Denali Therapeutics Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS Denali Therapeutics Inc. Condensed Consolidated Balance Sheets (Unaudited) (In thousands, except share amounts) March 31, 2022 December 31, 2021 Assets Current assets: Cash and cash equivalents $ 104,953 $ 293,477 Short-term marketable securities 852,569 571,930 Cost sharing reimbursements due from related party — 1,226 Prepaid expenses and other current assets 30,914 30,601 Total current assets 988,436 897,234 Long-term marketable securities 250,268 425,449 Property and equipment, net 37,679 38,865 Operating lease right-of-use asset 30,263 30,743 Other non-current assets 14,212 11,871 Total assets $ 1,320,858 $ 1,404,162 Liabilities and stockholders' equity Current liabilities: Accounts payable $ 3,358 $ 4,779 Cost sharing payments due to related party 2,713 — Accrued compensation 5,844 19,013 Accrued clinical and other research & development costs 19,283 15,887 Accrued manufacturing costs 11,366 9,955 Other accrued costs and current liabilities 2,390 2,857 Operating lease liability, current 5,659 5,453 Related party contract liability, current 290,627 292,386 Contract liabilities, current — 27,915 Total current liabilities 341,240 378,245 Related party contract liability, less current portion 828 1,295 Contract liabilities, less current portion 3,398 3,398 Operating lease liability, less current portion 57,086 58,554 Other non-current liabilities 379 379 Total liabilities 402,931 441,871 Commitments and contingencies (Note 7) Stockholders' equity: Convertible preferred stock, $ 0.01 par value; 40,000,000 shares authorized as of March 31, 2022 and December 31, 2021; 0 shares issued and outstanding as of March 31, 2022 and December 31, 2021 — — Common stock, $ 0.01 par value; 400,000,000 shares authorized as of March 31, 2022 and December 31, 2021; 122,857,908 shares and 122,283,305 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively 1,554 1,548 Additional paid-in capital 1,635,840 1,608,238 Accumulated other comprehensive loss ( 9,251 ) ( 2,499 ) Accumulated deficit ( 710,216 ) ( 644,996 ) Total stockholders' equity 917,927 962,291 Total liabilities and stockholders’ equity $ 1,320,858 $ 1,404,162 See accompanying notes to unaudited condensed consolidated financial statements. 3 Table of Contents Denali Therapeutics Inc. Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited) (In thousands, except share and per share amounts) Three Months Ended March 31, 2022 2021 Collaboration revenue: Collaboration revenue from customers (1) $ 42,141 $ 7,922 Other collaboration revenue — 1 Total collaboration revenue 42,141 7,923 Operating expenses: Research and development (2) 86,098 60,207 General and administrative 22,541 18,936 Total operating expenses 108,639 79,143 Loss from operations ( 66,498 ) ( 71,220 ) Interest and other income, net 1,278 1,179 Net loss ( 65,220 ) ( 70,041 ) Other comprehensive income (loss): Net unrealized gain (loss) on marketable securities, net of tax ( 6,752 ) 13 Comprehensive loss $ ( 71,972 ) $ ( 70,028 ) Net loss per share, basic and diluted $ ( 0.53 ) $ ( 0.58 ) Weighted average number of shares outstanding, basic and diluted 122,673,935 120,884,665 __________________________________________________ (1) Includes related party collaboration revenue from a customer of $ 2.2 million and $ 0.9 million for the three months ended March 31, 2022 and 2021, respectively. (2) Includes expense for cost sharing payments to a related party of $ 2.7 million for the three months ended March 31, 2022, and an offset to expense from related party cost sharing reimbursements of $ 2.5 million for the three months ended March 31, 2021. See accompanying notes to unaudited condensed consolidated financial statements. 4 Table of Contents Denali Therapeutics Inc. Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) (In thousands, except share amounts) Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Accumulated Deficit Total Stockholders' Equity Shares Amount Balance at December 31, 2021 122,283,305 $ 1,548 $ 1,608,238 $ ( 2,499 ) $ ( 644,996 ) $ 962,291 Issuances under equity incentive plans 151,419 2 1,461 — — 1,463 Vesting of restricted stock units 423,184 4 ( 4 ) — — — Stock-based compensation — — 26,145 — — 26,145 Net loss — — — — ( 65,220 ) ( 65,220 ) Other comprehensive loss — — — ( 6,752 ) — ( 6,752 ) Balance at March 31, 2022 122,857,908 $ 1,554 $ 1,635,840 $ ( 9,251 ) $ ( 710,216 ) $ 917,927 Balance at December 31, 2020 120,531,333 $ 1,531 $ 1,503,660 $ ( 245 ) $ ( 354,415 ) $ 1,150,531 Issuances under equity incentive plans 334,634 3 3,819 — — 3,822 Vesting of restricted stock units 281,465 3 ( 3 ) — — — Stock-based compensation — — 21,028 — — 21,028 Net loss — — — — ( 70,041 ) ( 70,041 ) Other comprehensive income — — — 13 — 13 Balance at March 31, 2021 121,147,432 $ 1,537 $ 1,528,504 $ ( 232 ) $ ( 424,456 ) $ 1,105,353 See accompanying notes to unaudited condensed consolidated financial statements. 5 Table of Contents Denali Therapeutics Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands) Three Months Ended March 31, 2022 2021 Operating activities Net loss $ ( 65,220 ) $ ( 70,041 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 2,079 2,108 Stock–based compensation expense 26,145 21,028 Net amortization of premiums on marketable securities 1,627 1,161 Non-cash adjustment to operating lease expense ( 783 ) ( 691 ) Other non-cash items — ( 2 ) Changes in operating assets and liabilities: Prepaid expenses and other assets 1,242 6,301 Accounts payable 1,248 623 Accruals and other current liabilities ( 8,306 ) ( 10,804 ) Contract liabilities ( 27,915 ) 969 Related party contract liability ( 2,226 ) ( 892 ) Net cash used in operating activities ( 72,109 ) ( 50,240 ) Investing activities Purchases of marketable securities ( 364,337 ) ( 463,105 ) Purchases of property and equipment ( 4,041 ) ( 2,800 ) Maturities and sales of marketable securities 250,500 440,500 Net cash used in investing activities ( 117,878 ) ( 25,405 ) Financing activities Proceeds from exercise of awards under equity incentive plans 1,463 3,822 Net cash provided by financing activities 1,463 3,822 Net decrease in cash, cash equivalents and restricted cash ( 188,524 ) ( 71,823 ) Cash, cash equivalents and restricted cash at beginning of period 294,977 508,644 Cash, cash equivalents and restricted cash at end of period $ 106,453 $ 436,821 Supplemental disclosures of cash flow information Property and equipment purchases accrued but not yet paid $ 114 $ — See accompanying notes to unaudited condensed consolidated financial statements. 6 Table of Contents Denali Therapeutics Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) 1. Significant Accounting Policies Organization and Description of Business Denali Therapeutics Inc. ("Denali" or the “Company”) is a biopharmaceutical company, incorporated in Delaware, that discovers and develops therapeutics to defeat neurodegenerative diseases. The Company is headquartered in South San Francisco, California. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of SEC Regulation S-X for interim financial information. These unaudited condensed consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the Securities and Exchange Commission on February 28, 2022 (the "2021 Annual Report on Form 10-K"). The Condensed Consolidated Balance Sheet as of December 31, 2021 was derived from the audited annual consolidated financial statements as of and for the period then ended. Certain information and footnote disclosures typically included in the Company's annual consolidated financial statements have been condensed or omitted. The accompanying unaudited condensed consolidated financial statements reflect all adjustments that, in the opinion of management, are necessary for a fair statement of the results of the interim periods presented. All such adjustments are of a normal recurring nature except for the impacts of adopting new accounting standards, if any, discussed below. These interim financial results are not necessarily indicative of results expected for the full fiscal year or for any subsequent interim period. During the three months ended March 31, 2022 there were no material changes to the Company's significant accounting and financial reporting policies from those reflected in the 2021 Annual Report on Form 10-K. For further information with regard to the Company’s Significant Accounting Policies, please refer to Note 1, "Significant Accounting Policies," to the Company’s Consolidated Financial Statements included in the 2021 Annual Report on Form 10-K. Principles of Consolidation These unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned 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 Condensed Consolidated Statements of Operations and Comprehensive Loss. 7 Table of Contents Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires the Company to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, as well as the reported amounts of expenses during the reporting period. Actual results could differ from those estimates, and such differences could be material to the Condensed Consolidated Balance Sheets and Statements of Operations and Comprehensive Loss. 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. The Company’s investment policy limits investments to certain types of securities issued by the U.S. government and its agencies, as well as institutions with investment-grade credit ratings and places restrictions on maturities and concentration by type and issuer. The Company is exposed to credit risk in the event of a default by the financial institutions holding its cash, cash equivalents and marketable securities and issuers of marketable securities to the extent recorded on the Condensed Consolidated Balance Sheets. As of March 31, 2022 and December 31, 2021, 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. Further, the company is also subject to broad market risks and uncertainties resulting from recent events, such as the COVID-19 pandemic and the Russian invasion of Ukraine. 8 Table of Contents 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. Cash, Cash Equivalents and Restricted Cash The Company considers all highly liquid investments with original maturities of 90 days or less at the date of purchase to be cash and cash equivalents. Cash equivalents are reported at fair value. Cash, cash equivalents, and restricted cash reported within the Condensed Consolidated Statements of Cash Flows is composed of Cash and Cash equivalents reported in the Condensed Consolidated Balance Sheets and $ 1.5 million of restricted cash for the letter of credit for the Company’s headquarters building lease, which is included within other non-current assets in the Condensed Consolidated Balance Sheets. Marketable Securities The Company generally invests its excess cash in money market funds and investment grade short to intermediate-term fixed income securities. Such investments are included in cash and cash equivalents, short-term marketable securities, or long-term marketable securities on the Condensed Consolidated Balance Sheets, are considered available-for-sale, and reported at fair value with net unrealized gains and losses included as a component of stockholders’ equity. The Company classifies investments in securities with remaining maturities of less than one year, or where its intent is to use the investments to fund current operations or to make them available for current operations, as short-term investments. The Company classifies investments in securities with remaining maturities of over one year as long-term investments. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity, which is included in interest and other income, net in the Condensed Consolidated Statements of Operations and Comprehensive Loss. Realized gains and losses and declines in value determined to be due to credit losses on marketable securities, if any, are included in interest and other income, net. The Company periodically evaluates the need for an allowance for credit losses. This evaluation includes consideration of several qualitative and quantitative factors, including whether it has plans to sell the security, whether it is more likely than not it will be required to sell any marketable securities before recovery of its amortized cost basis, and if the entity has the ability and intent to hold the security to maturity, and the portion of any unrealized loss that is the result of a credit loss. Factors considered in making these evaluations include quoted market prices, recent financial results and operating trends, implied values from any recent transactions or offers of investee securities, credit quality of debt instrument issuers, expected cash flows from securities, other publicly available information that may affect the value of the marketable security, duration and severity of the decline in value, and the Company's strategy and intentions for holding the marketable security. Accounts Receivable Accounts receivable are included within prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets. The accounts receivable balance represents amounts receivable from the Company's collaboration partners, excluding related parties, net of an allowance for credit losses, if required. 9 Table of Contents Derivatives and Hedging Activities The Company measures its derivative instruments at fair value, and accounts for them as either assets or liabilities included within prepaid expenses and other current assets and other accrued costs and current liabilities, respectively, on the Condensed Consolidated Balance Sheets. Derivatives are adjusted to fair value through interest and other income, net in the Condensed Consolidated Statements of Operations and Comprehensive Loss. 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 Condensed Consolidated Balance Sheets. The changes in operating lease ROU assets and operating lease liabilities are presented net within non-cash adjustment to operating lease expense in the Condensed Consolidated Statements of Cash Flows. ROU assets represent the Company’s right to use the underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. 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. 10 Table of Contents 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. In determining the appropriate amount of revenue to be recognized as the Company fulfills its obligations under each of its agreements, the Company performs the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations based on estimated selling prices; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation. Amounts received prior to satisfying the revenue recognition criteria are recorded as contract liabilities in the Company’s Condensed Consolidated Balance Sheets. If the related performance obligation is expected to be satisfied within the next 12 months this will be classified in current liabilities. Amounts recognized as revenue prior to the Company having an unconditional right (other than a right that is conditioned only on the passage of time) to receipt are recorded as contract assets in the Company's Condensed Consolidated Balance Sheets. If the Company expects to have an unconditional right to receive the consideration in the next 12 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. 11 Table of Contents 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. Comprehensive Loss Comprehensive loss is composed of net loss and certain changes in stockholders’ equity that are excluded from net loss, primarily unrealized gains or losses on the Company’s marketable securities. Net Loss per Share Basic net loss per share is calculated by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period, without consideration for common stock equivalents. Diluted net loss per share is the same as basic net loss per share, since the effects of potentially dilutive securities are antidilutive given the net loss for each period presented. 12 Table of Contents 2. Fair Value Measurements Assets and liabilities measured at fair value at each balance sheet date are as follows (in thousands): March 31, 2022 Level 1 Level 2 Level 3 Total Assets: Cash equivalents: Money market funds $ 53,888 $ — $ — $ 53,888 U.S. government treasuries 10,013 — — 10,013 Commercial paper — 29,985 — 29,985 Short-term marketable securities: U.S. government treasuries 699,296 — — 699,296 Corporate debt securities — 72,141 — 72,141 Commercial paper — 81,132 — 81,132 Long-term marketable securities: U.S. government treasuries 223,055 — — 223,055 Corporate debt securities — 27,213 — 27,213 Total $ 986,252 $ 210,471 $ — $ 1,196,723 Liabilities: Foreign currency derivative contracts $ — $ 44 $ — $ 44 Total $ — $ 44 $ — $ 44 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 The carrying amounts of prepaid expenses and other current assets, accounts payable, cost sharing payments due to or from a related party and accrued liabilities approximate their fair values due to their short-term maturities. The Company’s Level 2 securities are valued using third-party pricing sources. The pricing services utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly. The Company has not transferred any assets or liabilities between the fair value measurement levels. 13 Table of Contents 3. Marketable Securities All marketable securities were considered available-for-sale at March 31, 2022 and December 31, 2021. On a recurring basis, the Company records its marketable securities at fair value using Level 1 or Level 2 inputs as discussed in Note 2, "Fair Value Measurements". The amortized cost, gross unrealized holding gains or losses, and fair value of the Company’s marketable securities by major security type at each balance sheet date are summarized in the tables below (in thousands): March 31, 2022 Amortized Cost Unrealized Holding Gains Unrealized Holding Losses Aggregate Fair Value Short-term marketable securities: U.S. government treasuries (1) $ 703,031 $ — $ ( 3,735 ) $ 699,296 Corporate debt securities (2) 72,422 — ( 281 ) 72,141 Commercial paper 81,132 — — 81,132 Total short-term marketable securities 856,585 — ( 4,016 ) 852,569 Long-term marketable securities: U.S. government treasuries (3) 227,708 — ( 4,653 ) 223,055 Corporate debt securities (4) 27,443 — ( 230 ) 27,213 Total long-term marketable securities 255,151 — ( 4,883 ) 250,268 Total $ 1,111,736 $ — $ ( 8,899 ) $ 1,102,837 __________________________________________________ (1) Unrealized holding losses on 43 securities with an aggregate fair value of $ 699.3 million. (2) Unrealized holding losses on 19 securities with an aggregate fair value of $ 68.6 million. (3) Unrealized holding losses on 18 securities with an aggregate fair value of $ 223.1 million. (4) Unrealized holding losses on 5 securities with an aggregate fair value of $ 27.2 million. 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 losses on 16 securities with an aggregate fair value of $ 410.1 million. (4) Unrealized holding losses on 6 security with an aggregate fair value of $ 15.3 million. As of March 31, 2022 and December 31, 2021, some of the Company's marketable securities were in an unrealized loss position. The Company has no t recognized an allowance for credit losses as of March 31, 2022 or December 31, 2021. The Company determined that it had the ability and intent to hold all marketable securities that have been in a continuous loss position until maturity or recovery. Further, these marketable securities were initially, and continue to be, held with investment grade, high credit quality institutions. All marketable securities with unrealized losses as of each balance sheet date have been in a loss position for less than 12 months or the loss is not material. 14 Table of Contents 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 Condensed Consolidated Statements of Operations and Comprehensive Loss. The fair values of forward foreign currency exchange contracts are estimated using current exchange rates and interest rates and take into consideration the current creditworthiness of the counterparties. Information regarding the specific instruments used by the Company to hedge its exposure to foreign currency exchange rate fluctuations is provided below. The following table summarizes the Company’s forward foreign currency exchange contracts outstanding as of March 31, 2022 and December 31, 2021, respectively (notional amounts in thousands): Foreign Exchange Contracts Number of Contracts Aggregate Notional (1) Amount in Foreign Currency Maturity Euros 3 150 Apr 2022 - Jun 2022 British Pounds 3 300 Apr 2022 - Jun 2022 Total at March 31, 2022 6 Euros 7 800 Jan 2022 - Jun 2022 British Pounds 6 900 Jan 2022 - Jun 2022 Total at December 31, 2021 13 _________________________________________________ (1) The notional amount represents the net amount of foreign currency that will be received upon maturity of the forward contracts. 5. Collaboration Agreements Biogen In August 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”), which 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"). The details of the Provisional Biogen Collaboration Agreement and the Biogen Collaboration Agreement and the payments the Company has received, and is entitled to receive, are further described in Note 6, Collaboration Agreements, to the consolidated financial statements in the 2021 Annual Report on Form 10-K. During the first quarter of 2022, there were no changes to the terms of the Company’s collaboration agreement with Biogen, and no change in the transaction price for the Biogen Collaboration Agreement has been recorded during the three months ended March 31, 2022. 15 Table of Contents A related party contract liability of $ 291.5 million and $ 293.7 million was recorded on the Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021, respectively. Approximately $ 288.9 million of the March 31, 2022 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 $ 2.6 million of this contract liability relates to the portion of the Option Research Services performance obligation yet to be satisfied, with such amount to be recognized over the estimated period of the services, which is expected to be more than one year . Expenses for cost sharing payments for LRRK2 Development Activities of $ 2.7 million were recorded as research and development expenses in the Condensed Consolidated Statement of Operations and Comprehensive Loss for the three months ended March 31, 2022, with the same amount recorded as cost sharing payments due to related party on the Condensed Consolidated Balance Sheets as of March 31, 2022. The Company recorded $ 2.5 million of cost sharing reimbursements for LRRK2 Development Activities as an offset to research and development expenses in the Condensed Consolidated Statement of Operations and Comprehensive Loss for the three months ended March 31, 2021, and $ 1.2 million was recorded as cost sharing reimbursements due from related party on the Condensed Consolidated Balance Sheets as of December 31, 2021. As of March 31, 2022, 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"). The details of the Sanofi Collaboration Agreement and the payments the Company has received, and is entitled to receive, are further described in Note 6, Collaboration Agreements, to the consolidated financial statements in the Company's 2021 Annual Report on Form 10-K. During the first quarter of 2022, there were no changes to the terms of the Company’s collaboration agreement with Sanofi, and the transaction price of the Sanofi Collaboration Agreement did no t change during the three months ended March 31, 2022 or 2021. A contract liability of $ 3.4 million was recorded on the Condensed Consolidated Balance Sheets as of both March 31, 2022 and December 31, 2021. This contract liability relates to the portion of the Alzheimer's Disease Services performance obligation yet to be satisfied, with such amounts to be recognized over the estimated period of the services, which is expected to be several years. The Company recorded no receivable associated with the Sanofi Collaboration Agreement on the Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021, respectively. In April 2022, Sanofi commenced dosing in a Phase 2 study of SAR3820/DNL788 in patients with ALS, triggering a $ 40.0 million milestone which is due in May 2022. As of March 31, 2022, the Company had earned milestone payments of $ 25.0 million and had no t recorded any product sales under the Sanofi Collaboration Agreement. Takeda Takeda Collaboration Agreement In January 2018, the Company entered into a Collaboration and Option Agreement ("Takeda Collaboration Agreement") with Takeda Pharmaceutical Company Limited ("Takeda"). The details of the Takeda Collaboration Agreement are further described in Note 6, Collaboration Agreements, to the consolidated financial statements in the Company's 2021 Annual Report on Form 10-K. In March 2022, Takeda and the Company agreed to terminate activity on the ATV:Tau program over which Takeda had an option to develop and commercialize jointly with the Company. As a result of this decision, total preclinical milestone payments that Takeda may owe was reduced to $ 55.0 million, of which $ 43.0 million has been received as of March 31, 2022. 16 Table of Contents A contract liability of $ 27.9 million was recorded on the Condensed Consolidated Balance Sheets as of December 31, 2021 relating to the remaining Tau program services. As a result of the decision to terminate the ATV:Tau program, the performance obligation related to ATV:Tau was considered fully satisfied, and the contract liability was recognized in its entirety within collaboration revenue from customers in the Condensed Consolidated Statement of Operations and Comprehensive Loss for the three months ended March 31, 2022. The transaction price of the Takeda Collaboration Agreement increased by $ 12.0 million during the three months ended March 31, 2022, due to a preclinical milestone being unconstrained. This milestone was triggered by the January 2022 approval of the clinical trial application for TAK-594/DNL593 ("PTV:PGRN") by the Medicines and Healthcare products Regulatory Agency in the UK, and the milestone payment was received in February 2022. There was no contract liability or receivable associated with the Takeda Collaboration Agreement on the Condensed Consolidated Balance Sheets as of March 31, 2022, and no receivable as of December 31, 2021. The Company has no remaining performance obligations under the Takeda Collaboration Agreement, and accordingly the $ 12.0 million was recorded as collaboration revenue from customers in the three months ended March 31, 2022. PTV:PGRN and ATV:TREM2 Collaboration Agreements Opt-in by Takeda on the PTV:PGRN and ATV:TREM2 programs represented 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. The details of the PTV:PGRN Collaboration Agreement and the ATV:TREM2 Collaboration Agreement are further described in Note 6, Collaboration Agreements, to the consolidated financial statements in the Company's 2021 Annual Report on Form 10-K. During the first quarter of 2022, there were no changes to the terms of either the PTV:PGRN Collaboration Agreement or the ATV:TREM2 Collaboration Agreement, and there was no change in the transaction price of either agreement during the three months ended March 31, 2022. Under the PTV:PGRN Collaboration Agreement and the ATV:TREM2 Collaboration Agreement, Takeda may be obligated to pay the Company up to an aggregate of $ 280.0 million upon achievement of certain clinical milestone events and up to an aggregate of $ 200.0 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 $ 150.0 million if one biologic product from each program achieves this milestone. The Company recorded $ 2.9 million and $ 2.1 million of cost sharing reimbursements for PTV:PGRN and ATV:TREM2 Development Activities, respectively, as an offset to research and development expenses in the Condensed Consolidated Statement of Operations and Comprehensive Loss for the three months ended March 31, 2022, the entirety of which is also recorded as a receivable within prepaid expenses and other current assets on the Condensed Consolidated Balance Sheet as of March 31, 2022. As of March 31, 2022, the Company had earned $ 53.0 million in preclinical milestone and option fee payments from Takeda, and had no t recorded any product sales under the Takeda Collaboration Agreement. 17 Table of Contents Collaboration Revenue Revenue disaggregated by collaboration agreement and performance obligation is as follows (in thousands): Three Months Ended March 31, 2022 2021 Takeda Collaboration Agreement: Takeda Collaboration Agreement Services (1) $ 39,916 $ 7,030 Total Takeda Collaboration Revenue 39,916 7,030 Sanofi Collaboration Agreement Alzheimer's Disease Services (2) — 1 Total Sanofi Collaboration Revenue — 1 Biogen Collaboration Agreement Option Research Services (2) 2,225 892 Total Biogen Collaboration Revenue 2,225 892 Total Collaboration Revenue $ 42,141 $ 7,923 _________________________________________________ (1) $ 27.9 million and $ 5.7 million of revenue for the three months ended March 31, 2022 and March 31, 2021, respectively, was included in the contract liability balance at the beginning of the period. (2) Revenue for the three months ended March 31, 2022 and March 31, 2021 represent amounts that were included in the contract liability balance at the beginning of the respective period. 6. License Agreements Genentech In June 2016, the Company entered into an Exclusive License Agreement with Genentech, Inc. (“Genentech License Agreement”). The details of the Genentech License Agreement are further described in Note 7, License Agreements, to the consolidated financial statements in the Company's 2021 Annual Report on Form 10-K. No expenses were recorded associated with the Genentech License Agreement in the three months ended March 31, 2022 or 2021. 7. Commitments and Contingencies Lease Obligations In May 2018, the Company entered into an operating lease for its corporate headquarters in South San Francisco (the "Headquarters Lease"), and in August 2021, the Company entered into an operating lease for laboratory, office and warehouse premises in Salt Lake City, Utah (“SLC Lease”). The details of both leases are further described in Note 9, Commitments and Contingencies, to the consolidated financial statements in the Company's 2021 Annual Report on Form 10-K. During the first quarter of 2022, there were no changes to the terms of either lease. Further, for accounting purposes, the SLC lease has not yet commenced as the landlord has not yet made the underlying asset available for use by Denali, and as such, no lease liability or ROU asset is recorded on the Condensed Consolidated Balance Sheets as of March 31, 2022, and no operating lease expense has been recorded for the three months ended March 31, 2022. 18 Table of Contents 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 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. The following table contains a summary of the lease costs recognized under ASC 842 and other information pertaining to the Company’s operating lease for the periods presented (in thousands): Three Months Ended March 31, 2022 2021 Operating lease cost (1) $ 2,863 $ 2,789 Cash paid for amounts included in measurement of lease liability $ 2,618 $ 2,536 As of March 31, 2022 2021 Weighted average remaining lease term 7.1 years 8.1 years Weighted average discount rate 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 Condensed Consolidated Balance Sheet as of March 31, 2022 (in thousands): Year Ended December 31: 2022 (nine months) 8,084 2023 11,053 2024 11,417 2025 11,793 2026 12,182 Thereafter 29,966 Total undiscounted lease payments 84,495 Present value adjustment ( 21,750 ) Net operating lease liabilities $ 62,745 Sublease In October 2018, the Company entered into a sublease agreement ("Sublease Agreement") for space in the corporate headquarters. The details of the Sublease Agreement are further described in Note 9, Commitments and Contingencies, to the consolidated financial statements in the Company's 2021 Annual Report on Form 10-K. During the first quarter of 2022, there were no changes to the terms of the Sublease Agreement. Total sublease income, including rent and variable sublease cost reimbursements, was $ 1.0 million and $ 0.9 million for the three months ended March 31, 2022 and 2021, respectively. 19 Table of Contents The following table details the future undiscounted cash inflows relating to the Sublease Agreement as of March 31, 2022 (in thousands): Year Ended December 31: 2022 (nine months) 2,272 2023 3,096 2024 876 2025 and thereafter — Total undiscounted sublease receipts $ 6,244 Indemnification In the ordinary course of business, the Company may provide indemnifications of varying scope and terms to vendors, lessors, business partners, board members, officers, and other parties with respect to certain matters, including, but not limited to, losses arising out of breach of such agreements, services to be provided by the Company, negligence or willful misconduct of the Company, violations of law by the Company, or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with directors and certain officers and employees that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers or employees. No demands have been made upon the Company to provide indemnification under such agreements, and thus, there are no claims that the Company is aware of that could have a material effect on the Company’s Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Operations and Comprehensive Loss, or Condensed Consolidated Statements of Cash Flows. 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 the later of September 6, 2022 or when all development and manufacturing services are completed. As of March 31, 2022 and December 31, 2021, the Company had open purchase orders for biological product development and manufacturing costs totaling $ 44.6 million and $ 35.8 million, respectively. The activities under these purchase orders are expected to be completed by December 2025. As of March 31, 2022 and December 31, 2021, the Company had total non-cancellable purchase commitments under the DMSA of $ 35.2 million and $ 28.3 million, respectively. During the three months ended March 31, 2022 and 2021, the Company incurred costs of $ 10.0 million and $ 5.2 million, respectively, and made payments of $ 8.7 million and $ 0.7 million, respectively, for the development and manufacturing services rendered under the DMSA. Contingencies From time to time, the Company may be involved in lawsuits, arbitration, claims, investigations and proceedings consisting of intellectual property, employment and other matters which arise in the ordinary course of business. The Company records accruals for loss contingencies to the extent that the Company concludes that it is probable that a liability has been incurred and the amount of the related loss can be reasonably estimated. 20 Table of Contents 8. Stock-Based Awards The Company has issued stock-based awards from various equity incentive and stock purchase plans, as more fully described in Note 10, "Stock-Based Awards" to the consolidated financial statements in the Company's 2021 Annual Report on Form 10-K. Stock Option Activity The following table summarizes stock option activity for the three months ended March 31, 2022: Number of Options Weighted-Average Exercise Price Balance at December 31, 2021 13,686,386 $ 24.33 Granted 1,830,168 46.67 Exercised ( 151,419 ) 9.66 Forfeited ( 67,087 ) 44.04 Balance at March 31, 2022 15,298,048 $ 27.06 Vested and expected to vest at March 31, 2022 13,562,353 $ 30.43 Exercisable at March 31, 2022 9,017,879 $ 19.19 The estimated fair value of stock options granted to employees were calculated using the Black-Scholes option-pricing model using the following assumptions: Three Months Ended March 31, 2022 2021 Expected term (in years) 6.08 6.08 Volatility 65.5 % - 66.1 % 62.2 % - 63.4 % Risk-free interest rate 1.5 % - 1.8 % 0.5 % - 1.0 % Dividend yield — — 21 Table of Contents Restricted Stock Activity The following table summarizes restricted stock unit ("RSU") activity for the three months ended March 31, 2022: Number of RSU shares Weighted-Average Fair Value at Date of Grant per Share Unvested at December 31, 2021 2,629,980 $ 43.97 Granted 779,843 46.55 Vested and released ( 423,184 ) 43.80 Forfeited ( 35,140 ) 45.87 Unvested at March 31, 2022 2,951,499 $ 44.65 Expected to vest at March 31, 2022 2,951,499 $ 44.65 Stock-Based Compensation Expense The Company’s results of operations include expenses relating to stock-based compensation as follows (in thousands): Three Months Ended March 31, 2022 2021 Research and development $ 15,556 $ 12,314 General and administrative 10,589 8,714 Total $ 26,145 $ 21,028 9. Net Loss Per Share Since the Company was in a loss position for all periods presented, basic net loss per share is the same as diluted net loss per share for all periods as the inclusion of all potential shares of common stock outstanding would have been anti-dilutive. Potentially dilutive securities that were not included in the diluted per share calculations because they would be anti-dilutive were as follows: Three Months Ended March 31, 2022 2021 Options issued and outstanding and ESPP shares issuable 15,447,944 14,323,256 Restricted shares subject to future vesting 2,951,499 2,699,107 Total 18,399,443 17,022,363 22 Table of Contents