Humacyte, Inc. 10-K

Item 8. Financial Statements and Supplementary Data. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS HUMACYTE, INC. Page Report of Independent Registered Public Accounting Firm (PCAOB ID 238 ) 108 Consolidated Balance Sheets as of December 31, 2021 and 2020 109 Consolidated Statements of Operations and Comprehensive Loss for the Years ended December 31, 2021 and 2020 110 Consolidated Statements of Changes in Redeemable Convertible Preferred Stock and Stockholders’ Equity ( Deficit ) for the Years ended December 31, 2021 and 2020 111 Consolidated Statements of Cash Flows for the Years ended December 31, 2021 and 2020 112 Notes to Consolidated Financial Statements 113 107 Table of Contents Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Humacyte, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Humacyte, Inc. and its subsidiary (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of operations and comprehensive loss, of changes in redeemable convertible preferred stock and stockholders’ equity (deficit) and of cash flows for the years then ended, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP Raleigh, North Carolina March 29, 2022 We have served as the Company’s auditor since 2013. 108 Table of Contents HUMACYTE, INC. CONSOLIDATED BALANCE SHEETS (in thousands except for share and per share amounts) As of December 31, 2021 2020 ASSETS Current assets Cash and cash equivalents $ 217,502 $ 39,929 Short-term investments 8,000 — Accounts receivable 176 113 Prepaid expenses 3,662 1,407 Total current assets 229,340 41,449 Finance lease right-of-use assets, net 21,432 23,492 Operating lease right-of-use assets, net 727 769 Property and equipment, net 35,034 40,978 Total assets $ 286,533 $ 106,688 LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) Current liabilities Accounts payable $ 2,094 $ 2,274 Accrued expenses 6,757 4,592 Finance lease obligation, current portion 1,981 1,729 Deferred payroll tax, current portion 173 145 Operating lease obligation, current portion 45 42 PPP loan payable, current portion — 2,451 Total current liabilities 11,050 11,233 Contingent earnout liability 103,660 — Finance lease obligation, net of current portion 21,109 23,090 SVB loan payable 27,361 — Operating lease obligation, net of current portion 682 727 Common stock warrant liabilities 497 — Deferred payroll tax, net of current portion — 144 PPP loan payable, net of current portion — 822 Total liabilities 164,359 36,016 Commitments and contingencies (Note 13) Redeemable convertible preferred stock (Series A, B, C and D) $ 0.001 par value, 0 and 69,613,565 shares authorized as of December 31, 2021 and 2020, respectively, 0 and 69,613,562 shares outstanding as of December 31, 2021 and 2020, respectively; liquidation preference of $ 0 and $ 435,579 as of December 31, 2021 and 2020, respectively — 420,989 Stockholders’ equity (deficit) Preferred stock, $ 0.0001 par value; 20,000,000 and 0 shares designated as of December 31, 2021 and 2020, respectively, 0 shares issued and outstanding as of December 31, 2021 and 2020 — — Common stock, $ 0.0001 par value; 250,000,000 and 340,216,780 shares authorized as of December 31, 2021 and 2020, respectively; 103,003,646 and 5,822,396 shares issued and outstanding as of December 31, 2021 and 2020, respectively 10 1 Additional paid-in capital 536,737 37,778 Accumulated deficit ( 414,573 ) ( 388,096 ) Total stockholders’ equity (deficit) 122,174 ( 350,317 ) Total liabilities, redeemable convertible preferred stock and stockholders’ equity (deficit) $ 286,533 $ 106,688 The accompanying notes are an integral part of these financial statements. 109 Table of Contents HUMACYTE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (in thousands except for share and per share amounts) Year Ended December 31, 2021 2020 Grant Revenue $ 1,263 $ 1,491 Operating expenses: Research and development 61,341 54,078 General and administrative 21,130 12,013 Total operating expenses 82,471 66,091 Loss from operations ( 81,208 ) ( 64,600 ) Other income (expenses), net Interest income 16 278 Change in fair value of contingent earnout liability 55,772 — Interest expense ( 4,348 ) ( 2,202 ) Gain on PPP loan forgiveness 3,284 — Change in fair value of common stock warrant liabilities 56 — Transaction costs expensed ( 49 ) — Total other income (expenses), net 54,731 ( 1,924 ) Net loss and comprehensive loss $ ( 26,477 ) $ ( 66,524 ) Net loss per share attributable to common stockholders, basic and diluted $ ( 0.66 ) $ ( 11.54 ) Weighted-average shares outstanding used in computing net loss per share attributable to common stockholders, basic and diluted 39,970,398 5,765,688 The accompanying notes are an integral part of these financial statements. 110 Table of Contents HUMACYTE, INC. CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) (in thousands except for share amounts) Redeemable Convertible Preferred Stock Common Stock Additional Paid-in Capital Accumulated Deficit Total Stockholders’ (Deficit) Equity Shares Amount Shares Amount Balance as of December 31, 2019 69,613,562 $ 420,989 5,627,157 $ 1 $ 32,783 $ ( 321,572 ) $ ( 288,788 ) Proceeds from the exercise of stock options — — 195,239 — 301 — 301 Stock-based compensation — — — — 4,694 — 4,694 Net loss — — — — — ( 66,524 ) ( 66,524 ) Balance as of December 31, 2020 69,613,562 420,989 5,822,396 $ 1 $ 37,778 $ ( 388,096 ) $ ( 350,317 ) Issuance of warrants in conjunction with debt — — — — 3,275 — 3,275 Conversion of redeemable convertible preferred stock into common stock in connection with the Merger and related PIPE financing ( 69,613,562 ) ( 420,989 ) 69,613,562 7 420,982 — 420,989 The merger and related PIPE financing, net of transaction costs and acquired liabilities — — 27,346,449 2 209,478 — 209,480 Public warrants assumed upon the merger, net of transaction costs — — — — 13,912 — 13,912 Contingent earnout liability recognized upon closing of the reverse recapitalization — — — — ( 159,432 ) — ( 159,432 ) Proceeds from the exercise of stock options — — 221,239 — 598 — 598 Stock-based compensation — — — — 10,146 — 10,146 Net loss — — — — — ( 26,477 ) ( 26,477 ) Balance as of December 31, 2021 — $ — 103,003,646 $ 10 $ 536,737 $ ( 414,573 ) $ 122,174 The accompanying notes are an integral part of these financial statements. 111 Table of Contents HUMACYTE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year Ended December 31, 2021 2020 Cash flows from operating activities Net loss $ ( 26,477 ) $ ( 66,524 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation expense 6,181 6,291 Stock-based compensation expense 10,146 4,694 Change in fair value of contingent earnout liability ( 55,772 ) — Change in fair value of common stock warrant liabilities ( 56 ) — Loss on disposal of property and equipment — 177 Amortization expense 2,060 2,060 Non-cash operating lease costs 42 81 Amortization of SVB debt discount 977 — Accrued interest on PPP loan obligation 11 22 Gain on PPP loan forgiveness ( 3,284 ) — Payment of liabilities assumed in Merger ( 14,461 ) — Changes in operating assets and liabilities: Accounts receivable ( 63 ) 488 Prepaid expenses ( 2,174 ) ( 767 ) Accounts payable ( 197 ) ( 889 ) Accrued expenses 2,035 ( 1,408 ) Operating lease obligation ( 42 ) ( 82 ) Deferred payroll taxes ( 116 ) 289 Net cash used in operating activities ( 81,190 ) ( 55,568 ) Cash flows from investing activities Purchase of short-term investments (certificates of deposit) ( 8,000 ) — Purchase of property and equipment ( 220 ) ( 318 ) Proceeds from sale of property and equipment — 50 Net cash used in investing activities ( 8,220 ) ( 268 ) Cash flows from financing activities Proceeds from Merger and PIPE financing, net of offering costs paid 242,400 — Payment of transaction costs related to Merger ( 3,945 ) — Proceeds from the exercise of stock options 598 301 Proceeds from SVB loan 29,659 — Proceeds from PPP loan — 3,251 Payment of finance lease principal ( 1,729 ) ( 1,500 ) Net cash provided by financing activities 266,983 2,052 Net increase (decrease) in cash and cash equivalents 177,573 ( 53,784 ) Cash and cash equivalents at the beginning of the period 39,929 93,713 Cash and cash equivalents at the end of the period 217,502 39,929 Supplemental disclosure Cash paid for interest on SVB loan $ 1,123 $ — Supplemental disclosure of noncash activities: Operating lease right-of-use assets obtained in exchange for lease obligations $ — $ 36 Purchase of property and equipment in accounts payable $ 21 $ 4 Issuance of warrants in conjunction with debt $ 3,275 $ — Unpaid liabilities assumed in connection with Merger $ 130 $ — Conversion of redeemable convertible preferred stock into common stock in connection with the reverse capitalization $ 420,989 $ — Contingent earnout liability recognized upon the closing of the reverse recapitalization $ 159,432 $ — The accompanying notes are an integral part of these financial statements. 112 Table of Contents HUMACYTE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Description of Business Organization Humacyte, Inc. and subsidiary, or the Company, is pioneering the development and manufacture of off-the-shelf, universally implantable, bioengineered human tissues designed to improve the lives of patients and transform the practice of medicine. The Company is leveraging its 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. On August 26, 2021 (the “Closing Date”), Alpha Healthcare Acquisition Corp. (“AHAC”) consummated a merger pursuant to that certain Business Combination Agreement, dated as of February 17, 2021 (the “Merger Agreement”), by and among Humacyte, Inc., a Delaware Corporation (“Legacy Humacyte”), AHAC and Hunter Merger Sub, Inc. (“Merger Sub”). 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 (such transactions, the “Merger,” and, collectively with the other transactions described in the Merger Agreement, the “Reverse Recapitalization”). As a result of the Merger, AHAC was renamed Humacyte, Inc. (“New Humacyte”) and Legacy Humacyte was renamed Humacyte Global, Inc. The Merger is accounted for as a reverse recapitalization in accordance with U.S. GAAP, and under this method of accounting, AHAC is treated as the acquired company for financial reporting purposes and Legacy Humacyte is treated as the acquirer. Operations prior to the Merger are those of Legacy Humacyte. Refer to Note 3 — Reverse Recapitalization for further details of the Merger. Liquidity and Going Concern Since its inception in 2004, the Company has generated no product revenue and has incurred net losses and negative cash flows from operations in each year. To date, the Company has financed its operations primarily through the sale of equity securities and convertible debt, proceeds from the Reverse Recapitalization, borrowings under loan facilities and, to a lesser extent, through governmental and other grants. At December 31, 2021 and December 31, 2020, the Company had an accumulated deficit of $ 414.6 million and $ 388.1 million, respectively. The Company’s net losses were $ 26.5 million and $ 66.5 million for the years ended December 31, 2021 and 2020, respectively. Net cash flows used in operating activities were $ 81.2 million and $ 55.6 million during the years ended December 31, 2021 and 2020, respectively. Substantially all of the Company’s net losses resulted from costs incurred in connection with the Company’s research and development programs and from general and administrative costs associated with the Company’s operations. The Company expects to incur substantial operating losses and negative cash flows from operations for the foreseeable future as the Company advances its product candidates. As of December 31, 2021, the Company had cash and cash equivalents and short-term investments of $ 225.5 million. The Company believes its combined cash and cash equivalents and short-term investments on hand will be sufficient to fund operations, including clinical trial expenses and capital expenditure requirements, for at least 12 months from the issuance date of these financial statements. 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 the Company’s business, as supply chains have been disrupted, and facilities and production have been suspended. The future progression of the pandemic and its effects on the Company’s business and operations are uncertain. The COVID-19 pandemic may affect the Company’s ability to initiate and complete preclinical studies, delay its clinical trials or future clinical trials, disrupt regulatory activities, or have other adverse effects on its business and operations. The pandemic has already caused significant disruptions in the financial markets, and may continue to cause such disruptions, which could impact the Company’s ability to raise additional funds to support its operations. Moreover, the pandemic has significantly impacted economies worldwide and could result in adverse effects on the Company’s business and operations. 113 Table of Contents HUMACYTE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Description of Business (continued) To date, the COVID-19 pandemic has not resulted in material financial impacts or impairment losses in the carrying values of the Company’s assets as a result of the pandemic and the Company is not aware of any specific related event or circumstance that would require it to revise the estimates reflected in these financial statements. The extent to which the COVID-19 pandemic will directly or indirectly impact the Company’s 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 pandemic. 2. Summary of Significant Accounting Policies Basis of Presentation The Company has prepared the accompanying financial statements in conformity with accounting principles generally accepted in the United States of America, or U.S. GAAP. The Company’s consolidated financial statements reflect the operations of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Unless otherwise noted, the Company has retroactively adjusted all common and preferred share and related share price information to give effect to the Exchange Ratio established in the Merger Agreement. Operations prior to the Merger are those of Legacy Humacyte. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates in the financial statements include stock-based compensation costs, right-of-use, or ROU assets, accruals for research and development activities, contingent earnout liability, fair value of common stock warrants, redeemable convertible preferred stock and income taxes. The Company evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors and adjusts those estimates and assumptions when facts and circumstances dictate. Actual results could differ from those estimates. Segments The Company operates and manages its business as one reportable and operating segment. The Company is developing proprietary, bioengineered, acellular human tissues that are designed to be used in the treatment of diseases and conditions across a range of anatomic locations in multiple therapeutic areas. The Company’s chief executive officer, who is the chief operating decision maker, reviews financial information on an aggregate basis for purposes of evaluating financial performance and allocating resources. Comprehensive loss Comprehensive loss includes net loss as well as other changes in stockholders’ equity (deficit) that result from transactions and economic events other than those with stockholders. There was no difference between net loss and comprehensive loss for the years ended December 31, 2021 and 2020. Cash and Cash Equivalents The Company considers all short-term, highly liquid investments, including certificates of deposit (“CDs”) purchased with an original maturity of three months or less at the date of purchase, to be cash equivalents. Cash deposits are held with financial institutions with investment-grade ratings in the United States of America, or U.S. Cash deposits typically exceed federally insured limits. As of December 31, 2021, cash and cash equivalents consisted of cash on deposit with banks denominated in U.S. dollars, investments in money market funds, and CDs maturing within three months of their purchase date. At December 31, 2020, cash and cash equivalents consisted of cash on deposit with banks denominated in U.S. dollars and investments in money market funds. 114 Table of Contents HUMACYTE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Summary of Significant Accounting Policies (continued) Short-term Investments The Company classifies its certificates of deposit as cash and cash equivalents or short-term investments and reassesses the appropriateness of the classification of its investments at the end of each reporting period. Certificates of deposit held for investment with an original maturity greater than three months are carried at amortized cost and reported as short-term investments on the consolidated balance sheets. The type of certificates of deposit that the Company invests in are not considered debt securities under Financial Accounting Standards Board ("FASB") Accounting Standards Codification (“ASC”) 320, Investments - Debt Securities. As of December 31, 2021, the Company had approximately $ 10.0 million in certificates of deposit. These cash deposits are deposited at a bank that is a member of the Certificate of Deposit Account Registry Service (“CDARS”), in which large deposits are divided into smaller amounts and placed with other FDIC insured banks which are also members of the CDARS network. Those members issue CDs in amounts under $250,000, so that the entire deposit balance is eligible for FDIC insurance. The Company classified $ 2.0 million as cash and cash equivalents and classified $ 8.0 million of its certificates of deposits as short-term investments on its consolidated balance sheets as of December 31, 2021. The Company did not have any certificates of deposit as of December 31, 2020. Revenue Recognition The Company’s revenues generally consist of grant revenues, including revenues generated under government and other awarded grants. Grant Revenue The Company generates revenue primarily from government and other awarded grants that reimburse the Company for certain allowable costs related to research and development efforts. These grants include the following terms: The Department of Defense grants are for an award of $ 4.0 million, all of which was recognized as revenue before the program ended, for work on bioengineered blood vessels for vascular trauma, which was awarded to the Company in September 2017 and ended in February 2020, and an award of $ 7.1 million for work to support human tissue engineered blood vessels for vascular reconstruction in the injured warfighter, which was awarded to the Company in August 2017 and is ongoing. The Company has recognized revenue of $ 1.3 million and $ 1.1 million during the year ended December 31, 2021 and 2020, respectively, for reimbursement of certain allowable costs related to these grants. The National Institutes of Health grant is for $ 1.6 million for work to support bioengineered grafts for peripheral vascular disease, which was awarded to the Company in November 2013. The Company recognized $ 1.6 million for the reimbursement of certain allowable costs related to the grant before this program ended in 2020. The Company recognized $ 0.3 million during the year ended December 31, 2020, and no revenue during the year ended December 31, 2021, for reimbursement of certain allowable costs related to this grant. The Company has determined that the grants are not within the scope of ASC 606 as they do not meet the definition of a contract with a customer. The Company has concluded that the grants meet the definition of a contribution and are nonexchange transactions and has applied the contribution accounting model in Subtopic 958-605, Not-for-Profit-Entities-Revenue Recognition by analogy. The Company recognizes funding received from grants as revenue, rather than as a reduction of research and development expenses, because the Company is the principal in conducting the research and development activities and these grants are central to the Company’s ongoing operations. The Company recognizes revenue only after the qualifying expenses related to the grants have been incurred and it is reasonably assured that the expenses will be reimbursed and the revenue will be collectible. The related costs incurred are included in research and development expense in the Company’s consolidated statements of operations and comprehensive loss. Revenue from grants not within the scope of ASC 606 was $ 1.3 million and $ 1.5 million for the years ending December 31, 2021 and 2020, respectively. 115 Table of Contents HUMACYTE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Summary of Significant Accounting Policies (continued) Revenue from Customers Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration that an entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASC 606 also impacts certain other areas, such as the accounting for costs to obtain or fulfill a contract. In addition, ASC 606 requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. For contracts where the period between when the Company transfers a promised good or service to the customer and when the customer pays is one year or less, the Company has elected the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component. Concentration of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and short-term investments consisting of CDs. Total cash balances exceeded insured balances by the Federal Deposit Insurance Corporation as of December 31, 2021 and 2020. The company has cash equivalents that are invested in highly rated money market funds invested only in obligations of the U.S. government and its agencies. The majority of the Company’s revenue has been derived from government grants. The Company’s grants which represented 10% or more of the Company’s total revenue during the years ended December 31, 2021 and 2020 or accounts receivable balance as of December 31, 2021 and 2020 are as follows: 2021 2020 Revenue Accounts Receivable Revenue Accounts Receivable Grant A — % — — — Grant B — % — % 10 % — Grant C 100 % 100 % 67 % 100 % Grant D — — 18 % — Total 100 % 100 % 95 % 100 % All of the Company’s revenues were generated from grants from government and other entities located in the United States, for the years ended December 31, 2021 and 2020. Net Loss per Share Attributable to Common Stockholders The Company follows the two-class method to compute basic and diluted net loss per share attributable to common stockholders when shares meet the definition of participating securities. The two-class method determines net loss per common share for each class of common and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires income available to common stockholders for the period to be allocated between common and participating securities based upon their respective rights to share in the earnings as if all income for the period had been distributed. During periods of loss, there is no allocation required under the two-class method since the redeemable convertible preferred stock did not have a contractual obligation to share in the Company’s losses. Basic net loss per share attributable to common stockholders is computed by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period without consideration of potentially dilutive common stock. Diluted net loss per share attributable to common stockholders reflects the potential 116 Table of Contents HUMACYTE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Summary of Significant Accounting Policies (continued) dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company unless inclusion of such shares would be anti-dilutive. As the Company has only incurred losses, basic and diluted net loss per share is the same. The potential shares of common stock that were excluded from the computation of diluted net loss per share for each period because including them would have had an antidilutive effect were as follows: December 31, 2021 2020 Shares issuable upon conversion of Series A redeemable convertible preferred stock — 18,421,897 Shares issuable upon conversion of Series B redeemable convertible preferred stock — 24,137,647 Shares issuable upon conversion of Series C redeemable convertible preferred stock — 11,241,283 Shares issuable upon conversion of Series D redeemable convertible preferred stock — 15,812,735 Exercise of options under stock plan 6,711,192 4,813,262 Warrants to purchase common stock 5,588,506 32,961 The 15,000,000 Contingent Earnout shares are excluded from the anti-dilutive table for all the periods presented as such shares are contingently issuable until the share price of the Company exceeds specified thresholds that have not yet been achieved, or upon the occurrence of a change in control. Fair Value of Financial Instruments Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants at the measurement date. ASC 820, Fair Value Measurement and Disclosures , establishes a hierarchy whereby inputs to valuation techniques used in measuring fair value are prioritized, or the fair value hierarchy. There are three levels to the fair value hierarchy based on reliability of inputs, as follows: • Level 1 — Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets. • Level 2 — Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. • Level 3 — Unobservable inputs in which little or no market data exists, therefore requiring the Company to develop its own assumptions. The Company evaluates assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level at which to classify them for each reporting period, utilizing valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The determination requires significant judgments to be made by the Company. Property and Equipment, Net Property and equipment, net are recorded at cost less accumulated depreciation. Expenditures for major additions and improvements are capitalized and minor replacements, maintenance, and repairs are charged to expense as incurred. When property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the balance sheet accounts and any resulting gain or loss is included in the results of operations for the respective period. 117 Table of Contents HUMACYTE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Summary of Significant Accounting Policies (continued) Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets. The estimated useful lives for significant asset categories are as follows: Property and equipment Estimated Useful Lives (Years) Scientific equipment 5 – 7 Computer equipment 5 Software 3 Furniture and fixtures 5 – 7 Leasehold improvements Lesser of useful life or life of lease Construction in progress N/A Impairment of Long-Lived Assets The Company reviews the carrying value of property and equipment for indicators of possible impairment whenever events and circumstances indicate that the carrying value of an asset or asset group may not be recoverable from the estimated future net undiscounted cash flows expected to result from its use and eventual disposition. In cases where estimated future net undiscounted cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of the asset or asset group. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition, and other economic factors. Based on this assessment, during the years ended December 31, 2021 and 2020, respectively, the Company concluded there were no such events or changes in circumstances requiring review of the carrying amount of the Company’s long-lived assets and there was no impairment during the years ended December 31, 2021 and 2020. Income Taxes 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 the Company’s financial statements. In estimating future tax consequences, the Company considers all expected future events other than enactment of changes in tax laws or rates. A valuation allowance is recorded, if necessary, to reduce net deferred tax assets to their realizable values if management does not believe it is more likely than not that the net deferred tax assets will be realized. As of December 31, 2021 and 2020, the Company has recorded a full valuation allowance against its deferred tax assets. The Company applies the accounting guidance for uncertainties in income taxes, which prescribes a recognition threshold and measurement process for recording uncertain tax positions taken, or expected to be taken, in a tax return in the financial statements. Additionally, the guidance also prescribes the treatment for derecognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. The Company accrues for the estimated amount of taxes for uncertain tax positions if it is more likely than not that the Company would be required to pay such additional taxes. The Company recognizes the benefit of an income tax position only if it is more likely than not (greater than 50%) that the tax position will be sustained upon tax examination, based solely on the technical merits of the tax position. Otherwise, no benefit can be recognized. Assessing an uncertain tax position begins with the initial determination of the sustainability of the position and is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. As of each balance sheet date, unresolved uncertain tax positions must be reassessed. Additionally, the Company must accrue interest and related penalties, if applicable, on all tax exposures for which reserves have been established consistent with jurisdictional tax laws. The Company has analyzed its filing positions in all significant Federal and state jurisdictions where it is required to file income tax returns, as well as open tax years in these jurisdictions. As of December 31, 2021 and 2020, the Company has determined that no uncertain tax positions would have a material impact on the financials statements of the Company. The Company is no longer subject to Federal, state, and local tax examinations by tax authorities for years before 2018 118 Table of Contents HUMACYTE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Summary of Significant Accounting Policies (continued) although carry-forward attributes that were generated prior to 2018 may still be adjusted upon examination by the taxing authorities if they either have been or will be used in a future period. No income tax returns are currently under examination by taxing authorities. As of December 31, 2021 and 2020, the Company had no t recorded any amounts for unrecognized tax benefits. The Company’s policy is to recognize interest and penalties related to uncertain tax positions in the provision for income taxes. As of December 31, 2021 and 2020, the Company had no accrued interest or penalties related to uncertain tax positions, and no amounts had been recognized in the Company’s statements of operations and comprehensive loss. Intellectual Property The Company seeks to protect its intellectual property by filing patent applications in the United States and abroad related to novel technologies and product candidates that it views as important to its business. The patent positions of biotechnology companies generally, including the Company’s patent positions, is highly uncertain and involves complex legal and factual questions for which legal principles remain unresolved. Patent costs have been expensed as incurred as general and administrative expense. Research and Development The Company expenses research and development costs as operating expenses as incurred. 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 clinical trials, and other related clinical trial fees, such as for investigator grants, patient screening, laboratory work and statistical compilation and analysis; allocation of facility lease and maintenance costs; • depreciation of leasehold improvements, laboratory equipment and computers; • costs related to purchasing raw materials for and producing product candidates for clinical trials; • costs related to compliance with regulatory requirements; • costs related to the manufacturing scale-out initiative; and • license fees related to in-licensed technologies. Accrued Research and Development The Company has entered into various agreements with CROs and a CMO, which conduct preclinical studies and clinical trials and contract manufacturing activities. The Company’s research and development accruals are estimated based on the level of services performed, progress of the studies, including the phase or completion of events, and contracted costs. The estimated costs of research and development provided, but not yet invoiced, are included in accrued expenses on the balance sheet. If the actual timing of the performance of services or the level of effort varies from the original estimates, the Company will adjust the accrual accordingly. Payments made under these arrangements in advance of the performance of the related services are recorded as prepaid expenses and other current assets until the services are rendered. The Company terminated its agreement with its CMO on March 6, 2020. The remaining HAV inventory at the CMO was fully depleted during the year ended December 31, 2021. Stock-Based Compensation The Company accounts for stock-based compensation for employees and non-employees measured at grant date, based on the fair value of the award. The Company measures the fair value of awards granted using the Black-Scholes option pricing model and recognizes the expense over the requisite service period using the straight-line method. Option valuation 119 Table of Contents HUMACYTE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Summary of Significant Accounting Policies (continued) models, including the Black-Scholes option-pricing model, require the input of highly subjective assumptions, and changes in the assumptions used can materially affect the grant-date fair value of an award. These assumptions include the risk-free rate of interest, expected dividend yield, expected volatility, the expected term of the award, and the fair value of the underlying common stock on the date of grant. Forfeitures are accounted for as they occur. Common Stock Warrants In connection with the Merger, the Company assumed 5,000,000 publicly-traded warrants (“Public Warrants”) and 177,500 private placement warrants issued to AHAC Sponsor LLC (the “Sponsor”), Oppenheimer & Co. Inc. and Northland Securities, Inc, in connection with AHAC’s initial public offering (“Private Placement Warrants” and, together with the Public Warrants, the “Common Stock Warrants”). The Common Stock Warrants entitle the holder to purchase one share of the Company’s Common stock, par value $ 0.0001 (“Common Stock”), at an exercise price of $ 11.50 per share. The Public Warrants are publicly traded and are exercisable for cash unless certain conditions occur, such as the failure to have an effective registration statement related to the shares issuable upon exercise or redemption by the Company under certain conditions, at which time the warrants may be eligible for a cashless exercise. The Private Placement Warrants are non-redeemable for cash so long as they are held by the initial purchasers or their permitted transferees. If the Private Placement Warrants are held by someone other than the initial purchasers or their permitted transferees, the Private Placement Warrants are redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants. The Company evaluated the Common Stock Warrants to determine the appropriate financial statement classification upon the consummation of the Merger. The Common Stock Warrants are not mandatorily redeemable and are considered to be freestanding instruments as they are separately exercisable into common shares. As such, the Common Stock Warrants were not classified as liabilities under FASB ASC Topic 480, Distinguishing Liabilities from Equity (“ASC 480”). The Company then evaluated the Common Stock Warrants under FASB ASC Topic 815, Derivatives and Hedging . The agreement governing the Common Stock Warrants includes a provision (“Replacement of Securities Upon Reorganization”), the application of which could result in a different settlement value for the Private Placement Warrants depending on their holder. Because the holder of an instrument is not an input into the pricing of a fixed-for-fixed option on the Company’s ordinary shares, the Private Placement Warrants are not considered to be “indexed to the Company’s own stock” and therefore are not classified in stockholders’ equity. As the Private Placement Warrants meet the definition of a derivative, the Company 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 Public Warrants are considered to be “indexed to the Company’s own stock”. The agreement provides that in the event of a tender or exchange offer made to and accepted by holders of more than 50 % of the outstanding shares of the Company’s common shares, all holders of the Common Stock Warrants (both the Public Warrants and the Private Placement Warrants) would be entitled to receive cash for all of their Common Stock Warrants. As the Company has 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, the Company concluded that the Public Warrants meet the criteria to be classified within stockholders’ equity. Contingent Earnout Liability In connection with the Reverse Recapitalization and pursuant to the Merger Agreement, Legacy Humacyte equity holders are entitled to receive as additional merger consideration of up to 15,000,000 shares of the Company’s Common Stock (the “Contingent Earnout Shares”), comprised of two separate tranches of 7,500,000 shares 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 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. 120 Table of Contents HUMACYTE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Summary of Significant Accounting Policies (continued) The estimated fair value of the Contingent Earnout Shares was determined using a Monte Carlo simulation using a distribution of potential outcomes on a monthly basis over a ten -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 the current Company common stock price, expected volatility, risk-free rate, expected term and expected dividend yield. The Contingent Earnout Shares are categorized as a Level 3 fair value measurement (see “Fair Value of Financial Instruments” accounting policy described above) because the Company 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. Leases The Company accounts for its leases under ASC 842, Leases . The Company determines if an arrangement is or contains a lease and the classification of that lease at inception of a contract. The Company’s operating lease assets are included in “operating lease right-of-use assets, net”, and the current and non-current portions of the operating lease liabilities are included in “operating lease obligation, current portion”, and “operating lease obligation, net of current portion”, respectively, on the balance sheets. The Company’s finance lease assets are included in “finance lease right-of-use assets, net”, and the current and non-current portions of the finance lease liabilities are included in “finance lease obligation, current portion”, and “finance lease obligation, net of current portion”, respectively, on the consolidated balance sheets. Under this guidance, arrangements meeting the definition of a lease are classified as operating or finance leases, and are recorded on the balance sheet as both a right-of-use asset and lease liability, calculated by discounting fixed lease payments over the lease term at the rate implicit in the lease or the Company’s incremental borrowing rate. Lease right-of-use assets and lease obligations are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. Operating lease right-of-use assets are adjusted for (i) payments made at or before the commencement date, (ii) initial direct costs incurred, and (iii) tenant incentives under the lease. As the implicit rate for the operating leases were not determinable, the Company used an incremental borrowing rate based on the information available at the respective lease commencement dates in determining the present value of future payments. The incremental borrowing rate represents the interest rate the Company would expect to incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease. The Company determined the incremental borrowing rate by considering various factors, such as its credit rating, interest rates of similar debt instruments of entities with comparable credit ratings, the lease term and the currency in which the lease was denominated. The Company considers a lease term to be the noncancelable period that it has the right to use the underlying asset, including any periods where it is reasonably certain the Company will exercise any option to extend the contract. Lease expenses for minimum lease payments for operating leases are recognized on a straight-line basis over the lease term. Amortization expense of the right-of-use asset for finance leases is recognized on a straight-line basis over the lease term and interest expense for finance leases is recognized based on the incremental borrowing rate. Lease liabilities are increased by interest and reduced by payments each period, and the right of use asset is amortized over the lease term. In calculating the right-of-use assets and lease liabilities, the Company has elected to combine lease and non-lease components for all asset classes. The Company excludes short-term leases, if any, having initial terms of 12 months or less from the new guidance as an accounting policy election, and recognizes rent expense on a straight-line basis over the lease term. Other Risks and Uncertainties The Company is subject to risks and uncertainties common to early-stage companies in the biotechnology industry, including, but not limited to, successful discovery and development of its product candidates, the success of clinical trials and other studies for its product candidates, including for its ongoing V005 Phase II/III clinical trial and V007 Phase III clinical trial, the regulatory approval and commercialization of its HAVs and other product candidates, the expected size of the target populations for the Company’s product candidates, the degree of market acceptance of the HAVs, if approved, 121 Table of Contents HUMACYTE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Summary of Significant Accounting Policies (continued) the availability of third-party coverage and reimbursement, development by competitors of new technological innovations, the ability to manufacture HAVs and other product candidates in sufficient quantities, expectations regarding the Company’s strategic partnerships, dependence on third parties, key personnel and the ability to attract and retain qualified employees, protection of proprietary technology and confidentiality of trade secrets, compliance with governmental regulations, the impact of the COVID-19 pandemic, the Company’s implementation and maintenance of effective internal controls, and the ability to secure additional capital to fund operations and commercial success of its product candidates. Product candidates currently under development will require extensive preclinical and clinical testing and regulatory approval prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel, and infrastructure and extensive compliance-reporting capabilities. Even if the Company’s commercialization efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales, and the Company may depend on certain strategic relationships to distribute its products, including the Company’s strategic partnership with Fresenius Medical Care Holdings, Inc., (“Fresenius Medical Care”) to sell, market and distribute its 6 millimeter HAV for certain specified indications outside the United States. Recently Adopted Accounting Pronouncements In December 2019, the FASB issued ASU 2019-12 “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”). The FASB issued this update to remove certain exceptions to the general principles in the Accounting Standards Codification (“ASC”) Topic 740 and to improve consistent application of and simplify U.S. GAAP for other areas of ASC Topic 740 by clarifying and amending existing guidance. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company adopted ASU 2019-12 as of January 1, 2021. The adoption of the new guidance did not have a material impact on the Company’s financial statements and related disclosures. In August 2020, the FASB issued ASU No. 2020-06, “Debt-Debt with Conversion and Other Options (Subtopic 470 – 20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815–40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06”), which simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and it also simplifies the diluted earnings per share calculation in certain areas. Either a modified retrospective method of transition or a fully retrospective method of transition is permissible for the adoption of this standard. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021, with early adoption permitted. The Company adopted ASU 2020-06 as of January 1, 2021. The adoption of this ASU had no impact on the Company’s financial statements and related disclosures. Recently Issued Accounting Pronouncements In May 2021, the FASB issued ASU No. 2021-04, “Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options” (“ASU 2021-04”). The FASB issued this update to clarify and reduce diversity in an issuer’s accounting for modifications or exchanges of freestanding equity classified written call options (for example, warrants) that remain equity classified after modification or exchange. ASU 2021-04 is effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the amendments prospectively to modifications or exchanges occurring after the effective date of the amendments. The Company plans to adopt the standard effective January 1, 2022 and does not expect a material impact to its consolidated financial statements or disclosures. In November 2021, the FASB issued ASU No. 2021-10, “Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance” (“ASU 2021-10”) to improve financial reporting by requiring disclosures that increase the transparency of transactions with a government accounted for by applying a grant or contribution model by analogy, including (i) the types of transactions, (ii) an entity’s accounting for those transactions, and (iii) the effect of those transactions on an entity’s financial statements. ASU 2021-10 is effective for all entities within their scope for 122 Table of Contents HUMACYTE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Summary of Significant Accounting Policies (continued) financial statements issued for annual periods beginning after December 15, 2021. Early adoption is permitted and an entity can elect to apply the amendments in this guidance prospectively or retrospectively. The Company plans to adopt this standard effective January 1, 2022 and does not expect a material impact to its consolidated financial statements or disclosures. 3. Reverse Recapitalization On August 26, 2021, Merger Sub, a wholly-owned subsidiary of AHAC, merged with Legacy Humacyte, with Legacy Humacyte surviving as a wholly-owned subsidiary of AHAC. At the effective time of the Merger: • each outstanding share of Legacy Humacyte common stock was converted into approximately 0.26260 shares of the Company’s common stock; • each outstanding share of preferred stock of Legacy Humacyte was cancelled and converted into the aggregate number of shares of New Humacyte’s common stock that would be issued upon conversion of the shares of Legacy Humacyte preferred stock based on the applicable conversion ratio immediately prior to the effective time, multiplied by approximately 0.26260 ; and • each outstanding option or warrant to purchase Legacy Humacyte common stock was converted into an option or warrant, as applicable, to purchase a number of shares of the Company’s common stock equal to the number of shares of Legacy Humacyte common stock subject to such option or warrant multiplied by approximately 0.26260 , at an exercise price per share equal to the current exercise price per share for such option or warrant divided by approximately 0.26260 ; in each case, rounded down to the nearest whole share. In addition, upon the closing of the merger (the “Closing”), 2,500,000 Class B shares of AHAC (Founder Shares) automatically converted into shares of the Company’s common stock, on a one -for- one basis. Former holders of the Legacy Humacyte common stock and Legacy Humacyte preferred stock are eligible to receive up to an aggregate of 15,000,000 additional shares of the Company’s common stock (the “Contingent Earnout Shares”) in the aggregate in two equal tranches of 7,500,000 shares if the volume-weighted average closing sale price of the 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. At the Closing on August 26, 2021, the Company recorded a liability (“Contingent Earnout Liability”) of $ 159.4 million, based on the estimated fair value of the 15 million Contingent Earnout Shares with a corresponding reduction of additional paid-in capital in the equity section of the Company’s consolidated balance sheet. Concurrently with the execution of the Merger Agreement, AHAC entered into subscription agreements (the “Subscription Agreements”) with certain investors (the “PIPE Investors”). Pursuant to the Subscription Agreements, the PIPE Investors purchased an aggregate of 17,500,000 shares of the Company’s common stock (the “PIPE Shares”) in a private placement at a price of $ 10.00 per share for an aggregate purchase price of $ 175 million (the “PIPE Financing”). The PIPE Financing was consummated in connection with the Closing. 123 Table of Contents HUMACYTE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. Reverse Recapitalization (continued) The number of shares of the Company’s common stock outstanding immediately following the consummation of the Merger was: Shares Common stock of AHAC, outstanding prior to Merger 10,355,000 Less redemption of AHAC shares ( 3,008,551 ) Common stock of AHAC 7,346,449 AHAC Founder Shares 2,500,000 New Humacyte shares issued to PIPE Investors 17,500,000 Issuance of common stock upon reverse recapitalization and PIPE Financing 27,346,449 New Humacyte shares issued in Merger to Legacy Humacyte stockholders 75,656,935 (1) Total shares of common stock immediately after Merger 103,003,384 ___________________________ (1) Includes 69,613,562 shares of common stock issued upon conversion of Legacy Humacyte’s redeemable convertible preferred stock. The Merger is accounted for as a reverse recapitalization in accordance with U.S. GAAP. Under this method of accounting, AHAC is treated as the acquired company for financial reporting purposes and Legacy Humacyte is treated as the acquirer. This determination is primarily based on the fact that subsequent to the Merger, the Legacy Humacyte stockholders hold a majority of the voting rights of the combined company, Legacy Humacyte comprises all of the ongoing operations of the combined company, Legacy Humacyte comprises a majority of the carryover governing body of the combined company, and Legacy Humacyte’s senior management comprises all of the senior management of the combined company. Accordingly, for accounting purposes, the Merger was treated as the equivalent of Legacy Humacyte issuing shares for the net assets of AHAC, accompanied by a recapitalization. The net assets of AHAC were stated at historical costs. No goodwill or other intangible assets were recorded. Operations prior to the Merger are those of Legacy Humacyte. In connection with the Merger, the Company received $ 242.4 million in proceeds from the Merger and related PIPE Financing. The Company incurred $ 3.9 million of transaction costs, consisting of banking, legal, and other professional fees, of which $ 3.9 million was recorded as a reduction of proceeds to additional paid-in capital, and less than $ 0.1 million related to the Private Placement Warrants, which are classified as liabilities in the consolidated balance sheets, was expensed in the consolidated statements of operations and comprehensive loss. All transaction costs were paid as of December 31, 2021. Legacy Humacyte assumed $ 15.2 million of liabilities, including PIPE Financing fees and legal fees, and $ 0.1 million of assets from AHAC. Of the $ 15.2 million of liabilities assumed from AHAC, as of December 31, 2021, $ 0.1 million was included in accrued expenses. 124 Table of Contents HUMACYTE, INC. NOTES TO FINANCIAL STATEMENTS 4. Fair Value Measurements The Company’s assets and liabilities that were measured at fair value on a recurring basis were as follows: Fair Value Measured as of December 31, 2021 ($ in thousands) Level 1 Level 2 Level 3 Total Assets: Cash equivalents (money market funds) $ 208,821 $ — $ — $ 208,821 Cash equivalents (certificates of deposit) — 2,000 — 2,000 Short-term investments (certificates of deposit) — 8,000 — 8,000 Total financial assets $ 208,821 $ 10,000 $ — $ 218,821 Liabilities: Contingent earnout liability $ — $ — $ 103,660 $ 103,660 Common stock warrant liabilities (Private Placement Warrants) — — 497 497 Total financial liabilities $ — $ — $ 104,157 $ 104,157 Fair Value Measured as of December 31, 2020 ($ in thousands) Level 1 Level 2 Level 3 Total Assets: Cash equivalents (money market funds) $ 35,623 $ — $ — $ 35,623 Total financial assets $ 35,623 $ — $ — $ 35,623 The following table presents a summary of the changes in the fair value of the Company’s Level 3 financial instruments: ($ in thousands) Contingent Earnout Liability Private Placement Warrants Fair value as of December 31, 2020 $ — $ — Private placement warrant liability acquired as part of the merger — ( 553 ) Contingent earnout liability recognized upon the closing of the reverse recapitalization ( 159,432 ) — Change in fair value included in other (expense) income 55,772 56 Fair value as of December 31, 2021 $ ( 103,660 ) $ ( 497 ) The fair value of the Contingent Earnout Liability and Private Placement Warrants liability are based on significant unobservable inputs, which represent Level 3 measurements within the fair value hierarchy. In determining the fair value of the Contingent Earnout Liability, the Company used the Monte Carlo simulation value 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 the current Company common stock price, expected volatility, risk-free rate, expected term and expected dividend yield (see Note 9). In determining the fair value of the Private Placement Warrants liability, the Company used the Monte Carlo simulation valuation model to estimate the fair value utilizing assumption including the current Company stock price, expected volatility, risk-free rate, expected term and expected dividend yield (see Note 9). 125 Table of Contents HUMACYTE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. Fair Value Measurements (continued) The Company’s money market funds are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices. Certificates of deposit are carried at amortized cost in the Company’s consolidated balance sheet, which approximates their fair value based on Level 2 inputs. The carrying values of other receivables, accounts payable and accrued expenses as of December 31, 2021 and 2020 approximated their fair values due to the short-term nature of these items. 5. Property and Equipment, Net Property and equipment, net consist of the following: As of December 31, ($ in thousands) 2021 2020 Scientific equipment (1) $ 27,641 $ 27,412 Computer equipment 155 149 Software 335 335 Furniture and fixtures 988 988 Leasehold improvements 26,355 26,355 55,474 55,239 Accumulated depreciation ( 20,440 ) ( 14,261 ) Property and equipment, net $ 35,034 $ 40,978 ___________________________ (1) Includes $ 3.6 million and $ 3.5 million for the years ended December 31, 2021 and 2020, respectively, related to scientific equipment not placed into service and therefore not being depreciated. Depreciation expense totaled $ 6.2 million and $ 6.3 million for the years ended December 31, 2021 and 2020, respectively. All long-lived assets are maintained in the United States. 6. Accrued Expenses Accrued expenses consisted of the following: As of December 31, ($ in thousands) 2021 2020 Accrued external research, development and manufacturing costs $ 2,520 $ 2,615 Accrued employee compensation and benefits 3,943 1,009 Accrued professional fees 294 968 Total $ 6,757 $ 4,592 7. Debt On April 30, 2020, the Company received loan proceeds in the amount of approximately $ 3.3 million under the Paycheck Protection Program (“PPP”). All or portion of this loan and any accrued interest was eligible to be forgiven after a twenty four week period as long as the borrower used the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of the loan forgiven was to be reduced if the borrower terminated employees or reduced salaries during the twenty four week period. The unforgiven portion of the PPP loan was to be payable over two years at an interest rate of 1%, with a deferral of payments for the first ten months. On May 25, 2021, the PPP loan was forgiven and the Company recognized a gain from loan extinguishment in the amount of $ 3.3 million during the year ended December 31, 2021. 126 Table of Contents HUMACYTE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. Debt (continued) On March 30, 2021, the Company entered into a term 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, or the Loan Agreement. The Company’s obligations under the Loan Agreement are secured by substantially all of its assets except for its intellectual property. The Loan Agreement contains certain customary covenants, including, but not limited to, those relating to additional indebtedness, liens, asset divestitures, and affiliate transactions. If a minimum liquidity amount is not maintained, 50 % of the outstanding principal and interest will become cash collateralized. As of December 31, 2021, the Company was in compliance with all covenants. The Company may use the proceeds of borrowings under the Loan Agreement as working capital and to fund its general business requirements. The Loan Agreement provides that the term loans will be distributed in tranches. The initial term loan tranche of $ 20.0 million was drawn on March 31, 2021, and on October 13, 2021 the Company borrowed an additional $ 10.0 million under the Loan Agreement. Borrowings under the Loan Agreement are accounted for net of issuance costs which are being accreted to interest expense over the term of the loan using the effective interest method. As of December 31, 2021, two subsequent $ 10.0 million term loan tranches were eligible to be disbursed at the request of the Company during specified draw periods between now and 2023 if certain business milestones and other requirements are met by the dates specified in the Loan Agreement. Borrowings bear interest at the greater of 7.5 % or the Wall Street Journal Prime Rate plus 4.25 % ( 7.5 % as of December 31, 2021). Interest-only payments on the principal amount outstanding are due monthly beginning in the first month after the loan is dispersed. Repayment of principal may begin as soon as July 1, 2023 under the level of borrowing outstanding at December 31, 2021, and no later than April 1, 2024 if the remaining two loan tranches are drawn. The term loans may only be prepaid in full, and such prepayment requires 30 days’ advance notice and is subject to a prepayment fee of 3.00 % (with a step down to 2.00 % after March 30, 2022, and a further step down to 1.00 % after March 30, 2023). The Company is not obligated to pay a prepayment fee if the Company makes a prepayment after March 30, 2024. In connection with the Loan Agreement, the Company granted warrants to the lenders to purchase shares of common stock at an exercise price of $ 10.28 per share, of which 287,704 warrants were immediately exercisable. The warrants are classified within stockholders’ equity as the settlement of the warrants is indexed to the Company’s own stock. The Company recognized the fair value of the warrants immediately exercisable within stockholders’ equity using a Black-Scholes valuation model at issuance. At issuance, the Company initially determined that the funding of an additional tranche was not probable, and therefore no value was ascribed to the remaining 123,302 warrants that were only exercisable upon the funding of the additional tranche. As a result of the Company’s additional $ 10.0 million borrowings under the Loan Agreement on October 13, 2021, the warrants to purchase the additional 123,302 shares of the Company’s common stock became exercisable at an exercise price of $ 10.28 per share and the value of the warrants was recorded as of that date. The additional warrants are classified within stockholders’ equity using a Black-Scholes valuation model, as the settlement of the warrants is indexed to the Company’s own stock. As of December 31, 2021, the fair value of warrants ($ 3.3 million), a 5 % final payment fee ($ 1.5 million) and debt issuance costs ($ 0.3 million) are being accreted to interest expense over the term of the loan using the effective interest method. SVB loan payable and net discount or premium balances are as follows: ($ in thousands) December 31, 2021 Principal amount of SVB loan payable $ 30,000 Final payment amount of SVB loan payable 1,500 Net premium associated with accretion of final payment and other debt issuance costs ( 4,139 ) SVB loan payable, current and noncurrent 27,361 Less SVB loan payable, current portion — SVB loan payable, noncurrent portion $ 27,361 127 Table of Contents HUMACYTE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. Debt (continued) Future minimum payments of principal on the Company’s outstanding variable rate borrowings as of December 31, 2021 are as follows: Year ending December 31: ($ in thousands) 2022 $ — 2023 10,000 2024 17,143 2025 2,857 Total future payments $ 30,000 8. Leases The Company’s finance lease relates to its headquarters, which was substantially completed in June 2018 and leased through May 2033, and its operating lease relates to the land lease associated with its headquarters. During 2020 the Company had an operating lease for laboratory and office space in Ohio. In March 2020, the Company terminated this lease, effective September 30, 2020, and paid termination fees of less than $ 0.1 million. At December 31, 2021 and 2020, the Company had finance lease liabilities of $ 23.1 million and $ 24.8 million, respectively, and right-of-use assets of $ 21.4 million and $ 23.5 million, respectively, and operating lease liabilities of $ 0.7 million and $ 0.8 million, respectively, and right-of-use assets of $ 0.7 million and $ 0.8 million, respectively, all of which were included in the consolidated balance sheets. The Company’s leases do not require any contingent rental payments, impose any financial restrictions, or contain any residual value guarantees. Certain of the Company’s leases include renewal options and escalation clauses; renewal options have been included in the calculation of the lease liabilities and right of use assets as the Company is reasonably certain to exercise the options due to the specialized nature of the leased building. Variable expenses generally represent the Company’s share of the landlord’s operating expenses. The Company does not act as a lessor in any lease arrangements. The following summarizes quantitative information about the Company’s leases: Year Ended December 31, ($ in thousands) 2021 2020 Finance lease cost Amortization of right-of-use assets $ 2,060 $ 2,060 Interest on lease liabilities 2,044 2,180 Total finance lease cost 4,104 4,240 Operating lease cost 105 152 Total lease cost $ 4,209 $ 4,392 Year Ended December 31, 2021 Year Ended December 31, 2020 ($ in thousands) Finance Leases Operating Leases Finance Leases Operating Leases Operating cash flows from leases $ ( 2,044 ) $ ( 105 ) $ ( 2,180 ) $ ( 182 ) Financing cash flows from leases $ ( 1,729 ) $ — $ ( 1,500 ) $ — Weighted-average remaining lease term 5.04 5.74 5.52 6.24 Weighted-average discount rate 8.50 % 8.50 % 8.50 % 8.50 % 128 Table of Contents HUMACYTE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. Leases (continued) As of December 31, 2021, the maturities of the Company’s lease liabilities were as follows: ($ in thousands) Finance Leases Operating Leases 2022 $ 3,868 $ 105 2023 3,965 105 2024 4,065 105 2025 4,167 105 2026 4,237 105 Thereafter 12,699 574 Total 33,001 1,099 Less: present value discount ( 9,911 ) ( 372 ) Lease liabilities $ 23,090 $ 727 9. Stockholders’ Equity (Deficit) Redeemable Convertible Preferred Stock As of December 31, 2020 and immediately prior to the Merger, Legacy Humacyte had outstanding series A redeemable convertible preferred stock, series B redeemable convertible preferred stock, series C redeemable convertible preferred stock and series D redeemable convertible preferred stock, which are collectively referred to as “redeemable convertible preferred stock.” As of December 31, 2020, redeemable convertible preferred stock consisted of the following (in thousands, except share amounts): Redeemable Convertible Preferred Stock Authorized Redeemable Convertible Preferred Stock Issued and Outstanding Carrying Value Liquidation Preference Issuance Price Series A redeemable convertible preferred stock 18,421,897 18,421,897 $ 74,079 $ 74,079 $ 4.0212 Series B redeemable convertible preferred stock 24,137,647 24,137,647 127,358 136,500 $ 5.6550 Series C redeemable convertible preferred stock 11,241,286 11,241,283 70,704 75,000 $ 6.6717 Series D redeemable convertible preferred stock 15,812,735 15,812,735 148,848 150,000 $ 9.4859 69,613,565 69,613,562 $ 420,989 $ 435,579 In connection with the Merger, all previously issued and outstanding redeemable convertible preferred stock was converted into an equivalent number of shares of common stock of the Company on a one-for-one basis, then multiplied by the Exchange Ratio pursuant to the Merger Agreement. Common Stock On August 26, 2021, the Merger and related PIPE Financing was consummated and the Company issued 27,346,449 shares of common stock for proceeds of $ 242.4 million. The Company incurred $ 3.9 million of transaction costs, consisting of banking, legal, and other professional fees. Legacy Humacyte assumed $ 15.2 million of liabilities, including PIPE Financing fees and legal fees, and $ 0.1 million of assets from AHAC. Immediately following the Merger, there were 103,003,384 shares of common stock outstanding with a par value of $ 0.0001 . As of December 31, 2021, the Company’s Second Amended and Restated Certificate of Incorporation authorized the Company to issue 250,000,000 shares of common stock at a par value of $ 0.0001 per share. The number of authorized 129 Table of Contents HUMACYTE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. Stockholders’ Equity (Deficit) (continued) shares of common stock may be increased or decreased (but not below the number of shares thereof then outstanding or reserved for issuance) by the affirmative vote of the holders of a majority of the capital stock of the Company entitled to vote and may require a separate class vote of the common stock. The holders of common stock are entitled to receive dividends from time to time as may be declared by the Company’s board of directors. Through December 31, 2021, no dividends have been declared. The holders of common stock are entitled to one vote for each share held with respect to all matters voted on by the common stockholders of the Company. In the event of a reorganization of the Company, after payment to the preferred stockholders of their liquidation preferences, holders of common stock are entitled to share ratably in all remaining assets of the Company. At December 31, 2021 and 2020, the Company had reserved common stock for future issuances as follows: December 31, 2021 2020 Conversion of Series A redeemable convertible preferred stock — 18,421,897 Conversion of Series B redeemable convertible preferred stock — 24,137,647 Conversion of Series C redeemable convertible preferred stock — 11,241,286 Conversion of Series D redeemable convertible preferred stock — 15,812,735 Common stock reserved for Contingent Earnout Shares 15,000,000 — Exercise of options under stock plans 6,711,192 4,813,262 Issuance of options under stock plans 7,418,937 2,948,598 Shares available for grant under ESPP 1,030,033 — Warrants to purchase common stock 5,588,506 32,961 35,748,668 77,408,386 Upon the Closing on August 26, 2021, all of the outstanding redeemable convertible preferred stock was converted to Common Stock pursuant to the conversion rate effective immediately prior to the Merger and the Exchange Ratio and the remaining amount was reclassified to additional paid-in capital. Preferred Stock The Company’s Second Amended and Restated Certificate of Incorporation provides the Company’s board of directors with the authority to issue $ 0.0001 par value preferred stock in one more series and to establish from time to time the number of shares to be included in each such series, by adopting a resolution and filing a certification of designations. Voting powers, designations, powers, preferences and relative, participating, optional, special and other rights shall be stated and expressed in such resolutions. There were 20,000,000 shares designated as preferred stock and none were outstanding as of December 31, 2021. 130 Table of Contents HUMACYTE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. Stockholders’ Equity (Deficit) (continued) Warrants Activity of warrants for the year ended December 31, 2021 is set forth below: Legacy Humacyte Common Stock Warrants Private Placement Warrants Public Warrants Total Common Stock Warrants Outstanding as of December 31, 2020 32,961 — — 32,961 Common Stock Warrants issued to SVB 411,006 — — 411,006 Common Stock Warrants as part of the Merger — 177,500 5,000,000 5,177,500 Warrants exercised ( 32,961 ) — — ( 32,961 ) Outstanding as of December 31, 2021 411,006 177,500 5,000,000 5,588,506 In conjunction with a long-term debt agreement entered into on March 15, 2006 and paid in full during 2011, the Company issued a warrant that gave the holder the right to purchase 32,961 shares of the Company’s common stock at an exercise price of $ 1.14 per share, which was outstanding as of December 31, 2020. The warrant was fully exercised on March 4, 2021. There was no activity for the warrant during the year ended December 31, 2020. See Note 7 — Debt for a discussion of warrants issued in conjunction with the Company’s Loan Agreement. Private Placement Warrants The Private Placement Warrants were initially recognized as a liability on the Closing Date, at a fair value of $ 0.6 million, and the Private Placement Warrant liability was remeasured to fair value as of December 31, 2021, resulting in a gain of $ 0.1 million for the year ended December 31, 2021, classified within Change in fair value of common stock warrant liabilities in the consolidated statements of operations and comprehensive loss. The Private Placement Warrants were valued using the following assumptions under the Monte Carlo simulation value model: December 31, 2021 August 26, 2021 Market price of public stock $ 7.25 $ 10.96 Exercise price $ 11.50 $ 11.50 Expected term (years) 4.65 5.00 Expected share price volatility 61.0 % 32.5 % Risk-free interest rate 1.21 % 0.68 % Estimated dividend yield 0 % 0 % Public Warrants The Public Warrants may only be exercised for a whole number of shares and will expire five years after the completion of the Merger. The Public Warrants became exercisable 30 days after the completion of the Merger. The Public Warrants were initially recognized as equity on the Closing Date at a fair value of $ 2.80 per share. There were no exercises of the Public Warrants during the year ended December 31, 2021. Contingent Earnout Liability Following the Closing, former holders of Legacy Humacyte common and preferred shares may receive up to 15,000,000 additional shares of the Company’s common stock in the aggregate, in two equal tranches of 7,500,000 shares of common stock per tranche. The first and second tranches are issuable if the closing volume weighted average price 131 Table of Contents HUMACYTE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. Stockholders’ Equity (Deficit) (continued) (“VWAP”) per share of common stock quoted on the Nasdaq (or the exchange on which the shares of common stock are then listed) is greater or equal to $ 15.00 and $ 20.00 , respectively, over any 20 trading days within any 30 consecutive trading day period. Upon the Closing, the contingent obligation to issue Contingent Earnout Shares was accounted for as a liability because the triggering events that determine the number of Contingent Earnout Shares required to be issued include events that are not solely indexed to the common stock of Humacyte. The estimated fair value of the total Contingent Earnout Shares at the Closing on August 26, 2021, was $ 159.4 million based on a Monte Carlo simulation valuation model using a distribution of potential outcomes on a monthly basis over a ten -year period using the most reliable information available. The Contingent Earnout Liability was remeasured to fair value as of December 31, 2021, resulting in the recording of a non-cash gain of $ 55.8 million for the year ended December 31, 2021, classified within Change in fair value of contingent earnout liability in the consolidated statements of operations and comprehensive loss. Assumptions used in the valuations are described below: December 31, 2021 August 26, 2021 Current stock price $ 7.25 $ 10.96 Expected share price volatility 85.8 % 79.6 % Risk-free interest rate 1.52 % 1.34 % Estimated dividend yield 0 % 0 % Expected term (years) 10.00 10.00 10. Stock-based Compensation At Closing, the 2021 Long-Term Incentive Plan, or the 2021 Plan, and the 2021 Employee Stock Purchase Plan, or the ESPP, became effective. As of December 31, 2021, 7,418,937 and 1,030,033 shares of common stock were available under the 2021 Plan and ESPP, respectively. The 2021 Plan and ESPP provide that on January 1 of each year commencing January 1, 2022, the 2021 Plan and the ESPP reserve will automatically increase in an amount equal to the lesser of (a) 5 % and 1 %, respectively, of the number of shares of the Company’s common stock outstanding on December 31 of the preceding year and (b) a number of shares of common stock determined by the Company’s board of directors. In December 2021, the Company’s board of directors determined that there would be no automatic increase in the number of shares reserved under the 2021 Plan or the ESPP on January 1, 2022. Under the 2021 Plan, the Company can grant non-statutory stock options, or NSOs, incentive stock options, or ISOs, stock appreciation rights, restricted stock, restricted stock units, unrestricted stock, performance awards and other forms of awards. Under the ESPP, eligible employees are permitted to purchase shares of the Company’s common stock at the lower of 85 % of the closing trading price per share of the Company’s common stock on the first day of the offering or 85 % of the closing trading price per share on the exercise date, which will occur on the last day of each offering. Prior to the Closing, Legacy Humacyte had two equity incentive plans, the 2015 Omnibus Incentive Plan, as amended, or the 2015 Plan, and the 2005 Stock Option Plan, or the 2005 Plan. As a result of the Merger, no further awards may be granted under either the 2015 plan or the 2005 Plan. All awards previously granted and outstanding as of the effective date of the Merger, which totaled 5,886,706 and 518,432 shares of common stock reserved for options issued under the 2015 Plan and 2005 Plan, respectively, were adjusted to reflect the impact of the Merger as set forth in the Merger Agreement, but otherwise remain in effect pursuant to their original terms. The shares underlying any award granted under the 2021 Plan or the 2015 Plan that are forfeited, cancelled or reacquired by the Company prior to vesting, that expire or that are paid out in cash rather than shares will become available for grant and issuance under the 2021 Plan. The Company ’ s stock option plans allow for the grant of awards that the Company believes aid in aligning the interests of these persons with those of its stockholders. The Company ’ s board of directors determines the specific terms of equity incentive grants, including the exercise price per share and vesting period for option awards. Option awards are granted with an exercise price equal to the fair market value of the Company ’ s common stock at the date of grant. 132 Table of Contents HUMACYTE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. Stock-based Compensation (continued) The Company has granted options that include either a service-based or performance-based vesting condition, or both, and a 10-year contractual term. The service-based vesting condition for the plans is generally satisfied over 36 to 48 months from the date of grant. The performance-based vesting conditions are satisfied upon the attainment of certain product development milestones. The Company recognizes stock-based compensation expense based on the grant date fair value of the awards measured using the Black-Scholes option pricing model. Compensation expense related to awards with service-based vesting conditions is recognized on a straight-line basis over the requisite service period. Compensation expense related to awards with performance-based vesting conditions is recognized over the requisite service period using the accelerated attribution method to the extent achievement of the performance-based condition is probable. The Company does not recognize compensation expense related to awards with performance-based vesting conditions until it is probable that the performance-based vesting condition will be achieved. Forfeitures are accounted for as they occur. Option awards under the Company’s option plans generally provide for accelerated vesting of the unvested portions of any option award in the event of an involuntary termination, as such term is defined in the relevant stock option agreement, of a grantee’s employment during the period that commences 30 days prior to the effective date of a corporate transaction and that ends 12 months following the effective date of such transaction. Additionally, the Company’s board of directors may, in its sole discretion, accelerate the vesting of any unvested stock options in the event of a corporate transaction. The Company estimated the fair value of the stock options on the date of grant using the following assumptions in the Black-Scholes option-pricing model: Year Ended December 31, 2021 2020 Estimated dividend yield 0 % 0 % Expected share price volatility (weighted average and range, if applicable) 91.4 % ( 90.7 % to 93.1 %) 91.5 % ( 89.4 % to 91.6 %) Risk-free interest rate (weighted average and range, if applicable) 0.78 % ( 0.62 % to 1.32 %) 0.46 % ( 0.34 % to 0.75 %) Expected term of options (in years) (weighted average and range, if applicable) 6.05 ( 6.00 to 6.25 ) 6.00 • Fair Value of Common Stock. As the Company’s common stock was not publicly traded prior to the Merger, the fair value of the shares of its common stock underlying the options has historically been determined by the Company’s board of directors with input from management, after considering independent third-party valuation reports. • Expected Term. The expected term represents the period that stock options are expected to be outstanding. The Company 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 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 the Company has a limited trading history to use the volatility of its common stock. For purposes of identifying these peer companies, the Company 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. 133 Table of Contents HUMACYTE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. Stock-based Compensation (continued) • Expected Dividend Yield. The Company has not paid dividends on its common stock nor does it expect to pay dividends in the foreseeable future. Accordingly, the Company has estimated the dividend yield to be zero . At December 31, 2021, there were 7,418,937 options remaining available for grant under the 2021 Plan. The Company has sufficient authorized and unissued shares to make all issuances currently available under the 2021 Plan. The following tables show a summary of stock-based compensation expense included in the consolidated statements of operations and comprehensive loss for the years ended December 31, 2021 and 2020, and remaining unrecognized cost as of December 31, 2021 and 2020: Year Ended December 31, ($ in thousands) 2021 2020 Research and development $ 3,220 $ 1,135 General and administrative 6,926 3,559 Total $ 10,146 $ 4,694 As of December 31, ($ in thousands) 2021 2020 Unrecognized share-based compensation cost $ 13,346 $ 5,789 Expected weighted average period compensation costs to be recognized (years) 2.3 1.7 A summary of option activity under the Company’s stock option plans during the years ended December 31, 2021 and 2020 is presented below: Number of Shares Weighted Average Exercise Price Per Share Weighted Average Remaining Contractual Term (years) Aggregate Intrinsic Value (in thousands) Options outstanding at December 31, 2020 4,813,262 $ 6.04 6.6 $ 20,422 Granted 2,250,617 10.25 Exercised ( 188,278 ) 2.98 Forfeited ( 164,409 ) 8.47 Options outstanding at December 31, 2021 6,711,192 $ 7.48 5.3 $ 8,276 Vested and exercisable, December 31, 2021 4,642,546 $ 6.28 3.6 $ 8,276 Vested and expected to vest, December 31, 2021 6,711,192 $ 7.48 5.3 $ 8,276 The total intrinsic value of options exercised during the years ended December 31, 2021 and 2020 was $ 1.4 million and $ 1.4 million, respectively. The weighted-average grant-date fair value per share of options granted during the years ended December 31, 2021 and 2020 was $ 7.63 and $ 7.26 , respectively. 134 Table of Contents HUMACYTE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. Income Taxes The Company did not record any income tax expense or benefit during the years ended December 31, 2021 and 2020. The Company has a net operating loss and has provided a valuation allowance against net deferred tax assets due to uncertainties regarding the Company’s ability to realize these assets. All losses before income taxes arose in the U.S. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and deferred tax liabilities, including valuation allowances, are as follows: As of December 31, ($ in thousands) 2021 2020 Deferred tax assets: Net operating loss $ 58,646 $ 53,515 Capitalized research and development 36,830 32,337 Research credits 16,765 15,056 Stock-based compensation 1,323 2,519 Right of use lease liability 153 177 Accrued expenses 92 57 Other 1 1 Total deferred tax asset 113,810 103,662 Less: valuation allowance ( 111,575 ) ( 101,757 ) Total net deferred tax asset 2,235 1,905 Deferred tax liabilities: Basis difference in fixed assets ( 2,082 ) ( 1,728 ) Right of use lease assets ( 153 ) ( 177 ) Total deferred tax liability ( 2,235 ) ( 1,905 ) Total net deferred tax asset/(liability) $ — $ — A valuation allowance is provided for deferred tax assets where the recoverability of the assets is uncertain. The determination to provide a valuation allowance is dependent upon the assessment of whether it is more likely than not that sufficient future taxable income will be generated to utilize the deferred tax assets. Based on the weight of the available evidence, which includes the Company’s historical operating losses, lack of taxable income and the accumulated deficit, the Company provided a full valuation allowance against the deferred tax assets resulting from the tax loss and credits carried forward as of December 31, 2021 and December 31, 2020. On November 18, 2021, North Carolina enacted the 2021 Appropriations Act, which included a gradual corporate income tax rate decrease from the current 2.5% to 0% by 2030. The Company is in a cumulative loss position and does not have significant deferred tax liabilities that can be utilized as a source of taxable income in the future. Therefore, the Company has reduced its North Carolina deferred tax assets, including the net operating losses, to zero , as no benefit is expected to be realized from these deferred tax assets prior to 2030 when there would be no income tax in North Carolina. The reduction in the value of the deferred tax assets resulted in $ 6.9 million of tax expense, which was offset fully by the reduction in the corresponding valuation allowance. If the Company becomes profitable prior to 2030, the Company will recognize an income tax benefit related to the portion of its North Carolina deferred tax assets utilized. 135 Table of Contents HUMACYTE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. Income Taxes (continued) The reasons for the difference between the actual income tax benefit for the years ended December 31, 2021 and 2020, and the amount computed by applying the statutory Federal income tax rate to losses before income taxes are as follows: December 31, 2021 2020 ($ in thousands) Amount Rate Amount Rate Income tax benefit at statutory rate $ ( 5,560 ) 21.0 % $ ( 13,970 ) 21.0 % State income taxes, net of federal benefit ( 1,706 ) 6.4 % ( 1,338 ) 2.0 % Tax credits ( 2,662 ) 10.1 % ( 2,625 ) 3.9 % Other nondeductible expenses ( 11,991 ) 45.3 % 90 ( 0.1 ) % Deferred rate changes 8,981 ( 33.9 ) % 16 0.0 % Deferred tax true-up (1) 3,120 ( 11.8 ) % ( 1,736 ) 2.6 % Change in valuation allowance 9,818 ( 37.1 ) % 19,563 ( 29.4 ) % Provision for income taxes $ — 0.0 % $ — 0.0 % ___________________________ (1) The deferred tax true-up for 2021 primarily relates to executive compensation subject to IRC Section 162(m) limitations. As of December 31, 2021 the Company had approximately $ 278.5 million and $ 278.9 million of Federal and state net operating losses, respectively. Of this amount, $ 117.3 million of Federal net operating losses are subject to an 80 % limitation on taxable income, do not expire and will carry forward indefinitely, while the remaining amount begins to expire in 2025. Some of these state net operating losses included in these amounts follow the Federal Tax Cuts and Jobs Act and are carried over indefinitely. The Company’s state net operating losses began to expire in 2020 and will expire completely in 2036. The state operating loss carryforwards are inclusive of North Carolina net operating losses, which are recorded at a zero benefit. As of December 31, 2021 and 2020, the Company had Federal and state research tax credit carryforwards of $ 17.0 million and $ 15.1 million, respectively. These credit carryforwards will begin to expire in 2025 and will expire completely in 2041. Net operating loss carryforwards and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service, or IRS, and may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant stockholders or groups over a three-year period in excess of 50% as defined under Sections 382 and 383 in the Internal Revenue Code, which could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. The amount of the annual limitation is determined based on the value immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. The Company has not determined whether there have been any cumulative ownership changes or the impact on the utilization of the loss carryforwards if such changes have occurred. A section 382 study will be performed at a time when forthcoming profitability is reasonably anticipated. On March 27, 2020, the CARES Act was passed by the U.S. Congress and signed into United States law. The CARES Act, among other things, includes certain provisions for individuals and corporations (including a suspension on the application of the 80% limitation described above for taxable years beginning prior to January 1, 2021); however, these benefits did not materially impact the Company’s income tax provision in the periods presented. 136 Table of Contents HUMACYTE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. Retirement Plan The Company maintains two defined contribution employee retirement plans, or 401(k) plans, for all employees upon their date of hire. The 401(k) plans are intended to qualify as tax-qualified plans under Section 401(k) of the Internal Revenue Code of 1986, as amended. The plans permit employees to contribute, on a pre-tax basis, a portion of their salary up to the Federally mandated limits. The Company matches an employee’s contribution up to 4 % of the employee’s compensation. Contributions to the plans by the Company totaled $ 0.6 million for each of the years ended December 31, 2021 and 2020. 13. Commitments and Contingencies Patent License Agreements Duke University In March 2006, the Company entered into a license agreement with Duke University, or Duke, which was subsequently amended in 2011, 2014, 2015, 2018, 2019 and January 2022. Under this license agreement, Duke granted the Company a worldwide, exclusive, sublicensable license to certain patents related to decellularized tissue engineering, referred to as the patent rights, as well as a non-exclusive license to use and practice certain know-how related to the patent rights. The relevant licensed patent on decellularization of tissue expired in 2021. The Company has agreed to use commercially reasonable efforts to develop, register, market and sell products utilizing the patent rights, referred to as the licensed products. Any services provided to a third party utilizing licensed products are referred to as licensed services. The Company has also agreed to meet certain benchmarks in its development efforts, including as to development events, clinical trials, regulatory submissions and marketing approval, within specified timeframes. Under the license agreement, Duke retains the right to use the patent rights for its own educational and research purposes, and to provide the patent rights to other non-profit, governmental or higher-learning institutions for non-commercial purposes without paying royalties or other fees. In connection with the Company’s entry into the license agreement, the Company granted equity consideration to Duke in the form of 52,693 shares of the Company’s common stock. Under the license agreement, the Company also agreed to pay Duke: • a low single-digit percentage royalty on eligible sales of licensed products and licensed services, plus a low double-digit percentage of any sublicensing revenue; • an annual minimum royalty beginning in 2012, which increases in the calendar year immediately following the first commercial sale of licensed products or licensed services (whichever occurs first); and • an additional amount in license fees, as certain milestones are met. The license agreement remains effective until the later of (i) the last of the patent rights expires or (ii) four years after the Company’s first commercial sale, unless terminated earlier. Either party may terminate the agreement for fraud, willful misconduct or illegal conduct, or uncured material breach. Duke may terminate the agreement if the Company becomes insolvent. Duke may also terminate the license, convert the license into a non-exclusive license or seek assignment of any sublicense if the Company fails to reach diligence milestones within the applicable time period. If the Company abandons any claim, patent or patent application, its rights under the license with respect to such patent rights will be terminated in the territory in which the Company abandons such rights. The Company may terminate the license agreement unilaterally upon three months ’ prior notice to Duke. The Company agrees to indemnify Duke against certain third-party claims. Payments to Duke under the license agreement were immaterial during the periods presented. Yale University In February 2014, the Company entered into a license agreement with Yale University, (“Yale”), that granted the Company a worldwide license to the patents related to coatings for small-diameter vessels to inhibit clotting. The license granted under the agreement is exclusive in the field of engineered vascular tissues and tissues and extracellular matrix- 137 Table of Contents HUMACYTE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. Commitments and Contingencies (continued) based implants used for vascular repair, reconstruction and replacement (provided that all uses are vascular tissues within the range of 1 – 12mm in diameter), except that it is subject to Yale’s non-exclusive right, on behalf of itself and all other non-profit academic institutions, to use the licensed products for research, teaching, and other non-commercial purposes. The Company has agreed to pay to Yale an annual maintenance fee, increasing between the first and fourth anniversaries of the agreement up to a maximum of less than $ 0.1 million per year for this license. In August 2019, the Company entered into a license agreement with Yale, that granted the Company a worldwide license to the patents related to Bioartificial Vascular Pancreas (“BVP”). The license granted under the agreement is exclusive in the field of engineered vascular tissues that deliver pancreatic islet cells to patients, except that it is subject to Yale’s non-exclusive right, on behalf of itself and all other non-profit academic institutions, to use the licensed products for research, teaching, and other non-commercial purposes. The Company has agreed to pay to Yale an annual maintenance fee, increasing between the first and fourth anniversaries of the agreement up to a maximum of less than $ 0.1 million per year for this license. In August 2019, the Company entered into a license agreement with Yale, that granted the Company a worldwide license to the patents related to tubular prostheses. The license granted under the agreement is exclusive in the field of engineered urinary conduits, engineered tracheas/airways, and engineered esophagi, except that it is subject to Yale’s non-exclusive right, on behalf of itself and all other non-profit academic institutions, to use the licensed products for research, teaching, and other non-commercial purposes. The Company has agreed to pay to Yale an annual maintenance fee, increasing between the first and fourth anniversaries of the agreement up to a maximum of less than $ 0.1 million per year for this license. The Company has agreed to use reasonable commercial efforts to develop and commercialize the licensed patents and any licensed products and methods, and to use reasonable efforts to make the licensed products available to patients in low and low-middle income countries. The Company is also obligated to provide Yale periodically an updated and revised copy of its plan for each license, which must indicate progress of its development and commercialization. The Company may also sublicense the Company’s rights without Yale’s prior written consent, but such sublicense is subject to certain conditions. In connection with its entry into the license agreement, the Company paid Yale upfront cash fees. The Company has also agreed to pay Yale: • annual maintenance fees, increasing between the first anniversary of the agreement until the fifth anniversary for the coating and BVP licenses and until the fourth anniversary for the tubular prostheses license up to a maximum of less than $ 0.1 million per year; • milestone payments upon achievement of certain regulatory and commercial milestones of $ 0.2 million and $ 0.6 million ; • a low single-digit percentage royalty on worldwide net sales, subject to reductions for third-party license fees; and • a low double-digit percentage of sublicensing income. If the Company or any of its future sublicensees bring a patent challenge against Yale or assists another party in bringing a patent challenge against Yale, the license fees described above will be subject to certain increases and penalties. The agreements expire on a country-by-country basis on the date on which the last of the patents in such country expires, lapses or is declared invalid. Yale may terminate the agreements if the Company fails to (i) provide written diligence reports, (ii) provide commercially reasonable diligence plans, (iii) implement the plans in accordance with the obligations under the agreements, or (iv) reach certain research and development milestones within the scheduled timeframe set forth in the agreements; however, any such termination right would be limited in scope to the country to which such failure relates. Yale may also terminate for the Company’s non-payment, uncured material breach, failure to obtain adequate insurance, bringing or assisting in bringing of a patent challenge against Yale, abandonment of the research and development of the Company’s products or insolvency. The Company may terminate the license agreements (i) on 90 days’ prior written notice to Yale, provided the Company is not in breach of the license agreements and has made all 138 Table of Contents HUMACYTE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. Commitments and Contingencies (continued) required payments to Yale thereunder and (ii) on written notice to Yale following an uncured material breach. With respect to the license agreements related to small-diameter vessels and BVP, the Company’s rights under the license agreements will also terminate automatically with respect to a patent application or patent within the licensed patents in a specified country if, upon receipt of written notice from Yale, the Company does not agree to pay the patent filing, prosecution and maintenance fees incurred by Yale for such patent applications or patents in the specified country. Under certain circumstances, Yale may, at its option, convert the exclusive licenses to non-exclusive licenses if the Company declines to initiate certain infringement or interference proceedings with respect to the licensed patents. The Company has agreed to indemnify Yale against certain third-party claims. Payments to Yale under the license agreement were immaterial during the periods presented. Legal Matters The Company currently is not aware of any legal proceedings or claims that management believes will have, individually or in the aggregate, a material adverse effect on the Company’s business, financial condition, results of operations, or cash flows. Indemnification To the extent permitted under Delaware law, the Company has agreed to indemnify its directors and officers for certain events or occurrences while the director or officer is, or was serving, at the Company’s request in such capacity. The indemnification period covers all pertinent events and occurrences during the director’s or officer’s service. The maximum potential amount of future payments the Company could be required to make under these indemnification arrangements is not specified in such arrangements; however, the Company has director and officer insurance coverage that is intended to reduce its exposure and enable the Company to recover a portion of any potential future amounts the Company could be required to make. To date, the Company has not incurred any costs as a result of such obligations and has not accrued any liabilities related to such obligations in the consolidated financial statements. 14. Related Party Transactions Fresenius Medical Care investments and distribution agreement In June 2018, the Company completed a $ 150 million financing transaction pursuant to which Fresenius Medical Care purchased shares of series D redeemable convertible preferred stock that at the Closing of the Merger converted into 15,812,735 shares of the Company ’ s common stock. In August 2021, Fresenius Medical Care invested $ 25 million as part of the PIPE Financing and received 2.5 million shares of the Company ’ s common stock. In addition, the Company entered into a distribution agreement with Fresenius Medical Care in June 2018 which, as amended as of February 16, 2021, granted Fresenius Medical Care and its affiliates exclusive rights to develop outside the United States and EU and commercialize outside of the United States the Company’s 6 millimeter x 42 centimeter HAV and all improvements thereto, and modifications and derivatives thereof (including any changes to the length, diameter or configuration of the foregoing), for use in vascular creation, repair, replacement or construction, including renal replacement therapy for dialysis access, the treatment of peripheral arterial disease, and the treatment of vascular trauma, but excluding coronary artery bypass graft, pediatric heart surgery, or adhering pancreatic islet cells onto the outer surface of the distribution product for use in diabetic patients. Within the United States, Fresenius Medical Care will collaborate with the Company in its commercialization of the product in the field, including adoption of the distribution product as a standard of care in patients for which such use is supported by clinical results and health economic analyses. The Company is responsible for developing and seeking regulatory approval for the distribution product in the field in the United States. For countries outside the United States, the parties agreed to use commercially reasonable efforts to satisfy certain agreed minimum market entry criteria for the distribution product in the field in such country. For the EU, once such criteria have been satisfied for the applicable country, or if the parties otherwise mutually agree to obtain regulatory approval for the distribution product in the field in the applicable country, the Company agreed to use commercially reasonable efforts to obtain such regulatory approval (other than pricing approval), and Fresenius Medical Care agreed to use commercially reasonable efforts to obtain the corresponding pricing approval. For the rest of the world 139 Table of Contents HUMACYTE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. Related Party Transactions (continued) (i.e., outside the United States and the EU), once such criteria have been satisfied for the applicable country, or if the parties otherwise mutually agree to obtain regulatory and pricing approval for the distribution product in the field in the applicable country, Fresenius Medical Care agreed to use commercially reasonable efforts to obtain such approvals, and the Company agreed to use commercially reasonable efforts to support Fresenius Medical Care in its efforts. Under the distribution agreement, the Company grants an exclusive, sublicensable license to Fresenius Medical Care under the patents, know-how and regulatory materials controlled by the Company during the term to commercialize the distribution product in the field outside the United States, subject to the Company’s retained rights to carry out its obligations under the distribution agreement. The Company also grants a non-exclusive, sublicensable license to Fresenius Medical Care under the patents, know-how and regulatory materials controlled by the Company during the term to develop the distribution product in accordance with the terms of the distribution agreement. In addition, the Company grants to Fresenius Medical Care, among other things, a perpetual, irrevocable, non-exclusive sublicensable license under the patents and know-how that primarily relate to the distribution product or its manufacture and that were created, conceived or developed solely or jointly by or on behalf of Fresenius Medical Care in the performance of its activities under the distribution agreement. The distribution agreement provides that the Company will own all know-how and patents that primarily relate to the distribution product or its manufacture that are created, conceived or developed by or on behalf of either party in the performance of activities under the distribution agreement. Ownership of all other know-how, patents, materials and other intellectual property created, conceived or developed during the performance of activities under the distribution agreement will be determined in accordance with U.S. patent laws for determining inventorship. The Company is obligated to make payments to Fresenius Medical Care based on a share of aggregate net sales by or on behalf of the Company of the distribution product in the United States in the field. Such revenue-share payments will be a percentage of net sales in the low double digits, without regard to the calendar year in which such net sales are attributable, until such time that the Company has paid to Fresenius Medical Care a certain total amount, at which time the revenue-share will decrease to a percentage of net sales in the mid-single digits. The amounts that Fresenius Medical Care will be obligated to pay the Company under the distribution agreement for sales of the distribution product in the field outside of the United States will vary. Fresenius Medical Care agreed to pay the Company initially, on a country-by-country basis for sales outside of the United States, the amount equal to the average cost of manufacturing the Company’s distribution product plus a fixed dollar amount per unit. Following a specified period, on a country-by-country basis outside of the United States, Fresenius Medical Care will pay the Company a fixed percentage of net sales for each unit sold in such country, such that the Company will receive more than half of such net sales. The distribution agreement will generally continue on a country-by-country basis until the later of (a) the tenth anniversary of the launch date of the distribution product in the relevant country or (b) the expiration of the last-to-expire valid claim of specified patents in such country. Each party is permitted to terminate the distribution agreement for insolvency of, or, under certain circumstances, including various cure periods, material breach by the other party. Subject to a cure period, Fresenius Medical Care may also terminate the distribution agreement in its entirety or on a country-by-country basis (i) for certain withdrawals of regulatory approval or (ii) for termination or expiration of any of our in-licenses that is necessary for the exercise of Fresenius Medical Care’s rights, or the satisfaction of its obligations, under the distribution agreement. In addition, Fresenius Medical Care may terminate the distribution agreement for convenience on a country-by-country basis upon not less than 12 months’ written notice to the Company, although Fresenius Medical Care is not permitted to give such notice prior to the end of the second year following launch of the distribution product in such country. Each party is required to indemnify one another for certain third-party claims. Arrangements with Dr. Niklason and Yale University In September 2016, the Company entered into a Memorandum of Understanding Regarding Scientific and Operational Leadership, or MOU, with Dr. Niklason in connection with her performance of various consulting activities for the Company. The MOU provided for the Company to make a payment each year through 2023 to the academic institution with which Dr. Niklason was then affiliated, up to an aggregate amount of $ 2.5 million for 2018 through 2023, and to pay Dr. 140 Table of Contents HUMACYTE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. Related Party Transactions (continued) Niklason reasonable consulting fees in consideration of the services she performed for the Company. For the year ended December 31, 2020, the Company made payments under the MOU of $ 0.5 million, to, or on behalf of, Yale University, where Dr. Niklason serves as an Adjunct Professor in Anesthesia. The MOU was terminated effective November 9, 2020. The following table shows a summary of related party expenses included in the statements of operations and comprehensive loss for the years ended December 31, 2021 and 2020: Year Ended December 31, ($ in thousands) 2021 2020 Expenses under MOU $ — $ 500 License expenses 85 92 Other 91 28 Total $ 176 $ 620 As of December 31, 2021 and December 31, 2020, the Company was a party to license agreements with Yale University, as described in Note 13 — Commitments and Contingencies above. 141 Table of Contents Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None.