What changed in this filing

/stocks — the workspaceLOADING

Item 9A. Controls and Procedures

2021-02-17 compared with 2020-02-13 · 589 added, 988 removed, 1334 unchanged (54% of the section changed)

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The table below sets forth information with regard to securities authorized for issuance under our equity compensation plans as of December 31, 2020.

As of December 31, 2019, we had four active equity compensation plans, each of which was approved by our stockholders:

● Our Amended and Restated 2005 Stock Incentive Plan;

● Our Amended and Restated 2010 Employee, Director and Consultant Equity Incentive Plan;

● Our 2019 Equity Incentive Plan;

● Our Amended and Restated 2010 Employee Stock Purchase Plan.

As of December 31, 2020, we had three active equity compensation plans, each of which was approved by our stockholders:

● Amended and Restated 2010 Employee, Director and Consultant Equity Incentive Plan;

● 2019 Equity Incentive Plan;

● Amended and Restated 2010 Employee Stock Purchase Plan.

Plan Category

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Incorporated by reference herein

Separation Agreement, dated as of March 30, 2019, by and between Ironwood Pharmaceuticals, Inc.

and Cyclerion Therapeutics, Inc.

Current Report on Form 8-K (File No.

April 4, 2019

Eleventh Amended and Restated Certificate of Incorporation

9 unchanged sentences

March 30, 2010

Separation Agreement, dated as of March 30, 2019, by and between Ironwood Pharmaceuticals, Inc.

and Cyclerion Therapeutics, Inc.

Current Report on Form 8-K (File No.

April 4, 2019

Specimen Class A Common Stock certificate

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June 15, 2015

Incorporated by reference herein

Indenture, dated as of August 12, 2019, by and between Ironwood Pharmaceuticals, Inc.

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Description of Securities of Ironwood Pharmaceuticals, Inc.

Amended and Restated 2005 Stock Incentive Plan and form agreements thereunder

Registration Statement on Form S-1, as amended (File No.

January 29, 2010

Amended and Restated 2010 Employee, Director and Consultant Equity Incentive Plan

4 unchanged sentences

November 6, 2018

Form of Non-employee Director Restricted Stock Agreement under the Amended and Restated 2010 Employee, Director and Consultant Equity Incentive Plan

Quarterly Report on Form 10-Q (File No.

July 30, 2019

Form of Restricted Stock Unit Agreement under the Amended and Restated 2010 Employee, Director and Consultant Equity Incentive Plan

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November 6, 2018

Incorporated by reference herein

2019 Equity Incentive Plan

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July 30, 2019

Form of Performance-Based Restricted Stock Unit Award Agreement under the 2019 Equity Incentive Plan

Quarterly Report on Form 10-Q (File No.

Amended and Restated 2010 Employee Stock Purchase Plan

Annual Report on Form 10-K (File No.

February 13, 2020

Change of Control Severance Benefit Plan, as amended and restated

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February 21, 2013

Incorporated by reference herein

Commercial Agreement, dated as of January 31, 2017, by and among Allergan USA, Inc., Forest Laboratories, LLC and Ironwood Pharmaceuticals, Inc.

23 unchanged sentences

August 1, 2019

Incorporated by reference herein

Amendment to the Amended and Restated License Agreement, dated as of January 8, 2021, by and between Ironwood Pharmaceuticals, Inc.

and Astellas Pharma Inc.

Amended and Restated License and Collaboration Agreement, dated as of September 16, 2019, by and between AstraZeneca AB and Ironwood Pharmaceuticals, Inc.

20 unchanged sentences

June 13, 2019

Lease Termination Agreement for facilities at 301 Binney Street, Cambridge, Massachusetts, dated as of June 11, 2019, by and between Ironwood Pharmaceuticals, Inc.

and BMR-Rogers Street LLC.

Current Report on Form 8-K (File No.

June 13, 2019

Tax Matters Agreement, dated as of March 30, 2019, by and between Ironwood Pharmaceuticals, Inc.

2 unchanged sentences

April 4, 2019

Incorporated by reference herein

Employee Matters Agreement, dated as of March 30, 2019, by and between Ironwood Pharmaceuticals, Inc.

26 unchanged sentences

August 7, 2015

Incorporated by reference herein

Additional Warrants Confirmation, dated as of June 22, 2015, between Ironwood Pharmaceuticals, Inc.

26 unchanged sentences

August 13, 2019

Incorporated by reference herein

Additional Call Option Transaction Confirmation for the 2026 Notes, dated as of August 12, 2019, between Ironwood Pharmaceuticals, Inc.

12 unchanged sentences

and JPMorgan Chase Bank, National Association

Annual Report on Form 10-K (File No.

February 13, 2020

Call Spread Unwind Agreement, dated as of August 7, 2019, between Ironwood Pharmaceuticals, Inc.

and Credit Suisse Capital LLC

Annual Report on Form 10-K (File No.

February 13, 2020

Subsidiaries of Ironwood Pharmaceuticals, Inc.

Annual Report on Form 10-K (File No.

February 13, 2020

Consent of Independent Registered Public Accounting Firm

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Certification of Chief Executive Officer pursuant to Rules 13a-14(b) or 15d-14(b) of the Exchange Act and 18 U.S.C.

Incorporated by reference herein

Certification of Chief Financial Officer pursuant to Rules 13a-14(b) or 15d-14(b) of the Exchange Act and 18 U.S.C.

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XBRL Taxonomy Extension Label Linkbase Database

XBRL Taxonomy Extension

Presentation Linkbase Document

XBRL Taxonomy ExtensionPresentation Linkbase Document

XBRL Taxonomy Extension Definition Linkbase Document

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February 17, 2021

Alexander Denner

/s/ Andrew Dreyfus

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February 17, 2021

Index to Consolidated Financial Statements of

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Collaboration Agreement for North America with Allergan plc

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments.

The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosure to which it relates.

Collaboration Agreement for North America with AbbVie Inc.

Description of the Matter

Revenue recognized from the Collaboration Agreement for North America with Allergan plc (together with its affiliates, or “Allergan”) was $325.4 million for the sale of LINZESS in the U.S for the year ended December 31, 2019.

As discussed in Note 6 to the consolidated financial statements, the Company generates the majority of its revenue from a collaboration arrangement with Allergan related to linaclotide (LINZESS).

The Company records its share of the net profits or net losses from the sales of LINZESS in the U.S., less commercial expenses, and presents the settlement payments to and from Allergan as collaboration arrangements revenue or collaborative arrangements expense, as applicable.

Auditing revenue recognition under the Allergan collaboration is especially challenging and requires significant auditor judgment because complete and accurate information regarding net profits realized from sales of LINZESS in the U.S.

Revenue recognized from the Collaboration Agreement for North America with AbbVie Inc.

(together with its affiliates, or “AbbVie”) was $368.6 million for the sale of LINZESS in the U.S.

for the year ended December 31, 2020.

As discussed in Note 6 to the consolidated financial statements, the Company generates the majority of its revenue from a collaboration arrangement with AbbVie related to linaclotide (LINZESS).

The Company records its share of the net profits or net losses from the sales of LINZESS in the U.S., less commercial expenses, and presents the settlement payments to and from AbbVie as collaboration expense or collaborative arrangements revenue, as applicable.

Auditing revenue recognition under the AbbVie collaboration is especially challenging and requires significant auditor judgment because complete and accurate information regarding net profits realized from sales of LINZESS in the U.S.

and the costs incurred in selling it may not be available at the time the financial statements are prepared.

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We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company’s internal controls over its collaboration revenue process.

The Company maintains and operates a suite of controls over the Company’s evaluation of the completeness and accuracy of its quarterly reporting from Allergan.

Our audit procedures included, among others, reviewing the Company’s contract with Allergan, reviewing information provided by Allergan, performing auditing procedures over gross sales, adjustments to arrive at net sales, cost of goods sold, and selling and marketing costs contributing to Ironwood’s share of net profits and obtaining confirmation directly from Allergan .

Valuation of Convertible Notes

Description of the Matter

As more fully described in Note 12 to the consolidated financial statements, in August 2019, Ironwood issued $200 million of 0.75% Convertible Senior Notes due 2024 (the “2024 Convertible Notes”) and $200 million of 1.50% Convertible Senior Notes due 2026 (the “2026 Convertible Notes”).

Ironwood used some of the proceeds from the offering to repurchase $215 million aggregate principal of the existing 2.25% Convertible Senior Notes due 2022 (the “2022 Convertible Notes”).

The Company separately accounted for the liability and equity components of the 2022 Convertible Notes, the 2024 Convertible Notes and the 2026 Convertible Notes by allocating the proceeds between the liability component and the embedded conversion option, or equity component, due to the Company's ability to settle the Convertible Notes in cash, its Class A Common Stock, or a combination of cash and Class A Common Stock at the option of the Company.

The estimated fair value of the 2022 Convertible Notes, the 2024 Convertible Notes and the 2026 Convertible Notes was $141.3 million, $235.7 million and $240.1 million as of December 31, 2019.

Auditing the Company’s valuation of the fair value of the debt component associated with the 2022, 2024 and 2026 Convertible Notes was especially judgmental because the carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature.

How We Addressed the Matter in Our Audit

We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company’s internal controls over the significant assumptions underlying the determination of the interest rates used to calculate the fair value of the 2022, 2024 and 2026 Convertible Notes and the conversion option that was recorded in stockholders’ equity.

To test the interest rates used to calculate the fair value of debt, our audit procedures included testing the Company’s valuation methodology, evaluating the significant assumptions used by the Company, and evaluating the completeness and accuracy of the underlying data supporting the significant assumptions and estimates.

In addition, we involved a valuation professional to assist in our evaluation of the methodology used by the Company and significant assumptions.

The Company maintains and operates a suite of controls over the Company’s evaluation of the completeness and accuracy of its quarterly reporting from AbbVie.

Our audit procedures included, among others, reviewing the Company’s contract with AbbVie, reviewing information provided by AbbVie, performing auditing procedures over gross sales and adjustments to arrive at net sales, cost of goods sold, and selling and marketing costs contributing to Ironwood’s share of net profits, and obtaining confirmation directly from AbbVie.

/s/ Ernst & Young LLP

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Restricted cash

Current assets of discontinued operations

Total current assets

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Convertible note hedges

Non-current assets of discontinued operations

LIABILITIES AND STOCKHOLDERS' DEFICIT

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:

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Accrued expenses and other current liabilities

Capital lease obligations

Current portion of deferred rent

Current portion of 2026 Notes

Current portion of contingent consideration

Current portion of operating lease liabilities

Deferred revenue

Current liabilities of discontinued operations

Total current liabilities

Capital lease obligations, net of current portion

Deferred rent, net of current portion

Note hedge warrants

Convertible senior notes

2026 Notes, net of current portion

Operating lease obligations, net of current portion

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Commitments and contingencies

Stockholders’ deficit:

Stockholders’ equity (deficit):

Preferred stock, $ 0.001 par value, 75,000,000 shares authorized, no shares issued and outstanding

Class A Common Stock, $ 0.001 par value, 500,000,000 shares authorized and 157,535,962 issued and outstanding at December 31, 2019 and 500,000,000 shares authorized and 154,414,691 shares issued and outstanding at December 31, 2018

Class A Common Stock, $ 0.001 par value, 500,000,000 shares authorized and 160,616,675 shares issued and outstanding at December 31, 2020 and 500,000,000 shares authorized and 157,535,962 shares issued and outstanding at December 31, 2019

Additional paid-in capital

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( 1,572,232 )

Total stockholders’ deficit

Total liabilities and stockholders’ deficit

Total stockholders’ equity (deficit)

Total liabilities and stockholders’ equity (deficit)

The accompanying notes are an integral part of these consolidated financial statements.

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Other expense, net

Net income (loss) from continuing operations

Net loss from discontinued operations

Income (loss) from continuing operations, before income taxes

Income tax expense

Income (loss) from continuing operations

Loss from discontinued operations, net of income taxes

Net income (loss)

Net income (loss) per share from continuing operations—basic and diluted

Net loss per share from discontinued operations—basic and diluted

Net income (loss) per share—basic and diluted

Weighted average common shares outstanding used in computing net income (loss) per share—basic and diluted:

Income (loss) per share from continuing operations, net of income taxes—basic

Income (loss) per share from continuing operations, net of income taxes—diluted

Loss per share from discontinued operations, net of income taxes—basic and diluted

Net income (loss) per share—basic

Net income (loss) per share—diluted

Weighted average shares used in computing net income per share—basic:

Weighted average shares used in computing net income per share—diluted:

The accompanying notes are an integral part of these consolidated financial statements.

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Net income (loss)

Other comprehensive income (loss):

Unrealized gains (losses) on available-for-sale securities

Total other comprehensive income (loss)

Other comprehensive income:

Unrealized gains on available-for-sale securities

Total other comprehensive income

Comprehensive income (loss)

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( 1,308,760 )

Issuance of common stock upon exercise of stock options and employee stock purchase plan

Issuance of common stock awards

Issuance of common stock related to share-based awards and employee stock purchase plan

Conversion of Class B Common Stock to Class A Common Stock

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( 1,591,128 )

Issuance of common stock upon exercise of stock options and employee stock purchase plan

Issuance of common stock awards

Conversion of Class B Common Stock to Class A Common Stock

( 14,748,123 )

Share-based compensation expense related to share-based awards to employees and employee stock purchase plan

Unrealized losses on available-for-sale securities

Issuance of common stock related to share-based awards and employee stock purchase plan, net of cancellations

Share-based compensation expense related to share-based awards and employee stock purchase plan

Equity component of convertible senior notes

Equity component of issuance costs for convertible senior notes

Purchase of capped calls

Equity component of partial repurchase of 2022 Convertible Notes

Dividend of SGC business

Balance at December 31, 2019

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Stockholders’

equity (deficit)

Balance at December 31, 2019

( 1,572,232 )

Issuance of common stock upon exercise of stock options and employee stock purchase plan, net of cancellations

Issuance of common stock related to share-based awards and employee stock purchase plan

Share-based compensation expense related to share-based awards and employee stock purchase plan

Equity component of convertible senior notes

Equity component of issuance costs for convertible senior notes

Purchase of capped calls

Equity component of partial repurchase of 2022 Convertible Notes

Dividend of SGC business

Balance at December 31, 2020

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Write-down of excess non-cancellable ZURAMPIC and DUZALLO sample purchase commitments

Gain on facility subleases

Accretion of discount/premium on investment securities

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Accounts receivable and related party accounts receivable, net

Prepaid expenses and other current assets

Inventory, net

Prepaid expenses and other current assets

Operating lease right-of-use assets

Accounts payable, related party accounts payable and accrued expenses

Accrued research and development costs

Deferred revenue

Operating lease right-of-use assets

Operating lease liabilities

Deferred revenue

Deferred rent

Net cash used in continuing operating activities

Other liabilities

Net cash provided by (used in) continuing operating activities

Net cash provided by discontinued operating activities

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Payments for partial repurchase of 2022 Convertible Notes

Payments on 2026 Notes

Principal payments on PhaRMA notes

Costs associated with issuance of 2026 Notes

Proceeds from issuance of 2026 Notes, net of discount to lender

Payments on 8.375% Notes due 2026

Payments on contingent purchase price consideration

Net cash (used in) provided by continuing financing activities

Net cash (used in) provided by discontinued financing activities

Net cash (used in) provided financing activities

Net cash provided by (used in) continuing financing activities

Net cash used in discontinued financing activities

Net cash provided by (used in) financing activities

Net increase (decrease) in cash, cash equivalents and restricted cash

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Cash paid for interest

Cash paid for income taxes

Non-cash investing and financing activities

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Ironwood Pharmaceuticals, Inc.

(“Ironwood” or the “Company”) is a gastrointestinal (“GI”) healthcare company dedicated to advancing the treatment of GI diseases and redefining the standard of care for millions of GI patients.

The Company is focused on the development and commercialization of innovative GI product opportunities in areas of large unmet need, leveraging its demonstrated expertise and capabilities in GI diseases.

On April 1, 2019, the Company completed its tax-free spin-off of its soluble guanylate cyclase (“sGC”) business into a separate publicly traded company, Cyclerion Therapeutics, Inc.

(“Cyclerion”).

(“Ironwood” or the “Company”) is a gastrointestinal (“GI”) healthcare company dedicated to advancing the treatment of GI diseases and redefining the standard of care for GI patients.

The Company is focused on the development and commercialization of innovative GI product opportunities in areas of significant unmet need, leveraging its demonstrated expertise and capabilities in GI diseases.

LINZESS ® (linaclotide), the Company’s commercial product, is the first product approved by the United States Food and Drug Administration (the “U.S.

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The Company has strategic partnerships with leading pharmaceutical companies to support the development and commercialization of linaclotide throughout the world.

The Company and its partner, Allergan plc (together with its affiliates) (“Allergan”), began commercializing LINZESS in the U.S.

The Company and its partner, AbbVie Inc.

(together with its affiliates, “AbbVie”) (successor to Allergan plc (together with its affiliates), “Allergan”), began commercializing LINZESS in the U.S.

in December 2012.

Under the Company’s 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 the Company and Allergan.

Allergan also has an exclusive license from the Company to develop and commercialize linaclotide in all countries other than China (including Hong Kong and Macau), Japan and the countries and territories of North America (the “Allergan License Territory”).

On a country-by-country and product-by-product basis in the Allergan License Territory, Allergan pays the Company a royalty as a percentage of net sales of products containing linaclotide as an active ingredient.

In addition, Allergan has exclusive rights to commercialize linaclotide in Canada as CONSTELLA and in Mexico as LINZESS.

Under the Company’s 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 the Company and AbbVie.

AbbVie also has an exclusive license from the Company to develop and commercialize linaclotide in all countries other than China (including Hong Kong and Macau), Japan and the countries and territories of North America (the “AbbVie License Territory”).

On a country-by-country and product-by-product basis in the AbbVie License Territory, AbbVie pays the Company a royalty as a percentage of net sales of products containing linaclotide as an active ingredient.

In addition, AbbVie has exclusive rights to commercialize linaclotide in Canada as CONSTELLA and in Mexico as LINZESS.

Astellas Pharma Inc.

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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.

On August 1, 2019, the Company amended and restated its license agreement with Astellas.

Beginning in 2020, the Company will no longer be responsible for the supply of linaclotide active pharmaceutical ingredient (“API”) to Astellas (Note 6).

In August 2019, the Company amended and restated its license agreement with Astellas.

Effective in 2020, Company is no longer responsible for the supply of linaclotide active pharmaceutical ingredient (“API”) to Astellas (Note 6).

In October 2012, the Company and AstraZeneca AB (together with its affiliates) (“AstraZeneca”) entered into a collaboration agreement to co-develop and co-commercialize linaclotide in China (including Hong Kong and Macau) (the “AstraZeneca License Territory”).

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

As of September 16, 2019, AstraZeneca has the exclusive right to develop, manufacture, and commercialize products containing linaclotide in the AstraZeneca License Territory (Note 6).

AstraZeneca launched LINZESS in China in November 2019.

The Company and Allergan are exploring 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 June 2019, the Company announced positive topline data from its Phase IIIb trial demonstrating the efficacy and safety of LINZESS 290 mcg on the overall abdominal symptoms of bloating, pain and discomfort, in adult patients with IBS-C.

The Company and Allergan are 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.

In May 2019, the Company and Allergan announced the initiation of a Phase II clinical trial evaluating the safety and efficacy of MD-7246 in adult patients with IBS with diarrhea (“IBS-D”).

The Company is advancing IW-3718, a gastric retentive formulation of a bile acid sequestrant, for the potential treatment of refractory gastroesophageal reflux disease (“refractory GERD”).

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

In September 2019, the Company amended and restated its existing collaboration agreement with AstraZeneca whereby AstraZeneca obtained the exclusive right to develop, manufacture, and commercialize products containing linaclotide in the AstraZeneca License Territory (Note 6).

In November 2019, AstraZeneca began commercializing LINZESS for the treatment of adults with IBS-C in China.

The Company and AbbVie are exploring 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 September 2020, based on the Phase IIIb data demonstrating efficacy and safety of LINZESS 290 mcg on the overall abdominal symptoms of bloating, pain and discomfort in adult patients with IBS-C, the U.S.

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

In June 2020 and July 2020, the United States Patent and Trademark Office granted patents covering the formulation of the 72 mcg dose of LINZESS and methods of using the formulation, respectively.

The patents are expected to expire in 2031.

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

In May 2020, the Company and AbbVie announced top-line data from a Phase II trial evaluating MD-7246 in adult patients with

abdominal pain associated with irritable bowel syndrome with diarrhea.

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

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

The Company was developing IW-3718, a gastric retentive formulation of a bile acid sequestrant, in a Phase III program.

In September 2020, the Company announced that one of its two identical Phase III trials for the potential treatment of refractory gastroesophageal reflux disease (“refractory GERD”) did not meet the pre-specified criteria associated with a planned early efficacy assessment.

Based on these findings, the Company is discontinuing development of IW-3718.

In connection with this decision, the Company reduced its workforce by approximately 100 full-time employees.

This workforce reduction affected both field-based and home-office employees, including the relevant general and administrative support functions.

The Company substantially completed the reduction in its workforce in the fourth quarter of 2020 (Note 18).

Additionally, the Company periodically enters into co-promotion agreements to bolster its salesforce productivity.

For example, in April 2019, the Company entered into an agreement with Allergan to continue to perform sales detailing activities for VIBERZI ® (eluxadoline) from April 1, 2019 through December 31, 2019.

In August 2019, the Company entered into a disease education and promotional agreement with Alnylam Pharmaceuticals, Inc.

(“Alnylam”) for Alnylam’s GIVLAARI TM (givosiran), an RNAi therapeutic targeting aminolevulinic acid synthase 1, for the treatment of acute hepatic porphyria (“AHP”).

GIVLAARI was approved by the U.S.

FDA, in December 2019.

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

Under the agreement, the Company performs disease awareness activities related to AHP and sales detailing activities of GIVLAARI.

These and other agreements are more fully described in Note 6, Collaboration, License, Co-Promotion and Other Commercial Agreements, to these consolidated financial statements.

On April 1, 2019, Ironwood completed the separation of its sGC business, and certain other assets and liabilities, into Cyclerion (the “Separation”).

On April 1, 2019, Ironwood completed the separation (the “Separation”) of its soluble guanylate cyclase (“sGC”) business, and certain other assets and liabilities, into Cyclerion Therapeutics, Inc (“Cyclerion”).

The Separation was effected by means of a distribution of all of the outstanding shares of common stock, with no par value, of Cyclerion through a dividend of all outstanding shares of Cyclerion’s common stock, to Ironwood’s stockholders of record as of the close of business on March 19, 2019 (Note 3).

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

The Summer Street Property became the Company’s new headquarters in October 2019, replacing its prior headquarters at 301 Binney Street (Note 9).

In August 2019, the Company issued $ 200.0 million in aggregate principal amount of 0.75 % Convertible Senior Notes due 2024 (the “2024 Convertible Notes”) and $ 200.0 million in aggregate principal amount of 1.50 % Convertible Senior Notes due 2026 (the “2026 Convertible Notes”).

The Company 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 the cost of associated capped call transactions (the “Capped Calls”) and to repurchase $ 215.0 million aggregate principal amount of the existing 2.25 % Convertible Senior Notes due 2022 (the “2022 Convertible Notes”) and in September 2019 to redeem all of the outstanding principal balance of the 8.375 % Notes due 2026 (the “2026 Notes”) (Note 12).

The Company 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, the Company 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.

These transactions are more fully described in Note 12, Notes Payable , to these consolidated financial statements.

The Company was incorporated in Delaware on January 5, 1998 as Microbia, Inc.

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

For the year ended December 31, 2019, the Company recorded net income of approximately $ 21.5 million.

For the years ended December 31, 2020 and 2019, the Company recorded net income of approximately $ 106.2 million and approximately $ 21.5 million, respectively.

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

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The Company currently operates in one reportable business segment—human therapeutics.

Reclassifications and Revisions to Prior Period Financial Statements

Reclassifications

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

The Company has presented its sGC business as discontinued operations in its 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, the Company determined that its sGC business met the criteria for classification as a discontinued operation in accordance with Accounting Standards Codification (“ASC”) Subtopic 205-20, Discontinued Operations (“ASC 205-20”).

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.

The Company determined that its sGC business, which was disposed on April 1, 2019, met the criteria for classification as a discontinued operation in accordance with Accounting Standards Codification (“ASC”) Subtopic 205-20, Discontinued Operations (“ASC 205-20”).

Accordingly, the accompanying consolidated financial statements as of and for the year ended December 31, 2019 and all prior periods present the balance sheet, operations, and cash flows 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.

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valuation procedures for the issuance and repurchase of convertible notes;

balance sheet classification 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;

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Restricted Cash

The Company is contingently liable under unused letters of credit with a bank, related to the Company’s facility lease and vehicle lease agreements, in the amount of approximately $ 2.2 million and approximately $ 7.7 million as of December 31, 2019 and 2018, respectively.

The Company records as restricted cash the collateral used to secure these letters of credit.

During the year ended December 31, 2019, approximately $ 6.4 million of the Company’s restricted cash

related to the termination of its former headquarters lease in Cambridge, Massachusetts was released.

The amount of restricted cash included in current assets and non-current assets was approximately $ 1.7 million and $ 0.5 million at December 31, 2020, respectively.

The amount of restricted cash in current assets and non-current assets was approximately $1.2 million and $ 1.0 million at December 31, 2019, respectively.

Inventory is stated at the lower of cost or net realizable value with cost determined under the first-in, first-out basis in accordance with ASC 330, Inventory , including Accounting Standards Update (“ASU”) No.

2015-11, Inventory (Topic 330):

Simplifying the Measurement of Inventory .

The Company evaluates inventory levels quarterly and any inventory that has a cost basis in excess of its expected net realizable value, inventory that becomes obsolete, inventory in excess of expected sales requirements, inventory that fails to meet commercial sale specifications or is otherwise impaired is written down with a corresponding charge to the statement of operations in the period that the impairment is first identified.

The Company also assesses, on a quarterly basis, whether it has any excess non-cancelable purchase commitments resulting from its minimum supply agreements with its suppliers.

The Company relies on data from several sources to estimate the net realizable value of inventory and non-cancelable purchase commitments, including partner forecasts of projected inventory purchases that are received quarterly, the Company’s internal forecasts and related process, historical sales by geographic region, and the status of and progress toward commercialization of linaclotide in partnered territories.

The Company capitalizes inventories manufactured in preparation for initiating sales of a product candidate when the related product candidate is considered to have a high likelihood of regulatory approval and the related costs are expected to be recoverable through sales of the inventories.

In determining whether or not to capitalize such inventories, the Company evaluates, among other factors, information regarding the product candidate’s safety and efficacy, the status of regulatory submissions and communications with regulatory authorities and the outlook for commercial sales, including the existence of current or anticipated competitive drugs and the availability of reimbursement.

In addition, the Company evaluates risks associated with manufacturing the product candidate, including the ability of the Company’s third-party suppliers to complete the validation batches, and the remaining shelf life of the inventories.

Costs associated with developmental products prior to satisfying the inventory capitalization criteria are charged to research and development expense as incurred.

Concentrations of Suppliers

The Company relies on third-party manufacturers and its collaboration partners to manufacture linaclotide API, linaclotide finished drug product, and finished goods.

Currently, the Company uses three third-party facilities actively producing linaclotide API and finished drug product.

The Company also has an agreement with another independent third party to serve as a redundant linaclotide API manufacturing capacity to support its partnered territories.

Beginning in 2020, each of the Company’s partners for linaclotide will be responsible for API, finished drug product and finished goods manufacturing (including bottling and packaging) for its respective territories and distributing the finished goods to wholesalers.

If any of the Company’s suppliers were to limit or terminate production or otherwise fail to meet the quality or delivery requirements needed to satisfy the supply commitments, the process of locating and qualifying alternate sources could require up to several months, during which time the Company’s production could be delayed.

The Company relies on its collaboration partners and their suppliers to manufacture linaclotide API, linaclotide finished drug product, and finished goods.

If any of the Company’s collaboration partners and their suppliers were to limit or terminate production or otherwise fail to meet the quality or delivery requirements needed to satisfy the supply commitments, the process of locating and qualifying alternate sources could require up to several months, during which time production could be

Such delays could have a material adverse effect on the Company’s business, financial position and results of operations.

Accounts Receivable and Related Valuation Account

The Company makes judgments as to its ability to collect outstanding receivables and provides an allowance for receivables when collection becomes doubtful.

The Company makes judgments as to its ability to collect outstanding receivables and provides an allowance for credit losses when collection becomes doubtful.

Provisions are made based upon a specific review of all significant outstanding invoices and the overall quality and age of those invoices not specifically reviewed.

The Company’s receivables relate primarily to amounts reimbursed under its collaboration, license and co-promotion agreements, as well as historical amounts due from product sales to wholesalers.

The Company believes that credit risks associated with

these partners and wholesalers are not significant.

To date, the Company has not had any significant write-offs of bad debt, and the Company did not have an allowance for doubtful accounts as of December 31, 2019 or 2018.

The Company’s receivables relate primarily to amounts reimbursed under its collaboration, license and co-promotion agreements.

The Company believes that credit risks associated with these partners are not significant.

The Company reviews the need for an allowance for credit losses for its receivables based on various factors including payment history and historical bad debt experience.

The Company had no allowance for credit losses as of December 31, 2020 or 2019.

Concentrations of Credit Risk

Financial instruments that subject the Company to credit risk primarily consist of cash and cash equivalents, restricted cash, and accounts receivable.

The Company maintains its cash and cash equivalent balances with high-quality financial institutions and, consequently, the Company believes that such funds are subject to minimal credit risk.

The Company maintains its cash and cash equivalent balances with high-quality financial institutions and the Company believes that such funds are subject to minimal credit risk.

The Company has adopted an investment policy which limits the amounts the Company may invest in certain types of investments, and requires all investments held by the Company to be at least AA- rated, thereby reducing credit risk exposure.

Accounts receivable, including related party accounts receivable, primarily consist of amounts due under the linaclotide collaboration agreement with Allergan for North America and linaclotide license agreement with Astellas for Japan (Note 6).

Accounts receivable primarily consist of amounts due under the linaclotide collaboration agreement with AbbVie for North America (Note 6).

The Company does not obtain collateral for its accounts receivable.

Accounts receivable or payable to or from Allergan and Cyclerion are presented as related party accounts receivable and related party accounts payable, respectively, on the consolidated balance sheets.

The percentages of revenue recognized from significant customers of the Company in the years ended December 31, 2019, 2018 and 2017 as well as the account receivable balances, net of any payables due, at December 31, 2019 and 2018 are included in the following table:

The Company previously reflected amounts due from Allergan, net of amounts payable to Allergan, prior to its acquisition by AbbVie as related party accounts receivable, net.

Following the acquisition of Allergan by AbbVie, the Company determined that AbbVie is not a related party to the Company (Note 17).

The percentages of revenue recognized from significant collaborative partners of the Company in the years ended December 31, 2020, 2019 and 2018 as well as the account receivable balances, net of any payables due, at December 31, 2020 and 2019 are included in the following table:

Year Ended December 31,

Collaborative Partner:

Allergan (North America and Europe)

AbbVie (North America and Europe)

Astellas (Japan)

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Asset Description

Manufacturing equipment

Laboratory equipment

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Costs incurred during the preliminary project stage are expensed as incurred, while costs incurred during the application development stage are capitalized and amortized over the estimated useful life of the software.

The Company also capitalizes costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional functionality.

The Company also capitalizes costs

related to specific upgrades and enhancements when it is probable the expenditures will result in additional functionality.

Maintenance and training costs related to software obtained for internal use are expensed as incurred.

Leasehold improvements are amortized over the shorter of the estimated useful life of the asset or the lease term.

Under ASC Topic 840, Leases (“ASC 840”), capital lease assets were amortized over the lease term.

Costs for capital assets not yet placed into service have been capitalized as construction in process, and will be depreciated in accordance with the above guidelines once placed into service.

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During the year ended December 31, 2018, the Company recorded an impairment charge of approximately $ 151.8 million to fully write-off its ZURAMPIC and DUZALLO intangible assets.

Goodwill represents the difference between the purchase price and the fair value of the identifiable tangible and intangible net assets when accounting for business combinations.

Goodwill is not amortized, but is reviewed for impairment.

The Company tests its goodwill for impairment annually as of October 1 st , or more frequently if events or changes in circumstances indicate that would more likely than not reduce the fair value of the reporting unit below its carrying value.

Impairment may result from, among other things, deterioration in the performance of the acquired asset, adverse market conditions, adverse changes in applicable laws or regulations and a variety of other circumstances.

If the Company determines that an impairment has occurred, a write-down of the carrying value and an impairment charge to operating expenses in the period the determination is made is recorded.

In evaluating the carrying value of goodwill, the Company must make assumptions regarding estimated future cash flows and other factors.

Changes in strategy or market conditions could significantly impact those judgments in the future and require an adjustment to the recorded balances.

There were no impairments of goodwill for the years ended December 31, 2019, 2018, or 2017.

Impairment of Long-Lived Assets

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If the carrying value of the asset exceeds such projected undiscounted cash flows, the asset will be written down to its estimated fair value.

There were no significant impairments of long-lived assets for the years ended December 31, 2019, 2018, or 2017.

The Company provides for income taxes under the liability method.

The Company provides for income taxes under the asset and liability method.

Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates in effect when the differences are expected to reverse.

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Costs attributable to debt financings are deferred and amortized to interest expense over the term of the debt using the effective interest method.

Portions of the financing costs incurred in connection with the 2022 Convertible Notes, 2024 Convertible Notes and 2026 Convertible Notes were deemed to relate to the equity components and were recorded as a reduction to additional paid in capital.

Costs incurred in connection with convertible debt securities are allocated between the liability and equity components.

In accordance with ASC 835, Interest , the Company presents debt issuance costs on the balance sheet as a direct deduction from the associated debt liability.

The convertible senior notes are more fully described in Note 12, Notes Payable , to these consolidated financial statements.

Effective January 1, 2019 , the Company adopted ASC Topic 842, Leases (“ASC 842”), using the optional transition method .

The adoption of ASC 842 represents a change in accounting principle that aims to increase transparency and comparability among organizations by requiring the recognition of right-of-use assets and lease liabilities on the balance sheet for both operating and finance leases.

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 840.

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

The recognition of right-of-use assets and lease liabilities related to the Company’s operating leases under ASC 842 has had a material impact on the Company’s consolidated financial statements.

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

These practical expedients include:

The adoption of ASC 842 represented a change in accounting principle that aimed to increase transparency and comparability among organizations by requiring the recognition of right-of-use assets and lease liabilities on the balance sheet for both operating and finance leases.

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

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

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

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Subsequent to the Company’s adoption of ASC 842, the Company elected the post-transition practical expedient, by class of underlying asset, to account for lease components and non-lease components together as a single component for the asset class of operating lease right-of-use real estate assets.

The Company’s lease portfolio for year ended December 31, 2019 includes:

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

The Company’s lease portfolio for the year ended December 31, 2020 included:

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

The Company determines if an arrangement is a lease at the inception of the contract.

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Derivative Assets and Liabilities

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

In June 2015, in connection with the issuance of the 2022 Convertible Notes, the Company entered into convertible note hedge transactions (the “Convertible Note Hedges”).

Concurrently with entering into the Convertible Note Hedges, the Company also entered into certain warrant transactions in which it sold note hedge warrants (the “Note Hedge Warrants”) to the Convertible Note Hedge counterparties to acquire shares of the Company’s Class A Common Stock, subject to customary anti-dilution adjustments (Note 12).

Note Hedge counterparties to acquire shares of the Company’s Class A Common Stock, subject to customary anti-dilution adjustments (Note 11).

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

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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.

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

Revenue Recognition

Effective January 1, 2018 , the Company adopted ASU No.

2014 -09, Revenue from Contracts with Customers (Topic 606) and related amendments (“ASU 2014 -09”) using the modified retrospective transition method.

The adoption of ASU 2014-09 represented a change in accounting principle that aimed to more closely align revenue recognition with the delivery of the Company's products or services and provided 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.

In accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”), the Company recognizes revenue when the customer obtains control of a promised good or service, in an amount that reflects the consideration which the Company expects to receive in exchange for the good or service.

Upon adoption of ASC 606, the Company 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 the Company’s consolidated statement of operations, balance sheets, or statement of cash flows.

The reported results for the years ended 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 (“ASC 605”).

As part of the ASC 606 adoption, the Company has 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 the Company has the right to invoice, when consideration from the customer corresponds directly with the value to the customer of the Company’s 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, the Company 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.

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

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The Company receives its share of the net profits or bears its share of the net losses from the sale of linaclotide in the U.S.

through its collaboration agreement with Allergan for North America.

Prior to the execution of the amended and restated collaboration agreement with AstraZeneca (the “Amended AstraZeneca Agreement”) on September 16, 2019, the Company received its share of the net profits and bore its share of the net losses from the sale of linaclotide in the China (including Hong Kong and Macau), through its collaboration with AstraZeneca.

through its collaboration agreement with AbbVie for North America.

The Company has adopted a policy to recognize revenue net of tax withholdings, as applicable.

Revenue recognition under ASC 606

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

To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, it performs the following five steps:

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

(ii) identify the performance obligations in the contract;

(iii) determine the transaction price;

(iv) allocate the transaction price to the performance obligations in the contract;

and (v) recognize revenue when (or as) the Company satisfies the performance obligations.

The Company must develop assumptions that require significant judgment to determine the standalone selling price for each performance obligation identified in the contract.

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.

Collaboration, License, Co-Promotion and Other Commercial Agreements

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For licenses that are combined with other promises, the Company assesses the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time.

For performance obligations that are satisfied over time, the Company

evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.

For performance obligations that are satisfied over time, the Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.

The Company’s license and collaboration agreements include milestone payments, such as development and other milestones.

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If the Company is 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, the Company recognizes 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

In accordance with ASC 808 Topic, Collaborative Arrangements (“ASC 808”), the Company considered the nature and contractual terms of the arrangement and the nature of the Company’s business operations to determine the classification of payments under the Company’s collaboration agreements.

In accordance with ASC 808 Topic, Collaborative Arrangements (“ASC 808”), the Company considers the nature and contractual terms of the arrangement and the nature of the Company’s business operations to determine the classification of payments under the Company’s collaboration agreements.

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

Therefore, the Company, consistent with its accounting policies prior to the adoption of ASC 606, applies the separation, initial measurement, and recognition principles of ASC 606 to its collaboration agreements.

The Company 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 its initial conclusions, the Company will continue to analogize to ASC 606 for further guidance on areas such as separation, initial measurement, and recognition for its existing collaborative arrangements where applicable.

Therefore, the Company applies the separation, initial measurement, and recognition principles of ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”), as applicable.

The Company’s collaborative arrangements revenues generated from sales of LINZESS in the U.S.

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In accordance with the sales-based royalty exception, the Company recognizes its 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 the Company and its 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.

The Company is 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.

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 the Company and AbbVie.

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.

The Company is highly dependent on AbbVie for timely and accurate information regarding net revenues from sales of LINZESS in the U.S.

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

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

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

Given that the Company is not the primary obligor and does not have the inventory risks in the collaboration agreement with Allergan for North America, it records its share of the net profits or net losses from the sales of LINZESS in the U.S.

basis and presents the settlement payments to and from Allergan as collaboration expense or collaborative arrangements revenue, as applicable.

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

Given that the Company is not the primary obligor and does not have the inventory risks in the collaboration agreement with AbbVie for North America, it records its share of the net profits or net losses from the sales of LINZESS in the U.S.

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

The Company and AbbVie settle the cost sharing quarterly such that the Company’s 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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Certain of these adjustments were recorded as an accounts receivable reserve, while certain of these adjustments were recorded as accrued expenses.

The Company produced linaclotide finished drug product, API and development materials for certain of its partners.

The Company recognizes 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, the Company is 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, the Company will no longer be responsible for the supply of linaclotide finished drug product or API to its partners.

Sale of Active Pharmaceutical Ingredient

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

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

As it relates to development materials and API produced for Astellas, the Company was 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 with AbbVie for North America.

Prior to the execution of the Amended AstraZeneca Agreement in September 2019, any linaclotide API, finished drug product, 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.

The Company recognized 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 passed all quality testing required for acceptance by the partner.

The Company’s 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, the Company followed the provisions of ASC Topic 605-25, Revenue Recognition—Multiple-Element Arrangements (‘‘ASC 605-25’’), in accounting for these agreements.

Under ASC 605-25, the Company was 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 the Company’s control.

The Company 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

The Company 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 (“ASU 2009- 13”) until the adoption of ASC 606.

The Company 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, the Company 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, the Company 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.

The Company determined the estimated selling price for deliverables using vendor-specific objective evidence (“VSOE”) of selling price, if available, third-party evidence (“TPE”) of selling price if VSOE was not available, or best estimate of selling price (“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, the Company 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, the Company 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.

The Company 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, the Company had no pre-commercial milestones that were deemed substantive.

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

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

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

The Company recorded revenue transactions gross in the consolidated statements of operations if it is deemed the principal in the transaction, which includes being the primary obligor and having the risks and rewards of ownership.

The Company recognized its 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 reported by Allergan and related cost of goods sold and selling, general and administrative expenses are incurred by the Company and its collaboration partner.

These amounts were 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.

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.

The Company recorded its 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 the Company was not the primary obligor and did not have the risks and rewards of ownership in the collaboration agreement with Allergan for North America.

The Company and Allergan settle the cost sharing quarterly, such that the Company’s 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

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

The Company 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.

The Company 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.

The Company 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, the Company determined that it was 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, the Company recorded net product revenue for the Lesinurad Products using a deferred revenue recognition model (sell-through).

Accordingly, the Company 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, the Company concluded it 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.

The Company evaluated the creditworthiness of each of its 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, the Company must be able to (i) calculate its gross product revenue from the sales to Distributors and (ii) reasonably estimate its net product revenue.

The Company calculated gross product revenue based on the wholesale acquisition cost that the Company charged its Distributors for ZURAMPIC and DUZALLO.

The Company estimated its net product revenue by deducting from its 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.

The Company supplied linaclotide finished drug product, API and development materials for certain of its partners.

The Company 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.

Cost of Revenues

Cost of revenues includes cost related to the sales of linaclotide API and finished drug product, as well as the cost of product revenue related to sales of the Lesinurad Products 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 the Company’s partners outside of the U.S.

Cost related to the sales of linaclotide API, finished drug product, and finished goods are generally recognized upon shipment to certain of the Company’s partners outside of the U.S.

The Company’s cost of revenues for linaclotide consists of the internal and external costs of producing such API and finished drug product.

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

Under the Company’s collaboration agreement with Allergan for North America, the Company is reimbursed for certain research and development expenses and nets these reimbursements against its research and development expenses as incurred.

Amounts owed to Allergan or AstraZeneca under the Company’s respective collaboration agreements were 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).

Under the Company’s collaboration agreement with AbbVie for North America, the Company is reimbursed for certain research and development expenses and nets these reimbursements against its research and development expenses as incurred.

Amounts owed to AbbVie or AstraZeneca under the Company’s respective collaboration agreements were recorded as incremental research and development expense.

Restructuring Expenses

The Company records costs and liabilities associated with exit and disposal activities in accordance with ASC 420, Exit or Disposal Cost Obligations .

Restructuring expenses are comprised primarily of costs associated with exit and disposal activities in accordance with ASC 420, Exit or Disposal Cost Obligations , and include one-time termination benefits and contract-related costs.

Such costs are based on estimates of fair value in the period liabilities are incurred.

The Company evaluates and adjusts these costs as appropriate for changes in circumstances as additional information becomes available.

The Company evaluates and adjusts these costs for changes in circumstances as additional information becomes available.

Selling, General and Administrative Expenses

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

In connection with the Amended AstraZeneca Agreement,

effective in September 2019, AstraZeneca will be fully responsible for all costs related to the development, manufacture, and commercialization of linaclotide in China (including Hong Kong and Macau).

The Company includes 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 presents the net payment to or from Allergan as collaboration expense or collaborative arrangements revenue, respectively.

In connection with the Amended AstraZeneca Agreement, effective in September 2019, AstraZeneca will be fully responsible for all costs related to the development, manufacture, and commercialization of linaclotide in China (including Hong Kong and Macau).

The Company includes 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 presents the net payment to or from AbbVie as collaboration expense or collaborative arrangements revenue, respectively.

Share-Based Compensation Expense

The Company grants awards under its share-based compensation programs, including stock awards, restricted stock awards (“RSAs”), restricted stock units (“RSUs”), stock options, and shares issued under the Company’s employee stock purchase plan (“ESPP”).

The Company grants awards under its share-based compensation programs, including stock awards, restricted stock awards (“RSAs”), restricted stock units (“RSUs”) (including both time-based and performance-based RSUs), stock options, and shares issued under the Company’s employee stock purchase plan (“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.

The Company estimates the fair value of the stock option 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 the Company’s Class A Common Stock on the date of grant.

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

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

The Company makes 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 the Company recognizes in connection with share-based payments.

The Company estimates forfeitures at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ from those estimates.

The Company estimates forfeitures over the requisite service period using historical forfeiture activity and records share-based compensation expense only for those awards that are expected to vest.

The Company estimates the fair value of stock options 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 the Company’s Class A Common Stock on the date of grant, with the exception of performance-based RSUs with market conditions, which are measured using the Monte Carlo simulation method on the date of grant (Note 14).

Discounted stock purchases under the Company’s 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, the Company uses a straight-line method to recognize compensation expense over the respective service period.

For awards that contain performance conditions, the Company determines the appropriate amount to expense at each reporting date based on the anticipated achievement of performance targets, which requires judgement, including forecasting the achievement of future specified targets.

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

Throughout the performance period, the Company re-assesses the estimated performance and updates the number of performance-based awards that it believes will ultimately vest.

Discounted stock purchases under the Company’s 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.

The Company records 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 when 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.

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These costs were charged to selling, general and administrative expenses as incurred.

Contingent Consideration

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

The consideration for the Company’s business acquisitions includes future payments that are contingent upon the occurrence of a particular event or events.

Contingent consideration at December 31, 2018 related to future royalty and milestone payments based on the estimated future sales of the Lesinurad Products.

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

The contingent consideration obligations are then evaluated as of each reporting date.

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 the consolidated statements of operations.

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 the Company’s credit risk, which is based on the estimated cost of debt for market participants (Note 7).

Net Income (Loss) Per Share

The Company calculates basic net income (loss) per common share and diluted net income (loss) per common share by dividing the net income (loss) by the weighted average number of common shares outstanding during the period.

Basic net income (loss) per common share is computed by dividing the net income (loss) by the weighted average number of common shares outstanding during the period.

Diluted net income (loss) per common share is computed by dividing net income (loss) by the diluted number of shares outstanding during the period.

Except where the result would be antidilutive to net income (loss), diluted net income (loss) per common share is computed assuming the conversion of the 2022 Convertible Notes, the 2024 Convertible Notes and the 2026 Convertible Notes, the exercise of outstanding common stock options and the vesting of RSUs and RSAs (using the treasury stock method), as well as their related income tax effects.

As of December 31, 2018, there were no longer any Class B common shares outstanding as all Class B common shares converted on a one-to-one basis to Class A common shares.

Historically, the Company allocated undistributed earnings between the classes of common stock on a one-to-one basis when computing net income (loss) per share.

As a result, historically, basic and diluted net income (loss) per Class A and Class B shares were equivalent.

Comprehensive Income (Loss)

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Except as set forth below, the Company did not adopt any new accounting pronouncements during the year ended December 31, 2020 that had a material effect on its consolidated financial statements.

In June 2018, the FASB issued ASU No.

2018-07, Compensation—Stock Compensation (Topic 718) :

Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”) .

ASU 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees, and as a result, the accounting for share-based payments to non-employees will be substantially aligned.

ASU 2018-07 is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year.

adoption is permitted but not earlier than an entity’s adoption date of Topic 606.

The Company adopted this standard during the three months ended March 31, 2019 .

The adoption of ASU 2018-07 did not have a material impact on the Company’s financial position and results of operations.

In July 2018, the FASB issued ASU 2018-09, Codification Improvements (“ASU 2018-09”).

The amendments in ASU 2018-09 affect a wide variety of Topics in the FASB codification and apply to all reporting entities within the scope of the affected accounting guidance.

The Company has evaluated ASU 2018- 09 in its entirety and determined that the amendments related to Topic 718-740, Compensation—Stock Compensation—Income Taxes , are the only provisions that currently apply to the Company.

The amendments in ASU 2018- 09 related to Topic 718-740, Compensation—Stock Compensation—Income Taxes , clarify that an entity should recognize excess tax benefits related to stock compensation transactions in the period in which the amount of the deduction is determined.

The amendments in ASU 2018- 09 related to Topic 718-740 are effective for fiscal years beginning after December 15, 2018, with early adoption permitted.

The Company adopted this standard during the three months ended March 31, 2019 .

The adoption of this standard did not have a material impact on the Company’s financial position and results of operations.

The Company adopted ASC 842 using the optional transition method outlined in ASU 2018-11 as of January 1, 2019.

The adoption of ASC 842 resulted in the recognition of operating lease right-of-use assets of approximately $ 88.3 million and corresponding lease liabilities of approximately $ 94.9 million.

In July 2019, the FASB issued ASU No.

2019-07, Disclosure Update and Simplification and Investment Company Reporting Modernization (“ASU 2019-07”).

The update is intended to simplify disclosure requirements to reflect the amendments of various SEC disclosure requirements that the SEC determined were redundant, duplicative, overlapping, outdated or superseded and is effective upon issuance.

The adoption of ASU 2019-07 did not have a material impact on the Company’s financial position, results of operations, or financial statement disclosures.

In June 2016, the FASB issued ASU No.

In June 2016, the FASB issued Accounting Standards Update (“ASU”) No.

2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”).

ASU 2016-13 will change how companies account for credit losses for most financial assets and certain other instruments.

For trade receivables, loans and held-to-maturity debt securities, companies will be required to recognize an allowance for credit losses rather than reducing the carrying value of the asset.

ASU 2016-13 changed how companies account for credit losses for most financial assets and certain other instruments.

For trade receivables, loans and held-to-maturity debt securities, companies are required to recognize an allowance for credit losses rather than reducing the carrying value of the asset.

Subsequent to the issuance of ASU 2016-13, the FASB issued ASU No.

2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments (“ASU 2019-04”), ASU No.

2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses , Topic 815, Derivatives and Hedging , and Topic 825, Financial Instruments , ASU No.

2019-05, Financial Instruments—Credit Losses (Topic 326) :

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2019-10, Financial Instruments—Credit Losses (Topic 326) , Derivatives and Hedging (Topic 815) , and Leases (Topic 842):

Effective Date (“ASU 2019-10”), and ASU No.

2019-11, Codification Improvements to Topic 326, Financial Instruments—Credit Losses (“ASU 2019-11”) to provide additional guidance on the adoption of ASU 2016-13.

ASU 2019-04 added Topic 326, Financial Instruments—Credit Losses , and made several amendments to the codification, including modifying the accounting for available-for-sale debt securities.

ASU 2019-05 provides targeted transition relief by providing an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis.

ASU 2016-13, ASU 2019-04, ASU 2019-05, ASU 2019-10, and ASU 2019-11 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

Early adoption is permitted.

The Company does not expect the adoption of ASU 2016-13 and related amendments to have a material impact on the Company’s financial position and results of operations.

Effective Date , ASU No.

2019-11, Codification Improvements to Topic 326, Financial Instruments—Credit Losses , ASU No.

2020-02, Financial Instruments—Credit Losses (Topic 326) and Leases (Topic 842) :

Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No.

119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No.

2016-02, Leases (Topic 842) to provide additional guidance on the adoption of ASU 2016-13.

Early adoption was permitted.

The Company adopted these ASUs during the three months ended March 31, 2020 .

The adoption of these ASUs did not have a material impact on the Company’s financial position and results of operations.

In January 2017, the FASB issued ASU No.

2017 -04, Intangibles—Goodwill and Other (Topic 350) (“ASU 2017-04”) to simplify the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test.

2017-04, Intangibles—Goodwill and Other (Topic 350) (“ASU 2017-04”) to simplify the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test and to eliminate the required quantitative analysis for reporting units with negative carrying value.

ASU 2017-04 is effective for fiscal years beginning after December 15, 2019.

Early adoption is permitted.

The Company does not expect the adoption of ASU 2017-04 to have a material impact on the Company’s financial position and results of operations.

Early adoption was permitted.

The Company adopted ASU 2017-04 during the three months ended March 31, 2020 .

The adoption of ASU 2017-04 did not have a material impact on the Company’s financial position and results of operations.

In August 2018, the FASB issued ASU No.

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The amendments in ASU 2018-13 are effective for fiscal years beginning after December 15, 2019, with early adoption permitted.

The Company is currently evaluating the potential impact that the adoption of ASU 2018-13 may have on the Company’s financial position and results of operations.

The Company adopted ASU 2018-13 during the three months ended March 31, 2020 .

The adoption of ASU 2018-13 did not have a material impact on the Company’s financial statement disclosures.

In August 2018, the FASB issued ASU No.

2018-15, Intangibles—Goodwill and Other—Internal Use Software (Subtopic 350-40):

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that

is a Service Contract (a consensus of the FASB Emerging Issues Task Force) (“ASU 2018-15”) which provides additional guidance on the accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract.

ASU 2015-18 requires a customer in a cloud computing arrangement that is a service contract to follow the new internal-use software guidance to determine which implementation costs to capitalize as assets or expense as incurred.

The new internal-use software guidance requires that certain costs incurred during the application development stage be capitalized and other costs incurred during the preliminary project and post-implementation stages be expensed as they are incurred.

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract (a consensus of the FASB Emerging Issues Task Force) (“ASU 2018-15”) which provides guidance on the accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract.

ASU 2015-18 requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance to determine which implementation costs to capitalize as assets or expense as incurred.

The internal-use software guidance requires that certain costs incurred during the application development stage be capitalized and other costs incurred during the preliminary project and post-implementation stages be expensed as they are incurred.

A customer’s accounting for the hosting component of the arrangement is not affected by this guidance.

The amendments in ASU 2018-15 are effective for fiscal years beginning after December 15, 2019, with early adoption permitted.

The Company is currently evaluating the potential impact that the adoption of ASU 2018-15 may have on the Company’s financial position and results of operations.

The Company adopted ASU 2018-15 using the prospective transition method during the three months ended March 31, 2020 .

The adoption of ASU 2018-15 did not have a material impact on the Company’s financial position and results of operations.

In October 2018, the FASB issued ASU No.

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The amendments in ASU 2018-17 will be effective for fiscal years beginning after December 15, 2019, with early adoption permitted.

The Company is currently evaluating the potential impact that the adoption of ASU 2018-17 may have on the Company’s financial position and results of operations.

The Company adopted ASU 2018-17 during the three months ended

March 31, 2020 .

The adoption of ASU 2018-17 did not have a material impact on the Company’s financial position and results of operations.

In December 2019, the FASB issued ASU No.

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The Company is currently evaluating the potential impact that the adoption of ASU 2019-12 may have on the Company’s financial position and results of operations.

No other accounting standards known by the Company to be applicable to it that have been issued by the FASB or other standard-setting bodies and that do not require adoption until a future date are expected to have a material impact on the Company’s consolidated financial statements upon adoption.

In August 2020, the FASB issued ASU No.

2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40):

Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”).

The amendments in ASU 2020-06 simplify the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity.

Under ASU 2020-06, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives.

These changes will reduce reported interest expense and increase reported net income for entities that have issued a convertible instrument that was bifurcated under previously existing guidance.

The new guidance also requires the if-converted method to be applied for all convertible instruments.

The standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021 .

Early adoption is permitted.

The Company is currently evaluating the impact that the adoption of ASU 2020-06 may have on the Company’s financial position and results of operation.

Other recent accounting pronouncements issued, but not yet effective, are not expected to be applicable to the Company or have a material effect on the consolidated financial statements upon future adoption.

Cyclerion Separation

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Net Assets Transferred to Cyclerion

In addition, the Company received approximately $ 1.3 million during the three months ended September 30, 2019 associated with tenant improvement reimbursement provisions related to the Cyclerion lease in accordance with the separation agreement.

In addition, the Company received approximately $ 1.3 million during the year ended December 31, 2019 associated with tenant improvement reimbursement provisions related to the Cyclerion lease in accordance with the separation agreement.

The tax matters agreement, dated as of March 30, 2019, governs each party’s rights, responsibilities and obligations with respect to taxes, including taxes, if any, incurred as a result of any failure of the Separation to qualify as tax-free.

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Additionally, the Company entered into two transition services agreements and a development agreement with Cyclerion.

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

Services provided by the Company to Cyclerion will continue for an initial term of one to two years from the date of the Separation (as applicable), unless earlier terminated or extended according to the terms of the transition services agreement.

Services provided by Cyclerion to the Company will continue for an initial term of one year from the date of the Separation, unless earlier terminated or extended according to the terms of such transition services agreement.

Services received and performed are paid at a mutually agreed upon rate.

Amounts received for services provided to Cyclerion are recorded as other income and amounts paid for services provided by Cyclerion are recorded as selling, general and administrative expense and research and development expense, as applicable.

During the year ended December 31, 2019, the Company recorded approximately $ 0.3 million as other income for services provided to Cyclerion.

During the year ended December 31, 2019, the Company recorded an insignificant amount in both selling,

general and administrative expense and research and development expense for services provided by Cyclerion, respectively.

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

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

As of December 31, 2020, both transition service agreements had terminated.

Amounts received for services provided to Cyclerion were recorded as other income and amounts paid for services provided by Cyclerion were recorded as selling, general and administrative expense and research and development expense, as applicable.

During the years ended December 31, 2020 and 2019, the Company recorded an insignificant amount and approximately $ 0.3 million, respectively, as other income for services provided to Cyclerion.

During each of the years ended December 31, 2020 and 2019, the Company recorded an insignificant amount in both selling, general and administrative expense and research and development expense for services provided by Cyclerion, respectively.

Such research and development activities are governed by a joint steering committee comprised of representatives from both Cyclerion and Ironwood.

Services received are paid at a mutually agreed upon rate.

The Company recorded approximately $ 4.5 million in research and development expenses under the development agreement during the year ended December 31, 2019.

The Company recorded approximately $ 2.3 million and $ 4.5 million in research and development expenses under the development agreement during the years ended December 31, 2020 and 2019, respectively.

The Company had an insignificant amount and approximately $ 1.5 million of accounts payable due to Cyclerion as of December 31, 2020 and 2019, respectively.

Discontinued Operations

Upon Separation, the Company determined its sGC business qualified for discontinued operations accounting treatment in accordance with ASC 205-20.

The following is a summary of expenses of Cyclerion for years ended December 31, 2019, 2018 and 2017 (in thousands):

Upon the Separation, the Company determined its sGC business qualified for discontinued operations accounting treatment in accordance with ASC 205-20.

There were no discontinued operations during year ended December 31, 2020.

The following is a summary of expenses of Cyclerion classified as discontinued operations for years ended December 31, 2019 and 2018 (in thousands):

Year Ended December 31,

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Net loss from discontinued operations

There were no assets and liabilities related to discontinued operations as of December 31, 2019, as all balances were transferred to Cyclerion upon Separation.

The following is a summary of assets and liabilities of discontinued operations as of December 31, 2018 (in thousands):

Prepaid expenses and other current assets

Property and equipment, net

Accounts payable

Accrued research and development costs

Accrued expenses and other current liabilities

There were no assets or liabilities related to discontinued operations as of either December 31, 2020 or December 31, 2019, as all balances were transferred to Cyclerion upon Separation.

Net Income (Loss) Per Share

The following table sets forth the computation of basic and diluted net income (loss) per common share (in thousands, except per share amounts), which is computed by dividing net (income) loss by the weighted average number of common shares outstanding during the period:

The following table sets forth the computation of basic and diluted net income (loss) per common share (in thousands, except per share amounts):

Year Ended December 31,

Net income (loss)

Weighted average number of common shares outstanding used in net income (loss) per share — basic and diluted

Net income (loss) per share — basic and diluted

In June 2015, in connection with the issuance of approximately $ 335.7 million in aggregate principal amount of the 2022 Convertible Notes (Note 12), the Company entered into the Convertible Note Hedges.

The Convertible Note Hedges are generally expected to reduce the potential dilution to the Company’s Class A common stockholders upon a conversion of the 2022 Convertible Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of converted 2022 Convertible Notes in the event that the market price per share of the Company’s Class A Common Stock, as measured under the terms of the Convertible Note Hedges, is greater than the conversion price of the 2022 Convertible Notes.

The Convertible Note Hedges are not considered for purposes of calculating the number of diluted weighted average shares outstanding, as their effect would be antidilutive.

Concurrently with entering into the Convertible Note Hedges, the Company also sold Note Hedge Warrants with the Convertible Note Hedge counterparties to acquire shares of the Company’s Class A Common Stock, subject to customary anti-dilution adjustments (Note 12).

The Note Hedge Warrants could have a dilutive effect on the Company’s Class A Common Stock to the extent that the market price per share of the Class A Common Stock exceeds the applicable strike price of such warrants.

The Note Hedge Warrants are not considered for purposes of calculating the number of diluted weighted averages shares outstanding, as their effect would be antidilutive.

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

The Capped Calls are generally expected to reduce the potential dilution to the Company’s Class A common stockholders upon a conversion of the 2024 Convertible Notes or the 2026 Convertible Notes and/or offset any cash payments that the Company is required to make in excess of the principal amount of converted 2024 Convertible Notes or 2026 Convertible Notes in the event that the market price per share of the Company’s Class A Common Stock, as measured under the terms of the Capped Calls, is greater than the conversion price of the 2024 Convertible Notes or the 2026 Convertible Notes.

The Capped Calls are not considered for purposes of calculating the number of diluted weighted average shares outstanding, as their effect would be anti-dilutive.

The following potentially dilutive securities have been excluded from the computation of diluted weighted average shares outstanding, as applicable, as their effect would be anti-dilutive (in thousands):

Weighted average number of common shares outstanding used in net income (loss) per share — basic

Effect of dilutive securities:

Stock options

Time-based restricted stock units

Performance-based restricted stock units

Restricted stock

Dilutive potential common shares

Weighted average number of common shares outstanding used in net income (loss) per share — diluted

Net income (loss) per share — basic

Net income (loss) per share — diluted

The outstanding securities have been excluded from the computation of diluted weighted average shares outstanding, as applicable, as their effect would be anti-dilutive (in thousands):

Year Ended December 31,

Options to purchase Class A Common Stock

Shares subject to repurchase

Restricted stock units

Stock options

Restricted stock awards

Time-based restricted stock units

Performance-based restricted stock units

Note Hedge Warrants

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2026 Convertible Notes

The potentially dilutive impact of the 2022 Convertible Notes, 2024 Convertible Notes and 2026 Convertible notes (together, the “Convertible Senior Notes”) (Note 11) is determined using the treasury stock method.

Under this method, no numerator or denominator adjustments arise from the principal and interest components of the Convertible Senior Notes because the Company has the intent and ability to settle the Convertible Senior Notes’ principal and interest in cash.

Instead, the Company is required to increase the diluted net income (loss) per share denominator by the variable number of shares that would be issued upon conversion if it settled the conversion spread obligation with shares.

For diluted net income (loss) per share purposes, the conversion spread obligation is calculated based on whether the average market price of the Company’s Class A Common Stock during the reporting period is in excess of the conversion price of the Convertible Senior Notes.

There was no calculated spread added to the denominator for the years ended December 31, 2020, 2019, or 2018.

Goodwill and Intangible Assets

The Company closed a transaction with AstraZeneca (the “Lesinurad Transaction”) on June 2, 2016 (the “Acquisition Date”) pursuant to which the Company received an exclusive license to develop, manufacture and commercialize the Lesinurad Products in the U.S.

On August 2, 2018, the Company delivered to AstraZeneca a notice of termination of the lesinurad license agreement, which termination was made with respect to all products under the lesinurad license agreement.

In August 2018, the Company delivered to AstraZeneca a notice of termination of the lesinurad license agreement, which termination was made with respect to all products under the lesinurad license agreement.

The value of the developed technology – ZURAMPIC and developed technology – DUZALLO intangible assets as of the Acquisition Date was approximately $ 22.0 million and approximately $ 145.1 million, respectively.

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The Company tests its goodwill for impairment annually as of October 1 st , or more frequently if events or changes in circumstances indicate an impairment may have occurred (Note 2).

As of December 31, 2019, there was no impairment of goodwill.

There were no impairments of goodwill during the years ended December 31, 2020, 2019, and 2018.

Collaboration, License, Co-Promotion and Other Commercial Agreements

For the year ended December 31, 2019, the Company had linaclotide collaboration agreements with Allergan for North America and AstraZeneca for China (including Hong Kong and Macau), as well as linaclotide license agreements with Astellas for Japan and with Allergan for the Allergan License Territory.

The Company also had agreements with Allergan to co-promote VIBERZI in the U.S.

and with Alnylam to perform disease awareness activities for AHP and sales detailing activities for GIVLAARI.

The following table provides amounts included in the Company’s

consolidated statements of operations as collaborative arrangements revenue and sale of API primarily attributable to transactions from these arrangements (in thousands):

For the year ended December 31, 2020, the Company had linaclotide collaboration agreements with AbbVie for North America and AstraZeneca for China (including Hong Kong and Macau), as well as linaclotide license agreements with Astellas for Japan and with AbbVie for the AbbVie License Territory.

The Company also had an agreement with Alnylam to perform disease awareness activities for AHP and sales detailing activities for GIVLAARI.

The following table provides amounts included in the Company’s consolidated statements of operations as collaborative arrangements revenue and sale of API primarily attributable to transactions from these arrangements (in thousands):

Year Ended December 31,

Collaborative Arrangements Revenue

Linaclotide Collaboration Agreements:

Allergan (North America)

Allergan (Europe and other)

Linaclotide Collaboration and License Agreements:

AbbVie (North America)

AbbVie (Europe and other)

AstraZeneca (China, including Hong Kong and Macau)

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Co-Promotion and Other Agreements:

Exact Sciences (COLOGUARD) (1)

Allergan (VIBERZI)

AbbVie (VIBERZI) (1)

Alnylam (GIVLAARI)

Total collaborative arrangements revenue

Linaclotide License Agreements:

Linaclotide Agreements:

Astellas (Japan)

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Total sale of API

(1) In August 2016, the Company terminated the Co-Promotion Agreement for COLOGUARD with Exact Sciences Corp.

Under the terms of the agreement, the Company continued to receive royalty payments through July 2017.

(2) During the year ended December 31, 2018, the Company recorded approximately $ 0.8 million in revenue related to the sale of API to Allergan, separate from its existing revenue agreements.

Accounts receivable, net included approximately $ 43.9 million and approximately $ 21.0 million related to collaborative arrangements revenue and sale of API, collectively, as of December 31, 2019 and 2018, respectively.

Related party accounts receivable, net included approximately $ 110.1 million and approximately $ 63.0 million related to collaborative arrangements revenue, net of approximately $ 4.1 million and approximately $ 3.1 million related to related party accounts payable as of December 31, 2019 and 2018, respectively.

As of December 31, 2019, deferred revenue was approximately $ 0.9 million related to the disease education and promotional agreement with Alnylam.

As of December 31, 2019 and 2018, there were no impairment indicators for the accounts receivable recorded.

(1) The Company had an agreement with AbbVie to perform sales detailing activities for VIBERZI® (eluxadoline) which terminated as of December 31, 2019.

Accounts receivable, net, included approximately $ 145.8 million primarily related to collaborative arrangements revenue and sale of API, collectively, as of December 31, 2020, including approximately $ 110.9 million of accounts receivable, net, which includes approximately $ 4.3 million of accounts payable from the Company’s partner, AbbVie.

Accounts receivable, net, included approximately $ 43.9 million related to collaborative arrangements revenue and sale of API, collectively, as of December 31, 2019.

The Company previously reflected amounts due from Allergan prior to its acquisition by AbbVie in May 2020 as related party accounts receivable.

As of December 31, 2019, related party accounts receivable, net, included approximately $ 110.1 million related to collaborative arrangements revenue, net of approximately $ 4.1 million of related party accounts payable.

Following acquisition of Allergan by AbbVie, the Company determined that AbbVie is not a related party to the Company (Note 17).

At December 31, 2019, deferred revenue was approximately $ 0.9 million related to the disease education and promotional agreement with Alnylam.

At December 31, 2020, no deferred revenue was recorded.

The Company routinely assesses the creditworthiness of its license and collaboration partners.

The Company has not experienced any material losses related to receivables from its license or collaboration partners during the years ended December 31, 2020, 2019, or 2018.

Linaclotide Agreements

Collaboration Agreement for North America with Allergan

In September 2007, the Company entered into a collaboration agreement with Allergan to develop and commercialize linaclotide for the treatment of IBS-C, CIC, and other GI conditions in North America.

Under the terms of this collaboration agreement, the Company received a non-refundable, upfront licensing fee and shares equally with Allergan all development costs as well as net profits or losses from the development and sale of linaclotide in the U.S.

Collaboration Agreement for North America with AbbVie

In September 2007, the Company entered into a collaboration agreement with AbbVie to develop and commercialize linaclotide for the treatment of IBS-C, CIC, and other GI conditions in North America.

Under the terms of this collaboration agreement, the Company received a non-refundable, upfront licensing fee and shares equally with AbbVie all development costs as well as net profits or losses from the development and sale of linaclotide in the U.S.

The Company receives royalties in the mid-teens percent based on net sales in Canada and Mexico.

Allergan is solely responsible for the further development, regulatory approval and commercialization of linaclotide in those countries and funding any costs.

AbbVie is solely responsible for the further development, regulatory approval and commercialization of linaclotide in those countries and funding any costs.

The collaboration agreement for North America also includes contingent milestone payments, as well as a contingent equity investment, based on the achievement of specific development and commercial milestones.

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During the years ended December 31, 2020, 2019 and 2018, the Company incurred approximately $ 20.1 million, approximately $ 37.6 million, and approximately $ 39.2 million in total research and development expenses under the linaclotide collaboration for North America.

As a result of the research and development cost-sharing provisions of the linaclotide collaboration for North America, the Company offset approximately $ 7.2 million and approximately $ 9.0 million in research and development costs during the years ended December 31, 2019 and 2018, respectively, to reflect the obligations of each party under the collaboration to bear half of the development costs incurred.

The Company recognized approximately $ 0.6 million in incremental research and development costs during the year ended December 31, 2017, to reflect the obligations of each party under the collaboration to bear half of the development costs incurred.

The Company and Allergan began commercializing LINZESS in the U.S.

As a result of the research and development cost-sharing provisions of the linaclotide collaboration for North America, the Company incurred approximately $ 5.6 million during the year ended December 31, 2020, and offset approximately $ 7.2 million and approximately $ 9.0 million in research and development costs during the years ended December 31, 2019 and 2018, respectively, to reflect the obligations of each party under the collaboration to bear 50 % of the development costs incurred.

The Company and AbbVie began commercializing LINZESS in the U.S.

in December 2012.

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

LINZESS net sales are calculated and recorded by Allergan and may include gross sales net of discounts, rebates, allowances, sales taxes, freight and insurance charges, and other applicable deductions.

If either party provided fewer calls on physicians in a particular year than it was contractually required to provide, such party’s share of the net profits would be adjusted as set forth in the collaboration agreement for North America.

During the year ended December 31, 2017, the adjustment to the share of the net profits was eliminated in connection with the co-promotion activities under the Company’s agreement with Allergan to co-promote VIBERZI in the U.S., as described below in Agreement with Allergan for VIBERZI .

Additionally, these adjustments to the share of the net profits have been eliminated, in full, in 2018 and all subsequent years under the terms of the Company’s commercial agreement with Allergan entered into in January 2017 under which the Company promoted Allergan’s CANASA ® product and promoted its DELZICOL ® products as described below in Commercial Agreement with Allergan .

The Company has completed its obligations under the terms of the commercial agreement with Allergan.

The Company evaluated its collaboration arrangement for North America with Allergan under ASC 606 and concluded that all development-period performance obligations had been satisfied as of September 2012.

LINZESS net sales are calculated and recorded by AbbVie and may include gross sales net of discounts, rebates, allowances, sales taxes, freight and insurance charges, and other applicable deductions.

The Company evaluated its collaboration arrangement for North America with AbbVie and concluded that all development-period performance obligations had been satisfied as of September 2012.

However, the Company has determined that there are three remaining commercial-period performance obligations, which include the sales detailing of LINZESS, participation in the joint commercialization committee, and approved additional trials.

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Additionally, the Company receives royalties in the mid-teens percent based on net sales in Canada and Mexico.

Royalties, commercial sales-based milestones, and net profit and loss sharing payments will be recorded as collaborative arrangements revenue or expense in the period earned, in accordance with the sales-based royalty exception, as these payments relate predominately to the license granted to Allergan.

Royalties, commercial sales-based milestones, and net profit and loss sharing payments will be recorded as collaborative arrangements revenue or expense in the period earned, as these payments relate predominately to the license granted to AbbVie.

The Company records royalty revenue in the period earned based on royalty reports from its partner, if available, or based on the projected sales and historical trends.

The cost reimbursements received from Allergan during the commercialization period will be recognized as earned in accordance with the right-to-invoice practical expedient, as the Company’s right to consideration corresponds directly with the value of the services transferred during the commercialization period.

Under the Company’s collaboration agreement with Allergan for North America, LINZESS net sales are calculated and recorded by Allergan and include gross sales net of discounts, rebates, allowances, sales taxes, freight and insurance charges, and other applicable deductions, as noted above.

The cost reimbursements received from AbbVie during the commercialization period will be recognized as earned in accordance with the right-to-invoice practical expedient, as the Company’s right to consideration corresponds directly with the value of the services transferred during the commercialization period.

Under the Company’s collaboration agreement with AbbVie for North America, LINZESS net sales are calculated and recorded by AbbVie and include gross sales net of discounts, rebates, allowances, sales taxes, freight and insurance charges, and other applicable deductions, as noted above.

These amounts include the use of estimates and judgments, which could be adjusted based on actual results in the future.

The Company records its share of the net profits or net losses from the sales of LINZESS in the U.S.

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

This treatment is in accordance with the Company’s revenue recognition policy, given that the Company is not the primary obligor and does not have the inventory risks in the collaboration agreement with Allergan for North America.

The Company relies on Allergan to provide accurate and complete information related to net sales of LINZESS in accordance with U.S.

generally accepted accounting principles in order to calculate its settlement payments to and from Allergan and record collaboration expense or collaborative arrangements revenue, as applicable.

From time to time, in accordance with the terms of the collaboration with Allergan for North America, the Company engages an independent certified public accounting firm to review the accuracy of the financial reporting from Allergan to the Company.

In connection with such a review during the three months ended September 30, 2018, Allergan reported to the Company an approximately $ 59.3 million negative adjustment to LINZESS net sales.

adjustment related to the cumulative difference between certain previously estimated LINZESS gross-to-net sales reserves and allowances made by Allergan during the years ended December 31, 2015, 2016 and 2017, and subsequent actual payments made.

This adjustment was primarily associated with estimated governmental and contractual rebates, as reported by Allergan.

Upon receiving this information from Allergan, the Company recorded a change in accounting estimate to reduce collaborative arrangements revenue by approximately $ 29.7 million during the three months ended September 30, 2018 related to the Company’s share of this adjustment.

In addition, during the three months ended December 31, 2018, Allergan reported to the Company a true-up of approximately $ 0.2 million related to the previously reported adjustment for the cumulative difference between certain previously estimated LINZESS gross-to-net sales reserves and allowances.

The Company recognized collaborative arrangements revenue from the Allergan collaboration agreement for North America during the years ended December 31, 2019, 2018 and 2017 as follows (in thousands):

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

The Company relies on AbbVie to provide accurate and complete information related to net sales of LINZESS

in accordance with U.S.

generally accepted accounting principles in order to calculate its settlement payments to and from AbbVie and record collaboration expense or collaborative arrangements revenue, as applicable.

From time to time, in accordance with the terms of the collaboration with AbbVie for North America, the Company engages an independent certified public accounting firm to review the accuracy of the financial reporting from AbbVie to the Company.

In connection with such a review during the three months ended September 30, 2018, AbbVie reported to the Company an approximately $ 59.3 million negative adjustment to LINZESS net sales.

The adjustment related to the cumulative difference between certain previously estimated LINZESS gross-to-net sales reserves and allowances made by AbbVie during the years ended December 31, 2015, 2016 and 2017, and subsequent actual payments made.

This adjustment was primarily associated with estimated governmental and contractual rebates, as reported by AbbVie.

Upon receiving this information from AbbVie, the Company recorded a change in accounting estimate to reduce collaborative arrangements revenue by approximately $ 29.7 million during the three months ended September 30, 2018 related to the Company’s share of this adjustment.

In addition, during the three months ended December 31, 2018, AbbVie reported to the Company a true-up of approximately $ 0.2 million related to the previously reported adjustment for the cumulative difference between certain previously estimated LINZESS gross-to-net sales reserves and allowances.

The Company recognized collaborative arrangements revenue from the AbbVie collaboration agreement for North America during the years ended December 31, 2020, 2019, and 2018 as follows (in thousands):

Year Ended December 31,

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Total collaborative arrangements revenue

(1) Includes net profit share adjustments of approximately $ 1.7 million recorded during the year ended December 31, 2017 related to a change in estimated selling expenses previously recorded.

The collaborative arrangements revenue recognized in the years ended December 31, 2020, 2019, and 2018 primarily represents the Company’s share of the net profits and net losses on the sale of LINZESS in the U.S.

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Year Ended December 31,

Collaborative arrangements revenue related to sales of LINZESS in the U.S.

Ironwood's collaborative arrangement revenue

Selling, general and administrative costs incurred by the Company (1)

The Company’s share of net profit

(1) Includes only collaborative arrangements revenue or selling, general and administrative costs attributable to the cost-sharing arrangement with Allergan.

Excludes approximately $ 2.4 million, approximately $ 2.2 million, and approximately $ 0.9 million for the years ended December 31, 2019, 2018 and 2017, respectively, related to patent prosecution and patent litigation costs recognized in connection with the collaboration agreement with Allergan.

(2) Certain of the unfavorable adjustments to the Company’s share of the LINZESS net profits were reduced or eliminated in connection with the co-promotion activities under the Company’s agreement with Allergan to co-promote VIBERZI in the U.S., as described below in Agreement with Allergan for VIBERZI .

Ironwood's share of net profits (2)

(1) Includes Ironwood’s selling, general and administrative expenses attributable to the cost-sharing arrangement with AbbVie.

Excludes approximately $ 0.6 million, approximately $ 2.4 million, and approximately $ 2.2 million for the years ended December 31, 2020, 2019, and 2018 respectively, related to patent prosecution and patent litigation costs recognized in connection with the collaboration agreement with AbbVie.

(2) Ironwood has recalculated its share of net profit on sales of LINZESS in the U.S.

to conform with AbbVie’s recast of historically reported LINZESS U.S.

net sales (previously reported by Allergan).

In May 2014, CONSTELLA ® became commercially available in Canada and, in June 2014, LINZESS became commercially available in Mexico.

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The Company recognized approximately $ 2.3 million, approximately $ 2.2 million, and approximately $ 1.9 million of combined royalty revenues from Canada and Mexico during the years ended December 31, 2020, 2019, and 2018, respectively.

License Agreement with Allergan (All countries other than the countries and territories of North America, China (including Hong Kong and Macau), and Japan)

License Agreement with AbbVie (All countries other than the countries and territories of North America, China (including Hong Kong and Macau), and Japan)

In April 2009, the Company entered into a license agreement with Almirall, S.A.

(“Almirall”) to develop and commercialize linaclotide in Europe (including the Commonwealth of Independent States and Turkey) for the treatment of IBS-C, CIC and other GI conditions (the “European License Agreement”).

(“Almirall”) to develop and commercialize linaclotide in Europe (including the Commonwealth of Independent States and Turkey) for the treatment

of IBS-C, CIC and other GI conditions (the “European License Agreement”).

In accordance with the European License Agreement, the Company granted Almirall a right to access its U.S.

Phase III clinical trial data for the purposes of

supporting European regulatory approval.

Additionally, the Company was required to participate on a joint development committee during linaclotide’s development period and is required to participate in a joint commercialization committee while linaclotide is commercially available.

In October 2015, Almirall transferred its exclusive license to develop and commercialize linaclotide in Europe to Allergan.

Additionally, in October 2015, the Company and Allergan separately entered into an amendment to the European License Agreement relating to the development and commercialization of linaclotide in Europe.

Pursuant to the terms of the amendment, (i) certain sales-based milestones payable to the Company under the European License Agreement were modified to increase the total milestone payments such that, when aggregated with certain commercial launch milestones, they could total up to $ 42.5 million, (ii) the royalties payable to the Company during the term of the European License Agreement were modified such that the royalties based on sales volume in Europe begin in the mid-single digit percent and escalate to the upper-teens percent by calendar year 2019, and (iii) Allergan assumed responsibility for the manufacturing of linaclotide API for Europe from the Company, as well as the associated costs.

The Company concluded that the 2015 amendment to the European License Agreement was not a modification to the linaclotide collaboration agreement with Allergan for North America.

In January 2017, concurrently with entering into the commercial agreement as described below in Commercial Agreement with Allergan , the Company and Allergan entered into an amendment to the European License Agreement (the “2017 Amendment”).

Phase III clinical trial data for the purposes of supporting European regulatory approval.

In October 2015, Almirall transferred its exclusive license to develop and commercialize linaclotide in Europe to AbbVie.

Additionally, in October 2015, the Company and AbbVie separately entered into an amendment to the European License Agreement relating to the development and commercialization of linaclotide in Europe.

Pursuant to the terms of the amendment, (i) certain sales-based milestones payable to the Company under the European License Agreement were modified to increase the total milestone payments such that, when aggregated with certain commercial launch milestones, they could total up to $ 42.5 million, (ii) the royalties payable to the Company during the term of the European License Agreement were modified such that the royalties based on sales volume in Europe begin in the mid-single digit percent and escalate to the upper-teens percent by calendar year 2019, and (iii) AbbVie assumed responsibility for the manufacturing of linaclotide API for Europe from the Company, as well as the associated costs.

The Company concluded that the 2015 amendment to the European License Agreement was not a modification to the linaclotide collaboration agreement with AbbVie for North America.

In January 2017, the Company and AbbVie entered into an amendment to the European License Agreement (the “2017 Amendment”).

The 2017 Amendment extended the license to develop and commercialize linaclotide in all countries other than China (including Hong Kong and Macau), Japan, and the countries and territories of North America.

On a country-by-country and product-by-product basis in such additional territory, Allergan is obligated to pay the Company a royalty as a percentage of net sales of products containing linaclotide as an active ingredient in the upper-single digits for five years following the first commercial sale of a linaclotide product in a country, and in the low-double digits thereafter.

On a country-by-country and product-by-product basis in such additional territory, AbbVie is obligated to pay the Company a royalty as a percentage of net sales of products containing linaclotide as an active ingredient in the upper-single digits for five years following the first commercial sale of a linaclotide product in a country, and in the low-double digits thereafter.

The royalty rate for products in the expanded territory will decrease, on a country-by-country basis, to the lower-single digits , or cease entirely, following the occurrence of certain events.

Allergan is obligated to assume certain purchase commitments for quantities of linaclotide API under the Company’s agreements with third-party API suppliers.

The 2017 Amendment did not modify any of the milestones or royalty terms related to Europe.

Prior to the adoption of ASC 606, the Company concluded that the 2017 Amendment was a material modification to the European License Agreement;

however, this modification did not have a material impact on the Company's consolidated financial statements as there was no deferred revenue associated with the Amended European License Agreement.

The Company also concluded that the 2017 Amendment was not a material modification to the linaclotide collaboration agreement with Allergan for North America.

The Company’s conclusions on deliverables under ASC 605-25 are described below in Commercial Agreement with Allergan .

The Company evaluated the European License Agreement under ASC 606.

In evaluating the terms of the European License Agreement under ASC 606, the Company determined that there are no remaining performance obligations as of September 2012.

In evaluating the terms of the European License Agreement, as amended, the Company determined that there are no remaining performance obligations as of September 2012.

However, the Company continues to be eligible to receive consideration in the form of commercial launch milestones, sales-based milestones, and royalties.

The commercial launch milestones, sales-based milestones and royalties under the European License Agreement have historically been recognized as revenue as earned.

Under ASC 606, the Company applied the sales-based royalty exception to royalties and sales-based milestones, as these payments relate predominantly to the license granted to Allergan (formerly Almirall).

Accordingly, the royalties and sales-based milestones are recorded as revenue in the period earned.

The Company records royalties on sales of CONSTELLA in Europe in the period earned based on royalty reports from its partner, if available, or the projected sales and historical trends.

The commercial launch milestones, sales-based milestones and royalties under the European License Agreement and the 2017 Amendment relate predominantly to the license granted to AbbVie.

The Company records royalties on sales of CONSTELLA in Europe in the period earned based on royalty reports from its partner, if available, or the projected sales and historical trends under the sales-based royalty exception.

The commercial launch milestones are recognized as revenue when it is probable that a significant reversal of revenue would not occur and the associated constraint has been lifted.

Additionally, the Company evaluated the terms of the 2017 Amendment under ASC 606 and determined that it would be treated as a separate contract given that it adds a distinct good or service at an amount that reflects standalone selling price.

The Company determined that all performance obligations in the 2017 Amendment were satisfied in January 2017 when the license for the additional territory was transferred.

The Company continues to receive royalties under this agreement, which are recorded in the period earned pursuant to the sales-based royalty exception, as they related predominantly to the license granted to Allergan.

The Company recognized approximately $ 2.2 million, approximately $ 1.7 million and approximately $ 1.1 million of royalty revenue from the Amended European License Agreement during the years ended December 31, 2020, 2019, and 2018, respectively.

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Under the 2009 License Agreement with Astellas, the Company received royalties which escalated based on sales volume, beginning in the low-twenties percent, less the transfer price paid for the API included in the product sold and other contractual deductions.

Under the 2009 License Agreement with Astellas, the Company received an up-front licensing fee of $ 30.0 million, which was recognized as collaborative arrangements revenue on a straight-line basis over the Company’s estimate of the period over which linaclotide was to be developed under the 2009 License Agreement with Astellas in accordance with ASC 605.

The development period was completed in December 2016 upon approval of LINZESS by the Japanese Ministry of Health, Labor and Welfare, at which point all previously deferred revenue under the agreement was recognized.

The 2009 License Agreement with Astellas also includes three development milestone payments that totaled up to $ 45.0 million, all of which were achieved and recognized as revenue through December 31, 2016 in accordance with ASC 605.

The Company had evaluated the terms of the 2009 License Agreement with Astellas under ASC 606 and determined that there were no remaining performance obligations as of December 2016.

However, there continued to be consideration in the form of royalties on sales of LINZESS in Japan under the 2009 License Agreement with Astellas.

Upon adoption of ASC 606, the Company concluded that the royalties on sales of LINZESS in Japan related predominantly to the license granted to Astellas.

Accordingly, the Company applied the sales-based royalty exception and recorded royalties on sales of LINZESS in Japan in the period earned based on royalty reports from Astellas, if available, or the projected sales and historical trends.

Under the 2009 License Agreement with Astellas, the Company received an up-front licensing fee of $ 30.0 million and three development milestone payments that totaled $ 45.0 million, which were recognized as revenue prior to the adoption of ASC 606 on January 1, 2018.

The Company evaluated the terms of the 2009 License Agreement with Astellas and determined that there were no remaining performance obligations as of the adoption of ASC 606.

Additionally, under the terms of the Astellas Commercial Supply Agreement, the Company determined it had an ongoing performance obligation to supply API.

Upon adoption of ASC 606, product revenue is recognized when the customer obtains control of the Company’s product, which occurs at a point in time, typically upon shipment of the product to the customer.

This resulted in earlier revenue recognition than the Company’s historical accounting.

During the years ended December 31, 2019, 2018, and 2017, the Company recognized approximately $ 27.5 million, approximately $ 69.6 million, and approximately $ 29.7 million, respectively, from the sale of API to Astellas under the 2009 License Agreement with Astellas and the Astellas Commercial Supply Agreement.

During the years ended December 31, 2019 and 2018, the Company recognized revenue of approximately $ 27.5 million and approximately $ 69.6 million, respectively, from the sale of API to Astellas under the 2009 License Agreement with Astellas and the Astellas Commercial Supply Agreement.

The royalties on sales of LINZESS in Japan did not exceed the transfer price of API sold and other contractual deductions during each of the periods presented.

In August 2019, the Company and Astellas amended and restated the 2009 License Agreement with Astellas (the “Amended Astellas License Agreement”).

This amendment is considered a modification to the 2009 License Agreement with Astellas and is accounted for as a new and separate contract.

Under the terms of the Amended Astellas License Agreement, the Company will no longer be responsible for the supply of linaclotide API to Astellas, and Astellas will be responsible for its own supply of linaclotide API in Japan, beginning in 2020.

Astellas committed to purchase certain quantities of linaclotide API from the Company in 2019.

This amendment to the 2009 License Agreement with Astellas was accounted for as a separate contract.

Under the terms of the Amended Astellas License Agreement, the Company is no longer responsible for the supply of linaclotide API to Astellas, and Astellas assumed responsibility for its own supply of linaclotide API in Japan in 2020.

In connection with the execution of the Amended Astellas License Agreement, Astellas paid the Company a non-refundable, upfront payment of $ 10.0 million in August 2019.

Further, beginning in 2020, Astellas will, in lieu of the royalty payment terms set forth in the 2009 License Agreement with Astellas, pay royalties to the Company at rates

beginning in the mid-single digit percent and escalating to low-double-digit percent, based on aggregate annual net sales in Japan of products containing linaclotide API.

These royalty payments will be subject to reduction following the expiration of certain licensed patents and the occurrence of generic competition in Japan.

The Company continued to supply linaclotide API for Japan during 2019 at a contractually defined rate.

Additionally, Astellas will reimburse the Company for the Company’s performance of adverse event reporting services at a fixed monthly rate until such services are terminated.

Further, Astellas, in lieu of the royalty payment terms set forth in the 2009 License Agreement with Astellas, pays royalties to the Company at rates beginning in the mid-single digit percent and escalating to low-double-digit percent, based on aggregate annual net sales in Japan of products containing linaclotide API.

These royalty payments are subject to reduction following the expiration of certain licensed patents and the occurrence of generic competition in Japan.

The Company continued to supply linaclotide API for Japan during 2019 and 2020 at a contractually defined rate.

Additionally, Astellas reimbursed the Company for the Company’s performance of adverse event reporting services at a fixed monthly rate until such services were terminated in February 2020.

The Company identified the following performance obligations under the Amended Astellas License Agreement:

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The Company allocated the approximately $ 20.4 million in remaining purchase orders for API to the obligation to supply linaclotide API to Astellas for 2019.

Consideration for the supply of linaclotide API is recognized over the performance period as linaclotide API is shipped to Astellas using an output method.

Consideration allocated to the adverse event reporting services is recognized as such services are provided over the performance period based on the amount to which the Company has a right to invoice using an output method.

Consideration for the supply of linaclotide API is recognized over the performance period as linaclotide API is shipped to Astellas.

Royalties on sales of LINZESS in Japan relate predominantly to the license granted to Astellas.

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The Company recognized $ 10.0 million in collaborative arrangements revenue during the year ended December 31, 2019 related to the upfront fee associated with the execution of the Amended Astellas License Agreement.

The Company recognized approximately $ 18.3 million from the sale of API to Astellas under the Amended License Agreement during the year ended December 31, 2019.

The Company recognized an insignificant amount of collaborative arrangements revenue related to adverse event reporting services for the year ended December 31, 2019.

The Company recognized approximately $ 2.0 million and approximately $ 18.3 million from the sale of API to Astellas under the Amended License Agreement during the years ended December 31, 2020 and 2019, respectively.

The Company recognized approximately $ 2.1 million of royalty revenue during the year ended December 31, 2020.

The Company recognized an insignificant amount of collaborative arrangements revenue related to adverse event reporting services in each of the years ended December 31, 2020 and 2019.

Collaboration Agreement for China (including Hong Kong and Macau) with AstraZeneca

In October 2012, the Company entered into a collaboration agreement with AstraZeneca to co-develop and co-commercialize linaclotide in the AstraZeneca License Territory (the “AstraZeneca Collaboration Agreement”).

The collaboration provided AstraZeneca with an exclusive nontransferable license to exploit the underlying technology in the AstraZeneca License Territory.

collaboration provided AstraZeneca with an exclusive nontransferable license to exploit the underlying technology in the AstraZeneca License Territory.

The parties shared responsibility for continued development and commercialization of linaclotide under a joint development plan and a joint commercialization plan, respectively, with AstraZeneca having primary responsibility for the local operational execution.

The parties agreed to an Initial Development Plan (“IDP”), which included the planned development of linaclotide in China, including the lead responsibility for each activity and the related internal and external costs.

The IDP indicated that AstraZeneca was responsible for a multinational Phase III clinical trial (the “Phase III Trial”), the Company was responsible for nonclinical development and supplying clinical trial material and both parties were responsible for the regulatory submission process.

The IDP indicated that the party specifically designated as being responsible for a particular development activity under the IDP should implement and conduct such activities.

The activities were governed by a Joint Development Committee (“JDC”), with equal representation from each party.

The JDC was responsible for approving, by unanimous consent, the joint development plan and development budget, as well as approving protocols for clinical studies, reviewing and commenting on regulatory submissions, and providing an exchange of data and information.

There were no refund provisions in the AstraZeneca Collaboration Agreement.

Under the terms of the AstraZeneca Collaboration Agreement, the Company received a $ 25.0 million non-refundable up-front payment upon execution.

The Company was also eligible for $ 125.0 million in additional commercial milestone payments contingent on the achievement of certain sales targets.

The parties also shared in the net

profits and losses associated with the development and commercialization of linaclotide in the AstraZeneca License Territory, with AstraZeneca receiving 55 % of the net profits or incurring 55 % of the net losses until a certain specified commercial milestone was achieved, at which time profits and losses would be shared equally thereafter.

Activities under the AstraZeneca Collaboration Agreement were evaluated in accordance with ASC 605-25 to determine if they represented a multiple element revenue arrangement.

The Company identified the following deliverables in the AstraZeneca Collaboration Agreement:

● an exclusive license to develop and commercialize linaclotide in the AstraZeneca License Territory (the “License Deliverable”) (the deliverable was completed upon execution and all associated revenue was recognized as of December 31, 2016);

● research, development and regulatory services pursuant to the IDP, as modified from time to time (the “R&D Services”);

● JDC services;

In September 2019, the Company and AstraZeneca entered into an amendment and restatement of the AstraZeneca Collaboration Agreement (the “Amended AstraZeneca Agreement”) under which AstraZeneca obtained the exclusive right to develop, manufacture and commercialize products containing linaclotide in the AstraZeneca License Territory (the “AstraZeneca License”).

Prior to the execution of the Amended AstraZeneca Agreement, the Company identified the following performance obligations under the AstraZeneca Collaboration Agreement:

● research, development and regulatory services pursuant to the development plan (“R&D Services”);

● Joint Development Committee (“JDC”) services;

● obligation to supply clinical trial material;

● co-promotion services for NEXIUM (the “Co-Promotion Deliverable”) (the deliverable was completed and all associated revenue was recognized as of December 31, 2013).

Under ASC 605, the License Deliverable was nontransferable and had certain sublicense restrictions.

The Company determined that the License Deliverable had standalone value as a result of AstraZeneca’s internal product development and commercialization capabilities, which would enable it to use the License Deliverable for its intended purposes without the involvement of the Company.

The remaining deliverables were deemed to have standalone value based on their nature and all deliverables met the criteria to be accounted for as separate units of accounting under ASC 605-25.

The Company performed R&D services and JDC services and supplied clinical trial materials during the estimated development period.

All consideration allocated to such services was being recognized as a reduction of research and development costs, using the proportional performance method, by which the amounts were recognized in proportion to the costs incurred in accordance with ASC 605.

In August 2014, the Company and AstraZeneca, through the JDC, modified the IDP and development budget to include approximately $ 14.0 million in additional activities over the remaining development period, to be shared by the Company and AstraZeneca under the terms of the AstraZeneca Collaboration Agreement.

The total amount of the non-contingent consideration allocable to the AstraZeneca Collaboration Agreement was approximately $ 34.0 million (“Arrangement Consideration”), which included the $ 25.0 million non-refundable up-front payment and approximately $ 9.0 million representing 55 % of the costs for clinical trial material supply services and research, development and regulatory activities allocated to the Company in the IDP or as approved by the JDC in subsequent periods.

The Company allocated the Arrangement Consideration to the non-contingent deliverables based on management’s best estimated selling price (“BESP”) of each deliverable using the relative selling price method, as the Company did not have vendor-specific objective evidence or third-party evidence of selling price for such deliverables.

Of the total Arrangement Consideration, approximately $ 29.7 million was allocated to the License Deliverable, approximately $ 1.8 million to the R&D Services, approximately $ 0.1 million to the JDC services, approximately $ 0.3 million to the clinical trial material supply services, and approximately $ 2.1 million to the Co-Promotion Deliverable in the relative selling price model.

Because the Company shared development costs with AstraZeneca, payments from AstraZeneca with respect to both research and development and selling, general and administrative costs incurred by the Company prior to the commercialization of linaclotide in the AstraZeneca License Territory were recorded as a reduction in expense, in accordance with the Company’s policy, which was consistent with the nature of the cost reimbursement.

Development costs incurred by the Company that pertain to the joint development plan and subsequent amendments to the joint

development plan, as approved by the JDC, were recorded as research and development expense as incurred.

● Joint Commercialization Committee services.

Under the original AstraZeneca Collaboration Agreement, the Company shared development costs with AstraZeneca, with AstraZeneca incurring 55 % of the net losses from the development and commercialization of linaclotide in the AstraZeneca License Territory.

Payments from AstraZeneca with respect to both research and development and selling, general and administrative costs incurred by the Company prior to the commercialization of linaclotide in the AstraZeneca License Territory were recorded as a reduction in expense.

Development costs incurred by the Company that pertained to the joint development plan and subsequent amendments to the joint development plan, as approved by the JDC, were recorded as research and development expense as incurred.

Payments to AstraZeneca were recorded as incremental research and development expense.

As a result of the cost-sharing arrangements under the collaboration, the Company recognized approximately $ 0.3 million in incremental research and development costs during the year ended December 31, 2017.

In March 2017, the Company began providing supply of linaclotide finished drug product and certain commercialization-related services pursuant to the AstraZeneca Collaboration Agreement.

During the year ended December 31, 2017, the Company recognized approximately $ 0.2 million as collaborative arrangements revenue related to linaclotide finished drug product, as this deliverable was no longer contingent.

Upon the adoption of ASC 606, the Company reevaluated the AstraZeneca Collaboration Agreement and, consistent with its conclusions under ASC 605, identified six performance obligations including the license, R&D services, JDC services, supply of clinical trial material, co-promotion services for NEXIUM, and the Joint Commercialization Committee (“JCC”) services.

The Company determined that the supply of linaclotide finished drug product for commercial requirements was an optional service at inception of the arrangement and did not provide a material right to AstraZeneca.

At the ASC 606 adoption date, the Company had fully satisfied its obligation to transfer the license and NEXIUM co-promotion services to AstraZeneca.

The following remaining performance obligations were ongoing as of the adoption date:

● R&D Services

● JDC services;

● obligation to supply clinical trial material;

● JCC services.

Under ASC 606, the Company applied the contract modification practical expedient to the August 2014 amendment, which expanded the scope of the Company’s activities under the IDP and increased the development budget.

This practical expedient allows an entity to reflect the aggregate effect of all modifications that occur before the beginning of the earliest period presented.

The application of this practical expedient resulted in a total transaction price of approximately $ 34.0 million, which was allocable to the Company’s performance obligations on a relative standalone selling price basis.

Under ASC 606, amounts of consideration allocated to the license and NEXIUM co-promotion services would have been recognized in full prior to adoption as these performance obligations were satisfied in October 2012 and December 2013, respectively.

Consideration allocated to the R&D Services was recognized as such services were provided over the performance period using an output method based on full-time employee labor hours and external expenses incurred.

Consideration allocated to the JDC services was recognized ratably over the development period using a time-based, straight-line attribution model.

Revenue from the supply of clinical trial material was recognized as the clinical trial material was delivered to the customer.

During the year ended December 31, 2019, the Company incurred no costs related to R&D services and JDC services.

During the year ended December 31, 2018, the Company offset approximately $ 1.2 million related to R&D Services and JDC services.

Additionally, the parties shared in the net profits and losses associated with the development and commercialization of linaclotide in the AstraZeneca License Territory, with AstraZeneca receiving 55 % of the net profits or incurring 55 % of the net losses until a certain specified commercial milestone was achieved;

from that point, profits and losses would have been shared equally thereafter.

Any cost reimbursements received from AstraZeneca during the commercialization period were recognized as earned in accordance with the right-to-invoice practical expedient, as the Company’s right to consideration corresponds directly with the value of the services transferred during the commercialization period.

During the years ended December 31, 2019 and 2018, the Company incurred approximately $ 1.2 million and approximately $ 0.9 million, respectively, related to pre-launch commercial services and supply chain services.

In September 2019, the Company and AstraZeneca entered into the Amended AstraZeneca Agreement, under which AstraZeneca obtained the exclusive right to develop, manufacture and commercialize products containing linaclotide in the AstraZeneca License Territory (the “AstraZeneca License”).

Under the Amended AstraZeneca Agreement, the Company will receive non-contingent payments totaling $ 35.0 million in three installments through 2024.

Under the Amended AstraZeneca Agreement, the Company is entitled to receive non-contingent payments totaling $ 35.0 million in three installments through 2024, of which $ 10.0 million was received in January 2021.

In addition, AstraZeneca may be required to make milestone payments totaling up to $ 90.0 million contingent on the achievement of certain sales targets and will be required to pay tiered royalties to the Company at rates beginning in the mid-single-digit percent and increasing up to twenty percent based on the aggregate annual net sales of products containing linaclotide in the AstraZeneca License Territory.

In connection with the Amended AstraZeneca Agreement, the Company and AstraZeneca entered into a transition services agreement (“AstraZeneca TSA”) and an amended commercial supply agreement (“AstraZeneca CSA”).

Under the terms of the AstraZeneca TSA, the Company will provide certain regulatory and administrative services for a term of approximately two years from the date of execution, unless earlier terminated or extended according to the terms of the transition services agreement.

Services performed are paid at a mutually agreed upon rate.

Amounts for AstraZeneca TSA services are recorded as collaborative arrangements revenue.

Under the terms of the AstraZeneca CSA, the Company will supply linaclotide API, finished drug product and finished goods for the Licensed Territory through no later than March 31, 2020 at predetermined rates.

The Company evaluated the Amended AstraZeneca Agreement in accordance with ASC 606 and determined that it would be treated as a separate contract because it adds a distinct good or service at an amount that reflects standalone selling price.

Under the terms of the AstraZeneca CSA, the Company supplied linaclotide API, finished drug product and finished goods for the Licensed Territory through March 31, 2020 at predetermined rates.

The Company evaluated the Amended AstraZeneca Agreement and determined that it would be accounted for as a separate contract because it adds a distinct good or service at an amount that reflects standalone selling price.

The following performance obligations under the Amended AstraZeneca Agreement were identified:

● delivery of the AstraZeneca License;

● delivery of the expanded AstraZeneca License;

● AstraZeneca TSA services;

● supply of linaclotide API, finished drug product and finished goods under the AstraZeneca CSA.

The Company determined that the non-contingent payments should be allocated to the delivery of the AstraZeneca License.

The non-contingent payments totaling $ 35.0 million will be paid in installments through 2024.

The Company determined that the non-contingent payments should be allocated to the delivery of the expanded AstraZeneca License.

The Company determined that the performance obligation related to the transfer of the AstraZeneca License was satisfied as of the execution date of the Amended AstraZeneca Agreement.

As a portion of the payments relating to the transfer of the AstraZeneca License are due significantly after the performance obligation was satisfied, the Company adjusted its transaction price for the significant financing component of approximately $ 2.6 million.

Accordingly, the Company recognized approximately $ 32.4 million relating to the delivery of the AstraZeneca License as collaborative arrangements revenue during the year ended December 31, 2019 and will recognize the approximately $ 2.6 million relating to the significant financing component as interest income through 2024 using the effective interest method.

Consideration allocated to the AstraZeneca TSA services will be recognized as collaborative arrangements revenue as such services are provided over the performance period using an output method based on the amount to which the Company has a right to invoice.

Consideration for the supply of linaclotide API, finished drug product and finished goods under the AstraZeneca CSA will be recognized over the performance period using an output method as linaclotide API, finished drug product and finished goods are shipped to AstraZeneca.

Accordingly, the Company recognized approximately $ 32.4 million relating to the delivery of the AstraZeneca License as collaborative arrangements revenue at contract inception and will recognize the approximately $ 2.6 million relating to the significant financing component as interest income through 2024 using the effective interest method.

Consideration allocated to the AstraZeneca TSA services will be recognized as collaborative arrangements revenue as such services are provided over the performance period based on the amount to which the Company has a right to invoice.

Consideration for the supply of linaclotide API, finished drug product and finished goods under the AstraZeneca CSA was recognized over the performance period as linaclotide API, finished drug product and finished goods were shipped to AstraZeneca.

During the year ended December 31, 2020, the Company recognized approximately $ 0.7 million in collaborative arrangements revenue related to the Amended AstraZeneca License, of which approximately $ 0.6 million related to the AstraZeneca TSA services and approximately $ 0.1 million related to royalties.

During the year ended December 31, 2020, the Company recognized approximately $ 5.5 million of sale of API on its consolidated statement of operations relating to the supply of linaclotide finished drug product and finished goods under the AstraZeneca CSA.

During the year ended December 31, 2019, the Company recognized approximately $ 32.6 million in collaborative arrangements revenue related to the Amended AstraZeneca License, of which approximately $ 32.4 million related to the delivery of the AstraZeneca License and approximately $ 0.2 million related to the AstraZeneca TSA services.

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Co-Promotion and Other Agreements

Agreement with Allergan for VIBERZI

In August 2015, the Company and Allergan entered into an agreement for the co-promotion in the U.S.

of VIBERZI, Allergan’s treatment for adults suffering from IBS-D (the “VIBERZI Co-Promotion Agreement”).

terms of the VIBERZI Co-Promotion Agreement, the Company’s clinical sales specialists detailed VIBERZI to the same health care practitioners to whom they detail LINZESS.

Allergan was responsible for all costs and activities relating to the commercialization of VIBERZI outside of the co-promotion.

The Company’s promotional efforts under the non-exclusive co-promotion began when VIBERZI became commercially available in December 2015.

The VIBERZI Co-Promotion Agreement was effective through December 31, 2017.

Under the terms of the VIBERZI Co-Promotion Agreement, the Company’s promotional efforts were compensated based on the volume of calls delivered by the Company’s sales force, with the terms of the agreement reducing or eliminating certain of the unfavorable adjustments to the Company’s share of net profits stipulated by the linaclotide collaboration agreement with Allergan for North America, provided that the Company provided a minimum number of VIBERZI calls on physicians.

The Company provided the minimum number of VIBERZI calls on physicians pursuant to the VIBERZI Co-Promotion Agreement, and was compensated with the elimination of certain of the unfavorable adjustments to the Company’s share of net profits stipulated by the linaclotide collaboration agreement with Allergan for North America for the year ending December 31, 2017.

During the year ended December 31, 2017, the Company recognized approximately $ 1.5 million in revenue related to the VIBERZI Co-Promotion Agreement for the performance of medical education services.

In December 2017, the Company and Allergan entered into an amendment to the commercial agreement with Allergan (the “VIBERZI Amendment”), as described below, to include the VIBERZI promotional activities through December 31, 2018.

Under the terms of the VIBERZI Amendment, the Company’s clinical sales specialists continued detailing VIBERZI in the second position to the same health care practitioners to whom they detailed LINZESS in the first position and provided certain medical education services.

The Company evaluated the VIBERZI Amendment in accordance with ASC 606 and determined that it would be treated as a separate contract because it adds a distinct good or service at an amount that reflects standalone selling price.

The following performance obligations under the VIBERZI Amendment were identified:

● sales detailing of VIBERZI in either first or second position;

● medical education services.

During the three months ended December 31, 2018, the Company determined that the sales-based milestone was no longer constrained and recognized approximately $ 1.3 million as collaborative arrangements revenue.

During the year ended December 31, 2018, the Company recognized approximately $ 3.0 million of collaborative arrangements revenue related to VIBERZI for medical education events.

In December 2018 and in March 2019, the Company extended the VIBERZI Amendment through April 2019.

In April 2019, the Company entered into a new agreement with Allergan to continue to perform sales detailing activities for VIBERZI, from April 1, 2019 through December 31, 2019 (the “VIBERZI Promotion Agreement”).

Under the terms of the VIBERZI Promotion Agreement, the Company’s clinical sales specialists detailed VIBERZI in the second position to the same health care practitioners to whom they detailed LINZESS in the first position.

In accordance with ASC 606, the VIBERZI Promotion Agreement is accounted for as a separate contract as it contains distinct services at an amount that reflects standalone selling price, incremental to past agreements.

Under the VIBERZI Promotion Agreement the Company identified the performance of VIBERZI second position sales details as the sole performance obligation under the agreement.

The Company had the potential to achieve a milestone payment of up to $ 4.2 million based on the number of VIBERZI prescription extended units filled over the term of the agreement.

The Company had the potential to be compensated up to a maximum amount of approximately $ 4.1 million, based on the number of VIBERZI sales details performed.

The Company and Allergan terminated the VIBERZI Promotion Agreement effective January 1, 2020.

The Company did not receive payment based on the number of VIBERZI prescription extended units filled because the milestone was not achieved during the year ended December 31, 2019.

During the year ended December 31, 2019, the Company recognized approximately $ 3.7 million of collaborative arrangements revenue related to VIBERZI sales details.

The compensation related to the VIBERZI sales details was recognized over the term of the agreement using an output method based on estimated amounts for which the Company had the right to invoice based on the number of sales details performed during the associated period.

Co-Promotion Agreement with Exact Sciences Corp.

for COLOGUARD ®

In March 2015, the Company and Exact Sciences Corp.

(“Exact Sciences”) entered into an agreement to co-promote Exact Sciences’ COLOGUARD, the first and only U.S.

FDA-approved noninvasive stool DNA screening test for colorectal cancer (the “Exact Sciences Co-Promotion Agreement”).

The Exact Sciences Co-Promotion Agreement was terminated by the parties in August 2016.

Under the terms of the non-exclusive Exact Sciences Co-Promotion Agreement, the Company’s sales team promoted and educated health care practitioners regarding COLOGUARD through July 2016.

Exact Sciences maintained responsibility for all other aspects of the commercialization of COLOGUARD outside of the co-promotion.

Under the terms of the Exact Sciences Co-Promotion Agreement, the Company was compensated primarily via royalties earned on the net sales of COLOGUARD generated from the healthcare practitioners on whom the Company called with such royalties payable through July 2017.

There were no refund provisions in the Exact Sciences Co-Promotion Agreement.

During the year ended December 31, 2017, the Company recognized approximately $ 2.5 million as collaborative arrangements revenue related to this arrangement in accordance with ASC 605-25.

The Company determined that the Exact Sciences Co-Promotion Agreement was completed prior to the adoption of ASC 606 and accordingly did not reevaluate the terms of the agreement.

Disease Education and Promotional Agreement with Alnylam

In August 2019, the Company and Alnylam entered into a disease education and promotional agreement for Alnylam’s GIVLAARI, a therapeutic for the potential treatment of AHP (the “Alnylam Agreement”).

In August 2019, the Company and Alnylam entered into a disease education and promotional agreement for Alnylam’s GIVLAARI, and this agreement was subsequently amended in December 2020 (the “Alnylam Agreement”).

GIVLAARI was approved by the U.S.

FDA in December 2019 for the treatment of adult patients with AHP.

Under the terms of the agreement, the Company’s sales force will perform disease awareness activities and sales detailing activities of GIVLAARI to gastroenterologists and health care practitioners to whom they detail LINZESS in the first position.

The Company is entitled to receive service fees, payable by Alnylam quarterly, totaling up to $ 9.5 million over the term of the agreement, which is approximately three years from execution.

The Company also is eligible to receive a royalty based on a percentage of net sales of GIVLAARI that are directly attributable to the Company’s promotional efforts.

FDA in November 2019 for the treatment of adult patients with AHP.

Under the terms of the Alnylam Agreement, the Company’s sales force is performing disease awareness activities and sales detailing activities for GIVLAARI to gastroenterologists and health care practitioners to whom they detail LINZESS in the first position over the term of the agreement, which is approximately three years.

Under the Alnylam Agreement, the Company received service fees, totaling approximately $ 5.5 million for services rendered through December 31, 2020.

The Company also is eligible to receive royalties based on a percentage of net sales of GIVLAARI that are directly attributable to the Company’s promotional efforts over the term of the agreement.

The Company identified the following performance obligation under the Alnylam Agreement:

● performance of disease education activities for AHP and performance of sales details for GIVLAARI (together “Givosiran Education and Promotion Activities”).

The Company allocated the service fees to the performance of Givosiran Education and Promotion Activities and recognizes collaborative arrangements revenue over the term of the agreement as the services are performed using an output method based on the amount to which the Company has a right to invoice.

Royalties will be recognized as collaborative arrangements revenue using an output method for Givosiran Education and Promotion Activities based on the amount to which the Company has a right to invoice when the associated constraints have been lifted.

During the year ended December 31, 2019, the Company recognized $ 2.0 million in collaborative arrangements revenue related to the service fees.

As of December 31, 2019, the Company had a deferred revenue balance of approximately $ 0.9 million related to the Givosiran Education and Promotion Activities performed in accordance with the Alnylam Agreement.

The Company did not recognize any royalty revenue related to the Alnylam Agreement.

Other Collaboration and License Agreements

The Company has other collaboration and license agreements that are not individually significant to its business.

Pursuant to the terms of one agreement, the Company may be required to pay up to $ 18.0 million for regulatory milestones, none of which had been paid as of December 31, 2019.

Pursuant to the terms of another license agreement, the Company recognized approximately $ 0.5 million in collaborative arrangements revenue during the year ended December 31, 2019 related to a nonrefundable upfront payment.

The Company is eligible to receive up to $ 63.5 million in development and sales-based milestones, as well as a royalties as a percentage of net sales of a product, under the terms of this agreement.

The Company did not record any research and development expense associated with the Company’s other collaboration and license agreements during the year ended December 31, 2019.

The Company recorded approximately $ 5.0 million in research and development expenses associated with the Company’s other

collaboration and license agreements during the year ended December 31, 2018.

The Company did not record any research and development expense associated with the Company’s other collaboration and license agreements during the year ended December 31, 2017.

The Company allocated the service fees to the performance of Givosiran Education and Promotion Activities and recognized collaborative arrangements revenue through December 31, 2020 as the services were performed based on the amount to which the Company had a right to invoice.

Royalties are recognized as collaborative arrangements revenue for Givosiran Education and Promotion Activities based on the amount to which the Company has a right to invoice when the associated constraints have been lifted.

During the years ended December 31, 2020 and 2019, the Company recognized approximately $ 3.5 million and approximately $ 2.0 million, respectively, in collaborative arrangements revenue related to the service fees.

During the year ended December 31, 2020, the Company recognized approximately $ 0.8 million in royalty revenue related to the Alnylam Agreement.

The Company did not recognize any royalty revenue related to the Alnylam Agreement during the year ended December 31, 2019.

As of December 31, 2019, the Company had a deferred revenue balance of

approximately $ 0.9 million related to advance billings of service fees.

As of December 31, 2020, the Company had no deferred revenue.

Fair Value of Financial Instruments

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Money market funds

Repurchase agreements

Restricted cash:

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Repurchase agreements

Restricted cash:

Money market funds

Convertible note hedges

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Note hedge warrants

Contingent Consideration

Total liabilities measured at fair value

There were no transfers between fair value measurement levels during each of the years ended December 31, 2020 or 2019.

Cash equivalents, accounts receivable, related party accounts receivable, prepaid expenses and other current assets, accounts payable, related party accounts payable, accrued research and development costs, accrued expenses and other current liabilities, the current portion of capital lease obligations, deferred rent, deferred revenue and operating lease obligations at December 31, 2019 and 2018 are carried at amounts that approximate fair value due to their short-term maturities.

Convertible Note Hedges and Note Hedge Warrants

Cash equivalents, accounts receivable, related party accounts receivable, prepaid expenses and other current assets, accounts payable, related party accounts payable, accrued research and development costs, accrued expenses and other current liabilities, current portion of operating lease obligations, and deferred revenue at December 31, 2020 and 2019 are carried at amounts that approximate fair value due to their short-term maturities.

Convertible Note Hedges and Note Hedge Warrants with Respect to 2022 Convertible Notes

The Company’s Convertible Note Hedges and the Note Hedge Warrants are recorded as derivative assets and liabilities, respectively, and are classified as Level 3 measurements under the fair value hierarchy.

These derivatives are not actively traded and are valued using the Black-Scholes option-pricing model, which requires the use of subjective assumptions.

Significant inputs used to determine the fair value as of December 31, 2019 included the price per share of the Company’s Class A Common Stock, expected terms of the derivative instruments, strike prices of the derivative instruments, risk-free interest rate, and expected volatility of the Company’s Class A Common Stock.

Significant inputs used to determine the fair value as of December 31, 2020 included the price per share of the Company’s Class A Common Stock, expected terms of the derivative instruments, strike prices of the derivative instruments, risk-free interest rates, and expected volatility of the Company’s Class A Common Stock.

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

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(1) Based on U.S.

Treasury yield curve, with terms commensurate with the terms of the Convertible Note Hedges and the Note Hedge Warrants.

Treasury yield curve, with terms commensurate with the expected terms of the Convertible Note Hedges and the Note Hedge Warrants.

(2) The closing price of the Company’s Class A Common Stock on the last trading days of the years ended December 31, 2020 and 2019, respectively.

(3) As per the respective agreements for the Convertible Note Hedges and Note Hedge Warrants.

The strike prices for the Convertible Note Hedges and Note Hedge Warrants were adjusted in conjunction with the conversion rate adjustment in April 2019 (Note 12).

(4) Expected volatility based on historical volatility of the Company’s Class A Common Stock.

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The Convertible Note Hedges and the Note Hedge Warrants are recorded at fair value at each reporting date and changes in fair value are recorded in other (expense) income, net within the Company's consolidated statements of operations.

Gains and losses for these derivative financial instruments are presented separately in the Company's consolidated statements of cash flows.

The following table reflects the change in the Company's Level 3 Convertible Note Hedges and Note Hedge Warrants from December 31, 2018 through December 31, 2020 (in thousands):

Balance at December 31, 2018

Cash settlement (received) paid upon early termination of derivatives (Note 11)

Change in fair value, recorded as a component of gain (loss) on derivatives

Balance at December 31, 2019

Cash settlement (received) paid upon early termination of derivatives

Change in fair value, recorded as a component of gain (loss) on derivatives

Change in fair value, recorded as a component of (loss) gain on derivatives

Balance at December 31, 2020

In August 2019, the Company repurchased $ 215.0 million aggregate principal amount of the 2022 Convertible Notes, which triggered a partial termination of the outstanding Convertible Note Hedges and Note Hedge Warrants (Note 12).

During the year ended December 31, 2019, the Company 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.

Contingent Consideration

In connection with the Lesinurad Transaction, the Company recorded a liability of $ 67.9 million as of the Acquisition Date for contingent payments due to AstraZeneca.

This valuation was based on a Monte-Carlo simulation, which includes significant estimates related to probability weighted net cash outflow projections, primarily comprised of estimated future royalty and milestone payments to AstraZeneca, discounted using a yield curve equivalent to the Company’s credit risk, which was the estimated cost of debt financing for market participants.

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 Company recognized a gain on fair value remeasurement of contingent consideration of approximately $ 31.0 million during the year ended December 31, 2018.

The contingent consideration was fully settled during the year ended December 31, 2019 and no liability remains as of December 31, 2019.

The following table reflects the change in the Company’s Level 3 contingent consideration payable from December 31, 2017 through December 31, 2019 (in thousands):

Consideration

Fair Value at December 31, 2017

Changes in fair value

Payments/transfers to accrued expenses and other current liabilities

Fair Value at December 31, 2018

Fair value at December 31, 2019

Convertible Senior Notes

In June 2015, the Company issued approximately $ 335.7 million aggregate principal amount of its 2022 Convertible Notes.

In August 2019, the Company issued $ 200.0 million aggregate principal amount of its 2024

Convertible Notes and $ 200.0 million aggregate principal amount of its 2026 Convertible Notes, and used a portion of the proceeds from such issuance to repurchase $ 215.0 million aggregate principal amount of its 2022 Convertible Notes.

In August 2019, the Company issued $ 200.0 million aggregate principal amount of its 2024 Convertible Notes and $ 200.0 million aggregate principal amount of its 2026 Convertible Notes, and used a portion of the proceeds from such issuances to repurchase $ 215.0 million aggregate principal amount of its 2022 Convertible Notes.

The Company separately accounted for the liability and equity components of each of the 2022 Convertible Notes, 2024 Convertible Notes, and 2026 Convertible Notes, by allocating the proceeds between the liability component and equity component (Note 11).

The fair value of the respective convertible senior notes, which differs from their carrying value, is influenced by interest rates, the price of the Company’s Class A Common Stock and the volatility thereof, and the prices for the respective convertible senior notes observed in market trading, which are Level 2 inputs.

The estimated fair value of the 2022 Convertible Notes as of December 31, 2019 and 2018 was approximately $ 141.3 million and approximately $ 315.0 million, respectively.

The estimated fair value of the 2024 Convertible Notes was approximately $ 235.7 million as of December 31, 2019.

The estimated fair value of the 2026 Convertible Notes was approximately $ 240.1 million as of December 31, 2019.

The estimated fair value of the 2022 Convertible Notes as of December 31, 2020 and 2019 was approximately $ 130.2 million and $ 141.3 million, respectively.

The estimated fair value of the 2024 Convertible Notes as of December 31, 2020 and 2019 was approximately $ 222.3 million and $ 235.7 million, respectively.

The estimated fair value of the 2026 Convertible Notes as of December 31, 2020 and 2019 was approximately $ 224.1 million and $ 240.1 million, respectively.

Capped Calls with Respect to 2024 Convertible Notes and 2026 Convertible Notes

In connection with the issuance of the 2024 Convertible Notes and the 2026 Convertible Notes, the Company entered into the Capped Calls with certain financial institutions.

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The strike price and cap price are subject to anti-dilution adjustments generally similar to those applicable to the 2024 Convertible Notes and the 2026 Convertible Notes.

8.375 % Notes Due 2026

In September 2016, the Company closed a direct private placement pursuant to which the Company issued $ 150.0 million in aggregate principal amount of the 2026 Notes in January 2017.

The outstanding principal balance of the 2026 Notes was redeemed in September 2019 (Note 12).

The estimated fair value of the 2026 Notes was approximately $ 148.2 million as of December 31, 2018.

This valuation was calculated using a discounted cash flow estimate of expected interest and principal payments and was determined using Level 3 inputs, including significant estimates related to expected LINZESS sales and a discount rate equivalent to market participant interest rates.

Nonrecurring fair value measurements – Intangible Assets

On August 2, 2018, the Company delivered to AstraZeneca a notice of termination of the lesinurad license agreement.

During the three months ended September 30, 2018, the Company recorded an approximately $ 151.8 million impairment charge related to its acquired intangible assets.

The impairment assessment performed utilized the revised projected revenue and net cash flows assumed through the termination of the lesinurad license agreement, resulting in an impairment of the full carrying value of the intangible assets (Note 5).

Inventory consisted of the following (in thousands):

Raw Materials

Work in Progress

Finished Goods

The Company’s inventory represents linaclotide API, finished drug product, and finished goods.

The Company evaluates inventory levels at each quarterly reporting date and any inventory that has a cost basis in excess of its expected net realizable value, inventory that becomes obsolete, inventory in excess of expected sales requirements, inventory that fails to meet commercial sale specifications or is otherwise impaired is written down with a corresponding charge to the statement of operations in the period that the impairment is first identified.

No impairment of linaclotide API inventory was recorded during the years ended December 31, 2019 or 2018.

The Company has entered into multiple commercial supply agreements for the purchase of linaclotide API.

Two of the Company’s linaclotide API supply agreements for supplying API to its collaboration and license partners outside of North America historically contained minimum purchase commitments.

The determination of the net realizable value of inventory and non-cancelable purchase commitments is based on demand forecasts from the Company’s partners, which are received quarterly, and the Company’s internal forecast for projected demand in subsequent years.

During the year ended December 31, 2015, the Company wrote down approximately $ 10.1 million related to excess non-cancelable purchase commitments for linaclotide API.

During the three months ended September 30, 2018, the Company assigned to Allergan certain of these linaclotide excess non-cancelable purchase commitments that the Company had previously accrued for.

Accordingly, the Company relieved the previous accrual of approximately $ 2.5 million, which was recorded as write-down of commercial supply and inventory to net realizable value and (settlement) loss on non-cancelable purchase commitments on the Company’s consolidated statement of operations.

As of December 31, 2018, the accrual for excess linaclotide purchase commitments was recorded as approximately $ 2.5 million in accrued expenses and approximately $ 2.5 million in other liabilities, in the Company's consolidated balance sheet.

In connection with the Amended AstraZeneca Agreement, certain of the Company’s 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.

Accordingly, the Company recorded a settlement of approximately $ 3.5 million as write-down of commercial supply and inventory to net realizable value and (settlement) loss on non-cancelable purchase commitments related to certain of the aforementioned reversals during the year ended December 31, 2019.

As of December 31, 2019, the Company had no remaining accruals for excess purchase commitments on its consolidated balance sheet.

The Company relied exclusively on AstraZeneca for the commercial manufacture and supply of ZURAMPIC and DUZALLO under the Lesinurad Commercial Supply Agreement (the “Lesinurad CSA”) through the termination of the lesinurad license agreement.

As part of the Company's net realizable value assessment of its inventory, the Company assesses whether it has any excess non-cancelable purchase commitments resulting from its minimum supply agreements with its suppliers.

During the lesinurad transition service agreement (“Lesinurad TSA”) period, title for ZURAMPIC commercial supply and samples did not pass to the Company.

Accordingly, the Company recorded purchases of ZURAMPIC commercial supply and samples from AstraZeneca as prepaid assets until they were sold or used.

Purchases of DUZALLO commercial supply and samples were not within the scope of the Lesinurad TSA.

As of October 1, 2017, in connection with the expiration of the Lesinurad TSA period, the Company was no longer operating under this agreement

for the warehousing and distribution of commercial supply and samples of ZURAMPIC.

During the year ended December 31, 2017, the Company wrote down approximately $ 0.3 million of lesinurad commercial supply purchase commitments as a result of revised demand forecasts and recorded in write-downs of commercial supply and inventory to net realizable value and (settlement) loss on non-cancelable inventory purchase commitments in the Company's consolidated statement of operations.

Further, during the year ended December 31, 2017, the Company wrote-down approximately $ 1.7 million of ZURAMPIC sample supply purchase commitments as a result of a reduction in near-term forecasted demand.

These write-downs were recorded in selling, general and administrative expenses in the Company's consolidated statement of operations.

The Company wrote down approximately $ 2.5 million related to lesinurad inventory and commercial supply purchase commitments during the year ended December 31, 2018, as a result of revised demand forecasts and the notice of termination of the Lesinurad License.

The adjustment was recorded as write-down of commercial supply and inventory to net realizable value and loss on non-cancelable purchase commitments.

Further, during the year ended December 31, 2018, the Company wrote-down approximately $ 0.4 million of DUZALLO sample supply purchase commitments as a result of the notice of termination of the lesinurad license agreement.

These write-downs were recorded in selling, general and administrative expenses in the Company's consolidated statement of operations.

Effective January 1, 2019 , the Company adopted ASC 842 using the optional transition method .

The Company’s lease portfolio for the year ended December 31, 2020 includes:

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

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

Lease cost is recognized on a straight-line basis over the lease term.

The components of lease cost for the year ended December 31, 2019 are as follows (in thousands):

The components of lease cost for the year ended December 31, 2020 and 2019 are as follows (in thousands):

Year Ended December 31,

Operating lease cost during period, net (1)

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Total lease cost

(1) Operating lease cost is presented net of approximately $ 0.3 million of sublease income for the year ended December 31, 2019.

Sublease income related to a sublease agreement between Ironwood and Cyclerion executed upon Separation.

(1) Operating lease cost is presented net of approximately $ 0.3 million of sublease income for the year ended December 31, 2019 related to a sublease agreement between Ironwood and Cyclerion executed upon Separation.

The sublease agreement terminated in May 2019.

Supplemental cash flow information related to leases for the periods reported is as follows:

Year Ended December 31,

Right-of-use assets obtained in exchange for new operating lease upon adoption of ASC 842 (in thousands)

Adjustment to right-of-use assets as a result of the lease modification at the Separation date (in thousands)

Adjustment to right-of-use assets as a result of the lease modification upon Separation (in thousands)

Adjustment to right-of-use assets as a result of the termination of the Binney Street Lease (in thousands)

Right-of-use assets obtained in exchange for new operating lease liabilities (1) (in thousands)

Right-of-use assets obtained in exchange for new operating lease liabilities upon execution of Summer Street Lease (in thousands)

Cash paid for amounts included in the measurement of lease liabilities (in thousands)

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Weighted-average discount rate of operating leases

(1) Relates to right-of-use assets and operating lease liabilities for the Summer Street Lease.

Future minimum lease payments under non-cancelable operating leases under ASC 842 as of December 31, 2019 are as follows (in thousands):

Future minimum lease payments under non-cancelable operating leases as of December 31, 2020 are as follows (in thousands):

2026 and thereafter

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Operating lease liabilities, net of current portion

At December 31, 2018, future minimum lease payments under non-cancelable leases under ASC 840 were as follows (in thousands):

2024 and thereafter

Total future minimum lease payments

Summer Street Lease (current headquarters)

On June 11, 2019, the Company entered into the Summer Street Lease, a non-cancelable operating lease with MA-100 Summer Street Owner, L.L.C.

(the “Summer Street Landlord”) for the Summer Street Property.

The Summer Street Property began serving as the Company’s headquarters in October 2019, replacing its prior headquarters at 301 Binney Street in Cambridge, Massachusetts.

The Summer Street Lease terminates on June 11, 2030 and includes an option to extend the term of the lease for an additional five years at a market base rental rate, a 2 % annual rent escalation, free rent periods, and a tenant improvement allowance.

The rent expense for the Summer Street Property, inclusive of the escalating rent payments and lease incentives, is recognized on a straight-line basis over the lease term.

In June 2019, the Company entered into a non-cancelable operating lease (the “Summer Street Lease”) for approximately 39,000 square feet of office space on the 23 rd floor of 100 Summer Street, Boston, Massachusetts, which began serving as the Company’s headquarters in October 2019, replacing its prior headquarters at 301 Binney Street in Cambridge, Massachusetts.

The Summer Street Lease terminates on June 11, 2030 and includes a 2 % annual rent escalation, free rent periods, a tenant improvement allowance, and an option to extend the term of the lease for an

additional five years at a market base rental rate.

The rent expense, inclusive of the escalating rent payments and lease incentives, is recognized on a straight-line basis over the lease term.

Additionally, the Summer Street Lease requires a letter of credit to secure the Company’s obligations under the lease agreement of approximately $ 1.0 million, which is collateralized by a money market account recorded as restricted cash on the Company’s consolidated balance sheet as of December 31, 2020.

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At December 31, 2020, the balances of the right-of-use asset and operating lease liability were approximately $ 16.6 million and approximately $ 23.2 million, respectively.

The Company recorded an asset retirement obligation in connection with the estimated future costs related to the removal of certain leasehold improvements at the Summer Street Property upon termination of the lease.

The balance of the Company’s asset retirement obligation for the Summer Street Lease was approximately $ 0.5 million as of December 31, 2019.

Lease cost related to the Summer Street Lease recorded during the year ended December 31, 2019 was approximately $ 1.5 million.

At December 31, 2019, the balances of the right-of-use asset and operating lease liability were approximately $ 17.7 million and approximately $ 22.8 million, respectively.

Lease costs related to the Summer Street Lease recorded during the years ended December 31, 2020 and 2019 were approximately $ 2.5 million and approximately $ 1.5 million, respectively.

Binney Street Lease (prior headquarters)

The Company rented office space at 301 Binney Street, Cambridge, Massachusetts (“Binney Street Property”) under a non-cancelable operating lease, entered into in January 2007, as amended (“Binney Street Lease”) through October 2019.

The Binney Street Property previously served as the Company’s headquarters and was replaced by the Summer Street Property in October 2019, as discussed above.

Prior to the modifications discussed below, the term of the Binney Street Lease was through January 31, 2025 for approximately 223,000 square feet of laboratory and office space.

The Binney Street Lease included an option to extend the term of the lease for an additional five years at a market base rental rate, a 3 % annual rent escalation, free rent periods, and a tenant improvement allowance.

The rent expense for the Binney Street Lease, inclusive of the escalating rent payments and lease incentives, was to be recognized on a straight-line basis over the lease term through January 2025.

Additionally, the Binney Street Lease required a letter of credit to secure the Company’s obligations under the lease agreement of approximately $ 6.4 million, which was collateralized by a certificate of deposit recorded as restricted cash and released during the year ended December 31, 2019.

The Company rented office space at 301 Binney Street, Cambridge, Massachusetts under a non-cancelable operating lease entered into in January 2007, as amended (“Binney Street Lease”) through October 2019.

On April 1, 2019, the Company modified the Binney Street Lease to reduce its leased premises to approximately 108,000 rentable square feet of office space on the first and third floors.

The surrendered portion of approximately 114,000 rentable square feet on the first and second floor of the building was subsequently occupied by Cyclerion under a direct lease between Cyclerion and the Binney Street landlord.

As a result of the modification, the Company adjusted the value of its right-of-use asset and operating lease liability using an incremental borrowing rate of approximately 5.1 %, and recognized a gain of approximately $ 3.2 million, which was recorded as a reduction to operating expenses on its consolidated statement of operations.

The Company elected to determine the proportionate reduction in the right-of-use asset based on the reduction to the lease liability.

As of January 1, 2019, in conjunction with the adoption of ASC 842, the Company recorded a right-of-use asset of approximately $ 87.7 million and a lease liability of approximately $ 94.3 million associated with the Binney Street Lease.

On April 1, 2019, the Company modified its lease with BMR-Rogers Street LLC (“Binney Street Landlord”), to reduce its leased premises to approximately 108,000 rentable square feet of office space on the first and third floors.

The surrendered portion of approximately 114,000 rentable square feet on the first and second floor of the building became occupied by Cyclerion under a direct lease between Cyclerion and the Binney Street Landlord.

As a result of the modification, the Company adjusted the value of its right-of-use asset and operating lease liability using an incremental borrowing rate of approximately 5.1 %, and recognized a gain of approximately $ 3.2 million, recorded as operating expenses on its consolidated statement of operations.

The Company elected to determine the proportionate reduction in the right-of-use asset based on the reduction to the lease liability and will apply that methodology consistently to all comparable modifications that decrease the scope of the lease.

On June 11, 2019, the Company entered into a lease termination agreement (the “Lease Termination”) with the Binney Street Landlord to terminate the Company’s existing lease for approximately 108,000 square feet of office space.

The Lease Termination was effective during the fourth quarter of 2019 in exchange for an approximately $ 9.0 million payment to the Binney Street Landlord.

The Company determined that the Lease Termination would be accounted for as a lease modification that reduces the term of the existing lease.

As a result of this modification, the Company adjusted the value of its right-of-use asset and operating lease liability using an incremental borrowing rate of approximately 4.0 %.

On June 11, 2019, the Company entered into a lease termination agreement (the “Lease Termination”) with the Binney Street landlord to terminate the Company’s lease for approximately 108,000 square feet of office space.

The Lease Termination was effective during the fourth quarter of 2019 in exchange for an approximately $ 9.0 million payment.

The Lease Termination was accounted for as a lease modification that reduces the term of the existing lease and the Company adjusted the value of its right-of-use asset and operating lease liability using an incremental borrowing rate of approximately 4.0 %.

Lease cost related to the Binney Street Lease recorded during the year ended December 31, 2019 was approximately $ 16.3 million, net of sublease income of approximately $ 0.3 million.

Under ASC 840, rent expense related to the Binney Street Lease recorded during the years ended December 31, 2018 and 2017 was approximately $ 10.0 million and approximately $ 7.6 million, respectively.

Data center colocation lease

The Company rents space for its data center at a colocation in Boston, Massachusetts under a non-cancelable operating lease (the “Data Center Lease”).

The Data Center Lease contains various provisions, including a 4 % annual rent escalation.

The rent expense, inclusive of the escalating rent payments, is recognized on a straight-line basis over the lease term through August 2022.

The Company recorded a right-of-use asset of approximately $ 0.6 million and a lease liability of approximately $ 0.6 million associated with the Data Center Lease upon adoption of ASC 842.

The incremental borrowing rate for the outstanding Data Center Lease obligation upon adoption of ASC 842 was approximately 6.0 %.

During the three months ended March 31, 2019, the Company migrated its data management process to a cloud-based services system, rendering its current data center technology and assets obsolete.

As a result, the Company considered the right-of-use asset associated with the Data Center Lease to be impaired.

recorded a charge of approximately $ 0.5 million to selling, general, and administrative expenses on its consolidated statement of operations as a result of the impairment during the three months ended March 31, 2019.

At December 31, 2019, the lease liability associated with the Data Center Lease was approximately $ 0.4 million, and the right-of-use asset remained fully impaired .

Lease costs related to the Data Center Lease was approximately $ 0.2 million for the year ended December 31, 2019.

Under ASC 840, rent expenses related to the Data Center Lease were approximately $ 0.2 million and an insignificant amount for the years ended December 31, 2018 and 2017, respectively.

Under ASC 840, rent expense related to the Binney Street Lease recorded during the year ended December 31, 2018 was approximately $ 10.0 million.

Vehicle fleet leases

During April 2018, the Company entered into a master services agreement containing 12-month leases (the “2018 Vehicle Leases”) for certain vehicles within its fleet for its field-based sales force and medical science liaisons.

During April 2018, the Company entered into a master services agreement containing 12-month leases (the “2018 Vehicle Leases”) for vehicles within its fleet for its field-based sales force and medical science liaisons.

These leases are classified as short-term in accordance with the practical expedient in ASC 842.

The 2018 Vehicle Leases expire at varying times beginning in June 2019, with a monthly renewal provision.

In accordance with the terms of the 2018 Vehicle Leases, the Company maintains a letter of credit securing its obligation under the lease agreements of $ 1.3 million, which is collateralized by a money market account recorded as restricted cash on the Company’s consolidated balance sheets.

Lease cost related to the 2018 Vehicle Leases was approximately $ 1.5 million for the year ended December 31, 2019.

The 2018 Vehicle Leases expire at varying times, with a monthly renewal provision.

Lease cost related to the 2018 Vehicle Leases was approximately $ 1.4 million and approximately $ 1.5 million, respectively, for the years ended December 31, 2020 and 2019.

Under ASC 840, lease cost related to the 2018 Vehicle Leases was approximately $ 0.8 million for the year ended December 31, 2018.

Prior to the adoption of ASC 842, during 2018, the Company had certain ongoing vehicle leases for its field-based sales force and medical science liaisons (the “2015 Vehicle Leases”).

These leases were classified as capital leases under ASC 840.

The 2015 Vehicle Leases expired at varying times through December 2018.

In connection with entering into the 2018 Vehicle Leases, all of the 2015 Vehicle Leases were terminated through December 31, 2018.

At December 31, 2018, the Company had no remaining capital lease obligations related to the 2015 Vehicle Leases.

Prior to the adoption of ASC 842, the Company entered into leases for certain computer and office equipment certain of which expired in 2018.

These leases were classified as capital leases under ASC 840.

At December 31, 2018, the Company had approximately $ 0.2 million in capital lease obligations.

At December 31, 2018, the weighted average interest rate on the outstanding capital lease obligations was approximately 3.4 %.

As of December 31, 2019, the Company has not recorded any finance leases within its portfolio in accordance with ASC 842.

Property and Equipment

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Construction in process

Manufacturing equipment

Less accumulated depreciation and amortization

As of December 31, 2018, certain of the Company’s manufacturing equipment was located in the United Kingdom at one of the Company’s contract manufacturers.

During the year ended December 31, 2019, the Company

ceased use of its manufacturing equipment that was previously located in the United Kingdom at one of its contract manufacturers in connection with the restructuring of certain of its agreements with its partners outside of the U.S.

As of December 31, 2018, the Company had approximately $ 0.2 million of assets under capital leases and recorded an insignificant amount of accumulated amortization.

Depreciation expense of property and equipment for the year ended December 31, 2019 was approximately $ 5.6 million.

Depreciation and amortization expense of property and equipment, including amounts recorded under capital leases under ASC 840, was approximately $ 3.9 million, and approximately $ 6.4 million for the years ended December 31, 2018 and 2017, respectively.

Depreciation expense of property and equipment was approximately $ 2.3 million and $ 5.6 million for the years ended December 31, 2020 and 2019, respectively.

Depreciation and amortization expense of property and equipment, including amounts recorded under capital leases under ASC 840, was approximately $ 3.9 million for the year ended December 31, 2018.

During the year ended December 31, 2020, the Company recorded approximately $ 1.2 million in restructuring expenses in its consolidated statement of operations related to the impairment of certain fixed assets as a result of its decision to discontinue IW-3718 development.

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following (in thousands):

Accrued vacation

Accrued incentive compensation

Other employee benefits

Accrued vacation

Professional fees

Accrued interest

Other employee benefits

Restructuring liabilities

As of December 31, 2019, other accrued expenses of approximately $ 10.0 million included approximately $ 4.1 million related to API batches yet to be invoiced, approximately $ 0.9 million related to activities associated with the Company’s move to the 100 Summer Street headquarters, approximately $ 0.6 million related to unbilled inventory, and approximately $ 0.2 million related to equipment for clinical studies.

As of December 31, 2018, other accrued expenses of approximately $ 10.2 million included approximately $ 2.5 million related to linaclotide excess purchase commitments and, approximately $ 1.4 million related to excess non-cancelable Lesinurad Products commercial supply and sample purchase commitments.

As of December 31, 2020, other accrued expenses of approximately $ 2.0 million included approximately $ 1.6 million of uninvoiced vendor liabilities and approximately $ 0.3 million of accrued interest.

As of December 31, 2019, other accrued expenses of approximately $ 10.3 million included approximately $ 4.1 million related to API batches uninvoiced, approximately $ 0.9 million related to activities associated with the Company’s move to the 100 Summer Street headquarters, approximately $ 0.6 million related to unbilled inventory, approximately $ 0.3 million of accrued interest, and approximately $ 0.2 million related to equipment for clinical studies.

Notes Payable

8.375 % Notes due 2026

On September 23, 2016, the Company closed a direct private placement, pursuant to which the Company issued $ 150.0 million in aggregate principal amount of the 2026 Notes on January 5, 2017 (the “Funding Date”).

The Company received net proceeds of approximately $ 11.2 million from the 2026 Notes, which were used to redeem the outstanding principal balance of the 11 % PhaRMA Notes due 2024 (the “PhaRMA Notes”) on the Funding Date.

On September 23, 2016, the Company closed a direct private placement, pursuant to which the Company issued $ 150.0 million in aggregate principal amount of 8.375 % Notes due 2026 (the “2026 Notes”) and received net proceeds of approximately $ 11.2 million.

The Company capitalized approximately $ 0.5 million of debt issuance costs, which were netted against the carrying value of the 2026 Notes.

Proceeds from the issuance of the 2024 Convertible Notes and the 2026 Convertible Notes were used, in part, to redeem the outstanding principal balance of the 2026 Notes in September 2019.

Proceeds from the issuance of the 2024 Convertible Notes and the

2026 Convertible Notes were used, in part, to redeem the outstanding principal balance of the 2026 Notes in September 2019.

The Company 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.

The redemption of the 2026 Notes resulted in a loss on extinguishment of debt of approximately $ 7.6 million related to the prepayment premium and write-off of the unamortized debt issuance costs and unamortized debt discount.

The 2026 Notes had an annual interest rate of 8.375 %, with interest payable March 15, June 15, September 15 and December 15 of each year (each an “ 8.375 % Payment Date”), which began June 15, 2017.

Principal of the 2026 Notes was payable on the 8.375 % Payment Dates beginning March 15, 2019 through the redemption of the 2026 Notes.

The 2026 Notes had an annual interest rate of 8.375 %, with interest payable March 15, June 15, September 15 and December 15 of each year (each an “ 8.375 % Payment Date”).

Principal of the 2026 Notes was payable on the 8.375 % Payment Dates beginning March 15, 2019.

From March 15, 2019, the Company made quarterly payments on the 2026 Notes equal to the greater of (i) 7.5 % of net sales of linaclotide in the U.S.

for the preceding quarter (the “ 8.375 % Synthetic Royalty Amount”) and (ii) accrued and

unpaid interest on the 2026 Notes (the “ 8.375 % Required Interest Amount”).

for the preceding quarter (the “ 8.375 % Synthetic Royalty Amount”) and (ii) accrued and unpaid interest on the 2026 Notes (the “ 8.375 % Required Interest Amount”).

Principal on the 2026 Notes was due to be repaid in an amount equal to the 8.375 % Synthetic Royalty Amount minus the 8.375 % Required Interest Amount, when this was a positive number, until the principal had been paid in full.

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Bank National Association, as trustee (the “Trustee”).

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

The 2022 Convertible Notes are senior unsecured obligations and bear cash interest at the annual rate of 2.25 %, payable on June 15 and December 15 of each year.

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

The Company may settle conversions of the 2022 Convertible Notes through payment or delivery, as the case may be, of cash, shares of Class A Common Stock of the Company or a combination of cash and shares of Class A Common Stock, at the Company’s option (subject to, and in accordance with, the settlement provisions of the 2022 Indenture).

The Company may settle conversions of the 2022 Convertible Notes through payment or delivery, as the case may be, of cash, shares of the Company’s Class A Common Stock or a combination of cash and shares of Class A Common Stock, at the Company’s option (subject to, and in accordance with, the settlement provisions of the 2022 Indenture).

The initial conversion rate for the 2022 Convertible Notes was 60.3209 shares of Class A Common Stock (subject to adjustment as provided for in the 2022 Indenture) per $ 1,000 principal amount of the 2022 Convertible Notes, which was equal to an initial conversion price of approximately $ 16.58 per share and 20,249,665 shares.

In connection with the Separation of the Company’s sGC business, in April 2019, the conversion rate under the 2022 Indenture was adjusted to equal 68.9172 shares of Ironwood Class A Common Stock per $ 1,000 principal amount of the 2022 Convertible Notes, which is equal to an adjusted conversion price of approximately $ 14.51 per share and 23,135,435 shares.

In connection with the Separation, in April 2019, the conversion rate under the 2022 Indenture was adjusted to equal 68.9172 shares of Class A Common Stock per $ 1,000 principal amount of the 2022 Convertible Notes, which is equal to an adjusted conversion price of approximately $ 14.51 per share and 23,135,435 shares.

Holders of the 2022 Convertible Notes may convert their 2022 Convertible Notes at their option at any time prior to the close of business on the business day immediately preceding December 15, 2021 in multiples of $ 1,000 principal amount, only under the following circumstances:

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On or after December 15, 2021, until the close of business on the second scheduled trading day immediately preceding June 15, 2022, holders may convert their 2022 Convertible Notes, in multiples of $ 1,000 principal amount, at the option of the holder regardless of the foregoing circumstances.

If a make-whole fundamental change, as described in the 2022 Indenture, occurs and a holder elects to convert its 2022 Convertible Notes in connection with such make-whole fundamental change, such holder may be entitled to an increase in the conversion rate as described in the 2022 Indenture.

The Company may not redeem the 2022 Convertible Notes prior to the maturity date and no “sinking fund” is provided for by the 2022 Convertible Notes, which means that

the Company is not required to periodically redeem or retire the 2022 Convertible Notes.

The Company may not redeem the 2022 Convertible Notes prior to the maturity date and no “sinking fund” is provided for by the 2022 Convertible Notes, which means that the Company is not required to periodically redeem or retire the 2022 Convertible Notes.

Upon the occurrence of certain fundamental changes involving the Company, holders of the 2022 Convertible Notes may require the Company to repurchase for cash all or part of their 2022 Convertible Notes at a repurchase price equal to 100 % of the principal amount of the 2022 Convertible Notes to be repurchased, plus accrued and unpaid interest.

The 2022 Indenture does not contain any financial covenants or restrict the Company’s ability to repurchase the Company’s securities, pay dividends or make restricted payments in the event of a transaction that substantially increases the Company’s level of indebtedness.

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In accordance with accounting guidance for debt with conversion and other options, the Company separately accounted for the liability and equity components of the 2022 Convertible Notes by allocating the proceeds between the liability component and the embedded conversion option, or equity component, due to the Company's ability to settle the 2022 Convertible Notes in cash, its Class A Common Stock, or a combination of cash and Class A Common Stock at the option of the Company.

The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature.

The allocation was performed in a manner that reflected the Company's non-convertible debt borrowing rate for similar debt.

The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated conversion feature.

The equity component of the 2022 Convertible Notes was recognized as a debt discount and represents the difference between the gross proceeds from the issuance of the 2022 Convertible Notes and the fair value of the liability component of the 2022 Convertible Notes on their respective dates of issuance.

The excess of the principal amount of the liability component over its carrying amount, or debt discount, is amortized to interest expense using the effective interest method over seven years , or the expected life of the 2022 Convertible Notes.

The debt discount is amortized to interest expense using the effective interest method over seven years , or the expected life of the 2022 Convertible Notes.

The equity component is not remeasured as long as it continues to meet the conditions for equity classification.

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The 2022 Convertible Notes were repurchased at a premium totaling approximately $ 227.3 million.

The Company recognized a loss on extinguishment of debt of approximately $ 23.4 million during the year ended December 31, 2019 related to the premium and proportional write-off of the 2022 Convertible Notes unamortized debt issuance costs and unamortized debt discount.

The Company recognized a loss on extinguishment of debt of approximately $ 23.4 million during the year ended December 31, 2019 related to the prepayment premium and proportional write-off of the 2022 Convertible Notes unamortized debt issuance costs and unamortized debt discount.

Additionally, the repurchase resulted in a reduction to additional paid-in capital of approximately $ 27.0 million during the year ended December 31, 2019 related to the equity component of the 2022 Convertible Notes.

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

The Company used approximately $ 25.2 million of the net proceeds from the sale of the 2024 Convertible Notes and 2026 Convertible Notes to pay the cost of the Capped Calls, as described below.

The Company used approximately $ 25.2 million of the net proceeds from the sale of the 2024 Convertible Notes and 2026 Convertible Notes to pay the cost of the Capped Calls, as

described below.

For purposes of this section, “Notes” refer to the 2024 Convertible Notes and the 2026 Convertible Notes, collectively.

The 2024 Convertible Notes and 2026 Convertible Notes were issued by the Company on August 12, 2019, pursuant to separate Indentures, each dated as of such date (each an “Indenture” and together the “Indentures”), between the Company and the Trustee.

The 2024 Convertible Notes will bear cash interest at the annual rate of 0.75 % and the 2026 Convertible Notes will bear cash interest at the annual rate of 1.50 % , each payable on June 15 and December 15 of each year, which began on December 15, 2019.

The 2024 Convertible Notes bear cash interest at the annual rate of 0.75 % and the 2026 Convertible Notes bear cash interest at the annual rate of 1.50 %, each payable on June 15 and December 15 of each year.

The 2024 Convertible Notes will mature on June 15, 2024 and the 2026 Convertible Notes will mature on June 15, 2026, unless earlier converted or repurchased.

The Company will settle conversions of the 2024 Convertible Notes and 2026 Convertible Notes through payment or delivery, as the case may be,

of cash, shares of Class A Common Stock of the Company or a combination of cash and shares of Class A Common Stock, at the Company’s option (subject to, and in accordance with, the settlement provisions of the applicable Indenture).

The initial conversion rate for each of the 2024 Convertible Notes and the 2026 Convertible Notes is 74.6687 shares of Class A Common Stock (subject to adjustment as provided for in the applicable Indenture) per $ 1,000 principal amount of the 2024 Convertible Notes and 2026 Convertible Notes, which is equal to an initial conversion price of approximately $ 13.39 per share, representing a conversion premium of approximately 37.5 % above the last reported sale price of Class A Common Stock of $ 9.74 per share on August 7, 2019.

The Company will settle conversions of the 2024 Convertible Notes and 2026 Convertible Notes through payment or delivery, as the case may be, of cash, shares of the Company’s Class A Common Stock or a combination of cash and shares of Class A Common Stock, at the Company’s option (subject to, and in accordance with, the settlement provisions of the applicable Indenture).

Holders of the 2024 Convertible Notes and 2026 Convertible Notes may convert their Notes at their option at any time prior to the close of business on the business day immediately preceding December 15, 2023, with respect to the 2024 Convertible Notes, and December 15, 2025, with respect to the 2026 Convertible Notes, in multiples of $ 1,000 principal amount, only under the following circumstances:

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If the Company experiences a fundamental change, as described in the Indentures, prior to the maturity date of the respective Notes, holders of such Notes will, subject to specified conditions, have the right, at their option, to require the Company to repurchase for cash all or a portion of their Notes at a repurchase price equal to 100 % of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to, but not including, the fundamental change repurchase date.

In addition, following certain corporate events that occur prior to the applicable maturity date of the Notes, the Company will increase the conversion rate for a holder who elects to convert its Notes in connection with such corporate event.

If a make-whole fundamental change, as described in the Indentures, occurs and a holder elects to convert its Notes in connection with such make-whole fundamental change, such holder may be entitled to an increase in the conversion rate as described in the Indentures.

The Indentures do not contain any financial covenants or restrict the Company’s ability to repurchase the Company’s securities, pay dividends or make restricted payments in the event of a transaction that substantially increases the Company’s level of indebtedness.

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In accordance with accounting guidance for debt with conversion and other options, the Company separately accounted for the liability and equity components of the 2024 Convertible Notes and the 2026 Convertible Notes by allocating the proceeds between the liability components and the embedded conversion options, or equity components, due to the Company’s ability to settle the 2024 Convertible Notes and the 2026 Convertible Notes in cash, its Class A Common Stock, or a combination of cash and Class A Common Stock at the option of the Company.

The carrying amount of the respective liability components were calculated by measuring the fair value of a similar liability that does not have an associated convertible feature.

The allocation was performed in a manner that reflected the Company’s non-convertible debt borrowing rate for similar debt.

The respective equity components of the 2024 Convertible Notes and the 2026 Convertible Notes were recognized as a debt discount and represent the difference between the gross proceeds

from the issuance of the 2024 Convertible Notes and 2026 Convertible Notes and the fair value of the liability of the 2024 Convertible Notes and 2026 Convertible Notes on their respective dates of issuance.

The excess of the principal amount of the liability component over its carrying amount, or debt discount, is amortized to interest expense using the effective interest method over approximately five and seven years , or the expected life of the 2024 Convertible Notes and the 2026 Convertible Notes, respectively.

The carrying amount of the respective liability components were calculated by measuring the fair value of a similar liability that does not have an associated conversion feature.

The respective equity components of the 2024 Convertible Notes and the 2026 Convertible Notes were recognized as a debt discount and represent the difference between the gross proceeds from the issuance of the 2024 Convertible Notes and 2026 Convertible Notes and the fair value of the liability of the 2024 Convertible Notes and 2026 Convertible Notes on their respective dates of issuance.

The debt discount is amortized to interest expense using the effective interest method over approximately five and seven years , or the expected life of the 2024 Convertible Notes and the 2026 Convertible Notes, respectively.

The respective equity components are not remeasured as long as they continue to meet the conditions for equity classification.

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The portion of these costs allocated to the equity components totaling approximately $ 2.1 million were recorded as a reduction to additional paid-in capital.

The portion of these costs allocated to the liability components totaling approximately $ 6.9 million were recorded as a reduction in the carrying value of the debt on the consolidated balance sheet and are amortized to interest expense using the effective interest method over the expected life of the 2024 Convertible Notes and the 2026 Convertible Notes.

The portion of these costs allocated to the liability components totaling approximately $ 6.9 million were recorded as a reduction in the carrying value of the debt on the

consolidated balance sheet and are amortized to interest expense using the effective interest method over the expected lives of the 2024 Convertible Notes and the 2026 Convertible Notes.

The Company determined the expected life of the 2024 Convertible Notes and the 2026 Convertible Notes was equal to their approximately five and seven-year terms, respectively.

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The following table sets forth total interest expense recognized related to convertible senior notes during the years ended December 31, 2020, 2019, and 2018 (in thousands):

Year Ended December 31,

Contractual interest expense

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Future minimum payments under the convertible senior notes as of December 31, 2020, are as follows (in thousands):

2025 and Thereafter

Total future minimum payments under the convertible senior notes

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In connection with the Separation in April 2019, the exercise price was adjusted to $ 18.82 per share and the number of shares underlying the Note Hedge Warrants was increased to 23,135,435 shares.

The Note Hedge Warrants could have a dilutive effect on the Class A Common Stock to the extent that the market price per share of the Company's Class A Common Stock exceeds the applicable strike price of such warrants.

The Note Hedge Warrants

could have a dilutive effect on the Class A Common Stock to the extent that the market price per share of the Company’s Class A Common Stock exceeds the applicable strike price of such warrants.

The Convertible Note Hedges and the Note Hedge Warrants are separate transactions entered into by the Company and are not part of the terms of the 2022 Convertible Notes.

Holders of the 2022 Convertible Notes and the Note Hedge Warrants do not have any rights with respect to the Convertible Note Hedges.

The Company paid approximately $ 91.9 million for the Convertible Note Hedges and recorded this amount as a long-term asset on its

consolidated balance sheet.

The Company received approximately $ 70.8 million for the Note Hedge Warrants and recorded this amount as a long-term liability, resulting in a net cost to the Company of approximately $ 21.1 million.

Holders of the Convertible Note Hedges and the Note Hedge Warrants do not have any rights with respect to the 2022 Convertible Notes.

The Company paid approximately $ 91.9 million for the Convertible Note Hedges and received approximately $ 70.8 million for the Note Hedge Warrants, resulting in a net cost to the Company of approximately $ 21.1 million.

In August 2019, concurrently with the repurchase of $ 215.0 million aggregate principal amount of the 2022 Convertible Notes, the Company terminated the respective portion of the Convertible Note Hedges and Note Hedge Warrants.

The Company received approximately $ 3.2 million related to net termination payments from the counterparties of the Convertible Note Hedges and Note Hedge Warrants.

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

The Convertible Note Hedges and Note Hedge Warrants are accounted for as derivative assets and liabilities, respectively, in accordance with ASC 815.

The Company received approximately $ 3.2 million of termination payments from the counterparties of the Convertible Note Hedges and Note Hedge Warrants.

The Convertible Note Hedges and Note Hedge Warrants are accounted for as derivative assets and liabilities, respectively, in accordance with ASC 815, and are remeasured to fair value at each reporting date (Note 7).

Capped Calls with Respect to 2024 Convertible Notes and 2026 Convertible Notes

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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.

The Capped Calls have a cap price of approximately $ 17.05 per share, representing an approximately 75 % premium over the last reported sale price of the Class A Common Stock as of August 7, 2019, which cap price is subject to certain adjustments under the terms of the Capped Calls.

The Capped Calls have a cap price of approximately $ 17.05 per share, subject to certain adjustments.

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 are expected generally to reduce the potential dilution to the Class A Common Stock upon conversion of the 2024 Convertible Notes and the 2026 Convertible Notes in the event that the market price per share of Class A Common Stock, as measured under the terms of the Capped Calls, is greater than the strike price of the Capped Calls as adjusted pursuant to the anti-dilution adjustments.

If, however, the market price per share of Class A Common Stock, as measured under the terms of the Capped Calls, exceeds the cap price of the Capped Calls, there would nevertheless be dilution upon conversion of the 2024 Convertible Notes and the 2026 Convertible Notes to the extent that such market price exceeds the cap price of the Capped Calls.

The Capped Calls are expected generally to reduce the potential dilution to the Class A Common Stock upon conversion of the 2024 Convertible Notes and the 2026 Convertible Notes in the event that the market price per share of Class A Common Stock is greater than the strike price of the Capped Calls as adjusted pursuant to the anti-dilution adjustments.

If, however, the market price per share of Class A Common Stock exceeds the cap price of the Capped Calls, there would nevertheless be dilution upon conversion of the 2024 Convertible Notes and the 2026 Convertible Notes to the extent that such market price exceeds the cap price of the Capped Calls.

The Capped Calls are separate transactions entered into by and between the Company and the Capped Calls counterparties and are not part of the terms of the 2024 Convertible Notes or the 2026 Convertible Notes.

Holders of the 2024 Convertible Notes and the 2026 Convertible Notes do not have any rights with respect to the Capped Calls.

The Company recorded a reduction to additional paid-in capital of approximately $ 25.0 million during the year ended December 31, 2019 related to the premium payments for the Capped Calls.

Additionally, the Company recorded an approximately $ 0.2 million reduction to equity related to transaction costs incurred in connection with the Capped Calls during the year ended December 31, 2019.

Commitments and Contingencies

Commercial Supply Commitments

The Company has multiple supply agreements for the purchase of linaclotide finished drug product and API.

Two of the Company’s API supply agreements for supplying API to its collaboration partners outside of North America have historically contained minimum purchase commitments.

During the year ended December 31, 2019, the Company amended its API supply agreements to transfer its minimum purchase commitments to its partners outside of North America beginning in 2020.

Under its remaining agreements, the Company had no minimum purchase commitments as of December 31, 2019.

In addition, the Company and Allergan are jointly obligated to make minimum purchases of linaclotide API for the territories covered by the Company's collaboration with Allergan for North America.

Currently, Allergan fulfills all such minimum purchase commitments.

Commitments Related to the Collaboration and License Agreements

Under the collaboration agreement with Allergan for North America the Company shares all development and commercialization costs related to linaclotide in the U.S.

with Allergan.

The actual amounts that the Company pays its partner or that the partner pays to the Company will depend on numerous factors outside of the Company’s control, including the success of certain clinical development efforts with respect to linaclotide, the content and timing of decisions made by the regulators, the reimbursement and competitive landscape around linaclotide and the Company’s other product candidates, and other factors.

In addition, the Company has commitments to make potential future milestone payments to third parties under certain of its license and collaboration arrangements.

These milestones primarily relate to the initiation and results of clinical trials, obtaining regulatory approval in various jurisdictions and the future commercial success of development programs, the outcome and timing of which are difficult to predict and subject to significant uncertainty.

In addition to the milestones discussed above, the Company is obligated to pay royalties on future sales, which are contingent on generating levels of sales of future products that have not been achieved and may never be achieved.

These agreements are more fully described in Note 6, Collaboration, License, Co-promotion and Other Commercial Agreements , to these consolidated financial statements.

Commitments with AbbVie

The Company and AbbVie are jointly obligated to make minimum purchases of linaclotide API for the territories covered by the Company’s collaboration with AbbVie for North America.

Currently, AbbVie fulfills all such minimum purchase commitments.

Under the collaboration agreement with AbbVie for North America, the Company shares all development and commercialization costs related to linaclotide in the U.S.

The actual amounts that the Company pays to AbbVie or that AbbVie pays to the Company will depend on numerous factors outside of the Company’s control, including the success of certain clinical development efforts with respect to linaclotide, the content and timing of decisions made by the regulators, the reimbursement and competitive landscape around linaclotide and the Company’s other product candidates, and other factors.

Other Funding Commitments

As of December 31, 2019, the Company has several on-going studies in various clinical trial stages.

As of December 31, 2020, the Company has on-going studies in various pre-clinical and clinical trial stages.

The Company’s most significant clinical trial expenditures are to contract research organizations.

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While the outcome of these other claims cannot be predicted with certainty, management does not believe that the outcome of any of these ongoing legal matters, individually and in aggregate, will have a material adverse effect on the Company’s consolidated financial statements.

In connection with the settlements the Company entered into in 2018, the Company agreed to pay an aggregate of $ 4.0 million in avoidance of litigation fees and expenses during the year ended December 31, 2018.

For additional

information relating to such ANDAs and any resolution of related litigation, see Item 3, Legal Proceedings , elsewhere in this Annual Report on Form 10-K.

In January 2020, the Company and AbbVie entered into settlement agreements with Sandoz Inc.

and Teva Pharmaceuticals, USA resolving patent litigation brought in response to the last outstanding abbreviated new drug applications seeking approval to market generic versions of LINZESS prior to the expiration of the Company’s and AbbVie’s applicable patents.

In connection with litigation settlements the Company entered into in 2018, the Company agreed to pay an aggregate of $ 4.0 million in avoidance of litigation fees and expenses during the year ended December 31, 2018.

Stockholders’ Equity

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Authority is given to the board of directors to determine and fix such voting powers, full or limited, or no voting powers, and such designations, preferences and relative participating, optional or other special rights, and qualifications, limitation or restrictions thereof, including without limitation, dividend rights, conversion rights, redemption privileges and liquidation preferences.

Prior to December 31, 2018, the Company had designated two series of common stock, Series A common stock (“Class A Common Stock”) and Series B common stock (“Class B Common Stock”).

The holders of Class A Common Stock and Class B Common Stock voted together as a single class.

The Company has one class of common stock (“Class A Common Stock”).

Class A Common Stock is entitled to one vote per share.

Class B Common Stock was also entitled to one vote per share with the following exceptions :

(1) after the completion of an initial public offering of the Company’s stock, the holders of the Class B Common Stock were entitled to ten votes per share if the matter was an adoption of an agreement of merger or consolidation, an adoption of a resolution with respect to the sale, lease, or exchange of the Company’s assets or an adoption of dissolution or liquidation of the Company, and (2) Class B common stockholders were entitled to ten votes per share on any matter if any individual, entity, or group sought to obtain or had obtained beneficial ownership of 30 % or more of the Company’s outstanding shares of common stock.

Class B Common Stock could be sold at any time and irrevocably converted to Class A Common Stock, on a one - for-one basis, upon sale or transfer.

The Class B Common Stock was also entitled to a separate class vote for the issuance of additional shares of Class B Common Stock (except pursuant to dividends, splits or convertible securities), or any amendment, alteration or repeal of any provision of the Company’s charter.

On December 31, 2018, all Class B Common Stock automatically converted into Class A Common Stock.

The Company had reserved such number of shares of Class A Common Stock as there were outstanding shares of Class B Common Stock solely for the purpose of effecting the conversion of the Class B Common Stock.

Upon conversion, 13,972,688 shares of Class B Common Stock were converted to Class A Common Stock.

There are no outstanding shares of Class B Common Stock remaining after the conversion as of December 31, 2018.

The Company has reserved, out of its authorized but unissued shares of Class A Common Stock, sufficient shares to effect the conversion of the convertible senior notes and the Note Hedge Warrants pursuant to the terms thereof (Note 11).

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The Company has several share-based compensation plans under which stock options, RSAs, RSUs, and other share-based awards are available for grant to employees, officers, directors and consultants of the Company.

The following table summarizes share-based compensation expense (in thousands):

The following table summarizes share-based compensation expense by award type (in thousands):

Year Ended December 31,

Employee stock options

Restricted stock units

Stock options

Time-based restricted stock units

Performance-based restricted stock units

Restricted stock awards

Non-employee stock options

Employee stock purchase plan

The following table summarizes the expenses reflected in the consolidated statements of operations as follows for the years ended December 31, 2019, 2018 and 2017 (in thousands):

The following table summarizes the share-based compensation expense reflected in the consolidated statements of operations (in thousands):

Years Ended December 31,

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Restructuring expenses

During the three months ended March 31, 2018, the Company reduced its field-based workforce by approximately 60 employees, primarily consisting of field-based sales representatives that promoted DUZALLO or ZURAMPIC in the first position, resulting in modifications to certain share-based payment awards.

As a result of the modification, the Company recorded share-based compensation expense of approximately $ 0.2 million to restructuring expenses during the year ended December 31, 2018.

During the three months ended June 30, 2018, the Company initiated a reduction in its headquarter-based workforce by approximately 40 employees associated with the Separation.

Certain share-based payment awards were modified in connection with the reduction in workforce.

As a result of the modifications, the Company recorded share-based compensation expense of approximately $ 1.4 million during the year ended December 31, 2018.

During the three months ended September 30, 2018, the Company reduced its workforce by approximately 100 employees, primarily consisting of field-based sales representatives, as a result of the termination of the exclusive Lesinurad License.

Certain share-based payment awards were modified in connection with the reduction in workforce.

As a result of the modifications, the Company recorded share-based compensation expense of approximately $ 0.6 million to restructuring expenses during the year ended December 31, 2018.

Certain share-based payment awards were modified in connection with the reduction in workforce.

As a result of the modifications, the Company recorded share-based compensation expense of approximately $ 0.7 million to restructuring expenses for the year ended December 31, 2019.

In April 2019, in connection with the Separation, all outstanding share-based payment awards were modified in accordance with the equity conversion-related provisions of the employee matters agreement.

Restructuring expenses include modifications to share-based awards held by employees impacted by the various workforce reductions (Note 18).

No share-based compensation expense was recognized in connection with these modifications.

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As a result of the modification to the ESPP, the Company recorded approximately $ 0.3 million of share-based compensation expense for the year ended December 31, 2019.

In connection with certain other modifications of share-based payment awards for the year ended December 31, 2019, the Company recognized approximately $ 3.0 million in share-based compensation expense.

In connection with certain other modifications of share-based payment awards for the years ended December 31, 2020 and 2019, the Company recognized an insignificant amount and approximately $ 3.0 million in share-based compensation expense, respectively.

Stock Benefit Plans

As of December 31, 2020, the Company has the following active stock benefit plans pursuant to which awards are currently outstanding:

the 2019 Equity Incentive Plan (the “2019 Equity Plan”), the Amended and Restated 2010 Employee Stock Purchase Plan (the “2010 Purchase Plan”), the Amended and Restated 2010 Employee, Director, and Consultant Equity Incentive Plan (the “2010 Equity Plan”), and the Amended and Restated 2005 Stock Incentive Plan (the “2005 Equity Plan”).

the 2019 Equity Incentive Plan (the “2019 Equity Plan”), the Amended and Restated 2010 Employee Stock Purchase Plan (the “2010 Purchase Plan”) and the Amended and Restated 2010 Employee, Director, and Consultant Equity Incentive Plan (the “2010 Equity Plan”).

At December 31, 2020, there were 14,357,176 shares available for future grant under the 2019 Equity Plan and the 2010 Purchase Plan.

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Under the 2019 Equity Plan, 10,000,000 shares of Class A Common Stock were initially reserved for issuance.

Awards that are returned to the 2010 Equity Plan and 2005 Equity Plan as a result of their expiration, cancellation, termination or repurchase are automatically made available for issuance under the 2019 Equity Plan.

Awards that are returned to the 2010 Equity Plan as a result of their expiration, cancellation, termination or repurchase are automatically made available for issuance under the 2019 Equity Plan.

Awards that expire, cancel, terminate, or are repurchased under the 2019 Equity Plan will no longer be available for future grant.

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(i) 1,000,000 shares, (ii) 1 % of the Class A shares of common stock outstanding on the last day of the immediately preceding fiscal year, or (iii) such lesser number of shares as is determined by the board of directors.

At December 31, 2019, there were 4,913,030 shares available for future grant under the 2010 Purchase Plan.

2010 Equity Plan & 2005 Equity Plan

The 2010 Equity Plan and 2005 Equity Plan provided for the granting of stock options, RSAs, RSUs, and other share-based awards to employees, officers, directors, consultants, or advisors of the Company.

At December 31, 2019, there were no shares available for future grant under the 2010 Equity Plan or 2005 Equity Plan.

As of December 31, 2020, there were 4,705,393 shares available for future grant under the 2010 Purchase Plan.

2010 Equity Plan

The 2010 Equity Plan provided for the granting of stock options, RSAs, RSUs, and other share-based awards to employees, officers, directors, consultants, or advisors of the Company.

At December 31, 2020, there were no shares available for future grant under the 2010 Equity Plan.

Restricted Stock Awards

In 2019, the Company granted an aggregate of 198,523 shares of Class A Common Stock to independent members of the board of directors under restricted stock agreements in accordance with the terms of the 2010 Equity Plan, and either the Company’s director compensation plan, effective in January 2014, or the Company’s non-employee director compensation policy, effective May 2019.

These shares of restricted stock vest ratably over the period of service from the Company’s 2019 annual meeting of stockholders through the Company’s 2020 annual meeting of stockholders, provided the individual continues to serve on the Company’s board of directors through each vest date.

In 2018, the Company granted an aggregate of 129,784 shares of Class A Common Stock to independent members of the board of directors under restricted stock agreements in accordance with the terms of the 2010 Equity Plan and the Company’s director compensation plan, effective in January 2014.

These shares of restricted stock vested ratably over the period of service from the Company’s 2018 annual meeting of stockholders through the Company’s 2019 annual meeting of stockholders, provided the individual continued to serve on the Company’s board of directors through each vesting date.

In 2017, the Company granted an aggregate of 134,793 shares of Class A Common Stock to independent members of the board of directors under restricted stock agreements in accordance with the terms of the 2010 Equity

Plan and the Company’s director compensation plan, effective in January 2014.

These shares of restricted stock vested ratably over the period of service from the Company’s 2017 annual meeting of stockholders through the Company’s 2018 annual meeting of stockholders, provided the individual continued to serve on the Company’s board of directors through each vest date.

RSAs are granted to non-employee members of the board of directors under restricted stock agreements in accordance with the terms of the 2019 Equity Plan and the Company’s non-employee director compensation policy, effective May 2019.

Annual restricted stock grants to each non-employee member of the board of directors vest ratably over the period of service from the grant date through the Company’s 2021 annual meeting of stockholders, provided the individual continues to serve on the Company’s board of directors through each vest date.

Initial restricted stock grants to new non-employee members of the board of directors vest annually over a three-year period from the date of grant provided the individual continues to serve on the Company’s board of directors through each vest date.

A summary of restricted stock activity for the year ended December 31, 2020 is presented below:

Fair Value (1)

Unvested as of December 31, 2019

Unvested as of December 31, 2020

(1) Prior period amounts have not been retrospectively adjusted to reflect the effect of the Separation on the Company’s stock price.

The weighted-average grant date fair value per share of restricted stock awards granted during the years ended December 31, 2020, 2019, and 2018 was $ 10.16 , $ 10.96 , and $ 18.58 , respectively.

Amounts relating to restricted stock awards granted prior to the Separation have not been adjusted to reflect the effect of the Separation on the Company’s stock price.

Restricted Stock Units

RSUs granted under the Company’s equity plans represent the right to receive one share of the Company’s Class A Common Stock pursuant to the terms of the applicable award agreement.

The RSUs generally vest 25 % per year on the approximate anniversary of the date of grant until fully vested, provided the individual remains in continuous service with the Company through each vesting date.

Shares of the Company’s Class A Common Stock are delivered to the employee upon vesting, subject to payment of applicable withholding taxes.

The fair value of all RSUs is based on the market value of the Company's Class A Common Stock on the date of grant.

Time-based RSUs

Time-based RSUs generally vest over a two -to- four-year period on the approximate anniversary of the date of grant until fully vested, provided the individual remains in continuous service with the Company through each vesting date.

The fair value of all time-based RSUs is based on the market value of the Company's Class A Common Stock on the date of grant.

Compensation expense, including the effect of estimated forfeitures, is recognized over the applicable service period.

A summary of RSU activity for the year ended December 31, 2019 is as follows:

A summary of time-based RSU activity for the year ended December 31, 2020 is as follows:

Outstanding as of December 31, 2019

Vested and released

Outstanding as of December 31, 2020

The weighted-average grant date fair value per share of time-based RSUs granted during the years ended December 31, 2020, 2019, and 2018 was $ 11.59 , $ 12.11 , and $ 15.63 , respectively.

Amounts relating to time-based RSUs granted prior to the Separation have not been adjusted to reflect the effect of the Separation on the Company’s stock price.

Performance-based RSUs

Performance-based RSUs (“PSUs”) were granted to certain executives in 2020.

PSUs vest upon the achievement of specified performance criteria over a two to three-year performance period, generally subject to the executive remaining in continuous service with the Company through the applicable vesting dates.

The performance criteria applicable to the PSUs were (i) gaining the U.S.

FDA’s acceptance of one or more additional New Drug Applications through internal development or acquisition of development-stage or commercial-stage programs (“Pipeline PSUs”), (ii) achieving certain profitability metrics (“Profitability PSUs”) and (iii) realizing relative total shareholder return goals (the “Relative TSR PSUs”).

The fair value of Pipeline PSUs and Profitability PSUs is based on the market value of the Company's Class A Common Stock on the date of grant.

The Relative TSR PSUs are valued using the Monte Carlo simulation method on the date of grant.

The weighted average assumptions used to estimate the fair value of Relative TSR PSUs were as follows for the year ended December 31, 2020:

Year Ended December 31,

Fair value of common stock

Expected volatility

Expected term (in years)

Risk-free interest rate

Expected dividend yield

A summary of PSU activity for the year ended December 31, 2020 is as follows:

Fair Value (1)

Unvested as of December 31, 2018

( 1,298,536 )

( 1,649,844 )

Unvested as of December 31, 2019

(1) Prior period amounts have not been retrospectively adjusted to reflect the effect of the Separation on the Company’s stock price.

Outstanding as of December 31, 2019

Vested and released

Outstanding as of December 31, 2020

No PSUs were granted prior to the year ended December 31, 2020.

Stock Options

Stock options granted under the Company’s equity plans generally have a ten-year term and vest over a period of four years , provided the individual continues to serve at the Company through the vesting dates.

Stock options granted under the Company’s equity plans represent the right to purchase one share of the Company’s Class A Common Stock pursuant to the terms of the applicable award agreement.

Shares of the Company's Class A Common Stock are delivered to the employee upon exercise, subject to payment of applicable withholding taxes.

As of April 2020, the Company no longer grants stock options.

Stock options previously granted under the Company’s equity plans generally have a ten-year term and vest over a period of four years , provided the individual continues to serve at the Company through the vesting dates.

Options granted under all equity plans are exercisable at a price per share not less than the fair market value of the underlying common stock on the date of grant.

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The weighted average assumptions used to estimate the fair value of the stock options using the Black-Scholes option-pricing model were as follows for the years ended December 31, 2020, 2019, and 2018:

Years Ended December 31,

Expected volatility

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Expected dividend yield

Expected volatility is based on the historic volatility of the Company’s Class A Common Stock.

Expected volatility is based on the historical volatility of the Company’s Class A Common Stock.

The Company estimates the expected term using historical data.

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Treasury instrument with a remaining term similar to the expected term of the share-based award.

The Company has not paid and does not anticipate paying cash dividends on its shares of common stock in the foreseeable future;

Company has not paid and does not anticipate paying cash dividends on its shares of common stock in the foreseeable future;

therefore, the expected dividend yield is assumed to be zero .

The weighted-average grant date fair value per share of options granted during the years ended December 31, 2020, 2019, and 2018 was $ 5.89 , $ 6.10 , and $ 6.81 , respectively.

Prior period amounts have not been adjusted to reflect the effect of the Separation on the Company’s stock price.

The Company grants to certain employees performance-based options to purchase shares of common stock.

Amounts relating to stock options granted prior to the Separation have not been adjusted to reflect the effect of the Separation on the Company’s stock price.

The Company historically granted to certain employees performance-based options to purchase shares of common stock.

These options are subject to performance-based milestone vesting.

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Exercisable at December 31, 2020

(1) Prior period amounts have not been retrospectively adjusted to reflect the effect of the Separation on the exercise price of the Company’s stock options.

(1) Exercise prices relating to stock options granted prior to the Separation have not been adjusted to reflect the effect of the Separation on the stock options.

The total intrinsic value of options exercised during the years ended December 31, 2020, 2019, and 2018 was approximately $ 3.5 million, approximately $ 5.1 million, and approximately $ 20.1 million, respectively.

The intrinsic value was calculated as the difference between the fair value of the Company’s common stock and the exercise price of the option issued.

The intrinsic value was calculated as the difference between the fair value of the Company’s Class A Common Stock and the exercise price of the option issued.

The following table sets forth the Company's unrecognized share-based compensation expense, net of estimated forfeitures, as of December 31, 2020, by type of award and the weighted-average period over which that expense is expected to be recognized:

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Restricted stock awards

Restricted stock units

Time-based restricted stock units

Performance-based restricted stock units

Stock options with time-based and performance-based vesting (1)

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The total unrecognized share-based compensation cost will be adjusted for future changes in estimated forfeitures.

In general, the Company has not recorded a provision for federal or state income taxes as it has had cumulative net operating losses since inception.

On December 22, 2017, the Tax Cuts and Jobs Act was enacted.

This law substantially amended the Internal Revenue Code, including reducing the U.S.

corporate tax rates.

Upon enactment, the Company’s deferred tax asset and related valuation allowance decreased by approximately $ 153.9 million.

As the deferred tax asset is offset in full by valuation allowance, this enacted legislation had no impact on the Company’s financial position or results of operations.

The Company completed its accounting for the tax effects of the Tax Cuts and Job Act as of December 31, 2018 and did not record any material adjustments to its original estimate.

During the year ended December 31, 2020, the Company recorded approximately $ 2.7 million in income tax expense related to state income tax, which primarily resulted from a change in California tax which temporarily disallows the use of net operating losses to offset taxable income.

The Company did not record a provision for federal income taxes for the period ended December 31, 2020, as it offset taxable income with federal net operating losses and continues to record a full valuation allowance against net deferred tax assets.

The Company did not record a provision for federal, state, or foreign income taxes for the period ended December 31, 2019 and 2018, respectively, because the Company incurred a tax loss during these years and offset the benefit of these tax losses with valuation allowance.

The Company has not recorded a foreign tax provision as it has had cumulative net operating losses outside of the United States since inception.

On March 27, 2020.

the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was enacted and signed into law.

The Company benefitted from certain provisions of the CARES Act, specifically, the increase in allowable business interest deduction from 30% of adjusted taxable income to 50% of adjusted taxable income, which allowed the Company to take additional interest deductions for the period ended December 31, 2020.

Additionally, the Company was able to claim 100% bonus depreciation on leasehold improvements incurred in the period ended December 31, 2019 and 2020.

A reconciliation of income taxes computed using the U.S.

federal statutory rate to that reflected in operations follows (in thousands):

federal statutory rate of 21 % to that reflected in the consolidated statements of operations are as follows (in thousands):

Year Ended December 31,

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federal statutory rate

Effect of U.S.

Permanent differences

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Change in the valuation allowance

Components of the Company’s deferred tax assets and liabilities are as follows (in thousands):

Year Ended December 31,

Income tax expense

Deferred tax assets and liabilities were determined based on the difference between financial statement and tax bases using enacted tax rates in effect for the year in which the differences are expected to reverse.

The components of the Company’s deferred tax assets and liabilities are as follows (in thousands):

Deferred tax assets:

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Capitalized research and development

Contingent consideration

Share-based compensation

Basis difference on North America collaboration agreement

Basis difference on collaboration agreement for North America with AbbVie

Accruals and reserves

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Net deferred tax asset

Management of the Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets.

Management has considered the Company’s history of operating losses prior to the year ended December 31, 2019 and concluded, in accordance with the applicable accounting standards, that it is more likely than not that the Company will not realize the benefit of its deferred tax assets.

Accordingly, the deferred tax assets have been fully reserved at December 31, 2019 and 2018.

Management reevaluates the positive and negative evidence on a quarterly basis.

The valuation allowance decreased approximately $ 29.1 million during the year ended December 31, 2019 primarily due to a decrease of the intangible deferred tax asset due to the recognition of a tax loss during the year ended December 31, 2019 related to the termination of the lesinurad license agreement and establishment of a deferred tax liability for a basis difference in the 2024 Convertible Notes and 2026 Convertible Notes, partially offset by an increase in the deferred tax asset for temporarily disallowed interest expense.

The valuation allowance increased approximately $ 80.7 million during the year ended December 31, 2018 primarily due to the 2018 net operating loss and increase in tax credit carryforwards;

the establishment of a deferred tax asset for temporarily disallowed interest expense;

an increase in the basis difference on the collaboration agreement for North America with Allergan;

and an increase in intangible deferred tax assets as a result of the impairment of the lesinurad franchise, partially offset by adjustments to the contingent consideration obligation.

Subject to the limitations described below, at each of December 31, 2019 and 2018, the Company had federal net operating loss carryforwards of approximately $ 1.2 billion to offset future federal taxable income, which expiration began in 2019 and will continue through 2037.

The 2019 and 2018 net operating loss of $ 32.7 million and $ 89.1 million, respectively, have an indefinite life.

As of December 31, 2019 and 2018, the Company had state net operating loss carryforwards of approximately $ 1.0 billion and approximately $ 877.1 million, respectively, to offset future state taxable income, which will begin to expire in 2020 and will continue to expire through 2039.

The Company also had tax credit carryforwards of approximately $ 64.6 million and approximately $ 63.3 million as of December 31, 2019 and 2018, respectively, to offset future federal and state income taxes, which expire at various times through 2039.

On a periodic basis, the Company reassesses the valuation allowance on its deferred income tax assets weighing positive and negative evidence to assess the recoverability of the deferred tax assets.

Management evaluated the positive evidence, including income during the year ended December 31, 2020, and negative evidence, including its cumulative losses in recent years and its plan to build its innovative GI pipeline through potential acquisition or in-licensing externally development products, and concluded that it is more likely than not that the Company will not realize the benefit of its deferred tax assets for the year ended December 31, 2020.

Accordingly, the net deferred tax assets have been fully offset by a valuation allowance as of December 31, 2020 and 2019.

Management re-evaluates the positive and negative evidence on a quarterly basis.

Based on the Company’s financial performance and its future projections, it may record a reversal of all, or a portion of the valuation allowance associated with its 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.

The Company’s total deferred tax asset balance subject to a valuation allowance was $ 395.0 million and approximately $ 430.2 million as of December 31, 2020 and 2019, respectively.

The valuation allowance decreased approximately $ 35.2 million during the year ended December 31, 2020 primarily due to the Company’s offsetting taxable income with previously disallowed interest expense and net operating losses, partially offset by an increase in deferred tax asset for the basis difference of the collaboration agreement for North America with AbbVie.

The valuation allowance decreased approximately $ 29.1 million during the year ended December 31, 2019 primarily due to establishment of a deferred tax liability for a basis difference in the 2024 Convertible Notes and 2026 Convertible Notes, partially offset by an increase in the deferred tax asset for temporarily disallowed interest expense.

Subject to the limitations described below, at December 31, 2020, the Company had federal net operating loss carryforwards of approximately $ 1.1 billion of which approximately $ 1.0 billion is subject to an expiration between 2021 and 2037 and $ 0.1 billion may be carried forward indefinitely.

As of December 31, 2020, the Company had state net operating loss carryforwards of approximately $ 0.9 billion to offset future state taxable income, which is subject to expiration between 2021 and 2039.

The Company also had tax credit carryforwards of approximately $ 65.3 million as of December 31, 2020 to offset future federal and state income taxes, which is subject to expiration at various times through 2040.

Utilization of net operating loss carryforwards and research and development credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations that could occur in the future in accordance with Section 382 of the Internal Revenue Code of 1986 (“IRC Section 382”) and with Section 383 of the Internal Revenue Code of 1986, as well as similar state provisions.

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In general, an ownership change, as defined by IRC Section 382, results from transactions increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period.

The Company has completed several financings since its inception which may result in a change in control as defined by IRC Section 382, or could result in a change in control in the future.

The following table summarizes the changes in the Company’s unrecognized income tax benefits for the years ended December 31, 2020, 2019, and 2018 (in thousands):

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The Company had gross unrecognized tax benefits of approximately $ 68.1 million, approximately $ 53.1 million, and approximately $ 38.6 million as of December 31, 2020, 2019 and 2018 , respectively .

Of the approximately $ 53.1 million of total unrecognized tax benefits at December 31, 2019, none of the unrecognized tax positions would, if recognized, affect the Company’s effective tax rate, due to a valuation allowance against deferred tax assets and only impacts the Company’s deferred tax accounting.

Of the approximately $ 68.1 million of total unrecognized tax benefits at December 31, 2020, approximately $ 0.8 million would, if recognized, affect the Company’s effective tax rate, and the remaining amount would not affect the Company’s effective tax rate due to a valuation allowance against the Company’s net deferred tax assets.

A reserve for uncertain tax positions of approximately $ 0.8 million is recorded in other liabilities on the Company’s consolidated balance sheet as of December 31, 2020.

The Company will recognize interest and penalties, if any, related to uncertain tax positions in income tax expense.

As of December 31, 2020, no interest or penalties have been accrued.

The statute of limitations for assessment by the Internal Revenue Service (“IRS”) and state tax authorities is open for tax years ended December 31, 2019, 2018, and 2017.

The statute of limitations for assessment by the Internal Revenue Service (“IRS”) and state tax authorities is open for tax years ended December 31, 2017 through the present, although net operating losses generated from years prior to 2017 could be subject to examination and adjustments to the extent utilized in future years.

There are currently no federal or state income tax audits in progress.

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Related Party Transactions

Under the collaboration agreement, the Company and Allergan equally support the development and commercialization of linaclotide (Note 6).

Amounts due to and due from Allergan are reflected as related party accounts payable and related party accounts receivable, respectively.

These balances are reported net of any balances due to or from the related party.

As of December 31, 2019 and 2018, the Company had approximately $ 106.0 million and approximately $ 60.0 million, respectively, in related party accounts receivable, net of related party accounts payable, associated with Allergan.

The Company has and currently obtains health insurance services for its employees from an insurance provider whose President and Chief Executive Officer became a member of the Company’s Board of Directors in April 2016.

The Company paid approximately $ 7.4 million, approximately $ 11.9 million, and approximately $ 12.1 million in

insurance premiums to this insurance provider during the years ended December 31, 2019, 2018, and 2017, respectively.

At both December 31, 2019 and 2018, the Company had no accounts payable due to this related party.

In connection with the Separation, the Company executed certain contracts with Cyclerion whose President became a member of the Company’s Board of Directors in April 2019 (Note 3).

As of December 31, 2019, the Company had an insignificant amount of accounts receivable and approximately $ 1.5 million of accounts payable due from and to Cyclerion, respectively.

Workforce Reduction

On January 30, 2018, the Company commenced an initiative to evaluate the optimal mix of investments for the lesinurad franchise.

The Company previously reflected amounts due to and due from Allergan prior to its acquisition by AbbVie as related party accounts payable and related party accounts receivable, respectively.

Following the acquisition of Allergan by AbbVie, the Company determined that AbbVie is not a related party to the Company.

As such, only historical amounts paid to and received from Allergan (prior to its acquisition by AbbVie) are considered related party accounts payable and related party accounts receivable, respectively.

Balances of related party accounts payable and related party accounts receivable, respectively, were reported net of any balances due to or from the related party.

In connection with the Separation, the Company executed certain contracts with Cyclerion, whose President and Chief Scientific Officer at the time of the Separation became a member of the Company’s Board of Directors in April 2019 (Note 3).

As of December 31, 2020, Cyclerion was no longer considered a related party.

Workforce Reductions and Restructuring

During the years ended December 31, 2020, 2019, and 2018 the Company recorded approximately $ 15.4 million, approximately $ 3.6 million, and approximately $ 14.7 million in restructuring expenses, respectively, in its consolidated statement of operations.

In January 2018, the Company commenced an initiative to evaluate the optimal mix of investments for the lesinurad franchise.

As part of this effort, the Company reduced its field-based workforce by approximately 60 employees, primarily consisting of field-based sales representatives that promoted DUZALLO or ZURAMPIC in the first position.

During the three months ended March 31, 2018, the Company substantially completed the implementation of this reduction in field-based workforce and, in accordance with ASC 420, recorded approximately $ 2.4 million of costs in its consolidated statement of operations as restructuring expenses.

On June 27, 2018, the Company determined the initial organizational designs of the two new businesses, including employees’ roles and responsibilities, in connection with the Separation.

As part of this process, the Company initiated a reduction in its headquarter-based workforce by approximately 40 employees and substantially completed the reduction in its workforce during the year ended December 31, 2019.

During the years ended December 31, 2019 and 2018, the Company recorded an insignificant amount of adjustments and approximately $ 4.0 million in connection with the reduction in workforce in accordance with ASC 420, respectively.

These costs are reflected in the consolidated statement of operations as restructuring expenses.

On August 16, 2018, the Company initiated a reduction in its workforce by approximately 100 employees, primarily consisting of field-based sales representatives in connection with the termination of the Lesinurad License and substantially completed the reduction in its workforce and recorded associated costs during the year ended December 31, 2019.

During the year ended December 31, 2019, the Company recorded an insignificant amount of adjustments to restructuring costs related to this workforce reduction.

During the year ended December 31, 2018, the Company recorded approximately $ 8.3 million of costs, including approximately $ 5.4 million of severance, benefits and related costs and approximately $ 2.9 million of contract-related costs, including the write-down of certain prepaid assets and deposits, in accordance with ASC 420 in connection with the reduction in workforce.

These costs are reflected in the consolidated statement of operations as restructuring expenses.

On February 7, 2019, following further analysis of the Company’s strategy and core business needs, and in an effort to further strengthen the operational efficiency of the organization, the Company commenced a reduction in workforce by approximately 35 employees, primarily based in the home office.

During the year ended December 31, 2019, the Company recorded approximately $ 3.7 million of costs that are reflected in the consolidated statement of operations as restructuring expenses.

The following table summarizes the accrued liabilities activity recorded in connection with the reduction in workforce for the year ended December 31, 2019 (in thousands):

During the three months ended March 31, 2018, the Company substantially completed this reduction in field-based workforce and recorded approximately $ 2.4 million of severance, benefits and related costs as restructuring expenses during the year ended December 31, 2018 related to this reduction in workforce.

In June 2018, the Company determined the initial organizational designs of the two new businesses, including employees’ roles and responsibilities, in connection with the Separation.

As part of this process, the Company initiated a reduction in its headquarters-based workforce by approximately 40 employees and substantially completed the reduction in its workforce during the year ended December 31, 2018.

During the year ended December 31, 2018, the Company recorded approximately $ 4.0 million of severance, benefits and related costs as restructuring expenses related to this reduction in workforce.

In August 2018, the Company initiated a reduction in its workforce by approximately 100 employees, primarily consisting of field-based sales representatives in connection with the termination of the Lesinurad License and substantially completed the reduction in its workforce and recorded associated costs during the year ended December 31, 2018.

During the years ended December 31, 2020 and 2019, the Company recorded an insignificant amount of adjustments to restructuring costs related to this workforce reduction.

During the year ended December 31, 2018, the Company recorded approximately $ 8.3 million of restructuring expenses, including approximately $ 5.4 million of severance, benefits and related costs and approximately $ 2.9 million of contract-related costs, including the write-down of certain prepaid assets and deposits, in connection with this reduction in workforce.

In February 2019, following further analysis of the Company’s strategy and core business needs, and in an effort to further strengthen the operational efficiency of the organization, the Company commenced a reduction in workforce by approximately 35 employees, primarily based in the home office and substantially completed the reduction in its workforce and recorded associated costs during the year ended December 31, 2019.

During the year ended December 31, 2019, the Company recorded approximately $ 3.7 million of severance, benefits and related costs as restructuring expenses related to this reduction in workforce.

In September 2020, the Company announced that one of its two identical Phase III trials evaluating IW-3718 in refractory GERD did not meet certain criteria, including the study’s primary endpoint of achieving a statistically significant improvement in heartburn severity.

Based on these findings, the Company is discontinuing development of IW-3718.

In connection with this decision, the Company reduced its workforce by approximately 100 full-time employees.

This workforce reduction affected both field-based and home-office employees, including the relevant general and administrative support functions.

The Company substantially completed the reduction in its workforce in the fourth quarter of 2020.

The Company incurred approximately $ 15.5 million during the year ended December 31, 2020 in restructuring expenses, primarily for severance, benefits and related costs related to this reduction in force.

Restructuring expenses during the year ended December 31, 2020 also included approximately $ 1.2 million related to the impairment of certain fixed assets as a result of the Company’s decision to discontinue IW-3718 development.

The following table summarizes the accrued liabilities activity recorded in connection with the reductions in workforce and related restructuring activities during the year ended December 31, 2020 (in thousands):

December 31, 2019

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Employee severance, benefits and related costs

June 2018 Reduction

August 2018 Reduction

February 2019 Reduction

September 2020 Reduction

Contract related costs

August 2018 Reduction

The following table summarizes the accrued liabilities activity recorded in connection with the reduction in workforce for the year ended December 31, 2018 (in thousands):

September 2020 Reduction

December 31, 2018

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Employee severance, benefits and related costs

January 2018 Reduction

June 2018 Reduction

August 2018 Reduction

February 2019 Reduction

Contract related costs

August 2018 Reduction

During the years ended December 31, 2019 and 2018, the Company recorded approximately $ 3.6 million and approximately $ 14.7 million in restructuring expenses, respectively.

Selected Quarterly Financial Data (Unaudited)

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Other expense, net (3)

Net (loss) income from continuing operations

Net loss from discontinued operations (4)

Net (loss) income

Net (loss) income per share from continuing operations—basic

Net (loss) income per share from continuing operations—diluted

Net loss per share from discontinued operations—basic and diluted

Net (loss) income per share--basic

Net (loss) income per share—diluted (5)

Net income and comprehensive income

Net income per share—basic

Net income per share—diluted

(in thousands, except per share data)

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Net loss from discontinued operations (7)

Net (loss) income per share from continuing operations—basic and diluted

Net income (loss) and comprehensive income (loss)

Income per share from continuing operations, net of income taxes—basic

Income per share from continuing operations, net of income taxes—diluted

Net loss per share from discontinued operations—basic and diluted

Net loss per share--basic and diluted

(1) Total revenues includes approximately $ 48.8 million of revenue from sales of linaclotide API to our linaclotide partners, primarily driven by the commercialization of linaclotide in Japan for the year ended December 31, 2019, as well as approximately $ 32.4 million related to the non-contingent payments from the Amended AstraZeneca Agreement and a $ 10.0 million upfront fee from the Amended Astellas License Agreement, both executed during the third quarter of 2019.

(2) Total costs and expenses includes approximately $ 3.6 .

million in restructuring expenses for the year ended December 31, 2019, as well as approximately $ 3.2 million related to the gain on lease modification in April 2019.

Net income (loss) per share—basic

Net income (loss) per share—diluted

(1) Total revenues includes approximately $ 8.0 million of revenue from sales of linaclotide API to the Company’s linaclotide partners for the year ended December 31, 2020.

(2) Total costs and expenses includes approximately $ 15.4 million in restructuring expenses for the year ended December 31, 2020.

(3) Other expense, net includes approximately $ 6.1 million loss on fair value remeasurement of derivatives for the year ended December 31, 2020.

(4) Total revenues includes approximately $ 48.8 million of revenue from sales of linaclotide API to the Company’s linaclotide partners, primarily driven by the commercialization of linaclotide in Japan for the year ended December 31, 2019, as well as approximately $ 32.4 million related to the non-contingent payments from the Amended AstraZeneca Agreement and a $ 10.0 million upfront fee from the Amended Astellas License Agreement, both executed during the third quarter of 2019.

(5) Total costs and expenses includes approximately $ 3.6 million in restructuring expenses for the year ended December 31, 2019, as well as approximately $ 3.2 million related to the gain on lease modification in April 2019.

(6) Other expense, net includes approximately $ 31.0 million in loss on extinguishment of debt related to the partial repurchase of the 2022 Convertible Notes and the redemption of the 2026 Notes, and approximately $ 3.0 million gain on fair value remeasurement of derivatives for the year ended December 31, 2019.

(7) During the year ended December 31, 2019, the Company completed the Separation.

Certain amounts related to Cyclerion have been reclassified as discontinued operations for the years ended December 31, 2019 and 2018.

(5) Diluted earnings per share is equivalent to basic earnings per share for the year ended December 31, 2019.

(6) Total revenue includes approximately $ 70.4 million of revenue from sales of linaclotide API to our linaclotide partners, primarily driven by the commercialization of linaclotide in Japan for the year ended December 31, 2018.

(7) Total costs and expenses includes approximately $ 14.7 million in restructuring expenses for the year ended December 31, 2018, as well as approximately $ 151.8 million related to the impairment of intangible assets and approximately $ 31.0 million related to a gain on remeasurement of contingent consideration incurred during the third quarter of 2018 in connection with the exit of the Lesinurad License.

(8) Other expense, net includes approximately $ 8.7 million loss on fair value remeasurement of derivatives for the year ended December 31, 2018.

Certain amounts related to Cyclerion have been reclassified as discontinued operations for the year ended December 31, 2019.

Subsequent Events

In January 2020, the Company and Allergan entered into settlement agreements with Sandoz Inc.

(“Sandoz”) and Teva Pharmaceuticals, USA (“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 the Company 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.

On February 4, 2021, Mark Mallon notified the Company that he is resigning from his position as Chief Executive Officer of the Company and a member of the Company’s board of directors, in each case effective March 12, 2021 (the “Transition Date”).

Upon the Transition Date, Thomas McCourt, who is the President of the Company, also will become the Company’s interim Chief Executive Officer.

Mallon’s resignation is not due to any disagreement with the Company on any matter relating to the Company’s operations, policies, or practices.

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 9A. Controls and Procedures