Stock based compensation

3 Months Ended

Mar. 31, 2023

Stock based compensation

Stock based compensation

Note 16—Stock-based compensation

On June 17, 2021, the Company adopted the Century Therapeutics, Inc. 2021 Equity Incentive Plan (the “2021 Incentive Plan”) which superseded the 2018 Incentive Plan and from that date forward all issuances of incentive awards will be governed by the 2021 Incentive Plan.

The 2021 Incentive Plan provides for the Company to sell or issue common stock or restricted common stock, restricted stock units (“RSU”), or to grant incentive stock options or nonqualified stock options for the purchase of common stock, to employees, members of the Board of Directors, and consultants of the Company under terms and provisions established by the Board of Directors. Under the terms of the 2021 Incentive Plan, options may be granted at an exercise price not less than fair market value.

Upon adoption of the 2021 Incentive Plan, the Company was authorized to issue 5,481,735 shares of Common Stock under the 2021 Incentive Plan (which represents 5,640,711 shares of Common Stock initially available for grant under the 2021 Incentive Plan less 158,976 shares of Common Stock reserved for issuance upon the exercise of previously granted stock options that remain outstanding under the 2018 Incentive Plan). The number of shares of common stock initially reserved for issuance under the 2021 Incentive Plan shall be increased, upon approval by the board of directors, on January 1, 2022 and each January 1 thereafter, in an amount equal to the least of, (i) five percent (5%) of the outstanding common stock on the immediately preceding December 31, or (ii) such number of common stock determined by the board of directors no later than the immediately preceding December 31. For 2022, the 2021 Incentive Plan reserved shares were increased under clause (i) by 2,750,276 shares, effective as of January 1, 2022. For 2023, the 2021 Incentive Plan reserved shares were increased under clause (i) by 2,954,788 shares, effective as of January 1, 2023. As of March 31, 2023, there were 4,863,670 shares available for issuance under the 2021 Incentive Plan.

The Company’s stock-based awards are subject to service-based vesting conditions. Compensation expense related to awards to employees and directors with service-based vesting conditions is recognized on a straight-line basis based on the grant date fair value over the associated service period of the award, which is generally the vesting term. Stock awards granted typically vest over a four-year period but may be granted with different vesting terms. The Company may also issue awards with performance-based vesting conditions. For performance-based awards, the Company would reassess at each reporting date whether achievement of the performance condition is probable and accrue compensation expense if and when the achievement of the performance condition is probable.

The Company recognizes the costs of the stock-based payments as the employees vest in the awards.

As of March 31, 2023, the Company had reserved shares of common stock for issuance as follows:

	Shares
Options and RSUs issued and outstanding	10,915,052
Shares available for future stock option and RSU grants	4,863,670
Shares available for employee stock purchase plan	1,114,126
Total	16,892,848

The shares of Common Stock available under the 2021 Incentive Plan as of March 31, 2023 are as follows

	Shares
Balance, December 31, 2022	5,786,358
Shares reserved for issuance	2,954,788
Options granted	(3,770,399)
RSU’s granted	(546,795)
Options and RSUs forfeited / cancelled	439,718
Balance March 31, 2023	4,863,670

Stock Options

The following table summarizes stock option activity for the three month period ended March 31, 2023:

		Weighted Average
				Remaining		Aggregate
				Contractual		Intrinsic
				Term		Value
	Shares	Exercise Price		(years)		(in thousands)
Outstanding January 1, 2023	7,489,678	$	7.77	7.84	$	8,991
Granted	3,770,399		4.66	—		—
Exercised	(452,102)		0.99	—		—
Forfeited	(437,573)		10.39	—		—
Outstanding, March 31, 2023	10,370,402	$	5.28	4.55	$	3,952
Exercisable at March 31, 2023	3,145,362	$	6.45	6.93	$	3,262

The weighted average grant date fair value of awards for options granted during the three months ended March 31, 2023 was $4.65. As of March 31, 2023, there was $38,428 of total unrecognized compensation expense related to unvested stock options with time-based vesting terms, which is expected to be recognized over a weighted average period of 3.13 years.

The Company estimates the fair value of its option awards to employees and directors using Black-Scholes. Due to the lack of substantial company-specific historical and implied volatility data of its common stock, the Company has based its estimate of expected volatility on the historical volatility of a group of similar public

companies. The Company has never paid dividends and does not expect to in the foreseeable future. The expected term of the options granted to employees is derived from the “simplified” method as described in Staff Accounting Bulletin 107 relating to stock-based compensation. The risk-free interest rates for periods within the expected term of the option are based on the U.S. Treasury securities with a maturity date commensurate with the expected term of the associated award. The Company will account for actual forfeitures as they occur.

The weighted-average assumptions used to calculate the fair value of stock options granted are as follows:

	March 31, 2022		December 31, 2022
Expected dividend rate	—		—
Expected option term (years)	6.08		6.09
Expected volatility	79.15	%	69.73	%
Risk-free interest rate	3.65	%	1.08	%

Stock-based compensation expense recorded under ASC 718 related to stock options granted and common stock issued under the 2021 Employee Stock Purchase Plan (the “ESPP”) were allocated to research and development and general and administrative expense as follows:

	Three Months Ended		Three Months Ended
	March 31,		March 31,
	2023		2022
Research and development	$	2,112	$	1,309
General and administrative		1,685		1,071
Total stock-based compensation	$	3,797	$	2,380

Stock-based compensation expense by award type included within the condensed consolidated statements of operations is as follows:

	Three Months Ended		Three Months Ended
	March 31,		March 31,
	2023		2022
Stock options	$	3,546	$	2,108
Restricted stock units		97		—
Restricted stock awards		93		272
Employee stock purchase plan		61		—
Total stock-based compensation	$	3,797	$	2,380

Restricted Stock Units

The following table summarizes RSU activity for the quarter ended March 31, 2023:

		Weighted Average
	Shares	Grant Date Fair Value
Total Unvested December 31, 2022	—	$	—
Granted	546,795		4.64
Forfeited	(2,145)		4.64
Total Unvested March 31, 2023	544,650	$	4.64

As of March 31, 2023, there was $2,428 of total unrecognized compensation expense related to the unvested restricted stock with time-based vesting terms, which is expected to be recognized over a weighted average period of 3.85 years. All restricted stock units vest over a four-year period.

Restricted Stock Awards

The following table summarizes restricted stock activity as of March 31, 2023 and December 31, 2022:

		Weighted Average
	Shares	Grant Date Fair Value
Total Unvested December 31, 2022	193,031	$	8.41
Granted	—		—
Forfeited	(47,689)		—
Vested	(95,877)		2.50
Total Unvested March 31, 2023	49,465	$	7.27

Pursuant to certain stock purchase agreements containing vesting and other provisions, the Company has the right to repurchase unvested shares.

As of March 31, 2023, there was $356 of total unrecognized compensation expense related to the unvested restricted stock with time-based vesting terms, which is expected to be recognized over a weighted average period of 1.98 years. All restricted stock vests over a four-year period.

Early-Exercise of Unvested Equity Awards

Certain equity award holders early exercised unvested equity awards. The cash received upon early exercise of options of $1,314 was recorded as a deposit liability on the Company’s balance sheet as of March 31, 2023.

Employee Stock Purchase Plan

The ESPP was adopted by the Board of Directors in May 2021. A total of 564,071 shares of common stock were initially reserved for issuance under this plan, which shall be increased, upon approval by the board of directors, on January 1, 2022 and each January 1 thereafter, to the lesser of (i) one percent (1%) of the outstanding shares of common stock on the last day of the immediately preceding fiscal year, or (ii) an amount determined by the board of directors no later than the last day of the immediately preceding fiscal year. For 2022, the ESPP reserved shares were increased under clause (i) by 550,055 shares, effective as of January 1, 2022. For 2023, the board waived the annual increase to the shares reserved under the ESPP. As of March 31, 2023, there were 1,114,126 shares available for issuance, under the ESPP.