SENTI BIOSCIENCES, INC. Senti Biosciences, Inc. ("Senti") entered into a business combination agreement (the "Agreement") withDynamics Special Purpose Corp. ("DYNS") onDecember 19, 2021 . The transactions contemplated by the terms of the Agreement were completed onJune 8, 2022 (the "Closing"), in conjunction with which DYNS changed its name toSenti 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". You should read the following discussion and analysis of our financial condition and results of operations together with our accompanying consolidated financial statements and the related notes contained in Part II, Item 8 of this Annual Report on Form 10-K. Unless the context indicates otherwise, references in this Annual Report on Form 10-K to the "Company," "Senti," "we," "us," "our" and similar terms refer toSenti Biosciences, Inc. (formerly known asDynamics Special Purpose Corp. ) and its consolidated subsidiaries following the Company's Merger. 129 --------------------------------------------------------------------------------
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Cautionary Statement Regarding Forward-Looking Statements
In This Annual 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 10K 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 Part I, Item 1A of this Annual Report on Form 10-K filed with theU.S. Securities and Exchange Commission (the "SEC"). The Company's securities filings can be accessed on the EDGAR section of theSEC'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$58.2 million and$55.3 million for the years endedDecember 31, 2022 and 2021, respectively. As ofDecember 31, 2022 and 2021, we had cash, cash equivalents, and short-term investments, of$98.6 million and$56.0 million , respectively, and an accumulated deficit of$173.3 million and$115.1 million , respectively. Net cash flows used in operating activities were$34.9 million and$34.6 million during the years endedDecember 31, 2022 and 2021, 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;
•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;
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•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, 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.
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. As ofMarch 22, 2023 , the issuance date of the consolidated financial statements for the year endedDecember 31, 2022 , the Company concluded that substantial doubt existed about the Company's ability to continue as a going concern beyond twelve months from the issuance date of the annual consolidated financial statements. In light of these concerns, our independent registered public accounting firm included in its opinion for the year endedDecember 31, 2022 an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern beyond twelve months fromMarch 22, 2023 .
Recent Developments
Merger with
OnJune 8, 2022 (the "Closing Date"),Dynamics Special Purpose Acquisition Corp. ("Dynamics" or "DYNS") consummated a merger pursuant to whichExplore Merger Sub, Inc. ("Merger Sub"), aDelaware corporation and wholly owned subsidiary of Dynamics, merged with and intoSenti Sub I, Inc. (formerly namedSenti 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 renamedSenti 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 toBayer Healthcare LLC for a purchase price of$5,175,000 onMay 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
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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.
Common Stock Purchase Agreement
OnAugust 31, 2022 , we entered into a Common Stock Purchase Agreement and a Registration Rights Agreement (collectively referred to as the "Purchase Agreement") withChardan Capital Markets LLC ("Chardan") to sell to Chardan up to the lesser of: (i)$50.0 million of shares of the Company's common stock over a period of 36 months; and (ii) 8,727,049 shares of common stock, subject to certain limitations and conditions contained in the Purchase Agreement.
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.
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")
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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):
Years Ended
December 31,
2022 2021
Personnel-related expenses, including share-based compensation expense
$ 13,528 $ 7,687 External services and supplies 12,394 9,041 Office and facilities 7,324 4,680 Other 821 549 Total$ 34,067 $ 21,957 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 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
•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;
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•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 expense, 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.
General and administrative expenses consisted of the following (in thousands):
Years Ended
December 31,
2022 2021
Personnel-related expenses, including share-based compensation expense
$ 29,843 $ 11,756 External services and supplies 7,165 7,395 Office and facilities 1,396 1,534 Insurance 1,821 127 Other 623 438 Total$ 40,848 $ 21,250 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 andSEC 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.
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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 onMay 14, 2021 . Results of Operations
Comparison of the Years Ended
The following table summarizes our results of operations for the years ended
Years Ended
December 31,
2022 2021 Change
Revenue:
Contract revenue $ 3,286 $ 2,291 $ 995
Grant income 1,000 470 530
Total revenue 4,286 2,761 1,525
Operating expenses:
Research and development 34,067 21,957 12,110
General and administrative 40,848 21,250 19,598
Total operating expenses 74,915 43,207 31,708
Loss from operations (70,629) (40,446) (30,183)
Other income (expense):
Interest income, net 1,701 11 1,690
Change in fair value of contingent earnout liability 9,461 - 9,461
Gain on extinguishment of convertible notes 1,289 - 1,289
Change in preferred stock tranche liability - (14,742) 14,742
Loss on impairment of fixed assets - (22) 22
Other expense (32) (120) 88
Total other income (expense), net 12,419 (14,873) 27,292
Net loss $ (58,210) $ (55,319) $ (2,891)
Contract revenue. For the years ended December 31, 2022 and 2021, we generated
revenue from contracts and license agreements of $3.3 million and $2.3 million ,
respectively. The increase of $1.0 million was due primarily to a new
collaboration agreement entered into in May 2021 , partially offset by the
collaboration agreement contract modification which caused $0.7 million of the
previously recognized upfront payment to be reversed in December 2022 .
Grant income. For the years ended December 31, 2022 and 2021, we generated
revenue from grants of $1.0 million and $0.5 million , respectively. The increase
of $0.5 million was primarily due to the recognition of revenue related to the
SBIR SENTI-202 grant funding which began in FY 2021.
Research and development expenses. Research and development expenses were
$34.1 million and $22.0 million for the years ended December 31, 2022 and 2021,
respectively. The increase of $12.1 million was primarily due to an increase of
$5.8 million in personnel-related expenses, which includes a $2.7 million
increase in stock-based compensation expense, $3.4 million in professional
services costs and $2.6 million in facility costs.
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General and administrative expenses. General and administrative expenses were$40.8 million and$21.3 million for the years endedDecember 31, 2022 and 2021, respectively. The increase of$19.6 million was primarily due to increases of$18.1 million in personnel-related expenses, which includes an$11.4 million increase in stock-based compensation expense, an increase in insurance of$1.7 million and$0.2 million in other corporate expenses, partially offset by a decrease of$0.2 million related to professional, legal and accounting services expenses and a decrease of$0.1 million in facility costs.
Change in fair value of contingent earnout liability. For the year ended
Gain on extinguishment of convertible notes. For the year endedDecember 31, 2022 , we recognized a gain of$1.3 million upon extinguishment of convertible notes. Change in preferred stock tranche liability. For the year endedDecember 31, 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 theDecember 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 year endedDecember 31, 2022 , as the preferred stock tranches were issued onMay 14, 2021 .
Liquidity and Capital Resources
Sources of Liquidity
From inception to
OnAugust 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 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 the Company's common stock to Chardan, we issued 300,000 shares of Class A common stock as ofDecember 31, 2022 aggregating to net proceeds of$0.7 million under the Common Stock Purchase Agreement. 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 ofDecember 31, 2022 , we had$98.6 million in cash, cash equivalents, and short-term investments, and an accumulated deficit of$173.3 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, 136
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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):
Years Ended
December 31,
2022 2021
Net cash from operating activities
Net cash from investing activities (81,959) (5,543)
Net cash from financing activities 118,551 68,435
Net change in cash and cash equivalents
Operating Activities
For the year endedDecember 31, 2022 , net cash used in operating activities of$34.9 million was primarily due to our loss of$58.2 million with non-cash adjustments of$16.4 million for stock-based compensation expense,$9.5 million for the change in fair value of the contingent earnout liability,$3.9 million for depreciation and amortization of operating lease right-of-use-assets,$1.3 million for gain on extinguishment of convertible notes and$0.4 million for accretion of discount on short-term investments. Other material changes comprised of$14.1 million increase in operating lease liabilities,$2.2 million increase in accounts payable and accrued expenses and other current liabilities offset by$1.3 million increase in prepaid expenses and other assets and as well as a$1.0 million decrease in deferred revenue. For the year endedDecember 31, 2021 , net cash used in operating activities of$34.6 million was primarily due to our net loss of$55.3 million with non-cash adjustments of$14.7 million for an increase in our preferred stock tranche liability,$3.0 million for depreciation and amortization of operating lease right-of-use assets and$2.3 million for stock-based compensation expense, as well as a$1.8 million increase in deferred revenue,$2.0 million for an increase in accounts payable and accrued expenses and other current liabilities, offset by a decrease of$1.1 million in operating lease liabilities, an increase of$1.6 million in prepaid and other assets and an increase of$0.4 million in accounts receivable. During the year endedDecember 31, 2021 the Company expensed$2.2 million of deferred offering costs related to the suspended IPO, all of which was paid and is included in the net cash used in operating activities.
Investing Activities
For the year endedDecember 31, 2022 , net cash used in investing activities of$82.0 million was due to$40.6 million purchases of short-term investments and$41.4 million purchases of property and equipment.
For the year ended
Financing Activities
For the year endedDecember 31, 2022 , net cash provided by financing activities of$118.6 million was primarily due to$112.0 million proceeds received from Merger and related PIPE financing activities, net of transaction cost,$5.2 million from issuance of convertible notes,$0.7 million from issuance of common stock under Common Stock Purchase Agreement,$0.5 million from the issuance of common stock upon exercise of stock options and$0.2 million from the issuance of common stock under Employee Stock Purchase Plan (ESPP). 137 --------------------------------------------------------------------------------
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For the year endedDecember 31, 2021 , net cash provided by financing activities of$68.4 million was primarily due to proceeds received of$67.0 million from the issuance of our Series B redeemable convertible preferred stock and$1.5 million from the issuance of common stock upon exercise of stock options.
Funding Requirements
Based upon our current operating plans, we believe that our existing cash and cash equivalents will not be sufficient to fund our operations beyond the next twelve months from the date of this Annual 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;
•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.
Accounting standards require that management evaluate whether we have adequate
financial resources to continue as a going concern beyond twelve months after
the date that these consolidated financial statements are available to be
issued. Management has determined that additional funds will be needed to
continue as a going concern for the period defined in the accounting standards.
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Contractual Obligations and Commitments
OnJune 3, 2021 , we entered into a lease agreement for a new cGMP facility inAlameda, 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 ofDecember 31, 2022 , we have paid$35.5 million in construction costs of the$42.1 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 endedDecember 31, 2021 , we entered into a three-year collaboration and option agreement withBlueRock 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 II, Item 8, Notes to Consolidated Financial Statements, Note 15 - 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 ofDecember 31, 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
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 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 8, 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 theSEC .
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 withU.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 consolidated financial statements included elsewhere in this Annual Report on Form 10-K, 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 underU.S. GAAP that require us to make subjective estimates and judgments about 139 --------------------------------------------------------------------------------
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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.
Contingent Earnout Liability
In connection with the Reverse Recapitalization, Legacy Senti equity holders are entitled to receive as additional merger consideration up to 2,000,000 shares of our common stock in the aggregate, in two equal tranches of 1,000,000 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 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 lacked company-specific and implied volatility information for 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 theU.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.
Determination of the Fair Value of Common Stock
Historically, for all periods prior to the Merger, we were required to estimate the fair value of our common stock underlying our share-based awards when performing the fair value calculations using the Black-Scholes option pricing model. Because our common stock is not currently publicly traded, the fair value of our common stock underlying our share-based awards has been determined on each grant date by our board of directors, with input from management, considering our most recently available third-party valuation of our common stock. In the absence of a public trading market for our common stock, on each grant date, our board of directors has made a reasonable determination of the fair value of our common stock based on the information known to us on the date of grant, upon a review of any recent events and their potential impact on the estimated fair value per share of the common stock, and timely valuations from an independent third-party valuation in accordance with guidance provided by theAmerican Institute of Certified Public Accountants, Inc. Practice Aid: Valuation of Privately-Held-Company Equity Securities Issued as Compensation, 2013. In addition, our board of directors considered various objective and subjective factors to determine the fair value of our common stock, including:
•the estimated value of each security both outstanding and anticipated;
•the anticipated capital structure that will directly impact the value of the currently outstanding securities;
•our results of operations and financial position;
•the status of our research and development efforts;
•the composition of, and changes to, our management team and board of directors;
•the lack of liquidity of our common stock as a private company;
•our stage of development and business strategy and the material risks related to our business and industry;
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•external market conditions affecting the life sciences and biotechnology industry sectors;
•U.S. and global economic conditions;
•the results of independent third-party valuations of our common stock;
•the likelihood of achieving a liquidity event for the holders of our common stock, such as an initial public offering or a sale of our company, given prevailing market conditions; and
•the market value and volatility of comparable companies.
The Practice Aid identifies various available methods for allocating enterprise value across classes and series of capital stock to determine the estimated fair value of common stock at each valuation date. In accordance with the Practice Aid, we considered various income, market or asset valuation methods. Based on our early stage of development and other relevant factors, we appropriately used different valuation methods including a hybrid of the option pricing method, or OPM, and guideline transactions Backsolve method, a hybrid of the OPM and guideline public company methods or a hybrid of OPM, Backsolve method, and Monte Carlo simulation to determine the estimated fair value of our common stock for valuations performed throughMarch 31, 2022 . In determining the estimated fair value of our common stock, our Board of Directors also considered the fact that our stockholders could not freely trade our common stock in the public markets. Accordingly, we applied discounts to reflect the lack of marketability of our common stock based on the weighted-average expected time to liquidity. Our Board of Directors and management develop best estimates based on the application of these approaches and the assumptions underlying these valuations, giving careful consideration to the advice from our third-party valuation expert. Such estimates involve inherent uncertainties and the application of significant judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our equity-based compensation expense could be materially different.
Valuation of Preferred Stock Tranche Liability
Our Series B redeemable convertible preferred stock included an obligation whereby the investors agreed to buy, and the Company agreed to sell, additional shares at a fixed price if certain agreed-upon milestones were achieved or at the election of investors. This obligation was determined to be a freestanding financial instrument that should be accounted for as a liability at fair value, and until settlement, the preferred stock tranche liability was revalued at each reporting period with changes in the fair value recorded in earnings. Upon achieving specific milestones, and obtaining Board and stockholder approval, the tranches were called and settled onMay 14, 2021 . The liability was then extinguished and the fair value was reclassified to redeemable convertible preferred stock. Historically, we utilized theMonte Carlo valuation model and/or Black-Scholes option pricing model which incorporated assumptions and estimates, to value the preferred stock tranche feature prior to its settlement. Significant estimates and assumptions impacting the fair value measurement included the estimated fair value per share of the underlying Series B redeemable convertible preferred stock, risk-free rate, expected dividend yield, time to liquidity, expected volatility of the price of the underlying preferred stock and determining the type of option (call option and/or forward contract) and associated probabilities. The most significant assumptions impacting the fair value of the preferred stock tranche feature included the estimated fair value of our Series B redeemable convertible preferred stock, the estimated probability of and time to liquidity for going public and staying-private, and the determination of the type of option (call option and/or forward contract) and associated probability. Historically, we determined the estimated fair value per share of the underlying redeemable convertible preferred stock by taking into consideration the most recent sales of our redeemable convertible preferred stock as well as additional factors that we deemed relevant. We assessed these assumptions and estimates on a quarterly basis as additional information impacting the assumptions became available. The risk-free rate was determined by reference to theU.S. Treasury yield curve for time periods approximately equal to the expected term of the preferred stock tranche feature. We estimated a 0% dividend yield based on the expected dividend yield and the fact that we 141 --------------------------------------------------------------------------------
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have never paid or declared dividends. We estimated the time to liquidity by weighting potential timelines associated with reaching various pipeline milestones and completing an initial public offering. Historically, we have been a private company and lack company-specific and implied volatility information of our stock. Therefore, we estimated our expected stock volatility based on the historical volatility of a representative group of public companies in the biotechnology industry for the expected terms. The determination of the type of option is based on the payouts available to the holders of the tranche rights and the level of control the investors had over-exercising these rights.
These estimates involved inherent uncertainties and the application of significant judgment. As a result, if factors or expected outcomes change and we used significantly different assumptions or estimates, our preferred stock tranche liability could be materially different.
Revenue from Contracts
We recognize revenue from contracts when our customer obtains control of the
promised goods or services, in an amount that reflects the consideration which
we have received or expect to receive in exchange for those goods or services.
Our revenues are primarily derived through our collaborative research,
development and license agreements. The terms of these types of agreements may
include (i) research and development services, (ii) licenses for our technology
or programs, and (iii) services or obligations in connection with participation
in research or steering committees. Payments to us under these arrangements
typically include one or more of the following: nonrefundable upfront and
license fees, research funding, milestone and other contingent payments for the
achievement of defined research, development and commercial-based events, as
well as royalties on sales of any commercialized products. We assess whether the
promises in its arrangements with customers are considered distinct performance
obligations that should be accounted for separately. Judgment may be required to
determine whether the research and development services are distinct from the
license to our intellectual property or participation on steering committees.
Arrangements that include rights to additional goods or services that are
exercisable at a customer's discretion are generally considered options. If
these options provide a material right to the customer, they are considered
performance obligations. The identification of material rights requires
judgments related to the determination of the value of the underlying license
relative to the option exercise price, including assumptions about the technical
feasibility and the probability of developing a candidate that would be subject
to the option rights.
The transaction price in each arrangement is allocated based on the relative
standalone selling price ("SSP") of each distinct performance obligation, which
requires judgment. In instances where SSP is not directly observable, such as
when a license or service is not sold separately, SSP is determined using
information that may include market conditions and other observable inputs. Due
to the early stage of our licensed technology, the license of such technology is
typically combined with research and development services and steering committee
participation as one performance obligation. Changes in the key assumptions used
to determine the SSP could have a significant effect on the allocation of
arrangement consideration between multiple performance obligations.
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
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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.
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