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, 2022 and 2021 109 Consolidated Statements of Operations and Comprehensive Loss for the Years ended December 31, 2022 and 2021 110 Consolidated Statements of Changes in Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the Years ended December 31, 2022 and 2021 111 Consolidated Statements of Cash Flows for the Years ended December 31, 2022 and 2021 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, 2022 and 2021, 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, 2022 and 2021, 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. 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 24, 2023 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, 2022 2021 ASSETS Current assets Cash and cash equivalents $ 149,772 $ 217,502 Short-term investments 2,107 8,000 Accounts receivable 31 176 Prepaid expenses and other current assets 2,298 3,662 Total current assets 154,208 229,340 Finance lease right-of-use assets, net 19,373 21,432 Operating lease right-of-use assets, net 682 727 Property and equipment, net 30,039 35,034 Total assets $ 204,302 $ 286,533 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Accounts payable $ 1,595 $ 2,094 Accrued expenses 7,108 6,757 SVB loan payable, current portion 8,571 — Finance lease obligation, current portion 2,256 1,981 Operating lease obligation, current portion 50 45 Deferred payroll tax — 173 Total current liabilities 19,580 11,050 Contingent Earnout Liability 27,893 103,660 SVB loan payable, net of current portion 20,336 27,361 Finance lease obligation, net of current portion 18,853 21,109 Operating lease obligation, net of current portion 632 682 Common stock warrant liabilities 80 497 Total liabilities 87,374 164,359 Commitments and contingencies (Note 13) Stockholders’ equity Preferred stock, $ 0.0001 par value; 20,000,000 shares designated as of December 31, 2022 and 2021; 0 shares issued and outstanding as of December 31, 2022 and 2021 — — Common stock, $ 0.0001 par value; 250,000,000 shares authorized as of December 31, 2022 and 2021; 103,229,013 and 103,003,646 shares issued and outstanding as of December 31, 2022 and 2021, respectively 10 10 Additional paid-in capital 543,456 536,737 Accumulated deficit ( 426,538 ) ( 414,573 ) Total stockholders’ equity 116,928 122,174 Total liabilities and stockholders’ equity $ 204,302 $ 286,533 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, 2022 2021 Grant revenue $ 1,565 $ 1,263 Operating expenses: Research and development 63,260 61,341 General and administrative 22,883 21,130 Total operating expenses 86,143 82,471 Loss from operations ( 84,578 ) ( 81,208 ) Other income (expense), net Interest income 2,629 16 Change in fair value of Contingent Earnout Liability 75,767 55,772 Change in fair value of common stock warrant liabilities 417 56 Gain on PPP loan forgiveness — 3,284 Interest expense ( 6,200 ) ( 4,348 ) Transaction costs expensed — ( 49 ) Total other income, net 72,613 54,731 Net loss and comprehensive loss $ ( 11,965 ) $ ( 26,477 ) Net loss per share attributable to common stockholders, basic and diluted $ ( 0.12 ) $ ( 0.66 ) Weighted-average shares outstanding used in computing net loss per share attributable to common stockholders, basic and diluted 103,051,366 39,970,398 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, 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 Proceeds from the exercise of stock options — — 225,367 — 535 — 535 Stock-based compensation — — — — 6,184 — 6,184 Net loss — — — — — ( 11,965 ) ( 11,965 ) Balance as of December 31, 2022 — — 103,229,013 $ 10 $ 543,456 $ ( 426,538 ) $ 116,928 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, 2022 2021 Cash flows from operating activities Net loss $ ( 11,965 ) $ ( 26,477 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation expense 6,151 6,181 Stock-based compensation expense 6,184 10,146 Change in fair value of Contingent Earnout Liability ( 75,767 ) ( 55,772 ) Change in fair value of common stock warrant liabilities ( 417 ) ( 56 ) Loss on disposal of property and equipment 6 — Amortization expense 2,059 2,060 Non-cash operating lease costs 45 42 Amortization of SVB debt discount 1,546 977 Accrued interest on PPP loan obligation — 11 Gain on PPP loan forgiveness — ( 3,284 ) Payment of liabilities assumed in Merger — ( 14,461 ) Changes in operating assets and liabilities: Accounts receivable 145 ( 63 ) Prepaid expenses and other current assets 1,364 ( 2,174 ) Accounts payable ( 509 ) ( 197 ) Accrued expenses 247 2,035 Operating lease obligation ( 45 ) ( 42 ) Deferred payroll taxes ( 173 ) ( 116 ) Net cash used in operating activities ( 71,129 ) ( 81,190 ) Cash flows from investing activities Purchase of short-term investments (certificates of deposit) ( 10,107 ) ( 8,000 ) Proceeds from maturity of short-term investments (certificates of deposit) 16,000 — Purchase of property and equipment ( 1,048 ) ( 220 ) Net cash provided by (used in) investing activities 4,845 ( 8,220 ) Cash flows from financing activities Proceeds from the exercise of stock options 535 598 Payment of finance lease principal ( 1,981 ) ( 1,729 ) Proceeds from Merger and PIPE financing, net of offering costs paid — 242,400 Payment of transaction costs related to Merger — ( 3,945 ) Proceeds from SVB loan — 29,659 Net cash (used in) provided by financing activities ( 1,446 ) 266,983 Net (decrease) increase in cash and cash equivalents ( 67,730 ) 177,573 Cash and cash equivalents at the beginning of the period 217,502 39,929 Cash and cash equivalents at the end of the period 149,772 217,502 Supplemental disclosure Cash paid for interest on SVB loan $ 2,668 $ 1,123 Supplemental disclosure of noncash activities: Purchase of property and equipment in accounts payable and accrued expenses $ 135 $ 21 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 (the “Company”), is pioneering the development and manufacture of off-the-shelf, universally implantable, bioengineered human tissues, advanced tissue constructs and organ systems designed to improve the lives of patients and transform the practice of medicine. The Company is leveraging its regenerative medicine technology platform to develop proprietary product candidates for use in the treatment of diseases and conditions across a range of anatomic locations in multiple therapeutic areas. On August 26, 2021 (the “Closing Date”), Alpha Healthcare Acquisition Corp. (“AHAC”) consummated a merger pursuant to a 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”), a Delaware corporation and wholly owned subsidiary of AHAC. As contemplated by the Merger Agreement, Merger Sub merged with and into Legacy Humacyte, with Legacy Humacyte continuing as the surviving corporation and as a wholly-owned subsidiary of AHAC (such transactions, the “Merger,” and, collectively with the other transactions described in the Merger Agreement, the “Reverse Recapitalization”). On the Closing Date, AHAC changed its name to Humacyte, Inc. (“New Humacyte”) and Legacy Humacyte changed its name to Humacyte Global, Inc. The Merger is accounted for as a reverse recapitalization in accordance with accounting principles generally accepted in the United States of America (“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 operating 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, 2022 and December 31, 2021, the Company had an accumulated deficit of $ 426.5 million and $ 414.6 million, respectively. The Company’s operating losses were $ 84.6 million and $ 81.2 million for the years ended December 31, 2022 and 2021, respectively. Net cash flows used in operating activities were $ 71.1 million and $ 81.2 million during the years ended December 31, 2022 and 2021, respectively. Substantially all of the Company’s operating 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, 2022, the Company had cash and cash equivalents and short-term investments of $ 151.9 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 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 enrollment in clinical trials has been delayed. To date, there have been no 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 ongoing effects of 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 and timelines, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19, the emergence of new virus variants, and the duration and intensity of the related economic impact of the pandemic. 113 Table of Contents HUMACYTE, INC. NOTES TO FINANCIAL STATEMENTS 2. Summary of Significant Accounting Policies Basis of Presentation The Company has prepared the accompanying financial statements in conformity with 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 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, advanced tissue constructs and organ systems 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 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, 2022 and 2021. 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, 2022 and 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. 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, 2022 and 2021, the Company had approximately $ 10.1 million and $ 10.0 million, respectively, in CDs. These cash deposits are deposited at a bank that is a member of the Certificate of Deposit Account Registry Service 114 Table of Contents HUMACYTE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (“CDARS”), in which large deposits are divided into smaller amounts and placed with other Federal Deposit Insurance Corporation (“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. As of December 31, 2022, the Company classified $ 8.0 million of its CDs as cash and cash equivalents and $ 2.1 million of its CDs as short-term investments on its consolidated balance sheets. As of December 31, 2021, the Company classified $ 2.0 million of its CDs as cash and cash equivalents and $ 8.0 million of its CDs as short-term investments on its consolidated balance sheets. 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. In August 2017, the Department of Defense (“DoD”) granted the Company a cash award for work to support human tissue engineered blood vessels for vascular reconstruction in the injured warfighter. The final amount awarded to the Company totaled $ 6.8 million and the program ended in November 2022. Based on the terms of the research project award agreement associated with the DoD grant, allowable costs were reimbursed to the Company based on the percentage of completion of project milestones in accordance with milestone payment schedules set forth in the agreement. During the years ended December 31, 2022 and 2021, the Company recognized revenue of $ 1.6 million and $ 1.3 million, respectively, for reimbursement of certain allowable costs related to this grant. Revenue related to the DoD grant is included in grant revenue in the Company’s consolidated statements of operations and comprehensive loss. As of December 31, 2022 and 2021, there was $ 31 thousand and $ 176 thousand, respectively, of accounts receivable related to the DoD grant included in the Company’s consolidated balance sheets. The Company has determined that the grant is not within the scope of ASC 606 as it does not meet the definition of a contract with a customer. The Company has concluded that the grant meets the definition of a contribution and is a nonexchange transaction 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 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. 115 Table of Contents HUMACYTE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 FDIC as of December 31, 2022 and 2021. The Company has cash equivalents that are invested in highly rated money market funds that are invested only in obligations of the U.S. government and its agencies. During the years ended December 31, 2022 and 2021 , 100 % of the Company’s total revenue relates to the award it received from the DoD in August 2017. As of December 31, 2022 and 2021 , 100 % of the Company’s accounts receivable relates to the DoD grant. 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 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 incurred losses for the years ended December 31, 2022 and 2021, basic and diluted net loss per share is the same for each period. 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: Year Ended December 31, 2022 2021 Exercise of options under stock plan 7,203,874 6,711,192 Warrants to purchase common stock 5,588,506 5,588,506 The 15,000,000 Contingent Earnout Shares, as defined in Note 3, are excluded from the anti-dilutive table for all 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. 116 Table of Contents HUMACYTE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS • 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. 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, 2022 and 2021, 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, 2022 and 2021. 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, 2022 and 2021, 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, 117 Table of Contents HUMACYTE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, 2022 and 2021, 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 2019 although carry-forward attributes that were generated prior to 2019 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, 2022 and 2021, 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, 2022 and 2021, 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. 118 Table of Contents HUMACYTE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 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 119 Table of Contents HUMACYTE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 income (expense), net in the consolidated statements of operations and comprehensive loss. The estimated fair value of the Contingent Earnout Shares was determined using a Monte Carlo simulation 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. 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 10 -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. 120 Table of Contents HUMACYTE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 2/3 clinical trial and V007 Phase 3 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, 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 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 adopted ASU 2021-04 as of January 1, 2022. The adoption of this ASU had no impact on the Company’s consolidated financial statements and 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 (for example, guidance on contributions for not-for-profit-entities in ASC 958-605). For transactions within the scope, ASU 2021-10 requires the disclosure of (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 financial statements issued for annual periods beginning after December 15, 2021. The Company adopted ASU 2021-10 effective January 1, 2022 and elected to apply the amendments prospectively to all transactions within the scope of the amendment that are reflected in the financial statements at the date of adoption. The adoption did not have a material impact to the Company’s consolidated financial statements or disclosures. See the above section titled “Grant Revenue” for disclosure related to the Company’s government grants. 121 Table of Contents HUMACYTE, INC. NOTES TO FINANCIAL STATEMENTS 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 Common Stock; • each outstanding share of preferred stock of Legacy Humacyte was cancelled and converted into the aggregate number of shares of 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 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 (the “Founder Shares”) automatically converted into shares of 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 Common Stock (the “Contingent Earnout Shares”) in the aggregate, comprised of two equal tranches of 7,500,000 shares per tranche 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 15,000,000 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 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. The number of shares of 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. 122 Table of Contents HUMACYTE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Merger was accounted for as a reverse recapitalization in accordance with U.S. GAAP. Under this method of accounting, AHAC was treated as the acquired company for financial reporting purposes and Legacy Humacyte was treated as the acquirer. This determination was primarily based on the fact that subsequent to the Merger, the Legacy Humacyte stockholders held a majority of the voting rights of the combined company, Legacy Humacyte comprised all of the ongoing operations of the combined company, Legacy Humacyte comprised a majority of the governing body of the combined company, and Legacy Humacyte’s senior management comprised 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, $ 0.1 million was included in accrued expenses as of December 31, 2021, and there were no unpaid liabilities as of December 31, 2022. 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, 2022 ($ in thousands) Level 1 Level 2 Level 3 Total Assets: Cash equivalents (money market funds) $ 141,159 $ — $ — $ 141,159 Cash equivalents (certificates of deposit) — 8,000 — 8,000 Short-term investments (certificates of deposit) — 2,107 — 2,107 Total financial assets $ 141,159 $ 10,107 $ — $ 151,266 Liabilities: Contingent Earnout Liability $ — $ — $ 27,893 $ 27,893 Private Placement Warrants liability — — 80 80 Total financial liabilities $ — $ — $ 27,973 $ 27,973 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 Private Placement Warrants liability — — 497 497 Total financial liabilities $ — $ — $ 104,157 $ 104,157 123 Table of Contents HUMACYTE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following tables present a summary of the changes in the fair value of the Company’s Level 3 financial instruments: Contingent Earnout Liability Year Ended December 31, ($ in thousands) 2022 2021 Fair value as of beginning of period $ ( 103,660 ) $ — Contingent Earnout Liability recognized upon the closing of the reverse recapitalization — ( 159,432 ) Change in fair value included in other income, net 75,767 55,772 Fair value as of end of period $ ( 27,893 ) $ ( 103,660 ) Private Placement Warrants Year Ended December 31, ($ in thousands) 2022 2021 Fair value as of beginning of period $ ( 497 ) $ — Private Placement Warrants liability acquired as part of the Merger — ( 553 ) Change in fair value included in other income, net 417 56 Fair value as of end of period $ ( 80 ) $ ( 497 ) The fair value of the Contingent Earnout Liability and Private Placement Warrants (as defined in Note 9 — Stockholders’ Equity (Deficit)) 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 Common Stock price, expected volatility, risk-free rate, expected term and expected dividend yield (see Note 9 — Stockholders’ Equity (Deficit)). Contingent earnout payments involve certain assumptions requiring significant judgment and actual results can differ from assumed and estimated amounts. 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 assumptions including the current Company stock price, expected volatility, risk-free rate, expected term and expected dividend yield (see Note 9 — Stockholders’ Equity (Deficit)). 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 sheets, 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, 2022 and 2021 approximated their fair values due to the short-term nature of these items. 124 Table of Contents HUMACYTE, INC. NOTES TO FINANCIAL STATEMENTS 5. Property and Equipment, Net Property and equipment, net consist of the following: As of December 31, ($ in thousands) 2022 2021 Scientific equipment (1) $ 27,821 $ 27,641 Computer equipment 167 155 Software 209 335 Furniture and fixtures 988 988 Leasehold improvements 26,355 26,355 Construction in progress 680 — 56,220 55,474 Accumulated depreciation ( 26,181 ) ( 20,440 ) Property and equipment, net $ 30,039 $ 35,034 ___________________________ (1) As of December 31, 2021, includes $ 3.6 million related to scientific equipment not depreciated until being placed into service during the third quarter of 2022. Depreciation expense totaled $ 6.2 million for each of the years ended December 31, 2022 and 2021. 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) 2022 2021 Accrued external research, development and manufacturing costs $ 2,437 $ 2,520 Accrued employee compensation and benefits 4,227 3,943 Accrued professional fees 444 294 Total $ 7,108 $ 6,757 7. Debt On March 30, 2021, the Company entered into a term loan agreement with Silicon Valley Bank (“SVB”) and SVB Innovation Credit Fund VIII, L.P., as amended in June 2021 and September 2021 (the “Loan Agreement”), 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, 2022, 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, 2022, two subsequent $ 10.0 million term loan tranches will be eligible to be drawn at the request of the Company during specified draw periods prior to May 15, 2023, the first tranche subject to submission by the Company of its first Biologics License 125 Table of Contents HUMACYTE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Application (“BLA”) to the FDA for its HAV prior to March 31, 2023, and the second tranche subject to the first approval from the FDA of any BLA for the HAV prior to March 31, 2023 and the Company having borrowed the first remaining tranche. Borrowings bear interest at the greater of 7.5 % or the Wall Street Journal Prime Rate plus 4.25 % ( 11.75 % as of December 31, 2022). 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, 2022, 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 was subject initially to a prepayment fee of 3.00 % (that was decreased to 2.00 % after March 30, 2022 (with a further decrease 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 Common 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 first 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 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 Common Stock. As of December 31, 2022, 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, 2022 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 ( 2,593 ) SVB loan payable, current and noncurrent 28,907 Less SVB loan payable, current portion ( 8,571 ) SVB loan payable, noncurrent portion $ 20,336 Future minimum payments of principal on the Company’s outstanding variable rate borrowings as of December 31, 2022 are as follows: Year ending December 31: ($ in thousands) 2023 $ 8,571 2024 17,143 2025 4,286 Total future payments $ 30,000 126 Table of Contents HUMACYTE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On April 30, 2020, the Company received loan proceeds in the amount of approximately $ 3.3 million under the Paycheck Protection Program (“PPP”). The loan and accrued interest were forgivable after a 24-week period as long as the Company used the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintained its payroll levels. 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. 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. At December 31, 2022 and 2021, the Company had finance lease liabilities of $ 21.1 million and $ 23.1 million, respectively, and right-of-use assets of $ 19.4 million and $ 21.4 million, respectively, and operating lease liabilities of $ 0.7 million and $ 0.7 million, respectively, and right-of-use assets of $ 0.7 million and $ 0.7 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) 2022 2021 Finance lease cost Amortization of right-of-use assets $ 2,059 $ 2,060 Interest on lease liabilities 1,887 2,044 Total finance lease cost 3,946 4,104 Operating lease cost 105 105 Total lease cost $ 4,051 $ 4,209 Year Ended December 31, 2022 Year Ended December 31, 2021 ($ in thousands) Finance Leases Operating Leases Finance Leases Operating Leases Operating cash flows from leases $ ( 1,887 ) $ ( 105 ) $ ( 2,044 ) $ ( 105 ) Financing cash flows from leases $ ( 1,981 ) $ — $ ( 1,729 ) $ — Weighted-average remaining lease term 4.57 5.24 5.04 5.74 Weighted-average discount rate 8.50 % 8.50 % 8.50 % 8.50 % 127 Table of Contents HUMACYTE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2022, the maturities of the Company’s lease liabilities were as follows: ($ in thousands) Finance Leases Operating Leases 2023 $ 3,965 $ 105 2024 4,065 105 2025 4,167 105 2026 4,237 105 2027 2,673 105 Thereafter 10,026 469 Total 29,133 994 Less: present value discount ( 8,024 ) ( 312 ) Lease liabilities $ 21,109 $ 682 9. Stockholders’ Equity (Deficit) Redeemable Convertible Preferred Stock 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.” 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 and the amounts were reclassified as additional paid-in capital. 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 per share. As of December 31, 2022, the Company’s Second Amended and Restated Certificate of Incorporation authorized the Company to issue 250,000,000 shares of Common Stock. The number of authorized shares of Common Stock may be increased or decreased (but not below the number of shares 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, 2022, 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. 128 Table of Contents HUMACYTE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2022 and 2021, the Company had reserved Common Stock for future issuances as follows: December 31, 2022 2021 Common stock reserved for Contingent Earnout Shares 15,000,000 15,000,000 Exercise of options under stock plans 7,203,874 6,711,192 Issuance of options under stock plans 6,700,888 7,418,937 Shares available for grant under ESPP 1,030,033 1,030,033 Warrants to purchase Common Stock 5,588,506 5,588,506 35,523,301 35,748,668 Preferred Stock The Company’s Second Amended and Restated Certificate of Incorporation provides the Company’s board of directors with the authority to issue preferred stock, par value $ 0.0001 per share, 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, 2022 and 2021. Warrants The Company had the following common stock warrants outstanding as of December 31, 2022 and 2021: Common Stock Warrants Outstanding Legacy Humacyte Common Stock Warrants 411,006 Private Placement Warrants 177,500 Public Warrants 5,000,000 Total Common Stock Warrants 5,588,506 See Note 7 — Debt for a discussion of common stock warrants issued in conjunction with the Company’s Loan Agreement in 2021 (such warrants, “Legacy Humacyte Common Stock Warrants”). There were no issuances, exercises or expirations of warrants during the year ended December 31, 2022 . During the year ended December 31, 2021, there were 32,961 warrants exercised that were issued in conjunction with a long-term debt agreement repaid in a prior reporting period. There were no expirations of warrants during the year ended December 31, 2021 . 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 liability was remeasured to an estimated fair value of $ 0.5 million as of December 31, 2021. See Note 4 — Fair Value Measurements for a summary of the change in the fair value of the Private Placement Warrants during the years ended December 31, 2022 and 2021. The remeasurement of the Private Placement Warrant liability to a fair value of $ 0.1 million as of December 31, 2022 resulted in a non-cash gain of $ 0.4 million for the year ended December 31, 2022, compared to a non-cash gain of $ 0.1 million for the year ended December 31, 2021. The remeasurement of the Private Placement Warrant liability is classified within Change in fair value of common stock warrant liabilities in the consolidated statements of operations and comprehensive loss. 129 Table of Contents HUMACYTE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Private Placement Warrants were valued using the following assumptions under the Monte Carlo simulation value model: As of December 31, 2022 2021 Market price of public stock $ 2.11 $ 7.25 Exercise price $ 11.50 $ 11.50 Expected term (years) 3.65 4.65 Expected share price volatility 78.3 % 61.0 % Risk-free interest rate 4.14 % 1.21 % 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, 2022. 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 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 (“VWAP”) per share of Common Stock quoted on 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. 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 10 -year period using the most reliable information available. The estimated fair value of the total Contingent Earnout Shares at December 31, 2021 was $ 103.7 million. See Note 4 — Fair Value Measurements for a summary of the change in the fair value of the Contingent Earnout Liability during the years ended December 31, 2022 and 2021. The remeasurement of the Contingent Earnout Liability to a fair value of $ 27.9 million as of December 31, 2022, resulted in a non-cash gain of $ 75.8 million for the year ended December 31, 2022, compared to a non-cash gain of $ 55.8 million for the year ended December 31, 2021. The remeasurement of the Contingent Earnout Liability is 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: As of December 31, 2022 2021 Current stock price $ 2.11 $ 7.25 Expected share price volatility 89.0 % 85.8 % Risk-free interest rate 3.88 % 1.52 % Estimated dividend yield 0 % 0 % Expected term (years) 10.00 10.00 130 Table of Contents HUMACYTE, INC. NOTES TO FINANCIAL STATEMENTS 10. Stock-based Compensation At Closing, the 2021 Long-Term Incentive Plan, (the “2021 Plan”), and the 2021 Employee Stock Purchase Plan, (the “ESPP”), became effective. As of December 31, 2022, 6,700,888 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 both December 2021 and 2022, 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 either January 1, 2022 or January 1, 2023. Under the 2021 Plan, the Company can grant non-statutory stock options, (“NSOs”), incentive stock options, ISOs, stock appreciation rights, restricted stock, restricted stock units, unrestricted stock, performance awards and other forms of awards. Under the ESPP, when and if implemented, eligible employees will be 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, (the “2015 Plan”), and the 2005 Stock Option Plan (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 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. As of December 31, 2022, 3,632,237 and 484,562 shares of Common Stock remain reserved for outstanding options issued under the 2015 Plan and 2005 Plan, respectively. The Company’s stock option plans allow for the grant of awards that the Company believes aid in aligning the interests of award recipients with those of its stockholders. The Company’s board of directors or compensation committee 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. 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. 131 Table of Contents HUMACYTE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, 2022 2021 Estimated dividend yield 0 % 0 % Expected share price volatility (weighted average and range, if applicable) 88.8 % ( 87.4 % to 100.0 %) 91.4 % ( 90.7 % to 93.1 %) Risk-free interest rate (weighted average and range, if applicable) 3.50 % ( 1.89 % to 3.69 %) 0.78 % ( 0.62 % to 1.32 %) Expected term of options (in years) (weighted average and range, if applicable) 6.25 6.05 ( 6.00 to 6.25 ) • Fair Value of Common Stock. Prior to the Merger, as the Company’s common stock was not publicly traded, the fair value of the shares of its common stock underlying the options was determined by the Company’s board of directors with input from management, after considering independent third-party valuation reports. Subsequent to the Merger, the fair value of the Common Stock has been determined based on the closing price of the shares on Nasdaq. • Expected Term. The expected term represents the period that stock options are expected to be outstanding. 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 determined based on a blended approach using the historical share volatility of the Company’s Common Stock and that 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. 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. • 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, 2022, there were 6,700,888 options remaining available for grant under the 2021 Plan. The Company has sufficient authorized and unissued shares to issue Common Stock in satisfaction of any awards available for grant under the 2021 Plan. The following table shows a summary of stock-based compensation expense included in the consolidated statements of operations and comprehensive loss for the years ended December 31, 2022 and 2021: Year Ended December 31, ($ in thousands) 2022 2021 Research and development $ 1,034 $ 3,220 General and administrative 5,150 6,926 Total $ 6,184 $ 10,146 132 Table of Contents HUMACYTE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A summary of option activity under the Company’s stock option plans during the year ended December 31, 2022 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, 2021 6,711,192 $ 7.48 5.3 $ 8,276 Granted 2,791,029 3.54 Exercised ( 225,367 ) 2.37 Forfeited ( 2,072,980 ) 8.21 Options outstanding at December 31, 2022 7,203,874 $ 5.90 7.5 $ 429 Vested and exercisable, December 31, 2022 3,375,289 $ 6.46 5.3 $ 429 Vested and expected to vest, December 31, 2022 7,203,874 $ 5.90 7.5 $ 429 The weighted-average grant-date fair value per share of options granted during the years ended December 31, 2022 and 2021 was $ 2.70 and $ 7.63 , respectively. The total intrinsic value of options exercised during the years ended December 31, 2022 and 2021 was $ 0.3 million and $ 1.4 million, respectively. As of December 31, 2022, unrecognized stock-based compensation cost for options was $ 13.3 million and is expected to be recognized over a weighted-average period of 2.4 years. 11. Income Taxes The Company did not record any income tax expense or benefit during the years ended December 31, 2022 and 2021. 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. 133 Table of Contents HUMACYTE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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) 2022 2021 Deferred tax assets: Net operating loss $ 67,879 $ 58,646 Capitalized research and development 43,818 36,830 Research credits 18,054 16,765 Stock-based compensation 3,047 1,323 Right of use lease liability 144 153 Accrued expenses 65 92 Other 1 1 Total deferred tax asset 133,008 113,810 Less: valuation allowance ( 131,151 ) ( 111,575 ) Total net deferred tax asset 1,857 2,235 Deferred tax liabilities: Basis difference in fixed assets ( 1,713 ) ( 2,082 ) Right of use lease assets ( 144 ) ( 153 ) Total deferred tax liability ( 1,857 ) ( 2,235 ) 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, 2022 and December 31, 2021. 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 in 2021, 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. 134 Table of Contents HUMACYTE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The reasons for the difference between the actual income tax benefit for the years ended December 31, 2022 and 2021, and the amount computed by applying the statutory Federal income tax rate to losses before income taxes are as follows: December 31, 2022 2021 ($ in thousands) Amount Rate Amount Rate Income tax benefit at statutory rate $ ( 2,512 ) 21.0 % $ ( 5,560 ) 21.0 % State income taxes, net of federal benefit ( 1,767 ) 14.8 % ( 1,706 ) 6.4 % Tax credits ( 2,325 ) 19.4 % ( 2,662 ) 10.1 % Other nondeductible expenses ( 15,735 ) 131.5 % ( 11,991 ) 45.3 % Deferred rate changes 1,698 ( 14.2 ) % 8,981 ( 33.9 ) % Deferred tax true-up (1) 1,065 ( 8.9 ) % 3,120 ( 11.8 ) % Change in valuation allowance 19,576 ( 163.6 ) % 9,818 ( 37.1 ) % Provision for income taxes $ — 0.0 % $ — 0.0 % ___________________________ (1) The deferred tax true-up for 2022 and 2021 primarily relates to executive compensation subject to IRC Section 162(m) limitations and t he 2021 research and development and net operating loss carryforwards were adjusted due to application of the employee retention credit determined in 2022. As of December 31, 2022 the Company had approximately $ 322.4 million and $ 323.9 million of Federal and state net operating losses, respectively. Of this amount, $ 161.1 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 2042. The state operating loss carryforwards are inclusive of North Carolina net operating losses, which are recorded at a zero benefit. As of December 31, 2022 and 2021, the Company had Federal and state research tax credit carryforwards of $ 18.1 million and $ 15.7 million, respectively. These credit carryforwards will begin to expire in 2025 and will expire completely in 2042. 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. 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 $ 0.7 million and $ 0.6 million for the years ended December 31, 2022 and 2021, respectively. 135 Table of Contents HUMACYTE, INC. NOTES TO FINANCIAL STATEMENTS 13. Commitments and Contingencies Patent License Agreements Duke University In March 2006, the Company entered into a license agreement with Duke University (“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-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 December 2022, in accordance with the terms of the agreement, the Company provided Yale with 90 days written notice of termination, effective March 21, 2023. 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 136 Table of Contents HUMACYTE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 (see above) 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, respectively ; • 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 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. 137 Table of Contents HUMACYTE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 an additional 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 artery 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 (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 138 Table of Contents HUMACYTE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 Yale University Dr. Niklason serves as an Adjunct Professor in Anesthesia at Yale University. As of December 31, 2022 and 2021, the Company was a party to license agreements with Yale University, as described in Note 13 — Commitments and Contingencies above. 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, 2022 and 2021: Year Ended December 31, ($ in thousands) 2022 2021 License expenses 100 85 Other 19 91 Total $ 119 $ 176 T here was $ 50 thousand of license expenses payable to Yale University included in accounts payable on the Company’s consolidated balance sheets, as of December 31, 2022 . 139 Table of Contents Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None.