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Item 7. Management’s Discussion and Analysis

2021-02-17 compared with 2020-02-13 · 299 added, 570 removed, 304 unchanged (74% of the section changed)

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As a result of many factors, such as those set forth under “Risk Factors” in Item 1A of this Annual Report on Form 10 K, our actual results may differ materially from those anticipated in these forward-looking statements.

We are a gastrointestinal, or GI, healthcare company dedicated to advancing the treatment of GI diseases and redefining the standard of care for millions of GI patients.

We are focused on the development and commercialization of innovative GI product opportunities in areas of large unmet need, leveraging our demonstrated expertise and capabilities in GI diseases.

Discussion and analysis of our financial condition and results of operations for the fiscal year ended December 31, 2019 compared to the fiscal year ended December 31, 2018 is included in Part II, Item 7 –"Management's Discussion and Analysis of Financial Condition and Results of Operations"

in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed with the Securities and Exchange Commission on February 13, 2020.

We are a gastrointestinal, or GI, healthcare company dedicated to advancing the treatment of GI diseases and redefining the standard of care for GI patients.

We are focused on the development and commercialization of innovative GI product opportunities in areas of significant unmet need, leveraging our demonstrated expertise and capabilities in GI diseases.

LINZESS ® (linaclotide), our commercial product, is the first product approved by the United States Food and Drug Administration, or U.S.

FDA in a class of GI medicines called guanylate cyclase type C, or GC-C, agonists, and is indicated for adult men and women suffering from irritable bowel syndrome with constipation, or IBS-C, or chronic idiopathic constipation, or CIC.

FDA, in a class of GI medicines called guanylate cyclase type C agonists and is indicated for adult men and women suffering from irritable bowel syndrome with constipation, or IBS-C, or chronic idiopathic constipation, or CIC.

LINZESS is available to adult men and women suffering from IBS-C or CIC in the United States, or the U.S., and Mexico and to adult men and women suffering from IBS-C in Japan and China.

Linaclotide is available under the trademarked name CONSTELLA ® to adult men and women suffering from IBS-C or CIC in Canada, and to adult men and women suffering from IBS-C in certain European countries.

We have strategic partnerships with leading pharmaceutical companies to support the development and commercialization of linaclotide throughout the world, including with Allergan plc (together with its affiliates), or Allergan in the U.S., AstraZeneca AB (together with its affiliates), or AstraZeneca, in China (including Hong Kong and Macau) and Astellas Pharma Inc., or Astellas, in Japan.

We and Allergan are also advancing MD-7246, a delayed release formulation of linaclotide, as an oral, intestinal, non-opioid, pain-relieving agent for patients with abdominal pain associated with certain GI diseases.

MD-7246 is designed to have the pain-relieving effect of linaclotide with minimal impact on bowel function.

In May 2019, we and Allergan announced the initiation of a Phase II clinical trial evaluating the safety and efficacy of MD-7246 in adult patients with abdominal pain associated with IBS with diarrhea, or IBS-D.

We are advancing another GI development program, IW-3718, a gastric retentive formulation of a bile acid sequestrant for the potential treatment of refractory gastroesophageal reflux disease, or refractory GERD.

In June 2018, we initiated two Phase III clinical trials evaluating the safety and efficacy of IW-3718 in patients with refractory GERD.

We are also leveraging our leading capabilities in GI to bring additional treatment options to GI patients.

This includes our U.S.

disease education and promotional agreement with Alnylam Pharmaceuticals, Inc., or Alnylam, for Alnylam’s GIVLAARI™ (givosiran), an RNAi therapeutic targeting aminolevulinic acid synthase 1, for the treatment of acute hepatic porphyria, or AHP.

In January 2020, we and Allergan entered into settlement agreements with Sandoz Inc., or Sandoz, and Teva Pharmaceuticals, USA, or Teva, resolving patent litigation brought in response to Sandoz’s and Teva’s abbreviated new drug applications seeking approval to market generic versions of LINZESS prior to the expiration of our and Allergan’s applicable patents.

For additional information relating to the resolution of such litigation, see Item 3, Legal Proceedings , elsewhere in this Annual Report on Form 10-K.

We have strategic partnerships with leading pharmaceutical companies to support the development and commercialization of linaclotide throughout the world, including with AbbVie Inc.

(together with its affiliates), or AbbVie, (successor to Allergan plc (together with its affiliates), or Allergan), in the U.S.

and all countries worldwide other than China (including Hong Kong and Macau) and Japan, AstraZeneca AB (together with its affiliates), or AstraZeneca, in China (including Hong Kong and Macau) and Astellas Pharma Inc., or Astellas, in Japan.

We also aim to leverage our leading capabilities in GI to bring additional treatment options to GI patients;

for example, we have a U.S.

disease education and promotional agreement with Alnylam Pharmaceuticals, Inc.

for Alnylam’s GIVLAARI® (givosiran) for the treatment of acute hepatic porphyria.

To date, we have dedicated a majority of our activities to the research, development and commercialization of linaclotide, as well as to the research and development of our other product candidates.

Prior to the year ended December 31, 2019, we incurred net losses in each year since our inception in 1998.

Prior to the year ended December 31, 2019, when we recorded net income for the year of approximately $21.5 million, we incurred net losses in each year since our inception in 1998.

For the year ended December 31, 2020, we recorded net income of approximately $106.2 million.

As of December 31, 2019, we had an accumulated deficit of

approximately $1.6 billion.

We are unable to predict the extent of any future losses or guarantee that our company will be able to achieve or maintain positive cash flows.

As of December 31, 2020, we had an accumulated deficit of approximately $1.5 billion.

We are unable to predict the extent of any future losses or guarantee that our company will be able to maintain positive cash flows.

We were incorporated in Delaware on January 5, 1998 as Microbia, Inc.

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Key 2020 Financial Highlights

● Issued $400.0 million in Convertible Senior Notes.

In August 2019, we issued $200.0 million in 0.75% Convertible Senior Notes due 2024, or the 2024 Convertible Notes, and $200.0 million in 1.50% Convertible Senior Notes due 2026, or the 2026 Convertible Notes.

We received net proceeds of approximately $391.0 million from the sale of the 2024 Convertible Notes and the 2026 Convertible Notes, after deducting fees and expenses of approximately $9.0 million.

The proceeds from the issuance of the 2024 Convertible Notes and the 2026 Convertible Notes were used in August 2019 to pay approximately $25.2 million related to the associated capped call transactions, or the Capped Calls, and to repurchase $215.0 million aggregate principal amount of the existing 2.25% Convertible Senior Notes due 2022, or the 2022 Convertible Notes.

The proceeds from the issuance of the 2024 Convertible Notes and 2026 Convertible Notes were also used to redeem the outstanding principal balance of the 8.375% Notes due 2026, or the 2026 Notes, on September 16, 2019.

We retired the 2026 Notes, which had an outstanding aggregate principal balance of approximately $116.5 million, for a redemption price of approximately $123.0 million.

During the year ended December 31, 2019, we recognized a loss on extinguishment of debt of approximately $31.0 million related to the redemption of the 2026 Notes and the partial repurchase of the 2022 Convertible Notes.

In connection with the partial repurchase of the 2022 Convertible Notes, we also terminated the respective portion of our existing convertible note hedges transactions, or the Convertible Note Hedges, and the respective portion of our existing warrants, or the Note Hedge Warrants, which we had entered into in June 2015 in connection with our issuance of the 2022 Convertible Notes.

These transactions are more fully described in Note 12, Notes Payable , to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.

● Amended and restated our ex-U.S.

linaclotide partnerships with Astellas in Japan and AstraZeneca in China (including Hong Kong and Macau) .

On August 1, 2019, we amended and restated our license agreement with Astellas, or the Amended Astellas License Agreement.

As a result, we recognized $10.0 million in revenue from Astellas related to upfront payments.

Beginning in 2020, we will no longer be responsible for the supply of linaclotide active pharmaceutical ingredient, or API, to Astellas.

On September 16, 2019, we amended and restated our collaboration agreement with AstraZeneca, or the Amended AstraZeneca Agreement, under which AstraZeneca obtained the exclusive right to develop, manufacture, and commercialize products containing linaclotide in the AstraZeneca license territory, or the AstraZeneca License.

As a result, we recognized approximately $32.4 million in revenue from AstraZeneca related to non-contingent payments in 2019.

Beginning in 2020, we will no longer be responsible for API, finished drug product and finished goods manufacturing for China and Macau and for finished drug product manufacturing for Hong Kong.

These agreements are more fully described in Note 6, Collaboration, License, Co-Promotion and Other Commercial Agreements , to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.

● Announced a new U.S.

GI disease education and promotional agreement for GIVLAARI.

In August 2019, we entered into a disease education and promotional agreement with Alnylam for Alnylam’s GIVLAARI.

GIVLAARI was approved by the U.S.

FDA in December 2019.

Under the agreement, we will perform disease awareness activities related to AHP and sales detailing activities for GIVLAARI.

agreement is more fully described in Note 6, Collaboration, License, Co-Promotion and Other Commercial Agreements , to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.

● Relocated our headquarters to a new office in downtown Boston, Massachusetts.

On June 11, 2019, we entered into a non-cancelable operating lease, or the Summer Street Lease, for approximately 39,000 square feet of office space on the 23rd floor of 100 Summer Street, Boston, Massachusetts, or the Summer Street Property.

The Summer Street Property began serving as our new headquarters in October 2019, replacing our prior headquarters at 301 Binney Street in Cambridge, Massachusetts.

Monthly base rent payments were contractually reduced in connection with the execution of the Summer Street Lease.

This agreement is more fully described in Note 9.

Leases , to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.

Our Legacy Business

On April 1, 2019, we completed the separation, or the Separation, of our soluble guanylate cyclase, or sGC, business, and certain other assets and liabilities, into a separate, independent publicly traded company, Cyclerion Therapeutics, Inc., or Cyclerion.

The Separation was effected by means of a distribution of all the outstanding shares of common stock, with no par value, of Cyclerion, through a dividend of Cyclerion’s common stock to our stockholders of record as of the close of business on March 19, 2019.

The separation agreement with Cyclerion, dated as of March 30, 2019, sets forth, among other things, our agreements with Cyclerion regarding the principal actions to be taken in connection with the Separation, including the dividend, which was effective as of April 1, 2019.

In connection with the Separation, we also entered into certain other agreements with Cyclerion, including transition services agreements and a development agreement.

Pursuant to the transition service agreements, we are obligated to provide and are entitled to receive certain transition services related to corporate functions, such as finance, procurement, facilities and development.

Pursuant to the development agreement, Cyclerion is obligated to provide us with certain research and development services with respect to certain of our products and product candidates, including MD-7246 and IW-3718.

The Separation and the aforementioned agreements are more fully described in Note 3, Cyclerion Separation , to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.

Key Performance Indicators

The following charts summarize key metrics of revenue, earnings (losses), and operating cash use (dollars in thousands, per share amounts in dollars) :

These metrics are more fully described in the Results of Operations and Liquidity and Capital Resources sections below.

Financial Overview

● During the year ended December 31, 2020, we recognized approximately $389.5 million in total revenues, compared to approximately $428.4 million during the year ended December 31, 2019.

The decrease of 9% was primarily driven by a decrease in sale of active pharmaceutical ingredient, or API, in 2020 compared to 2019.

An increase in collaborative arrangements revenue related to sales of LINZESS in the U.S.

of approximately $43.2 million in 2020 compared to 2019 was offset by approximately $42.4 million in non-

recurring revenue recognized in 2019 in connection with amendments to our collaborative arrangements with AstraZeneca and Astellas.

● During the year ended December 31, 2020, we recognized approximately $368.6 million in collaborative arrangements revenue related to sales of LINZESS in the U.S.

compared to approximately $325.4 million during the year ended December 31, 2019.

The increase of 13% was primarily driven by an increase in LINZESS prescription demand in the U.S.

in 2020 compared to 2019.

● Our operations resulted in net income of approximately $106.2 million during the year ended December 31, 2020 compared to net income of $21.5 million during the year ended December 31, 2019, primarily driven by increased revenue from sales of LINZESS in the U.S., as well as decreases in costs primarily associated with the discontinuation of MD-7246 and IW-3718 development programs.

● We generated $168.8 million in cash from operations during the year ended December 31, 2020, ending the year with $362.6 million in cash and cash equivalents.

● In connection with our decision to discontinue development of IW-3718, we reduced our workforce by approximately 100 full-time employees.

We substantially completed the reduction in our workforce in the fourth quarter of 2020.

We expect to realize annualized cost savings in total operating expenses from this workforce reduction, as well as cost savings related to external spend for IW-3718 previously expected through 2021.

Financial Operations Overview

Our revenues are generated primarily through our collaborative arrangements and license agreements related to research and development and commercialization of linaclotide, as well as co-promotion arrangements in the U.S.

Effective January 1, 2018, we adopted Accounting Standards Codification, or ASC, Topic 606, Revenue from Contracts with Customers, or ASC 606, using the modified retrospective transition method.

The adoption of ASC 606 represented a change in accounting principle that aims to more closely align revenue recognition with the delivery of our services and will provide financial statement readers with enhanced disclosures.

In accordance with ASC 606, we recognize revenue when the customer obtains control of a promised good or service, in an amount that reflects the consideration which we expect to receive in exchange for the good or service.

Upon adoption of ASC 606, we concluded that no cumulative-effect adjustment to the accumulated deficit as of January 1, 2018 was necessary.

The adoption of ASC 606 had no impact on our consolidated statement of operations, consolidated balance sheets, or consolidated statement of cash flows.

The reported results for the year ended as of December 31, 2019 and 2018 reflect the application of ASC 606 guidance, while the reported results for the year ended December 31, 2017 were prepared in accordance with ASC 605, Revenue Recognition , or ASC 605.

The terms of the collaborative research and development, license and co-promotion agreements contain multiple performance obligations which may include (i) licenses, (ii) research and development activities, (iii) the manufacture of finished drug product, API, or development materials for a partner which are reimbursed at a contractually determined rate, and (iv) education or co-promotion activities by our clinical sales specialists.

Payments to us may include (i) up-front license fees, (ii) payments for research and development activities, (iii) payments for the manufacture of finished drug product, API or development materials, (iv) payments based upon the achievement of certain milestones, (v) payments for sales detailing, promotional support services and medical education initiatives and (vi) royalties on product sales.

We receive our share of the net profits or bear our share of the net losses from the sale of linaclotide in the U.S.

Through September 16, 2019, the date of the Amended AstraZeneca Agreement, we received our share of the net profits or bore our share of the net losses from the sale of linaclotide in China.

The majority of our revenues are generated from the sales of LINZESS in the U.S.

We record our share of the net profits and losses from the sales of LINZESS in the U.S.

on a net basis and present the settlement payments to and from Allergan as collaboration expense or collaborative arrangements revenue, as applicable.

on a net basis and present the settlement payments to and from AbbVie as collaboration expense or collaborative arrangements revenue, as applicable.

Net profits or losses consist of net sales to third-party customers and sublicense income in the U.S.

less the cost of goods sold as well as selling, general and administrative expenses.

Although we expect net sales to increase over time, the settlement payments between Allergan and us, resulting in collaborative arrangements revenue or collaboration expense, are subject to fluctuation based on the ratio of selling, general and administrative expenses incurred by each party.

Although we expect net sales to increase over time, the settlement payments between AbbVie and us, resulting in collaborative arrangements revenue or collaboration expense, are subject to fluctuation based on the ratio of selling, general and administrative expenses incurred by each party.

In addition, our collaborative arrangements revenue may fluctuate as a result of the timing and amount of license fees and clinical and commercial milestones received and recognized under our current and future strategic partnerships as well as timing and amount of royalties from the sales of linaclotide in the European, Canadian or Mexican markets or any other markets where linaclotide receives approval.

Product revenue consisted of sales of ZURAMPIC ® and DUZALLO ® , or the Lesinurad Products, in the U.S.

through the date of the termination of our exclusive license to develop, manufacture, and commercialize in the U.S.

products containing lesinurad as an active ingredient, or the Lesinurad License, in January 2019.

Product revenue was recognized when a particular national wholesaler or a selected regional wholesaler, or a Distributor, obtained control of our product, which occurred at a point in time, typically upon shipment of the Lesinurad Products to the Distributor.

When we performed shipping and handling activities after the transfer of control to the Distributor (e.g., when control transferred prior to delivery), they were considered fulfillment activities, and accordingly, the costs were accrued for when the related revenue was recognized.

Taxes collected from customers relating to product sales and remitted to governmental authorities were excluded from revenues.

We expensed incremental costs of obtaining contracts with Distributors as and when incurred if the expected amortization period of the asset that we would have recognized was one year or less.

through the date of the termination in January 2019 of our exclusive license to develop, manufacture, and commercialize in the U.S.

products containing lesinurad as an active ingredient, or the Lesinurad License.

Through December 31, 2020, we also generated revenues from the manufacture of linaclotide finished drug product, finished goods, API and development materials for certain of our partners.

Cost of Revenues .

Cost of revenues primarily includes cost of collaborative arrangements revenue related to our collaborative arrangements, the sales of linaclotide API and finished drug product, as well as the cost of product revenue related to the sales of ZURAMPIC and DUZALLO in the U.S.

Cost related to the sales of linaclotide API and finished drug product are recognized upon shipment of linaclotide API and finished drug product to certain of our partners outside of the U.S.

Our cost of collaborative arrangements revenue for linaclotide consists of the internal and

external costs of producing such API and finished drug product for certain of our partners outside of the U.S.

Cost of product revenue related to the sales of ZURAMPIC and DUZALLO in the U.S.

included the cost of producing finished goods that corresponded with product revenue for the reporting period, such as third party supply and overhead costs, as well as certain period costs related to freight, packaging, stability and quality testing, and customer acquisition.

Write-down of Inventory to Net Realizable Value and (Settlement) Loss on Non-cancelable Inventory and Commercial Supply Purchase Commitments.

During the year ended December 31, 2019, we recorded settlements of approximately $3.5 million as write-down of commercial supply to net realizable value and (settlement) loss on non-cancelable purchase commitments related to reversal of certain previously accrued non-cancelable purchase commitments.

During the year ended December 31, 2018, we wrote down approximately $0.3 million primarily related to lesinurad inventory and commercial supply purchase commitments as a result of revised demand forecasts and the notice of termination of the Lesinurad License.

During the year ended December 31, 2018, we assigned to Allergan certain linaclotide excess non-cancelable purchase commitments for which we previously accrued.

Accordingly, we relieved the previous accrual of approximately $2.5 million.

During the year ended December 31, 2017, we wrote down approximately $0.3 million of lesinurad commercial supply purchase commitments as a result of revised demand forecasts.

Cost of revenues primarily includes costs related to the sales of linaclotide API, finished drug product, and finished goods to our partners, which generally occurs upon shipment for sales of API, finished drug product and finished goods after the material has passed all quality testing required for acceptance by the partner to certain of our partners outside of the U.S.

Settlement on Non-cancelable Inventory and Commercial Supply Purchase Commitments.

During the year ended December 31, 2019, we recorded settlements related to reversals of certain previously accrued non-cancelable purchase commitments.

Research and Development Expense.

Research and development expense consists of expenses incurred in connection with the research into and development of product candidates.

These expenses consist primarily of compensation, benefits and other employee-related expenses, research and development related facility costs, third-party contract costs relating to nonclinical study and clinical trial activities, development of manufacturing processes, regulatory registration of third-party manufacturing facilities, as well as licensing fees for our product candidates.

We charge all research and development expenses to operations as incurred.

Under our linaclotide collaboration agreements with Allergan for the U.S.

and, prior to the execution of the Amended AstraZeneca Agreement in September 2019, AstraZeneca for China (including Hong Kong and Macau), we were reimbursed for certain research and development activities and we netted these reimbursements against our research and development expenses as incurred.

Amounts owed to Allergan on an ongoing basis, or AstraZeneca prior to the execution of the Amended AstraZeneca Agreement, under our respective collaboration agreements were recorded as incremental research and development expense.

The core of our research and development strategy is to leverage our demonstrated expertise and capabilities in GI diseases to bring multiple medicines to patients.

We are advancing innovative product opportunities in areas of large unmet need, including IBS-C and CIC, abdominal pain associated with lower GI disorders, and refractory GERD.

development expense consists of expenses incurred in connection with the research into and development of product candidates.

We record all research and development expenses as incurred.

Research and development expenses include amounts owed to AbbVie on an ongoing basis, as well as AstraZeneca prior to September 2019 when we amended and restated our existing collaboration agreement with AstraZeneca, or the Amended AstraZeneca Agreement, under cost-sharing provisions in our respective collaboration agreements for linaclotide.

Reimbursements received for research and development activities under these agreements were netted against research and development expenses.

Linaclotide .

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for the treatment of IBS-C or CIC in adults.

Linaclotide also is approved and commercially available in Japan and in a number of E.U.

Linaclotide also is approved and commercially available in China, Japan, and in a number of E.U.

and other countries.

In January 2019, the Chinese National Medical Products Administration approved the marketing application for LINZESS for adults with IBS-C in China.

AstraZeneca launched LINZESS in China in November 2019.

We and Allergan continue to explore ways to enhance the clinical profile of LINZESS by studying linaclotide in additional indications, populations and formulations to assess its potential to treat various conditions.

We and AbbVie continue to explore ways to enhance the clinical profile of LINZESS by studying linaclotide in additional indications, populations and formulations to assess its potential to treat various conditions.

In January 2017, the U.S.

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In June 2019, we announced positive topline data from our Phase IIIb trial demonstrating the efficacy and safety of linaclotide 290 mcg on the overall abdominal symptoms of bloating, pain and discomfort in adult patients with IBS-C.

We submitted a Supplemental New Drug Application to the U.S.

FDA in November 2019 to seek a more comprehensive description of the effects of LINZESS on its approved label.

We and Allergan have established a nonclinical and clinical post-marketing plan with the U.S.

In September 2020, based on the Phase IIIb data, the U.S.

FDA approved our Supplemental New Drug Application to include a more comprehensive description of the effects of LINZESS in its approved label.

In connection with the U.S.

FDA approval of LINZESS, we were required to conduct certain nonclinical and clinical studies including those aimed at further understanding the safety profile of linaclotide.

We and AbbVie completed such additional studies and determined that:

(a) orally administered linaclotide was not detected in breast milk, (b) there is little or no evidence of any potential for antibodies to be developed to linaclotide, and (c) there were no signs or symptoms of an immunogenic response to linaclotide.

The results observed do not alter the known safety profile for linaclotide based on the clinical studies and post-marketing experience to-date.

In addition, we and AbbVie have established a nonclinical and clinical post-marketing plan with the U.S.

FDA to understand the safety and efficacy of LINZESS in pediatric patients.

Clinical pediatric programs in IBS-C and functional constipation are currently ongoing.

MD-7246 is a delayed-release formulation of linaclotide being evaluated as an oral, intestinal, non-opioid, pain-relieving agent for patients suffering from abdominal pain associated with certain GI diseases.

designed to provide targeted delivery of linaclotide to the colon, where the majority of the abdominal pain is believed to originate, and to limit additional fluid secretion in the small intestine resulting in minimal impact on bowel function.

We and Allergan are initially exploring MD-7246 in a Phase II clinical trial evaluating the safety and efficacy of MD-7246 in adult patients with abdominal pain associated with IBS-D.

We are advancing IW-3718, a gastric retentive formulation of a bile acid sequestrant, for the potential treatment of refractory GERD.

Our clinical research has demonstrated that reflux of bile from the intestine into the stomach and esophagus plays a key role in the ongoing symptoms of refractory GERD.

IW-3718 is a novel formulation of a bile acid sequestrant designed to release in the stomach over an extended period of time, bind to bile that refluxes into the stomach, and potentially provide symptomatic relief in patients with refractory GERD.

In June 2018, we initiated two Phase III clinical trials evaluating the safety and efficacy of IW-3718 in patients with refractory GERD.

Clinical pediatric programs in IBS-C and functional constipation are ongoing.

We and AbbVie were developing MD-7246, a delayed release formulation of linaclotide.

In May 2020, we and AbbVie announced top-line data from a Phase II trial evaluating MD-7246 in adult patients with abdominal pain associated with IBS-D.

The Phase II trial did not meet its primary or key secondary endpoints.

Based on these findings, we and AbbVie discontinued the development of MD-7246.

We were developing IW-3718, a gastric retentive formulation of a bile acid sequestrant, for the potential treatment of refractory gastroesophageal reflux disease, or refractory GERD.

In September 2020, we announced that one of our two identical Phase III trials evaluating IW-3718 in refractory GERD did not meet the pre-specified criteria associated with a planned early efficacy assessment.

Following the assessment from an independent data monitoring committee, we unblinded the data and confirmed that IW-3718-302 did not meet the criteria, including the study’s primary endpoint of achieving a statistically significant improvement in heartburn severity.

Based on these findings, we are discontinuing development of IW-3718.

Early research and development .

After the Separation, our early research and development efforts have been focused on supporting our development stage GI programs, including exploring strategic options for further development of certain of our internal programs, as well as evaluating potential external development stage GI programs.

Our early research and development efforts have been focused on supporting our development stage GI programs, including exploring strategic options for further development of certain of our internal programs.

Included in early research and development are costs relating to the development of IW-3300, a GC-C agonist, which is in pre-clinical development for the potential treatment of visceral pain conditions, as well as certain other expenses associated with historical programs.

The following table sets forth our research and development expenses related to our product pipeline for the years ended December 31, 2020, 2019, and 2018.

These expenses relate primarily to internal compensation, benefits and other employee-related expenses and external costs associated with nonclinical studies and clinical trial costs for our product candidates.

These expenses relate primarily to internal compensation, benefits and other employee-related expenses and external costs associated with nonclinical studies and clinical trial costs for our

product candidates.

We allocate costs related to facilities, depreciation, share-based compensation, research and development support services, laboratory supplies and certain other costs directly to programs.

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Since 2004, the date we began tracking costs by program, we have incurred approximately $527.2 million of research and development expenses related to linaclotide.

The expenses for linaclotide include both our portion of the research and development costs incurred by Allergan for the U.S.

The expenses for linaclotide include both our portion of the research and development costs incurred by AbbVie for the U.S.

and AstraZeneca for China (including Hong Kong and Macau) prior to the execution of the Amended AstraZeneca Agreement, and invoiced to us under the cost-sharing provisions of our collaboration agreements, as well as the unreimbursed portion of research and development costs incurred by us under such cost-sharing provisions.

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Any failure by us to obtain, or any delay in obtaining, regulatory approvals would materially adversely affect our product development efforts and our business overall.

In connection with the U.S.

FDA approval of LINZESS, we were required to conduct certain nonclinical and clinical studies including those aimed at further understanding the safety profile of linaclotide.

We and Allergan completed such additional studies and determined that:

The results observed do not alter the known safety profile for linaclotide based on the clinical studies and post-marketing experience to-date.

In addition, we and Allergan established a nonclinical and clinical post-marketing plan with the U.S.

FDA to understand the efficacy and safety of LINZESS in pediatric patients.

Clinical pediatric programs in IBS-C and functional constipation are currently ongoing.

We and Allergan are also exploring development opportunities to enhance the clinical profile of LINZESS by studying linaclotide in additional indications, populations and formulations to assess its potential to treat various conditions.

We cannot currently estimate with any degree of certainty the amount of time or money that we will be

required to expend in the future on linaclotide for other geographic markets within IBS-C and CIC, or in additional indications, populations or formulations.

We and AbbVie are exploring development opportunities to enhance the clinical profile of LINZESS by studying linaclotide in additional indications, populations and formulations to assess its potential to treat various conditions.

We cannot currently estimate with any degree of certainty the amount of time or money that we will be required to expend in the future on linaclotide for other geographic markets within IBS-C and CIC, or in additional indications, populations or formulations.

Given the inherent uncertainties that come with the development of pharmaceutical products, we cannot estimate with any degree of certainty how our programs will evolve, and therefore the amount of time or money that would be required to obtain regulatory approval to market them.

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We will continue to invest in linaclotide, including the investigation of ways to enhance the clinical profile within its currently approved indications, and the exploration of its potential utility in other indications, populations and formulations.

We will also continue to invest in our other GI-focused product candidates as we advance them through clinical trials, in addition to funding research and development activities under our external collaboration and license agreements.

We will continue to invest in our GI-focused product candidates as we advance them through pre-clinical and clinical trials, in addition to funding research and development activities under our external collaboration and license agreements.

Selling, General and Administrative Expense.

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We record all selling, general and administrative expenses as incurred.

Prior to the execution of the Amended AstraZeneca Agreement, we were reimbursed for certain selling, general and administrative expenses and we netted these reimbursements against our selling, general and administrative expenses as incurred.

Under the Amended AstraZeneca Agreement, AstraZeneca is responsible for all costs and expenses incurred under the AstraZeneca License.

We include Allergan’s selling, general and administrative cost-sharing payments in the calculation of the net profits and net losses from the sale of LINZESS in the U.S.

and present the net payment to or from Allergan as collaboration expense or collaborative arrangements revenue, respectively.

Amortization of Acquired Intangible Assets .

Amortization expense was based on the economic consumption of intangible assets.

Our amortization was related to the ZURAMPIC and DUZALLO intangible assets, which were amortized on a straight-line basis over the estimated useful life of the assets.

We believe that the straight-line method of amortization represented the pattern in which the economic benefits of the intangible assets were consumed.

Gain on Fair Value Remeasurement of Contingent Consideration .

We closed a transaction with AstraZeneca, or the Lesinurad Transaction, in June 2016, pursuant to which we received an exclusive license to develop, manufacture and commercialize products containing lesinurad as an active ingredient, including ZURAMPIC and DUZALLO, in the U.S.

Our contingent consideration obligation related to the Lesinurad Transaction consisted of the fair value of estimated future milestone and royalty payments.

This liability was revalued at each reporting date.

Changes in the fair value of our contingent consideration, other than changes due to payments, were recognized as a (gain) loss on fair value remeasurement of contingent consideration in our consolidated statement of operations.

Adjustments were recorded when there were changes in significant assumptions, including net sales projections, probability weighted net cash outflow projections, the discount rate, passage of time, and the yield curve equivalent to our credit risk, which was based on the estimated cost of debt for market participants.

Prior to the execution of the Amended AstraZeneca Agreement, we were reimbursed for certain selling, general and administrative expenses and netted these reimbursements against selling, general and administrative expenses as incurred.

AstraZeneca is responsible for all costs and expenses incurred under the Amended AstraZeneca Agreement.

We include AbbVie’s selling, general and administrative cost-sharing payments in the calculation of the net profits and net losses from the sale of LINZESS in the U.S.

and present the net payment to or from AbbVie as collaboration expense or collaborative arrangements revenue, respectively.

Gain on Lease Modification.

During the year ended December 31, 2019, we recorded a gain on lease modification of approximately $3.2 million related to a modification of our 301 Binney Street lease in April 2019.

During the year ended December 31, 2019, we recorded a gain on lease modification related to a modification of our prior headquarters lease in April 2019.

For additional information relating to the gain, see Note 8, Leases , to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.

Restructuring Expenses.

We record costs and liabilities associated with exit and disposal activities in accordance with ASC Topic 420, Exit or Disposal Cost Obligations, or ASC 420.

Such costs are based on estimates of fair value in the period the liabilities are incurred in accordance with ASC 420.

We evaluate and adjust these liabilities as appropriate for changes in circumstances as additional information becomes available.

Impairment of intangible assets.

During the year ended December 31, 2018, we recorded an impairment charge of approximately $151.8 million related to our ZURAMPIC and DUZALLO intangible assets.

For additional information relating to the impairment of these assets, see Note 5, Goodwill and Intangible Assets , to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K

Other (Expense) Income.

Interest expense consists primarily of cash and non-cash interest costs related to the convertible senior notes and the 2026 Notes.

Non-cash interest expense consists of amortization of the debt discount and debt issuance costs associated with the convertible senior notes and the 2026 Notes.

We amortize these costs using the effective interest rate method over the life of the respective note agreements as interest expense in our consolidated statements of operations.

Gain (loss) on derivatives consists of the change in fair value of the Convertible Note Hedges and Note Hedge Warrants, which are recorded as derivative assets and liabilities.

The Convertible Note Hedges and the Note Hedge Warrants are recorded at fair value at each reporting period and changes in fair value are recorded in our consolidated statements of operations.

Restructuring expenses pertain to workforce reduction and restructuring initiatives and are more fully described in Note 18, Workforce Reduction and Restructuring , to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.

We substantially completed a workforce reduction related to discontinuing development of IW-3718 in the fourth quarter of 2020 and incurred approximately $15.5 million of restructuring expenses, primarily for one-time cash employee severance and benefit costs.

Interest Expense.

Interest expense consists primarily of cash and non-cash interest costs related to the convertible senior notes.

Non-cash interest expense consists of amortization of the debt discount and debt issuance costs associated with our convertible senior notes.

Interest and Investment Income.

Interest and investment income consists of interest earned on our cash, cash equivalents and marketable securities as well as significant financing components of payments due from collaboration partners.

Gain (loss) on Derivatives.

In June 2015, we issued 2.25% Convertible Senior Notes due June 15, 2022, or the 2022 Convertible Notes, and in August 2019, we issued 0.75% Convertible Senior Notes due 2024, or the 2024 Convertible Notes, and 1.50% Convertible Senior Notes due 2026, or the 2026 Convertible Notes (together with the 2022 Convertible Notes and the 2024 Convertible Notes, the Convertible Senior Notes).

In connection with the issuance of our 2022 Convertible Notes, we entered into convertible note hedge transactions, or the Convertible Note Hedges, and separate note hedge warrant transactions, or the Note Hedge Warrants, with certain financial institutions.

Gain (loss) on derivatives consists of the change in fair value of the Convertible Note Hedges and Note Hedge Warrants, which are recorded at fair value at each reporting period and changes in fair value are recorded in our consolidated statements of operations.

The Convertible Note Hedges and Note Hedge Warrants are more fully described in Note 11 , Notes Payable , to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.

In August 2019, we issued $200.0 million in aggregate principal amount of the 2024 Convertible Notes and $200.0 million in aggregate principal amount of the 2026 Convertible Notes.

We received net proceeds of approximately $391.0 million from the sale of the 2024 Convertible Notes and the 2026 Convertible Notes, after deducting fees and expenses of approximately $9.0 million.

The proceeds from the issuance of the 2024 Convertible Notes and the 2026 Convertible Notes were used to redeem all of the outstanding principal balance of the 2026 Notes, repurchase $215.0 million aggregate principal amount of the 2022 Convertible Notes and pay approximately $25.2 million for the purchase of the Capped Calls.

We recognized a loss on extinguishment of debt of approximately $31.0 million related to the redemption of the 2026 Notes and the partial repurchase of the 2022 Convertible Notes.

Loss on Extinguishment of Debt.

We recognized a loss on extinguishment of debt during the year ended December 31, 2019 related to the redemption of the 8.375% Notes due 2026, or the 2026 Notes, and the partial repurchase of the 2022 Convertible Notes.

In connection with the partial repurchase of the 2022 Convertible Notes, we also terminated the respective portion of our existing Convertible Note Hedges and Note Hedge Warrants.

These transactions are more fully described in Note 11, Notes Payable , to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.

In connection with the issuance of the 2024 Convertible Notes and the 2026 Convertible Notes, we entered into the Capped Calls.

The Capped Calls cover 29,867,480 shares of Class A Common Stock (subject to anti-dilution and certain other adjustments), which is the same number of shares of Class A Common Stock that initially underlie the 2024 Convertible Notes and the 2026 Convertible Notes.

The Capped Calls have an initial strike price of approximately $13.39 per share, which corresponds to the initial conversion price of the 2024 Convertible Notes and the 2026 Convertible Notes and is subject to anti-dilution adjustments generally similar to those applicable to the 2024 Convertible Notes and the 2026 Convertible Notes, and have a cap price of approximately $17.05 per share.

These instruments meet the conditions outlined in ASC Topic 815 , Derivatives and Hedging , or ASC 815, to be classified in stockholders’ deficit and are not subsequently remeasured as long as the conditions for equity classification continue to be met.

These transactions are more fully described in Note 12 , Notes Payable , to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.

Interest income consists of interest earned on our cash, cash equivalents and marketable securities as well as significant financing components identified under ASC 606.

Income Taxes.

We prepare our income tax provision based on our interpretation of the income tax accounting rules and each jurisdiction’s enacted tax laws and regulations and record our income tax provision by applying our estimated annual effective tax rate to pre-tax income.

The difference between the recorded provision for income taxes and the income tax provision based on U.S.

statutory tax rates was primarily attributable to the impact of a continued valuation allowance.

Discontinued Operations.

We have recast all historical expenses directly associated with our sGC business as discontinued operations in accordance with ASC Subtopic 250-20, Discontinued Operations .

In connection with the Separation, we recast all historical expenses directly associated with our sGC business as discontinued operations for the years ended December 31, 2019 and 2018 in accordance with ASC Subtopic 250-20, Discontinued Operations .

For additional information refer to Note 3, Cyclerion Separation , to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.

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generally accepted accounting principles.

The preparation of these financial statements requires us to make certain estimates and assumptions that may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the amounts of revenues and expenses during the reported periods.

Significant estimates and assumptions in our consolidated financial statements include those related to revenue recognition;

accounts receivable;

inventory valuation and related reserves;

useful lives of long-lived assets;

impairment of long-lived assets, including our acquired intangible assets and goodwill;

valuation procedures for right-of-use assets and operating lease liabilities;

valuation procedures for the issuance and repurchase of convertible notes;

valuation of assets and liabilities held for disposition and losses related to discontinued operations;

fair value of derivatives;

balance sheet classification of notes payable and convertible notes;

income taxes, including the valuation allowance for deferred tax assets;

research and development expenses;

contingencies and share-based compensation.

The preparation of these financial statements requires us to make certain estimates and assumptions that may affect the reported amounts of assets and liabilities, the disclosure of assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reported periods.

We base our estimates on our historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

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Changes in estimates are reflected in reported results in the period in which they become known.

We believe that our application of the following accounting policies, each of which require significant judgments and estimates on the part of management, are the most critical to aid in fully understanding and evaluating our reported financial results.

reported financial results.

Our significant accounting policies are more fully described in Note 2, Summary of Significant Accounting Policies , to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.

Reclassifications and Revisions to Prior Period Financial Statements

Certain prior period financial statement items have been reclassified to conform to current period presentation.

We have presented our sGC business as discontinued operations in our consolidated financial statements for all periods presented.

The historical financial statements and footnotes have been recast accordingly.

Discontinued Operations

During the three months ended June 30, 2019, we determined that the separation of our sGC business on April 1, 2019 met the criteria for classification as a discontinued operation in accordance with ASC Subtopic 205-20, Discontinued Operations .

Accordingly, the accompanying consolidated financial statements for all periods presented have been recast to present the assets and liabilities associated with the sGC business as held for disposition and the expenses directly associated with the sGC business as discontinued operations.

For additional information related to discontinued operations, refer to Note 3, Cyclerion Separation , to these consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.

Fair Value Measurements

We have certain assets and liabilities that are measured at fair value on a recurring basis, and which have been classified as Level 1, 2 or 3 within the fair value hierarchy as described in ASC 820, Fair Value Measurement .

In general, fair values determined by Level 1 inputs utilize observable inputs such as quoted prices in active markets for identical assets or liabilities.

Fair values determined by Level 2 inputs utilize data points that are either directly or indirectly observable, such as quoted prices for similar instruments in active markets, interest rates and yield curves.

Fair values determined by Level 3 inputs utilize unobservable data points in which there is little or no market data, which require us to develop our own assumptions for the asset or liability.

Our investment portfolio includes mainly fixed income securities that do not always trade on a daily basis.

As a result, the pricing services we use apply other available information as applicable through processes such as benchmark yields, benchmarking of like securities, sector groupings and matrix pricing to prepare valuations.

In addition, model processes are used to assess interest rate impact and develop prepayment scenarios.

These models take into consideration relevant credit information, perceived market movements, sector news and economic events.

The inputs into these models may include benchmark yields, reported trades, broker-dealer quotes, issuer spreads and other relevant data.

We validate the prices provided by our third party pricing services by obtaining market values from other pricing sources and analyzing pricing data in certain instances.

We classify our derivative financial instruments and contingent consideration as Level 3 under the fair value hierarchy.

The derivatives are not actively traded and are valued using the Black-Scholes option pricing model, which requires the use of subjective assumptions, primarily the expected stock price volatility assumption and expected term.

The contingent consideration was not actively traded and was valued using the Monte-Carlo, simulation which requires the use of subjective assumptions, including probability weighted net cash outflow projections, discounted using a yield curve equivalent to our credit risk, which was the estimated cost of debt financing for market participants.

Adjustments are recorded when there are changes in significant assumptions, including net sales projections, probability weighted net cash outflow projections, the discount rate, passage of time, and the yield curve equivalent to our credit risk, which is based on the estimated cost of debt for market participants.

Effective January 1, 2019, we adopted ASC Topic 842, Leases, or ASC 842, using the optional transition method.

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In addition, the standard requires enhanced disclosures that meet the objective of enabling financial statement users to assess the amount, timing, and uncertainty of cash flows arising from leases.

The reported results for the year ended December 31, 2019 reflect the application of ASC 842 guidance, while the reported results for prior periods were prepared in conjunction with ASC Topic 840, Leases , or ASC 840.

Because there were no material changes to the values of existing capital leases as a result of the adoption of ASC 842, we concluded that no cumulative-effect adjustment to the accumulated deficit as of January 1, 2019 was necessary.

recognition of right-of-use assets and lease liabilities related to our operating leases under ASC 842 had a material impact on our consolidated financial statements.

As part of the ASC 842 adoption, we elected certain practical expedients outlined in the guidance.

These practical expedients include:

As part of the ASC 842 adoption, we elected certain practical expedients, which include:

● A policy election to use the short-term lease exception by asset class;

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o An entity need not reassess the classification for any expired or existing leases.

As a result, all leases that were classified as operating leases in accordance with ASC 840 are classified as operating leases under ASC 842, and all leases that were classified as capital leases in accordance with ASC 840 are classified as finance leases under ASC 842.

As a result, all leases that were previously classified as operating leases in accordance with ASC Topic 840, Leases , or ASC 840, are classified as operating leases under ASC 842, and all leases that were classified as capital leases in accordance with ASC 840 are classified as finance leases under ASC 842.

o An entity need not reassess initial direct costs for any existing leases.

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Our lease portfolio for the year ended December 31, 2020 includes:

leases for our prior and current headquarters locations, a data center colocation lease, vehicle leases for our salesforce representatives, and leases for computer and office equipment.

a lease for our headquarters location, a data center colocation lease, vehicle leases for our salesforce representatives, and leases for computer and office equipment.

We determine if an arrangement is a lease at the inception of the contract.

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In June 2015, in connection with the issuance of the 2022 Convertible Notes, we entered into the Convertible Note Hedges.

Concurrently with entering into the Convertible Note Hedges, we also entered into certain warrant transactions in which we sold Note Hedge Warrants to the Convertible Note Hedge counterparties to acquire shares of our Class A Common Stock, subject to customary anti-dilution adjustments.

our Class A Common Stock, subject to customary anti-dilution adjustments.

In connection with the partial repurchase of the 2022 Convertible Notes in August 2019, we terminated our Convertible Note Hedges and Note Hedge Warrants proportionately.

These instruments are derivative financial instruments under ASC 815.

These derivatives are recorded as assets or liabilities at fair value at the end of each reporting period and the fair value is determined using the Black-Scholes option-pricing model.

The changes in fair value are recorded as a component of other (expense) income in the consolidated statements of operations.

Significant inputs used to determine the fair value include the price per share of our Class A Common Stock on the date of valuation, expected term of the derivative instruments, the strike prices of the derivative instruments, the risk-free interest rate, and the expected

volatility of our Class A Common Stock.

Changes to these inputs could materially affect the valuation of the Convertible Note Hedges and Note Hedge Warrants in future periods.

In August 2019, in connection with the issuance of the 2024 Convertible Notes and the 2026 Convertible Notes, we entered into the Capped Calls.

The Capped Calls cover the same number of shares of Class A Common Stock that initially underlie the 2024 Convertible Notes and the 2026 Convertible Notes (subject to anti-dilution and certain other adjustments).

These instruments meet the conditions outlined in ASC 815 to be classified in stockholders’ deficit and are not subsequently remeasured as long as the conditions for equity classification continue to be met.

Revenue Recognition

Effective January 1, 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and related amendments, or ASU 2014-09, using the modified retrospective transition method.

The adoption of ASU 2014-09 represented a change in accounting principle that aims to more closely align revenue recognition with the delivery of our products or services and will provide financial statement readers with enhanced disclosures.

ASU 2014-09 also included Subtopic 340-40, Other Assets and Deferred Costs—Contracts with Customers, which required the deferral of incremental costs of obtaining a contract with a customer.

Upon adoption of ASC 606, we concluded that no cumulative-effect adjustment to the accumulated deficit as of January 1, 2018 was necessary.

There were no remaining or ongoing deliverables or unrecognized consideration as of December 31, 2017 that required an adjustment to the accumulated deficit.

The adoption of ASC 606 had no impact on our consolidated statement of operations, consolidated balance sheets, or consolidated statement of cash flows.

The reported results for the years ended December 30, 2019 and 2018 reflect the application of ASC 606 guidance, while the reported results for the year ended December 31, 2017 were prepared in accordance with ASC 605, Revenue Recognition , or ASC 605.

As part of the ASC 606 adoption, we have utilized certain practical expedients outlined in the guidance.

These practical expedients include:

● Expensing as incurred incremental costs of obtaining a contract, such as sales commissions, if the amortization period of the asset would be less than one year;

● Recognizing revenue in the amount that we have the right to invoice, when consideration from the customer corresponds directly with the value to the customer of our performance completed to date;

● For contracts that were modified before the beginning of the earliest reporting period presented in accordance with the pending content that links to this paragraph, an entity need not retrospectively restate the contract for those contract modifications in accordance with paragraphs ASC 606-10-25-12 through 25-13.

Instead, an entity shall reflect the aggregate effect of all modifications that occur before the beginning of the earliest period presented in accordance with the pending content that links to this paragraph when:

(a) Identifying the satisfied and unsatisfied performance obligations, (b) Determining the transaction price, and (c) Allocating the transaction price to the satisfied and unsatisfied performance obligations.

Prior to the adoption of ASC 606, we recognized revenue when there was persuasive evidence that an arrangement existed, services had been rendered or delivery had occurred, the price was fixed or determinable, and collection was reasonably assured.

Our revenues are generated primarily through collaborative arrangements and license agreements related to the development and commercialization of linaclotide, as well as co-promotion arrangements in the U.S.

The terms of the collaborative arrangements and other agreements contain multiple performance obligations which may include (i) licenses, (ii) research and development activities, including participation on joint steering committees, (iii) the manufacture of finished drug product, API, or development materials for a partner, which are reimbursed at a contractually determined rate, and (iv) education or co-promotion activities by our clinical sales specialists.

payments based upon the achievement of certain milestones, (v) payments for sales detailing, promotional support services and medical education initiatives, and (vi) royalties on product sales.

Additionally, we may receive our share of the net profits or bear our share of the net losses from the sale of linaclotide in the U.S.

Prior to the execution of the Amended AstraZeneca Agreement in September 2019, we received our share of the net profits and bore our share of the net losses from the sale of linaclotide in China (including Hong Kong and Macau).

We have adopted a policy to recognize revenue net of tax withholdings, as applicable.

Revenue recognition under ASC 606

Upon executing a revenue generating arrangement, we assess whether it is probable we will collect consideration in exchange for the good or service it transfers to the customer.

To determine revenue recognition for arrangements that we determine are within the scope of ASC 606, we perform the following five steps:

Upon executing a revenue generating arrangement, we assess whether it is probable we will collect consideration in exchange for the good or service it transfers to the customer and perform the following five steps:

(i) identify the contract(s) with a customer;

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The assumptions that are used to determine the standalone selling price may include forecasted revenues, development timelines, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success.

Non-refundable payments to us under these agreements may include (i) up-front license fees, (ii) payments for research and development activities, (iii) payments for the manufacture of finished drug product, API, or development materials, (iv) payments based upon the achievement of certain milestones, (v) payments for sales detailing, promotional support services and medical education initiatives, and (vi) royalties on product sales.

Additionally, we receive our share of the net profits or bear our share of the net losses from the sale of linaclotide in the U.S.

We have adopted a policy to recognize revenue net of tax withholdings, as applicable.

Collaboration, License, Co-Promotion and Other Commercial Agreements

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If we are entitled to additional payments when the customer exercises these options, any additional payments are recorded as revenue when the customer obtains control of the goods, which is typically upon shipment for sales of API and finished drug product.

For agreements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, we recognize revenue when the related sales occur in accordance with the sales-based royalty exception under ASC 606-10-55-65.

Net Profit or Net Loss Sharing

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While ASC 808 provides guidance on classification, the standard is silent on matters of separation, initial measurement, and recognition.

Therefore, we, consistent with our accounting policies prior to the adoption of ASC 606, apply the separation, initial measurement, and recognition principles of ASC 606 to our collaboration agreements.

We adopted ASU No.

2018-18, Collaborative Arrangements (Topic 808):

Clarifying the Interaction between Topic 808 and Topic 606, during the three months ended December 31, 2018 and confirmed that,

consistent with our initial conclusions, we will continue to analogize to ASC 606 for further guidance on areas such as separation, initial measurement, and recognition for our existing collaborative arrangements where applicable.

Therefore, we apply the separation, initial measurement, and recognition principles of ASC Topic 606, Revenue from Contracts with Customers , or ASC 606, to our collaboration agreements.

Our collaborative arrangements revenue generated from sales of LINZESS in the U.S.

are considered akin to sales-based royalties.

In accordance with the sales-based royalty exception, we recognize our share of the pre-tax commercial net profit or net loss generated from the sales of LINZESS in the U.S.

in the period the product sales are earned, as reported by Allergan, and related cost of goods sold and selling, general and administrative expenses are incurred by us and our collaboration partner.

These amounts are partially determined based on amounts provided by Allergan and involve the use of estimates and judgments, such as product sales allowances and accruals related to prompt payment discounts, chargebacks, governmental and contractual rebates, wholesaler fees, product returns, and co-payment assistance costs, which could be adjusted based on actual results in the future.

We are highly dependent on Allergan for timely and accurate information regarding any net revenues realized from sales of LINZESS in the U.S.

in accordance with both ASC 808 and ASC 606, and the costs incurred in selling it, in order to accurately report its results of operations.

We recognize our share of the pre-tax commercial net profit or net loss generated from the sales of LINZESS in the U.S.

in the period the product sales are earned, as reported by AbbVie, and related cost of goods sold and selling, general and administrative expenses as incurred by us and our collaboration partner.

These amounts are partially determined based on amounts provided by AbbVie and involve the use of estimates and judgments, such as product sales allowances and accruals related to prompt payment discounts, chargebacks, governmental and contractual rebates, wholesaler fees, product returns, and co-payment assistance costs, which could be adjusted based on actual results in the future.

We are highly dependent on AbbVie for timely and accurate information regarding any net revenues realized from sales of LINZESS in the U.S.

in accordance with ASC 808, and the related costs, in order to accurately report its results of operations.

If we do not receive timely and accurate information or incorrectly estimate activity levels associated with the collaboration at a given point in time, we could be required to record adjustments in future periods.

In accordance with ASC 606-10-55, Principal Agent Considerations , we record revenue transactions as net product revenue in our consolidated statements of operations if we were deemed the principal in the transaction, which includes being the primary obligor, retaining inventory risk, and control over pricing.

Given that we are not the primary obligor and do not have the inventory risks in the collaboration agreement with Allergan for North America, we record our share of the net profits or net losses from the sales of LINZESS in the U.S.

on a net basis and present the settlement payments to and from Allergan as collaboration expense or collaborative arrangements revenue, as applicable.

We and Allergan settle the cost sharing quarterly, such that our consolidated statements of operations reflects 50% of the pre-tax net profit or loss generated from sales of LINZESS in the U.S.

We record revenue transactions as net product revenue in our consolidated statements of operations if we were deemed the principal in the transaction, which includes being the primary obligor, retaining inventory risk, and control over pricing.

Given that we are not the primary obligor and do not have the inventory risks in the collaboration agreement with AbbVie for North America, we record our share of the net profits or net losses from the sales of LINZESS in the U.S.

on a net basis and present the settlement payments to and from AbbVie as collaboration expense or collaborative arrangements revenue, as applicable.

We and AbbVie settle the cost sharing quarterly, such that our consolidated statements of operations reflect 50% of the pre-tax net profit or loss generated from sales of LINZESS in the U.S.

Product Revenue, Net

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We expensed incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that we would have recognized was one year or less.

We evaluated the creditworthiness of each of our Distributors to determine whether it was probable that a significant reversal in the amount of the cumulative revenue recognized would not occur.

We calculated our net product revenue based on the wholesale acquisition cost that we charged our Distributors for the Lesinurad Products less variable consideration.

The product revenue variable consideration consisted of estimates relating to (i) trade discounts and allowances, such as invoice discounts for prompt payment and distributor fees, (ii) estimated government and private payor rebates, chargebacks and discounts, such as Medicaid reimbursements, (iii) reserves for expected product returns and (iv) estimated costs of incentives offered to certain indirect customers including patients.

These estimates would be adjusted based on actual results in the period such variances become known.

Other Incentives:

Incentives that we offered include voluntary patient assistance programs, such as co-pay assistance programs which were intended to provide financial assistance to qualified commercially insured patients with prescription drug co-payments required by payors.

The calculation of the accrual for co-pay assistance was based on an estimate of claims and the cost per claim that we expected to receive associated with product that has been recognized as revenue.

Product revenue was recorded net of the trade discounts, allowances, rebates, chargebacks, discounts, product returns, and other incentives.

Certain of these adjustments were recorded as an accounts receivable reserve, while certain of these adjustments were recorded as accrued expenses.

Through December 31, 2019, we produced linaclotide finished drug product, API and development materials for certain of our partners.

We recognize revenue on linaclotide finished drug product, API and development materials when control has transferred to the partner, which generally occurs upon shipment for sales of API and finished drug product, after the material has passed all quality testing required for collaborator acceptance.

As it relates to development materials and API produced for Astellas, we are reimbursed at a contracted rate.

Such reimbursements are considered as part of revenue generated pursuant to the Astellas license agreement and are presented as collaborative arrangements revenue.

Any linaclotide finished drug product, API and development materials currently produced for Allergan for the U.S.

are recognized in accordance with the cost-sharing provisions of the collaboration agreement with Allergan for North America.

Prior to the execution of the Amended AstraZeneca Agreement in September 2019, any linaclotide finished drug product, API and development materials produced for AstraZeneca for China (including Hong Kong and Macau), were recognized in accordance with the cost-sharing provisions of the AstraZeneca collaboration agreement.

Beginning in 2020, we will no longer be responsible for the supply of linaclotide finished drug product or API to our partners.

Sale of Active Pharmaceutical Ingredient

During the years ended December 31, 2020, 2019, and 2018, we produced linaclotide API, finished drug product, finished goods, and/or development materials for certain of our partners.

As of December 31, 2020, we are no longer responsible for the supply of linaclotide API, finished drug product, finished goods or development materials to our partners.

As it relates to development materials and API produced for Astellas, we were reimbursed at a contracted rate.

Such reimbursements were considered as part of revenue generated pursuant to the Astellas license agreement and are presented as collaborative arrangements revenue.

Any linaclotide API, finished drug product, finished goods, and development materials AbbVie is responsible for producing for the U.S.

are recognized in accordance with the cost-sharing provisions of the collaboration agreement for North America with AbbVie.

Prior to the execution of the Amended AstraZeneca Agreement in September 2019, any linaclotide API, finished drug product, finished goods, and development materials produced for AstraZeneca for China (including Hong Kong and Macau) were recognized in accordance with the cost-sharing provisions of the AstraZeneca collaboration agreement.

We recognize revenue on linaclotide API, finished drug product, finished goods, and development materials when control has transferred to the partner, which generally occurs upon shipment after the material has passed all quality testing required for acceptance by the partner.

Our deferred revenue balance consists of advance billings and payments received from customers in excess of revenue recognized.

Revenue recognition prior to the adoption of ASC 606

Agreements Entered into Prior to January 1, 2011

For arrangements that include multiple deliverables and were entered into prior to January 1, 2011, we followed the provisions of ASC Topic 605-25, Revenue Recognition—Multiple-Element Arrangements , or ASC 605-25, in accounting for these agreements.

Under ASC 605-25, we were required to identify the deliverables included within the agreement and evaluate which deliverables represent separate units of accounting.

Collaborative research and development and licensing agreements that contained multiple deliverables were divided into separate units of accounting when the following criteria were met:

● Delivered element(s) had value to the collaborator on a standalone basis;

● There was objective and reliable evidence of the fair value of the undelivered obligation(s);

● If the arrangement included a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) was considered probable and substantially within our control.

We allocated arrangement consideration among the separate units of accounting either on the basis of each unit’s respective fair value or using the residual method, and applied the applicable revenue recognition criteria to each of the separate units.

If the separation criteria were not met, revenue of the combined unit of accounting was recorded based on the method appropriate for the last delivered item.

Agreements Entered into or Materially Modified on or after January 1, 2011 and prior to January 1, 2018

We evaluated revenue from multiple element agreements entered into on or after January 1, 2011 under ASC 605 or ASU No.

2009-13, Multiple-Deliverable Revenue Arrangements , or ASU 2009- 13, until the adoption of ASC 606.

We also evaluated whether amendments to its multiple element arrangements were considered material modifications that were subject to the application of ASU 2009-13.

This evaluation required management to assess all relevant facts and circumstances and to make subjective determinations and judgments.

When evaluating multiple element arrangements under ASU 2009-13, we considered whether the deliverables under the arrangement represented separate units of accounting.

This evaluation required subjective determinations and required management to make judgments about the individual deliverables and whether such deliverables were separable from the other aspects of the contractual relationship.

In determining the units of accounting, management evaluated certain criteria, including whether the deliverables had standalone value, based on the consideration of the relevant facts and circumstances for each arrangement.

Factors considered in this determination included the research, manufacturing

and commercialization capabilities of the partner and the availability of relevant research and manufacturing expertise in the general marketplace.

In addition, we considered whether the collaborator can use the license or other deliverables for their intended purpose without the receipt of the remaining elements, and whether the value of the deliverable was dependent on the undelivered items and whether there were other vendors that could provide the undelivered items.

The consideration received was allocated among the separate units of accounting using the relative selling price method, and the applicable revenue recognition criteria were applied to each of the separate units.

We determined the estimated selling price for deliverables using vendor-specific objective evidence, or VSOE, of selling price, if available, third-party evidence, or TPE, of selling price if VSOE was not available, or best estimate of selling price, or BESP, if neither VSOE nor TPE was available.

Up-Front License Fees prior to January 1, 2018

When management believed the license to its intellectual property had standalone value, we generally recognized revenue attributed to the license upon delivery.

When management believed the license to its intellectual property did not have standalone value from the other deliverables to be provided in the arrangement, it was combined with other deliverables and the revenue of the combined unit of accounting was recorded based on the method appropriate for the last delivered item.

Milestones prior to January 1, 2018

At the inception of each arrangement that included pre-commercial milestone payments, we evaluated whether each pre-commercial milestone was substantive, in accordance with ASU No.

2010-17, Revenue Recognition—Milestone Method , prior to the adoption of ASC 606.

This evaluation included an assessment of whether (a) the consideration was commensurate with either (1) the entity’s performance to achieve the milestone, or (2) the enhancement of the value of the delivered item(s) as a result of a specific outcome resulting from the entity’s performance to achieve the milestone, (b) the consideration relates solely to past performance and (c) the consideration is reasonable relative to all of the deliverables and payment terms within the arrangement.

We evaluated factors such as the scientific, clinical, regulatory, commercial and other risks that must be overcome to achieve the respective milestone, the level of effort and investment required and whether the milestone consideration is reasonable relative to all deliverables and payment terms in the arrangement in making this assessment.

At December 31, 2017, we had no pre-commercial milestones that were deemed substantive.

Commercial milestones were accounted for as royalties and were recorded as revenue upon achievement of the milestone, assuming all other revenue recognition criteria were met.

Net Profit or Net Loss Sharing prior to January 1, 2018

In accordance with ASC 808 and ASC 605-45, Principal Agent Considerations , we considered the nature and contractual terms of the arrangement and the nature of our business operations to determine the classification of the transactions under our collaboration agreements.

We recorded revenue transactions gross in the consolidated statements of operations if we were deemed the principal in the transaction, which includes being the primary obligor and having the risks and rewards of ownership.

We recognized our share of the pre-tax commercial net profit or net loss generated from the sales of LINZESS in the U.S.

in the period the product sales were reported by Allergan and related cost of goods sold and selling, general and administrative expenses were incurred by us and our collaboration partner.

These amounts were partially determined based on amounts provided by Allergan and involved the use of estimates and judgments, such as product sales allowances and accruals related to prompt payment discounts, chargebacks, governmental and contractual rebates, wholesaler fees, product returns, and co-payment assistance costs, which could be adjusted based on actual results.

For the periods covered in the consolidated financial statements presented, there have been no material changes to prior period estimates of revenues, cost of goods sold or selling, general and administrative expenses associated with the sales of LINZESS in the U.S.

We recorded our share of the net profits or net losses from the sales of LINZESS in the U.S.

on a net basis and presented the settlement payments to and from Allergan as collaboration expense or collaborative arrangements revenue,

as applicable, as we were not the primary obligor and did not have the risks and rewards of ownership in the collaboration agreement with Allergan for North America.

We and Allergan settle the cost sharing quarterly, such that our consolidated statements of operations reflect 50% of the pre-tax net profit or loss generated from sales of LINZESS in the U.S.

Royalties on Product Sales prior to January 1, 2018

We received royalty revenues under certain of the Company’s license or collaboration agreements.

We recorded these revenues as earned.

Product Revenue, Net prior to January 1, 2018

As noted above, net product revenue was derived from sales of the Lesinurad Products in the U.S.

We recognized net product revenue from sales of the Lesinurad Products in accordance with ASC 605, when persuasive evidence of an arrangement existed, delivery had occurred and title of the product and associated risk of loss had passed to the customer, the price was fixed or determinable, and collection from the customer was reasonably assured.

ASC 605 required, among other criteria, that future returns could be reasonably estimated in order to recognize revenue.

We began commercializing ZURAMPIC in October 2016 and DUZALLO in October 2017 in the U.S.

Initially, upon the product launch of each of the Lesinurad Products, we determined that we were not able to reliably make certain estimates, including returns, necessary to recognize product revenue upon delivery to Distributors.

As a result, through September 30, 2017, we recorded net product revenue for the Lesinurad Products using a deferred revenue recognition model (sell-through).

Accordingly, we recognized net product revenue when the Lesinurad Products were prescribed to the end-user, using estimated prescription demand and pharmacy demand from third party sources and the Company’s analysis of third party market research data, as well as other third-party information through September 30, 2017.

During the three months ended December 31, 2017, we concluded we had sufficient volume of historical activity and visibility into the distribution channel in order to reasonably make all estimates required under ASC 605 to recognize product revenue upon delivery to the Distributor.

During the three months and year ended December 31, 2017, product revenue was recognized upon delivery of the Lesinurad Products to the Distributors.

We evaluated the creditworthiness of each of our Distributors to determine whether revenue could be recognized upon delivery, subject to satisfaction of the other requirements, or whether recognition was required to be delayed until receipt of payment.

In order to conclude that the price is fixed or determinable, we must be able to (i) calculate our gross product revenue from the sales to Distributors and (ii) reasonably estimate our net product revenue.

We calculated gross product revenue based on the wholesale acquisition cost that we charged our Distributors for the Lesinurad Products.

We estimated our net product revenue by deducting from our gross product revenue (i) trade discounts and allowances, such as invoice discounts for prompt payment and distributor fees, (ii) estimated government and private payor rebates, chargebacks and discounts, such as Medicaid reimbursements, (iii) reserves for expected product returns and (iv) estimated costs of incentives offered to certain indirect customers including patients.

These estimates could be adjusted based on actual results in the period such variances become known.

We supplied linaclotide finished drug product, API and development materials for certain of our partners.

We recognized revenue on linaclotide finished drug product, API and development materials when the material had passed all quality testing required for collaborator acceptance, delivery had occurred, title and risk of loss had transferred to the partner, the price was fixed or determinable, and collection was reasonably assured.

The agreements above are more fully described in Note 6, Collaboration, License, Co-promotion and Other Commercial Agreements, in the accompanying notes to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.

Research and Development Expense

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However, if we incorrectly estimate activity levels associated with the CRO services at a given point in time, we could be required to record material adjustments in future periods.

Prior to the execution of the Amended AstraZeneca Agreement in September 2019, under our collaboration agreement with AstraZeneca for China (including Hong Kong and Macau), we were reimbursed for certain research and development expenses and we netted these reimbursements against our research and development expenses as incurred.

Under our collaboration agreement with Allergan for North America, we are reimbursed for certain research and development expenses and we net these reimbursements against our research and development expenses as incurred.

Amounts owed to Allergan or AstraZeneca under our respective collaboration agreements are recorded as incremental research and development expense.

Under our collaboration agreement with AbbVie for North America, we are reimbursed for certain research and development expenses and we net these reimbursements against our research and development expenses as incurred.

Amounts owed to AbbVie under our collaboration agreement are recorded as incremental research and development expense.

Nonrefundable advance payments for research and development activities are capitalized and expensed over the related service period or as goods are received.

In connection with the execution of the Amended AstraZeneca Agreement, AstraZeneca is fully responsible for all research and development costs incurred related to the development, manufacture, and commercialization of linaclotide in China (including Hong Kong and Macau).

Share-Based Compensation Expense

We grant awards under our share-based compensation programs, including stock awards, restricted stock awards, or RSAs, restricted stock units, or RSUs, stock options, and shares issued under our employee stock purchase plan, or ESPP.

Share-based compensation is recognized as expense in the consolidated statements of operations based on the grant date fair value over the requisite service period, net of estimated forfeitures.

We estimate the fair value of stock options and ESPP shares using the Black-Scholes option-pricing model, which requires the use of subjective assumptions including volatility and expected term, among others.

The fair value of stock awards, RSAs, and RSUs is based on the market value of our Class A Common Stock on the date of grant.

For awards that vest based on service conditions, we use the straight-line method to allocate compensation expense to reporting periods.

For awards that contain performance conditions, we determine the appropriate amount to expense based on the anticipated achievement of performance targets, which requires judgment, including forecasting the achievement of future specified targets.

We make certain assumptions in order to value and record expense associated with awards made to employees and non-employees under our share-based compensation arrangements.

Changes in these assumptions may lead to variability with respect to the amount of expense we recognize in connection with share-based payments.

We estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates.

We grant awards under our share-based compensation programs, including stock awards, restricted stock awards, or RSAs, restricted stock units, or RSUs (including performance-based RSUs, or PSUs), stock options, and shares issued under our employee stock purchase plan, or ESPP.

Share-based compensation is recognized as expense in

the consolidated statements of operations based on the grant date fair value over the requisite service period, net of estimated forfeitures.

We estimate forfeitures over the requisite service period using historical forfeiture activity and record share-based compensation expense only for those awards that are expected to vest.

We estimate the fair value of stock options on the date of grant using the Black-Scholes option-pricing model, which requires the use of subjective assumptions including volatility and expected term, among others.

The fair value of stock awards, RSAs, and RSUs is based on the market value of our Class A Common Stock on the date of grant, with the exception of PSUs with market conditions, which are measured using the Monte Carlo simulation method.

Discounted stock purchases under our ESPP are valued on the first date of the offering period using the Black-Scholes option-pricing model to compute the fair value of the lookback provision plus the purchase discount.

For awards that vest based on service conditions and market conditions, we use the straight-line method to recognize compensation expense over the respective service period.

At the date performance conditions are determined to be probable of achievement, we record a cumulative expense catch-up, with remaining expense amortized over the remaining service period.

Throughout the performance period, we re-assess the estimated performance and update the number of performance-based awards that we believe will ultimately vest.

Discounted stock purchases under our ESPP are recognized over the offering period.

Compensation expense related to modified awards is measured based on the fair value for the awards as of the modification date.

Any incremental compensation expense arising from the excess of the fair value of the awards on the modification date compared to the fair value of the awards immediately before the modification date is recognized at the modification date or ratably over the requisite remaining service period, as appropriate.

We record the expense for stock option grants subject to performance-based milestone vesting using the accelerated attribution method over the remaining service period when management determines that achievement of the milestone is probable.

Management evaluates whether the achievement of a performance-based milestone is probable based on the relative satisfaction of the performance conditions as of the reporting date.

Compensation expense for discounted purchases under the ESPP is measured using the Black-Scholes model to compute the fair value of the lookback provision plus the purchase discount and is recognized as compensation expense over the offering period.

While the assumptions used to calculate and account for share-based compensation awards represent management’s best estimates, these estimates involve inherent uncertainties and the application of management’s judgment.

As a result, if revisions are made to our underlying assumptions and estimates, our share-based compensation expense could vary significantly from period to period.

Contingent Consideration

In accordance with ASC Topic 805, Business Combinations , we recognize assets acquired and liabilities assumed in business combinations, including contingent liabilities and non-controlling interest in the acquiree based on the fair value estimates as of the date of acquisition.

The consideration for our business acquisitions may include future payments that are contingent upon the occurrence of a particular event or events.

The obligations for such contingent consideration payments are recorded at fair value on the acquisition date.

The contingent consideration obligations are then evaluated each reporting period.

Changes in the fair value of contingent consideration obligations, other than changes due to payments, are recognized as a (gain) loss on fair value remeasurement of contingent consideration in our consolidated statements of operations.

For further details related to contingent consideration, refer to Note 7, Fair Value of Financial Instruments , to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.

We utilize the asset and liability method of accounting for income taxes.

Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and tax basis of assets and liabilities using enacted tax rates in effect for years in which the temporary differences are expected to reverse.

We provide a valuation allowance when it is more likely than not that deferred tax assets will not be realized.

We maintain a valuation allowance on the majority of our net operating losses and other deferred tax assets.

Accordingly, we have not reported any tax benefit relating to the remaining net operating loss carryforwards and income tax credit carryforwards that are available for utilization in future periods.

federal net operating loss carryforwards totaled approximately $1.1 billion as of December 31, 2020.

On a periodic basis, we reassess the valuation allowance on our deferred income tax assets, weighing positive and negative evidence to assess the recoverability of the deferred tax assets.

In 2020, we reassessed the valuation allowance and considered negative evidence, including our cumulative losses in recent years and our plan to build our innovative GI pipeline through potential acquisition or in-licensing externally developed products, and positive evidence, including our income during the year ended December 31, 2020 and our projections of future income.

After assessing both the negative evidence and the positive evidence, we concluded that we should continue to maintain the valuation allowance on net deferred tax assets as of December 31, 2020 given the significance of the weight of the negative evidence.

Based on our recent financial performance and our future projections, we could record a reversal of all, or a portion of the valuation allowance associated with U.S.

deferred tax assets in future periods.

However, any such change is subject to actual performance and other considerations that may present positive or negative evidence at the time of the assessment.

Our total deferred tax asset balance subject to the valuation allowance was approximately $395.0 million as of December 31, 2020.

Significant judgment is required in making these assessments to maintain or reverse our valuation allowances and, to the extent our future expectations change we would have to assess the recoverability of these deferred tax assets at that time.

If we determine that our net deferred tax assets are realizable in a future period, we would record material changes to income tax expense or benefit in that period.

We record uncertain tax positions on the basis of a two-step process.

First, we determine whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position.

Second, for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is greater than 50 percent likely to be realized upon ultimate settlement with the relevant tax authority.

Significant judgment is required in evaluating whether our tax positions meet this two-step process.

The nature of the uncertain tax positions is often very complex and subject to change, and the amounts at issue can be substantial.

We re-evaluate these uncertain tax positions on a quarterly basis based on a number of factors including, but not limited to, changes in facts or circumstances, changes in tax law, and effectively settled issues under audit and new audit activity.

Any change in these factors could result in the recognition of a tax benefit or an additional charge to the tax provision.

Results of Operations

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Collaborative arrangements revenue

Product revenue, net

Sale of active pharmaceutical ingredient

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Cost and expenses:

Cost of revenues, excluding amortization of acquired intangible assets

Write-down of commercial supply and inventory to net realizable value and (settlement) loss on non-cancellable purchase commitments

Cost of revenues

Settlement on non-cancellable purchase commitments

Research and development

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Total cost and expenses

Income (loss) from operations

Income from operations

Other (expense) income:

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Other expense, net

Net income (loss) from continuing operations

Net loss from discontinued operations

Net income (loss)

Income from continuing operations, before income tax expense

Income tax expense

Income from continuing operations

Loss from discontinued operations, net of income taxes

Year Ended December 31, 2020 Compared to Year Ended December 31, 2019

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Collaborative arrangements revenue

Product revenue, net

Sale of active pharmaceutical ingredient

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Collaborative arrangements revenue.

The increase in revenue from collaborative arrangements of approximately $106.8 million for the year ended December 31, 2019 compared to the year ended December 31, 2018 was primarily related to approximately $32.4 million in revenue recognized related to non-contingent payments outlined in the Amended AstraZeneca Agreement;

an approximately $31.3 million increase in our share of the net profits from the sale of LINZESS in the U.S.

driven by increased prescription demand;

an approximately $29.9 million negative adjustment during the year ended December 31, 2018 related to a change in estimate of gross-to-net sales reserves and

allowances, primarily associated with governmental and contractual rebates;

$10.0 million from an up-front payment received in connection with the Amended Astellas License Agreement;

an approximately $2.3 million increase in co-promotion and royalty revenue;

and an approximately $0.5 million increase from an up-front license payment received.

Product revenue, net.

The decrease in net product revenue of approximately $3.4 million for the year ended December 31, 2019 compared to the year ended December 31, 2018, was due to our termination of the Lesinurad License in January 2019.

As a result of this termination, we are no longer commercializing the Lesinurad Products.

The increase in revenue from collaborative arrangements of approximately $1.9 million for the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily related to an approximately $43.2 million increase in our share of the net profits from the sale of LINZESS in the U.S.

driven by increased prescription demand and lower collaboration-related selling expenses due to the COVID-19 pandemic and an approximately $3.6 million increase in linaclotide royalty revenue.

These increases were offset by an approximately $32.4 million decrease in revenue related to non-contingent payments pursuant to the Amended AstraZeneca Agreement and recognized in 2019;

an approximately $10.0 million decrease in revenue recognized related to a one-time up-front payment received in 2019 in connection with the amendment and restatement of our license agreement with Astellas for linaclotide in Japan, or the Amended Astellas License Agreement;

and an approximately $2.2 million decrease in co-promotion revenue.

Sale of active pharmaceutical ingredient.

The decrease in sale of API of approximately $21.6 million for the year ended December 31, 2019 compared to the year ended December 31, 2018 was primarily due to an approximately $23.8 million decrease in shipments of linaclotide API to Astellas for Japan pursuant to the Amended Astellas License Agreement;

and an approximately $0.8 million decrease in shipments of linaclotide API to Allergan, partially offset by an approximately $3.0 million increase in sale of finished drug product to AstraZeneca.

The decrease in sale of API of approximately $40.8 million for the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily related to a decrease of approximately $43.8 million in sales of API to Astellas in Japan, resulting from the transition of manufacturing responsibilities to Astellas in connection with the Amended Astellas License Agreement executed in August 2019.

This decrease was partially offset by an approximately $2.6 million increase in sales of API, finished drug product, and finished goods to AstraZeneca in China.

Substantively all sales of API, finished drug product, and finished goods to AstraZeneca in China occurred during the three months ended March 31, 2020 in connection with the transition of manufacturing responsibilities to AstraZeneca under the terms of the Amended AstraZeneca Agreement.

Cost and Expenses

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Cost and expenses:

Cost of revenues, excluding amortization of acquired intangible assets

Write-down of commercial supply and inventory to net realizable value and (settlement) loss on non-cancellable purchase commitments

Cost of revenues

Settlement on non-cancellable purchase commitments

Research and development

Selling, general and administrative

Amortization of acquired intangible assets

Gain on fair value remeasurement of contingent consideration

Gain on lease modification

Restructuring expenses

Impairment of intangible assets

Total cost and expenses

Cost of revenues, excluding amortization of acquired intangible assets.

The decrease of approximately $8.9 million for the year ended December 31, 2019 compared to the year ended December 31, 2018 was primarily related to a decrease of approximately $10.7 million due to a decrease in linaclotide API sales to Astellas pursuant to the Amended Astellas License Agreement and a decrease of approximately $0.4 million related to sales of the Lesinurad Products, partially offset by an increase of approximately $2.7 million due to an increase in API sales to AstraZeneca.

Write-down of commercial supply and inventory to net realizable value and (settlement) loss on non-cancellable purchase commitments.

The decrease in write-down of commercial supply and inventory to net realizable value and loss on non-cancellable purchase commitments of approximately $3.8 million for the year ended December 31, 2019 compared to the year ended December 31, 2018, was primarily due to the settlement of certain commercial supply purchase commitments that occurred during the year ended December 31, 2019, which resulted in an overall gain.

Cost of revenues.

The decrease of approximately $20.7 million for the year ended December 31, 2020 compared to the year ended December 31, 2019 was comprised of a decrease in cost of revenues of approximately $20.1 million related to the sale of API to Astellas in Japan and a decrease in cost of revenues of approximately $0.5 million related to the sale of API, finished drug product, and finished goods to AstraZeneca in China, concurrent with the decrease in revenue from the sale of API to Astellas and AstraZeneca, respectively.

Settlement on non-cancellable purchase commitments.

The settlement of certain commercial supply purchase commitments occurred during the year ended December 31, 2019, which resulted in an overall gain.

In connection with the Amended AstraZeneca Agreement, certain of our previously written-down linaclotide excess purchase commitments were assumed by AstraZeneca and resulted in a settlement of approximately $2.5 million.

Additionally, certain previously written-down linaclotide purchase commitments were satisfied through API purchases at pricing terms favorable to the pricing estimates at the time of the write-down, resulting in a gain of approximately $0.7 million upon purchase.

During the year ended December 31, 2018, we recorded approximately $0.2 million of write-downs of lesinurad inventory and purchase commitments.

Additionally, certain

previously written-down linaclotide purchase commitments were satisfied through API purchases at pricing terms favorable to the pricing estimates at the time of the write-down, resulting in a gain of approximately $0.7 million upon purchase.

Research and development.

The increase in research and development expense of approximately $14.0 million for the year ended December 31, 2019 compared to the year ended December 31, 2018 was primarily related to an increase of approximately $26.4 million in external development costs related to IW-3718;

an increase of approximately $9.2 million related to linaclotide development;

and an increase of approximately $0.7 million in professional services fees, including consulting and temporary support costs.

These increases were partially offset by a decrease of approximately $16.0 million in compensation, benefits and other employee-related expenses primarily associated with decreased headcount;

a decrease of approximately $4.8 million in operating expenses, including facilities and IT related expenses;

and a decrease of approximately $1.3 million related to lesinurad development due to the termination of the Lesinurad License.

The decrease in research and development expense of approximately $27.0 million for the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily related to a decrease of approximately $14.4 million in external development costs related to IW-3718;

a decrease of approximately $6.1 million in operating expenses primarily related to facilities and other operating costs;

a decrease of approximately $3.4 million in compensation, benefits, and other employee-related expenses;

and a decrease of approximately $2.7 million related to linaclotide development.

Selling, general and administrative.

Selling, general and administrative expenses decreased for the year ended December 31, 2019 compared to the year ended December 31, 2018 primarily as a result of the Separation which was completed on April 1, 2019, and the termination of the Lesinurad License in January 2019.

The decrease of approximately $47.2 million was primarily due to decreases in non-Separation costs of approximately $56.6 million, partially offset by an approximately $9.4 million increase in costs associated with the Separation.

The approximately $56.6 million decrease in non-Separation costs primarily includes an approximately $27.7 million decrease in other compensation, benefits and employee-related expenses as a result of a decrease in headcount related to the 2018 workforce reductions;

an approximately $19.4 million decrease in sales and marketing programs;

an approximately $6.2 million decrease in costs associated with the lesinurad post-marketing clinical study;

an approximately $4.0 million decrease in professional services fees;

Selling, general and administrative expenses decreased approximately $32.4 million for the year ended December 31, 2020 compared to the year ended December 31, 2019.

The decrease in selling, general and administrative expense included an approximately $20.5 million decrease in costs associated with the Separation, which was completed on April 1, 2019, and an approximately $12.1 million decrease in non-Separation costs.

The approximately $20.5 million decrease in Separation costs includes an approximately $9.7 million decrease in facilities costs primarily due to our change in headquarters location;

an approximately $7.8 million decrease in compensation, benefits, and other employee-related expenses;

an approximately $2.0 million decrease in consulting and investment banking costs;

and an approximately $1.0 million decrease in legal costs.

These decreases were partially offset by an approximately $2.0 million increase in facilities and other operating expenses.

The approximately $9.4 million increase in costs associated with the Separation includes an approximately $6.6 million increase in operating expenses, including facilities, primarily due to asset disposals related to the change in headquarters location and an approximately $4.9 million increase in compensation, benefits and other employee-related expenses.

These increases were partially offset by an approximately $2.1 million decrease in Separation-related legal, accounting, consulting and investment banking expenses.

Amortization of acquired intangible assets .

The decrease in amortization of acquired intangible assets of approximately $8.1 million for the year ended December 31, 2019 compared to the year ended December 31, 2018 was due to the impairment of the intangible assets related to the Lesinurad Products as a result of revised cash flow assumptions and the exit of the Lesinurad License.

Gain on fair value remeasurement of contingent consideration.

The decrease in the gain on fair value of the contingent consideration obligation of approximately $31.0 million for the year end December 31, 2019 compared to the year ended December 31, 2018 was due to the termination of the Lesinurad License.

During the three months ended September 30, 2018, the Company reduced its projected revenue assumptions associated with the sales of ZURAMPIC and DUZALLO and delivered to AstraZeneca a notice of termination of the lesinurad license agreement.

The approximately $12.1 million decrease in non-Separation costs includes an approximately $4.0 million decrease in legal costs;

an approximately $3.3 million decrease in facilities costs primarily due to our change in headquarters location;

an approximately $2.6 million decrease in travel costs as a result of the COVID-19 pandemic;

an approximately $1.4 million decrease in post-marketing requirements for lesinurad as a result of our termination of the license agreement with AstraZeneca for the development, manufacture, and commercialization of products in the U.S.

containing lesinurad as an active ingredient;

an approximately $1.0 million decrease in collaboration costs pursuant to the Amended AstraZeneca Agreement;

and an approximately $0.7 million decrease in compensation, benefits, and other employee-related expenses.

These decreases in non-Separation costs were partially offset by an approximately $1.7 million increase in consulting costs.

Gain on lease modification .

The increase in the gain on lease modification of approximately $3.2 million for the year ended December 31, 2019 compared to the year ended December 31, 2018 was due to the modification of the 301 Binney Street lease in connection with the Separation.

The gain on lease modification of approximately $3.2 million for the year ended December 31, 2019 was due to the modification of our prior headquarters lease in connection with the Separation.

Restructuring expenses .

The decrease in restructuring expenses of approximately $11.1 million for the year ended December 31, 2019 compared to the year ended December 31, 2018, was primarily due to costs associated with the workforce reductions that occurred in January 2018, June 2018, and August 2018, which exceeded the costs incurred in the February 2019 workforce reduction.

Impairment of intangible assets.

The decrease in the impairment of intangible assets of approximately $151.8 million for each of the year ended December 31, 2019 compared to the year ended December 31, 2018 was due to the full asset impairment of the intangible assets that occurred in 2018 related to the Lesinurad Products as a result of revised net cash flow assumptions and the exit of the Lesinurad License.

The increase in restructuring expenses of approximately $11.8 million for the year ended December 31, 2020 compared to the year ended December 31, 2019 related to the workforce reduction substantially completed during the fourth quarter of 2020 in connection with our decision to discontinue IW-3718 development.

The Company recorded restructuring expenses of approximately $15.4 during the year ended December 31, 2020 in connection with this workforce reduction.

During the year ended December 31, 2019, the Company recorded approximately $3.6 million in connection with a workforce reduction that was substantially completed during the first quarter of 2019.

Other (Expense) Income, Net

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Interest expense.

Interest expense decreased by approximately $1.1 million during the year ended December 31, 2019 compared to the year ended December 31, 2018, mainly due to a decrease of approximately $4.7 million and approximately $3.7 million in interest expense associated with the 2026 Notes and the 2022 Convertible Notes, respectively, due to the redemption of the outstanding principal balance of the 2026 Notes in September 2019 and the repurchase of $215.0 million aggregate principal amount of the 2022 Convertible Notes in August 2019, partially offset by an increase of approximately $7.3 million in interest expense associated with the 2024 Convertible Notes and the 2026 Convertible Notes issued in August 2019.

Interest expense decreased by approximately $7.1 million during the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily due to a decrease of approximately $10.4 million in interest expense related to the 2022 Convertible Notes that were partially repurchased in August 2019 and a decrease of approximately $9.0 million in interest expense associated with the 2026 Notes that were fully redeemed in September

2019, partially offset by an increase of approximately $6.2 million and $6.1 million in interest expense associated with the 2024 Convertible Notes and the 2026 Convertible Notes, respectively.

Interest and investment income.

Interest and investment income decreased by an insignificant amount for the year ended December 31, 2019 compared to the year ended December 31, 2018, primarily due to lower average cash and cash equivalent balances throughout the year.

Interest and investment income decreased by approximately $1.4 million in the year ended December 31, 2020 compared to the year ended December 31, 2019, resulting primarily from a decrease in investment income of approximately $2.1 million due to lower investment interest rates, partially offset by an increase in interest income of approximately $0.8 million related to the significant financing component of long-term receivables.

Gain (loss) on derivatives.

For the year ended December 31, 2019, we recorded a gain of approximately $3.0 million on derivatives as a result of the partial termination of the Convertible Note Hedges and Note Hedge Warrants and the change in fair value of the remaining Convertible Note Hedges and Note Hedge Warrants during the year.

For the year ended December 31, 2018, we recorded a loss on derivatives of approximately $8.7 million resulting from the change in fair value of the Convertible Note Hedges and the Note Hedge Warrants.

For the year ended December 31, 2020, we recorded a loss on derivatives of approximately $6.1 million resulting from an approximately $18.3 million decrease in the fair value of the Convertible Note Hedges and an approximately $12.2 million decrease in the fair value of the Note Hedge Warrants.

For the year ended December 31, 2019, we recorded a gain on derivatives of approximately $3.0 million resulting from an approximately $29.2 million increase in the fair value of the Convertible Note Hedges and an approximately $22.6 million increase in the fair value of the Note Hedge Warrants, partially offset by an approximately $3.6 million loss recognized upon the partial termination of the Convertible Note Hedges and the Note Hedge Warrants associated with the partial repurchase of the 2022 Convertible Notes.

Loss on extinguishment of debt.

The loss on extinguishment of debt was approximately $31.0 million during the year ended December 31, 2019 and pertained to the write-off of unamortized debt issuance costs and debt discount related to the partial repurchase of the 2022 Convertible Notes in August 2019 and the prepayment premium and write-off of the unamortized debt issuance costs and debt discount on the 2026 Notes as part of the redemption of all of the outstanding principal amount of the 2026 Notes in September 2019.

The loss on extinguishment of debt was approximately $31.0 million during the year ended December 31, 2019 and pertained to the write-off of unamortized debt issuance costs and debt discount related to the partial repurchase of the 2022 Convertible Notes and the prepayment premium and write-off of the remaining unamortized debt issuance costs and debt discount on the 2026 Notes as part of the redemption of all of the outstanding principal amount of the 2026 Notes.

Other income.

Other income increased approximately $0.5 million during the year ended December 31, 2019 compared to year ended December 31, 2018, primarily due to income related to a transition service agreement with Cyclerion.

Year Ended December 31, 2018 Compared to Year Ended December 31, 2017

(dollars in thousands)

Collaborative arrangements revenue

Product revenue, net

Sale of active pharmaceutical ingredient

Total revenues

Collaborative arrangements revenue.

The increase in revenue from collaborative arrangements of approximately $7.3 million for the year ended December 31, 2018 compared to the year ended December 31, 2017 was primarily related to an approximately $36.2 million increase in our share of the net profits from the sale of LINZESS in the U.S.

driven by increased prescription demand;

an approximately $1.5 million increase in revenue related to VIBERZI ® (eluxadoline) co-promotion activities;

an approximately $1.3 million increase due to the recognition of the VIBERZI sales-based milestone;

and an approximately $1.0 million increase in revenue related to royalty payments received in relation to all partner activities.

The increases were partially offset by an adjustment to our share of the net profits from the sale of LINZESS in the U.S.

of approximately $29.9 million related to a change in estimate of gross-to-net sales reserves and allowances, primarily associated with governmental and contractual rebates;

and approximately $2.5 million decrease attributable to the decrease in revenue under the Co-Promotion Agreement with Exact Sciences Corp.

due to the end of the royalty period.

Product revenue, net.

The increase in net product revenue of approximately $0.4 million for the year ended December 31, 2018 compared to the year ended December 31, 2017 was primarily due to net product sales of DUZALLO in the U.S.

We began commercializing DUZALLO in September 2017.

Sale of active pharmaceutical ingredient.

The increase in sale of API of approximately $40.7 million for the year ended December 31, 2018 compared to the year ended December 31, 2017 was primarily due to increased shipments of linaclotide API to Astellas for Japan.

In March 2017, Astellas began commercializing LINZESS for the treatment of adults with IBS-C in Japan, and in September 2018, Astellas began commercializing LINZESS for the treatment of adults with chronic constipation in Japan.

Cost and Expenses

(dollars in thousands)

Cost and expenses:

Cost of revenues, excluding amortization of acquired intangible assets

Write-down of commercial supply and inventory to net realizable value and loss on non-cancellable purchase commitments

Research and development

Selling, general and administrative

Amortization of acquired intangible assets

Gain on fair value remeasurement of contingent consideration

Restructuring expenses

Impairment of intangible assets

Total cost and expenses

Cost of revenues, excluding amortization of acquired intangible assets.

The increase of approximately $13.7 million for the year ended December 31, 2018 compared to the year ended December 31, 2017 was primarily related to an increase of approximately $15.2 million due to an increase in linaclotide API sales to Astellas, partially offset by approximately $1.5 million of one-time period related costs incurred during the year ended December 31, 2017.

Write-down of commercial supply and inventory to net realizable value and loss on non-cancelable purchase commitments.

The insignificant decrease in write-down of lesinurad commercial supply and loss on non-cancelable purchase commitments for the year ended December 31, 2018 compared to the year ended December 31, 2017 was driven by write-downs of inventory, overhead, and purchase commitments of approximately $2.8 million primarily due to revisions to the lesinurad commercial supply demand forecasts as a result of exiting the lesinurad franchise and additional insignificant adjustments related to linaclotide inventory;

offset by an approximately $2.5 million settlement related to linaclotide excess non-cancelable purchase commitment accruals that were assigned to Allergan during the year ended December 31, 2018.

Research and development.

The increase in research and development expense of approximately $12.9 million for the year ended December 31, 2018 compared to the year ended December 31, 2017 was primarily related to an increase of approximately $17.2 million in research costs related to our early research and development;

an increase of approximately $4.2 million in compensation, benefits and other employee-related expenses;

and an increase of approximately $1.4 million in operating costs, including facilities.

These increases were partially offset by a decrease of $9.5 million in costs related to lesinurad development and transition services agreement expenses with AstraZeneca, which ended in 2017.

Selling, general and administrative.

Selling, general and administrative expenses decreased by approximately $11.5 million for the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily as a result of an approximately $5.4 million decrease in transitional support service costs which ended in 2017 associated with the Lesinurad Transaction;

an approximately $4.2 million decrease in costs associated with product samples;

an approximately $3.5 million decrease in costs related to facilities and operating costs;

an approximately $1.9 million decrease in cost as a result of gains recorded in association with the disposal of the salesforce fleet vehicles;

approximately $1.2 million decrease in costs associated with professional services;

an approximately $0.9 million decrease in costs related to sales and marketing programs;

and an approximately $0.8 million decrease in compensation, benefits, and employee-related expenses.

These decreases were partially offset by an approximately $3.8 million increase in legal and consulting costs associated with the 2018 proxy statement and an approximately $2.9 million increase in other legal costs.

Amortization of acquired intangible assets.

The increase in amortization of acquired intangible assets expense of approximately $1.9 million for the year ended December 31, 2018 compared to the year ended December 31, 2017 was primarily due to the amortization of the DUZALLO intangible asset which began amortizing in August 2017 upon U.S.

FDA approval.

During the year ended December 31, 2018, the ZURAMPIC and DUZALLO intangible assets were written down and considered fully impaired.

Gain on fair value remeasurement of contingent consideration.

Fair value remeasurement of contingent consideration includes significant estimates related to probability weighted net cash outflow projections, discounted using a yield curve equivalent to our credit risk which estimates the probability weighted analysis of expected future milestone and royalty payments based on net sales to be made to AstraZeneca in connection with the Lesinurad Transaction.

Changes to these inputs are re-evaluated each reporting period.

The decrease in the gain on fair value of the contingent consideration obligation of approximately $0.3 million for the year ended December 31, 2018 compared to the year ended December 31, 2017 was due to revised projected revenue assumptions associated with the sales of ZURAMPIC and DUZALLO.

Restructuring expenses.

The increase in restructuring expenses of approximately $14.7 million for the year ended December 31, 2018 compared to the year ended December 31, 2017 was due to approximately $8.3 million of workforce reduction and contract termination costs incurred during the year ended December 31, 2018 associated with the exit of the Lesinurad License;

approximately $4.0 million of costs related to the workforce reduction in June 2018 associated with the determination of the initial organizational designs of the two new companies that resulted from the Separation;

and approximately $2.4 million of costs incurred with the reduction in field-based workforce in January 2018 associated with an initiative to evaluate the optimal mix of investments for the lesinurad franchise.

Impairment of intangible assets.

The increase in the impairment of intangible assets of approximately $151.8 million for the year ended December 31, 2018 compared to the year ended December 31, 2017 was due to the full asset impairment of the ZURAMPIC and DUZALLO intangible assets as a result of revised net cash flow assumptions and the exit of the Lesinurad License.

Other (Expense) Income

(dollars in thousands)

Other (expense) income:

Interest expense

Interest and investment income

Loss on derivatives

Loss on extinguishment of debt

Total other expense, net

Interest expense.

Interest expense increased by approximately $1.4 million during the year ended December 31, 2018 compared to the year ended December 31, 2017, mainly due to an increase of approximately $1.5 million in interest expense associated with the 2022 Convertible Notes.

Interest and investment income.

Interest and investment income increased approximately $0.9 million for the year ended December 31, 2018 compared to the year ended December 31, 2017, mainly due to higher returns on investment securities in 2018, and partially offset by lower average investment balances in 2018 versus 2017.

Loss on derivatives.

For the year ended December 31, 2018 we recorded a loss on derivatives of approximately $8.7 million resulting from an approximately $67.1 million decrease in fair value of the Convertible Note Hedges and an approximately $58.4 million increase in the fair value of the Note Hedge Warrants.

For the year ended December 31, 2017, we recorded a loss on derivatives of approximately $3.3 million resulting from an approximately $24.3 million decrease in fair value of the Convertible Note Hedges and an approximately $21.0 million increase in the fair value of the Note Hedge Warrants.

Loss on extinguishment of debt.

Loss on extinguishment of debt was approximately $2.0 million for the year ended December 31, 2017 due to the write-off of the remaining unamortized debt issuance costs on the 11% PhaRMA Notes due 2024, or the PhaRMA Notes, as part of the redemption in January 2017.

For the year ended December 31, 2020 compared to the year ended December 31, 2019, other income decreased by approximately $0.5 million, primarily related to a transition service agreement with Cyclerion that terminated during the first quarter of 2020.

Income taxes.

During the year ended December 31, 2020, we recorded income tax expense of approximately $2.7 million, which was primarily payable to California resulting from a change in California tax that temporarily disallows the use of net operating losses.

We did not record any income tax expense for the year ended December 31, 2019.

Net loss from discontinued operations.

There was approximately $37.4 million of net loss from discontinued operations for the year ended December 31, 2019.

For additional information on discontinued operations, see Note 3, Cyclerion Separation , to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Liquidity and Capital Resources

Until the year ended December 31, 2019, we had incurred losses since our inception in 1998 and, as of December 31, 2019, we had an accumulated deficit of approximately $1.6 billion.

We have financed our operations to date primarily through both the private sale of our preferred stock and the public sale of our common stock, including approximately $203.2 million of net proceeds from our initial public offering in February 2010, and approximately $413.4 million of net proceeds from our follow on public offerings;

payments received under our strategic collaborative arrangements, including up-front and milestone payments, royalties and our share of net profits, as well as reimbursement of certain expenses;

and debt financings, including approximately $167.3 million of net proceeds from the private placement of our PhaRMA Notes in January 2013, approximately $324.0 million of net proceeds from the private placement of our 2022 Convertible Notes in June 2015, approximately $11.2 million of net proceeds from the private placement of our 2026 Notes in January 2017, and approximately $391.0 million of net proceeds from the private placement of our 2024 Convertible Notes and 2026 Convertible Notes in August 2019.

In connection with the issuance of the 2026 Notes, we redeemed the PhaRMA Notes in full and, in connection with the issuance of the 2024 Convertible Notes and the 2026 Convertible Notes, we repurchased $215.0 million aggregate principal amount of our 2022 Convertible Notes and redeemed all of our 2026 Notes.

Until the year ended December 31, 2019, we had incurred losses since our inception in 1998 and we had an accumulated deficit of approximately $1.5 billion as of December 31, 2020.

We have financed our operations to date primarily through both the private sale of our preferred stock and the public sale of our common stock, debt financings, and cash generated from our operations.

As of December 31, 2020, our debt is comprised of approximately $520.7 million aggregate principal amount of convertible notes, due at various dates between 2022 and 2026.

Refer to Note 11, Notes Payable, to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, for information related to our debt obligations.

At December 31, 2020, we had approximately $362.6 million of unrestricted cash and cash equivalents.

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We invest cash in excess of immediate requirements in accordance with our investment policy, which limits the amounts we may invest in certain types of investments and requires all investments held by us to be at least AA- rated, with a remaining maturity when purchased of less than twenty-four months, so as to primarily achieve liquidity and capital preservation.

During the year ended December 31, 2019, our balances of cash and cash equivalents decreased approximately $1.6 million.

This decrease is primarily due to approximately $7.2 million in capital expenditures as well as approximately $1.2 million used in financing activities, primarily due to payments of approximately $227.3 million to repurchase $215.0 million aggregate principal amount of the 2022 Convertible Notes.

Financing activities also included principal and prepayment premium payments totaling $156.4 million to fully redeem the outstanding principal balance of the 2026 Notes, and payments for the purchase of the Capped Calls for approximately $25.2 million.

These financing activities cash outflows were partially offset by approximately $391.0 million in net proceeds from the issuance of the 2024 Convertible Notes and the 2026 Convertible Notes, after deducting the initial purchaser’s commissions, as well as offering expenses, approximately $13.6 million in proceeds from the exercise of stock options and the issuance of shares under our ESPP, and approximately $3.2 million in proceeds from partial termination of the Convertible Notes Hedges and Note Hedge Warrants.

Cash and cash equivalents used in investing and financing activities was offset by approximately $10.7 million of cash provided by operating our business.

During the year ended December 31, 2020, our balances of cash and cash equivalents increased by approximately $185.5 million.

Net cash provided by operating activities totaled approximately $168.8 million as a result of profitable operations driven primarily by the sales of LINZESS in the U.S.

Additionally, cash provided by financing activities totaled approximately $18.5 million as a result of proceeds from the exercise of stock options and purchases pursuant to our ESPP.

These cash inflows were partially offset by approximately $1.8 million in capital expenditures.

We may from time to time seek to retire, redeem or repurchase all or part of our outstanding debt through cash purchases and/or exchanges, in open market purchases, privately negotiated transactions, by tender offer or otherwise.

Such repurchases, redemptions or exchanges, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors, and the amounts involved may be material.

The COVID-19 pandemic is disrupting the U.S.

healthcare system, as well as global capital markets.

There continues to be significant uncertainty surrounding the extent and duration of the impact of the COVID-19 pandemic on our business and operations.

The COVID-19 pandemic could have a material adverse impact on our financial condition and results of operations in the future, including by impacting our ability to obtain financing.

The impact of COVID-19 on our business and financial condition is more fully described below in Trends and Uncertainties.

Cash Flows From Operating Activities

Net cash provided by operating activities totaled approximately $168.8 million for the year ended December 31, 2020.

The cash provided by operations primarily related to cash flows from our net income of approximately $106.2 million, net of non-cash items of approximately $63.6 million.

The non-cash items are primarily comprised of approximately $31.2 million of share-based compensation expense, approximately $22.3 million of non-cash interest expense, approximately $6.1 million loss on derivatives, and approximately $3.6 million of depreciation and amortization of property and equipment.

Net cash provided by operating activities totaled approximately $10.7 million for the year ended December 31, 2019, of which approximately $0.6 million related to cash used in continuing operations and approximately $11.3 million related to cash provided by discontinued operations.

The use of approximately $0.6 million in cash for continuing operations primarily related to cash flows from our net income of approximately $21.5 million and non-cash items of approximately $77.8 million, partially offset by changes in assets and liabilities of approximately $100.0 million, primarily resulting from a decrease in accounts receivable and related party accounts receivable, a decrease in prepaid expenses and other current assets, an increase in operating right-of-use assets, a decrease in accounts payable and related party accounts payable and accrued expenses, a decrease in accrued research and development costs, and a

decrease in operating lease liabilities.

The use of approximately $0.6 million in cash for continuing operations primarily related to cash flows from our net income of approximately $21.5 million, net of non-cash items of approximately $77.8 million, partially offset by changes in assets and liabilities of approximately $100.0 million, primarily resulting from an increase in accounts receivable and related party accounts receivable of approximately $68.9 million and a decrease in accounts payable and related party accounts payable and accrued expenses of approximately $32.7 million.

Non-cash items included approximately $31.3 million in share-based compensation expense, approximately $31.0 million of loss on extinguishment of debt, approximately $19.6 million in non-cash interest expense, approximately $5.6 million in depreciation and amortization expense of property and equipment, partially offset by approximately $3.5 million related to the settlement on non-cancellable purchase commitments, approximately $3.2 million gain on lease modification, and an approximate $3.0 million net increase due to the change in fair value of the Convertible Note Hedges and Note Hedge Warrants.

Net cash used in operating activities totaled approximately $70.9 million for the year ended December 31, 2018, of which approximately $82.7 million related to cash used in continuing operations and approximately $11.8 million related to cash provided by discontinued operations.

The primary use of cash was our net loss of approximately $282.4 million, partially offset by non-cash items of approximately $198.2 million and changes in assets and liabilities of approximately $1.5 million, primarily resulting from an increase in accounts receivable and related party accounts receivable, a decrease in prepaid expenses and other current assets, a decrease in inventory and other assets, an increase in accounts payable and related party accounts payable and accrued expenses, an increase in accrued research and development costs, and an increase in deferred rent.

Non-cash items included approximately $151.8 million of intangible asset impairment related to the termination of the lesinurad license agreement, approximately $40.5 million in share-based compensation expense, approximately $17.6 million in non-cash interest expense, an approximate $8.7 million net decrease due to the change in fair value of the Convertible Note Hedges and Note Hedge Warrants, approximately $8.1 million in amortization of acquired intangible assets, and approximately $3.9 million in depreciation and amortization expense of property and equipment;

partially offset by an approximately $31.0 million due to the non-cash change in fair value of contingent consideration, and approximately $1.9 million due to the gain on disposal of property and equipment.

Net cash used in operating activities totaled approximately $100.8 million for the year ended December 31, 2017, of which approximately $108.0 million related to cash used in continuing operations and approximately $7.3 million related to cash provided by discontinued operations.

The primary uses of cash were our net loss of approximately $116.9 million and changes in assets and liabilities of approximately $25.4 million resulting primarily from a decrease in related party accounts receivable, an increase in restricted cash associated with the release of the line of credit related to our lease amendment in 2017, a decrease in accounts payable, related party accounts payable, and accrued expenses, an increase in prepaid expenses and other assets, an increase in inventory and other assets, a decrease in deferred rent and an increase in accrued research and development costs.

These uses of cash were primarily offset by non-cash items of approximately $34.3 million, including approximately $30.9 million in share-based compensation expense, approximately $16.1 million in non-cash interest expense, approximately $6.4 million in depreciation and amortization expense of property and equipment, approximately $6.2 million in amortization of acquired intangible assets, an approximately $3.3 million increase due to the change in fair value of the Convertible Note Hedges and Note Hedge Warrants, approximately $2.0 million loss on extinguishment of debt, approximately $1.3 million in write-down of excess non-cancelable product sample purchase commitment, and approximately $0.7 million in loss on disposal of property and equipment;

partially offset by an approximately $31.3 million due to the non-cash change in fair value of contingent consideration, and approximately $1.6 million due to the gain on facility subleases.

Cash Flows From Investing Activities

Cash used in investing activities for the year ended December 31, 2020 totaled approximately $1.8 million and pertained to the purchase of property and equipment.

Cash used in investing activities for the year ended December 31, 2019 totaled approximately $11.1 million, of which approximately $6.9 million related to cash used in continuing operations and approximately $4.2 million related to cash used in discontinued operations.

Cash used in investing activities pertained primarily to the purchase of approximately $7.2 million of property and equipment, primarily laboratory space and leasehold improvements on the second floor of our prior headquarters purchased prior to the Separation and transferred to Cyclerion, and leasehold improvements, equipment, and furniture at our current headquarters.

Cash provided by investing activities for the year ended December 31, 2018 totaled approximately $88.9 million, of which approximately $97.1 million related to cash provided by continuing operations and approximately $8.3 million related to cash used in discontinued operations.

Cash provided by investing activities was primary related to maturities of approximately $99.2 million of available-for-sale securities, and approximately $0.4 million in proceeds from the purchases of property and equipment.

This was partially offset by the sale of approximately $1.5 million of property and equipment, primarily laboratory equipment as well as hardware and software related to our information technology infrastructure, and the purchase of approximately $3.2 million of available-for-sale securities.

Cash provided by investing activities for the year ended December 31, 2017 totaled approximately $151.5 million, of which approximately $152.9 million related to cash provided by continuing operations and approximately $1.4 million related to cash used in discontinued operations.

Cash provided by investing activities was primary related to the sales and maturities of approximately $346.9 million of available-for-sale securities, and an insignificant amount of proceeds from the sale of property and equipment.

This was partially offset by the purchase of approximately $191.4 million of available-for-sale securities and the purchase of approximately $2.8 million of property and equipment, primarily laboratory equipment as well as hardware and software related to our information technology infrastructure.

Cash Flows From Financing Activities

Cash provided by financing activities for the year ended December 31, 2020 totaled approximately $18.5 million and resulted from proceeds from the exercise of stock options and the issuance of shares under our ESPP.

Cash used in financing activities for the year ended December 31, 2019 totaled approximately $1.2 million and resulted from approximately $227.3 million in payments to repurchase $215.0 million aggregate principal amount of the 2022 Convertible Notes.

Financing activities also included principal and prepayment premium payments totaling $156.4 million to fully redeem the outstanding principal balance of the 2026 Notes.

We also purchased Capped Calls for approximately $25.2 million.

These cash outflows were partially offset by approximately $391.0 million in net proceeds from the issuance of the 2024 Convertible Notes and the 2026 Convertible Notes, after deducting fees and expenses of approximately $9.0 million, approximately $13.6 million in proceeds from the exercise of stock options and the issuance of shares under our ESPP, and approximately $3.2 million in proceeds from the partial termination of the Convertible Notes Hedges and Note Hedge Warrants.

Cash provided by financing activities for the year ended December 31, 2018 totaled approximately $30.1 million and resulted primarily from approximately $32.1 million in cash provided by stock option exercises and the issuance of shares under our ESPP, partially offset by approximately $1.8 million in cash used for payments on our capital leases.

Cash provided by financing activities for the year ended December 31, 2017 totaled approximately $19.8 million and resulted primarily from approximately $146.3 million in proceeds from issuance of the 2026 Notes, and approximately $26.4 million in cash provided by stock option exercises and the issuance of shares under our ESPP, partially offset by approximately $134.3 million in cash paid to redeem our outstanding PhaRMA Notes, approximately $15.1 million in cash used for payments on contingent purchase consideration, including a milestone payment to AstraZeneca for the approval of DUZALLO, approximately $3.2 million in cash used for payments on our capital leases, and approximately $0.2 million in costs associated with the issuance of the 2026 Notes.

We also entered into capped call transactions for approximately $25.2 million in connection with the 2024 Convertible Notes and 2026 Convertible Notes, or the Capped Calls.

These cash outflows were partially offset by approximately $391.0 million in net proceeds

from the issuance of the 2024 Convertible Notes and the 2026 Convertible Notes, after deducting fees and expenses of approximately $9.0 million, approximately $13.6 million in proceeds from the exercise of stock options and the issuance of shares under our ESPP, and approximately $3.2 million in proceeds from the partial termination of the Convertible Notes Hedges and Note Hedge Warrants.

Funding Requirements

We began commercializing LINZESS in the U.S.

with our collaboration partner, Allergan, in the fourth quarter of 2012, and we currently derive a significant portion of our revenue from this collaboration.

In addition, we are deploying significant resources to advance product opportunities in IBS-C and CIC, abdominal pain associated with IBS and refractory GERD, as well as to fulfill U.S.

with our collaboration partner, AbbVie, in the fourth quarter of 2012, and we currently derive a significant portion of our revenue from this collaboration.

In addition, we are deploying significant resources to fulfill U.S.

FDA requirements for linaclotide.

We have also historically derived revenue from the sale of linaclotide API to Astellas for Japan;

beginning in 2020, however, we will no longer be responsible for the supply of linaclotide API to Astellas.

Our goal is to generate and maintain positive cash flows, driven by increased revenue generated through sales of LINZESS and other commercial activities and financial discipline.

Under our collaboration with Allergan for North America, total net sales of LINZESS in the U.S., as recorded by Allergan, are reduced by commercial costs incurred by each party, and the resulting amount is shared equally between us and Allergan.

Additionally, we receive royalties from Allergan based on sales of linaclotide in its licensed territories outside of the U.S.

Under our collaboration with AbbVie for North America, total net sales of LINZESS in the U.S., as recorded by AbbVie, are reduced by commercial costs incurred by each party, and the resulting amount is shared equally between us and AbbVie.

Additionally, we receive royalties from AbbVie based on sales of linaclotide in its licensed territories outside of the U.S.

We believe revenues from our LINZESS partnership for the U.S.

with Allergan will continue to constitute a significant portion of our total revenue for the foreseeable future and we cannot be certain that such revenues, as well as the revenues from our other commercial activities, will enable us to generate positive cash flows, or to do so in the timeframes we expect.

We also anticipate that we will continue to incur substantial expenses for the next several years as we further develop and commercialize linaclotide in the U.S.

and other markets, develop and commercialize other products, and invest in our pipeline and potentially other external opportunities.

with AbbVie will continue to constitute a significant portion of our total revenue for the foreseeable future and we cannot be certain that such revenues, as well as the revenues from our other commercial activities, will continue to enable us to generate positive cash flows, or to do so in the timeframes we expect.

We also anticipate that we will continue to incur substantial expenses for the next several years as we further develop and commercialize linaclotide in the U.S., develop and commercialize other products, and invest in building our pipeline through internal or external opportunities.

We believe that our cash on hand as of December 31, 2020 will be sufficient to meet our projected operating needs at least through the next twelve months from the issuance of these financial statements.

and other markets, as well as our expectations regarding revenue from Astellas for Japan and AstraZeneca for China (including Hong Kong and Macau), as well as our goal to generate and maintain positive cash flows, are forward-looking statements that involve risks and uncertainties.

Our forecast of the period of time through which our financial resources will be adequate to support our operations, including the underlying estimates regarding the costs to develop, obtain regulatory approval for, and commercialize linaclotide in the U.S., as well as our expectations regarding revenue from Astellas for Japan and AstraZeneca for China (including Hong Kong and Macau), and our goal to generate and maintain positive cash flows, are forward-looking statements that involve risks and uncertainties.

Our actual results could vary materially and negatively from these and other forward-looking statements as a result of a number of factors, including the factors discussed in the “Risk Factors” section of this Annual Report on Form 10-K.

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● the terms and timing of any additional collaborative, licensing or other arrangements that we may establish, including royalties or other payments due or payable under such agreements;

● the acquisition of businesses, products and technologies and the impact of other strategic transactions, as well as the cost and timing of integrating any such assets into our business operations.

● the acquisition of businesses, products and technologies and the impact of other strategic transactions, as well as the cost and timing of evaluating, acquiring, and, if completed, integrating into our business operations any such assets.

Financing Strategy

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Lease Obligations

The following table summarizes our lease and commercial supply obligations at December 31, 2019 (excluding interest, except as otherwise noted):

The following table summarizes our lease obligations at December 31, 2020 (in thousands):

Payments Due by Period

(in thousands)

Operating lease obligations

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The 2022 Convertible Notes are governed by an indenture between us and U.S.

Bank National Association, as trustee, or the 2022 Indenture.

Bank National Association, as trustee.

The 2022 Convertible Notes are senior unsecured obligations and bear cash interest at a rate of 2.25% per year, payable on June 15 and December 15 of each year, which began on December 15, 2015.

The 2022 Convertible Notes will mature on June 15, 2022, unless earlier converted or repurchased.

To minimize the impact of potential dilution to our Class A common stockholders upon conversion of the 2022 Convertible Notes, we entered into the Convertible Note Hedges and Note Hedge Warrants.

In August 2019, we repurchased $215.0 million aggregate principal amount of the 2022 Convertible Notes, and we partially terminated the proportionate portion of the Convertible Note Hedges and Note Hedge Warrants we entered into in connection with the issuance of the 2022 Convertible Notes.

We remeasure the remaining Convertible Note Hedges and Note Hedge Warrants to fair value at each reporting date using the Black-Scholes option-pricing model, with changes in fair value recorded as (loss) gain on derivatives in our consolidated statements of operations.

During the year ended December 31, 2019, the Company recorded a gain on derivatives of approximately $3.0 million as a result of the partial termination of the Convertible Note Hedges and Note Hedge Warrants and the change in fair value of the remaining Convertible Note Hedges and Note Hedge Warrants.

In August 2019, we issued $200.0 million in aggregate principal amount of the 2024 Convertible Notes and $200.0 million in aggregate principal amount of the 2026 Convertible Notes.

The 2024 Convertible Notes and 2026 Convertible Notes are governed by separate indentures, each dated as of August 12, 2019, each an Indenture and collectively the Indentures, between us and U.S.

The 2024 Convertible Notes and 2026 Convertible Notes are governed by separate indentures between us and U.S.

Bank National Association, as trustee.

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Total payments on convertible senior notes

The convertible senior notes, Convertible Note Hedges, Note Hedge Warrants and Capped Calls are more fully described in Note 12, Notes Payable , in the accompanying notes to our financial statements appearing elsewhere in this Annual Report on Form 10-K.

Commitments Related to Our Collaboration and License Agreements

We have certain collaboration and license agreements that are not individually significant to our business.

We may be required to pay up to $18.0 million for regulatory milestones, none of which had been paid as of December 31, 2019.

Our license and collaboration agreements are more fully described in Note 6, Collaboration, License, Co-Promotion and Other Commercial Agreements , in the accompanying notes to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.

Our obligations under our convertible senior notes, as well as potential financial effects from the Convertible Note Hedges, Note Hedge Warrants and Capped Calls are more fully described in Note 11, Notes Payable , in the accompanying notes to our financial statements appearing elsewhere in this Annual Report on Form 10-K.

Tax-related Obligations

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These uncertain tax positions are more fully described in Note 15, Income Taxes , in the accompanying notes to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.

Other Funding Commitments

As of December 31, 2019, we have several ongoing studies in various clinical trial stages.

Our most significant clinical trial expenditures are to CROs.

The contracts with CROs generally are cancellable, with notice, at our option and do not have any significant cancellation penalties.

These items are not included in the table above.

Off-Balance Sheet Arrangements

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, that would have been established for the purpose of facilitating off-balance sheet arrangements (as that term is defined in Item 303(a)(4)(ii) of Regulation S-K) or other contractually narrow or limited purposes.

As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in those types of relationships.

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New Accounting Pronouncements

For a discussion of recent accounting pronouncements, please refer to Note 2, Summary of Significant Accounting Policies , to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.

For a discussion of recent accounting pronouncements, refer to Note 2, Summary of Significant Accounting Policies , to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.

We did not otherwise adopt any new accounting pronouncements during the fiscal year ended December 31, 2020 that had a material effect on our consolidated financial statements included in this report.

Trends and Uncertainties

Impact of the COVID-19 Pandemic

In December 2019, COVID-19 emerged in Wuhan, Hubei Province, China.

On March 11, 2020, the World Health Organization declared a global pandemic and recommended containment and mitigation measures worldwide.

On March 13, 2020, former U.S.

President Donald Trump announced a national emergency relating to the pandemic.

Government authorities in the U.S.

have recommended or imposed various containment and mitigation measures on large portions of the population , and similar measures have also been taken in many other countries around the world.

Both the outbreak of COVID-19 and the containment and mitigation efforts have had a serious adverse impact on the U.S.

economy and the economies of other countries around the world, the severity and duration of which remain uncertain.

The COVID-19 pandemic, including containment and mitigation measures has impacted, and is expected to continue to impact, our business and operations in a number of ways, including:

● Day to Day Operations

Most of our customer-facing employees have resumed in-person work practices;

however, they are limited in the number of in-person details they are able to conduct due to containment and mitigation measures related to the COVID-19 pandemic.

We monitor the impact of the COVID-19 pandemic in the territories where our customer-facing employees have resumed in-person work practices, and in some cases, we have paused the in-person work practices as a result of the impact of the COVID-19 pandemic in those territories.

Customer-facing employees who are not providing in-person services continue to support their customers virtually through telephone and web-based technologies.

Headquarters employees have the option to work remotely through mid-2021.

● Collaboration Agreement for North America with AbbVie

We and our partner, AbbVie, are focused on maintaining the availability of LINZESS for adult men and women suffering from IBS-C or CIC.

We include our and AbbVie’s collaboration-related selling, general, and administrative expenses, including expenses from in-person and remote selling activities, in the calculation of net profits from the sale of LINZESS in the U.S.

and present net payments to us as collaborative arrangements revenue.

In the fourth quarter of 2020, we and AbbVie agreed to include costs incurred throughout 2020 associated with remote selling activities performed by our and AbbVie’s customer-facing employees in collaboration-related selling, general and administrative expenses in our calculation of net profits from the sale of LINZESS in the U.S.

As such, we have experienced fluctuations in our settlement payments based on the ratio of selling, general and administrative expenses incurred by each party during the year ended December 31, 2020, and may continue to experience such fluctuations in the future.

The COVID-19 pandemic may negatively impact future net sales of LINZESS in the U.S., including as a result of reduced and/or restricted in-person promotion or potential changes in patient access to healthcare (including due to unemployment or modifications in insurance coverage) and payor reimbursement levels.

● Manufacturing and Supply Chain

We and AbbVie continue to monitor the supply and availability of LINZESS for adult men and women suffering from IBS-C or CIC in the U.S.

As of the date of this Annual Report on Form 10-K, the COVID-19 pandemic has not caused significant disruptions to manufacturing operations or supply of LINZESS in the U.S.

or of clinical trial material for our ongoing trials.

● Clinical Development of GI Pipeline

The COVID-19 pandemic impacted the development of our pipeline during the year ended December 31, 2020.

For example, prior to our decision to discontinue the development of IW-3718, the COVID-19 pandemic impacted enrollment in our Phase III clinical trials of IW-3718 for the treatment of refractory GERD, resulting in lower than expected research and development expenses relating to IW-3718 clinical trials during the year ended December 31, 2020.

The COVID-19 pandemic resulted in changes to our business and operations which impacted our financial condition and results of operations for the year ended December 31, 2020, including as described above.

During the year ended December 31, 2020, we incurred a total of approximately $2.4 million of incremental expenses, primarily related to personal protective equipment for our field-based employees and external costs of strategy and operations analysis related to the impacts of the COVID-19 pandemic.

There continue to be significant uncertainties surrounding the extent and duration of the impact of the COVID-19 pandemic on our business and operations and we expect to incur additional expenses in future periods related to the impact of the COVID-19 pandemic on our business and operations.

We continue to evaluate the impact of the COVID-19 pandemic on our operating results and financial condition.

The COVID-19 pandemic may have a material adverse impact on our business and financial condition in the future.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis