Document
Denali Therapeutics Inc.DNLIAccelerated Filer10-QMarch 31, 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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

(Mark One)
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019 
OR
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 001-38311

Denali Therapeutics Inc.
(Exact name of registrant as specified in its charter)

Delaware46-3872213 
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
161 Oyster Point Blvd.
South San Francisco, CA, 94080
(Address of principal executive offices and zip code)
(650) 866-8548
(Registrant’s telephone number, including area code)
_______________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer¨Accelerated filerx
Non-accelerated filer
¨
Smaller reporting company¨
Emerging growth company
x 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common Stock, par value $0.01 per shareDNLINASDAQ Global Select Market
The number of outstanding shares of the registrant’s common stock as of May 1, 2019 was 95,478,391.




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Item 4.
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Item 1A.
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Item 4.
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Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

Denali Therapeutics Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except share amounts)

March 31, 2019December 31, 2018
Assets
Current assets:
Cash and cash equivalents$39,661 $77,123 
Short-term marketable securities445,820 387,174 
Prepaid expenses and other current assets14,052 16,539 
Total current assets499,533 480,836 
Long-term marketable securities97,554 147,881 
Property and equipment, net36,955 25,162 
Operating lease right-of-use asset34,407 — 
Other non-current assets8,147 8,105 
Total assets$676,596 $661,984 
Liabilities and stockholders' equity
Current liabilities:
Accounts payable$3,662 $1,891 
Accrued liabilities12,114 8,520 
Accrued compensation3,213 9,952 
Contract liabilities23,148 11,427 
Other current liabilities1,107 996 
Total current liabilities43,244 32,786 
Contract liabilities, less current portion44,852 57,350 
Operating lease liability, less current portion71,412 — 
Deferred rent, less current portion— 24,532 
Other non-current liabilities440 471 
Total liabilities159,948 115,139 
Commitments and contingencies (Note 8)
Stockholders' equity:
Convertible preferred stock, $0.01 par value; 40,000,000 shares authorized as of March 31, 2019 and December 31, 2018; 0 shares issued and outstanding as of March 31, 2019 and December 31, 2018
  
Common stock, $0.01 par value; 400,000,000 shares authorized as of March 31, 2019 and December 31, 2018; 95,257,705 shares and 94,662,435 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively
1,279 1,273 
Additional paid-in capital781,966 774,158 
Accumulated other comprehensive income (loss)332 (649)
Accumulated deficit(266,929)(227,937)
Total stockholders' equity516,648 546,845 
Total liabilities and stockholders’ equity$676,596 $661,984 

See accompanying notes to unaudited condensed consolidated financial statements.
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Denali Therapeutics Inc.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
(In thousands, except share and per share amounts)

Three Months Ended March 31,
2019 2018 
Collaboration revenue$4,205 $641 
Operating expenses:
Research and development37,403 20,819 
General and administrative9,310 5,570 
Total operating expenses46,713 26,389 
Loss from operations(42,508)(25,748)
Interest and other income, net3,516 2,070 
Net loss (38,992)(23,678)
Other comprehensive income (loss):
Net unrealized income (loss) on marketable securities, net of tax981 (919)
Comprehensive loss$(38,011)$(24,597)
Net loss per share, basic and diluted$(0.41)$(0.26)
Weighted average number of shares outstanding, basic and diluted94,984,503 89,560,576 

See accompanying notes to unaudited condensed consolidated financial statements.
 

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Denali Therapeutics Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
(In thousands, except share amounts)

Common StockAdditional Paid-in CapitalAccumulated Other Comprehensive Income (Loss)Accumulated DeficitTotal Stockholders' Equity
Three Months Ended March 31, 2019SharesAmount
Balance at December 31, 201894,662,435 $1,273 $774,158 $(649)$(227,937)$546,845 
Issuances under equity incentive plans199,503 2 906 — — 908 
Vesting of early exercised common stock46,874 1 31 — — 32 
Vesting of restricted stock awards348,893 3 (3)— —  
Stock-based compensation— — 6,874 — — 6,874 
Net loss— — — — (38,992)(38,992)
Other comprehensive income— — — 981 — 981 
Balance at March 31, 201995,257,705 $1,279 $781,966 $332 $(266,929)$516,648 
Three Months Ended March 31, 2018
Balance at December 31, 201787,480,362 $1,201 $656,660 $(368)$(191,697)$465,796 
Issuance of common stock in connection with the Takeda Collaboration Agreement
4,214,559 42 94,364 — — 94,406 
Issuances under equity incentive plans81,735 1 218 — — 219 
Vesting of early exercised common stock93,749 1 278 — — 279 
Vesting of restricted stock awards718,584 7 (7)— —  
Stock-based compensation— — 2,925 — — 2,925 
Net loss— — — — (23,678)(23,678)
Other comprehensive loss— — — (919)— (919)
Balance at March 31, 201892,588,989 $1,252 $754,438 $(1,287)$(215,375)$539,028 


See accompanying notes to unaudited condensed consolidated financial statements.
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Denali Therapeutics Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)

Three Months Ended March 31,
2019 2018 
Operating activities
Net loss$(38,992)$(23,678)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization2,403 854 
Stock–based compensation expense6,874 2,925 
Net amortization of premiums and (discounts) on marketable securities(1,317)(387)
Non-cash rent expense1,265 (225)
Gain on disposal of property and equipment (44)
Changes in operating assets and liabilities:
Prepaid expenses and other assets2,849 (1,613)
Accounts payable1,965 (951)
Accrued and other current liabilities(4,593)(3,257)
Contract liabilities(777)59,953 
Net cash (used in) provided by operating activities(30,323)33,577 
Investing activities
Purchases of marketable securities(109,810)(328,036)
Purchases of property and equipment(2,028)(537)
Maturities and sales of marketable securities103,791 27,299 
Net cash used in investing activities(8,047)(301,274)
Financing activities
Payments of issuance costs related to issuance of common stock (1,342)
Payments of issuance costs related to issuance of preferred stock (44)
Issuance of common stock in connection with the Takeda Collaboration Agreement 94,406 
Proceeds from exercise of awards under equity incentive plans908 219 
Net cash provided by financing activities908 93,239 
Net decrease in cash, cash equivalents and restricted cash(37,462)(174,458)
Cash, cash equivalents and restricted cash at beginning of period78,623 218,910 
Cash, cash equivalents and restricted cash at end of period$41,161 $44,452 
Supplemental disclosures of cash flow information
Tenant improvements provided by the landlord$11,341 $ 
Property and equipment purchases accrued but not yet paid$1,569 $246 

See accompanying notes to unaudited condensed consolidated financial statements.
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Denali Therapeutics Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Significant Accounting Policies
Organization and Description of Business

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

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of SEC Regulation S-X for interim financial information.

These unaudited condensed consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the Securities and Exchange Commission on March 12, 2019 (the "2018 Annual Report on Form 10-K"). The condensed consolidated Balance Sheet as of December 31, 2018 was derived from the audited annual consolidated financial statements as of the period then ended. Certain information and footnote disclosures typically included in the Company's annual consolidated financial statements have been condensed or omitted. The accompanying unaudited condensed consolidated financial statements reflect all adjustments that, in the opinion of management, are necessary for a fair statement of the results of the interim periods presented. All such adjustments are of a normal recurring nature except for the impacts of adopting new accounting standards discussed below. These interim financial results are not necessarily indicative of results expected for the full fiscal year or for any subsequent interim period.

During the three months ended March 31, 2019, except as discussed below in the sections titled Leases and Recently Adopted Accounting Standards, there were no material changes to the Company's significant accounting and financial reporting policies from those reflected in the 2018 Annual Report on Form 10-K. For further information with regard to the Company’s Significant Accounting Policies, please refer to Note 1, "Significant Accounting Policies," to the Company’s Consolidated Financial Statements included in the 2018 Annual Report on Form 10-K.
Principles of Consolidation

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

The preparation of financial statements in conformity with U.S. GAAP requires the Company to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, as well as the reported amounts of expenses during the reporting period. Actual results could differ from those estimates, and such differences could be material to the condensed consolidated financial position and statements of operations and comprehensive loss.
Concentration of Credit Risk and Other Risks and Uncertainties

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents, marketable securities and forward foreign currency exchange contracts. Substantially all of the Company’s cash and cash equivalents are deposited in accounts with financial institutions that management believes are of high credit quality. Such deposits have and will continue to exceed federally insured limits. The Company maintains its cash with accredited financial institutions and accordingly, such funds are subject to minimal credit risk. The Company has not experienced any losses on its cash deposits.

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 March 31, 2019 and December 31, 2018, the Company had no off-balance sheet concentrations of credit risk.

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

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

The Company’s restricted cash consists of the letter of credit for the Company’s headquarters building lease, and is included within other non-current assets on the accompanying condensed consolidated balance sheets.
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Derivatives and Hedging Activities

The Company accounts for its derivative instruments as either assets or liabilities on the condensed consolidated balance sheet and measures them at fair value. Derivatives are adjusted to fair value through Interest and other income, net in the condensed consolidated statements of operations and comprehensive loss.
Leases
The Company 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 (“ROU”) asset and operating lease liability is recognized for identified operating leases in the condensed consolidated balance sheets.
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 (“IBR”) 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 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.
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In determining the appropriate amount of revenue to be recognized as the Company fulfills its obligations under each of its agreements, the Company performs the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations based on estimated selling prices; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.

Amounts received prior to satisfying the revenue recognition criteria are recorded as contract liabilities in the Company’s consolidated balance sheets. If the related performance obligation is expected to be satisfied within the next twelve months this will be classified in current liabilities. Amounts recognized as revenue prior to 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 performance obligation 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.

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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Net Loss per Share
Basic net loss per share is calculated by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period, without consideration for common stock equivalents. Diluted net loss per share is the same as basic net loss per share, since the effects of potentially dilutive securities are antidilutive given the net loss for each period presented.
Recently Adopted Accounting Pronouncement
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU") No. 2016-02, Leases (Topic 842), which supersedes the guidance in former ASC 840, Leases. The FASB issued further updates to this guidance in July 2018 through ASU 2018-10, Codification Improvements to Topic 842, Leases and ASU 2018-11, Leases (Topic 842): Targeted Improvements, in December 2018 through ASU 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors and in March 2019 through ASU 2019-01 Leases (Topic 842): Codification Improvements. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. The standard is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted, and is required to be adopted using a modified retrospective approach.
The Company has adopted this standard as of January 1, 2019 applying the optional transition method such that it is not required to adjust prior period presentations. ASU 2016-02 has impacted the Company’s condensed consolidated balance sheet as of March 31, 2019 as the Company has certain operating lease arrangements for which the Company is the lessee and one future operating lease arrangement for which the Company is the lessor. The Company has no financing leases. Management has 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 the Company has recognized a net ROU asset of $46.1 million and operating lease liability of approximately $71.3 million, as of January 1, 2019. The standard did not have a material impact on the Company’s condensed consolidated statements of operations and comprehensive loss and stockholders' equity.
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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):

March 31, 2019
Level 1Level 2Level 3Total
Assets:
Cash equivalents:
Money market funds$24,930 $ $ $24,930 
Short-term marketable securities:
U.S. government treasuries287,681   287,681 
U.S. government agency securities 51,328  51,328 
Corporate debt securities 69,678  69,678 
Commercial paper 37,133  37,133 
Long-term marketable securities:
U.S. government treasuries81,526   81,526 
Corporate debt securities 16,028  16,028 
Foreign currency derivative contracts 26  26 
Total$394,137 $174,193 $ $568,330 
Liabilities:
Foreign currency derivative contracts$ $159 $ $159 
Total$ $159 $ $159 

December 31, 2018
Level 1Level 2Level 3Total
Assets:
Cash equivalents:
Money market funds$42,225 $ $ $42,225 
U.S. government treasuries1,499   1,499 
Commercial paper 9,979  9,979 
Short-term marketable securities:
U.S. government treasuries219,754   219,754 
U.S. government agency securities 73,151  73,151 
Corporate debt securities 71,675  71,675 
Commercial paper 22,594  22,594 
Long-term marketable securities:
U.S. government treasuries117,131   117,131 
U.S. government agency securities 1,977  1,977 
Corporate debt securities 28,773  28,773 
Foreign currency derivative contracts 14  14 
Total$380,609 $208,163 $ $588,772 
Liabilities:
Foreign currency derivative contracts$ $182 $ $182 
Total$ $182 $ $182 
The carrying amounts of accounts payable and accrued liabilities approximate their fair values due to their short-term maturities.
The Company’s Level 2 securities are valued using third-party pricing sources. The pricing services utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly.
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There were no transfers of assets or liabilities between the fair value measurement levels during the three months ended March 31, 2019 or 2018.
3. Cash and Marketable Securities
Cash, cash equivalents and restricted cash

A reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets to the amount reported within the condensed consolidated statements of cash flows is shown in the table below (in thousands):
March 31, 2019December 31, 2018March 31, 2018
Cash and cash equivalents
$39,661 $77,123 $44,001 
Restricted cash included within other non-current assets
1,500 1,500 451 
Total cash, cash equivalents, and restricted cash
$41,161 $78,623 $44,452 
Marketable Securities
All marketable securities were considered available-for-sale at March 31, 2019 and December 31, 2018. The amortized cost, gross unrealized holding gains or losses, and fair value of the Company’s marketable securities by major security type at each balance sheet date are summarized in the tables below (in thousands):
March 31, 2019
Amortized CostUnrealized Holding GainsUnrealized Holding LossesAggregate Fair Value
Short-term marketable securities:
U.S. government treasuries
$287,665 $172 $(156)$287,681 
U.S. government agency securities
51,404 4 (80)51,328 
Corporate debt securities
69,764 7 (93)69,678 
Commercial paper
37,133   37,133 
Total short-term marketable securities
445,966 183 (329)445,820 
Long-term marketable securities:
U.S. government treasuries
81,105 421  81,526 
Corporate debt securities
15,971 57  16,028 
Total long-term marketable securities
97,076 478  97,554 
Total
$543,042 $661 $(329)$543,374 

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December 31, 2018
Amortized CostUnrealized Holding GainsUnrealized Holding LossesAggregate Fair Value
Short-term marketable securities:
U.S. government treasuries
$220,081 $29 $(356)$219,754 
U.S. government agency securities
73,373  (222)73,151 
Corporate debt securities
71,940 1 (266)71,675 
Commercial paper
22,594   22,594 
Total short-term marketable securities
387,988 30 (844)387,174 
Long-term marketable securities:
U.S. government treasuries
116,878 329 (76)117,131 
U.S. government agency securities
1,975 2  1,977 
Corporate debt securities
28,864 8 (99)28,773 
Total long-term marketable securities
147,717 339 (175)147,881 
Total
$535,705 $369 $(1,019)$535,055 

As of March 31, 2019 and December 31, 2018, some of the Company’s marketable securities were in an unrealized loss position. At each balance sheet date, the Company determined that it did have the ability and intent to hold all marketable securities that have been in a continuous loss position until maturity or recovery, thus there has been no recognition of any other-than-temporary impairment in the three months ended March 31, 2019 and 2018. 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.

All of the Company’s marketable securities have an effective maturity of less than two years.
4. Derivative Financial Instruments
Foreign Currency Exchange Rate Exposure

The Company uses forward foreign currency exchange contracts to hedge certain operational exposures resulting from potential changes in foreign currency exchange rates. Such exposures result from portions of the Company’s forecasted cash flows being denominated in currencies other than the U.S. dollar, primarily the Euro and British Pound. The derivative instruments the Company uses to hedge this exposure are not designated as cash flow hedges, and as a result, changes in their fair value are recorded in Interest and other income, net, on the Company's condensed consolidated statements of operations and comprehensive loss.

The fair values of forward foreign currency exchange contracts are estimated using current exchange rates and interest rates and take into consideration the current creditworthiness of the counterparties. Information regarding the specific instruments used by the Company to hedge its exposure to foreign currency exchange rate fluctuations is provided below. The Company did not have foreign currency exchange contracts prior to June 2018.

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The following table summarizes the Company’s forward foreign currency exchange contracts outstanding as of March 31, 2019 (notional amounts in thousands):
Foreign Exchange ContractsNumber of Contracts
Aggregate Notional(1) Amount in Foreign Currency
Maturity
Euros
22 2,039 Apr. 2019 - Jan. 2020
British Pounds
27 3,982 Apr. 2019 - Feb. 2020
Swiss Francs
24 939 Apr. 2019 - Feb. 2020
Total
73 
_________________________________________________
(1)  The notional amount represents the net amount of foreign currency that will be received upon maturity of the forward contracts.

The derivative liability balance of $0.2 million is recorded in Other current liabilities and the derivative asset balance of $25,675 is recorded in Prepaid assets and other current assets on the condensed consolidated balance sheet as of March 31, 2019. The net gain associated with the Company's derivative instruments of $19,287 is recognized in Interest and other income, net on the condensed consolidated statement of operations and comprehensive loss for the three months ended March 31, 2019.
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. In connection with the entry into the F-star Collaboration Agreement, the Company also purchased an option for an upfront option fee of $0.5 million (the “buy-out-option”), to acquire all of the outstanding shares of F-star Gamma pursuant to a pre-negotiated buy-out option agreement (the “Option Agreement”).

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

As a result of the Acquisition, F-star Gamma has become a wholly-owned subsidiary of the Company and the Company has 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 has made initial exercise payments under the Purchase Agreement and the F-star Gamma License in the aggregate, of $18.0 million, less the estimated net liabilities of F-star Gamma, which is approximately $0.2 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. The amount of the contingent payments varies 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. 
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Under the terms of the original F-star Collaboration Agreement, the Company 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, the Company had 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, the Company exercised its right to nominate two additional Fcab Targets and identified a second Accepted Fcab Target. The Company made a one-time payment of $6.0 million in aggregate for the two additional Accepted Fcab Targets and has extended the time period for its selection of the third Accepted Fcab Target until approximately the fourth anniversary of the date of the original F-star Collaboration Agreement.
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, with $18.3 million recorded in research and development expense in the year ended December 31, 2018Further, since this transaction was accounted for as an asset purchase rather than a business combination, the Company did not recognize any contingent consideration on the acquisition date. Contingent consideration is expected to be recognized in research and development expense in the future as incurred. 
The Company was and continues to be responsible for certain research costs incurred by F-star Ltd in conducting activities under each agreed development plan, for up to 24 months. The first of the agreed development plans was completed during the year ended December 31, 2018, and the second commenced during the three months ended March 31, 2019. The Company recognized $0.2 million and $0.3 million of research and development expense related to the funding of F-star Ltd activities under these development plans during the three months ended March 31, 2019 and March 31, 2018, respectively. 
6. Collaboration Agreements
Sanofi 
In October 2018, the Company entered into a Collaboration and License Agreement ("Sanofi Collaboration Agreement") with Genzyme Corporation, a wholly owned subsidiary of Sanofi S.A. ("Sanofi") pursuant to which certain small molecule CNS and peripheral RIPK1 inhibitors contributed by Sanofi and by Denali will be developed and commercialized. The Sanofi Collaboration Agreement became effective in November 2018 when the HSR requirements were satisfied upon which Sanofi paid the Company an upfront payment of $125.0 million. Under the Sanofi Collaboration Agreement, Denali is eligible to receive milestone payments from Sanofi up to approximately $1.1 billion upon achievement of certain clinical, regulatory and sales milestone events. Such milestone payments include $600.0 million in clinical and regulatory milestone payments for CNS Products and $495.0 million in clinical, regulatory and commercial milestone payments for Peripheral Products, as defined.
Denali 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 sold 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 Denali compared to RIPK1 Inhibitors contributed by Denali.
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Denali and Sanofi will jointly develop CNS Products pursuant to a global development plan. The Company will be responsible, at its own cost, for conducting Phase 1 and Phase 2 trials for CNS Products for Alzheimer’s disease and any activities required to support such clinical trials and specific for Alzheimer’s disease. Denali will also conduct, at Sanofi’s cost, a Phase 1b trial for the lead CNS penetrant RIPK1 inhibitor, DNL747, for ALS. Sanofi will be responsible, at its cost, for all other Phase 1 and Phase 2 trials for CNS Products, including for multiple sclerosis. Sanofi will lead the conduct of all Phase 3 and later stage development trials for CNS Products, with Sanofi and Denali funding 70% and 30% of such costs, respectively. The Company will have the ability to opt out of the cost-profit sharing provisions of the Sanofi Collaboration Agreement, as further described below.
Sanofi will lead commercialization activities globally for CNS Products. The Company 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.
The Company 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 and country basis. Sanofi may also terminate Denali's cost-profit sharing provisions of the Sanofi Collaboration Agreement in its entirety if, following notice from Sanofi and a cure period, the Company fails to satisfy its cost-sharing obligations. After such an opt out by the Company or termination by Sanofi, Denali will no longer be obligated to share in the development and commercialization costs for the applicable CNS Products and Denali will not share in the applicable profits from such CNS Products. Instead, the Company will be entitled to receive tiered royalties on net sales of the applicable CNS Products in the relevant country (or countries). The royalty rates are percentages 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 the Company has met certain co-funding thresholds at the time of its election or Sanofi’s termination of the Company's 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. Denali will be entitled to receive tiered royalties in the low- to mid- teen percentages on net sales of Peripheral Products.
The Company identified the following distinct performance obligations associated with the Sanofi Collaboration Agreement upon inception: the CNS program license, the Peripheral program license, the Phase 1 and Phase 2 trials for CNS Products for Alzheimer’s disease ("Alzheimer's Disease Services"), and the Phase 1b trial for DNL747 for ALS and associated activities ("Retained Activities").
The Company believes that the Sanofi Collaboration Agreement is a collaboration arrangement as defined in ASC 808, Collaborative Agreements. The Company also believes that Sanofi meets the definition of a customer as defined in ASC 606, Revenue From Contracts With Customers for three of the performance obligations identified at inception, but does not meet the definition of a customer for the Alzheimer's Disease Services. Further, Sanofi does not meet the definition of a customer for all Phase 3 and later stage development trials for CNS Products led by Sanofi for which Denali will fund 30% of total costs. Since ASC 808 does not address recognition and measurement, the Company looked to other accounting literature for guidance where the performance obligation does not fall under ASC 606, and determined that for the Alzheimer's Disease Services, the guidance in ASC 606 should be analogized for the recognition, measurement and reporting of this performance obligation, and for the cost sharing provisions, the Company determined that the guidance in ASC 730, Research and Development should be applied.
The transaction price at inception included upfront fixed consideration of $125.0 million. All potential future milestones and other payments were considered constrained at the inception of the Sanofi Collaboration Agreement since the Company could not conclude it is probable that a significant reversal in the amount recognized will not occur. The transaction price increased by $5.8 million from inception through March 31, 2019 as amounts due for costs incurred related to the Retained Activities were no longer constrained.
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The respective standalone value for each of the performance obligations has been determined by applying the SSP method and the transaction price allocated based on the relative SSP method with revenue recognition timing to be determined either by delivery or the provision of services.
The Company used an adjusted market assessment approach to estimate the selling price for the program licenses, and an expected cost plus margin approach for estimating the Alzheimer’s Disease Services, and the Retained Activities. The program licenses and existing know-how were delivered on the effective date of the Sanofi Collaboration Agreement. The Alzheimer’s Disease Services and the Retained Activities are expected to be delivered over time as the services are performed. For the Alzheimer's Disease Services, revenue will be recognized over time using the input method, based on costs incurred to perform the services, since the level of costs incurred over time is thought to best reflect the transfer of services to Sanofi. For the Retained Activities, revenue will be recognized over time using the output method, based on amounts invoiced to Sanofi, since this is believed to directly correlate to the value of the services performed.
A contract liability of $3.8 million and $3.9 million is recorded on the condensed consolidated balance sheet as of March 31, 2019 and December 31, 2018, respectively, which relates to the portion of the Alzheimer's Disease Services performance obligation yet to be satisfied, with such amounts to be recognized over the estimated period of the services, which is expected to be several years. There was a receivable of $3.4 million and $2.3 million at March 31, 2019 and December 31, 2018, respectively, associated with the Sanofi Collaboration Agreement. 
In assessing the Sanofi Collaboration Agreement, management is required to exercise considerable judgment in estimating revenue to be recognized. Management applies judgment in determining the separate performance obligations, in estimating the selling price, in determining when control was transferred to Sanofi for the licenses, and in estimating total future costs when using the input method.
Through March 31, 2019, Denali has not achieved any milestones and has no product sales recorded under the Sanofi Collaboration Agreement.
Takeda

In January 2018, the Company entered into a Collaboration and Option Agreement ("Takeda Collaboration Agreement") with Takeda Pharmaceutical Company Limited ("Takeda"), pursuant to which the Company granted Takeda an option to develop and commercialize, jointly with the Company, certain biologic products that are enabled by Denali's blood-brain barrier ("BBB") delivery technology and intended for the treatment of neurodegenerative disorders. The programs were Denali’s ATV:BACE1/Tau and ATV: TREM2 programs, as well as a third identified discovery stage program. The Takeda Collaboration Agreement became effective in February 2018 when the requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 were satisfied. In February 2019, the agreement was amended to replace ATV:BACE1/Tau with ATV:Tau. The amendment did not have a material impact to the condensed consolidated financial statements.

Under the Takeda Collaboration Agreement and unless otherwise agreed jointly between both parties, Denali will be responsible, at its cost, for conducting activities relating to pre-IND development of biologic products directed to the three identified targets and enabled by its BBB delivery technology targeting TfR during the applicable research period. The period through which the option can be exercised continues for each target until the first biologic product directed to the relevant target is IND-ready or approximately five years after selection of the target, whichever is earlier.

Under the Takeda Collaboration AgreementTakeda paid a $40.0 million upfront payment, and may pay up to an aggregate of $25.0 million with respect to each program directed to a target and based upon the achievement of certain preclinical milestone events, up to $75.0 million in total. The upfront payment of $40.0 million was received in February 2018, as well as the first preclinical milestone payment of $5.0 million related to one of the programs.
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If Takeda exercises its option with respect to a particular target, then Takeda will have the right to develop and commercialize, jointly with the Company, a specified number of biologic products enabled by its BBB delivery technology that were developed during the research period and which are directed to the relevant target. The Company will grant to Takeda a co-exclusive license under the intellectual property the Company controls related to those biologic products.

Takeda is obligated to pay Denali a $5.0 million option fee for each target for which Takeda exercises its option, up to $15.0 million in total.

In addition, Takeda may be obligated to pay Denali up to an aggregate of $707.5 million upon achievement of certain clinical and regulatory milestone events if Takeda exercises its option for all three collaboration programs. Takeda may also be obligated to pay Denali up to $75.0 million per biologic product upon achievement of a certain sales-based milestone, or an aggregate of $225.0 million if one biologic product from each program achieves this milestone.

If Takeda exercises its option for a particular target, Denali and Takeda will share equally the development and commercialization costs, and, if applicable, the profits, for each collaboration program. However, for each collaboration program, the Company may elect not to continue sharing development and commercialization costs, or Takeda may elect to terminate Denali's cost-profit sharing rights and obligations if, following notice from Takeda and a cure period, the Company fails to satisfy its cost sharing obligations with respect to the relevant collaboration program. After such an election by the Company or termination by Takeda becomes effective, Denali will no longer be obligated to share in the development and commercialization costs for the relevant collaboration program, and will not share in any profits from that collaboration program. Instead the Company 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 certain co-funding thresholds have been met at the time of the Company's election to opt out of co-development or Takeda’s termination of Denali's 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 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.

For each collaboration program for which costs and profits are shared with Takeda, Denali will lead the conduct of clinical activities for each indication through the first Phase 2 trial, and Takeda will lead the conduct of all subsequent clinical activities for that indication. Further, Denali and Takeda will jointly commercialize biologic products included in the relevant collaboration program in the United States and China. Unless Denali has opted out of cost-sharing for two collaboration programs, it has the right to lead commercialization activities in the United States for one collaboration program and Takeda will lead commercialization activities in the United States for all collaboration programs for which Denali does not lead commercialization activities. Further, Takeda will lead commercialization activities in China and will solely conduct commercialization activities in all other countries. The Company has the right to lead all manufacturing activities for all collaboration programs for which the parties are sharing costs and profits.

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Each party may terminate the Takeda Collaboration Agreement in its entirety, or with respect to a particular collaboration program, as applicable, if the other party remains in material breach of the Takeda Collaboration Agreement following a cure period to remedy the material breach. Takeda may terminate the Takeda Collaboration Agreement in its entirety or with respect to any particular collaboration program, for convenience and after giving a specified amount of prior notice, but Takeda may not do so for a certain period of time after the Effective Date of the Takeda Collaboration Agreement. Takeda may also terminate the Takeda Collaboration Agreement with respect to any collaboration program if the joint steering committee ("JSC") established under the Takeda Collaboration Agreement unanimously agrees that a material safety event has occurred with respect to the applicable collaboration program. Denali may terminate the Takeda Collaboration Agreement with respect to a particular collaboration program if Takeda fails to conduct material development and commercial activities for a specified period of time with respect to a collaboration program, unless Takeda cures such failure within a certain period of time. Denali and Takeda may each terminate the Takeda Collaboration Agreement in its entirety if the other party is declared insolvent or in similar financial distress or if, subject to a specified cure period, the other party challenges any patents licensed to it under the Takeda Collaboration Agreement.

Pursuant to the terms of the Takeda Collaboration Agreement, the Company entered into a common stock purchase agreement (the "Stock Purchase Agreement") with Takeda on January 3, 2018, pursuant to which Takeda purchased 4,214,559 shares of Denali’s common stock (the "Shares") for an aggregate purchase price of $110.0 million. The sale of the Shares closed on February 23, 2018. The fair market value of the common stock sold to Takeda was $94.4 million, based on the closing stock price of $22.40 on the date of issuance, resulting in a $15.6 million premium paid to the Company above the fair value of the Company's common stock which was credited to contract liability in the Company's condensed consolidated balance sheet. 

The Company believes that the Takeda Collaboration Agreement is a collaboration arrangement as defined in ASC 808, Collaborative Agreements. Further, during the research period, the Company believes that the arrangement is a contract with a customer as defined in ASC 606, Revenue From Contracts With Customers. The Takeda Collaboration Agreement and the Stock Purchase Agreement are being accounted for as one arrangement because they were entered into at the same time with interrelated financial terms. 

The Company identified performance obligations during the research period consisting of the license, the development options, and JSC participation together with the research services for each collaboration program. The license rights, JSC involvement, option and research services are considered to be a single performance obligation for each program since the research services are highly interrelated with the option and JSC involvement and will significantly modify the license. The performance obligations under each of the three programs are separate since the activities and risks under the programs are distinct.

The Company has determined that all other goods or services which are contingent upon Takeda exercising its option for each program are not considered performance obligations at the inception of the Takeda Collaboration Agreement.

The transaction price at inception included fixed consideration consisting of the upfront fee of $40.0 million, the $15.6 million premium on the sale of common stock, and the first preclinical milestone payment of $5.0 million. It also included variable consideration of $26.0 million relating to future milestones that were not constrained. The amount of variable consideration was estimated using the most likely amount method. In October 2018, the Company confirmed the first preclinical milestone was met for the second program, triggering a milestone payment of $5.0 million, which was received in November 2018. In December 2018, the Company confirmed the first preclinical milestone was met for the third program, triggering a milestone payment of $5.0 million, which was received in February 2019.

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The remaining $44.0 million of preclinical milestones were considered constrained at the inception of the Takeda Collaboration Agreement since the Company could not conclude it is probable that a significant reversal in the amount recognized will not occur. Additionally, cost and profit sharing income, and the development and commercial milestones as outlined above, have not been considered given Takeda has not exercised its options for the development and commercial phases for any program. There was no change in the transaction price from inception through March 31, 2019. This will be reassessed at each reporting period.

The transaction price has been ascribed in its entirety to the three performance obligations identified in the research term of the Takeda Collaboration Agreement.

Revenue is recognized when, or as, the Company satisfies its performance obligations by transferring the promised services to Takeda. Revenue will be recognized over time using the input method, based on costs incurred to perform the research services, since the level of costs incurred over time is thought to best reflect the transfer of services to Takeda. There were no material changes in estimates during the three months ended March 31, 2019.

A contract liability of $64.2 million and $64.9 million is recorded on the condensed consolidated balance sheet as of March 31, 2019 and December 31, 2018, respectively, which relate to the three performance obligations identified, with such amounts to be recognized over the estimated period of the pre-IND research services, which is expected to be several years.

Revenue recognized relating to future milestone payments of approximately $1.4 million, for which the Company concluded that it is probable that a significant reversal in the amount recognized will not occur, is presented net in the contract liability on the condensed consolidated balance sheet.

In assessing the Takeda Collaboration Agreement, management is required to exercise considerable judgment in estimating revenue to be recognized. Management applies judgment in determining the separate performance obligations in the research period, estimating variable consideration, and estimating total future costs when using the input method.

Through March 31, 2019, Denali has recognized $15.0 million in milestones from Takeda and has not recorded any product sales under the Takeda Collaboration Agreement. There was no receivable as of March 31, 2019, and a receivable of $5.0 million as of December 31, 2018, related to the Takeda Collaboration Agreement.  
Collaboration Revenue
Revenue disaggregated by collaboration agreement and performance obligation is as follows (in thousands):

Three Months Ended March 31,
20192018
Takeda Collaboration Agreement(1)
$682 $641 
Sanofi Collaboration Agreement
Alzheimer's Disease Services(1)
94  
Retained Activities3,429  
Total Sanofi Collaboration Revenue3,523  
Total Collaboration Revenue$4,205 $641 
_________________________________________________
(1)     Amounts for the three months ended March 31, 2019 represent revenue recognized during the period that was included in the contract liability balance at the beginning of the period. There was no deferred revenue at the beginning of the period for the three months ended March 31, 2018.  
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7.  License Agreements
Genentech

In June 2016, the Company entered into an Exclusive License Agreement with Genentech, Inc. (“Genentech”). The agreement gives the Company access to Genentech’s LRRK2 small molecule program for Parkinson’s disease. Under the agreement, Genentech granted the Company (i) an exclusive, worldwide, sublicensable license under Genentech’s rights to certain patents and patent applications directed to small molecule compounds which bind to and inhibit LRRK2 and (ii) a non-exclusive, worldwide, sublicensable license to certain related know-how, in each case, to develop and commercialize certain compounds and licensed products incorporating any such compound. The Company is obligated to use commercially reasonable efforts during the first three years of the agreement to research, develop and commercialize at least one licensed product.

To date, the Company has paid an upfront fee of $8.5 million and a technology transfer fee of $1.5 million, both of which were recorded as research and development expense in the year ended December 31, 2016, and the first clinical milestone of $2.5 million which was recorded as research and development expense in the year ended December 31, 2017. 

The Company may owe Genentech milestone payments upon the achievement of certain development, regulatory, and commercial milestones, up to a maximum of $315.0 million in the aggregate, as well as 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 the Company, (ii) the date a compound was first discovered, derived or optimized by the Company, (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. The Company also has the right to credit a certain amount of its payments of third-party royalty and milestones against royalty and milestones payments owed to Genentech, up to a maximum reduction of fifty percent. The Company’s royalty payment obligations will expire on a country-by-country and licensed product-by-licensed product basis upon the later of (a) ten years after the first commercial sale of such licensed product in such country and (b) the expiration of the last valid claim of a licensed patent covering such licensed product in such country.

Genentech may terminate the agreement if the Company challenges any of the patent rights licensed to the Company by Genentech, or if the Company materially breaches the agreement, subject to specified notice and cure provisions, or enters into bankruptcy or insolvency proceedings. If Genentech terminates the agreement for the Company’s material breach, bankruptcy or insolvency after the Company has made a milestone payment to Genentech, then the Company is obligated to grant to Genentech an exclusive right of first negotiation with respect to certain of the Company’s patents, know-how and regulatory filings directed to Genentech-provided compounds. The Company does not have the right to terminate the agreement without cause, but may terminate the agreement for Genentech’s material breach, subject to specified notice and cure provisions.

Unless earlier terminated, the agreement with Genentech will continue in effect until all of the Company’s royalty and milestone payment obligations to Genentech expire. Following expiration of the agreement, the Company will retain the licenses under the intellectual property Genentech licensed to the Company on a non-exclusive, royalty-free basis.
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8. Commitments and Contingencies
Lease Obligations

In September 2015, the Company entered into a non-cancelable operating lease for its former corporate headquarters comprising 38,109 of rentable square feet in a building in South San Francisco ("Former Headquarters Lease"). The Former Headquarters Lease commenced on August 1, 2016 with a lease term of eight years. The Former Headquarters Lease provided for monthly base rent amounts escalating over the term of the lease. In addition, the Former Headquarters Lease provided both a tenant improvement allowance (“TIA”) of up to $7.4 million, of which $1.9 million would be repaid to the landlord in the form of additional monthly rent with interest applied.

In May 2018, the Company entered into an amendment to the Former Headquarters Lease (the "Headquarters Lease Amendment") to relocate and expand its headquarters to 148,020 rentable square feet in a building in South San Francisco, California (the "New Premises"). The Headquarters Lease Amendment has a contractual term of ten years from the legal commencement date, which was April 1, 2019 when the building was ready for occupancy. For accounting purposes, the lease commencement date was determined to be August 1, 2018, which was the date at which the Company obtained control over the property. The Company has an option to extend the lease term for a period of ten years by giving the landlord written notice of the election to exercise the option at least nine months, but not more than twelve months, prior to the expiration of the Headquarters Lease Amendment lease term. The Company did not believe this renewal was 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 provides a TIA of up to $25.9 million, of which $4.4 million will be repaid to the landlord in the form of additional monthly rent. The Company will also be required to pay the operating expenses for the New Premises, such as taxes and insurance, which will be treated as variable lease payments.
 
All of the TIA under the Headquarters Lease Amendment has been utilized as of March 31, 2019, and as such the $25.9 million and has been recorded as leasehold improvements assets and an offset to the lease ROU asset on the condensed consolidated balance sheet as of March 31, 2019.  As of March 31, 2019, the carrying value of the ROU asset was $34.4 million and is separately stated on the condensed consolidated balance sheet.  The related current and non-current liabilities as of March 31, 2019 were $0.8 million and $71.4 million, respectively. The current and non-current lease liabilities are included in Other current liabilities and Operating lease liability, less current portion, respectively, in the condensed consolidated balance sheet.

Management was required to exercise judgment in applying the requirements of ASC 842, including the determination as to whether certain contracts contain a lease and for the Headquarters Lease Amendment, the discount rate used to determine the measurement of the lease liability. The discount rate used was 9.0%, which was management’s estimate of the Company’s incremental borrowing rate since the rate implicit in the lease was not known. To estimate the Company’s incremental borrowing rate, management considered observable debt yields of comparable market instruments, as well as benchmarks within the Headquarters Lease Amendment that may be indicative of the rate implicit in the lease.
In October 2018, the Company entered into a sublease agreement ("Sublease Agreement") to sublease approximately 36,835 rentable square feet of space in its New Premises. The Sublease Agreement has a term of five years from the commencement date of April 12, 2019, and provides for the Company to receive monthly base rent amounts escalating over the term of the lease. The Company will also pass through the sublessee’s portion of the operating expenses for the New Premises, such as taxes and insurance, which will be treated as variable sublease income.
Total operating lease costs, including variable and short term lease costs, were $2.3 million for the three months ended March 31, 2019. Rent expense including amortization of leasehold improvements was $0.4 million for the three months ended March 31, 2018.

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Operating lease liabilities are based on the net present value of the remaining lease payments over the remaining lease term. In determining the present value of lease payments, we use our incremental borrowing rate based on the information available at the lease commencement date. As of March 31, 2019, the weighted average remaining lease term is 10 years and the weighted average discount rate used to determine the operating lease liability was 9.0%. Cash paid for amounts included in the measurement of lease liabilities for the three months ended March 31, 2019 was $0.7 million and was included in Net cash (used in) provided by operating activities in our condensed Consolidated Statements of Cash Flows.
The following table reconciles the undiscounted cash flows for the first five years and total of the remaining years to the operating lease liabilities recorded in the condensed consolidated balance sheet as of March 31, 2019 (in thousands):

Year Ending December 31:
2019$4,785 
20209,767 
202110,386 
202210,726 
202311,078 
2024 and later64,399 
Total undiscounted lease payments111,141 
Present value adjustment(38,979)
Net operating lease liabilities$72,162 

The following table details the future undiscounted cash inflows relating to the Company's sublease as of March 31, 2019 (in thousands):
 
Year Ending December 31:
2019$2,003 
20202,842 
20212,925 
20223,009 
20233,096 
2024 and later875 
Total undiscounted sublease receipts$14,750 
Indemnification

In the ordinary course of business, the Company may provide indemnifications of varying scope and terms to vendors, lessors, business partners, board members, officers, and other parties with respect to certain matters, including, but not limited to, losses arising out of breach of such agreements, services to be provided by the Company, negligence or willful misconduct of the Company, violations of law by the Company, or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with directors and certain officers and employees that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers or employees. No demands have been made upon the Company to provide indemnification under such agreements, and thus, there are no claims that the Company is aware of that could have a material effect on the Company’s balance sheet, statements of comprehensive loss, or statements of cash flows.
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Commitments
Effective September 2017, the Company entered into a Development and Manufacturing Services Agreement as amended (“DMSA”) with Lonza Sales AG (“Lonza”) for the development and manufacture of biologic products. Under the DMSA, the Company will execute purchase orders based on project plans authorizing Lonza to provide development and manufacturing services with respect to certain of the Company's antibody and enzyme products, and will pay for the services provided and batches delivered in accordance with the DMSA and project plan. Unless earlier terminated, the Lonza agreement will expire on September 6, 2022.
As of March 31, 2019 and December 31, 2018, the Company had non-cancellable purchase orders for biological product development and manufacturing costs totaling $25.4 million and $24.7 million respectively. The activities under these purchase orders are expected to be completed by November 2024. During the three months ended March 31, 2019 and 2018, the Company incurred costs of $3.6 million and $0.1 million, respectively, and made payments of $2.6 million and $0.1 million, respectively, for the development and manufacturing services rendered under the agreement. As of March 31, 2019 and December 31, 2018, the Company had total non-refundable purchase commitments of $12.3 million and $14.0 million, respectively, under the DMSA.
9. Stock-Based Awards
2017 Equity Incentive Plan

In December 2017, the Company adopted the 2017 Equity Incentive Plan (the “2017 Plan”), which initially reserved approximately 6.4 million shares of common stock for the issuance of stock options, restricted stock and other stock awards, to employees, non-employee directors, and consultants under terms and provisions established by the Board of Directors and approved by the stockholders. The 2017 Plan provides that the number of shares reserved and available for issuance under the 2017 Plan will automatically increase each January 1, beginning on January 1, 2019, by the least of (i) 10.0 million shares, (ii) 5% of the outstanding shares on the last day of the immediately preceding fiscal year, or (iii) such number of shares determined by the administrator of the 2017 Plan. In January 2019, the number of common stock available for issuance under the 2017 Plan was increased by approximately 4.8 million as a result of this automatic increase provision.

Awards granted under the 2017 Plan expire no later than ten years from the date of grant. For stock options, the option price shall not be less than 100% of the estimated fair value of the Company's common stock on the day of grant. Options granted typically vest over a four-year period but may be granted with different vesting terms.
2015 Stock Incentive Plan

 In May 2015, the Company adopted the 2015 Stock Incentive Plan (the “2015 Plan”), which as amended, reserved approximately 8.3 million shares of common stock for the issuance of stock options, restricted stock and other stock awards, to employees, non-employee directors, and consultants under terms and provisions established by the Board of Directors and approved by the stockholders. Awards granted under the 2015 Plan expire no later than ten years from the date of grant. For stock options, the option price shall not be less than 100% of the estimated fair value of the Company's common stock on the day of grant. For all stock options granted between August 2015 and February 2016 with an exercise price of $0.68, a deemed fair value of $1.20 per share was used in calculating stock-based compensation expense, which was determined using management hindsight. Options granted typically vest over a four-year period but may be granted with different vesting terms.

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Upon adoption of the 2017 Plan, no new awards or grants are permitted under the 2015 Plan, and the approximately 0.2 million shares that were then unissued and available for future award under the 2015 Plan became available under the 2017 Plan. The 2015 Plan will continue to govern restricted stock awards and option awards previously granted thereunder.
As of March 31, 2019 there were approximately 4.1 million shares available for the Company to grant under the 2017 Plan.
Stock Option Activity

The following table summarizes option award activity under the 2017 Plan and the 2015 Plan: 
Number of 
Options
Weighted-
Average 
Exercise Price
Weighted-
Average