Senti Biosciences Holdings, Inc. 10-Q

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Senti Biosciences, Inc. (“Senti”) entered into a business combination agreement (the “Agreement”) with Dynamics Special Purpose Corp. (“DYNS”) on December 19, 2021. The transactions contemplated by the terms of the Agreement were completed on June 8, 2022 (the “Closing”), in conjunction with which DYNS changed its name to Senti Biosciences, Inc. (hereafter referred to, collectively with its subsidiaries, as “Senti”, the “Company”, “we”, “us” or “our”, unless the context otherwise requires). The transactions contemplated in the Agreement are collectively referred to as the “Business Combination”. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes included under Part I, Item 1 of this Quarterly Report on Form 10-Q (this “Quarterly Report”) as well as Senti’s audited consolidated financial statements and notes thereto included in the final prospectus and definitive proxy statement, dated May 13, 2022 (the “Proxy Statement/Prospectus”) and filed with the SEC. In addition, you should refer to our audited consolidated financial statements and the related notes for the year ended December 31, 2021 and the section entitled “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” included in the Company’s Registration Statement on Form S-1, filed with the SEC on June 28, 2022 and amended on July 29, 2022. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties. Cautionary Statement Regarding Forward-Looking Statements In This Quarterly Report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act that are not historical facts and involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. All statements, other than statements of historical fact included in this Form 10‑Q including, without limitation, statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding the Company’s financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. Words such as “expect,” “believe,” “anticipate,” “intend,” “estimate,” “seek” and variations and similar words and expressions are intended to identify such forward-looking statements. Such forward-looking statements relate to future events or future performance, but reflect management’s current beliefs, based on information currently available. A number of factors could cause actual events, performance or results to differ materially from the events, performance and results discussed in the forward-looking statements. For information identifying important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, please refer to the Risk Factors section of the Proxy Statement/Prospectus and Part II, Item 1A of this Quarterly Report on Form 10-Q filed with the U.S. Securities and Exchange Commission (the “SEC”). The Company’s securities filings can be accessed on the EDGAR section of the SEC’s website at www.sec.gov. Except as expressly required by applicable securities law, the Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. Overview Senti is a preclinical biotechnology company developing next-generation cell and gene therapies engineered with its gene circuit platform technologies to fight challenging diseases. Senti’s mission is to create a new generation of smarter therapies that can outmaneuver complex diseases in ways previously not implemented by conventional medicines. To accomplish this mission, Senti has built a synthetic biology platform that it believes may enable it to program next-generation cell and gene therapies with what it refers to as “gene circuits.” These gene circuits, which Senti created from novel and proprietary combinations of genetic parts, are designed to reprogram cells with biological logic to sense inputs, compute decisions and respond to their respective cellular environments. Senti aims to design and optimize gene circuits through its Design-Build-Test-Learn Engine or DBTL Engine, to improve the “intelligence” of cell and gene therapies in order to enhance their therapeutic effectiveness against a broad range of diseases that conventional medicines are unable to address. Senti’s gene circuit platform technologies can be applied in a modality-agnostic manner, with applicability to natural killer (NK) cells, T cells, tumor-infiltrating lymphocytes 26 Table of Contents (“TILs”), stem cells including Hematopoietic Stem Cells (“HSCs”), in vivo gene therapy and messenger ribonucleic acid (mRNA). All of Senti’s current product candidates are in preclinical development. Senti’s lead product candidates utilize allogeneic chimeric antigen receptor (“CAR”) NK cells outfitted with its gene circuit technologies in several oncology indications with currently high unmet needs. Senti expects to file investigational new drug applications (“INDs”) for multiple product candidates starting in 2023. We have incurred net losses of $11.6 million and $12.0 million for the three months ended June 30, 2022 and 2021, respectively, and $23.4 million and $33.0 million for the six months ended June 30, 2022 and 2021, respectively. We expect to continue to incur significant losses for the foreseeable future. As of June 30, 2022, we had cash and cash equivalents of $139.8 million, and an accumulated deficit of $138.4 million. We anticipate that our expenses and operating losses will increase substantially over the foreseeable future. The expected increase in expenses will be driven in large part by our ongoing activities, if and as we: • continue to advance our gene circuit platform technologies; • continue preclinical development of our current and future product candidates and initiate additional preclinical studies; • commence clinical studies of our current and future product candidates; • establish our manufacturing capability, including developing our contract development and manufacturing relationships, and building our internal manufacturing facilities; • acquire and license technologies aligned with our gene circuit platform technologies; • seek regulatory approval of our current and future product candidates; • expand our operational, financial, and management systems and increase personnel, including personnel to support our preclinical and clinical development, manufacturing and commercialization efforts; • continue to develop, grow, perfect, and defend our intellectual property portfolio; and • incur additional legal, accounting, or other expenses in operating our business, including the additional costs associated with operating as a public company. In addition, in 2021, we began construction on a dedicated in-house, state-of-the-art current good manufacturing practices “cGMP” facility to support clinical and commercial-scale production of multiple allogeneic NK cell product candidates. We anticipate that this facility will become operational in time to support initial clinical trials for our lead product candidates. Our manufacturing facility is designed to leverage the latest cell therapy process technologies as we strive to maximize scalability and minimize cost of goods. We believe our cash and cash equivalents will be sufficient to fund operations, including clinical trial expenses and capital expenditure requirements, for at least 12 months from the date of this Quarterly Report. During 2021, widespread availability of COVID-19 vaccines in the United States and elsewhere in the world, combined with government assistance programs, fiscal policies and other factors, led to a rebound in the global economy as several states and countries began to re-open and loosen many COVID-19 related restrictions. Nonetheless, the COVID-19 pandemic remains a global health crisis and continues to evolve. As of June 30, 2022, we were operating at pre-pandemic levels, although we cannot at this time predict the specific extent, duration, or full impact that the COVID-19 pandemic will have on our business, financial condition and operations, including planned preclinical studies, clinical trials and clinical development timelines. The impact of the COVID-19 pandemic on our financial performance will depend on future developments, including the duration and spread of the pandemic, its impact on our IND-enabling studies, clinical trial enrollment, trial sites and other third parties with whom we do business, its impact on regulatory authorities and our key scientific and management personnel, and related governmental advisories and restrictions. These developments and the impact of the COVID-19 pandemic on the financial markets and the overall economy are highly uncertain and cannot be predicted. If the financial markets or the overall economy are impacted for an extended period, our business may be materially adversely affected. 27 Table of Contents Recent Developments Merger with Dynamics Special Purpose Corp. On June 8, 2022 (the “Closing Date”), Dynamics Special Purpose Acquisition Corp. (“Dynamics” or “DYNS”) consummated a merger pursuant to which Explore Merger Sub, Inc. (“Merger Sub”), a Delaware corporation and wholly owned subsidiary of Dynamics, merged with and into Senti Sub I, Inc. (formerly named Senti Biosciences, Inc.) (“Legacy Senti”), with Legacy Senti surviving as a wholly-owned subsidiary of Dynamics (such transactions, the “Merger,” and, collectively with the other transactions described in the merger agreement (as defined below, the “Reverse Recapitalization”). As a result of the Merger, Dynamics was renamed Senti Biosciences, Inc. Pursuant to the terms of the merger agreement, at the effective time of the Merger (the “Effective Time”), (1) each outstanding share of common stock of Legacy Senti was cancelled and converted into the right to receive approximately 0.1957 shares of the Company’s common stock, par value $0.0001 per share (“Common Stock”), and (2) each outstanding share of preferred stock of Legacy Senti was cancelled and converted into the aggregate number of shares of Common Stock that would be issued upon conversion of the shares of Legacy Senti preferred stock based on the applicable conversion ratio immediately prior to the Effective Time, multiplied by approximately 0.1957, resulting in the issuance of a total of 23,163,614 shares of Common Stock. Prior holders of shares of Legacy Senti common stock and Legacy Senti preferred stock also received the contingent right to receive certain Earnout Shares (as defined below), for each share owned by each such Legacy Senti stockholder that was outstanding immediately prior to the closing of the Merger (the “Closing”). In addition, certain investors purchased an aggregate of 5,060,000 shares of Common Stock (such investors, the “PIPE Investors”) in a private placement that closed concurrently with the Closing for an aggregate purchase price of $50.6 million (the “PIPE Financing”). Additionally, at the Closing, 14,915,963 shares of Common Stock were issued to Dynamics stockholders (reflecting actual redemptions by Dynamics public stockholders). Additionally, an unsecured convertible promissory note in the aggregate principal amount of $5,175,000 that was previously issued by Senti to Bayer Healthcare LLC for a purchase price of $5,175,000 on May 19, 2022 was automatically cancelled and exchanged for 517,500 shares of Common Stock. Pursuant to the terms of the merger agreement, at the Effective Time of the Merger, options to purchase shares of Legacy Senti common stock were converted into options to purchase an aggregate of 1,667,546 shares of Common Stock. Following the Closing Date, former holders of Legacy Senti common stock and preferred stock may receive up to 2,000,000 additional shares of Common Stock (“Earnout Shares”) in the aggregate in two equal tranches if the volume-weighted average closing sale price of our Common Stock is greater than or equal to $15.00 and $20.00, respectively, for any 20 trading days within any 30 consecutive trading day period. The first and second tranche term is two and three years, respectively, from the closing of the Merger. If there is a change of control within the three-year following the closing of the Merger that results in a per share price equal to or in excess of the $15.00 and $20.00 share price milestones not previously met, then Company shall issue the earnout shares to the holders of Legacy Senti common stock and preferred stock. Components of Results of Operations Total Revenue We currently have no therapeutic products approved for sale, and we have never generated any revenue from the sale of any therapeutic products. Total revenue consists of contract revenue related to research services provided to customers and grant income which is research funding received from grants. Our ability to generate product revenues will depend on our partners’ ability to replicate our results and the successful development and eventual commercialization of our product candidates, which we do not expect for the foreseeable future, if ever. We may also look to generate revenue from collaboration and license agreements in the future. 28 Table of Contents Operating Expenses Our operating expenses consist of research and development expense and general and administrative expenses. Research and Development Expenses Research and development costs consist primarily of costs incurred for the discovery and preclinical development of our product candidates, which include: • employee-related expenses, including salaries, related benefits, and stock-based compensation expenses for employees engaged in research and development functions; • expenses incurred in connection with research, laboratory consumables and preclinical studies; • the cost of consultants engaged in research and development related services and the cost to manufacture drug products for use in our preclinical studies and trials; • facilities, depreciation and other expenses, which include allocated expenses for rent and maintenance of facilities, insurance and supplies; • costs related to regulatory compliance; and • the cost of annual license fees. We have not historically tracked research and development expenses by program, with the exception of third-party research projects. We have various ongoing early-stage research and product candidate discovery projects and going forward, we expect to have various products undergoing clinical trials. Our internal resources, employees and infrastructure are not directly tied to any one research or product candidate discovery project and are typically deployed across multiple projects. As such, we do not maintain information regarding these costs incurred for these early-stage research and product candidate discovery programs on a project-specific basis. Our direct external development program expenses reflect external costs attributable to our preclinical development candidates selected for further development as well as investigational new drug applications (“INDs”) and clinical development. Such expenses include third-party contract costs relating to manufacturing, clinical trial activities, translational medicine and toxicology activities. We do not allocate internal research and development costs which include personnel, facility costs, laboratory consumables and discovery and research related activities associated with our pipeline because these costs are deployed across multiple programs and our platform, and, as such, are not separately classified. Research and development expenses consisted of the following (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 (unaudited) (unaudited) (unaudited) (unaudited) Personnel-related expenses, including share-based compensation $ 3,866 $ 1,845 $ 6,664 $ 3,582 External services and supplies 3,424 2,385 6,332 4,530 Office and facilities 1,782 906 3,528 1,837 Other 175 99 325 189 Total $ 9,247 $ 5,235 $ 16,849 $ 10,138 Research and development activities are central to our business model. There are numerous factors associated with the successful commercialization of any of our product candidates, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development. In addition, future regulatory factors beyond our control may impact our preclinical development programs. Product candidates in clinical development generally have higher development costs than those in preclinical stages of development, primarily due to the increased size and duration of clinical trials. At this time, we cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the 29 Table of Contents preclinical development of any of our product candidates. However, we expect that our research and development expenses and manufacturing costs will increase substantially in connection with our planned preclinical and clinical development activities in the near term and in the future. The successful development of our current and future product candidates is highly uncertain. This is due to numerous risks and uncertainties, including the following: • negative or inconclusive results from our preclinical or clinical trials or the clinical trials of others for product candidates similar to ours, leading to a decision or requirement to conduct additional preclinical studies or clinical trials or abandon any or all of our programs; • product-related side effects experienced by participants in our clinical trials or by individuals using therapeutics similar to our product candidates; • delays in submitting IND applications or comparable foreign applications, or delays or failures to obtain the necessary approvals from regulators to commence a clinical trial, or a suspension or termination of a clinical trial once commenced; • conditions imposed by the U.S. Food and Drug Administration (“FDA”) or other regulatory authorities regarding the scope or design of our clinical trials; • delays in enrolling research subjects in clinical trials; • high drop-out rates of research subjects; • inadequate supply or quality of product candidate components or materials or other supplies necessary for the conduct of our clinical trials; • Chemistry, manufacturing and control (“CMC”) challenges associated with manufacturing and scaling up biologic product candidates to ensure consistent quality, stability, purity and potency among different batches used in clinical trials; • greater-than-anticipated clinical trial costs; • poor potency or effectiveness of our product candidates during clinical trials; • unfavorable FDA or other regulatory authority inspection and review of a clinical trial or manufacturing site; • delays as a result of the COVID-19 pandemic or events associated with the pandemic; • failure of our third-party contractors or investigators to comply with regulatory requirements or otherwise meet their contractual obligations in a timely manner, or at all; • delays and changes in regulatory requirements, policies and guidelines; and • the FDA or other regulatory authorities interpret our data differently than we do. A change in the outcome of any of these variables may significantly impact the costs and timing associated with the development of our product candidates. We may never succeed in obtaining regulatory approval for any of our product candidates. General and Administrative Expenses General and administrative expenses consist primarily of salaries and employee-related costs, including stock-based compensation, for personnel in executive, finance and other administrative functions. Other significant costs include legal fees relating to corporate matters, professional fees for accounting and consulting services and an allocation of facility-related costs. 30 Table of Contents General and administrative expenses consisted of the following (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 (unaudited) (unaudited) (unaudited) (unaudited) Personnel-related expenses, including share-based compensation $ 11,533 $ 2,572 $ 15,374 $ 4,620 External services and supplies 1,505 1,482 2,446 3,289 Office and facilities 359 360 643 706 Other 485 140 678 250 Total $ 13,882 $ 4,554 $ 19,141 $ 8,865 We expect our general and administrative expenses will increase for the foreseeable future to support our increased research and development, manufacturing activities, and preclinical and clinical activities and to reflect increased costs associated with operating as a public company. These increased costs will likely include increased expenses for audit, legal, regulatory, tax and related services associated with maintaining compliance with exchange listing and SEC requirements, director and officer insurance premiums and investor relations costs. Other Income (Expense) Interest Income, net Interest income, net consists of interest earned on our cash and cash equivalents, and short-term investments, if any, held during the year, net of interest expense. Change in Fair Value of Contingent Earnout Liability The change in fair value of the contingent earnout liability that was accounted for as a liability as of the date of the Merger, and is remeasured to fair value at each reporting period, resulting in a non-cash gain or loss. Gain on Extinguishment of Convertible Notes Our convertible note was extinguished as part of the Merger and the change in fair value was recorded in earnings. Change in Preferred Stock Tranche Liability Our preferred stock tranche liability had been accounted for at fair value with changes in the fair value recorded in earnings at each reporting period through settlement on May 14, 2021. 31 Table of Contents Results of Operations Comparison of the Three Months Ended June 30, 2022 and 2021 The following table summarizes our results of operations for the three months ended June 30, 2022 and 2021 (in thousands): Three Months Ended June 30, 2022 2021 Change Revenue: Contract revenue $ 1,108 $ 778 $ 330 Grant income 250 15 235 Total revenue 1,358 793 565 Operating expenses: Research and development 9,247 5,235 4,012 General and administrative 13,882 4,554 9,328 Total operating expenses 23,129 9,789 13,340 Loss from operations (21,771) (8,996) (12,775) Other income (expense): Interest income, net 27 2 25 Change in fair value of contingent earnout liability 8,878 — 8,878 Gain on extinguishment of convertible notes 1,289 — 1,289 Change in preferred stock tranche liability — (2,918) 2,918 Other expense 25 (95) 120 Total other income (expense), net 10,219 (3,011) 13,230 Net loss $ (11,552) $ (12,007) $ 455 Contract revenue . For the three months ended June 30, 2022 and 2021, we generated revenue from contracts and license agreements of $1.1 million and $0.8 million, respectively. The increase of $0.3 million was due primarily to a new collaboration agreement entered into in May 2021. Grant income . For the three months ended June 30, 2022 and 2021, we generated revenue from grants of $0.3 million and less than $0.1 million, respectively. The increase of $0.2 million was primarily due to the recognition of revenue related to the Small Business Innovation Research (“SBIR”) SENTI-202 grant funding. Research and development expenses . Research and development expenses were $9.2 million and $5.2 million for the three months ended June 30, 2022 and 2021, respectively. The increase of $4.0 million was primarily due to an increase of $2.0 million in personnel-related expenses, which includes $1.3 million rise of stock-based compensation expense, $1.0 million in professional services costs and $0.9 million in facility costs. General and administrative expenses . General and administrative expenses were $13.9 million and $4.6 million for the three months ended June 30, 2022 and 2021, respectively. The increase of $9.3 million was primarily due to an increase of $9.0 million in personnel-related expenses, which includes $7.4 million rise of stock-based compensation expense. Change in fair value of contingent earnout liability . For the three months ended June 30, 2022, the increase of $8.9 million resulted from a non-cash gain related to the remeasurement of the contingent earnout liability. 32 Table of Contents Gain on extinguishment of convertible notes. For the three months ended June 30, 2022, we recognized a gain of $1.3 million upon extinguishment of convertible notes. Change in preferred stock tranche liability . For the three months ended June 30, 2021, we recognized a loss of $2.9 million as an adjustment to the preferred stock tranche liability. The adjustment stems primarily from the increase, since the December 31, 2020 measurement date, in management’s estimate of the fair value of our Series B redeemable convertible preferred stock resulting from a decrease in time to liquidity as we drew nearer to completing an exit strategy. There was no equivalent activity for the three months ended June 30, 2022, as the preferred stock tranches were issued on May 14, 2021. Comparison of the Six Months Ended June 30, 2022 and 2021 The following table summarizes our results of operations for the six months ended June 30, 2022 and 2021 (in thousands): Six Months Ended June 30, 2022 2021 Change Revenue: Contract revenue $ 1,962 $ 822 $ 1,140 Grant income 500 43 457 Total revenue 2,462 865 1,597 Operating expenses: Research and development 16,849 10,138 6,711 General and administrative 19,141 8,865 10,276 Total operating expenses 35,990 19,003 16,987 Loss from operations (33,528) (18,138) (15,390) Other income (expense): Interest income, net 31 2 29 Change in fair value of contingent earnout liability 8,878 — 8,878 Gain on extinguishment of convertible notes 1,289 — 1,289 Change in preferred stock tranche liability — (14,742) 14,742 Other expense (30) (131) 101 Total other income (expense), net 10,168 (14,871) 25,039 Net loss $ (23,360) $ (33,009) $ 9,649 Contract revenue . For the six months ended June 30, 2022 and 2021, we generated revenue from contracts and license agreements of $2.0 million and $0.8 million, respectively. The increase of $1.1 million was due primarily to a new collaboration agreement entered into in May 2021. Grant income . For the six months ended June 30, 2022 and 2021, we generated revenue from grants of $0.5 million and less than $0.1 million, respectively. The increase of $0.5 million was primarily due to the recognition of revenue related to the SBIR SENTI-202 grant funding. Research and development expenses . Research and development expenses were $16.8 million and $10.1 million for the six months ended June 30, 2022 and 2021, respectively. The increase of $6.7 million was primarily due to an increase of $3.1 million in personnel-related expenses, which includes $1.4 million rise of stock-based compensation expense, $1.8 million in professional services costs and $1.7 million in facility costs. 33 Table of Contents General and administrative expenses . General and administrative expenses were $19.1 million and $8.9 million for the six months ended June 30, 2022 and 2021, respectively. The increase of $10.3 million was primarily due to increases of $10.8 million in personnel-related expenses, which includes $7.5 million rise of stock-based compensation expense, partially offset by a decrease of $0.8 million related to professional, legal and accounting services expenses. Change in fair value of contingent earnout liability . For the six months ended June 30, 2022, the increase of $8.9 million resulted from a non-cash gain related to the remeasurement of the contingent earnout liability. Gain on extinguishment of convertible notes. For the six months ended June 30, 2022, we recognized a gain of $1.3 million upon extinguishment of convertible notes. Change in preferred stock tranche liability. For the six months ended June 30, 2021, we recognized a loss of $14.7 million as an adjustment to the preferred stock tranche liability. The adjustment stems primarily from the increase, since the December 31, 2020 measurement date, in management’s estimate of the fair value of our Series B redeemable convertible preferred stock resulting from a decrease in time to liquidity as we drew nearer to completing an exit strategy. There was no equivalent activity for the six months ended June 30, 2022, as the preferred stock tranches were issued on May 14, 2021. Liquidity and Capital Resources Sources of Liquidity From inception to June 30, 2022, we raised aggregate gross proceeds of $158.1 million from the issuance of shares of our redeemable convertible preferred stock and the issuance of convertible notes. In connection with the Merger, the Company received $140.7 million in proceeds from the Merger and related PIPE Financing, including the Bayer convertible note cancellation and exchange. We do not have any products approved for sale and have not generated any revenue from product sales or otherwise. We have incurred net losses and negative cash flows from operations since our inception and anticipate we will continue to incur net losses for the foreseeable future. As of June 30, 2022, we had $139.8 million in cash and cash equivalents, and an accumulated deficit of $138.4 million, respectively. We will need substantial additional funding to support our continuing operations and pursue our development strategy. Until such time as we can generate significant revenue from sales of our product candidates, if ever, we expect to finance our operations through the sale of equity, debt financings or other capital sources, including potential collaborations with other companies or other strategic transactions. Adequate funding may not be available to us on acceptable terms, if at all. Should we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back, or discontinue the development and commercialization of our product candidates or delay our efforts to expand our product pipeline. We may also be required to sell or license to other parties’ rights to develop or commercialize our product candidates that we would prefer to retain. Cash Flows The following table sets forth a summary of our cash flows for each of the periods indicated (in thousands): Six Months Ended June 30, 2022 2021 Net cash from operating activities $ (15,754) $ (13,859) Net cash from investing activities (18,640) (626) Net cash from financing activities 118,160 67,925 Net change in cash and cash equivalents $ 83,766 $ 53,440 34 Table of Contents Operating Activities For the six months ended June 30, 2022, net cash used in operating activities of $15.8 million was primarily due to our loss of $23.4 million with non-cash adjustments of $9.9 million for stock-based compensation expense, $8.9 million for the change in fair value of the contingent earnout liability, $1.9 million for depreciation and amortization of operating lease right-of-use-assets and $1.3 million for gain on extinguishment of convertible notes. Other material changes comprised of $7.9 million increase in operating lease liabilities, offset by $1.4 million decrease in accounts payable and accrued and other current liabilities and as well as a $1.0 million decrease in deferred revenue. For the six months ended June 30, 2021, net cash used in operating activities of $13.9 million was primarily due to our net loss of $33.0 million with non-cash adjustments of $14.7 million for an increase in our preferred stock tranche liability, $2.7 million increase in deferred revenue and $1.6 million for an increase in accounts payable and accrued expenses. Investing Activities For the six months ended June 30, 2022 and 2021, net cash used in investing activities of $18.6 million and $0.6 million respectively, was entirely due to purchases of property and equipment. Financing Activities For the six months ended June 30, 2022, net cash provided by financing activities of $118.2 million was primarily due to $112.5 million proceeds received from Merger and related PIPE financing activities, net of transaction cost, $5.2 million from issuance of convertible notes and $0.5 million from the issuance of common stock upon exercise of stock options. For the six months ended June 30, 2021, net cash provided by financing activities of $67.9 million was primarily due to proceeds received of $67.0 million from the issuance of our Series B redeemable convertible preferred stock, $1.5 million from the issuance of common stock upon exercise of stock options and $0.5 million from the payment of deferred offering costs. Funding Requirements Based upon our current operating plans, we believe that our existing cash and cash equivalents will be sufficient to fund our operations for the next twelve months from the date of this Quarterly Report. We anticipate that we will continue to seek additional funding, though the precise timing of such may prove uncertain. Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. Our assumptions may prove to be inaccurate, and we could deplete our capital resources sooner than we expect. Additionally, the process of testing and manufacturing product candidates in preclinical studies and clinical trials is costly and the timing and expenses in these trials are uncertain. Our future capital requirements will depend on many factors, including: • the scope, rate of progress, results and costs of drug discovery, preclinical development, laboratory testing and clinical trials for our product candidates; • the number and development requirements of product candidates that we may pursue, and other indications for our current product candidates that we may pursue; • the costs, timing and outcome of regulatory review of our product candidates; • the scope and costs of constructing and operating our planned cGMP facility and any commercial manufacturing activities; • the cost associated with commercializing any approved product candidates; • the cost and timing of developing our ability to establish sales and marketing capabilities, if any; 35 Table of Contents • the costs of preparing, filing and prosecuting patent applications, maintaining, enforcing and protecting our intellectual property rights, defending intellectual property-related claims and obtaining licenses to third-party intellectual property; • the timing and amount of any milestone and royalty payments we are required to make under our present or future license agreements; • our ability to establish and maintain collaborations on favorable terms, if at all; and • the extent to which we acquire or in-license other product candidates and technologies and associated intellectual property. In order to improve our liquidity, management is actively pursuing additional financing. We expect our expenses to increase substantially in connection with ongoing activities, particularly as we advance our preclinical activities and clinical trials for our product candidates in development. Accordingly, we will need to obtain substantial additional funding for continuing operations. If we are unable to raise capital when needed, or on attractive terms, we could be forced to delay, reduce or eliminate our research or drug development programs or any future commercialization efforts. Although management continues to pursue these plans, there is no assurance that we will be successful in obtaining sufficient funding on terms acceptable to us to fund continuing operations, if at all. Contractual Obligations and Commitments On June 3, 2021, we entered into a lease agreement for a new cGMP facility in Alameda, California to support planned initial clinical trials for our product candidates. The lease will expire in 2032 with future undiscounted operating lease payments of $46.0 million over an initial lease period of eleven years. See Note 6 - Operating Leases for details on our lease obligations. In 2021, we began construction of the cGMP facility. As of June 30, 2022, we have paid $17.9 million in construction costs of the $35.5 million purchase commitment. The agreements with the construction company provide for termination following a certain period after notice. Upon termination we will be responsible for payment for work performed to date. During the year ended December 31, 2021, we entered into a three-year collaboration and option agreement with BlueRock Therapeutics LP (“BlueRock”) under which the Company granted BlueRock an option to execute an exclusive or non-exclusive license to develop, manufacture and commercialize cell therapy products (See Part I, Item 1, Notes to Condensed Consolidated Financial Statements (Unaudited), Note 14 - Related Parties for details into the BlueRock agreement). In consideration for the option, the Company is responsible for up to $10.0 million in research and development costs and expenses associated with the collaboration plan incurred over the three-year term. We have also entered into license agreements under which we are obligated to make annual maintenance payments of $0.1 million and specified milestone and royalty payments. Milestone and royalty payment obligations under these agreements are contingent upon future events, such as our achievement of specified development, regulatory, and sales milestones, or generating product sales. As of June 30, 2022, we were unable to estimate the timing or likelihood of achieving these milestones or generating future product sales. We have entered into sponsored research agreements under which we are obligated to pay $0.7 million, $0.8 million and $0.2 million in 2022, 2023 and 2024, respectively. Following the Closing, former holders of Legacy Senti common stock and preferred stock may receive up to 2,000,000 additional shares of the Company’s common stock in the aggregate, in two equal tranches of 1,000,000 shares of common stock per tranche. Refer to Note 3, Stockholders’ Equity (Deficit), for further details of the contingent earnout. 36 Table of Contents Off-Balance Sheet Arrangements During the periods presented, we did not have, nor do we currently have, any off-balance sheet arrangements as defined under the rules and regulations of the SEC. Critical Accounting Policies and Significant Judgments and Estimates Our management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities in our consolidated financial statements and accompanying notes. On an ongoing basis, we evaluate our estimates and judgments. We base our estimates and assumptions on historical experience, known trends and events, and various other factors that are believed to be reasonable and appropriate under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in Note 2 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, we believe the following accounting policies and estimates to be most critical to the preparation of our consolidated financial statements. We define our critical accounting policies as those under U.S. GAAP that require us to make subjective estimates and judgments about matters that are inherently uncertain and are likely to have a material impact on our financial condition and results of operations, as well as the specific manner in which we apply those principles. Other than the new critical accounting policy and estimate discussed below, there have been no material changes to our critical accounting policies and estimates as compared to those described in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth in our Current Report on Form 8-K dated June 8, 2022, which was filed with the SEC on June 15, 2022. Contingent Earnout Liability In connection with the Reverse Recapitalization, Legacy Senti equity holders are entitled to receive as additional merger consideration of up to 2,000,000 shares of our common stock in the aggregate, in two equal tranches of 1,100,000 shares of common stock per tranche, for no consideration upon the occurrence of certain triggering events, including a change of control event. In accordance with ASC 815-40, Derivatives and Hedging , as certain terms of the Contingent Earnout Shares were not indexed to the common stock, they were accounted for as a liability at the Reverse Recapitalization date and subsequently remeasured at each reporting date with changes in fair value recorded as a component of other income (expense), net in the condensed consolidated statements of operations and comprehensive loss. The estimated fair value of the Contingent Earnout Shares was determined using a Monte Carlo simulation valuation model using a distribution of potential outcomes. The assumptions utilized in the calculation were based on the achievement of certain stock price milestones, including our current common stock price, expected volatility, risk-free rate, expected term and expected dividend yield. The common stock price was based on the closing price of our common stock as reported on the date at the Reverse Recapitalization and each reporting date. Historically, we have been a private company and lack company-specific and implied volatility information of our common stock. Therefore, we estimated our expected volatility based on the historical volatility of a representative group of public companies in the biotechnology industry for the expected terms. The risk-free rate was determined by reference to the U.S. Treasury yield curve for time periods approximately equal to the expected term of the Contingent Earnout Shares. The expected dividend yield was 0% based on the fact that we have never paid or declared dividends. The risk free rate and expected volatility requires significant judgment and actual results can differ from assumed and estimated amounts. 37 Table of Contents Emerging Growth Company Status The Jumpstart Our Business Startups Act (“JOBS”) Act permits an emerging growth company to take advantage of an extended transition to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. The Company is an “emerging growth company” as defined in Section 2(a) of the Securities Act, and has elected to not take advantage of the benefits of this extended transition period. We expect to remain an emerging growth company until the earlier of: (1) the last day of the fiscal year (a) following the fifth anniversary of the closing of the Dynamics Initial Public Offering (“IPO”) (which occurred on May 25, 2021), (b) in which we have total annual revenue of at least $1.07 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common equity that is held by non-affiliates exceeds $700 million as of the end of that fiscal year’s second fiscal quarter and our net sales for the year exceed $100 million; and (2) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the preceding, rolling three-year period. Smaller Reporting Company Status The Company is a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K. Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited financial statements. We will remain a smaller reporting company if (1) the market value of our common stock held by non-affiliates is less than $250 million as of the last business day of the second fiscal quarter, or (2) our annual revenues in our most recent fiscal year completed before the last business day of our second fiscal quarter are less than $100 million and the market value of our common stock held by non-affiliates is less than $700 million as of the last business day of the second fiscal quarter. Segment Information We have one business activity and operate in one reportable segment. Item 3. Quantitative and Qualitative Disclosures About Market Risk As a “smaller reporting company,” we are not required to provide this information.