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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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)
_______________________________________
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
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  ☒    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  ☒    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 filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
The number of outstanding shares of the registrant’s common stock as of July 31, 2019 was 95,841,615.




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Page
Item 1.
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

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PART I. FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS
Denali Therapeutics Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except share amounts)

June 30, 2019December 31, 2018
Assets
Current assets:
Cash and cash equivalents$62,936 $77,123 
Short-term marketable securities415,667 387,174 
Prepaid expenses and other current assets17,378 16,539 
Total current assets495,981 480,836 
Long-term marketable securities55,832 147,881 
Property and equipment, net47,195 25,162 
Operating lease right-of-use asset34,647 — 
Other non-current assets3,949 8,105 
Total assets$637,604 $661,984 
Liabilities and stockholders' equity
Current liabilities:
Accounts payable$3,931 $1,891 
Accrued liabilities13,793 8,520 
Accrued compensation4,092 9,952 
Contract liabilities22,598 11,427 
Other current liabilities2,135 996 
Total current liabilities46,549 32,786 
Contract liabilities, less current portion44,563 57,350 
Operating lease liability, less current portion70,911 — 
Deferred rent, less current portion— 24,532 
Other non-current liabilities408 471 
Total liabilities162,431 115,139 
Commitments and contingencies (Note 8)
Stockholders' equity:
Convertible preferred stock, $0.01 par value; 40,000,000 shares authorized as of June 30, 2019 and December 31, 2018; 0 shares issued and outstanding as of June 30, 2019 and December 31, 2018
  
Common stock, $0.01 par value; 400,000,000 shares authorized as of June 30, 2019 and December 31, 2018; 95,656,896 shares and 94,662,435 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively
1,283 1,273 
Additional paid-in capital798,277 774,158 
Accumulated other comprehensive income (loss)879 (649)
Accumulated deficit(325,266)(227,937)
Total stockholders' equity475,173 546,845 
Total liabilities and stockholders’ equity$637,604 $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 June 30,Six Months Ended June 30,
2019 2018 2019 2018 
Collaboration revenue$4,197 $1,648 $8,402 $2,289 
Operating expenses:
Research and development51,884 52,134 89,287 72,953 
General and administrative15,076 6,896 24,386 12,466 
Total operating expenses66,960 59,030 113,673 85,419 
Loss from operations(62,763)(57,382)(105,271)(83,130)
Interest and other income, net4,113 2,658 7,629 4,728 
Loss before income taxes(58,650)(54,724)(97,642)(78,402)
Income tax benefit313  313  
Net loss (58,337)(54,724)(97,329)(78,402)
Other comprehensive income (loss):
Net unrealized income (loss) on marketable securities, net of tax
547 (206)1,528 (1,125)
Comprehensive loss$(57,790)$(54,930)$(95,801)$(79,527)
Net loss per share, basic and diluted$(0.61)$(0.59)$(1.02)$(0.86)
Weighted average number of shares outstanding, basic and diluted
95,495,497 92,899,524 95,241,412 91,239,274 

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
SharesAmount
Balance at December 31, 201894,662,435 $1,273 $774,158 $(649)$(227,937)$546,845 
Issuances under equity incentive plans
547,124 5 3,472 — — 3,477 
Vesting of early exercised common stock
93,752 2 62 — — 64 
Vesting of restricted stock awards353,585 3 (3)— —  
Stock-based compensation— — 20,588 — — 20,588 
Net loss— — — — (97,329)(97,329)
Other comprehensive income— — — 1,528 — 1,528 
Balance at June 30, 201995,656,896 $1,283 $798,277 $879 $(325,266)$475,173 
Balance at March 31, 201995,257,705 $1,279 $781,966 $332 $(266,929)$516,648 
Issuances under equity incentive plans
347,621 3 2,566 — — 2,569 
Vesting of early exercised common stock
46,878 1 31 — — 32 
Vesting of restricted stock awards4,692 — — — —  
Stock-based compensation— — 13,714 — — 13,714 
Net loss— — — — (58,337)(58,337)
Other comprehensive income— — — 547 — 547 
Balance at June 30, 201995,656,896 $1,283 $798,277 $879 $(325,266)$475,173 
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 plans360,409 3 1,649 — — 1,652 
Vesting of early exercised common stock140,624 2 308 — — 310 
Vesting of restricted stock awards1,125,791 11 (11)— —  
Stock-based compensation— — 7,635 — — 7,635 
Net loss— — — — (78,402)(78,402)
Other comprehensive loss— — — (1,125)— (1,125)
Balance at June 30, 201893,321,745 $1,259 $760,605 $(1,493)$(270,099)$490,272 
Balance at March 31, 201892,588,989 $1,252 $754,438 $(1,287)$(215,375)$539,028 
Issuances under equity incentive plans278,674 2 1,431 — — 1,433 
Vesting of early exercised common stock46,875 1 30 — — 31 
Vesting of restricted stock awards407,207 4 (4)— —  
Stock-based compensation— — 4,710 — — 4,710 
Net loss— — — — (54,724)(54,724)
Other comprehensive loss— — — (206)— (206)
Balance at June 30, 201893,321,745 $1,259 $760,605 $(1,493)$(270,099)$490,272 

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)

Six Months Ended June 30,
2019 2018 
Operating activities
Net loss$(97,329)$(78,402)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization4,046 2,709 
Stock–based compensation expense20,588 7,635 
Net amortization of discounts on marketable securities(2,734)(1,092)
Non-cash rent expense1,740 (1,339)
Gain on disposal of property and equipment (36)
Other non-cash items(313) 
Changes in operating assets and liabilities:
Prepaid expenses and other assets2,704 (1,718)
Accounts payable1,303 7,094 
Accrued and other current liabilities(1,887)(1,403)
Contract liabilities(1,616)58,305 
Net cash used in operating activities(73,498)(8,247)
Investing activities
Purchases of marketable securities(144,029)(361,686)
Purchases of property and equipment(12,299)(1,109)
Maturities of marketable securities212,162 92,049 
Net cash provided by (used in) investing activities55,834 (270,746)
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 plans3,477 1,651 
Net cash provided by financing activities3,477 94,671 
Net decrease in cash, cash equivalents and restricted cash(14,187)(184,322)
Cash, cash equivalents and restricted cash at beginning of period78,623 218,910 
Cash, cash equivalents and restricted cash at end of period$64,436 $34,588 
Supplemental disclosures of cash flow information
Tenant improvements provided by the landlord$11,341 $ 
Property and equipment purchases accrued but not yet paid$2,162 $ 

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 six months ended June 30, 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 June 30, 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 sheet.
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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Income Taxes
Intraperiod tax allocation rules require allocation of the provision for income taxes between continuing operations and other categories of earnings, such as other comprehensive income. In periods in which the Company has a year-to-date pre-tax loss and pre-tax income in other categories of earnings, such as other comprehensive income, the Company must allocate the tax provision to the other categories of earnings. A related tax benefit is then recorded in continuing operations.
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 the Company has certain operating lease arrangements for which the Company is the lessee and one 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 as of January 1, 2019 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 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):

June 30, 2019
Level 1Level 2Level 3Total
Assets:
Cash equivalents:
Money market funds$36,180 $ $ $36,180 
Short-term marketable securities:
U.S. government treasuries273,103   273,103 
U.S. government agency securities 28,957  28,957 
Corporate debt securities 78,950  78,950 
Commercial paper 34,657  34,657 
Long-term marketable securities:
U.S. government treasuries45,794   45,794 
Corporate debt securities 10,038  10,038 
Foreign currency derivative contracts 16  16 
Total$355,077 $152,618 $ $507,695 
Liabilities:
Foreign currency derivative contracts$ $155 $ $155 
Total$ $155 $ $155 

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 and six months ended June 30, 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):
June 30, 2019December 31, 2018June 30, 2018
Cash and cash equivalents
$62,936 $77,123 $33,088 
Restricted cash included within other non-current assets
1,500 1,500 1,500 
Total cash, cash equivalents, and restricted cash
$64,436 $78,623 $34,588 
Marketable securities
All marketable securities were considered available-for-sale at June 30, 2019 and December 31, 2018. On a recurring basis, the Company records its marketable securities at fair value using Level 1 or Level 2 inputs as discussed in Note 2, "Fair Value Measurements". The amortized cost, gross unrealized holding gains or losses, and fair value of the Company’s marketable securities by major security type at each balance sheet date are summarized in the tables below (in thousands):
June 30, 2019
Amortized CostUnrealized Holding GainsUnrealized Holding LossesAggregate Fair Value
Short-term marketable securities:
U.S. government treasuries
$272,540 $568 $(5)$273,103 
U.S. government agency securities
28,960 7 (10)28,957 
Corporate debt securities
78,842 122 (14)78,950 
Commercial paper
34,657   34,657 
Total short-term marketable securities
414,999 697 (29)415,667 
Long-term marketable securities:
U.S. government treasuries
45,339 455  45,794 
Corporate debt securities
9,968 70  10,038 
Total long-term marketable securities
55,307 525  55,832 
Total
$470,306 $1,222 $(29)$471,499 

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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 June 30, 2019, 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 and six months ended June 30, 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.

The Company recorded unrealized gains on marketable securities in other comprehensive income during the three and six months ended June 30, 2019. There were no unrealized gains in other comprehensive income during the three and six months ended June 30, 2018. As a result, the Company recorded a tax benefit of $0.3 million for the three and six months ended June 30, 2019 on the condensed consolidated statements of operations and a corresponding tax charge in other comprehensive income of $0.3 million. There was no tax benefit recorded for the three and six months ended June 30, 2018 on the condensed consolidated statements of operations and comprehensive 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, British Pound, and Swiss Franc. 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 June 30, 2019 (notional amounts in thousands):
Foreign Exchange ContractsNumber of Contracts
Aggregate Notional(1) Amount in Foreign Currency
Maturity
Euros
19 2,776 Jul. 2019 - May 2020
British Pounds
21 3,181 Jul. 2019 - May 2020
Swiss Francs
18 703 Jul. 2019 - Feb 2020
Total
58 
_________________________________________________
(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 on the condensed consolidated balance sheet as of both June 30, 2019 and December 31, 2018. The derivative asset balance of $15,682 and $13,669 is recorded in Prepaid assets and other current assets on the condensed consolidated balance sheet as of June 30, 2019 and December 31, 2018, respectively. The net loss associated with the Company's derivative instruments of $7,320 and gain of $11,967 is recognized in Interest and other income, net on the condensed consolidated statement of operations and comprehensive loss for the three and six months ended June 30, 2019, respectively, and a net loss of $31,952 was recognized in Interest and other income, net on the condensed consolidated statement of operations and comprehensive loss for both the three and six months ended June 30, 2018.
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 has made payments to F-star totaling $11.5 million. In connection with the entry into the F-star Collaboration Agreement, the Company also purchased an option for an upfront option fee of $0.5 million (the “buy-out-option”), to acquire all of the outstanding shares of F-star Gamma pursuant to a pre-negotiated buy-out option agreement (the “Option Agreement”).

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

As a result of the Acquisition, F-star Gamma became a wholly-owned subsidiary of the Company and the Company changed the entity’s name to Denali BBB Holding Limited. In addition, the Company became a direct licensee of certain intellectual property of F-star Ltd by way of the Company’s assumption of F-star Gamma’s license agreement with F-star Ltd, dated August 24, 2016, (the “F-star Gamma License”). The Company made initial exercise payments under the Purchase Agreement and the F-star Gamma License, in the aggregate, of $17.8 million. In addition, the Company is required to make future contingent payments, to F-star Ltd and the former shareholders of F-star Gamma, up to a maximum amount 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 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. In June 2019, the Company made a payment of $1.5 million to F-star Ltd upon the achievement of a specified preclinical milestone in the Company's ETV:IDS program.
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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. The Company recognized $1.5 million of contingent consideration as research and development expense during the three and six months ended June 30, 2019 and $18.3 million of upfront consideration as research and development expense in the three and six months ended June 30, 2018. As the 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. Further future contingent consideration is expected to be recognized in research and development expense as incurred.
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 $0.3 million and $0.5 million in research and development expense related to the funding of F-star Ltd activities under these development plans during the three and six months ended June 30, 2019, respectively, and $0.2 million and $0.5 million for the three and six months ended June 30, 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 RIPK1 inhibitors contributed by Sanofi and by Denali will be developed and commercialized. The Sanofi Collaboration Agreement became effective in November 2018, at which time Sanofi paid the Company an upfront payment of $125.0 million. Under the Sanofi Collaboration Agreement, 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 in the Sanofi Collaboration Agreement.
Denali will share profits and losses equally with Sanofi for CNS Products sold in the United States and China, and receive variable royalties on net sales for CNS Products sold outside of the United States and China and for Peripheral Products sold worldwide.
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 in Alzheimer’s disease and any activities required to support such clinical trials and specific for Alzheimer’s disease. Denali is conducting, at Sanofi’s cost, a Phase 1b trial for the lead CNS penetrant RIPK1 inhibitor, DNL747, in ALS. Sanofi is 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. Sanofi will also lead the commercialization activities globally for CNS Products, subject to certain options that Denali has to conduct co-commercialization activities with respect to each CNS Product in the United States and China.
Sanofi will be responsible, at its cost, for conducting activities relating to the development and commercialization of all Peripheral Products. Denali will be entitled to receive tiered royalties in the low- to mid- teen percentages on net sales of Peripheral Products.
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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 $9.1 million from inception through June 30, 2019 as amounts due for costs incurred related to the Retained Activities were no longer constrained.
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 $3.7 million and $3.9 million was recorded on the condensed consolidated balance sheet as of June 30, 2019 and December 31, 2018, respectively. These contract liabilities relate 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 June 30, 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 June 30, 2019, Denali has not recognized any milestones and has not recorded any product sales recorded under the Sanofi Collaboration Agreement. In July 2019, Sanofi received regulatory approval for the commencement of a DNL758 Phase 1 clinical trial in healthy volunteers. The trial commenced and triggered a milestone payment of $10.0 million, which the Company expects to receive in August 2019.
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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, at which time Take