Denali Therapeutics Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS Denali Therapeutics Inc. Condensed Consolidated Balance Sheets (Unaudited) (In thousands, except share amounts) June 30, 2023 December 31, 2022 Assets Current assets: Cash and cash equivalents $ 131,973 $ 218,044 Short-term marketable securities 1,059,014 1,118,171 Prepaid expenses and other current assets 33,075 36,104 Total current assets 1,224,062 1,372,319 Property and equipment, net 39,821 44,087 Operating lease right-of-use assets 27,417 30,437 Other non-current assets 14,434 13,399 Total assets $ 1,305,734 $ 1,460,242 Liabilities and stockholders' equity Current liabilities: Accounts payable $ 8,520 $ 2,790 Cost sharing payments due to related party 6,976 4,388 Accrued clinical and other research & development costs 15,120 16,297 Accrued manufacturing costs 17,263 22,307 Other accrued costs and current liabilities 3,603 3,682 Accrued compensation 10,256 17,087 Operating lease liabilities, current 6,774 7,318 Related-party contract liability, current 845 290,053 Total current liabilities 69,357 363,922 Related-party contract liability, less current portion 422 479 Operating lease liabilities, less current portion 48,751 53,032 Other non-current liabilities 379 379 Total liabilities 118,909 417,812 Commitments and contingencies (Note 7) Stockholders' equity: Convertible preferred stock, $ 0.01 par value; 40,000,000 shares authorized as of June 30, 2023 and December 31, 2022; 0 shares issued and outstanding as of June 30, 2023 and December 31, 2022 — — Common stock, $ 0.01 par value; 400,000,000 shares authorized as of June 30, 2023 and December 31, 2022; 137,362,688 shares and 135,965,918 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively 1,700 1,686 Additional paid-in capital 2,083,951 2,018,617 Accumulated other comprehensive loss ( 1,441 ) ( 6,886 ) Accumulated deficit ( 897,385 ) ( 970,987 ) Total stockholders' equity 1,186,825 1,042,430 Total liabilities and stockholders’ equity $ 1,305,734 $ 1,460,242 See accompanying notes to unaudited condensed consolidated financial statements. 3 Table of Contents Denali Therapeutics Inc. Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited) (In thousands, except share and per share amounts) Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Collaboration revenue: Collaboration revenue from customers (1) $ 294,123 $ 52,480 $ 329,264 $ 94,621 Total collaboration revenue 294,123 52,480 329,264 94,621 Operating expenses: Research and development (2) 97,520 92,737 226,336 178,835 General and administrative 26,120 21,159 53,260 43,700 Total operating expenses 123,640 113,896 279,596 222,535 Income (loss) from operations 170,483 ( 61,416 ) 49,668 ( 127,914 ) Interest and other income, net 12,900 2,649 23,934 3,927 Income (loss) before income taxes 183,383 ( 58,767 ) 73,602 ( 123,987 ) Income tax expense — ( 27 ) — ( 27 ) Net income (loss) 183,383 ( 58,794 ) 73,602 ( 124,014 ) Other comprehensive income (loss): Net unrealized gain (loss) on marketable securities, net of tax 1,076 ( 3,023 ) 5,445 ( 9,775 ) Comprehensive income (loss) $ 184,459 $ ( 61,817 ) $ 79,047 $ ( 133,789 ) Net income (loss) per share: Net income (loss) per share, basic $ 1.34 $ ( 0.48 ) $ 0.54 $ ( 1.01 ) Net income (loss) per share, diluted $ 1.30 $ ( 0.48 ) $ 0.52 $ ( 1.01 ) Weighted-average shares used in calculating: Weighted average number of shares outstanding, basic 137,047,227 123,008,558 136,787,321 122,842,171 Weighted average number of shares outstanding, diluted 140,930,625 123,008,558 140,550,226 122,842,171 __________________________________________________ (1) Includes related-party collaboration revenue from customers of $ 294.1 million and $ 294.3 million for the three and six months ended June 30, 2023, respectively, and $ 0.5 million and $ 2.7 million for the three and six months ended June 30, 2022, respectively. (2) Includes expenses for cost sharing payments due to a related party of $ 7.0 million and $ 11.1 million for the three and six months ended June 30, 2023, respectively, an offset to expense from related-party cost sharing reimbursements of $ 0.4 million for the three months ended June 30, 2022, and expense for cost sharing payments due to a related party of $ 2.4 million for the six months ended June 30, 2022. See accompanying notes to unaudited condensed consolidated financial statements. 4 Table of Contents Denali Therapeutics Inc. Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) (In thousands, except share amounts) Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income (loss) Accumulated Deficit Total Stockholders' Equity Shares Amount Balance at December 31, 2022 135,965,918 $ 1,686 $ 2,018,617 $ ( 6,886 ) $ ( 970,987 ) $ 1,042,430 Issuances under equity incentive plans 730,887 7 10,616 — — 10,623 Vesting of restricted stock units 665,883 7 ( 7 ) — — — Stock-based compensation — — 54,725 — — 54,725 Net income — — — — 73,602 73,602 Other comprehensive income — — — 5,445 — 5,445 Balance at June 30, 2023 137,362,688 $ 1,700 $ 2,083,951 $ ( 1,441 ) $ ( 897,385 ) $ 1,186,825 Balance at March 31, 2023 136,741,627 $ 1,694 $ 2,048,297 $ ( 2,517 ) $ ( 1,080,768 ) $ 966,706 Issuances under equity incentive plans 526,579 5 9,014 — — 9,019 Vesting of restricted stock units 94,482 1 ( 1 ) — — — Stock-based compensation — — 26,641 — — 26,641 Net income — — — — 183,383 183,383 Other comprehensive income — — — 1,076 — 1,076 Balance at June 30, 2023 137,362,688 $ 1,700 $ 2,083,951 $ ( 1,441 ) $ ( 897,385 ) $ 1,186,825 Balance at December 31, 2021 122,283,305 $ 1,548 $ 1,608,238 $ ( 2,499 ) $ ( 644,996 ) $ 962,291 Issuances under equity incentive plans 391,961 5 5,860 — — 5,865 Vesting of restricted stock units 482,012 5 ( 5 ) — — — Stock-based compensation — — 50,081 — — 50,081 Net loss — — — — ( 124,014 ) ( 124,014 ) Other comprehensive loss — — — ( 9,775 ) — ( 9,775 ) Balance at June 30, 2022 123,157,278 $ 1,558 $ 1,664,174 $ ( 12,274 ) $ ( 769,010 ) $ 884,448 Balance at March 31, 2022 122,857,908 $ 1,554 $ 1,635,840 $ ( 9,251 ) $ ( 710,216 ) $ 917,927 Issuances under equity incentive plans 240,542 3 4,399 — — 4,402 Vesting of restricted stock units 58,828 1 ( 1 ) — — — Stock-based compensation — — 23,936 — — 23,936 Net loss — — — — ( 58,794 ) ( 58,794 ) Other comprehensive loss — — — ( 3,023 ) — ( 3,023 ) Balance at June 30, 2022 123,157,278 $ 1,558 $ 1,664,174 $ ( 12,274 ) $ ( 769,010 ) $ 884,448 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) Six Months Ended June 30, 2023 2022 Operating activities Net income (loss) $ 73,602 $ ( 124,014 ) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 12,332 4,151 Stock–based compensation expense 54,654 50,081 Net amortization of premiums and (discounts) on marketable securities ( 19,386 ) 2,118 Non-cash adjustment to operating lease expense ( 1,805 ) ( 1,623 ) Other non-cash items — 5 Changes in operating assets and liabilities: Prepaid expenses and other assets 1,823 ( 14,751 ) Accounts payable 8,472 2,087 Accruals and other current liabilities ( 12,399 ) ( 2,441 ) Contract liabilities — ( 27,915 ) Related-party contract liability ( 289,264 ) ( 2,705 ) Net cash used in operating activities ( 171,971 ) ( 115,007 ) Investing activities Purchases of marketable securities ( 901,841 ) ( 505,460 ) Purchases of property and equipment ( 8,636 ) ( 6,934 ) Maturities and sales of marketable securities 985,829 483,147 Net cash provided by (used in) investing activities 75,352 ( 29,247 ) Financing activities Proceeds from exercise of awards under equity incentive plans 10,623 5,865 Net cash provided by financing activities 10,623 5,865 Net decrease in cash, cash equivalents and restricted cash ( 85,996 ) ( 138,389 ) Cash, cash equivalents and restricted cash at beginning of period 219,544 294,977 Cash, cash equivalents and restricted cash at end of period $ 133,548 $ 156,588 Supplemental disclosures of cash flow information Cash paid during the period for income taxes $ 4 $ — Property and equipment purchases accrued but not yet paid $ 575 $ 321 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 the Securities and Exchange Commission ("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, 2022, as filed with the SEC on February 27, 2023 (the "2022 Annual Report on Form 10-K"). The Condensed Consolidated Balance Sheet as of December 31, 2022 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 six months ended June 30, 2023 there were no material changes to the Company's significant accounting and financial reporting policies from those reflected in the 2022 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 2022 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 Income (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 Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). Concentration of Credit Risk and Other Risks and Uncertainties Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents, and marketable securities. 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 June 30, 2023 and December 31, 2022, the Company had no off-balance sheet concentrations of credit risk. The Company is subject to a number of risks similar to other clinical-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 bank failures or instability in the financial services sector, the COVID-19 pandemic, the Russian invasion of Ukraine, inflation, rising interest rates, and recession risks as well as supply chain and labor shortages. 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. 8 Table of Contents 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 $ 1.6 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 or short-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, unless intended to fund current operations. 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 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. 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. 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. Right-of-use (“ROU”) assets and operating lease liabilities are 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. 9 Table of Contents 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 twelve 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. 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. 10 Table of Contents Amounts received prior to satisfying the revenue recognition criteria are recorded as contract liabilities in the Company’s Condensed Consolidated Balance Sheets. If the related performance obligation is expected to be satisfied within the next twelve months this will be classified in current liabilities. Amounts recognized as revenue prior to the Company having an unconditional right (other than a right that is conditioned only on the passage of time) to receipt are recorded as contract assets in the Company's Condensed Consolidated Balance Sheets. If the Company expects to have an unconditional right to receive the consideration in the next twelve months, this will be classified in current assets. A net contract asset or liability is presented for each contract with a customer. At contract inception, the Company assesses the goods or services promised in a contract with a customer and identifies those distinct goods and services that represent a performance obligation. A promised good or service may not be identified as a performance obligation if it is immaterial in the context of the contract with the customer, if it is not separately identifiable from other promises in the contract (either because it is not capable of being separated or because it is not separable in the context of the contract), or if the promised good or service does not provide the customer with a material right. The Company considers the terms of the contract to determine the transaction price. The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring promised goods or services to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. Variable consideration will only be included in the transaction price when it is not considered constrained, which is when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. If it is determined that multiple performance obligations exist, the transaction price is allocated at the inception of the agreement to all identified performance obligations based on the relative standalone selling prices ("SSP"). The relative SSP for each deliverable is estimated using external sourced evidence if it is available. If external sourced evidence is not available, the Company uses its best estimate of the SSP for the deliverable. Revenue is recognized when, or as, the Company satisfies a performance obligation by transferring a promised good or service to a customer. An asset is transferred when, or as, the customer obtains control of that asset, which for a service is considered to be as the services are received and used. The Company recognizes revenue over time by measuring the progress toward complete satisfaction of the relevant performance obligation using an appropriate input or output method based on the nature of the service promised to the customer. After contract inception, the transaction price is reassessed at every period end and updated for changes such as resolution of uncertain events. Any change in the transaction price is allocated to the performance obligations on the same basis as at contract inception, or to a single performance obligation as applicable. The Company accounts for the exercise of a material right as either a contract modification or as a continuation of the existing contract, as is most appropriate based on the facts and circumstances. 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 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. 11 Table of Contents 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 combined weighted-average number of common shares outstanding during the period and potentially dilutive common equivalent shares outstanding. However, where there is a net loss per share, no adjustment is made for potentially issuable shares since their effect would be anti-dilutive. In this case, diluted net loss per share is equal to basic net loss per share. 2. Fair Value Measurements Assets and liabilities measured at fair value at each balance sheet date are as follows (in thousands): June 30, 2023 Level 1 Level 2 Level 3 Total Assets: Cash equivalents: Money market funds $ 109,800 $ — $ — $ 109,800 Short-term marketable securities: U.S. government treasuries 993,536 — — 993,536 U.S. government agency securities — 26,666 — 26,666 Corporate debt securities — 19,032 — 19,032 Commercial paper — 19,780 — 19,780 Total $ 1,103,336 $ 65,478 $ — $ 1,168,814 December 31, 2022 Level 1 Level 2 Level 3 Total Assets: Cash equivalents: Money market funds $ 105,340 $ — $ — $ 105,340 U.S. government treasuries 43,781 — — 43,781 Commercial paper — 9,948 — 9,948 Short-term marketable securities: U.S. government treasuries 1,003,504 — — 1,003,504 U.S. government agency securities — 16,861 — 16,861 Corporate debt securities — 54,215 — 54,215 Commercial paper — 43,591 — 43,591 Total $ 1,152,625 $ 124,615 $ — $ 1,277,240 The carrying amounts of cost sharing reimbursements due to related party, prepaid expenses and other current assets, accounts payable, and accrued liabilities approximate their fair values due to their short-term maturities. The Company’s Level 2 securities are valued using third-party pricing sources. The pricing services utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly. The Company has not transferred any assets or liabilities between the fair value measurement levels. 12 Table of Contents 3. Marketable Securities All marketable securities were considered available-for-sale at June 30, 2023 and December 31, 2022. 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): June 30, 2023 Amortized Cost Unrealized Holding Gains Unrealized Holding Losses Aggregate Fair Value Short-term marketable securities: U.S. government treasuries (1) $ 994,580 $ 47 $ ( 1,091 ) $ 993,536 U.S. government agency securities (2) 26,698 4 ( 36 ) 26,666 Corporate debt securities (3) 19,046 1 ( 15 ) 19,032 Commercial paper 19,780 — — 19,780 Total $ 1,060,104 $ 52 $ ( 1,142 ) $ 1,059,014 __________________________________________________ (1) Unrealized holding losses on 42 securities with an aggregate fair value of $ 778.8 million. (2) Unrealized holding losses on 5 securities with an aggregate fair value of 19.8 million. (3) Unrealized holding losses on 5 securities with an aggregate fair value of $ 15.8 million. December 31, 2022 Amortized Cost Unrealized Holding Gains Unrealized Holding Losses Aggregate Fair Value Short-term marketable securities: U.S. government treasuries (1) $ 1,009,733 $ 58 $ ( 6,287 ) $ 1,003,504 U.S. government agency securities 16,823 38 — 16,861 Corporate debt securities (2) 54,571 — ( 356 ) 54,215 Commercial paper 43,591 — — 43,591 Total $ 1,124,718 $ 96 $ ( 6,643 ) $ 1,118,171 __________________________________________________ (1) Unrealized holding losses on 51 securities with an aggregate fair value of $ 683.4 million. (2) Unrealized holding losses on 16 securities with an aggregate fair value of $ 54.2 million. As of June 30, 2023 and December 31, 2022, a majority 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 June 30, 2023 or December 31, 2022. 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, a majority of these marketable securities are held in U.S. government securities, and the remainder were initially, and continue to be, held with investment grade, high credit quality institutions. All marketable securities with unrealized losses as of each balance sheet date have been in a loss position for less than twelve months or the loss is not material. As of June 30, 2023, all of the Company’s marketable securities have an effective maturity of less than one year . 13 Table of Contents 4. 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. In May 2018, the Company exercised the pre-negotiated option agreement (the "Option Agreement") under the F-star Collaboration 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”). The details of the Acquisition are further described in Note 4, "Acquisition", to the consolidated financial statements in the Company's 2022 Annual Report on Form 10-K. As of June 30, 2023, the Company had paid consideration of $ 43.8 million in the aggregate consisting of up-front, preclinical and clinical contingent consideration, all of which had been recognized as research and development expense in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) in the first quarter of 2023. The aggregate $ 43.8 million consideration payment includes $ 24.0 million of the $ 30.0 million contingent consideration payment triggered in March 2023 upon the achievement of a specified clinical milestone in the ETV:IDS program. The remaining $ 6.0 million of the $ 30.0 million contingent consideration payment remained in accrued clinical and other research and development costs on the Condensed Consolidated Balance Sheet as of June 30, 2023, and was paid in July 2023. This payment fully satisfies the Company's clinical contingent consideration obligations under the Purchase Agreement. There was no contingent consideration expense recognized for the three months ended June 30, 2023 or the three and six months ended June 30, 2022. 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 5, "Collaboration Agreements", to the consolidated financial statements in the 2022 Annual Report on Form 10-K. During the three and six months ended June 30, 2023, there were no changes to the terms of the Biogen Collaboration Agreement. During the three and six months ended June 30, 2023, Biogen exercised its option to license Denali’s ATV:Abeta program which was previously concluded to be a material right. Biogen provided additional consideration of $ 5.0 million at the time of exercise which was fully allocated to the material right. The option exercise was accounted for as a continuation of the existing contract, and resulted in the delivery of the ATV:Abeta Program License. The $ 288.9 million related party contract liability associated with the material right for the ATV:Abeta option, and the $ 5.0 million option fee were both allocated to this performance obligation which was satisfied upon transfer of the ATV:Abeta Program License in April 2023. Accordingly, related-party collaboration revenue from customers of $ 293.9 million was recognized in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) during the three and six months ended June 30, 2023. No change in the transaction price for the Biogen Collaboration Agreement was recorded during the three and six months ended June 30, 2022. 14 Table of Contents A related-party contract liability of $ 1.3 million and $ 290.5 million was recorded on the Condensed Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022, respectively. As of June 30, 2023, all of the remaining contract liability under the Biogen Collaboration Agreement relates to the portion of the Option Research Services performance obligation for the second option program 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 $ 7.0 million and $ 11.1 million of cost sharing payments to Biogen for LRRK2 development activities in research and development expenses in the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2023, respectively. The Company recorded an offset to research and development expenses for LRRK2 Development Activities of $ 0.4 million for cost sharing reimbursements, and incremental research and development expenses for LRRK2 Development Activities of $ 2.4 million for cost sharing payments, for the three and six months ended June 30, 2022, respectively. C ost sharing payments due to related party of $ 7.0 million and $ 4.4 million were recorded on the Condensed Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022 , respectively. As of June 30, 2023, the Company had earned $ 5.0 million in option fee payments, but has not recorded milestone revenue or 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 5, "Collaboration Agreements", to the consolidated financial statements in the Company's 2022 Annual Report on Form 10-K. The Company has no remaining performance obligations under the Sanofi Collaboration Agreement, and therefore no contract liability remains on the Condensed Consolidated Balance Sheets as of June 30, 2023 or December 31, 2022 . During the three and six months ended June 30, 2023, there were no changes to the terms of the Sanofi Collaboration Agreement. There was no revenue or changes in transaction price for the three months ended June 30, 2023. For the six months ended June 30, 2023 there was an increase in transaction price of $ 25.0 million as a result of a milestone payment triggered and received in January 2023 upon the commencement of dosing in a Phase 2 study of SAR443820/DNL788 in individuals with multiple sclerosis. This milestone was recognized in collaboration revenue from customers in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) during the first quarter of 2023 since the associated performance obligation had been satisfied. The transaction price of the Sanofi Collaboration Agreement increased by $ 40.0 million during the three and six months ended June 30, 2022 related to a $ 40.0 million milestone triggered in April 2022 upon first patient in a Phase 2 study of SAR443820/DNL788 in individuals with amyotrophic lateral sclerosis (ALS). As of June 30, 2023, the Company had earned milestone payments of $ 100.0 million and had no t recorded any product sales under the Sanofi Collaboration Agreement. Takeda PTV:PGRN and ATV:TREM2 Collaboration Agreements 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 5, "Collaboration Agreements", to the consolidated financial statements in the Company's 2022 Annual Report on Form 10-K. There are no remaining performance obligations or potential payments remaining under the initial Takeda Collaboration Agreement. 15 Table of Contents The 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 of which became effective in December 2021. The details of the PTV:PGRN Collaboration Agreement and the ATV:TREM2 Collaboration Agreement are further described in Note 5, "Collaboration Agreements", to the consolidated financial statements in the Company's 2022 Annual Report on Form 10-K. During the three and six months ended June 30, 2023, there were no changes to the terms of the ATV:TREM2 or PTV:PGRN Collaboration Agreements. During the three months ended June 30, 2023, there were no changes in the transaction price, and for the six months ended June 30, 2023 there was an increase in transaction price for a $ 10.0 million milestone payment that was triggered upon achievement of a specified clinical milestone in the Phase 1/2 clinical of DNL593 in patients with FTD-GRN in the first quarter of 2023 and is recognized in collaboration revenue from customers in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the six months ended June 30, 2023. During the three and six months ended June 30, 2022, there were no changes to the transaction prices for either the PTV:PGRN or ATV:TREM2 Takeda Collaboration Agreements. The Company recorded $ 1.9 million and $ 3.4 million of cost sharing reimbursements for PTV:PGRN Development Activities, and $ 1.5 million and $ 3.2 million for ATV:TREM2 Development Activities, for the three and six months ended June 30, 2023, respectively, as offsets to research and development expenses in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). The Company recorded $ 2.8 million and $ 5.7 million of cost sharing reimbursements for PTV:PGRN Development Activities, and $ 1.5 million and $ 3.6 million for ATV:TREM2 Development Activities, for the three and six months ended June 30, 2022, respectively, as offsets to research and development expenses in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). Cost sharing reimbursements of $ 3.4 million and $ 8.9 million are recorded as receivables within prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022, respectively. As of June 30, 2023, the Company had earned an aggregate of $ 10.0 million in option fee payments and $ 10.0 million in milestone payments from Takeda under the PTV:PGRN and ATV:TREM2 Collaboration Agreements, and had no t recorded any product sales under either agreement. 16 Table of Contents Collaboration Revenue Revenue disaggregated by collaboration agreement and performance obligation is as follows (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Takeda Collaboration Agreement: Takeda Collaboration Agreement Services (1) $ — $ 12,000 $ — $ 51,916 PTV:PGRN Collaboration Agreement — — 10,000 — Total Takeda Collaboration Revenue — 12,000 10,000 51,916 Sanofi Collaboration Agreement CNS Program License — 40,000 25,000 40,000 Total Sanofi Collaboration Revenue — 40,000 25,000 40,000 Biogen Collaboration Agreement ATV:Abeta Program License (2) 293,912 — 293,912 — Option Research Services (3) 211 480 352 2,705 Total Biogen Collaboration Revenue 294,123 480 294,264 2,705 Total Collaboration Revenue $ 294,123 $ 52,480 $ 329,264 $ 94,621 _________________________________________________ (1) Revenue of $ 27.9 million for the six months ended June 30, 2022 was included in the contract liability balance at the beginning of the period. No revenue for the three months ended June 30, 2022 was included in the contract liability balance at the beginning of the period. (2) Revenue of $ 288.9 million for the three and six months ended June 30, 2023 was included in the contract liability balance at the beginning of the period. (3) Revenue for the three and six months ended June 30, 2023 and 2022 was included in the contract liability balance at the beginning of the period. 6. License Agreement 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 6, "License Agreements", to the consolidated financial statements in the Company's 2022 Annual Report on Form 10-K. No expenses were recorded under the Genentech License Agreement for the three and six months ended June 30, 2023. In June 2022, the Company paid Genentech a $ 7.5 million clinical milestone payment triggered upon the commencement of dosing in the global Phase 2b LUMA study to evaluate the efficacy and safety of BIIB122/DNL151 by the Company's collaboration partner Biogen. Biogen is responsible for 50 % of any payment obligation to Genentech under the Biogen Collaboration Agreement, including this clinical milestone, and accordingly a net $ 3.8 million of research and development expense was recorded in the three and six months ended June 30, 2022 in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). To date, the Company has made payments to Genentech of $ 25.0 million in the aggregate, including an upfront fee, a technology transfer fee and three clinical milestone payments, with $ 18.8 million of the payments recorded as research and development expense as incurred, net of cost sharing reimbursements from Biogen. 17 Table of Contents 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"), as further described in Note 8, "Commitments and Contingencies," to the consolidated financial statements in the Company's 2022 Annual Report on Form 10-K. In August 2021, the Company entered into an operating lease for laboratory, office and warehouse premises in Salt Lake City, Utah (the “SLC Lease”) . In March 2023, the Company terminated the SLC Lease, which resulted in the recognition of $ 7.9 million of accelerated depreciation on leasehold improvements in the six months ended June 30, 2023 . The SLC Lease had not commenced for accounting purposes, and as such, no lease liability or ROU asset was recorded on the Condensed Consolidated Balance Sheet, and no operating lease expense was recorded associated with this lease. In April 2023, the Company entered into a new operating lease in Salt Lake City for a 59,336 square foot laboratory, office and warehouse premises with a contractual term of approximately 15.0 years upon commencement, and future undiscounted lease payments of approximately $ 13.4 million. For accounting purposes, this new lease has not yet commenced, and as such, no lease liability or ROU asset is recorded on the Condensed Consolidated Balance Sheet as of June 30, 2023 , and no operating lease expense has been recorded on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2023 . Management exercised judgment in applying the requirements of ASC 842, including the determination as to whether certain contracts contain a lease and for leases identified under the standard, the discount rate used to determine the measurement of the lease liability. The discount rates of our operating leases are an approximation of the Company's incremental borrowing rate and are dependent upon the term and economics of the agreement. To estimate the incremental borrowing rate, management considers observable debt yields of comparable market instruments, as well as benchmarks within the lease agreement that may be indicative of the rate implicit in the lease. There were no changes to the terms of the leases recognized under ASC 842 during the three or six months ended June 30, 2023. Operating lease costs, including variable costs, recognized under ASC 842 were $ 3.3 million and $ 6.2 million for the three and six months ended June 30, 2023, respectively, and $ 2.6 million and $ 5.5 million for the three and six months ended June 30, 2022, respectively. The following table contains a summary of other information pertaining to the Company’s operating lease for the periods presented (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Cash paid for amounts included in measurement of lease liabilities $ 2,763 $ 2,676 $ 5,759 $ 5,294 As of June 30, 2023 2022 Weighted average remaining lease term 5.8 years 6.8 years Weighted average discount rate 9.0 % 9.0 % The following table reconciles the undiscounted cash flows for the next five years and total of the remaining years to the operating lease liabilities recorded in the Condensed Consolidated Balance Sheet as of June 30, 2023 (in thousands): 18 Table of Contents Year Ended December 31: 2023 (six months) 5,586 2024 11,417 2025 11,793 2026 12,182 2027 12,584 Thereafter 17,381 Total undiscounted lease payments 70,943 Present value adjustment ( 15,418 ) Net operating lease liabilities $ 55,525 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 Income (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 when all development and manufacturing services are completed, which is expected to be by November 2029. As of June 30, 2023 and December 31, 2022, the Company had total non-cancellable purchase commitments under the DMSA of $ 41.5 million and $ 32.3 million, respectively. During the three months ended June 30, 2023 and 2022, the Company incurred costs of $ 10.9 million and $ 9.5 million, respectively, and made payments of $ 8.3 million and $ 7.0 million, respectively, for the development and manufacturing services rendered under the DMSA. During the six months ended June 30, 2023 and 2022, the Company incurred costs of $ 16.1 million and $ 19.5 million, respectively, and made payments of $ 12.1 million and $ 15.7 million, respectively, for the development and manufacturing services rendered under the DMSA. In the normal course of business, the Company enters into other firm purchase commitments primarily related to research and development activities. The Company had contractual obligations under certain clinical and manufacturing agreements other than the DMSA of $ 39.3 million and $ 9.6 million, as of June 30, 2023 and December 31, 2022, respectively, with certain amounts subject to cost sharing with Takeda. 19 Table of Contents 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. 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 9, "Stock-Based Awards" to the consolidated financial statements in the Company's 2022 Annual Report on Form 10-K. Stock Option Activity The following table summarizes stock option activity for the six months ended June 30, 2023: Number of Options Weighted-Average Exercise Price Balance at December 31, 2022 14,673,717 $ 27.03 Granted 3,264,781 27.68 Exercised ( 572,998 ) 12.60 Forfeited ( 418,929 ) 41.33 Balance at June 30, 2023 16,946,571 $ 27.29 Vested and expected to vest at June 30, 2023 16,136,700 $ 28.63 Exercisable at June 30, 2023 10,656,835 $ 24.47 The estimated fair value of stock options granted to employees were calculated using the Black-Scholes option-pricing model using the following assumptions: Six Months Ended June 30, 2023 2022 Expected term (in years) 5.50 - 6.08 5.50 - 6.08 Volatility 68.7 % - 69.6 % 65.1 % - 66.1 % Risk-free interest rate 3.4 % - 4.2 % 1.5 % - 3.0 % Dividend yield — — Restricted Stock Activity The following table summarizes restricted stock unit ("RSU") activity for the six months ended June 30, 2023: Number of RSU shares Weighted-Average Fair Value at Date of Grant per Share Unvested at December 31, 2022 3,330,654 $ 41.39 Granted 1,447,065 27.63 Vested and released ( 665,883 ) 41.95 Forfeited ( 251,052 ) 36.83 Unvested and expected to vest at June 30, 2023 3,860,784 $ 36.43 20 Table of Contents Stock-Based Compensation Expense The Company’s results of operations include expenses relating to stock-based compensation as follows (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Research and development $ 15,189 $ 14,872 $ 31,973 $ 30,428 General and administrative 11,381 9,064 22,681 19,653 Total $ 26,570 $ 23,936 $ 54,654 $ 50,081 9. 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): Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Numerator: Net income (loss) $ 183,383 $ ( 58,794 ) $ 73,602 $ ( 124,014 ) Denominator: Weighted average number of shares outstanding, basic 137,047,227 123,008,558 136,787,321 122,842,171 Dilutive effect of outstanding common stock options, ESPP shares issuable, and restricted shares 3,883,398 — 3,762,905 — Weighted average number of shares outstanding, diluted 140,930,625 123,008,558 140,550,226 122,842,171 Net income (loss) per share, basic $ 1.34 $ ( 0.48 ) $ 0.54 $ ( 1.01 ) Net income (loss) per share, diluted $ 1.30 $ ( 0.48 ) $ 0.52 $ ( 1.01 ) Potentially dilutive securities, including all options issued and outstanding, ESPP shares issuable, and restricted shares subject to future vesting, that were not included in the diluted per share calculations for all periods presented because they would be anti-dilutive totaled approximately 11.8 million and 18.4 million shares as of June 30, 2023 and June 30, 2022, respectively. 21 Table of Contents