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 “Merger.” 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 Annual Report on Form 10-K for the year ended December 31, 2022 (the “Annual Report”) and filed with the Securities and Exchange Commission (the “SEC”) on March 22, 2023.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 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,” “explore,” “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 Annual Report 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’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 (“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 $18.7 million and $11.6 million for the three months ended June 30, 2023 and 2022, respectively and $37.4 million and $23.4 million for the six months ended June 30, 2023 and 2022, respectively. As of June 30, 2023 and December 31, 2022, we had cash, cash equivalents and short-term investments 24 Table of Contents of $59.6 million and $98.6 million, respectively, and an accumulated deficit of $210.7 million and $173.3 million, respectively. Net cash flows used in operating activities were $30.0 million and $15.8 million during the six months ended June 30, 2023 and 2022, respectively. Substantially all of our net losses resulted from costs incurred in connection with our research and development programs and from general and administrative costs associated with our operations. We expect to continue to incur significant losses for the foreseeable future. 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; • 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, and commercialization efforts; • continue to develop, grow, maintain, enforce 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. Recent Developments On August 10, 2023, we announced a transaction with GeneFab, LLC (“GeneFab”), a new independent contract manufacturing and synthetic biology biofoundry focused on next-generation cell and gene therapies. The transaction provided us with additional capital and reduced longer term operating expenses. In connection with the transaction, we will receive approximately $37.8 million in cash before the end of 2025. Approximately $18.9 million was due at closing, which amount was netted against prepayment owed by us for manufacturing and support services to GeneFab. The remaining $18.9 million will be paid to us in installments in 2024 and 2025. In addition, we will receive $8.0 million in manufacturing credit, subject to certain conditions, and will sublease our recently constructed 92,000 square foot current good manufacturing practice (cGMP) facility in Alameda, CA to GeneFab (a portion of which will be subject to the satisfaction of certain conditions). 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. Operating Expenses Our operating expenses consist of research and development expenses and general and administrative expenses. 25 Table of Contents 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, 2023 2022 2023 2022 (unaudited) (unaudited) (unaudited) (unaudited) Personnel-related expenses, including share-based compensation $ 4,571 $ 3,866 $ 9,379 $ 6,664 External services and supplies 3,407 3,424 7,011 6,332 Office and facilities 2,636 1,782 5,229 3,528 Other 338 175 651 325 Total $ 10,952 $ 9,247 $ 22,270 $ 16,849 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 preclinical development of any of our product candidates. However, we expect that our research and development 26 Table of Contents 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 studies 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; • 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. 27 Table of Contents General and administrative expenses consisted of the following (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 (unaudited) (unaudited) (unaudited) (unaudited) Personnel-related expenses, including share-based compensation $ 6,652 $ 11,533 $ 13,828 $ 15,374 External services and supplies 1,546 1,505 2,837 2,446 Office and facilities 407 359 856 643 Insurance 414 161 918 202 Other 601 324 983 476 Total $ 9,620 $ 13,882 $ 19,422 $ 19,141 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. 28 Table of Contents Results of Operations Comparison of the Three Months Ended June 30, 2023 and 2022 The following table summarizes our results of operations for the three months ended June 30, 2023 and 2022 (in thousands): Three Months Ended June 30, 2023 2022 Change Revenue: Contract revenue $ 687 $ 1,108 $ (421) Grant income 250 250 — Total revenue 937 1,358 (421) Operating expenses: Research and development 10,952 9,247 1,705 General and administrative 9,620 13,882 (4,262) Total operating expenses 20,572 23,129 (2,557) Loss from operations (19,635) (21,771) 2,136 Other income (expense): Interest income, net 794 27 767 Change in fair value of contingent earnout liability 148 8,878 (8,730) Gain on extinguishment of convertible notes — 1,289 (1,289) Other expense (4) 25 (29) Total other income (expense), net 938 10,219 (9,281) Net loss $ (18,697) $ (11,552) $ (7,145) Contract revenue . For the three months ended June 30, 2023 and 2022, we generated revenue from contracts and license agreements of $0.7 million and $1.1 million, respectively. The decrease of $0.4 million was primarily due to decline in services provided for the Spark collaboration project. Grant income . For the three months ended June 30, 2023 and 2022, we generated revenue from grants of $0.3 million and $0.3 million, respectively, from the SBIR SENTI-202 grant funding. Research and development expenses . Research and development expenses were $11.0 million and $9.2 million for the three months ended June 30, 2023 and 2022, respectively. The increase o f $1.7 million w as primarily due to an increase of $0.7 million in personnel-related expenses and an increase of $0.9 million in facility costs. General and administrative expenses . General and administrative expenses were $9.6 million and $13.9 million for the three months ended June 30, 2023 and 2022, respectively. The decrease of $4.3 million was primarily due to a decrease of $4.9 million in personnel-related expenses, which includes a $4.8 million decrease in stock-based compensation expense, and an increase in insurance of $0.3 million. Interest income, net . Interest income was $0.8 million and nominal for the three months ended June 30, 2023 and 2022, respectively, due to a higher average cash balances, as well as an increase in interest rates in the relevant periods. Change in fair value of contingent earnout liability . For the three months ended June 30, 2023 and 2022, we recognized a non-cash gain of $0.2 million and $8.9 million, respectively. The decrease of $8.7 million related to the remeasurement of the contingent earnout liability to fair value. 29 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 as part of the Merger. Comparison of the Six Months Ended June 30, 2023 and 2022 The following table summarizes our results of operations for the six months ended June 30, 2023 and 2022 (in thousands): Six Months Ended June 30, 2023 2022 Change Revenue: Contract revenue $ 1,723 $ 1,962 $ (239) Grant income 500 500 — Total revenue 2,223 2,462 (239) Operating expenses: Research and development 22,270 16,849 5,421 General and administrative 19,422 19,141 281 Total operating expenses 41,692 35,990 5,702 Loss from operations (39,469) (33,528) (5,941) Other income (expense): Interest income, net 1,855 31 1,824 Change in fair value of contingent earnout liability 207 8,878 (8,671) Gain on extinguishment of convertible notes — 1,289 (1,289) Other expense (12) (30) 18 Total other income (expense), net 2,050 10,168 (8,118) Net loss $ (37,419) $ (23,360) $ (14,059) Contract revenue . For the six months ended June 30, 2023 and 2022, we generated revenue from contracts and license agreements of $1.7 million and $2.0 million, respectively. The decrease of $0.2 million was primarily due to decline in services provided for the Spark collaboration project. Grant income . For the six months ended June 30, 2023 and 2022, we generated revenue from grants of $0.5 million and $0.5 million, respectively, from the SBIR SENTI-202 grant funding. Research and development expenses . Research and development expenses were $22.3 million and $16.8 million for the six months ended June 30, 2023 and 2022, respectively. The increase of $5.4 million was primarily due to an increase of $2.7 million in personnel-related expenses, an increase of $1.7 million in facility costs, and an increase of $0.7 million in professional services costs. General and administrative expenses . General and administrative expenses were $19.4 million and $19.1 million for the six months ended June 30, 2023 and 2022, respectively. The increase of $0.3 million was primarily due to an increase of $0.7 million in insurance, an increase of $0.5 million in depreciation and amortization, an increase of $0.4 million in professional services costs offset by a decrease of $1.5 million in personnel-related expenses. Interest Income, net. Interest income was $1.9 million and nominal for the six months ended June 30, 2023 and 2022, respectively, due to a higher average cash balances, as well as an increase in interest rates in the relevant periods. 30 Table of Contents Change in fair value of contingent earnout liability . For the six months ended June 30, 2023 and 2022, we recognized a non-cash gain of $0.2 million and $8.9 million, respectively. The decrease of $8.7 million related to the remeasurement of the contingent earnout liability to fair value. 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 as part of the Merger. Liquidity and Capital Resources Sources of Liquidity From inception to June 30, 2023, we raised aggregate gross proceeds of $299.5 million from the Merger and PIPE Financing, the issuance of shares of our common stock, the issuance of shares of our redeemable convertible preferred stock, the issuance of convertible notes and, to a less extent, through collaboration agreements and governmental grants. On August 31, 2022, we entered into the Purchase Agreement with Chardan. Pursuant to the Purchase Agreement, we have the right, in our sole discretion, to sell to Chardan up to the lesser of: (i) $50.0 million of shares of our common stock; and (ii) 8,727,049 shares of common stock at 97% of the volume weighted average price (“VWAP”) of the common stock calculated in accordance with the Purchase Agreement, over a period of 36 months subject to certain limitations and conditions contained in the Purchase Agreement. Sales and timing of any sales of common stock are solely at our election, and we are under no obligation to sell any securities to Chardan under the Purchase Agreement. As consideration for Chardan’s commitment to purchase shares of our common stock at our direction upon the terms and subject to the conditions set forth in the Purchase Agreement, upon execution of the Purchase Agreement, we issued 100,000 shares of our common stock to Chardan and paid a $0.4 million document preparation fee. We recognized an expense of $0.7 million within general and administrative expenses in our Condensed Consolidated Statements of Operations and Comprehensive Loss for the Chardan related costs and legal fees incurred in connection with the agreement. Other than the issuance of the commitment shares of our common stock to Chardan we issued 300,000 shares of common stock up until June 30, 2023, aggregating to net proceeds of $0.7 million under the Purchase Agreement. There were no shares issued within six months ended June 30, 2023. 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, 2023, we had $59.6 million in cash, cash equivalents and short-term investments, and an accumulated deficit of $210.7 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. On August 10, 2023, we announced the transaction with GeneFab, a newly formed independent contract manufacturing and synthetic biology biofoundry focused on next-generation cell and gene therapies. The transaction provided us with additional capital and reduced longer term operating expenses. 31 Table of Contents 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, 2023 2022 Net cash from operating activities $ (29,979) $ (15,754) Net cash from investing activities 8,834 (18,640) Net cash from financing activities 246 118,160 Net change in cash and cash equivalents $ (20,899) $ 83,766 Operating Activities For the six months ended June 30, 2023, net cash used in operating activities of $30.0 million was primarily due to our loss of $37.4 million with non-cash adjustments of $7.2 million for stock-based compensation expense, $2.1 million for depreciation and amortization of operating lease right-of-use-assets, $1.0 million for accretion of discount on short-term investments, and $0.2 million for the change in fair value of contingent earnout liability. Other material changes comprised of $1.2 million decrease in accounts payable and accrued expenses and other current liabilities, $0.6 million decrease in deferred revenue, offset by $1.0 million increase in operating lease liabilities. For the six months ended June 30, 2022, net cash used in operating activities of $15.8 million was primarily due to our net 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 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 and $0.4 million increase in accounts payable and accrued expenses and other current liabilities, offset by $1.4 million increase in prepaid expenses and other assets and $1.0 million decrease in deferred revenue. Investing Activities For the six months ended June 30, 2023, net cash provided by investing activities of $8.8 million was due to $37.0 million cash received upon maturity of short-term investments offset by $18.0 million purchases of short-term investments and $10.2 million purchases of property and equipment. For the six months ended June 30, 2022, net cash used in investing activities of $18.6 million, was entirely due to purchases of property and equipment. Financing Activities For the six months ended June 30, 2023, $0.2 million cash was provided by financing activities primarily due to $0.3 million proceeds from the issuance of common stock under Employee Stock Purchase Plan (ESPP). 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 proceeds from the issuance of common stock upon exercise of stock options. Funding Requirements Based upon our current operating plans, there is uncertainty about whether our existing cash, cash equivalents, and short-term investments will be sufficient to fund our operations, including clinical trial expenses and capital expenditure requirements, beyond 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 32 Table of Contents 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. On August 10, 2023, we announced the transaction with GeneFab, a newly formed independent contract manufacturing and synthetic biology biofoundry focused on next-generation cell and gene therapies. The transaction provided us with additional capital and reduced longer term operating expenses. 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 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; • 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 5 - Operating Leases for details on our lease obligations. In 2021, we began construction of the cGMP facility. Buildout of the cGMP facility was completed in June 2023. As of June 30, 2023, we have paid $40.0 million in construction costs of the $42.2 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 we granted BlueRock an option to execute an exclusive 33 Table of Contents 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 12 - Related Parties for details into the BlueRock agreement). In consideration for the option, we are 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, 2023, 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 $0.4 million and $0.3 million in 2023 and 2024, respectively. Following the closing of the Merger, former holders of Legacy Senti common stock and preferred stock may receive up to 2,000,000 additional shares of our common stock in the aggregate, in two equal tranches of 1,000,000 shares of common stock per tranche. Refer to Note 6, Stockholders’ Equity (Deficit), for further details of the contingent earnout. 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 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. During the six months ended June 30, 2023, there have not been any other significant changes to our critical accounting policies and estimates, except as noted below, from those presented in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, that are of significance, or potential significance, to us. Impairment of Long-Lived Assets As a result of the change in the manner in which the Company expects to recover the assets subject to the GeneFab transaction, the asset group used in the long-lived impairment assessment was changed to two asset groups as of June 30, 2023, the oncology and non-oncology asset group, with the non-oncology including all the assets expected to be transferred in the GeneFab transaction. This asset group reassessment triggered a need to perform an impairment analysis for the non-oncology asset group that considered the final terms of the transaction as the fair value of the non-oncology asset group and no impairment was deemed necessary. 34 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 $1.235 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.