Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Annual Report on Form 10-K.

Forward-Looking Information

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated and combined financial statements and the corresponding notes included in this Annual Report on Form 10‐K. This discussion contains forward‐looking statements that involve significant risks and uncertainties. As a result of many factors, such as those referenced or set forth under “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” in Item 1A of this Annual Report on Form 10‐K, our actual results may differ materially from those anticipated in these forward‐looking statements.

Overview

We are a clinical-stage biopharmaceutical company on a mission to develop treatments for serious CNS diseases through the discovery, development and commercialization of innovative medicines. Our lead asset, CY6463 (previously known as IW-6463), is a pioneering, CNS-penetrant, soluble guanylate cyclase (sGC) stimulator that is currently in clinical development for Mitochondrial Encephalomyopathy, Lactic Acidosis and Stroke-like episodes (MELAS) and Alzheimer's disease with vascular pathology (ADv). sGC stimulators are small molecules that act synergistically with nitric oxide (NO) as positive allosteric modulators on sGC to boost production of cyclic guanosine monophosphate, or cGMP. cGMP is a key second messenger that, when produced by sGC, regulates diverse and critical biological functions in the CNS including neuronal function, neuroinflammation, cellular bioenergetics, and blood flow and vascular dynamics.

We operate in one reportable business segment—human therapeutics.

Separation from Ironwood Pharmaceuticals

On April 1, 2019, Ironwood Pharmaceuticals Inc., or Ironwood, completed the separation of its sGC business, and certain other assets and liabilities, into us as a separate, independent publicly traded company by way of a pro-rata distribution of our common stock through a dividend distribution of one share of our common stock, with no par value per share, for every 10 shares of Ironwood common stock held by Ironwood stockholders as of the close of business on March 19, 2019, the record date for the distribution, which we refer to herein as the Separation. As a result of the Separation, we became an independent public company and commenced trading under the symbol “CYCN” on the Nasdaq Global Select Market on April 2, 2019.

In connection with the Separation, on March 30, 2019, we entered into certain agreements with Ironwood to provide a framework for our relationship with Ironwood following the Separation, including, among others, a Separation Agreement, a Tax Matters Agreement, and an Employee Matters Agreement.

In addition, in connection with the Separation, on April 1, 2019, we entered into a Development Agreement, an Ironwood Transition Services Agreement, a Cyclerion Transition Services Agreement and an Intellectual Property License Agreement with Ironwood. All services provided to and from the Company under the Transition Services Agreements were completed as of March 31, 2020 and the agreements were terminated. Ironwood and the Company have agreed that the Development Agreement will not be renewed beyond its initial term which ends on March 31, 2021.

On April 2, 2019, we issued 11,817,165 shares of our common stock, in the 2019 Equity Private Placement, to accredited investors for gross proceeds of $175 million (net proceeds of approximately $165 million).

Our historical consolidated and combined financial statements for the periods prior to the Separation have been derived from Ironwood’s combined financial statements and accounting records and are presented in conformity with United States Generally Accepted Accounting Principles, or U.S. GAAP.

Our historical financial statements may not be indicative of our future performance and do not necessarily reflect what our results of operations, financial condition and cash flows would have been had we operated as a separate, publicly traded company for the periods presented prior to the Separation. The consolidated and combined financial statements prior to the Separation included herein do not reflect any changes that occurred in our financing or operations as a result of the Separation from Ironwood.

Financial Overview

Research and Development Expense. Research and development expenses are incurred in connection with the discovery and development of our product candidates. These expenses consist primarily of the following costs: compensation, benefits and other employee-related expenses, research and development related facilities, third-party contracts relating to nonclinical study and clinical trial activities. All research and development expenses are charged to operations as incurred.

CNS programs. The core of our portfolio is CY6463, an orally administered CNS-penetrant sGC stimulator that is being developed as a symptomatic and potentially disease-modifying therapy for serious CNS diseases. Nitric oxide-sGC-cGMP is a fundamental CNS signaling network, but it has not yet been leveraged for its full therapeutic potential. CY6463 enhances the brain’s natural ability to produce cGMP, an important second messenger in the CNS, by stimulating sGC, a key node in the NO-sGC-cGMP pathway. This pathway is critical to basic CNS functions, and deficient NO-sGC-cGMP signaling is believed to play an important role in the pathogenesis of neurodegenerative diseases. Agents that stimulate sGC to produce cGMP may compensate for deficient NO signaling.

In January 2020, we announced positive Phase 1 study results that provided the foundation for continued development of CY6463. The Phase 1 healthy participant study results indicate that CY6463 was well tolerated. Pharmacokinetic (PK) data, obtained from both blood and cerebral spinal fluid (CSF), support once-daily dosing with or without food and demonstrated CY6463 penetration of the blood-brain-barrier with CSF concentrations expected to be pharmacologically active.

In October 2020, we announced positive topline results from our CY6463 Phase 1 translational pharmacology study in healthy elderly participants. Treatment with CY6463 for 15 days in this 24-subject study confirmed and extended results seen in the earlier first-in-human Phase 1 study: once-daily oral treatment demonstrated blood-brain-barrier penetration with expected CNS exposure and target engagement. Results also showed significant improvements in neurophysiological and objective performance measures as well as in inflammatory biomarkers associated with aging and neurodegenerative diseases. CY6463 was safe and generally well tolerated in this study. Significant effects on cerebral blood flow and markers of bioenergetics were not observed in this study of healthy elderly participants. We believe that these results, together with nonclinical data, support continued development of CY6463 as a potential new medicine for serious CNS diseases.

We have initiated our CY6463 Phase 2 clinical trial in adult participants with MELAS. In the coming months, we will use the findings of the translational pharmacology study, in addition to observations from the first-in-human Phase 1 study, to inform further clinical development activities, including the initiation of a planned Phase 2 clinical trial in ADv in mid-2021, as well as explore other potential indications.The ADv study will be supported in part by a grant from the Alzheimer's Association’s Part the Cloud-Gates Partnership Grant Program, which provides Cyclerion with $2 million of funding over two years.

Our next-generation CNS program is focused on discovery of new sGC stimulators with, for example, greater CSF-to-plasma exposure and/or potentially differentiated patterns of CNS engagement relative to CY6463. Differentiated sGC stimulators will expand the potential of sGC stimulation for the treatment of disorders of the CNS.

daily, vascular sGC stimulator that was evaluated in a Phase 2 study of participants with sickle cell disease. We released topline results from this study in October 2020. We also have discovery and pre-clinical phase compounds with targeted sGC stimulators.

The following table summarizes our research and development expenses and employee and facility related costs allocated to research and development expense, for the years ended December 31, 2020 and 2019. The product pipeline expenses relate primarily to external costs associated with nonclinical studies and clinical trial costs, which are presented by development candidate.

Year Ended December 31,

(in thousands)

Product pipeline external costs:

Total product pipeline external costs 13,958 31,979

Total research and development expenses $ 56,414 $ 95,140

Securing regulatory approvals for new drugs is a lengthy and costly process. Any failure by us to obtain, or any delay in obtaining, regulatory approvals would materially adversely affect our product development efforts and our business overall.

Given the inherent uncertainties of pharmaceutical product development, we cannot estimate with any degree of certainty how our programs will evolve, and therefore the amount of time or money that would be required to obtain regulatory approval to market them. As a result of these uncertainties surrounding the timing and outcome of any approvals, we are currently unable to estimate precisely when, if ever, our discovery and development candidates will be approved. We invest carefully in our pipeline, and the commitment of funding for each subsequent stage of our development programs is dependent upon the receipt of clear, supportive data.

The successful development of our product candidates is highly uncertain and subject to a number of risks including, but not limited to:

As a result of the factors listed above, including the factors discussed under the “Risk Factors” section in Item 1A of this Annual Report on Form 10-K, we are unable to determine the duration and costs to complete current or future nonclinical and clinical stages of our product candidates or when, or to what extent, we will generate revenues from the commercialization and sale of our product candidates. Development timelines, probability of success and development costs vary widely. We anticipate that we will make determinations as to which additional programs to pursue and how much funding to direct to each program on an ongoing basis in response to the data from the studies of each product candidate, the competitive landscape and ongoing assessments of such product candidate’s commercial potential.

General and Administrative Expense. General and administrative expense consists primarily of compensation, benefits and other employee-related expenses for personnel in our administrative, finance, legal, information technology, business development, and human resource functions. Other costs include the legal costs of pursuing patent protection of our intellectual property, general and administrative related facility costs, insurance costs and professional fees for accounting and legal services. Certain costs associated with our separation from Ironwood are included in these expenses. We record all general and administrative expenses as incurred.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated and combined financial statements prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make certain estimates and assumptions that may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated and combined financial statements, and the amounts of expenses during the reported periods. Significant estimates and assumptions in our consolidated and combined financial statements include those related to allocation of expenses, assets and liabilities from Ironwood’s historical financial statements for the periods prior to the Separation, impairment of long-lived assets; income taxes, including the valuation allowance for deferred tax assets; research and development expenses; contingencies and share-based compensation. We base our estimates on our historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ materially from our estimates under different assumptions or conditions. Changes in estimates are reflected in reported results in the period in which they become known.

We believe that our application of accounting policies requires significant judgments and estimates on the part of management and is the most critical to aid in fully understanding and evaluating our reported financial results. Our significant accounting policies are more fully described in Note 2, Summary of Significant Accounting Policies, of the consolidated and combined financial statements elsewhere in this Annual Report on Form 10-K.

All research and development expenses are expensed as incurred. We defer and capitalize nonrefundable advance payments we make for research and development activities until the related goods are received or the related services are performed. See Note 2, Summary of Significant Accounting Policies, of the consolidated and combined financial statements appearing elsewhere in this Annual Report on Form 10-K.

Results of Operations

For the period prior to the Separation, our consolidated and combined financial statements include an allocation of expenses related to certain Ironwood corporate functions, including senior management, legal, human resources, finance, information technology and quality assurance. These expenses were allocated to Cyclerion based on direct usage or benefit where identifiable, with the remainder allocated pro-rata based on project related costs, headcount or other measures. We considered the allocation methodologies used to be a reasonable and appropriate reflection of the historical Ironwood expenses attributable to us. The expenses reflected in the consolidated and

combined financial statements may not be indicative of expenses that will be incurred by us in the future. After the Separation, we began performing these corporate functions using internal resources or purchased services, certain of which were provided by Ironwood under the Transition Services Agreement. The following discussion summarizes the key factors we believe are necessary for an understanding of our consolidated financial statements.

Year Ended December 31, Change

(dollars in thousands)

Cost and expenses:

Gain on lease modification, net (1,669 ) — (1,669 ) 100 %

Revenue from related party. The decrease in revenue from related party for the year ended December 31, 2020 compared to the year ended December 31, 2019 is due to a decrease in services provided in the current year as compared to the prior year, partially offset by the Company providing services to Ironwood for the full year 2020 compared to only three quarters post-Separation in 2019. Ironwood and the Company have agreed that the Development Agreement will not be renewed beyond its initial term which ends on March 31, 2021.

Research and development expenses. The decrease in research and development expenses of approximately $38.7 million for the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily due to a net decrease in personnel and related costs of approximately $12.5 million, a net decrease in facilities and other costs of approximately $8.2 million, and a net decrease in product pipeline external costs of approximately $18.0 million. The net decrease in personnel and related costs of $12.5 million was driven by lower salaries and related costs of $13.4 million, including $1.9 million in stock-based compensation, primarily due to lower average headcount, partially offset by $0.9 million in costs associated with the 2020 workforce reduction as compared to the 2019 workforce reduction. The net decrease in facilities and other costs allocated to research and development of approximately $8.2 million was primarily due to reductions in the Company’s total leased premises. The net decrease in product pipeline external costs was primarily due to decreases over the periods of approximately $13.0 million in praliciguat studies, approximately $6.2 million in olinciguat studies and approximately $0.1 million in discovery research, partially offset by an increase of approximately $1.3 million in CY6463 studies.

General and administrative expenses. The decrease in general and administrative expenses of approximately $5.6 million for the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily driven by approximately $5.9 million in salaries and other employee-related costs, including $2.1 million in stock-based compensation, primarily due to lower average headcount and the pre-Separation allocation from Ironwood recorded in the prior period, and approximately $3.5 million of non-recurring outsourced professional services and other costs associated with the Separation recorded in the prior period partially offset by an increase of approximately $1.7 million in professional fees supporting the Company’s financing activities in the current year, including the Shelf, the 2020 Equity Private Placement and the ATM Offering, an increase of approximately $1.4 million in other outside professional and corporate expenses, an increase of approximately $0.4 million in other operating and administrative expenses, and an increase of approximately $0.3 million in costs associated with the 2020 workforce reduction as compared to the 2019 workforce reduction.

Gain on lease modification, net. The gain on lease modification, net of $1.7 million recorded in the year ended December 31, 2020 is driven by a $2.1 million gain related to the Lease Amendment to the Head Lease at 301 Binney Street in Cambridge, Massachusetts that was executed on February 28, 2020 in which the Company returned approximately 40,000 rentable square feet to the landlord, partially offset by a $0.4 million loss related to the Second Lease Amendment to the Head Lease at 301 Binney Street in Cambridge, Massachusetts that was executed

on September 15, 2020 in which the Company returned approximately 17,000 rentable square feet to the landlord.

Sublease termination income, net. The sublease termination income, net of $2.9 million recorded in the year ended December 31, 2020 represents the difference between the consideration received and the consideration given up related to the Sublease Termination Agreement that was executed on September 15, 2020.

Interest and other income, net. Interest and other income, net decreased by approximately $1.4 million for the year ended December 31, 2020 compared to the year ended December 31, 2019 due to a decrease of approximately $1.6 million in interest income driven by lower cash balances and lower interest rates in the current year as compared to the prior year, partially offset by an increase of approximately $0.2 million in net sublease income from the sublease agreement which was in effect for more months in the current year than the prior year before its termination.

Liquidity and Capital Resources

Prior to the Separation, the primary source of liquidity for our business was cash flow allocated to Cyclerion from Ironwood. Post Separation, transfers of cash to and from Ironwood related to the Transition Service Agreements, Development Agreement and provisions of the Separation Agreement, have been reflected in the consolidated and combined statement of cash flows.

After the Separation on April 1, 2019, we raised approximately $165 million net of direct financing expenses with the closing of the 2019 Equity Private Placement on April 2, 2019.

On July 29, 2020, we closed on a private placement of 6,062,500 shares of our common stock, pursuant to a Common Stock Purchase Agreement, for total gross proceeds of approximately $24.3 million. There were no material fees or commissions related to the transaction.

On September 3, 2020, the Company entered into the Sales Agreement with Jefferies with respect to an at-the-market offering, or ATM Offering, under the shelf registration statement. Under the ATM Offering, the Company may offer and sell, from time to time at its sole discretion, shares of its common stock, having an aggregate offering price of up to $50.0 million through Jefferies as its sales agent. The Company will pay to Jefferies cash commissions of 3.0 percent of the gross proceeds of sales of common stock under the Sales Agreement. As of December 31, 2020, no shares have been issued or sold under the ATM Offering.

Our ability to continue to fund our operations and meet capital needs will depend on our ability to generate cash from operations and access to capital markets and other sources of capital, as further described below. We anticipate that our principal uses of cash in the future will be primarily to fund our operations, working capital needs, capital expenditures and other general corporate purposes.

On December 31, 2020, we had approximately $54.4 million of unrestricted cash and cash equivalents. Our cash equivalents include amounts held in U.S. government money market funds. We invest cash in excess of immediate requirements in accordance with our investment policy, which requires all investments held by us to be at least “AAA” rated or equivalent, with a remaining final maturity when purchased of less than twelve months, so as to primarily achieve liquidity and capital preservation.

Going Concern

Based on the timing expectations of our research and development plans, including our clinical trials, we expect that our existing cash and cash equivalents as of December 31, 2020, will be sufficient to fund our planned operating expenses and capital expenditure requirements through the next 12 months following the date of this Annual Report on Form 10-K. We have based this estimate on assumptions that may prove to be wrong, particularly as the process of testing drug candidates in clinical trials is costly and the timing of progress in these trials is uncertain.

Cash Flows

The following is a summary of cash flows for the years ended December 31, 2020 and 2019:

Year Ended December 31,

(dollars in thousands)

Net cash used in operating activities $ (72,490 ) $ (102,215 )

Net cash provided by (used in) investing activities $ 18 $ (6,715 )

Net cash provided by financing activities $ 28,090 $ 211,571

Cash Flows from Operating Activities

Net cash used in operating activities totaled approximately $72.5 million for the year ended December 31, 2020. The primary uses for cash were our net loss of $77.8 million, the payment of a $6.3 million termination fee related to the Head Lease modification, and the net changes in our operating assets and liabilities of $1.3 million. The uses of cash were partially offset by non-cash adjustments of $12.9 million, primarily from share-based compensation.

Net cash used in operating activities totaled approximately $102.2 million for the year ended December 31, 2019. The primary uses of cash were our net loss of $123.0 million and the net changes in our operating assets and liabilities of $2.3 million from our working capital accounts, partially offset by non-cash adjustments of $23.1 million, primarily from share-based compensation.

Cash Flows from Investing Activities

Net cash provided by investing activities for the year ended December 31, 2020 was de minimis and related to the purchases and sales of property and equipment.

Net cash used in investing activities for the year ended December 31, 2019 totaled approximately $6.7 million, primarily from the purchase of leasehold improvements and other property and equipment.

Cash Flows from Financing Activities

Net cash provided by financing activities for the year ended December 31, 2020 was approximately $28.1 million, primarily from $24.3 million in proceeds from the 2020 private placement, $3.5 million of proceeds from the PPP loan, and $0.3 million from proceeds from employee stock award plan.

Net cash provided by financing activities for the year ended December 31, 2019 was approximately $211.6 million, primarily from $164.6 million in net proceeds from the 2019 private placement, $46.4 million of cash transferred to us from Ironwood prior to Separation when Ironwood managed our cash and financing arrangements, and $0.5 million from proceeds from employee stock award plans.

Debt – Paycheck Protection Program

On April 21, 2020, we received loan proceeds in the amount of approximately $3.5 million pursuant to a promissory note agreement (the “Promissory Note”) with a bank under the Paycheck Protection Program (“PPP”), of which certain key terms were adjusted by the Paycheck Protection Program Flexibility Act (“PPPFA”). The Promissory Note has an initial loan maturity of April 20, 2022, a stated interest rate of 1.0% per annum, and has payments of principal and interest that are due monthly after an initial deferral period where interest accrues, but no payments are due. Under the PPPFA, the initial deferral may be extended from six up to ten months and the loan maturity may be extended from two to five years. The Promissory Note provides for customary events of default, including, among others, those relating to failure to make payment when due and breaches of representations. We may prepay the principal of the Promissory Note at any time without incurring any prepayment charges. The loan is

subject to all the terms and conditions applicable under the PPPFA and is subject to review by the Small Business Association for compliance with program requirements.

The loan’s principal and accrued interest are forgivable to the extent that the proceeds are used for eligible purposes, subject to certain limitations, and that we maintain our payroll levels over a twenty-four-week period following the loan date. The loan forgiveness amount may be reduced if we terminate employees or reduce salaries during the twenty-four-week period. We believe that we have used the proceeds for eligible purposes consistent with the provisions of the PPPFA. However, the Company cannot assure at this time that the loan under the Promissory Note will be forgiven partially, or in full.

Funding Requirements

We expect our expenses to fluctuate as we advance the preclinical activities and clinical trials of our product candidates.

We believe that our existing cash and cash equivalents as of December 31, 2020 will enable us to fund our planned operating expenses and capital expenditure requirements at least through the next 12 months following the date of this Annual Report on Form 10-K, excluding net cash flows from potential business development activities. We based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect.

Because of the many risks and uncertainties associated with research, development and commercialization of product candidates, we are unable to estimate the exact amount of our working capital requirements. Our expenses will fluctuate, and our future funding requirements will depend on, and could increase or decrease significantly as a result of, many factors, including the:

• costs, timing and outcome of regulatory review of our product candidates;

• cost and timing of necessary actions to support our strategic objectives;

A change in any of these or other variables with respect to the development of any of our product candidates could significantly change the costs and timing of the development of that product candidate. Further, our operating plans may change in the future, and we may need additional funds to meet operational needs and capital requirements associated with such operating plans.

Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of public or private equity offerings, debt financings, collaborations, strategic alliances or licensing arrangements with third parties. As discussed under the “Risk Factors” in Item 1A of this Annual Report on Form 10-K, to preserve the tax-free treatment of the Separation, we may be barred, in certain circumstances, for a two-year period following the Separation, from engaging in certain capital raising transactions. To the extent that we raise additional capital through the sale of equity or convertible debt securities, outstanding equity ownership may be materially diluted, and the terms of securities sold in transactions could include liquidation or other preferences that adversely affect the rights of holders of common stock. Debt financing and preferred equity financing, if available, may involve agreements that include restrictive covenants that limit our ability to take specified actions, such as incurring additional debt, making capital expenditures or declaring dividends. In addition, debt financing would result in increased fixed payment obligations.

If we raise funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us.

If we are unable to raise additional funds when needed, we may be required to delay, reduce or eliminate our product development or future commercialization efforts, or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Contractual Commitments and Obligations

Tax-related Obligations

We exclude assets, liabilities or obligations pertaining to uncertain tax positions from our summary of contractual commitments and obligations as we cannot make a reliable estimate of the period of cash settlement with the respective taxing authorities. As of December 31, 2020, we had no uncertain tax positions.

Other Funding Commitments

As of December 31, 2020, we had, and continue to have, several ongoing studies in various clinical trial stages. Our most significant clinical trial spending is with clinical research organizations, or CROs. The contracts with CROs generally are cancellable, with notice, at our option and do not have any significant cancellation penalties.

Transition from Ironwood and Costs to Operate as an Independent Company

Our consolidated and combined financial statements for the period prior to the Separation reflect our operating results and financial position as it was operated by Ironwood, rather than as an independent company. As a result of the Separation, we have incurred additional ongoing operating expenses to operate as an independent, publicly traded, company. These costs include the cost of various corporate functions, incremental information technology-related costs and incremental costs to operate stand-alone accounting, legal, human resources and other administrative functions. We also incurred non-recurring expenses and non-recurring capital expenditures.

The Ironwood Transition Services Agreement provided us with certain services and resources related to corporate functions for an initial term of up to two years from the date of the Separation (as applicable). All services provided by Ironwood to the Company under the Ironwood Transition Services Agreement were completed as of March 31, 2020, and it has been terminated.

It is not practicable to estimate the costs that would have been incurred in each of the periods presented in the historical financial statements for the functions described above. Actual costs that would have been incurred if we operated as a stand-alone company for the periods prior to the Separation would have depended on various factors, including organizational design, outsourcing and other strategic decisions related to corporate functions, information technology and back office infrastructure.

Off-Balance Sheet Arrangements

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, that would have been established for the purpose of facilitating off-balance sheet arrangements (as that term is defined in Item 303(a)(4)(ii) of Regulation S-K) or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in those types of relationships. We enter into guarantees in the ordinary course of business related to the guarantee of our own performance.

New Accounting Pronouncements

For a discussion of new accounting pronouncements see Note 2, Summary of Significant Accounting Policies, of the consolidated and combined financial statements appearing elsewhere in this Annual Report on Form 10-K.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

Item 8. Financial Statements and Supplementary Data.

The information required by this Item 8 is set forth in our financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

Disclosure Controls and Procedures

We maintain “disclosure controls and procedures,” as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our principal executive and our principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.

With respect to the year ended December 31, 2020, under the supervision and with the participation of our management, we conducted an evaluation of the effectiveness of the design and operations of our disclosure controls and procedures. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of December 31, 2020 to provide reasonable assurance that the information required to be disclosed by us in this Annual Report was (a) reported within the time periods specified by SEC rules and regulations and (b) communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding any required disclosure.

Management's Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. generally accepted accounting principles (“GAAP”). Internal control over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

Management assessed our internal control over financial reporting as of December 31, 2020, the end of our fiscal year. Management based its assessment on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Management’s assessment included evaluation of elements such as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment.

Based on this assessment, management has concluded that our internal controls over financial reporting were effective as of December 31, 2020 and provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with GAAP. We reviewed the results of management’s assessment with the Audit Committee of our Board of Directors.

Internal control over financial reporting has inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements will not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

Attestation Report of the Registered Public Accounting Firm

This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Our report was not subject to attestation by our independent registered public accounting firm pursuant to the rules of the Securities and Exchange Commission for “emerging growth companies” that permit us to provide only management’s report in this report.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal year ended December 31, 2020 which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Internal Controls

In designing and evaluating the disclosure controls and procedures, management does not expect that our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control systems are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud.

Item 9B. Other Information.

Not applicable.

PART III

We will file a definitive Proxy Statement for our 2021 Annual Meeting of Stockholders, or the Proxy Statement, with the SEC, pursuant to Regulation 14A, not later than 120 days after the end of our fiscal year. Accordingly, certain information required by Part III has been omitted under General Instruction G(3) to Form 10-K. Only those sections of the 2021 Proxy Statement that specifically address the items set forth herein are incorporated by reference.

Item 10. Directors, Executive Officers and Corporate Governance.

The information required by this Item 10 will be included in our Proxy Statement under the captions “Information Regarding the Board of Directors and Corporate Governance,” “Election of Directors,” “Executive Officers” and “Section 16(a) Beneficial Ownership Reporting Compliance” and is incorporated herein by reference.

Item 11. Executive Compensation.

The information required by this Item 11 will be included in our Proxy Statement under the captions “Executive Compensation” and “Director Compensation” and is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information required by this Item 12 will be included in our Proxy Statement under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Securities Authorized for Issuance under Equity Compensation Plans” and is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

The information required by this Item 13 will be included in our Proxy Statement under the captions “Transactions with Related Persons” and “Independence of the Board of Directors” and is incorporated herein by reference.

Item 14. Principal Accounting Fees and Services.

The information required by this Item 14 will be included in our Proxy Statement under the caption “Ratification of Selection of Independent Registered Public Accounting Firm” and is incorporated herein by reference.

PART IV

Item 15. Exhibits, Financial Statement Schedules.

(a)(1) Financial Statements

See the Index to Consolidated Financial Statements in the Financial Statements Section beginning on page F-1 of this Annual Report on Form 10-K.

(a)(2) Financial Statement Schedules

All financial statement schedules have been omitted as they are not required, not applicable, or the required information is included in the financial statements or notes to the financial statements.

(a)(3) Exhibits

EXHIBIT INDEX

Exhibit No. Description

21.1 List of Subsidiaries

23.1 Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm

101.INS XBRL Instance Document

101.SCH XBRL Taxonomy Extension Schema Document

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF XBRL Taxonomy Extension Definition Linkbase Document

101.LAB XBRL Taxonomy Extension Label Linkbase Document

101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

+ Indicates a management contract or compensatory plan.

Item 16.Form 10-K Summary.

Not applicable.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized, on February 25, 2021.

CYCLERION THERAPEUTICS, INC.

By: /s/ PETER M. HECHT

Peter M. Hecht

Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 25, 2021.

Signature Title

/s/ PETER M. HECHT

Peter M. Hecht Chief Executive Officer (Principal Executive Officer)

/s/ANJEZA GJINO

/s/ KEVIN CHURCHWELL

Kevin Churchwell Director

/s/ GEORGE CONRADES

George Conrades Director

/s/ MARSHA FANUCCI

Marsha Fanucci Director

/s/ OLE ISACSON

Ole Isacson Director

/s/ STEPHANIE LOVELL

Stephanie Lovell Director

/s/ TERRANCE MCGUIRE

Terrance McGuire Director

/s/ MICHAEL MENDELSOHN

Michael Mendelsohn Director

Index to Consolidated and Combined Financial Statements of Cyclerion Therapeutics, Inc.

Page

Report of Independent Registered Public Accounting Firm F-2

Consolidated Balance Sheets as of December 31, 2020 and 2019 F-3

Notes to the Consolidated and Combined Financial Statements F-7

F-1

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of Cyclerion Therapeutics, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated and combined balance sheets of Cyclerion Therapeutics, Inc. (the Company) as of December 31, 2020 and 2019, the related consolidated and combined statements of operations and comprehensive loss, shareholders' equity (deficit) and cash flows for each of the two years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated and combined financial statements”). In our opinion, the consolidated and combined financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2018.

Boston, Massachusetts

February 25, 2021

F-2

Cyclerion Therapeutics, Inc.

Consolidated Balance Sheets

(In thousands except share and per share data)

ASSETS

Current assets:

Related party accounts receivable 127 1,474

Restricted cash, net of current portion 3,837 4,991

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Related party accounts payable 286 81

Accrued research and development costs 1,421 2,198

Accrued expenses and other current liabilities 7,294 9,320

Short-term note payable 3,509 —

Current portion of operating lease liabilities 3,293 3,420

Operating lease liabilities, net of current portion 38,933 70,500

Commitments and contingencies — —

Stockholders' equity

Accumulated other comprehensive loss (27 ) (20 )

Total liabilities and stockholders' equity $ 115,378 $ 186,478

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

F-3

Cyclerion Therapeutics, Inc.

Consolidated and Combined Statements of Operations and Comprehensive Loss

(In thousands except per share data)

Revenue from related party $ 2,296 $ 4,507

Cost and expenses:

Gain on lease modification, net (1,669 ) —

Sublease termination income, net 2,875 —

Interest and other income, net 588 2,029

Net loss per share:

Basic and diluted net loss per share $ (2.56 ) $ (4.49 )

Weighted average shares used in calculating:

Other comprehensive loss:

Foreign currency translation adjustment loss (7 ) (20 )

Total other comprehensive loss (7 ) (20 )

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

F-4

Cyclerion Therapeutics, Inc.

Consolidated and Combined Statements of Stockholders’ Equity (Deficit)

(In thousands except share data)

Shares Amount Investment capital deficit loss (deficit)

Net transfers from Ironwood — — 38,687 — — — 38,687

Ironwood allocation - share-based compensation — — 3,989 — — — 3,989

Separation-related adjustment — — 7,752 — — — 7,752

Reclassification of net parent company investment — — (2,602 ) 2,602 — — —

Distribution of common stock by Ironwood upon separation 15,562,555 — — — — — —

Issuance of common stock awards 21,942 — — — — — —

Foreign currency translation adjustment — — — — — (20 ) (20 )

Foreign currency translation adjustment — — — — — (7 ) (7 )

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

F-5

Cyclerion Therapeutics, Inc.

Consolidated and Combined Statements of Cash Flows

(In thousands)

Year Ended December 31,

CASH FLOWS FROM OPERATING ACTIVITIES:

Adjustments to reconcile net loss to net cash (used in) operating activities:

Depreciation and amortization 2,297 2,700

Net loss on disposal of property and equipment 159 751

Gain on lease modification (1,669 ) —

Sublease termination income, net (2,875 ) —

Changes in operating assets and liabilities:

Related party accounts receivable 1,346 (1,474 )

Other current assets (55 ) (115 )

Related party accounts payable 205 81

Accrued research and development costs (776 ) (3,064 )

Operating lease liabilities (2,692 ) 2,655

Accrued expenses and other current liabilities (1,983 ) (1,556 )

Net cash used in operating activities (72,490 ) (102,215 )

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchases of property and equipment (1,524 ) (6,888 )

Proceeds from sale of property and equipment 1,542 173

Net cash provided by (used in) investing activities 18 (6,715 )

CASH FLOWS FROM FINANCING ACTIVITIES:

Gross proceeds from 2019 private placement — 175,000

Costs associated with 2019 private placement — (10,378 )

Proceeds from exercises of stock options and ESPP 331 510

Proceeds from short-term note payable 3,509 —

Transfers from Ironwood — 46,439

Net cash provided by financing activities 28,090 211,571

Cash, cash equivalents and restricted cash, beginning of period 102,621 —

Cash, cash equivalents and restricted cash, end of period $ 58,232 $ 102,621

Supplemental cash flow disclosure:

Cash paid for initial direct costs of lease modification $ 6,507 $ —

Non-cash investing activities

Fixed asset purchases in accounts payable and accrued expenses $ — $ 823

Total cash, cash equivalents and restricted cash $ 58,232 $ 102,621

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

F-6

Cyclerion Therapeutics, Inc.

Notes to the Consolidated and Combined Financial Statements

1. Nature of Business

Nature of Operations

Cyclerion Therapeutics, Inc. (“Cyclerion”, the “Company” or “we”) is a clinical-stage biopharmaceutical company on a mission to develop treatments for serious CNS diseases through the discovery, development and commercialization of innovative medicines. Our lead asset, CY6463 (previously known as IW-6463), is a pioneering, CNS-penetrant, soluble guanylate cyclase (sGC) stimulator that is currently in clinical development for Mitochondrial Encephalomyopathy, Lactic Acidosis and Stroke-like episodes (MELAS) and Alzheimer's disease with vascular pathology (ADv). sGC stimulators are small molecules that act synergistically with nitric oxide (NO) as positive allosteric modulators on sGC to boost production of cyclic guanosine monophosphate, or cGMP. cGMP is a key second messenger that, when produced by sGC, regulates diverse and critical biological functions in the CNS including neuronal function, neuroinflammation, cellular bioenergetics, and blood flow and vascular dynamics.

Cyclerion GmbH, a wholly owned subsidiary, was incorporated in Zug, Switzerland on May 3, 2019. Cyclerion GmbH is an operational entity with one employee who is the Company’s Chief Scientific Officer. The functional currency is the Swiss franc.

Cyclerion Securities Corporation, a wholly owned subsidiary, was incorporated in Massachusetts on November 15, 2019 and was granted securities corporation status in Massachusetts for the 2019 tax year. Cyclerion Securities Corporation has no employees.

Company Overview

The Company’s mission is to develop treatments for serious CNS diseases. Its priorities are advancing its ongoing CY6463 clinical programs and seeking the out-licensing of praliciguat and other non-CNS assets.

CNS programs. CY6463is an orally administered CNS-penetrant sGC stimulator that is being developed as a symptomatic and potentially disease-modifying therapy for serious CNS diseases. Nitric oxide-sGC-cGMP is a fundamental CNS signaling network, but it has not yet been leveraged for its full therapeutic potential. CY6463 enhances the brain’s natural ability to produce cGMP, an important second messenger in the CNS, by stimulating sGC, a key node in the NO-sGC-cGMP pathway. This pathway is critical to basic CNS functions and deficient NO-sGC-cGMP signaling is believed to play an important role in the pathogenesis of neurodegenerative diseases. Agents that stimulate sGC to produce cGMP may compensate for deficient NO signaling.

On January 13, 2020, we announced positive results from our Phase 1 first-in-human study that provided the foundation for continued development of CY6463. The Phase 1 healthy participant study results indicate that CY6463 was well tolerated. Pharmacokinetic (PK) data, obtained from both blood and cerebral spinal fluid (CSF), support once-daily dosing with or without food and demonstrated CY6463 penetration of the blood-brain-barrier with CSF concentrations expected to be pharmacologically active.

On October 14, 2020, we announced positive topline results from our CY6463 Phase 1 translational pharmacology study – in healthy elderly participants. Treatment with CY6463 for 15 days in this 24-subject study confirmed and extended results seen in the earlier first-in-human Phase 1 study: once-daily oral treatment demonstrated blood-brain-barrier penetration with expected CNS exposure and target engagement. Results also showed significant improvements in neurophysiological and objective performance measures as well as in inflammatory biomarkers associated with aging and neurodegenerative diseases. CY6463 was shown to be safe and generally well tolerated. Significant effects on cerebral blood flow and markers of bioenergetics were not observed in this study of healthy elderly participants. We believe that these results, together with nonclinical data, support continued development of CY6463 as a potential new medicine for serious CNS diseases.

F-7

2 clinical trial in ADvin mid-2021, as well as explore other potential indications. The ADv study will be supported in part by a grant from the Alzheimer’s Association’s Part the Cloud-Gates Partnership Grant Program, which provides Cyclerion with $2 million of funding over two years.

Our next generation CNS program is focused on discovery of new sGC stimulators with, for example, greater CSF-to-plasma exposure and/or potentially differentiated patterns of CNS engagement relative to CY6463. Differentiated sGC stimulators will expand the potential of sGC stimulation for the treatment of disorders of the CNS.

Non-CNS assets. We have other assets that are outside of our current strategic focus. These non-core assets are not being internally developed at this time and are available for licensing to a third-party partner.Praliciguatis an orally administered, once-daily systemic sGC stimulator that was evaluated in two Phase 2 proof-of-concept studies for adult participants with diabetic nephropathy (DN) and heart failure with preserved ejection fraction (HFpEF). We released topline results from these studies in October 2019. Olinciguatis an orally administered, once-daily, vascular sGC stimulator that was evaluated in a Phase 2 study of participants with sickle cell disease. We released topline results from this study in October 2020. We also havediscovery and pre-clinical phasecompounds with targeted sGC stimulators.

The Separation

On April 1, 2019, Ironwood Pharmaceuticals, Inc. (“Ironwood”) completed the previously announced separation of its sGC business, and certain other assets and liabilities, into a separate, independent publicly traded company by way of a pro-rata distribution of all of the outstanding shares of common stock of Cyclerion Therapeutics, Inc. through a dividend distribution of one share of the Company’s common stock, with no par value per share, for every 10 shares of Ironwood common stock held by Ironwood stockholders as of the close of business on March 19, 2019, the record date for the Distribution (the entire transaction being the “Separation”). As a result of the Separation, the Company became an independent public company and commenced regular way trading under the symbol “CYCN” on the Nasdaq Global Select Market on April 2, 2019.

In connection with the Separation, on March 30, 2019, the Company entered into certain agreements with Ironwood to provide a framework for the Company’s relationship with Ironwood following the Separation, including, among others, the Separation Agreement, Tax Matters Agreement, and Employee Matters Agreement (“EMA”).

In addition, in connection with the Separation, on April 1, 2019, the Company entered into a Development Agreement, an Ironwood Transition Services Agreement, a Cyclerion Transition Services Agreement and an Intellectual Property License Agreement with Ironwood. All services provided to and from the Company under the Transition Services Agreements were completed as of March 31, 2020 and the agreements were terminated. Ironwood and the Company have agreed that the Development Agreement will not be renewed beyond its initial term which ends on March 31, 2021.

On April 2, 2019, the Company issued 11,817,165 shares in a private placement (the “2019 Equity Placement’’) of common stock to accredited investors for gross proceeds of $175 million (net proceeds of approximately $165 million).

2020 Equity Private Placement

On July 29, 2020, the Company entered into a Common Stock Purchase Agreement (the “2020 Equity Private Placement”) with two investors for a private placement of 6,062,500 shares of the Company’s common stock, at a purchase price of $4.00 per share for total gross proceeds of approximately $24.3 million. The closing of the 2020 Equity Private Placement occurred on July 29, 2020. The Company did not use a placement agent or broker in connection with the 2020 Equity Private Placement and incurred no commissions and no material direct transaction fees.

F-8

At-the-Market Offering

On July 24, 2020, the Company filed a Registration Statement on Form S-3 (the “Shelf”) with the Securities and Exchange Commission (the “SEC”) in relation to the registration of common stock, preferred stock, debt securities, warrants and units of any combination thereof for an aggregate initial offering price not to exceed $150.0 million. The Shelf was declared effective as of July 31, 2020. On September 3, 2020, the Company entered into a Sales Agreement (the “Sales Agreement”) with Jefferies LLC (“Jefferies”) with respect to an at-the-market offering (the “ATM Offering”) under the Shelf. Under the ATM Offering, the Company may offer and sell, from time to time at its sole discretion, shares of its common stock, having an aggregate offering price of up to $50.0 million through Jefferies as its sales agent. The Company will pay to Jefferies cash commissions of 3.0 percent of the gross proceeds of sales of common stock under the Sales Agreement. As of December 31, 2020, no shares have been issued or sold under the ATM Offering.

Basis of Presentation

The Company did not operate as a separate, stand-alone entity for the full period covered by the annual consolidated and combined financial statements. The Company’s consolidated balance sheets as of December 31, 2020 and 2019, statement of operations and comprehensive loss for the year ended December 31, 2020 and the statement of cash flows for the year ended December 31, 2020 consist of the consolidated balances of Cyclerion as prepared on a stand-alone basis. The Company’s consolidated and combined statement of operations and comprehensive loss for the year ended December 31, 2019 as well as our statement of cash flows for the year ended December 31, 2019 have been prepared on a “carve out” basis for the periods and dates prior to the Separation on April 1, 2019.

The consolidated and combined financial statements reflect the historical results of the operations, financial position and cash flows of Cyclerion, in conformity with United States generally accepted accounting principles (“U.S. GAAP”).

The accompanying consolidated and combined financial statements reflect the consolidated and combined financial position and consolidated and combined results of operations of the Company as an independent, publicly-traded company for the period after the Separation on April 1, 2019. The consolidated and combined financial statements also reflect the financial position and results of operations of the Company as a combined reporting entity of Ironwood for periods prior to the Separation.

For periods prior to the Separation, the consolidated and combined financial statements of Cyclerion reflect the assets, liabilities, and expenses directly attributable to Cyclerion, as well as allocations of certain corporate level assets, liabilities and expenses, deemed necessary to fairly present the financial position, results of operations and cash flows of Cyclerion, as discussed further below. As such, these allocations may not be indicative of the actual amounts that would have been recorded had Cyclerion operated as an independent, publicly traded company for the years presented.

During the year ended December 31, 2019, the Company recorded approximately $7.8 million in Separation-related adjustments in its consolidated and combined statements of stockholders’ equity (deficit). The Separation-related adjustments primarily related to differences between assets and liabilities transferred to Cyclerion as a result of the Separation and assets and liabilities reported in the Company’s combined balance sheets as of March 31, 2019.

Prior to the Separation, Cyclerion was dependent upon Ironwood for all of its working capital and financing requirements, as Ironwood used a centralized approach to cash management and financing its operations. There were no cash amounts specifically attributable to Cyclerion for the historical periods presented; therefore, there is no cash reflected for historical periods in the consolidated and combined financial statements. Accordingly, cash and cash equivalents, debt or related interest expense have not been allocated to Cyclerion in the historical financial statements. Financing transactions related to Cyclerion are accounted for as a component of net parent investment in the historical combined balance sheets and as a financing activity on the accompanying combined statements of cash flows.

F-9

Prior to the Separation, Cyclerion’s combined financial statements included an allocation of expenses related to certain Ironwood corporate functions, including senior management, legal, human resources, finance, information technology and quality assurance. These expenses were allocated to Cyclerion based on direct usage or benefit where identifiable, with the remainder allocated pro-rata based on project related costs, headcount or other measures. These allocations may not be indicative of the actual expense that would have been incurred had Cyclerion operated as an independent, publicly traded company for the periods presented.

Prior to the Separation, the combined balance sheets of Cyclerion included assets and liabilities that were allocated principally on a specific identification basis and net parent investment was shown in lieu of stockholders’ equity. As a result of the Separation, the Company’s net parent investment balance was reclassified to paid-in capital.

Going Concern

At each reporting period, the Company evaluates whether there are conditions or events that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. The Company’s evaluation entails analyzing prospective operating budgets and forecasts for expectations of the Company’s cash needs and comparing those needs to the current cash and cash equivalent balances. The Company is required to make certain additional disclosures if it concludes substantial doubt exists and it is not alleviated by the Company’s plans or when its plans alleviate substantial doubt about the Company’s ability to continue as a going concern.

The Company has experienced negative operating cash flows for all historical periods presented and the Company expects these losses to continue into the foreseeable future as the Company continues the development and clinical testing of its product candidate CY6463, and its discovery research programs. On April 2, 2019, the Company received gross proceeds of $175 million (net proceeds of approximately $165 million) from the 2019 Equity Private Placement. On July 29, 2020, the Company received proceeds of approximately $24.3 million from the 2020 Equity Private Placement.

After considering the Company’s current research and development plans and the timing expectations related to the progress of its programs, and after considering its existing cash and cash equivalents as of December 31, 2020, the Company did not identify conditions or events that would raise substantial doubt about the Company’s ability to continue as a going concern within one year from the date these financial statements were issued.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated and combined financial statements include the accounts of Cyclerion Therapeutics, Inc. and its wholly owned subsidiaries, Cyclerion GmbH and Cyclerion Securities Corporation. All intercompany transactions and balances are eliminated in consolidation.

Segment Information

Operating segments are components of an enterprise for which separate financial information is available and is evaluated regularly by the Company’s chief operating decision-maker in deciding how to allocate resources and in assessing performance. The Company currently operates in one reportable business segment—human therapeutics.

Use of Estimates

The preparation of consolidated and combined financial statements in accordance with U.S. GAAP requires the Company’s management to make estimates and judgments that may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated and combined financial statements, and the amounts of expenses during the reported periods. On an ongoing basis, the Company’s

F-10

management evaluates its estimates, judgments and methodologies. Significant estimates and assumptions in the consolidated and combined financial statements include those related to allocations of expenses, assets and liabilities from Ironwood’s historical financial statements for the periods prior to the Separation, impairment of long-lived assets, income taxes, including the valuation allowance for deferred tax assets, research and development expenses, contingencies and share-based compensation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ materially from these estimates under different assumptions or conditions. Changes in estimates are reflected in reported results in the period in which they become known.

Cash and Cash Equivalents

The Company considers all highly liquid investment instruments with a remaining maturity when purchased of three months or less to be cash equivalents. Investments qualifying as cash equivalents may consist of money market funds and overnight repurchase agreements. The carrying amount of cash equivalents approximates fair value. There were no cash amounts specifically attributable to Cyclerion for the historical periods presented; therefore, there is no cash reflected in the combined financial statements.

Restricted Cash

The Company is contingently liable under an unused letter of credit with a bank, related to the Company’s facility lease, in the amount of approximately $3.8 million and approximately $7.7 million as of December 31, 2020 and 2019, respectively. The Company records the collateral used to secure the letter of credit as restricted cash. The full amount of restricted cash was recorded as a component of non-current assets at December 31, 2020. The amount of restricted cash in current assets and non-current assets was approximately $2.7 million and $5.0 million, respectively, at December 31, 2019.

Property and Equipment

Property and equipment, including leasehold improvements, are recorded at cost, and are depreciated when placed into service using the straight-line method based on their estimated useful lives as follows:

Asset Description Estimated Useful Life (In Years)

Laboratory equipment 5

Computer and office equipment 3

Furniture and fixtures 7

Software 3

Included in property and equipment are certain costs of software obtained for internal use. 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. Maintenance and training costs related to software obtained for internal use are expensed as incurred.

Costs for capital assets not yet placed into service have been capitalized as construction in progress and are depreciated in accordance with the above guidelines once placed into service. Maintenance and repair costs are expensed as incurred.

Leasehold improvements are amortized over the shorter of the estimated useful life of the asset or the lease term. The Company has no capital leases.

Property and equipment that is no longer required for the business is considered disposed of when it ceases to be used. Disposals are either sold or retired and the net book value is removed from the consolidated balance

F-11

sheet and a corresponding gain or loss on the sale or disposal is recognized as a component of operating expenses in the consolidated and combined statements of operations and comprehensive loss.

Fair Value of Investment Instruments

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:

• Level 1 — Quoted prices in active markets for identical assets or liabilities.

Foreign Currency Translation Adjustment

The functional currency of the Company’s foreign subsidiary is its local currency, the Swiss franc. The assets and liabilities of the Company’s foreign subsidiary are translated into U.S. dollars at exchange rates in effect at the balance sheet date. Income and expense items are translated at the average exchange rates prevailing during the period. The cumulative translation effect for the Company’s foreign subsidiary is included as a foreign currency translation adjustment in the consolidated and combined statements of stockholders’ equity (deficit) and as a component of comprehensive loss in the consolidated and combined statements of operations and comprehensive loss.

The Company’s intercompany accounts are typically denominated in the functional currency of the foreign subsidiary. Gains and losses resulting from the remeasurement of intercompany balances are recorded in the consolidated statements of operations.

Related Party Accounts Receivable

The Company makes judgments as to its ability to collect outstanding receivables and provides an allowance for receivables when collection becomes doubtful. Provisions are made based upon a specific review of all significant outstanding invoices. The Company’s receivables primarily relate to amounts earned under a Development Agreement with Ironwood. The Company believes that credit risks associated with Ironwood are not significant. To date, the Company has not had significant write-offs of bad debt and the Company did not have an allowance for doubtful accounts as of December 31, 2020 or 2019.

Impairment of Long-Lived Assets

The Company regularly reviews the carrying amount of its long-lived assets to determine whether indicators of impairment may exist, which warrant adjustments to carrying values or estimated useful lives. If indications of impairment exist, projected future undiscounted cash flows associated with the asset are compared to the carrying amount to determine whether the asset’s value is recoverable. 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, 2020 or 2019.

F-12

Leases

Effective January 1, 2019, the Company adopted Accounting Standards Codification (“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 years ended December 31, 2020 and 2019 reflect the application of ASC 842 guidance.

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

As part of the ASC 842 adoption, the Company has used certain practical expedients outlined in the guidance. These practical expedients include:

• Account policy election to use the short-term lease exception by asset class;

• Election of the practical expedient package during transition, which includes:

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

The Company has a property lease for its headquarters location at 301 Binney Street, Cambridge, MA (the “Head Lease”). The Company determines if an arrangement is a lease at the inception of the contract. The asset component of the Company’s operating leases is recorded as operating lease right-of-use (“ROU”) assets, and the liability component is recorded as current portion of operating lease liabilities and operating lease liabilities, net of current portion, in the Company’s consolidated balance sheets.

ROU assets and operating lease liabilities are recognized based on the present value of lease payments over the lease term at the commencement date. The Company uses an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments if an implicit rate of return is not provided with the lease contract. Operating lease right-of-use assets are adjusted for incentives received.

Lease cost is recognized on a straight-line basis over the lease term, and includes amounts related to short-term leases. Variable lease costs that do not depend on an index or rate are recognized as incurred.

ROU assets and operating lease liabilities are remeasured upon certain modifications to leases using the present value of remaining lease payments and estimated incremental borrowing rate upon lease modification. The difference between the remeasured ROU assets and the operating lease liabilities are recognized as a gain or loss in operating expenses. The Company reviews any changes to its lease agreements for potential modifications and/or indicators of impairment of the respective ROU asset.

On October 18, 2019, the Company entered into an agreement to sublease 15,700 rentable square feet of its Head Lease to a subtenant (the “Sublease Agreement”). Sublease income is recognized on straight-line basis over the term of the sublease agreement and is recorded net of the related rent expense from the Head Lease within interest and other income, net in the consolidated and combined statements of operations and comprehensive loss. In sublease agreements that contain non-monetary consideration, the Company estimates the fair market value of the non-monetary consideration received using market data and recognizes it on a straight-line basis over the sublease term. Variable lease consideration that does not depend on an index or rate is allocated to a non-lease component and is recognized over time in accordance with the pattern of transfer.

F-13

No modification or impairment was deemed to have occurred by entering into the sublease agreement because the Company was not released, either fully or in part, from its obligations under the Head Lease. See Note 8, Leases.

On February 28, 2020 the Company entered into an amendment to its Head Lease (the “Lease Amendment”). The Lease Amendment provided for the partial termination of the Company's rights and obligations with respect to a portion of the leased premises of approximately 40,000 rentable square feet. The Company will continue to lease approximately 74,000 rentable square feet under terms of the amended lease. The Lease Amendment was determined to be a lease modification that qualified as a change of accounting on the existing lease and not a separate contract. As such, the ROU assets and operating lease liabilities were remeasured using an incremental borrowing rate at the date of modification and the Company recorded a gain of approximately $2.1 million as a component of operating expenses for the year ended December 31, 2020. No impairment of the ROU asset was deemed to have occurred. See Note 8, Leases.

On September 15, 2020, the Company entered into an amendment to its Head Lease (the “Second Lease Amendment”). The Second Lease Amendment provided for the partial termination of the Company's rights and obligations with respect to a portion of the leased premises of approximately 17,000 rentable square feet (the “Surrender Space”). The Surrender Space includes the 15,700 rentable square feet being subleased by the Company to a subtenant. The Company will continue to lease approximately 57,000 rentable square feet under terms of the amended lease. The Second Lease Amendment was determined to be a lease modification that qualified as a change of accounting on the existing lease and not a separate contract. As such, the ROU assets and operating lease liabilities were remeasured using an incremental borrowing rate at the date of modification and the Company recorded a loss of approximately $0.4 million as a component of operating expenses for the year ended December 31, 2020. No impairment of the ROU asset was deemed to have occurred. See Note 8, Leases.

On September 15, 2020, concurrent with the execution of the Second Lease Amendment, the Company entered into an agreement with its subtenant to terminate the Sublease Agreement of approximately 15,700 rentable square feet (“the Sublease Termination Agreement”). Under the terms of the Sublease Termination Agreement, the former subtenant is obligated to provide licensed rooms and services to the Company free of charge through the original sublease term. Upon termination of the sublease, the Company recognized sublease termination income of approximately $3.1 million related to the prepaid rooms and services, and wrote off the remaining indirect costs from the sublease of approximately $0.2 million, in the consolidated and combined statements of operations and comprehensive loss for the year ended December 31, 2020. See Note 8, Leases.

Paycheck Protection Program Loan

On April 21, 2020, the Company received loan proceeds in the amount of approximately $3.5 million pursuant to a promissory note agreement (the “Promissory Note”) with a bank under the Paycheck Protection Program (“PPP”). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The Promissory Note has an original loan maturity of April 20, 2022, a stated interest rate of 1.0% per annum, and has payments of principal and interest that are due monthly after an initial six-month deferral period where interest accrues, but no payments are due. The Promissory Note provides for customary events of default, including, among others, those relating to failure to make payment when due and breaches of representations. The Company may prepay the principal of the Promissory Note at any time without incurring any prepayment charges. The loan is subject to all the terms and conditions applicable under the PPP and is subject to review by the Small Business Association (the “SBA”) for compliance with program requirements, including the Company’s certification that the current economic uncertainty made the PPP loan request necessary to support ongoing operations. On October 2, 2020, the SBA issued procedural guidance with respect to PPP loans and changes in ownership and the Company believes that it is compliant with respect to the 2020 Equity Private Placement and the ATM Offering.

In June 2020, the Payroll Protection Program Flexibility Act (“PPPFA”) was signed into law adjusting certain key terms of loans issued under the PPP. In accordance with the PPPFA, the initial deferral period may be extended from six to up to ten months and the loan maturity may be extended from two to five years. The PPPFA also provided for certain other changes, including the extent to which the loan may be forgiven.

The loan’s principal and accrued interest are forgivable to the extent that the proceeds are used for eligible purposes, subject to certain limitations, and that the Company maintains its payroll levels over a twenty-four-week

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period following the loan date. The loan forgiveness amount may be reduced if the Company terminates employees or reduces salaries during the twenty-four-week period. The Company believes that it has used the proceeds for eligible purposes consistent with the provisions of the PPPFA. However, there can be no assurance that any portion of the loan will be forgiven and that we will not have to repay the loan in full.

As the legal form of the Promissory Note is a debt obligation, the Company is accounting for it as debt under Accounting Standards Codification (ASC) 470, Debt and recorded a short-term liability of $3.5 million in the consolidated balance sheets upon receipt of the loan proceeds. The Company is accruing interest over the term of the loan and is not imputing additional interest at a market rate because the guidance on imputing interest in ASC 835-30, Interest excludes transactions where interest rates are prescribed by a government agency. A de minimis amount of interest expense has been recognized within interest and other income, net in the consolidated statements of operations and comprehensive loss for the year ended December 31, 2020. A de minimis amount of interest expense has been accrued within accrued expenses and other current liabilities on the consolidated balance sheets as of December 31, 2020. If any amount of the loan is ultimately forgiven, income from the extinguishment of debt would be recognized as a gain on loan extinguishment in the consolidated statement of operations and comprehensive loss.

Revenue

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 Topic 606, Revenue from Contracts with Customers (“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 stand-alone selling price for each performance obligation identified in the contract. The assumptions that are used to determine the stand-alone selling price may include forecasted revenues, development timelines, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success.

The Company generates revenue from a Development Agreement with Ironwood, pursuant to which the Company provides certain research and development services with respect to certain of Ironwood’s products and product candidates. Such research and development activities are governed by a joint steering committee composed of representatives of both companies. Services performed are invoiced at a mutually agreed upon rate and the initial term of the agreement is two years from the date of Separation and automatically renews for one year unless either party notifies the other at least six months prior to the expiration. Ironwood and the Company have agreed that the Development Agreement will not be renewed beyond its initial term which ends on March 31, 2021.

Research and Development Costs

The Company expenses research and development costs to operations as incurred. The Company defers and capitalizes nonrefundable advance payments made by the Company for research and development activities until the related goods are received or the related services are performed. The Company estimates the period over which such services will be performed and the level of effort to be expended in each period. If actual timing of performance or the level of effort varies from the estimate, the Company will adjust the amounts recorded accordingly. The Company has not experienced any material differences between accrued or prepaid costs and actual costs since inception.

Research and development expenses are comprised of costs incurred in performing research and development activities, which may include salary, benefits and other employee-related expenses; share-based compensation expense; laboratory supplies and other direct expenses; facilities expenses; overhead expenses; third-party contractual costs relating to nonclinical studies and clinical trial activities and related contract manufacturing expenses, development of manufacturing processes and regulatory registration of third-party manufacturing facilities; and other outside expenses.

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General and Administrative Expenses

The Company expenses general and administrative costs to operations as incurred. General and administrative expense consists of compensation, share-based compensation, benefits and other employee-related expenses for personnel in the Company’s administrative, finance, legal, information technology, business development and human resource functions. Other costs include the legal costs of pursuing patent protection of the Company’s intellectual property, general and administrative related facility costs, insurance costs and professional fees for accounting and legal services.

Income taxes

The Company is primarily subject to U.S. federal and Massachusetts state income taxes. For federal and state income taxes, deferred tax assets and liabilities are recognized based upon temporary differences between the financial statement and the tax basis of assets and liabilities. Deferred income taxes are based upon prescribed rates and enacted laws applicable to periods in which differences are expected to reverse. A valuation allowance is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Accordingly, the Company provides a valuation allowance, if necessary, to reduce deferred tax assets to amounts that are realizable.

The tax positions taken or expected to be taken in the course of preparing the Company tax returns are required to be evaluated to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet a more-likely-than-not threshold would be recorded as a tax expense in the current year. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances. It does not consider the likelihood of whether or not the IRS will review the position. Cyclerion evaluates uncertain tax positions on a quarterly basis and adjusts the level of the liability to reflect any subsequent changes in the relevant facts surrounding the uncertain positions. Any changes to these estimates, based on the actual results obtained and/or a change in assumptions, could affect Cyclerion's income tax provision in future periods. There were no uncertain tax positions that require accrual or disclosure in the consolidated financial statements as of December 31, 2020, and 2019. The Company’s policy is to recognize interest and penalties related to income tax, if any, in income tax expense. As of December 31, 2020, and 2019, the Company has no accruals for interest or penalties related to income tax matters.

Patent Costs

The Company incurred and recorded as operating expense legal and other fees related to patents of approximately $1.7 million and $0.8 million for the years ended December 31, 2020 and 2019, respectively. These costs were charged to general and administrative expenses as incurred.

Interest and Other Income, Net

For the year ended December 31, 2020, interest and other income, net consisted of $0.3 million of interest income related to interest generated from our cash and cash equivalents balances and $0.3 million of net sublease income, net of a de minimis amount of interest expense related to the PPP loan. For the year ended December 31, 2019, interest and other income, net consisted of $1.9 million of interest income related to interest generated from our cash and cash equivalents balances and $0.1 million of net sublease income.

Subsequent Events

The Company considers events or transactions that have occurred after the balance sheet date of December 31, 2020, but prior to the filing of the financial statements with the Securities and Exchange Commission, to provide additional evidence relative to certain estimates or to identify matters that require additional recognition or disclosure. Subsequent events have been evaluated through the filing of the financial statements accompanying this Annual Report on Form 10-K. See Note 14, Subsequent Events.

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New Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standard setting bodies that are adopted by the Company as of the specified effective date. Except as discussed elsewhere in the notes to the consolidated and combined financial statements, the Company did not adopt any new accounting pronouncements during the years ended December 31, 2020 and 2019, that had a material effect on its consolidated and combined financial statements.

In June 2016, the FASB issued 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. 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. 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief (“ASU 2019-05”) to provide additional guidance on the adoption of ASU 2016-13, ASU No. 2019-10, Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) (“ASU 2019-10”), ASU No. 2019-11, Codification Improvements to Topic 326, Financial Instruments-Credit Losses (“ASU 2019-11”) and ASU No. 2020-02, Financial Instruments—Credit Losses (Topic 326) and Leases (Topic 842)("ASU 2020-02"). ASU 2019-04 added Topic 326, Financial Instruments—Credit Losses, and made several amendments to the codification and also modified 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 2019-10 aligned the effective dates of certain major updates not yet effective to conform to the FASB’s new philosophy of staggering major updates between large public companies and all other entities. ASU 2019-11’s major provisions included additional clarifications and practical expedients related to expected recoveries for purchased assets with credit deterioration, troubled debt restructuring, accrued interest receivables, and other areas when adopting ASU 2016-13. ASU 2020-02 provided amendments to the Topic 326 including a new section related to credit losses measured at amortized cost and a clarification to Topic 842 and is effective when adopting other areas of Financial Instruments-Credit Losses Topic 326. As a public business entity that qualifies as a smaller reporting company, ASU 2016-13, ASU 2019-04 and ASU 2019-05 are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the potential impact that the adoption of these ASUs will have on the Company’s financial position and results of operations.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (“ASU 2018-13”): Disclosure Framework—Changes to the Disclosure Requirement for Fair Value Measurement (“ASU 2018-13”) which amends the disclosure requirements for fair value measurements. The amendments in ASU 2018-13 are effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company adopted ASU 2018-13 in the first quarter of 2020 and the adoption of standard did not will have a material impact on the Company’s financial position or results of operations.

In August 2018, the FASB issued ASU No. 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract (“ASU 2018-15”). ASU 2018-15 requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in ASC 350-40, Intangibles—Goodwill and Other—Internal Use Software (ASC 350-40), to determine which implementation costs to capitalize as assets or expense as incurred. The internal-use software guidance in ASC 350-40 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 adopted ASU 2018-15 in the first quarter of 2020 and the adoption of this standard did not have a material impact on the Company’s financial position or 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 and combined financial statements upon adoption.

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3. Related Party Transactions

Relationship with Ironwood

Prior to April 1, 2019, the Company was managed and operated in the normal course of business under Ironwood. Ironwood became a related party when Mark Currie, Ironwood’s former Chief Scientific Officer and the Company’s President, joined Ironwood’s board in April 2019 following the Separation.

Certain shared costs were allocated to the Company and reflected as expenses in the Company’s stand-alone combined financial statements for periods prior to the Separation. The expenses reflected in the combined financial statements for periods prior to the Separation may not be indicative of expenses that will be incurred by the Company in the future.

(a) Corporate costs

Ironwood incurred significant corporate costs for services provided to Cyclerion. These costs included expenses for information systems, accounting, other financial services (such as treasury, audit and purchasing), human resources, legal, facilities and Separation-related costs.

A portion of these costs benefited Cyclerion and have been allocated to Cyclerion using a pro-rata method based on project related costs, headcount, or other measures that management believes are consistent and reasonable.

The corporate costs allocated to Cyclerion, prior to the Separation, and included in the combined statements of operations for the year ended December 31, 2019 was approximately $6.8 million and was included in general and administrative expenses.

(b) Cash Management and Financing

Cyclerion participated in Ironwood’s centralized cash management and financing programs prior to the Separation. Disbursements were made through centralized accounts payable systems operated by Ironwood. Cash receipts were transferred to centralized accounts, also maintained by Ironwood. As cash is disbursed and received by Ironwood, it was accounted for by Cyclerion through net parent investment. All obligations were financed by Ironwood and financing decisions were determined by central Ironwood treasury operations until the Separation.

Other Transactions with Ironwood

As part of the Separation from Ironwood, the Company entered into Transition Services Agreements and a Development Agreement with Ironwood.

Under the Transition Services Agreements, the Company provides certain services to Ironwood, and Ironwood provides certain services to the Company, each related to corporate functions such as finance, procurement, facilities and development for a period of up to two years from the date of the Separation, unless earlier terminated or extended by mutual agreement. These services are charged to and from Ironwood and are recorded as part of operating expenses. All services provided to and from the Company under the Transition Services Agreements were completed as of March 31, 2020 and the agreements were terminated. The net charge to operating expenses for the Transition Services Agreements was de minimis and $0.2 million for the years ended December 31, 2020 and 2019, respectively.

Under the Development Agreement, the Company provides certain research and development services to Ironwood at mutually agreed upon rates and the amounts earned are recorded as revenue from related party. Such research and development activities are governed by a joint steering committee composed of representatives of both Ironwood and the Company. Ironwood and the Company have agreed that the Development Agreement will not be renewed beyond its initial term which ends on March 31, 2021. The Company recorded approximately $2.3 million

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and $4.5million in revenue from related party for services provided under the Development Agreement for the years ended December 31, 2020 and 2019, respectively.

In accordance with the Separation Agreement, there were certain other transactions and adjustments post-Separation between the Company and Ironwood. For the year ended December 31, 2020, the Company recorded approximately $0.7 million in general and administrative expense for the reimbursement of certain expenses to Ironwood in accordance with the Separation Agreement. During the year ended December 31, 2019, Cyclerion paid Ironwood approximately $1.3 million associated with tenant improvement reimbursement provisions.

The total amount due from Ironwood at December 31, 2020 and 2019 was approximately $0.1 million and $1.5 million, respectively, primarily from the Development Agreement, and is reflected as related party accounts receivable. There was no amount due to Ironwood at December 31, 2020 and approximately$0.1 million due to Ironwood at December 31, 2019.

Peter Hecht, Ironwood’s former Chief Executive Officer and the Chief Executive Officer and board member of Cyclerion, donated 2.5 million of his shares of Ironwood common stock to American Endowment Foundation for the creation of a donor advised fund that divested these shares to invest $34.0 million in Cyclerion as part of the financing transaction completed by Cyclerion on April 2, 2019. Mark Currie has invested $4.0 million in Cyclerion as part of this financing. Dr. Currie and certain other investors have funded a portion of their investment through sales of Ironwood common stock.

Other Related Party Transactions

During the years ended December 31, 2020 and 2019, the Company recorded approximately $1.5 million and $0.2 million, respectively, of research and development costs to a related party which it engaged to provide research and development transaction support services. The entity became a related party when Mark Currie, the Company’s President through December 31, 2020, joined its board in January 2020. There was approximately $0.3 million and a de minimis amount due to the related party for the years ended December 31, 2020 and 2019, respectively.

4. Fair Value of Financial Instruments

The Company’s cash equivalents are generally classified within Level 1 of the fair value hierarchy. The following tables present information about the Company’s financial assets measured at fair value on a recurring basis as of December 31, 2020 and 2019 and indicate the level of the fair value hierarchy used to determine such fair values (in thousands):

Fair Value Measurements as of December 31, 2020 Using:

Level 1 Level 2 Level 3 Total

Cash equivalents:

Fair Value Measurements as of December 31, 2019 Using:

Level 1 Level 2 Level 3 Total

Cash equivalents:

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5. Property and Equipment

Property and equipment, net consisted of the following (in thousands):

December 31, December 31,

Laboratory equipment $ — $ 14,505

Construction in progress — 915

Computer and office equipment 44 1,890

Less: accumulated depreciation and amortization (10,287 ) (21,602 )

As of December 31, 2020, and 2019, the Company’s property and equipment was primarily located in Cambridge, Massachusetts.

Depreciation and amortization expense of the Company’s property and equipment was approximately $2.3 million and $2.7 million for the years ended December 31, 2020 and 2019, respectively. The Company has ceased using its current laboratory and office space for meaningful business activities as part of its plan to exit the facilities in early 2021. As such, the Company sold or disposed substantially all of its laboratory and office equipment during the year ended December 31, 2020. The Company recorded a total net loss on disposal of property and equipment of approximately $0.2 million for the year ended December 31, 2020, which includes a loss related to computer and office equipment of approximately $1.0 million and a gain related to the sale of laboratory equipment of approximately $0.8 million. The Company recorded a loss on disposal of property and equipment of approximately $0.8 million for the year ended December 31, 2019 which primarily related to leasehold improvements.Net loss on disposal of property and equipment is recognized as a component of operating expenses in the consolidated and combined statements of operations and comprehensive loss for the years ended December 31, 2020 and 2019.

Fixed asset purchases included in accounts payable and accrued expenses was approximately $0.8 million on December 31, 2019, respectively.

6. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following (in thousands):

December 31, December 31,

Accrued incentive compensation $ 1,720 $ 3,767

Accrued severance and benefit costs 3,640 2,009

Accrued expenses and other current liabilities $ 7,294 $ 9,320

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7. Commitments and Contingencies

Other Funding Commitments

The Company enters into contracts in the normal course of business with clinical research organizations for clinical research and other third parties for preclinical research studies and testing and other services and products for operating purposes. These contracts are generally cancellable, with notice, at the Company’s option and do not have any significant cancellation penalties.

Guarantees

On September 6, 2018, Cyclerion was incorporated in Massachusetts and its officers and directors are indemnified for certain events or occurrences while they are serving in such capacity. Prior to the Separation, the Company’s officers and directors were similarly indemnified under Delaware law.

The Company enters into certain agreements with other parties in the ordinary course of business that contain indemnification provisions. These typically include agreements with directors and officers, business partners, contractors, clinical sites and customers. Under these provisions, the Company generally indemnifies and holds harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the Company’s activities. These indemnification provisions generally survive termination of the underlying agreements. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited. However, to date the Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. As a result, the estimated fair value of these obligations is minimal. Accordingly, the Company did not have any liabilities recorded for these obligations as of December 31, 2020 or December 31, 2019.

8. Leases

The FASB issued ASU 2016-02, or the leasing standard or ASC 842, in February 2016. ASU 2016-02 requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months. ASU 2016-02 also requires certain qualitative and quantitative disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases.

On April 1, 2019, the Company entered into the Head Lease, a direct operating lease for its existing premises located at 301 Binney Street, Cambridge, MA consisting of approximately 114,000 rentable square feet of office and laboratory space on the first and second floors. The Head Lease is for a term of 123 months with two five-year extension options and certain expansion rights. The Head Lease includes a letter of credit of $7.7 million posted with the landlord as a security deposit, which is collateralized by a money market account recorded as restricted cash on the Company’s consolidated balance sheets as of December 31, 2019. Cyclerion has also entered into customary non-disturbance arrangements with the building landlord’s mortgagee and with the property ground lessor recognizing Cyclerion’s leasehold interest in this property.

The Head Lease provides for annual base rent of approximately $11.0 million in the first year, which increases on a yearly basis by 3.0% (subject to an abatement of base rent of approximately $2.7 million in the first year of the lease). The Company is obligated to pay the landlord for certain costs, taxes and operating expenses related to the premises, subject to certain exclusions; however, the Company has concluded that these payments are not in-substance fixed payments and therefore are not included in the calculation of the related lease liability and asset under ASC 842. Additionally, the Company has made the policy election to adopt the practical expedient to not separate lease components from non-lease components for the right-to-use asset class of office and laboratory space. This policy election results in the Company accounting for the lease component, the use of the premises, and the non-lease components, which include a property management fee, as a single lease component.

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The Company recorded the liability associated with the Head Lease at the present value of the lease payments not yet paid, discounted using the discount rate for the Head Lease established at the commencement date. As the Head Lease does not provide an implicit rate, the Company had to estimate the incremental borrowing rate, or IBR, as of the commencement date. The IBR is defined under ASC 842 as the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term for an amount equal to the lease payments in a similar economic environment. The Company determined its IBR to be 10.9%, which was used to discount the remaining lease payments over the remaining lease term and recorded a lease liability of $71.3 million on April 1, 2019. This lease liability will be amortized over the remaining lease term in an amount equal to the difference between the cash rent paid and the monthly interest calculated on the remaining lease liability.

The Company had a tenant improvement allowance from the landlord of approximately $2.3 million for certain permitted costs related to the buildout of the premises. The Company is deemed to be the owner of these tenant improvements during the lease term. These $2.3 million of improvements are included in the Company’s property, plant and equipment balances in its consolidated balance sheets as of December 31, 2019 and are depreciated over the shorter of their useful life or the related lease term. The Company received the payment for the tenant allowance in the third quarter of 2019.

On April 1, 2019, the Company recorded a right-of-use asset in the amount $71.3 million. The right-of-use asset is being amortized over the remaining lease term in an amount equal to the difference between the calculated straight-line expense of the total lease payments less the monthly interest calculated on the remaining lease liability.

On February 28, 2020 the Company entered into an amendment to its Head Lease. The Lease Amendment provides for the partial termination of the Company’s rights and obligations with respect to a portion of the leased premises of approximately 40,000 rentable square feet. The Company will continue to lease approximately 74,000 square feet including the area covered by the subleased premise, discussed below. The Company reduced its remaining lease payments through June 2029 by approximately $41.9 million. In connection with the Lease Amendment, the Company paid $6.3 million for a termination fee and $0.2 million for other initial direct costs, which will be deferred and recognized over the remaining lease term. The Company’s security deposit was reduced by approximately $2.7 million to approximately $5.0 million.

The Lease Amendment was determined to be a lease modification that qualified as a change of accounting on the existing lease and not a separate contract. As such, the ROU assets and operating lease liabilities were remeasured using an incremental borrowing rate at the date of modification of 9.7%, which resulted in a reduction of the ROU asset of $21.4 million and a reduction in the operating lease liabilities of $23.5 million. The Company recorded the resulting gain of approximately $2.1 million as a component of operating expenses in the consolidated statement of operations and comprehensive loss for the year ended December 31, 2020.

On September 15, 2020 the Company entered into the Second Lease Amendment to its Head Lease. The Second Lease Amendment provides for the partial termination of the Company’s rights and obligations with respect to a portion of the leased premises of approximately 17,000 rentable square feet. The Surrender Space includes 15,700 rentable square feet being subleased by the Company to a subtenant. The Company will continue to lease approximately 57,000 square feet of space. The Company reduced its remaining lease payments through June 2029 by approximately $16.9 million. The Company paid no termination or other initial direct costs related to the execution of the Second Lease Amendment. The Company’s security deposit was reduced by approximately $1.2 million to approximately $3.8 million, which is classified as restricted cash on the Company’s consolidated balance sheet as of December 31, 2020.

The Second Lease Amendment was determined to be a lease modification that qualified as a change of accounting on the existing lease and not a separate contract. As such, the ROU assets and operating lease liabilities were remeasured using an incremental borrowing rate at the date of modification of 6.1%, which resulted in a reduction of the ROU asset of $5.9 million and a reduction in the operating lease liabilities of $5.5 million. The Company recorded the resulting loss of approximately $0.4 million as a component of operating expenses in the consolidated statement of operations and comprehensive loss for the year ended December 31, 2020.

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The Company had an operating lease right-of-use asset of approximately $43.4 million and $68.1million related to the amended Head Lease recorded in its consolidated balance sheets as of December 31, 2020 and 2019, respectively. The Company had current operating lease liabilities of approximately $3.3 million and $3.4million, and noncurrent operating lease liabilities of approximately $38.9 million and $70.5million, related to the amended Head Lease recorded in its consolidated balance sheets as of December 31, 2020 and 2019, respectively.

Lease cost is recognized on a straight-line basis over the lease term. For the years ended December 31, 2020 and 2019, the Company recognized a total of approximately $8.6 million and $9.3 million, respectively, of total lease costs. Variable lease costs not subject to an index or rate are recognized as incurred. For the years ended December 31, 2020 and 2019, the Company recognized a total of approximately $2.2 million and $1.8 million, respectively, of variable lease costs related to the Head Lease, as amended.

Supplemental cash flow information related to leases for the periods reported is as follows:

Decrease in right-of-use assets related to lease modifications $ 27,333 $ —

Decrease in operating lease liabilities due to lease modifications $ 29,002 $ —

Weighted-average remaining lease term of operating leases (in years) 8.5 9.5

Weighted-average discount rate of operating leases 6.1 % 10.9 %

Future minimum lease payments under non-cancelable operating leases under ASC 842 as of December 31, 2020 are as follows (in thousands):

Operating Lease Payments

Total future minimum lease payments (receipts) 54,471

Less: present value adjustment 12,245

Less: current portion of operating lease liabilities 3,293

Operating lease liabilities, net of current portion $ 38,933

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On March 31, 2019, the Company entered into a short-term sublease of approximately 24,000 rentable square feet with Ironwood to provide temporary working space for a portion of its workforce while the buildout of the Company’s new premises was being completed. The sublease was for an initial one-month term with several one-month extension options. The Company subleased the space for approximately 1.5 months, vacating the space and terminating the sublease in mid-May 2019. The Company incurred approximately $0.2 million in rent expense related to the sublease, which is included in the total lease cost of $9.3 million, for the year ended December 31, 2019.

On October 18, 2019, the Company entered into an agreement with a third party to sublease 15,700 rentable square feet of its lease premises under the Head Lease. The sublease was scheduled to expire on June 30, 2029, unless earlier terminated in accordance with the sublease agreement, and has no extension options. The sublease provides for annual base rent of approximately $1.5 million in the first year, which increases on a yearly basis by 3.0% (subject to an abatement of base rent of approximately $0.7 million for the first six months of the sublease). As part of the consideration for the sublease, the sublessee agreed to provide licensed rooms and services within the sublease premises to the Company over the sublease term free of charge. In addition, the sublessee is responsible for its pro rata share of certain costs, taxes and operating expenses related to the subleased space, the consideration for which is variable and is based on the actual operating costs of the lessor. The Company allocated the total consideration in the sublease agreement between the lease and non-lease components in the contract based on their relative standalone prices. The Company determined that the variable consideration relates exclusively to non-lease components and will be recognized as incurred. The sublease included an initial security deposit of $0.5 million, which was provided by the sublessee in the form of a letter of credit, and an additional security deposit of $0.4 million within nine months of the sublease commencement.

On September 15, 2020, concurrent with execution of the Second Lease Amendment, the Company entered into the Sublease Termination Agreement to terminate its sublease of 15,700 rentable square feet. Under the terms of the Sublease Termination Agreement, the subtenant is relieved of its obligation to provide future cash rental payments to the Company. The agreements requiring the former subtenant to provide licensed rooms and services to the Company free of charge through the original sublease term survived the sublease termination. The Company expects to receive the benefit of the licensed rooms and services beginning in the third quarter of 2021. The letter of credit security deposit related to the sublease was released.

The Company determined that the Sublease Termination Agreement constitutes a non-monetary exchange under ASC 845 Nonmonetary Transactions (“ASC 845”) where, in return for the free rooms and the services, the Company agreed to terminate its rights and obligations under the sublease agreement. In accordance with ASC 845, the Company determined that the accounting for the transaction should be based on the fair value of assets or services involved. The Company estimated the fair value of the rooms and services to be approximately $1.5 million and $2.9 million, respectively. Accordingly, prepaid rooms and services of $4.4 million were recorded upon the sublease termination, of which $1.6 million is recorded in other current assets and $2.8 million is recorded in other assets in the consolidated balance sheets as of December 31, 2020. Termination fee income of $3.1 million was recognized related to the rooms and services, after considering the rent receivable balance of $1.3 million outstanding from the subtenant. The remaining unamortized direct costs of $0.2 million were written off. The effects of the Sublease Termination Agreement are recorded within sublease termination income, net in the consolidated and combined statements of operations and comprehensive loss.

The Company determined that the licensed rooms represent a lease under ASC 842. Once the Company obtains control of the rooms, the prepaid rooms balance will be reclassified from other assets to a ROU asset, and the related lease expense will be recorded on a straight-line basis over the lease term. The Company determined that the licensed services represent a non-lease component, which will be recognized separately from the lease component for this asset class. The expense related to the licensed services will be recognized on a straight-line basis over the period the services are received. Both the lease expense and services expense will be recognized as a component of research and development costs in the consolidated and combined statements of operations and comprehensive loss.

For the years ended December 31, 2020 and 2019, gross sublease income of $1.5 million and $0.4 million, respectively, and net sublease income of approximately $0.3 million and $0.1 million, respectively, was recorded in interest and other income, net in the consolidated and combined statements of operations and comprehensive loss.

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9. Share-based Compensation Plans

Prior to the Separation, share-based compensation expense was allocated to Cyclerion using a combined specific identification and pro-rata method based on internal project related costs and headcount that management believed were consistent and reasonable.

In connection with the Separation, Cyclerion adopted its own share-based compensation plans. Specifically, Cyclerion adopted the 2019 Employee Stock Purchase Plan (“2019 ESPP”) and the 2019 Equity Incentive Plan (“2019 Equity Plan”). Under the 2019 ESPP, eligible employees may use payroll deductions to purchase shares of stock in offerings under the plan, and thereby acquire an interest in the future of the Company. Under the 2019 Equity Plan, new post-Separation awards, including stock options and restricted stock units (“RSUs”), may be granted to employees of the Company.

Cyclerion also mirrored two of Ironwood’s existing plans, the Amended and Restated 2005 Stock Incentive Plan (“2005 Equity Plan”) and the Amended and Restated 2010 Employee, Director and Consultant Equity Incentive Plan (“2010 Equity Plan). These mirror plans were adopted to facilitate the exchange of Ironwood equity awards for Cyclerion equity awards upon the Separation as part of the equity conversion. As a result of the Separation and in accordance with the EMA, employees of both companies retained their existing Ironwood vested options and received a pro-rata share of Cyclerion options, regardless of which company employed them post-Separation. For employees that were ultimately employed by Cyclerion, unvested Ironwood options and RSUs were converted to unvested Cyclerion options and RSUs.

The conversion of equity awards resulting from the Separation impacted approximately 143 employees and was treated as a Type 1 modification under ASC Topic 718, Share-Based Payments, as the awards are expected to vest under the original terms. Incremental compensation expense was measured as the excess, if any, of the fair value of the modified award over the fair value of the original award immediately before its terms were modified. The fair value of RSUs and restricted stock awards was measured using the fair value stock price immediately before and immediately after the modification date which resulted in no incremental compensation expense. The fair value of stock options was measured using the Black-Scholes option pricing method using the appropriate valuation assumptions immediately before and immediately after the modification date. As a result of the modification, Cyclerion recognized a one-time incremental expense of approximately $0.3 million for the vested stock options and will recognize an incremental expense of approximately $7.5 million for the unvested stock options over their remaining vesting period.

The following table provides share-based compensation reflected in the Company’s consolidated and combined statements of operations and comprehensive loss for the years ended December 31, 2020 and 2019 (in thousands):

Year Ended December 31,

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. 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. The estimated fair value of options, including the effect of estimated forfeitures, is recognized over the requisite service period, which is typically the vesting period of each option.

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A summary of stock option activity for the years ended December 31, 2020 and 2019 is as follows:

Weighted

Weighted Average Average

Average Remaining Intrinsic

Number Exercise Contractual Value (in

of Options Price Term (Years) thousands)

Outstanding as of December 31, 2018 — $ — — —

Aggregate impact of conversion related to spin-off 6,456,982 14.90 — —

During the years ended December 31, 2020 and 2019, the Company granted stock options to purchase an aggregate of 1,382,846 shares and 1,687,029, respectively, at weighted average grant date fair values per option share of $1.97 and $4.97, respectively. The total grant date fair value of options granted during the years ended December 31, 2020 and 2019 was $2.7 million and $8.4 million, respectively.

As of December 31, 2020, the unrecognized share-based compensation expense, net of estimated forfeitures, related to all unvested stock options held by Cyclerion’s employees is $14.6 million and the weighted average period over which that expense is expected to be recognized is 2.72 years.

The weighted-average Black-Scholes assumptions used in estimating the fair value of the stock options granted by Cyclerion following the Separation during the years ended December 31, 2020 and 2019 were as follows:

Year Ended Year Ended

Weighted average risk-free interest rate 0.43 % 1.77 %

Expected dividend yield — —

Expected option term (in years) 6.3 6.3

Expected stock price volatility 91.73 % 65.20 %

For the years ended December 31, 2020 and 2019, expected volatility was estimated using an average of the historical volatility of the common stock of a group of similar companies that were publicly traded. The Company will continue to apply this process until a sufficient amount of historical information regarding the volatility of its own stock price becomes available.

The Company has granted to certain employees performance based options to purchase shares of common stock. These options are subject to performance based milestone vesting. During the years ended December 31, 2020 and 2019 there were no shares that vested as a result of performance milestone achievements. The Company recorded no share-based compensation expense related to these performance-based options for the years ended December 31, 2020 and 2019.

Market-based Stock Options

The Company has granted to certain employees performance‐based options to purchase shares of common stock. These options are subject to performance‐based milestone vesting. During the years ended December 31, 2020 and 2019 there were no shares that vested as a result of performance milestone achievements. The Company recorded no share-based compensation expense related to these performance-based options for the years ended December 31, 2020 and 2019.

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The Company also has granted to certain employees stock options containing market conditions that vest upon the achievement of specified price targets of the Company’s share price for a period through December 31, 2024. Vesting is measured based upon the average closing price of the Company’s share price for any thirty consecutive trading days, subject to certain service requirements. Stock compensation cost is expensed on a straight-line basis over the derived service period for each stock price target within the award, ranging from approximately 4.0 to 4.6 years. The Company accelerates expense when a stock price target is achieved prior to the derived service period. The Company does not reverse expense recognized if the share price target(s) are ultimately not achieved but expense is reversed when a stock award recipient has a break in service prior to the completion of the derived service period. For the years ended December 31, 2020 and 2019, the Company recorded $0.1 million and a de minimis amount of share-based compensation expense, respectively related to these stock options containing market conditions. As of December 31, 2020, there was $0.3 million of unrecognized compensation costs related to stock options containing market conditions, which is expected to be recognized over a weighted-average period of 8.89 years.

A summary of stock awards containing market conditions activity for the years ended December 31, 2020 and 2019 is as follows:

Weighted

Weighted Average Aggregate

Average Remaining Intrinsic

Number of Exercise Contractual Value (in

Options Price Term (years) thousands)

Outstanding as of December 31, 2018 — $ — $ — $ —

Exercised — — — —

Cancelled or forfeited — — —

Granted — — — —

Exercised — — — —

Cancelled or forfeited (75,000 ) $ 2.01 — —

Exercisable at December 31, 2020 — $ — — $ —

The fair value of stock options containing market conditions is estimated using Monte Carlo simulations. No stock options containing market conditions were granted during the year ended December 31, 2020. The range of assumptions used to determine the fair value of awards granted during the year ended December 31, 2019 were as follows:

Year Ended

Weighted average risk-free interest rate 1.76 %

Expected dividend yield —

Derived service period (in years) 4.0 - 4.6

Expected stock price volatility 65.91 %

Restricted Stock Units

The RSUs generally vest 25% per year on the approximate anniversary of the date of grant until fully vested, provided the employee remains continuously employed with the Company through each vesting date. Shares of the Company’s common stock are delivered to the employee upon vesting, subject to payment of applicable

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withholding taxes. The fair value of all RSUs is based on the market value of the Company’s 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 years ended December 31, 2020 and 2019 is as follows:

Weighted Average

Number Grant Date

of Shares Fair Value

Unvested as of December 31, 2018 — $ —

Aggregate impact of conversion related to spin-off 932,469 15.55

Granted — —

As of December 31, 2020, the unrecognized share-based compensation expense, net of estimated forfeitures, related to all unvested restricted stock units by the Company’s employees is $2.4 million and the weighted-average period over which that expense is expected to be recognized is 1.85 years.

Restricted Stock Awards

Any of the Company’s non-employee directors who served as non-employee directors of Ironwood received shares of the Company’s unvested restricted stock in respect of any outstanding unvested awards of Ironwood restricted stock they held. Such restricted stock awards were subject to the vesting schedule set forth in the original Ironwood restricted stock award. On April 1, 2019, the Company made grants of 21,942 shares of its restricted stock at a weighted average grant date fair value of $14.81 to its non-employee directors who did not hold Ironwood restricted stock prior to the distribution. Such restricted stock awards have an equivalent value to the shares of the Company’s restricted stock granted to its non-employee directors who held Ironwood restricted stock prior to the distribution, and have been pro-rated to reflect each non-employee director’s period of service with the Company from the date of the distribution to the anticipated date of the first annual grant. These restricted stock awards fully vested on May 30, 2019. The Company did not grant any restricted stock awards during the year ended December 31, 2020.

10. Loss per share

Basic and diluted net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Prior to April 1, 2019, there were no Cyclerion shares outstanding, as such, the shares outstanding immediately after the distribution and the private placement were used to calculate the basic and diluted net loss per share for the year ended December 31, 2019.

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Basic and diluted earnings per share are calculated as follows:

Year Ended December 31,

Numerator:

Denominator:

Net loss per share — basic and diluted $ (2.56 ) $ (4.49 )

For the year ended December 31, 2020 8,026,356 shares of common stock related to stock options and 294,913 shares of common stock related to RSUs were excluded from the calculation of diluted net loss per share since the inclusion of such shares would be anti-dilutive.

11. Income Taxes

There was no provision for income taxes for the years ended December 31, 2020, and 2019, due to the Company’s operating losses and a full valuation allowance on deferred tax assets. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

A reconciliation of income taxes computed using the U.S. federal statutory rate to that reflected in operations follows (in thousands):

CYCN US Equity

CYCN · 10-K · period ended 2020-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Item 8. Financial Statements and Supplementary Data.

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

Item 9A. Controls and Procedures.

Item 9B. Other Information.

Item 10. Directors, Executive Officers and Corporate Governance.

Item 11. Executive Compensation.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

Item 14. Principal Accounting Fees and Services.

Item 15. Exhibits, Financial Statement Schedules.

Item 16.Form 10-K Summary.

CYCN US Equity☆

CYCN · 10-K · period ended 2020-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Item 8. Financial Statements and Supplementary Data.

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

Item 9A. Controls and Procedures.

Item 9B. Other Information.

Item 10. Directors, Executive Officers and Corporate Governance.

Item 11. Executive Compensation.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

Item 14. Principal Accounting Fees and Services.

Item 15. Exhibits, Financial Statement Schedules.

Item 16.Form 10-K Summary.

CYCN US Equity