Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 Merger (defined below); references to “Legacy Humacyte” refer to Humacyte, Inc. prior to the Merger; and references to “AHAC” refer to Alpha Healthcare Acquisition Corp. prior to the Merger.
Cautionary Statement Regarding Forward-Looking Statements
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 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.
Overview
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 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 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 use in vascular trauma, AV access for hemodialysis, and PAD. We are also developing the HAV for CABG and pediatric heart surgery. Over the longer term, we are developing our HAV for the delivery of cellular therapies, including pancreatic islet cell transplantation to treat Type 1 diabetes (our BVP). 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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For the HAV, we believe there is substantial clinical demand for safe and effective vascular conduits to replace and repair blood vessels throughout the body. Vascular injuries resulting from trauma are common in civilian and military populations, frequently resulting in the loss of either life or limb. Existing treatment options in the vascular repair, reconstruction and replacement market include the use of autologous vessels and synthetic grafts, which we believe suffer from significant limitations. For example, the use of autologous veins to repair traumatic vascular injuries can lead to significant morbidity associated with the surgical wounds created for vein harvest and prolonged times to restore blood flow to injured limbs, leading to an increased risk of complications such as amputation and reperfusion injury. In addition, in many instances of vascular trauma the patient may not have adequate vein available, or the time between injury and treatment is too long, to make autologous graft repair feasible. Synthetic grafts are often contraindicated in the setting of vascular trauma due to higher infection risk that can lead to prolonged hospitalization and limb loss. 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.
As of December 31, 2023, our HAVs have been implanted in approximately 573 patients. We and our collaborators are currently conducting Phase 3 and Phase 2 trials of our 6 millimeter HAV across three therapeutic indications: vascular trauma, AV access for hemodialysis, and PAD. 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 May 2023, we were granted the RMAT designation for the HAV for urgent arterial repair following extremity vascular trauma. 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. In September 2023, we announced positive top line results from our V005 Phase 2/3 trial in vascular trauma, and in December 2023 we filed a BLA for urgent arterial repair following extremity vascular trauma when synthetic graft is not indicated, and when autologous vein use is not feasible. In February 2024, the FDA accepted the BLA filing and granted priority review and set a PDUFA) date of August 10, 2024.
In April 2023, we announced completion of enrollment of our V007 Phase 3 trial of the HAV for use in AV access for hemodialysis. Upon anticipated completion of our V007 Phase 3 trial in 2024, and dependent upon clinical results, we intend to submit a BLA supplement to the FDA for an indication in AV access for hemodialysis.
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, 2023 and 2022, we had an accumulated deficit of $537.3 million and $426.5 million, respectively, and working capital of $64.8 million and $134.6 million, respectively. Our operating losses were approximately $100.0 million and $84.6 million for the years ended December 31, 2023 and 2022, respectively. Net cash flows used in operating activities were $73.3 million and $71.1 million during the years ended December 31, 2023 and 2022, respectively. 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.
As of December 31, 2023, we had cash and cash equivalents of $80.4 million. Subsequent to December 31, 2023, in March 2024 we completed the Offering (defined below), which provided approximately $43.1 million in net proceeds and received an additional $20.0 million under the Purchase Agreement (defined below) We believe our cash and cash equivalents on hand will be sufficient to fund operations, including clinical trial expenses and capital expenditure requirements, for at least 12 months from the date of this Annual Report on Form 10-K. See Note 1 — Organization and Description of Business in the notes to our accompanying consolidated financial statements contained in Part II, Item 8 of this Annual Report on Form 10-K for additional information regarding this assessment.
Our need for additional capital will depend in part on the scope and costs of our development and commercial manufacturing activities. To date, we have not generated any revenue from the sale of commercialized products. 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, the sale of equity or debt, proceeds from the Purchase Agreement, 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. 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. See “Risk Factors” for additional information.
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We expect to continue to incur significant expenses and to increase operating losses for at least the next several years. We anticipate that our expenses will increase substantially as we seek to:
• obtain marketing approval for our 6 millimeter HAV for vascular repair, reconstruction and replacement, including for indications in vascular trauma and AV access for hemodialysis;
• commercialize the HAV via U.S. market launches for an indication in vascular trauma and hemodialysis AV access;
• scale out our manufacturing facility to the extent required to satisfy potential demand following any receipt of marketing approval;
• continue our preclinical and clinical development efforts;
• maintain, expand and protect our intellectual property portfolio;
• add operational, financial and management information systems and personnel to support, among other things, our product development and commercialization efforts and operations; and
• continue operating as a public company, which includes higher costs associated with hiring additional personnel, 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 The Nasdaq Stock Market LLC (“Nasdaq”).
Recent Developments
On February 29, 2024, we entered into an underwriting agreement (the “Underwriting Agreement”) with Cowen and Company, LLC and Cantor Fitzgerald & Co. as representatives of the several underwriters named therein (collectively, the “Underwriters”), relating to the issuance and sale in an underwritten offering (the “Offering”) of 15,410,000 shares of our Common Stock, which included a full exercise of the Underwriters’ option to purchase additional shares, at a price to the public of $3.00 per share (the “Shares”). The net proceeds to us from the Offering were approximately $43.1 million after deducting underwriting discounts and commissions and estimated Offering expenses. The Offering closed on March 5, 2024.
Components of Results of Operations
Revenue
To date, we have not generated revenue from the sale of any products. All of our revenue has been derived from government and other grants. From inception through December 31, 2023, we have been awarded grants, including grants from the California Institute of Regenerative Medicine (“CIRM”), NIH, and the DoD, to support our development, production scaling and clinical trials of our product candidates. We may generate revenue in the future from government and other grants, payments from future license or collaboration agreements and, if any of our product candidates receive marketing approval, from product sales. We expect that any revenue we generate will fluctuate from quarter to quarter. If we fail to complete the development of, or obtain marketing approval for, our product candidates in a timely manner, our ability to generate future revenue, and our results of operations and financial position, would be materially adversely affected.
Research and Development Expenses
Since our inception, we have focused our resources on our research and development activities, including conducting preclinical studies and clinical trials, developing our manufacturing process and activities related to regulatory filings for our product candidates. We recognize research and development expenses as they are incurred. Our research and development expenses consist primarily of:
• salaries and related overhead expenses for personnel in research and development functions, including stock-based compensation and benefits;
• fees paid to consultants and CROs, including in connection with our clinical trials, and other related clinical trial fees, such as for investigator grants, patient screening, laboratory work and statistical compilation and analysis;
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• allocation of facility lease and maintenance costs;
• depreciation of leasehold improvements, laboratory equipment and computers;
• costs related to purchasing raw materials and producing our product candidates for clinical trials;
• costs related to compliance with regulatory requirements;
• costs related to our manufacturing development and expanded-capabilities initiatives; and
• license fees related to in-licensed technologies.
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 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 2 and Phase 3 clinical trials. 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. We plan to further increase our research and development expenses for the foreseeable future as we continue the development of our proprietary scientific technology platform and our novel manufacturing paradigm.
The successful development of our preclinical and clinical product candidates is highly uncertain. At this time, we cannot estimate with any reasonable certainty the nature, timing or costs of the efforts that will be necessary to complete the remainder of the development of any of our preclinical or clinical product candidates or the period, if any, in which material net cash inflows from these product candidates may commence. This is due to the numerous risks and uncertainties associated with the development of our product candidates, including:
• the scope, rate of progress, expense and results of our preclinical development activities, our ongoing clinical trials and any additional clinical trials that we may conduct, and other research and development activities;
• successful patient enrollment in and the initiation and completion of clinical trials;
• the timing, receipt and terms of any marketing approvals from applicable regulatory authorities including the FDA and non-U.S. regulators;
• the extent of any required post-marketing approval commitments to applicable regulatory authorities;
• development of clinical and commercial manufacturing capabilities or making arrangements with third-party manufacturers in order to ensure that it or its third-party manufacturers are able to successfully manufacture our product;
• obtaining, maintaining, defending and enforcing patent claims and other intellectual property rights;
• significant and changing government regulations;
• launching commercial sales of our product candidates, if approved, whether alone or in collaboration with others;
• the degree of market acceptance of any product candidates that obtain marketing approval; and
• maintaining a continued acceptable safety profile following approval, if any, of our product candidates.
A change in the outcome of any of these variables could lead to significant changes in the costs and timing associated with the development of our product candidates. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials beyond those that we currently anticipate being required to conduct in order to complete the clinical development of any of our product candidates, or if we experience significant delays in the enrollment or the conduct of any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development.
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General and Administrative Expenses
General and administrative expenses consist primarily of salaries and related costs for employees in executive, finance, human resources, commercialization, and administrative support functions, which also include stock-based compensation expenses and benefits for such employees. 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 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 the Purchase Agreement (defined below), finance leases, and our former loan agreement with SVB during the periods each were outstanding, (iv) the change in fair value of our derivative liabilities including the private placement Common Stock warrant liabilities related to the Private Placement Warrants, which we assumed in connection with the Merger; the contingent derivative liability related to the Purchase Agreement; a liability related to a freestanding option agreement related to the Purchase Agreement; and the derivative liability related to our agreement with JDRF (defined below), all of which are subject to remeasurement to fair value at each balance sheet date resulting in a non-cash gain or loss, (v) a loss on debt extinguishment related to the prepayment of our loan agreement with SVB in May 2023, and (vi) an employee retention credit we recognized in June 2023.
Results of Operations
Comparison of the Years Ended December 31, 2023 and 2022
Year Ended December 31, Change
($ in thousands) 2023 2022 $
%
Grant revenue $ — $ 1,565 $ (1,565) (100) %
Operating expenses:
Research and development
76,550 63,260 13,290 21 %
General and administrative
23,497 22,883 614 3 %
Total operating expenses
100,047 86,143 13,904 16 %
Loss from operations
(100,047) (84,578) (15,469) 18 %
Other income (expense), net:
Interest income 5,467 2,629 2,838 108 %
Change in fair value of Contingent Earnout Liability (10,023) 75,767 (85,790) (113) %
Employee retention credit 3,107 — 3,107 100 %
Loss on extinguishment of debt (2,421) — (2,421) (100) %
Interest expense (6,599) (6,200) (399) 6 %
Change in fair value of derivative liabilities (260) 417 (677) (162) %
Total other income (expense), net
(10,729) 72,613 (83,342) (115) %
Net loss
$ (110,776) $ (11,965) $ (98,811) 826 %
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Grant Revenue
There was no revenue for the year ended December 31, 2023, compared to $1.6 million in grant revenue for the year ended December 31, 2022. Revenue for 2022 related to the reimbursement of qualifying expenses incurred in connection with our grant from DoD, which totaled approximately $6.8 million over the life of the grant before this program ended in November 2022.
Research and Development Expenses
The following table discloses the breakdown of research and development expenses for the periods indicated:
Year Ended December 31, Change
($ in thousands) 2023 2022 $ %
External services
$ 19,136 $ 15,583 $ 3,553 23 %
Materials and supplies
13,705 11,210 2,495 22 %
Payroll and personnel expenses
30,118 23,678 6,440 27 %
Other research and development expenses
13,591 12,789 802 6 %
$ 76,550 $ 63,260 $ 13,290 21 %
Research and development expenses were $76.6 million for the year ended December 31, 2023, representing an increase of $13.3 million, or 21%, from $63.3 million for the year ended December 31, 2022. The increase was primarily driven by expenses incurred to support our expanded research and development initiatives, including the completion of our V005 Phase 2/3 trial and the V017 study for the use of the HAV in extremity vascular trauma, and our related BLA filing in December 2023, increased product manufacturing and development, and clinical development of the HAV for use in AV access for hemodialysis. Expense increases were primarily comprised of (i) a $6.4 million increase in payroll and personnel expenses, (ii) a $3.6 million increase in external services, including the support of clinical studies, (iii) a $2.5 million increase in the purchase of materials and supplies, and (iv) a $0.8 million increase in other research and development expenses.
General and Administrative Expenses
General and administrative expenses were $23.5 million and $22.9 million for the years ended December 31, 2023 and 2022, respectively. The slight net increase in general and administrative expenses during the year ended December 31, 2023 of $0.6 million, or 3%, compared to the year ended December 31, 2022 was primarily driven by preparation for the planned commercial launch of the HAV for an indication in vascular trauma, including a $1.3 million increase in payroll and personnel expenses and a $0.3 million increase in insurance expense, partially offset by a $1.0 million decrease in professional fees, including a reduction in legal fees.
Total Other Income (Expense), net
Total other income (expense), net was expense of $10.7 million for the year ended December 31, 2023, compared to income of $72.6 million for the year ended December 31, 2022. The increase in expense of $83.3 million primarily resulted from the remeasurement of the Contingent Earnout Liability as of December 31, 2023, which resulted in non-cash expense of $10.0 million for the year ended December 31, 2023, compared to a $75.8 million non-cash gain for the year ended December 31, 2022, and a $2.4 million loss on extinguishment of debt related to the prepayment of balances outstanding under our loan agreement with SVB, partially offset by a $3.1 million employee retention credit and a $2.8 million increase in interest income earned on our cash, cash equivalents and short-term investments during 2023 primarily due to higher interest rates.
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Liquidity and Capital Resources
Sources of Liquidity
We have historically financed our operations primarily through the sale of equity securities and convertible debt, proceeds from the Merger and related PIPE Financing (as defined in Note 1 to our accompanying consolidated financial statements contained in Part II, Item 8 of this Annual Report on Form 10-K), borrowings under loan facilities, the Purchase Agreement (defined below), and, to a lesser extent, through grants from governmental and other agencies. Since our inception, we have incurred significant operating losses and negative cash flows. As of December 31, 2023 and 2022, we had an accumulated deficit of $537.3 million and $426.5 million, respectively.
As of December 31, 2023 and 2022, we had working capital of $64.8 million and $134.6 million, respectively. As of December 31, 2023, we had cash and cash equivalents of $80.4 million and as of December 31, 2022, we had cash and cash equivalents and short-term investments of $151.9 million. Subsequent to December 31, 2023, in March 2024 we completed the Offering which provided approximately $43.1 million in net proceeds and received an additional $20.0 million under the Purchase Agreement. We believe our cash and cash equivalents will be sufficient to fund operations, including clinical trial expenses and capital expenditure requirements for at least 12 months from the date of this Annual Report on Form 10-K. See Note 1 to our accompanying consolidated financial statements contained in Part II, Item 8 of this Annual Report on Form 10-K for additional information regarding our assessment. We believe that our longer-term working capital, planned research and development, capital expenditures and other general corporate funding requirements may 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 of this Annual Report on Form 10-K titled “Forward-Looking Statements” and “Risk Factors.” Adequate capital may not be available to us when needed or on acceptable terms. 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.
On May 12, 2023, we entered into a Revenue Interest Purchase Agreement (the “Purchase Agreement”) with two purchasers (the “Purchasers”), both affiliates of Oberland Capital Management LLC (“Oberland”), and another affiliate of Oberland, as agent for the Purchasers (the “Agent”), to obtain financing in respect to the further development and commercialization of our HAV, to repay our then outstanding credit facility with SVB, and for other general corporate purposes. Pursuant to the Purchase Agreement, on May 12, 2023, the Purchasers purchased certain revenue interests (the “Revenue Interests”) from us in exchange for an aggregate investment amount of up to $150.0 million (the “Investment Amount”). On May 12, 2023, we received an initial payment of $40.0 million , less certain transaction expenses, which was used to repay in full all of the outstanding obligations under our loan agreement with SVB . We will be entitled to receive up to approximately $110.0 million in subsequent installments subject to the terms and conditions set forth in the Purchase Agreement, as follows: (i) $20.0 million upon our BLA for an indication in vascular trauma being accepted on or prior to March 31, 2024, (ii) $40.0 million , at our option, upon us receiving FDA approval of the HAV for the vascular trauma indication on or prior to December 31, 2024 and (iii) $50.0 million , at our option, upon reaching $35.0 million trailing worldwide three-month net sales any time prior to December 31, 2025. Each tranche is dependent on the satisfaction of the conditions and receipt of funds from the previous tranche.
On February 18, 2024, we agreed with the Purchasers and the Agent, to waive certain breaches related to, and extend the deadline for certain post-closing obligations under, the Purchase Agreement, including the requirement for a leasehold mortgage over our headquarters. Giving effect to the extension and waiver, we are obligated to deliver by no later than April 30, 2024 (or such later date as the Agent may agree in its sole discretion), an executed leasehold mortgage (or alternative documentation satisfactory to the Agent in its sole discretion) over our headquarters. Concurrently with such agreement, we delivered a request that the Purchasers fund the second payment under the Purchase Agreement in an aggregate amount equal to $20.0 million, which was funded on March 11, 2024. As of March 15, 2024, we had received funding of $60.0 million under the Purchase Agreement.
For additional information about this financing transaction, see Note 6 to our accompanying consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K.
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On February 29, 2024, we entered into the Underwriting Agreement with the Underwriters, relating to the issuance and sale in an underwritten offering of 15,410,000 shares of our Common Stock at a price to the public of $3.00 per share. The net proceeds to us from the Offering were approximately $43.1 million, after deducting underwriting discounts and commissions and estimated Offering expenses. The Offering closed on March 5, 2024.
Material Cash Requirements
Our known material cash requirements include: (1) the purchase of supplies and services that are primarily for research and development; (2) repayments pursuant to the Purchase Agreement (for additional information see below and Note 6 to our accompanying consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K); (3) employee wages, benefits, and incentives; (4) financing and operating lease payments (for additional information see below and Note 8 to our accompanying consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K), and (5) payments under the JDRF Agreement (for additional information see Note 13 to our accompanying consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K). We have also entered into contracts with CROs primarily for clinical trials. 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, for example, legal contingencies, uncertain tax positions, and other matters.
As of December 31, 2023, we had non-cancellable purchase com mitments of $20.2 million for supplies and services that are primarily for research and development. We have existing license agreements with Duke University and Yale University, a distribution agreement with Fresenius Medical Care and the JDRF Agreement. 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, 2023. For additional information regarding our agreements with Duke University, Yale University, and Fresenius Medical Care, 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.” For additional information about the JDRF Agreement, see Note 13 — Commitments and Contingencies to our accompanying consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K .
Revenue Interest Purchase Agreement
On May 12, 2023, we entered into the Purchase Agreement and repaid in full all of the then-existing obligations under our loan agreement with SVB. Under the Purchase Agreement, as of December 31, 2023, we had $38.6 million recorded as a revenue interest liability on our consolidated financial statements. On February 18, 2024, we delivered a request that the Purchasers fund the second payment under the Purchase Agreement in an aggregate amount of $20.0 million, which was funded on March 11, 2024. For additional information regarding repayment, see Note 6 — Revenue Interest Purchase Agreement to our accompanying consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K.
Leases
Our finance lease relates to our headquarters facility containing our manufacturing, research and development and general and administrative functions, which was substantially completed in June 2018 and is being leased through May 2033, and our operating lease relates to the land lease associated with our headquarters. See Note 8 to our accompanying consolidated financial statements contained in Part II, Item 8 of this Annual Report on Form 10-K for further information regarding our leases. Our future contractual obligations under our lease agreements as of December 31, 2023 are as follows:
($ in thousands) Total Less than
1 year 1 – 3 years
3 – 5 years
More than
5 years
Finance leases
$ 25,168 $ 4,065 $ 8,404 $ 4,818 $ 7,881
Operating leases
889 105 210 210 364
ATM Facility
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, 2023, we have not conducted any sales of Common Stock under the ATM Facility.
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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 hemodialysis AV access and submit BLAs for FDA approval, (ii) if marketing approval is obtained, to launch and commercialize our HAVs for an indication in vascular trauma and hemodialysis AV access 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 BVP 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.
Our future funding requirements, both short-term and long-term, will depend on many factors, including:
• the progress and results of our clinical trials and interpretation of those results by the FDA and other regulatory authorities;
• the cost, timing and outcome of regulatory review of our product candidates, particularly for marketing approval of our HAVs in the United States;
• the scope, progress, results and costs of preclinical development, laboratory testing and clinical trials for our additional product candidates;
• the cost and timing of our future commercialization activities, including product manufacturing, marketing and distribution for our HAVs if approved by the FDA, and any other product candidate for which we receive marketing approval in the future;
• the amount and timing of revenues, if any, that we receive from commercial sales of any product candidates for which we receive marketing approval;
• 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; and
• 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. Adequate capital may not be available to us when needed or on acceptable terms. Other than the funds that may become available to us under the Purchase Agreement upon the achievement of specified milestones, we do not currently have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of stockholders. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making acquisitions or capital expenditures. Debt financing would also result in fixed payment obligations. 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.
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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Cash Flows
The following table shows a summary of our cash flows for each of the periods shown below:
Year Ended December 31,
($ in thousands) 2023 2022
Net loss $ (110,776) $ (11,965)
Non-cash adjustments to reconcile net loss to net cash used in operating activities (1) :
30,900 (60,193)
Changes in operating assets and liabilities: 6,571 1,029
Net cash used in operating activities (73,305) (71,129)
Net cash provided by (used in) investing activities (173) 4,845
Net cash provided by (used in) financing activities 4,507 (1,446)
Net decrease in cash, cash equivalents and restricted cash $ (68,971) $ (67,730)
Cash, cash equivalents and restricted cash at the beginning of the period $ 149,772 $ 217,502
Cash, cash equivalents and restricted cash at the end of the period $ 80,801 $ 149,772
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(1) Includes depreciation, amortization related to our leases and our debt discount, stock-based compensation expense, non-cash interest expense related to our revenue interest liability and our JDRF Award liability (defined below), the changes in fair value of our Contingent Earnout Liability and our derivative liabilities, and in 2023 includes a loss on extinguishment of debt and an immaterial amount of loss on disposal of property and equipment.
Cash Flow from Operating Activities
The increase in net cash used in operating activities from 2022 to 2023 was primarily due to increased spending on pre-clinical, clinical and pre-commercial activities as well as payroll and personnel expenses, primarily those related to preparation for the completion of our trial for the use of the HAV in vascular trauma and our related BLA filing, expansion of clinical development of the HAV for use in AV access, and preparation for the planned commercial launch of the HAV for an indication in vascular trauma.
Cash Flow from Investing Activities
Net cash used in investing activities for the year ended December 31, 2023 consisted of purchases of property and equipment partially offset by proceeds from the maturity of our short-term investments (certificates of deposit). Net cash provided by investing activities for the year ended December 31, 2022 was primarily due to a net cash inflow of $5.9 million related to our certificates of deposit classified as short-term investments.
Cash Flow from Financing Activities
Net cash provided by financing activities for the year ended December 31, 2023 consisted primarily of net proceeds from the Purchase Agreement, partially offset by the repayment of our loan agreement with SVB. Net cash used in financing activities for the year ended December 31, 2022 consisted primarily of principal payments of our finance leases.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in SEC rules and regulations.
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Critical Accounting Estimates
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. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. 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 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. Our critical accounting policies are summarized below.
Contingent Earnout Liability
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 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 valuations at December 31, 2023 and 2022.
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. Contingent earnout payments involve certain assumptions requiring significant judgment and actual results can differ from assumed and estimated amounts.
Revenue Interest Liability
On May 12, 2023, we entered into the Purchase Agreement to obtain financing in respect to the further development and commercialization of our HAV, to repay our credit facility with SVB, and for other general corporate purposes. We recorded a revenue interest liability related to the Purchase Agreement on our consolidated balance sheet on the date we entered into the Purchase Agreement, which is presented net of issuance costs and a debt discount. We impute interest expense associated with this liability using the effective interest rate method. The estimated effective interest rate is calculated based on the rate that would enable the debt to be repaid in full over the anticipated life of the arrangement. Interest expense and amortization of our issuance costs and debt discount is recognized over the estimated term in our consolidated statements of operations and comprehensive loss. The interest rate on the liability may vary during the term of the agreement primarily due to the level of forecasted net sales. We evaluate the interest rate quarterly based on our current net sales forecasts utilizing the prospective method. A significant increase or decrease in net sales could materially impact the revenue interest liability, interest expense and the time period for repayment.
At December 31, 2023, the revenue interest liability is calculated using our current estimate of forecasted global net sales of our products for our planned commercial launch, and impacted by a debt discount comprising the estimated fair value of a bifurcated derivative liability related to the Purchasers’ put option under the Purchase Agreement, the estimated fair value of a freestanding option agreement related to the Purchase Agreement, and issuance and transaction costs incurred. As our product candidates are not yet approved for sale, the estimated probability and timing or amounts of repayment is likely to change each reporting period.
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The fair value of the contingent derivative liability is valued using a “with-and-without” method. The “with-and-without” methodology involves valuing the whole instrument on an as-is basis and then valuing the instrument without the individual embedded derivative. The difference between the entire instrument with the embedded derivative compared to the instrument without the embedded derivative was the fair value of the contingent derivative liability. The estimated probability and timing of underlying events triggering the exercisability of the contingent derivative liability bifurcated from within the Purchase Agreement, forecasted cash flows and the discount rate are significant unobservable inputs used to determine the estimated fair value of the entire instrument with the embedded derivative.
Stock-Based Compensation
We measure and recognize compensation expense for all options based on the estimated fair value of the award on the grant date. We use the Black-Scholes option-pricing model to estimate the fair value of option awards. The fair value is recognized as expense on a straight-line basis over the requisite service period. We account for forfeitures as they occur.
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. These estimates are complex, involve a number of variables, uncertainties and assumptions and the application of management’s judgment, as they are inherently subjective. If any assumptions change, our stock-based compensation expense could be materially different in the future.
These assumptions are estimated as follows:
• Fair Value of Common Stock . The fair value of our Common Stock has been determined based on the closing price of the shares on Nasdaq.
• Expected Term . The expected term represents the period that stock options are expected to be outstanding. We calculated the expected term using the simplified method for options, which is available where there is insufficient historical data about exercise patterns and post-vesting employment termination behavior. The simplified method is based on the vesting period and the contractual term for each grant, or for each vesting-tranche for awards with graded vesting. The mid-point between the vesting date and the maximum contractual expiration date is used as the expected term under this method. For awards with multiple vesting-tranches, the times from grant until the mid-points for each of the tranches may be averaged to provide an overall expected term.
• Expected Volatility . 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.
• Risk-Free Interest Rate . The risk-free interest rate was based on the yields of U.S. Treasury zero-coupon securities with maturities similar in duration to the expected term of the options.
• Expected Dividend Yield . We have not paid dividends on our Common Stock nor do we expect to pay dividends in the foreseeable future. Accordingly, we have estimated the dividend yield to be zero.
Common Stock Warrants
Under the Merger, we assumed 5,000,000 publicly-traded warrants (“Public Warrants”) and 177,500 private placement warrants issued to AHAC in connection with AHAC’s initial public offering (“Private Placement Warrants” and, together with the Public Warrants, the “Common Stock Warrants”). We account for the Common Stock Warrants in accordance with the guidance contained in ASC Topic 480, Distinguishing Liabilities from Equity and ASC Topic 815, Derivatives and Hedging ( “ASC 815”) .
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We account for the Private Placement Warrants in accordance with the guidance contained in ASC 815, under which the warrants do not meet the criteria for equity treatment and must be recorded as liabilities. As the Private Placement Warrants meet the definition of a derivative under ASC 815, we recorded these warrants as liabilities on the consolidated balance sheet at fair value, with subsequent changes in their respective fair values recognized in the consolidated statements of operations and comprehensive loss at each reporting date. The fair value of the warrants was estimated using a Monte Carlo simulation value model utilizing assumptions including our current common stock price, expected volatility, risk-free rate, expected term and expected dividend yield. The fair value of the Private Placement Warrants is based on significant unobservable inputs, which represent Level 3 fair value measurements within the fair value hierarchy (see “Fair Value of Financial Instruments” accounting policy described in Note 2 to our accompanying consolidated financial statements contained in Part II, Item 8 of this Annual Report on Form 10-K). Determining the fair value of the Private Placement Warrants involves certain assumptions requiring significant judgment and actual results can differ from assumed and estimated amounts.
The Public Warrants are considered to be “indexed to the Company’s own stock” and as we have a single class of common stock, a qualifying cash tender offer of more than 50% of the Company’s common stock will always result in a change-in-control and would not preclude permanent equity classification of the Public Warrants. Based on this evaluation, we concluded that the Public Warrants meet the criteria to be classified within stockholders’ equity.
Emerging Growth Company and Smaller Reporting Company Status
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 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. 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.
Item 7A. 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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