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Item 7. Management’s Discussion and Analysis

2023-03-24 compared with 2022-03-29 · 95 added, 97 removed, 288 unchanged (40% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction 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,” “Humacyte,” “we,” “us,” “our” and similar terms refer to Humacyte, Inc.

(formerly known as Alpha Healthcare Acquisition Corp.) and its consolidated subsidiaries (including Humacyte Global, Inc.) following the Company’s merger with Alpha Healthcare Acquisition Corp (the “Merger”);

(formerly known as Alpha Healthcare Acquisition Corp.) and its consolidated subsidiaries (including Humacyte Global, Inc.) following the Merger (defined below);

references to “Legacy Humacyte” refer to Humacyte, Inc.

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In addition to historical information, some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, future financial performance, expense levels and liquidity sources, includes forward-looking statements that involve risks and uncertainties.

You should read the sections of this Annual Report on Form 10-K entitled “Forward-Looking Statements” and “Risk Factors” for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

We are pioneering the development and manufacture of off-the-shelf, universally implantable, bioengineered human tissues with the goal of improving the lives of patients and transforming the practice of medicine.

We believe our technology has the potential to overcome limitations in existing standards of care and address the lack of significant innovation in products that support tissue repair, reconstruction and replacement.

We are leveraging our novel, scalable technology platform to develop proprietary, bioengineered, acellular human tissues for use in the treatment of diseases and conditions across a range of anatomic locations in multiple therapeutic areas.

We are initially using our proprietary, scientific technology platform to engineer and manufacture Human Acellular Vessels (“HAVs”).

You should read the sections of this Annual Report on Form 10-K titled “Forward-Looking Statements” and “Risk Factors” for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

We are pioneering the development and manufacture of off-the-shelf, universally implantable, bioengineered human tissues, advanced tissue constructs and organ systems with the goal of improving the lives of patients and transforming the practice of medicine.

We believe our regenerative medicine technology has the potential to overcome limitations in existing standards of care and address the lack of significant innovation in products that support tissue repair, reconstruction and replacement.

We are leveraging our novel, scalable technology platform to develop proprietary product candidates for use in the treatment of diseases and conditions across a range of anatomic locations in multiple therapeutic areas.

We are initially using our proprietary, scientific technology platform to engineer and manufacture HAVs.

Our investigational HAVs are designed to be easily implanted into any patient without inducing a foreign body response or leading to immune rejection.

We are developing a portfolio, or “cabinet”, of HAVs with varying diameters and lengths.

The HAV cabinet would initially target the vascular repair, reconstruction and replacement market, including vascular trauma;

The HAV cabinet would initially target the vascular repair, reconstruction and replacement market, including use in vascular trauma;

AV access for hemodialysis;

In addition, we are developing our HAVs for pediatric heart surgery and the delivery of cellular therapies, including pancreatic islet cell transplantation to treat Type 1 diabetes.

In addition, we are developing our HAVs for pediatric heart surgery and the delivery of cellular therapies, including pancreatic islet cell transplantation to treat Type 1 diabetes (our biovascular pancreas).

We will continue to explore the application of our technology across a broad range of markets and indications, including the development of urinary conduit, trachea, esophagus and other novel cell delivery systems.

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Given the competitive advantages our HAVs are designed to have over existing vascular substitutes, we believe that HAVs have the potential to become the standard of care and lead to improved patient outcomes and lower healthcare costs.

We have generated no product revenue and incurred net losses and negative cash flows from operations in each year since our inception in 2004.

We are currently conducting Phase 2 and Phase 3 trials of our 6 millimeter HAV across two therapeutic indications, vascular trauma and AV access for hemodialysis, as well as continuing long-term follow up of patients in our Phase 2 PAD studies.

We were granted Fast Track designation by the FDA for our 6 millimeter HAV for use in AV access for hemodialysis in 2014.

We also received the first RMAT designation from the FDA, for the creation of vascular access for performing hemodialysis, in March 2017.

In addition, in 2018 our HAV product candidate was assigned a priority designation by the Secretary of Defense under Public Law 115-92, enacted to expedite the FDA’s review of products that are intended to diagnose, treat or prevent serious or life-threatening conditions facing American military personnel.

Upon completion of our Phase 3 trials, we intend to submit a BLA to the FDA for an indication in vascular trauma.

We have generated no product revenue and incurred operating losses and negative cash flows from operations in each year since our inception in 2004.

As of December 31, 2022 and 2021, we had an accumulated deficit of $426.5 million and $414.6 million, respectively, and working capital of $134.6 million and $218.3 million, respectively.

Our net losses were approximately $26.5 million and $66.5 million for the years ended December 31, 2021 and 2020, respectively.

Our operating losses were approximately $84.6 million and $81.2 million for the years ended December 31, 2022 and 2021, respectively.

Net cash flows used in operating activities were $71.1 million and $81.2 million during the years ended December 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.

Substantially all of our operating 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 incur substantial operating losses and negative cash flows from operations for the foreseeable future as we advance our product candidates.

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Our ability to generate product revenue will depend on the successful development and eventual commercialization of one or more of our product candidates.

Until such time, if ever, we expect to finance our operations through the use of existing cash and cash equivalents and short-term investments, sale of equity or debt, borrowings under credit facilities, or through potential collaborations, other strategic transactions or government and other grants.

Until such time, if ever, we expect to finance our operations through the use of existing cash and cash equivalents and short-term investments, the sale of equity or debt, borrowings under credit facilities, or through potential collaborations, other strategic transactions or government and other grants.

Adequate capital may not be available to us when needed or on acceptable terms.

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• add operational, financial and management information systems and personnel to support, among other things, our product development and commercialization efforts and operations;

• operate as a public company, which includes higher costs associated with hiring additional personnel, director and officer insurance premiums, audit and legal fees, investor relations fees and expenses for compliance with public company reporting requirements under the Exchange Act and rules implemented by the SEC and The Nasdaq Stock Market LLC (“Nasdaq”).

Recent Developments

Closing of Merger

• continue operating as a public company, which includes higher costs associated with hiring additional personnel, director and officer insurance premiums, audit and legal fees, expenses for compliance with public company reporting requirements under the Exchange Act and rules implemented by the SEC and The Nasdaq Stock Market LLC (“Nasdaq”).

On August 26, 2021 (the “Closing Date”), Legacy Humacyte and AHAC consummated a merger pursuant to that certain Business Combination Agreement, dated as of February 17, 2021 (the “Merger Agreement”), by and among Legacy Humacyte, AHAC and Hunter Merger Sub, Inc.

(“Merger Sub”).

(“Merger Sub”), a Delaware corporation and wholly owned subsidiary of AHAC.

As contemplated by the Merger Agreement, Merger Sub merged with and into Legacy Humacyte, with Legacy Humacyte continuing as the surviving corporation and as a wholly owned subsidiary of AHAC (the “Merger”).

As a result of the Merger, AHAC was renamed Humacyte, Inc.

and Legacy Humacyte was renamed Humacyte Global, Inc.

On the Closing Date, AHAC changed its name to Humacyte, Inc.

and Legacy Humacyte changed its name to Humacyte Global, Inc.

Operations prior to the Merger included in this Annual Report on Form 10-K are those of Legacy Humacyte.

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Additionally, at the Closing, 2,500,000 shares of AHAC’s Class B common stock (“Founder Shares”) automatically converted into shares of Common Stock on a one-for-one basis.

Pursuant to the terms of the Merger Agreement, at the Effective Time of the Merger, (1) warrants to purchase shares of Legacy Humacyte common stock were converted into warrants to purchase an aggregate of 287,704 shares of Common Stock, and (2) options to purchase shares of Legacy Humacyte common stock were converted into options to purchase an aggregate of 6,405,138 shares of Common Stock.

Following the Closing Date, former holders of Legacy Humacyte common stock and Legacy Humacyte preferred stock may receive up to 15,000,000 additional shares of Common Stock (“Contingent Earnout Shares”) in the aggregate in two equal tranches if the volume-weighted average closing sale price of our Common Stock is greater than or equal to $15.00 and $20.00 , respectively, for any 20 trading days within any 30 consecutive trading day period.

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Impact of COVID-19

The COVID-19 pandemic, which began in December 2019 and has spread worldwide, has caused many governments to implement measures to slow the spread of the outbreak, including shelter-in-place orders and the mandatory shutdown of certain businesses.

The outbreak and government measures taken in response have had a significant impact, both direct and indirect, on our business, as supply chains have been disrupted, and facilities and production have been suspended.

The future progression of the COVID-19 pandemic, including any existing or potential variants of the virus which causes COVID-19, and its effects on our business and operations are uncertain.

The COVID-19 pandemic may affect our ability to initiate and complete preclinical studies, delay our clinical trials or future clinical trials, disrupt regulatory activities, or have other adverse effects on our business and operations.

The pandemic has already caused significant disruptions in the financial markets, and may continue to cause such disruptions, which could impact our ability to raise additional funds to support our operations.

Moreover, the pandemic has significantly impacted economies worldwide and could result in adverse effects on our business and operations.

The COVID-19 outbreak and government measures taken in response have had a significant impact, both direct and indirect, on our business, as supply chains have been disrupted and enrollment in clinical trials has been delayed.

To date, the COVID-19 pandemic has not resulted in material financial impacts or impairment losses in the carrying values of our assets and we are not aware of any specific related event or circumstance that would require us to revise the estimates reflected in our financial statements.

The extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition, including current and future clinical trials and research and development costs, will depend on future developments that are highly uncertain, including as a result of new

information that may emerge concerning COVID-19, the actions taken to contain or treat it, and the duration and intensity of the related economic impact of the COVID-19 pandemic.

The extent to which the ongoing effects of the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition, including current and future clinical trials and research and development costs and timelines, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19, the emergence of new virus variants, and the duration and intensity of the related economic impact of the COVID-19 pandemic.

Components of Results of Operations

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• depreciation of leasehold improvements, laboratory equipment and computers;

• costs related to purchasing raw materials for and producing our product candidates for clinical trials;

• costs related to purchasing raw materials and producing our product candidates for clinical trials;

• costs related to compliance with regulatory requirements;

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• license fees related to in-licensed technologies.

The majority of our research and development resources are currently focused on our Phase III clinical trials for our 6 millimeter HAV and other work needed to obtain marketing approval for our 6 millimeter HAV for use for vascular repair, reconstruction and replacement, including vascular trauma and AV access in hemodialysis in the United States and Europe.

We have incurred and expect to continue to incur significant expenses in connection with these and our other clinical development efforts, including expenses related to regulatory filings, trial enrollment and conduct, data analysis, patient follow up and study report generation for our Phase II and Phase III clinical trials.

The majority of our research and development resources are currently focused on our Phase 2 and 3 clinical trials for our 6 millimeter HAV and other work needed to obtain marketing approval for our 6 millimeter HAV for use for vascular repair, reconstruction and replacement, including vascular trauma and AV access in hemodialysis in the United States.

We do not allocate all of our costs by each research and development program for which we are developing our cabinet of HAVs, as a significant amount of our development activities broadly support multiple programs that use our technology platform.

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Other significant general and administrative expenses include facilities costs, professional fees for accounting and legal services and expenses associated with obtaining and maintaining patents.

We expect our general and administrative expenses will increase for the foreseeable future to support our expanded infrastructure and increased costs of operating as a public company.

These increases are expected to include increased employee-related expenses and increased director and officer insurance premiums, audit and legal fees, investor relations fees and expenses for compliance with public company reporting requirements under the Exchange Act and rules implemented by the SEC, as well as Nasdaq rules.

Other Income (Expenses), Net

Total other income (expenses), net consists of (i) 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, (ii) a gain on Paycheck Protection Program (“PPP”) loan forgiveness, (iii) a change in fair value of private placement common stock warrant liabilities related to the Private Placement Warrants, which we assumed in connection with the Merger, and which are subject to remeasurement to fair value at each balance sheet date resulting in a non-cash gain or loss, (iv) interest income earned on our cash and cash equivalents and short-term investments, (v) interest expense incurred on the Loan Agreement, finance leases, and our PPP loan during the periods each were outstanding, and (vi) legal, accounting, and investment banking fees and other costs directly related to the consummation of the Merger that were associated with the aforementioned warrant liabilities.

See Note 8 to our accompanying consolidated financial statements contained in Part II, Item 8 of this Annual Report on Form 10-K for a description of the leases.

We expect our general and administrative expenses will continue to increase for the foreseeable future to support our expanded infrastructure and increased costs of operating as a public company and as we prepare for our anticipated commercial launch of the HAV.

These increases are expected to include increased employee-related expenses, increased sales and marketing expenses, and increased director and officer insurance premiums, audit and legal fees, and expenses for compliance with public company reporting requirements under the Exchange Act and rules implemented by the SEC, as well as Nasdaq rules.

Other Income (Expense), Net

Total other income (expense), net consists of (i) 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, (ii) interest income earned on our cash and cash equivalents and short-term investments, (iii) interest expense incurred on our Loan Agreement, finance leases, and our PPP loan during the periods each were outstanding, (iv) a change in fair value of private placement common stock warrant liabilities related to the Private Placement Warrants, which we assumed in connection with the Merger, and which are subject to remeasurement to fair value at each balance sheet date resulting in a non-cash gain or loss, (v) a non-cash gain on PPP loan forgiveness during the year ended December 31, 2021, and (vi) during the year ended December 31, 2021, legal, accounting, and underwriting fees and other costs directly related to the consummation of the Merger that were associated with the aforementioned warrant liabilities.

Results of Operations

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($ in thousands) 2022 2021 $

Revenue $ 1,263 $ 1,491 $ (228) (15) %

Grant revenue $ 1,565 $ 1,263 $ 302 24 %

Operating expenses:

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(84,578) (81,208) (3,370) 4 %

Other income (expenses), net:

Other income (expense), net:

Interest income 2,629 16 2,613 *

Change in fair value of Contingent Earnout Liability 75,767 55,772 19,995 36 %

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Other income, net 417 7 410 *

Total other income (expenses), net

Total other income, net

72,613 54,731 17,882 33 %

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Grant Revenue

For the years ended December 31, 2021 and 2020, we generated $1.3 million and $1.5 million of revenue, respectively, related to the reimbursement of qualifying expenses incurred in connection with our grants from DoD and NIH.

The decrease in revenue of $0.2 million, or 15%, was primarily driven by $0.3 million of revenue recognized during 2020 related to our grant from NIH before the program ended in 2020, partially offset by $0.1 million related to the timing of reimbursement of certain allowable costs related to our grant from DoD in 2021 as compared to 2020.

For the years ended December 31, 2022 and 2021, revenue was approximately $1.6 million and $1.3 million, respectively, and related to the reimbursement of qualifying expenses incurred in connection with our grant from DoD.

The increase in revenue of $0.3 million, or 24%, relates to the timing of reimbursement of certain allowable costs related to our grant from DoD, which totaled approximately $6.8 million over the life of the grant before this program ended in November 2022.

Research and Development Expenses

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$ 15,583 $ 15,786 $ (203) (1) %

Materials and supplies

11,210 10,901 309 3 %

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Research and development expenses increased from $61.3 million for the year ended December 31, 2021 to $63.3 million for the year ended December 31, 2022.

The increase of $7.3 million, or 13%, was primarily driven by a $5.3 million increase in payroll and personnel expenses to support our expanding research and development initiatives, including a $3.2 million increase in salaries and benefits and a $2.1 million increase in non-cash stock compensation expense.

Other components of the current-year increase included a $1.1 million increase in external services and a $1.1 million increase in the purchase of lab supplies to be used in the development of our commercial-scale manufacturing process and other research and development initiatives, including the support of clinical studies.

The increase of $1.9 million, or 3%, was primarily driven by expenses incurred to support our expanded research and development initiatives, including a $1.4 million increase in other research and development expenses driven by expanded preclinical studies of our earlier-stage pipeline programs combined with smaller increases in supplies and personnel.

General and Administrative Expenses

General and administrative expenses were $22.9 million and $21.1 million for the years ended December 31, 2022 and 2021, respectively.

The increase in general and administrative expenses during this period of $9.1 million, or 76%, was driven by (i) increases in non-cash stock compensation expense of $3.4 million primarily related to stock option grants associated with the appointment of our Chief Executive Officer in November 2020 and our Chief Financial Officer in May

2021, (ii) professional fees of $2.2 million related to the completion of the PIPE Financing and the Merger, (iii) $1.3 million in salaries and benefits and $0.7 million in recruiting costs primarily due to headcount added during 2021 and (iv) $0.6 million in insurance costs driven by the purchase of directors and officers insurance in 2021 related to the transition to being a public company.

Total Other Income (Expenses)

Total other income (expenses) was $54.7 million and $(1.9) million for the years ended December 31, 2021 and 2020, respectively.

The increase of $56.7 million in income resulted from a $55.8 million non-cash gain related to the remeasurement of the contingent earnout liability as of December 31, 2021 and a $3.3 million gain on PPP loan forgiveness, partially offset by a $2.1 million increase in interest expense related to our loan facility with Silicon Valley Bank which commenced in March 2021.

The increase in general and administrative expenses during this period of $1.8 million, or 8%, was

primarily driven by expenses associated with the transition to public company status and company growth, including (i) a $1.2 million increase in salaries and benefits and recruiting costs primarily due to higher headcount, including the initial members of the planned commercial launch team, (ii) a $1.1 million increase in external services, (iii) a $0.6 million increase in insurance costs, (iv) a $0.6 million increase in other general and administrative expenses, including software costs, travel and expenses related to our board of directors, partially offset by a $1.8 million decrease in non-cash stock compensation expense primarily due to higher costs in 2021 resulting from restructuring of the management team to accommodate the transition to being a public company.

Total Other Income, net

Total other income, net was $72.6 million and $54.7 million for the years ended December 31, 2022 and 2021, respectively.

The increase of $17.9 million in income primarily resulted from (i) a $20.0 million increase in the non-cash gain related to the remeasurement of the Contingent Earnout Liability during the year ended December 31, 2022 compared to the year ended December 31, 2021, (ii) a $2.6 million increase in interest income, and (iii) a $0.4 million increase in the non-cash gain related to the remeasurement of our private placement warrant liability, partially offset by (i) a $3.3 million gain on PPP loan forgiveness we recognized during the year ended December 31, 2021 and (ii) a $1.9 million increase in interest expense primarily related to our loan facility with Silicon Valley Bank, which commenced in March 2021.

Liquidity and Capital Resources

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We believe that our longer-term working capital, planned research and development, capital expenditures and other general corporate funding requirements will be satisfied through the sale of equity, debt, borrowings under credit facilities or through potential collaborations with other companies, other strategic transactions or government or other grants.

Our liquidity plans are subject to a number of risks and uncertainties, including those described in the sections entitled “Forward-Looking Statements” and “Risk Factors.”

Our liquidity plans are subject to a number of risks and uncertainties, including those described in the sections of this Annual Report on Form 10-K titled “Forward-Looking Statements” and “Risk Factors.”

As of December 31, 2022 and 2021, we had working capital of $134.6 million and $218.3 million, respectively.

As of December 31, 2021, we have $30.0 million outstanding principal and $20.0 million of contingent borrowing capacity under our Loan Agreement as defined below.

As of December 31, 2022, we had $30.0 million outstanding principal and $20.0 million of contingent borrowing capacity under our Loan Agreement (as defined below).

We do not currently have any committed external source of funds beyond the Loan Agreement.

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(1) the purchase of supplies and services that are primarily for research and development;

(2) debt repayments (for additional information, see below and Note 7 to our accompanying consolidated financial statements contained in Part II, Item 8 of this Annual Report on Form 10-K);

(2) debt repayments (for additional information, see below and Note 7 to our consolidated financial statements contained in Part II, Item 8 of this Annual Report on Form 10-K);

(3) employee wages, benefits, and incentives;

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These contracts generally provide for termination upon limited notice, and therefore we believe that our non-cancellable obligations under these agreements are not material.

Moreover, we may be subject to additional material cash requirements that are contingent upon the occurrence of certain events, e.g., legal contingencies, uncertain tax positions, and other matters.

Moreover, we may be subject to additional material cash requirements that are contingent upon the occurrence of certain events, for example, legal contingencies, uncertain tax positions, and other matters.

As of December 31, 2022, we had non-cancellable purchase com mitments of $32.0 million for supplies and services that are primarily for research and development.

We have entered into license agreements with Duke University and Yale University and have a distribution agreement with Fresenius Medical Care Holdings, Inc.

The amount and timing of any potential milestone payments, license fee payments, royalties and other payments that we may be required to make under these agreements are unknown or uncertain at December 31, 2021.

For additional information regarding these agreements and the nature of payments that could become due thereunder, see “Business — Distribution” and “Business — Intellectual Property,” included elsewhere in this Annual Report on Form 10-K.

In April 2020, we received loan proceeds in the amount of approximately $3.3 million under the PPP established under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).

The loan and accrued interest were forgivable after a 24-week period as long as we used the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintained its payroll levels.

On May 25, 2021, the Small Business Administration approved the forgiveness of the outstanding amount of the PPP loan and we recognized a gain from loan extinguishment in the amount of $3.3 million during the year ended December 31, 2021.

We have existing license agreements with Duke University and Yale University and have a distribution agreement with Fresenius Medical Care.

The amount and timing of any potential milestone payments, license fee payments, royalties and other payments that we may be required to make under these

agreements are unknown or uncertain at December 31, 2022.

For additional information regarding these agreements and the nature of payments that could become due thereunder, see the sections in this Annual Report on Form 10-K titled “Business — Distribution” and “Business — Intellectual Property.”

In March 2021, we entered into the Loan Agreement with Silicon Valley Bank and SVB Innovation Credit Fund VIII, L.P., as amended in June and September 2021, which provides a term loan facility of up to $50.0 million, with a maturity date of March 1, 2025.

The initial term loan tranche of $20.0 million was funded upon the closing of the Loan Agreement, and on October 13, 2021, we borrowed an additional $10.0 million under the Loan Agreement.

The additional $20.0 million becomes accessible in two tranches of $10.0 million each contingent on the achievement of certain business and clinical development milestones.

The additional $20.0 million becomes accessible in two tranches of $10.0 million each contingent on the achievement of certain business and clinical development milestones, although we currently do not expect to make any additional borrowings under the Loan Agreement.

As a result of the additional borrowing in October 2021, the commencement of repayment of principal was deferred until no earlier than July 2023 and potentially later if the remaining tranches are drawn.

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We may use the proceeds of borrowings under the Loan Agreement as working capital and to fund our general business requirements.

Borrowings under the Loan Agreement bear interest at a rate of 7.5% or the sum of the Wall Street Journal Prime Rate plus 4.25%, whichever is greater.

Borrowings under the Loan Agreement bear interest at a rate of 7.5% or the sum of the Wall Street Journal Prime Rate plus 4.25%, whichever is greater (11.75% as of December 31, 2022).

In addition, the lenders were granted warrants to purchase common stock.

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Additionally, we are obligated to pay to the lenders a final payment fee of $1.5 million upon the maturity of the loan.

Our contractual obligations under the Loan Agreement as of December 31, 2021, include no cash payments related to principal within one year, $27.1 million within one to three years, and $2.9 million within three to five years.

Our contractual obligations under the Loan Agreement as of December 31, 2022, include $8.6 million in cash payments related to principal within one year and $21.4 million within one to three years.

In April 2020, we received loan proceeds in the amount of approximately $3.3 million under the PPP established under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).

Our finance lease relates to our headquarters facility containing our manufacturing, research and development and general and administrative functions, which was substantially completed in June 2018 and leased through May 2033, and our operating lease relates to the land lease associated with our headquarters.

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994 105 210 210 469

On September 1, 2022, we entered into an agreement for the sale from time to time up to $80.0 million of shares of Common Stock pursuant to a sales agreement (the “ATM Facility”).

As of December 31, 2022, we have not conducted any sales of Common Stock under the ATM Facility.

Future Funding Requirements

We expect to incur significant expenses in connection with our ongoing activities as we seek to (i) continue clinical development of our 6 millimeter HAV for use in vascular trauma and dialysis AV access and submit biologics license applications for FDA approval, (ii) if marketing approval is obtained, to launch and commercialize our HAVs for dialysis AV access and vascular repair in the U.S.

market, including subsequent launches in key international markets, (iii) advance our pipeline in major markets, including PAD Phase III trials and continue preclinical development and advance to planned clinical studies in CABG and biovascular pancreas for diabetes, and (iv) scale out our manufacturing facility as required to satisfy potential demand if our HAVs receive marketing approval.

We expect to incur significant expenses in connection with our ongoing activities as we seek to (i) continue clinical development of our 6 millimeter HAV for use in vascular trauma and hemodialysis AV access and submit biologics license applications for FDA approval, (ii) if marketing approval is obtained, to launch and commercialize our HAVs for hemodialysis AV access and vascular repair in the U.S.

market, including subsequent launches in key international markets, (iii) advance our pipeline in major markets, including PAD Phase 3 trials and continue preclinical development and advance to planned clinical studies in CABG and biovascular pancreas for diabetes, and (iv) scale out our manufacturing facility as required to satisfy potential demand if our HAVs receive marketing approval.

We will need additional funding in connection with these activities.

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• the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending any intellectual property-related claims;

• the costs of operating as a public company, including hiring additional personnel as well as increased director and officer insurance premiums, audit and legal fees, investor relations fees and expenses for compliance with public company reporting requirements under the Exchange Act and rules implemented by the SEC and Nasdaq.

• the costs of operating as a public company, including hiring additional personnel as well as increased director and officer insurance premiums, audit and legal fees, and expenses for compliance with public company reporting requirements under the Exchange Act and rules implemented by the SEC and Nasdaq.

Until such time, if ever, as we are able to successfully develop and commercialize one or more of our product candidates, we expect to continue financing our operations through the sale of equity, debt, borrowings under credit facilities or through potential collaborations with other companies, other strategic transactions or government or other grants.

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If we are unable to raise capital, we could be forced to delay, reduce, suspend or cease our research and development programs or any future commercialization efforts, which would have a negative impact on our business, prospects, operating results and financial condition.

Humacyte’s principal use of cash in recent periods has been primarily to fund its operations, including the clinical and preclinical development of its product candidates.

Humacyte’s future capital requirements, both short-term and long-term, will depend on many factors, including the progress and results of our clinical trials and preclinical development, timing and extent of spending to support development efforts, cost and timing of future commercialization activities, and the amount and timing of revenues, if any, that we receive from commercial sales.

Our principal use of cash in recent periods has been primarily to fund our operations, including the clinical and preclinical development of our product candidates.

Our future capital requirements, both short-term and long-term, will depend on many factors, including the progress and results of our clinical trials and preclinical development, timing and extent of spending to support development efforts, cost and timing of future commercialization activities, and the amount and timing of revenues, if any, that we receive from commercial sales.

See “Risk Factors” for additional risks associated with our substantial capital requirements.

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Changes in operating assets and liabilities:

(557) (2,369)

Net cash used in operating activities (71,129) (81,190)

Net cash used in investing activities (8,220) (268)

Net cash provided by financing activities 266,983 2,052

Net increase (decrease) in cash and cash equivalents $ 177,573 $ (53,784)

Net cash provided by (used in) investing activities 4,845 (8,220)

Net cash (used in) provided by financing activities (1,446) 266,983

Net (decrease) increase in cash and cash equivalents $ (67,730) $ 177,573

Cash and cash equivalents at the beginning of the period $ 217,502 $ 39,929

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___________________________

(1) Includes depreciation, amortization related to our leases and our debt discount, stock-based compensation expense, and in 2021 includes the change in fair value of our contingent earnout liability and our common stock warrant liabilities and a gain on PPP loan forgiveness.

(1) Includes depreciation, amortization related to our leases and our debt discount, stock-based compensation expense, the change in fair value of our Contingent Earnout Liability and our common stock warrant liabilities, and in 2021 includes a gain on PPP loan forgiveness.

Cash Flow from Operating Activities

The increase in net cash used in operating activities from 2020 to 2021 was primarily due to $14.5 million in payments of liabilities acquired in the Merger as well as increased payroll and personnel expenses and spending on pre-clinical, clinical and pre-commercial activities.

The decrease in net cash used in operating activities from 2021 to 2022 was primarily due to $14.5 million in payments of liabilities acquired in the Merger during the year ended December 31, 2021, partially offset by increased spending on pre-clinical, clinical and pre-commercial activities as well as payroll and personnel expenses.

Cash Flow from Investing Activities

The increase in net cash used in investing activities from 2020 to 2021 was primarily due to our $8.0 million investment in certificates of deposit classified as short-term investments on our consolidated balance sheet.

The increase in net cash provided by investing activities from 2021 to 2022 was primarily due to a net cash inflow of $5.9 million related to investments in certificates of deposit classified as short-term investments on our consolidated balance sheets.

Cash Flow from Financing Activities

The increase in net cash provided by financing activities was primarily due to $242.4 million of proceeds in connection with the Merger, including proceeds from the trust account that we obtained in connection with the closing of the Merger, as well as from the PIPE Financing.

We also received $29.7 million of net proceeds in connection with draws under our loan facility with Silicon Valley Bank.

The decrease in net cash provided by financing activities for the year ended 2022 was primarily due to $242.4 million of proceeds received in August 2021 in connection with the Merger, including proceeds from the trust account that we obtained in connection with the closing of the Merger, as well as from the PIPE Financing, along with $29.7 million of net proceeds in connection with draws under our loan facility with Silicon Valley Bank in March 2021.

Off-Balance Sheet Arrangements

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Critical Accounting Estimates

Our consolidated financial statements are prepared in accordance with U.S.

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.

The preparation of our consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and disclosure of contingent liabilities.

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Although we believe that our estimates, assumptions, and judgments are reasonable, they are based upon information presently available.

Actual results may differ significantly from these estimates under different assumptions, judgments, or conditions.

Actual results may differ significantly from these estimates based on different assumptions, judgments, or conditions.

An accounting estimate or assumption is considered critical if both (a) the nature of the estimate or assumption involves a significant level of estimation uncertainty, and (b) the impact within a reasonable range of outcomes of the estimate and assumption is material to our financial condition.

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In connection with the Reverse Recapitalization, Legacy Humacyte equity holders are entitled to receive as additional merger consideration of up to 15,000,000 shares of our common stock in the aggregate, in two equal tranches of 7,500,000 shares of common stock per tranche, for no consideration upon the occurrence of certain triggering events, including a change of control event that is not solely indexed to the common stock.

In accordance with ASC 815-40, as 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 (expense) income, net in the consolidated statements of operations and comprehensive loss.

In accordance with ASC 815-40, as 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 on a monthly basis over a 10-year period prioritizing the most reliable information available.

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.

See Note 9 to our accompanying consolidated financial statements contained in Part II, Item 8 of this Annual Report on Form 10-K for further information regarding the assumptions used in the valuation at the Closing Date and December 31, 2021.

The Contingent Earnout Shares are categorized as a Level 3 fair value measurement (see “Fair Value of Financial Instruments” accounting policy described in Note 2 to our financial statements contained elsewhere in this Annual Report on Form 10-K) because we estimated projections over a ten-year period utilizing unobservable inputs.

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The determination of the grant date fair value of options using an option pricing model is affected principally by our estimated fair value of shares of our common stock and requires management to make a number of other assumptions, including the expected term of the option, the volatility of the underlying shares, the risk-free interest rate and expected dividends.

The assumptions used in our Black-Scholes option-pricing model represent management’s good faith estimates

at the time of measurement.

The assumptions used in our Black-Scholes option-pricing model represent management’s good faith estimates at the time of measurement.

These estimates are complex, involve a number of variables, uncertainties and assumptions and the application of management’s judgment, as they are inherently subjective.

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• Fair Value of Common Stock .

As our common stock was not publicly traded prior to the Merger, the fair value of the shares of our common stock underlying the options has historically been determined by our board of directors with input from management, after considering independent third-party valuation reports.

Subsequent to the Merger, the fair value of our Common Stock has been determined based on the closing price of the shares on Nasdaq.

Prior to the Merger, as our common stock was not publicly traded, the fair value of the shares of our common stock underlying the options was determined by our board of directors with input from management, after considering independent third-party valuation reports.

See “—Fair Value of Common Stock” and “—Common Stock Valuation Methodology.”

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• Expected Volatility .

The expected volatility was based on the historical share volatility of several publicly traded peer companies over a period of time equal to the expected term of the options, as we have limited trading history to use to determine the volatility of our common stock.

The expected volatility was determined based on a blended approach using the historical share volatility of our Common Stock and that of several publicly traded peer companies over a period of time equal to the expected term of the options, as we have limited trading history.

For purposes of identifying these peer companies, we considered the industry, stage of development, size and financial leverage of potential comparable companies.

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Accordingly, we have estimated the dividend yield to be zero.

Fair Value of Common Stock

Fair Value of Common Stock Post-Merger

Following the closing of the Merger, the fair value of our Common Stock is determined based on the closing price of our Common Stock on Nasdaq on the date stock options or other awards are granted under the 2021 Plan.

Fair Value of Common Stock Pre-Merger

Historically, for all periods prior to the Merger, the fair values of the shares of common stock underlying our options were determined on each grant date by our board of directors with input from management.

In order to determine the fair value, our board of directors considered, among other things, contemporaneous valuations of our common stock and preferred stock prepared by an unrelated third-party valuation firm in accordance with the guidance provided by the American Institute of Certified Public Accountants 2013 Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation (the “Practice Aid”).

Given the absence of a public trading market of our capital stock, the assumptions used to determine the estimated fair value of our common stock are based on a number of objective and subjective factors, including:

Securities Issued as Compensation (the “Practice Aid”).

Given the absence of a public trading market of our capital stock, the assumptions used to determine the estimated fair value of our common stock were based on a number of objective and subjective factors, including:

• our stage of development and business strategy;

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The probability-weighted expected return method (“PWERM”) is a scenario-based analysis that estimates value per share based on the probability-weighted present value of expected future investment returns, assuming various outcomes, as well as the economic and control rights of each share class.

Based on our early stage of development, we determined that the PWERM method, incorporating the OPM as one of several scenarios, was the most appropriate method for allocating our enterprise value to determine the estimated fair value of our common stock for valuations performed as of November 13, 2020 and October 23, 2019, which resulted in common stock valuations of $10.28 and $8.48 per share, respectively.

Based on our early stage of development, we determined that the PWERM method, incorporating the OPM as one of several scenarios, was the most appropriate method for allocating our enterprise value to determine the estimated fair value of Legacy Humacyte common stock for valuations performed as of November 13, 2020 and October 23, 2019, which resulted in common stock valuations of $10.28 and $8.48 per share, respectively.

In January, February, March and June 2021, stock options were granted at fair market value with an exercise price of $10.28, consistent with the fair market value determined two months earlier in November 2020.

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We also utilized the PWERM method for our valuation as of June 25, 2018, which resulted in a common stock valuation of $8.48 per share.

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.

In determining the estimated fair value of Legacy Humacyte 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.

The estimated fair value of our common stock at each grant date reflected a non-marketability discount partially based on the anticipated likelihood and timing of a future liquidity event.

Following the closing of the Merger, the fair value of our common stock is determined based on the closing price of our common stock on the primary stock exchange on which our common stock is traded on the date stock options or other awards are granted under the 2021 Plan.

Income taxes are computed using the asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements.

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Our policy is to recognize interest and penalties related to uncertain tax positions in the provision for income taxes, if any.

As of December

31, 2021 and 2020, we had no accrued interest or penalties related to uncertain tax positions, and no amounts had been recognized in our statements of operations and comprehensive loss.

As of December 31, 2022 and 2021, we had no accrued interest or penalties related to uncertain tax positions, and no amounts had been recognized in our statements of operations and comprehensive loss.

Emerging Growth Company and Smaller Reporting Company Status

The Company is an “emerging growth company” as defined in the Jumpstart our Business Startups Act of 2012 (the “JOBS Act”), and may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies until it is no longer an emerging growth company.

We are an “emerging growth company” as defined in the Jumpstart our Business Startups Act of 2012 (the “JOBS Act”), and may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies until it is no longer an emerging growth company.

Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards.

We expect to use the extended transition period and, therefore, while the Company is an emerging growth company it will not be subject to new or revised accounting standards at the same time that they become applicable to other public companies that are not emerging growth companies, unless it chooses to early adopt a new or revised accounting standard.

This may make it difficult or impossible to compare the Company’s financial results with the financial results of another public company because of the potential differences in accounting standards used.

Additionally, the Company is a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K under the Exchange Act (“Regulation S-K”).

We expect to use the extended transition period and, therefore, while we are an emerging growth company we will not be subject to new or revised accounting standards at the same time that they become applicable to other public companies that are not emerging growth companies, unless we choose to early adopt a new or revised accounting standard.

This may make it difficult or impossible to compare our financial results with the financial results of another public company because of the potential differences in accounting standards used.

Additionally, we are a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K under the Exchange Act (“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.

The Company will remain a smaller reporting company if (1) the market value of Common Stock held by non-affiliates is less than $250 million as of the last business day of the second fiscal quarter, or (2) the Company’s annual revenues in its most recent fiscal year completed before the last business day of its second fiscal quarter are less than $100 million and the market value of Common Stock held by non-affiliates is less than $700 million as of the last business day of the second fiscal quarter.

Quantitative and Qualitative Disclosure about Market Risk

We will remain a smaller reporting company if (1) the market value of 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 its second fiscal quarter are less than $100 million and the market value of Common Stock held by non-affiliates is less than $700 million as of the last business day of the second fiscal quarter.

Quantitative and Qualitative Disclosures About Market Risk

We qualify as a smaller reporting company, as defined by Item 10 of Regulation S-K and, thus, are not required to provide the information required by this Item.

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What changed 10-K

Item 7. Management’s Discussion and Analysis