IRONWOOD PHARMACEUTICALS INC

On April 1, 2019, Ironwood completed the previously announced separation of its sGC business, and certain other assets and liabilities, into a separate, independent publicly traded company (the “Separation”). 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 Cyclerion’s common stock, to Ironwood’s stockholders of record as of the close of business on March 19, 2019. Cyclerion is a clinical-stage biopharmaceutical company harnessing the power of sGC pharmacology to discover, develop, and commercialize breakthrough treatments for serious and orphan diseases. Cyclerion’s portfolio is comprised of several sGC stimulators, including olinciguat a vascular sGC stimulator in Phase II development, praliciguat a systemic sGC stimulator in Phase II development, and IW-6463, a central nervous system-penetrant sGC stimulator in Phase I development. The accompanying condensed consolidated financial statements and related disclosure are as of March 31, 2019 and do not reflect the effects of the Separation on the Company’s assets, liabilities, and stockholders’ deficit.

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. 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. The Company recorded a charge of approximately $0.5 million to selling, general, and administrative expenses on its condensed consolidated statement of operations as a result of the impairment. At March 31, 2019, the lease liability associated with the Data Center Lease was approximately $0.5 million, and the right-of-use asset was fully impaired. The incremental borrowing rate for the outstanding Data Center Lease obligation at adoption of ASC 842 was approximately 6.0%.

Lease cost related to the Data Center Lease recorded during the three months ended March 31, 2019 was insignificant. Under ASC 840, rent expenses related to the Data Center Lease were insignificant for the three months ended March 31, 2018.

As described in Note 1, Nature of Business, and Note 10, Cyclerion Separation, the Company completed the Separation on April 1, 2019. Effective upon the completion of the Separation, Ironwood appointed Mark Mallon as the chief executive officer of the Company.

On April 1, 2019, the Company amended its lease (the “2019 Lease Amendment”) with BMR-Rogers Street LLC, the building landlord of the Facility, to reduce its existing leased premises to approximately 108,000 rentable square feet of office space on the first and third floors. The Company surrendered a portion of its prior premises by approximately 114,000 rentable square feet on the second and first floor of the building. The surrendered portion of its prior premises is now occupied by Cyclerion under a direct lease between Cyclerion and the building landlord. As part of the Separation, certain improvements are being completed in Cyclerion’s leased premises.  To accommodate the post-Separation completion of such improvements, Ironwood has entered into a short-term swing space sublease of approximately 24,000 rentable square feet with Cyclerion in Ironwood’s remaining premises in the Facility to allow a portion of Cyclerion’s employees to continue to operate while such improvements are completed. The sublease is for an initial one-month term with several one-month extension options.

The separation agreement provides for indemnification obligations designed to make Cyclerion financially responsible for many liabilities that may exist relating to its business activities, whether incurred prior to or after the distribution, including any pending or future litigation, but we cannot guarantee that Cyclerion will be able to satisfy its indemnification obligations. It is also possible that a court would disregard the allocation agreed to between us and Cyclerion and require us to assume responsibility for obligations allocated to Cyclerion. Third parties could also seek to hold us responsible for any of these liabilities or obligations, and the indemnity rights we have under the separation agreement may not be sufficient to fully cover all of these liabilities and obligations. Even if we are successful in obtaining indemnification, we may have to bear costs temporarily. In addition, our indemnity obligations to Cyclerion, including those related to assets or liabilities allocated to us, may be significant. These risks could negatively affect our business, financial condition or results of operations.

The distribution, together with certain related transactions, is intended to qualify for tax-free treatment to us and our stockholders for U.S. federal income tax purposes. We received a favorable private letter ruling from the Internal Revenue Service, or IRS, under the pilot program established in Revenue Procedure 2017-52 relating to the U.S. federal income tax treatment of the distribution. Consistent with the guidelines set forth in Revenue Procedure 2017-52, the IRS private letter ruling does not cover all of the issues that are relevant to determining whether the distribution is generally tax free for U.S. federal income tax purposes. Accordingly, completion of the distribution was conditioned upon, among other things, our receipt of an opinion from an outside tax advisor that the distribution will qualify as a transaction that is generally tax-free to both us and our stockholders for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code. The private letter ruling and opinion were based on and relied on, among other things, certain facts and assumptions, as well as certain representations, statements and undertakings from us and Cyclerion (including those relating to the past and future conduct of us and Cyclerion). If any of these facts, assumptions, representations, statements or undertakings is, or becomes, inaccurate or incomplete, or if we or Cyclerion breach any of our respective covenants relating to the distribution, the IRS private letter ruling and any tax opinion may be invalid. Moreover, the opinion is not binding on the IRS or any courts. Accordingly, notwithstanding receipt of the IRS private letter ruling and the opinion, the IRS could determine that the distribution and certain related transactions should be treated as taxable transactions for U.S. federal income tax purposes.