GeneFab Transaction

9 Months Ended

Sep. 30, 2024

Related Party Transactions [Abstract]

GeneFab Transaction

GeneFab Transaction

On August 7, 2023, the Company entered into a framework agreement (the “GeneFab Framework Agreement”) with GeneFab and Valere Bio, Inc., a Delaware corporation and the parent company of GeneFab, which is wholly owned by Celadon Partners, LLC, pursuant to which the Company, subject to the terms and conditions therein, sold, assigned and transferred its rights, title and interest in certain of the assets and contractual rights, including all of the Company’s equipment at the Company’s facilities in Alameda and certain of the Company’s non-oncology license rights, intellectual property related to the schematics for and design of the Alameda facility, and subleased to GeneFab its premises under a lease agreement for the Alameda facility. The transaction provided the Company with additional capital in the form of a note receivable and rights to future manufacturing and research activities performed by GeneFab at market rates and reduced longer term operating expenses.

Concurrently with the transaction, the Company and GeneFab entered into a development and manufacturing services agreement (the “GeneFab Services Agreement”), pursuant to which GeneFab will provide certain services to the Company using the subleased Alameda facility and acquired equipment. As part of this transaction, the Company entered into a transition services agreement with GeneFab whereby certain services are to be provided by each party to the other party during a transition period beginning on the closing of the transaction.

The total consideration in connection with the transaction was $37.8 million, of which $18.9 million was due at closing and was netted against prepayment due to GeneFab for future manufacturing and research activities. The remaining $18.9 million consideration (the “GeneFab Note Receivable”) is subject to satisfaction of certain conditions. The Company elected to account for the GeneFab Note Receivable under the fair value option and recorded the GeneFab Note Receivable at its fair value of $16.6 million at the closing date of the transaction. The GeneFab Note Receivable is remeasured each reporting period with changes from remeasurement included in other income (expense) in the condensed consolidated statements of operations and comprehensive loss. Refer to Note 4. Fair Value Measurements.

The Company was entitled to $18.9 million in future manufacturing and research activities to be rendered by GeneFab under the services agreement, which are recorded in GeneFab prepaid expenses on the condensed consolidated balance sheet. The Company determined that the $18.9 million for future manufacturing and research activities, inclusive of the volume discount provided, was executed at market terms and does not result in any impact to the total consideration received from GeneFab for the disposal of the business. As of September 30, 2024, $3.9 million of this initial prepaid amount is remaining for future manufacturing and research activities.

As part of the transaction, the Company subleased the facility in Alameda, California to GeneFab which will support the clinical manufacturing of the Company’s chimeric antigen receptor natural killer (CAR-NK) programs, including SENTI-202. As a result of sublease event, the Company recognized an impairment of long-lived assets of $25.7 million for the nine months ended September 30, 2023 due to the impairment of the Company’s leasehold improvements. Refer to Note 6. Operating Leases, for additional information on the sublease.

The Company agreed to grant a license to GeneFab under certain of its intellectual property rights to conduct manufacturing services and to research, develop, manufacture and commercialize products outside of oncology, pursuant to a license agreement (the “Non-Oncology License”).

In connection with the transaction, Philip Lee, Ph.D., former Co-Founder and Chief Technology Officer of the Company, assumed the role of Chief Executive Officer of GeneFab. Additionally, GeneFab extended offers of employment to 45 of the Company's employees formerly employed in its research and development and manufacturing functions. All 45 employees accepted the offers of employment and are actively engaged in providing manufacturing and research activities to the Company.

GeneFab was granted an option to purchase up to 1,963,344 shares (i.e., up to $20.0 million worth) of the Company’s common stock at a per share purchase price of $10.18670 (the “GeneFab Option”). The GeneFab Option becomes exercisable upon the execution of the license agreement, no later than August 7, 2026. The GeneFab Option may be exercised in installments of common stock equal to no more than 19.9% of the Company’s outstanding shares of common stock as of the closing date of the transaction. The purchase of the remaining shares under the GeneFab Option requires approval by the Company’s stockholders. The Company determined that the GeneFab Option was a derivative as the terms of the instrument contain certain provisions that preclude equity classification in accordance with ASC 815. As such, the GeneFab Option was recorded as a liability at its fair value of $9.6 million at the closing date of the transaction and subsequently remeasured with changes in fair value recorded in other income (expense) in the condensed consolidated statements of operations and comprehensive loss. Refer to Note 4. Fair Value Measurements.

As additional consideration for the transaction, the Company and GeneFab entered into a seller economic share agreement (the “GeneFab Economic Share”), pursuant to which the Company will be entitled to receive ten percent of the realized gains of GeneFab’s parent company arising and resulting from any cash or in-kind distributions from GeneFab in connection with a dividend or sale event, subject to the terms and conditions of the GeneFab Economic Share. The Company elected to account for the GeneFab Economic Share under the fair value option and recorded the GeneFab Economic Share at its fair value of $1.8 million at the date of the transaction. The GeneFab Economic Share is remeasured each reporting period with changes from remeasurement included in other income (expense) in

the condensed consolidated statements of operations and comprehensive loss. Refer to Note 4. Fair Value Measurements.

The Company determined that GeneFab is a variable interest entity (“VIE”) since its total equity at risk is not sufficient to finance its activities without additional subordinated financial support. The Company performed a qualitative analysis to determine if it is the primary beneficiary of GeneFab and determined it does not have the power to direct the significant activities of GeneFab. As a result, the Company determined it is not the primary beneficiary and therefore does not consolidate GeneFab.

Refer to Note 14. Related Parties, for GeneFab related party considerations.

Gain on the Disposal of Business

As the assets and contractual rights transferred to GeneFab were determined to constitute a business as defined in ASC 805, Business Combinations, the Company accounted for the disposal by applying the derecognition guidance in ASC 810, Consolidation, which requires that a gain or loss be recognized for the difference between the carrying value of the assets sold and the fair value of the consideration received (or receivable).

As of August 7, 2023, the total fair value of the consideration was determined to be $37.3 million, including the GeneFab prepaid expenses of $18.9 million, the estimated fair value of the GeneFab Note Receivable of $16.6 million and the estimated fair value of the GeneFab Economic Share of $1.8 million. Out of the total consideration, $9.6 million was allocated to the GeneFab Option, representing its estimated fair value as of the closing date.

In connection with the sale, the Company recognized a gain on disposal in the amount of $21.9 million in net income from discontinued operations during the year ended December 31, 2023, representing the excess of the fair value of the consideration (net of the portion allocated to the GeneFab Option) over the carrying value of the assets sold of $5.5 million. The gain on disposal was primarily related to the transfer of the non-oncology intellectual property to GeneFab which had no carrying value.

Discontinued Operations

In accordance with ASC 205, Presentation of Financial Statements (“ASC 205”), the Company determined that the sale of the non-oncology business, including the equipment and transfer of in-house manufacturing activities in the Alameda facility, to GeneFab represented a strategic shift that will have a major effect on the Company’s operations and financial results, thus meeting the criteria to be reported as discontinued operations. Discontinued operations include the cost and depreciation of equipment and related deposits or liabilities, manufacturing personnel-related costs including costs arising as a result of the disposal such as equity award modifications and severance, and the gain from the disposal of the business.

As of September 30, 2024 and December 31, 2023, there were no assets related to the discontinued operations, and the liabilities related to the discontinued operations were zero and $0.2 million, respectively.

There were no material operating expenses related to the discontinued operations since August 2023, when the transaction with GeneFab closed.

The following table summarizes the condensed operating results of the discontinued operations for the three and nine months ended September 30, 2023 (in thousands):

	Three Months Ended September 30,		Nine months ended September 30,
	2023		2023
Operating expenses:
Research and development	$	1,641	$	9,975
General and administrative	(1,478)		(496)
Total operating expenses	163		9,479
Loss from discontinued operations	(163)		(9,479)
Other expense	(6)		(6)
Gain on disposal of business	21,861		21,861
Net income from discontinued operations	$	21,692	$	12,376

The following table summarizes the condensed cash flow information of the discontinued operations for the nine months ended September 30, 2023 (in thousands):

	Nine months ended September 30,
	2023
Operating activities (noncash adjustments to net income):
Depreciation	$	185
Stock-based compensation	(2,022)
Investing activities:
Purchases of property and equipment	$	(4,079)

Related Parties

Bayer Healthcare LLC

On May 21, 2021, the Company entered into a collaboration and option agreement (“BlueRock Agreement”) with BlueRock, a wholly-owned subsidiary of Bayer, pursuant to which the Company granted to BlueRock an option (“BlueRock Option”), on a collaboration program-by-collaboration program basis, to obtain an exclusive or non-exclusive license to develop, manufacture and commercialize cell therapy products that contain cells of specified types and which incorporate an option gene circuit from such collaboration program or a closely related derivative gene circuit. The Company was responsible for up to $10 million in costs and expenses incurred in connection with the research plan and related activities to be conducted over a three-year research term as specified in the collaboration and option agreement. The Company completed the initial research plan and related activities in May 2024. If the Company and BlueRock agree to add new research activities to the research plan, then BlueRock will be obligated to reimburse the Company for the costs and expenses incurred.

The Company concluded that the BlueRock Agreement is not within the scope of ASC 808, Collaborative Arrangements, because the Company did not receive any consideration and therefore, is not exposed to both significant risks and rewards for the arrangement. The Company also determined that the agreement is also not currently within the scope of ASC 606 because the BlueRock Agreement does not currently meet the criteria of a contract with a customer, and will not be within the scope of ASC 606 until any consideration is paid. Potential future milestone payments and royalties are subject to BlueRock’s exercise of the BlueRock Option and execution of a commercial license agreement by both parties. Under the BlueRock Agreement, the specific financial terms for milestone payments and royalties will be negotiated and agreed to only after the option is exercised. As of September 30, 2024, Bayer has not exercised its option for a license.

Bayer held 13% of the outstanding shares of the Company’s common stock as of September 30, 2024 and December 31, 2023. Accordingly, Bayer is considered a related party.

Seer, Inc.

In January 2023, the Company acquired lab automation equipment purchased from Seer, Inc. (“Seer”) (NASDAQ: SEER). Omid Farokhzad, a member of the Company’s board of directors is the Chief Executive Officer of Seer. The consideration of $0.2 million, plus interest, will be paid over a two-year period, and title will transfer to the Company upon final payment. The transaction was classified as a finance lease in accordance with ASC 842.

GeneFab, LLC.

As a result of the transaction with GeneFab (refer to Note 3. GeneFab Transaction), whereby Philip Lee, Ph.D., the former Co-Founder and Chief Technology Officer of the Company, assumed the role of Chief Executive Officer of GeneFab, GeneFab is a related party. In connection with the disposal of the business, the Company received the GeneFab Note Receivable and the GeneFab Economic Share and provided GeneFab with the GeneFab Option. Refer to Note 4. Fair Value Measurements.

On June 12, 2024, the Company entered into a sublease agreement with GeneFab for a portion of the Company’s corporate headquarters in South San Francisco. The Company has also subleased its manufacturing facility in Alameda to GeneFab and recorded total sublease income of $4.7 million including variable costs charged for the nine months ended September 30, 2024.

In connection with the services agreement entered into with GeneFab on August 7, 2023, the Company was entitled to $18.9 million for future services under the agreement, of which $3.9 million remained in GeneFab prepaid expenses - related party as of September 30, 2024. Additionally, amounts due from GeneFab related to costs incurred by Senti on its behalf were $0.9 million as of September 30, 2024 and were recorded in GeneFab receivable - related party on the condensed consolidated balance sheets. The Company incurred $3.8 million and $11.1 million

of research and development expenses under the services agreement during the three and nine months ended September 30, 2024.