DNLI US Equity☆

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and the related notes to those statements included elsewhere in this report. This discussion and analysis and other parts of this report contain forward-looking statements based upon current beliefs, plans and expectations related to future events and our future financial performance that involve risks, uncertainties and assumptions, such as statements regarding our intentions, plans, objectives, expectations, forecasts and projections. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under the section titled “Risk Factors” and elsewhere in this report.

Overview

Our goal is to discover and develop therapeutics to defeat degeneration.

Our strategy is guided by three overarching principles that we believe will significantly increase the probability of success and will accelerate the timing to bring effective therapeutics to patients with neurodegenerative diseases:

•Genetic Pathway Potential: We select our therapeutic targets and disease pathways based on genes that, when mutated, cause, or are major risk factors for, neurodegenerative diseases. We refer to these genes as degenogenes;

•Engineering Brain Delivery: We engineer our product candidates to cross the blood-brain barrier ("BBB") and act directly in the brain; and

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•Biomarker-Driven Development: We discover, develop and utilize biomarkers to select the right patient population and demonstrate target engagement, pathway engagement and impact on disease progression of our product candidates.

We are developing a broad portfolio of targeted therapeutic candidates for neurodegenerative diseases. Our programs are at different stages of clinical and preclinical development, including five programs in clinical studies.

We have also developed a proprietary BBB platform technology, our transport vehicle ("TV"), which enables multiple modality-based platforms to deliver a wide range of large-molecule therapeutics across the BBB, including enzymes, antibodies, proteins and oligonucleotides. This technology is designed to engage specific BBB transport receptors, which are ubiquitously expressed in brain capillaries and facilitate transport of proteins into the brain. We are currently optimizing and broadening this platform technology.

Our five clinical-stage programs are:

•our leucine-rich repeat kinase 2 ("LRRK2") inhibitor program, in collaboration with Biogen, to address Parkinson’s disease;

•our Eukaryotic initiation factor 2 B ("EIF2B”) activator program to address diseases such as amyotrophic lateral sclerosis ("ALS") and Frontotemporal Dementia ("FTD”);

•our ETV:IDS program, our most advanced program enabled by our TV technology, which is designed to restore iduronate 2-sulfatase ("IDS"), and reduce glycosaminoglycans, both peripherally and in the brain, in patients with mucopolysaccharidosis II ("MPS II", or "Hunter syndrome");

•our receptor interacting serine/threonine protein kinase 1 ("RIPK1") inhibitor program, partnered with Sanofi, to address neurological diseases such as Alzheimer’s disease and ALS as well as multiple sclerosis ("MS”); and

•a second non-CNS penetrant RIPK1 inhibitor, partnered with Sanofi, to address peripheral inflammatory diseases such as cutaneous lupus.

The following table summarizes key information about our clinical stage programs:

Program Product Candidate(s) Clinical Phase Indication(s) Operational Control

LRRK2 DNL151 (BIIB122) Ph 1 and Ph 1b Parkinson's disease Joint with Biogen

ETV:IDS DNL310 Ph 1/2 Hunter syndrome (MPS II) Denali

EIF2B DNL343 Ph 1 ALS and FTD Denali

RIPK1 (CNS) DNL788 (SAR443820) Ph 1 Neurological diseases Sanofi

To complement our internal capabilities, we have entered into arrangements with biopharmaceutical companies, patient-focused data companies, numerous leading academic institutions and foundations to gain access to new product candidates, enable and accelerate the development of our existing programs and deepen our scientific understanding of certain areas of biology. We currently rely on third-party contract manufacturers to manufacture and supply our preclinical and clinical materials to be used during the development of our product candidates. We currently do not need commercial manufacturing capacity.

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Since we commenced operations, we have devoted substantially all of our resources to discovering, acquiring and developing product candidates, building our BBB platform technology and assembling our core capabilities in understanding key neurodegenerative disease pathways.

Key operational and financing milestones for the year ended December 31, 2020 and in 2021 to date include:

•LRRK2

◦In January 2020, we announced positive results from our LRRK2 program. Phase 1b results with DNL201 in patients with Parkinson’s disease demonstrated high levels of target and pathway engagement and improvement of lysosomal biomarkers. Interim Phase 1 results with DNL151 (BIIB122) in more than 150 healthy volunteers also met all safety and biomarker goals. Both clinical trials showed dose-dependent target engagement, improvement in biomarkers of lysosomal function and demonstrated safety profiles supporting progression to further development;

◦In August 2020, we entered into a binding Provisional Collaboration and License Agreement with Biogen Inc.’s subsidiaries, Biogen MA Inc. (“BIMA”) and Biogen International GmbH (“BIG”) (BIMA and BIG, collectively, “Biogen”) to co-develop and co-commercialize our small molecule inhibitors of LRRK2 for Parkinson’s disease. Under the Provisional Collaboration and License Agreement, Biogen also received rights to opt into two programs and a right of first negotiation for two additional programs, in each case for neurodegenerative diseases leveraging our TV technology platform to cross the BBB and excluding small molecules, AAVs and oligonucleotides. In October 2020, the Provisional Collaboration and License Agreement expired upon the execution of the Definitive LRRK2 Collaboration and License Agreement and Right of First Negotiation, Option and License Agreement with Biogen (collectively the "Biogen Collaboration Agreement"). In connection with the Biogen Collaboration Agreement, we received an equity investment of $465.0 million in September 2020 and an aggregate of $560.0 million in upfront payments in October 2020. We may be eligible to receive up to $1.1 billion in potential milestone payments plus profit sharing and royalties for the LRRK2 program;

◦In August 2020, we announced, together with our collaboration partner Biogen, the selection of DNL151 (BIIB122) to progress into late-stage development. We expect to initiate late-stage clinical development of DNL151 (BIIB122) in Parkinson's patients in the second half of 2021. Two clinical studies are planned: one in patients who carry LRRK2 mutations and the other in Parkinson's patients independent of mutation status;

◦In January 2021, we announced completion of the DNL151 (BIIB122) Phase 1b trial in Parkinson’s patients. Target engagement and pathway engagement goals were met. We are currently completing further dose escalation cohorts in an expanded Phase 1 trial to define the full therapeutic window of DNL151 (BIIB122);

•ETV:IDS: In August 2020, we commenced dosing in a Phase 1/2 clinical trial of DNL310 in Hunter syndrome patients. In November 2020, we announced biomarker proof of concept was achieved in the Phase 1/2 trial after four weekly doses of DNL310, and in February 2021, we announced additional positive interim results after three months of dosing. Based on strong proof-of-concept data, we are expanding our DNL310 development program in the ongoing Phase 1/2 trial, which will enable further exploration of clinical endpoints related to neuronopathic manifestations in patients. We plan to initiate a Phase 2/3 trial in the first half of 2022;

•EIF2B: In February 2020, we initiated a Phase 1 clinical trial for DNL343 in healthy volunteers. Results from this trial are expected to be available in the first half of 2021. We plan to initiate a Phase 1b trial of DNL343 in patients with ALS in the second half of 2021;

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•RIPK1

◦In December 2020, our collaboration partner Sanofi commenced dosing of DNL788 (SAR443820), a potent, selective brain-penetrant small molecule inhibitor of RIPK1, in a Phase 1 clinical trial in healthy volunteers. Earlier in 2020, we decided, together with our collaboration partner Sanofi, to pause clinical studies with DNL747 and focus our efforts on accelerating development of DNL788 (SAR443820), the backup molecule, which we believe has superior drug properties and a more rapid path toward proof-of-concept clinical studies in patients in multiple neurological indications;

◦Separately, in July 2020, Sanofi commenced dosing of DNL758 (SAR443122), a peripherally-restricted small molecule inhibitor of RIPK1, in a Phase 1b clinical trial in hospitalized adult patients with severe COVID-19 lung disease. The Phase 1b trial was completed and DNL758 (SAR443122) was found to be generally well tolerated and resulted in changes in disease relevant biomarkers and clinical outcome trends consistent with the proof of mechanism. Based on the rapidly evolving landscape of treatment and prevention options for COVID-19, Sanofi has made a sponsor decision to hold further development in COVID-19 at this time. Sanofi plans to initiate a Phase 2 clinical trial of DNL758 (SAR443122) in patients with cutaneous lupus in the first half of 2021;

•Other

◦In January 2020, we sold 9.0 million shares of common stock (inclusive of shares sold pursuant to an overallotment option granted to the underwriters in connection with the offering) through an underwritten public offering at a price of $23.00 per share for aggregate net proceeds of $193.9 million;

◦In December 2020 and January 2021, GLP toxicology studies were initiated for PTV:PGRN and ATV:TREM2, respectively, triggering the second preclinical milestone payments under the Takeda Collaboration Agreement of $8.0 million for each program. The milestone payment for PTV:PGRN was received in January 2021;

◦In January 2021, following achievement of human biomarker proof of concept with DNL310 for Hunter syndrome, we announced the addition of five new brain-penetrant enzyme replacement therapy programs in its ETV portfolio including: (1) ETV:GBA for Gaucher disease and Parkinson’s disease; (2) ETV:GAA for Pompe disease; (3) ETV:IDUA for MPS I; (4) ETV:NAGLU for MPS IIIB; and (5) ETV:ARSA for Metachromatic Leukodystrophy ("MLD"); and

◦To address risks posed by the COVID-19 pandemic, we have implemented policies that enable some of our employees to work remotely. For all on-site personnel, we have implemented several safety protocols, including regular, mandatory COVID-19 testing procedures and compliance measures for social distancing and use of personal protective equipment. After initial COVID-19 pandemic shutdown restrictions were put into place in March 2020, we experienced a pause in patient recruitment in several clinical trials. Recruitment has since resumed for all affected clinical trials.

We do not have any products approved for sale and have not generated any product revenue since our inception. We have funded our operations primarily from the issuance and sale of convertible preferred stock, and the proceeds from our IPO, follow-on offering, and payments received from our collaboration agreements with Takeda, Sanofi and Biogen.

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We have incurred significant operating losses to date and expect to continue to incur operating losses for the foreseeable future. Our ability to generate product revenue will depend on the successful development and eventual commercialization of one or more of our product candidates. Due to revenue recognized from our collaboration arrangement with Biogen, we had net income of $71.1 million for the year ended December 31, 2020. Our net losses were $197.6 million and $88.2 million for the years ended December 31, 2019 and 2018, respectively. As of December 31, 2020, we had an accumulated deficit of $354.4 million. We expect to continue to incur significant expenses and operating losses as we advance our current clinical stage programs through healthy volunteer and patient trials; broaden and improve our BBB platform technology; acquire, discover, validate and develop additional product candidates; obtain, maintain, protect and enforce our intellectual property portfolio; and hire additional personnel.

License and Collaboration Agreements

Takeda

In January 2018, we entered into the Collaboration Agreement with Takeda (“Takeda Collaboration Agreement”) pursuant to which we granted Takeda an option with respect to three of our programs to develop and commercialize, jointly with us, certain biologic products that are enabled by our BBB delivery technology and intended for the treatment of neurodegenerative disorders. The three programs were our ATV:BACE1/Tau, ATV:TREM2 and PTV:PGRN programs. The Takeda Collaboration Agreement became effective in February 2018 when the requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR") were satisfied. In February 2019, we amended the Takeda Collaboration Agreement to replace the ATV:BACE1/Tau program with the ATV:Tau program.

Under the terms of the Takeda Collaboration Agreement, Takeda paid us a $40.0 million upfront payment, and is obligated to pay us up to an aggregate of $25.0 million with respect to each program under the Takeda Collaboration Agreement directed to a target and based upon the achievement of certain preclinical milestone events, up to $75.0 million in total, of which we have earned and received $15.0 million to date. Takeda is also obligated to pay us a $5.0 million option fee for each target for which Takeda exercises its option, up to $15.0 million in total.

Pursuant to the terms of the Takeda Collaboration Agreement, we entered into the Purchase Agreement with Takeda in January 2018, pursuant to which we agreed to issue and sell, and Takeda agreed to purchase, 4,214,559 shares of our common stock for an aggregate purchase price of $110.0 million. We closed the sale of the 4,214,559 shares of our common stock to Takeda on February 23, 2018.

After Takeda exercises its option for a particular target, we and Takeda will share equally the development and commercialization costs, and, if applicable, the profits, for each collaboration program. However, for each collaboration program, we may elect not to continue sharing development and commercialization costs, or Takeda may elect to terminate our cost-profit sharing rights and obligations if, following notice from Takeda and a cure period, we fail to satisfy our cost sharing obligations with respect to the relevant collaboration program. After such an election by us or termination by Takeda becomes effective, we will no longer be obligated to share in the development and commercialization costs for the relevant collaboration program, and we will not share in any profits from that collaboration program. Instead we will be entitled to receive tiered royalties. The royalty rates will be in the low- to mid-teen percentages on net sales, or low- to high-teen percentages on net sales if we have met a certain co-funding threshold at the time of our election to opt out of co-development or Takeda’s termination of our cost-profit sharing rights and obligations, and, in each case, these royalty rates will be subject to certain reductions specified in the Takeda Collaboration Agreement. Takeda will pay these royalties to us for each biologic product included in the relevant collaboration program, on a country-by-country basis, until the latest of (i) the expiration of certain patents covering the relevant biologic product, (ii) the expiration of all regulatory exclusivity for that biologic product, and (iii) an agreed period of time after the first commercial sale of that biologic product in the applicable country, unless biosimilar competition in excess of a significant level specified in the Takeda Collaboration Agreement occurs earlier, in which case Takeda’s royalty obligations in the applicable country would terminate.

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In addition, if Takeda exercises its option for all three collaboration programs, Takeda may be obligated to pay us up to an aggregate of $407.5 million upon achievement of certain clinical milestone events and up to an aggregate of $300.0 million in regulatory milestone events relating to receipt of regulatory approval in the United States, certain European countries and Japan. Takeda may also be obligated to pay us up to $75.0 million per biologic product upon achievement of a certain sales-based milestone, or an aggregate of $225.0 million if one biologic product from each program achieves this milestone.

We have recognized collaboration revenue of $27.2 million, $5.9 million and $5.7 million associated with the Takeda Collaboration Agreement in the years ended December 31, 2020, 2019 and 2018, respectively. We recorded a receivable of $8.0 million from Takeda as of December 31, 2020, payment for which was received in January 2021, and no receivable as of December 31, 2019.Through December 31, 2020, we have received $15.0 million in preclinical milestone payments from Takeda and have not recorded any product sales under the Takeda Collaboration Agreement.

Sanofi

In October 2018, we entered into the Sanofi Collaboration Agreement with Sanofi pursuant to which certain small molecule CNS and peripheral RIPK1 inhibitors contributed by Sanofi and by us will be developed and commercialized. The Sanofi Collaboration Agreement became effective in November 2018 when the HSR requirements were satisfied. Under the terms of the Collaboration Agreement, Sanofi paid us a $125.0 million upfront payment. Under the Sanofi Collaboration Agreement, Sanofi is required to make milestone payments up to approximately $1.1 billion upon achievement of certain clinical, regulatory and sales milestone events. Such milestone payments include $215.0 million in clinical milestone payments and $385.0 million in regulatory milestone payments for CNS Products, as defined, that are developed and approved in the United States, by the European Medicines Agency ("EMA") and in Japan for three indications, including Alzheimer's disease. These milestones also include $120.0 million in clinical milestone payments, $175.0 million in regulatory milestone payments and $200.0 million in commercial milestone payments for Peripheral Products, as defined, that are developed and approved in the United States, by the EMA and in Japan for three indications. Through December 31, 2020, we have received milestone payments of $10.0 million under the Sanofi Collaboration Agreement.

We will share profits and losses equally with Sanofi for CNS Products sold in the United States and China, and receive royalties on net sales for CNS Products outside of the United States and China and for Peripheral Products sold worldwide, each as further described below. RIPK1 Inhibitors contributed by Sanofi and developed and commercialized under the Sanofi Collaboration Agreement will be subject to lower milestone and royalty payments to us compared to RIPK1 Inhibitors contributed by us. We will also retain responsibility for certain payment obligations under our agreement with an academic institution which licensed certain intellectual property to us that we are sublicensing to Sanofi under the Sanofi Collaboration Agreement.

We and Sanofi will jointly develop CNS Products pursuant to a global development plan. We will be responsible, at our cost, for the conduct of Phase 1 and Phase 2 trials for CNS Products for Alzheimer’s disease and any activities required to support such clinical trials and specific for Alzheimer’s disease. Sanofi will be responsible, at its cost, for all other Phase 1 and Phase 2 trials for CNS Products, including for ALS and multiple sclerosis. Sanofi will lead the conduct of all Phase 3 and later stage development trials for CNS Products, with Sanofi funding 70% of such costs and us funding 30% of such costs. We have the ability to opt out of the cost-profit sharing provisions of the Sanofi Collaboration Agreement, as further described below.

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Sanofi will lead commercialization activities globally for CNS Products. We may elect to conduct certain co-commercialization activities outside of MS with respect to each CNS Product in the United States and/or China, provided that the cost-profit sharing provisions of the Sanofi Collaboration Agreement for the relevant CNS Product are still in effect, as further described below.

We may opt out of the cost-profit sharing provisions of the Sanofi Collaboration Agreement for CNS Products in the United States and China on a CNS Product-by-CNS Product and country-by-country basis. Sanofi may also terminate our cost-profit sharing provisions of the Sanofi Collaboration Agreement in its entirety if, following notice from Sanofi and a cure period, we fail to satisfy our cost-sharing obligations. After such an opt out by us or termination by Sanofi, we will no longer be obligated to share in the development and commercialization costs for the applicable CNS Products and we will not share in the applicable profits from such CNS Products. Instead, we will be entitled to receive tiered royalties on net sales of the applicable CNS Products in the relevant country (or countries). The royalty rates will be a percentage in the low double digits to mid-teens, but may increase to the mid-teens to low-twenties percentages for all countries in which Sanofi is paying royalties on the applicable CNS products, if we have met certain co-funding thresholds at the time of our election or Sanofi’s termination of our cost-profit sharing rights and obligations.

Sanofi will be responsible, at its cost, for conducting activities relating to the development and commercialization of all Peripheral Products. Sanofi will lead commercialization activities globally for Peripheral Products. We will be entitled to receive tiered royalties in the low- to mid- teen percentages on net sales of Peripheral Products.

We have recognized collaboration revenue of $1.1 million, $20.8 million and $123.5 million associated with the Sanofi Collaboration Agreement in the years ended December 31, 2020, 2019 and 2018, respectively, and recorded a receivable from Sanofi of $44,303 and $1.2 million on the Consolidated Balance Sheets as of December 31, 2020 and 2019, respectively. Through December 31, 2020, we have received milestone payments of $10.0 million and have not recorded any product sales under the Sanofi Collaboration Agreement.

Biogen

In August 2020, we entered into the Provisional Biogen Collaboration Agreement with Biogen pursuant to which we granted Biogen a license to co-develop and co-commercialize our LRRK2 Program, an option in respect of two Option Programs, and a right of first negotiation with respect to the ROFN Programs should we decide to seek a collaboration with a third party for such programs. In October 2020, we entered into the LRRK2 Agreement and the ROFN and Option Agreement with Biogen. The material terms of the LRRK2 Agreement and the ROFN and Option Agreement were consistent with, and superseded, the Provisional Biogen Collaboration Agreement.

The LRRK2 Agreement

The LRRK2 Agreement includes our LRRK2 Products that penetrate the BBB, including DNL201 and DNL151 (BIIB122), as well as those that do not penetrate the BBB. Based on the totality of preclinical and clinical data to date, both DNL201 and DNL151 (BIIB122) (two chemically distinct LRRK2 inhibitors) have met our requirements to proceed into further late-stage clinical testing, however, DNL151 (BIIB122) has been selected to proceed due to pharmacokinetic properties that provide additional dosing regimen flexibility.

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Under the terms of the LRRK2 Agreement, Biogen paid us a $400 million upfront payment in October 2020. With respect to the LRRK2 Program, Biogen is required to make milestone payments up to approximately $1.125 billion upon achievement of certain development and sales milestone events. Such milestone payments include $375.0 million in development, $375.0 million upon first commercial sale, and $375.0 million in net sales-based milestones. We will share profits and losses equally with Biogen for LRRK2 Products in the United States and will share profits and losses in China with Biogen sharing 60% of such profits and losses and us sharing 40% of such profits and losses. We will be entitled to receive royalties in the high teens to low twenties percentages on net sales for LRRK2 Products outside of the United States and China.

We and Biogen will jointly develop LRRK2 Products pursuant to a clinical development plan set forth in the LRRK2 Agreement. We and Biogen will share responsibility and costs for global development of LRRK2 Products, with Biogen funding 60% of such costs and us funding 40% of such costs. We have the ability to opt out of the development cost sharing arrangement, as further described below. Biogen will lead commercialization activities globally for LRRK2 Products. We will co-commercialize the LRRK2 Products with Biogen in the United States and China, provided that the profit-sharing arrangement for the LRRK2 Products is still in effect, as further described below.

We may opt out of development cost sharing worldwide and upon such election, of all further profit sharing from the LRRK2 Program. We also have the right to opt-out of the profit-sharing arrangement for the LRRK2 Program or for only those LRRK2 Products that do not penetrate the BBB (“Peripheral LRRK2 Products”), in each of the United States and China. After such an opt out, we will no longer be obligated to share in the development and commercialization costs for, and we will not share in the applicable revenues from, such LRRK2 Program (or from the Peripheral LRRK2 Products) in such country, as applicable. In such cases, we will be entitled to receive tiered royalties on net sales of the applicable LRRK2 Program in the relevant country (or countries). The royalty rates for the applicable LRRK2 Program will be a percentage in the high teens to low twenties, but may increase to the low twenties to mid-twenties, if we have met certain co-funding thresholds or there has been a first commercial sale at the time of our election.

The ROFN and Option Agreement

In addition to the LRRK2 Program, Biogen also received an exclusive option to license two preclinical programs from our TV technology platform, including our ATV:Abeta program and a second program utilizing our TV technology for an unnamed target, excluding small molecules, AAVs and oligonucleotides. Biogen’s option may be triggered up to initiation of IND-enabling studies for each program and continues for each program until a specified period of time after delivery of an option data package or 30 business days after the 5th anniversary of the effective date of the Provisional Biogen Collaboration Agreement, whichever is earlier.

Further, Biogen will have the right of first negotiation on two additional TV-enabled therapeutics in the field of Alzheimer’s disease, Parkinson’s disease, ALS or multiple sclerosis should we decide to seek a collaboration with a third party for such programs, but this does not include any of our small molecule, AAVs and oligonucleotide programs. The ROFN period continues until seven years after the effective date of the Provisional Biogen Collaboration Agreement or the date on which we have offered Biogen two ROFN Programs and for which Biogen has agreed to trigger a ROFN for such program, whichever is earlier. However, if we do not execute an agreement with a third party with respect to a particular ROFN Program offered to Biogen within a specified amount of time, then Biogen will have one additional right to exercise the ROFN again with respect to such ROFN Program.

Under the ROFN and Option Agreement, Biogen paid us a $160 million upfront payment in October 2020. With respect to the options granted by us to Biogen, Biogen is obligated to pay to us an aggregate of up to $270 million in option exercise and development milestone payments and an aggregate of up to $615 million in commercial milestone payments, following the achievement of certain prespecified milestone events and if Biogen exercises both of its options. Furthermore, Biogen is obligated to pay us royalties in the mid-single digit to mid-teens percentages, depending on the program for which Biogen exercises its option and upon the achievement of certain sales thresholds.

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In addition, if Biogen exercises its ROFN with respect to an eligible Denali program, the parties are obligated to negotiate in good faith for a specified period of time regarding the financial and other terms of an agreement pursuant to which Biogen would obtain rights to such program.

Common Stock Purchase Agreement

In August 2020, in connection with the Provisional Biogen Collaboration Agreement, we entered into a common stock purchase agreement (the “Stock Purchase Agreement”) with BIMA, pursuant to which we agreed to issue and sell, and BIMA agreed to purchase, 13,310,243 shares of our common stock (the “Shares”) for an aggregate purchase price of $465.0 million pursuant to the terms and conditions thereof. The sale of the Shares closed, and payment was received, in September 2020.

We have recognized related party collaboration revenue of $307.4 million and a related party offset to research and development expense of $9.3 million in the year ended December 31, 2020 associated with the Biogen Collaboration Agreement. We have recorded cost sharing reimbursements due from Biogen of $5.7 million on the consolidated balance sheet as of December 31, 2020. Through December 31, 2020, we have not received any milestone payments from Biogen and have not recorded any product sales under the Biogen Collaboration Agreement.

F-star

In August 2016, we 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”). The goal of the collaboration is the development of Fcabs to enhance delivery of therapeutics across the BBB into the brain. The collaboration leverages F-star’s modular antibody technology and our expertise in the development of therapies for neurodegenerative diseases. In connection with the entry into the F-star Collaboration Agreement, we also purchased an option for an upfront option fee of $0.5 million, or the buy-out option, to acquire all of the outstanding shares of F-star Gamma pursuant to a pre-negotiated buy-out option agreement ("Option Agreement").

In May 2018, we exercised such buy-out option 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 we acquired all of the outstanding shares of F-star Gamma (the “Acquisition”).

As a result of the Acquisition, F-star Gamma became our wholly-owned subsidiary and the entity's name was changed to Denali BBB Holding Limited. In addition, we became a direct licensee of certain intellectual property of F-star Ltd by way of our assumption of F-star Gamma’s license agreement with F-star Ltd, dated August 24, 2016, (the “F-star Gamma License”). We made initial exercise payments of $18.0 million in aggregate under the Purchase Agreement and the F-star Gamma License, less the net liabilities of F-star Gamma, which were approximately $0.2 million. In addition, we are required to make future contingent payments, to F-star Ltd and the former shareholders of F-star Gamma, up to a maximum amount of $447.0 million in the aggregate upon the achievement of certain defined preclinical, clinical, regulatory and commercial milestones. These include up to $27.0 million in preclinical contingent payments, $50.0 million in clinical contingent payments, $120.0 million in regulatory contingent payments and $250.0 million in commercial contingent payments. The amount of the contingent payments will vary based on whether F-star delivers an Fcab (constant Fc-domains with antigen-binding activity) that meets pre-defined criteria and whether the Fcab has been identified solely by us or solely by F-star Ltd. or jointly by us and F-star Ltd. In June 2019, we made a payment of $1.5 million to F-star Ltd upon the achievement of a specified preclinical milestone in our ETV:IDS program.

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Under the terms of the original F-star Collaboration Agreement, we could nominate up to three Fcab targets (“Accepted Fcab Targets”) within the first three years of the date of the F-star Collaboration Agreement. Upon entering into the F-star Collaboration Agreement, we selected transferrin receptor (“TfR”) as the first Accepted Fcab Target and paid F-star Gamma an upfront fee of $5.5 million, which included selection of the first Accepted Fcab Target. In May 2018, we exercised our right to nominate two additional Fcab Targets and identified a second Accepted Fcab Target. We made a one-time payment for the two additional Accepted Fcab Targets of $6.0 million in the aggregate and extended the time period for our selection of the third Accepted Fcab Target until approximately the fourth anniversary of the date of the original F-star Collaboration Agreement, or August 2020. We have not identified a third Fcab Target.

We did not recognize any contingent consideration on the acquisition date. We recognized $1.5 million and $18.3 million of consideration as research and development expense in the years ended December 31, 2019 and 2018, respectively. No research and development expense was recognized for consideration under the F-star Purchase Agreement in the year ended December 31, 2020. $6.0 million for the nomination of two additional Accepted Fcab Targets under the F-star Collaboration Agreement was recognized as research and development expense in the year ended December 31, 2018, along with the upfront option fee of $0.5 million previously included within other non-current assets. We recognized an additional $1.2 million, $1.1 million and $0.8 million of research and development expense related to the funding of F-star research costs for the years ended December 31, 2020, 2019 and 2018, respectively.

Genentech

In June 2016, we entered into an Exclusive License Agreement with Genentech. The agreement gives us access to Genentech’s LRRK2 inhibitor program. As consideration to date, we have paid Genentech $12.5 million in the aggregate, including an upfront fee, a technology transfer fee and a clinical milestone payment, all of which was recorded as research and development expense as incurred. No amounts were recorded in the years ended December 31, 2020 or 2019. The first clinical milestone payment of $12.5 million was recorded as research and development expense during the year ended December 31, 2017.

We may owe Genentech milestone payments upon the achievement of certain development, regulatory, and commercial milestones, up to a maximum of $315.0 million in the aggregate. These milestones include up to $37.5 million in clinical milestone payments, $102.5 million in regulatory milestone payments and $175.0 million in commercial milestone payments. In addition, we may owe royalties on net sales of licensed products ranging from low to high single-digit percentages, with the exact royalty rate dependent on various factors, including (i) whether the compound incorporated in the relevant licensed product is a Genentech-provided compound or a compound acquired or developed by us, (ii) the date a compound was first discovered, derived or optimized by us, (iii) the existence of patent rights covering the relevant licensed product in the relevant country, (iv) the existence of orphan drug exclusivity covering a licensed product that is a Genentech-provided compound and (v) the level of annual net sales of the relevant licensed product. We also have the right to credit a certain amount of third-party royalty and milestone payments against royalty and milestone payments owed to Genentech, up to a maximum reduction of fifty percent. Under the terms of our LRRK2 Agreement with Biogen, Biogen is responsible for 50% of any payment obligation to Genentech under this agreement accruing after October 2020.

Unless earlier terminated, the agreement with Genentech will continue in effect until all of our royalty and milestone payment obligations to Genentech expire. Following expiration of the agreement, we will retain the licenses under the intellectual property Genentech licensed to us on a non-exclusive, royalty-free basis.

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Components of Operating Results

Collaboration Revenue

To date, we have not generated any revenue from product sales and do not expect to generate any revenue from product sales for the foreseeable future. All revenue recognized to date has been collaboration and license revenue from our collaboration agreements with Takeda, Sanofi and Biogen.

In the future, we will continue to recognize revenue from the Takeda Collaboration Agreement, Sanofi Collaboration Agreement, and Biogen Collaboration Agreement, and may generate revenue from product sales or milestones, royalties and cost reimbursement from other collaboration agreements, strategic alliances and licensing arrangements. We expect that our revenue will fluctuate from quarter-to-quarter and year-to-year as a result of the timing and amount of license fees, milestones, reimbursement of costs incurred and other payments and product sales, to the extent any are successfully commercialized. If we fail to complete the development of our product candidates in a timely manner or obtain regulatory approval for them, our ability to generate future revenue, and our results of operations and financial position, would be materially adversely affected.

Operating Expenses

Research and Development

Research and development activities account for a significant portion of our operating expenses. We record research and development expenses as incurred. Research and development expenses incurred by us for the discovery and development of our product candidates and BBB platform technology include:

• external research and development expenses, including:

–expenses incurred under arrangements with third parties, such as contract research organizations ("CROs"), preclinical testing organizations, contract development and manufacturing organizations ("CDMOs"), academic and non-profit institutions and consultants;

–expenses to acquire technologies to be used in research and development that have not reached technological feasibility and have no alternative future use;

–fees related to our license and collaboration agreements;

•personnel related expenses, including salaries, benefits and stock-based compensation expense; and

•other expenses, which include direct and allocated expenses for laboratory, facilities and other costs.

A portion of our research and development expenses are direct external expenses, which we track on a program-specific basis once a program has commenced late-stage IND-enabling studies.

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Program expenses include expenses associated with our most advanced product candidates and the discovery and development of backup or next-generation molecules. We also track external expenses associated with our TV platform. These expenses include those incurred by us relating to our Takeda Collaboration Agreement, Sanofi Collaboration Agreement and Biogen Collaboration Agreement. All external costs associated with earlier stage programs, or that benefit the entire portfolio, are tracked as a group. We do not track personnel or other operating expenses incurred for our research and development programs on a program-specific basis. These expenses primarily relate to salaries and benefits, stock-based compensation, facility expenses including rent and depreciation, and lab consumables.

Where we share costs with our collaboration partners, such as in our Biogen Collaboration Agreement, research and development expenses may include cost sharing reimbursements from or payments to our partner, respectively.

It is challenging to predict the nature, timing and estimated long-range costs of the efforts that will be necessary to complete the development of, and obtain regulatory approval for, any of our product candidates. This is made more challenging by events outside of our control, such as the recent COVID-19 pandemic. We are also unable to predict when, if ever, material net cash inflows will commence from sales or licensing of our product candidates. This is due to the numerous risks and uncertainties associated with drug development, including the uncertainty of:

•our ability to add and retain key research and development personnel;

•our ability to establish an appropriate safety profile with IND-enabling toxicology studies;

•our ability to successfully develop, obtain regulatory approval for, and then successfully commercialize, our product candidates;

•our successful enrollment in and completion of clinical trials;

•the costs associated with the development of any additional product candidates we identify in-house or acquire through collaborations;

•our ability to discover, develop and utilize biomarkers to demonstrate target engagement, pathway engagement and the impact on disease progression of our molecules;

•our ability to establish agreements with third-party manufacturers for clinical supply for our clinical trials and commercial manufacturing, if our product candidates are approved;

•the terms and timing of any collaboration, license or other arrangement, including the terms and timing of any milestone payments thereunder;

•our ability to obtain and maintain patent, trade secret and other intellectual property protection and regulatory exclusivity for our product candidates if and when approved;

•our receipt of marketing approvals from applicable regulatory authorities;

•our ability to commercialize products, if and when approved, whether alone or in collaboration with others; and

•the continued acceptable safety profiles of the product candidates following approval.

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A change in any of these variables with respect to the development of any of our product candidates would significantly change the costs, timing and viability associated with the development of that product candidate. We expect our research and development expenses to increase at least over the next several years as we continue to implement our business strategy, advance our current programs, expand our research and development efforts, seek regulatory approvals for any product candidates that successfully complete clinical trials, access and develop additional product candidates and incur expenses associated with hiring additional personnel to support our research and development efforts. In addition, product candidates in later stages of clinical development generally incur higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials.

General and Administrative

General and administrative expenses include personnel-related expenses, such as salaries, benefits, travel and stock-based compensation expense, expenses for outside professional services and allocated expenses. Outside professional services consist of legal, accounting and audit services and other consulting fees. Allocated expenses consist of rent, depreciation and other expenses related to our office and research and development facility not otherwise included in research and development expenses.

We expect to continue to incur certain expenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the SEC and those of any national securities exchange on which our securities are traded, insurance expenses, investor relations activities and other administrative and professional services. We expect to increase our administrative headcount as we advance our product candidates through clinical development, which will increase our general and administrative expenses.

Interest and Other Income, Net

Interest and other income, net, consists primarily of interest income and investment income earned on our cash, cash equivalents, and marketable securities, gains and losses on foreign currency hedges, and sublease income.

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Results of Operations

Comparison of the years ended December 31, 2020 and 2019

The following table sets forth the significant components of our results of operations (in thousands):

Year EndedDecember 31, Change

Collaboration revenue:

Operating expenses:

__________________________________________________

* Percentage is not meaningful.

Collaboration revenue. Collaboration revenue was $335.7 million for the year ended December 31, 2020 compared to $26.7 million recognized for the year ended December 31, 2019. The increase of $309.0 million was primarily due to $307.4 million of revenue recognized under our Biogen Collaboration Agreement in 2020. There was also an increase in revenue from our collaboration with Takeda of $21.2 million driven by increased costs incurred in the programs partnered with Takeda, partially offset by a decrease of $19.6 million in revenue from our collaboration with Sanofi driven by a $10.0 million milestone recognized in the year ended December 30, 2019 related to the Peripheral program and the winding down of revenue for retained activities as activities are transferred to Sanofi.

Research and development expenses. Research and development expenses were $212.6 million for the year ended December 31, 2020 compared to $193.4 million for the year ended December 31, 2019.

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The following table summarizes our research and development expenses by program and category (in thousands):

Year EndedDecember 31, Change

Other unallocated research and development expenses 33,018 32,704 314 1

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(1)Includes an offset to expense due to related party cost reimbursement of $9.3 million.

(2)Personnel-related expenses include stock-based compensation expense of $29.0 million and $19.3 million for the years ended December 31, 2020 and 2019, respectively, reflecting an increase of $ 9.7 million.

The increase in research and development expenses of approximately $19.2 million for the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily attributable to the following:

•an increase of $26.4 million in personnel-related expenses, consisting of a $16.7 million increase in salaries and related expenses attributable to an increase in our research and development headcount, and a $9.7 million increase in stock-based compensation expense primarily attributable to additional equity award grants and our increasing market price;

•increases of $4.0 million and $2.2 million in EIF2B and ETV:IDS program external expenses, respectively, reflecting the progress of these programs in clinical trials during 2020;

•$2.6 million of increased TV platform and other program external expenses, reflecting our increased investment in our pipeline, including the progress in our PTV:PGRN and ATV:Trem2 programs as well our continued investment in developing a deep pipeline; and

•$0.3 million of increased other unallocated research and development expenses, which was primarily due to an increase in facilities-related expenses of $1.7 million resulting from increased rent expense associated with the new headquarters lease, partially offset by a $0.7 million decrease in lab consumable expenses, and a $0.7 million decrease in other general costs, such as travel and IT related expenses attributable to our research and development departments, both due to the impact of the COVID-19 pandemic.

These increases were partially offset by a decrease of $12.8 million in the LRRK2 program external expenses primarily due to cost sharing reimbursements from Biogen, and a $3.5 million decrease in other external research and development expenses.

General and administrative expenses. General and administrative expenses were $60.3 million for the year ended December 31, 2020 compared to $46.5 million for the year ended December 31, 2019. The increase of $13.8 million was primarily attributable to the following:

•$8.5 million of increased personnel-related expenses, driven by higher general and administrative headcount and stock-based compensation expense associated with additional equity award grants and our increasing market price;

• $3.4 million of increased legal and other professional services expenses, primarily associated with the execution of the Biogen Collaboration Agreement;

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•$1.5 million of increased other general costs, primarily attributable to insurance, tax and IT related expenses; and

•$0.4 million of increased facilities related expenses, including increased rent expense associated with the new headquarters lease.

Interest and other income, net. Interest and other income, net was $9.2 million for the year ended December 31, 2020 compared to $15.2 million for the year ended December 31, 2019. The decrease of $6.0 million was primarily due to a $7.0 million decrease in interest income earned on our investments due to declining interest rates, partially offset by an increase of$1.0 million in sublease income received in the year ended December 31, 2020 compared to the year ended December 31, 2019.

Income tax (expense) benefit. There was $0.8 million income tax expense for the year ended December 31, 2020 due to taxable income resulting from the Biogen Collaboration Agreement, compared to $0.4 million income tax benefit for the year ended December 31, 2019 associated with an unrealized gain on marketable securities in other comprehensive income for the year ended December 31, 2019.

Comparison of the years ended December 31, 2019 and 2018

Refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations” in our 2019 Annual Report on Form 10-K for a discussion of the results of operations for the year ended December 31, 2019 compared to the year ended December 31, 2018.

Liquidity and Capital Resources

Sources of Liquidity

We fund our operations primarily with the proceeds from our IPO, our follow-on offering, and payments received from our collaboration agreements with Takeda, Sanofi and Biogen. On December 7, 2017, we completed our IPO pursuant to which we issued 15,972,221 shares of our common stock, including 2,083,333 shares sold pursuant the underwriters' full exercise of their option to purchase additional shares, at a price of $18.00 per share. We received net proceeds of $264.3 million from our IPO in December 2017, net of underwriting discounts and commissions, and offering expenses incurred by us.

Pursuant to the Takeda Collaboration Agreement, we have received $55.0 million related to upfront and milestone payments through December 31, 2020. Further, under the associated Purchase Agreement we received $110.0 million in February 2018 for the sale and issuance of 4,214,559 shares of our common stock.

Pursuant to the Sanofi Collaboration Agreement, we received an upfront payment of $125.0 million in November 2018, and a milestone payment of $10.0 million in August 2019, which was triggered by the commencement of a DNL758 (SAR443122) Phase 1 clinical trial in healthy volunteers. We have received further payments of $13.7 million for performance of Retained Activities through December 31, 2020.

In January 2020, we sold 9.0 million shares of common stock (inclusive of shares sold pursuant to an overallotment option granted to the underwriters in connection with the offering) through an underwritten public offering at a price of $23.00 per share for aggregate net proceeds of approximately $193.9 million.

Pursuant to the common stock purchase agreement between us and BIMA (the "Biogen Stock Purchase Agreement"), we received $465.0 million on September 22, 2020 for the sale and issuance of 13,310,243 shares of our common stock. In October 2020, we received $560.0 million from Biogen in upfront payments associated with the Biogen Collaboration Agreement. In December 2020, we received $3.6 million of cost sharing reimbursements from Biogen.

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As of December 31, 2020, we had cash, cash equivalents and marketable securities in the amount of $1.5 billion.

Future Funding Requirements

To date, we have not generated any product revenue. We do not expect to generate any product revenue unless and until we obtain regulatory approval of and commercialize any of our product candidates, and we do not know when, or if, either will occur.

We expect to continue to incur significant losses for the foreseeable future, and we expect the losses to increase as we expand our research and development activities and continue the development of, and seek regulatory approvals for, our product candidates, and begin to commercialize any approved products. Further, we expect general and administrative expenses to increase as we continue to incur additional costs associated with supporting our growing operations. We are subject to all of the risks typically related to the development of new product candidates, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. We anticipate that we will need substantial additional funding in connection with our continuing operations.

Until we can generate a sufficient amount of revenue from the commercialization of our product candidates or from our existing collaboration agreements, or future agreements with other third parties, if ever, we expect to finance our future cash needs through public or private equity or debt financings. Additional capital may not be available on reasonable terms, if at all. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of one or more of our product candidates. If we raise additional funds through the issuance of additional debt or equity securities, it could result in dilution to our existing stockholders, increased fixed payment obligations and the existence of securities with rights that may be senior to those of our common stock. If we incur indebtedness, we could become subject to covenants that would restrict our operations and potentially impair our competitiveness, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. Additionally, any future collaborations we enter into with third parties may provide capital in the near term but limit our potential cash flow and revenue in the future. Any of the foregoing could significantly harm our business, financial condition and prospects.

We have incurred significant net losses in every year since our inception until the year ended December 31, 2020, including net losses $197.6 million, and $36.2 million for the years ended December 31, 2019 and 2018, respectively. We had net income of $71.1 million for the year ended December 31, 2020, as a result of revenue recognized associated with our collaboration arrangement with Biogen. We have also experienced negative cash flow from operations in every year since our inception, excluding the years ended December 31, 2020 and 2018, in which we received significant cash inflows from collaboration partners. As of December 31, 2020, we had an accumulated deficit of $354.4 million. We expect to incur substantial additional losses in the future as we conduct and expand our research and development activities. We believe that our existing cash, cash equivalents and marketable securities will be sufficient to enable us to fund our projected operations through at least the 12 months following the filing date of this Form 10-K. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. Our future funding requirements will depend on many factors, including:

•the timing and progress of preclinical and clinical development activities;

•the number and scope of preclinical and clinical programs we decide to pursue;

•the progress of the development efforts of third parties with whom we have entered into license and collaboration agreements;

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•our ability to maintain our current research and development programs and to establish new research and development, license or collaboration arrangements;

•our ability and success in securing manufacturing relationships with third parties or in establishing and operating a manufacturing facility;

•the costs involved in prosecuting, defending and enforcing patent claims and other intellectual property claims;

•the cost and timing of regulatory approvals;

•our efforts to enhance operational, financial and information management systems and hire additional personnel, including personnel to support development of our product candidates; and

•the costs and ongoing investments to in-license and/or acquire additional technologies.

A change in the outcome of any of these or other variables with respect to the development of any of our product candidates could significantly change the costs and timing associated with the development of that product candidate. Furthermore, our operating plans may change in the future, and we may need additional funds to meet operational needs and capital requirements associated with such operating plans.

Cash Flows

The following table sets forth a summary of the primary sources and uses of cash for each of the periods presented below (in thousands):

Year Ended December 31,

Net Cash Provided By Operating Activities

During the year ended December 31, 2020, cash provided by operating activities was $416.2 million, which consisted of net income of $71.1 million, adjusted by non-cash items primarily related to stock-based compensation and depreciation, partially offset by net amortization of discounts on marketable securities and non-cash rent expenses. Cash used in operating activities was also driven by changes in our operating assets and liabilities, including most significantly an increase in related party contract liability of $297.4 million associated with the Biogen Collaboration Agreement.

Net Cash Used In Investing Activities

During the year ended December 31, 2020, cash used in investing activities was $623.2 million, which primarily consisted of $1.3 billion of purchases of marketable securities partially offset by $665.4 million in proceeds from the maturity of marketable securities.

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Net Cash Provided By Financing Activities

During the year ended December 31, 2020, cash provided by financing activities was $634.7 million, which consisted of $420.1 million associated with the issuance of 13,310,243 shares of our common stock to BIMA in September 2020 under the Biogen Stock Purchase Agreement, $193.9 million in net cash proceeds from our follow-on offering completed in January 2020, and $20.7 million the proceeds from the exercise of options to purchase common stock and issuance of shares pursuant to our employee stock purchase plan ("ESPP") shares.

Years ended December 31, 2019 and 2018

Refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” in our 2019 Annual Report on Form 10-K for a discussion of the cash flows for the years ended December 31, 2019 and 2018.

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Off-Balance Sheet Arrangements

We have not entered into any off-balance sheet arrangements. Prior to our acquisition of all of the outstanding shares of F-star Gamma, our F-star Collaboration Agreement represented a variable interest in a variable interest entity, or VIE, F-star Gamma. However, we did not consolidate F-star Gamma in our consolidated financial statements because we had determined that we were not considered to be its primary beneficiary.

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Contractual Obligations and Commitments

The following table summarizes our contractual obligations as of December 31, 2020 (in thousands):

Total Less Than 1 Year 1-3 Years 3-5 Years More Than 5 Years

__________________________________________________

(1)Represents future minimum lease payments under our headquarters lease. The minimum lease payments above do not include any related common area maintenance charges or real estate taxes.

(2)Represents non-cancellable fees due in connection with license and other contractual agreements, including those under the Lonza DMSA.

(3)We enter into contracts in the normal course of business, primarily with CROs for preclinical research studies and clinical trials, or for other services or supplies related to research and development activities. These contracts generally provide for termination on notice, and no arrangements include material stipulated commitment payments.

In May 2018, we entered into an amendment to our operating lease for our former corporate headquarters in South San Francisco (the "Headquarters Lease Amendment") to relocate and expand our headquarters to 148,020 rentable square feet in a building in South San Francisco, California (the "New Premises"). The Headquarters Lease Amendment has a contractual term of ten years from the legal commencement date, which was April 1, 2019 when the building was ready for occupancy. For accounting purposes, the lease commencement date was determined to be August 1, 2018, which was the date at which we were deemed to have obtained control over the property. We have an option to extend the lease term for a period of ten years by giving the landlord written notice of the election to exercise the option at least nine months, but not more than twelve months, prior to the expiration of the Headquarters Lease Amendment lease term. We determined that this renewal was not reasonably certain at lease inception.

The Headquarters Lease Amendment provides for monthly base rent amounts escalating over the term of the lease. In addition, the Headquarters Lease Amendment provided a tenant improvement allowance ("TIA") of up to $25.9 million, which was fully utilized, of which $4.4 million will be repaid to the landlord in the form of additional monthly rent. This is recorded as leasehold improvement assets and an offset to the lease ROU asset on the Consolidated Balance Sheet as of December 31, 2020. We are also required to pay the operating expenses for the New Premises, such as taxes and insurance, which are treated as variable lease payments.

Effective September 2017, we 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, we will execute purchase orders based on project plans authorizing Lonza to provide development and manufacturing services with respect to certain of our antibody and enzyme products, and will pay for the services provided and batches delivered in accordance with the DMSA and project plan. Unless earlier terminated, the DMSA will expire on September 6, 2022.

As of December 31, 2020 and 2019, we had open purchase orders for biological product development and manufacturing costs totaling $33.0 million and $21.2 million, respectively. The activities under these purchase orders are expected to be completed by February 2028. As of December 31, 2020 and 2019, we had total non-refundable purchase commitments of $27.1 million and $11.2 million, respectively, under the DMSA.

During the years ended December 31, 2020 and 2019, we incurred costs of $10.8 million and $12.7 million, and made payments of $7.3 million and $12.5 million, respectively, for the development and manufacturing services rendered under the DMSA.

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Pursuant to certain license agreements, including our agreement with Genentech, we have obligations to make future milestone and royalty payments to other parties. Additionally, we have certain contingent payments to F-star and former shareholders of F-star Gamma related to the acquisition of F-star Gamma, up to a maximum amount of $447.0 million in the aggregate, as well as liabilities associated with income taxes. However, we are unable to estimate the timing or likelihood of these payments and, therefore, they are not included in the estimates detailed above.

Critical Accounting Policies and Significant Judgments and Estimates

This discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported revenues recognized and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in the notes to our consolidated financial statements included elsewhere in this report, we believe that the following accounting policies are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

Revenue Recognition

License and Collaboration Revenue

We analyze our 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, we first determine 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 Revenue from Contracts with Customers (“Topic 606”). For elements of collaboration arrangements that are accounted for pursuant to ASC 808, an appropriate recognition method is determined and applied consistently, generally by analogy to Topic 606. The accounting treatment pursuant to Topic 606 is outlined below.

The terms of licensing and collaboration agreements entered into typically include payment of one or more of the following: non-refundable, up-front license fees; development, regulatory and commercial milestone payments; payments for manufacturing supply and research and development services; and royalties on net sales of licensed products. Each of these payments results in license, collaboration and other revenue, except for revenues from royalties on net sales of licensed products, which are classified as royalty revenue. The core principle of Topic 606 is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received in exchange for those goods or services. We 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.

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In determining the appropriate amount of revenue to be recognized as we fulfill our obligations under each of our agreements, we perform the following steps: (i) identify the promised goods or services in the contract; (ii) determine whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measure the transaction price, including the constraint on variable consideration; (iv) allocate the transaction price to the performance obligations based on estimated selling prices; and (v) recognize revenue when (or as) we satisfy each performance obligation.

We record amounts received prior to satisfying the revenue recognition criteria as contract liabilities in our 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 our Consolidated Balance Sheets. If we expect 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, we assess the goods or services promised in a contract with a customer and identify 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.

We consider the terms of the contract to determine the transaction price. The transaction price is the amount of consideration to which we expect 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, we use our best estimate of the SSP for the deliverable.

Revenue is recognized when, or as, we satisfy 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. We recognize revenue over time by measuring the progress toward our 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.

We 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.

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Research and Development Expenses

We record research and development expenses to operations as incurred. Research and development expenses represent costs incurred by us for the discovery and development of our product candidates and the development of our BBB platform technology and include: employee-related expenses, including salaries, benefits, travel and non-cash stock-based compensation expense; external research and development expenses incurred under arrangements with third parties, such as CROs, preclinical testing organizations, CDMOs, academic and non-profit institutions and consultants; costs to acquire technologies to be used in research and development that have not reached technological feasibility and have no alternative future use; license fees; and other expenses, which include direct and allocated expenses for laboratory, facilities and other costs. Where we share costs with our collaboration partners, such as in our Biogen Collaboration Agreement, research and development expenses may include cost sharing reimbursements from or payments to our partner, respectively.

As part of the process of preparing financial statements, we are required to estimate and accrue expenses. A portion of our research and development expenses are external costs, which we track on a program-specific basis once a program has commenced a late-stage IND-enabling study. We record the estimated expenses of research and development activities conducted by third-party service providers based upon the estimated amount of services provided within research and development expense in the statements of operations and comprehensive loss. These services include the conduct of preclinical studies and clinical trials, contract manufacturing activities and consulting services. If the costs have been prepaid, this expense reduces the prepaid expenses in the balance sheets, and if not yet invoiced, the costs are included in accrued liabilities in the balance sheets. These costs are a significant component of our research and development expenses. We record amortization of prepaid expenses or accrued expenses for these costs based on the estimated amount of work completed and in accordance with agreements established with these third parties.

Costs for certain research and development activities are recognized based on an evaluation of the progress to completion of specific tasks. We estimate the amount of work completed through discussions with internal personnel and external service providers as to the progress or stage of completion of the services and the agreed-upon fee to be paid for such services. We make significant judgments and estimates in determining the accrued balance in each reporting period. As actual costs become known, we adjust our accrued estimates. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed may vary from our estimates and could result in us reporting amounts that are too high or too low in any particular period. Our accrued expenses are dependent, in part, upon the receipt of timely and accurate reporting from external clinical research organizations and other third-party service providers. To date, we have not experienced material differences between our accrued expenses and actual expenses. However, due to the nature of estimates, we cannot assure you that we will not make changes to our estimates in the future as we become aware of additional information about the status or conduct of our clinical trials and other research activities.

Stock-Based Compensation

We have granted stock-based awards, consisting of stock options, restricted stock units, restricted stock awards, and shares issued under its employee stock purchase plan to our employees, certain non-employee consultants and certain members of our board of directors. We measure compensation expense for all stock-based awards at the grant date based on the fair value measurement of the award, which for non-employee stock-based awards became effective subsequent to the adoption of ASU No. 2018-07, Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting on September 30, 2018. We recognize the corresponding compensation expense of awards over the requisite service period, which is generally the vesting period of the respective award, and we adjust for actual forfeitures as they occur.

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We estimate the fair value of stock options granted to our employees and directors and rights to acquire stock granted under our ESPP, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. We use the fair value of our common stock to determine the fair value of restricted stock awards.

The Black-Scholes option-pricing model requires the use of highly subjective assumptions which determine the fair value of stock-based awards. These assumptions include:

•Expected Term. Our expected term represents the period that our stock-based awards are expected to be outstanding and is determined using the simplified method (based on the mid-point between the vesting date and the end of the contractual term), as we do not have sufficient historical data to use any other method to estimate expected term.

•Expected Volatility. As we have very limited trading history of our common stock, the expected volatility is estimated based on the average volatility for comparable publicly traded biopharmaceutical companies over a period equal to the expected term of the stock option grants. The comparable companies are chosen based on their similar size, stage in the life cycle or area of specialty.

•Risk-Free Interest Rate. The risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of the stock option grants.

•Expected Dividend. We have never paid dividends on our common stock and have no plans to pay dividends on our common stock. Therefore, we use an expected dividend yield of zero.

Determination of the estimated fair value of our common stock on grant dates prior to our IPO

As there was no public market for our common stock prior to our IPO, the estimated fair value of our common stock was determined by our board of directors, with input from management, considering our most recently available third-party valuations of common stock and our board of directors’ assessment of additional objective and subjective factors that it believed were relevant, and factors that may have changed from the date of the most recent valuation through the date of the grant.

We periodically determined the estimated fair value of our common stock at various dates using contemporaneous valuations performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants’ Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation ("Practice Aid"). In accordance with the Practice Aid, our board of directors considered the Current Value Method, the Option-Pricing Method, and the Probability-Weighted Expected Return Method in estimating the fair value of our common stock.

Our board of directors and management developed best estimates based on application of these approaches and the assumptions underlying these valuations, giving careful consideration to the advice from our third-party valuation expert. Such estimates involve inherent uncertainties and the application of significant judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our equity-based compensation could be materially different.

Determination of the fair value of our common stock on grant dates following our IPO

The fair value of each share of underlying common stock is based on the closing price of our common stock as reported by The NASDAQ Global Select Market on the date of grant.

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In the past, we granted stock options that vest in conjunction with certain performance and market conditions to certain key employees. These awards have two separate market triggers for vesting based upon either (i) the successful achievement of stepped target closing prices on a national securities exchange for 90 consecutive trading days later than 180 days after the Company’s initial public offering for its common stock, or (ii) stepped target prices for a change in control transaction. In the event that neither of these market triggers are achieved by the specified timelines, such awards will terminate with respect to that portion of the shares. Expense is recognized using the accelerated attribution method and is recognized over the derived service period. We used a lattice model with a Monte Carlo simulation to value these performance and market contingent stock-based option awards. This valuation methodology utilized the estimated fair value of our common stock on grant date and several key assumptions, including expected volatility of our stock price based on comparable public companies, risk-free rates of return and expected dividend yield.

Stock-based compensation expense was $50.4 million, $38.4 million and $18.8 million for the years ended December 31, 2020, 2019, and 2018, respectively. As of December 31, 2020, we had $125.4 million of total unrecognized stock-based compensation expenses which we expect to recognize over a weighted-average period of 2.8 years.

We have not recognized, and we do not expect to recognize in the near future, any tax benefit related to employee stock-based compensation expense as a result of the full valuation allowance on our deferred tax assets including deferred tax assets related to our net operating loss carryforwards.

Leases

Effective January 1, 2019, we adopted Accounting Standards Codification (“ASC”), Topic 842, Leases (“Topic 842”), applying the optional transition method such that we are not required to adjust prior period presentations. ASU 2016-02 has impacted our Consolidated Balance Sheets as we have certain operating lease arrangements for which we are the lessee and one operating lease arrangement for which we are the lessor. We have no financing leases. We elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allows us to carryforward the historical lease classification. The impact of adoption of the standard is that as of January 1, 2019 we recognized a ROU asset of $46.1 million and operating lease liability of $71.3 million. The standard did not have a material impact on our Consolidated Statements of Operations and Comprehensive Loss, Consolidated Statements of Convertible Preferred Stock and Stockholders' Equity (Deficit), or Consolidated Statements of Cash Flows.

We make a determination as to whether an arrangement is a lease at inception. We recognize a right-of-use (“ROU”) asset and operating lease liability for identified operating leases in the Consolidated Balance Sheets.

ROU assets represent our right to use the underlying assets for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. We recognize operating lease ROU assets and liabilities at 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, we use our incremental borrowing rate (“IBR”) on the date of lease commencement, or the rate implicit in the lease, if known. We do not assume renewals or early terminations in our determination of the lease term unless it is reasonably certain at lease inception to exercise these options.

We do not include leases with an initial term of 12 months or less on the balance sheet, unless they include an option to purchase the underlying asset which is reasonably certain of exercise. We recognize lease expenses on a straight-line basis over the lease term. We have leases with lease and non-lease components, which we have elected to account for as a single lease component.

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Recent Accounting Pronouncements

See Note 1 to our consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K for a description of recent accounting pronouncements applicable to our business.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks in the ordinary course of our business, primarily related to interest rate and foreign currency sensitivities.

Interest Rate Sensitivity

We are exposed to market risk related to changes in interest rates. We had cash, cash equivalents and marketable securities of $1,502.4 million as of December 31, 2020, which consisted primarily of money market funds and marketable securities, largely composed of investment grade, short to intermediate term fixed income securities.

The primary objective of our investment activities is to preserve capital to fund our operations. We also seek to maximize income from our investments without assuming significant risk. To achieve our objectives, we maintain a portfolio of investments in a variety of securities of high credit quality and short-term duration, according to our board-approved investment policy. Our investments are subject to interest rate risk and could fall in value if market interest rates increase. A hypothetical 10% relative change in interest rates during any of the periods presented would not have had a material impact on our consolidated financial statements.

Foreign Currency Sensitivity

The majority of our transactions occur in U.S. dollars. However, we do have certain transactions that are denominated in currencies other than the U.S. dollar, primarily the Euro and British Pound, and we therefore are subject to foreign exchange risk. The fluctuation in the value of the U.S. dollar against other currencies affects the reported amounts of expenses, assets and liabilities primarily associated with a limited number of preclinical, clinical and manufacturing activities.

We seek to mitigate the impact of changes in currency exchange rates on cash flows from certain foreign currency denominated operating expenses by entering into forward foreign currency exchange contracts. Generally, the market risks of these contracts are offset by the corresponding gains and losses on the transactions being hedged.

We do not use derivative financial instruments for speculative trading purposes, nor do we hedge foreign currency exchange rate exposure in a manner that entirely offsets the effects of changes in foreign currency exchange rates. The counterparties to these forward foreign currency exchange contracts are creditworthy multinational commercial banks, which minimizes the risk of counterparty nonperformance. We regularly review our hedging program and may, as part of this review, make changes to the program.

As of December 31, 2020, we had open forward foreign currency exchange contracts with notional amounts of $8.2 million. A hypothetical 10% strengthening in foreign currency compared with the U.S. dollar at December 31, 2020 would have resulted in an increase in the value received over the remaining life of these contracts of approximately $0.8 million and, if realized, would positively affect earnings during the remaining life of the contracts. This analysis does not consider the impact of the hypothetical changes in foreign currency rates would have on the forecasted transactions that these foreign currency sensitive instruments were designated to offset.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Denali Therapeutics Inc.

Index to Consolidated Financial Statements

Page

Report of Independent Registered Public Accounting Firm 151

Consolidated Balance Sheets 155

Consolidated Statements of Operations and Comprehensive Income (Loss) 156

Consolidated Statements of Stockholders' Equity 157

Consolidated Statements of Cash Flows 158

Notes to Consolidated Financial Statements 159

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Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of Denali Therapeutics Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Denali Therapeutics Inc. (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive income (loss), stockholders' equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 26, 2021 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

151

Accounting for revenue under the Takeda Collaboration & Option Agreement

152

153

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2015.

Redwood City, California

February 26, 2021

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Denali Therapeutics Inc.

Consolidated Balance Sheets

(In thousands, except share amounts)

Assets

Current assets:

Cost sharing reimbursements due from related party 5,674 —

Prepaid expenses and other current assets 20,284 14,675

Liabilities and stockholders’ equity

Current liabilities:

Accrued expenses and other current liabilities 47,145 24,015

Related party contract liability, current 3,569 —

Related party contract liability, less current portion 293,849 —

Contract liabilities, less current portion 23,325 43,753

Operating lease liability, less current portion 64,175 68,865

Other non-current liabilities 701 379

Commitments and contingencies (Note 9)

Stockholders’ equity:

Accumulated other comprehensive income (loss) (245) 350

See accompanying notes to consolidated financial statements.

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Denali Therapeutics Inc.

Consolidated Statements of Operations and Comprehensive Income (Loss)

(In thousands, except share and per share amounts)

Year Ended December 31,

Collaboration revenue:

Other collaboration revenue 98 358 60

Operating expenses:

Income tax (expense) benefit (823) 351 —

Other comprehensive income (loss):

Net unrealized gain (loss) on marketable securities, net of tax (595) 999 (281)

Net income (loss) per share:

Basic net income (loss) per share $ 0.65 $ (2.07) $ (0.39)

Diluted net income (loss) per share $ 0.63 $ (2.07) $ (0.39)

Weighted-average shares used in calculating:

__________________________________________________

(1)Includes related party collaboration revenue from customer of $307,437.

(2)Includes an offset to expense from related party cost reimbursement of $9,260.

See accompanying notes to consolidated financial statements.

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Denali Therapeutics Inc.

Consolidated Statements of Stockholders’ Equity

(In thousands, except share amounts)

Shares Amount

Vesting of restricted stock awards 1,940,203 19 (19) — — —

Other comprehensive loss — — — (281) — (281)

Vesting of early exercised common stock 135,424 2 90 — — 92

Vesting of restricted stock awards and units 419,064 4 (4) — — —

Other comprehensive income — — — 999 — 999

Vesting of restricted stock units 309,097 3 (3) — — —

Other comprehensive loss — — — (595) — (595)

See accompanying notes to consolidated financial statements.

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Denali Therapeutics Inc.

Consolidated Statements of Cash Flows

(In thousands)

Year Ended December 31,

Operating activities

Non-cash adjustment to operating lease expense (2,360) 2,117 —

Changes in operating assets and liabilities:

Related party contract liability 297,418 — —

Deferred rent — — 3,438

Other non-current liabilities 322 — 379

Investing activities

Financing activities

Proceeds from public offering of common stock, net of issuance costs 193,948 — —

Payments of issuance costs related to issuance for common stock — — (1,342)

Payments of issuance costs related to issuance for preferred stock — — (44)

Proceeds from exercise of awards under equity incentive plans 20,655 6,190 3,999

Supplemental disclosures of cash flow information

Tenant improvements provided by the landlord $ — $ 11,343 $ 14,561

Property and equipment purchases accrued but not yet paid $ 67 $ — $ 335

See accompanying notes to consolidated financial statements.

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Denali Therapeutics Inc.

Notes to Consolidated Financial Statements

1. Significant Accounting Policies

Organization and Description of Business

Denali Therapeutics Inc. ("Denali" or the “Company”) is a biopharmaceutical company, incorporated in Delaware, that discovers and develops therapeutics to defeat neurodegenerative diseases. The Company is headquartered in South San Francisco, California.

Basis of Presentation

These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).

Principles of Consolidation

These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All intercompany balances and transactions have been eliminated in consolidation. For the Company and its subsidiary, the functional currency has been determined to be U.S. dollars. Monetary assets and liabilities denominated in foreign currency are remeasured at period-end exchange rates. Non-monetary assets and liabilities denominated in foreign currencies are remeasured at historical rates. Foreign currency transaction gains and losses resulting from remeasurement are recognized in interest and other income, net in the Consolidated Statements of Operations and Comprehensive Income (Loss).

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires the Company to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported amounts of expenses during the reporting period. Actual results could differ from those estimates, and such differences could be material to the Consolidated Balance Sheets and Consolidated Statements of Operations and Comprehensive Income (Loss).

Concentration of Credit Risk and Other Risks and Uncertainties

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents, marketable securities and forward foreign currency exchange contracts. Substantially all of the Company’s cash and cash equivalents are deposited in accounts with financial institutions that management believes are of high credit quality. Such deposits have and will continue to exceed federally insured limits. The Company maintains its cash with accredited financial institutions and accordingly, such funds are subject to minimal credit risk.

The Company’s investment policy limits investments to certain types of securities issued by the U.S. government, its agencies and institutions with investment-grade credit ratings and places restrictions on maturities and concentration by type and issuer. The Company is exposed to credit risk in the event of a default by the financial institutions holding its cash, cash equivalents and marketable securities and issuers of marketable securities to the extent recorded on the Consolidated Balance Sheets. As of December 31, 2020 and 2019, the Company had no off-balance sheet concentrations of credit risk.

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The Company is exposed to counterparty credit risk on all of its derivative financial instruments. The Company has established and maintains strict counterparty credit guidelines and enters into hedges only with financial institutions that are investment grade or better to minimize the Company’s exposure to potential defaults. The Company does not require collateral to be pledged under these agreements.

The Company is subject to a number of risks similar to other early-stage biopharmaceutical companies, including, but not limited to, the need to obtain adequate additional funding, possible failure of current or future preclinical testing or clinical trials, its reliance on third parties to conduct its clinical trials, the need to obtain regulatory and marketing approvals for its product candidates, competitors developing new technological innovations, the need to successfully commercialize and gain market acceptance of the Company’s product candidates, its right to develop and commercialize its product candidates pursuant to the terms and conditions of the licenses granted to the Company, protection of proprietary technology, the ability to make milestone, royalty or other payments due under any license or collaboration agreements, and the need to secure and maintain adequate manufacturing arrangements with third parties. If the Company does not successfully commercialize or partner any of its product candidates, it will be unable to generate product revenue or achieve profitability.

The COVID-19 pandemic has caused increased risk and uncertainty for the Company. Credit risk associated with investments in securities may increase if any institution with which the Company has an investment is significantly impacted by the COVID-19 pandemic. As of December 31, 2020, the Company has not realized any losses on its cash deposits or investments. Further, COVID-19 may impact the timelines and progress of the Company's preclinical activities and clinical trials and may impact its ability to raise capital in the near term.

Convertible Preferred Stock

The Company is authorized to issue 40.0 million shares of preferred stock in one or more series and to fix the powers, designations, preferences and relative participating option or other rights thereof, including dividend rights, conversion rights, voting rights, redemption terms, liquidation preferences and the number of shares constituting any series, without any further vote or action by the Company’s shareholders. As of December 31, 2020 and 2019, the Company had no shares of preferred stock issued or outstanding.

Segments

The Company has one operating segment. The Company’s chief operating decision maker, its Chief Executive Officer, manages the Company’s operations on a consolidated basis for the purposes of allocating resources.

Fair Value of Financial Instruments

Accounting Standards Codification ("ASC") Topic 820, Fair Value Measurement (“ASC 820”), establishes a fair value hierarchy for instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs). Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability, and are developed based on the best information available in the circumstances.

ASC 820 identifies fair value as the exchange price, or exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a three-tier fair value hierarchy that distinguishes between the following:

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Level 1 – inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2 – inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3 – inputs are unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

The carrying amounts reflected in the Consolidated Balance Sheets for cash and cash equivalents, prepaid expenses and other current assets, accounts payable and accrued liabilities approximate their fair values, due to their short-term nature.

Cash, Cash Equivalents and Restricted Cash

The Company considers all highly liquid investments with original maturities of 90 days or less at the date of purchase to be cash and cash equivalents. Cash equivalents are reported at fair value.

Cash, cash equivalents, and restricted cash reported within the Consolidated Statements of Cash Flows is composed of Cash and Cash equivalents reported in the Consolidated Balance Sheets and $1.5 million of restricted cash for the letter of credit for the Company’s headquarters building lease which is included within other non-current assets in the Consolidated Balance Sheets.

Marketable Securities

The Company generally invests its excess cash in money market funds and investment grade short to intermediate-term fixed income securities. Such investments are included in cash and cash equivalents, short-term marketable securities, or long-term marketable securities on the Consolidated Balance Sheets, are considered available-for-sale, and reported at fair value with net unrealized gains and losses included as a component of stockholders’ equity.

The Company classifies investments in securities with remaining maturities of less than one year, or where its intent is to use the investments to fund current operations or to make them available for current operations, as short-term investments. The Company classifies investments in securities with remaining maturities of over one year as long-term investments. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity, which is included in interest and other income, net in the Consolidated Statements of Operations and Comprehensive Income (Loss). Realized gains and losses and declines in value determined to be due to credit losses on marketable securities, if any, are included in interest and other income, net.

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The Company periodically evaluates the need for an allowance for credit losses. This evaluation includes consideration of several qualitative and quantitative factors, including whether it has plans to sell the security, whether it is more likely than not it will be required to sell any marketable securities before recovery of its amortized cost basis, and if the entity has the ability and intent to hold the security to maturity, and the portion of any unrealized loss that is the result of a credit loss. Factors considered in making these evaluations include quoted market prices, recent financial results and operating trends, implied values from any recent transactions or offers of investee securities, credit quality of debt instrument issuers, expected cash flows from securities, other publicly available information that may affect the value of the marketable security, duration and severity of the decline in value, and the Company's strategy and intentions for holding the marketable security.

Accounts Receivable

Accounts receivable are included within prepaid expenses and other current assets on the Consolidated Balance Sheets. The accounts receivable balance represents amounts receivable from the Company's collaboration partners, net of an allowance for credit losses, if required.

Derivatives and Hedging Activities

The Company measures its derivative instruments at fair value, and accounts for them as either assets or liabilities included within prepaid expenses and other current assets and accruals and other current liabilities, respectively, on the Consolidated Balance Sheets. Derivatives are adjusted to fair value through interest and other income, net in the Consolidated Statements of Operations and Comprehensive Income (Loss).

Property and Equipment, Net

Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method over the related estimated useful lives as presented in the table below. Significant additions and improvements are capitalized, while repairs and maintenance are charged to expense as incurred.

Asset Estimated useful life

Leasehold improvements Shorter of life of asset or lease term

Manufacturing and laboratory equipment five years

Computer hardware and software three years

Office furniture and equipment five years

Impairment of Long-Lived Assets

The Company periodically evaluates property and equipment for impairment whenever events or changes in circumstances indicate that a potential impairment may have occurred. If such events or changes in circumstances arise, the Company compares the carrying amount of the long-lived assets to the estimated future undiscounted cash flows expected to be generated by the long-lived assets. If the estimated aggregate undiscounted cash flows are less than the carrying amount of the long-lived assets, an impairment charge, calculated as the amount by which the carrying amount of the assets exceeds the fair value of the assets, is recorded. The fair value of the long-lived assets is determined based on the estimated discounted cash flows expected to be generated from the long-lived assets. The Company has not recorded any such impairment charges during the years presented.

Leases

The Company adopted Accounting Standards Update ("ASU") No. 2016-02, Leases as of January 1, 2019. A determination is made as to whether an arrangement is a lease at inception. A right-of-use

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(“ROU”) asset and operating lease liability is recognized for identified operating leases in the Consolidated Balance Sheets. The changes in operating lease ROU assets and operating lease liabilities are presented net within non-cash adjustment to operating lease expense in the Consolidated Statements of Cash Flows.

ROU assets represent the Company’s right to use the underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments due over the lease term, with the ROU assets adjusted for lease incentives received. When determining the present value of lease payments, the Company uses its incremental borrowing rate on the date of lease commencement, or the rate implicit in the lease, if known. The Company does not assume renewals in its determination of the lease term unless the renewals are deemed by management to be reasonably certain at lease inception.

Leases with an initial term of 12 months or less are not recorded on the balance sheet, unless they include an option to purchase the underlying asset that the Company is reasonably certain to exercise. The Company recognizes lease expenses on a straight-line basis over the lease term. The Company has leases with lease and non-lease components, which the Company has elected to account for as a single lease component.

Revenue Recognition

License and Collaboration Revenue

The Company analyzes its collaboration arrangements to assess whether they are within the scope of ASC 808, Collaborative Arrangements (“ASC 808”) to determine whether such arrangements involve joint operating activities performed by parties that are both active participants in the activities and exposed to significant risks and rewards dependent on the commercial success of such activities. This assessment is performed throughout the life of the arrangement based on changes in the responsibilities of all parties in the arrangement. For collaboration arrangements within the scope of ASC 808 that contain multiple elements, the Company first determines which elements of the collaboration are deemed to be within the scope of ASC 808 and those that are more reflective of a vendor-customer relationship and, therefore, within the scope of Topic 606. For elements of collaboration arrangements that are accounted for pursuant to ASC 808, an appropriate recognition method is determined and applied consistently, generally by analogy to Topic 606. The accounting treatment pursuant to Topic 606 is outlined below.

The terms of licensing and collaboration agreements entered into typically include payment of one or more of the following: non-refundable, up-front license fees; development, regulatory and commercial milestone payments; payments for manufacturing supply and research and development services and royalties on net sales of licensed products. Each of these payments results in license, collaboration and other revenue, except for revenues from royalties on net sales of licensed products, which are classified as royalty revenue. The core principle of Topic 606 is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received in exchange for those goods or services. The Company may also receive reimbursement or make payments to a collaboration partner to satisfy cost sharing requirements. These payments are accounted for pursuant to ASC 808 and are recorded as an offset or increase to research and development expenses, respectively.

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.

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Amounts received prior to satisfying the revenue recognition criteria are recorded as contract liabilities in the Company’s Consolidated Balance Sheets. If the related performance obligation is expected to be satisfied within the next twelve months this will be classified in current liabilities. Amounts recognized as revenue prior to the Company having an unconditional right (other than a right that is conditioned only on the passage of time) to receipt are recorded as contract assets in the Company's Consolidated Balance Sheets. If the Company expects to have an unconditional right to receive the consideration in the next twelve months, this will be classified in current assets. A net contract asset or liability is presented for each contract with a customer.

At contract inception, the Company assesses the goods or services promised in a contract with a customer and identifies those distinct goods and services that represent a performance obligation. A promised good or service may not be identified as a performance obligation if it is immaterial in the context of the contract with the customer, if it is not separately identifiable from other promises in the contract (either because it is not capable of being separated or because it is not separable in the context of the contract), or if the promised good or service does not provide the customer with a material right.

The Company considers the terms of the contract to determine the transaction price. The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring promised goods or services to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. Variable consideration will only be included in the transaction price when it is not considered constrained, which is when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur.

If it is determined that multiple performance obligations exist, the transaction price is allocated at the inception of the agreement to all identified performance obligations based on the relative standalone selling prices ("SSP"). The relative SSP for each deliverable is estimated using external sourced evidence if it is available. If external sourced evidence is not available, the Company uses its best estimate of the SSP for the deliverable.

Revenue is recognized when, or as, the Company satisfies a performance obligation by transferring a promised good or service to a customer. An asset is transferred when, or as, the customer obtains control of that asset, which for a service is considered to be as the services are received and used. The Company recognizes revenue over time by measuring the progress toward complete satisfaction of the relevant performance obligation using an appropriate input or output method based on the nature of the service promised to the customer.

After contract inception, the transaction price is reassessed at every period end and updated for changes such as resolution of uncertain events. Any change in the transaction price is allocated to the performance obligations on the same basis as at contract inception, or to a single performance obligation as applicable.

Management may be required to exercise considerable judgment in estimating revenue to be recognized. Judgment is required in identifying performance obligations, estimating the transaction price, estimating the SSP of identified performance obligations, which may include forecasted revenue, development timelines, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success, and estimating the progress towards satisfaction of performance obligations.

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Research and Development Expenses

Research and development costs are expensed as incurred. Research and development costs consist of salaries and other personnel related expenses, including associated stock–based compensation, consulting fees, lab supplies, and facility costs, as well as fees paid to other entities that conduct certain research, development and manufacturing activities on behalf of the Company. Where the Company shares costs with collaboration partners, such as in the Biogen Collaboration Agreement, research and development expenses may include cost sharing reimbursements from or payments to the collaboration partner, respectively.

Nonrefundable advance payments for goods and services that will be used or received in future research and development activities are deferred and recognized as expense in the period in which the related goods are delivered or services are performed.

The Company has acquired and may continue to acquire the rights to develop and commercialize new product candidates from third parties. The upfront payments to acquire license, product or rights, as well as any future milestone payments, are immediately recognized as research and development expense provided that there is no alternative future use of the rights in other research and development projects.

Stock-Based Compensation

The Company’s stock-based compensation programs grant awards that have included stock options, restricted stock units, restricted stock awards, and shares issued under its employee stock purchase plan. Grants are awarded to employees, including directors, and non-employees.

The Company measures compensation expense for all stock-based awards at the grant date based on the fair value measurement of the award, which for non-employee stock-based awards became effective subsequent to the adoption of ASU No. 2018-07, Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting on September 30, 2018. The expense is recorded on a straight-line basis over the requisite service period, which is generally the vesting period, for the entire award. Expense is adjusted for actual forfeitures of unvested awards as they occur. The Company calculates the fair value measurement of stock options using the Black-Scholes valuation model. The Company uses the fair value of our common stock to determine the fair value of restricted stock awards.

Income Taxes

Income taxes are accounted for using the liability method, under which deferred tax assets and liabilities are determined based on the temporary differences between the financial reporting and tax bases of assets and liabilities and consideration is given to net operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the enacted tax rates that are expected to be in effect when the differences are expected to reverse.

The Company assesses the likelihood that deferred tax assets will be recovered from future taxable income, and a valuation allowance is established when necessary to reduce deferred tax assets to the amounts more likely than not expected to be realized.

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The Company recognizes and measures uncertain tax positions using a two–step approach. The first step is to evaluate the tax position taken or expected to be taken by determining whether the weight of available evidence indicates that it is more likely than not that the tax position will be sustained in an audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. Significant judgment is required to evaluate uncertain tax positions. The Company evaluates uncertain tax positions on a regular basis. The evaluations are based on a number of factors, including changes in facts and circumstances, changes in tax law, correspondence with tax authorities during the course of the audit, and effective settlement of audit issues. Previously recognized tax positions that no longer meet the more-likely-than-not threshold are derecognized in the first subsequent financial reporting period in which that threshold is no longer met.

The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense.

Comprehensive Income (Loss)

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

Net Income (Loss) per Share

Basic net income (loss) per share is calculated by dividing the net income (loss) by the weighted-average number of shares of common stock outstanding during the period, without consideration for common stock equivalents.

Diluted net income (loss) per share is computed based on the treasury stock method by dividing net income by the weighted-average number of common shares outstanding during the period plus potentially dilutive common equivalent shares outstanding. However, where there is a net loss per ordinary share, no adjustment is made for potentially issuable ordinary shares since their effect would be anti-dilutive. In this case, diluted net loss per share is equal to basic net loss per share.

Recently Issued Accounting Pronouncement

In December 2019, the Financial Accounting Standards Board ("FASB") issued ASU No. 2019-12, Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes. ASU No. 2019-12 modifies ASC 740 to simplify several aspects of accounting for income taxes, including eliminating certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation. The guidance is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years, with early adoption permitted, and is required to be adopted prospectively, with the exception of certain specific amendments. The Company is currently finalizing its assessment of the impact of this ASU and does not expect it to have a material impact on its Consolidated Financial Statements.

Recently Adopted Accounting Pronouncement

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires measurement and recognition of expected credit losses for financial assets. In April 2019, the FASB issued clarification to ASU 2016-13 within ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. The Company adopted this standard as of January 1, 2020 using a modified retrospective approach. Adoption of the standard did not have a material impact on the Consolidated Financial Statements.

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2. Fair Value Measurements

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

Level 1 Level 2 Level 3 Total

Assets:

Cash equivalents:

Short-term marketable securities:

U.S. government agency securities — 25,217 — 25,217

Long-term marketable securities:

U.S. government treasuries 2,561 — — 2,561

Foreign currency derivative contracts — 185 — 185

Liabilities:

Foreign currency derivative contracts $ — $ 11 $ — $ 11

Total $ — $ 11 $ — $ 11

Level 1 Level 2 Level 3 Total

Assets:

Cash equivalents

Short-term marketable securities:

U.S. government agency securities — 2,000 — 2,000

Long-term marketable securities:

Foreign currency derivative contracts — 85 — 85

Liabilities:

Foreign currency derivative contracts $ — $ 8 $ — $ 8

Total $ — $ 8 $ — $ 8

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.

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

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3. Marketable Securities

All marketable securities were considered available-for-sale at December 31, 2020 and 2019. On a recurring basis, the Company records its marketable securities at fair value using Level 1 or Level 2 inputs as discussed in Note 2, "Fair Value Measurements". The amortized cost, gross unrealized holding gains or losses, and fair value of the Company’s marketable securities by major security type at each balance sheet date are summarized in the tables below (in thousands):

Short-term marketable securities:

Long-term marketable securities:

U.S. government treasuries 2,561 — — 2,561

__________________________________________________

(1)Unrealized holding losses on 19 securities with an aggregate fair value of $369.9 million.

(2)Unrealized holding losses on 2 securities with an aggregate fair value of $10.1 million.

(3)Unrealized holding loss on 1 security with an aggregate fair value of $20.1 million.

Short-term marketable securities:

U.S. government agency securities 1,999 1 — 2,000

Long-term marketable securities:

__________________________________________________

(1)Unrealized holding losses on 2 securities with an aggregate fair value of $9.3 million.

(2)Unrealized holding losses on 4 securities with an aggregate fair value of $25.9 million.

(3)Unrealized holding loss on 1 security with an aggregate fair value of $10.1 million.

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

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As of December 31, 2020 and 2019, some of the Company’s marketable securities were in an unrealized loss position. The Company has not recognized an allowance for credit losses as of December 31, 2020 and there was no other-than-temporary impairment as of December 31, 2019. The Company determined that it had the ability and intent to hold all marketable securities that have been in a continuous loss position until maturity or recovery. Further, these marketable securities were initially, and continue to be, held with investment grade, high credit quality institutions. All marketable securities with unrealized losses as of each balance sheet date have been in a loss position for less than twelve months or the loss is not material.

The Company recorded unrealized gains on marketable securities in other comprehensive income for the year ended December 31, 2019. As a result, the Company recorded a tax benefit of 0.4 million for the year ended December 31, 2019 on the Consolidated Statements of Operations and Comprehensive Income (Loss) and a corresponding tax charge in other comprehensive income. There was no unrealized gain on marketable securities in other comprehensive income for the years ended December 31, 2020, or 2018, and as such there was no tax benefit recorded for the years ended December 31, 2020 and 2018 on the Consolidated Statements of Operations and Comprehensive Income (Loss).

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

4. Derivative Financial Instruments

Foreign Currency Exchange Rate Exposure

The Company uses forward foreign currency exchange contracts to hedge certain operational exposures resulting from potential changes in foreign currency exchange rates. Such exposures result from portions of the Company's forecasted cash flows being denominated in currencies other than the U.S. dollar, primarily the Euro and British Pound. The derivative instruments the Company uses to hedge this exposure are not designated as cash flow hedges, and as a result, changes in their fair value are recorded in interest and other income, net, on the Company's Consolidated Statements of Operations and Comprehensive Income (Loss).

The fair values of forward foreign currency exchange contracts are estimated using current exchange rates and interest rates and take into consideration the current creditworthiness of the counterparties. Information regarding the specific instruments used by the Company to hedge its exposure to foreign currency exchange rate fluctuations is provided below.

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

_________________________________________________

(1)The notional amount represents the net amount of foreign currency that will be received upon maturity of the forward contracts.

Immaterial derivative liabilities are recorded on the Consolidated Balance Sheets as of December 31, 2020, and 2019. A derivative asset balance of $0.2 million is recorded in prepaid expenses and other current assets on the Consolidated Balance Sheets as of December 31, 2020 and an immaterial derivative asset balance is recorded in prepaid expenses and other current assets on the Consolidated Balance Sheets as of December 31, 2019. Net gains of $0.1 million and $0.2 million, and a net loss of $0.2 million, each associated with the Company's derivative instruments, are recognized in interest and other income, net on the Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2020, 2019 and 2018, respectively.

5. Acquisition

In August 2016, the Company entered into a License and Collaboration Agreement (“F-star Collaboration Agreement”) with F-star Gamma Limited (“F-star Gamma”), F-star Biotechnologische Forschungs-und Entwicklungsges M.B.H ("F-star GmbH") and F-star Biotechnology Limited ("F-star Ltd") (collectively, “F-star”) to leverage F-star’s modular antibody technology and the Company’s expertise in the development of therapies for neurodegenerative diseases. Under the F-star Collaboration Agreement, the Company made payments to F-star totaling $11.5 million. In connection with the entry into the F-star Collaboration Agreement, the Company also purchased an option for an upfront option fee of $0.5 million (the “buy-out-option”), to acquire all of the outstanding shares of F-star Gamma pursuant to a pre-negotiated buy-out option agreement (the “Option Agreement”).

In May 2018, the Company exercised the Option Agreement and entered into a Share Purchase Agreement (the “Purchase Agreement”) with the shareholders of F-star Gamma and Shareholder Representative Services LLC, pursuant to which the Company acquired all of the outstanding shares of F-star Gamma (the “Acquisition”).

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As a result of the Acquisition, F-star Gamma became a wholly-owned subsidiary of the Company and the Company changed the entity’s name to Denali BBB Holding Limited. In addition, the Company became a direct licensee of certain intellectual property of F-star Ltd by way of the Company’s assumption of F-star Gamma’s license agreement with F-star Ltd, dated August 24, 2016, (the “F-star Gamma License”). The Company made initial exercise payments under the Purchase Agreement and the F-star Gamma License, in the aggregate, of $17.8 million. In addition, the Company is required to make future contingent payments, to F-star Ltd and the former shareholders of F-star Gamma, up to a maximum amount of $447.0 million in the aggregate upon the achievement of certain defined preclinical, clinical, regulatory and commercial milestones. These include up to $27.0 million in preclinical contingent payments, $50.0 million in clinical contingent payments, $120.0 million in regulatory contingent payments and $250.0 million in commercial contingent payments. The amount of the contingent payments will vary based on whether F-star delivers an Fcab (constant Fc-domains with antigen-binding activity) that meets pre-defined criteria and whether the Fcab has been identified solely by the Company or solely by F-star or jointly by the Company and F-star.

The Company concluded that the assets acquired and liabilities assumed upon the exercise of the Option Agreement did not meet the accounting definition of a business, and as such, the acquisition was accounted for as an asset purchase. As the transaction was accounted for as an asset purchase rather than a business combination, the Company didnot recognize any contingent consideration on the acquisition date. To date, the Company has paid consideration of $19.8 million in the aggregate, consisting of up-front and contingent consideration, all of which was recorded as research and development expense as incurred. The Company recognized $1.5 million of contingent consideration as research and development expense for the year ended December 31, 2019. There was no contingent consideration recognized for the year ended December 31, 2020. Any future contingent consideration is expected to be recognized as incurred in research and development expense on the Consolidated Statements of Operations and Comprehensive Income (Loss).

Under the F-star Collaboration Agreement, the Company is responsible for certain research costs incurred by F-star Ltd in conducting activities under an agreed development plan for each Fcab, for up to 24 months after the target Fcab is accepted. The Company's responsibility for research costs under the first development plan related to an Fcab that targets the transferrin receptor was completed during the year ended December 31, 2018. The responsibility for costs under the second development plan related to an undisclosed Fcab target commenced in February 2019. The Company recognized $1.2 million, $1.1 million, and $0.8 million in research and development expense related to the funding of F-star activities under these development plans during the years ended December 31, 2020, 2019, and 2018, respectively.

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6. Collaboration Agreements

Biogen

Provisional Biogen Collaboration Agreement and Common Stock Purchase Agreement

On August 5, 2020, the Company entered into a binding Provisional Collaboration and License Agreement (“Provisional Biogen Collaboration Agreement”) with Biogen Inc.’s subsidiaries, Biogen MA Inc. (“BIMA”) and Biogen International GmbH (“BIG”) (BIMA and BIG, collectively, “Biogen”) pursuant to which the Company granted Biogen a license to co-develop and co-commercialize Denali’s small molecule LRRK2 inhibitor program (the “LRRK2 Program”), an option in respect of each of (i) the Company’s amyloid beta program utilizing the Company's Transport Vehicle ("TV") technology platform to cross the blood-brain barrier ("BBB") and (ii) one other unnamed program also utilizing the Company's TV technology platform (the “Option Programs”), and a right of first negotiation with respect to two additional unnamed programs for indications within Alzheimer’s disease, Parkinson’s disease, amyotrophic lateral sclerosis ("ALS") or multiple sclerosis utilizing the Company's TV technology platform (the “ROFN Programs”) should the Company decide to seek a collaboration with a third party for such programs. The Provisional Biogen Collaboration Agreement was a binding agreement, which became effective on the closing of the Common Stock Purchase Agreement ("SPA"), as described further below. The Provisional Biogen Collaboration Agreement expired in October 2020 upon the execution of a Definitive LRRK2 Collaboration and License Agreement (“LRRK2 Agreement”) with Biogen on October 4, 2020 and a Right of First Negotiation, Option and License Agreement (the “ROFN and Option Agreement”) on October 6, 2020 (collectively, the "Biogen Collaboration Agreement").

Under the terms of the Provisional Biogen Collaboration Agreement, Biogen was obligated to pay the Company a $560.0 million upfront payment, payable upon execution of the Biogen Collaboration Agreement, which occurred in October 2020. With respect to the LRRK2 Program, Biogen is required to make milestone payments up to approximately $1.125 billion upon achievement of certain development and sales milestone events. Such milestone payments include $375.0 million in development, $375.0 million upon first commercial sale, and $375.0 million in net sales-based milestones. The Company will share 50% of the profits and losses with Biogen for LRRK2 Products in the United States, and 40% of such profits and losses in China. The Company will be entitled to receive royalties in the high teens to low twenties percentages on net sales for LRRK2 Products outside of the United States and China.

Under the terms of the Provisional Biogen Collaboration Agreement, through the effective date of the Biogen Collaboration Agreement, the Company conducted and controlled LRRK2 clinical development. Subsequently, the Company and Biogen are jointly developing LRRK2 Products pursuant to a clinical development plan set forth within the LRRK2 Agreement. The parties share responsibility and costs for global development of LRRK2 Products pursuant to a mutually agreed development plan and budget ("LRRK2 Development Activities"), with Biogen funding 60% and the Company funding 40% of such costs.

The Company may opt out of development cost sharing worldwide and, upon such election, from any further profit-sharing from the LRRK2 Program. The Company also has the right to opt-out of the profit sharing arrangement for the LRRK2 Program or for only those LRRK2 Products that do not penetrate the BBB (“Peripheral LRRK2 Products”), in each of the United States and China. After such an opt out, the Company will no longer be obligated to share in the development and commercialization costs for, or be entitled to share in the applicable revenues from, such LRRK2 Program (or from the Peripheral LRRK2 Products) for such country, as applicable. If the Company chooses to exercise its opt out rights, the Company will be entitled to receive tiered royalties on net sales of the applicable LRRK2 Program in the relevant country (or countries). The royalty rates for the applicable LRRK2 Program will be a percentage in the high teens to low twenties, but may increase to the mid-twenties if the Company has met certain co-funding thresholds or there has been a first commercial sale at the time of the Company's election.

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In addition to the LRRK2 Program, Biogen received an exclusive option to license two preclinical programs enabled by the Company's TV technology platform, which platform aims to improve brain uptake of biotherapeutics, including its Antibody Transport Vehicle ("ATV"): Abeta program ("ATV-enabled anti-amyloid beta program") and a second program utilizing the Company's TV technology for an unnamed target ("TV program"), excluding small molecules, Adeno-associated viruses ("AAV") and oligonucleotides. Biogen’s option may be exercised up to initiation of investigational new drug ("IND")-enabling studies for each program and continues for each program until a specified period of time after delivery of an option data package, or thirty business days after the 5th anniversary of the effective date of the Provisional Biogen Collaboration Agreement, whichever is earlier.

Further, Biogen will have the right of first negotiation ("ROFN") on two additional TV-enabled therapeutics within Alzheimer’s disease, Parkinson’s disease, ALS or multiple sclerosis should the Company decide to seek a collaboration with a third party for such programs, but this does not include any of the Company’s small molecule, AAV or oligonucleotide programs. The ROFN period continues until seven years after the effective date of the Provisional Biogen Collaboration Agreement or the date on which the Company has offered Biogen two ROFN Programs, whichever is earlier. However, if the Company does not execute an agreement with a third party with respect to a particular ROFN Program offered to Biogen within a specified amount of time, Biogen will have one additional right to exercise the ROFN again with respect to such ROFN Program.

In connection with the Provisional Biogen Collaboration Agreement, the Company entered into a common stock purchase agreement (the "Stock Purchase Agreement") with BIMA on August 5, 2020, pursuant to which the Company agreed to issue and sell, and BIMA agreed to purchase, 13,310,243 shares of the Company’s common stock (the “Shares”) for an aggregate purchase price of $465.0 million pursuant to the terms and conditions thereof. Since the shares of common stock owned by Biogen as of December 31, 2020 represent more than 10% of the voting interest of the Company, Biogen is considered a related party as defined in ASC 850. Management determined that it was appropriate to account for the Provisional Biogen Collaboration Agreement and the SPA as one arrangement because they were entered into at the same time with interrelated financial terms.

On September 22, 2020, the Company closed the sale of the Shares to BIMA pursuant to the Stock Purchase Agreement. The estimated fair market value of the Shares issued to BIMA was $420.1 million, based on the closing stock price of $35.87 on the date of issuance adjusted by a discount for lack of marketability due to certain holding period restrictions, which was valued using an option pricing model. This stock issuance resulted in a $44.9 million premium paid to the Company above the estimated fair value of the Company's common stock (the "Stock Premium"), which forms part of the transaction price for the Provisional Biogen Collaboration Agreement.

Upon inception, the Company identified the LRRK2 license as the only distinct performance obligation under ASC 606 associated with the Provisional Biogen Collaboration Agreement. No performance obligations were identified related to the Option or ROFN Programs since the relevant financial and operational terms were not considered to be sufficiently defined in the Provisional Biogen Collaboration Agreement to allow the Company to determine its obligations. Further, the Company was required to perform interim LRRK2 development activities subject to cost sharing in the period prior to finalization of the clinical development plan set forth within the LRRK2 Agreement.

At inception, there was no transaction price for the Provisional Biogen Collaboration Agreement. On September 22, 2020, as noted above, the $44.9 million Stock Premium was included in the transaction price. All other potential future payments were considered constrained at inception through execution of the Biogen Collaboration Agreement since they were all contingent on the execution of the Biogen Collaboration Agreement.

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