348 20,655 6,190 Net cash provided by financing activities 19,348 634,749 6,190 Net increase (decrease) in cash, cash equivalents and restricted cash ( 213,667 ) 427,695 2,326 Cash, cash equivalents and restricted cash at beginning of year 508,644 80,949 78,623 Cash, cash equivalents and restricted cash at end of year $ 294,977 $ 508,644 $ 80,949 Supplemental disclosures of cash flow information Tenant improvements provided by the landlord $ — $ — $ 11,343 Property and equipment purchases accrued but not yet paid $ 593 $ 67 $ — See accompanying notes to consolidated financial statements. 157 Table of Contents Denali Therapeutics Inc. Notes to Consolidated Financial Statements 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 These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Principles of Consolidation These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. For the Company and its subsidiaries, 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, and transactions in foreign currencies are remeasured at average exchange rates. Foreign currency gains and losses resulting from remeasurement are recognized in interest and other income, net in the Consolidated Statements of Operations and Comprehensive Income (Loss). 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 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 Consolidated Balance Sheets and Consolidated Statements of Operations and Comprehensive Income (Loss). Reclassifications Certain amounts in prior period financial statements have been reclassified to conform to the current period presentation. Such reclassifications have not materially affected previously reported amounts. 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. 158 Table of Contents 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 Consolidated Balance Sheets . As of December 31, 2021 and 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 December 31, 2021, 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. Convertible Preferred Stock The Company is authorized to issue 40.0 million shares of preferred stock in one or more series and to fix the powers, designations, preferences and relative participating option or other rights thereof, including dividend rights, conversion rights, voting rights, redemption terms, liquidation preferences and the number of shares constituting any series, without any further vote or action by the Company’s shareholders. As of December 31, 2021 and 2020 , the Company had no shares of preferred stock issued or outstanding. 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. Fair Value of Financial Instruments Accounting Standards Codification ("ASC") Topic 820, Fair Value Measurement (“ASC 820”), establishes a fair value hierarchy for instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs). Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability, and are developed based on the best information available in the circumstances. 159 Table of Contents ASC 820 identifies fair value as the exchange price, or exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a three-tier fair value hierarchy that distinguishes between the following: Level 1 – inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 – inputs are other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 – inputs are unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. The carrying amounts reflected in the Consolidated Balance Sheets for cash and cash equivalents, prepaid expenses and other current assets, accounts payable and accrued liabilities approximate their fair values, due to their short-term nature. 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 Consolidated Statements of Cash Flows is composed of Cash and Cash equivalents reported in the 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 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 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 Consolidated Statements of Operations and Comprehensive Income (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. 160 Table of Contents 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 Consolidated Balance Sheets. The accounts receivable balance represents amounts receivable from the Company's collaboration partners, excluding related parties, 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 Accrued expenses and other current liabilities, respectively, on the Consolidated Balance Sheets. Derivatives are adjusted to fair value through interest and other income, net in the Consolidated Statements of Operations and Comprehensive Income (Loss). Property and Equipment, Net Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method over the related estimated useful lives as presented in the table below. Significant additions and improvements are capitalized, while repairs and maintenance are charged to expense as incurred. Asset Estimated useful life Leasehold improvements Shorter of life of asset or lease term Manufacturing and laboratory equipment five years Computer hardware and software three years Office furniture and equipment five years Impairment of Long-Lived Assets The Company periodically evaluates property and equipment for impairment whenever events or changes in circumstances indicate that a potential impairment may have occurred. If such events or changes in circumstances arise, the Company compares the carrying amount of the long-lived assets to the estimated future undiscounted cash flows expected to be generated by the long-lived assets. If the estimated aggregate undiscounted cash flows are less than the carrying amount of the long-lived assets, an impairment charge, calculated as the amount by which the carrying amount of the assets exceeds the fair value of the assets, is recorded. The fair value of the long-lived assets is determined based on the estimated discounted cash flows expected to be generated from the long-lived assets. The Company has not recorded any such impairment charges during the years presented. 161 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 and operating lease liability is recognized for identified operating leases in the 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 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. 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, Option 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 license, option and collaboration agreements entered into typically include payment of one or more of the following: non-refundable, up-front license fees; option exercise 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. 162 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 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 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. 163 Table of Contents Research and Development Expenses Research and development costs are expensed as incurred. Research and development costs consist of salaries and other personnel related expenses, including associated stock–based compensation, consulting fees, lab supplies, and facility costs, as well as fees paid to other entities that conduct certain research, development and manufacturing activities on behalf of the Company. Where the Company shares costs with collaboration partners, such as in the Biogen Collaboration Agreement and the Takeda Collaboration Agreement, research and development expenses may include cost sharing reimbursements from or payments to the collaboration partner, respectively. Nonrefundable advance payments for goods and services that will be used or received in future research and development activities are deferred and recognized as expense in the period in which the related goods are delivered or services are performed. The Company has acquired and may continue to acquire the rights to develop and commercialize new product candidates from third parties. The upfront payments to acquire license, product or rights, as well as any future milestone payments, are immediately recognized as research and development expense provided that there is no alternative future use of the rights in other research and development projects. Stock-Based Compensation The Company’s stock-based compensation programs grant awards that have included stock options, restricted stock units, restricted stock awards, and shares issued under its employee stock purchase plan. Grants are awarded to employees, including directors, and non-employee service providers. The Company measures compensation expense for all stock-based awards at the grant date based on the fair value measurement of the award. The expense is recorded on a straight-line basis over the requisite service period, which is generally the vesting period, for the entire award. Expense is adjusted for actual forfeitures of unvested awards as they occur. The Company calculates the fair value measurement of stock options subject solely to service-based vesting requirements using the Black-Scholes valuation model. The Company uses the fair value of its common stock to determine the fair value of restricted stock awards. Income Taxes Income taxes are accounted for using the liability method, under which deferred tax assets and liabilities are determined based on the temporary differences between the financial reporting and tax bases of assets and liabilities and consideration is given to net operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the enacted tax rates that are expected to be in effect when the differences are expected to reverse. The Company assesses the likelihood that deferred tax assets will be recovered from future taxable income, and a valuation allowance is established when necessary to reduce deferred tax assets to the amounts more likely than not expected to be realized. 164 Table of Contents The Company recognizes and measures uncertain tax positions using a two–step approach. The first step is to evaluate the tax position taken or expected to be taken by determining whether the weight of available evidence indicates that it is more likely than not that the tax position will be sustained in an audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. Significant judgment is required to evaluate uncertain tax positions. The Company evaluates uncertain tax positions on a regular basis. The evaluations are based on a number of factors, including changes in facts and circumstances, changes in tax law, correspondence with tax authorities during the course of the audit, and effective settlement of audit issues. Previously recognized tax positions that no longer meet the more-likely-than-not threshold are derecognized in the first subsequent financial reporting period in which that threshold is no longer met. The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. Comprehensive Income (Loss) Comprehensive income (loss) is composed of net income (loss) and certain changes in stockholders’ equity that are excluded from net income (loss), primarily unrealized gains or losses on the Company’s marketable securities. Net Income (Loss) per Share Basic net income (loss) per share is calculated by dividing the net income (loss) by the weighted-average number of shares of common stock outstanding during the period, without consideration for common stock equivalents. Diluted net income (loss) per share is computed based on the treasury stock method by dividing net income by the weighted-average number of common shares outstanding during the period plus potentially dilutive common equivalent shares outstanding. However, where there is a net loss per ordinary share, no adjustment is made for potentially issuable ordinary shares since their effect would be anti-dilutive. In this case, diluted net loss per share is equal to basic net loss per share. 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 was 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 the Company's Consolidated Financial Statements. 165 Table of Contents 2. Fair Value Measurements Assets and liabilities measured at fair value at each balance sheet date are as follows (in thousands): December 31, 2021 Level 1 Level 2 Level 3 Total Assets: Cash equivalents: Money market funds $ 265,294 $ — $ — $ 265,294 Short-term marketable securities: U.S. government treasuries 450,436 — — 450,436 Corporate debt securities — 70,009 — 70,009 Commercial paper — 51,485 — 51,485 Long-term marketable securities: U.S. government treasuries 410,147 — — 410,147 Corporate debt securities — 15,302 — 15,302 Total $ 1,125,877 $ 136,796 $ — $ 1,262,673 Liabilities: Foreign currency derivative contracts $ — $ 111 $ — $ 111 Total $ — $ 111 $ — $ 111 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 cost sharing reimbursements due from related party, prepaid expenses and other current assets, accounts payable and accrued expenses 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 during the years ended December 31, 2021 or 2020. 166 Table of Contents 3. Marketable Securities All marketable securities were considered available-for-sale at December 31, 2021 and 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): December 31, 2021 Amortized Cost Unrealized Holding Gains Unrealized Holding Losses Aggregate Fair Value Short-term marketable securities: U.S. government treasuries (1) $ 450,689 $ — $ ( 253 ) $ 450,436 Corporate debt securities (2) 70,076 1 ( 68 ) 70,009 Commercial paper 51,485 — — 51,485 Total short-term marketable securities 572,250 1 ( 321 ) 571,930 Long-term marketable securities: U.S. government treasuries (3) 411,904 — ( 1,757 ) 410,147 Corporate debt securities (4) 15,373 — ( 71 ) 15,302 Total long-term marketable securities 427,277 — ( 1,828 ) 425,449 Total $ 999,527 $ 1 $ ( 2,149 ) $ 997,379 __________________________________________________ (1) Unrealized holding losses on 19 securities with an aggregate fair value of $ 450.4 million. (2) Unrealized holding losses on 16 securities with an aggregate fair value of $ 68.5 million. (3) Unrealized holding loss on 16 securities with an aggregate fair value of $ 410.1 million. (4) Unrealized holding loss on 6 securities with an aggregate fair value of $ 15.3 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 loss on 1 security with an aggregate fair value of $ 20.1 million. 167 Table of Contents As of December 31, 2021 and 2020, many 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 December 31, 2021 and 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, the majority of securities in an unrealized loss position are U.S. government securities. The remainder of these marketable securities were initially, and continue to be, held with investment grade, high credit quality institutions. All of these marketable securities have been in a loss position for less than twelve months or the loss is not material. All of the Company’s marketable securities have an effective maturity of less than two years . 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 Consolidated Statements of Operations and Comprehensive Income (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 December 31, 2021 and 2020 (notional amounts in thousands): Foreign Exchange Contracts Number of Contracts Aggregate Notional (1) Amount in Foreign Currency Maturity Euros 7 800 Jan 2022 - Jun 2022 British Pounds 6 900 Jan 2022 - Jun 2022 Total at December 31, 2021 13 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. 168 Table of Contents 5. Acquisition In August 2016, the Company entered into a License and Collaboration Agreement (“F-star Collaboration Agreement”) with F-star Gamma Limited (“F-star Gamma”), F-star Biotechnologische Forschungs-und Entwicklungsges M.B.H ("F-star GmbH") and F-star Biotechnology Limited ("F-star Ltd") (collectively, “F-star”) to leverage F-star’s modular antibody technology and the Company’s expertise in the development of therapies for neurodegenerative diseases. Under the F-star Collaboration Agreement, the Company made payments to F-star totaling $ 11.5 million. In connection with the entry into the F-star Collaboration Agreement, the Company also purchased an option for an upfront option fee of $ 0.5 million (the “buy-out-option”), to acquire all of the outstanding shares of F-star Gamma pursuant to a pre-negotiated buy-out option agreement (the “Option Agreement”). In May 2018, the Company exercised the Option Agreement and entered into a Share Purchase Agreement (the “Purchase Agreement”) with the shareholders of F-star Gamma and Shareholder Representative Services LLC, pursuant to which the Company acquired all of the outstanding shares of F-star Gamma (the “Acquisition”). As a result of the Acquisition, F-star Gamma became a wholly-owned subsidiary of the Company and the Company changed the entity’s name to Denali BBB Holding Limited. In addition, the Company became a direct licensee of certain intellectual property of F-star Ltd by way of the Company’s assumption of F-star Gamma’s license agreement with F-star Ltd, dated August 24, 2016, (the “F-star Gamma License”). The Company made initial exercise payments under the Purchase Agreement and the F-star Gamma License, in the aggregate, of $ 17.8 million. In addition, the Company is required to make future contingent payments, to F-star Ltd and the former shareholders of F-star Gamma, up to a maximum amount as of the date of acquisition of $ 447.0 million in the aggregate upon the achievement of certain defined preclinical, clinical, regulatory and commercial milestones. These include up to $ 27.0 million in preclinical contingent payments, $ 50.0 million in clinical contingent payments, $ 120.0 million in regulatory contingent payments and $ 250.0 million in commercial contingent payments. 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. 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 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 year ended December 31, 2019. There was no contingent consideration recognized for the years ended December 31, 2021 and 2020. Any future contingent consideration is expected to be recognized as incurred in research and development expense on the Consolidated Statements of Operations and Comprehensive Income (Loss). Under the F-star Collaboration Agreement, the Company was responsible for certain research costs incurred by F-star Ltd in conducting activities under an agreed development plan for each Fcab, for up to 24 months after the target Fcab is accepted. In July 2021, a side letter was executed to the Company's agreements with F-star, which confirmed the completion of the research services performed by F-star Ltd that were funded by the Company. The Company recognized $ 0.1 million, $ 1.2 million, and $ 1.1 million in research and development expense related to the funding of F-star Ltd activities under development plans during the years ended December 31, 2021, 2020, and 2019, respectively. 169 Table of Contents 6. Collaboration Agreements Biogen 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"). Biogen made an upfront payment of $ 560.0 million upon execution of the Biogen Collaboration Agreement in October 2020. LRRK2 Agreement 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. 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. 170 Table of Contents Stock Purchase Agreement 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 December 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. ROFN and Option Agreement Under this agreement, 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. Under the ROFN and Option Agreement, with respect to the options granted by the Company to Biogen, if exercised, 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. The Biogen Collaboration Agreement was 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. 171 Table of Contents 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 December 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. 172 Table of Contents A related party contract liability of $ 293.7 million was recorded on the Consolidated Balance Sheet as of December 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 within one year of the balance sheet date, and $ 4.8 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 more than one year . The Company recorded $ 6.5 million and $ 9.3 million of cost sharing reimbursements for interim LRRK2 development activities and LRRK2 Development Activities as an offset to research and development expenses in the Consolidated Statement of Operations and Comprehensive Income for the year ended December 31, 2021 and 2020, respectively , of which $ 1.2 million and $ 5.7 million was recorded as cost sharing reimbursements due from related party on the Consolidated Balance Sheet as of December 31, 2021 and 2020, 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 December 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"). 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. 173 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 increased by $ 15.0 million and $ 10.0 million for the years ended December 31, 2021 and 2019, respectively, related to clinical milestones received, and by $ 1.0 million and a further $ 10.4 million, for the years ended December 31, 2020 and 2019, respectively, 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 was 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 Consolidated Balance Sheets as of each of December 31, 2021 and 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, and a receivable of $ 44,303 associated with the Sanofi Collaboration Agreement on the Consolidated Balance Sheets as of December 31, 2021 and 2020, respectively. In assessing the Sanofi 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 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. 174 Table of Contents Through December 31, 2021, the Company has earned milestone payments of $ 25.0 million, including a $ 15.0 million milestone triggered in June 2021 upon first patient in a Phase 2 study of SAR443122/DNL758 in patients with cutaneous lupus erythematosus, which the Company received in July 2021. The Company has no t recorded any product sales under the Sanofi Collaboration Agreement. 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, 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 agreem ent was amended to replace the ATV:BACE1/Tau program with the ATV:Tau program. The amendment did not have a material impact to the consolidated financial statements. Under the Takeda Collaboration Agreement and unless otherwise agreed jointly between both parties, the Company is 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. Subsequent to Takeda exercising 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 Consolidated Balance Sheets. 175 Table of Contents 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. 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 consisti ng of the upfron t 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 years ended December 31, 2021 and 2020. A contract liability of $ 27.9 million and $ 39.8 million was recorded on the Consolidated Balance Sheets as of December 31, 2021 and 2020, respectively. The contract liability as of December 31, 2021 relates to the remaining Tau program services, with such amounts to be recognized within twelve months. In December 2020 GLP toxicology studies were initiated for DNL593 (PTV:PGRN) triggering an $ 8.0 million milestone which was recorded as a receivable as of December 31, 2020 and received in January 2021. In November 2021, Takeda exercised its option for DNL593 under the Takeda Collaboration Agreement, triggering the $ 5.0 million option fee, which was received in December 2021, at which point the opt in became effective. In January 2022, a clinical trial application for DNL593 was approved by the Medicines and Healthcare products Regulatory Agency in the UK, triggering a $ 12.0 million milestone from Takeda which was received in February 2022. In January 2021, GLP toxicology studies were initiated for DNL919 (ATV:TREM2) triggering an $ 8.0 million milestone which was received in March 2021. In December 2021, Takeda exercised its option for DNL919 under the Takeda Collaboration Agreement, triggering the $ 5.0 million option fee, which was received in December 2021, at which point the opt in became effective. 176 Table of Contents Through December 31, 2021, the Company has received $ 31.0 million in preclinical milestone payments from Takeda which are included in the transaction price described above, and has no t recorded any product sales under the Takeda Collaboration Agreement. PTV:PGRN and ATV:TREM2 Collaboration Agreements Management determined that the opt-in by Takeda on the PTV:PGRN and ATV:TREM2 programs represent two new contracts with a customer for accounting purposes (the "PTV:PGRN Collaboration Agreement" and the "ATV:TREM2 Collaboration Agreement"), both effective in December 2021 upon payment of the respective option fees. For each contract, the Company identified a single performance obligation under ASC 606, and initially one unit of account under ASC 808 associated with each of the PTV:PGRN and ATV:TREM2 Collaboration Agreements. The performance obligation is the delivery of a co-exclusive license under the intellectual property the Company controls related to the PTV:PGRN or ATV:TREM2 program ("PTV:PGRN Technology License" or "ATV;TREM2 Technology License"), and the unit of account is the obligation to share in responsibility and costs for global development of PTV:PGRN or ATV:TREM2 Products pursuant to a mutually agreed development plan and budget ("PTV:PGRN Development Activities" or "ATV:TREM2 Development Activities"), which both include JSC involvement. The PTV:PGRN Development Activities and JSC participation, and the ATV:TREM2 Development Activities and JSC participation are each considered to be single units of account since the activities are highly interrelated with the JSC involvement and these are not distinct in the context of the contract. The Company believes that the PTV:PGRN and ATV:TREM2 Collaboration Agreements are both collaboration arrangements as defined in ASC 808, Collaborative Arrangements. The Company also believes that Takeda meets the definition of a customer as defined in ASC 606, Revenue From Contracts With Customers for the PTV:PGRN Technology License and the ATV:TREM2 Technology License performance obligations delivered in these collaboration agreements, respectively. Since ASC 808 does not address recognition and measurement, the Company looked to other accounting literature for the PTV:PGRN Development Activities and ATV:TREM2 Development Activities units of account, and determined that the guidance in ASC 730, Research and Development should be applied. The transaction price for each contract at inception includes fixed consideration consisting of the option fee of $ 5.0 million . All potential future milestones and other payments were considered constrained at the inception of the PTV:PGRN and the ATV:TREM2 Collaboration Agreements since the Company could not conclude it was probable that a significant reversal in the amount recognized would not occur. From inception of the PTV:PGRN Collaboration Agreement and the ATV:TREM2 Collaboration Agreement through December 31, 2021, there was no change to the transaction price in either agreement. The entire transaction price was allocated to the underlying Technology License in each Collaboration Agreement, which was delivered on or around the effective date of the respective Collaboration Agreement, with the revenue allocated to this performance obligation recognized during the year ended December 31, 2021. The 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. The Company recorded $ 7.7 million and $ 6.0 million of cost sharing reimbursements for PTV:PGRN and ATV:TREM2 Development Activities, respectively, as an offset to research and development expenses in the Consolidated Statement of Operations and Comprehensive Income for the year ended December 31, 2021, the entirety of which is also recorded as a receivable on the Consolidated Balance Sheet as of December 31, 2021. In assessing the Takeda Collaboration Agreement and the PTV:PGRN and the ATV:TREM2 Collaboration Agreements, management is required to exercise considerable judgment in estimating revenue to be recognized. Management applies judgment in determining whether opt-in resulted in a modification to an existing contract or a new contract, in determining the separate performance obligations in the research period and estimating variable consideration. 177 Table of Contents Collaboration Revenue Revenue disaggregated by collaboration agreement and performance obligation is as follows (in thousands): Year Ended December 31, 2021 2020 2019 Takeda Collaboration Agreement: Takeda Collaboration Agreement Services (1) $ 19,921 $ 27,155 $ 5,926 PTV:PGRN Collaboration Agreement 5,000 — — ATV:TREM2 Collaboration Agreement 5,000 — — Total Takeda Collaboration Revenue 29,921 27,155 5,926 Sanofi Collaboration Agreement: Peripheral Program License 15,000 — 10,000 Alzheimer's Disease Services (2) 4 98 358 Retained Activities — 969 10,394 Total Sanofi Collaboration Revenue 15,004 1,067 20,752 Biogen Collaboration Agreement: LRRK2 Program License — 306,545 — Option Research Services (3) 3,736 892 — Total Biogen Collaboration Revenue 3,736 307,437 — Total Collaboration Revenue $ 48,661 $ 335,659 $ 26,678 _________________________________________________ (1) $ 15.9 million and $ 19.6 million of revenue for the year ended December 31, 2021 and 2020 was included in the contract liability balance at the beginning of the year. All of the revenue recognized in the year ended December 31, 2019 was included in the contract liability balance at the beginning of the year. (2) Revenue for the years ended December 31, 2021, 2020 and 2019 represent amounts that were included in the contract liability balance at the beginning of the respective year. (3) Revenue for the year ended December 31, 2021 represents amounts that were included in the contract liability balance at the beginning of the year. 7. 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. 178 Table of Contents 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 years ended December 31, 2021, 2020 or 2019. 8. Balance Sheet Components Property and Equipment, Net Property and equipment, net consists of the following (in thousands): As of December 31, 2021 2020 Manufacturing and laboratory equipment $ 30,114 $ 24,216 Leasehold improvements 35,235 34,738 Computers equipment and purchased software 1,337 1,254 Furniture and fixtures 1,523 1,440 Total property and equipment 68,209 61,648 Less: accumulated depreciation ( 29,344 ) ( 20,802 ) Total property and equipment, net $ 38,865 $ 40,846 Depreciation expense was $ 8.6 million , $ 8.5 million and $ 8.0 million for the years ended December 31, 2021, 2020 and 2019, respectively. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consists of the following (in thousands): As of December 31, 2021 2020 Accrued compensation $ 19,013 $ 20,503 Accrued clinical costs and other research & development costs 15,887 11,775 Accrued manufacturing costs 9,955 7,140 Other accrued costs and current liabilities 2,857 3,037 Operating lease liability, current 5,453 4,690 Total accrued expenses and other current liabilities $ 53,165 $ 47,145 179 Table of Contents 9. Commitments and Contingencies Lease Obligations In May 2018, the Company entered into an operating lease for its headquarters in South San Francisco (the "Headquarters Lease"), a 148,020 rentable square feet building in South San Francisco, California (the "Headquarters"). The Headquarters Lease 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 Amendmen t lease term. The Company determined that this renewal was not reasonably certain at lease inception. The Headquarters Lease provides for monthly base rent amounts escalating over the term of the lease. In addition, the Headquarters Lease 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 Consolidated Balance Sheets . The Company is also required to pay the operating expenses for the Headquarters, such as taxes and insurance, which are treated as variable lease payments. In August 2021, the Company entered into an operating lease for approximately 65,000 square feet of laboratory, office and warehouse premises ("SLC Premises") in Salt Lake City, Utah (“SLC Lease”), with a contractual term of approximately 8.4 years which will commence upon completion of certain improvements by the landlord and the Company, and future undiscounted lease payments totaling approximately $ 12.5 million. For accounting purposes, the lease had not yet commenced as of December 31, 2021 since the landlord was completing initial build-out activities and had not yet made the underlying asset available for use by the Company, and as such, no lease liability or ROU asset is recorded on the consolidated balance sheet as of December 31, 2021 , and no operating lease expense has been recorded for the year ended December 31, 2021 . 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, the discount rate used to determine the measurement of the lease liability. The discount rate of our Headquarters Lease is an approximation of the Company's incremental borrowing rate at lease commencement and is dependent upon the term and economics of the agreement. To estimate the incremental borrowing rate, management considered observable debt yields of comparable market instruments, as well as benchmarks within the Headquarters Lease agreement that may be indicative of the rate implicit in the lease. 180 Table of Contents The following table contains a summary of the lease costs recognized under ASC 842 and other information pertaining to the Company’s operating leases for the periods presented (in thousands): Year Ended December 31, 2021 2020 2019 Operating lease cost (1) $ 11,223 $ 11,126 $ 10,194 Cash paid for amounts included in measurement of lease liability $ 10,336 $ 9,737 $ 5,421 As of December 31, 2021 2021 2020 2019 Weighted average remaining lease term 7.3 years 8.3 years 9.3 years Weighted average discount rate 9 % 9 % 9 % __________________________________________________ (1) Including variable and short-term lease costs The following table reconciles the undiscounted cash flows for the next five years and total of the remaining years to the operating lease liability recorded in the Consolidated Balance Sheet as of December 31, 2021 (in thousands): Year Ended December 31: 2022 $ 10,702 2023 11,053 2024 11,417 2025 11,793 2026 12,182 Thereafter 29,966 Total undiscounted lease payments 87,113 Present value adjustment ( 23,106 ) Net operating lease liabilities $ 64,007 In October 2018, the Company entered into a sublease agreement ("Sublease Agreement") to sublease approximately 36,835 rentable square feet of space in its Headquarters. 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 Headquarters to the sublessee, which are treated as variable sublease income. Total sublease income, including rent and variable sublease cost reimbursements, was $ 3.8 million, $ 3.6 million and $ 2.6 million for the year ended December 31, 2021, 2020 and 2019 , respectively. The following table details the future undiscounted cash inflows relating to the Company's Sublease Agreement as of December 31, 2021 (in thousands): Year Ended December 31: 2022 $ 3,009 2023 3,096 2024 876 2025 and thereafter — Total undiscounted sublease receipts $ 6,981 181 Table of Contents 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 Consolidated Balance Sheets , Consolidated Statements of Operations and Comprehensive Income (Loss), or Consolidated Statements of Cash Flows . 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 December 31, 2021 and 2020, the Company had open purchase orders for biological product development and manufacturing costs totaling $ 35.8 million and $ 33.0 million, respectively, of which certain amounts are subject to cost sharing with Takeda. The activities under these purchase orders are expected to be completed by February 2028. As of December 31, 2021 and 2020, the Company had total non-cancellable purchase commitments of $ 28.3 million and $ 27.1 million, respectively, under the DMSA. During the years ended December 31, 2021, 2020 and 2019, the Company incurred costs of $ 17.4 million, $ 10.8 million, and $ 12.7 million, respectively, and made payments of $ 14.9 million, $ 7.3 million, and $ 12.5 million respectively, for the development and manufacturing services rendered under the DMSA. In the normal course of business, the Company enters into various firm purchase commitments primarily related to research and development activities. The Company had contractual obligations under development and manufacturing agreements other than the DMSA of $ 11.5 million and $ 3.8 million, as of December 31, 2021 and 2020, respectively, with certain amounts subject to cost sharing with Takeda. Further, the Company had other commitments of $ 1.7 million and $ 1.0 million as of December 31, 2021 and 2020, respectively, and a purchase commitment related to manufacturing equipment for the SLC Facility of $ 8.0 million as of December 31, 2021. 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 ("the Court") challenging the compensation paid to the Company's Directors since the IPO in December 2017. 182 Table of Contents On January 13, 2021, the parties to the derivative action entered into a settlement agreement, the terms of which were disclosed via Form 8-K filed on February 5, 2021. The settlement agreement was approved by the Court on April 16, 2021. Amounts paid by the Company pursuant to the settlement agreement were determined to not be material. 10. Stock-Based Awards Equity Incentive Plans The Company's equity incentive plans, the 2017 Equity Incentive Plan (the “2017 Plan”), and previously, the 2015 Stock Incentive Plan (the “2015 Plan”) reserve 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 2017 Plan and 2015 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. 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. The 2017 Plan provides that the number of shares reserved and available for issuance under the 2017 Plan will automatically increase each January 1, beginning on January 1, 2019, by the lesser 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 2021, common stock available for issuance under the 2017 Plan was increased by approximately 6.0 million shares as a result of this automatic increase provision. As of December 31, 2021 and 2020, there were approxim ately 7.0 million and 3.7 million common shares available for the Company to grant under the 2017 Plan, respectively. Stock Option Activity The following table summarizes option award activity under the 2017 Plan and the 2015 Plan: Number of Options Weighted- Average Exercise Price Weighted- Average remaining contractual life (years) Aggregate Intrinsic Value (in thousands) Balance at December 31, 2020 12,959,926 $ 16.31 7.37 $ 874,026 Options granted 2,037,717 72.11 Options exercised ( 1,021,123 ) 14.86 Options forfeited ( 290,134 ) 35.35 Balance at December 31, 2021 13,686,386 $ 24.33 6.76 $ 333,011 Options vested and expected to vest at December 31, 2021 11,950,691 $ 27.76 7.21 $ 256,779 Options exercisable at December 31, 2021 8,237,187 $ 15.78 6.21 $ 238,436 183 Table of Contents 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 was $ 47.9 million, $ 43.8 million, and $ 13.1 million for the years ended December 31, 2021, 2020 and 2019, respectively. During the years ended December 31, 2021, 2020, and 2019 the weighted-average grant-date fair value of the options vested was $ 11.83 , $ 11.51 , and $ 10.09 per share, respectively. The weighted-average grant date fair value of all options granted during the years ended December 31, 2021, 2020 and 2019 was $ 41.30 , $ 15.67 , and $ 11.86 per share, respectively. Stock Options Granted to Employees with Service-Based Vesting The estimated fair value of stock options granted to employees were calculated using the Black-Scholes option-pricing model, which requires various assumptions, including the fair value of the Company’s common stock, expected term, expected dividend yield, expected volatility, and the risk-free interest rate. The fair value of the Company’s common stock is based on the current market price, unless an adjustment is determined to be required, through discussion with senior management, due to material non-public information know by the Company at the time of grant. The expected volatility of the Company’s stock options is estimated using a combination of average historical stock price volatility of the Company's stock and that of comparable public companies within the biotechnology and pharmaceutical industry that are deemed to be representative of future stock price trends, since the Company does not have sufficient trading history to rely solely on the volatility of 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. Management considers whether the Company is in possession of material non-public information at the time of grants when estimating volatility. The expected term of stock options represents the period that the Company’s stock-options 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). The risk-free interest rate is based on the implied yield currently available on U.S. treasury notes with terms approximately equal to the expected life of the option. The expected dividend rate is zero as the Company currently has no history or expectation of declaring cash dividends on the Company’s common stock. Management considers whether the company is in possession of material non-public information at the time of grants when making certain estimates, including volatility and the fair value of the Company's common stock. The following assumptions were used in estimating the fair value of grants during the: Year Ended December 31, 2021 2020 2019 Expected term (in years) 5.50 - 6.08 5.50 - 6.08 5.50 - 6.08 Volatility 61.0 % - 63.4 % 65.2 % - 67.1 % 65.5 % - 77.8 % Risk-free interest rate 0.5 % - 1.3 % 0.3 % - 1.7 % 1.5 % - 2.6 % Dividend yield — — — 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. 184 Table of Contents 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. The expense recognized associated with these performance- and market- contingent awards was $ 0.3 million of general and administrative expense during the year ended December 31, 2020, and $ 5.2 million and $ 0.5 million of general and administrative expense and research and development expense, respectively, for the year ended December 31, 2019. There was no expense recognized in the year ended December 31, 2021. 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. 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 RSUs granted under the Plan for the year ended December 31, 2021 is summarized below: Share Units Weighted-Average Fair Value at Date of Grant per Share Unvested at December 31, 2020 2,301,679 $ 27.08 Granted 1,107,759 68.30 Vested and released ( 634,336 ) 26.43 Forfeited ( 145,122 ) 38.54 Unvested at December 31, 2021 2,629,980 $ 43.97 Expected to vest – December 31, 2021 2,629,980 $ 43.97 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 $ 117.3 million as of December 31, 2021. During the years ended December 31, 2020 and 2019 the weighted-average grant-date fair value of RSUs granted was $ 29.31 and $ 18.86 , respectively. The total fair value of RSUs that vested during the years ended December 31, 2021 and 2020 was $ 39.8 million and $ 8.7 million , respectively, and of RSUs and RSAs that vested during the year ended December 31, 2019 was $ 8.8 million . 185 Table of Contents Stock-Based Compensation Expense The Company’s results of operations include expenses relating to stock-based compensation as follows (in thousands): Year Ended December 31, 2021 2020 2019 Research and development $ 50,036 $ 29,002 $ 19,261 General and administrative 35,211 21,349 19,117 Total $ 85,247 $ 50,351 $ 38,378 As of December 31, 2021, total unamortized stock-based compensation expense related to employee and non-employee awards was $ 190.8 million . The weighted-average period over which such stock-based compensation expense will be recognized is approximately 2.8 years. There was no tax benefit realized related to awards vested or exercised during the years ended December 31, 2021 and December 31, 2019. For the year ended December 31, 2020 a tax benefit of $ 1.0 million was realized related to awards vested or exercised during the period. There is no tax benefit on total stock-based compensation expense for the years ended December 31, 2021 , 2020 and 2019 since the company has recorded a full valuation allowance on all deferred tax assets. 11. Defined Contribution Plan The Company sponsors a 401(k) retirement savings plan for the benefit of its employees, including Denali's named executive officers, who satisfy certain eligibility requirements. Under the 401(k) plan, eligible employees may elect to defer a portion of their compensation, within the limits prescribed by the Code, on a pre-tax or after-tax (Roth) basis through contributions to the 401(k) plan. The 401(k) plan authorizes employer safe harbor contributions. The 401(k) plan is intended to qualify under Sections 401(a) and 501(a) of the Code. As a tax-qualified retirement plan, pre-tax contributions to the 401(k) plan and earnings on those pre-tax contributions are not taxable to the employees until distributed from the 401(k) plan, and earnings on Roth contributions are not taxable when distributed from the 401(k) plan. The Company made contributions to the Plan for eligible participants, and recorded contribution expenses o f $ 2.3 million , $ 1.9 million, and $ 1.6 million for the years ended December 31, 2021, 2020, and 2019 , respectively. 12. Income Taxes The provision for income taxes consisted of the following (in thousands): Year Ended December 31, 2021 2020 Current: U.S. Federal $ — $ — U.S. State ( 576 ) 823 Foreign 1 — Total Current $ ( 575 ) $ 823 Deferred: U.S. Federal $ — $ — U.S. State — — Foreign — — Total deferred $ — $ — 186 Table of Contents The reconciliation of federal statutory income tax rate to our effective income tax rate is as follows: Year Ended December 31, 2021 2020 2019 Taxes at the U.S. statutory tax rate 21.0 % 21.0 % 21.0 % Effect of Tax Act — 1.1 — Change in valuation allowance ( 28.2 ) ( 4.0 ) ( 24.4 ) Research tax credits 4.1 ( 9.2 ) 3.5 Stock-based compensation 3.2 ( 7.9 ) 0.1 Other 0.1 0.1 ( 0.1 ) Total provision for income taxes 0.2 % 1.1 % 0.1 % Deferred Income Taxes The components of the Company’s net deferred tax assets are as follows (in thousands): December 31, 2021 2020 Deferred tax assets: Net operating loss carryforwards $ 59,285 $ 54,110 Tax credit carryforwards 48,058 27,411 Contract liabilities 75,281 15,344 Operating lease liability 15,040 17,179 Stock-based compensation 30,185 18,709 Accruals and other 15,385 17,767 Gross deferred tax assets 243,234 150,520 Valuation allowance ( 228,586 ) ( 133,054 ) Net deferred tax assets 14,648 17,466 Deferred tax liabilities: Property and equipment ( 7,424 ) ( 9,329 ) Operating lease right-of-use asset ( 7,224 ) ( 8,137 ) Net deferred tax assets $ — $ — Recognition of deferred tax assets is appropriate when realization of such assets is more likely than not. Based upon the weight of available evidence, especially the uncertainties surrounding the realization of deferred tax assets through future taxable income, the Company believes it is not more likely than not that the deferred tax assets will be fully realizable. Accordingly, the Company has provided a 100 % valuation allowance against its net deferred tax assets as of December 31, 2021 and 2020. There was an increase in the net valuation allowance of $ 95.5 million during the year ended December 31, 2021. As of December 31, 2021, the Company has federal net operating loss (“NOL”) carryforwards of approximately $ 232.3 million, which are available to reduce future taxable income, and has federal R&D and orphan drug tax credits of approximately $ 31.7 million and $ 9.3 million respectively, both of which may be used to offset future tax liabilities. The federal NOL and federal tax credit carryforwards will begin to expire in 2035. The Company also has state NOL carryforwards of approximately $ 150.0 million, which are available to reduce future taxable income, and has state tax credits of approximately $ 24.3 million which may be used to offset future tax liabilities. The state NOL will begin to expire in 2035 and the state tax credit carryforwards will be carried forward indefinitely. 187 Table of Contents The NOL and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service (“IRS”) and state tax authorities and may become subject to an annual limitation in the event of certain future cumulative changes in the ownership interest of significant stockholders over a three-year period in excess of 50%, as defined under Sections 382 and 383 of the Internal Revenue Code of 1986. This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. Annual limitations may result in expiration of net operating loss and tax credit carryforwards before some or all of such amounts have been utilized. The Company follows the provisions of ASC 740 , Accounting for Income Taxes , and the accounting guidance related to accounting for uncertainty in income taxes. The Company determines its uncertain tax positions based on a determination of whether and how much of a tax benefit taken by the Company in its tax filings is more likely than not to be sustained upon examination by the relevant income tax authorities. A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows (in thousands): December 31, 2021 2020 2019 Unrecognized tax benefits at January 1 $ 8,139 $ 5,299 $ 2,642 Additions for tax positions taken in a prior year 1,042 — 107 Additions for tax positions taken in the current year 4,725 3,009 2,595 Reductions for tax positions taken in the prior year ( 207 ) ( 169 ) ( 45 ) Unrecognized tax benefits at December 31 $ 13,699 $ 8,139 $ 5,299 If recognized , none of the unrecognized tax benefits would reduce the annual effective tax rate for the year ended December 31, 2021. The Company will recognize both accrued interest and penalties related to unrecognized benefits in income tax expense. As of December 31, 2021, no liability has been recorded for potential interest or penalties. The Company does no t expect the unrecognized tax benefits to change significantly over the next 12 months. Since the Company is in a loss carryforward position, the Company is generally subject to examination by the U.S. federal, state and local income tax authorities for all tax years in which a loss carryforward is available. 188 Table of Contents 13. Net Income (Loss) and Net Income (Loss) Per Share The following table sets forth the computation of the basic and diluted net income (loss) per share (in thousands, except share and per share data): Year Ended December 31, 2021 2020 2019 Numerator: Net income (loss) $ ( 290,581 ) $ 71,136 $ ( 197,614 ) Denominator: Weighted average number of shares outstanding, basic 121,524,795 108,974,137 95,608,208 Dilutive effect of outstanding common stock options, ESPP shares issuable, and restricted shares — 3,728,971 — Weighted average number of shares outstanding, diluted 121,524,795 112,703,108 95,608,208 Net income (loss) per share, basic $ ( 2.39 ) $ 0.65 $ ( 2.07 ) Net income (loss) per share, diluted $ ( 2.39 ) $ 0.63 $ ( 2.07 ) Potentially dilutive securities that were not included in the diluted per share calculations for the years ended December 31, 2021, 2020, and 2019, respectively, because they would be anti-dilutive were as follows: Year Ended December 31, 2021 2020 2019 Options issued and outstanding and ESPP shares issuable 13,836,282 3,286,045 11,921,434 Restricted shares subject to future vesting 2,629,980 879,792 882,636 Total 16,466,262 4,165,837 12,804,070 189 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.