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Commitments and Contingencies
 9 Months Ended
Sep. 30, 2021
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies Commitments and Contingencies
Lease Obligations
In May 2018, the Company entered into an operating lease for its corporate headquarters in South San Francisco (the "Headquarters Lease"). The details of the Headquarters Lease are further described in Note 9, Commitments and Contingencies, to the consolidated financial statements in the Company's 2020 Annual Report on Form 10-K. During the third quarter of 2021, there were no changes to the terms of the Headquarters Lease.
In August 2021, the Company entered into an operating lease for approximately 50,000 square feet of laboratory, office and warehouse premises in Salt Lake City, Utah (“SLC Lease”), with a contractual term of approximately 8.4 years which will commence upon completion of certain improvements by the landlord and the Company, and future undiscounted lease payments totaling approximately $12.5 million. For accounting purposes, the lease has not yet commenced as the landlord has not yet made the underlying asset available for use by Denali, and as such, no lease liability or ROU asset is recorded on the condensed consolidated balance sheet as of September 30, 2021, and no operating lease expense has been recorded for the three and nine months ended September 30, 2021.
Management exercised judgment in applying the requirements of ASC 842, including the determination as to whether certain contracts contain a lease and for the headquarters lease, the discount rate used to determine the measurement of the lease liability. The discount rate of our headquarters lease is an approximation of the Company's incremental borrowing rate and is dependent upon the term and economics of the agreement. To estimate the incremental borrowing rate, management considered observable debt yields of comparable market instruments, as well as benchmarks within the headquarters lease agreement that may be indicative of the rate implicit in the lease.
The following table contains a summary of the lease costs recognized under ASC 842 and other information pertaining to the Company’s operating leases for the periods presented (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Operating lease cost (1)
$2,863 $2,833 $8,429 $8,341 
Cash paid for amounts included in measurement of lease liability$2,618 $2,536 $7,717 $7,202 
As of September 30,
20212020
Weighted average remaining lease term7.6 years8.6 years
Weighted average discount rate9 %9 %
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(1)Including variable and short-term lease costs
The following table reconciles the undiscounted cash flows for the next five years and total of the remaining years to the operating lease liability recorded in the Condensed Consolidated Balance Sheet as of September 30, 2021 (in thousands):
Year Ended December 31:
2021 (three months)$2,618 
202210,702 
202311,053 
202411,417 
202511,793 
Thereafter42,148 
Total undiscounted lease payments89,731 
Present value adjustment(24,489)
Net operating lease liabilities$65,242 
Sublease
In October 2018, the Company entered into a sublease agreement ("Sublease Agreement") for space in the corporate headquarters. The details of the Sublease Agreement are further described in Note 9, Commitments and Contingencies, to the consolidated financial statements in the Company's 2020 Annual Report on Form 10-K. During the third quarter of 2021, there were no changes to the terms of the Sublease Agreement. Total sublease income, including rent and variable sublease cost reimbursements, was $1.0 million and $0.9 million for the three months ended September 30, 2021 and 2020, respectively, and $2.9 million and $2.8 million for the nine months ended September 30, 2021 and 2020, respectively.
The following table details the future undiscounted cash inflows relating to the Sublease Agreement as of September 30, 2021 (in thousands):
Year Ended December 31:
2021 (three months)$737 
20223,009 
20233,096 
2024876 
Total undiscounted sublease receipts$7,718 
Indemnification
In the ordinary course of business, the Company may provide indemnifications of varying scope and terms to vendors, lessors, business partners, board members, officers, and other parties with respect to certain matters, including, but not limited to, losses arising out of breach of such agreements, services to be provided by the Company, negligence or willful misconduct of the Company, violations of law by the Company, or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with directors and certain officers and employees that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers or employees. No demands have been made upon the Company to provide indemnification under such agreements, and thus, there are no claims that the Company is aware of that could have a material effect on the Company’s Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Operations and Comprehensive Loss, or Condensed Consolidated Statements of Cash Flows.
Commitments
Effective September 2017, the Company entered into a Development and Manufacturing Services Agreement as amended (“DMSA”) with Lonza Sales AG (“Lonza”) for the development and manufacture of biologic products. Under the DMSA, the Company will execute purchase orders based on project plans authorizing Lonza to provide development and manufacturing services with respect to certain of the Company's antibody and enzyme products, and will pay for the services provided and batches delivered in accordance with the DMSA and project plan. Unless earlier terminated, the DMSA will expire on September 6, 2022.
As of September 30, 2021 and December 31, 2020, the Company had open purchase orders for biological product development and manufacturing costs totaling $42.0 million and $33.0 million, respectively. The activities under these purchase orders are expected to be completed by July 2027. As of September 30, 2021 and December 31, 2020, the Company had total non-cancellable purchase commitments under the DMSA of $27.6 million and $27.1 million, respectively, under the DMSA.
During the three months ended September 30, 2021 and 2020, the Company incurred costs of $5.8 million and $1.4 million, respectively, and made payments of $4.0 million and $0.8 million, respectively, for the development and manufacturing services rendered under the DMSA. During the nine months ended September 30, 2021 and 2020, the Company incurred costs of $14.2 million and $6.2 million, respectively, and made payments of $10.4 million and $6.0 million, respectively, for the development and manufacturing services rendered under the DMSA.
Contingencies
From time to time, the Company may be involved in lawsuits, arbitration, claims, investigations and proceedings consisting of intellectual property, employment and other matters which arise in the ordinary course of business. The Company records accruals for loss contingencies to the extent that the Company concludes that it is probable that a liability has been incurred and the amount of the related loss can be reasonably estimated.